Monopoly Mayhem: Corporations Win, Workers Lose
Why do big corporations continue to win while workers get shafted? It all comes down to power: who has it, and who doesn’t.
Big corporations have become so dominant that workers and consumers have fewer options and have to accept the wages and prices these giant corporations offer. This has become even worse now that thousands of small businesses have had to close as a result of the pandemic, while mammoth corporations are being bailed out.
At the same time, worker bargaining power has declined as fewer workers are unionized and technologies have made outsourcing easy, allowing corporations to get the labor they need for cheap.
These two changes in bargaining power didn’t happen by accident. As corporations have gained power, they’ve been able to gut anti-monopoly laws, allowing them to grow even more dominant. At the same time, fewer workers have joined unions because corporations have undermined the nation’s labor laws, and many state legislatures – under intense corporate lobbying – have enacted laws making it harder to form unions.
Because of these deliberate power shifts, even before the pandemic, a steadily larger portion of corporate revenues have been siphoned off to profits, and a shrinking portion allocated to wages.
Once the economy tanked, the stock market retained much of its value while millions of workers lost jobs and the unemployment rate soared to Great Depression-era levels.
To understand the current concentration of corporate power we need to go back in time.
In the late nineteenth century, corporate power was a central concern. “Robber barons,” like John D. Rockefeller and Cornelius Vanderbilt, amassed unprecedented wealth for themselves by crushing labor unions, driving competitors out of business, and making their employees work long hours in dangerous conditions for low wages.
As wealth accumulated at the top, so too did power: Politicians of the era put corporate interests ahead of workers, even sending state militias to violently suppress striking workers. By 1890, public anger at the unchecked greed of the robber barons culminated in the creation of America’s first anti-monopoly law, the Sherman Antitrust Act.
In the following years, antitrust enforcement waxed or waned depending on the administration in office; but after 1980, it virtually disappeared. The new view was that large corporations produced economies of scale, which were good for consumers, and anything that was good for consumers was good for America. Power, the argument went, was no longer at issue. America’s emerging corporate oligarchy used this faulty academic analysis to justify killing off antitrust.
As the federal government all but abandoned antitrust enforcement in the 1980s, American industry grew more and more concentrated. The government green-lighted Wall Street’s consolidation into five giant banks. It okayed airline mergers, bringing the total number of American carriers down from twelve in 1980 to just four today. Three giant cable companies came to dominate broadband. A handful of drug companies control the pharmaceutical industry.
Today, just five giant corporations preside over key, high-tech platforms, together comprising more than a quarter of the value of the entire U.S. stock market. Facebook and Google are the first stops for many Americans seeking news. Apple dominates smartphones and laptop computers. Amazon is now the first stop for a third of all American consumers seeking to buy anything.
The monopolies of yesteryear are back with a vengeance.
Thanks to the abandonment of antitrust, we’re now living in a new Gilded Age, as consolidation has inflated corporate profits, suppressed worker pay, supercharged economic inequality, and stifled innovation.
Meanwhile, big investors have made bundles of money off the growing concentration of American industry. Warren Buffett, one of America’s wealthiest men, has been considered the conscience of American capitalism because he wants the rich to pay higher taxes. But Buffett has made his fortune by investing in monopolies that keep out competitors.
– The sky-high profits at Wall Street banks have come from their being too big to fail and their political power to keep regulators at bay.
– The high profits the four remaining airlines enjoyed before the pandemic came from inflated prices, overcrowded planes, overbooked flights, and weak unions.
– High profits of Big Tech have come from wanton invasions of personal privacy, the weaponizing of false information, and disproportionate power that prevents innovative startups from entering the market.
If Buffett really wanted to be the conscience of American capitalism, he’d be a crusader for breaking up large concentrations of economic power and creating incentives for startups to enter the marketplace and increase competition.
This mega-concentration of American industry has also made the entire economy more fragile – and susceptible to deep downturns. Even before the coronavirus, it was harder for newer firms to gain footholds. The rate at which new businesses formed had already been halved from the pace in 1980. And the coronavirus has exacerbated this trend even more, bringing new business formations to a standstill with no rescue plan in sight.
And it’s brought workers to their knees. There’s no way an economy can fully recover unless working people have enough money in their pockets to spend. Consumer spending is two-thirds of this economy.
Perhaps the worst consequence of monopolization is that as wealth accumulates at the top, so too does political power.
These massive corporations provide significant campaign contributions; they have platoons of lobbyists and lawyers and directly employ many voters. So items they want included in legislation are inserted; those they don’t want are scrapped.
