Increasing monopoly power can get you coming and going, especially at the airport. The decreased competition in air travel resulting from successive mergers among airlines has already increased air fares. Now a pending take-over of Dollar Thrifty Automotive Group by either Hertz or Avis promises to reduce competition once you are off the plane.
But these days, questions of monopoly power seem a dead issue in Congress and among the general public. Such apathy is true even in the face of growing concentration in banking and financial services, where just three banks now hold a third of all deposits and are making well over half of new mortgage loans. Teddy Roosevelt must be turning over in his grave.
A century ago, public concern about pricing abuses by monopolies was the core economic policy issue of the day. In those days, monopolies often used the legal ruse of “trusts” that held controlling interests in several nominally independent companies. TR, a Republican who was proud to be called “progressive,” was the most aggressive “trust-buster” of all time. But now, Roosevelt is being disowned by many contemporary Republicans and anti-trust is not an issue for either party. What happened?
In 1910, people were acutely aware that concentrated market power can lead to higher prices for consumers, having dealt with such issues for decades, especially in reaction to abusive pricing by railroads that had monopolies on service in certain areas. Such concerns had led to the establishment of the Interstate Commerce Commission in 1887 and passage of the Sherman Anti-Trust Act in 1890.
That act had many loopholes, however, and perceived continued abuses led to calls for greater action.
After an assassin’s bullet catapulted Roosevelt into the White House after only six months as VP, vigorous anti-monopoly enforcement be-came his top priority. In all, he instigated 45 anti-trust actions including those that broke up Standard Oil and International Harvester.
But such activism was not part of the makeup of his more conservative protégé, William Howard Taft, who let anti-trust wither after taking office in 1909. And legislation to plug loopholes in the Sherman Act did not pass until 1914, after Democrats took control of both the presidency and Congress.
For decades after that, federal action to limit monopoly power was accepted as legitimate by both parties. For example, in 1956, the Eisenhower administration forced IBM to sell computers as well as lease them and to sell parts for computers it no longer sold. Then, when the Johnson administration filed a broader anti-trust suit against IBM shortly before Richard Nixon’s inauguration, the new president’s Justice Department continued to prosecute the suit and filed one of its own against AT&T.
Over time, however, anti-trust became less of an issue. One reason was that as trade grew, competition increased. In a way, our country became more like Canada. Canada never tried to break up companies that had monopoly power, but if Massey Harris started to abuse its dominant position in Canadian farm machinery, the government would threaten to lower tariffs on U.S.-made machinery. The same was true for the few Canadian steel companies. Perceived abuses brought threats to lower steel tariffs.
Over the last 30 years, imports have broken any monopoly power still held by U.S. manufacturers, especially in steel, and in autos, appliances and other consumer goods. But imports are not the threat to services such as banking, air transport or car rentals, that they are to manufacturing.
Moreover, the government has turned a blind eye to increasing concentration in air travel, where mergers often seemed the only alternative to bankruptcy of historic companies as deregulation changed the industry after 1978 and over-indebted companies were hit by the downturn in air travel after Sept 11, 2001.
The same has been true in banking and other financial services since the financial bubble started to pop three years ago. The large banks that now engage in such aggressive – some would say predatory – competition with smaller banks often have the market share they do precisely because the government urged them to take over other failing institutions during the financial debacle of 2008. Bank of America, J.P. Morgan and Wells Fargo respectively took over Countrywide Financial, Washington Mutual and Wachovia with the blessing of the federal government.
Even more importantly, the continuing implicit “too-big-to-fail” doctrine of successive administrations gives the biggest 20 or so banks an enormous cost advantage in securing loanable funds. As long as markets are convinced that the government will not let the largest banks fail, investors are more willing to place funds with them than with smaller banks that might be left to go bust. Many estimate that this gives the big banks an 3/4 of one percent advantage in cost of funds compared to smaller competitors.
This adds up to an implicit subsidy of some $40 billion a year. Since it stems from a tacit policy favor rather than an appropriation from the Treasury, no one bats an eye. But this favor is an enormous blow to the rest of the banking industry and an ongoing one that makes their position more difficult, year after year.
Yes, there may be more urgent problems than anti-trust right now. But consumers are going to pay until we deal with the problem.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.