When the Great Progressive Hope Is . . . Neoliberalism

The striking thing about Elizabeth Warren’s proposal to break up big tech is that it fits the Neoliberal deregulatory playbook to a T.

From about the mid-1930s to the mid-1970s, roughly a quarter of American economic output, in industries ranging from air travel to natural gas, was subject to a form of regulation that grew directly out of the original progressive movement of a century ago. Although regulatory regimes varied by industry and sometimes by state, common themes were vertical integration and the regulation of the price and quality of goods or services provided to end users.

Electric utilities were encouraged not just to produce their own power, but to own the networks of power lines that distributed the power to consumers. The nation’s regulated monopoly telecommunications provider, AT&T, not only provided telephone service to consumers, but also owned the local and long distance network infrastructure through which the firm connected calls, and even invested heavily in upstream research and development — the famous Bell Labs — instead of relying on startups to create an innovation pipeline.

This vertical integration allowed regulated firms to streamline the entire production cycle. AT&T could guarantee call quality and connections because it controlled the entire infrastructure linking any two callers, right down to the phones the callers used, which were owned by AT&T and hardwired into the wall. The efficiencies associated with this approach are like the advantages that have made Apple products beloved of consumers. Unlike virtually all of its competitors, Apple controls the entire production cycle of its devices: it designs the chips and other components, writes the software, and runs its own sales, marketing, and customer service operations. As a result, it delivers a reliable, integrated experience that customers love.

Vertical integration not only created economies of scale, but also economies of regulation: To ensure that consumers received a fair price and high standards of quality, regulators needed only to oversee a small number of vertically integrated entities, instead of having to regulate separate markets at each level of the supply chain.

And integration was also good for labor. Instead of having to unionize atomistic firms operating at numerous levels of the supply chain, unions only needed to organize a small number of vertically-integrated firms, each of which had a large workforce, making the gains from any one successful organizing campaign quite large. Shortly before deregulation, for example, AT&T was the largest employer in America, with more that 100,000 souls on payroll. Like workers at many other regulated firms, AT&T’s workers belonged to strong unions that made AT&T a paragon of progressive labor practices.

The Neoliberal attack on this approach to regulation started swiftly and brutally in the late 1970s, when over the space of three years Congress tore down most of the regulatory edifice. But as law scholars Joseph D. Kearney and Thomas W. Merrill observe, Congress did not replace regulation with laissez faire, but rather with a “new paradigm” — one that looks suspiciously like the one proposed by Warren for the regulation of big tech. Kearney and Merrill write:

Instead of striving for equality of treatment among end-users and reliability of service, the new paradigm seeks to encourage providers to offer different packages of services at different prices to end-users, on the theory that competition among these providers will enhance consumer welfare. Thus, in one regulated industry after another, we see a movement to eliminate tariffed [i.e., price-regulated] services in favor of contractual choice, to unbundle standardized packages of services in order to allow end-users to select among different service elements, and to eliminate restrictions on entry in order to encourage competition among multiple providers. The role of the agency has been transformed from one of protecting end-users to one of arbitrating disputes among rival providers and, in particular, overseeing access to and pricing of “bottleneck” facilities that could be exploited by incumbent firms to stifle competition.

Joseph D. Kearney and Thomas W. Merrill, The Great Transformation of Regulated Industries Law, 98 Colum. L. Rev. 1323, 1325-1326 (1998).

The idea was to promote competition at every possible level of the supply chain by atomizing vertically integrated firms, and to engage in actual regulatory supervision only when there is a “bottleneck,” a level of the supply chain at which technological considerations make it impossible for competition between numerous sellers to prevail. Even then, the new paradigm would strive only to regulate for equal access, rather than to impose the old limits on price and quality. The hope — and this is what made deregulation a Neoliberal project — was that further regulation would be unnecessary because competition would guarantee the socially desirable outcomes that regulation had once been tasked with achieving: high wages and good working conditions, low prices and high quality products for consumers, and plenty of innovation.

That was the deregulatory promise. What America actually got was different. Competitive markets proved highly unreliable creators of value, subject to boom and bust cycles, short-termism, oppression of labor, and manipulation executed far quicker than any antitrust enforcer could respond. Deregulation of banking led to creation of a vast “shadow banking” sector that drove bubble lending and helped trigger the 2007 financial crisis. Investment decisions regarding research and development moved from the boardrooms of regulated firms trying to please regulators demanding returns on thirty-, fifty-, or hundred-year time horizons to an atomized market of venture capitalists looking to make a quick buck. The result was the marketing- and advertising-driven innovation of the internet startup, that of “we wanted flying cars, instead we got 140 characters” infamy. The days of the huge private capital commitments in basic research that led to Bell Labs’ invention of the transistor, the key to microcomputing and the entire information age that has followed, were gone.

