Editor’s Note: The Federal Trade Commission is celebrating its 100th anniversary this year; the first official meeting of the commission was held on March 16, 1915. In this series of articles, we are chronicling highlights in the agency’s history.
Islamic revolutionaries held 52 Americans hostage in the U.S. embassy in Tehran for 444 days, from November 1979 to January 1981, a new and unsettling turn of events that disturbed and captivated television viewers across the country and around the world. Democratic President Jimmy Carter stumbled through the remainder of his term in office. Popular enthusiasm for presidential challenger Ronald Reagan mounted: His optimism and moral certainty seemed to provide an antidote to the nation's economic and military doldrums.
Disdain for the Federal Trade Commission in the halls of Congress, meanwhile, grew ever greater. Twice Congress allowed the agency’s funding to lapse entirely. The commission was actually forced to shut its doors for two days in 1980, May 1 and June 2, according to the young FTC attorney William Kovacic, a politically savvy former Capitol Hill staffer, in a 1982 Tulsa Law Review
article that gave one of the earliest and most incisive insider accounts of the FTC’s fall from grace.
Bills introduced on both sides of Capitol Hill proposed to sharply curtail the FTC’s authority. A House bill in late 1979 included amendments to end some of the FTC’s most conspicuous investigations and proposals, including those dealing with the funeral industry, used cars, hearing aids and mobile homes. It also empowered either chamber of Congress to veto any FTC rulemaking aimed at regulating an entire industry.
By February 1980, the Senate had gone even further down the path of the so-called legislative veto. The Senate bill would have terminated specific investigations, including the proceedings to restrict advertising to children, it would compel the agency to provide a week’s notice and hold a public hearing for any rulemaking, and it would stop the commission from investigating any profession that was regulated at the state level.
That last provision meant that doctors, lawyers and used car salesmen, among others, would escape federal antitrust scrutiny. But when the House and Senate conferees came to the White House to discuss this legislation, Carter made clear that he would veto a measure that contained such terms.
The Senate conferees backed down and ultimately a measure was enacted that allowed the FTC to be subject to congressional veto, but only when a majority of both chambers voted for it. Some agency initiatives, including the funeral price disclosure rule, were allowed.
Carter’s statement on May 28, 1980 as he signed the bill—the Federal Trade Commission Improvements Act of 1980—revealed just how close the agency had come to having its wings permanently clipped. “I am signing this bill despite the congressional veto provision, because the very existence of this agency is at stake,” Carter said.
In November 1980, Reagan took the presidency in a lopsided vote, winning 44 of the states while Carter won only six. At his inaugural address, Reagan underscored his anti-regulatory philosophy, something that many Americans were applauding. “Government is not the solution to our problem,” he told the crowd. “Government is the problem.”
The hostages in Iran were released as the new president finished his inauguration address, adding to the sense that Reagan was firmly in command of the situation and could be relied upon to solve the nation’s problems.
A transition team to determine the FTC’s future direction was quickly formed. It included Harry Diffendal, Jeffrey A. Eisenach, Michael Horowitz, James C. Miller III, Timothy J. Muris and Robert D. Tollison. Other senior advisers included Donald I. Baker, Calvin Collier, Lewis Engman, Richard Posner, Bert Rein, Antonin Scalia and Joseph Sims, according to FTC:WATCH
. The team’s report was assembled under the direction of James Miller, a Reagan loyalist who was an economics professor at Texas A&M University. The Reagan team believed it was doing what was best for the American people by making fundamental changes in antitrust and consumer protection policy.
“You’d have to be blind and deaf not to realize through the last year of the Carter administration that the Federal Trade Commission had gotten itself in real trouble with Congress, and even The Washington Post
called it the National Nanny,” Miller said in a recent interview with FTC:WATCH
. “We were very much of the view that a substantial reform of the FTC was necessary.”
Rumors quickly began circulating within the FTC that the transition team had recommended slashing the agency’s budget. That inspired intense anxiety among staffers. They knew that the consumer protection function of the FTC was under attack and David Stockman, Reagan’s director of the Office of Management and Budget, proposed eliminating the agency’s bureau of competition as well.
