COVID-19 | How exclusionary social protection systems in the MENA are making the COVID-19 pandemic’s effects worse

COVID-19 | How exclusionary social protection systems in the MENA are making the COVID-19 pandemic’s effects worse

The COVID-19 pandemic has made the majority of people living in the MENA region even more vulnerable, adding to existing structural problems that include under-resourced public health services, a high ...

COVID-19 | The voices of children and youth in Tanzania’s COVID-19 response

COVID-19 | The voices of children and youth in Tanzania’s COVID-19 response

Rapid research into the effects of COVID-19 on young people in Tanzania reveals high levels of anxiety about the virus as it relates to relationships, economic livelihoods and the community. ...

The rise of Big Tech cements the fall of the US economy

While the US economy is going through its worst crisis in the last eight decades, with small businesses shutting down en masse and millions of Americans losing their jobs, one wouldn’t know anything is wrong solely from looking at the largest US companies. The crisis, triggered―but not caused―by the COVID-19 pandemic measures, has enabled some of the world’s largest corporations to amass record profits. It allows them to capture ever-larger shares of a market that is increasingly monopolised. How could that happen and what will it lead to?

The widening gap between the Big Five and the rest

It is no secret that Amazon has done well throughout the pandemic, with both the company’s profits and Jeff Bezos’ personal wealth shooting up to record highs in the middle of one of the worst recessions the US has ever seen. While brick-and-mortar retailers have suffered tremendous damage as a result of the measures implemented in response to COVID-19, Amazon has thrived off the accelerated shift to online services.

And it is not alone in this: The so-called US tech companies―also referred to as the Big Five―have all managed to keep increasing their profits while the US economy is contracting. Apple, Alphabet (Google’s holding company), Amazon, Facebook, and Microsoft saw their combined pre-tax profits rise by an annualised 5% in the second quarter; starkly contrasting profits of the rest of corporate America, which fell by an annualised 27% (excluding finance).

A company experiencing profits growth during a recession is highly unusual, and the Big Five’s outperformance has led to a dramatic increase of their share in total non-financial profits made by US companies. Having already risen from 4% in 2011 to 11% in 2019, the Big Five have increased their slice of the pie to 16% in the first half of this year.

To put this into perspective: The concentration of US non-financial profits in the top five companies has historically been around 7-9% while the current top five, which includes three of the large tech companies, accounted for an astounding 19.3% in 2019. Since the onset of the pandemic, this figure is estimated to have risen further to 25%. This would mean that five companies now receive one quarter of all non-financial profits made in the US.

Profits of financial entities are excluded here because we are examining the production side of the US economy. But Wall Street, too, is an almost insane case of monopolisation and control over public policy that might be explored in another article.

A long-standing trend of market concentration

There is no question that the pandemic measures have accelerated the ever-widening gap between the Big Five and the rest, but at the same time it cannot be ignored that the US economy has seen a long-standing trend of market and profits concentration. Even before Big Tech came along, many of the major industries, ranging from beer to healthcare, had already seen the emergence of oligopolies (a few dominant firms), duopolies (two dominant firms) and even monopolies (one dominant firm).

A prime example is the case of high-speed internet provision in the US, for which the market is almost completely controlled by the three telecom giants AT&T, Verizon, and Comcast. By carving up the market, they have avoided competing in the same regions, forcing as many as 75% of US households to ‘choose’ from just one provider. Health insurance is another industry for which the market has been sliced up by the companies who dominate it, ensuring that competition is avoided as much as possible. As a consequence, in many states 80-90% of the health insurance market is controlled by just two companies.

Capitalism is a system in which competition drives innovation and growth. The natural strategy for a company to become dominant in an industry is to outcompete its rivals by producing better and cheaper products―i.e., by innovating. The problem in the US today is that more often than not, it has been a lack of competition which has allowed for high levels of market concentration and abnormally high profit margins in the US.

But it wasn’t always like this. The US government used to pay great attention to market concentration and threats to competition, which was why they had created antitrust regulation in the first place around the turn of the 20th century. According to Jonathan Tepper and Denise Hearn, who documented the vast extent of uncompetitive and increasingly concentrated industries in the US in ‘The Myth of Capitalism’, point to the dismantling of antitrust regulation since the 1980s as one of the major causes for the growing degree of what they refer to as ‘industrial concentration’.

An illustration of when antitrust was still applied in full force is the case of IBM in 1969. The US government brought an antitrust lawsuit to PC maker IBM who held 70% of the market at the time. The lawsuit instigated IBM to make its hardware compatible with software other than the programmes it sold itself, allowing for new companies such as Microsoft (founded in 1975) to emerge and produce software for IBM machines and, eventually, for those produced by other companies.

