Jeffrey Tucker, discussing the decline of apprenticeships last week, noted the modern state-controlled schooling system is based on “the completely la-la-land view, emerging sometime after World War II, that a student can sit at a desk listening for 16 to 20 years and thereby be prepared to call down immediately a substantial salary from a firm by virtue of the great value he or she provides.” This view is preposterous, Tucker said, as businesses are often flooded with college graduates who have little practical knowledge. Of course, that’s only a problem for the private sector; when it comes to the government sector, schooling credentials have always been more valuable then practical ability.
Bureaucracy is a credential-based system. A PhD or Juris Doctor is the modern equivalent of an earldom or a knighthood. Mere possession of a credential is sufficient to establish one’s credibility on a subject — even if the subject isn’t directly related to the credential.
Educational credentials are generally a stepping-stone towards government commissions; these pieces of paper confer authority upon the possessor, which in the eyes of the state and its supporters equal expertise. Some government commissions are election-based: the president, members of Congress, etc.; the overwhelming majority of commissions are beholden to the bureaucracy itself, technically originating from the president in communion with the Senate, but in practice arising from self-selected interest groups. These groups function much like medieval guilds in that they are effectively mini-states that rely on credentialism to restrict competition or challenges to their so-called expertise over a given trade.
Let’s consider my favorite agency, the Federal Trade Commission. Although the FTC is billed as a “consumer protection agency,” in reality it is simply the research-and-development arm of the antitrust guild. The law specifies no particular qualifications for FTC members — unlike, say, the solicitor general, who must be a lawyer — but in modern practice virtually all commissioners are antitrust professionals.* It’s a closed system, and the FTC’s primary job is to ensure it remains closed to “unqualified” outsiders.
Consider the words of former FTC member Thomas B. Leary. In a 2005 interview, Leary bemoaned the fact that so many physician groups had run afoul of the FTC’s “guidelines” about how medical providers were expected to organize and conduct their businesses. Leary said he was sympathetic to the physicians themselves; he blamed a lack of competent antitrust advice:
The Guidelines are very helpful to practitioners who are willing to pay attention to them and deal with them. I think they’re very fulsome. It may be, quite frankly, that collectively they’re too big a mouthful for outside-the-beltway practitioners. And I am not saying that in a patronizing way.
I get the impression there are an awful lot of lawyers giving antitrust advice on the Health Care Guidelines who are not really antitrust lawyers, and I think that it might be desirable to consider amplifying on those Guidelines through speeches and things of that kind to make them more focused for the edification of outsiders. As you know we’ve got a case under consideration right now involving possible application of the Guidelines. When that opinion comes out, it may provide some guidance for people — regardless of the outcome. (Italics added)
It’s important to understand that Leary is not talking about the law — that is, a statute enacted by Congress — but merely the opinions of unelected antitrust lawyers at the FTC and Department of Justice. The “guidelines” exist solely in their minds; even if a physician group followed the guidelines to the letter, the FTC can turn around and say, “Oh, that’s not what we meant.” Indeed, that’s exactly what’s happened in the majority of FTC cases (about three dozen since 2001) against physician groups.
Now, Leary is no healthcare expert. He’s never run a medical practice or a hospital. His knowledge of healthcare management is no greater than mine. He is, however, an antitrust lawyer with “50 years of experience” in that field, according to Hogan & Hartson, the law firm he was a partner at before and after his six-year FTC tenure. And that’s what’s important. He’s master of a field with no real market value, but thanks to the state’s antitrust patent, he’s instantly a valuable commodity for firms — such as physician groups — looking for “expertise” in dealing with the FTC.
The damage such false expertise can reek on the market is incredible. The man who succeeded Leary as a commissioner, John Thomas Rosch, proved as much. Like Leary, Rosch spent his career as an antitrust litigator for a prominent law firm. When he was invested with the powers of the FTC, Rosch suddenly became an expert in hospital management, which he put to use in a handful of cases involving hospital mergers. One of his victims was a small nonprofit hospital that nearly suffered financial ruin at Rosch’s hand.
Prince William Hospital in Manassas, Virginia, spent over a year seeking a larger nonprofit partner to provide badly needed capital. PWH was a one-hospital operation, and many of its facilities had not been upgraded since the 1960s. After a lengthy review, the hospital’s board chose to merge with Inova Hospital System, a larger group also based in northern Virginia. Inova promised approximately $250 million in new investment. PWH physicians and local politicians seemed agreeable to the deal; it was a win-win for everyone.
Everyone except Commissioner Rosch. The FTC was in the midst of a losing streak when it came to stopping hospital mergers. Rosch, a Republican, joined the FTC during the Bush years and quickly asserted control over the agency’s litigation bureaucracy. Rosch needed a hospital merger he could torpedo as a show-of-strength. PWH and Inova presented themselves as victims of opportunity.
What ensued was one of the longest merger “reviews” in antitrust history — nearly two years of FTC demands for documents about every aspect of PWH and Inova’s operations. The review wasn’t limited to “competitive” issues. During one meeting with over two dozen FTC lawyers, the staff questioned PWH’s architectural decisions regarding future construction plans; one lawyer scoffed at the hospital’s plans to include only private rooms in a new patient wing, as opposed to semi-private rooms. On another occasion, FTC lawyers demanded PWH’s confidential personnel files, a move the hospital balked at.
All of this took place at Rosch’s command. In December 2007, he issued a ten-page memorandum to the FTC’s chief litigator. The FTC refused to release the contents of this memorandum, but an FTC official later confirmed to me that “[Rosch] was very active in the investigation.” This same official said that at that time, “Rosch views the litigation strategy of the staff as his unique domain among the Commissioners given his litigation experience.” [This may no longer be the case since Democrat Jon Leibowitz became chairman; Rosch publicly chided the staff for its actions in a recent physician case.]
