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Profits are too high. America needs a giant dose of competition

655 points by bainsfather 11y ago

dkopi 11y ago
"An intense burst of consolidation will boost their profits more. Since 2008 American firms have engaged in one of the largest rounds of mergers in their country’s history, worth $10 trillion. Unlike earlier acquisitions aimed at building global empires, these mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs." I suspect being "Too big to fail" is another major reason for these mergers. Eric Dash actually let out a warning in the NY Times in 2008: http://www.nytimes.com/2008/11/01/business/01bank.html http://www.nytimes.com/2008/11/01/business/01bank.html "As the government makes taxpayer funds available to banks weakened by the financial crisis, the criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive." Mega companies can make huge profits because they feel more confident taking huge risks. If we succeed - we profit. If we fail - we're too big to fail. This is commonly refered to as a Moral Hazard: https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard
- disposeofnick9 11y ago
  Accordingly, the US is currently in qualitatively worse shape risk-wise because there are fewer banks with larger portfolios, and regulators are part of the chorus of revolving characters in the banking-government complex... making another structural or "mistake" (flash crash) failure more likely because of institutional resistance to more objectively deploy necessary measures (enforcement) to regulate economic behavior. Check out Robert Reich on Thom Hartmann for more. Elizabeth Warren and Peter Schiff probably have a thing or two to say as well.
  - mineshaftgap 11y ago
    "By the way, it cost us more — the S&L crisis cost the taxpayers more than the TARP did in 2008. So, I don’t know why he would cite that. In fact, the failure of a very large number of smaller institutions turned out to be much more expensive to the taxpayers. In fact, as far as the bailout of 2008 was concerned, we made money on that in the money that was extended to financial institutions. And, by the way, it wasn’t just to big ones then. It was to small ones as well. The only institutions that weren’t able to pay us back were the auto companies. And I don’t think — I thought it was a good idea to pay them. As to size, the question is not just to the size, but what would happen if they couldn’t pay their debts. And that’s what people ignore. We did two things in the legislation to deal with that. First of all, we made it much, much less likely that they would get so indebted that they couldn’t pay them back. It’s not their overall size. It’s the indebtedness that’s the threat. You could not now have an AIG, which got itself $170 billion beyond what it could pay off in derivatives, because we do not allow institutions under the law now to get so indebted without the capital to back it up. Secondly and most importantly, what we said is this: If a large institution can’t pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved. What then happens is this: It may be that we would have to borrow from the taxpayers to pay some of the debts, not all, as the previous law required, but if we have to pay some of the debts to prevent the failure of a large institution from having serious economic consequences, the treasury secretary is mandated by law to recover every penny from large — other large financial institutions. And, again, it’s not the size of the institution, but the size of the unpaid indebtedness. Well, we have dealt with that by reducing the indebtedness and requiring that the institution will be dissolved if it fails." Barney Frank on PBS NewsHour.
- WalterBright 11y ago
  I've been investing for 30 years. My experience is, whenever a couple megacorps announce a merger, SELL! The deals always look good on paper, but the reality of trying to merge two gigantic organizations is just an unrelenting, slow motion disaster. The last time I got gulled into believing the hype was the AOL-TimeWarner merger.
  - hkmurakami 11y ago
    It's also often a way for a new CEO to "prove" to the board that he/she is doing good work to propel the company forward. The key is that they're going through the motions of "doing big things" rather than truly pursuing the best interests of the company. Not limited to megacorps either. Plenty of smaller companies engage in this behavior.
    - crdoconnor 11y ago
      CEO pay doesn't correlate with effectiveness but it correlates very strongly with company size.
  - derefr 11y ago
    There are two kinds of mergers: those between roughly orthogonal businesses that want to exploit some vague "synergies" between them (as in the AOL-TimeWarner case); and those between companies that were previously competitors, as in the constantly-growing brewery megacorp of Annheiser Busch. The latter is both much safer for investors, and much worse for customers, than the former; this type of merger has the direct goal of decreasing margin pressure by decreasing competition.
    - jpatokal 11y ago
      But the second type can also fail quite miserably. Daimler-Chrysler, Kmart-Sears, Sprint-Nextel...
      - charlesdm 11y ago
        Sure. But if it works, it's amazing for the shareholders. Just look at Anheuser-Busch Inbev (and their history of merging/consolidating) and their soon to be merger with SABMiller.
- tw04 11y ago
  I know of leaders at a company who shall remain unnamed that literally came right out and said (in private obviously) their last two mergers were to grow large enough to be too big to fail. So you're not at all off base.
disposeofnick9 11y ago
Maybe it's not that the profits are too high, but inequities of distribution are causing tangible, social externalities (Carrier moving to Mexico, undocumented workers rights abused in meatpacking facilities)? Perhaps more companies need worker representative groups with equity and voting board stakes as in Europe (even though investing in an employer is doubly risky)? When interests align, things toward working out compromises... treat people as just another disposable automaton, expect adversarialness, sabotage and/or rebellion.
- fennecfoxen 11y ago
  > Maybe it's not that the profits are too high... Perhaps more companies need worker representative groups with equity Or perhaps that money could just go back to the American consumer in the form of lower prices? That would be a far more equitable way to distribute it.
  - kuschku 11y ago
    That has been tried for a few decades now, it doesn't really help. Lower prices are useless when a lot of the money goes into rent. Higher wages and better working conditions are required, so that people have more money they can spend. It also helps in a global context, as the prices of imported products won't change much just based on your national policies.
    - mattlutze 11y ago
      > Higher wages and better working conditions are required, so that people have more money they can spend. Higher wage doesn't do it alone, just as lower prices doesn't do it alone. Both need to work in concert to increase the worker's effective wealth. Better conditions are tangential though definitely very important for an improved work/life balance. > It also helps in a global context, as the prices of imported products won't change much just based on your national policies. National policies, in the form of tariff, tax, and relative currency value, are enormous factors in the cost of imported goods.
golergka 11y ago
This article seems strange. Why does analysis include only american companies? Capital moves freely between state borders now, and shareholders of companies of that caliber can decide to invest in China, Europe or other regions all around the globe— but there's not even a hint of that information in the article.
- bainsfather 11y ago
  The article's title is "Business in America". They do mention the retreat of foreign firms from the American market, and suggest this is partly due to American firms getting favourable advantages from their government, plus large incumbents being generally favoured. Regarding your comment on capital - nothing stops foreign capital buying shares in American firms, indeed monopolies or businesses with large moats are very attractive to investors - but the article is not about who owns the firms.
  - golergka 11y ago
    I think that "Business in America" is a invalid concept altogether; there are just some companies that happen to pay taxes in america and are small enough so that they haven't expanded in other regions yet. But all the markets that these companies operate on — labour markets, capital markets, produced goods markets, resource markets — are global ones. It's like that Sargasso sea: it's not really a separate body of water, it's just a part of Atlantic ocean that was named differently because of very small degree of separation.
    - alanwatts 11y ago
      >"Business in America" is a invalid concept altogether; Agreed. If we want to have an efficient global market, we need to quit thinking in terms of the arbitrarily narrow scope of nationalism. Most people in the US have yet to realize the irony of a sovereign nation's tax payers bailing out super-sovereign multinational banks who hoard their money in foreign tax havens like the British Cayman Islands.
- jernfrost 11y ago
gozur88 11y ago
>The profit bit of the picture, though, has changed a lot. Last year America’s airlines made $24 billion—more than Alphabet, the parent company of Google. Wow, that's profound. An industry with 600k employees made more than Google last year! Next you'll be telling me the banking industry makes more than Microsoft! Airlines need to make big profits in good years - they lose money like crazy in bad years. I don't know if it's still true, but at one time if you subtracted all the money US airlines lost from the money they made since the beginning of the industry you'd have a negative number. To the larger point, this is what happens when you pile on a bunch of regulations and then allow industry to capture the regulators. The barriers to entry are raised so high it's impossible to have real competition.
