Capitalisn’t: Should We Let Walmart Regulate Itself?

Luigi: In the last episode, we explored the contentious debate over whether corporations should focus primarily on stakeholders or shareholders.

Kate: In the last few weeks, we’ve seen two examples of what it can look like when companies at least claim to follow through on the demands of stakeholders, one involving Walmart.

Speaker 3: America’s largest retailer is taking matters into their own hands in the wake of another mass shooting. Walmart announced yesterday that it will discontinue sales of handgun ammunition and ammunition that can be used with military-style rifles. It will also stop all handgun sales in the state of Alaska, the last state the megastore still sold them.

Speaker 4: You know, good for Walmart for doing this. And these are weapons of war.

Speaker 5: Maybe what’s actually happening is Walmart is listening to its own customers—

Speaker 6: Yeah.

Speaker 5: —and listening to the American people who want changes, and not only in the stores but in society.

Luigi: And the other involves the four largest automakers who went around the Trump administration’s new, less-stringent fuel emission standards to cut a private deal with California that is closer to the Obama-era emissions standards.

Speaker 7: The DOJ has launched an investigation looking at Ford, Honda, BMW, Volkswagen, four automakers who have reached an agreement. They did it within the last couple of weeks with the state of California regarding vehicle emissions. The reason that the DOJ has launched this investigation is to look into why they reached this agreement with California. Did they violate any antitrust laws in reaching that agreement?

Speaker 8: I know a lot of this probably comes down to virtue signaling as well. You know, these companies wanting to take public credit for green posturing.

Kate: But there’s an important overarching question to all of this. Should companies really be taking it upon themselves to address issues when the government doesn’t do a good job of policing? Should these businesses be punished or praised?

Luigi: From the University of Chicago, this is Luigi Zingales.

Kate: And from Georgetown University, this is Kate Waldock.

You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t.

In most of our episodes, we specialize in what is not working in capitalism and how to fix it. But actually, this episode is about government failures and what doesn’t work in government and how the market is trying to fix it.

The inability to reach any political consensus on some form of background checks can be considered one of the largest government failures in America today. A statistic that was just released by Edelman, which is the largest PR firm in America, they ran a survey, and they find that 86 percent of Americans declared themselves in favor of requiring background checks for gun purchases at gun shows or other private sales.

So, it’s not only a slim majority, it’s 80 percent of Americans in favor of that. Still, we don’t have any law. The same survey by Edelman suggests that not only are Americans in favor of background checks, but also look favorably to CEOs that openly support gun safety laws. Seventy-two percent of Americans are in favor. The majority of the American people want some restriction on guns, and the government is not able to provide it.

Kate: Yeah. Two weeks ago, when we were talking about the Business Roundtable decision to consider stakeholders’ values and their interests when making business decisions, we took a pretty skeptical view of all this. Luigi and I both agreed that the government should be the one ultimately being the regulator reining in corporate wrongdoing, but this time corporations are actually regulating themselves. In the gun-control debate, in the environmental debate, companies are making decisions that restrict themselves in furtherance of what they think people want.

Luigi: At some level, this corporate activity is so intense that it is actually getting pushback from the government. So, just recently the Department of Justice decided to open an antitrust investigation against the four automakers that agreed to stricter emissions standards with the government of California. So, here we have the federal government trying to force some corporations to a lower standard vis-a-vis the environment than they choose to have.

And last year, when Citigroup was very actively involved in trying to reduce the amount of financing that was going to the gun industry, there was an SEC commissioner that, according to a Bloomberg report, said in a meeting to Citigroup, if you keep going in this direction, you’re going to have trouble with us. Kind of threatening that the SEC will take action on other grounds—because, of course, they couldn’t take action on this ground—other grounds to punish companies that seem to display a preference on some social issues.

Kate: And in addition to the investigation into those four automakers, the Trump administration is also considering a plan to try to revoke California’s authority to enforce strict emissions within its borders. Saying that, all right, you’re allowed to enforce some sort of standards within California, but this pact with these four automakers, those will affect cars in the entire country, and California itself doesn’t have the authority to do that. So, this is something that hasn’t happened yet, but it’s an action that the Trump administration is considering.

Luigi: Kate, why do you think, besides the specifics of the shooting at Walmart, why do you think there is so much interest by corporations in taking these actions that in the past they would have avoided taking? There is a very famous statement by the then-CEO of Walt Disney that said Mickey Mouse is neither Republican or Democrat, he must be independent, he must be loved by everybody. So, why are corporations abandoning this neutrality to take positions that, while not clearly identified as Democrat, are clearly on the left-leaning side of the political spectrum and will alienate a lot of customers?