The FTC is a “passel of ideologues who are hostile to the business system, to the free enterprise system, and who sit down there and invent theories that justify more meddling and interference in the economy,” Stockman said, in an article that ran in the Chicago Tribune
on February 23, 1981.
William Baxter, Reagan’s assistant attorney general for antitrust, a law professor from Stanford University, soon made it clear he hoped to abolish the FTC’s antitrust authority and consolidate it inside the Justice Department’s antitrust division.
FTC Chairman Michael Pertschuk was awkwardly stranded in the role of chairman as the administration worked out its plan of action. There were two Republicans serving on the commission, David Clanton and Patricia Bailey, and either one might be asked to serve as acting chairman until Reagan named his personal choice. According to FTC:WATCH
, which was chronicling the transition within the agency, Bailey lost any chance of getting the top job after she vocally and publicly disagreed with Stockman’s plan to shrink the agency. Clanton got the nod instead.
Pertschuk declined to leave the commission, however, and stepped down into a role as a commissioner, a post he promptly began to use as a bully pulpit to criticize the administration’s plans for the agency.
Pertschuk watched as his favored initiatives collapsed. There was no longer any political support for limiting the ways high-sugar products could be advertised to children. In 1981, the commission agreed with the staff recommendation that the rulemaking in the kidvid proceeding should be terminated. “While the rulemaking record establishes that child-oriented television advertising is a legitimate cause for public concern, there do not appear, at the present time, [to be] workable solutions which the commission can implement through rulemaking in response to the problems articulated during the course of the proceeding,” the final report stated.
Back at the FTC, long months passed without a permanent chairman being named. Clanton filled in. At last Miller, who had led the Reagan FTC transition team, took the post. By this time, tensions within and around the agency were boiling. The dramatic clash of ideologies made it increasingly difficult for people to find common ground.
Moderate Republicans who supported antitrust enforcement were viewed as being as foolish and out-of-step as Democrats. Pertschuk was vilified. In antitrust circles, where everyone wants to be the smartest in the room, many people who disagreed shouted ineffectively for a while and then grew prudently silent.
Many people publicly distanced themselves from Pertschuk. FTC Commissioner Robert Pitofsky, a Democratic appointee, resigned from the agency on April 30, 1981. In a letter to President Reagan, Pitofsky said that “at times, and on particular issues, my loyalties have been with those who believed that too many of the FTC’s roster of projects were excessive or just plain wrong.” This departure left Pertschuk as the sole Democrat at the FTC. Pitofsky was replaced by a friend of Chairman Miller’s from Texas named George Douglas, who was nominally a Democrat but who subsequently agreed with Miller on almost every issue that came before the agency.
The antitrust staff at the agency was sent to special classes conducted by economists who explained to them that interfering with corporate consolidations was counter-productive and would hurt consumers because prices might rise if the deals were not permitted. The economists believed that the mergers were occurring for solid economic reasons, and would create efficiencies that would benefit everyone. In reality, however, some of the proposed mergers succeeded but many failed.
The same case was made against consumer protection regulation. Trying to fend off bad corporate behavior was paternalistic. People who were financially injured had only themselves to blame because they had chosen poorly of their own volition, the economists said. Companies that systematically defrauded consumers would be punished in the marketplace and go out of business. But liberal critics said that many consumers would be financially injured by shrewd con artists if the government didn’t act more aggressively against wrong-doers.
The newsletter FTC:WATCH
, which had been founded in 1976 by Republican stalwart Art Amolsch, the former chief of public affairs at the FTC during the Richard Nixon administration, soon found itself in the middle of the debate. Amolsch had obtained a copy of the administration’s internal transition report, and he published excerpts from it on April 3, 1981. He also published an acerbic commentary on it, calling some of its statements “moronic” and laden with inaccurate characterizations of what the agency had done under its most recent Republican and Democratic directors.
He also noted that few of the people engineering the transition had any real-world business experience.
