Playing Monopoly

No one likes Mondays. Kids have to go back to school, teachers have to go back to school – they find that just as depressing – and everyone else has to go back to work. Those of us who are retired get to sleep in and then bumble through another day, wondering what to do with ourselves now that it’s time to live carefully – outliving the available funds is a worry. We keep CNBC on in the background. The 401(k) could evaporate again. And this Monday was also Tax Monday – everything was due by midnight – but most everyone does their taxes on line, early enough, so that’s just a dull ache – a bit of resentment. And this Monday was also just another day in the nasty politics – a nothing day – the day before the big New York primary. One more news story about how Ted Cruz is driving Donald Trump crazy, or one more about how Bernie Sanders is driving Hillary Clinton crazy, would be one too many. All that will be settled on Tuesday evening. There was no need to attend to the endless this-might-happen-tomorrow talk. Something will happen. It can wait.

It’s was probably best just to putter around and pay some bills, but that doesn’t make Mondays any better – the cable bill just keeps getting bigger for no good reason – although there were some odd things in the news:

The Obama administration will direct federal agencies to root out anticompetitive behavior in the economy and shake up concentrated industries, the president announced Friday. The executive order gives agencies 60 days to lay out a game plan for tackling the barriers to competition in the sectors of the economy they oversee.

The announcement comes amid a flurry of rule-making and executive orders favored by the White House, such as new investor protection guidelines for financial advisers issued by the Department of Labor, which aim to reduce fees on retirement savings.

These sorts of rules, Obama said in an interview with Yahoo Finance, “seem small-bore initially because they don’t get a lot of attention, but they can add up to billions of dollars out of the pockets of consumers.” Indeed, the newly unveiled effort to boost market competition may be among the most far-reaching of Obama’s last acts as president, with the potential to touch every corner of the U.S. economy.

The president said his administration is starting with cable company set-top boxes, whose prices have soared 185 percent in recent years.

Well, that’s a place to start – the growing cable bill was puzzling – but how did that happen? Oh yeah:

Over the past few decades, U.S. industries have undergone a long wave of consolidation. Data show that nearly every segment of the market, from retail trade to banking, has grown more concentrated since the 1990s.

The outcome for consumers: fewer choices and higher prices. That’s according to a report released Friday by the White House’s Council of Economic Advisors, surveying the landscape of the American business world. “Competition is good for consumers,” Obama said.

Who could argue with that? But these things just fall in place:

In many corners of the economy competition is relegated to just a handful of firms. A Justice Department-approved merger last year between Expedia and Orbitz, for instance, put 95 percent of the online-travel-bookings market in the hands of one company, according to the American Hotel & Lodging Association.

And eight years after a financial crisis blamed partly on the oversight of the credit ratings industry, just three providers of credit ratings – Fitch, Moody’s and Standard and Poor’s – dominate 97 percent of that market.

Though it varies case by case, such extreme concentration can harm ordinary consumers. “When there is little or no competition, consumers are made worse off if a firm uses its market power to raise prices, lower quality for consumers or block entry by entrepreneurs,” the report said.

Someone has been asleep at the switch:

Antitrust regulation goes back more than a century. The Sherman Antitrust Act of 1890 declared illegal “every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce,” and it is still in use today, alongside numerous other laws and regulations.

Oversight of mergers and combinations that might limit competition is split primarily between the Federal Trade Commission and the Antitrust Division of the Justice Department. In recent years, these regulators have nixed numerous tie-ups, from the proposed T-Mobile-AT&T merger to Comcast’s ill-fated attempt to acquire Time Warner.

But the fevered pace of corporate deal-making in recent years has put antitrust regulators on their heels. In March, officials from the Justice Department and FTC sounded off before a Senate committee hearing on antitrust measures, bemoaning the burdens placed on their agencies.

“There was mention of a merger wave. We kind of look at it as a tsunami,” Bill Baer, head of the Antitrust Division, told senators at the hearing. Edith Ramirez, chairwoman of the FTC, added: “We are incredibly busy. We are asking for more resources.”

Okay, no one was asleep at the switch, they were just overwhelmed, but don’t think about starting your own small business:

The rate of entrepreneurship in the U.S. has lagged in recent years as the largest corporations have captured a growing slice of market revenue in most industries. As the CEA report showed, the return on assets for the top 10 percent of companies has far outstripped that of the rest of the business world.

The big guys make money, and the small guys can’t, because the big guys do. These are the sorts of thing you discover when you read the International Business Times because one more word about Donald Trump and you’d probably kick the cat across the room, and such stories might lead you to Paul Krugman, who, on Tax Monday, had a few things to say about this, starting with the strike where Bernie Sanders gave a rousing speech to the striking workers in Brooklyn and Hillary Clinton chatted with the guys on the picket line across the river in Manhattan. Krugman thinks that strike was about competition:

When Verizon workers went on strike last week, they were mainly protesting efforts to outsource work to low-wage, non-union contractors. But they were also angry about the company’s unwillingness to invest in its own business. In particular, Verizon has shown a remarkable lack of interest in expanding its FIOS high-speed Internet network, despite strong demand.

