What America Needs: More Competition

Unfashionably, I am an unrepentant advocate for free market capitalism. Vocal “progressive” and populist critics assail the system as rotten, rigged against ordinary people, aggravating inequality. Their cure: more regulation and government intervention, protectionism, curbing free trade, forcing wages higher, and banning corporate money from politics.

Well, the system is indeed rigged. Corporate money does suborn government. And, as a recent piece in The Economist explains, not only have overall profits been strong,* but particularly profitable companies have, in this century, been able to sustain their dominance. That’s contrary to economic theory, which says fat profits in a sector will soon attract competitors, driving prices down and squeezing profits.

However, the cited “progressive” agenda would actually make things worse. Indeed, a lot of it is already part of the problem. The true problem is insufficient competition. And everything “progressives” seek would lessen competition.

When I wrote my Rational Optimism book in 2009, the airline industry was Exhibit A for the virtue of competitive free markets. Now it exemplifies what’s gone wrong. The industry once was pervasively regulated and government-cosseted, but in the 1970s Alfred Kahn (my former leader at the NY PSC) heroically swept all that aside. The resultant flowering of new small airlines and open competition slashed fares so much that flying was no longer for the rich alone. The skies opened to millions of travelers, a vast public boon. And, as of 2009, the industry’s cumulative profits, over its entire history, were approximately zero. In other words, all the benefits of airline investment were captured by consumers, with nothing for the “greedy capitalists” who made it possible!

But then a wave of consolidations and mergers drastically reduced airline competition. Carriers now have far more pricing power, becoming very profitable indeed. Their fuel costs recently collapsed – in competition’s heyday, that would have triggered huge fare cuts – but now airlines get to keep the windfall.

So, as The Economist argued, what we need is not the anti-competitive “progressive” agenda but, rather, lower barriers to competition. One example they cited is the proliferation of licensing requirements, afflicting a host of trades from hairdressing to interior decorating. Supposed consumer protection masks the real purpose: squelching competitors to existing businesses. A hair salon can charge a lot more if there’s not another nearby. Likewise, incumbent taxi firms and hotels try to get government regulators to shield them from Uber and Airbnb.

Protectionism is the same story: protecting businesses against competition, so they can charge more. Sure, free trade means some job losses. They’re very visible, like when Carrier moves a factory to Mexico. Less visible is the benefit to consumers, of lower prices, adding trillions to their wallets – whose spending means vast job creation, making up for those lost. Protectionists ignore this.

I’ve written before how government regulation hurts competition. Coping with massively complex regulatory regimes like Dodd-Frank and Sarbanes-Oxley is doable for huge corporations with armies of lawyers and accountants. For small start-up firms, not so much. This has caused a big decline in our rate of new business creation.

Higher minimum wages too impede competition. Governor Cuomo’s $15 plan has brought forth a parade of small businesses explaining how it will hurt their viability, for self-evident reasons. “Progressives” dismiss such concerns, as if the money will just come out of fat profits, as if all business earn fat profits. Most in fact don’t. And driving some out of business, reducing competition, will make big ones even stronger, harming consumers.

I’ve recognized how campaign cash corrupts government to favor some businesses over others, again undermining competition. But opposing Citizens United is anti-competitive on the part of the political class itself. Government regulation of political campaigns will always be an incumbent-protection scheme, stifling electoral competition. I’ve advocated instead a tax credit for political donations, to unleash a flood of citizen contributions, freeing politicians from servitude to big money donors. The savings from reduced corporate welfare would dwarf the cost, to the Treasury, of the tax credit.

Competition makes people better, do better, and live better.