On August 5th, US District Judge Amit Meta released a Department of Justice (DOJ) ruling against Google, which sets a dangerous precedent that could potentially hinder a common business practice in many industries, signaling a shift in antitrust policy that could negatively impact economic growth. 

The facts state that Google pays Apple roughly $20 billion per year to be the search engine default in Apple’s marquee browser, Safari.  The high price tag and Google’s large market share caught the ire of federal antitrust regulators, who argued that the payments were effectively preventing competition, resulting in Google’s persistently high market share. By singling out Google’s behavior as harmful, the court sets a precedent that could hinder legitimate business practices common in both online and offline markets.

Paying for privileged status is a routine, lawful, and often beneficial strategy employed by businesses to gain visibility and drive sales. Regardless, as the court will admit, these tactics are only valuable when the product is of sufficient quality to actually attract customers. To argue that Google’s payments are anticompetitive ignores the broader context in which such transactions occur and fails to appreciate the options that remain available to consumers.

Consider the example of product placement in retail stores, a practice deeply entrenched in the business world. Consumer goods companies routinely pay retailers for prime shelf space — often at eye level — to increase the visibility of their products. Consumers retain the freedom to choose alternative products, even if those products are less prominently displayed. The ability to pay “slotting fees” for prime shelf space does not guarantee a sale; it simply enhances the likelihood of consumer engagement. The court’s decision against Google fails to account for this dynamic. Just as consumers can walk past a product at eye level and choose something else, they can just as easily change their default search engine.

Beverage companies negotiate exclusive contracts with restaurants, schools, stadiums, and other establishments. If consumers don’t like the soda beverage options, they drink alternative beverages like water or go to different venues that offer the experience they seek. This, in turn, would drive more competition for the contract itself as other more reputable brands try to fill that void. The existence of exclusive contracts does not mean that consumers are harmed or that such contracts forgo competition. 

The main difference is that no soda beverage company maintains as high a market share as Google, but that shouldn’t matter as long as there is competition for the contract and no demonstrable consumer harm. Antitrust enforcement has never taken high market share as inherently indicative of anticompetitive behavior but rather has focused on consumer welfare. The market for search engines remains competitive, with Bing, DuckDuckGo, Yahoo! (once the top search engine to beat) and other options available to consumers, and many of those companies are bidding on the same contract as Google. The notion that Google’s payments have somehow stifled all competition ignores the presence of these alternatives and the fact that consumers are increasingly aware of and able to exercise their choices. 

The court’s decision fails to acknowledge that consumer behavior is not dictated solely by defaults. Users have shown a willingness to change search defaults when they perceive the alternative to be superior, whether due to privacy concerns, performance, or other factors. The existence of these alternatives and the ability of consumers to choose them should be sufficient evidence that the market remains competitive. 

As Geoffrey Manne, President and Founder of the International Center for Law and Economics, notes in his review of the case, “Google’s default agreements can’t be deemed to have caused anticompetitive harm because defaults are readily overcome by high-quality, reputable alternatives.” The ruling itself even acknowledges that there was no “price that Microsoft could ever offer Apple to make the switch because of Bing’s inferior quality.” In other words, the price of the contract and Google’s market share are irrelevant because there is no other product that matches the quality of its search. Consumers clearly have options when it comes to search, but because they consistently choose one product over the other does not mean that the exclusive contracts indicate anticompetitive behavior. Companies invest in marketing, partnerships, and product placements to increase their visibility and, ultimately, their revenue. This is not anti-competitive; it is the essence of competition.  

The DOJ’s aggressive approach could have broad economic implications. If businesses are discouraged from investing in securing market positions due to fear of antitrust repercussions, we could see a reduction in advertising spending, marketing partnerships, and other forms of competitive economic behavior. This would hurt not only the companies themselves but also the industries that rely on such spending, from advertising agencies to retail chains. It could also harm consumers by raising prices, since distributors would no longer have the subsidy of the contract to help lower the price for consumers. The ripple effects could be far-reaching, dampening economic activity in sectors that depend on the flow of investment from businesses seeking to enhance their market presence.

