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    A Hipster and a Hillbilly Walk into a Bar

    A curious political convergence has been reshaping U.S. antitrust policy. Conservative populists have found common cause with the so-called “neo-Brandeisians” of the left—named for the late Supreme Court Justice Louis Brandeis—in seeking to challenge big business, particularly the tech giants.  While both cohorts’ concerns about concentrated power deserve attention, their shared willingness to abandon the longstanding “consumer welfare standard” that has guided antitrust enforcement for decades threatens to undermine the very market innovations that have driven American prosperity. For roughly 40 years, the consumer welfare standard has provided a clear, economically sound framework for antitrust enforcement. By focusing enforcers’ attention on whether business practices harm consumers through higher prices or reduced output, it has created predictable rules that allow businesses to innovate while protecting against genuine harms to competition. This approach helped transform the U.S. economy into the most dynamic in the world. But the neo-Brandeisians’ “hipster antitrust” movement, which includes Biden administration appointees like former Federal Trade Commission (FTC) Chair Lina Khan and former Assistant U.S. Attorney General for Antitrust Jonathan Kanter, has sought to radically expand antitrust’s scope. They invoke Justice Brandeis’s century-old warnings about “the curse of bigness” to justify enforcement based on concerns about protecting labor, small businesses, and even democratic values. While such issues deserve policy discussion, they stray far beyond considerations of competition and consumer harm. In recent days, proponents of “hipster antitrust” have found their ideological bedfellows on the right, in what some are calling “hillbilly antitrust” or “America First antitrust.” Embraced by Khan and Kanter’s successors in the Trump administration—Andrew Ferguson and Gail Slater, respectively—hillbilly antitrust advances similarly interventionist ideas under different branding.  While clothed in rhetoric about protecting “forgotten Americans” from “corporate tyranny,” the right’s new approach to antitrust shares the left’s willingness to challenge mergers and business practices that don’t demonstrably harm consumers. Both camps have targeted tech platforms, seeking to apply industrial-era antitrust concepts to digital markets that operate in fundamentally different ways from traditional industries. And both embrace antitrust as a tool to address broader societal concerns, rather than a focused instrument for protecting market competition. The hipsters and hillbillies do appear to differ on the role that regulation should play. The Biden administration favored expanding regulation, most notably the Khan FTC’s attempt to ban employee noncompete agreements. By contrast, under the Trump administration, the FTC and U.S. Justice Department (DOJ) recently solicited suggestions for which anticompetitive regulations should be eliminated. But taken as a whole, this left-right convergence should concern anyone who values economic freedom and innovation. In rejecting the discipline imposed by the consumer welfare standard, both approaches risk subjecting businesses to unpredictable and politically motivated enforcement based on amorphous concepts like “fairness” or “human flourishing,” rather than measurable economic effects. Among the practical implications are that companies face uncertainty about whether efficiency-enhancing mergers will be blocked based on non-economic concerns. For example, the administration recently cleared Verizon’s acquisition of Frontier, but only after Verizon promised to abandon its DEI (diversity, equity, and inclusion) policies.  Investment in innovation becomes riskier when success might trigger antitrust enforcement, not because a company harmed consumers, but because it grew too large, disrupted established industries, or engaged in politically unpopular business practices. The results we should expect are less innovation, fewer new products and services and, ultimately, reduced consumer benefits. The consumer welfare standard doesn’t ignore concerns like quality, innovation, and choice. Rather, it incorporates them when they affect consumer well-being. What it wisely avoids is transforming antitrust into a Swiss Army knife to address social policies better handled through targeted legislation. None of this means antitrust should remain static. Digital markets present new challenges that require thoughtful adaptation of existing principles. Labor-market competition deserves greater attention. But these adaptations should build upon, rather than abandon, the consumer welfare framework that has served the economy well. This means developing better tools to analyze the effects of innovation, data advantages, and platform competition, not discarding economic analysis in favor of vague social goals. Despite their surface differences, hipster and hillbilly antitrust share a fundamental misunderstanding. While they see robust antitrust as requiring more government intervention, protecting competition often means allowing market forces to work. The consumer welfare standard’s focus on protecting consumers, rather than competitors; its insistence on economic evidence, rather than speculation; and its skepticism of government micromanagement remain the best guideposts for antitrust in the digital age. The post A Hipster and a Hillbilly Walk into a Bar appeared first on Truth on the Market.

    Could the DOJ and FTC Reform Regulations that Harm Competition?

    When many think about monopolies and unfair business practices, they typically picture large corporations squashing smaller rivals. But there’s another significant culprit restricting competition that gets far less attention: government regulations themselves.  The Trump administration has in recent weeks taken the first steps toward reining in some of these regulations. The U.S. Justice Department (DOJ) and Federal Trade Commission (FTC) have both convened proceedings seeking public input on regulations that harm competition. The requests were so expansive that it would be easy to conclude the agencies were asking for a “wish list.” Toward that end, the International Center for Law & Economics (ICLE) submitted detailed recommendations revealing how extensively government rules can undermine the markets they’re meant to protect. This isn’t a new concern. Dating back to English common law and America’s founding era, anti-monopoly traditions were often focused on limiting government-granted exclusive privileges, rather than scrutinizing successful private businesses. Since at least the 1600s, monarchs have granted favored merchants exclusive rights to sell certain goods, creating artificial monopolies that harmed consumers. Today’s regulatory landscape creates similar problems through different mechanisms. The Permission-Slip Economy Consider trying to start a new natural gas pipeline, hospital, or telecommunications service. In many cases, you can’t simply raise capital and begin operations—you need government permission in the form of a “certificate of convenience and necessity” (CCN). These certificates are supposedly designed to ensure adequate service and prevent wasteful duplication of infrastructure. In practice, CCNs often function as barriers to protect existing companies from competition. The approval process typically allows current market players to argue against new entrants, effectively giving competitors veto power over potential rivals. Imagine needing McDonald’s approval before you could open a Burger King nearby, and you’ll understand the problem. Now, imagine needing an existing hospital’s approval before opening a new outpatient surgery center, and you’re talking about a big deal.  CCNs’ “competitor’s veto” provisions make it extremely difficult for innovative or more efficient companies to enter markets, even when consumers would benefit from additional choices or lower prices. The Licensing Trap Another major barrier comes from occupational licensing—government requirements that workers obtain permits before practicing their trade. While licensing makes sense for professions that involve significant public-safety risks (like medicine or engineering), it has expanded far beyond these areas. Today, many states require licenses for florists, interior designers, hair braiders, and other occupations where the safety risks are minimal or nonexistent. These licensing requirements create several problems. They raise costs for workers who must pay fees and complete training programs before starting their careers. They make it harder for people to change professions or move between states with different requirements. And they often reduce competition, increasing consumer prices without meaningful safety benefits. The Obama administration found: “[T]he evidence on licensing’s effects on prices is unequivocal: many studies find that more restrictive licensing laws lead to higher prices for consumers. In 9 of the 11 studies we reviewed… significantly higher prices accompanied stricter licensing” and “Stricter licensing was associated with quality improvements in only 2 out of the 12 studies reviewed.” The requirements are frequently pushed by existing practitioners who want to limit new competitors, rather than by genuine safety concerns. For example, a “sunrise review” is a process used by state legislatures to evaluate the potential impact of proposed new occupational regulations before they are enacted. The Institute for Justice reports that occupational and professional associations initiated at least 83% of sunrise reviews, while consumer advocates were behind only 4%. Legal Immunity for Anticompetitive Behavior Perhaps more surprisingly, federal law exempts certain industries from antitrust rules that prohibit price-fixing and market division. These exemptions cover some agricultural cooperatives, aspects of professional sports leagues, and other sectors. The exemptions essentially give these industries legal permission to engage in conduct that would be criminal if practiced by other businesses. These special privileges aren’t fully based on sound economic reasoning but often result from successful lobbying efforts. They distort markets and allow some groups to restrict competition in ways that ultimately harm consumers through higher prices or reduced innovation. When Government Competes Unfairly Sometimes, the government itself enters markets as a competitor, while maintaining special legal privileges for itself. The Tennessee Valley Authority, which provides electricity across multiple states, illustrates this problem. When government-owned businesses compete against private companies while remaining immune from antitrust laws, they can engage in anticompetitive practices without consequences. This creates particular problems in emerging markets like broadband internet. Local power companies affiliated with government entities control utility poles that internet providers must access. When these same power companies offer internet services, they may have incentives to delay or block competitors’ access to essential infrastructure. Because of their government status, they often can’t be challenged under normal antitrust laws. Inflating Public-Project Costs Federal and state prevailing-wage laws require contractors on government-funded projects to pay predetermined wage rates, supposedly to ensure fair compensation for workers. But these rates are often calculated using flawed methods and tend to mirror union wages, even in areas where most workers aren’t unionized. The result is artificially inflated costs for public-construction projects like schools, roads, bridges, and other infrastructure. These higher costs mean taxpayers get less value for their money, and non-union contractors often can’t compete for public work even if they could complete projects at lower cost. Ironically, these laws originated partly from discriminatory efforts to protect white workers from competition by Black and immigrant laborers. Energy-Market Distortions Federal efforts to increase competition in electricity transmission have backfired in instructive ways. FERC Order No. 1000 was intended to create more competitive processes for building major transmission lines. Instead, it has created a complex, centralized planning system that often delays projects and discourages needed investment. The problem stems from trying to engineer competition through regulatory mandates, rather than allowing market forces to operate naturally. The result has been fewer transmission projects and higher costs—the opposite of the intended outcome. Agency Overreach Even the agencies responsible for protecting competition sometimes create anticompetitive problems through their own policies. The FTC’s recent blanket ban on noncompete agreements exemplifies this issue. While some noncompete clauses may harm workers and competition, others serve legitimate purposes, such as encouraging companies to invest in employee training. Similarly, expanded data-privacy rules and complex merger-filing requirements, while well-intentioned, can impose disproportionate costs on smaller businesses and discourage beneficial business combinations that pose no competitive threats. When Lawsuit Settlements Distort Charitable Markets A more subtle form of government-enabled market distortion occurs through the misuse of “cy pres” awards. The cy-pres, or “next best,” doctrine permits funds from cash settlements in class actions to be directed to third parties—typically, charitable organizations with missions ostensibly related to the lawsuit’s claims—rather than to class members themselves. While traditionally used for residual funds that remained after compensation attempts, cy pres has increasingly been employed as a primary distribution mechanism when class members are deemed hard to identify, or when per-member compensation would be minimal. In 2009, the DOJ Civil Rights Division adopted a policy of directing leftover settlement funds—those not distributed to direct victims—to third-party charities. This marked a significant shift as, prior to this, such cy-pres distributions were rare in federal government settlements. The policy was intended to ensure that unclaimed funds from civil-rights settlements were used to benefit communities or causes related to the underlying case, rather than reverting to the U.S. Treasury or remaining undistributed. Since then, the government’s policy has flip-flopped with each change in administration, with the first Trump administration rescinding the guidance, the Biden administration reinstating it, and the second Trump administration again rescinding it. While this might sound benign, these awards can significantly distort competition among nonprofit organizations and advocacy groups. Courts and lawyers essentially pick winners in the charitable sector, directing millions of dollars to favored organizations without regard to their effectiveness, the preferences of the actual class members, or competitive merit. This creates an unfair advantage for recipient organizations over their peers, who must rely on voluntary donations and grants. The problem becomes particularly pronounced when settlement funds repeatedly flow to the same organizations, or those with connections to attorneys involved in the lawsuit. These recipients gain resources that allow them to expand operations, hire more staff, and increase their influence—not because they’ve demonstrated superior performance in serving their missions, but because they received court-ordered windfalls. This government-directed resource allocation undermines the competitive dynamics that typically drive nonprofit organizations to improve their effectiveness and respond to donor preferences. The Path Forward These problems aren’t inevitable. The same agencies asking for input on anticompetitive regulations have the authority to challenge many of these barriers in court or advocate for their elimination.  ICLE’s recommendations aim to encourage dismantling or reforming these unnecessary barriers and reorienting regulatory and enforcement priorities toward sound economic principles and the consumer-welfare standard. This includes specific calls to eliminate or scale back CCNs and occupational licensing and to reevaluate and curtail antitrust exemptions. Furthermore, ICLE recommends that the FTC refine its rules and enforcement actions by rescinding the overly broad noncompete-agreement rule. Like the child who wishes for a pony but would be content with a puppy, ICLE’s recommendations may be aspirational. But if this administration moves the needle on just a few of these issues, it will be taking a step toward removing regulatory barriers to competition. The key is recognizing that effective competition policy must look beyond private business conduct to examine how government rules themselves affect markets. When regulations create barriers to entry, protect incumbents from competition, or impose unnecessary costs, they ultimately harm the consumers, workers, and entrepreneurs that competition policy is supposed to protect. True competition policy requires treating government-created barriers with the same skepticism we apply to private anticompetitive conduct. Only by addressing both sources of market distortion can we create an economy that genuinely serves consumers through innovation, efficiency, and competitive pricing. The post Could the DOJ and FTC Reform Regulations that Harm Competition? appeared first on Truth on the Market.