But why doesn’t Verizon want to invest? Probably because it doesn’t have to: many customers have no place else to go, so the company can treat its broadband business as a cash cow, with no need to spend money on providing better service (or, speaking from personal experience, on maintaining existing service).

And Verizon’s case isn’t unique. In recent years many economists, including people like Larry Summers and yours truly, have come to the conclusion that growing monopoly power is a big problem for the U.S. economy – and not just because it raises profits at the expense of wages. Verizon-type stories, in which lack of competition reduces the incentive to invest, may contribute to persistent economic weakness.

That’s Krugman’s thesis:

The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of GDP going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before.

How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described: able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service. The result would be what we see: an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment.

We seem to have found a way to create a perpetually weak economy for ourselves – reduced competition and increased monopoly power will do that, but why would we do that?

Krugman, with his Nobel Prize in Economics and all that, offers a nontechnical answer:

The answer can be summed up in two words: Ronald Reagan.

For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement.

True, there was a limited revival of anti-monopoly efforts during the Clinton years, but these went away again under George W. Bush. The result was an economy with far too much concentration of economic power. And the Obama administration – preoccupied with the aftermath of financial crisis and the struggle with bitterly hostile Republicans – has only recently been in a position to grapple with competition policy.

Now he’s playing catch-up. But if a Republican is elected in November, that won’t matter much. Still, the Wall Street Journal’s Greg Ip says one should be careful with this stuff:

When the government intervenes in a market to promote competition, it also risks discouraging investments in scale and proprietary technology that, besides raising barriers to entry, leave consumers better off.

One recent example: The FCC move last year, under pressure from the White House, to classify Internet service providers as common carriers, subject to utility-like regulation, and bar them from charging content providers for better access to their networks.

The purpose of “net neutrality” was to bar ISPs from favoring some content over others. In reality, it favors large content providers, such as Netflix, at the expense of ISPs, such as Comcast, but in a way that reduces the return on ISPs’ networks. Airlines charge business and leisure travelers different prices for the same seats, reflecting the different value they place on the seat. Paid priority is a logical way for ISPs to allocate finite bandwidth to the content that values it more.

By banning paid priority, net neutrality reduces the potential return on ISPs’ networks, which could discourage investment…

The argument is that “big” is sometimes good. The little guys just mess things up, drawing off profits that the big guys would use to make things even more wonderful. But if Krugman is right, why would they even bother to do that? They can make even more money improving nothing, ever, and letting customer service slide and become a joke – if they can get away with it. Talk about the supposed efficiency gains from corporate consolidation and they can.

This calls for a little history, and last December, Martin Longman provided that in a long essay with these key passages:

Running for president in 1912, Woodrow Wilson explicitly evoked the connection between fear of monopoly and fear of economic domination by distant money centers that had long dominated populist and progressive American politics. …

After winning the election, Wilson set out to implement his vision, and that of his intellectual mentor, Louis Brandeis, of an America in which the federal government used expanded political powers to structure markets in ways that maximized local control of local business. The Wilson-Brandeis program included, for example, passing the Clayton Antitrust Act, which targeted even incipient monopolies in the name of making the world safe for small business. It also included dramatic cuts in tariffs, which at the time were widely seen as propping up northern manufacturing monopolies at the expense of the rest of the country.

It also included establishment of the Federal Reserve System, which aimed to shift control of finance and monetary policy from private bankers in New York to a transparent public board, with voting power dispersed across twelve member banks headquartered in cities across the Heartland such as St. Louis, Minneapolis, and Kansas City. In the Wilson-Brandeis vision, effective government management of the economy meant maintaining equality of opportunity not only among firms but also among the different regions of the country.

These and similar public measures enacted early in the twentieth century helped to contain the forces pushing toward greater regional concentrations of wealth and power that inevitably occurred as the country industrialized. Standard Oil sucked wealth out of the oil fields of western Pennsylvania, and transferred it to its headquarters in New York City, for example, but the government broke up the colossus into thirty-four regional companies, ensuring that the oil wealth was widely shared geographically.

Working toward the same end were laws, mostly enacted in the 1920s and ’30s, that were explicitly designed to protect small-scale retailers from displacement by chain stores headquartered in distant cities. Indiana passed the first of many graduated state taxes on retail chains in 1929. In 1936, overwhelming majorities in the U.S. House of Representatives and Senate joined in by passing federal anti-chain store legislation known as the Robinson-Patman Act.