After two years, over $15 million in legal bills, and a downgrading of PWH’s credit rating, the hospitals’ merger collapsed. The final straw came when the FTC finally announced it would challenge the deal under Section 5 of the Federal Trade Commission Act. The FTC Act requires complaints be tried before an administrative law judge. The FTC, however, bypassed their two sitting judges — neither of whom was hearing a case at the time — and appointed Rosch himself to serve as judge! The hospitals saw the writing on the wall.
The FTC’s only stated reason for its unprecedented decision to name a sitting commissioner as trial judge was Rosch’s “40 years of experience as a trial lawyer, predominantly in the context of complex competition cases, making him the best available candidate to sit as the trier of fact in this case.” This doesn’t pass the smell test. Experience as a litigator is not equivalent to experience as a judge. More importantly, the FTC’s two administrative law judges at the time both had substantial experience both as judges and as triers of “complex competition cases.” Indeed, then-Chief Administrative Law Judge Stephen J. McGuire had just presided over the most complex antitrust case in FTC history, the Commission’s seven-year pursuit of Rambus Incorporated (more on that in a moment).
The real reason that Rosch orchestrated his own appointment as trial judge – and an FTC official told me, “I’m sure the idea came out of his office, not at anybody else’s request” — was that McGuire and his fellow judge had ruled against the FTC staff in four major antitrust cases. Rosch wanted to avoid any independent review of the antitrust investigation that he had directly supervised.
Shortly after PWH and Inova abandoned their merger, Rosch spoke to an antitrust industry audience, where he again emphasized his “expertise” as the primary justification for his appointment as trial judge:
I haven’t discussed the specific reasons for the assignment with my colleagues. But I hope the assignment helped address concerns about both the antitrust expertise of the judges conducting plenary trials at the Commission and the time it takes to prepare for and conduct such a trial.
Rosch’s outright lie about not speaking to his colleagues aside, it’s not clear who had “concerns” about the “antitrust expertise of judges” — aside from Rosch and his fellow commissioners, that is. In two cases where the FTC disagreed with its administrative law judge about the disposition of an antitrust case, the appellate courts broke the deadlock in favor of the judges. (Of course, Rosch has also chastised the appellate courts for lacking sufficient antitrust expertise.)
Rosch’s claim that judges lack sufficient “antitrust expertise” mirrors Thomas Leary’s statement about lawyers “who are not really antitrust lawyers” advising physicians. Both place enormous weight on their own credentials as antitrust lawyers; which, in reality, means they have law degrees and chose to network with other people who call themselves antitrust lawyers, nothing more. Whether they possess relevant knowledge and experience is, apparently, irrelevant.
Such thinking permeates the FTC’s trial of cases. In the Rambus litigation, Judge McGuire rejected the Commission’s two principal “expert” witnesses as unreliable. The Rambus case arose from the FTC’s belief — heavily influenced by industry lobbyists — that the computer memory industry had adopted the “wrong” technical standards, because they included inventions that were under patent to Rambus. (Please, spare me the anti-IP comments here; this isn’t the forum.) The FTC paid over $1.1 million to expert witnesses to help prove this theory.
One expert, Dr. Bruce Jacob of the University of Maryland, received $208,900 to testify about alternative technologies the memory industry — specifically manufacturers of DRAM — should have adopted in the 1990s instead of the Rambus designs. Judge McGuire said Jacob was “not persuasive,” because he, um, lacked expertise in memory design:
Professor Jacob had never done DRAM circuit design. Indeed, Professor Jacob had never designed any circuits for computer chips (even apart from DRAMs) that were to be fabricated prior to 2002. Aside from reviewing some DRAM data sheets, Professor Jacob, who was a student at the time, had no particular DRAM-related experience in the mid-1990s. Professor Jacob did not obtain his graduate degree and begin to teach electrical engineering until 1997
A second expert, economist R. Preston McAfee, received $573,000 to detail the alternate universe that would have existed if the DRAM industry had adopted non-Rambus technologies. Like most “expert” economics testimony, McAfee was compelled to work backwards from the FTC’s conclusions. As with Dr. Jacob, Judge McGuire found McAfee’s testimony “not persuasive.” Among the problems was Dr. McAfee’s conclusion that there were “equal or superior technologies” that the DRAM industry should have adopted; Judge McGuire said this analysis was “flawed,” because Dr. McAfee “did not quantify” any cost, performance, or future flexibility differences between Rambus and non-Rambus technologies.
Overall, the FTC’s attempt to retroactively create an alternate DRAM universe demonstrated an appalling mix of arrogance and ignorance. Judge McGuire issued his initial decision dismissing the case in February 2004. The FTC then took three years to review, reverse, and rewrite the decision in favor of the Commission’s position; this was followed by another two years of review by the federal appellate courts, which ultimately reversed the Commission and reinstated McGuire’s original decision. The FTC, however, never wavered from its view that it knew best, even after conceding defeat in the courts.
You can condemn the FTC’s petulance, but it’s more important to understand where it comes from. These people sat at their desks for 20 years, obtained that all-important schooling credential, “worked” as lawyers (or academics) in a field where they could fabricate any theory they wanted without any regard for economics or empirical data, and ultimately found themselves rewarded with a government title, salary, benefits, and staff. What do you think the consequences of such a system are?
*The current five commissioners include two career government attorneys, two career antitrust litigators, and a law professor who consulted foreign governments on antitrust policy.