    California Leads the Charge in Systematically Dismantling US Federal Antitrust Law

    The California Law Revision Commission (CLRC) is currently reviewing proposed amendments to the state’s antitrust statutes, particularly the Cartwright Act. As made clear in a recently published memo, a major goal of the effort is clearly to distance California from the perceived constraints of federal antitrust law that limit liability for single-firm conduct under Section 2 of the Sherman Antitrust Act.  California intends to achieve this by strategically overturning specific U.S. Supreme Court decisions and departing from the error-cost framework that has traditionally shaped federal antitrust analysis. The cumulative effect of California’s proposed amendments—but particularly the section on single-firm conduct—would be to align California antitrust law more closely with EU competition law, where dominant firms must actively give a leg up to competitors (see the International Center for Law & Economics’ comments to the CLRC proceeding here and here,  and ICLE President Geoff Manne’s August 2024 presentation to the commission here). Abandoning the Error-Cost Framework U.S. antitrust law traditionally operates within an error-cost framework, weighing the risks and costs of mistakenly condemning procompetitive behavior (Type I errors) versus mistakenly allowing anticompetitive behavior (Type II errors). Historically, there has been a preference for avoiding Type I errors, based on the view that the costs of chilling beneficial conduct are often more significant and harder to correct than the costs of permitting harmful conduct. The reasoning for prioritizing avoidance of Type I errors echoes arguments like that given by Judge Frank Easterbrook. In a nutshell, Easterbrook argued that procompetitive conduct that is deterred by legal action has no constituency to advocate for its re-legalization, and improperly deterred firms have no standing to sue. Thus, if a court wrongly condemns a beneficial practice, those benefits may be lost permanently, whereas if a court wrongly permits a harmful practice, the market itself often works to correct the situation over time (e.g., through new entry attracted by high profits).  In stark contrast, the proposed legislative findings accompanying the CLRC memo explicitly state that courts should “liberally interpret California’s antitrust laws” and “be mindful that California favors the risk of over-enforcement of antitrust laws over the risk of under-enforcement.”  This position rests on the unsubstantiated assumption that the risk of underenforcement currently outweighs that of overenforcement. The contention is based on the idea that, because something feasibly might go wrong, there is no need to establish (or to even seriously inquire about) whether heightened antitrust scrutiny and expanded enforcement are genuinely warranted.  But the “more up-to-date economic analysis” that downplays the risk of Type I errors is, in large part, purely theoretical—rooted in abstract possibility theorems that ignore practical complexities and the real-world institutional context in which enforcement decisions are made. For example, despite decades of such theoretical models, particularly regarding rational predation, little of this “post-Chicago School” learning has been widely incorporated into antitrust law, and there is virtually no empirical evidence of systematic problems for the conduct they question.  Intuition-driven concerns —i.e., vague suspicions that something must be amiss—pressed into service of a presumptively interventionist agenda do not provide a sufficient basis to abandon the cautious approach embedded in the error-cost framework, or support the assumption that underenforcement is a greater risk than overenforcement. That is as true for California as it is for the rest of the United States. Targeting Key Supreme Court Precedents The CLRC memo’s authors seek to overturn fundamental presumptions in U.S. antitrust law by aiming to nullify three key Supreme Court decisions: Trinko, Amex, and Brooke Group. This approach is misguided on both legal and economic grounds. Nullifying Trinko: Implications for Refusals to Deal U.S. and EU law differ significantly on the question of refusals to deal, with the United States strenuously limiting enforcement. In seeking to dispense with Trinko, however, the CLRC’s proposed amendment would move the Cartwright Act closer to the European Union’s approach. Under the EU’s lower threshold for liability, free riding is the norm, especially after the mind-boggling Android Auto ruling rendered by the European Court of Justice (see here and here).   As with other aspects of antitrust law, the U.S. approach to refusals to deal is rooted in the error-cost framework’s preference for avoiding Type I errors. Trinko held that enforced sharing “may lessen the incentive for the monopolist, the rival, or both to invest” and would require courts to act as “central planners, identifying the proper price, quantity, and other terms of dealing,” a role for which they are ill-suited.  The Aspen Skiing decision laid down one of the few exceptions, but the Court noted that it considered the case to be “at or near the outer boundary” of Section 2 liability, emphasizing the significance of a firm ceasing a voluntary and presumably profitable course of dealing. This, the Court noted, pointed to anticompetitive foreclosure as the only economically rational explanation.  This highlights a key feature of American antitrust law concerning refusals to deal; namely, that U.S. antitrust law generally does not apply the “essential facilities” doctrine—i.e., one company’s right to access the facilities of another. Indeed, as the Court held in Trinko, “we have never recognized such a doctrine.” By contrast, EU competition law is much more interventionist, with refusals to deal being a staple of the system. While conditions for liability exist (indispensability, elimination of competition, blocking the emergence of a new product), they have been significantly relaxed in practice. For example, in Microsoft, showing a limitation of technical development was sufficient to prove that the refusal impeded a “new product” (here). Furthermore, the recent Android Auto ruling discarded indispensability, finding “mere convenience” sufficient to create an access obligation on a dominant firm.  Thus, whenever denying access to an app could reduce its appeal to consumers—and the platform is, in principle, designed to host third-party apps—access must be granted. In effect, this means that, once a dominant company (noting that, in the EU, dominance has been found with market shares as low as 39.7%) opens its platform to third parties, it largely surrenders control over access, retaining discretion only on the narrowest security-related grounds. The CLRC’s proposal that liability should not turn on whether the defendant treated particular parties differently in exercising exclusionary conduct (including refusals to deal) is a further move away from effects-based analysis and toward the European model. By removing the protection for unconditional refusals to deal, it risks applying a standard meant for discriminatory conduct to all exclusionary behavior, thereby impinging on companies’ freedom of contract, encouraging free riding, and chilling innovation. Abandoning Amex: Turning Back the Clock for Two-Sided Markets The Supreme Court’s decision in Amex is considered uniquely important for the antitrust analysis of firms in the modern platform economy (see here). In Amex, the Court held that, in cases involving two-sided markets, plaintiffs must show harm on both sides of the market. The CLRC’s proposed amendments would reverse Amex by suggesting that showing harm on only one side of a multisided market should suffice to prove antitrust liability. This would be fundamentally misguided. The economics of two-sided markets require considering both sides, as there is no meaningful economic relationship between benefits and costs on each side when considered in isolation. Assessing harm on only one side will arbitrarily include (or exclude) users and transactions, and thus result in incorrect inferences about market power. Indeed, evidence of a price effect on one side can be consistent with neutral, anticompetitive, or procompetitive conduct: distinguishing among these in any meaningful way requires assessing price and quality on both sides. Adopting an approach that permits liability based solely on harm to one side of a platform risks benefiting certain business users at the expense of consumers. This would further distance California antitrust law from the consumer-welfare standard, edging it toward a model where liability hinges on nebulous concepts of “power,” hunches, and the enforcers’ discretion in choosing which group of businesses to favor.  The critique of Amex stems from a broader opposition to vertical integration. Like other critics, the CLRC identifies the lenient treatment of vertical arrangements under U.S. antitrust law as a significant barrier to increased enforcement. U.S. law, however, favors vertical arrangements for a valid reason based on the error-cost framework. Empirical evidence consistently indicates that, while firms do employ vertical restraints, these practices seldom result in net anticompetitive effects. In many cases, in fact, they actually promote competition (here and here). Forfeiting Brooke Group: Risking Harm to Procompetitive Pricing The evidentiary standard for proving predatory pricing is deliberately high in U.S. antitrust law, which aims to promote consumer welfare by encouraging high output and low prices—not by protecting competitors or artificially maintaining an arbitrary, fixed number of firms in the market. Aligned with the error-cost framework, the law errs on the side of underenforcement, recognizing that penalizing low prices risks deterring the efficient, pro-competitive behavior that antitrust laws are meant to encourage. This high threshold also helps to prevent rivals from exploiting the legal system to shield themselves from more efficient competitors—a misuse of the law that would distort public policy for private gain. The U.S. approach is encapsulated in the Brooke Group decision. Brooke Group set two strict conditions for predatory pricing claims: Prices must be below some measure of incremental costs; and There must be a realistic prospect of recouping these losses.  The recoupment requirement is crucial because, without it, predatory pricing leads to lower aggregate prices and enhances consumer welfare. Economic learning makes clear that, without a likelihood of recoupment, predatory pricing is not a rational business strategy (see here). In the short term, punishing such cases would likely harm consumers. Over the medium to long term, it would surely discourage efficient conduct—particularly when that conduct happens to disadvantage competitors. This would be a paradoxical outcome for a law intended to protect competition. By contrast, the EU standard is much laxer and more likely to injure consumers. In the EU, authorities must prove prices are below average variable cost (presumed predatory) or between average variable and average total cost (predatory if part of a “plan to eliminate competition”). Crucially, recoupment does not need to be shown. By dispensing with Brooke Group, the CLRC proposal effectively recommends shifting California predatory-pricing law toward the European model. But such a  standard lacks a basis in economic theory or evidence. The European approach reflects “structuralist considerations” far removed from consumer-welfare concerns. The fear is that dominant companies could, even to consumers’ benefit, create more concentrated markets presumed to be detrimental. This approach leaves less room to analyze concrete effects and is more prone to false positives, ignoring both consumer benefits from lower prices and the chilling effect on aggressive pricing. There is no basis for enshrining such an approach in California law. Conclusion The proposed changes to California’s single-firm-conduct provision represent a sharp departure from the established U.S. antitrust framework. By rejecting caution against Type I errors and seeking to overturn key Supreme Court precedents, California risks deterring pro-competitive behavior and ultimately harming consumers and innovation. These reforms appear driven by a single unexamined assumption: that there must be more antitrust enforcement. But tearing down settled doctrine and abandoning the error-cost framework simply to increase the number of infringements—particularly when based on a vague, unquantified intuition that current enforcement is insufficient—is neither sound law, sound economics, nor sound policy. Who, after all, can credibly determine the “right” amount of enforcement? If there was “more” enforcement in the past, perhaps it reflected not a better equilibrium, but socially costly over-litigation, economic ignorance, ambiguous standards, and imprecise rules. A way out of the hollow “more” versus “less” enforcement—or “pro” versus “anti” business—debate is to recognize that legal standards and precedent exist for a reason. They are the product of decades of legal and economic debate, litigation, and incremental refinement. Experimental arguments have been raised, tested, and discarded—and, occasionally, they have moved the needle. This evolution doesn’t make the current standards perfect. But the rules that have emerged from this ongoing process of argumentative refinement offer a degree of predictability and coherence in a field where market behavior is often ambiguous, and where the outcomes of pro-competitive and exclusionary conduct can be nearly indistinguishable. This ambiguity is even more acute in so-called “digital markets,” where innovation is fast-moving, variable costs are often minimal or zero, and the risk of misjudging business practices is especially high. Rather than pursue divergence for its own sake, California should preserve alignment with the broader U.S. framework—one grounded in the consumer-welfare standard, effects-based analysis, and the prudent caution of the error-cost approach. The post California Leads the Charge in Systematically Dismantling US Federal Antitrust Law appeared first on Truth on the Market.

