During a Stigler Center keynote webinar, Nobel laureate Paul Romer discussed concentration problems in the US and possible solutions, including a “pigouvian” tax, flexible merger review, and public option for online search.

The Stigler Center has become known for its trend-setting conferences on antitrust. In 2019, we presented a Report on Digital Platforms that anticipated much of the work Congress did this year. In May 2020, we were planning to have a conference on the threat that monopolies pose to democracy. Unfortunately, the pandemic forced us to move that conference online and to spread it out over time.

The first phase took place in the Spring and Fall of 2020 and brought together economists, legal scholars, historians and political scientists to explore the historical evidence on the interconnection between market power and political power. Our webinars discussed the role of industrial cartels in facilitating the rise of Nazi Germany and of Imperial Japan; the impact of Chaebols and other industrial conglomerates in the political dynamics of South Korea, Israel, Brazil, and Mexico; and also the rise and fall of antimonopoly movements in the US. All these webinars are freely available online on our Stigler Center YouTube Page.

A general, fair conclusion to these discussions is that market and political power are intrinsically linked: a vibrant democracy only exists in an environment of vibrant economic competition—and vice-versa. We are, however, witnessing growing market concentration. In the last few days, we also saw how concentration can facilitate the elimination of dissent. These trends raise the question: Do we need to modify antitrust policy? And if yes, how?

This is the reason why the second part of our conference, which started this week, focuses on policy. In the next 45 days, we will discuss whether antitrust should be designed to explicitly promote economic or political liberty and what trade-offs are involved. This week’s webinar marks the beginning of this second phase. We hope that you will follow us in this debate.

Almost a week ago, Facebook and Twitter announced that President Donald Trump was banned from their platforms. These actions sparked a sea-change in moderation across major tech companies. Google and Apple announced that due to Parler’s lack of moderation policies, the app would no longer be included in their app stores. Shopify removed stores tied to the President from its platform. Amazon refused to host Parler on its servers. And Parler is now suing Amazon for antitrust violations.

As a result, concerns about the political power of Big Tech and lack of competition have never been greater. Yet even before the events of last week, those familiar with digital platforms like Facebook had concerns about the political power they wield. During an hour-long keynote webinar hosted by the Stigler Center, Nobel Prize-winning economist and New York University professor Paul Romer said that he had done an informal poll about whether Mark Zuckerberg, founder and CEO of Facebook, could influence a close election and found that most people answered in the affirmative. 

“What was striking was that the more people knew about the details of political advertising on Facebook and things like its news feed, the stronger was their assertion that yes, indeed, if he chose to, Zuckerberg could influence a close election and do so without violating any law,” said Romer.

“This is the fundamental problem that we have to grapple with, one that is more important and more fundamental than this issue about whether or not moderation is censorship. My quick take on that is that if you think that moderation is censorship—moderation within the firm, which moderates what can actually be said on its platform—If you think moderation is censorship, you’ve got a competition problem.”

“If you think moderation is censorship, you’ve got a competition problem.”

But how do we fix the concentration problem in the US?

Romer’s preferred method is to impose a progressive “pigouvian” tax, which increases with the size of the company it’s being levied on—a proposal he has presented in a 2019 New York Times op-ed.

“Suppose that we wanted to make sure that there were several different manufacturers of aircraft worldwide, and that was in the interests of the US and US consumers. We could put a tax on the sale of aircraft. We could put a tax on tickets. It doesn’t matter where you levy it, but the nature of that tax is that it should be progressive. The marginal tax rate should increase with the scale of the firm that made the airplane that the flight is using,” explained Romer. “And that tax could set out at zero for some big exemption bracket, basically for firms that capture, say, up to a fifth of the total worldwide aviation market, and could increase up to something like 10 percent for a firm that captures the entire global aviation market.”

Such a tax would be an effective tool to keep firms from getting too big as it would give some advantage to smaller firms, make it less attractive for firms to go out and buy more firms, and even make it more attractive for them to spin-off certain parts of their business, according to Romer. He also pointed out that a similar tax can be levied in digital ads and help rein in the power of Big Tech. Last January, Maryland’s legislature introduced a bill that would impose a new tax on digital advertising, ranging from 2.5 percent to 10 percent.

“It makes perfect sense for them to try and claw back for the citizens of Maryland revenue which has been sucked out of their state and is going to San Francisco, New York, Seattle, and a few other places,” said Romer. “I think the political economy here is one where if we can allow local taxation, we can see some innovation, and then some people do it, some won’t. And then we’ll learn from their experience as we approach a national consensus.”

The bill, which passed through the Maryland legislature with a veto-proof majority early last year, was vetoed by Governor Larry Hogan. It has yet to be put up for another vote in order to override the veto.

Romer argued that the implementation of such a tax would not just address the size of these tech firms but also their business model, which is based on advertising and is the reason why they try to maximize engagement.

“Small countries in the world would be wise to take very seriously the possibility of putting a tax on all digital advertising revenues that are collected by these firms that are mostly outside their borders and are undermining the functioning of markets,” said Romer.

In addition to a pigouvian tax, Romer mentioned other potential solutions, such as a public record of all ads, along with information about how many and what types of people they were shown to, a public option for online search that businesses could sign up for, as well as a more flexible merger-review process.

Many judges, especially at the appeals court level, think that “structural remedies are too harsh” and are unlikely to reverse mergers after the fact, said Romer. A more flexible merger-review system would allow regulators to take a “wait and see” approach and hold off on approving mergers right away, or then approve them conditionally with an explicit option to come back and revisit the decision in the future.

“If regulators were forced to make permanent decisions, they will inevitably be much more conservative about letting anything get approved,” he said.

He warned that a more flexible merger review alone would not fix America’s concentration problem.

“Merger review on its own is not going to be enough to prevent the kind of concentration that we see,” said Romer. “We need to change the underlying dynamics.”