The New Republic, July 6,1974
A PORTRAIT OF Sen. John Sherman (1823-1900) adorned a recent cover of Business Week, and inside, the magazine warned that “business almost certainly faces tougher antitrust enforcement and possibly even a new antitrust law aimed at breaking up the corporate giants in the country’s basic industries.” The same week that John Sherman was being resurrected from the mists of history, the Washington Post reported that the Justice Department may revive an 18-year-old lawsuit against General Motors for monopolizing the bus industry. The Justice Department’s interest was apparently aroused by a report on the transportation industry released earlier this year by the Senate sub-committee on antitrust and monopoly. The report, written by Bradford Snell, described how GM, often in conjunction with Standard Oil of California and Firestone Tire, purchased over 100 urban transit systems during the 1930s and systematically replaced electric cars with less efficient, more polluting GM buses.
Sen. Philip Hart (D-Mich.), chairman of the anti-trust subcommittee, is pushing for legislation that, for the first time, would make market dominance a basis for breaking up large firms in such oligopolistic industries as autos, steel, aluminum, chemicals, drugs, electrical machinery, computers, communications equipment and energy. And the Federal Trade Commission has been virtually racing with the Justice Department to bring antitrust suits against IBM, Xerox, the energy, cereals and tire industries.
Sen. John Sherman, were he alive today, would be both pleased and perplexed — pleased that his famous law of 1890 is still invoked, perplexed by the fact that 84 years after his law was passed, the trusts are more firmly planted than ever. According to the Federal Trade Commission, the top 200 manufacturing corporations now control more than 60 percent of US manufacturing assets; 25 years ago they controlled 48 percent.
The basic problem is that antitrust is a criminologist’s approach to economics. It seeks to punish or deter unwanted behavior; it supplies no model of desired behavior. And as in other lines of police work, the prosecution of misconduct is subject to many personal whims and political interventions. ITT is only the latest of many corporate giants that have been dealt with gently for political reasons; many others — GM, for example — have never even been gently attacked. Definitions of illegal antitrust behavior are so vague and the burdens of proof so demanding, that cases can be tied up in court for years, at great expense and with sparse results. Only rarely does a corporate executive go to jail; fines are minimal and tax deductible; the few divestitures that have been ordered have not changed conditions notably in any industry, or brought lower prices. Nor is it readily apparent how, even if stiffer penalties were applied and more lawsuits filed, any substantial economic benefits to the public would be achieved. Even Sen. Hart’s new bill, were it to get through Congress, would alter the economy very little. It would establish the presumption that corporations with high market dominance are acting in restraint of trade, but this would be a rebuttable presumption leading to complex litigation.
Perhaps reformers remain so fascinated by antitrust laws because so many reformers are lawyers. Thurman Arnold, who headed the antitrust division of the Justice Department from 1938 to 1943, believed the antitrust laws actually aided monopoly by satisfying a popular taste for anti-corporate rituals, without changing anything. “By virtue of the very crusade against them,” Arnold wrote, “the great corporations grew bigger and bigger, and more and more respectable…The reason why these [antitrust] attacks always ended with a ceremony of atonement, but few practical results, lay in the fact that there were no new organizations growing up to take over the functions of those under attack. The opposition was never able to build up its own commissary and its service of supply. It was well supplied with orators and economists, but it lacked practical organizers.”
WHY NOT PUT Arnold’s dictum to work? Not abandon the antitrust laws, for without them economic power would concentrate even more rapidly, but build public competitors to giant corporations.
The idea of public enterprise is not new in free-enterprise America; there have been government-built or operated post offices, highways, canals, munitions plants, schools and parks since the earliest days of the republic. More recently there have been public utilities, bus lines, railroads, radio and TV broadcasting, housing developments, hospitals, nuclear facilities and space shuttles. Generally these public enterprises have been in areas of social or military need, or where natural monopolies occur, as in electricity and transportation. But why should the definition of natural monopoly be limited to activities where only one enterprise can efficiently perform a needed service? Why not include industries where monopoly or oligopoly conditions exist because of market domination by a handful of large firms?
