Reforming capitalism to save it

IN THE FIVE YEARS since the publication of Thomas Piketty’s runaway bestseller, Capital in the Twenty-First Century, rising inequality has yet to force any consensus on what to do about it, while the macro trends of globalization and automation continue to make America unequal.

Now, at the start of the 2020 election cycle, actors of various stripes — from economists to policy analysts to politicians — say some of this inequality is a symptom of a curse that has a clear remedy: the concentration of corporate power the likes of which America hasn’t seen for a century.

A growing body of evidence ties the real decline in incomes of ordinary Americans over the last four decades to industry consolidation, especially in labor markets where workers and suppliers are squeezed by corporate giants.

Politicians are hoisting their pitchforks. In March, Sen. Elizabeth Warren called for the breakup of tech giants Amazon, Facebook, and Google. Sen. Ed Markey has co-sponsored bills with Minnesota Sen. Amy Klobuchar, the ranking Democrat on the Senate Antitrust Subcommittee, that would put teeth back in federal antitrust enforcement, to prevent corporate takeovers that concentrate too much market power and stifle competition. Rhode Island Congressman David Cicilline, the new chair of the House Antitrust Subcommittee, has promised to hold hearings to “raise the consciousness of the American people. Maybe people don’t know all the words — monopsony, antitrust, and market power — but they know the system is rigged.”

Two new books provide some of the intellectual undergirding for this populist prairie wildfire: The Myth of Capitalism: Monopolies and the Death of Competition, by Jonathan Tepper and Denise Hearn, and The Curse of Bigness: Antitrust in the New Gilded Age, by Timothy Wu.

Both books are level headed critiques of a rigged system by members of its economic and political establishment. Tepper, a former hedge fund analyst and trader, works with Hearn at a macroeconomic research firm that caters to banks and offices that manage fortunes of ultra-high net worth families. Wu, a professor at Columbia Law School, worked on competition policy at the Obama White House and Federal Trade Commission.

Neither book advocates European style socialism or income redistribution through higher taxes. Instead, both are calls to restore competition in capitalism in order to spread prosperity more broadly. Both recognize that large businesses can deliver economies of scale and widely shared benefits, but both take aim at dominant firms that exploit their market power in coercive, non-competitive ways, from predatory pricing to tacit collusion.

“Capitalism without competition is not capitalism,” write Tepper and Hearn in The Myth of Capitalism. “In industry after industry, competition is dying.” Four airlines dominate air travel and hold monopoly power over regional hubs, giving travelers little choice to go elsewhere when “they treat you like garbage,” they write.

Cable companies are notorious for gouging consumers where they have no other options. Big pharma carves moats around its lucrative monopolies on drugs by betraying the spirit of expiring patents through legal acrobatics. In concentrated industries, startup formation has withered and protected incumbents with few real competitors have little incentive to innovate. In rural counties, the pain is far worse in places dominated by a single employer, whether vertically integrated agribusiness giants or Walmarts that have gobbled up or killed off locally owned businesses that were the lifeblood of the American way of life.

The result, Tepper and Hearn show, is rising corporate profits, falling incomes, and the transfer of wealth from ordinary Americans to monopolists. “This book,” they say, “started out as a simple detective story: Who killed your paycheck?” Looking at the data and following the money, they found that “[s]omething was very broken. The rules of the game had changed. This book became our attempt to answer why.”

Of the two books, The Myth of Capitalism offers the broadest review of the political and economic forces that enabled consolidation since the 1970s. Neither political party looks good in retrospect. Bill Clinton was governor of Arkansas, where Tyson Foods and Walmart became giants, and was president when their business models devoured rural America.

Antitrust enforcement was more lax under President Obama, whose Treasury Department was led and shaped by Timothy Geithner, whose top priority was rescuing the US financial system from its self-induced near-collapse in 2008. Under Obama, not a single case was filed to enforce the Sherman Antitrust Act in 2014. The revolving door of former federal officeholders and regulators who left government to work for Monsanto would shock a cynic. Business schools now teach oligopoly strategy to future titans of industry with zero moral concern for the social costs.

