Why Our Capitalist System Is Broken and How to Fix It, According to Author Jonathan Tepper
By Mary Childs
Barron's
Updated Dec. 11, 2018 10:04 a.m. ET
Jonathan Tepper
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About 18 months ago, Jonathan Tepper realized his metric was broken.
A founder of macroeconomic research group Variant Perception, Tepper had created what he called the United States wages leading indicator. Based on labor-market tightness, unemployment claims, and other factors, it predicted whether workers would get a raise. Because wages are the biggest corporate expense, it could also predict when corporate profits would feel the pain of higher wages. It worked “flawlessly” for decades, he says.
But in 2017, as corporate profits kept rising and the indicator forecast higher wages, those wage gains didn’t materialize. Something was amiss, and it mattered—for investors and the economy—whether the shift was cyclical and would right itself, or a symptom of a structural change.
Tepper began to dig into the issue, and concluded that a growing concentration of corporate power was responsible. His reading included an academic paper by Rice University Professor Gustavo Grullon and others entitled “ Are Industries Becoming More Concentrated?” He also thought of Jeremy Grantham, co-founder of the investment firm Grantham, Mayo, & Van Otterloo, telling Barron’s that profit margins are “probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism.”
Tepper and colleague Denise Hearn recently published a book on the subject: The Myth of Capitalism: Monopolies and the Death of Competition, which unpacks how American commerce—and American life—came to be dominated by a handful of powerful mega-corporations.
Years of friendship with Tepper paid off in a candid conversation about capitalism, and much more. Here are the highlights.
So, not to make this about me, but reading your book, I couldn’t help thinking about media consolidation—how U.S. media coverage outside of major cities has dropped, how there are six public-relations people for every journalist. To me, that shows how companies increasingly seek to write their own narrative.
When people read the book, they generally think of their own industry. When I sit on a plane next to a doctor, he’ll tell me his entire town is run by the same hospital system. When I talk to my literary agent, they’re down to five publishers, even though [there’s] the appearance of 30 or 40 publishing imprints. Industry after industry, it resonates.
The loss of trust in journalism goes back to the increasing consolidation. You had over 50 major media organizations in the early 1990s, and you’re now down to six. Most are in New York or L.A. These are very distant from the actual concerns of most Americans. Local news is dying and it’s not just the consolidation; you have Facebook and YouTube capturing all the economics of content creation.
Why now?
We’re at the end of four merger waves since merger guidelines were changed in the early ’80s. We are now seeing the full effect in terms of economic growth, productivity, wages, and higher prices.
To what extent has the finance industry fueled this?
Massively. Merger and acquisition departments at banks get paid for [facilitating] consolidation. This year alone they’ve made $21 billion in M&A fees. Whose incentive is it to see concentration? Wall Street; K Street law firms that represent companies in front of the [Federal Trade Commission] and [Department of Justice]; economists paid to write fantastic and fanciful models of what will happen with prices. There’s a revolving door between the DOJ and FTC and law firms and economic consulting groups like Charles Rivers and Compass Lexecon. There’s an enormous amount of money stacked in favor of mergers. There’s no one really out there representing consumers or workers.
What are some other factors beyond 1980s merger regulation?
China joining the World Trade Organization; the global labor arbitrage; the financial crisis; relatively high levels of student debt and mortgage debt reduced geographic mobility. If people have less geographic mobility, they’re searching for jobs in highly concentrated markets. Lots of things interact with each other.
The book talks about concentration in airlines and insurance. What are other areas now getting more attention?
Economists are starting to focus on the impact on workers. The opposite of a monopoly, where you have one seller, is a monopsony, with one buyer. Many labor markets are increasingly monopsonistic. I don’t mean that literally, like there’s one coal company that owns the town, which happened in West Virginia, but metaphorically. If people can’t go out and search far and wide for jobs—if there are what economists call frictions and asymmetries, meaning the companies have good information about what the right pay is, and workers don’t, or companies can hire and fire at will, but employees are tied by non-competes—that’s an effective form of monopsony, where you only have one buyer for your labor. Janitors have been sued for trying to find another job. One-fifth of Americans are covered by noncompetes. You’re not in a coal town, but you can’t shop for a better wage.
Why has the “party of business” not seized on this?
People have confused being pro-big business with being pro-capitalism. Because many of the monopolies or oligopolies donate money, many representatives tend to see things in line with them. Entrepreneurs love what I’m writing; they want a fair shake. [Friedrich] Hayek and other conservative economic thinkers were against concentrations of economic power. Greater economic dynamism, more competition, freedom, are things the right should love and value.
What do you prescribe?
Markets should remain open to all entrants. Crony regulations have functioned as barriers to entry in many industries; we have to have principles-based regulation, rather than rules-based. Glass-Steagall was 35 pages and worked well for years; loads of banks started. Dodd-Frank was 2,200 pages, and almost no new banks have started. More regulation is not a solution to creating a better economy.
There’s extensive evidence that getting below six key players in an industry increases prices. You want to stop mergers that materially reduce the number of competitors. We do need to break up mergers that have made industries uncompetitive. I’d break up Google in a second—-- they never should’ve been allowed to buy DoubleClick or AdMob and vertically integrate the ad exchanges. There’s no reason why two companies should control 90% of the U.S. beer market. I’d break up most of the recent insurance mergers.
You forgot Facebook [ticker: FB].
I’d throw Facebook in. With WhatsApp and Instagram, they materially reduced the social-networking space.
What are the odds people take your advice?
Historically, relatively low. But it’s not just me; it has to be a groundswell. All I’m doing is adding my little grain of sand to the sand pile. That [Tim] Wu is coming out at the same time—I didn’t know he was writing a book, he didn’t know I was writing a book—tells you it was the zeitgeist.
The polls show this is very popular. I don’t think it’s a left or right issue; Republicans are waking up to the fact that it’s not good to let Google and Facebook determine who gets to speak in the marketplace of ideas. I don’t think there’s bias in search results, but it’s not good to have the internet controlled by two companies.
I’d be thrilled if this were an election issue in 2020. It’s long overdue. The merger guidelines could be changed, but the DOJ and FTC are essentially captured by the pro-merger lobby and pro-merger economists. We need legislation.
What should Barron’s readers consider?
Are very big companies good for investment? While monopolies do throw off a lot of cash, there is a lot of evidence that breaking up companies leads to better outcomes: Companies are able to grow and do well on their own. Rockefeller was playing golf when he heard Standard Oil was being broken up and his tip to his golf partner was to buy Standard Oil. Often the parts are worth more than whole. There’s a good website, Google Cemetery, of the brands Google shut down. It’s breathtaking. You have to wonder how many good ideas die within companies. Look at spinoffs. Realize big isn’t always better. There’s a good reason to not have behemoths controlling an economy.
Thanks, Jonathan. •
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