Jason Furman, the chair of the Council of Economic Advisors under President Obama and now a senior fellow at the Peterson Institute for International Economics, argues that “both microeconomic and macroeconomic evidence” point to declining competition:
On the micro level, most industries today have fewer players than before. Just think about hospitals or cellphone service providers or beer companies. Throughout our economy you see larger companies, older companies, and, in any given industry, fewer companies. Growth in international trade has been a counterweight — but only within the tradable sector. Most of our economy is not tradable, and so for most of our economy, international trade isn’t a factor.
On the macro level, companies’ rate of return on capital has stayed the same or risen, while the safe rate of return on bonds has fallen precipitously. If there were really vigorous competition, you wouldn’t see increases in return on invested capital. In addition, we see an increase in the share of national income going to capital — that is, to investors — rather than to wages. That income shift has been larger in industries that have seen bigger reductions in competition.
He believes that this lack of competition plays a role in the increasing income inequality within the United States:
Wages aren’t determined strictly by supply and demand; they also depend on institutional arrangements and bargaining power. And with greater industry concentration, the bargaining power of employers rises. If there are four hospitals in your town and you’re a nurse at one of them, you can threaten to leave and go work at another one as a way to get a raise. If there’s only one hospital, it’s a lot harder to advocate for a raise.
[O]ne problem with American capitalism has been overlooked: a corrosive lack of competition. The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP. America is meant to be a temple of free enterprise. It isn’t.
…You might think that voters would be happy that their employers are thriving. But if they are not reinvested, or spent by shareholders, high profits can dampen demand. The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged.
…Unfortunately the signs are that incumbent firms are becoming more entrenched, not less…A $10 trillion wave of mergers since 2008 has raised levels of concentration further…Having limited working capital and fewer resources, small companies struggle with all the forms, lobbying and red tape. This is one reason why the rate of small-company creation in America has been running at its lowest levels since the 1970s. The ability of large firms to enter new markets and take on lazy incumbents has been muted by an orthodoxy among institutional investors that companies should focus on one activity and keep margins high. Warren Buffett, an investor, says he likes companies with “moats” that protect them from competition. America Inc has dug a giant defensive ditch around itself.
What can be done?:
The first step is to take aim at cosseted incumbents. Modernising the antitrust apparatus would help. Mergers that lead to high market share and too much pricing power still need to be policed. But firms can extract rents in many ways. Copyright and patent laws should be loosened to prevent incumbents milking old discoveries. Big tech platforms such as Google and Facebook need to be watched closely: they might not be rent-extracting monopolies yet, but investors value them as if they will be one day. The role of giant fund managers with crossholdings in rival firms needs careful examination, too.
The second step is to make life easier for startups and small firms. Concerns about the expansion of red tape and of the regulatory state must be recognised as a problem, not dismissed as the mad rambling of anti-government Tea Partiers. The burden placed on small firms by laws like Obamacare has been material. The rules shackling banks have led them to cut back on serving less profitable smaller customers. The pernicious spread of occupational licensing has stifled startups. Some 29% of professions, including hairstylists and most medical workers, require permits, up from 5% in the 1950s.
A blast of competition would mean more disruption for some: firms in the S&P 500 employ about one in ten Americans. But it would create new jobs, encourage more investment and help lower prices. Above all, it would bring about a fairer kind of capitalism. That would lift Americans’ spirits as well as their economy.