(Big issue 7-26-2019)
|Jul 26||Public post|| 7|
Welcome to Big, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…
Today I’m going to discuss the Department of Justice’s headline grabbing move from earlier this week, when it issued a statement saying it was investigating big tech, garnering front page placement in both the New York Times and the Wall Street Journal.
These kinds of announcements are very annoying in the Trump era, because it’s hard to know what any of it means. Trump officials aren’t afraid to use power to restructure corporations, but it’s rarely clear whether it’s to pursue the public interest or to punish enemies. It also seems quite possible that the DOJ is using the press it is getting for launching an investigation against big tech to cover for its illegal clearance of a merger between Sprint and T-Mobile, which it did today. I’m going to lay out a few theories of what is going on. Are many of these people headline grabbing crooks working on behalf of shady interests? No doubt. Are they serious about antitrust? Maybe!
But first, production corruption. How are prom dresses, airplanes, and nuclear missiles all part of our monopoly crisis? Read on to find out…
America Can’t Made Prom Dresses Anymore
One of the key themes of this newsletter is the corruption of our productive capacity, both in the U.S. and across the west. Earlier this week, I was reading testimony from companies complaining to the U.S. trade negotiator’s office about Chinese tariffs. Before imposing tariffs, USTR allows affected parties to testify, and they did.
The list of products and commodities companies say they can no longer make in America is long. Nylon products, optical scanners, consumer robotics, electronics, all types of clothing, specialty chemicals… etc. China has become the factory of the world. It has done so via a mix of subsidies and policies the Chinese government used to monopolize production. Their tactics aren’t new, it’s state-sponsored mercantilism, and we had trade laws from the American Revolution onward designed to protect us from such predatory tactics. But in the 1990s, in the throes of the End of History mania, we got rid of protections against foreign concentrations of power. And so we are now dependent on Chinese monopolies of all sorts of things.
My favorite example is Stephen Lang of the American Bridal & Prom Industry Association, who said, “we can't make wedding gowns and prom dresses in the United States.” The entire labor force for doing so, and even things like beads for hand-sown adjustments, are now in China. “It’s impossible… We can't even get the materials in this country to make this clothing.”
From prom dresses to point of sale terminals, the argument from American distributors is pretty much always the same. The ecosystem of production doesn’t exist in the U.S. anymore and it would be too expensive to bring it back. This argument is nonsense. For two hundred years, America had a high wage/high productivity model of production. We have shifted to a low wage/low productivity model of outsourced production, because we stopped enforcing our anti-monopoly rules against foreign concentrations of power, especially in China.
Just recognize for a second what is really happening. Our business leaders assert it is simply impossible to make wedding and prom dresses in America. We have become the land of “No we can’t.”
Production Corruption: Boeing Loses to a Rocket Monopolist?
About a week and a half ago, I wrote a piece speculating that a large $100B+ contract for nuclear tipped ICBM missiles might be headed to Boeing to help bail out the company after its spectacular 737 Max fiasco, a shadow bailout through the Pentagon budget. Yesterday, Boeing shocked the defense establishment and pulled out of the contest, leaving Northrop Grumman as the only bidder.
The Air Force had hoped to weigh both companies’ competing options to get the best missile for the lowest possible price, according to a contract solicitation announced last week. Now, the Pentagon will have to either start the procurement over ― under new specifications designed to bring Boeing back to the table ― or try to negotiate with Northrop Grumman despite having no competing options.
This is a very bad situation for the military, because Northrop can dictate the pricing and terms for an entire new set of nuclear missiles. And why does Northrop have such pricing power? Naturally, it has to do with a bad merger.
The dispute arose from Northrop Grumman’s 2018 acquisition of a company called Orbital ATK, a dominant producer of rocket motors.
In a July 23 letter to top procurement officials, obtained by The Washington Post, Boeing defense CEO Leanne Caret said the Air Force’s request for proposals “takes no steps to mitigate Northrop’s anticompetitive and inherently unfair cost, resource and integration advantages” related to solid rocket motors. The trade publication Inside Defense previously reported on the contents of the letter.
Northrop bought Orbital ATK last year, in a deal approved by the Federal Trade Commission. The FTC put conditions on Northrop, intended to block precisely this kind of leveraging power into monopolization of nuclear missile production. According to the settlement, Northrop had to establish internal firewalls and offer its rockets available on a “non-discriminatory basis to all competitors for missile contracts.” Boeing is basically saying that the FTC didn’t enforce the consent decree at all, that the merger went through effectively without conditions. It’s not just the FTC’s fault; the FTC worked with the Department of Defense on the merger, and the DOD told the FTC it expected “substantial benefits from the merger, including increased competition for future programs and lower costs.”
