Economic

The threat of stagflation

Posted on by j.giglio

Turn on the TV, radio, social media, news sites, and podcasts and the COVID-19 virus story is topic number 1 through 100 with only the weather report offering relief. The pandemic has both disrupted and ended people’s lives.

The federal government is facing the momentous task of reversing the effects of the resulting recession with a combination of expansionary fiscal and monetary policy. On the fiscal side, rescue spending, financed with gobs of new debt, prevented further deterioration of the economy. On the monetary side, the Federal Reserve has pursued both traditional and unconventional policies.

The public debt of the United States has risen quickly over the last several months. From Feb. 20, 2020 through June 20, 2020, the government’s total public debt has increased by about $3.068 trillion from $23,409 trillion to $26,477 trillion. While the federal government has gone on a borrowing binge and approved huge relief spending, the Federal Reserve is creating huge amounts of dollars that end up paying for the debt.

Lurking behind the easing of monetary policy is the fear that too much money chasing too few goods will lead to inflation, thereby decreasing the purchasing power of the dollar. Once the crisis is over, there is the prospect of prices and inflation accelerating simultaneously, or what people of a certain age will remember as stagflation.

In other words, one potential economic consequence of deficit-financed public spending and the Federal Reserve’s emergency lending programs and interest rate cuts is the threat of inflation in a post Covid-19 economy. Among other things, inflation eats away at the purchasing power of people’s paychecks.

It also disrupts people’s behavior, causing demand-pull inflation. Suppose a rise in prices sets off rumors that prices will increase still more. This is common during inflationary times, when the increasing prices of goods lead people to expect that prices will be even higher tomorrow. People rush in, causing prices to go higher still. People buy more of a product when inflation is rampant, anticipating that the price will only rise more.

Meanwhile, firms selling the products see prices go up and decide not to take advantage of good times by increasing their offerings, but instead hold back, waiting for tomorrow. Thus demand goes up and supply goes down.

At its worst, the entire economy goes out of control, as happened in the 1970s. After several decades of unprecedented growth, signs of a slowdown emerged amid events such as sudden oil price spikes in 1973 and 1979, and increased global competition precipitated important economic changes. In the hope of inflating the economy out of unemployment, the government printed tons of money.

The economy was stuck between a rock and a hard place. Economists called the twin phenomenon of stagnating growth and double- digit inflation: “stagflation.” In 1979, President Jimmy Carter appointed Paul Volcker to chair the Federal Reserve Board. He pursued tight monetary policies, pushing interest rates over 20 percent, with the desired consequence of a steep and prolonged business recession breaking the back of runaway inflation. By 1986, inflation almost disappeared entirely.

The legendary philosopher king of baseball, Yogi Berra, allegedly once said: “It’s tough to make predictions, especially about the future.” Still, many financial mavens are fretting and speculating about the danger of price inflation resulting from money being printed at a frenetic pace in the United States. They fear the country may be entering an era of double-digit inflation similar to the 1970s and that stagflation may return to the daily lexicon.

As John Maynard Keynes wrote, “Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Americans can only hope that Lenin was wrong or misquoted, and they will not experience the return of stagflation. Time will tell if the inflation mongers are right.

The economy and COVID-19, Part 2

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Americans are struggling to adjust to a pandemic whose future progression is uncertain. They have not seen an economic downturn of quite such scale or scope, and people are unsure about how the United States can pull out of the crisis.

Righting the economic ship will require a delicate balance of managing debt and encouraging growth. A large infrastructure investment program that includes private contributions is a feasible way to achieve that goal.

Governments are struggling to prop up economies while confronting the serious and immediate public health challenges of COVID-19, resulting in unprecedented emergency spending and huge budget deficits throughout the world. In the United States, Congress has passed huge spending bills to help businesses and households that have swollen the national debt by about $2.4 trillion. The Congressional Budget Office numbers for its Doctor Doom scenario recently projected a budget deficit of more than $3.7 trillion for the current fiscal year.

