Will Washington Take Down Apple—And Why?

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Is Apple being given a hint to fork over more campaign contributions?

The US Department of Justice has not only successfully sued Apple for arguably non-existent anti-trust violations in the e-book market. It has even demanded–and gotten–a court appointed “monitor” placed inside the company to supervise the company’s pricing decisions.

This is a company that went from an $18 billion market value in 2000 to a $455 billion market value in 2013. During the same period, Microsoft’s market value fell from $603 billion to $290 billion. Should anyone expect the success story to continue now that the government is meddling with all the company’s pricing?

Apple appealed the anti-trust judgement this Tuesday, but was unable to get the government “monitor’s” work suspended while the case is under appeal. Among the interesting facts that have come out about the “monitor,” Michael Bromwich: he bills for his time at $1,100 an hour and charged $138,432 for his first two weeks of “work.”

Apple has labeled Bromwich’s appointment “unprecedented and unconstitutional.” We wish it were unprecedented. This form of government price interference and intimidation has become increasingly common.

Joseph Covington, who headed the Justice Department’s Foreign Corrupt Practices Act Division in the 1980’s, told Forbes, in reference to monitors appointed to enforce that act: “This is good business for Justice Department lawyers who create the marketplace [for monitors] and then get…a job there [after they leave government].”

Nor is it limited to the Justice department. If a company gets into the sights of the Federal Trade Commission (FTC) or even the Food and Drug Administration (FDA), the terms of settlement increasingly include “monitoring” by highly paid lawyers, who are typically former FTC or FDA employees.

This is not just the small time corruption it might seem. It is tremendously damaging to the economy. The collapse of the Soviet Union should have demonstrated once and for all how important honest and unimpeded prices are for an economy.

If the government takes control of pricing, as it is doing in more and more sectors of the economy, it is guaranteeing unemployment and economic suffering. It is also guaranteeing an ever greater problem of crony capitalism, as companies respond by increasing their campaign contributions or take other steps to buy influence in Washington.

Apple is and ought to be ramping up its Washington presence. A Politico article of May 2012 wondered about the earlier naivete of the company leadership. Did they really think they could get away with lobbying expenditure of only $500,000 in the first quarter of that year compared to $5mm for Google and $1.8mm for Microsoft? Did they really think they could get away with having no company political action committee (PAC) from which to make campaign contributions?

Apple might have thought it was safe, even untouchable. Was not the company an icon of American economic leadership? Did not Apple employees overwhelmingly direct what campaign contributions they made to President Obama? Even with the lawsuit, had not Apple employees in fact given 93 percent of their contributions to Obama in 2012 and only 7% to Romney? Wasn’t that good enough?

Well no. Google employees gave 98 percent of their money to Obama and it was a whole lot more money ($727,702 versus $338,752). Apple CEO Tim Cook hadn’t even maxed out (given to the legal limit) in his own contribution.

This lack of political involvement may be contrasted with Amazon’s Jeff Bezos, who stood on the other side of the anti-trust suit, even though he had created what certainly looked like a near monopoly in e-books, the subject of the suit. Apple is not wrong to argue in its legal filing that its entry into the sector “marked the beginning, not the end, of competition.” But Bezos has bought the Washington Post, and Washington officials will think twice about tangling with him.

In thinking about Apple’s relative lack of political involvement in the past, we should also keep in mind what Politico reported last month: “President Barack Obama has a plan to save the Senate’s tenuous Democratic majority: sell a populist message…and raise lots of cash.”

In Washington doing favors for special interests is one way of raising cash. But so is intimidating them. Either way you get paid, whether from gratitude or fear.

In addition, there is another reason why Apple could now be in the crosshairs of the Justice Department. On November 5, 2013, the company issued a report containing this: “Apple has never received an order under Section 215 of the USA Patriot Act. We would expect to challenge such an order if served on us.” This made jaws drop both in Silicon Valley and Washington. It was daring, perhaps foolhardy. It was directly taking on the government.

Before leaving the besieged Apple, we might pause to consider how the company also gives the lie to one of the great economic myths of our day: that falling prices (deflation) hinder an economy. Here is a typical version of the myth from an AP story last month: “Many economists have worried that the Eurozone may be about to suffer a debilitating bout of deflation…. Falling prices can hurt an economy as consumers postpone spending in the hope of getting cheaper deals in the future while businesses fail to innovate and invest.”

This is all backward. Businesses innovate and invest in order to become more productive. Being more productive allows them to lower prices, improve quality, and get more customers. Everyone benefits from lower prices, but especially the poor and the middle class, who have the most trouble dealing with rising prices.

Apple is a good illustration of all this. Various tech experts on the internet have been discussing what an Apple Iphone would have cost if available in 1991. What would we have had to pay to get similar features and power in some form (clearly not hand held)? The estimates vary but the top one approaches $4mm.

Shouldn’t it be obvious (to anyone other than a Federal Reserve official) that falling prices, produced by innovative and productive businesses such as Apple, are exactly what we should be hoping for? If so, why is the government determined both to create inflation and to interfere with Apple’s price setting decisions?