Labor, too, went into a tailspin, as firms responded to the unbundling gospel by unbundling their workforces into atomized pools of “independent contractors,” who could be unionized only by painstaking piecemeal organizing efforts, if they could be unionized at all. Wages never recovered.

And consumers, too, suffered. Consumers benefit from competition only to the extent that consumers have the time and sophistication to choose wisely between competing alternatives. Firms responded to their new freedom to set prices and quality standards by swamping consumers with dizzying arrays of product options that consumers could navigate only at high cost. The airlines, for example, instituted dynamic pricing that forced consumers to time their ticket purchases to minimize the fares they paid, and unbundled the flight experience to absurd extremes, making it impossible to compare ticket prices because one price might include, for example, the right to a carryon bag but no seat assignment, whereas the other might include the reverse. Where once they paid a fixed regulated price for a standardized package of services, consumers now had to waste countless hours navigating competing reservations websites into order to avoid getting fleeced.

Perhaps more importantly, deregulated firms responded to the inefficiency of market atomization by trying to stitch themselves back together, only this time without the regulatory supervision required to prevent bad behavior. The history of American telecommunications after AT&T’s 1984 breakup has been that of the progressive recreation of the old monopoly out of its pieces, so much so that today a majority of telecommunications are provided by only two companies, both of which were spun off of AT&T back in 1984. Only now, the firms are unregulated in price and service quality, with the result that Americans pay more than any other developed country for service that lags them all.

The tragedy of Warren’s plan is that it seeks to lock in the conditions that have given rise to this world, to write the Neoliberal obsession with unbundling, deintegration, and competition into federal law for the tech giants.

Warren’s proposal calls for forcing Google and Amazon to unbundle their platforms from their other offerings: Google should spin off its advertising exchange from its search platform, and Amazon should spin off its manufacturing businesses (e.g., Amazon Basics) from its online shopping business. That is the regime of vertical disintegration and competition that characterizes Neoliberal deregulation. Apart from the unbundling, the only regulation actually to be found in Warren’s plan is the regulation of access to the unbundling platforms on “fair and nondiscriminatory” terms, which is intended to ensure that every business can list on Google search, or create a page on Facebook, on equal terms. Nondiscrimination is a staple of Neoliberal deregulation: deal with “bottlenecks” by insisting on equal access, but leave everything else to the market.

Warren’s call to “break up Amazon, Google, and Facebook” sounds progressive, given that today the tech giants are more or less unregulated. But the form of regulation that Warren proposes is not the regulation that the original progressive movement of a century ago called for and in fact created: the price and quality regulation of vertically integrated businesses.

The original progressives shared with Warren a profound dislike of laissez faire. But unlike Warren, they hated the (then-old-, now-Neo-) liberal faith in competition as panacea. The original progressives understood that far from being a threat, industrial size, and particularly vertical integration, is a progressive opportunity. It not only allows firms to get the most out of technology, but brings huge sections of the economy under unitary administrative structures that are compliant toward regulators and unions precisely because their size makes them politically visible and therefore vulnerable (just as the size of Google, Facebook, and Amazon have turned them all into political targets today). There is a reason why Amazon eventually caved to labor activists and adopted a $15 minimum wage, and in that moment labor achieved more than it could have for decades if Amazon’s workforce served an atomized set of employers instead. Rather than break large firms up, creating the anonymity and disorganization in which misbehavior thrives and regulation dies, progressives today must seek to do with large firms what the original progressives did a century ago: turn them into the equivalent of public-private partnerships.

Warren should know better than to propose the Neoliberal paradigm as blueprint for regulating the tech giants. Indeed, she made her name promoting creation of an agency — the Consumer Financial Protection Bureau — dedicated to regulating the quality of products offered on highly competitive consumer financial product markets. But she seems to have fallen victim to an intellectual virus — the notion that big must be bad — that may be the greatest threat today to the prospects of a renewed progressive movement.

It is painfully fitting that this manifestly Neoliberal agenda is coming from a candidate for the Democratic presidential nomination. After all, it was under the Carter Administration, at the instigation of one Senator Kennedy and a staffer, Stephen Breyer, who went on to become a Clinton-appointed Supreme Court Justice, that the old progressive regulatory system was dismantled.