The Effects of Mega-Mergers

Chapter 4 shows that a good part of the decrease in competition has resulted from the recent wave of large mergers. Merger regulation, which is based solely on economic considerations, is limited to assessing the potential anticompetitive effects among the competing firms, without any consideration of the size alone of the combined firm or the effects on noncompeting firms. In addition, many mergers are justified by a claim of increased efficiencies in the new firm, which is often the result of layoffs and plant closures. Not only does this cause significant job losses, it also hurts families and communities. Even though economic theory does not take these kinds of externalities into account, they are nonetheless harmful consequences of mergers. Numerous studies have shown that many mergers do not result in lower prices, while some mergers have even led to price increases. In these mergers, workers suffered not for the sake of consumers but for the financial benefits reaped by the shareholders and managers of the merging firms and by the professionals who put the deals together. It also appears that investment advisors encourage mergers just so that they can profit from the transactions, regardless of the degree of benefit provided to consumers (or even shareholders). With little or no benefit to consumers from some mergers and significant harm to labor, the chapter argues that we need to reassess how the government should review mergers.

Recommendations

Chapter 9 lays out proposals for change. They range from simple and uncontroversial ones, like requiring the government to collect reliable statistics about the number of jobs lost through mergers and outsourcing, to controversial proposals, like adding labor representation to the corporate boards of directors. Although some antitrust scholars have recently proposed changing merger review to include consideration of the effects on labor, the chapter argues that changing the current process is not feasible. Instead, the chapter proposes the creation of a new government panel to review proposed mergers and outsourcing. The board would assess the expected displacement of labor in comparison with a realistic appraisal of the expected gains to consumers. The chapter argues that the proposed reforms cannot be achieved until the influence of business on Congress is limited. The chapter also deals with political effects, by pointing out that the harm to workers has aggregated over the years, culminating in popular support for both Donald Trump and Bernie Sanders in the 2016 presidential election. There is a dark side to this growing populist movement, however, because disgruntled labor has played a role in nationalistic and fascistic movements during the twentieth century.

The Theory of Competitive Markets

Chapter 2 explains how the theory of competitive markets became the benchmark for economic analysis, implicitly leading to the assumption that firms actually compete in real-world markets rather than acting as oligopolies. The chapter begins by showing how competition theoretically maximizes resource allocation and constrains the behavior of firms. Then it analyzes the assumptions that underlie the theory, emphasizing the problems that stem from the assumption of consumer sovereignty and the ability of producers to manipulate consumer preferences. It also explains how the assumption that markets are competitive became the paradigm of economic education, as advocated by Alfred Marshall, rather than recognizing the prevalence of monopolies and oligopolies, as advocated by Marshall’s successor, Joan Robinson. Finally, the chapter shows how the assumption that real-world markets are competitive is used to justify opposition to government regulation, based on the notion that competition already provides the only necessary constraints.

Introduction

Chapter 1 explains that this book examines two economic “principles,” or beliefs, that have shaped the perception of the economic system in the United States today: (1) the belief that the U.S. economy is competitive, making government market regulation unnecessary, and (2) the belief that corporations exist for the benefit of their shareholders, but not for other stakeholders. Contrary to what many economists and policymakers believe, the chapter shows that numerous markets in the United States are not competitive and that the belief in shareholder primacy is not an economic principle but a normative notion. In addition, the belief in the existence of competitive markets is used to argue that market regulation is unnecessary because competition provides all the needed constraints. If there are no constraints from competition and no regulation, serious harm can result, as shown by the Great Recession of 2008. The chapter also points out that there never was a purely laissez-faire market economy. The real question is how much market regulation is desirable. It is often difficult to debate this issue because many people label any expansion of government regulation as socialism. In addition, some people just do not like being told what to do by the government. That was a principle reason for the objection to the individual mandate in the Affordable Care Act. The chapter then introduces the relationship between the two economic narratives and the millions of job losses this century, using lessons from the new institutional economics to analyze the issues.

Lack of Competition in U.S. Markets

Chapter 3 shows that many product markets in the United States are not competitive, resulting in the firms’ ability to earn excess profits by charging higher prices to consumers. It analyzes the competitiveness of U.S. markets in four different ways. First, it examines the profitability of business firms to determine if their profits are so high that we can conclude that they operate in markets lacking competition. It uses the profits of the iPhone and the airline companies to illustrate this. Second, it looks at the increasing consensus by many economists that markets are becoming less competitive. These commentators include President Barack Obama’s Council of Economic Advisers, Joseph Stiglitz, and Paul Krugman. Third, it shows how an examination of the conduct of the firms in an industry can help us assess the competitiveness of that industry. Finally, it analyzes the concentration of the firms in a market as a way to determine competitiveness, examining the many studies over the past few years that show greatly increased concentration in many markets. Based on these four perspectives, the chapter argues that there is strong evidence of a lack of competition in many markets, which shifts the burden to those who oppose government regulation to demonstrate that there actually is viable competition that sufficiently constraints the firms.

