By Gerard Baker in THE TIMES, 5 December 2019
Love it or hate it, most Americans would probably agree that their economy is a model of capitalism. Competition, choice, free markets; for good or ill, these seem to define the way America works. By contrast, fans and critics alike look across the Atlantic and see a different model with less choice, more regulation, more government intervention.
But what if, in at least one critical respect, this is the wrong way around? A new book by a French economist who lives and works in the US is making Americans think again about the health of their capitalism.
The Great Reversal by Thomas Philippon of New York University argues, with copious data and rigorous analysis, that in the past 20 years America has gone from being a highly competitive free-market economy to one dominated by huge companies that are eliminating choice, raising prices, increasing inequality and impairing dynamism.
In most key sectors, mergers and acquisitions and a system in which big companies are able to exploit the regulatory system for their benefit have diminished competition, to Americans’ detriment. Meanwhile in Europe, the reverse has happened. The same sectors have become more competitive, ironically perhaps, under the direction of regulatory authorities which, far from stifling economic dynamism, have actually stimulated it.
It’s easy to test Mr Philippon’s thesis. Take airlines. In the past few decades consolidation in the sector has resulted in a handful of companies controlling the market. If you want to fly from New York to St Louis, Missouri, these are the options according to the travel website Expedia: Delta Airlines will fly you from John F Kennedy International Airport on a round trip for $299. Shop around and you’ll discover that American Airlines will do the same journey . . . for $299.
In sector after sector the story is the same on either side of the Atlantic. If you want a high-speed broadband internet connection in New York you have two choices. Verizon Fios will charge you $79.99 a month. Never knowingly undersold, Time Warner Spectrum will charge you . . . $79.99 a month.
This lack of choice means that prices are higher, of course. The average monthly cost of a broadband connection in the US is $68. In the UK it is $40, in Italy $30, in France $31.
Mobile phone service is similar: American users pay about $100 a month, while subscribers in Europe pay about half that.
A recent study estimated that concentration — the reduction in the number of companies that dominate a sector — had increased in three quarters of all American domestic industries between 1998 and 2012.
It wasn’t ever thus. Mr Philippon discovered when he moved to the US in the late 1990s that prices were much lower than they were in Europe. But in 20 years there has been a great reversal. Since the completion of the single market, Europe has adopted many of the pro-market, pro-competition policies that the US has long been renowned for.
In the US, takeovers have been a big factor. The number of mergers increased in the 30 years to 2017 from an average of just over 2,000 a year to more than 15,000 a year. More important has been the power that large American companies have to use lobbying to get favourable conditions from regulators and policymakers at the federal and state level. Mr Philippon estimates that uncompetitive markets cost Americans $300 a month, a total for the economy of $1.5 trillion in the space of 20 years.
The phenomenon is a key driver of the growing inequality in the US. Often immune from serious competition, companies are able to generate profits, the proceeds of which go to shareholders and top management, widening the disparity between those at the top and the rest of the country.
“Most US domestic markets have become less competitive, and US firms charge excessive prices to US consumers,” says Mr Philippon. Excess profits are used to pay our dividends and to buy back shares, not to hire and invest.
Of course, overall US economic performance has been stronger than Europe’s, though Mr Philippon notes that in terms of output per head the gap is much smaller. It’s also true that the US has innovated more in the past 20 years. But here too is a twist: since the big tech companies such as Apple, Amazon and Alphabet have grown to exercise enormous power in the sector over the past decade, innovation has declined.
There is, by the way, a Brexit coda to all this. If it leaves the EU, the UK may no longer benefit from Europe’s competitive markets. On the other hand, Mr Philippon points out that Europe deregulated its markets in part at least because the UK was among the strongest advocates of competition and choice inside the EU. Will a post-Brexit EU result in another great reversal?