    Google Antitrust Remedies Could Harm the US Economy and Consumers

    Google and the U.S. Justice Department (DOJ) will make their closing arguments tomorrow in the Google Search remedies trial. Judicial adoption of the DOJ’s recommendations to “break up” Google, stemming from this and another DOJ lawsuit, could seriously undermine American innovation and competitiveness and harm, not help, American consumers. Background The DOJ sued Google in October 2020 for maintaining an illegal monopoly in internet-search and search-advertising markets in violation of the Sherman Antitrust Act. The department’s suit alleged that Google had “us[ed] [its] monopoly profits to buy preferential treatment for its search engine on devices, web browsers, and other search access points, creating a continuous and self-reinforcing cycle of monopolization.” The suit focused on Google’s exclusivity agreements, which involved the company’s search-related payments to web browsers and to such device manufacturers as Apple. The agreements forbade preinstallation of any competing search service, but did not in any way prevent consumers from accessing other internet-search engines. Following a lengthy trial, U.S. District Court Judge Amit Mehta issued an August 2024 opinion holding that Google’s exclusivity agreements had illegally monopolized markets for “internet searches” and for “general search text advertising.” Having found Google liable, the judge subsequently convened a separate trial to decide upon an appropriate remedy for Google’s antitrust violation. The DOJ wants the court to ban Google’s exclusivity agreements and to inform the government prior to making any investments related to artificial intelligence. The DOJ also recommended “structural remedies” that would effectively “break up” the existing Google platform. These include: Google’s divestiture of its Chrome browser, a “critical distribution point,” to shield against self-preferencing”; and Google’s divestiture of Android, “if proposed remedies are not effective in preventing Google from improperly leveraging its control of Android to its advantage or ‘if Google attempts to circumvent’ remedies.” Furthermore, the DOJ wants a government-appointed remedies-oversight committee established to regulate the development and design of Google’s products. Implications of the Proposed Remedies DOJ’s proposed remedies go far beyond eliminating Google’s contractual payments to gain default status for its search engine. They involve micromanagement of Google’s commercial conduct, including conduct that was not found to be anticompetitive. As such, they could be in tension with Judge Mehta’s factual finding that Google acted innovatively and efficiently in developing and improving its search engine. Taking note of this finding, Judge Mehta or an appeals court could choose to reject non-contractual payments-related remedies as unjustified interference in Google’s normal business activities. Trial or appeals judges could also find powerful case-law support for rejecting remedies that go beyond undoing the Google payments contracts. Most notable is the highly influential appeals-court decision in the landmark 2001 Microsoft monopolization case. The Microsoft appeals panel overturned the trial court’s order to break up the company. It stressed that the trial court had not determined that a breakup was needed to rectify the anticompetitive conduct that had been shown. A similar finding could be justified in the Google matter. Moreover, Google judges may take note of scholarship focusing on why firm-breakup remedies have been disfavored in monopolization cases. As Herbert Hovenkamp has explained: “the antitrust record of monopoly breakup decrees has not been pretty.” In addition, and very significantly, the expansive nature of the DOJ’s proposed remedies raises major economic-policy concerns. Google disputes Judge Mehta’s finding of liability (which it likely will appeal), and has also voiced specific objections to the DOJ remedies on economic grounds, asserting that: The DOJ’s proposal would force browsers and mobile devices to default to search services like Microsoft’s Bing, making it harder to access Google. The proposal to prevent Google from competing for the right to distribute Google Search would raise prices and slow innovation. The proposal would force Google to share users’ most sensitive and private search queries with companies the users may never have heard of, jeopardizing their privacy and security. The proposal to split off Chrome and Android, which the company built at great cost over many years, and to make available for free would break those platforms, hurt businesses built on them, and undermine security. The DOJ’s proposal would also hamstring how the firm develops AI, and having a government-appointed committee regulate the design and development of Google’s products would hamper American innovation at a time of fierce international competition with China. The final concern, about hamstringing innovation by one of America’s “crown jewel” tech firms during a period of fierce international competition, has not been lost on President Donald Trump. According to Techzine, Trump stated in October 2024 that “China is afraid of Google,” and further indicated “that a breakup would possibly mean the end of the company, which would no longer act as a counterweight to China.” Reuters had a similar report. The proposed DOJ remedies, however, do not appear to reflect these considerations. More Antitrust Problems for Google What’s more, Google faces additional serious U.S. antitrust problems. In April 2025, in a separate DOJ antitrust prosecution, U.S. District Court Judge Leonie Brinkema held that Google had illegally monopolized open-web advertising markets. The remedies hearing in that matter may consider divestiture of another key asset: Google Ad Manager. Such a divestiture, added to the possible divestiture of Google Chrome and Android, could deal a crippling blow to Google’s integrated system and revenue-generation model. A recent Reason magazine article highlighted the combined impact of the two Google suits: The proposed remedies in both cases threaten the company’s main source of revenue: Google Services, including Google Ads and products like Gmail, Google Drive, and YouTube, which Google’s present business model offers to users for free. Declaring this model and its associated practices illegal could have unintended consequences for consumers. Implementing both sets of remedies could impose multiple harms on Google and its consumer and business users, according to tech-policy scholars: “Consumers may ‘encounter more friction to select default browsers or search options to reach the products they want.’” “The remedies may also create fewer options and ‘higher cost or less successful advertising reach particularly for small businesses.’” “Adding extra middlemen in the ad stack may well increase costs for advertisers, which would seem to disproportionally harm smaller ad buyers.” Google’s services and ability to innovate (particularly in AI) and compete effectively could be weakened, due to financial harm and reduced access to data. The Road Forward The two Google federal trial judges (and, if necessary, appeals-court judges) may want to weigh the potential negative economic implications of far-reaching “remedies” that could impose higher costs on the economy than the benefits of reduced Google monopoly power. Antitrust remedies directed at Google (and potentially at other large U.S. digital platforms in the future) will have large domestic and international policy implications, potentially bearing on American competitiveness and global economic leadership. The Trump administration DOJ may wish to consider whether these implications merit a change of direction in recommended Google remedies. The post Google Antitrust Remedies Could Harm the US Economy and Consumers appeared first on Truth on the Market.