- diskcat 11y ago
  >The barriers to entry are raised so high it's impossible to have real competition. once again the government is responsible for it. don't worry though, im sure somebody will call for the government to 'reform' the industry and make all the problems go away.
  - domfletcher 11y ago
    It's certainly not entirely the governments fault. Airlines need to be strongly regulated with good reason and pretending that they don't lobby and campaign to increase regulation that acts as a barrier to entry is myopic at best.
  - Ensorceled 11y ago
    Why did you assume the OC meant the regulators was bad rather than their capture?
    - diskcat 11y ago
      any regulator is bound to be captured because the special interest has more concentrated power compared to consumers. Thus regulation always does the opposite of what it is supposed to do in the long run. This is a common theme with interference with the free market.
antr 11y ago
I don't think this is a competition issue. After the 2007-2010 credit crisis, US corporates have gone through a considerable effort of delevering, taking on less debt/financing risk. Consequently this has, and will continue, to increase net income. If lack of competition is real, this should be reflected at the EBITDA level, and The Economist has not discussed this at all. As a long-term subscriber of The Economist I'm a bit disappointed in this piece.
adventured 11y ago
Profits are unusually high almost entirely due to two factors. First, the massive expansion of the global economy the last ~20 years has particularly benefited the top Fortune 500 companies, along with the artificially cheap dollar from ~2003-2014 (which has now reversed and is wrecking profits for that same club). The global economy has grown far faster than the US economy since the late 1990s, companies that had exposure to that were obviously going to benefit tremendously vs domestic oriented companies. Second, the substantial margins and profit of the top US tech companies, which have boomed more than any other companies over those 20 years. Apple, Microsoft, Google, Oracle, Intel, Cisco, Qualcomm, etc That's about $130 billion in profit, between those seven companies. Oracle produces five Caterpillars worth of profit. Apple's profit is nearly Berkshire Hathaway + Johnson & Johnson + Boeing + General Electric. Or even more dramatic, if you were to do a three year average on profits, Apple would just about add up to these companies combined: Union Pacific, Visa, 3M, Caterpillar, McDonalds, CVS, Walgreens, Costco, Target, Honeywell, GM, Ford, Lockheed, Boeing, UPS, Fedex, Delta, America Airlines Microsoft is Goldman Sachs + Disney + Procter & Gamble. Google's profit is roughly greater than the top 50 US defense contractors combined. You might as well just say it's equal to the entire US defense contracting industry combined. Now strip out just Apple, Google and Microsoft, and then inflation adjust the remaining Fortune 500 back to a 1995 dollar and compare the group with the Fortune 500 of the mid to late 1990s. What you'll see, is US corporate profits are not that unusual and the top tech companies are producing a very large warping of the picture.
- tonyedgecombe 11y ago
  The point the article makes is that global companies make much more in their home markets than abroad.
justsaysmthng 11y ago
I find it odd that economists generally ignore the field of human psychology / behavior in their assessments. Things like mental and physical health, addictions and substance use, thought manipulation and mind control, the fears and desires, sexual fantasies, even popular movies and music affect the economy greatly. Not just a little bit, but greatly. A CEO's addiction to cocaine or promiscuity will have an impact on his company's bottom line. A young man starts a disrupting startup because he got inspired by a sci-fi movie a couple of years earlier. Adam Smith's "invisible hand" is "invisible" because those forces can't be explained by the mechanistic rules of economics or mathematics. We just need to look elsewhere for a comprehensive picture. What makes customers choose a product over the other ? Why do some companies retain great talent better than others - and hence reap greater profits ? How does pop music affect industrial design ? Of course, human behavior and psychology is hard to quantify, that is why it's being left out, but I think we can start to make these connections now that we have the tools and information available. Take Google and Facebook - these companies make their profits from advertising. Tens of billions. Add the profits of the media market - print, tv, radio. Now consider how all that advertising affects the demand curve in all the other industries. And it's not just the quantity, it's also the quality of advertising - today's ads are scientifically designed to drill their way into our subconsciousness. The colors, the sounds, the motions, the emotions - all of these are carefully weighted so as just to make you want a certain brand over the other. And now my favorite part - is there a connection between advertising, corporate profits, pollution and climate change ? I think there is and it's a great one. To conclude, I think regulators should look at all these factors much deeper, determine the connection between mind and economy and exercise their influence by tuning other parts of society, not just traditional economic levers. Of course this is a monumental task for humans, but AI might just be perfectly suited for this type of analyses.
- blfr 11y ago
  I find it odd that economists generally ignore the field of human psychology / behavior in their assessments. Psychology, especially social psychology, is an epistemological disaster area[1][2] and everyone would be better off ignoring its "findings", not just economists. [1] http://www.nature.com/news/over-half-of-psychology-studies-fail-reproducibility-test-1.18248 http://www.nature.com/news/over-half-of-psychology-studies-f... [2] http://michaelinzlicht.com/getting-better/2016/2/29/reckoning-with-the-past http://michaelinzlicht.com/getting-better/2016/2/29/reckonin...
known 11y ago
Unfair competition http://www.zerohedge.com/print/502779 http://www.zerohedge.com/print/502779
DrNuke 11y ago
It is not a problem if the money is somewhat recirculated within the economy (make projects for the general public, rejuvenate cities, create jobs, pay salaries). It is a big problem if the money is simply drained out of the economy and funnelled into fiscal havens.
- protonfish 11y ago
  Especially because this decimates the consumer base. When you've impoverished your nation's people, who will buy your products? The dysfunctional focus on short-term profits at the expense of overall economic health makes the economy sicker each year and this disease will continue to ravish the world as long as greedy children hold the power to do so.
InclinedPlane 11y ago
When profits are too easy there's not much incentive to innovate, there's no hunger. You can see this in google who have dominated their niche of the market so strongly that they've lacked the drive to seriously pursue other markets and to invest in their products to bring them to true maturity. Or look at Apple, who have been coasting on their momentum for years. Initially the iPhone was ahead of the curve in every way, now they are in the traditional Microsoft space, adapting innovations from around the industry and, one hopes, implementing them well and integrating them into a cohesive experience. Yet you have some major design missteps that haven't caused them to stumble. Though you could look at the entire smartphone/tablet industry in general as exemplary of the problem of easy money. Tablets have only slowly adapted to the role of content creation and work, because selling toys has been so insanely profitable there hasn't been a drive to do so.
macu 11y ago
TODO: Create brand and company with open source designs, versioned products, and sell just above cost!
Shivetya 11y ago
This isn't really about too much profitability, its about corporations getting large enough, diversified enough, and still having the ability to relocate their home, so that politicians cannot rely on them as cash cows for either political contributions or taxation.
pinkwolf 11y ago
genrally america is being run by lobbies, so naturally, those "lobbies" get all the profits.
ThomPete 11y ago
Profits are "too high" because productivity is up due to technology and digitalization which means that less people are required to take advantage of tech and make more money. Competition can't solve this because in tech most is a winner takes all so if anything competition will create even stronger few winners.
- drzaiusapelord 11y ago
  This is my thinking as well. Everyone worries about robots taking their jobs in the future, but we've had "robots" since office automation began in the 70s and 80s. Its a bit more obvious in the blue collar sector where a literal robot can take your welding job or whatever, but in the white collar sector, its still the same. There's so much more efficiency that people aren't in high demand anymore. It used to be even a "small" company was a few dozen people. Everyone needed an assistant, you had a whole team of people to do graphic work, a whole team of people to make copies, etc. That's a pretty far cry from a handful of people, a handful of computers, and a decent laser copier. There's no fix here. The genie is out of the bottle from an economic perspective. We just have this long slog ahead of us of working with this new reality. I imagine things like guaranteed minimum income will be the fix here as these jobs are never coming back, nor will new jobs come and replace them as things become more and more efficient.
  - maxerickson 11y ago
