The economy of late lacks pep. To return to growth, America needs an infusion of competition.
IN THE wake of the United scandal, in which one unfortunate passenger was “re-accommodated” (i.e. forcibly and cruelly dragged across the floor of an aircraft cabin), a number of commentators, among them Vermont Senator Bernie Sanders, decried the rampant consolidation within the airline industry. They are right to do so. In the past two decades, a series of bankruptcies, mergers, and acquisitions has reduced the number of major U.S. airlines from ten to a measly four (see graphic).
The airline industry is emblematic of the American economy at large. Traditional retailers like Macy’s or J. C. Penney are being squeezed: on one end by Amazon’s promise of a frictionless shopping experience, and on the other by Walmart’s aggressive price chopping. Defense industry titans like Raytheon and Lockheed Martin are accelerating efforts to buy up competitors. Google and Facebook have effectively built themselves a duopoly in the digital advertising space.
No wonder, then, why the American economy has slowed to a near-halt. Industries with less competition are less prone to disruption at the hands of small, agile up-and-comers with fresh ideas. Firms, in the absence of competitive pressure, become lackadaisical. They do not invest in improving workforce productivity or in capital expansion. As a result, wage growth slows to a glacial pace, prices rise without corresponding improvements in products, and economic growth peters out.
The first in a two-part series on mending America’s lackluster economy.
To give a sense of scale, under the Obama administration, G.D.P. growth averaged a tepid 2.1% in the post-crisis years. Some economists—notably former Treasury Secretary Larry Summers—have attributed this to so-called “secular stagnation,” where fundamental shifts in demography and the propensity (likeliness) to save money lead to permanent dips in aggregate demand—which, in turn, neuters growth. Other voices on the right have argued that over-regulation by the Obama administration has tied up capital in a web of restrictions, deterring investment and depressing long-run growth. Still others assert that the current growth slowdown is, in fact, the economic norm, as Ruchir Sharma argued in the latest edition of Foreign Affairs.
There is a fourth school of thought: that a lack of competition has stifled the American economy. As The Economist points out (see above graphs), U.S. corporate profits and return on capital (i.e. the amount of money made from investing large piles of money) have soared in recent years. This is the most convincing explanation of America’s meager economic performance. It relies not on grandiose macro-narratives, as do the arguments of Messrs. Summers and Sharma, nor is it contingent on the basic assumption that more government is bad for the economy.
The government is not absolved of blame, however. As this blog argued in April, 200 years of regulations piling up have resulted in an overly complex and burdensome regulatory regime begging to be streamlined. Moreover, regulations tend to favor established firms within an industry; only they have the resources necessary to foot the bill of increasingly onerous regulations. This creates “barriers to entry,” a market scenario in which startups are barred from entering an industry by the prohibitively expensive fixed costs of complying with the law.
How can these problems be fixed? In the coming days, this blog will run an editorial proposing an ambitious economic agenda for revitalizing American competition—and thereby the entire economy.