To the old populists’ claim that conventional natural monopolies should be publicly owned because of their power to extort vast profits, the New Deal added the idea of “yardstick” competition. The emphasis was not so much on direct competition between the public and private sectors as on comparative competition: by getting the government into business, the costs and profits of private corporations could be more accurately assessed, enabling public agencies to regulate more wisely. The Tennessee Valley Authority was the first enterprise billed as a yardstick. Its cheap electric rates cast a disparaging shadow over the high rates charged by private utilities. This didn’t do much to lower rates in, say, New England, but in areas TVA served, or threatened to serve, electric rates came tumbling down. TVA did not, however, have the same effect on the fertilizer industry. There TVA chose to use its Muscle Shoals facility for research and development rather than mass production of cheap fertilizer. This more traditional role of a public enterprise — subsidize the private sector, don’t compete with it — helped soften TVA’s “radical” image.
In the early 1940s there was a flicker of interest in applying the yardstick concept to aluminum. Wartime needs led the federal government to spend millions of dollars building new plants that were owned by the Defense Plant Corporation and accounted for half of U.S. aluminum production. The other half came almost entirely from the Aluminum Company of America, a Mellon-controlled company that was then the target of an antitrust suit. The question arose whether the DPC’s aluminum plants should be sold to private industry after the war, or retained under public ownership as Muscle Shoals was after World War I. David Lilienthal wanted at least one plant to go to TVA; Thurman Arnold backed him up, observing that “one TVA aluminum yardstick would be worth a dozen antitrust suits against the Aluminum Company.” Other New Dealers advocated an independent public aluminum corporation. In the end, the Surplus Properties Board, headed by Stuart Symington, sold the DPC plants to two family-controlled firms, Reynolds Metals and Kaiser Aluminum. The prewar monopoly thus became a postwar oligopoly.
THE YARDSTICK NOTION has been revived by Sen. Adlai Stevenson III (D-Illinois), who introduced legislation to establish a Federal Oil and Gas Corporation with authority to develop oil and gas resources on public lands. The FOGC would help the government acquire hard-to-get data on energy reserves, costs and profits. More importantly, it would inject a new competitive force into the cartel-like energy industry. If private oil corporations arranged to limit production and raise prices, FOGC could boost production and hold prices down. The FOGC legislation could be stronger than it now is — Stevenson’s version limits FOGC to 20 percent of the oil and gas on public lands, restricts its ability to refine and market directly to the public, and authorizes only $50 million in appropriations.
Now that Washington is again considering yardstick competition, there’s no reason it should confine its attention to the energy industry. Competitive public enterprises (CPEs) could play lively roles in all the industries covered by Hart’s new antitrust bill. At the least, there ought to be CPEs in the auto, steel, aluminum, drug, banking and insurance industries. These CPEs would not only reintroduce competition into markets that have become comfortably non-competitive; they would also be innovators and public interest watchdogs.
Take the automobile industry. Until faced with competition from abroad, three (or four) firms monopolized the domestic car market. None were keen to produce cars that were small, safe, low-polluting, or obtained good mileage. “The American automobile industry found that large cars provided much higher profits,” notes Geoffrey Cowan, a former organizer of Campaign GM. “Innovations in the fields of safety and pollution were not seriously attempted until required by government, and even then the law left the engineering initiative to private industry, which refused to consider capital-intensive innovations such as the stratified charger engine, preferring to settle for marginal low-cost solutions such as the catalytic converter.” Cowan favors a public auto company that would produce and market safe, low-polluting and economical cars, and actively promote mass transit.
A public steel corporation would not allow the private steel oligopoly to raise prices when furnaces were running under capacity and great social needs — such as low-cost housing — remained unmet. A public insurance company would offer low-cost, no-fault auto insurance, as do the provincially owned insurance companies of Saskatchewan, Manitoba and British Columbia. (A report in the Wall Street Journal a few years ago noted that 93 percent of premium income in Saskatchewan is paid in benefits, compared to 75 percent in the United States.) Life, fire and other policies would be simple and clearly written, so that consumers could understand what they were buying. In the drug industry, where private corporations make notorious super-profits, some form of public manufacturing and/or purchasing corporation could market generic drugs to consumers at much lower prices.
