Little competition in big business

This article is a followup to the Coeur d’Alene Press article published April 19: Goldman’s Golden Fleecing. I begin each article in this series with a paraphrase from “The Nearly Perfect Storm: An American Financial and Social Failure.”

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On the back row of the chessboard of wealth, the players are vying for control and power. Dodd-Frank details are now forthcoming, loopholes are forming, and lobbyists are queuing-up at Congressional offices. [Dodd Frank was enacted by Congress as a result of the 2008 meltdown.]

Meantime, Joe and Josephine citizen sit as pawns on the front row, trying to come to grips with America’s decline into a self-defeating triad of capitalizing gains, socializing risks, and shirking responsibility. America’s rank and file citizens are increasingly befuddled and angry. These manifestations of crony-infested market capitalism are leading more people to question the rule of law as it is practiced in the investment bank sector and with other large companies.

A study conducted by The Economist magazine (March 26, 2016) reveals a profitable large-scale American firm today has an 80 percent chance of being equally or more profitable 10 years from now.

One could say, sure, that’s the American way. If a company cannot compete, it goes under and is replaced by a better company. It is one of the ideas of capitalism: creative destruction, a theory of

economic advancement, as described by economist Joseph Schumpeter.

Along with this destruction comes the redistribution of power (and money) to the succeeding companies. In so doing, creative destruction prevents the accumulation of concentrated power. Thus, it discourages monopolies from forming.

But an 80 percent success rate? In the 1990s, the success rate was only 50 percent.

Competition, where art thou?

The 80 percent figure does not point to creative destruction or vigorous competition. Even more, American firms’ excess cash (beyond investment) is about $800 billion a year, or 4 percent of the nation’s gross domestic product (GDP). This amount of cash suggests these companies charge excessively high prices for their products or pay excessively low wages to employees — or both.

At the same time, small company creation is at its lowest level in over four decades. Can there be competition with resultant creative destruction if new competitors cannot enter the ring? No. In the present climate, the competition must come from firms that are already doing business. But many existing large firms are being absorbed by their competitors.

Yet, according to Maria Contreras-Sweet, administrator of the Small Business Administration (SBA), the 28 million small businesses in America create two out of every three new jobs. She also states that 64 cents of every dollar spent in a small business neighborhood, stays in that “neighborhood,” and not an off-shore bank account.

Why is there so much profit among the existing large firms and so few firms being created (in relation to the past)? The studies cited in this article claim the culprit is the increased concentration of power among fewer and fewer large companies, brought on by mergers and acquisitions, and the resultant power to keep moats around their increasingly closed industries.

Moreover, additional administrative burdens, courtesy of complex pieces of legislation, have increased significantly the “cost of doing business.” Start-up firms cannot afford the overhead of the red tape of laws that are unto themselves, almost incomprehensible. I tried to read the Obamacare plan. I was able to grasp the first draft of the legislation, but as additions were made to give the law its “teeth,” I gave up. It is more than 20,000 pages in length and growing.

I have had the same experience with other major pieces of legislation, especially the Dodd-Frank legislation. I was a small business owner. I am thankful I retired. Nowadays, I am not sure I could afford the accountants and lawyers to keep me in compliance with these laws.

Even more, America is taking on the patina of Third-World countries by requiring occupational licenses for 29 percent of professions, in comparison to 5 percent in the 1950s, a way for local governments to increase their revenue and control.

Apart from this dangerous trend of legislative overkill, the government has allowed too many mergers, leading to more concentration and less competition. Studies state:

“Two-thirds of [America’s] economy [in] 900-odd industries have become more concentrated since 1997. A tenth of the economy is at the mercy of a handful of firms. …Since 2008, American firms have engaged in one of the largest rounds of mergers in the country’s history. …The companies in question [regardless of their advertisements] usually make no pretense of planning to pass the savings they make…to their customers.”

The result of each merger is less competition, which can translate (as the 80 percent figure substantiates) into fewer chances of failure. None other than Warren Buffett states he likes companies with moats around them that protect his firms from competition. America’s vaunted capitalist does not like a pillar of capitalism: free enterprise.

Wretched excess

As one example of the absurdity of this trend, last week I made flight reservations to travel to and from southern California. I had read that some airlines were shrinking the width of their seats. Some have already decreased leg room, to which I can personally attest. I asked the airline agent how much it would cost to rent a wider seat: $39 per leg [one take-off and landing] of the trip. My round-trip entails eight legs, because of an intermediate layover at another city for business. I would have to pay almost as much as my airfare to garner a small bit of comfort during this trip.

Fuel costs have gone down, but the airlines have not reduced their fares accordingly or ceased these insulting add-ons. Instead, they nickel-and-dime passengers, who because of industry consolidation have fewer flight alternatives from which to choose. Last year, America’s airlines made $24 billion, exceeding the profits of the Internet giant, Google. Four airlines now dominate the industry, and they are gobbling up smaller airlines to increase their concentration.

Mr. Buffett’s moats are resulting in less competition in America. Competition is increasingly being played according to the rules of incumbent companies. This situation is effective for those American companies, but not effective for America. The practice masks Adam Smith’s invisible hand in that it does not lead to societal benefits. Joseph Schumpeter is turning over in his grave.

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Uyless Black is a Coeur d’Alene resident who spent part of his career as Senior Vice President at the Federal Reserve Bank of Dallas. He also served as ombudsman for the Federal Reserve Board in Washington, D.C. While at the Fed, he wrote the first program that simulated America’s money supply.