    Between 1970 and 2000 there was also a massive expansion of the global workforce. Both in absolute numbers and in the percentage of the planet that was participating in global markets. In many countries, women started working a lot more in that period. Other countries entered the global market (notably hundreds of millions of Indians and Chinese). People talk about the rise of Africa being the next cheap source of labor, but that is a smaller number of people that is less uniformly educated than the above cohorts. I don't think it is really all that strange that wages stagnated where they started out the highest. Maybe we in the US are actually on track for things to get better rather than worse.
    - 11y ago
padobson 11y ago
Wages are flat, buy and hold strategies are decimated by bubbles, and any job can be eaten by globalization. At the same time, profits are up, access to capital has never been cheaper, and global market access has never had fewer barriers to entry. The question is not how do we create living-wage jobs for the American worker, the question is how do we get the American worker to quit his job and start a business? The economy is quite clearly slanted toward the entrepreneur. We need to start getting Americans to invest their labor accordingly.
- adyus 11y ago
  If every employee quits their job to start a business, who will all these new businesses employ?
  - jessaustin 11y ago
    Wal-Mart eagerly await the day when they can fire all their employees and rehire them as contractors.
    - pc86 11y ago
      I don't see how a sudden increase in the number of freelancers/entrepreneurs changes the tax classification of Wal-Mart employees.
  - padobson 11y ago
    This is a great illustration of what reducing the labor pool will do for the demand for labor. Every laborer that turns entrepreneur will have a positive impact on wages, because it reduces the labor supply while simultaneously increasing the demand for labor.
  - lmm 11y ago
    Transaction costs have fallen far enough that businesses can be small enough to be run by one person, or at least a small number of people. Twenty years ago a small ad agency (say) might have been a couple of sales/client-management types who did a bit of writing, a dedicated copywriter, a dedicated graphic designer, and an accountant who also did payroll and basic HR/legal and handled the office lease. Today each of those sales/client-management types could have their own business, working out of a managed shared office, outsourcing writing and graphics as necessary to the copywriter and graphic designer who have their own businesses (because the Internet means there's much less overhead outsourcing and communicating with freelancers), with payroll/legal outsourced to service companies (which probably means less people - maybe 3-5 people handling 10 companies - but each company actually ends up with better access to dedicated specialists than when they had to have one person handling all of those).
cs702 11y ago
...and those profits are not being reinvested in new projects, new ventures, and new markets. Instead, large corporations have been accumulating historically high amounts of cash, which is just sitting on their balance sheets, idle.[1] It's definitely not due to lack of greed. Corporations in the US are very much driven by profit motives: whenever they identify an opportunity to make a profit from customers, they take advantage of it. Therefore, it must be that they aren't identifying enough attractive opportunities in which to invest that growing mountain of cash. Meanwhile, the US middle class appears to be struggling with stagnant wages and limited opportunity.[2] We have engine trouble, and no agreement on how to fix it. -- [1] https://www.stlouisfed.org/Publications/Regional-Economist/January-2013/Why-Are-Corporations-Holding-So-Much-Cash https://www.stlouisfed.org/Publications/Regional-Economist/J... [2] https://www.washingtonpost.com/local/happy-days-no-more-middle-class-families-squeezed-as-expenses-soar-wages-stall/2014/04/26/f4a857f0-7a47-11e3-b1c5-739e63e9c9a7_story.html https://www.washingtonpost.com/local/happy-days-no-more-midd...
- gz5 11y ago
  We have engine trouble partially because the US consumer has historically been the oil of the global economy. Now big business is ahead of its consumers (too many now under employed or unemployed), hence less opportunities to invest those cash mountains. As Andy Grove said, we need to optimize for jobs too. Else we simply don't have balance in the overall ecosystem, as we are now seeing.
- wheaties 11y ago
  Too much cash? Pay people more! Really that simple. Money has a momentum, a speed by which it flows through an economy. Eventually those mountains of capital will disappear because there is no one left to buy what is being sold.
  - Agustus 11y ago
    Those are profits, if you are able to operate your company to the degree that one is able to accumulate the cash, then there is no reason to increase liabilities to accomplish a task. If you want to spread the wealth around, then you need the government to perform this task.
cm3 11y ago
To anyone who wants less government and more free markets, unfortunately greed works in such ways that price fixing and market segmentation is very prevalent. Everywhere, even Western Europe. You'd probably not expect it, but take backpacks as an example. German backpack manufacturers hold retailers to fixed prices, disallowing anything lower than the set price. Same for mattresses (the kind you sleep on). The result is an illusion of free markets but where those who try to sell cheaper either get their supply cut off or get bullied in other ways. Same racketeering goes on with ISPs, and these are strong arguments why regulation bodies need to exist and impose hefty fines. Why am I mentioning this? Well, unfortunately without regulation there's no real competition because companies will split up a market and also agree on unofficial pricing structures to keep it expensive.
- namlem 11y ago
  Absolutely. Deregulated systems are every bit as vulnerable to greed and corruption as regulated ones. With regulation, you have to be careful to avoid rent-seeking schemes by established interests trying to raise barriers to competition. With deregulation, you have the obvious health, safety, and environmental risks, but you also have the issues of collusion that you mentioned, like price fixing and market segmentation. Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer.
  - cm3 11y ago
    But what other choices than regulation do we have? The regulation has to be regulated and fully transparent. I hope that as long every penny crossing the table is visible we'll have a positive outcome. e.g. US judges feeding inmates to private prison companies they have shares in is an extreme instance of where regulation and oversight failed. > Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer. Yeah and there's one online-only mattress firm that is now shifting to making their own mattresses and selling them as "Anti-Cartel Mattress" and promptly the firms that tried to prevent them earlier from selling their products cheaper than fixed have been trying to sue them for the product name. In German: http://www.tagesspiegel.de/wirtschaft/streit-um-eine-matratze-wie-ein-matratzenfabrikant-gegen-den-marktfuehrer-kaempft/11945698.html http://www.tagesspiegel.de/wirtschaft/streit-um-eine-matratz...
cm3 11y ago
I suppose if double-dutch and similar schemes wouldn't exist and they had to pay taxes like everyone else, there would be automatic reinvestment via government spending.
diego_moita 11y ago
It is tricky to relate high profits to low competition. Sometimes both can happen together. The histogram on the article shows IT/Technology and Finance as being 2 sectors with high profits, but these are sectors with a fierce, cut-throat level of competition. Also, as Peter Thiel argued, healthy profits are vital to finance innovation.
swehner 11y ago
I usually stay away from economist "writing." Here some laughing points from this article: * according to polling by Pew, a research outfit.... * Return on capital is at near-record levels, too (adjusted for goodwill). * Together they own 10-20% of most American companies * The spectre of very big online travel sites dominating the purchase of hotel rooms has led the hotel firms to consolidate, too
- BCM43 11y ago
  Care to explain the problems with those statements?
  - swehner 11y ago
    You're sure they are not obvious?
    - jat850 11y ago
      I'm not the GP but they're not obvious to me, either.
    - alienasa 11y ago
      I'm pretty sure they're not obvious. What are the problems?
    - astrodust 11y ago
      Also looking for some clarification here. Of all the things to nitpick about those are some strange choices.
delinka 11y ago
How does this thesis fit with manufacturers of 'premium' products? 'Premium' being those products that indeed compete with other products but are perceived as somehow better by consumers. Tablets are a good example: Though Android has all the market share, iOS generates all the profit. Does Apple need a giant dose of competition? Looks to me like they have it and still keep raking in the profits.
tmaly 11y ago
The best way to keep out competition is to create barriers to entry. The onslaught of new laws and new regulations in any industry is the perfect barrier. Think about it, how many startups can afford to hire a compliance staff that ensures they are keeping up with all the laws and regulations passed? Look at how many pages were added to the Federal Register in the US last year, I think in total there was something like 60,000 pages.
mc32 11y ago
The US industry needs a big dose of healthy taxation. I don't mean treat it like a windfall to trip over, I mean sensible taxation where the excess goes into infrastructure like bridges, roads, rail and urban planning and development as well as rural planning and development. Of course something along these lines would require restructuring how we tax foreign earnings (being more in line with the rest of the world) and regulate inversions to make them less attractive. It's a daydream and it won't happen but that's what we should do with the money, rather than pay fairly compensated employees more, with the exception of their hourlies, but that's more up to the states to decide. The gist is if we have extra earnings use them in a way that will create long term benefits for all citizens --who are living with infrastructure past its designed lifetime, in many cases.