In conclusion, the court’s decision to penalize Google for its payments to Apple as part of securing the default search engine position on Safari is a narrow interpretation of competitive behavior that fails to account for the broader business practices prevalent across various sectors. Paying for privileged positions is a common strategy employed by businesses to enhance visibility and drive sales, whether in retail, advertising, or digital markets. These payments do not inherently stifle competition; instead, they represent a legitimate and often beneficial investment. If anything, Google’s payments to Apple for default placement on Safari are akin to a company paying for a prime billboard spot. It’s about visibility, not coercion. The court should recognize these facts during the ensuing appeals process. 

One popular version of the case for industrial policy goes like this: free markets and free trade are great. These policies are the best means of promoting economic growth and widespread prosperity at home except when foreign governments don’t follow these policies. To the extent that our trading partners use tariffs, subsidies, and other tools of industrial policy, we can no longer stick with free markets. We must instead match the economic interventions of foreign governments with economic interventions of our own. If we don’t do so, we leave ourselves unarmed against the economic aggression of other countries — aggression that will impoverish us if we don’t repel it with our own tariffs, subsidies, and other tools of industrial policy.

The most obvious flaw in this case for industrial policy is its illogic. If tariffs and other government interventions into the economy harm the people of the home country when other governments follow policies of free trade and free markets, when a foreign government raises tariffs or otherwise intervenes more heavily into its country’s economy the result will be to weaken, not strengthen, that foreign-country’s economy. Far from requiring retaliatory economic interventions by our government, the economic interventions by the foreign government will themselves drain that foreign economy of efficiency and vigor, thereby making it less, not more, effective at ‘competing’ with our economy.

Relatedly, foreign-government deviations from free-market policies do not miraculously give officials in the home government the knowledge these officials must have to out-perform the market at allocating resources. If home-government officials had reliable access to such knowledge (and could be trusted to use it in the public interest), they should practice industrial policy regardless of the economic policies pursued abroad. The principal economic argument against industrial policy is that government officials cannot possibly know enough to out-perform markets and cannot be trusted even to try.

Over the years I’ve asked many protectionists “Why, if free trade is the best policy for our economy when other countries practice free trade, does free trade become a bad policy for us when other countries practice protectionism?” On rare occasions the answer will be that by raising our tariffs we will pressure foreign governments into lowering their tariffs, which will benefit the people of both countries. This answer is at least logically sound, if its practical merit is meager. But most of the time the answers are nothing more than verbal fusillades of inapt war and sports metaphors. “If we don’t retaliate with our own tariffs, we go into battle unarmed!” “If we don’t match their export subsidies with our own export subsidies, the playing field will be uneven!” “If we don’t pursue industrial policy as other governments pursue industrial policy, we’ll send our producers into the boxing ring with one arm tied behind their backs!”

Analogies such as these favorably impress only the economically uninformed, for only the economically uninformed believe that trade is a zero-sum (or even negative-sum) game in which the people of one country can gain only by inflicting losses on – by economically defeating – the people of other countries.

But protectionist arguments are plagued not only by logical flaws; the actual empirical record is also unfriendly to these arguments – as two recent reports make clear.

One report, in The Economist, is about China. The government in Beijing is keen on picking industrial ‘winners’ for that country, and one such chosen winner in recent years is the electric-vehicle industry. Using a variety of means, Chinese Communist Party officials and mandarins in Beijing have directed substantial resources into EV production — a policy that allegedly justifies matching support from the US government for American-based EV producers. But as matters are developing, this ‘winner’ in China is turning into a loser. According to The Economist,

At least eight large makers of the cars have shut down or halted production since the start of 2023. The ripples are visible throughout the supply chain. Qingdao Hi-Tech Moulds, a large auto-parts supplier, warned in a statement earlier this year that the halting of production at HiPhi, an automaker, could send its net profit tumbling by up to 60 percent. saic Anji Logistics, an auto-industry logistics provider, said in recent bankruptcy proceedings that it collapsed mainly because Aiways, another troubled automaker, had failed to pay its bills. The failure of Levdeo, yet another carmaker, has left 4bn yuan ($550m) in unpaid bills to suppliers, agents and banks. Some 52,000 ev-related companies shut down in China last year, an increase of almost 90 percent on the year before, according to one estimate.

