Morningstar Magazine - December 2017/January 2018 - 35

Given that there are papers from economists
on both sides of this issue, how would that affect the
legal process? Presumably the defense would
bring out one set of papers and plaintiffs would offer
another set.

Posner: There are a lot of answers to your
question. There are some papers that
have been written that I just don't think are
nearly as strong as the papers on our
side. How these papers would be used would
depend on what type of litigation we're
talking about.

It's very unlikely that someone is just going
to sue all the institutional investors for all the
anticompetitive effect they have had on
the whole economy. Such a claim is just too broad
and vague. What might happen is that someone might bring a lawsuit against institutional
investors solely for their effect on the airline
industry or for their effect on banking. Those could
be separate lawsuits.
Right now, there is one paper on the airline
industry as far as I know. What would happen
in litigation is that the plaintiff would say,
"Here is this paper," and they would probably try
to get the authors to testify as experts, but
even if not, they would hire other economists who
are experts. Those experts would say to the
court, "We have all this empirical evidence that
the institutional investors have reduced
competition in the airline industry with the result
that prices are higher."
Now, the defense would hire their own experts
who would have access to the same data,
and they would do their own analysis of that data.
And maybe those experts would be able to
find other data that the first set of experts haven't
seen yet-from the airline industry, for
example, or the institutional investors might be
able to supply them with data. So, they would
write their own report, and this other report would
most likely say, "No, nothing is happening;
there is no problem." And it's just up to the court
to figure out who is right.
Do you think the debate has reached a point where
you could see such lawsuits? Is there enough evidence
out there?

Posner: Yes. I believe that the plaintiffs would
have a strong case, and for that reason, it's just
a matter of time before somebody brings a
lawsuit. There has always been a lot of litigation
against the airlines for all kinds of stuff, all
kinds of anticompetitive behavior, and it's just
a matter of time before the plaintiffs bring
in the institutional investors and argue that they
are either implicitly or explicitly coordinating
the airlines.

Growing Issue

people like Teddy Roosevelt and Woodrow
Wilson-were ambivalent about busting trusts
because they saw that the prices were going down
for consumers. But they also understood
that the immense size of these companies posed
a threat to market competition.
Another point is that many people don't own
stock. Rich people, the middle class, the upper
middle class have shares in index funds.
Most people have little exposure to the stock
market or none at all. So, there is a good argument
that this trend has contributed to inequality.

Our view, given the trends in the industry toward
passive and scale advantages of the likes of
Vanguard and BlackRock, is that this will only become
more of an issue over time, making it more likely that
policymakers will get involved.

This is related to yet another point. Economists
are increasingly arguing that market concentration
has affected wages. As monopsony power
over labor increases, wages are getting squeezed.

Posner: Yes, absolutely. If you look at graphs
that show the growth of the institutional investors
and particularly the top 10 or the top four,
it's just a matter of extrapolation. And there's
no reason to think that their ownership is
going to flatten out or go down. There's every
reason to think it will continue to increase. Part
of the reason it will continue to increase,
of course, is that people are finding index funds
more and more appealing.

So, the overall effect is complicated. Workers
are probably losing, wealthy people are doing very
well, middle-class people are somewhere in
the middle. Ideally you want policymakers to take
all of this into account. You do want index
funds to remain easily accessible. But there is no
simple answer to this question, and certainly these
sorts of considerations wouldn't be a decisive
defense to litigation.

One of the differences between this and some of the
big well-known antitrust cases in the past, where
the beneficiaries of the anticompetitive behavior were
the shareholders of one or a handful of companies,
is that here the beneficiaries are the millions of
individual investors who have truly benefited from the
reduction in cost brought about by index funds.
Presumably this would be part of the calculus for policymakers in determining how big of an issue this
is. How does that affect litigation or the outcomes of
that litigation?

Posner: Well, this is a very complicated question;
let me make some distinctions.

The great consolidation of the 19th century that
led to antitrust laws being created in the
first place did benefit consumers. There's no doubt
that gas prices went down because of [John D.]
Rockefeller's consolidation of the oil industry.
There were huge economies of scale and prices
went way down. Even the trustbusters-

Restricting Ownership
Moving on to remedies, the one you lean toward
is restricting ownership to, say, one company within
a concentrated industry, as opposed to spreading
it out. Is that still your opinion?

Posner: This problem is not something for which
there is a clean solution. There are lots of
different solutions. I think litigation is the natural
solution. But the worry is, it's going to create
a huge mess because litigation is unpredictable
and the sort of remedies that courts make
are specific to the particular dispute. The courts
generally are not in the position to try to
look at the whole problem in all the markets
and figure out a remedy.

So, we're approaching this from a different
direction. What would rules look like that might
address this problem? Obviously, the rules
are going to have to be kind of blunt and are going

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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018