- tsax 11y ago
  Do you know how much is spent on US infrastructure per year? Do you think it's the lack of funds responsible for sub-par US infrastructure?
  - mc32 11y ago
    No, but it looks like since after WWii we've been mostly reactive rather than forward looking and proactive. There are tens of thousands of bridges in need of repair or replacement, for starters.
jack9 11y ago
Competition has driven down (non-union) wages and increased profits through aggregation/consolidation. Why compete for 20 years when you can borrow and spend to buy the competition and double your market with no chance for a startup to compete at the same level in a regulated market.
HelloRipley 11y ago
I like The Economist, but as a subscriber I notice two common trends: 1 - They really, REALLY, love to criticize America. 2 - They often have a really crappy understanding of micro-economic theory.
- massysett 11y ago
  I can't speak to 2, but they often praise America. They say America has an unparalleled ability to assimilate immigrants. They also praise other odd things, like the entrepreneurial spirit of American religion, or the power of technology transfer between government researchers and industry, or the high productivity of American freight railroads. One reason I read the Economist is because they see beyond the daily noise to pick out the news that requires digging and thought.
strommen 11y ago
Seriously? They're using airlines as the example of too-profitable companies? The industry was in total shambles for nearly an entire decade after 9/11. It's no wonder that they're hesitant to lower their margins. I truly can't imagine an industry that would be more difficult to run a company in: * Everything is highly regulated. * The dominant expense is a highly-volatile commodity controlled mainly by unpredictable/hostile countries. * Your product has been totally commoditized by airfare-pricing websites. * People get angry at your company when the weather is bad. * Use of your product is inextricably linked to the abhorrent process of airport security. * There is the continual potential of a terrorist attack decimating your sales overnight. Any decently smart airline is hoarding some profits, because if they don't they will go bankrupt the next time fuel costs spike or something scary happens during a U.S. flight.
- guelo 11y ago
  > Your product has been totally commoditized by airfare-pricing websites. That American made $24 billion last year without passing on anything to consumers shows that that is wrong. Pricing websites are under full control of the airlines at this point.
  - morgante 11y ago
    Savings are passed on to consumers, in part. Airline fares are near all time lows.
    - guelo 11y ago
      The point is that gas prices collapsed last year but ticket prices did not drop.
      - pvaclavek 11y ago
        Why should the price of a ticket be neccessarily bound to gas price? Wouldn't most people pay the same price regardless of gas price?
jrbapna 11y ago
I don't think it's that simple. There are few more factors at play: For one, the markets are risky. Let's not forget that just a few years ago, bonds which were supposedly rated AAA were nothing but air. The entire economic system collapsed quite literally overnight. Many people lost faith in the "system". Currently our debt levels are higher than any economist is comfortable with, and just like in the case with the subprime mortgages, there is huge political pressure to keep the government's AAA rating, whether deserved or not: https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades https://en.wikipedia.org/wiki/United_States_federal_governme... Additionally, over the past decade we've seen an huge rise in the number of startups, and the number of companies looking to "disrupt" entire industries. In 2016, it's not completely unreasonable that a billion dollar company could go bankrupt within a few years due to whatever disruption comes from left field. Hoarding cash is a hedge against this type of risk, as it allows large companies to be flexible, acquire smaller, potential threats, or go on the offensive if/when it becomes necessary. i.e. Facebook's acquisition of Whatsapp for 19B
abcampbell 11y ago
The question isn't are profits too high...but rather, where do profits come from?
abcampbell 11y ago
The question isn't 'are profits too high?' But rather 'where do profits come from?'
swasheck 11y ago
I believe this to be one of the primary causes of stagnation of innovation by larger companies. The bottom line on the balance sheet _now_ is more important than long-term viability. It's a bit depressing, honestly. A myopic focus on the self's now without regard for the future of what could be.
jokoon 11y ago
I'll always see that phenomena as a societal failure. It seems that overall, the country prefers to be divided with everyone not helping the government, not pay taxes (because for some reason, "government is the problem and can't get things done" (C) Reaganomics libertarians), and not even throwing money at scientific research. It seems that wherever you look, things revolves around the accounting of money, but not around the thing that money can do, like run society and build things. It's weird because now companies like Tesla and SpaceX are seen as disruptive, but the only thing they do differently is just avoiding business as usual and expanding markets. Ideally, capitalism should be dedicated to creating new markets all the time, but for some reason it stopped. Just like Neil Degrasse Tyson talked about NASA, it seems that without public agencies like NASA, nothing gets done.
- namlem 11y ago
  Given the mountains of evidence for the economic evidence of science funding, it baffles me how little we spend on the NSF. Their entire annual budget is a measly $7 billion. NASA, at least is not doing so bad, and have seen an increase in public support and funding. The NSF, unfortunately, is a much more behind-the-scenes bureaucratic organization, and doesn't have sexy images of Martian sunsets and Plutonian topography to generate PR. Yet I would argue their work is much more essential, as the academic breakthroughs of today create the game-changing technologies of the future. The most depressing part is that we even have a surplus of PhD's who would make good use of NSF funds.
drawkbox 11y ago
The velocity of money has fallen off a cliff since 2008 [1]. Money is not moving, that is bad for the lower, middle and most of all upper class and corporations. Consumer driven economies with policies that kill off consumer buying power is a bad mixture. Wage stagnation and money that moves like molasses isn't a recipe for growth. Companies can only do buybacks for so long. The trend is not good and CEOs don't see that changing [2]. About a third of respondents expect corporations to become more competitive within three years. Assessments of every element of the U.S. business environment improved between a 2011 survey and this latest one. The growing optimism "seems to reflect the cyclical rebound of the U.S. economy," the report said. But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling. Destruction of lower/middle consumer class since the 70s clearly charts in the shares of gross domestic income to persons [3], the long slide. [1] https://research.stlouisfed.org/fred2/series/M2V https://research.stlouisfed.org/fred2/series/M2V [2] http://www.npr.org/sections/thetwo-way/2014/09/08/346902566/harvard-study-says-economy-is-doing-half-its-job-guess-which-half http://www.npr.org/sections/thetwo-way/2014/09/08/346902566/... [3] https://research.stlouisfed.org/fred2/series/W270RE1A156NBEA https://research.stlouisfed.org/fred2/series/W270RE1A156NBEA
- cryoshon 11y ago
  >But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling. I read this, and I am at ease, because it means that the end is in sight. Eventually, the system will collapse under its own horrid weight, and we can have another go at making a good society.
  - philovivero 11y ago
    I think you underestimate how much a revolution sucks.
    - cryoshon 11y ago
      Nah. A revolution will suck a ton, just that it's inevitable if the current system of "rape the poor so that the rich can buy more vacation houses" continues.
rubber_duck 11y ago
People around here might not like it because in large our industry (SW) is based on IP but intellectual property is a huge artificial monopoly created under some economic rationalizations - but the reality is it's getting reduced to rent seeking and concentration of power/wealth. I'm not sure abolishing the concept of IP (patents, copyright, etc.) is the right way to go about it - but I'm 100% certain that there are hideous abuses of the current IP laws and they need to be rewritten with a much more liberal and modern foundation. Having software patents is questionable, having software patents last 20 years is straight out retarded - even if you could argue that some edge case software R&D would not get funded without patents (which is hard to believe because most of the time when something is patented people come up with alternatives and give them away for free simply to avoid patent issues - and that's arguably even more work because the solution space is smaller). A far more realistic software patent would be between 5 and 10 years. Likewise for copyright - copyright claims should expire waaay before the 95 years.
- nwah1 11y ago
  That's part of it. Another part is old-school rent-seeking via real estate trolling (speculating), which is exactly like patent trolling. But a lot of tech profits are just "network effects" and vendor lock-in and not really a result of any kind of government privileges. Yet, if we had policies which fostered competition and open standards then we'd have less vendor lock-in.
williesleg 11y ago
Funny how the liberal elites with nothing are demanding their fair share. Get a job and go build something yourself. Then give it all away yourself.
emodendroket 11y ago
What a surprise. The Economist thinks the solution is more markets.