Robert Tollison, an economist who had assisted in the preparation of the report and who was soon named head of the agency’s bureau of economics, sent an angry letter to the editor, which Amolsch published. Tollison criticized Amolsch’s “near-hysterical attack” and “frenzied tone,” and called the column “beyond the bounds of reasonable discourse.”
These kinds of testy exchanges occurred in numerous locations. Former FTC staffer Tim Muris was soon named head of the bureau of consumer protection. Miller later recollected that Muris strode the floors at 600 Pennsylvania Avenue commenting loudly that he wanted to retry Humphrey’s Executor v. US
—the lawsuit won by former FTC Chairman William Humphrey after he had been ejected from his post during the Franklin Delano Roosevelt administration for his views. This suggested to Muris’ colleagues at the FTC that he thought it would be best if people would depart the agency voluntarily rather than wait to be ejected from their jobs.
Miller later also recalled that Senator John Danforth, a Republican from Missouri, said that what was happening reminded him of the movie Rollerball
, which Miller said was an exaggeration.
The popular science fiction movie, released in 1975, tells the story of an ultraviolent sport in which competitors fight to the death.
Miller tried to defuse the tension by injecting some playful humor into the scene. At his first meeting with the staff, his presentation was preceded by a funeral dirge, and then the new chairman himself appeared, sporting a set of demonic horns on his head.
He didn’t get an enthusiastic reception. Some people were openly rude and disrespectful. “It fell flat,” recalled former FTC staff attorney Marc Winerman. “People didn’t think it was funny.”
Undeterred by the hostile response, Miller proceeded to lay out his vision for the agency’s future. One observer later recalled it as similar in style to a stem-winder sermon. At the end, Miller called out: “Are you with me?”
Miller waited for a response. The room was silent. “Are you with me?” he called again. There was another long pause. And then his employees slowly started to clap.
In the interview with FTC:WATCH
, Miller said he believed it was essential to remake the agency because it had been pushed off kilter by Pertschuk, who he described as “ideologically driven.” Miller said he set out to establish a foundation of solid economic analysis for making regulatory decisions.
“I thought I knew how to define the goals of an organization and to run an organization, and to achieve those goals as well as anybody,” Miller said. He said he wanted to make sure the rules were transparent to business, and also that economists would play a much bigger role at the agency in determining how cases would be viewed and analyzed.
Miller announced that he planned to cut the agency’s budget. During the years of congressional activism, the agency’s budget had swollen from $20.9 million in fiscal 1970, according to Kovacic’s analysis, to more than $70 million in fiscal 1980. To save money, Miller proposed shutting down the FTC’s regional offices. While this didn’t happen, he succeeded in substantially reducing their staffs. By fiscal 1984, the agency’s budget had been reduced to $64.2 million. By the end of Reagan’s second term, the staff had been cut by nearly one-half.
Investigations were abruptly terminated, one after another, often on the recommendation of a cadre of newly-hired economists. These workers were encouraged to question the decisions made by long-term employees. In addition, the policy-making senior staff turned over, as it does with any change of administration. Among those who soon departed were political appointee Robert Reich, who had headed the Office of Policy Planning, and attorney Bert Foer, who went to work at a regional jewelry chain before launching the American Antitrust Institute.
The “mantra” at the agency, said one of those new workers, Jack Carley, was simple. “Don’t just stand there, undo something,” Carley said at the Reagan Revolution event at George Mason Law and Economics Center, according to James Cooper’s 2013 book, Regulatory Revolution at the FTC.
Miller also did something that critics said deliberately damaged the agency’s reputation. Part of the agency’s mission is to monitor the advertising industry. The agency serves two purposes on that front: To protect consumers from misrepresentations, and to protect rival businesses from being damaged by false claims made by competitors. For that reason, the FTC had subscriptions to most publications with wide circulation. In those decades, two such publications, and the vehicles for large advertising campaigns, were Playboy
. Miller publicly announced he was stopping the handful of subscriptions to those publications, leading to headlines around the nation that suggested that officials had been filling their work hours reading magazines featuring centerfolds of naked women. Most people in the United States didn’t understand the agency’s need to keep track of advertising, and the announcement added to the perception that federal government workers were shiftless and engaged in trivial pursuits.
