The Chinese Model

I see that Robert Samuelson is coming to share my concerns about the consolidation of American businesses, at least if his latest Washington Post column is any gauge:

The paradox is this: Corporate profits have boomed, while corporate investment (financed in part from profits) has lagged. To explain the paradox, economists have advanced various theories. With ample spare capacity, it’s argued, firms don’t need more investment. Or, the U.S.-China trade wars have discouraged investment by trade-sensitive companies. General uncertainty — reflecting, say, Brexit and President Trump’s possible impeachment — reinforces the effect.

Now comes economist Thomas Philippon of New York University , who makes an astounding claim: The real culprit is the U.S. economy, long considered the most market-oriented major economy, because it suffers from a lack of competition.

Over the past two decades, “competition has declined in most sectors of the U.S. economy, ” he writes in his new book, “ The Great Reversal: How America Gave Up on Free Markets.” Companies can afford to be complacent because they face fewer rivals that might steal their sales and profits. Nor, he argues, is the problem confined to the superstar firms that catch all the headlines. It’s widespread. One recent study of 360 manufacturing industries found that, on average, the market share of the eight largest firms had risen from 50 percent to 59 percent since the late 1990s.

Increasingly insulated against competition — a phenomenon Philippon attributes to lax American antitrust policies and a general indifference to market structure — U.S. companies have had the freedom to raise profit margins and ship hundreds of billions of dollars in profits to shareholders via higher dividends and buybacks. (Buybacks are thought to raise firms’ stock prices by reducing the number of shares outstanding.)

I don’t think the counter-examples he provides are counter-examples at all. His first counter-example is in the auto industry:

Philippon also has minimized how much competitive pressures in the United States have increased since the mid-1960s. Then there were three major automakers (General Motors, Ford and Chrysler); now the number exceeds a dozen.

There are actually only two major U. S. automakers: GM and Ford. Chrysler hasn’t been a U. S. automaker for decades. What is actually happening is that there are global production chains and a significant number of foreign automakers, in some instances grudgingly, have assembly plants in the U. S. But those companies frequently are protected in their home countries and in many cases there is little competition among the suppliers.

Or his next example:

The three major TV networks (NBC, CBS and ABC) have morphed into dozens of cable and streaming video channels.

That’s a myopic view of the actual situation. There are presently a handful of providers: NBCUniversal, National Amusement (CBS), and Disney (ABC) and they own nearly all the other channels and, increasingly, the streaming services. There’s also WarnerMedia, Fox Corporation, Netflix, and Amazon. What appears to be a bit more competition is actually substantial consolidation among sectors that used to be considered distinct: local broadcasting, national broadcasting, production, distribution, and cable. What were dozens of companies a half century ago are now a handful. And the cable providers have government-granted monopolies within their territories.

His final example is even worse:

In 1982, the country had one effective nationwide telephone network (AT&T); now there are four.

In practice there are two and both are splinters of the “one effective nationwide telephone network”. Of his four major carriers (AT&T, Verizon, T-Mobile, and Sprint) AT&T with 35% of the market is, well AT&T, Verizon also with the 35% of the market used to be Bell Atlantic, T-Mobile has 17% of the market, and Sprint, barely able to sustain operations, has 12%. Being a monopoly, even a regional monopoly, doth have its privileges.

I’ve made my views clear. I think that size is the enemy. After a certain relatively small size big companies have fully realized all economies of scale and gain a further competitive edge via rent-seeking. Big companies are inefficient and risk-averse. We should be breaking up megacorporations simply because they’re too big not to be dangerous. If we’re worried about the ability to compete with foreign megacorporations, we should bar them from doing business in the United States.

We don’t need to emulate China to be competitive with China. We can’t compete with them in China because we’re not allowed to and unless we’re willing to adopt the Chinese model fully, which means nationalization, protection, and subsidies, we can’t compete with them here, either.