Bust Up America's Monopolies Before They Do More Harm
Theodore Roosevelt is an American icon. His face appears on Mount Rushmore, and his confident, confrontational approach is still remembered fondly. But Roosevelt wasn't quite a Republican of the laissez-faire Reaganite mold. Much of his campaign rhetoric now reads like language from a Bernie Sanders campaign rally. Roosevelt’s main attack against the “malefactors of great wealth,” as he called them, was to try to break up the monopolies and cartels that he saw as siphoning wealth from working-class Americans.
Now, modern-day Democrats are taking a page out of Roosevelt’s book. As part of a plan called the “Better Deal,” New York Senator Chuck Schumer and other party leaders have pledged to combat market concentration. The plan would create a new federal agency specifically devoted to prosecuting companies for anticompetitive practices. It would make government review of mergers mandatory instead of optional, and require regular postmerger follow-up assessments. It would judge mergers based not just on how they affect consumer prices, but on whether they hurt suppliers. And, most importantly, it would put the burden of proof on companies that want to merge, forcing them to show that their combination wouldn’t hurt competition, rather than giving them the benefit of the doubt.
All of this would represent a big change. Although the legal infrastructure already exists to prevent abusive mergers and break up monopolies, the new policy would represent a big shift in attitude and attention. Constantly reviewing mergers after they happen, and actively seeking out companies that have gotten too big, and putting the burden of proof on companies instead of on regulators would go a long way toward ending the lax attitude that the U.S. government has taken toward industrial concentration since the 1980s.
The Democrats’ new approach couldn’t come at a better time. Market power in the U.S. has been creeping higher for decades. Although there are few out-and-out monopolies as there were in Teddy Roosevelt’s time, oligopoly -- domination of an industry by a few giants -- is on the rise:
Part of the reason for this is the increased number of mergers and acquisitions. M&A activity soared in the 1980s and 1990s, and has remained at a high level since.
Economists have been sounding the alarm about this trend for a while now. John Kwoka, an economist at Northeastern University, has literally written the book on the follies of the modern age of antitrust. In a new report, he shows how much more complacent the government has gotten toward oligopolies. The government still doesn’t tend to let a single company dominate any industry, but it’s usually fine with just five or six. Kwoka traces the change in attitudes to the rise of the so-called Chicago school approach to antitrust policy:
The Chicago school…held that the tough merger standards of the previous period that were oriented toward maintaining fragmented industries sacrificed cost efficiencies. These views had a transformative effect on policy and in turn led to new Merger Guidelines in 1982 and thereafter.
Big companies often argue that mergers will allow increased economies of scale, whose efficiencies will more than cancel out any price rise from increased market power. Corporate acquirers hire expensive consultants to make that case to regulators -- the Chicago school means big money for economists willing to theorize that bigger equals better. But that idea runs counter to the basic theory of market power, which warns that when companies get dominant enough in their industry they raise prices and cut production. That tends to hurt economic efficiency, while simultaneously gouging consumers.
Evidence is piling up that the basic econ theory holds true more often than not. Economists Bruce Blonigen and Justin Pierce, for example, found that mergers tend to increase prices and profits without boosting productivity. In an era where outsourcing to low-cost countries has held prices down for many consumer goods, most Americans may not notice the creeping effects of oligopoly, but they are there nonetheless.
And economists are also starting to realize that industrial concentration may harm the economy in other ways as well. The Democrats’ new plan recognizes that big dominant companies may act not just as monopolists but as monopsonists as well, squeezing suppliers while increasing inefficiency. And research by top labor economists suggests that the profits of quasi-monopolists come out of the pockets of American workers in the form of stagnant or falling wages. The rise of big market players may even play a role in the declining rate of startup formation. Industrial concentration, in other words, might be one of the big culprits in U.S. economic sclerosis.
So it’s good that Democrats are trying to resurrect Teddy Roosevelt’s trust-busting crusade. The trend toward big dominant companies has been allowed to go on too long. A more competitive, dynamic economy would benefit American consumers, workers and small businesses alike.
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James Greiff at email@example.com