Outsourcing in the United States and Europe

Chapter 6 analyzes how the belief in shareholder primacy justified the outsourcing of millions of jobs this century, primarily to China and, under NAFTA, to Mexico. It details the failed attempts in Congress to regulate outsourcing, partly due to lobbying by business but also as a result of the belief that these kinds of activities should be left to the market. The chapter then compares the situation in the United States with the protection of labor and the limits on outsourcing in some countries in the European Union, particularly in Germany. In the European Union, the Charter of Fundamental Rights creates significant legal rights for workers and unions. Not only do many European countries have additional laws protecting labor, they also have a culture respecting the rights of workers. The chapter explains that the prevalent cultural views in the United States toward labor, unions, and government regulation make it impossible to provide similar legal protections for U.S. workers. Nonetheless, the chapter argues that we should not only learn from the E.U. experience, but should also adopt some of the European protections of labor.

Corporate Stakeholders

Chapter 5 echoes the growing sentiment that corporations need to take into account other interests besides that of their shareholders. It traces the origins of the idea that corporations exist solely to increase the wealth of their shareholders and explains how this belief in shareholder primacy came to be accepted as a truism by many scholars, judges, and commentators. When Milton Friedman originally popularized this idea in 1962, he wrote that corporations should serve shareholder interest “within the rules of the game.” These days the rules of the game are influenced tremendously by business lobbying. The chapter explains how the political influence of labor waned and was replaced by business influence in the 1970s. Since that time, Congress has done very little to protect labor because business interests have become extremely powerful lobbyists and substantial donors to political campaigns.

Postscript

Chapter 10 shows the commonality between other economic propositions and the two economic beliefs that are at the heart of this book, that U.S. markets are competitive and that the primary responsibility of corporations is to make money for its shareholders. Many people believe statements just because economists make them. Some people take these statements to be absolute truths, even though they are only opinions drawn from economic narratives disputed by many economists. Yet, despite this rejection, policymakers, members of the media, and laypeople still believe that they are true. John Quiggin and other economists refer to these views as “zombie economics” because they “still walk among us.” The chapter considers three of these: trickle-down tax policy, austerity, and privatization. No serious economist supports trickle-down tax policy, while the benefits of the other two propositions are disputed by a good number of economists. One of the lessons of this book is the need to question economic propositions put forth by policymakers as the absolute truth.

Belief Systems and Confirmation Bias

Chapter 8 uses lessons from the new institutional economics and the concepts of confirmation bias and belief systems to explain why so many people are reluctant to change their views about the U.S. markets and about the desirability of additional government regulation. The chapter begins by describing the development of belief systems, the filter through which people see the world. It explains how people create mental models of the world to simplify things and how people use heuristics and rules of thumb to help make decisions. Once people develop their views of how the world works, confirmation bias makes it difficult to change them. People have a tendency to pay attention to the information that reinforces their prior beliefs and to disregard information that challenges them. In addition, the vast majority of people have much more to think about than the relationship between the market and the government, so they do not pay much attention to details. The chapter uses studies about the rigidity of political views as an example to show the difficulty in changing the public’s acceptance of the harm done to workers by mergers and outsourcing.

Legitimization of Greed—Heartbreak to Workers

Chapter 7 discusses the changes in norms that have made it acceptable to make as much money as possible in any legal way, even at great harm to labor and communities. The chapter also considers the role of the media in glorifying the wealthy, along with its constant reporting of stock prices—which reinforces the belief that corporations exist only for shareholders. The chapter shows how the quest for wealth this century has led to a large, growing disparity in both income and wealth. Then the chapter examines the imprecision of unemployment statistics, showing how the statistics (1) overlook people who are not seeking work, and (2) disregard the change in pay and benefits when displaced workers take new jobs. In trying to assess the permanence of the harm caused to displaced workers, the chapter examines retaining programs under the Trade Adjustment Assistance program, which was designed to help workers who lost their jobs as a result of outsourcing. In what may be a surprising result, a number of studies have shown that retraining generally does not improve the employment prospects of displaced workers. Finally, the chapter looks at the tragic effects on two communities from the closing of an automobile manufacturing plant in Janesville, Wisconsin, and the shrinkage of a glass manufacturing company in Lancaster, Ohio.