655 points by bainsfather 11y ago

dkopi 11y ago

"An intense burst of consolidation will boost their profits more. Since 2008 American firms have engaged in one of the largest rounds of mergers in their country’s history, worth $10 trillion. Unlike earlier acquisitions aimed at building global empires, these mergers were largely aimed at consolidating in America, allowing the merged companies to increase their market shares and cut their costs." I suspect being "Too big to fail" is another major reason for these mergers. Eric Dash actually let out a warning in the NY Times in 2008: http://www.nytimes.com/2008/11/01/business/01bank.html http://www.nytimes.com/2008/11/01/business/01bank.html "As the government makes taxpayer funds available to banks weakened by the financial crisis, the criteria being used to choose who gets money appears to be setting the stage for consolidation in the industry by favoring those most likely to survive." Mega companies can make huge profits because they feel more confident taking huge risks. If we succeed - we profit. If we fail - we're too big to fail. This is commonly refered to as a Moral Hazard: https://en.wikipedia.org/wiki/Moral_hazard https://en.wikipedia.org/wiki/Moral_hazard

disposeofnick9 11y ago
Accordingly, the US is currently in qualitatively worse shape risk-wise because there are fewer banks with larger portfolios, and regulators are part of the chorus of revolving characters in the banking-government complex... making another structural or "mistake" (flash crash) failure more likely because of institutional resistance to more objectively deploy necessary measures (enforcement) to regulate economic behavior. Check out Robert Reich on Thom Hartmann for more. Elizabeth Warren and Peter Schiff probably have a thing or two to say as well.
- mineshaftgap 11y ago
  "By the way, it cost us more — the S&L crisis cost the taxpayers more than the TARP did in 2008. So, I don’t know why he would cite that. In fact, the failure of a very large number of smaller institutions turned out to be much more expensive to the taxpayers. In fact, as far as the bailout of 2008 was concerned, we made money on that in the money that was extended to financial institutions. And, by the way, it wasn’t just to big ones then. It was to small ones as well. The only institutions that weren’t able to pay us back were the auto companies. And I don’t think — I thought it was a good idea to pay them. As to size, the question is not just to the size, but what would happen if they couldn’t pay their debts. And that’s what people ignore. We did two things in the legislation to deal with that. First of all, we made it much, much less likely that they would get so indebted that they couldn’t pay them back. It’s not their overall size. It’s the indebtedness that’s the threat. You could not now have an AIG, which got itself $170 billion beyond what it could pay off in derivatives, because we do not allow institutions under the law now to get so indebted without the capital to back it up. Secondly and most importantly, what we said is this: If a large institution can’t pay its debts, it fails. It is not too big to fail. It is put out of business, by law. No federal official can advance any money to pay its debts under the law until it is dissolved. What then happens is this: It may be that we would have to borrow from the taxpayers to pay some of the debts, not all, as the previous law required, but if we have to pay some of the debts to prevent the failure of a large institution from having serious economic consequences, the treasury secretary is mandated by law to recover every penny from large — other large financial institutions. And, again, it’s not the size of the institution, but the size of the unpaid indebtedness. Well, we have dealt with that by reducing the indebtedness and requiring that the institution will be dissolved if it fails." Barney Frank on PBS NewsHour.
WalterBright 11y ago
I've been investing for 30 years. My experience is, whenever a couple megacorps announce a merger, SELL! The deals always look good on paper, but the reality of trying to merge two gigantic organizations is just an unrelenting, slow motion disaster. The last time I got gulled into believing the hype was the AOL-TimeWarner merger.
- hkmurakami 11y ago
  It's also often a way for a new CEO to "prove" to the board that he/she is doing good work to propel the company forward. The key is that they're going through the motions of "doing big things" rather than truly pursuing the best interests of the company. Not limited to megacorps either. Plenty of smaller companies engage in this behavior.
  - crdoconnor 11y ago
    CEO pay doesn't correlate with effectiveness but it correlates very strongly with company size.
- derefr 11y ago
  There are two kinds of mergers: those between roughly orthogonal businesses that want to exploit some vague "synergies" between them (as in the AOL-TimeWarner case); and those between companies that were previously competitors, as in the constantly-growing brewery megacorp of Annheiser Busch. The latter is both much safer for investors, and much worse for customers, than the former; this type of merger has the direct goal of decreasing margin pressure by decreasing competition.
  - jpatokal 11y ago
    But the second type can also fail quite miserably. Daimler-Chrysler, Kmart-Sears, Sprint-Nextel...
    - charlesdm 11y ago
      Sure. But if it works, it's amazing for the shareholders. Just look at Anheuser-Busch Inbev (and their history of merging/consolidating) and their soon to be merger with SABMiller.
tw04 11y ago
I know of leaders at a company who shall remain unnamed that literally came right out and said (in private obviously) their last two mergers were to grow large enough to be too big to fail. So you're not at all off base.

disposeofnick9 11y ago

Maybe it's not that the profits are too high, but inequities of distribution are causing tangible, social externalities (Carrier moving to Mexico, undocumented workers rights abused in meatpacking facilities)? Perhaps more companies need worker representative groups with equity and voting board stakes as in Europe (even though investing in an employer is doubly risky)? When interests align, things toward working out compromises... treat people as just another disposable automaton, expect adversarialness, sabotage and/or rebellion.

fennecfoxen 11y ago
> Maybe it's not that the profits are too high... Perhaps more companies need worker representative groups with equity Or perhaps that money could just go back to the American consumer in the form of lower prices? That would be a far more equitable way to distribute it.
- kuschku 11y ago
  That has been tried for a few decades now, it doesn't really help. Lower prices are useless when a lot of the money goes into rent. Higher wages and better working conditions are required, so that people have more money they can spend. It also helps in a global context, as the prices of imported products won't change much just based on your national policies.
  - mattlutze 11y ago
    > Higher wages and better working conditions are required, so that people have more money they can spend. Higher wage doesn't do it alone, just as lower prices doesn't do it alone. Both need to work in concert to increase the worker's effective wealth. Better conditions are tangential though definitely very important for an improved work/life balance. > It also helps in a global context, as the prices of imported products won't change much just based on your national policies. National policies, in the form of tariff, tax, and relative currency value, are enormous factors in the cost of imported goods.

golergka 11y ago

This article seems strange. Why does analysis include only american companies? Capital moves freely between state borders now, and shareholders of companies of that caliber can decide to invest in China, Europe or other regions all around the globe— but there's not even a hint of that information in the article.

bainsfather 11y ago
The article's title is "Business in America". They do mention the retreat of foreign firms from the American market, and suggest this is partly due to American firms getting favourable advantages from their government, plus large incumbents being generally favoured. Regarding your comment on capital - nothing stops foreign capital buying shares in American firms, indeed monopolies or businesses with large moats are very attractive to investors - but the article is not about who owns the firms.
- golergka 11y ago
  I think that "Business in America" is a invalid concept altogether; there are just some companies that happen to pay taxes in america and are small enough so that they haven't expanded in other regions yet. But all the markets that these companies operate on — labour markets, capital markets, produced goods markets, resource markets — are global ones. It's like that Sargasso sea: it's not really a separate body of water, it's just a part of Atlantic ocean that was named differently because of very small degree of separation.
  - alanwatts 11y ago
    >"Business in America" is a invalid concept altogether; Agreed. If we want to have an efficient global market, we need to quit thinking in terms of the arbitrarily narrow scope of nationalism. Most people in the US have yet to realize the irony of a sovereign nation's tax payers bailing out super-sovereign multinational banks who hoard their money in foreign tax havens like the British Cayman Islands.
jernfrost 11y ago

gozur88 11y ago

>The profit bit of the picture, though, has changed a lot. Last year America’s airlines made $24 billion—more than Alphabet, the parent company of Google. Wow, that's profound. An industry with 600k employees made more than Google last year! Next you'll be telling me the banking industry makes more than Microsoft! Airlines need to make big profits in good years - they lose money like crazy in bad years. I don't know if it's still true, but at one time if you subtracted all the money US airlines lost from the money they made since the beginning of the industry you'd have a negative number. To the larger point, this is what happens when you pile on a bunch of regulations and then allow industry to capture the regulators. The barriers to entry are raised so high it's impossible to have real competition.

