Busting The Trustbusters

Independent businesspeople voted in droves for Ronald Reagan. Now Reagan proposes that fewer businesspeople be independent.

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One principle lies behind nearly all of the Reagan Administration's policies concerning business and the economy: an open and competitive marketplace, free from government interference, corrects all ills. Deregulation, massive tax cuts, the shuttering of consumer-protection bureaus, the elimination of the Federal Reserve Board's margin requirements for corporate takeovers -- all these flow logically from that simple faith in the power of the free market. It is a faith, by and large, shared by America's independent businesspeople and entrepreneurs.

But one form of deregulation now threatens to undermine all of these others: the so-called reform of the antitrust laws. An earlier generation of Republicans saw these laws as necessary to preserve a truly free and competitive marketplace, and enforcement of them has been a matter of bipartisan enthusiasm. In word and deed, however, the Reagan Administration is now proceeding on the assumption that the antitrust laws have really been anticompetitive and the enthusiasm for enforcing them misguided. Consider:

* The Justice Department and the Federal Trade Commission, except in the most egregious instances of bid-rigging by contractors, have refused to bring any significant antitrust cases.

* Megamergers involving competitors in steel, oil, and electronics go unchecked.

* New Justice Department guidelines have removed from government review just about any vertical restraint a big company wants to impose on unwilling customers, distributors, or suppliers. In response, critical votes have been taken in both houses of Congress, and the attorneys general of all 50 states have issued their own set of uniform guidelines that they will use in policing vertical restraints under state law.

* Justice Department lawyers have filed a brief at the U.S. Supreme Court arguing that businesses should rarely, if ever, have standing to bring private antitrust suits against their competitors.

* The White House is recommending to Congress the most sweeping changes in the antitrust laws since President Woodrow Wilson signed the Clayton Act in 1914. The Administration proposes a five-year exemption from the antitrust laws for companies in any industry found to be hurt by unfair import competition. And it proposes to eliminate treble damage awards in most private antitrust suits, with the express purpose of reducing the likelihood that these risky and complex cases would be brought.

The economic theory behind all this is that the antitrust laws as now written artificially restrain the economy from organizing itself into units that are bigger and more vertically integrated -- units that would be more efficient in supplying goods and services at the lowest possible price, and more successful in competing for international markets. What the Reagan Administration is less eager to talk about is the unavoidable consequence of following through on that theory: that the American economy would have fewer -- and weaker -- independent businesses.

The Reagan theory is strangely at odds with recent experience. It is true, for example, that until recently, antitrust lawyers with the Justice Department did not sufficiently consider the effect of foreign competition when reviewing proposed mergers of companies within domestic industries. But it is a long leap from there to the assertion that the antitrust laws destroyed the competitiveness of American industry and now need to be suspended. Commerce Secretary Malcolm Baldrige may be the only man in America who really believes that the reason U.S. Steel, GM, and RCA have fared so poorly against foreign competition is that they just aren't big enough. If anything, these cases might suggest just the opposite: that the inability to compete is a result of being too big, not too small -- of operating in industries in which there has been too much concentration, not too little.

In defense of its laissez-faire attitude toward mergers, the Administration cites not a single example of an industry or a company that would have thrived in the marketplace but for the disruptive hand of the antitrust enforcer. Instead, these policies are prescribed on the basis of theoretical models about economic efficiency. In this context, efficiency has a special meaning. It does not mean that companies involved in mergers are themselves likely to pare operating costs, charge lower prices, or earn higher profits. In fact, F. M. Scherer, a visiting fellow at The Brookings Institution who has studied the financial reports of pre- and postmerger companies, has found that, "on average, mergers decrease efficiency" of particular companies. Rather, the Reagan theory is that the economy as a whole is more efficient in balancing overall supply and demand when companies are free to follow their instincts and attempt to monpolize the marketplace. But the theory is fundamentally flawed. It assumes, at the outset, that consumers and business managers are perfectly rational economic actors working in an ideal atomistic economy with frictionless competition. Is there anyone outside of Washington who believes this is how the economy operates?

What real businesspeople do believe is that the economy is too important to be left to government lawyers or to economists. That's why private antitrust suits filed by businesses of all sizes against predatory competitors have been so important in keeping the marketplace truly free and competitive. The Administration says it doesn't oppose these private suits -- only the punitive treble damages that are awarded after judges and juries have determined that illegal behavior has occurred. But, as a recent study prepared for Georgetown University Law Center concluded, without the possibility of winning treble damages, businesses and their high-priced attorneys will be unlikely to risk the expense and time of such complicated litigation.

There is also the deterrent effect of punitive antitrust damages to consider. Without treble damages, businesspeople will know that the only penalty for getting caught at predatory business practices will be to give back the ill-gotten gains. With so little at risk, many more will give monopolizing a try. This is hardly the policy one would expect from a self-described law-and-order administration.

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