Questions Senators Should Ask Kanter and Khan

September 18, 2022

Tuesday afternoon, Sen. Amy Klobuchar will preside over a hearing of the antitrust subcommittee of the Senate Judiciary Committee. Sen. Klobuchar’s witnesses will be her fellow “neo-Brandeisians” in antitrust law – Jonathan Kanter, Assistant Attorney General for the Department of Justice Antitrust Division, and Lina Khan, Chair of the Federal Trade Commission.

We can reasonably predict effusive, mutual admiration between Klobuchar, Kanter and Khan to set the hearing’s tone. But this hearing also offers an opportunity for committee members to dig into the regulatory war Kanter and Kahn are launching against American business, as well as government employee polls that show serious mismanagement of the Federal Trade Commission under Khan’s leadership, and deep flaws in the poorly drafted American Innovation and Choice Online Act (S.2992) that could extend government power over private business and lead to a privacy nightmare
with China.

Here are some lines of productive questioning that could break through the appearance of consensus on progressive antitrust policy that Chair Klobuchar and her star witnesses want to promote.

Questions for Chair Khan:
Office of Personnel Management surveys have for years shown that the employees of the FTC rate it very highly. That survey now gives you, Chair Khan, and your team low marks for lacking “high standards of honesty and integrity.”

Chair Khan, why are people at your own agency questioning your “honesty and integrity,” plunging the rating of your organization from a leader to a laggard among agencies?

o Is it credible that merely enacting a new policy paradigm at FTC would cause your employees to question your “honesty and integrity”?

Why have your employees also dropped your agency from among the first to among the last when asked if they have a “high level of respect” for senior leaders?

o How can that just be about policy?

Your FTC Colleague, Commissioner Christine Wilson, said: “Under Chair Khan, morale has plummeted, and we have seen an exodus of experienced lawyers and economists. The FTC may take a generation to recover from this loss of institutional knowledge.” I can’t remember a time when commissioners, even
those of different parties, criticized each other to that extent. Wouldn’t you at least agree that FTC is in crisis?

FTC has long been famous for its spirit of debate and intellectual ferment. FTC experts were once highly prized as speakers at economic and business forums. Why then, did you, early in your tenure, issue an email prohibiting your staff from attending conferences?
The agency’s internal culture of debate has been replaced with unilateral control by the Office of the Chair. You need not solicit even commission votes to compel the staff to follow your dictated policies in all investigations. Policies long subject to notice and comment are being altered or rescinded with little or no internal or external input. Chair Khan, is anyone so intelligent and splendidly educated that he or she can dispense with debate in trying to understand the complexities of the economy?

There are reports that the FTC is using consultants who are also currently being paid by corporations that have active interests in antitrust cases against their competitors.
o Chair Khan, is it true that some FTC consultants are also being paid by outside companies?
o Do some of these outside companies have a stake in how antitrust actions are perpetrated, including against their competitors?
o You don’t see a conflict of interest at FTC in hiring paid consultants of businesses with antitrust concerns?

Questions on the American Innovation and Choice Online Act:
Senate Bill 2992 requires tech companies to be fully “interoperable” with competitors, forcing them to share hardware, software, and operating systems with thousands of domestic and foreign companies.

After alarms were raised about national security, this bill was amended to prevent data sharing with “clear national security risks” and entities “controlled by the People’s Republic of China or the government of a foreign adversary.” Many critics see that assurance to be so vague and weak that it is no assurance at all.

Here’s why – FBI Director Christopher Wray recently warned: “China often disguises its hand in order to obtain influence and access where companies don’t suspect it. Outside of China, their government uses elaborate shell games to disguise its efforts from foreign companies and government investment screening programs.”

Director Wray went on to say that China “is taking advantage of unusual corporate forms like SPACs, or Special Purpose Acquisition Companies, and buying corporate shares and overweight voting rights that let their owners exert control over a company out of proportion with their actual stake in it.”

Director Wray also said the “Chinese government has also shut off much of the data that used to enable effective due diligence, making it much harder for a non-Chinese company to discern if the company it’s dealing with is, say, a subsidiary of a Chinese state-owned enterprise.”

Given Director Wray’s warnings, how credible is it that the thousands of companies that will access the guts of America’s leading tech companies will fail to – inadvertently or intentionally – give China access to the personal data of millions of Americans?

