Eric Posner: "It is concerning when asset managers like Blackrock have such a large impact on the economy."
Jun 2023
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Provokes with unconventional ideas
In the USA, the emergence of monopolies has been allowed to continue for far too long, says American lawyer Eric Posner. This has contributed significantly to inequality and political polarization. If the government consistently protected competition, the US economy could grow 1.25 times as quickly as it currently does.
This interview by Christoph Eisenring and Peter A. Fischer was originally published in German in Swiss daily NZZ on 20 May 2023. Translated and edited for layout purposes by the UBS Center.
Mr. Posner, tech companies in the U.S. are getting bigger and more powerful. Are we back in the days of the robber barons who shaped the U.S. economy with their monopolies in the late 19th century?
Today's situation is reminiscent of that. There was a period when there was significantly more competition in the USA than there is today. Market concentration has been increasing for thirty years. Competition is weakening, and inequality has increased at the same time.
And this despite the fact that globalization gained momentum in the 1980s? Surely that should have intensified competition.
In fact, the opinion has become entrenched that there is no longer any need to intervene rigorously against restrictions on competition because we have globalization. But don't forget the local markets. Research clearly shows that companies have been able to expand their margins and their market power has increased.
Companies may have higher margins, but prosperity has increased. What is the problem?
That is true, but economic growth and thus prosperity were lower than they could have been with more competition.
Why have company margins increased?
It is a combination of globalization and technological development. The more users a platform company has, the more attractive it becomes, which increases the tendency toward monopolies. In traditional industries, it also has to do with the decline of unions. Finally, in the U.S., an ideological component also played a role. Government was blamed for the stagflation of the 1970s, which boosted neoliberalism, leading to the dismantling of regulations.
After all, today's monopolies have a very different character than those of the rich families of the 19th century like the Rockefellers. Today, tech giants have only a temporary head start, which they can quickly lose.
Microsoft has had its monopoly position in operating systems for over thirty years. How long will Google or Meta with Facebook retain their supremacy? When a monopoly operates for ten years, it reduces its output during that time and charges excessive prices. That's a significant cost to consumers. And if a monopoly is replaced by another monopoly, consumers will be harmed for long periods of time. In the USA, the scientific consensus is now that the state has intervened too little.
So what should be done?
Mergers should be blocked more often than they have been in the past - think of Facebook's purchase of Whatsapp or Instagram. In many cases today, mergers are waved through too generously. And not just in the tech sector. People have also been too generous in a number of sectors, such as with beer brewers, sugar refineries, and hospitals.
How did this change in practice come about?
In the 1970s, companies began to realize that they could use lobbying to roll back regulation. In particular, the breakup of telecom monopoly AT&T into various smaller companies had shocked the business community. Fear spread that the government would break up more companies.
What could a tougher antitrust policy do?
Economic output in the 1970’s grew by 3 percent per year, but later by only 2 percent. It might be possible to gain half a percentage point of growth per year by restoring compliance with antitrust laws. That would result in a quarter more growth. And not only that: The share of wages in value added would be higher again, output likewise, and prices lower.
You mean realizing the American dream has become more difficult because corporations have more power again?
That is definitely the case. When companies’ market power increases, they raise prices. Capital owners benefit from this through higher returns. As a result, inequality increases. When corporate power depresses wages and raises selling prices, it becomes harder for the majority of Americans to live comfortably. With less competition, the American dream is over for more and more people.
Do you see a link between the increasing market concentration in the U.S. and the election of Donald Trump and the increased political polarization?
A large proportion of Americans have the impression that they are worse off than their parents. They live in cities from which industry has disappeared. This creates resentment. And these people are attracted to extreme political parties and people.
Superstar companies like the tech giants are very innovative after all and pay better wages than others.
Certainly, we would not be better off if these companies did not exist. But we could increase prosperity even more if their market power were tamed. There's a famous case from 2010, when the big Silicon Valley companies agreed in a memorandum not to steal each other's programmers. Among them were Google, Apple and Adobe. They were sued by the government and employees and eventually settled for $500 million.
But Google in Zurich pays top wages and poaches professionals from other companies.
In urban areas, the market power of companies in the labor market is also not nearly as strong as in rural areas. But take a rural area where Amazon sets up shop with a huge warehouse. Now Amazon hires hundreds of employees for $15 an hour. That immediately makes everyone who works there better off. But the question is whether wages will continue to grow in the longer term, or whether Amazon will exploit its local power and wages will then stagnate.
What do you recommend?
One should consider the impact on the labor market when assessing mergers. There is now little sympathy for unions in the U.S., but at least not putting obstacles in their way when employees want to organize would be a starting point. Raising minimum wages would be another option. But there is no easy solution.
