Paul Krugman: We're Living in a Second Robber Baron Era

Paul Krugman explains why the Verizon strike of last week points out a much deeper problem than what goes on with one telecommunications company in Monday's column. We are living in a time of corporate monopolies that rivals those of the robber baron age, and they are harming workers, consumers and the economy itself.


The issue, he writes, is not just wages and oursourcing; it is the fact that "Verizon has shown a remarkable lack of interest in expanding its Fios high-speed Internet network, despite strong demand."

The reason for that peculiar bit of seemingly self-destructive corporate behavior is that it does not have to. Verizon's customers have nowhere else to go and are forced to put up with shoddy service. And Verizon's case is far from alone. Krugman:

In recent years many economists, including people like Larry Summers and yours truly, have come to the conclusion that growing monopoly power is a big problem for the U.S. economy — and not just because it raises profits at the expense of wages. Verizon-type stories, in which lack of competition reduces the incentive to invest, may contribute to persistent economic weakness.

The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before.

How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described: able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service. The result would be what we see: an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to “secular stagnation” — that awkwardly-named but serious condition in which an economy tends to be depressed much or even most of the time, feeling prosperous only when spending is boosted by unsustainable asset or credit bubbles. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.

Increased monopolies, and decreased competition are bad for the economy. And Ronald Reagan is the man we have to thank for that. Known best for lowering taxes and deregulating banks, he also weakened enforcement of anti-trust regulations. He was assisted in this effort by George W. Bush, and Obama has been too distracted to deal with it, though Krugman suggests he is finally giving the problem some attention.

Better late than never.

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