This development is unsurprising. No matter how smart and clever are President Xi and his lieutenants, they cannot work miracles. If the Chinese have no comparative advantage at producing EVs on a scale as large as the one desired by these government officials, diverting resources on this scale into EV production is likely to backfire — as it’s now doing. It’s possible that if Beijing diverts yet more resources into this industry that eventually the Chinese will come to have the necessary comparative advantage at producing EVs. But as things now look, this possibility is a bad bet — although it’s a good bet that Beijing will in fact strive to buoy China’s troubled EV producers with yet more subsidies and special protections. After all, the money that Chinese-government officials are spending isn’t their own; it’s money forcibly taken from Chinese taxpayers and consumers.

But even if the unlikely occurs and the Chinese do eventually become efficient at producing EVs on the scale fancied by Pres. Xi, at what price for the Chinese people? Not only will they have been forced to subsidize losses during the period when Chinese EV producers have no comparative advantage at producing EVs on such a scale, this government-engineered creation of a Chinese comparative advantage at producing EVs necessarily — by the inescapable logic of comparative advantage — will have taken away from the Chinese a comparative advantage at producing some other outputs.

It’s impossible for officials in Beijing to know which Chinese industries their EV subsidies are destroying. It’s also impossible for them to know if the advantage that China will gain if and when it gets a comparative advantage at producing EVs will have been worth the cost. Indeed, because the money spent by government officials isn’t their own, and because these officials are not directed in their economic decisions by market prices, it’s almost certain that government-engineered economic outcomes are worse than would be the outcomes generated by freer markets.

Why we Americans should quake in fear at these self-destructive Chinese economic shenanigans is a mystery.

The second report, in the Financial Times, is about the US. The opening lines of this report speak volumes:

Some 40 per cent of the biggest US manufacturing investments announced in the first year of Joe Biden’s flagship industrial and climate policies have been delayed or paused, according to a Financial Times investigation.

The US president’s Inflation Reduction Act and Chips and Science Act offered more than $400bn in tax credits, loans and grants to spark development of a US cleantech and semiconductor supply chain.

However, of the projects worth more than $100mn, a total of $84bn have been delayed for between two months and several years, or paused indefinitely, the FT found.

The same economic and political obstacles that prevent US government officials from outperforming the private sector at allocating resources when Beijing and other governments are liberalizing their economies prevent the US government from outperforming the private sector at allocating resources when Beijing and other governments start intervening more heavily into their economies. And the time, effort, and resources spent by American producers lobbying for special privileges is made no less wasteful just because foreign governments engage in orgies of special-privilege giveaways.

If we Americans want our economy to be as productive as possible and to ensure as well as possible a high and growing standard of living for as many Americans as possible, we must keep our economy as competitive as possible. This condition means no protective tariffs and no subsidies. If other governments insist on harming their countries’ economies with such interventions, that’s their business. We can pity the citizens of those countries. But both economic logic and the empirical record are clear that the best course for us is economic freedom without special favors or penalties.

In June 2024, all three of the AIER Business Conditions indicators maintained their levels from the previous month. The Leading Indicator stood at a mildly expansionary level of 54, while the Roughly Coincident Indicator remained at 83 and the Lagging Indicator at a moderately contractionary 42.

Leading Indicator (54)

Among the twelve Leading Indicator components, from May to June 2024 seven rose, two fell, and three were neutral. Among the rising constituents were the 1-to-10 year US Treasury spread (5.8 percent), US Initial Jobless Claims (4.4 percent), Conference Board US Leading Index of Stock Prices (3.4 percent), University of Michigan Consumer Expectations Index (1.2 percent), US New Privately Owned Housing Units Started by Structure (1.1 percent), Conference Board US Leading Index Manufacturing, New Orders, Consumer Goods and Materials (0.6 percent), and the Conference Board US Manufacturers New Orders Nondefense Capital Good Ex Aircraft (0.1 percent). 

United States Heavy Truck Sales fell 8.7 percent, and the Adjusted Retail and Food Service Sales declined 0.2 percent. The US Average Weekly Hours All Employees Manufacturing, Inventory/Sales Ratio: Total Business, and FINRA Customer Debit Balances in Margin Accounts remained unchanged.

