In 1977 Richard Posner (then a prof at the University of Chicago's notorious ultra-libertarian school; now a federal judge) teamed up with an economist and law student to form Lexecon, which has since grown to a firm worth more than $130,000,000, whose major business is to serve as intellectual guns-for-hire who will produce plausible-seeming economic models defending giant corporate mergers against anti-trust regulators.
The top economists at Lexecon -- and its also-ran competitors -- bill out at $1,000+/hour to companies trying to get permission to form monopolies and near-monopolies by gobbling up their competitors. Lexecon's staff operate with very loose conflict of interest rules, allowing the company to contract out to opposing sides of the same issue, something that got them into trouble when the US government found out that the firm had assigned the same employees to work on cases for the Department of Justice and the companies the DoJ was suing.
Mergers and acquisitions have been an unmitigated disaster for American business, consistently producing giant firms that raise prices across the sector while lowering wages and using their might to force out competitive, scrappy new entrants that might disrupt their cozy arrangements. However, these firms do often produce higher dividends for their investors (even as they contribute to stagnation and contraction across the whole economy).
Donald Trump has spoken out against megamergers, saying that he believed the proposed Time Warner/AT&T merger should be stopped. But Trump's leader for antitrust on his transition team is Joshua Wright, an economist and professor at George Mason’s Antonin Scalia Law School, who never met a merger he didn't like. This week, he published an editorial in the New York Times defending mergers at any scale, writing, "Mergers between competitors do not often lead to market power but do often generate significant benefits for consumers."
These complex mathematical formulations carry weight with the government because they purport to be objective. But a ProPublica examination of several marquee deals found that economists sometimes salt away inconvenient data in footnotes and suppress negative findings, stretching the standards of intellectual honesty to promote their clients’ interests.
Earlier this year, a top Justice Department official criticized Compass Lexecon for using “junk science.” ProPublica sent a detailed series of questions to Compass Lexecon for this story. The firm declined to comment on the record.
Even some academic specialists worry that the research companies buy is slanted. “This is not the scientific method,” said Orley Ashenfelter, a Princeton economist known for analyzing the effects of mergers. Referring to one Compass study of an appliance industry deal, he said, “The answer is known in advance, either because you created what the client wanted or the client selected you as the most favorable from whatever group was considered.”
In contrast to their scholarship, the economists’ paid work for corporations rests almost entirely out of the public eye. Even other academics cannot see what they produce on behalf of clients. Their algorithms are shared only with government economists, many of whom have backgrounds in academia and private consulting, and hope to return there. At least seven professors on Compass’s payroll, including Carlton, have served as the top antitrust economist at the Department of Justice. Charles River Associates boasts at least three.
These Professors Make More Than a Thousand Bucks an Hour Peddling Mega-Mergers
[Jesse Eisinger and Justin Elliott/Propublica]
(Image: Cameron Cottrill, special to ProPublica)
(via We Make Money Not Art)