diskcat 11y ago
>The barriers to entry are raised so high it's impossible to have real competition. once again the government is responsible for it. don't worry though, im sure somebody will call for the government to 'reform' the industry and make all the problems go away.
- domfletcher 11y ago
  It's certainly not entirely the governments fault. Airlines need to be strongly regulated with good reason and pretending that they don't lobby and campaign to increase regulation that acts as a barrier to entry is myopic at best.
- Ensorceled 11y ago
  Why did you assume the OC meant the regulators was bad rather than their capture?
  - diskcat 11y ago
    any regulator is bound to be captured because the special interest has more concentrated power compared to consumers. Thus regulation always does the opposite of what it is supposed to do in the long run. This is a common theme with interference with the free market.

antr 11y ago

I don't think this is a competition issue. After the 2007-2010 credit crisis, US corporates have gone through a considerable effort of delevering, taking on less debt/financing risk. Consequently this has, and will continue, to increase net income. If lack of competition is real, this should be reflected at the EBITDA level, and The Economist has not discussed this at all. As a long-term subscriber of The Economist I'm a bit disappointed in this piece.

adventured 11y ago

Profits are unusually high almost entirely due to two factors. First, the massive expansion of the global economy the last ~20 years has particularly benefited the top Fortune 500 companies, along with the artificially cheap dollar from ~2003-2014 (which has now reversed and is wrecking profits for that same club). The global economy has grown far faster than the US economy since the late 1990s, companies that had exposure to that were obviously going to benefit tremendously vs domestic oriented companies. Second, the substantial margins and profit of the top US tech companies, which have boomed more than any other companies over those 20 years. Apple, Microsoft, Google, Oracle, Intel, Cisco, Qualcomm, etc That's about $130 billion in profit, between those seven companies. Oracle produces five Caterpillars worth of profit. Apple's profit is nearly Berkshire Hathaway + Johnson & Johnson + Boeing + General Electric. Or even more dramatic, if you were to do a three year average on profits, Apple would just about add up to these companies combined: Union Pacific, Visa, 3M, Caterpillar, McDonalds, CVS, Walgreens, Costco, Target, Honeywell, GM, Ford, Lockheed, Boeing, UPS, Fedex, Delta, America Airlines Microsoft is Goldman Sachs + Disney + Procter & Gamble. Google's profit is roughly greater than the top 50 US defense contractors combined. You might as well just say it's equal to the entire US defense contracting industry combined. Now strip out just Apple, Google and Microsoft, and then inflation adjust the remaining Fortune 500 back to a 1995 dollar and compare the group with the Fortune 500 of the mid to late 1990s. What you'll see, is US corporate profits are not that unusual and the top tech companies are producing a very large warping of the picture.

tonyedgecombe 11y ago
The point the article makes is that global companies make much more in their home markets than abroad.

justsaysmthng 11y ago

I find it odd that economists generally ignore the field of human psychology / behavior in their assessments. Things like mental and physical health, addictions and substance use, thought manipulation and mind control, the fears and desires, sexual fantasies, even popular movies and music affect the economy greatly. Not just a little bit, but greatly. A CEO's addiction to cocaine or promiscuity will have an impact on his company's bottom line. A young man starts a disrupting startup because he got inspired by a sci-fi movie a couple of years earlier. Adam Smith's "invisible hand" is "invisible" because those forces can't be explained by the mechanistic rules of economics or mathematics. We just need to look elsewhere for a comprehensive picture. What makes customers choose a product over the other ? Why do some companies retain great talent better than others - and hence reap greater profits ? How does pop music affect industrial design ? Of course, human behavior and psychology is hard to quantify, that is why it's being left out, but I think we can start to make these connections now that we have the tools and information available. Take Google and Facebook - these companies make their profits from advertising. Tens of billions. Add the profits of the media market - print, tv, radio. Now consider how all that advertising affects the demand curve in all the other industries. And it's not just the quantity, it's also the quality of advertising - today's ads are scientifically designed to drill their way into our subconsciousness. The colors, the sounds, the motions, the emotions - all of these are carefully weighted so as just to make you want a certain brand over the other. And now my favorite part - is there a connection between advertising, corporate profits, pollution and climate change ? I think there is and it's a great one. To conclude, I think regulators should look at all these factors much deeper, determine the connection between mind and economy and exercise their influence by tuning other parts of society, not just traditional economic levers. Of course this is a monumental task for humans, but AI might just be perfectly suited for this type of analyses.

blfr 11y ago
I find it odd that economists generally ignore the field of human psychology / behavior in their assessments. Psychology, especially social psychology, is an epistemological disaster area[1][2] and everyone would be better off ignoring its "findings", not just economists. [1] http://www.nature.com/news/over-half-of-psychology-studies-fail-reproducibility-test-1.18248 http://www.nature.com/news/over-half-of-psychology-studies-f... [2] http://michaelinzlicht.com/getting-better/2016/2/29/reckoning-with-the-past http://michaelinzlicht.com/getting-better/2016/2/29/reckonin...

known 11y ago

Unfair competition http://www.zerohedge.com/print/502779 http://www.zerohedge.com/print/502779

DrNuke 11y ago

It is not a problem if the money is somewhat recirculated within the economy (make projects for the general public, rejuvenate cities, create jobs, pay salaries). It is a big problem if the money is simply drained out of the economy and funnelled into fiscal havens.

protonfish 11y ago
Especially because this decimates the consumer base. When you've impoverished your nation's people, who will buy your products? The dysfunctional focus on short-term profits at the expense of overall economic health makes the economy sicker each year and this disease will continue to ravish the world as long as greedy children hold the power to do so.

InclinedPlane 11y ago

When profits are too easy there's not much incentive to innovate, there's no hunger. You can see this in google who have dominated their niche of the market so strongly that they've lacked the drive to seriously pursue other markets and to invest in their products to bring them to true maturity. Or look at Apple, who have been coasting on their momentum for years. Initially the iPhone was ahead of the curve in every way, now they are in the traditional Microsoft space, adapting innovations from around the industry and, one hopes, implementing them well and integrating them into a cohesive experience. Yet you have some major design missteps that haven't caused them to stumble. Though you could look at the entire smartphone/tablet industry in general as exemplary of the problem of easy money. Tablets have only slowly adapted to the role of content creation and work, because selling toys has been so insanely profitable there hasn't been a drive to do so.

macu 11y ago

TODO: Create brand and company with open source designs, versioned products, and sell just above cost!

Shivetya 11y ago

This isn't really about too much profitability, its about corporations getting large enough, diversified enough, and still having the ability to relocate their home, so that politicians cannot rely on them as cash cows for either political contributions or taxation.

pinkwolf 11y ago

genrally america is being run by lobbies, so naturally, those "lobbies" get all the profits.

ThomPete 11y ago

Profits are "too high" because productivity is up due to technology and digitalization which means that less people are required to take advantage of tech and make more money. Competition can't solve this because in tech most is a winner takes all so if anything competition will create even stronger few winners.

drzaiusapelord 11y ago
This is my thinking as well. Everyone worries about robots taking their jobs in the future, but we've had "robots" since office automation began in the 70s and 80s. Its a bit more obvious in the blue collar sector where a literal robot can take your welding job or whatever, but in the white collar sector, its still the same. There's so much more efficiency that people aren't in high demand anymore. It used to be even a "small" company was a few dozen people. Everyone needed an assistant, you had a whole team of people to do graphic work, a whole team of people to make copies, etc. That's a pretty far cry from a handful of people, a handful of computers, and a decent laser copier. There's no fix here. The genie is out of the bottle from an economic perspective. We just have this long slog ahead of us of working with this new reality. I imagine things like guaranteed minimum income will be the fix here as these jobs are never coming back, nor will new jobs come and replace them as things become more and more efficient.
- maxerickson 11y ago
  Between 1970 and 2000 there was also a massive expansion of the global workforce. Both in absolute numbers and in the percentage of the planet that was participating in global markets. In many countries, women started working a lot more in that period. Other countries entered the global market (notably hundreds of millions of Indians and Chinese). People talk about the rise of Africa being the next cheap source of labor, but that is a smaller number of people that is less uniformly educated than the above cohorts. I don't think it is really all that strange that wages stagnated where they started out the highest. Maybe we in the US are actually on track for things to get better rather than worse.
  - 11y ago

padobson 11y ago

Wages are flat, buy and hold strategies are decimated by bubbles, and any job can be eaten by globalization. At the same time, profits are up, access to capital has never been cheaper, and global market access has never had fewer barriers to entry. The question is not how do we create living-wage jobs for the American worker, the question is how do we get the American worker to quit his job and start a business? The economy is quite clearly slanted toward the entrepreneur. We need to start getting Americans to invest their labor accordingly.