They get tax cuts, tax loopholes, subsidies, bailouts, and regulatory exemptions. When the government is handing out money to stimulate the economy, these giant corporations are first in line. When they’ve gone so deep into debt to buy back their shares of stock that they might not be able to repay their creditors, what happens? They get bailed out. It’s the same old story.
The financial returns on their political investments are sky-high.
Take Amazon – the richest corporation in America. It paid nothing in federal taxes in 2018. Meanwhile, it held a national auction to extort billions of dollars in tax breaks and subsidies from cities eager to house its second headquarters. It also forced Seattle, its home headquarters, to back away from a tax on big corporations, like Amazon, to pay for homeless shelters for a growing population that can’t afford the city’s sky-high rents, caused in part by Amazon!
And throughout this pandemic, Amazon has raked in record profits thanks to its monopoly of online marketplaces, even as it refuses to provide its essential workers with robust paid sick leave and has fired multiple workers for speaking out against the company’s safety issues.
While corporations are monopolizing, power has shifted in exactly the opposite direction for workers.
In the mid-1950s, 35 percent of all private-sector workers in the United States were unionized. Today, 6.2 percent of them are.
Since the 1980s, corporations have fought to bust unions and keep workers’ wages low. They’ve campaigned against union votes, warning workers that unions will make them less “competitive” and threaten their jobs. They fired workers who try to organize, a move that’s illegal under the National Labor Relations Act but happens all the time because the penalty for doing so is minor compared to the profits that come from discouraging unionization.
Corporations have replaced striking workers with non-union workers. Under shareholder capitalism, striking workers often lose their jobs forever. You can guess the kind of chilling effect that has on workers’ incentives to take a stand against poor conditions.
As a result of this power shift, workers have less choice of whom to work for. This also keeps their wages low. Corporations have imposed non-compete, anti-poaching, and mandatory arbitration agreements, further narrowing workers’ alternatives.
Corporations have used their increased power to move jobs overseas if workers don’t agree to pay cuts. In 1988, General Electric threatened to close a factory in Fort Wayne, Indiana that made electrical motors and to relocate it abroad unless workers agreed to a 12 percent pay cut. The Fort Wayne workers eventually agreed to the cut. One of the factory’s union leaders remarked, “It used to be that companies had an allegiance to the worker and the country. Today, companies have an allegiance to the corporate shareholder. Period.”
Meanwhile, as unions have shrunk, so too has their political power. In 2009, even with a Democratic president and Democrats in control of Congress, unions could not muster enough votes to enact a simple reform that would have made it easier for workplaces to unionize.
All the while, corporations have been getting states to enact so-called “right-to-work” laws barring unions from requiring dues from workers they represent. Since worker representation costs money, these laws effectively gut the unions by not requiring workers to pay dues. In 2018, the Supreme Court, in an opinion delivered by the court’s five Republican appointees, extended “right-to-work” to public employees.
This great shift in bargaining power from workers to corporate shareholders has created an increasingly angry working class vulnerable to demagogues peddling authoritarianism, racism, and xenophobia. Trump took full advantage.
All of this has pushed a larger portion of national income into profits and a lower portion into wages than at any time since World War II.
That’s true even during a severe downturn. For the last decade, most profits have been going into stock buybacks and higher executive pay rather than new investment.
The declining share of total U.S. income going to the bottom 90 percent over the last four decades correlates directly with the decline in unionization. Most of the increasing value of the stock market has come directly out of the pockets of American workers. Shareholders have gained because workers stopped sharing the gains.
So, what can be done to restore bargaining power to workers and narrow the widening gap between corporate profits and wages?
For one, make stock buybacks illegal, as they were before the SEC legalized them under Ronald Reagan. This would prevent corporate juggernauts from siphoning profits into buybacks, and instead direct profits towards economic investment.
Another solution: Enact a national ban on “right-to-work” laws, thereby restoring power to unions and the workers they represent.
Require greater worker representation on corporate boards, as Germany has done through its “employee co-determination” system.
Break up monopolies. Break up any bank that’s “too big to fail”, and expand the Federal Trade Commission’s ability to find monopolies and review and halt anti-competitive mergers. Designate large technology platforms as “utilities” whose prices are regulated in the public interest and require that services like Amazon Marketplace and Google Search be spun off from their respective companies.
Above all, antitrust laws must stop mergers that harm workers, stifle competition, or result in unfair pricing.
This is all about power. The good news is that rebalancing the power of workers and corporations can create an economy and a democracy that works for all, not just a privileged few.
IPA’s weekly links
Guest post by Jeff Mosenkis of Innovations for Poverty Action
- I’ve heard these days in medicine there’s a glut of papers that are all essentially “[thing I was doing already] + in the time of COVID,” which seems like is true of all fields now. The German Development Institute for Evaluation (DEval) has a helpful roundup of several useful new hubs for evidence, research, and methodology resources for dev/social science.