Sometimes referred to by its supporters as “the Magna Carta of Small Business,” Robinson-Patman prevented the formation of chain stores even remotely approaching the scale and power of today’s Walmart or Amazon by cracking down on such practices as selling items below cost (a practice known as “loss leading”). The legislation also prohibited the chains from using their market power to extract price concessions from their suppliers.

Ah, those were the days, but they were not to last:

Beginning in the late 1970s nearly all the policy levers that had been used to push for greater regional income equality suddenly reversed direction. The first major changes came during Jimmy Carter’s administration. Fearful of inflation and under the spell of policy entrepreneurs such as Alfred Kahn, Carter signed the Airline Deregulation Act in 1978. This abolished the Civil Aeronautics Board, which had worked to offer rough regional parity in airfares and levels of service since 1938.

With that department gone, transcontinental service between major coastal cities became cheaper, at least initially, but service to smaller and even midsize cities in flyover America became far more expensive and infrequent. Today, average per-mile airfares for flights in and out of Memphis or Cincinnati are nearly double those for San Francisco, Los Angeles, and New York. At the same time, the number of flights to most midsize cities continues to decline; in scores of cities service has vanished altogether.

Since the quality and price of a city’s airline service is now an essential precondition for its success in retaining or attracting corporate headquarters, or, more generally, for just holding its own in the global economy, airline deregulation has become a major source of decreasing regional equality. As the airline industry consolidates under the control of just four main carriers, rate discrimination and declining service have become even more severe in all but a few favored cities that still enjoy real competition among carriers. The wholesale abandonment of publicly managed competition in the airline sector now means that corporate boards and financiers decide unilaterally, based on their own narrow business interests, what regions will have the airline service they need to compete in the global economy.

And Krugman was right:

Another turning point came in 1982, when President Ronald Reagan’s Justice Department adopted new guidelines for antitrust prosecutions. Largely informed by the work of Robert Bork, then a Yale law professor who had served as solicitor general under Richard Nixon, these guidelines explicitly ruled out any consideration of social cost, regional equity, or local control in deciding whether to block mergers or prosecute monopolies. Instead, the only criteria that could trigger antitrust enforcement would be either proven instances of collusion or combinations that would immediately bring higher prices to consumers.

This has led to the effective colonization of many once-great American cities, as the financial institutions and industrial companies that once were headquartered there have come under the control of distant corporations. Empirical studies have shown that when a city loses a major corporate headquarters in a merger, the replacement of locally based managers by “absentee” managers usually leads to lower levels of local corporate giving, civic engagement, employment, and investment, often setting in motion further regional decline. A Harvard Business School study that analyzed the community involvement of 180 companies in Boston, Cleveland, and Miami found that “locally headquartered companies do most for the community on every measure,” including having “the most active involvement by their leaders in prominent local civic and cultural organizations.”

According to another survey of the literature on how corporate consolidation affects the health of local communities, “local owners and managers … are more invested in the community personally and financially than ‘distant’ owners and managers.” In contrast, the literature survey finds, “branch firms are managed either by ‘outsiders’ with no local ties who are brought in for short-term assignments or by locals who have less ability to benefit the community because they lack sufficient autonomy or prestige or have less incentive because their professional advancement will require them to move.” The loss of social capital in many Heartland communities documented by Robert Putnam, George Packer, and many other observers is at least in part a consequence of the wave of corporate consolidations that occurred after the federal government largely abandoned traditional antitrust enforcement thirty-some years ago.

And that’s where we are today. We seem to have found a way to create a perpetually weak economy for ourselves, one that hurts more and more people, except for a very few. There is news of how Ted Cruz is driving Donald Trump crazy, and about how Bernie Sanders is driving Hillary Clinton crazy, but in December 2011 President Obama did say this other matter was the defining issue of our time:

For most Americans, the basic bargain that made this country great has eroded. Long before the recession hit, hard work stopped paying off for too many people. Fewer and fewer of the folks who contributed to the success of our economy actually benefited from that success. Those at the very top grew wealthier from their incomes and their investments – wealthier than ever before. But everybody else struggled with costs that were growing and paychecks that weren’t – and too many families found themselves racking up more and more debt just to keep up…

But this is not just another political debate. This is the defining issue of our time. This is a make-or-break moment for the middle class, and for all those who are fighting to get into the middle class. Because what’s at stake is whether this will be a country where working people can earn enough to raise a family, build a modest savings, own a home, secure their retirement.

And now, in the last year of his presidency, Barack Obama is finally getting around to doing a few things about this – but better late than never. It’s something to do when this year’s presidential candidates are busy doing not much more than insulting each other. Yes, the current candidates do talk about such things off and on, and Bernie Sanders almost incessantly, but that’s not the talk now. It is, however, something to consider on a sad Monday between major events. Does America want to keep playing Monopoly?

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About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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