In 1998, when the number of antitrust cases was already much lower than before, the US government brought an antitrust lawsuit against Microsoft because it was starting to monopolise the PC software market. The tech giant was using its popular Windows operating system to favour its own programs such as the Internet Explorer. And with the internet on the rise, the company was also well positioned to block competitors from areas such as search engines. The lawsuit helped curb Microsoft’s growing power and allow other software companies to compete. Perhaps more importantly, it also allowed tech startups―such as a little company called Google―to grow.

The Big Five and the abandonment of antitrust regulation

The irony of Google owing its existence to antitrust is that the tech giant is currently one of the largest violators of antitrust principles, which appear to no longer be enforced by the US government. Apart from being a monopoly in the market for search engines, Google together with Facebook controls the market for online advertising with both companies actively barring new entrants to the industry. When Facebook bought social media rival Instagram in 2012, there was not a single antitrust case brought against them to block the acquisition.

Buying the competition certainly has been a favorite tool for retaining dominance. Since 2005, the Big Five have acquired 549 companies, which in many instances were direct competitors. From 1985 to 2017, the number of mergers and acquisitions completed annually rose from 2,308 to 15,361 nationwide. Unsurprisingly, Tepper and Hearn are able to show that the rise in acquisitions has a clear inverse relationship with the number of antitrust cases.

On top of acquisitions, the Big Five have found other ways to cement their market dominance. As US President Donald Trump correctly pointed out, Amazon is subsidised massively by their exclusive access to state-owned US postal services (USPS) at cheap rates. It is estimated that the USPS undercharges Amazon by $1.47 per package―no wonder Amazon accounts for more than 43% of online retail sales.

Boosting profits without being more competitive

Highly concentrated industries allow for two major distortions that boost corporate profits without the dominant companies having to be more competitive: price gouging and suppressing wages.

For price gouging, the internet provision industry serves as a good example. New York University economist Thomas Philippon found in a 2019 study that prices for a monthly broadband connection were almost twice as high in the US than in Europe or South Korea. Similar price differences were observed for air travel in the US when compared to Europe. Flights in the US are dominated by four major airlines that often enjoy regional monopolies and have solidified their market dominance since the US deregulated the airline industry in 1978. Having been fairly stable until that point, inflation-adjusted flight prices jumped by 50% in the first ten years after deregulation.

Being often one of the few employers (in some cases the only employer) in small-town America, monopolies also hold significant power over labour, which they exert through lobbying for laxer labour laws, inserting non-compete clauses in labour contracts, and consequently depressing wages. Marshall Steinbaum, Ioana Marinescu and Jose Azar found that wages are typically 10-25% lower in a ‘highly concentrated’ industry than in a ‘very competitive one’. Overall, wages adjusted for inflation have been stagnant in the US since the 1970s.

The suppression of wages has no doubt elevated profits margins, as Tepper and Hearn show in an almost perfectly inverse relationship between the two. What they further show is that the income distribution to the lower percentiles has a remarkably close correlation to union membership, the latter of which has been on a steady decline since the 1960s, implying that the large US corporations have successfully worn down the power of labour.

The consequences of not having to compete

Higher prices and lower wages are the reason for the exorbitant profit margins we see in today’s economy. But apart from that, they also lead to a complete loss of the capitalist drive that usually spurs companies to innovate. This decline in innovation is for a large part indicated by the number of US-American start-ups―which usually account for a large portion of total innovation―having fallen by nearly half since the 1970s.

What’s more, the large companies that dominate their industries are themselves not driven to innovate anymore. Instead, they have found a new way to inflate the value of their company: share buybacks. A study conducted by the Harvard Business Review found that between 2009-2018, companies listed on the S&P500 spent $4.3 trillion, or 52% of net income (profits), on share buybacks and $3.3 trillion, or 39% of net income, on dividends. This increases the wealth of both owners and managers, but does not make the company any more productive as little capital remains for research and development (R&D). In 2018, only 43% of all companies listed on the S&P500 index invested in any R&D.

Of the Big Five, the loss of competitiveness is perhaps the clearest in the case of Apple. The American electronics manufacturer that once pioneered and dominated the smartphone market for almost a decade has been knocked to the fourth place in global smartphone sales, losing out to East Asian competitors Samsung, Huawei and Xiaomi. The only market Apple still dominates is the US, although it is worth wondering whether this would be the case if Huawei were allowed to sell its phones in the American market.