- A few weeks ago I saw someone say something like “good thing economics is so status driven and hierarchical, at least someone gets to publish nulls.” Heres’s a nice thread of responses to Pia Raffler’s request for resources on showing (and publishing) null results.
- Stefano DellaVigna and Elizabeth Linos compare the size of effects in academic trials of nudges, to 126 RCTs conducted by Nudge Unit trials in the practical world:
“In papers published in academic journals, the average impact of a nudge is very large – an 8.7 percentage point take-up effect, a 33.5% increase over the average control. In the Nudge Unit trials, the average impact is still sizable and highly statistically significant, but smaller at 1.4 percentage points, an 8.1% increase.”
They find publication bias and statistical power account for the difference (perhaps some nudge researchers can read the responses above for how to publish disappointing findings). Then using forecasts, they find academics overestimate the effects an intervention will have, while Nudge Unit practitioners are accurate.
- How are you at forecasting? A new prediction platform spearheaded by DellaVigna and Eva Vivalt lets anybody sign up to predict the outcomes of several trials.
- This is why we can’t have nice (or cheaper) things. The Times has an exposé of an institute at George Mason Law School funded by big tech companies who happen to be under regulatory scrutiny (h/t Florian Ederer.) The institute they fund trains regulators in the school of economic thought that the best kind of regulation is as little as possible. It follows the model of a judge training institute that does the same thing, and has been shown to influences judges to rule in favor of mergers. Planet Money had a couple of really good episodes explaining why, for example, we have only a few big telecom companies. It comes back to Robert Bork (Apple) taking an econ class at UChicago in the 70’s when he was in law school, and writing a book for the law field explaining that economics says to leave markets alone. There’s another good episode (Apple) on what this means for the big tech companies today like Google and Facebook. In summary, your cable and cell phone bills are so high because a dude took an econ class in the 70’s, and that’s the butterfly effect.
- An uncomfortable truth is that academics are big polluters, through conferences and other kinds of travel, but many of us are figuring out how to accomplish similar academic events without the travel these days. Here’s a really interesting article on how to de-carbonize conference travel, through simple things like holding them in more central locations, and having simultaneous regional hub meetings that connect to one another digitally. One crazy statistic, they calculated the carbon from travel for one major scientific conference and found on average it was “about 3 tonnes per scientist, or the average weekly emissions of the city of Edinburgh, UK.”
- Happily the NBER Summer Institute this week was online and therefore open to far more people. Claudia Goldin gives the Martin Feldstein lecture at NBER Summer Institute on women’s career progress over a century. “Tammy Duckworth is the first senator … to bring a baby into an active session of Congress, though many would say there have been babies in Congress before that time”
Betsy DeVos’ Deadly Plan to Reopen SchoolsTrump education…
Betsy DeVos’ Deadly Plan to Reopen Schools
Trump education secretary Betsy DeVos is heading the administration’s effort to force schools to reopen in the fall for in-person instruction. What’s her plan to reopen safely? She doesn’t have one.
Rather than seeking additional federal funds, she’s using this pandemic to further her ploy to privatize education — threatening to withhold federal funds from public schools that don’t reopen.
Repeatedly pressed by journalists during TV appearances, DeVos can’t come up with a single mechanism or guideline for reopening schools safely. She can’t even articulate what authority the federal government has to unilaterally withhold funds from school districts — a decision that’s made at the state and local level, or by Congress. But when has the Constitution stopped the Trump administration from trying to do whatever it wants?
DeVos is following Trump’s lead — prematurely reopening the economy, which he sees as key to his re-election but is causing a resurgence of the virus.
Let’s get something straight: Every single parent, teacher, and student wants to be able to return to in-person instruction in the fall — but only if no one’s life is put at risk.
Districts need more funding, not less, to implement the CDC’s guidelines. Given that state and local governments are already cash-strapped, it’s estimated that K-12 schools need at least $245 billion in additional funding to put safety precautions in place — funding that Republicans in Congress and the Trump administration refuse to give.
One might think an education secretary would be studying what kind of safety precautions would work best, and seeking emergency funding for those safeguards. Not DeVos. Just like her boss in the Oval Office, she’s been hard at work shafting working families to advance her personal agenda.
In late April, she issued rules for how states should use the $13 billion allocated in the CARES Act for schools. Her rules would divert millions of dollars away from low-income schools into the coffers of wealthy private schools. It’s such a blatant violation of federal law that several states are suing her and her department.
DeVos’ entire tenure has centered on shafting low-income students and their families — the very people she’s supposed to protect.
