Are we all annuity-seeking investors?
Has The Economist, the commentary magazine of the world’s capitalist elite, embraced the corporate vilification trend adopted by many populist politicians in the United States, the United Kingdom and many other countries of the world?
“The winners take it all! Why high profits are a problem for America, ”said the cover of the March 26 issue of The Economist. If anyone thought that this was just a way to provoke and attract newsstand sales, they would be disappointed; the title of the article inside had a similar vein: “Too Much of a Good Thing.” The profits are too high. The message in the feature film was not much different.
Possesses The Economist, the commentary magazine of the capitalist world elite, has embraced the corporate denigration trend adopted by many populist politicians in the United States, the United Kingdom and many other countries of the world? Not really: the reason and the culprit is once again the assertion of The Economist this lack of competition is one of the main drivers of the growing profit share of America’s largest corporations.
This claim is neither new nor original, but having it on the cover of the magazine signals us once again that something is brewing here. Yesterday, the White House and the Council of Economic Advisers joined in a similar narrative; President Barack Obama has launched a new initiative that calls on federal agencies to tackle uncompetitive markets. In a statement, the White House said that “in our economy, too many consumers are dealing with substandard or overpriced products, too many workers not getting the pay increases they deserve, too many entrepreneurs. and small businesses are unfairly squeezed out by their bigger competitors. The White House blamed “anti-competitive behavior – businesses stack the game against their competitors and their workers.”
There is perhaps growing evidence that the record level of profits and margins in many sectors of the economy does not represent a healthy economy, but rather the growing market power of many companies and their ability to grow. the prices.
Grullon, Larkin and Michaely (2015) studied all state-owned companies traded on major stock exchanges in the United States between 1972 and 2014 and found that more than 90 percent of U.S. industries have experienced increased levels of concentration over the past two decades. They also found that companies in the sectors with the greatest increase in product market concentration benefited from higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that the market power becomes an important source of value.
This phenomenon is mainly attributable to the consolidation of listed companies into larger entities. The increased level of concentration due to the consolidation of state-owned enterprises was not offset by a greater presence of private or foreign enterprises. Overall, they claim that the nature of US product markets has undergone a structural change that has weakened competition.
The persistence of historically high profit margins for US companies has of course not escaped the eyes of Wall Street analysts. Sumana Manohar of Goldman Sachs recently wondered how persistent high margins can be reconciled with the very idea of capitalism. Manohar predicted that the high margins should attract competition and force the margins down, but cautioned “if we are wrong and the high margins manage to persist over the next few years (especially when the growth of the global demand is lower than trend), there are broader questions to be asked about the effectiveness of capitalism.
Are there really broader questions to ask? Perhaps, and the first questions should revolve around the idea that the more many companies and industries become large and concentrated, the more they will be able to entrench themselves, to build “ditches” to isolate them from the competition, to capture regulation, and getting favorable treatment from government or sometimes outright big public sector contracts.
If companies operating in the market can influence prices and regulation, the profit maximization theorem as a route to welfare maximization falls flat. If companies can raise prices by monopolizing markets or by associating with other actors, and increase their income through political relations, they are not really engaged in the creation of value but in the transfer of value from taxpayers. and consumers to their coffers.
When it comes to the financial sector, consolidation and increasing concentration can create a strengthening cycle in which the more concentrated the asset management industry, the more likely companies are to refrain from competing.
Highly diversified pension funds, mutual funds, and other institutional investors now own a high (70-80 percent) and growing share of US publicly traded companies. Since several asset management companies are also very large, the same asset management company is often the major shareholder of several companies in the same industry.
José Azar, Martin C. Schmalz and Isabel Tecu (2015) studied the effects of having a small group of huge asset management firms in the United States holding shares in companies in concentrated industries like airlines. According to their estimates in the US airline industry, taking common ownership into account implies increases in effective market concentration that are 10 times greater than what is presumed “likely to increase market power” by antitrust authorities. They conclude that the growing cross-ownership of competing firms in the airline industry (which is focus more) may explain the price increases in the industry.
Harvard Law School’s Einer Elhauge (2016) takes these findings even further and asserts that such horizontal holdings can help explain fundamental economic puzzles, including
g why business leaders are rewarded for industry performance rather than individual business performance, why companies have not used recent high profits to increase production and employment, and why economic inequalities have increased in recent decades.
The increasing concentration of many industries in the United States raises many questions about American antitrust policy and the growing role of money in politics. Grullon, Larkin and Michaely attribute the increasing concentration to a lax antitrust policy. Other researchers say the Federal Trade Commission and the Department of Justice should empirically test the predictive value of their horizontal merger guidelines, which they rely on to approve many mergers. (Reeves, Stucke, 2010). Elhauge says equity acquisitions by the concentrated asset management industry, which create anti-competitive horizontal holdings, are illegal under current antitrust law, and recommends antitrust enforcement action to reverse them and their negative economic effects.
Despite the growing chatter about concentration, market power and political influence, it seems that these claims require more empirical study before we can conclude, like The Economist, that for S&P 500 companies, these windfall profits derived from ‘undue market power are currently being implemented. to about $ 300 billion per year, equivalent to one-third of taxed operating profits, or 1.7% of GDP.
Nonetheless, the growing anecdotal evidence from many industries and the persistence of high profit margins in the face of stagnant growth and growing inequality deserve serious consideration. A question may even loom large: as more and more Americans’ pensions and long-term savings are now invested in the stock market in defined contribution plans, have we created a retirement model based on on an increasing share of investments in rent-seeking Activities? In other words, are we facing an economic model in which tens of millions of Americans’ pensions depend on the ability of businesses to extract rents from consumers and taxpayers?
These are the kinds of questions we ask here at the Stigler Center and the ProMarket blog wishes to encourage researchers from all related disciplines to explore.