Yesterday’s news that CEOs are hoarding the GOP tax scam windfall is another clue in an economic puzzle. (More)
“We are 80 percent sure”
The God-King and Republicans in Congress insisted that their massive tax cuts would spur businesses to expand production, create jobs, and lift wages. But most economists doubted those promises and, yesterday, the New York Times reported that most corporations are using their tax cut windfall for stock buybacks and other nest-feathering for CEOs and wealthy shareholders:
Those so-called buybacks are good for shareholders, including the senior executives who tend to be big owners of their companies’ stock. A company purchasing its own shares is a time-tested way to bolster its stock price.
But the purchases can come at the expense of investments in things like hiring, research and development and building new plants — the sort of investments that directly help the overall economy. The buybacks are also most likely to worsen economic inequality because the benefits of stocks purchases flow disproportionately to the richest Americans.
That’s pretty much exactly what Democrats and progressive analysts predicted, and economist Dean Baker writes that companies are actually reducing the kinds of investments that boost productivity and create jobs:
According to data released by the Commerce Department, orders for non-defense capital goods fell by 1.5 percent in January after dropping 0.4 percent in December. We get the same story even if we pull out volatile orders for aircraft: a drop of 0.2 percent in January after a fall of 0.6 percent in December.
While these declines would not be a big story in normal times (the economic impact is very limited), they are huge in the context of the tax cuts. The main rationale for the cut in corporate tax rates was that it was supposed to lead to a surge in investment.
While investment takes time to put in place, these data are showing us orders. Orders can be made over the Internet or an old-fashioned landline telephone. They don’t take a lot of time.
It’s easy to wave the results away as mere greed, and that surely plays some role. But economic markets should put at least some brakes on greedy CEOs. In theory, the best way to bolster your company’s bottom line – and your reputation and salary as a CEO – is to offer better products, better services, and/or better prices. That will attract customers, who attract investors, so you can grow your business. It is, as conservative politicians and pundits say so often, “Econ 101.”
So why aren’t more companies behaving as “Econ 101” predicts?
Part of the answer is that there’s a whole lot more to economics. The basic economic story that students hear in Econ 101 is full of hidden assumptions that students don’t explore until they get to higher level courses. For example, that “best way to bolster your company’s bottom line” assumes your company exists in a competitive market where companies attract investors by attracting customers. Companies that stick with the same-old-same-old will get pushed aside by companies that innovate to create those better products, better services, and/or better prices.
But if the market is not competitive, the CEO’s decision matrix changes. If you have a monopoly – or something close enough to it – customers have no alternative. You don’t have to worry about attracting them, so you just try to attract investors. You squeeze as much money out of the business as possible and pass it on as dividends and other stock-price-based payouts, and/or leverage it to buy out your remaining competitors.
In short, you do exactly what many companies had done since the Great Recession, and exactly what companies are doing since the GOP passed their tax cuts.
Still there are economic measures for market concentration, and laws that govern mergers and would-be monopolists. And in most industries, those measures have not yet reached the threshold for economists – and regulators – to declare: “Monopoly!”
That’s a puzzle and economists aren’t yet certain of the answer, as Nobel laureate Paul Krugman explained in a recent interview with Vox’s Ezra Klein:
Klein — Liberals are also beginning to cohere around the idea that a major economic problem is that industries have become too concentrated and too many players have become monopolists in their own sectors. Do you think that is correct?
Krugman — I think it is. From the standard of, are we absolutely sure that this is a central issue, no, but we are 80 percent sure. There’s a bunch of different pieces of evidence that point in that direction.
First of all, measures of concentration — the conventional measures of industry concentration have gone up.
Second, we have seen, since about 2000, a substantial shift of income away from labor toward capital. Before then, inequality was about growing inequality of wages, but over the past 15 years or so it is increasingly about capital. If we try to understand that rise in capital share, certainly increased monopolization is one important possible source.
The third piece of evidence is corporations can borrow for only slightly more than the federal government needs to pay, yet private investment is, if anything, a bit low by historic standards. What could explain that? How can companies have free capital and not really want to invest it? Well, that what’s a monopolist does. A monopolist doesn’t want to increase capacity, because the only way you use capacity is to cut prices, and the monopolist doesn’t want to do that.
Between those three things, the direct evidence of growing concentration, increase in capital share of income, and this mysterious wedge between what appears to be the private sector’s assessment of investment opportunities and the cost of capital, it makes sense to think that monopolization is a big and growing issue.
Let’s look deeper at that first element, with a specific example. Walmart’s share of the U.S. grocery market reached 21.7% in 2017. That’s a far larger slice than any competitor, but it’s also far short of the 70% threshold that federal courts have used in applying antitrust laws.
You find similar patterns in other industries. Exxon Mobil’s 2017 market share was 12.76%, while Verizon’s was 35.74%. In health insurance, Blue Cross Blue Shield dominates with 31.72% of the national market, but they only reach that 70% threshold in a handful of states.
So yes, “the conventional measures of industry concentration have gone up” … but they rarely reach the legal standard for a monopoly. More and more companies are behaving like monopolies, but the market concentration data falling so far short of that 70% threshold are why Krugman and other data-driven economists are only “80 percent sure” we’re in a monopolized economy.
The question – and serious, academic economists are still debating it – is whether that 70% threshold is simply wrong. Perhaps it was a good guideline back when courts began applying the antitrust laws, but other changes in our economy have rendered that standard obsolete. Or maybe there are other factors, not related to market share, that have so many companies skittish about making plans to attract more customers … rather than merely to attract more investors.
Serious, academic economists are still debating this because the implications of a lower market share threshold would be huge. In industry after industry, The Big Players would have to break up, much as Standard Oil and Bell Telephone were forced to do in the last century. That kind of divestment, repeated across most major industries, would scramble a whole lot of jobs. And it would cost a whole lot of rich people a whole lot of money.
Companies’ behavior since the GOP tax scam is not the final nail in the coffin. It doesn’t get economists like Krugman from “80 percent sure” to “100 percent sure.” But it is another piece in a growing body of data that should inform our policy debates.
Image Credit — Wealthy Fat Cat: Pixabay; Composition: Crissie Brown (BPICampus.com)
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