The enthusiasm for Robinson-Patman regulation, which had been intended by Congress to protect the small merchants of Main Street against national chains, had already significantly declined because the law had become too convoluted to enforce sensibly. The agency was bringing only about two cases per year in this category by the late 1970s, according to Kovacic’s tally. Now the agency ceased to enforce the law altogether.
The focus changed on the consumer protection front as well. The agency continued to pursue cases of outright fraud, but other kinds of enforcement declined precipitously. This at times placed agency officials in an unattractive light. An economist on the agency’s staff suggested that the free market should be allowed to resolve problems caused by a defective life preserver, causing the agency to delay action on the case. Ultimately the company decided to fix the problem on its own after U.S. Representative Al Gore of Tennessee highlighted the FTC’s inaction in congressional testimony.
But it was merger policy that gave this era its distinctive flavor.
Merger deals of all kinds were waved through, one after another. In 1976, Congress had been concerned about consolidation in the petroleum refining business. Observers had worriedly noted that in an industry that once had hundreds of such firms, there were only eight survivors battling in the national marketplace. Now that regulatory approvals were so easy to obtain, energy-related firms drew together almost magnetically into newer and bigger combinations. Mobil Oil swallowed Marathon; Texaco acquired Getty Oil; SoCal merged with Gulf Oil.
One persistent critic was Democratic Commissioner Pertschuk, the former agency chairman, who remained a thorn in the side of Chairman Miller. In early 1983, for example, Pertschuk wrote to Senator Frank Lautenberg, a New Jersey Democrat, saying that merger enforcement had fallen to “the lowest level in recent years,” and that the activity at the agency primarily represented work undertaken before Chairman Miller arrived. “The only area in which the Bureau of Competition has recently excelled is in weakening existing commission orders,” he wrote, according to a news report in FTC:WATCH
on April 29, 1983.
As he had pledged, Pertschuk stayed until his term of office expired and left in 1984. It was Miller’s vision that came to animate the FTC in the following decades.
As this regulatory transformation unfolded, Wall Street initially hesitated. It was difficult to process the information that antitrust enforcement had slowed to a halt or even been reversed. But then investors got the signal and a new age of corporate consolidation dawned. Investment bankers went knocking on the doors of chief executives to try to determine who wanted to see his name in headlines as an acquiring executive, and who wanted to be the recipient of such advances. The same kinds of corporate takeovers that had filled news pages in the 1880s returned again in the 1980s. Old-style corporate executives who focused on long-term returns and investments were out of style, replaced by those who produced short-term windfalls for investors. Firms that resisted the momentum became acquisition targets for more predatory players.
In 1978, 355 major corporate acquisitions were tallied under the new reporting rules introduced by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. In 1980, there were 735.
Beginning in 1981, the start and then the rush toward economic concentration began to be chronicled in the annual federal HSR reports. In 1982, there were 1,203 such acquisitions; in 1985, there were 1,603 and in 1987, there were 2,533. That was an eight-fold increase since 1978. The deals grew sharply larger in dollar volume, too.
But fewer and fewer were being challenged by the antitrust agencies, or even questioned. In 1978, about 10 percent of transactions reportable under the HSR guidelines received second requests for more information from either the FTC or DOJ. In 1983, the FTC asked for more information in 1.3 percent of the transactions, and by 1987, when 2,170 acquisitions were reported, fewer than 1 percent of the companies initiating the purchases received a request for more information. An even smaller fraction were challenged by the agencies.
This happened despite growing awareness that many of the deals were being engineered on flimsy foundations. Bid numbers were sometimes plucked from the air by financiers including Bruce Wasserstein, according to John Weir Close, founder of the M&A Journal
, who described how Canadian entrepreneur Robert Campeau was induced to borrow $4.6 billion to buy the Federated Department Store chain in early 1988. In his 2013 book, A Great Cow-Tipping by Savages: The Boom, Bust and Boom Culture of M&As
, Close wrote that Wasserstein leaned on Campeau, an erratic and egocentric businessman who was already in financial trouble because of his recent acquisition of Allied department stores, to agree to a price tag that everyone knew was too high.
