Today’s NY Times column by Paul Krugman spells out one of the reasons why the U.S. economy is still underperforming at everything except funneling money to the .1 percent: too many corporations control so much of their markets, they have no incentive to put any of their profits back into the economy. Robber Baron Recessions spells it out.
The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before.
How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described: able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service. The result would be what we see: an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.
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Over at Washington Monthly, Nancy LeTourneau links to a 2015 cover story by Phillip Longman that gets into more detail including the history of how we got where we are today: Bloom and Bust. He’s looking at patterns of inequality in America, and why it varies from place to place. He cites a number of factors, then gets to a key point.
What, then, is the missing piece? A major factor that has not received sufficient attention is the role of public policy. Throughout most of the country’s history, American government at all levels has pursued policies designed to preserve local control of businesses and to check the tendency of a few dominant cities to monopolize power over the rest of the country. These efforts moved to the federal level beginning in the late nineteenth century and reached a climax of enforcement in the 1960s and ’70s. Yet starting shortly thereafter, each of these policy levers were flipped, one after the other, in the opposite direction, usually in the guise of “deregulation.” Understanding this history, largely forgotten in our own time, is essential to turning the problem of inequality around.
And…
Another turning point came in 1982, when President Ronald Reagan’s Justice Department adopted new guidelines for antitrust prosecutions. Largely informed by the work of Robert Bork, then a Yale law professor who had served as solicitor general under Richard Nixon, these guidelines explicitly ruled out any consideration of social cost, regional equity, or local control in deciding whether to block mergers or prosecute monopolies. Instead, the only criteria that could trigger antitrust enforcement would be either proven instances of collusion or combinations that would immediately bring higher prices to consumers.
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Longman’s article (read the whole thing) is looking at the bigger picture, but these details tie in with Krugman’s column today. When corporations are pretty much guaranteed a profit whatever they do, it makes no sense to risk money on service or pursuing innovation. Krugman points out the Verizon strike is partly over the jobs in their Fios business. There’s demand — but Verizon is in no hurry to meet it.
LeTourneau observes that President Obama is taking steps to change policies that have enabled this state of affairs.
This weekend, President Obama initiated an effort to reinvigorate a “free market economy.” In his weekly address, he brought it to a level most Americans understand all too well…cable boxes.
The change can’t come soon enough, and needs to go a long ways to undo the damage done.