By pulling out and leaving Northrop as the only bidder, Boeing is basically alleging the FTC/DOD aren’t doing anything to enforce the consent decree in the Orbital acquisition. Boeing is now trying to force the DOD to rewrite the bidding terms of the contract to make the cost basis for rockets equal for both parties. It is also potentially setting up a legal challenge to the contract.
Yesterday, Boeing stock took a hit, so Wall Street was surprised by the news.
(Boeing, of course, is in trouble because of its civilian division. The company is considering suspending production of the 737 Max entirely. But engineering problems are not unique to Boeing. Airbus’s A350 has a software bug that forces operators of the plane to turn the plane off and on every 149 hours to prevent "partial or total loss of some avionics systems or functions.” In other words, our aerospace industry, not just in America but across the West, is taking on the characteristics of corrupted concentrated markets. Not just high prices, but poor quality, and you don’t want to be flying poor quality airplanes. )
Is the Big Tech Announcement for Real?
Earlier this week, the Department of Justice announced that it is taking a sweeping look into big tech. This announcement is the second time the DOJ has gotten big headlines for doing nothing, or worse, covering for what is a clear violation of the law. That doesn’t mean the announcement is meaningless, only that it’s very hard to figure out what’s going on because the Trump administration is full of liars.
I found one part of the announcement fascinating. Delrahim said the DOJ was looking into “search, social media, and some retail services online.” Social media? That’s odd. Just a few weeks ago, there was a big announcement that the DOJ and the FTC had divided up big tech. The DOJ got Google, and the FTC got Facebook, aka social media. And pretty much at the same time as this DOJ announcement, Facebook announced on its earnings call that it is under antitrust investigation by the FTC. Investors shrugged, in my opinion rightfully, as it’s fairly obvious that FTC Chair Joe Simons is lazy and irrelevant. Maybe the DOJ thinks so too, and so has no qualms about just ignoring them and going ahead with its own investigation of social media. Or maybe the DOJ wants to threaten Twitter for political purposes.
I have two possible theories of what is happening. The first is that the DOJ is serious about going after Google and Amazon. I’ve done an analysis of Trump’s Antitrust chief Makan Delrahim, and it’s not clear to me he’s even capable of doing anything meaningful. But right now, Attorney General William Barr is big footing Delrahim, meeting with state attorneys general on big tech issues. And Barr is a serious guy.
Barr is not afraid of taking on corporate power, and has reasons to do so. He was an attorney at GTE, which merged to become Verizon. And he was on the board of Time Warner, which merged with AT&T. Both Verizon and AT&T/Time Warner despise Google. Barr also oversaw prosecutions over the savings and loan debacle when he was the Attorney General under the first George Bush, and in his confirmation hearings even expressed puzzlement the Obama administration hadn’t sent anyone to jail. So Barr is not averse to using power, even against people in his own class of elite lawyers and bankers.
Moreover, big tech is now an existential issue across the economy, so much so that Treasury Secretary Steve Mnunchin is discussing Amazon destroying most of retail. The states keep edging closer to action. The problem is also global. The Australians, who are some of the most savvy enforcers in the world, just released a report on big tech. Big tech is way above Makan Delrahim’s head at this point.
The second theory is that the DOJ is covering for a bunch of corrupt stuff it is doing in this news cycle. The DOJ just cleared what is obviously an illegal merger between Sprint and T-Mobile. There are four players in a concentrated market, and the goal of the merger is to raise prices. Rather than blocking the merger, the DOJ Antitrust division is allowing it, but demanding the sale of some assets to Dish, which would apparently start a fourth competitor, though such a competitor would be much smaller and weaker. This makes no sense. The stated logic of DOJ is that we need to get rid of a fourth competitor so that we can start a fourth competitor. The real logic is that Sprint is owned by a Trump ally, Masayoshi Son of Softbank, and Trump probably wants this deal put through.
There’s also an attempt to cover for the corrupt FTC settlement on Facebook over the company’s Cambridge Analytica scandal. I am not going to rehash all the problems with the settlement, suffice to say that the FTC did no real investigation, made no structural changes to the company, gave the company an excuse to exclude competitors going forward, and effectively wrote a liability release for the company for anything it may have done wrong. If you want a reasonable critique, read FTC Commissioner Rohit Chopra’s dissent on the settlement. It is an outrage. Though negotiated by the FTC, such a settlement has to be approved and filed by the Department of Justice, which means this one’s on the DOJ as well. So rather than getting a bunch of headlines that the DOJ is corrupt, they get headlines saying they are going after big tech. Again.
My view is that what’s happening is a mix of both. The DOJ is covering for its own corruption, and helping allies who hate Google and Amazon with a real investigation. Welcome to 2019.
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