Numerous public enterprises scattered throughout the economy could collectively perform another important function: they could serve as whistle-blowers on private collusion. The conspiracy of silence that prevails within the noncompetitive private sector is little-appreciated. If the price of fuels rises, for example, private utilities pass on the cost to consumers. Competitive public enterprises would not be so acquiescent. The classic example is TVA’s breaking of the electric machinery price-fixing conspiracy in the 1950s, which all the private utilities knew about or suspected — but silently accepted — for years.
Structurally, CPEs need not all be federal corporations modeled after TVA. Some could be jointly owned by the federal and state governments, as Volkswagen in Germany has been. Others could be state or locally owned. North Dakota has had for many decades a state-owned grain elevator and bank. Wisconsin sells cheap state life insurance. City-owned farmer’s markets exist in many places; with a little more effort and financing they might give supermarkets a run for their money. In some public enterprises, worker or community representatives could be given seats on the board of directors, and work arrangements could be more democratic. What ought to be avoided, or at least not confused with CPEs, are quasi-public corporations like Comsat that use public capital for private reward, or rescue operations like Amtrak that simply bail out failing private industries at public expense. CPEs should be non-subsidized businesses, competing with private corporations on an equal footing.
The concept of competitive public enterprise is subject to attack as a form of socialism. It is not socialist in the sense that it does not envision state monopolies; it is socialist in that it does envision a limited role for public ownership.
BUT AREN’T PUBLIC enterprises inherently bungling, inefficient, overstaffed and subject to political meddling? Listen to Frank Ikard, head of the American Petroleum Institute, testifying against FOGC: “Twenty years ago a penny would move a postcard from Texas to New York through the govemment postal service, or a gallon of oil from Texas to New York by tanker. Today, private enterprise still moves the gallon of oil from Texas to New York for a penny, but a postcard costs 8 cents.” The post office is bad enough, God knows, but it’s an inappropriate whipping boy for those against competitive public enterprise. For one thing, it is a monopoly, or virtual monopoly, and all monopolies, public or private, tend to soften around the midsection. A nonsubsidized public enterprise that was competing in the market with private corporations would be more likely to stay lean.
The record of public enterprise in the electric power industry bears this out. Municipally owned electric companies have consistently undersold privately owned utilities. The federal government’s wholesale power producers, TVA and the Bonneville Power Administration, are, as former Federal Power Commission Chairman Lee C. White told a Senate hearing on FOGC, outstanding examples “of efficient operations in the energy field by government.” The TVA Act exempts TVA from the civil service laws and requires that employees be hired and promoted on the basis of merit, without any political considerations. This rule has been adhered to for 41 years. The objection that public enterprises might become too political rings particularly hollow when one considers the many ways in which private corporations have used politics and politicians and have benefited from public subsidies.
In other democratic countries, public enterprise has had a decent track record. In Italy, publicly-owned holding companies maintain controlling interest in over 100 firms engaged in banking, mining, ship-building, shipping, chemicals, air transport, radio and television, civil engineering, motor vehicles and industrial equipment. The companies utilize some private capital, and they operate in the competitive market. They have contributed to making the Italian economy internationally competitive and to developing the backward southern region of the country.
In Britain, entire industries —coal, electric power, steel, transportation —were nationalized after World War II and are run by national boards directly responsible to government ministries. (These are, it should be noted, not competitive public enterprises of the kind we advocate for the United States.) A Parliamentary Select Committee on Nationalized Industries conducts periodic studies of the performance of state industries. The committee has established the principle that where nationalized industries are required to do something that is against or beyond their commercial interests, they must be compensated by the government. The same principle governs TVA: it receives Congressional appropriations for its agricultural, forestry and other programs that are supplementary to electric power generation.
In France the major banks and insurance companies, as well as the Renault auto company, were nationalized after World War II. In some of these firms, management functions are now being moved from Paris to various regional centers. At Renault limited experiments in offering stock to workers and allowing worker participation in management decisions are underway. French public enterprises work with, but are not controlled by, a national planning board.
The United States can learn from these foreign experiences, both good and bad; but we need not limit ourselves to foreign models any more than we need stick to the TVA mold. We have enough imagination to create lively public enterprises that will restore the benefits of competition and give consumers some real choices. How nice it would be to have a public sector that could really keep the private sector on its toes. And what a pleasure it would be to purchase products designed with sanity, not profit, foremost in mind.
This article was co-authored by Derek Shearer.