The FTC did not even issue a second request for more information about the purchase of Federated, a transaction that involved the third-largest department store chain in the United States buying the largest, according to FTC:WATCH
. Legislators in Ohio, where Federated was based, begged agency officials to investigate it more carefully. By then Miller had been replaced as chairman by Dan Oliver, who shared his strong free-market orientation. Oliver declined to provide more specific details to Congress, and instead departed for a long trip to Paris and Australia, FTC:WATCH
The debt-laden Federated deal collapsed and the company went into bankruptcy in 1990. About 50,000 retail creditors lost money when the company crashed, and, according to the Orlando Sentinel
, which closely reported on the events because many of the affected stores were located in Florida, tens of thousands of people lost their jobs when stores were shuttered as a result of the flawed deal. The two chains—Allied and Federated—had operated 1,334 stores before Campeau acquired them, and when Federated emerged from bankruptcy, only 223 stores remained under the Federated flag, according to contemporary news reports. Communities across the country were hurt as well because department stores and shopping centers frequently served as the gathering places and economic engines of many small cities.
Instead of probing for real-world consequences in cases like these, however, agency economists adopted mathematical models to try to predict the likely effects that industry concentration would have on prices. The Herfindahl-Hirschman Index was introduced in 1982 to give antitrust agencies a way to calculate the likely effects of a merger. Initially, markets with an HHI above 2,500 were considered highly concentrated, but as more and more firms consolidated, attorneys and economists found new ways to define the market so deals could be interpreted differently. When the consolidations grew so large that they began to inescapably butt up against the HHI calculations, the de facto thresholds were simply changed as a matter of agency practice, even though the old published numbers still remained on the books.
With so much money to be made on each transaction, a political consensus had been achieved. Some deals were stopped each year, of course, and so there came to be an industry of identifying which transactions might attract scrutiny, require costly divestitures or even be scuttled. But overall it started to become hazardous to the stock market to question mergers. Investors might be startled by unexpectedly bad outcomes. That could cause turmoil in the market, it was said, and innocent investors could be harmed.
The Reagan Republicans had initiated the change to minimal enforcement, but later Democrats perpetuated it, typically only increasing antitrust enforcement by a small margin and expressing themselves satisfied if they could obtain some divestitures before giving approval to the remainder of the transaction.
In 1999, a particularly symbolic merger was approved by a Democratic administration. The primary pieces of the old Standard Oil, the company that had precipitated the antitrust movement, the firm that the U.S. Supreme Court in 1911 called an illegal monopoly, were reconstituted under a new name, Exxon-Mobil.
FTC Chairman Bob Pitofsky, appointed to his post by Democratic President Bill Clinton, announced the decision approving the merger, though with some divestitures.
The Reagan administration had succeeded in changing antitrust policy for the remaining decades of the century.
“We did accomplish a lot redirecting the agency slowly and methodically like changing the course of an ocean-going vessel,” Miller said in 2011 at George Mason University’s Law and Economics Center’s 30th anniversary celebration of the Reagan Revolution at the FTC. “But we also recognized that reforms could be undone after we left. Accordingly, we went about trying to prevent recidivism in a number of ways. We endeavored to teach the highly motivated career staff that the approach that we advocated to competition and consumer protection matters was the one most efficient and serving the true interests of consumers.”
Questions were raised about whether all this deal-making was good for the economy, about the human cost of millions of middle-income jobs being lost when companies previously working as competitors were merged into single units. But the faith in the underlying ideological argument continued to grow in force. This school of thought had started first in Chicago and it became the dominant economic philosophy in the country, an explanation and a justification for all that came next. The fight that had been ignited in the Federal Trade Commission now shifted to Capitol Hill, and then to the highest court in the land.
—Kirstin Downey and Kirk Victor
FTC:WATCH, issues 111 to 268, January 9, 1981 to December 21, 1987.