Something has gone terribly, terribly wrong with American capitalism. This argument, put forth by Jonathan Tepper and Denise Hearn, lies at the heart of their explosive new book The Myth of Capitalism: Monopolies and the Death of Competition. Instead of delivering on its stated promise to provide more opportunity, prosperity and choice, they argue, Americans today are subjected to a system that encourages and rewards predatory behavior, in which corporate monopolists and oligopolists are allowed to bleed consumers dry (and sometimes literally make them bleed) with impunity because the government has been “captured to rig the rules of the game for the strong at the expense of the weak.”
The two, it should be noted, are no Marxists—quite the opposite. A staunch and passionate advocate for free markets, Tepper is the founder of Variant Perception, an investment research firm that caters to hedge funds, banks, asset mangers and family offices. A senior fellow at The American Conservative, he has previously worked at SAC Capital and Bank of America (where was he was Vice President in proprietary trading).
How does a self-professed fan of markets end up writing a book titled “The Myth of Capitalism”? For one, argues Tepper, what is often called capitalism today is not, in fact, capitalism: competition is the essence of capitalism, and there is almost no competition in the American economy today. “Capitalism,” write Tepper and Hearn, “has been the greatest system in history to lift people out of poverty and create wealth, but the ‘capitalism’ we see today in the United States is a far cry from competitive markets.” Instead, the US economy has been overtaken by a “fake version of capitalism,” with government officials allowing (even cultivating) the concentration of economic and political power in the hands of few powerful monopolists who “cozy up to regulators to get the kind of rules they want and donate to get the laws they desire.”
A clear and incisive indictment of the United States’ increasingly monopolized economy, where rising market power has led to less competition, lower productivity, lower wages and staggering inequality, The Myth of Capitalism is also an urgent call to action for both the left and the right to support the restoration of America’s antimonopoly ideals. [We published an excerpt from the book last week. Read it here.]
In a recent interview with ProMarket, Tepper talked about the rise of America’s oligopoly problem, explained why he believes antimonopoly is not a left-right issue, and called on those who believe in free markets to support meaningful reforms. “If the people who love capitalism and competition don’t reform markets,” he warns, “people who don’t like capitalism are going to do it, and I think that we’ll all be worse off.”
by Asher Schechter, ProMarket | Read more:
Image: via
The two, it should be noted, are no Marxists—quite the opposite. A staunch and passionate advocate for free markets, Tepper is the founder of Variant Perception, an investment research firm that caters to hedge funds, banks, asset mangers and family offices. A senior fellow at The American Conservative, he has previously worked at SAC Capital and Bank of America (where was he was Vice President in proprietary trading).
How does a self-professed fan of markets end up writing a book titled “The Myth of Capitalism”? For one, argues Tepper, what is often called capitalism today is not, in fact, capitalism: competition is the essence of capitalism, and there is almost no competition in the American economy today. “Capitalism,” write Tepper and Hearn, “has been the greatest system in history to lift people out of poverty and create wealth, but the ‘capitalism’ we see today in the United States is a far cry from competitive markets.” Instead, the US economy has been overtaken by a “fake version of capitalism,” with government officials allowing (even cultivating) the concentration of economic and political power in the hands of few powerful monopolists who “cozy up to regulators to get the kind of rules they want and donate to get the laws they desire.”A clear and incisive indictment of the United States’ increasingly monopolized economy, where rising market power has led to less competition, lower productivity, lower wages and staggering inequality, The Myth of Capitalism is also an urgent call to action for both the left and the right to support the restoration of America’s antimonopoly ideals. [We published an excerpt from the book last week. Read it here.]
In a recent interview with ProMarket, Tepper talked about the rise of America’s oligopoly problem, explained why he believes antimonopoly is not a left-right issue, and called on those who believe in free markets to support meaningful reforms. “If the people who love capitalism and competition don’t reform markets,” he warns, “people who don’t like capitalism are going to do it, and I think that we’ll all be worse off.”
Q: You start the book with David Dao, the passenger that was a beaten and forcibly removed from a United flight last year for refusing to give up his seat. What is it that makes what happened to Dao “a metaphor for American capitalism in the twenty-first century,” as you call it?
First, I think the episode clearly resonated with the public because people feel that something’s changed in the airline industry, that airlines are nickel and diming them, and that part of it is also tied to increasing concentration and market power.