    New US Trade Agreements Could Grow the Economy

    The Trump administration earlier this month announced a new trade agreement between the United States and the United Kingdom. This initial pact should be a harbinger of additional “win-win” American trade deals with the UK and other countries. Such agreements, besides reducing tariffs, could emphasize the mutual elimination of anticompetitive market distortions (ACMDs). Eliminating ACMDs would provide a far greater spur to economic growth than mere tariff reductions. The Agreement The May 8 U.S.-UK accord does far more than merely reduce some tariffs (although significant tariff reductions in such areas as steel, aluminum, cars, beef, and pharmaceuticals are certainly beneficial). As trade expert Shanker Singham explains, the pact is a broader framework agreement that points toward future negotiations regarding: free digital trade between the two nations; coordination on foreign-investment screening; and the elimination of technical barriers to trade, which are a type of ACMD. The third category is particularly important. National requirements that imports must meet the same technical standards that are imposed on domestic producers are an especially pernicious sort of technical trade barrier. A future U.S.-UK agreement that provides for the mutual recognition of technical standards would eliminate a serious barrier to numerous cross-border transactions. The paring back of additional ACMDs, through regulatory reforms in each country, could be the subject of additional U.S.-UK negotiations. In an April 2025 executive order, President Donald Trump already committed to unilaterally rolling back ACMDs embodied in anticompetitive federal regulations. The Agreement in Context The U.S.-UK pact is the first fruit of a new Trump trade strategy to use tariffs as an incentive to “cut deals” with individual nations whose trade practices are seen as harmful to the United States. It reflects the administration’s negative view of the approach taken in prior trade negotiations. The U.S.-led post-World War II trade-liberalization negotiations under the General Agreement for Tariffs and Trade (and later the World Trade Organization) succeeded in reducing tariffs and various nontariff barriers at the border. Unfortunately, however, they made little progress in dismantling ACMDs. ACMDs are internal (“behind the border”) government-imposed regulations, policies, or practices that distort the gains from open trade, competition on the merits, and property-rights protections. They favor certain firms or industries, rather than letting competition and consumer choice drive outcomes. ACMDs have proliferated around the world, especially in the East Asian economies of Japan, Korea, and most notably China, driving their export-led growth models. These ACMDs have suppressed U.S. exports and contributed to rising imports, which have led to excessive supply absorbed by the U.S. consumer. ACMDs have also badly damaged the per-capital gross national product of the countries that engage in them. The Competere consulting firm, led by Shanker Singham, has developed an economic model (the ACMD model) to measure the GDP-per-capita impact of ACMDs. The econometric model evaluates the effects on GDP growth of three sets of legal policies (“pillars”) that support a competitive, high-growth economy: property-rights protection, domestic competition, and international competition. The model has been applied to assess GDP changes in multiple countries. Significantly, improving a country’s ACMD index scores in domestic competition provides by far the largest boost to GDP per capita. Property-rights improvements come in second and international-trade improvements (such as tariff reductions) come in third. That means getting rid of anticompetitive regulatory restrictions provides the biggest bang for the buck. Implications for Trade Negotiations The implications of this model are clear. U.S. trade negotiators may want to use the carrot of American tariff reductions (coupled with the repeal of anticompetitive federal regulations) to achieve the elimination of significant foreign ACMDs. To the extent this strategy succeeds, higher economic growth should accompany new export opportunities for U.S. firms. This would be an economic win-win for both the United States and its negotiating partners. The post New US Trade Agreements Could Grow the Economy appeared first on Truth on the Market.

    Using Trade Policy to Counter Anti-Suit Injunctions and Strengthen Global Patent Enforcement

    Patents are property rights that drive innovation, investment, and economic growth, which are especially critical in technology sectors that rely on global standards. Robust, enforceable patent protections have underpinned America’s technological leadership and economic prosperity by ensuring innovators are rewarded for their investments.  These property rights are, however, increasingly threatened by strategic judicial actions from abroad—in particular, the issuance of anti-suit injunctions (ASIs). ASIs are judicial orders that prohibit litigants from initiating or continuing patent-enforcement proceedings in another jurisdiction. They serve as a powerful procedural tool that can prevent parallel litigation in multiple forums simultaneously.  While ASIs traditionally help maintain judicial efficiency and avoid conflicting decisions, their recent application—especially in disputes over standard-essential patents (SEPs)—has evolved into a strategic battle to secure jurisdictional advantage. An emerging central issue concerns national courts that assert their authority to set FRAND (“fair, reasonable, and nondiscriminatory”) licensing rates globally, leading to heightened jurisdictional conflicts and creating a potential “race to the bottom” scenario in global patent enforcement. This strategic use of ASIs (notably, in jurisdictions like China) is often linked to broader industrial-policy objectives—i.e., controlling international licensing terms by effectively devaluing foreign-held patents. Such judicial tactics undermine the foundational principle of territoriality in patent law. They also threaten the stability of global intellectual-property regimes by compelling patent holders into accepting licensing terms dictated by the most assertive jurisdiction, which can result in artificially low royalty rates. Anti-Suit Injunctions in Global Patent Disputes  An anti-suit injunction (ASI) is a court order (typically, an interlocutory one) that restrains a party from initiating or continuing legal proceedings in other jurisdictions. This powerful judicial tool targets a specific litigant, rather than the foreign court itself, with the goal of avoiding conflicting judgments or parallel proceedings that could undermine the domestic court’s authority. For example, in a notable case between Samsung and Ericsson involving patents essential to 4G and 5G wireless standards, Samsung sought and obtained an ASI from a court in Wuhan, China, prohibiting Ericsson from pursuing patent-enforcement actions in the United States and other jurisdictions. In response, a U.S. court issued an anti-anti-suit injunction (AASI) that blocked Samsung’s Chinese order and allowed Ericsson’s U.S. litigation to continue. ASIs are commonly employed to protect a court’s jurisdiction, prevent redundant litigation, and enforce contractual agreements—such as exclusive jurisdiction or arbitration agreements. In that context, they seek to promote judicial efficiency and uphold the principle of contractual freedom. But the ASI landscape has shifted dramatically, as they are increasingly invoked in complex, multi-jurisdictional disputes over SEPs subject to FRAND licensing terms. This surge has seen courts in various countries (most notably China) actively use ASIs as strategic weapons in high-stakes battles involving major technology companies.   This aggressive use of ASIs has triggered a jurisdictional “ping-pong game,” with courts in targeted nations responding with their own AASIs to neutralize the initial ASI and to protect their own jurisdiction. For instance, in a dispute between InterDigital and Xiaomi, after Xiaomi obtained an ASI from a Wuhan court preventing InterDigital from pursuing patent enforcement in India, the Delhi High Court issued an AASI that allowed InterDigital to proceed with its infringement actions in India—thus directly countering the Chinese court’s ASI and reinforcing India’s jurisdiction over the case.  We’ve seen such AASIs emerge from courts in the United States, India, and Europe—including the Unified Patent Court (UPC), which has shown a willingness to issue AASIs to defend its nascent jurisdiction. This escalation, which has sometimes even led to “anti-anti-anti-suit injunctions” (AAASIs), signals intensifying conflicts and a potential breakdown of international comity. Recent developments continue to shape this evolving field. The U.S. Court of Appeals for the Federal Circuit’s October 2024 decision in Ericsson v. Lenovo clarified the “dispositive” requirement for an ASI, potentially making them somewhat easier to obtain in U.S. SEP cases by holding that an ASI can be justified even if it only resolves a foreign injunction, rather than the entire foreign proceeding. Meanwhile, the EU’s World Trade Organization (WTO) dispute against China’s ASI practices saw a panel rule in early 2025 that, while China failed on certain transparency obligations, its ASI policies were not inconsistent with the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”). This decision has been appealed by both the EU and China, with an outcome expected in the latter half of 2025. ASIs as Industrial Policy The strategic deployment of ASIs by foreign courts—particularly those in managed economies like China—can function to effectively expropriate the value of patent rights from their U.S. owners. This aggressive use is not merely procedural; it aligns with broader industrial-policy objectives aimed at shifting the global technological balance, often by transitioning a nation from a net licensee to a net licensor of technology. Chinese courts have notably used ASIs in cases involving domestic technology leaders like Huawei and Xiaomi, shielding these companies from litigation abroad, while consolidating global disputes in China. These actions can be seen as strategic steps to assert China’s growing role as a global technology licensor.  Indeed, the significant economic and national interests intertwined with FRAND disputes often lead courts to adopt stances that favor domestic companies or strategic national goals. This calculated approach, where ASIs become instruments of economic statecraft, harms U.S. innovators. ASIs directly obstruct U.S. patent holders from enforcing their legitimate property rights in their chosen forums, which might include U.S. courts or other jurisdictions perceived as more favorable for upholding patent validity and ensuring fair compensation. In the Ericsson v. Samsung dispute, Samsung’s ASI from a Wuhan court was specifically designed to consolidate the global licensing dispute in China, ensuring exclusive authority over the terms. The European Union has voiced similar concerns, noting that Chinese ASIs can compel patent holders to accept lower-than-market royalty rates under duress. This artificially diminishes the patent holder’s leverage in negotiations, effectively devaluing their patent portfolio and coercing them into unfavorable licensing terms globally. When foreign courts combine issuing ASIs with assertions that they have jurisdiction to set FRAND royalty rates global, it can instigate a “race to the bottom” in which litigants shop for jurisdictions most likely to impose the lowest rates. This threatens to distort global licensing markets and undermine efficient, market-based outcomes. The proliferation of conflicting injunctions also generates enormous transaction costs (ultimately passed on to consumers), as resources are diverted from innovation to “meta-litigation” over jurisdictional supremacy.  This environment of heightened legal uncertainty and escalating litigation expenses discourages R&D investment in the United States, as the ability to reliably enforce IP rights globally is compromised. Moreover, the strategic use of ASIs to frustrate U.S. patent rights represents a profound disrespect for the sovereignty of U.S. courts and the territorial nature of patents. It generates international friction and disrupts the comity that should govern international legal relations. Arguments justifying ASIs often cite their utility in promoting judicial efficiency, preventing duplicative or vexatious parallel litigation, and upholding the authority of domestic courts, particularly in enforcing arbitration agreements or countering forum shopping. Some scholars suggest the current “ping-pong game” of global ASIs stems not just from procedural tactics, but from such deeper issues as significant national economic interests in SEPs, a regulatory void in FRAND dispute resolution, and divergent national choice-of-law rules. It’s also posited that China’s assertive use of ASIs and its global rate-setting ambitions could be a defensive reaction to similar extraterritorial reach by Western courts (notably in the UK) or a legitimate move to protect its own judicial sovereignty and reflect its growing stature as a technology licensor, rather than just a licensee. But while ASIs are not unique to China, and systemic issues do contribute to jurisdictional friction, Chinese ASIs are distinguished by their sweeping global scope, frequent ex-parte issuance, opaque judicial processes, and clear alignment with a national industrial policy that seeks to suppress global royalty rates.  Such strategically deployed ASIs appear designed to devalue foreign-held patents and dictate global terms under a preferred national framework. This suggests that, to at least some degree, the use of ASIs can constitute protectionist behavior that distorts efficient market outcomes and fundamentally undermines property rights, rather than fostering genuine comity or legitimate judicial management. A Trade-Policy Toolkit to Protect US Innovation  While recent attention has understandably focused on China’s rapid and expansive deployment of ASIs, it is important to recognize that the strategic use of such injunctions did not originate there. Courts in the United States and the United Kingdom, among others, have also issued ASIs in significant SEP cases, sometimes setting precedents that other jurisdictions (including China) have subsequently adopted and expanded.  There are also legitimate procedural reasons to employ ASIs, such as preventing duplicative litigation, enforcing arbitration agreements, or protecting jurisdictional integrity. The key concern arises when their deployment evolves beyond these legitimate purposes and becomes a strategic tool closely aligned with national industrial-policy objectives. Thus, addressing these jurisdictional tensions effectively will require nuanced international cooperation and reforms that extend beyond any single nation’s practices. Addressing the strategic misuse of ASIs and the consequent devaluation of U.S. intellectual property requires a comprehensive strategy that extends beyond reactive, case-by-case litigation. The most effective path forward for the United States would be to leverage existing trade-policy tools to address the issue. For example, the Office of the U.S. Trade Representative (USTR) could continue to prominently feature concerns about the misuse of ASIs (especially those emanating from China) in its annual Special 301 Report, potentially elevating countries that engage in such practices to the “Priority Watch List” to maintain pressure on them and underscore the seriousness of the issue. It could also seek to include provisions in new and existing bilateral and multilateral trade agreements that explicitly discourage or prohibit the use of ASIs that unduly interfere with the legitimate enforcement of patent rights in other jurisdictions. In the multilateral arena, the United States might more vigorously support efforts at the WTO to challenge practices that undermine TRIPS obligations. This includes continuing to highlight the economic harm and trade distortions caused by strategically deployed ASIs, even if initial panel rulings, like those in the EU-China dispute (DS611), are unfavorable on certain interpretations of TRIPS.  Furthermore, domestic legislative solutions warrant serious consideration. Congress should re-evaluate and consider enacting measures similar to the Defending American Courts Act (DACA). Such legislation could create significant disincentives for parties attempting to enforce foreign ASIs that undermine U.S. court proceedings or International Trade Commission investigations—e.g., by imposing presumptions of willful infringement or by limiting their ability to challenge patents at the U.S. Patent and Trademark Office’s (USPTO) Patent Trial and Appeal Board. The overarching goal of these concerted actions should be to ensure a global playing field in which innovation is rewarded through strong and enforceable intellectual-property rights. The strategic international deployment of ASIs, particularly when used to diminish the value of American intellectual property by dictating global licensing terms, poses a direct threat to the property rights that underpin much U.S. innovation and economic competitiveness. To safeguard the interests of American innovators and maintain technological leadership, the United States should employ a robust and assertive trade policy, coupled with domestic reforms, that can counter these jurisdictional challenges and ensure that patent rights are upheld worldwide. The post Using Trade Policy to Counter Anti-Suit Injunctions and Strengthen Global Patent Enforcement appeared first on Truth on the Market.

