To the extent the populist insurgency in the west has been successful, it is because its diagnosis of what is wrong with the world rings true to many people’s ears. The accusation that the economy is rigged, in particular, resonates — and that is because it contains a kernel of truth, and more than a kernel in the case of the US.
For evidence, take a look at Jason Furman’s recent observations on increasing market concentration in the US economy. He gives detailed evidence in prepared testimony to an OECD hearing into market concentration — one of a number of timely roundtables the organisation has been holding on competition policy.
Furman demonstrates an increased concentration in revenue across companies in many important sectors.
He also points to an increasingly skewed distribution of the return to capital as a sign that the increased concentration comes with increased market power, rather than (or in addition to) secular changes in production processes favouring larger units that maintain competition.
It is plausible to blame this phenomenon for a number of problems in the economy, including the fall in productivity growth and the pressure on labour incomes. How so? More rent extraction means more secure incumbent companies, and lack of dynamism (Furman demonstrates that the rate of destruction of old companies and creation of new ones has declined) undermines an important channel for growth: that resources move from less productive to more productive competitors. Lack of competition, by allowing greater mark-ups of prices over costs — including labour costs — can also explain a change in income shares from labour to capital.
And, importantly, Furman argues that increased concentration is, to a large degree, the consequence of policy choices — such as weak competition policy and antitrust enforcement, as my colleague Rana Foroohar regularly exposes— rather than just “natural” causes.
There is a bright side to this diagnosis, which is that what bad policy has wrought, good policy can undo. That makes it particularly interesting to compare different countries. Recent research by Germán Gutiérrez and Thomas Philippon precisely does that and busts an old myth: “Until the 1990s, US markets were more competitive than European markets. Today, European markets have lower concentration, lower excess profits, and lower regulatory barriers to entry.” This, they find, is true not just overall but within most individual industries.
Why does Europe do better? Gutiérrez and Philippon give two reasons. The first is that the EU institutions that have been built to police Europe’s single market are more independent than equivalent US ones, and the single-market driven efforts to reduce regulatory barriers mean Europe has undertaken more pro-competitive reforms. The political economy behind the institutional independence, the authors argue, is a result of the EU’s supranational nature: governments that may be sympathetic to their own industry’s vested interests do not want to take the chance that a common regulator be captured by another country’s businesses.
This ties in with the second reason, which is there is much less business lobbying in Europe than in the US.
What lessons should we draw from this? One is just a caveat: we cannot blame all economic ills on a rigged economic system. In particular, since productivity growth has fallen in Europe as well as the US, insufficient competition can at best partially account for it. But the explanation holds better for other phenomena, for example the change in income shares. Gutiérrez and Philippon show that (once real estate is excluded) the increase in the profit share to the detriment of labour incomes is largely a US phenomenon.
There is a deeper political point to make. The rise of populism is sometimes attributed to the rise of alienating systems of rules that reduce the room for popular decision making, or of popular dislike for liberal niceties — what Yascha Mounk calls “undemocratic liberalism” and “illiberal democracy”. But in the economic sphere at least, does this really hold? A central tenet of liberalism is fair rules equally binding on all, which among other things must mean vigorous competition policy. And an economy rigged for already-privileged interests is rarely a widely held popular demand.
On this score, then, the US has moved towards both less democracy and less liberalism over the past quarter-century. Meanwhile, the EU has gained more of both — and it has done so by doubling down on the international economic order that populists attack.
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