The next six months could witness one of the biggest consolidations of corporate power in the United States in almost a century, yet a variety of legal and economic factors may leave the federal government unable to stop it.
The essence of the problem is that during the extended economic crisis created by the coronavirus pandemic, many large companies — and especially their stock market values — have been growing rapidly while their small business competitors have faced something of an apocalypse. More than 400,000 small businesses have already closed and millions more are at risk.
Indeed, the death of these competitors may be part of why the stock market is up so much from its low point in March. Whether the sector is technology, home building, pharmaceuticals or telecommunications, investors seem thrilled with the prospect that big companies will eventually see an expansion of demand but not face as much competition. The stock market’s growth has been disproportionately concentrated among the biggest publicly traded firms.
Concentration of power in a small number of big companies is not, itself, new. Corporate concentration has grown significantly in recent years, bringing with it increased corporate profits and a falling share of income going to workers, researchers have shown. In addition, corporate capital investment has slowed and so has the rate of new business formation.
Scholars have debated why all of this has happened — new technology, the decline of worker bargaining power and the failure of antitrust authorities are all said to be causes — but the facts themselves are stark.
Nor is it news that high equity values fuel corporate acquisitions or that large companies like to snap up small ones. The economists Colleen Cunningham of London Business School, and Florian Ederer and Song Ma of Yale have shown that bigger companies engage in “killer acquisitions” buying innovative competitors to prevent them from becoming major threats. My colleague Thomas Wollmann at the University of Chicago, in work that includes the perfectly titled “How to Get Away With Merger,” has shown how health care companies try to keep such consolidations below the radar screen of regulators.
What is unusual at this moment is the extreme divergence in the health of different types of companies: Many of the biggest are flush with money, while smaller competitors have never been in more precarious shape.
The Federal Reserve’s Flow of Funds latest data (from the first quarter of 2020) shows that at the outset of the pandemic, nonfinancial businesses were sitting on an eye-popping $4.1 trillion of cash — the largest hoard ever. These companies also received huge tax reductions in the Tax Cut and Jobs Act of 2017, including incentives to acquire other firms. Then, earlier this year, the Coronavirus Aid, Relief and Economic Security (or CARES) Act, aimed at rescuing the economy from the ravages of the coronavirus, empowered the Federal Reserve to provide up to $5 trillion in subsidized loans for large businesses.
Given such enormous resources, many corporate giants are in great shape, but the rescue money for firms without access to public capital markets ran out at the end of July, and the prospects for many small businesses are bleak.
What’s needed to prevent rich companies from engaging in a mass gobbling up of small competitors is for government antitrust authorities to become more muscular. On the surface, this seems easy to accomplish. After all, either the Justice Department or the Federal Trade Commission must pass a judgment that any merger will not reduce competition for it to go through.
Traditionally, these rulings are not particularly political. The authorities follow an evaluation process outlined in a venerable document, the “Horizontal Merger Guidelines.” The government is supposed to care only about how the merger will affect consumers. It defines which companies should be considered a market and then calculates how concentrated that market would become with a merger, how easy it would be for someone new to enter, what efficiencies the merger would bring, and so on.
But three things make it hard to envision the authorities pursuing a “get tough” strategy at this critical moment.
First, the enforcement budget for antitrust actions was already stretched way too thin even before the current crisis began. That budget has been falling for years and is lower now than it was two decades ago. The entire antitrust division of the Justice Department and the F.T.C. are being forced to operate on less than a single company like Facebook brings in over a few days. In the last 10 years, the number of merger filings (which notify the authorities of an intended merger) has almost doubled, but the number of enforcement actions taken by the government has actually fallen.
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Second, there is an explicit carve-out in the merger guidelines for what is known as the “failing firm defense.” It says, effectively, that a merger won’t create more market power (and so can be allowed) if the target was going to die anyway. Unless Congress approves further relief money for small businesses, many of them will die: The number of companies that might fail without a merger is, effectively, unlimited. That short-run complication threatens to open the door to a buying spree.
In the last recession, the economist Carl Shapiro of the University of California, Berkeley, at the time serving as deputy assistant attorney general in the antitrust division, said that in making antitrust assessments, the government needed to distinguish between temporary financial distress and long-term nonviability. It will be critical to reinstate that distinction now.
Third, the federal antitrust record during crises is not reassuring. As the University of Michigan law professor Daniel Crane put it in his history of antitrust enforcement: “In the almost 120-year history of the Sherman Act, no political administration has reacted to a crisis by calling for more vigorous enforcement of the antitrust laws. To the contrary, administrations of both parties have responded to crises — both martial and economic — by explicitly or implicitly pulling back on antitrust enforcement. Industrialists have used crises as opportunities to deepen their grip on markets.”
The crisis that led to the telecom collapse of the early 2000s ushered in a huge consolidation of the telecom industry that has left us with giants like AT&T and Verizon. The financial crisis of a decade or so ago commenced a wave of consolidation in the banking sector.
As Congress and the president consider additional relief measures for small businesses, they should remember that there’s much more at stake than the number of jobs next month.
The largest downturn in 90 years threatens to fundamentally change the competitive balance in scores of industries for decades to come.
That might garner a hearty cheer from investors (because who doesn’t love a good, profitable monopoly?). But riches for shareholders would come because the government didn’t stop big companies, which would no longer fear competition, from squeezing more out of millions of consumers.
Austan Goolsbee, a professor of economics at the University of Chicago’s Booth School of Business, has been a Department of Justice antitrust consultant, and was an adviser to President Barack Obama. He supports the candidacy of Joseph R. Biden Jr. Follow him on Twitter: @austan_goolsbee