    Misreading Machines: How the Copyright Office’s Report Undermines Generative AI

    In a preview of its forthcoming report on copyright and artificial intelligence, the U.S. Copyright Office has unveiled a pre-publication draft of the report’s section on generative-AI training. The draft reflects a concerning tendency toward uncertainty and overreach, giving short shrift to the substantial arguments in favor of AI developers and deployers and notably discounting significant public benefits, while broadly construing market harms in ways that risk stifling technological progress.  Given both the office’s institutional incentives and its historical focus, this is perhaps unsurprising. It’s also important to note that, amid the office’s recent political struggles, the draft may yet be withdrawn, significantly modified before final publication, or simply not finalized at all. With that said, the views the office expresses do echo some recent court findings. The draft report also walks through each of the fair-use factors in considerable detail, providing nuanced and sometimes controversial interpretations. This post will endeavor to highlight some key points that stood out as particularly significant. Maybe GenAI Is Transformative…Sometimes? The report adopts a fragmented analytical approach, suggesting that each distinct part of generative AI—from initial training to fine-tuning to retrieval-augmented generation (RAG) to deployments—requires its own fair-use analysis for each instance (e.g., each instance of training and fine tuning for each release of ChatGPT, as well as each deployment of ChatGPT as unique products). Specifically, the report notes that training AI on copyrighted material will “often” be transformative, but then offers important caveats:  [T]ransformativeness is a matter of degree, and how transformative or justified a use is will depend on the functionality of the model and how it is deployed. On one end of the spectrum, training a model is most transformative when the purpose is to deploy it for research, or in a closed system that constrains it to a non-substitutive task…. On the other end of the spectrum is training a model to generate outputs that are substantially similar to copyrighted works in the dataset. For example, a foundation image model might be further trained on images from a popular animated series and deployed to generate images of characters from that series. Unlike cases where copying computer programs to access their functional elements was necessary to create new, interoperable works, using images or sound recordings to train a model that generates similar expressive outputs does not merely remove a technical barrier to productive competition. In such cases, unless the original work itself is being targeted for comment or parody, it is hard to see the use as transformative. The report nods to the recent “Studio Ghibli” AI trend, and suggests that such uses are not transformative. But note how the report characterizes the use. It begins the second part of the quoted language by noting that training a model to generate outputs  “substantially similar” to existing work isn’t transformative. This is an obvious restatement of copyright law—if you make a product whose purpose is to infringe copyright, the manner in which it infringes copyright can’t be transformative. But the report makes a subtle move that dramatically expands what counts as “substantially similar.” It argues that “to train a model that generates similar expressive outputs does not merely remove a technical barrier to productive competition.” Which is to say, as in the recent “Studio Ghibli” craze, making models capable of generating “similar expressive outputs” won’t be transformative. But this phrasing suggests a much larger analytical frame—something closer to an artist’s “style” or a writer’s “voice,” and not so much concern over outputs that are “substantially similar” to particular fixed works. Indeed, in its footnote to this language, the report says: The decision to train on expressive works when there are available alternatives may itself reflect a lack of transformative purpose. For example, an image model could be trained on mass image data collected through automated means (street-view cars, body cameras, security cameras), yet developers often choose aesthetic images such as stock photography. This suggests the purpose is not simply to generate images of the physical world, but to generate images that have expressive qualities like the originals. The report is concerned with AI models trained on images for their aesthetic content because the models learn to create works with those aesthetics. Again, the footnote doesn’t claim the concern is the reproduction of particular expressive works but instead the creation of new works that “have expressive qualities like the originals.” How far does this logic extend? And does it extend to human works, as well? The Black Crowes certainly borrowed quite a lot of the “expressive qualities” of the Rolling Stones, and Stephen King has widely admitted to wearing influences like H.P. Lovecraft on his sleeve. As Picasso is purported to have said: “good artists borrow, great artists steal.” Copyright protection does not extend to so-called “unprotectable elements,” such as facts, ideas, concepts, processes, systems, methods, and general themes common to a wide variety of works. Indeed, the report’s language would appear to undermine the scènes à faire defense to copyright infringement.  While there’s room for nuanced distinctions between clearly transformative uses (such as foundational training for new kinds of outputs or research-oriented models) and less transformative applications (such as generating similar expressive content), this level of fragmentation for determining fair use is impractical. It injects substantial uncertainty into AI development. A clearer delineation between foundational training (where copying vast datasets can be transformative) and deployment-level uses designed to infringe might yield more predictable and economically beneficial outcomes. The ‘Effect on the Market’ Swallows Everything The Copyright Office’s most troubling analytical leap involves its expansive view of the fourth fair-use factor: the “effect on the market.” By interpreting potential AI-generated outputs as direct substitutes for original works, the report threatens to substantially restrict innovation.  According to the report: While we acknowledge this is uncharted territory, in the Office’s view, the fourth factor should not be read so narrowly. The statute on its face encompasses any “effect” upon the potential market.  The speed and scale at which Al systems generate content pose a serious risk of diluting markets for works of the same kind as in their training data. That means more competition for sales of an author’s works and more difficulty for audiences in finding them. If thousands of Al-generated romance novels are put on the market, fewer of the human-authored romance novels that the Al was trained on are likely to be sold. Royalty pools can also be diluted. UMG noted that “[a]s Al-generated music becomes increasingly easy to create, it saturates this already dense marketplace, competing unfairly with genuine human artistry, distorting digital platform algorithms and driving ‘cheap content oversupply’ – generic content diluting human creators’ royalties.” The concern expressed here is not even that a model’s given output will affect the market for some particular piece of content by creating a substantially similar copy. The concern is that the market for creative works as a whole will be affected by generative AI. The report at least acknowledges the novelty of this position.  Further, this framing misconstrues the nature of generative-AI outputs, which typically serve different consumer needs and interests from the original expressive works. AI-generated writing, for instance, can support entirely different uses and markets than original journalistic or literary creations. For example, using generative AI to assist in creating original news content, by definition, cannot infringe on an original expression, as the intended output (a news story on an event that just occurred) cannot possibly exist yet. The report essentially construes the “effect on the market” as an argument about labor inputs in a production process, and not a matter of whether an original expression has been infringed.  The report imagines a certain state of the market and wants to freeze it in place. While it’s true that generative AI can be used to hastily create new romance novels or pop songs, it’s also true that AI will help with curation, allowing users to locate higher quality works in less time. This, however, is left unsaid in the report, and probably for good reason. Predicting all of the complicated market opportunities and responses that AI will create is a task far beyond the scope of copyright analysis. All of these are valid social concerns that should be discussed. But it is not a matter for copyright law to balance those sorts of equities in the big picture. Model Weights as Infringement The report’s position on model weights as potentially infringing copies is similarly problematic. Equating AI models’ learned patterns to mere copies oversimplifies the sophisticated statistical and transformative processes at-play, akin to conflating human memory or learned skills with unlawful reproduction. Such a stance stretches copyright protection beyond reasonable limits and misunderstands the underlying technology. As the report itself acknowledges, “the extent to which models retain or ‘memorize’ training data…was disputed by commenters.” But the report nonetheless suggests, “where the learned pattern is highly specific, ‘the pattern is the memorized training data.'”  This broad interpretation poses a substantial risk to AI innovation, as it fundamentally misunderstands how generative-AI models operate. Model weights do not function as databases or forms of digital compression that store and reconstruct specific copyrighted works. Rather, these weights reflect complex statistical relationships regarding how likely certain tokens—such as fragments of words or phrases—are to appear together, based on vast patterns extracted from human-generated content.  Moreover, equating model weights with databases or compressed copies conflates correlation with reconstruction. The trained models capture statistical probabilities about token arrangements, revealing patterns of usage and structure prevalent in large bodies of text. When generative models produce outputs, they synthesize text based on these statistical insights, rather than reconstructing original expressions from specific sources. Therefore, characterizing these models as repositories of copied works overlooks the transformative, statistical, and probabilistic nature inherent to their operation. This approach could potentially impose inappropriate legal constraints on technological development and innovation. It is true that generative-AI models can sometimes produce outputs that closely resemble existing works. But these outputs are fundamentally new generations, rather than copies stored within the model. While certain outputs might occasionally implicate specific copyrights, the underlying model weights themselves are neither reproductions nor infringements of any protected work. The Public Benefits of AI The report’s minimal acknowledgment of potential public benefits from generative AI is inadequate. While it nods perfunctorily to the existence of public benefits, it quickly pivots to counterbalance this acknowledgment:  In the Office’s view, there are strong claims to public benefits on both sides. Many applications of generative AI promise great benefits for the public, as does the production of expressive works. While the sheer volume of production itself does not necessarily serve copyright’s goals, commenters identified a wide range of potential benefits weighing in favor and against training on unlicensed copyrighted works. With regard to the fair use analysis, however, the Office cannot conclude that unlicensed use of copyrighted works for training offers copyright-related benefits that would change the fair use balance, apart from those already considered. The fact of the matter is that training these large language models and other forms of generative AI is not directed solely toward the purpose of writing poems or creating pictures. The iterative process of training and deployment allows researchers to discover both how to develop these systems at-scale and which uses may generate the most social benefit. We can easily imagine how training AI at-scale on medical images and photos of patients might help these systems recognize early warning signs of various diseases. What we can’t imagine is what happens when users and entrepreneurs begin to employ these systems in unexpected ways. The public benefit of facilitating training is hard to overstate.  It is, of course, also true that we do not want to hollow out the creative industries. But as the report itself notes (and the Copyright Office has previously recognized), the scale of licensed works that would be needed to facilitate AI training means that the economics just don’t make sense. Instead, in what is likely a question for Congress, we may need to think about ways to enable creators to better leverage their unique styles for different sorts of model outputs. For example, general models fine tuned to generate works in the style of (or with the voice of) particular creators could provide unique monetization opportunities. And that may require a new form of property right related to (but distinct from) copyright. Conclusion The report’s posture echoes a worrying trend evident in recent cases like Ross v. Thomson Reuters and ongoing speculation around Khadrey v. Meta, which would mean a rather restrictive interpretation of fair use. If courts uniformly embrace this narrow approach, the resulting landscape could significantly hinder AI innovation. In that event, legislative intervention or appellate-court clarification may become necessary to recalibrate the balance. Ultimately, while some level of concern about protecting rights holders is justified, the Copyright Office’s report introduces too much uncertainty and recommends overly broad restrictions. Policymakers and appellate courts should reaffirm the need for flexibility in the face of crucial innovation. Ensuring a balanced fair-use doctrine requires recognizing genuine differences between generative-AI tools and original expressive works in terms of their output, intent, and market impact. Without this balance, the legal framework risks becoming an obstacle, rather than an enabler, of technological advancement and economic growth.   The post Misreading Machines: How the Copyright Office’s Report Undermines Generative AI appeared first on Truth on the Market.