adyus 11y ago
If every employee quits their job to start a business, who will all these new businesses employ?
- jessaustin 11y ago
  Wal-Mart eagerly await the day when they can fire all their employees and rehire them as contractors.
  - pc86 11y ago
    I don't see how a sudden increase in the number of freelancers/entrepreneurs changes the tax classification of Wal-Mart employees.
- padobson 11y ago
  This is a great illustration of what reducing the labor pool will do for the demand for labor. Every laborer that turns entrepreneur will have a positive impact on wages, because it reduces the labor supply while simultaneously increasing the demand for labor.
- lmm 11y ago
  Transaction costs have fallen far enough that businesses can be small enough to be run by one person, or at least a small number of people. Twenty years ago a small ad agency (say) might have been a couple of sales/client-management types who did a bit of writing, a dedicated copywriter, a dedicated graphic designer, and an accountant who also did payroll and basic HR/legal and handled the office lease. Today each of those sales/client-management types could have their own business, working out of a managed shared office, outsourcing writing and graphics as necessary to the copywriter and graphic designer who have their own businesses (because the Internet means there's much less overhead outsourcing and communicating with freelancers), with payroll/legal outsourced to service companies (which probably means less people - maybe 3-5 people handling 10 companies - but each company actually ends up with better access to dedicated specialists than when they had to have one person handling all of those).

cs702 11y ago

...and those profits are not being reinvested in new projects, new ventures, and new markets. Instead, large corporations have been accumulating historically high amounts of cash, which is just sitting on their balance sheets, idle.[1] It's definitely not due to lack of greed. Corporations in the US are very much driven by profit motives: whenever they identify an opportunity to make a profit from customers, they take advantage of it. Therefore, it must be that they aren't identifying enough attractive opportunities in which to invest that growing mountain of cash. Meanwhile, the US middle class appears to be struggling with stagnant wages and limited opportunity.[2] We have engine trouble, and no agreement on how to fix it. -- [1] https://www.stlouisfed.org/Publications/Regional-Economist/January-2013/Why-Are-Corporations-Holding-So-Much-Cash https://www.stlouisfed.org/Publications/Regional-Economist/J... [2] https://www.washingtonpost.com/local/happy-days-no-more-middle-class-families-squeezed-as-expenses-soar-wages-stall/2014/04/26/f4a857f0-7a47-11e3-b1c5-739e63e9c9a7_story.html https://www.washingtonpost.com/local/happy-days-no-more-midd...

gz5 11y ago
We have engine trouble partially because the US consumer has historically been the oil of the global economy. Now big business is ahead of its consumers (too many now under employed or unemployed), hence less opportunities to invest those cash mountains. As Andy Grove said, we need to optimize for jobs too. Else we simply don't have balance in the overall ecosystem, as we are now seeing.
wheaties 11y ago
Too much cash? Pay people more! Really that simple. Money has a momentum, a speed by which it flows through an economy. Eventually those mountains of capital will disappear because there is no one left to buy what is being sold.
- Agustus 11y ago
  Those are profits, if you are able to operate your company to the degree that one is able to accumulate the cash, then there is no reason to increase liabilities to accomplish a task. If you want to spread the wealth around, then you need the government to perform this task.

cm3 11y ago

To anyone who wants less government and more free markets, unfortunately greed works in such ways that price fixing and market segmentation is very prevalent. Everywhere, even Western Europe. You'd probably not expect it, but take backpacks as an example. German backpack manufacturers hold retailers to fixed prices, disallowing anything lower than the set price. Same for mattresses (the kind you sleep on). The result is an illusion of free markets but where those who try to sell cheaper either get their supply cut off or get bullied in other ways. Same racketeering goes on with ISPs, and these are strong arguments why regulation bodies need to exist and impose hefty fines. Why am I mentioning this? Well, unfortunately without regulation there's no real competition because companies will split up a market and also agree on unofficial pricing structures to keep it expensive.

namlem 11y ago
Absolutely. Deregulated systems are every bit as vulnerable to greed and corruption as regulated ones. With regulation, you have to be careful to avoid rent-seeking schemes by established interests trying to raise barriers to competition. With deregulation, you have the obvious health, safety, and environmental risks, but you also have the issues of collusion that you mentioned, like price fixing and market segmentation. Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer.
- cm3 11y ago
  But what other choices than regulation do we have? The regulation has to be regulated and fully transparent. I hope that as long every penny crossing the table is visible we'll have a positive outcome. e.g. US judges feeding inmates to private prison companies they have shares in is an extreme instance of where regulation and oversight failed. > Fwiw though, there are online-only mattress brands that bypass the establishment by delivering directly to the consumer. Yeah and there's one online-only mattress firm that is now shifting to making their own mattresses and selling them as "Anti-Cartel Mattress" and promptly the firms that tried to prevent them earlier from selling their products cheaper than fixed have been trying to sue them for the product name. In German: http://www.tagesspiegel.de/wirtschaft/streit-um-eine-matratze-wie-ein-matratzenfabrikant-gegen-den-marktfuehrer-kaempft/11945698.html http://www.tagesspiegel.de/wirtschaft/streit-um-eine-matratz...

cm3 11y ago

I suppose if double-dutch and similar schemes wouldn't exist and they had to pay taxes like everyone else, there would be automatic reinvestment via government spending.

diego_moita 11y ago

It is tricky to relate high profits to low competition. Sometimes both can happen together. The histogram on the article shows IT/Technology and Finance as being 2 sectors with high profits, but these are sectors with a fierce, cut-throat level of competition. Also, as Peter Thiel argued, healthy profits are vital to finance innovation.

swehner 11y ago

I usually stay away from economist "writing." Here some laughing points from this article: * according to polling by Pew, a research outfit.... * Return on capital is at near-record levels, too (adjusted for goodwill). * Together they own 10-20% of most American companies * The spectre of very big online travel sites dominating the purchase of hotel rooms has led the hotel firms to consolidate, too

BCM43 11y ago
Care to explain the problems with those statements?
- swehner 11y ago
  You're sure they are not obvious?
  - jat850 11y ago
    I'm not the GP but they're not obvious to me, either.
  - alienasa 11y ago
    I'm pretty sure they're not obvious. What are the problems?
  - astrodust 11y ago
    Also looking for some clarification here. Of all the things to nitpick about those are some strange choices.

delinka 11y ago

How does this thesis fit with manufacturers of 'premium' products? 'Premium' being those products that indeed compete with other products but are perceived as somehow better by consumers. Tablets are a good example: Though Android has all the market share, iOS generates all the profit. Does Apple need a giant dose of competition? Looks to me like they have it and still keep raking in the profits.

tmaly 11y ago

The best way to keep out competition is to create barriers to entry. The onslaught of new laws and new regulations in any industry is the perfect barrier. Think about it, how many startups can afford to hire a compliance staff that ensures they are keeping up with all the laws and regulations passed? Look at how many pages were added to the Federal Register in the US last year, I think in total there was something like 60,000 pages.

mc32 11y ago

The US industry needs a big dose of healthy taxation. I don't mean treat it like a windfall to trip over, I mean sensible taxation where the excess goes into infrastructure like bridges, roads, rail and urban planning and development as well as rural planning and development. Of course something along these lines would require restructuring how we tax foreign earnings (being more in line with the rest of the world) and regulate inversions to make them less attractive. It's a daydream and it won't happen but that's what we should do with the money, rather than pay fairly compensated employees more, with the exception of their hourlies, but that's more up to the states to decide. The gist is if we have extra earnings use them in a way that will create long term benefits for all citizens --who are living with infrastructure past its designed lifetime, in many cases.

tsax 11y ago
Do you know how much is spent on US infrastructure per year? Do you think it's the lack of funds responsible for sub-par US infrastructure?
- mc32 11y ago
  No, but it looks like since after WWii we've been mostly reactive rather than forward looking and proactive. There are tens of thousands of bridges in need of repair or replacement, for starters.

jack9 11y ago

Competition has driven down (non-union) wages and increased profits through aggregation/consolidation. Why compete for 20 years when you can borrow and spend to buy the competition and double your market with no chance for a startup to compete at the same level in a regulated market.