Kate: It’s hard to make a blanket statement about all corporations, but for some corporations, when it comes to meeting compliance, regulatory compliance, it takes a long time. It’s difficult. You might have to create new types of plants, you might have to retrofit certain machines, you might have to make different types of cars. And so, when you have a lot of regulatory uncertainty that from one administration is becoming really tough, to the next administration is becoming lenient, and then back to being tough again, it makes it hard for companies to figure out what set of regulations they’re supposed to comply with. And so, at the end of the day, it might just be easier for them to comply with the stricter ones, because it means that it’s easier for them to stick with a stricter set than to go back to a looser set and then have to redo all of that infrastructure that they have.

Now, I guess a different point of view is that they’re responding to the interests of their workforce. People who work at Walmart might be concerned about their personal safety. People who work at those four automakers might be personally interested in making sure that the cars that they produce have better gas mileage. And so, I think that that’s another reason that has been shown in the literature as well, to be associated with better firm performance and better labor productivity.

Luigi: I think that certainly what you’re saying has some element of truth. I think that the uncertainty and the continuous changes in regulation are very disruptive for businesses and so they want some stability. But I think there is more than that. I think that on the one hand, there is long-term thinking. It’s ironic, because in the finance literature we think about the firms being too driven by short-term objectives. I’m sorry to say the government has probably even shorter objectives than firms.

And so, if I am a carmaker today, I am worried about the backlash against cars that may be coming in the future. I may be afraid that if we don’t have better standards, maybe at some point gasoline cars will be banned altogether. We don’t know how the tastes will evolve. And I want to be a little bit proactive, because I don’t want to be the only one cutting down on my standards, because then I will be completely noncompetitive vis-a-vis everybody else. But what I’m afraid of is that Tesla will take over the world or somebody like Tesla would take over the world. And the better way to protect myself is to try to move to a better image of cars in America. And this is a step in the right direction.

Kate: So, that’s not too different than your take on the Roundtable decision then, that in some sense it was just a marketing tactic to stave off potential regulation or potential changes in the industry.

Luigi: I think that this is a little bit more optimistic, that there is some long-term view of what may take place in society, and they are playing the game ahead of that.

Kate: But, if these are good things, and I agree with you that there are good elements of these decisions, why is the government getting so angry? What’s the potential downside to having corporations voluntarily choose not to sell certain products or voluntarily adhere to stronger emissions standards than necessary? I mean, why is Trump launching these Justice investigations into them for being better environmental compliers? It’s just because he’s like a big angry baby. And his feelings are hurt that he wanted everyone to praise him when he rolled back Obama-era emissions standards. And in fact, the opposite happened. A bunch of automakers criticized him for that.

Trump aside, there is legal argument, first of all, when companies take it upon themselves to, in certain cases, regulate themselves or decide not to sell certain products they think might be harmful to society, this might crowd out government regulation, right? It might put off or even entirely prevent higher emissions standards from the government itself.

And another argument is that eventually, if you let companies do too much of this, if they’re the only ones regulating themselves, this can devolve into protectionism. Where companies, under the guise of regulation, are actually just putting up barriers to entry.

Luigi: I think that you’re right, any kind of regulation, even on any kind of common standard, might be used in an anticompetitive way. The funny thing is that the Trump administration decided to go after this particular case, where they agreed on stricter emissions standards, rather than going after a lot of other situations where maybe the anticompetitive intent was much clearer. And so, I’m a little bit surprised by the move, and maybe it is more like an emotional move from the president or somebody close to the president rather than a rational response to what companies are doing.

Kate: That’s a diplomatic way of putting it, Luigi, an emotional move by the president.

Luigi: I don’t like to demean the debate at this level, I think that—

Kate: He’s not just a big toddler who feels like his ice cream cone fell on the floor.

Luigi: I’m trying to keep the standards high and treat everybody fairly.

Kate: There is, to some extent, a legal history in this sort of action, though. The Justice Department and the FTC have always been a little skeptical of self-regulation. Where this has been more relevant, I think, in the past, has been at the level of industry associations. Because, on one hand, you would see a really big benefit to certain types of collaboration or coordination within industries to make sure that certain standards are met. So, let’s say in food, for example, if you are a producer of a certain type of food, and you feel like there’s something to worry about that the FDA hasn’t caught onto yet, that industry association might promulgate rules that say, in order to be an accredited member of this association, you need to have stricter tests to make sure that you don’t have this problem with your food.