Roughly Coincident (83) and Lagging Indicators (42)

In the Roughly Coincident Indicator, five components rose and one declined. From May to June 2024, Industrial Production and Coincident Personal Income Less Transfer Payments each gained 0.3 percent, while Coincident Manufacturing and Trade Sales and the US Labor Force Participation Rate rose 0.2 percent. US Employees on Nonfarm Payrolls rose by 0.1 percent, and the Conference Board Consumer Confidence Present Situation Index declined by 3.9 percent. 

Among the six Lagging Indicators, one rose, four declined, and one was neutral.

Core CPI year-over-year fell by 2.9 percent, the Conference Board US Lagging Average Duration of Unemployment by 2.4 percent, and both the Census Bureau’s Private Construction Spending (Nonresidential) and US Commercial Paper Placed Top 30 Day Yields by 0.1 percent. US Manufacturing and Trade Inventories increased 0.3 percent while US Lagging Commercial and Industrial Loans rose were flat. 

The substantial divergence among the three indices perpetuates a trend of ambiguity rather than clarity. However, as will be elaborated in the discussion section, with the benefit of observing developments through July and mid-August there is increasing evidence that the Lagging Indicator has provided the most accurate reflection of underlying economic conditions.

Discussion

At the end of July 2024, applications for US unemployment benefits surged to their highest point in nearly a year, clearly indicating a labor market slowdown: initial claims for the week ending on July 27th increased by 14,000 to 249,000, exceeding the 236,000 expected. Continuing claims, representing the number of individuals receiving unemployment benefits, rose to 1.88 million in the week ending July 20 – the highest level since November 2021. 

Further, recent Worker Adjustment and Retraining Notification (WARN) data indicate that the layoffs which began in California’s tech sector are now spreading across Sun Belt states and industries. Texas has been particularly impacted, as have Nevada and Tennessee. Over half of US states, including Washington, DC, have experienced rising unemployment since March 2024. Approximately 35 percent of the US population now resides in areas where the three-month average unemployment rate has risen by more than 50 basis points from its twelve-month low.

The July 2024 Institute for Supply Management (ISM) manufacturing survey underscored the significant deterioration in labor market conditions. Although the survey’s overall index underperformed expectations, registering 46.8 compared to the anticipated 48.8, the most concerning development was the employment component’s steep drop to 43.4, well below the projected 49.2. That figure represents the lowest level since June 2020, and, excluding the pandemic period, the weakest reading since 2009. The underperformance in new orders further accentuates the prevailing economic weakness, as does the decline of average weekly hours worked to approximately 34.2. This is only the third occurrence of that level in the past two decades. The previous instances coincided with the 2008 and 2020 recessions.

The sharper-than-expected decline in July’s industrial production statistics likely exposes the impact of restrictive monetary policy on the real economy. Durable consumer goods and business equipment production are both on a downward trajectory, signaling weak factory output. Among the key results:

• Industrial production fell by 0.6 percent in July.
• Manufacturing output decreased by 0.3 percent.
• Consumer goods production dropped by 1.0 percent, following an 0.6 percent rise in June, with consumer durables such as automotive products and appliances—categories sensitive to interest rates—falling by 4.0 percent in July and 5.2 percent on a year-over-year basis.
• Nondurable consumer goods output saw an 0.2 percent decline after a 0.7 percent increase in June. Including intermediate nondurables, production increased by 0.4 percent, similar to June’s performance.
• Despite unusually warm weather in early July, electricity output decreased by 4.3 percent, significantly contributing to the overall drop in industrial production.
• Capacity utilization fell sharply to 77.8 percent from 78.4 percent in June, reflecting both reduced factory activity and worker hours.

The Empire State and Philadelphia Fed manufacturing surveys for August 2024 served to reinforce indications of a softening in activity with a notable decline in employment metrics. The Empire State index slightly improved to -4.7, while the Philly Fed index dropped sharply to -7.0, reflecting mixed underlying details including declining new orders in New York and slower growth in Philly. Despite surface variations in the data, both surveys showed declines in employee numbers and average hours worked. Numerous signs of contraction in interest-sensitive sectors indicate that producers are scaling back in anticipation of weakening demand.