She has repeatedly empowered the predatory for-profit college industry at the expense of the students they prey upon. Why? She has considerable financial stakes that are rife with conflicts of interest. Her financial investments are a web of holdings in for-profit colleges and student loan collectors.
When DeVos took office, she repealed an Obama-era rule imposing stricter regulations and higher standards on for-profit colleges. She also stopped canceling the debts of students defrauded by these institutions — a move that has prompted 23 states to bring a lawsuit against her. In the process, she was even held in contempt of court for violating a federal court order.
Now, in the middle of the worst public health crisis in more than a century, she’s jeopardizing the safety of our students, teachers, parents, bus drivers, and custodians, while rerouting desperately needed public school funds towards the private schools she’s always championed.
Remember, when you vote against Trump this November — you’re voting against her, too. It’s a win-win.
Framing Your Investments for Context & Clarity
Source: JP Morgan Asset Management
The above is one of my favorite charts.
This version comes from a JPM discussion on “Framing Bias.” It raises interesting issues about how decisions are influenced by the way information is presented:
“What level of returns should we expect from equity markets? The answer changes depending on the time period – when investors allow an incomplete picture to influence their decisions, it is an example of framing. While it appeared the market had climbed to untenable highs post-GFC, [but] if we take a slightly longer view, the overall market return was actually flat between 2000 and 2012. During that time period, the market had an average annual total return of 0.6% per year and a cumulative total return of 6.8% - effectively a sideways market.”
I draw a slightly different conclusion from the long term series of secular bull and bear markets. (Assuming you are not a trader), when you consider the chart above, investors are presented with several choices:
1. Time the market, moving in and out before long bear markets;
2. Buy & Hold, waiting out the decade (or longer) poor returns;
3. Reduce Risk, by making tactical moves to modestly shift asset class exposure.
The discussion of framing suggests there are other alternative contexts for these choices: For example, you can use tactical allocation shifts to manage behavior rather than to affect risk or returns.
Having now lived through two bear markets that were a decade+ long, I wanted to find a new way to think about what Buy & Hold investors should do during bear markets.1 To stick with the concept of framing, these investors should also pay attention to inflation, compounding, and how the idea of longer cycles negatively impacts our comprehension of valuation and prices.
A quick real estate story:
When we were purchasing our first suburban home in the late 1990s, we had narrowed it down to two houses. One was in Sea Cliff, a charming town on the North Shore of Long Island. The other was about 5 minutes south in Greenvale, in the Roslyn school district, which was a highly ranked (but became a notorious scandal-ridden) district.
Both homes cost about $250k. Sea Cliff was more quaint, but in front of that house was a bus stop. It was noisy, from inside you could hear the chuffing of the bus as it stopped, brakes squealing, diesel engine rumbling. I could not get past that, and so we ended up in Greenvale.
But the house I truly fell in love with was a Double Dutch Colonial in Sea Cliff. It was exorbitantly expensive at $400k. Now, if $250k and $400k don’t sound that far apart, you are being affected by your framing of current pricing. At the time, $400k — well over half again as expensive as our price range — was a giant gap far beyond what we could afford for a starter home.
I don’t see that house on Zillow, but a home next door (not as nice) is now up for sale at $1.795m.
That pricing reflects several real estate bull and bear markets, where prices advanced three steps, and then retreated one. But it also reflects how our comprehension of compounding and inflation creates valuations and prices that are difficult to grasp. Mortgage rates fell, suburbs became more attractive, and suddenly an asset appreciating 4X does not seem so wild. Around the same time (97?), the S&P 500 Index was about 800, and it is also 4X today.
One last thing: I have a very vivid recollection around this time of people taking a little off the table from appreciated equity and rolling that into real estate — trade up homes, vacation properties, etc.
Which makes me wonder about this: Maybe equity investors should think about bear markets — or even the last innings of bull markets — as opportunities for long-term accumulation phase with expected returns of zero or negative over the short term.
That sounds counter-intuitive. But given what we know about how unsuccessful investors are when it comes to market timing, what other choice do they have but to reframe the low return and/or expensive part so of the market cycle?
Buyers during the 1966-82 and the 2000-13 bear markets were essentially accumulating assets for the next bull market run. It surely felt awful to be a Buy & Hold stock accumulator in the 1970s, just as it did int he 2000s. But boy, did it pay off when the next bull cycle began.
I expect that when we look back at the end of this cycle (the 2013 - ?? bull market) and past the next bear cycle, if we might draw the same conclusion. Just an idea I am noodling around with.
More on this (eventually) . . .
1. I have done better than okay via market timing, but I keep coming back to Michael Mauboussin‘s question: Was it skill or luck? Not knowing for sure, I am willing to dabble with a little fun money but unwilling to risk real capital on trying to time in and out.
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