Making sloth safe again
By some measures — unemployment rates, f or one — the U. S. economy is cruising along, back to pre- crash numbers t raditionally associated with good times. But lots of people are concerned about lagging productivity growth and investment, which aren’t yet running at good-times rates and haven’t been for a while. You want to fix that? A new study by two economists at New York University’s Stern School of Business suggests the way to do it is to double- down on economic competition, i ncluding i nternational competition, including from China. In other words, do exactly the opposite of what the Trump administration seems bent on doing, namely, making things cosier for U.S. firms and workers. (And “bent” is the right word for the Trump administration, wouldn’t you say?)
The economists, Germán Gutiérrez a nd Thomas Philippon, don’t actually put it that way. In their academic work economists aren’t as quick as we who write for the newspapers are to draw strong policy conclusions from the various correlations they unearth. But it’s hard to see their conclusions leading anywhere else.
The economists start with two facts. Competition has been declining in many U. S. industries, at least when measured by the number of competitors accounting for a given share of output ( which they are quick to concede may not be the very best measure of competition). And investment has been lower than you’d expect, all else equal. In their view, these two trends are linked. Investment and innovation are things companies do when they have to, not when they want to. Or, as Bill Gates once put it, “Unless you’re running scared all the time, you’re gone.” Of course, the best way to run scared is to actually be scared and for businesses the most convincing source of fear is strong competitors.
Competition doesn’t help everyone, however. In 60 pages of thorough econometrics, Gutiérrez and Philippon look at how over the last 20 years the top third and bottom third of firms in given U. S. industries responded to competition. Typically, the top third answered with accelerated investment, innovation and even employment. The bottom third didn’t. In fact, lots in the bottom third simply disappeared, taking on the destruction role in creative destruction.
Two episodes the economists looked at in detail were the response of U. S. manufacturing firms to increased competition from China and the response of all U. S. business to the influx of new competitors during the dot-com boom of 1995–2000. In both episodes, the data seem to show that industry leaders responded by upping their game, at least in the investment numbers, while laggards on average languished.
Nothing in the numbers says more investment was the socially correct response, of course. Much entry of new businesses pre- 2000 may have led to too much investment, while the appropriate response to higher Chinese imports following China’s accession to the WTO may well have been to fold your corporate tent and move on to something else. (In industries with high exposure to imports, there are now half as many firms as there were in 1995, although on average those that remain are bigger and employ more people.)
But competition does seem to spur investment. So if you think investment is lagging and that’s hurting productivity growth, more competition is one way to boost it.
What’s causing declining competition in the U. S., which many people have noticed? ( The Economist recently argued that airlines in Europe — once a den of carved- up markets and chummy faux competition — compete a lot more these days than U. S. carriers do). Gutiérrez and Philippon don’t offer a definitive answer, but they do find that rising industry concentration is correlated with regulation. Industries where George Mason University’s index of regulation has risen have also usually experienced both declining competition and declining investment.
Why does regulation reduce competition? Three possible reasons: “regulations often require a large fixed cost component which benefits l arger firms; … regulation may introduce barriers to entry; and … increased rent seeking may allow larger firms to affect regulation though lobbying, thereby strengthening their position as leaders.”
That’s hardly conclusive. But it does point toward a set of policies on which Left and Right alike might agree: Don’t let big firms — or any firms — write the country’s laws and regulations, including its trade agreements, so as to give themselves competitive advantage and a quieter life. Both Bernie Sanders and Rand Paul and an awful lot of people in between would support such a strategy.
Unfortunately, it’s not clear the Trump administration does. It was elected on a promise to drain the Washington corruption swamp, but instead seems intent, certainly in its trade policies, to make America safe again for slothful, uncompetitive firms.
Help people who get hurt by capitalist competition, sure. But don’t protect the capitalists by curbing the competition.