But the main reason [David Dao] came to my mind is that in the days after, I was reading the news and there were quite a few articles pointing out how airlines are now an oligopoly and that you have no choice, and most of the Wall Street research houses were putting out similar notes, so the stock went up. The idea was that it just doesn’t matter what you do in terms of public relations or how you treat customers—if you have a lock on the customers, they have no choice.
So you have the passenger who was bloodied, and that’s horrific. But what was almost more horrific was that once everyone started focusing on the fact that it was an oligopoly, the stock went up. (...)
Q: And yet you argue that what we have in the United States today is a “grotesque, deformed version of capitalism.” What is the difference between capitalism, as you see it, and today’s US economy?
Jeremy Grantham once said that “profit margins are the most mean-reverting series in finance. If margins don’t revert, something has gone wrong with capitalism.” Given that we have record-high corporate profit margins and very little mean reversion, it is a sign that we aren’t seeing a lot of competition. It’s not just obvious that we don’t have a lot of competition from new entrants, but there’s relatively little competition in many industries—a lot of markets are divided up geographically, or there’s collusion.
Capitalism is not just having private property and not being communists, but rather it’s actually having competition. Competition is what creates clear price signals that help drive supply and demand. So the absence of competition, the absence of contestability, is troubling. (...)
Q: There has been a lot of talk in the media about America’s monopoly problem in recent years, but you argue that the US doesn’t have a monopoly problem so much as an oligopoly problem. Why is oligopoly the more pressing problem?
Having four players is not vastly better than having one. Some people say that only monopolies are bad and therefore if you don’t have a monopoly, things are totally fine. The truth is there are sectors in the economy where you have duopolies or an oligopoly with three, four, even five players. What ends up happening is that you end up with tacit collusion, where companies play repeated games with each other and have no incentive to compete on price.
You’d think that if one of them hikes prices, the others might then want to capture some market share, but basically competitors tend to move in lockstep. You don’t even have to do that by speaking to each other—it’s pretty well understood that you can use company conference calls and establish essentially what you’re going to do in terms of trying to chase market share or not, or your levels of pricing and all that.
In the book, I quote one of the world’s top pricing experts who wrote a book where he pretty much advises companies to send signals to the market, whether it’s via press releases or quarterly conference calls, but recommends that the readers consult with their lawyers and attorneys first, clearly understanding that speaking directly is illegal but speaking indirectly is not. There’s been research done on airline conference calls and how airlines have used conference calls to indicate whether they’ll expand or not. The FTC was in fact looking into that—but the FTC is a do-nothing institution and I doubt anything will come of it.
But you find this in many other areas. In the book, I compare this to how the mob commission used to divide up the US: One family might have one part of the city and another family might have the other part of the city, and people would stay off each other’s turf. If you look at the way that the insurance markets carved up the United States, where you’ll have one or two dominant insurers per state, or how retail stores divided up the US geographically and tend not to compete head on, it’s very similar. (...)
Q: The US economy you describe in the book is markedly different than what American capitalism looked like 40-50 years ago. How did we end up here?
The counterrevolution which led us to where we are today really started essentially in the 1960s and 1970s, when Robert Bork and others did not like the fact that the antitrust was being vigorously enforced. They thought it was preventing efficiency and some economies of scale, and they did have a point—antitrust was very restrictive, and some minor deals that wouldn’t have caused any competitive issues were blocked.
But the problem is that when you fast forward 40 years later, what started out as possibly a worthwhile effort to allow slightly more mergers has ended up becoming basically a policy that’s become a do-nothing policy, in which K Street law firms, economists-for-hire that go in and out of government at the DOJ and the FTC, and Wall Street firms are all spectacularly well paid to push mergers through.
It’s very much like the NCAA’s Sweet 16, where you start out with 16 teams and then get down to eight, and then four and then two. We’ve had a merger wave in the 1980s that graduated in the 1990s, a merger wave leading up to the 2007 crisis and then a merger wave that peaked around 2015, and in many industries we’ve just basically been eliminating player after player.
That’s really sort of how we got here: a ratchet effect where each merger wave takes out more and more players. The process of getting mergers through is deeply corrupted, with economists-for-hire presenting models showing that prices will go down and studies showing that these models are almost always wrong and that you generally get higher prices. The whole system is essentially a charade.
Q: But also, the government was not a silent player in all this. Many political choices were made along the way.