On the consumer side, in July, US spending was predominantly channeled towards essential grocery items, with discretionary spending remaining subdued. The 1 percent rise in headline retail sales exceeded expectations, driven largely by a recovery in auto sales, while the control group’s modest 0.3 percent gain reflects a cautious consumer environment. Excluding autos and gasoline, sales grew by 0.4 percent, marking a deceleration from the previous month and highlighting ongoing consumer restraint.

The tepid growth in consumption underscores an increasing reliance on discount-driven purchases as strained consumers navigate weak financial fundamentals. The food services sector, a critical indicator of service demand, showed a slight rebound with a 0.3 percent increase, yet continues to lag behind typical growth patterns, further illustrating cautious spending behavior. 

A somewhat brighter spot can be found in recent inflation data, which suggest progress in the Federal Reserve’s disinflation efforts. The June Personal Consumption Expenditure (PCE) index and several months of core inflation prints roughly aligned with the Fed’s 2 percent target indicate that the central bank may soon have the latitude to cut rates. Headline PCE inflation rounded up to 0.1 percent month-over-month in June, while the core PCE deflator rose modestly to 0.18 percent, slightly exceeding estimates. July’s Consumer Price Index (CPI) report showed a softening in the core measure, though inflation in core services such as housing rents and car insurance remains elevated, suggesting a mixed outcome for the core PCE deflator. If forecasts hold, the combination of July’s CPI and Producer Price Index (PPI) data imply an acceleration in the core PCE deflator on both monthly and annual bases. Nevertheless, the one-, three-, and six-month annualized changes in core CPI were 2.0 percent, 1.6 percent, and 2.8 percent respectively, with the first two measures meeting the Fed’s target pace and the third approaching it. Although PPI components feeding into the core PCE deflator were slightly softer in July, rising financial-service costs continue to exert upward pressure on this key inflation gauge. 

All of these factors have intensified calls for rate cuts and increased demand for long-duration assets. The frequent occurrence of headfakes and reversals in various economic indicators and aggregates in recent years necessitate a cautious interpretation of even seemingly clear economic trends, such as those now describing a contractionary path. While the Federal Reserve’s progress in controlling inflation may provide the latitude needed to begin rate cuts aimed at supporting employment and growth, the activation of the Sahm Rule suggests that the United States has either entered, or is on the verge, of entering a recession.

LEADING INDICATORS

ROUGHLY COINCIDENT INDICATORS

LAGGING INDICATORS

CAPITAL MARKET PERFORMANCE

Public debt, sometimes called government debt, is money borrowed by governments. Like all debt, public debt finances spending today by borrowing on the promise to repay what is borrowed in the future with interest.  Richard E. Wagner, an economist who has studied the borrowing of money by governments, explains the process of government borrowing by noting that democratic governments act as financial intermediaries, bringing together lenders and borrowers, “some willingly and others forcibly.” He observes that those willing to borrow are those who want greater spending today for their preferred programs despite a lack of current resources, while those who are forced would prefer lower taxes in the future over government programs today.

Public debt is not a new phenomenon. Governments and rulers in nearly every civilization have taken on public debt to finance large government projects, especially war and infrastructure. The rise of commercial society and the wealth it spawned made it easier for those in government to borrow money to finance spending of all sorts. As the merchant class became wealthier, the government found a growing pool of lenders who were happy to lend to the government with the promise of being paid back with interest. Writing in 1776, Adam Smith noted,

The government of [a commercial state of society] is very apt to repose itself upon this ability and willingness of its subjects to lend it their money on extraordinary occasions. It foresees the facility of borrowing, and therefore dispenses itself from the duty of saving.

Smith’s observation describes the current circumstances faced by the United States government. At all levels of government, willing lenders are happy to lend money and buy US Treasury securities and municipal bonds, allowing federal, state, and local governments to fund spending today by promising to pay in the future. This Explainer looks at that public debt, its impact on taxpayers, and what, if anything, can be doneto mitigate the scope and impact of that debt.

Read the full Explainer:

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