One vocal U.S. political tribe argues vociferously that capitalism is the source of all economic problems. Another tends to ignore that the current economy is not working for all Americans. French economist Thomas Philippon’s work should interest those who aren’t satisfied with either the complaints of the left or the indifference of the right.
Philippon argues that diminished competition has depressed American growth and wages. First exposed to the U.S. economy in the late 1990s while studying for a doctorate at the Massachusetts Institute of Technology, Philippon argues many U.S. sectors have been marked by a competitive decline over the last two decades because large companies have used lobbying and political contributions to increase the regulatory barriers potential new entrants face.
As U.S. markets have become more dominated by oligopolies, consumers face higher prices. This has also depressed labor prices through the effect of monopsony —the condition of there being only one or few employers in an industry—allowing employers to keep wages lower than they would if there were more competition. In the final analysis, it does not matter whether firms raise prices or employers push down wages, either way consumer purchasing power declines. He writes:
[S]ince 2000, US industries have become more concentrated. Leaders’ market shares have become more persistent and their profit margins have increased. This pattern holds in all industries that are not heavily exposed to foreign competition, that is, most of the economy minus about half of the manufacturing sector.
One example Philippon provides of a U.S. industry burdened by anti-competitive behavior is the health care sector, where there is forced inclusion, anti-steering provisions that prevent insurers from recommending less expensive or higher-quality healthcare, and opacity of fees. Health care costs have risen as layers of health intermediaries and providers extract fees from hapless consumers. Despite all this spending, U.S. citizens have experienced the first decline in peacetime life expectancy in any democracy since the Industrial Revolution.
Tech giants Google, Apple, Facebook, Amazon, and Microsoft also come under Philippon’s scrutiny. He rejects the claim that they are integral to the U.S. economy, arguing that “the stars of the digital economy are not as special as people think.” The giants have become too entrenched and need a strong dose of competition, as well as regulations protecting data privacy. He contends that they use the data they collect from consumers to charge more and to reduce competition. He suggests limiting big tech’s market power by constraining their ability to acquire other companies or by breaking them up, which he admits will be controversial.
Despite recommending some aspects of the EU’s economic system over the U.S.’s, Philippon isn’t completely starry-eyed about Europe, whose nations trail the U.S. in the World Economic Forum’s most recent Global Competitiveness Report. “I do not claim that Europe as a whole is doing better than the US, or even that it is doing particularly well,” he writes.
Yet he argues competitiveness has improved in Europe during the 21st century, while it has declined in the U.S. The EU has streamlined its regulations to encourage entry into and competition in many markets. One measure of regulatory burdens is the average number of days it takes to start a business. In many European countries this number has steadily decreased, falling to just four days in France in 2016 from 53 days in 1999, for example. Meanwhile, restrictions on political spending have allowed Europe to largely avoid the influence of big-money donors that characterize the U.S. political system, whose rights are enshrined in Supreme Court decisions including Buckley v. Valeo and Citizens United v. FEC.
Philippon’s arguments are weakest when he strays from economics into U.S. politics. He recommends restricting political contributions, but fails to comprehend the myriad ways elected officials can stand up to special interests even as they receive support from them. For example, in the U.S., an official can receive campaign contributions from two lobbies—e.g. the insurance industry and the trial bar—that are diametrically opposed on public policy. To an outsider, this doubling of contributions appears to confirm lobbyist influence. Yet a professional political analyst realizes that the official has the upper hand to force a compromise when neither lobby dominates the process. Readers would have been better served if Philippon had focused on cases where individual firms have successfully used government to restrict competition. Instead he provides an overly broad and vague criticism of U.S. political contributions, which are protected by the First Amendment.
Philippon goes on to argue that the EU’s regulatory institutions are more independent than those in the U.S., and less susceptible to being influenced by large corporations or by the revolving door of executives moving between the corporate world and the government agencies that regulate their industries—a phenomenon called “regulatory capture.” This is in part, he argues, because the politicians of the EU’s individual nations “are more worried about the regulator being captured by the other country than they are attracted by the opportunity to capture the regulator themselves.” They thus agree to tougher regulators than their previous national ones, making corporate lobbying less effective in the EU than in the U.S.
Philippon is less than convincing in arguing that the corrupt effect of lobbying is more harmful in the U.S. than in the EU, and he admits a lack of data to support his claims. He’s certainly correct that using lobbyists to extract economic advantages from government is harmful to consumers. Yet Philippon admits that evidence of these “zero-sum games are difficult to identify in the data.”
While lobbying expenditures by businesses and trade associations are growing rapidly in the U.S., he admits that it is difficult for researchers to make a direct connection between campaign contributions and specific legislation. He still asserts that political contributions and lobbying expenditures in the U.S. cause weakness in regulatory enforcement and foster the creation of regulatory barriers to competition.Yet he admits “the lack of consensus in the literature on the real effects of lobbying.”
Another factor behind the decrease in competition in the U.S., Philippon argues, is that weak antitrust enforcement has resulted in too many mergers of U.S. companies. This is surely news to shareholders of Pfizer and Allergan, whose proposed 2015 merger was killed under Obama in a policy dispute over tax inversions; or those of Broadcom and Qualcomm, whose 2018 deal was nixed under Trump. Risk arbitrage desks on Wall Street would not exist without the probability that regulators might reject mergers.
In sum, Philippon’s book acknowledges hard truths ignored by complacent American economists. He admits that import competition from China is a major force behind U.S. manufacturing job losses. He says conservatives are right to argue that the U.S. needs fewer regulations that hinder the entry or growth of small firms. And he points out the U.S. has “a stronger ecosystem for innovation, from venture capital to technological expertise,” but is limiting GDP and productivity growth through its neglect of competition.
While Philippon’s analysis isn’t perfect on every issue, he provides a valuable outside perspective on a myriad of economic issues that doesn’t conform to the normal left-right divide to which U.S. readers are accustomed. The U.S. debate tends to break down into one side arguing for more regulation and the other arguing for less, rather than either arguing for good regulation that helps to increase competition and to protect consumers and workers. Unfortunately, the tribal instincts of the current crop of U.S. officials and candidates tend to interfere with their ability to solve economic problems.
[The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon (Harvard University Press) 368 pp., $29.95]