HelloRipley 11y ago

I like The Economist, but as a subscriber I notice two common trends: 1 - They really, REALLY, love to criticize America. 2 - They often have a really crappy understanding of micro-economic theory.

massysett 11y ago
I can't speak to 2, but they often praise America. They say America has an unparalleled ability to assimilate immigrants. They also praise other odd things, like the entrepreneurial spirit of American religion, or the power of technology transfer between government researchers and industry, or the high productivity of American freight railroads. One reason I read the Economist is because they see beyond the daily noise to pick out the news that requires digging and thought.

strommen 11y ago

Seriously? They're using airlines as the example of too-profitable companies? The industry was in total shambles for nearly an entire decade after 9/11. It's no wonder that they're hesitant to lower their margins. I truly can't imagine an industry that would be more difficult to run a company in: * Everything is highly regulated. * The dominant expense is a highly-volatile commodity controlled mainly by unpredictable/hostile countries. * Your product has been totally commoditized by airfare-pricing websites. * People get angry at your company when the weather is bad. * Use of your product is inextricably linked to the abhorrent process of airport security. * There is the continual potential of a terrorist attack decimating your sales overnight. Any decently smart airline is hoarding some profits, because if they don't they will go bankrupt the next time fuel costs spike or something scary happens during a U.S. flight.

guelo 11y ago
> Your product has been totally commoditized by airfare-pricing websites. That American made $24 billion last year without passing on anything to consumers shows that that is wrong. Pricing websites are under full control of the airlines at this point.
- morgante 11y ago
  Savings are passed on to consumers, in part. Airline fares are near all time lows.
  - guelo 11y ago
    The point is that gas prices collapsed last year but ticket prices did not drop.
    - pvaclavek 11y ago
      Why should the price of a ticket be neccessarily bound to gas price? Wouldn't most people pay the same price regardless of gas price?

jrbapna 11y ago

I don't think it's that simple. There are few more factors at play: For one, the markets are risky. Let's not forget that just a few years ago, bonds which were supposedly rated AAA were nothing but air. The entire economic system collapsed quite literally overnight. Many people lost faith in the "system". Currently our debt levels are higher than any economist is comfortable with, and just like in the case with the subprime mortgages, there is huge political pressure to keep the government's AAA rating, whether deserved or not: https://en.wikipedia.org/wiki/United_States_federal_government_credit-rating_downgrades https://en.wikipedia.org/wiki/United_States_federal_governme... Additionally, over the past decade we've seen an huge rise in the number of startups, and the number of companies looking to "disrupt" entire industries. In 2016, it's not completely unreasonable that a billion dollar company could go bankrupt within a few years due to whatever disruption comes from left field. Hoarding cash is a hedge against this type of risk, as it allows large companies to be flexible, acquire smaller, potential threats, or go on the offensive if/when it becomes necessary. i.e. Facebook's acquisition of Whatsapp for 19B

abcampbell 11y ago

The question isn't are profits too high...but rather, where do profits come from?

abcampbell 11y ago

The question isn't 'are profits too high?' But rather 'where do profits come from?'

swasheck 11y ago

I believe this to be one of the primary causes of stagnation of innovation by larger companies. The bottom line on the balance sheet _now_ is more important than long-term viability. It's a bit depressing, honestly. A myopic focus on the self's now without regard for the future of what could be.

jokoon 11y ago

I'll always see that phenomena as a societal failure. It seems that overall, the country prefers to be divided with everyone not helping the government, not pay taxes (because for some reason, "government is the problem and can't get things done" (C) Reaganomics libertarians), and not even throwing money at scientific research. It seems that wherever you look, things revolves around the accounting of money, but not around the thing that money can do, like run society and build things. It's weird because now companies like Tesla and SpaceX are seen as disruptive, but the only thing they do differently is just avoiding business as usual and expanding markets. Ideally, capitalism should be dedicated to creating new markets all the time, but for some reason it stopped. Just like Neil Degrasse Tyson talked about NASA, it seems that without public agencies like NASA, nothing gets done.

namlem 11y ago
Given the mountains of evidence for the economic evidence of science funding, it baffles me how little we spend on the NSF. Their entire annual budget is a measly $7 billion. NASA, at least is not doing so bad, and have seen an increase in public support and funding. The NSF, unfortunately, is a much more behind-the-scenes bureaucratic organization, and doesn't have sexy images of Martian sunsets and Plutonian topography to generate PR. Yet I would argue their work is much more essential, as the academic breakthroughs of today create the game-changing technologies of the future. The most depressing part is that we even have a surplus of PhD's who would make good use of NSF funds.

drawkbox 11y ago

The velocity of money has fallen off a cliff since 2008 [1]. Money is not moving, that is bad for the lower, middle and most of all upper class and corporations. Consumer driven economies with policies that kill off consumer buying power is a bad mixture. Wage stagnation and money that moves like molasses isn't a recipe for growth. Companies can only do buybacks for so long. The trend is not good and CEOs don't see that changing [2]. About a third of respondents expect corporations to become more competitive within three years. Assessments of every element of the U.S. business environment improved between a 2011 survey and this latest one. The growing optimism "seems to reflect the cyclical rebound of the U.S. economy," the report said. But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling. Destruction of lower/middle consumer class since the 70s clearly charts in the shares of gross domestic income to persons [3], the long slide. [1] https://research.stlouisfed.org/fred2/series/M2V https://research.stlouisfed.org/fred2/series/M2V [2] http://www.npr.org/sections/thetwo-way/2014/09/08/346902566/harvard-study-says-economy-is-doing-half-its-job-guess-which-half http://www.npr.org/sections/thetwo-way/2014/09/08/346902566/... [3] https://research.stlouisfed.org/fred2/series/W270RE1A156NBEA https://research.stlouisfed.org/fred2/series/W270RE1A156NBEA

cryoshon 11y ago
>But what do business leaders see coming for workers in the next three years? Only 27 percent expect workers to enjoy higher pay, while 41 percent said wages and benefits would be falling. I read this, and I am at ease, because it means that the end is in sight. Eventually, the system will collapse under its own horrid weight, and we can have another go at making a good society.
- philovivero 11y ago
  I think you underestimate how much a revolution sucks.
  - cryoshon 11y ago
    Nah. A revolution will suck a ton, just that it's inevitable if the current system of "rape the poor so that the rich can buy more vacation houses" continues.

rubber_duck 11y ago

People around here might not like it because in large our industry (SW) is based on IP but intellectual property is a huge artificial monopoly created under some economic rationalizations - but the reality is it's getting reduced to rent seeking and concentration of power/wealth. I'm not sure abolishing the concept of IP (patents, copyright, etc.) is the right way to go about it - but I'm 100% certain that there are hideous abuses of the current IP laws and they need to be rewritten with a much more liberal and modern foundation. Having software patents is questionable, having software patents last 20 years is straight out retarded - even if you could argue that some edge case software R&D would not get funded without patents (which is hard to believe because most of the time when something is patented people come up with alternatives and give them away for free simply to avoid patent issues - and that's arguably even more work because the solution space is smaller). A far more realistic software patent would be between 5 and 10 years. Likewise for copyright - copyright claims should expire waaay before the 95 years.

nwah1 11y ago
That's part of it. Another part is old-school rent-seeking via real estate trolling (speculating), which is exactly like patent trolling. But a lot of tech profits are just "network effects" and vendor lock-in and not really a result of any kind of government privileges. Yet, if we had policies which fostered competition and open standards then we'd have less vendor lock-in.

williesleg 11y ago

Funny how the liberal elites with nothing are demanding their fair share. Get a job and go build something yourself. Then give it all away yourself.

emodendroket 11y ago

What a surprise. The Economist thinks the solution is more markets.