Why The "Atrophied" U.S. Economy Isn't As Free Or Competitive As You Think

Author Thomas Philippon, a French professor at New York University, recently set out on a journey to try and figure out just how the intricacies of business works in America.

Upon the conclusion of his research, he determined that the U.S. economy simply isn't as free - or as competitive - as many think, according to FT. What he found was that over the last 20 years, competition and competition policy have "atrophied" with ugly consequences. 

"America is no longer the home of the free-market economy," he concludes. The country isn't as competitive as Europe, its regulators are not more proactive and its new companies aren't much different from their predecessors. 

Thomas Philippon

His book, The Great Reversal, argues for the importance of competition and summarizes the results of his findings:

“First, US markets have become less competitive: concentration is high in many industries, leaders are entrenched, and their profit rates are excessive. Second, this lack of competition has hurt US consumers and workers: it has led to higher prices, lower investment and lower productivity growth. Third, and contrary to common wisdom, the main explanation is political, not technological: I have traced the decrease in competition to increasing barriers to entry and weak antitrust enforcement, sustained by heavy lobbying and campaign contributions.”

His argument is backed up by evidence. Broadband access in the U.S. costs about double what it costs in comparable countries. Profits per passenger on airlines are also far higher in the U.S. than they are overseas.

His analysis shows that “market shares have become more concentrated and more persistent, and profits have increased.”

And, more concentration then translates to higher profits. This has lead to post-tax profit share in the U.S. gross domestic product nearly doubling since the 1990s. 

The increase in market concentration in places like manufacturing can be attributed to competition from China, which drove weaker competitors out of the market. Companies like Walmart, in the 1990s, drove the rate of investment and productivity growth higher in the 1990s while the opposite happened in the 2000's: rising market concentration drove the profits of entrenched companies up and both the investment rate and productivity lower. 

This ugly form of increased concentration means that entry of new businesses has diminished and that the U.S. economy has seen a significant reduction in competition and a corresponding rise in monopoly and oligopoly.

The book often turns to comparisons with the EU. For instance, real GDP per head rose 21% in the U.S. between 1999 and 2017. In the EU, this number stood at 25%. Even in the Eurozone, this number was 19% despite the damage done by its "ineptly handled financial crisis".

Even inequality levels and trends and income distribution are less adverse in the EU. The comparisons seem justified, according to FT: 

In short, comparisons between the EU and the US are justifiable. These show that neither profit margins nor market concentration have exploded upwards in the EU as they have done in the US. The share of wages and salaries in the aggregate incomes — so-called “value-added” — of business has fallen by close to 6 percentage points in the US since 2000, but not at all in the eurozone. This destroys the hypothesis that technology is the main driver of the downward shift in the share of labour incomes. After all, technology (and international trade, as well) affected both sides of the Atlantic roughly equally.

Competition in product markets has become far more effective in the EU over the course of the last 20 or 30 years. It is reflective of purposeful deregulation and a more aggressive and independent competition policy than in the U.S.

But the EU has established more independent regulators than the U.S. would: what is being called a "healthy result" of a mutual distrust within the EU. 

Individual states fear the idea of being vulnerable to the practices of fellow members when it comes to regulation, which is beneficial to countries with weak national regulators. The independence of EU regulators also means that lobbying is far less of a problem overseas. 

Evidence shows that "the higher an EU member country’s product market regulation in 1998, the bigger the sub­sequent decline in such regulation". And the effect is more robust for those in the EU than non-EU members.

Lobbying has much more of an effect in the U.S. Evidence supports that lobbying works, which is exactly why large corporations in the U.S. continue to rely on it. This all boils down to a larger problem of the role of money in U.S. politics. FT writes that "members of Congress spend about 30 hours a week raising money."

The Supreme Court even ruled in 2010 that "companies are persons" and "money is speech". Former representative Mick Mulvaney summed it up in 2018: “If you’re a lobbyist who never gave us money, I didn’t talk to you. If you’re a lobbyist who gave us money, I might talk to you.”

Corporate lobbying is two to three times bigger in the U.S. than in the EU. Campaign contributions are about 50 times larger. 

The book also looks at finance, healthcare and technology. In finance, the book finds that the cost of taking in savings and transferring it to end users has stayed at about 2% for a century, regardless of technological developments. The book calls call the industry a "rent-extraction machine".

In healthcare, the book looks at why the U.S. spends far more on healthcare, but has far worse health outcomes than any other high-income country. The book says it is due to "rent-extracting monopolies" in the industry - all the way from doctors, to hospitals, to insurance companies to pharmaceutical businesses. 

In the world of tech, the book touches on the size of major players like Google, Amazon and Apple. The book says that while the weight of these mega-huge companies is no bigger than that of giants in the past, their links to the economy as a whole are far smaller than they ever were.