Sunday, December 4, 2011

The Cartelization of American Business


ZeroHedge: How The U.S. Will Become a 3rd World Country (Part 2):

Corporate influence over the political process, as well as over the tax and regulatory policies of the United States, is at an all time high.  The federal government is the largest single customer in the U.S. economy and, through taxation or regulation, the government can grant or deny market access to private companies and can either prevent or mandate the consumption of their products and services.  As a result, virtually every large corporation in the United States seeks to win the government’s business and to steer government tax policies and regulations in their favor.  Naturally, politicians who accede to the wishes of particular corporations are given campaign funds to ensure their reelection.  In the past decade, the amount of money spent on lobbying has more than doubled and there are currently 24 lobbyists for every 1 member of Congress.
The interdependence of elected officials and the largest U.S. corporations reached a new high with the 2008 bank bailouts.  The influence of private corporations and de facto industrial cartels (comprising the largest corporations in each major industry) over tax and regulatory policies creates significant economic distortions that ultimately compromise the sustainability and the stability of the economy.  Ideally, the government would be an impartial referee, rather than an active business partner that overwhelmingly favors large businesses over small businesses, despite the fact that small businesses account for the vast majority of American jobs.

This "cartelization" of American business happens as larger companies acquire smaller competitors, but the problem is that the illusion of competition often remains. One example that air travelers may notice are all of the different companies offering rental cars. As you walk down "rental car row" in any airport you might see Hertz, Avis, Enterprise, Alamo, Budget, and National, and take a certain pride in the diversity of options that capitalism has provided. In fact, Alamo, Budget, and National are little more than brands. Avis owns Budget, and Enterprise owns both Alamo and National.

The loss of a competitive market may hurt the customer, but it helps the politicians by simplifying fundraising. Continuing with the car rental example, a politician who wants to raise money for a campaign no longer needs to call Budget, Alamo, or National. They only need to ask for money from Hertz, Avis, and Enterprise; however, the potential money raised remains roughly the same. Each of those three companies will decided which candidates they want to endorse and then marshal funds to those candidates by asking their employees to donate to their endorsed candidates. Unions do the exact same thing. Over the years they've merged to form larger and larger unions.

Merging to form a larger company may provide market advantages. For instance, because Enterprise operates Alamo and National, they may have more logistical options for managing their fleet compared to smaller providers. Those market advantages come at the expense of the systemic risks brought about by large corporations. Those risks then become a costs to the tax payer when the large corporation needs to be bailed out. Remember that unlike a small business, large corporations employee lobbyists to convince politicians to create laws that benefit the company.

Nassim Nicholas Taleb, author of The Black Swan, and Mark Blyth have some thoughts on this problem and political dysfunction in America in their paper The Black Swan of Cairo (h/t Zerohedge):

Why is surprise the permanent condition of the U.S. political and economic elite? In2007–8, when the global financial system imploded, the cry that no one could have seen this coming was heard everywhere, despite the existence of numerous analyses showing that a crisis was unavoidable. It is no surprise that one hears precisely the same response today regarding the current turmoil in the Middle East. The critical issue in both cases is the artificial suppression of volatility—the ups and downs of life—in the name of stability. It is both mis-guided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high-impact, low-probability “tail risks” to disappear from policymakers’ fields of observation.

In short: too big to fail is two words too long.

1 comment:

Margaret said...

Some corporations refuse to do business with the federal government because of the red tape, late and short payments, and scrutiny they are forced to go through for the contracts.

One of our local banks refused TARP money because the president did his due diligence and actually read the document.