Leaked Docs Show Obama FTC Gave Google Its Monopoly After Google Execs Helped Obama Get Re-Elected

Leaked Docs Show Obama FTC Gave Google Its Monopoly After Google Execs Helped Obama Get Re-Elected

Leaked documents from the FTC's 2012 investigation of Google show exactly what is wrong with the state of American antitrust enforcement.
Rachel Bovard
By

Eight years ago, the Federal Trade Commission had the chance to face down Google — the giant of Silicon Valley whose power now alters the free flow of information at a global scale, distorts market access for businesses large and small, and changes the nature of independent thought in ways the world has never experienced.

Instead, the FTC blinked — and blinked hard, choosing to close the investigation in early 2013. A remarkable leak to Politico of agency documents about the 2012 Google investigation reveals that, despite ample evidence of market distortions and threats to competition presented by the agency’s lawyers, the five commissioners of the FTC deferred instead to speculative claims by their economists.

Records and reporting about the 2012 investigation suggest the FTC did so while bending to political pressure from the Obama White House — which was, in turn, bending to political pressure from Google. William Kovacic, a former FTC chair under President George W. Bush, reviewed the more than 300 pages of documents leaked to Politico and concluded the agency overlooked “what many experts and regulators would consider clear antitrust violations,” calling the specificity of issues outlined “breathtaking.”

In short, where we find ourselves today — with Google as the primary filter of the world’s information, engaging in a network of exclusionary contracts and anti-competitive conduct, and subject to an antitrust lawsuit led by the Department of Justice and joined by 48 state attorneys general — could have, and should have, been avoided.

That it wasn’t, however, provides key takeaways about where we are now with Big Tech, and, in particular, the method of enforcement of our antitrust laws, whose application has become too tightly wrapped around the axle of price, and captured by the speculative science of economic forecasting. It also reveals just how politicized antitrust enforcement has become — influenced by the siren song of internet exceptionalism and the powerful tug of Google, one of the world’s richest companies.

The Economists Were Wrong

Perhaps the most stunning takeaway in the 2012 documents is the extent to which the recommendations of the FTC’s lawyers sharply differed from those of the agency’s economists, on whose judgment the FTC commissioners ultimately relied in their decision to drop the investigation into Google.

The FTC’s antitrust attorneys concluded that Google was breaking the law by “banishing potential competitors” with a series of exclusionary contracts on mobile phones — much of which forms the basis for the lawsuit brought nearly a decade later by the Trump Department of Justice. The FTC’s economists, however, demurred, insisting that claims of Google’s market dominance were unfounded and would soon give way to competition. This required a markedly un-curious treatment of key facts.

The economists claimed, for example, that Google only represented 10 to 20 percent of the referral traffic to retail sites — disregarding statements from Google itself that those numbers were unreliable, as well as evidence from staff attorneys that Google’s referral traffic to retail provided closer to 70-90 percent. A pair of FTC economists made what Politico deemed “questionable assertions” about Google’s dominance of the advertising markets, citing as their evidence a study by Google and two academic papers funded by grants from Google.

Among other claims, two economists also alleged that Google’s grip on the market for mobile devices would fall in the face of competition from Amazon and Mozilla — and that the mobile distribution channel for search was too small a market to be relevant.

History has borne out how spectacularly wrong the economists were. This brings forward a key element of the over-reliance on an ever-narrowing set of criteria around which our antitrust laws are now enforced. It over-emphasizes speculative economic forecasting over hard market realities.

Coherent economic principles are central to antitrust enforcement for good reason — otherwise, justification for enforcement would swing wildly on ideological ballasts. But, like the consumer welfare standard’s current application, which is narrowly fixated on price (as opposed to a broad application that considers other factors, like consumer choice and innovation), economic forecasting has taken a premier and unquestionable seat among antitrust enforcers.

In particular, an over-reliance on a cost-benefit tool called the error-cost framework has made enforcers gun-shy about acting at all. Enforcers now largely defer to benefit claims made by the merging parties – and the economists these companies can afford to hire, who conveniently produce speculative analysis to buttress their points – while appearing to ignore hard evidence by senior executives clearly stating an anticompetitive intent behind a merger or business strategy.

In the case of Google, for example, one top executive bragged in an email that Google could “own the U.S. market” with its exclusive contracts with major phone makers and carriers. The FTC’s attorneys concluded Google was breaking competition laws. The agency’s economists, however, said there was no issue because they “expected” the mobile search to remain a small market.

In the FTC’s ultimate judgment, speculative analysis and complex econometric modeling reigned supreme over pragmatic facts regarding anti-competitive market behavior. This flips the intended calculus on its head.