And the Justice Department has always been a little bit worried about this, because it could be anticompetitive behavior in hiding. I think that the case law on this is kind of mixed, though. There have been examples of when the DOJ has found that industry association rules have been anticompetitive and have struck them down, and also cases in which they’ve said, yeah, there is market manipulation here, but it’s OK, because at the end of the day, it’s for the purpose of making consumers better off. So, there’s a bit of a history here. Trump isn’t just coming out of left field with this, but at the same time there’s plenty of cases that have showed that this sort of collaboration is not really collusion for price fixing. It’s collaboration in order to make consumers better off.

Luigi: I would say that there’s more than just some examples. There is a long tradition of using industry rules and industry self-regulation to create barriers to entry or to favor collusion. In the state of Illinois, lawyers cannot offer to reimburse victims for all the costs of potential litigation. This is against their ethical norm. There is nothing unethical, but it is just collusion among lawyers to make sure that they don’t spend too much money on capturing the client, and they collude on higher fees.

Kate: Yeah. But at the same time, there are plenty of instances of good coalitions or good industry associations. For example, there’s what’s called the Sustainable Apparel Coalition. I think its members include Nike, Walmart, and Patagonia. And their whole purpose was to reduce the environmental footprint of the apparel industry. And so, they developed, I think what’s called the Higg Index to measure this footprint across the supply chain. And so that’s now become of popular use in the apparel industry. There’s stuff like LEED certifications, right? Nonprofit certifications that have arisen with the backing of corporations in order to make sure that buildings are more green. I mean, there’s plenty of good examples of companies collaborating in ways that have benefited society and which haven’t come under scrutiny by the FTC or the DOJ.

Luigi: No, no. But there is a huge difference between the two cases. In one case, it is voluntary, and in the other it is forced upon everybody. If I create a new standard of what is super organic and safe stuff, and I start to market it and more and more people adopt it, that’s great. It’s another thing to say that all eggs that are sold today should meet my standards. And I decide the standards and, of course, the person or the group of people who decide the standards can choose a standard to fit their needs and to discourage their competitors.

Kate: Right. But there’s a fine line here, especially when it comes to industry councils or associations. You might say that it’s voluntary to be part of that association, but at the same time, if you don’t have that accreditation, it might hurt you from the perspective of consumers. In some cases, industry associations can levy fines against you if you don’t comply with what they’re saying.

Luigi: Yeah. But that is not voluntary. If you are in any way required to be part of that association, that is a kind of regulation. It’s private regulation, but it’s regulation with all the potential negatives of regulation. If it is a choice in which I create a higher standard, in which I participate and other people participate, and I put on a nice label for people who participate, but others can choose not to participate, then I think it is a free choice. And in that sense, it is a great opportunity.

Kate: OK. But I’m saying that there are examples in which virtually mandatory industry associations have done good things. The American Chemistry Council’s Responsible Care Code to make sure that certain toxic chemicals are not abused or overproduced. That’s virtually mandatory, but it’s still self-policing in a good way.

Luigi: In this particular case, I’m afraid that many times this self-regulation is just a soft way to prevent more serious government regulation and is actually not really enforced. Because part of the problem with a lot of self-regulation is that the people enforcing are the very members of the association, and so, you know, the expression “dog does not eat dog.” And so, if you’re a member of that association, you don’t want to punish somebody else. And so, without enforcement, the rules are just a wish list.

Kate: Yeah. I would have loved to see more research on this. What’s the relationship between these sorts of collaborations, these sorts of industry associations, self-policing within firms or at the industry level, and the crowding out or pushing off of actual government regulation? Unfortunately, it’s actually pretty hard to tell what the relationship between those two things are. Because it’s difficult to measure collaboration, and it’s also difficult to measure the counterfactual of regulation. It’s hard to know what sort of regulations would have been passed in the absence of that collaboration.

Luigi: One point that we have not discussed about why this is so prevalent today is because, to some extent, companies have gained a lot of market power. In a world where guns are sold by private shops, there are many of them, pressuring one of them or two of them will not make any difference in the world. Walmart is 20 percent of the market share of ammunition. Getting 20 percent out of the market is a lot. Particularly when you go to rural America or Southern places, Walmart’s local market power may be even much higher. And so, I think that part of this increase in the involvement of companies in social activities, even political decisions, is because they have such a bottleneck power.

If I am an activist, I find it very tempting to go after them. If I care deeply about stopping mass shootings in the United States, I would not go after every dinky little store that sells guns. Why? Because there are too many of them, and I cannot be effective. But if we’re down to two or three stores controlling the vast majority of guns, then I know I can exert a lot more pressure on those stores.

