A tale of regulation

Holman Jenkins writes in Saturday’s Wall Street Journal

In August, Larry and David Ellison closed their purchase of Hollywood’s Paramount studio only after the owner agreed to pay off a dubious Trump lawsuit concerning election coverage by CBS News.

…the Ellisons were unveiling their ambition to buy Warner Bros. Discovery, the nation’s third-biggest news and entertainment conglomerate. If the deal proceeds, it would require multiple approvals from Washington’s politicized bureaucrats.…

This week WBD admitted the obvious: The Ellison machinations had put the company in play, which was expected sooner or later anyway. But now a deal and resulting federal review are almost certain to be completed while the Trump administration is still in office. Bidders will have to ask themselves: Do I have good relations with the Trump administration? The Ellisons do.

There’s more good news if your name is Ellison. The sales process likely short-circuits an alternative WBD plan next year to spin off its old-style TV assets, hoping to make its remaining assets more attractive to potential buyers like Apple, Amazon and Netflix. Now these deep-pocketed players may be less likely to bid. So far, so good. The Ellisons may also not have to worry about a competing bid from Comcast. As owner of MSNBC, Comcast would expect bum treatment from the Trump administration.

…What if shareholders believe the Trump factor means the Paramount-Ellison offer is the only one not likely to be tortured to death under federal review? This happened when AT&T announced its ill-fated deal for the same assets in the first Trump administration. Then Mr. Zaslav and his board may decide they have little choice except to bow to the terms of the tech mogul and his budding studio mogul son.

Yes, it all seems a tad less fig-leafed than we’re used to in transactions between the political and media elites. The stakes are high for Mr. Trump and also anyone involved in news coverage, since the approaching midterm elections will determine whether impeachment-minded Democrats regain control of the House.

Turn off the morality play for a minute, and ask yourself this: Why are “multiple approvals from Washington’s politicized bureaucrats” required for each step in the endless dance by which one big media company buys another, slices and dices, and spits out parts it doesn’t want to be bought by other media companies? Why does the government have the power to extort obeisance in the first place?

Jenkins doesn’t name them, but I guess that includes the Federal Trade Commission and Department of Justice for anti-trust approvals, the Federal Communications Commission because media is involved, and the Securities and Exchange Commission because they are big financial transactions.

Just how much good is this process doing to shield Americans from the scourge of companies that are “too big,” misusing the airwaves somehow, or improperly treating their shareholders in mergers? Even if you think these problems exist, is the machinery doing anything positive about them? (As Jenkins makes clear, the process is clearly hurting the stockholders of acquisition targets, to the benefit of a preferred bidder, exactly the opposite of the stated goals of SEC regulation.)

Econ 1 teaches a parable of regulation: there is some clear “market failure” such as increasing returns to scale, asymmetric information, externality; the benevolent regulator steps in and crafts minimal rules to address that failure. How much does that parable explain of what we are actually seeing? Zero.

Public choice economics teaches a different parable, capture: regulators grow cozy with regulated industries, and protect their profits in return for an easy life and revolving door. That explains airline, telephone, trucking, and bank regulation in the 1960s and 1970s, but not really this sort of event.

We are seeing something different, and older: Regulation is used by politicians to extract political support. This sometimes means cash, especially lately, but in the case of media companies means good treatment as well. It is particularly tempting because regulation is not just rules, enforced by independent courts. Regulators offer “approval,” executing their own laws, or prosecuting, judging, and assessing penalties when they don’t like the outcome.

My fellow economists are largely in favor of regulation. Even anti-trust is now in vogue again. The old consumer welfare standard seems increasingly forgotten. And they see the world through the Econ 1 parable, because they all took Econ 1 and teach it again and again. Perhaps economists like everyone else supply where there is demand, ideas in our case.

This is not unique to the Trump administration. Companies have been strong-armed by regulatory approvals for decades, under both parties, and the crony capitalist game is just ratcheting upwards. Recall bank merger approvals, and the twitter files as notable examples. The idea that this will come to an end if we simply throw one set of rascals out and install another set of rascals does not stand the evidence. All you will get is a government extorting companies to a different political support.

Incentives rule, not morality. If the regulatory state has the power to issue discretionary approvals, which are worth millions and billions of dollars, politicians of both parties will use that power.

End the permit state. End the means of political extortion. Any company should be able to buy any other company.