Judge Robert Bork, one of the progenitors of the consumer welfare standard, explicitly warned against pushing economics beyond its competence. In his seminal book, “The Antitrust Paradox,” Bork wrote that “antitrust must avoid any standards that require direct measurement and quantification of either restriction of output or efficiency. Such tasks are impossible.”

He goes on, “The real objection to performance tests and efficiency defenses in antitrust law is that they are spurious. They cannot measure the factors relevant to consumer welfare, so that after the economic extravaganza was completed we should know no more than before it began.” Finally, Judge Bork notes that “the judge, the legislator, or lawyer cannot simply take the word of an economist in dealing with antitrust, for the economists will certainly disagree.”

Economic analysis, in other words, is a component, not the whole, of the analysis. Antitrust economics can help assess, but cannot ultimately determine, the scope of antitrust policy in its most rational form: determining who is being harmed, and how.

In 2012, the FTC made the critical error of letting economic speculation subsume the hard market evidence that former FTC chair William Kovacic called “specific, direct, and clear about the path ahead.” In its final judgment, the agency prioritized the “economic extravaganza” that Judge Bork explicitly warned against. They were wrong, and the market consequences have been severe.

Google’s Thumb on the Scale

The FTC was not acting in a vacuum, however. Although an independent agency, four of the FTC’s five commissioners voting on the Google probe were appointed by the Obama administration, which was notably close to Silicon Valley and very much bought into the notion of America’s internet exceptionalism.

According to The New York Times in 2016, President Obama was “America’s first truly digital president,” the leader who “routinely pushed policy that pleases the tech-savvy” and boasted “deep and meaningful connections” with Bill Gates, Mark Zuckerberg, and Steve Jobs.

In 2012, Google employees were the second-largest source of campaign donations by any single U.S. company besides Microsoft. Google employees were senior aides at the White House and Google executives served on White House advisory panels. On Nov. 6, 2012, the day Obama was re-elected to a second term, Eric Schmidt, Google’s then-executive chairman, “personally oversaw a voter-turnout software system for Mr. Obama,” according to the Wall Street Journal.

The frequent contact between Google and the White House continued during the FTC’s investigation. A report published in 2015 by the Wall Street Journal detailed the “unusual” depth of Google’s engagement with the Obama administration, finding the company had clocked 230 meetings with senior White House officials, roughly one per week. Their top lobbyist Johanna Shelton darkened White House doors for more than 60 meetings. By April of 2016, according to another report, Shelton had notched 128 White House meetings.

Google has reportedly also attempted to dictate how the FTC discusses both the company and the dropped antitrust case. When the Wall Street Journal published a partial leak of the FTC’s Google investigation documents in 2015 (later fully leaked to Politico) demonstrating the depth of disagreement between the agency’s staff and the final commission vote, Shelton emailed the agency’s chief of staff to state Google was “troubled” and “puzzled” by the FTC’s non-response. She asked the agency to issue a statement that “set the record straight.” A statement was issued two days later.

Congressional Oversight Is Desperately Needed

Thanks in part to the FTC’s whiff on Google in 2012, the power of Big Tech has continued to grow, unchecked and largely unrivaled. Antitrust enforcement is once again emerging as a key remedy to the anti-competitive and market-distorting elements of what is undeniably oligarchic power.

But to avoid the mistakes of 2012, congressional oversight is desperately needed: over how our antitrust laws are being enforced, if that enforcement aligns with the congressional intent of the statutes, if the enforcement agencies are adequately resourced for the task, and whether statutory interpretation needs clarification for the digital economy.

Big Tech is pouring big money into the policy and academic arguments that claim such efforts would “politicize” antitrust enforcement, away from the pristine science of economic analysis. But if FTC’s actions in 2012 are any indication, antitrust enforcement is already well-politicized, and economic analysis, while a useful guidepost, is not a compass. In fact, an over-reliance on the error-cost framework can render our antitrust laws completely moot in the face of real market threats.

In many areas, Congress has largely abandoned its role as the lawmaking body, preferring instead to outsource policy development to bureaucrats and the courts. It is encouraging, therefore, to see both the House and Senate engaging in scrutiny of antitrust enforcement for Big Tech.

The FTC of 2012 has given them a helpful guide by highlighting the areas of weakness in our current enforcement analysis, and the capture by billion-dollar interests that can defer it. In other words, the leaked FTC memos are a flashing red light that all is not well in the world of American antitrust enforcement. The antitrust agencies have effectively privatized antitrust law. Congress must democratize it again.

Rachel Bovard is The Federalist's senior tech columnist and the senior director of policy at the Conservative Partnership Institute.
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