And let me give you another example that I recently learned, which is quite intriguing. Think about credit-card companies. They’re probably as far away from a mass shooting as you can think of. However, most guns are bought by credit cards. If I plan a mass shooting, I probably buy a lot of my guns with credit cards, and I buy in a short period of time a lot of guns and particularly a lot of ammunition. If I’m a credit-card company, I get to see early on who is a likely shooter. Should they intervene or not?

Kate: Oh. Don’t make me answer that question. If I’m ever working for the CIA or the NSA or a big credit-card company, then come back to me and I’ll answer that. But I don’t think it can be answered in isolation without a discussion about privacy. And that’s also something that I’m concerned about.

Luigi: But, first of all, I wasn’t even talking about mandatory reporting. I was talking about voluntary reporting. If you are sitting at the airport, and you see somebody abandoning a backpack in a corner, you will call an agent to check on that person. At least, I certainly did in the past, and maybe I’m paranoid, but I find it normal, good citizen behavior. Wouldn’t you?

If somebody buys a lot of guns in a short period of time, and I report his name or her name—most of the time it is his name—to the police, and I do it voluntarily, is it a bad thing? If I get advance knowledge of a potential crime in the same way, by seeing somebody abandoning their backpack, if I see advance knowledge of a potential crime, then the question is, what inconvenience do I create? I certainly create some inconvenience for the guy who has to show up and open the backpack and show that there is nothing inside the backpack. But I think that the cost-benefit analysis is not terrible.

Now, do we have to mandate that everybody reports this? No, but do I want the credit-card company to do it. In the same way, I want a pharmaceutical company to notice when a huge amount of oxycodone is sold to a little town. When the amount of pills exceeds the amount of citizens, that’s a red flag. They are supposed to report that to the authorities. What is the difference?

Kate: Yeah. Except the pharmaceutical companies were the ones who were trying to push pills on the small towns where they could convince doctors to get people addicted.

Luigi: No, but this is interesting, because I think you’re right, but there are now legal suits against Walgreen or other companies that have not paid attention to this.

Kate: Right.

Luigi: And the question is, should they?, But there must be a range between something that is so required that if you don’t do it, there is a legal case against you and there is a liability, and you don’t care at all. Shouldn’t that be something in the middle that says, “Oh, maybe we can help in this dimension, without having a legal liability and without ignoring the thing completely”?

Kate: I think “should” is a difficult word to argue around. I mean, to your point about the credit-card purchases of guns, Apple has taken the exact opposite view, which is that they’re not cooperating with the government at all in any sort of criminal investigations, and they’re absolutely to the very bitter end protecting the security of their iPhones, because they think it’s something that consumers want. They think it’s something that consumers would feel threatened by if they knew that Apple would disclose any sort of worrisome behavior to the government or cooperate with the government in those sorts of investigations.

Now, credit-card companies might take the opposite view. They might say, maybe our consumers don’t actually care that much about us monitoring them, and in fact they would want us to cooperate, because it would contribute to their safety. I personally as a consumer don’t think that I do enough illegal activities that it would really matter if anyone were monitoring me. I think if all of my emails were disclosed and text messages and credit-card purchases, it would be extremely embarrassing, but probably not the end of the world. But I recognize and respect that there are other consumers who don’t feel the same way and care more about their privacy. So, I don’t think that I can speak for them, and each company is deciding this issue in a different way, and that’s fine.

Luigi: So, there is a side of you I don’t know, Kate. Because you said you don’t do enough illegal activities — it means you do some illegal activities, but not enough.

Kate: I have been known to jaywalk, Luigi. Occasionally, I ride a scooter without a helmet.

Luigi: Then the other side of you is not—

Kate: Terrible thing.

Luigi: —that interesting.

Actually, one point that is important is this. I want to make the distinction between the Walmart case and another case of Facebook and Google deciding unilaterally that they would not accept advertising for cryptocurrencies during the crypto mania. It was probably a good idea not to invest in cryptocurrency at that moment, so I don’t try to defend the cryptocurrencies themselves. The issue is, when two companies control between 60 and 70 percent of the market share in online ads, if two companies decide and maybe even coordinate to block some ads, your chances for your business to succeed are very, very limited.

And the funny thing is, after a year Facebook is coming out with a cryptocurrency of its own. That’s a pretty aggressive behavior, and the big difference is, again, what I see, is the market power, the ability of companies to intervene on the social dimension and limit this must be directly related to the degree of competition in the market. If I am the only bridge in town, I cannot choose who goes over the bridge or who doesn’t, because that really limits my freedom. But if there are a lot of bridges that bring me from point A to point B, I think that people can decide unilaterally who they are going to allow on and who they will not.