    New York’s Failed Economic Case for Price-Gouging Enforcement

    A major winter storm across northern New York State in January 1998 snapped power lines and left thousands without electricity, as temperatures plunged. In the small town of Chazy, just south of the Canadian border, a local hardware store stepped up. Chazy Hardware had just one generator on hand, but it managed to locate 54 more on a Saturday in Burlington, Vermont. The following morning, a driver and truck made the icy hours-long round trip to bring them back. Forty of the generators were sold on Saturday, and most of the rest sold Sunday afternoon. And then the State of New York fined Chazy Hardware for price gouging. Price-gouging laws are promoted as a way to protect disaster-stressed consumers from greedy businesses, but the state’s enforcement mostly centered on how Chazy Hardware allocated the costs of the emergency trip. Generators sold in advance reflected the store’s ordinary markup, and it allocated all of the extraordinary costs of the trip to the 14 additional generators they were able to bring in. The state Office of the Attorney General said those costs should have been averaged across all the weekend’s sales, and brought the price-gouging suit because of that differing view. Had Chazy Hardware done nothing—like every other store in town—they would have been in the clear. In February 2025, New York Attorney General Letitia James proposed new rules to clarify how the state enforces its price-gouging law. Alongside those rules came a staff report, “The Economic Case for Price Gouging Laws.” It’s a welcome attempt to ground enforcement in economic reasoning. Unfortunately the economic reasoning is thin, the analysis is badly one-sided, and the resulting rules—like the one that tripped up Chazy—still risk punishing businesses for the sort of extraordinary efforts emergencies require. In a recent regulatory comment, I explained these concerns in detail. While legislators ought to repeal state price-gouging laws, attorneys general are tasked with enforcing the laws on the books. A solid grounding in economics is essential to improve enforcement and aid compliance efforts. The AG’s Rulemaking and Its Economic Turn The new rules James proposed earlier this year to clarify how New York enforces its price-gouging law are part of a years-long process initiated in 2022. The goal is to clarify how pre-disruption prices are determined, how cost increases can justify price changes, and how a seller’s market share may trigger heightened scrutiny. Anti-gouging laws have long relied on vague terms like “unconscionably excessive,” leaving merchants, enforcers, and courts to guess at the boundaries. Clarification is desperately needed in this space. The idea is to ground enforcement in economic reasoning, rather than moral appeals. Price-gouging laws are economic regulations and, like other economic regulations, their enforcement ought to rest on a clear-eyed understanding of tradeoffs and real-world consequences. Unfortunately, the attorney general’s staff report does not provide that understanding. Its economic analysis is heavily one-sided, and the use of evidence is uneven. Studies critical of price-gouging laws are scrutinized or dismissed, but supportive articles are accepted uncritically. The report denounces critics for relying on theory and lacking empirical grounding, but then leans heavily on theoretical claims of its own that lack empirical grounding. Where it engages real economics, the logic falters: the report notes that short-run supply is typically inelastic, then proposes rules likely to make supply even less responsive. The staff report claims modern enforcement will be subtle and economically informed, but its reasoning is rough, and the rules offered by the state are blunt. What the Economics Actually Say While the staff report positions itself as a response to economists’ skepticism, it fails to engage it seriously. Most economists oppose price-gouging laws because they believe these laws make conditions worse for consumers, not because they don’t mind consumer exploitation. When prices are allowed to rise, they do more than ration scarce goods. They draw new supply into the market. Suppressing prices discourages demand and supply responses, often leaving communities with longer lines and fewer goods when they’re needed most. After Hurricanes Katrina and Rita in 2005, the Federal Trade Commission (FTC) investigated gas-price spikes and found that most increases tracked rising crude-oil prices and supply disruptions—not manipulation or abuse. The New York staff report complains that the FTC defined price gouging too conservatively. But New York’s own record suggests the FTC’s standard wasn’t far off: of the more than 3,000 complaints the AG received in late 2005, just 15 resulted in formal charges. The lesson? Actual price gouging is rare, and enforcement risks penalizing retailers who find themselves in a tight spot or—like Chazy Hardware—have gone to extraordinary efforts to boost supplies. More recent work by Timothy Beatty, Gabriel Lade, and Jay Shimshack on post-hurricane gasoline pricing confirms the point. Studying gasoline stations across multiple hurricanes, they found that average retail margins often fell after landfall, and that most stations held prices flat or even discounted fuel. Extreme price hikes were rare and short-lived. One possible reason: reputational concerns. Another: fear of price-gouging enforcement. Fear of price-gouging enforcement can backfire. Daniel Scheitrum, K. Aleks Schaefer, and Tina Saitone document how grocery retailers froze egg prices during the COVID-19 pandemic, even as wholesale costs spiked. Many cut promotions, restricted sales, or simply left shelves empty. Price-gouging litigation didn’t prevent harm; rather, it deepened shortages. In 2009, the South Carolina attorney general found the same effects in a survey of gasoline retailers: some gas stations chose to shut down after hurricanes rather than resupply at higher costs, because they feared price-gouging enforcement. The most vivid example of harm comes from W. David Montgomery, Robert Baron, and Mary Weisskopf, who modeled the effects of proposed federal price-gouging laws. Their simulation showed that such laws would have increased the overall harm caused by Hurricane Katrina by nearly $3 billion. Crucially, the additional losses would have been concentrated in the two states hit hardest by the storm. When prices can’t rise, goods don’t move to where they’re most needed. The New York AG’s staff report scoffs at the Montgomery, Baron, & Weisskopf report’s modeling for assuming straightforward price controls, rather than the more sophisticated price restraints that New York says it employs. Ironically, under the enforcement logic defended in the AG’s report, Chazy Hardware likely would have kept its truck at home, all of the generators would have remained warehoused in Vermont, and 50-plus New York households would have remained in the icy dark back in January 1998. In other words, the law would have concentrated harms on those struck by the disaster. Clarifying the Rules, Preserving the Wiggle Room New York’s price-gouging law has been on the books since 1979, but it has been for most of its history enforced with minimal regulatory guidance. The attorney general’s office and the courts have long been content to rely on “we know it when we see it” standards—reminiscent of Justice Potter Stewart’s famous remark on obscenity. Terms like “unconscionably excessive” or “unfair leverage” are left undefined or only loosely framed, applied in hindsight, and often without any clear benchmark. That ambiguity makes compliance difficult, especially with a law like New York’s that can be enforced even without any official declaration of emergency. The proposed rules aim to fix some of the law’s vagueness. They attempt to clarify how pre-disruption prices should be calculated, what kinds of cost increases justify price hikes, and how market share interacts with enforcement presumptions. It’s that n overdue effort—guidance of this sort could have helped 40 years ago. That it’s only arriving now reflects how little attention has been paid to the mechanics of enforcement, even as the statute has remained in force. But details matter. And in this case, the details often undermine the promise of clarity. The rules specify formulas, thresholds, and procedures, but the AG’s office also insists it will retain discretion to avoid unjust outcomes. In effect, they offer more elaborate definitions that nonetheless preserve “we’ll know it when we see it” as the ultimate rule. The result is a framework that appears precise but still leaves businesses guessing. Several provisions illustrate the problem: §?600.5 benchmarks “pre-disruption” prices using median sale prices prior to an emergency, even for sellers that use dynamic pricing or face abrupt shifts in costs. The rule penalizes responsiveness, rather than rewarding it. §?600.8 defines recoverable cost increases so narrowly that common emergency efforts—expedited shipping, hazard pay, overtime—may fall outside the safe zone, especially for smaller firms with less formal documentation. §?600.9 seeks to extend enforcement to out-of-state sellers offering goods online, who almost by definition would be expanding supplies into New York, and almost all of whom lack local market power. The staff report promises subtle, economically informed enforcement. But the state’s inability to pin down price gouging precisely means that even well-intentioned sellers will continue to operate under a cloud of uncertainty—albeit a slightly smaller cloud—if these rules go into effect. The Laws Are the Problem, but Discretion and Good Economics Still Matter The deeper problem isn’t the rules, but the law itself. Price-gouging statutes weren’t built for consistency or economic logic. Their terms are vague, their goals are muddled, and they fail to distinguish market power from effort. Repeal would be the best outcome. That’s a job for the New York State Legislature. But under current law, Attorney General James has broad discretion in enforcement: deciding which cases to bring, how to interpret ambiguous terms, and what remedies to pursue. That discretion matters. It gives the attorney general scope to apply economic reasoning and to implement the law more wisely. The rulemaking process should clarify how that discretion will be used and explain the economic rationale behind it. New York’s attempt to supply an economic foundation for enforcement is welcome. Other states with price-gouging laws should do the same; they should ground their actions in a real understanding of how markets work. But for economic analysis to do that job, it must do more than dress up gut-level enforcement in the language of efficiency. Improving enforcement means focusing on cases where sellers mislead customers, engage in fraud, or work to worsen supply constraints—not punishing transparent efforts to meet demand. It means distinguishing opportunism from urgency. And it means resisting the impulse to treat every sharp price increase as an abuse. Even with a flawed law, economically grounded enforcement can reduce harm, but only if it’s backed by better analysis than the state has offered so far. (And for the record, New York—like every other state—already has consumer-protection laws that prohibit fraud and deception. Repealing price-gouging laws wouldn’t prevent the state from going after actual bad actors.) Final Thoughts from a Reluctant Adviser Chazy Hardware’s story illustrates what can go wrong when good intentions meet vague laws and blunt enforcement. The attorney general’s office now claims a more modern, economically informed approach, but the proposed rules and the accompanying staff report suggest otherwise. They still risk punishing quick actions and chilling exactly the kinds of responses upon which communities rely in a crisis. In comments submitted during the rulemaking process, I offered a detailed critique of the state’s economic rationale and selected proposed rules. Even for laws one might question—or oppose entirely—rigorous analysis can help regulators avoid unintended consequences and reduce harm. This critique is offered in that spirit: not to defend the law, but to press for better governance within the framework we have. Until repeal is on the table, discretion matters. Economics can and should be used to improve enforcement, but only if the available theoretical and empirical work on price gouging is taken seriously and applied in a balanced way. The AG’s staff report falls far short of what’s needed to support clear, consumer-focused enforcement. If there’s to be a standard for enforcing price-gouging laws, let it be one grounded in consumer welfare, not in after-the-fact outrage dressed up as economic analysis. The post New York’s Failed Economic Case for Price-Gouging Enforcement appeared first on Truth on the Market.