All it would take would be for China to penetrate one of thousands of foreign companies from within. Isn’t it more than a little naïve to think that this vague clause in the bill will protect Americans’ data from China?
What about national security and the cloud? Microsoft Azure is a favored cloud storage provider for the government of Canada. AWS stores data for Homeland Security, the Department of Defense – including U.S. Navy command – and 80 percent of German DAX companies. Google Cloud serves New York City. Doesn’t this bill open the gates for China to work through the infiltrated companies described by Director Wray, creating a national security nightmare?

For Mr. Kanter: S. 2992 is advertised as a way to regulate “big tech.” It uses revenue figures and monthly numbers of active consumer and business users online to define its regulatory targets. This does, indeed, single out a handful of big tech companies. There are many companies, however, that are not big tech but that with a few years of equity growth and growth in online activity that could meet these
definitions. Mr. Kanter –

Walmart is ramping up digital competition with Amazon. If Walmart grows to the same size as Amazon in revenues and online users as big tech, would you have to regulate Walmart under the provisions of S. 2992?

If Bank of America were to grow in the next few years to a similar size as Google or Facebook in terms of revenues and online users, would you have to regulate Bank of America under the provisions of S. 2992?

I could go on, listing a Who’s Who of leading American companies, including grocery stores, that are by no means “big tech.” Yet they will either have to quit growing or grow into the crosshairs of the American Innovation and Choice Online Act, which can inflict death penalty fines of 15 percent of revenues.

The Consumer Welfare Standard
President Joe Biden last summer issued executive orders to empower a dozen executive branch agencies to mount aggressive antitrust actions against virtually every kind of business in America. The justification for this, the president said, was to counter “weakened investment” that occurred under the prevailing Consumer Welfare Standard, the metric by which judges have for almost fifty years evaluated business mergers and acquisitions by their impact on consumers, not competitors.

Now, the administration is blaming “monopolies” for recent higher prices.

Questions on Inflation, Growth and Antitrust Policy:
Under the Consumer Welfare Standard, 1980 to 2020, Americans enjoyed an average of 9.99% inflation-adjusted annual returns, 2 points above returns during the prior forty years. If you had invested $1,000 in the S&P 500 in 1980, and reinvested the dividends, by 2020, you would have had more than $97,000. And inflation and interest rates were low for more than four decades.

Now the S&P is down, inflation and interest rates are high and going higher. Are we really supposed to believe that these decades of supposedly growing concentration only now are suddenly beginning to hurt the American economy?
Did corporate executives suddenly bump into each other on the golf course one day in 2020 to conspire to monopolize the economy? Or is the inflation and reduced growth we are currently experiencing – after four decades of low inflation and growth – the result of other macroeconomic policies, such as a government that has put our country much deeper in debt than we have ever been, including the end of World War Two?
o Which is more believable – that after forty years of growth and low inflation, executives got together to conspire against the consumer, or the recent and astonishing explosion in federal debt is causing inflation?

Questions on the Real State of Competition:
President Biden says that over the past few decades we’ve seen “less competition and more concentration that holds our economy back.” Chair Khan wrote “studies reveal high concentration to now be a systemic, rather than isolated, feature of our economy.”

But a study by the respected economic group NERA shows that “in both the U.S. manufacturing sector and the broader U.S. economy … industrial concentration has been declining since 2007.”

At DOJ and FTC, the Herfindahl-Hirschman Index is used by antitrust regulators to define an overly concentrated industry. A market with HHI of less than 1,500 points is considered competitive. These economists found that this index had in fact declined in manufacturing from 821 In 2007 to 619 in 2017. The average HHI for manufacturing in 2017 was 150 points below its 2002 level.

Consider concentration at the top, the percent of economic activity accounted for by the four largest firms in a given industry. The numbers show a competitive economy that is becoming even more competitive – the concentration ratio fell from 36.9 percent in 2007 to 35.2 percent in 2017.

If the economy is becoming ever more concentration, how do you account for these falling HHI numbers for manufacturing and the broader U.S. economy?

o Did you just repudiate the HHI as a key metric in your agency’s antitrust policies?

If senators take this hearing as an opportunity to ask these and similarly tough questions, heat will shed light on the real state of progressive antitrust.