Kate: I think what you’re saying is that when companies take it upon themselves to police some sort of social institution or regulate themselves, that it’s a complicated decision as to whether this is good for the market, it’s anticompetitive, it limits consumer choice, it limits free speech. These are all complicated issues. And I think that at the end of the day, the current system is that it’s left up to judges in courts to decide whether or not the decision of a company or companies was truly a violation of antitrust law. And I think that things like intent and things like effects on prices, and effects on industries, those are all factors that judges take into account. And I’m happy with that system because, for the most part, I trust our current judicial system. I hope that that trust will be maintained, however.

Luigi: But actually, this is a legal question. I don’t know the answer. Imagine that I am a gun producer, and imagine that Amazon controls 90 percent of all the sales in America,. We’re not there yet. But imagine that’s the case and Amazon decides not to sell my gun. Can I sue Amazon on antitrust grounds? Probably not.

Kate: Yeah, I think that you can, because they’re limiting consumer choice. I mean, that’s the same grounds on which the DOJ is investigating those four auto companies, for limiting consumer choice. And in the example that you just gave, if Amazon really controlled 90 percent of the market, then a lot of people wouldn’t have access to guns if Amazon made that decision.

Luigi: If we are in a world in which there is free entry and competition, if every store decides not to sell guns when guns are legal and there is demand for guns, new stores will come in and they will start providing for customers. If there is demand, there will be supply. In a noncompetitive market, then that’s a completely different story, because if Facebook bans my ad sales, I don’t expect a new Facebook to come in, because there are network effects and all the other stuff we discuss in other podcasts, that make that a natural monopoly. And so, that’s the crucial difference that we should focus on.

Kate: I think that every single case is its own different animal. I can envision a case in which there’s some poison that’s just being sold in candy wrappers, it’s killing a lot of people. And so, Facebook and Google both decide not to advertise that poison. And even though they have the majority of the market share in online digital advertising, I would still expect a court to uphold that decision. Even though it’s intervening with the markets, even though it’s limiting consumer choice at the end of the day, I think it is a clear benefit for consumers not to have that poison advertised. I think it depends on each scenario, and I don’t think that it should be entirely dictated by market power.

Luigi: I think you’re right. What I’m just saying is that I see it as a dangerous thing for freedom that a monopoly makes this decision. I don’t see it as a danger for freedom that a nonmonopolist makes that decision. Because in a competitive market you have choice, in a noncompetitive market you don’t. And that’s one of the many reasons why I like competitive markets, precisely because of this freedom element to it.

Kate: I think that that’s fair, but I think that it misses some of the nuance of the actual issues around which these industries or large multinationals actually collaborate, which are things like labor standards. You have to have some sort of collusion in order to make sure that if you’re operating multinationally, either your company isn’t hiring children, like child labor, that they’re not working their laborers 24 hours a day. In the absence of that collusion, then you’ll have the economic forces of individual companies being incentivized to free ride and deviate from the pact and make more money, because it’s cheaper for them to produce something. And so, it’s exactly in these sorts of cases where there’s an absence of law, or of proper enforcement of regulation, that you need some sort of anticompetitive behavior, and in certain circumstances it’s the right thing.

Luigi: But in your example, do consumers care about where the products come from or not?

Kate: I think consumers care about labor safety and labor standards.

Luigi: They do.

Kate: Yeah.

Luigi: So why can’t you do that simply by free association? So, I have a label that says my products are child-labor free and people voluntarily join the association. And the association monitors that what you are doing is actually true. And the ones who don’t join my association will not sell in the marketplace.

Kate: I totally agree. I think that certification or associations are a good alternative to collaborative self-regulation. However, associations and certifications also come with their own downsides, which is that it’s hard for the consumer to know who to trust, right? It’s hard to know what the right label is in certain cases. Companies can even exploit that and create fake labels, and so they don’t always work.

Luigi: OK. So, Kate, do you think that self-regulation is a capital-is or capitalisn’t?

Kate: I think that we’ve rightly distinguished between cases where companies collaborate to self-regulate and companies act on an individual basis. There are certainly more reasons to be concerned about cases when companies collaborate, because then they might truly be acting in an anticompetitive way. But that’s not to say that every time companies collaborate, it’s anti-competitive, and I think that should be left up to the courts.

In the case of individual corporations deciding to self-regulate, I think that it’s not something the government should be punishing outright. I think that the government should just keep an eye on whether there’s such a big player in a certain market that it’s actually affecting the way that the market operates, and that if they were going to pass some sort of regulation, that the fact that the company is doing it themselves shouldn’t preclude the regulation, but that doesn’t mean they should be punished. What do you think, Luigi? This is a capital-is or capitalisn’t?

Luigi: Kate, I could not have said it better.