Could it be? The notion seems counterintuitive. New industries are supposed to raise economic growth, not retard it.
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.)
The cumulative effect is huge. After-tax U.S. corporate profits have soared from about 6 percent of the economy (gross domestic product) in 1980 to nearly 10 percent in 2017. For perspective: One percentage point of GDP roughly equals $210 billion.
The European experience is different. Facing more competition, firms have restrained prices, Philippon says. This bolsters Europeans’ purchasing power. He estimates that U.S. prices are on average 7 percent to 8 percent higher than their European counterparts. Some differences are huge. European Internet access fees average about $35 a month in many countries; the typical U.S. price is nearly double that. Europe’s health costs are lower.
To an American, all this is heresy. How could the Europeans — or, at any rate, at least some of them — have more competitive markets? Philippon, who is French, is emphatic: “The consequences of a lack of competition are lower wages, lower investment, lower productivity, lower growth, and more inequality.”
To repeat: His theory certainly fits the facts. U.S. business concentration has increased, corporate profits have surged and investment has slowed. The question is why. There is no consensus. Other theories — not just political uncertainty and trade wars — also fit the facts. Curiously, the intensity of competition may explain the specular rise in U.S. profits. The winners were arguably more profitable than the losers. With the losers gone or shrunken, profits rise. Similarly, the 2007-2009 Great Recession may likewise have made corporate managers more cautious.
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. The three major TV networks (NBC, CBS and ABC) have morphed into dozens of cable and streaming video channels. In 1982, the country had one effective nationwide telephone network (AT&T); now there are four.
Competitive choices abound. IBM’s dominance of the computer industry gave way to a slew of superstar competitors, each worrying that it may be overtaken by the next new thing. The Internet has exerted pressures on countless industries where few existed before. The rivalry between Walmart and Amazon is almost certain to serve consumers, as Philippon admits. (Jeff Bezos, Amazon’s founder and chief executive, owns The Post.)
Still, there is a larger question: Have we gone soft on using competition to regulate the economy? The answer is not obvious, nor are plausible remedies. Philippon favors more competition, while admitting the practical difficulties. “It is not clear how a breakup of Amazon or Google would proceed,” he writes. Being tougher on approving mergers seems a sensible middle ground. But if terms are too tough, the inability to sell might mean fewer start-ups .
We are surrounded by messy realities and difficult choices. Situation normal: It’s the fog of economics.