    President Trump Takes Aim at Anticompetitive Regulatory Barriers

    Anticompetitive regulatory distortions are a major drag on the U.S. economy. President Donald Trump’s April 9 “Executive Order on Reducing Anti-Competitive Regulatory Barriers” has the potential to drive dramatic U.S. economic growth. Implementation of the executive order may be expected to face legal challenges and opposition from special interests who benefit from the status quo. A substantial reduction in federal regulatory burdens could benefit American businesses and families directly. It could also provide the Trump administration with negotiating leverage to obtain a reduction in harmful foreign anticompetitive international trade distortions. Background: The Harm from Anticompetitive Regulations Numerous scholarly studies document that regulations impose large and excessive economic costs. Casey Mulligan of the University of Chicago explained in 2023 congressional testimony that federal rules finalized in 2021 and 2022 imposed $5,000 of additional annual costs per-household. He also calculated a higher household regulatory burden of $40,000 over eight years if the 2021-2022 trend continued. Mulligan added that distortion of competition is a major source of these burdens: [M]ere clerical “red tape” is merely the tip of the regulatory-cost iceberg. Complying with a regulation often involves high opportunity costs (foregone opportunities for businesses to trade, innovate, and realize their full potential). Moreover, “many rules protect a type of business from competition, sometimes by erecting barriers to new market participants and other times by outright prohibiting competing goods and services.” This skews market outcomes, reducing market-generated economic benefits. DOJ Regulations Task Force In an initial effort to address this problem, the U.S. Justice Department (DOJ) on March 27 announced the launch of an anticompetitive regulations task force to advocate for elimination of anticompetitive state and federal laws and regulations that undermine free-market competition and harm consumers, workers, and businesses. The DOJ noted that regulations that erect high barriers to competition make it more difficult for businesses to compete effectively, especially in markets that have the greatest impact on American households. These include housing, transportation, food and agriculture, health care, and energy markets. The department also stressed that these “undue burdens” often arise form “regulatory capture” of government by special interests and big business. The DOJ added that it would invite public comments to support the Trump administration’s mission to unwind laws and regulations that hinder business dynamism and make markets less competitive. The April 9 Executive Order The April 9 executive order goes far beyond nonbinding DOJ task-force advocacy, by creating a blueprint for direct government action against anticompetitive rules. In short: Within 70 days, the heads of all federal executive agencies (including independent agencies) must provide the DOJ and the Federal Trade Commission (FTC) with a list of all their regulations that impose anticompetitive restraints or distortions (such as the protection of monopolies or favored firms). Within 90 days of receiving the lists, the FTC chairman—in consultation with the DOJ, agency heads, and the White House—will present the Office of Management and Budget a consolidated list of regulations that merit rescission or modification in light of their anticompetitive effects. The OMB director will then consult with relevant agency heads, the FTC, the DOJ, and the White House in deciding whether to implement the proposed rescissions and modifications as part of the administration’s deregulatory agenda. The executive order’s timetable envisions the possible elimination or modification of large numbers of anticompetitive regulations by the fall. Possible Legal Challenges Court challenges may be expected against regulations targeted for elimination or modification. For example, incumbent businesses may argue that they are “harmed” by losing special regulatory benefits that gave them a leg up over their rivals (no matter that consumers and competition benefit from these changes). Recent U.S. Supreme Court decisions and a new presidential memorandum may help the Trump administration resist these lawsuits. An April 9 “Presidential Memorandum on Directing the Repeal of Unlawful Regulations” orders agency heads to identify existing regulations that are facially unlawful. In so doing, it highlights 10 recent Supreme Court decisions that cut back on overly broad agency assertions of regulatory authority. Indeed, these decisions may actually require the elimination of certain rules, according to the memorandum. The memorandum also emphasizes that agencies may avoid time-consuming public “notice and comment” proceedings by invoking the “good cause” exception of the Administrative Procedure Act (the federal law governing rulemaking) to scrap unlawful regulations. Nevertheless, novel legal questions arising from large-scale regulatory changes likely will lead to some costly delays in deregulatory improvements. Thus, the degree to which the administration will eventually succeed in eliminating many anticompetitive rules is uncertain. International Trade Implications Anticompetitive federal regulations do not only hurt Americans. They also may create barriers to entry and impose other costs on foreign businesses seeking to enter the U.S. market, through exports or foreign investment. As such, rescinding many problematic U.S. regulations could give the Trump administration great leverage in its efforts to reduce high foreign nontariff trade barriers—an important American trade priority. An April 2 administration fact sheet cited specific practices of other nations in explaining that “non-tariff barriers – meant to limit the quantity of imports/exports and protect domestic industries – . . . deprive U.S. manufacturers of reciprocal access to markets around the world.” Many of these barriers are anticompetitive rules, similar in effect to the federal anticompetitive regulations that the administration seeks to rescind. Anticompetitive foreign nontariff barriers—discussed at length in the administration’s 2025 trade policy agenda—are a type of anticompetitive market distortion. Trade-related ACMDs, which are on the rise, are more trade-restrictive (an estimated $1.4 trillion in losses in 2019) and economically harmful than tariffs. In short, highlighting the planned rescission of American anticompetitive regulations would provide American negotiators a carrot demonstrating U.S. commitment to a less regulatory (and freer) future international trade regime. The post President Trump Takes Aim at Anticompetitive Regulatory Barriers appeared first on Truth on the Market.

    Card-Fee Bills Would Benefit Big-Box Retailers but Harm Small Merchants

    Texas’ House and Senate are considering legislation to regulate payment-card transactions, with bills that proponents claim would save millions of dollars for merchants and consumers. The evidence, however, suggests that the benefits would accrue mostly to big-box stores, while smaller merchants and consumers will both suffer. H.B. 4061 and S.B. 2056 would prohibit card-issuing banks from retaining interchange fees on the sales tax and tips portions of a card transaction. This is similar to an Illinois law currently subject to a preliminary injunction for violating federal law.  But the Texas bills would go further by prohibiting banks with more than $85 billion in assets from coordinating with other banks to set interchange fees, or from using the default multilateral interchange fees set by Visa and Mastercard. Supporters claim this will foster competition and drive down costs for everyone. While some big-box chains might see savings, smaller retailers will face higher transaction fees and consumers would see prices rise. To understand why, consider how the fees currently work. After a consumer swipes their card, the cardholder’s bank pays the merchant’s bank the amount billed, minus an interchange fee. Since such fees were first established, default rates have been set by the major payment networks, with a uniform rate applied to any particular type of card. The only exceptions are a few of the largest merchants, such as Costco, who have been able to negotiate lower rates with issuers, usually in return for exclusivity. The default fee helps to solve the coordination problem that would otherwise crop up if the more than 5,000 U.S. banks and credit unions each attempted to set fees individually. Having uniform rates also creates certainty for issuers, who use the fees to fund fraud prevention, cardholder rewards, insurance, and other benefits. They’re also used to fund network fees, which cover investments in innovations like contactless payments and tokenized transactions that have dramatically improved the shopping experience and reduced fraud. Economists have shown that having a default fee usually maximizes welfare. Merchants who want to accept cards issued by one bank on a network like Visa or Mastercard are generally required to accept all cards in that network. Knowing that merchants are required to honor all cards of a particular network gives consumers confidence to use a card displaying that network’s brand. Merchants also benefit when consumers use the card more often, as card-using consumers spend more, and checkout is usually quicker. If merchants were required to honor all cards, but issuing banks could set fees independently, then each bank would have incentives to charge higher fees for itself, while spreading to all the other issuers on the network the risk that some merchants would stop taking that network’s cards. The risk of a merchant dropping a network also varies by merchant size. Major grocery and department-store chains often have the advantage of bargaining power, which lets them negotiate special deals with large banks. Large retailers can typically extract lower rates by threatening only to accept cards on one network. Not wanting to lose access to the millions of transactions that flow through big-box stores, banks are likely to offer them customized, discounted interchange fees. Small merchants lack that leverage. Big banks have little incentive to negotiate a custom fee schedule with “mom and pop” shops, such as independent restaurants or boutiques. Instead, they will impose take-it-or-leave-it terms, which could be significantly higher than today’s default interchange fees. The net effect is that smaller businesses would likely end up paying more to accept credit and debit cards, and at least some of that cost will be passed on to consumers.  In a state that prides itself on entrepreneurship and small-business vitality, lawmakers should tread carefully. HB 4061 and SB 2056 risk tipping the playing field further in favor of mega-retailers, to the detriment of the smaller local businesses that Texans hold dear. The post Card-Fee Bills Would Benefit Big-Box Retailers but Harm Small Merchants appeared first on Truth on the Market.