In The Curse of Bigness, a thin, small book at 154 pages that fits in the palm of a hand, Wu focuses his story narrowly but cogently on the rise and fall of antitrust enforcement in Washington. That tale begins with the reasons for the creation of the Sherman Act in 1890, the rise of Republican trust-busters Teddy Roosevelt and William Howard Taft, and the strengthening of antitrust tools by Progressive era economic reformers. Back then, the stakes were high. Their fight was for the very soul of American democracy.

“We must make our choice. We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both,” said Louis Brandeis. Brandeis was a Harvard Law School educated civic leader in Boston and advisor to Woodrow Wilson in the 1912 presidential campaign. Wilson nominated Brandeis to the US Supreme Court as a David to slay Goliath.

By the mid-2oth century, antitrust enforcement had become entrenched as the law of the land, suiting Republican protectors of small business America and Democratic defenders of big labor. After World War II, government investigators concluded that cartels in Germany had enabled Nazi fascism’s rise to power. Breaking them up was a priority of allied reconstruction. President Eisenhower’s farewell address in 1961 was a warning about the military industrial complex.

By the late 20^th century, however, laissez-faire economics gained influential champions at the University of Chicago. There, Robert Bork set a legal standard for approving corporate mergers so low that few regulators or courts question megamergers anymore. The test for stopping consolidation, argued Bork, is whether it raises prices or constricts “consumer welfare.”

The words “consumer welfare” do not appear anywhere in the Sherman Act or the Clayton Antitrust Act of 1914, both of which were enacted to limit concentrations of economic power deemed un-American. Bork rewrote the rules, and two generations of regulators and judges have gone along with it, obscuring the original intent of American antitrust law into a nearly forgotten language that cries out for resuscitation. As The Wall Street Journal noted recently, “no antitrust case has been brought on behalf of labor, and very few challenges have been made in modern times on the broader grounds of a company’s buying power over labor, goods or services.”

“We have forgotten that antitrust law had more than an economic goal, that it was meant fundamentally as a kind of constitutional safeguard, a check against the political dangers of unaccountable private power,” Wu writes. As a result, he says, the US now reaps “the curse of bigness,” a phrase coined by Brandeis. “We need to figure out how the classic antidote to bigness — the antitrust and other antimonopoly laws — might be recovered and updated to address the specific challenges of our time.”

“For a start,” Wu recommends, Congress should “create new levels of scrutiny for mega-mergers… but we also need judges who better understand the political as well as economic goals of antitrust. We need prosecutors willing to bring big cases with the courage of trustbusters and with the economic sophistication of the men and women who challenged AT&T” in the 1980s. The breakup of “Ma Bell” into “Baby Bells” spawned a burst of innovation in telecommunications by more agile, smaller firms that suddenly had incentives to invest heavily in competitive research and development.

Restoring American antitrust will require a multi-decade campaign, but Wu’s book doesn’t identify the law schools, prosecutors, courts, or elected leaders who will produce the next Brandeis for the 21^st century. Nor does he cover the think tanks and advocates waging the intellectual battle: the Open Markets Institute, led by Barry Lynn; legal scholar Lina Khan; the Roosevelt Institute; and the Institute for Local Self-Reliance, which promotes local action and fair trade similar to a new Boston ordinance sponsored by City Councilor Michelle Wu. Passed in March, the ordinance sets food purchasing standards for Boston schools to support local economies, sustainable production systems, and fair labor practices.

The presidential campaigns of Warren, Klobuchar and Vermont Sen. Bernie Sanders will add voice to this movement. And even if they fail, they could succeed as prophets, paving the way for future reforms to follow in their wake, as the losing Democratic nominee for president William Jennings Bryan did against William McKinley in 1896 and 1900.

Regulators in Washington can hear the distant rumbling. As The Wall Street Journal’s Paul Davies warned shareholders recently, regulators are “increasingly focusing on the power that these companies have over their workers and suppliers, looking more at labor issues in merger cases.”

One prominent Washington antitrust lawyer said this was the first time he has seen this happen. “Concern about dominant buyers [has] become a leading theme of the Federal Trade Commission’s current hearings on whether antitrust practice is working,” he said. “Such hearings are rare: the last set was in the mid-1990s… pressure for more intervention is building.”

The pitchforks are coming.

Carter Wilkie’s last In Depth piece for CommonWealth was his January review of As a City on Hill: The Story of America’s Most Famous Lay Sermon.