It is not to say innovation in the US has completely left the scene (for instance, the US is still a leader in microprocessors), but that the dynamism that once allowed for rapid technological change and global dominance is in decline. Tesla is another good example of a monopoly born in the US and having received billions worth of government support (see Mazzucato’s 2013 book ‘The Entrepreneurial State’) that now has increasing difficulty remaining competitive in an international setting.

The concentration of profits in the largest US companies and their dominance of entire sectors is essentially not a reflection of their superior competitiveness, but the result of a system benefiting them disproportionately while allowing them to accumulate wealth without becoming more competitive.

The lack of innovation is significant because an economy thus hollowed out of its productive capacity is bound to crumble, and, in the case of the US, allow a new power to rise and take its place in the global economy. There is only one reason that the loss of international competitiveness has not yet fully translated itself into a deterioration of living standards for Americans: the Dollar.


Further reading

  1. Jonathan Tepper (2018): Why American Workers Aren’t Getting A Raise: An Economic Detective Story. https://www.mythofcapitalism.com/worker-s-wages
  2. Jay Shambaugh, Ryan Nunn, Audrey Breitwieser, and Patrick Liu (2018): The state of competition and dynamism: Facts about concentration, start-ups, and related policies. https://www.brookings.edu/research/the-state-of-competition-and-dynamism-facts-about-concentration-start-ups-and-related-policies/
  3. Patrick Bet-David and Jonathan Tepper (2019): The Missing Link To Modern Day Capitalism. https://www.youtube.com/watch?v=HTGzUVH9LsA
  4. John Coumarianos (2019): How corporate monopolies fuel wage stagnation, inequality, and populism. https://www.marketwatch.com/story/how-corporate-monopolies-fuel-wage-stagnation-inequality-and-populism-2019-05-06
  5. Walter Frick (2020): Big tech’s 15-year acquisition spree had a hidden cost. https://qz.com/1883377/how-big-techs-acquisition-strategies-suppress-entrepreneurship/

This article was originally published on Kapital Economics, the platform for evidence-based economic analysis.

Josephine Valeske

About the authors:

Josephine Valeske holds a MA degree in Development Studies from the ISS and a BA degree in Philosophy and Economics. Apart from contributing to Kapital Economics, she currently works for the research and advocacy organisation Transnational Institute.

 

Bram Nicholas holds an MBA from the University of Western Sydney and is in the process of writing a PhD on the subject of exchange rates and forex markets at the University of Colombo. He is the founder and CEO of Kapital Economics and currently lectures at HUTECH, Vietnam.

Are you looking for more content about Global Development and Social Justice? Subscribe to Bliss, the official blog of the International Institute of Social Studies, and stay updated about interesting topics our researchers are working on.

COVID-19 | The COVID-19 pandemic and oil spills in the Ecuadorian Amazon: the confluence of two crises

COVID-19 | The COVID-19 pandemic and oil spills in the Ecuadorian Amazon: the confluence of two crises

How can we reframe the current planetary crisis to find ways for decisive and life-changing collective action? The Amazon region of Ecuador, at the center of two crises—COVID-19 and a ...

Covid-19 | Worsening inequality in the developing world: why we should say no to a ‘new normal’

Covid-19 | Worsening inequality in the developing world: why we should say no to a ‘new normal’

As the Covid-19 pandemic drags on, many of us living in wealthy countries are still struggling to get used to the ‘new normal’ of frequent regulatory changes that affect our ...

Covid-19 | How moving (academic) conferences online could help address social injustices

Curtailing the movement of people around the world in a bid to control and eventually stop the spread of Covid-19 has forced many, including academics, to gather online. A recent online conference of the European Consortium for Political Research I attended shows that such conferences can not only be a roaring success, but can also help address social injustices, in particular economic and social barriers to participation. Yet these practices should become the ‘new norm’ to ensure that these barriers are broken down once and for all.

Video conference

In August 2020 the European Consortium for Political Research (ECPR) held its first virtual general conference. This event also marked its 50-year anniversary. Remarkably, despite the restrictions, it still managed to virtually bring together over 2,000 researchers to discuss political science, including the politics of the Covid-19 crisis.

As a conference participant coming from an institution whose key focus is social justice, the important social justice dimensions of the event did not elude me. In this article, I highlight some of these dimensions to proffer what I believe may be cardinal collateral gains towards social justice within academia emerging from the otherwise unfortunate outbreak of the corona virus. Using the ECPR case example, I seek to make a global argument that these gains would be maximised if they are immediately and widely consolidated as a feature of such conferences.

