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Is the American Economy Being Hurt by Monopolistic Corporate America?
If we want more economic growth, we’ll need more productivity growth — and the latter would sure benefit from more business investment. (And more business investment might diffuse innovation more broadly through the economy.) That’s the obvious message from the above chart, produced last year by the Obama White House.
Now given that so-so investment is a problem across advanced economies, explanations should be global, at least in part. So one explanation is that weak investment is connected to the economic hangover from the Great Recession.
But the US business sector might have its own special problem. Here’s new research from NYU’s business school:
We argue that declining competition is (partly) responsible for the low rate of investment in the US. Our argument is based on the idea that firms that do not face the threat of entry do not have a strong urge to invest and innovate. We use Chinese import exposure as a natural experiment to test this idea. We find that industries most affected by Chinese competition saw a decline in the number of domestic firms, but at the same time, leaders in these industries increased investment the most. We also show that firms in industries with higher excess entry in the 1990s invested more in the 2000s, after controlling for firm fundamentals. We also study potential drivers of rising concentration; and find support for two hypotheses: increasing regulation, and superstar firms.
Axios framed the report this way: “Corporate America has become ever more concentrated over the past two decades, and its monopoly power is killing the incentive for large companies to invest in the economy.”
Yes, “monopoly power.” One reason I am especially interested in this issue is because of the recent critical clamor about the supposed monopolistic attributes of America’s tech giants. So it’s worth noting, I think, that their market dominance isn’t preventing them from being high-innovation, high-investment companies. That’s certainly the conclusion I draw from this PwC analysis, in which Big Tech figures prominently in the ranks of innovators and research spenders:
Hmm. Maybe these companies, despite their very strong market positions, don’t view those positions as a forever thing, nor see the status quo as unchangeable. They sure don’t seem to be acting like they are free from competitive pressures. Now this isn’t to say regulation or antitrust is forever off the table, either. But being too early is a lot like being wrong.
Published in Economics
So, my understanding of the normative case for an oligopolistic corporate sector is that productivity isn’t supposed to suffer. Freed from the fear of new entrants, companies grow to large scales, integrating both horizontally and vertically. This integration facilitates what economists call “corporate innovation,” as management practices, technology, market strategies, etc all feed back into each other.
I’m not sure if I got that right; it’s been a while since I read the oligopoly apologists (or whatever you call them). I also can’t remember if this is supposed to work in true monopolies; the apologists usually talk about sets of two or three large companies per market, not one, so I don’t think it does.
Some of their arguments do strike me as plausible, but I’m not sure if they’re necessarily exclusive to this style of corporate structuring. IIRC, the corporate oligopolies that survived the liberalization (and follow-on corporate break-ups) of the 80s still engage in a lot of corporate innovation today (I guess I’m thinking of IBM, GE, etc, and perhaps some of the power utilities), despite operating as individual entities in a much more competitive market place.
Let me state, I think, the same thing simple enough for me to understand. Declining competition accounts for declining productivity growth. Declining competition comes from the regulatory state. Indeed for all practical purposes the reason for regulation is to limit competition. Monopoly and concentration of industry is a product of government. Big tech in contrast is a product of zero marginal costs but they have to constantly innovate because at their back they can always hear, tech’s winged chariot hurrying near.
Capital investment only occurs when there’s an anticipated return. The 2010-14 period of very low economic growth and large regulatory growth wasn’t going to create a boatload of spend in the capital investment space, except in smaller firms or niche/emergent industries. ZIRP doesn’t create a bigger market for the industries looking to borrow funds for capital investments, if they don’t go out of pocket.
If you want to compete, you have to invest. Even monopolies like publicly-traded power companies have to invest, in the grid, in new power generation, etc, and that capital spend can be recovered in rates – which are, essentially, prices. Otherwise the grid falls apart and regulators won’t allow that.
But the same principle holds. You don’t spend where you don’t get a return. Where and when opportunity exists, capital will follow.
Thanks James for the topic. Clifton, Walter, Joe -all on point.
The UniParty does not care for your stinking competition idea. The big Oligarchs, who want none of your competition thingy, are our elected official’s real paymasters, pay the biggest kickbacks by far , and therefore our elected officials and bureaucracy will do their bidding anytime the oligarchs damn well please.
Competition is bad for the Oligarch’s business. Plain and simple. Therefore there will be no competition. How dare you suggest that our government can’t restrict supply so to allow the oligarchs to charge more money! The Oligarchy has bought our politicians and government fair and square – well sort of.
To give you a little local example. In my fair city of Los Angeles, the City Council and his eminence the Mayor just this month have deemed that private commercial trash pickup absolutely must be controlled by City Controlled and selected seven monopoly trash pickup franchises to better insure that the trash goes to the right landfill or some such rot.
All for a hefty fee and some really good kickbacks of course.
That competition thingy and the right to shop for best price – well the “public’s general welfare” will be better served by our City Council’s latest kickback scheme at least according to our betters in gov-ment.
Now I know that many of you will challenge that the idea that LA City can’t possibly be that corrupt- well think again. Each Councilman has a “office maintenance ” fund that a donor can give any amount to which allows the Councilman to spend on anything he wants too, including lining his own pockets.
Our Congress and bureaucracy ain’t much different. Buraq Hussein and Hillary brought the big city Democrat Machine Politics’ “pay to play” scheme to Washington and spread it on a massive scale. So now we have entrenched those corrupt attitudes and crony ethos deep into the deep state. Your competition thingy be damned.
Ain’t gov-ment wunderful?
I hear all the time about the economy hurting or getting better.
What makes the economy hurt? Does it get angry when it is hurting?
I saw a Quora question recently. The fellow wanted to know if the economy can be doing well when the people are doing badly. For people who have suffer from this most common and most disastrous of all popular American economic fallacies, the economy as sentient, acting, potentially powerful but rather needy being who will bestow blessings on its mewing children if it is healthy, it is a perfectly natural question.
Yes , if the people are happy it’s because the Economy is good not the other way around . I get so tired of pinhead suppositions !