If a company pays low wages, you can go to another place where the wages are better. Americans are highly mobile.
Americans' willingness to relocate for a job has greatly diminished. People want to stay in their community, with their family. Today, both parents often work, which means both must find a job in the new place. Only over the last twenty years have researchers realized that the American labor market is much less competitive than has always been claimed.
Would mergers also have to be banned at times because the companies become too powerful in the labor market?
This is already happening. The merger of the two publishing houses Penguin Random House and Simon & Schuster was also banned because the demand for manuscripts would have decreased, reducing their price and thus the compensation for writers in an already concentrated book market.
But the market for writers is somewhat special.
In another case, there were doubts about a merger of two hospitals in Texas. Research shows that when such mergers take place, the wages of nurses and physicians fall. If this causes health care workers to withdraw from the labor market, it can worsen care, especially in rural areas.
Back to the superstar firms: They include asset managers like Blackrock and Vanguard because there are huge economies of scale in managing assets worth hundreds of billions. Thanks to them, we can invest money much more cheaply than before. Why do you still see them as problematic?
The three largest would own 40 percent of the economy in the future, says one study. Let's take the airlines as an example. Airline managers will align with Vanguard and Blackrock because those are their biggest shareholders. The danger now is that asset managers will want to reduce competition among airlines because a more powerful position will boost the value of their shares. In any case, it is worrying when a few asset managers at the top can exert such a large influence on the economy.
How would you treat these superstar asset managers?
You could limit how much they can own in a market sector, for example, a maximum of one percent in each company. If they want to hold more than one percent, they would have to limit themselves to one company per industry. So either Blackrock could only hold one percent in airlines like Delta, United, or American, or they would have to limit themselves to United, for example. Alternatively, one could say that Blackrock would not be allowed to exercise its voting rights if it held more than one percent in more than one company in the same industry.
How was your idea received?
Not exactly enthusiastically. First you have to convince people that there is a problem at all. Maybe that's not the case today, but do we really want to watch for another twenty years?
Listening to you, one gets the impression that you have a pessimistic view of the markets.
Markets in which competition prevails create enormous value, there is no question about that. But there is no law of nature according to which markets remain competitive. Low growth and rising inequality in the U.S. are the result of the increasing market power of dominant firms. This can no longer be ignored.
In the USA, the emergence of monopolies has been allowed to continue for far too long, says American lawyer Eric Posner. This has contributed significantly to inequality and political polarization. If the government consistently protected competition, the US economy could grow 1.25 times as quickly as it currently does.
This interview by Christoph Eisenring and Peter A. Fischer was originally published in German in Swiss daily NZZ on 20 May 2023. Translated and edited for layout purposes by the UBS Center.
Mr. Posner, tech companies in the U.S. are getting bigger and more powerful. Are we back in the days of the robber barons who shaped the U.S. economy with their monopolies in the late 19th century?
In the USA, he is one of the most cited legal scholars: Eric Posner, who has been teaching at the University of Chicago since 1998. He was educated at Yale and Harvard Law School. He has thus had a very similar career to his father Richard Posner, who is well known in the USA and was also a professor in Chicago. However, Eric Posner is not a representative of the Chicago School à la Milton Friedman, who advocated the freest possible markets. Until recently, the 57-year-old advised the Biden administration Justice Department. He warns of an increasing monopolization of the economy that must be fought. In his book "Radical Markets," Posner launched controversial ideas: "quadratic voting" gives citizens a number of votes each year that they can use in upcoming votes or save for later ballots. If they want to give two votes to an issue, they have to use four voting rights - in line with quadratic voting. The conversation took place on the sidelines of a meeting of the UBS Center for Economics in Society. (cei)
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Eric Posner is the Kirkland and Ellis Distinguished Service Professor of Law and Arthur and Esther Kane Research Chair at University of Chicago Law School. Since 2022, he has been counsel to the Assistant Attorney General, Antitrust Division. He is also a fellow of the American Academy of Arts and Sciences and a member of the American Law Institute. His research interests include antitrust law, international law, and constitutional law. His most recent books are How Antitrust Failed Workers (Oxford, 2021) and The Demagogue’s Playbook (All Points Books, 2020).
Eric Posner is the Kirkland and Ellis Distinguished Service Professor of Law and Arthur and Esther Kane Research Chair at University of Chicago Law School. Since 2022, he has been counsel to the Assistant Attorney General, Antitrust Division. He is also a fellow of the American Academy of Arts and Sciences and a member of the American Law Institute. His research interests include antitrust law, international law, and constitutional law. His most recent books are How Antitrust Failed Workers (Oxford, 2021) and The Demagogue’s Playbook (All Points Books, 2020).