European pupil learning the lessons that teacher forgot
IF everything had been going fine in America, there would have been no market for Donald Trump’s call in 2016 to ‘Make America Great Again’.
French economist Thomas Philippon argues for a surprising conclusion: Europe is making a better job of running a competitive market economy than the home of capitalism. Which is not to claim that the European economy is doing exceptionally well, or that Trump’s populist nationalism does not have support in several European countries. But Philippon diagnoses some peculiarly American ailments which Europe, courtesy of European Union policies, has managed to avoid.
The American and European economies are broadly comparable in population, technology and level of development. The US has, for several decades, experienced poor productivity growth, increasing inequality and a declining share of labour in national income. It has also, Trump’s boosterism notwithstanding, been doing no better than sluggish old Europe in recent years. Philippon, who has divided his career between Europe and America, notes that per capita output growth, the ultimate measure of overall ability to support rising living standards, has been averaging below 1pc per annum in the USA for the last two decades. The poor performance predates the financial crash and most European countries, including Ireland, have managed to do a little better.
A principal explanation is that the USA has lost its traditional enthusiasm for keeping capitalism honest, through discouraging concentration in business and industry. Market dominance has been allowed to build up, while Europe has gone the opposite route. Developments in the airline industry illustrate the point. The USA liberalised the airline business, previously a tolerated cartel, in 1978, encouraging new entrants and price competition. Europe followed suit from 1986 onwards, resulting in the emergence of low-cost carriers and a better deal for customers. But the US permitted a spate of mergers which saw the industry consolidate while European regulators prohibited mergers thought likely to weaken competition.
The US now has just three big network airlines (American, Delta and United) and many routes now have just one carrier. There has not been a significant new entrant since the 1990s. Airline profits have risen but fares are higher than in Europe, where entry is encouraged, and competition is more intense.
If the decline in competition, which blunts innovation and improvements in productivity, had been confined to the airline business, the damage would be modest. Philippon provides evidence that it has been more general and laments a steady dilution of America’s antitrust policies that has been under way for 40 years. Meanwhile, the EU has intensified its pro-competition stance, through the single market reforms and the empowerment of the European Commission’s oversight role. It has been noticeable that Europe has given the digital giants, including Amazon, Apple, Facebook and Google, a tougher time in recent years than the US regulators.
These industries, now the biggest business corporations in the world, enjoy strong network economies which make them vulnerable to winnertakes-all outcomes.
America invented antitrust law at the end of the 19th Century to deal with similar problems in what were then the new emerging industries, including oil and railroads, while Europe to its cost permitted cartels and trusts, including national champions and imperial flag-bearers.
The pupil has, since European economic integration was initiated in the 1950s, been learning the lessons that teacher forgot. The diminished antitrust zeal in the US and consequent growth in the market dominance of the biggest firms owes something also to an increased intrusion into business life of state and federal regulation, in contrast to the deregulatory and pro-competitive single market reforms in the EU.
Philippon documents the rise of the American regulatory state and the anti-competitive impact, including the effective creation of new barriers to entry. It is a myth that business firms invariably oppose state regulation: they lobby actively for regulations which are in their interest, and in the USA the scale of business lobbying is extraordinary. Total cash expenditure on political lobbying in the US is about three times the European figure and the disparity in campaign financing is even greater. In the 2014 Senate race (for a single seat each) campaign spending in the two most expensive states reached $113m in North Carolina (population 10 million) and $97m in Colorado (population 6 million). It is unlikely that the total spent has reached these levels in Ireland for all Dail candidates combined at all elections since the foundation of the state a century ago. On average the winning candidate alone, in a US Senate or House of Representatives race, spends over $10m directly, roughly what all the Irish political parties will spend between them at the upcoming general election in this country. One consequence is that newly elected members of Congress in Washington are advised to commence fundraising for re-election on their first day in the office: some are believed to devote 30 hours per week to raising finance. The pay-off has come in part through the weakness of climate policy compared to Europe. The oil, gas and coal industries have been major spenders in Washington and climate action in the USA, when inevitably it must be faced, will cost more than it might have done had fewer politicians been beholden to fossil fuel interests.
Breaking the link between money and politics is not easy, even if you try. In most European countries, including the UK and Ireland, it is illegal to buy or sell political advertising on radio and television, a huge component of campaign spending in the US. But internet advertising on social media platforms is permitted, including targeted advertising based on the involuntary mining of personal information. Perhaps it is time for the EU to consider restrictions in this area to keep a lid on the intrusion of money into politics which has gone out of control in America. Time also, Philippon argues, for America to relearn the virtues of competitive capitalism from its erstwhile pupil across the pond.