I completely agree. I think that one of the key issues is that the government completely and radically changed antitrust through the bureaucracy, through the merger guidelines, and then basically by doing nothing and allowing mergers to proceed. Whereas the Sherman Act and Clayton Act were political acts passed by Congress, this is not something that we’ve collectively agreed is what we want. I think that most people are appalled at how things have changed.
In many cases, the people who are pro-merger have also taken over the courts and basically made the burden of proof so high that it’s very difficult to stop mergers. A lot of this is highly, highly ideological, in the sense that most of the pro-merger studies or models that are done before mergers turn out to be wrong, retrospectively. I have loads of footnotes in the book, and I hope people do go and read further studies.
What really happened is basically what I call an orgy of influence-peddling, with people moving in and out of the top of the FTC and the DOJ essentially green-lighting mergers and helping make them happen once they’re out of government. (...)
Q: What is your proposed solution for reforming markets and restoring an open, competitive economy?
In the book, I have a series of principles and specific reforms based on those principles. They’re fairly broad and I don’t pretend to have all the answers. There are many other people that put forward good ideas. Some of the key principles I mention are trying to reduce barriers to entry, to enhance competition, enforcement of antitrust, which means preventing mergers that reduced competition as well as undoing previous mergers that have created less competitive markets. Another key principle is to limit the revolving door. In the case of the US, you want to make sure that companies are limited in terms of how they can influence elections.
Those are just very basic reforms, but they could go a long way if implemented. Markets will not reform themselves. Monopolists are not going to want to give up their power and the current status quo in antitrust, because it pays them very, very well.
I would add that I’m not in favor of more regulation on its own. High levels of regulation create higher barriers to entry, and the most regulated sectors tend to be the ones with the highest concentration. What I’m in favor of is principles-based regulation rather than rules-based regulation. Glass Steagall was 35 pages long and worked for about 70 years, while Dodd-Frank is 2,200 pages and we’ve basically seen almost no new banks. I am also wary of creating new regulators or making regulators more powerful without making them accountable, because then you get regulatory capture. But I do believe we need more vigorous antitrust and a sensible reform of regulations.
First, I think the episode clearly resonated with the public because people feel that something’s changed in the airline industry, that airlines are nickel and diming them, and that part of it is also tied to increasing concentration and market power.
But the main reason [David Dao] came to my mind is that in the days after, I was reading the news and there were quite a few articles pointing out how airlines are now an oligopoly and that you have no choice, and most of the Wall Street research houses were putting out similar notes, so the stock went up. The idea was that it just doesn’t matter what you do in terms of public relations or how you treat customers—if you have a lock on the customers, they have no choice.
So you have the passenger who was bloodied, and that’s horrific. But what was almost more horrific was that once everyone started focusing on the fact that it was an oligopoly, the stock went up. (...)
Q: And yet you argue that what we have in the United States today is a “grotesque, deformed version of capitalism.” What is the difference between capitalism, as you see it, and today’s US economy?
Jeremy Grantham once said that “profit margins are the most mean-reverting series in finance. If margins don’t revert, something has gone wrong with capitalism.” Given that we have record-high corporate profit margins and very little mean reversion, it is a sign that we aren’t seeing a lot of competition. It’s not just obvious that we don’t have a lot of competition from new entrants, but there’s relatively little competition in many industries—a lot of markets are divided up geographically, or there’s collusion.
Capitalism is not just having private property and not being communists, but rather it’s actually having competition. Competition is what creates clear price signals that help drive supply and demand. So the absence of competition, the absence of contestability, is troubling. (...)
Q: There has been a lot of talk in the media about America’s monopoly problem in recent years, but you argue that the US doesn’t have a monopoly problem so much as an oligopoly problem. Why is oligopoly the more pressing problem?
Having four players is not vastly better than having one. Some people say that only monopolies are bad and therefore if you don’t have a monopoly, things are totally fine. The truth is there are sectors in the economy where you have duopolies or an oligopoly with three, four, even five players. What ends up happening is that you end up with tacit collusion, where companies play repeated games with each other and have no incentive to compete on price.
You’d think that if one of them hikes prices, the others might then want to capture some market share, but basically competitors tend to move in lockstep. You don’t even have to do that by speaking to each other—it’s pretty well understood that you can use company conference calls and establish essentially what you’re going to do in terms of trying to chase market share or not, or your levels of pricing and all that.
