The Federal Trade Commission has a hostile view of big business. The agency explicitly has suborned consumer welfare to its own subjective, economically myopic and legally dubious notions of competitive fairness.
Given the FTC’s foibles and idiosyncrasies, it seems unsurprising that the agency would turn its regulatory ire on the private-equity sector, long the regulatory quarry of populists and the economically misinformed. Although not obvious to many, private equity’s economic function is simple — to move money from those who have it to those who need it. Fund managers put otherwise stagnant capital to productive use, enabling under-resourced businesses to grow, innovate, create wealth, and provide goods and services to consumers.
The agency in September sued Welsh Carson Anderson & Stowe (WCAS), an investment firm, alleging that it has illegally consolidated control over, and raised prices among, Texas anesthesia providers. “The FTC is ignoring that … commercial rates have not exceeded the rate of medical cost inflation for close to 10 years,” WCAS objected in a statement to Axios. “The FTC’s decision to pursue a civil action against a minority investor of a physician-owned company is unprecedented and disregards well-settled principles of law.”
Courts will adjudicate whether WCAS specifically violated the law. However, FTC Chair Lina Khan’s overarching distrust of private equity harmonizes entirely with her hostility toward many mergers and other common business behaviors that regulators have considered benign or pro-competitive for decades.
“The growing role of private equity and other investment vehicles invites us to examine how these business models may distort ordinary incentives in ways that strip productive capacity and may facilitate unfair methods of competition and consumer protection violations,” Khan wrote in 2021. This sentence’s gobbledygook relies on the reader neglecting to question its many faulty economic assumptions.
Khan’s program will prevent markets from distributing capital to its most productive uses. In an opinion article in the Financial Times to defend her suit, Khan touted the FTC and Department of Justice’s recently proposed pre-merger disclosure rules. These would impose staggering reporting costs on merging companies, even though the vast majority never draw antitrust scrutiny. Like any compliance burden, they discourage acquisitions and investment, particularly in smaller deals. Moreover, the lack of acquisitions and investment reduces the number of firms founded, as pathways for investors and entrepreneurs to earn returns become foreclosed by red tape.
Khan further touted proposed merger guidelines and other recent guidance updates in which the agency arrogated the discretion to pursue cases based on temporary and subjective market conditions rather than economically rigorous analysis. These documents sever the agency from traditional, pro-consumer antitrust jurisprudence to favor an arbitrary “I know it when it I see it” approach.
These vague standards give businesses little certainty about what practices regulators deem illegal. Although they will likely fail to withstand judicial scrutiny, Khan brags that she has successfully bullied many litigation-averse firms into submission.
Khan’s skepticism of private equity harkens to an old sensibility. Human beings seem by nature disposed to mistrust such financial industries as banking and investment. Without an immediately apparent, tangible product, economic non-sophisticates (i.e., most people, including many economists) disregard the critical economic contributions these industries make. Such thinking, which has remained prevalent for millennia, sees finance as fat cats extracting huge profits from their “victims” — without contributing anything productive.
But this viewpoint badly misunderstands markets. It stumbles blindly past the stratospheric economic growth that stable banking systems and readily available investment funds make possible. It further overlooks that financial institutions earn the profits they generate by assuming vast risks and performing many other necessary (though sometimes difficult to grasp) services.
Without these services, the industry would lose much of the capital it relies on; razing the financial sector would not produce some magical, unending supply of free and available money. Capital is, after all, a finite resource with many uses, and economic actors must compete for it.
Private equity invests prolifically in the American economy. The sector chipped in $4.5 trillion from 2018 to 2022. In 2022, it created $1.7 trillion, or 6.5 percent of U.S. gross domestic product. What’s more, almost 90 percent of public pensions involve private-equity funds, which generally provide highly profitable and stable returns.
Khan’s FTC, supported by the Biden administration, many congressional Democrats, and a growing faction of Republicans, has habitually targeted productive American industries. However, because New York investment firms inspire less knee-jerk sympathy than the wildly popular Amazon Prime, another FTC target, voters should not mistake the larger aim: to subvert market forces to regulators’ whims and to plan the U.S. economy centrally.