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This issue is about the fear going through corporate America, which is a little discussed topic because, well, there are few people willing to speak out and risk retribution. But first, some follow up on Facebook’s Libra project, which I discussed yesterday.
World Domination! Facebook co-founder Chris Hughes has a thoughtful piece in the FT making a few different points on why regulators should stop Libra. The first is how Libra can undermine the ability of poor countries to conduct monetary policy, and central banking in general.
The sponsors are right that a liquid, stable currency would be attractive to many in emerging markets. So attractive, in fact, that if enough people trade out of their local currencies, they could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls.
Decentralisation is a popular Silicon Valley buzzword but it has decidedly failed in monetary policy. Centuries of financial instability led to the gradual emergence of today’s network of central banks. After many mistakes, we have learnt that we want a central bank to act to increase or decrease the monetary supply in moments of contraction or expansion. This power to help keep an economy stable is something we should be reinforcing and improving, not endeavoring to demolish.
Hughes also notes something else, which is that “the Libra Association could also wield significant power over the workings of global finance. Unless regulators jump in quickly, these for-profit companies will set the standards for identity verification, at least in the short run, as well as defining the rules and enforcement around the privacy of transactions and what to do in case of theft.” I hadn’t really thought this through, but if Facebook is able to redefine compliance with the Bank Secrecy Act rules, it could restructure payments in a fairly profound way.
Hughes is deeply concerned that Libra will catch on. I’m a skeptic, but then, Zuckerberg does have a track of changing the world, so we can’t dismiss this effort. Alphaville FT, in contrast to Hughes, has a hilarious cheat sheet on what Libra actually is, and how shoddily done the project looks. Libra is not actually blockchain or crypto-currency or permissionless, it just uses those buzzwords to disguise the fact they are setting up an unregulated Exchange-Trade Fund and potentially violating antitrust law via a payments cartel. Alphaville’s Izabella Kaminska raises a very good point, which is that if you want to help the unbanked, why do you… need to create a new currency? She also offers a new rule of thumb that sounds right.
For the last century, new communications technologies — radio, television, VCRs, the internet — have all been initially sold as something that will help with education, and have actually been used for entertainment. Alphaville suggests a corollary for new financial technology: it's initially sold as something that will help the unbanked, and it's actually used to sell drugs.
None of this is to say the international payments system right now is perfect. It’s not. International transfers cost enormous amounts of money, largely price gouging by companies like Western Union. But a significant announcement came yesterday - not from Facebook - but from the Bank of England, which says it will allow tech companies which meet stringent standards to set up bank accounts at the Bank of England (address at the not-actually-kidding “Threadneedle Street,”) on par with banks and enter the payments business.
Ok, so there we go. I worked in Congress on Dodd-Frank for years (and in particular transparency at the Federal Reserve), but the truth is, I hate thinking about payments and finance. No matter what, it seems I can’t get away from them. Curse you Mark Zuckerberg for forcing me to think about this stuff!
Monopolies and a Wave of Terror in American Commerce
Yesterday, an important story came out on the House Antitrust Subcommittee investigation of big tech by by Chairman David Cicilline. He talked about something we don’t typically associate with commerce. Fear.
Representative David Cicilline, a Democrat and a top antitrust lawmaker, said on Thursday that many of the small digital companies are reliant on the giants for access to consumers, saying that relationship “makes them concerned about raising their voice, raising concerns about the monopoly power of these platforms.”
“If you look at the size of some of the large platforms, their ability to exclude people from the platform can result in closing the business,” Cicilline told reporters.
“That’s sort of the most dangerous consequence of this kind of concentration is the ability to exclude rivals, put them out of business, diminish innovation, diminish entrepreneurship, diminish choices for consumers,” he said.
Anyone who has worked in policy around antitrust will have experience with the little guy expressing terror at something his or her dominant supplier or buyer might do, along with the frustration at not being able to say anything in public for fear of retaliation. This is the core argument against monopolization, which is that it prevents citizens from exercising their right to participate in the public square.
When I was a Congressional staffer, I was lobbied on once or twice a year by small companies concerned that a merger might destroy them. For instance, during the Staples-Office Depot merger, a small company that made a certain office supply said that the 25 year-old buyer who would take over the category in which they operated didn’t like them, and would simply start sourcing their product from China at a comparable cost. If the merger went through, poof, 125 good jobs gone. The executives told me that the entire supply chain was scared of this dynamic. Why, I asked, don’t you, or others, oppose the merger publicly? Fear of retaliation.
This fear was enabled by the Obama administration’s antitrust policy, and it had severe political consequences. Rural America moved far to the right during the Obama years, and there’s a reason. In the 2007-2008 primary in Iowa, Obama discussed monopolization in agriculture, which is particularly severe in the chicken industry. When Obama took office, his administration began bold hearings into consolidation, and told farmers they could speak out and the government would have their back against powerful processors.