In the book, I quote one of the world’s top pricing experts who wrote a book where he pretty much advises companies to send signals to the market, whether it’s via press releases or quarterly conference calls, but recommends that the readers consult with their lawyers and attorneys first, clearly understanding that speaking directly is illegal but speaking indirectly is not. There’s been research done on airline conference calls and how airlines have used conference calls to indicate whether they’ll expand or not. The FTC was in fact looking into that—but the FTC is a do-nothing institution and I doubt anything will come of it.
But you find this in many other areas. In the book, I compare this to how the mob commission used to divide up the US: One family might have one part of the city and another family might have the other part of the city, and people would stay off each other’s turf. If you look at the way that the insurance markets carved up the United States, where you’ll have one or two dominant insurers per state, or how retail stores divided up the US geographically and tend not to compete head on, it’s very similar. (...)
Q: The US economy you describe in the book is markedly different than what American capitalism looked like 40-50 years ago. How did we end up here?
The counterrevolution which led us to where we are today really started essentially in the 1960s and 1970s, when Robert Bork and others did not like the fact that the antitrust was being vigorously enforced. They thought it was preventing efficiency and some economies of scale, and they did have a point—antitrust was very restrictive, and some minor deals that wouldn’t have caused any competitive issues were blocked.
But the problem is that when you fast forward 40 years later, what started out as possibly a worthwhile effort to allow slightly more mergers has ended up becoming basically a policy that’s become a do-nothing policy, in which K Street law firms, economists-for-hire that go in and out of government at the DOJ and the FTC, and Wall Street firms are all spectacularly well paid to push mergers through.
It’s very much like the NCAA’s Sweet 16, where you start out with 16 teams and then get down to eight, and then four and then two. We’ve had a merger wave in the 1980s that graduated in the 1990s, a merger wave leading up to the 2007 crisis and then a merger wave that peaked around 2015, and in many industries we’ve just basically been eliminating player after player.
That’s really sort of how we got here: a ratchet effect where each merger wave takes out more and more players. The process of getting mergers through is deeply corrupted, with economists-for-hire presenting models showing that prices will go down and studies showing that these models are almost always wrong and that you generally get higher prices. The whole system is essentially a charade.
Q: But also, the government was not a silent player in all this. Many political choices were made along the way.
I completely agree. I think that one of the key issues is that the government completely and radically changed antitrust through the bureaucracy, through the merger guidelines, and then basically by doing nothing and allowing mergers to proceed. Whereas the Sherman Act and Clayton Act were political acts passed by Congress, this is not something that we’ve collectively agreed is what we want. I think that most people are appalled at how things have changed.
In many cases, the people who are pro-merger have also taken over the courts and basically made the burden of proof so high that it’s very difficult to stop mergers. A lot of this is highly, highly ideological, in the sense that most of the pro-merger studies or models that are done before mergers turn out to be wrong, retrospectively. I have loads of footnotes in the book, and I hope people do go and read further studies.
What really happened is basically what I call an orgy of influence-peddling, with people moving in and out of the top of the FTC and the DOJ essentially green-lighting mergers and helping make them happen once they’re out of government. (...)
Q: What is your proposed solution for reforming markets and restoring an open, competitive economy?
In the book, I have a series of principles and specific reforms based on those principles. They’re fairly broad and I don’t pretend to have all the answers. There are many other people that put forward good ideas. Some of the key principles I mention are trying to reduce barriers to entry, to enhance competition, enforcement of antitrust, which means preventing mergers that reduced competition as well as undoing previous mergers that have created less competitive markets. Another key principle is to limit the revolving door. In the case of the US, you want to make sure that companies are limited in terms of how they can influence elections.
Those are just very basic reforms, but they could go a long way if implemented. Markets will not reform themselves. Monopolists are not going to want to give up their power and the current status quo in antitrust, because it pays them very, very well.
I would add that I’m not in favor of more regulation on its own. High levels of regulation create higher barriers to entry, and the most regulated sectors tend to be the ones with the highest concentration. What I’m in favor of is principles-based regulation rather than rules-based regulation. Glass Steagall was 35 pages long and worked for about 70 years, while Dodd-Frank is 2,200 pages and we’ve basically seen almost no new banks. I am also wary of creating new regulators or making regulators more powerful without making them accountable, because then you get regulatory capture. But I do believe we need more vigorous antitrust and a sensible reform of regulations.
by Asher Schechter, ProMarket | Read more:
Image: via
