The Risk of Consolidation

Before we take a look at Robert Samuelson’s latest Washington Post column, musing over the loss of dynamism in the U. S. economy and how that can possibly have happened, let’s take a look at the chart above. The chart, graciously provided in an excellent post at Evonomics, illustrates mergers and acquisitions as a percentage of fixed asset investment and the 100 biggest companies as a percentage of the “corporate universe”. As you can see, right now big companies have a larger footprint in the economy that at any time previously in the post-war period other than, possibly, in the run-up to the financial crisis of 2008 which should tell you something.

Now back to Mr. Samuelson. He considers a recent study:

Consider a new study by economist Joel A. Elvery of the Federal Reserve Bank of Cleveland, who examined how workers’ occupations had altered from 1860 to 2015.

He placed all workers in one of 23 large occupational groupings (examples: farmers, laborers, engineers and managers) and then monitored what happened to the various groupings over time. The sharp decline of some occupational groups and the rise of others gauged the magnitude of economic disruption.

Some changes, though familiar, were stunning. Farming (including fishing and forestry) dropped from 43 percent of employment in 1860 to 1 percent in 2015. In an interview, Elvery credited mechanization (tractors and the like), better seeds, more fertilizers and more irrigation for the shift. Over the same period, the number of non-farm laborers fell from about 10 percent of employment to about 4 percent. The bulldozer was a crucial cause, Elvery noted. “One bulldozer could do the work of 50 people,” he said. The impact was enormous.

The study’s overall conclusion, however, was surprising and counterintuitive. Americans have been conditioned to think that present economic disruptions are at, or near, historical highs. Markets are cruel, hardhearted and volatile; job insecurity is on the rise. But that’s not what the study found. Instead, it concluded: “After 100 years of dramatic change, the mix of occupations has been more stable since 1970.” Occupational disruption is about half the level of the peak decades, the 1900s and the 1940s.

In theory, the stability of the occupational structure can be reconciled with rising economic insecurity. As Elvery pointed out, people can lose their jobs without switching occupations. For example: Unemployed journalists can — perhaps — find other journalism jobs, as opposed to becoming rocket scientists. But, again, this does not seem to be what’s happening.

A more likely possibility is that, in many different ways, the U.S. economy is becoming less dynamic. The most significant evidence of this is “The Rise and Fall of American Growth,” by economist Robert J. Gordon of Northwestern University, an encyclopedic overview of technological change since the Civil War. Greatly simplified, Gordon’s thesis is that the innovations up to 1970 (cars, airplanes, telephones, indoor plumbing, television, air conditioning, modern pharmaceuticals and more) dwarf the Internet as a source of rising living standards.

Other indicators point in the same direction. The business start-up rate has declined. Workers are moving less frequently to find new jobs. Productivity growth (a.k.a. overall efficiency) has lagged. Large firms are returning sizable amounts of cash to their shareholders, arguably because they can’t find attractive investment opportunities or, possibly, because they have become more risk-averse.

To me this is obviously true. Back to the graph at the top of the page. Big companies are more dominant than ever before. Big companies don’t take risks. They mitigate them. They are able to manipulate the forces in the society, whether financial, legal, or regulatory to their advantage and the return on investment of doing that is orders of magnitude better than doing it the old-fashioned way—by earning it. They acquire companies that have already taken the risks and subsume them into smothering, risk-averse corporate cultures. I cannot tell you how many business plans I have seen that amount to “do something that will get my company acquired by Microsoft, Google, or Facebook”.

How does this relate to my “theme of the day”? Increasing the barriers to entry into a sector of the economy or jobs, imposes risks on the company or individual. A perfect example of that is requiring a college degree for jobs that don’t pragmatically require one. That imposes thousands or even hundreds of thousands of dollars of cost and months or years of elapsed time on individuals seeking to enter the field. Those are risks and the effect is to transfer risks from companies to workers.

There is also a risk to the entire society. An economy is like an ecosystem. Dynamism and variety are a form of hedging your bets. When you’re afraid to let a big company collapse because of the run-on effects on the economy, which is exactly what happened in 2008-2009, there has been too much consolidation. That company should never have been allowed to exist in the first place.