    American Industrial Policy Should Start with No More Self-Inflicted Tax Wounds

    U.S. industrial-policy efforts frequently undermine themselves through counterproductive tax regulations, creating a paradox that hinders genuine investment and economic growth. Policymakers have committed substantial resources and political capital toward reshoring domestic manufacturing, upgrading national infrastructure, and enhancing American economic competitiveness. Indeed, these goals have been central to the Trump administration’s stated economic priorities. Yet despite these intentions, poorly structured tax policies simultaneously create substantial barriers to investment, growth, and global competitiveness. Nowhere is this contradiction more evident than in the recent shift in business-interest-deduction rules under Section 163(j) of the Internal Revenue Code contained in the Tax Cuts and Jobs Act of 2017 (TCJA). The move from an EBITDA-based standard—which allowed companies to deduct interest payments calculated from earnings before interest, taxes, depreciation, and amortization—to an EBIT-based standard has severely restricted allowable deductions, dramatically raising the cost of debt-financed investments.  While this shift, implemented in 2022, provided an immediate benefit for budget projections, helping the TCJA comply with budget-reconciliation rules by raising future revenue estimates, it has introduced significant long-term economic harm by discouraging domestic investment in capital-intensive industries critical to industrial revitalization and technological advancement. Genuine pro-growth policy must focus on creating a fertile ground for investment, rather than relying on reactive government subsidies or interventions. As such, the Trump administration’s policy agenda would be better served by Congress restoring the 30% of EBITDA deduction standard under Section 163(j) originally put in place in 2017. This structural reform would align tax incentives appropriately, organically encouraging private-sector investment, innovation, wage growth, and job creation—essential conditions for durable American economic strength and competitiveness. Congress should make restoring the 30% of EBITDA standard in Section 163j a key priority in its upcoming tax legislation. Interest Deductibility as Foundational Growth Policy Interest deductibility is a fundamental component of the U.S. corporate tax structure, reflecting the basic principle that businesses should only pay taxes on their net income—revenues minus legitimate business expenses. Interest payments resulting from debt incurred to finance investments and operations have traditionally been treated as ordinary and necessary business expenses. Allowing firms to deduct these costs from their taxable income appropriately recognizes interest payments as essential operational expenditures, rather than taxable profits. Economically, the rationale for interest deductibility is straightforward: it significantly lowers the cost of capital for companies. When firms know they can deduct the full expense of their interest payments, borrowing becomes more affordable. This affordability directly influences investment decisions, making it economically feasible for companies to expand operations; revitalize and rebuild aging infrastructure; build new infrastructure, factories, and facilities; and purchase advanced machinery and technologies. Proper interest deductibility thus plays a pivotal role in fostering domestic economic growth. By reducing the after-tax cost of capital, businesses have incentive to undertake more investments, leading to expanded productive capacity. These expansions have broader economic benefits, including job creation, higher productivity, and greater innovation. The positive relationship between affordable borrowing, investment, and economic growth is well-documented; industry analyses consistently show that, when the cost of capital is lower, businesses are more likely to pursue investments that enhance competitiveness, productivity, and ultimately, the American economy  Conversely, policies that restrict interest deductibility, such as the recent shift from EBITDA to EBIT under Section 163(j), can significantly increase the cost of investment capital. By removing the ability to deduct depreciation and amortization in calculating allowable interest deductions, the EBIT standard effectively penalizes capital-intensive industries, discouraging investment.  At a time when Congress and the administration are making every effort to bring manufacturing and investment back to the United States, creating disincentives for U.S. companies to invest must be avoided. The Harmful Shift from EBITDA to EBIT Before the TCJA, Section 163(j) targeted only corporations with substantial interest payments to related parties, primarily to prevent earnings stripping. At the time, deductions were capped at 50% of adjusted taxable income (ATI)—a calculation similar to EBITDA—and triggered only if a company’s debt-to-equity ratio exceeded 1.5-to-1. For most U.S. companies who borrowed from banks or unrelated parties, there was no restrictive cap. The TCJA introduced a significant change to the way business-interest expenses are deducted for tax purposes. For its initial period, the law capped interest deductions at 30% of a company’s EBITDA. This provision was intentionally structured to accommodate capital-intensive industries such as manufacturing, telecommunications, and energy that rely heavily on debt-financed investments in infrastructure and equipment. By including depreciation and amortization expenses in the calculation base, the EBITDA approach effectively recognized these substantial capital expenditures as legitimate costs of doing business, thus enabling more extensive deduction of interest expenses. But a critical aspect of the TCJA was its built-in sunset clause, automatically shifting the deduction standard from EBITDA to EBIT beginning in 2022. Under this stricter standard, companies could no longer include depreciation and amortization in the calculation, severely narrowing their allowable interest deductions. As a result, many businesses faced significantly higher effective tax rates on the same level of interest expense, due simply to this accounting shift.   The consequences can be particularly severe for capital-intensive industries, precisely those sectors vital to U.S. industrial policy goals like reshoring manufacturing and strengthening American infrastructure. Under an EBIT standard, companies find their costs of capital dramatically increased, depressing their incentive to invest domestically in equipment, technology, and expanded operations. Higher borrowing costs reduce the net returns on investment projects, forcing businesses either to defer crucial growth activities and investment, or seek more favorable environments overseas. In short, the EBIT-based approach negatively affects domestic investments, job creation, and innovation. Moreover, the United States has become an outlier with the 2022 shift to an EBIT-based deduction standard. Among the 35 OECD countries, the United States is alone in disallowing use of depreciation and amortization as legitimate business expenses in interest-deduction calculations. At a time when the administration is looking to improve the country’s attractiveness for capital-intensive production, this is an unusual policy. Conclusion Effective tax policy should establish baseline incentives that naturally guide market participants toward economically and socially beneficial outcomes. When policymakers neglect structural issues in favor of short-term measures, they risk perpetuating inefficiencies and creating dependencies that require constant intervention. Rather than relying on heavy-handed industrial policies to encourage domestic investment, simply reinstating EBITDA would organically improve the business climate. By properly allowing firms to increase the range of their legitimate expenses, the tax system would naturally encourage investment in capital-intensive industries without the need for continual, costly federal intervention. The post American Industrial Policy Should Start with No More Self-Inflicted Tax Wounds appeared first on Truth on the Market.

    Network Effects in FTC v Meta

    The Federal Trade Commission’s (FTC) ongoing antitrust case against Meta has brought network effects into the spotlight, as the agency’s complaint and opening statement both lean heavily on networks as a source of competitive harm. But the commission’s arguments fundamentally misunderstand how network effects interact with competition in digital markets. Far from being solely anticompetitive moats, network effects create nuanced competitive dynamics that the FTC fails to acknowledge. Network effects arise when a product’s value increases as more users join. In Meta’s case, this means Facebook becomes more valuable to users when their friends and family are there, too. The FTC views these effects primarily as harmful barriers to entry, pointing to Meta internal documents in which CEO Mark Zuckerberg noted in 2012: “our network effects are substantial, your friends are all here… and that’s hard to leave behind.” But the FTC’s argument (and Zuckerberg’s in 2012) relies on a static view of competition. It assumes network effects create permanent barriers, rather than advantages that can be overcome through innovation. It overlooks how quickly digital markets evolve, with the failures of countless other social networks demonstrating that network effects offer no guarantee of continued success. This perspective, however, misses crucial economic realities. As David Evans and Richard Schmalensee point out in a summary piece, drawing on their own research: Though network effects are important for multisided platforms, the simple winner-take-all notion that they always give larger platforms an insurmountable advantage over smaller rivals has been disproven by numerous counterexamples.  Network effects aren’t inherently anticompetitive; they’re a natural feature of many successful platforms that create significant consumer benefits through better matching, more content, and improved experiences. In social media, it can be hard to leave a given platform because it’s where all your friends are. I sometimes think about leaving Twitter/X.com but it’s still very valuable to me. That’s not a harm to me. And that’s fundamentally different than a case where it’s hard to leave because other competitors are junk. The harm, if any, comes not from network effects themselves, but from specific actions that restrain trade or artificially raise rivals’ costs. But the real thing that the FTC is missing (understandably, since they are arguing a one-sided point) is that, when it comes to networks like social-media platforms, the growth dynamics work both ways. The same forces that drive explosive expansion can trigger rapid collapse. Every new user makes the platform more attractive to others, accelerating growth. But this also works in reverse. When people start leaving the platform, each departure makes the network less valuable to those who remain, potentially triggering a mass exodus that feeds on itself. MySpace demonstrates this perfectly: once users began leaving, network effects operated in reverse, hastening its collapse. As Joseph Farrell and Paul Klemperer put it in their overview of the literature on network effects and competition: Such “competition for the market” or “life-cycle competition” can adequately replace ordinary compatible competition, and can even be fiercer. Think about TikTok. There’s been lots of focus on whether TikTok should be considered in the same market as Facebook and Instagram. Let’s put that aside. If we look at it just as a study in network effects, TikTok’s explosive success further undermines the FTC’s argument. Despite Facebook’s massive network, TikTok rapidly gained hundreds of millions of users by offering a superior experience. This demonstrates that network effects don’t prevent new entrants from capturing market share when they innovate effectively. The proper question isn’t whether network effects exist (they clearly do) but whether Meta engaged in specific anticompetitive actions beyond simply having network effects. Did Meta artificially raise rivals’ costs? Did it engage in exclusionary conduct beyond standard competition? Meta’s scale and network certainly provided advantages, but characterizing these as inherently anticompetitive misunderstands market dynamics. That scale and the breadth of the network was exactly what consumers wanted. As users increasingly value innovation over mere presence, network effects may actually increase market contestability by amplifying both gains and losses in user preference. Antitrust scrutiny of networks is warranted, but the FTC’s case here would be stronger if it focused on specific exclusionary practices, rather than network effects themselves. Users ultimately choose platforms based on quality, features, and experience—not just where their connections reside. The post Network Effects in FTC v Meta appeared first on Truth on the Market.

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