Naked Capitalism on Our Modern Gilded Age

How Oligopolies Undermined Competitiveness and Produced Inequality

Yves Smith








Economists, commentators, and policymakers have spilled boatloads of ink on what caused the financial crisis and why the US and most advanced economies remain mired in a weak recovery. A substantial school of thought sees stagnant wage rates, financialization, and rising inequality as linked causes. Starting in the 1970s, the old bargain between large corporations, which tended to anchor wages, and labor began to break down. Before, workers shared in the benefits of productivity gains, which enabled them to enjoy a rising standard of living. Economic policy also focused on the health of labor, measured in wage and employment levels.

While the shift in emphasis started in the 1970s, the new “free market” economic paradigm really took hold in the 1980s. Markets were touted as the neutral arbiters of economic problem, regulations were depicted as a drag on this virtuous device. That belief served to justify widespread deregulation. Stagnant worker wages were papered over by rising levels of consumer debt and asset prices, which allowed ordinary citizens for decades to use borrowing to augment flagging incomes and thus provide for rising living standards (another prop was much greater participation by women in the economy, so more and more two-earner households also masked the flat trend in real wages). Increased financialization, as well as lower tax rates on top earners (and the failure to close critical loopholes), helped promote widening inequality. And that now much greater disparity between the 1%, and particularly the 0.1%, and everyone else, has dampened the recovery, since the wealthiest don’t consume as much of their income as low and middle income people do, so the high degree of wealth concentration perpetuates post-crisis weak aggregate demand.

Now notice what is missing from this account: the role of anti-trust policy. One thing that even conservative economists will concede is that monopolies and oligopolies undermine the tidy “markets are virtuous” account. Monopolies and oligopolies have the power to set prices unnaturally high, assuring more profits for themselves. Yet the highly efficient markets of economic fairy tales, where no producer or buyer has pricing power, is a highly unattractive setting for businessmen. Efficient markets produce minimal profits. Indeed, rampant competition is destructive to businesses, as railroad speculation and bankruptcies in America in the 1800s demonstrated.

The job of an entrepreneur is to find or create market inefficiencies. That might be the virtuous way, by creating a distinctive product that is hard to replicate (think the iPhone). It might be by exploiting a niche market (think the convenience store that charges high prices but can get away with it by being open 24 hours or by being in an underserved location). Or it might be by trying to become a dominant player in a market that has some barriers to entry (say scale economies or network effects).

The US knows, or should know, how this movie plays out. The Gilded Age era of consolidation, which came to be described as Morganization (for JP Morgan) was one of combining businesses into trust to gain market power. But the result, as Morgan’s US Steel showed, was uncompetitive, high cost producers that under-invested in innovation and even in upgrading the caliber of management (Alfred Chandler described US Steel’s failure to adopt management structures appropriate for an enterprise of its scale).

A lnot-widely-noticed, but nevertheless important element of the new economic paradigm that emerged in the 1970s and 1980s was less and less enforcement of anti-trust laws. When I was young and involved in acquisitions, large corporations worried about having a deal nixed on anti-trust grounds. Now that sort of event is so rare as to be noteworthy when it does take place.

Weak anti-trust enforcement has played a direct role in the restructuring of American business and the unprecedentedly high profit share of GDP that US corporations now enjoy. For instance, a popular strategy among private equity firms is what are called rollups, meaning industry consolidations. And when a small number of players come to dominate an industry, crapification often results. For instance, in his excellent book The Buyout of America, Josh Kosman describes how the two biggest mattress makers, Sealy and Simmons, each owned by private equity firms, kept raising prices by twice the rate in the general economy from 1998 to 2006, while cheapening the top of the mattress and moving the industry to “no flip” beds, which were less durable. That paved the way for the success of foam beds by makers like Tempu-Pedic. Simmons filed for bankruptcy in 2009.

In an important Washington Post op-ed earlier this week, Lina Khan, a policy analyst for the New America Foundation and Sandeep Vaheesan, special counsel at the American Antitrust Institute, describe how lax antitrust enforcement made the US less competitive and more unequal. From their article:

Take the $2.5 trillion health-care industry, where rising costs are fueled in good part by consolidation. A frenzy of mergers starting in the 1990s has meant that most Americans today live in areas where there is little competition among hospitals. Studies show that after merging, hospitals routinely raise prices. As detailed in Time last year, many hospitals now mark up services from a routine blood test to chemotherapy by as much as several hundred percent. In health care alone, market power redistributes hundreds of billions of dollars in wealth upward annually.

The same is true in other sectors. Meager competition among cable providers and the growing market power of large content owners have enabled Comcast, Time Warner Cable and others to raise the price of subscriptions at close to three times the rate of inflation since 2008. High-speed broadband presents a similar picture: Americans now pay more than double what European consumers pay. Merger mania in the airline industry — where eight majors have combined to create four giant carriers over the past decade — has resulted in fare increases of as much as 65 percent on certain routes.

And although the place where oligopolies usually throw their weight around is with pricing to customers, they also can exert pricing power with suppliers. Khan and Vaheesan describe the now-notorious wage-suppression pact among Apple, Google, Pixar, Intel, and Adobe. That sort of price collusion is a flat-out antitrust violation. But there are softer forms that have become depressingly normal. For instance, I’ve mentioned how Wal-Mart seeks to become a big supplier at its mid-sized and smaller vendors. Once the Bentonville giant becomes 40% or more of a company’s revenues, it knows it can exploit its leverage. One of my attorneys heard repeatedly of how Wal-Mart would keep demanding lower and lower prices from its vendors, unconcerned as to whether it drove them out of business (which it too often did). The authors describe similar practices in the poultry business:

In agriculture, meanwhile, consolidation among meat processors has left many farmers subject to the whims of individual companies, enabling firms such as Tyson to cut what they pay farmers and raise their own profit margins. The average price a farmer could fetch per hog dropped 31 percent between 1989 and 2008, for example, a period when the top four pork producers increased their national market share from around 45 percent to 63 percent.

Khan and Vaheesan also point to the fall in the number of new businesses that create jobs (as opposed to merely employ the principals) fell by 53% from 1977 to 2010 relative to the working age population. They argue that concentrated power of entrenched businesses plays a role. They also highlight the dearth of decent academic work in this area, which has the convenient effect of keeping it off the policy agenda.

The authors describe how some fairly simple policy measures would reverse these adverse developments:

We can restore a more fair and competitive economy. To do so, we must realize, first, that intense concentration across our markets contributes to inequality. Second, we must recognize that we have the right to use laws to neutralize the power of these corporate giants. Americans in the Gilded Age freed themselves from the clutches of Standard Oil and the railroads because they knew that markets and economic outcomes were theirs to shape. Today, by contrast, we frequently surrender this power by assuming that inequality is a result of impersonal forces — technology, globalization — to be tracked and studied by technocrats, rather than a condition we can change through popular will and political action.

But first the public has to recognize that market concentration is a problem that affects them broadly, and not just in obvious cases like their cable bill. Hopefully as concerns about inequality and plutocracy rise, we’ll see better forensics on the causes.


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