Proposed Antitrust Legislation Threatens To Harm U.S. Tech Startups And The Innovation Economy

The recently-released GDP estimates revealed that the economy contracted for the second quarter in a row, and some economists fear that we may already be in a recession. Given the precarious nature of the economy, recently proposed legislation intended to throttle the “Big Tech” companies seems singularly ill-timed, given that the bill would almost surely make life harder for tech startups and otherwise harm the innovation economy.

The head of the Federal Trade Commission, Lina Khan, has embraced a neo-Brandeisian antitrust model that eschews the notion that a merger, a market, or the size of a firm be judged solely on its impact on prices and consumer welfare. In its place is a determination to constrain big companies simply because being big is, in itself, harmful. This alternative economic approach has its adherents in Congress as well: for instance, Senator Amy Klobucher’s S. 2992, the American Innovation and Choice Online Act would essentially enact Khan’s agenda and damage the U.S. economy.

The problem with such a paradigm is that replacing an objective standard with one that’s much less clear gives regulators much more discretion to act arbitrarily and pursue political agendas. The current antitrust agenda poses a threat to economic growth because of its direct effects on large tech platforms, and its indirect/secondary effects on millions of smaller businesses that rely on those platforms to connect with customers and sell goods and services.

Platforms like marketplaces and app stores created by “Big Tech” companies such as Google GOOG , Amazon AMZN , and Apple AAPL have dramatically expanded the range of both digital (most notably apps) and physical products (toys, furniture, and the like) that Americans can easily access. For instance, at its inception Amazon allowed millions of Americans who lived in rural areas to easily obtain books without needing to drive long distances. During the pandemic the company’s Fresh delivery service helped urban residents obtain groceries and other provisions without venturing into stores.

While members of Congress push an anti-tech agenda like American Innovation and Choice Online Act and other legislation, researchers have been measuring the potential side effects from turning these bills into law. For example, research by Dartmouth economist John T. Scott estimates that the harm to sales by U.S. small business retailers resulting from the implementation of AICOA would approach $500 billion over five years, or the equivalent to a new 5.2% “tax” on small business sales.

But the harm from the legislation would go beyond typical “main street” small businesses that depend on these platforms to sell goods; a new study by economists Cameron Miller and Liad Wagman finds that tech startups would also be impacted. Increasing their costs might be even more damaging to the U.S. economy, given how important this sector is for job creation, innovation and American competitiveness. Their research suggests that startups that use the platforms created by the major tech companies (such as app stores) and seriously constraining them would result in higher startup costs, decreased efficiency, and the need to hire more programmers to deal with the security requirements and added complexity that the legislation would engender as a consequence of banning so-called “self-preferencing” of “store brand” products.

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Throttling the large tech companies is the last thing our economy needs at the moment: besides the sad reality that we are at the precipice of a recession, it is also the case that we’ve been experiencing reduced productivity growth for two decades, with a brief pause due to the pandemic. A recent analysis by Ruchir Sharma in the Financial Times lays out the problems that this creates for a society: In the U.S. and elsewhere, slower growth has increased the predilection for governments to bail out low-performing companies that employ a significant number of workers and keep them operational. Much of the stated, if misguided, motivation for the government’s antitrust activities is precisely to protect the companies and jobs that are threatened by the rise of “big tech” companies—at the cost of new firms being created or nascent firms expanding.

Taking steps to forestall the demise of unproductive, uncreative firms ultimately makes it harder for new firms to acquire capital.

Throttling the big tech companies merely because of an inchoate fear that they will one day become predatory, raise prices, and hamstring their competitors despite failing to do such a thing after more than two decades of business amounts to policymaking by whimsy. The FAANGs (Facebook, Apple, Amazon, Netflix and Google) have led to the creation of millions of jobs, trillions of dollars of wealth, and an improved standard of living for U.S. citizens. Disrupting these companies because of an ideological objection to large companies would harm the economy and leave consumers with little or nothing to show for it.