As early as April 14th, 2020 the World Health Organisation had issued an alert on mass international gatherings in light of the Covid-19 pandemic. This alert, which has led to a new global norm on limiting the gathering of a large number of people, therefore meant that the ECPR’s conference, if held physically, was going to raise many eyebrows. The body thus decided to take the conference online, attracting a perhaps unprecedented number of participants. The ECPR president noted that the virtual conference hosted more participants than the previous physical general conference. So it was probably a good decision to have the conference run virtually.

In my view, the idea to have a virtual rather than a physical conference had two main gains that help to address some of the social injustices that for a long time have been entrenched within the academic sphere.  For readers that may be new to the idea of social justice, it is a critical political and philosophical view of society that is concerned with the fair and just relations between individuals in society. This issue became salient at the ECPR’s event because the virtual nature of the conference broke down two of the barriers that disable some academics from taking full advantage of such academically stimulating platforms: an economic barrier and a social barrier.

The conference broke down an economic barrier by providing easy access to participants who may not have had the financial resources required to travel and pitch camp in a physical location. Here, I refer to the huge flight and hotel costs that would have been a deal-breaker for many of such people, including myself. In addition, conference registration costs can run up to several hundred euros. Groups that usually suffer from such setbacks include students, both at the Master’s and PhD level, as well as academics from less-financially-endowed institutions or countries.

Yet, members from these groups contribute some of the most original and case-sensitive analyses of social and political science, thereby contributing to the academic debates upon which associations such as the ECPR thrive. For a long time, barriers of this calibre have limited some of these voices in these discourses, and perhaps this new virtualisation of academic life is the pathway to raising their voices.

 For the ECPR specifically, the Western European origins of the consortium has for a long time kept researchers from Eastern Europe from fully participating in these conferences. Yet, they were ubiquitous this time round on almost all the 15 panels that I participated in. As a researcher interested in the politics of conflicts, I gathered the most relevant insights from these Eastern European participants and other participants from the Middle East. It is likely that physical conferences may have created a lot more barriers to their participation.

Second, the conference broke down a social barrier, particularly one preventing females from participating in conferences, rooted in the absence of females in academia in general. Perhaps readers may be aware of the so-called leaky pipeline phenomenon characterising how women fall out of the scene as they progress in their academic careers. This a significant social justice issue that many responsible organisations are trying to deal with, including the ECPR. As the president’s anniversary address acknowledges, there are many more women involved in the ECPR’s activities both at administrative and academic levels. Indeed, throughout the conference, female panellists were a frequent encounter that I welcomed. Yet, I could not help but wonder how difficult it must be for many of them to juggle their child-rearing duties with spending a week away, possibly on another continent, to attend an academic conference.

With this in mind, it is clear to me how the Covid-19-induced virtualisation of academic life may provide some opportunity to academics and researchers with such responsibilities to actively participate in the academic fraternity whilst tending to their role in home economics. Of course, conferencing online from home is no walk in the park either, but in my view, it is less of a burden to have to return to those duties just after one hour of online engagement than having to be way for a whole week for the same purpose.

Whilst highlighting these gains, I am not oblivious of the other forms of injustices that virtual conferences also present. Here I refer to the loss of jobs in the hospitality industry that hosts conferences, or the outrageous financial gains these virtualizations rake in for owners of online communication platforms. Nevertheless, I am also persuaded by the campaigns led by some senior colleagues at my university to tone down the current climatically and financially unsustainable model of flying thousands of participants every year to conferences.

Already, deep voices within the scientific community are predicting that the ‘new normal’ is expected to stay. Yet I am concerned that perhaps these gains exemplified by the ECPR’s virtual general conference may not be consolidated, at least not in the immediate future. From the plenary address and the post-conference questionnaire, I can gather that the ECPR is already considering at least some physical meeting during next year’s general conference. Other conferences may possibly be considering doing the same.

Yet, it is my view that the failure to immediately entrench the above-highlighted Covid-19-induced shifts to improving social justice within the academe would be ‘one step forward, two steps backward’. I hope it won’t be.

About the author:

Dennis Penu (penu@iss.nl) is a PhD Research Fellow at the International Institute of Social Studies of the Erasmus University Rotterdam with research interests in the links between political geography and conflicts studied with qualitative comparative methods.

Are you looking for more content about Global Development and Social Justice? Subscribe to Bliss, the official blog of the International Institute of Social Studies, and stay updated about interesting topics our researchers are working on.