Slouching toward Reregulation

There is one solution to the monopoly problem that is conspicuously absent from Noah Smith’s account of monopoly power debates at this year’s ASSA.

Smith rightly concludes that breaking up big firms is not a perfect solution to the monopoly problem. (He thinks, incorrectly, in my view, that breakup is too hard; the real reason not to break up big firms is that they are often more efficient than small ones.) And he rightly gives a list of alternatives to breaking big firms up, including unions, minimum wage laws, putting workers on corporate boards, and imposing tougher labor standards on large firms than small. But he doesn’t seem to see where all of these alternatives point.

Where do minimum wage laws and applying tougher labor standards to large firms point?

To rate regulation, of course. To that approach to governing the market that once — in the decades following World War Two — stretched from securities brokerage to railroads to telephones to airlines.

In a regulated industry, a government administrative agency dictates prices and performance standards to the privately-owned firms that compete in the market. Applying tougher labor standards to firms with monopoly power, a proposal that Smith attributes to Nick Hanauer, is a shade of the old rate regulation, which was often imposed on monopolized industries, such as telephone service, to restrain the power of large firms.

Minimum wage laws are themselves a form of blunt price regulation, blunt because they are imposed on a one-off basis by legislatures instead of by expert administrative agencies with authority to revise the prices dynamically in response to changing circumstances. And both unionization and putting workers on corporate boards are even blunter forms of rate regulation, in that they hope that by increasing the bargaining power of workers, workers will succeed at negotiating the higher wages and better working conditions that a regulator would be empowered to impose by fiat.

True, most of Smith’s proposals are aimed at softening the consequences of labor market monopsony, whereas rate regulation was generally aimed at softening the consequences of consumer market monopoly. But there’s no reason why the Department of Labor couldn’t apply the tenets of rate regulation to labor markets.

Rate regulation is the most developed form of intervention in markets, one that encompasses all the other forms, but also goes beyond them, so it’s the natural choice for achieving just market-level distributions of wealth where unregulated markets fail to do so. A rate regulator can unionize an industry if the regulator wishes, just as the ICC effectively cartelized long-haul railroads to stabilize their prices: the regulator simply insists on approving only a wage tariff that is uniform for all workers, effectively forcing workers to bargain collectively with their employers. But a rate regulator can do more than that, regulating market entry to strike a balance between job security and competitiveness, insisting that workers offer certain bundles of skills, and even imposing workplace safety and benefits standards.

Once we start to believe that markets are failing, and that just breaking up big firms won’t achieve distributively fair market outcomes, as economists seem to be concluding, the door is open to market intervention, and at that point it makes sense to use the best tool for the job. The one-off ad hockery of minimum wages won’t do. Nor will strengthening unions — if you make them strong enough to really succeed, you make them strong enough to oppress investors and consumers. What you need is a politically accountable agency empowered to make markets work for all market participants.

That’s what rate regulation was, and could be again. Let’s stride to it, not slouch.