I don’t want to get into all of the details here, but chicken processors essentially have no power vis-a-vis the large companies who contract them out to turn chicks into poultry. They are told what feed to use, how to care for the chickens, and what price they will receive. The ability to retaliate is total. Obama pledged something important for these proud farmers: independence. As Lina Khan reported years ago:
The message seemed to be clear: the highest brass in the Obama administration was listening closely to how America’s independent farmers are pushed around by big companies, and they were no longer going to tolerate it.
Staples told the crowd at the hearing that he feared that Pilgrim’s Pride, the processing company with which he contracts, might punish him for voicing his troubles. Later, Christine Varney, the government’s chief antitrust regulator at the time, who was sitting in front of an American flag, spoke up. “Mr. Staples, let me say, I fully expect you will not experience retaliation by virtue of your presence here today,” she said, handing him a piece of paper with her phone number on it. “But if you do, you call me.” The hearing erupted into applause.
Of course, Varney did nothing, Eric Holder did nothing, and Tom Vilsack did little. Towards the end of the administration, they proposed some mild regulations (that the Trump administration promptly threw in the trash), but that was seven years after they promised there would be no retaliation and then enabled retaliation.
Fear is pervasive across the economy at this point, and most of the people who will speak up are those who have left their companies. Brian Kelly, the founder of pioneering ad technology AppNexus, testified to Congress recently that Google is a monopoly and needs to be broken up. Why was he able to do that? Because he sold his company to AT&T.
Similarly, I spoke on a panel a few months ago in Congress on airlines, and Adam Goldstein, the former CEO of flight travel booking site Hipmunk, talked as well. I used to love Hipmunk, but it’s terrible now and I don’t use it. Goldstein explained why. He noted that after the wave of consolidation among airlines during the Obama years, airlines stopped allowing his site to have access to pricing data unless they hid certain routes to consumers. This move to avoid competition destroyed the business and harmed consumers. (It’s also obviously illegal, and the Department of Transportation has antitrust authority it doesn’t use to stop it.) Why did Goldstein speak publicly? Hipmunk sold itself off and he’s no longer there.
I’ve heard from venture capitalists frightened to talk for fear they can’t sell portfolio companies to big tech, I’ve heard from farmers and boutique owners about retaliation, small banks and credit unions on retaliation from their software providers, and even large companies afraid they’ll spook shareholders if they go public with how dominant Google or Amazon is. Fear is everywhere, normalized even. A week ago, the United Autoworkers lost a unionization vote in Tennessee at a Volkswagen plant. The loss was devastating.
A win for the union would have been historic. Foreign automakers, such as VW and Toyota (TM),own 31 factories and produce nearly half of the cars built in the United States. None of those 31 foreign-owned plants have ever been unionized. Workers there are generally paid less than workers represented by the UAW.
The rumors were that Volkswagen was telling workers that if they voted to unionize, the company would simply shut the plant down. Was that true? Maybe. But workers couldn’t risk it. Again, this is fear, the fear of retaliation. And now I’m going to guess Ford and GM are now going to demand more concessions from their workers, who have few options, like the farmers and CEOs I’ve mentioned. None of this warranted much press attention, or attention by the Presidential candidates, despite it being a central political problem in America today.
There are many public policy levers that brought us to this point of fear and desperation. Eroding antitrust laws, union protections, and financial rules are some of them. But the point is that we are in a moment of low-level quiet terror, like a soft authoritarian regime, where the coercive power functions by effectively seizing the property of its victims. It’s a bit like the mob, without the breaking of kneecaps part (though with health care systems as they are…) And remember, the people I’ve mentioned are relatively powerful - CEOs of companies, venture capitalists, farmers who own their own land, unionized workers, etc. Just go down the line and think about what it’s like for those without property or power.
This situation is not new. In the 1950s, Emanuel Celler, who I’ll reference frequently in this newsletter, had a debate with the CEO of Dupont in the pages of Reader’s Digest. Celler was discussing a situation where a GE salesman said he’d sell refrigerator compressors “at any cost” to put a competitor out of business, which caused panic in the refrigerator industry. The head of GE, Charles Wilson, soon said there was nothing to the story and the “salesman had been talked to.” Still, Celler wrote, “I don’t like to see men first terrorized and then relieved to find out that Charles Wilson is feeling kindly and won’t let his men shoot.” Here’s how Celler started out his essay.
Under our ancient common law your neighbor must not point a gun at you, even though he has never shot anyone. Similarly, our antitrust laws were intended to protect businessmen not only from violence but from fear of violence.
I love that quote, because it says it really says it all right there.
There are many reasons, efficiency being one, that we should force competition within markets without allowing anti-competitive behavior. We want companies competing over producing better goods and services, not the acquisition and abuse of power. It is simply more efficient if everyone has to win because their products are better, as opposed to they have a bigger legal budget or more power.
But fundamentally, America (and any democracy) should mean a land where we are free from fear, free from domination. Right now, in the commercial sector, it is anything but.
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