Outstanding national debt now exceeds $25 trillion. Additional outlays in response to a second wave of COVID-19 outbreaks could further increase the debt and add to sovereign risk. Even in a low interest rate environment, higher debt service costs will crowd out other government spending. Trying to explain to the average politician that debt is a drag on future growth is a waste of time. Spending today and making a suitcase of promises is what helps them get reelected tomorrow. The future is someone else’s concern.

The Federal Reserve Bank has taken emergency measures to make credit easier to obtain with a bigger money supply and lower interest rates. Additionally, the Fed is lending more than $2 trillion to businesses and state and local governments. There is concern that the Fed’s actions risk future price inflation which would decrease the purchasing power of the dollar. The era of the dollar as the world’s primary reserve currency may also come to an end. In that case the U.S. would no longer benefit from the typical safe-haven demand from foreign investors as the value of the dollar collapses.

Policymakers note that these concerns must take a backseat to addressing the immediate crisis. The present commands their attention, but they may insufficiently appreciate that the future may be more of the present.

Going forward, the U.S. will have to manage the debt, deficits, and debt service payments, and at the same time find ways to support economic recovery to grow its way out of all this debt. While fiscal consolidation—raising taxes, cutting spending, or both—is the tried and true method for tackling debt challenges, it is likely to encounter some major tactical problems.

Raising taxes is politically difficult given the perception among many in Congress that voting for tax increases is tantamount to announcing your retirement from elective politics. Similarly, cutting high-dollar payment programs like Social Security, and Medicare is bound to be strongly opposed by legions of elderly voters.

Another approach is to focus and allocate resources to areas that create the most jobs. The time is long overdue for a bipartisan infrastructure investment package that rebuilds America’s crumbling roads and bridges, invests in future industries, and promotes increased productivity while immediately employing people whose income would give the American economy a shot in the arm. There is a broad consensus among mainstream economists that infrastructure investment has a large multiplier effect through the economy.

The problem is where the actual dollars can come from to fund such an ambitious program. One solution is to recruit private firms to help start, fund, and run as many of these infrastructure projects as possible. If properly structured, such public-private partnerships could tap into the billions of dollars in private capital hungering for low-risk investment opportunities able to offer decent rates of return.

COVID-19 has introduced a host of new economic challenges. A robust infrastructure program that includes private participation would be an effective way to begin to address them.

President’s proposal for a payroll tax holiday

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President Trump has proposed to eliminate payroll taxes that fund Social Security and Medicare through the end of the year to provide the economy with a shot of adrenaline. The idea is to put after-tax take-home pay in the hands of people who are likely to spend it right away to help staunch the economic pain caused by the COVID-19 pandemic, but in practice it wouldn’t make much sense.

Payroll taxes include the Social Security tax, which is 12.4 percent of earned income up to a maximum of $137,700 for 2020. Employers and employees each pay half. The Medicare tax, also evenly split between employers and employees is 2.9 percent of earned income with no maximum. Married couples filing jointly who make $250,000 or more and individuals who make over $200,000, pay an additional 0.9 percent.

The payroll tax cut idea is not new. In 2011 and 2012, the Congress and President Obama reduced the employee share of the tax from 6.2 percent to 4.2 percent and filled the resulting gap in the Social Security Trust Fund with general revenues.

While Trump has fixed his sights on getting the payroll tax holiday into the next coronavirus stimulus bill, it is unclear whether he can get Republicans, much less Democrats, to go along with such a proposal. Democrats argue instead for expanded unemployment insurance and aid to state and local governments.

Congressional Republicans have also been slow to endorse the payroll tax rollback, claiming it is too early to argue what should go into the next stimulus bill. They are also concerned with adding to a budget deficit that is forecast to balloon to $3.7 trillion this fiscal year.

Cutting payroll taxes does not make sense because it would do little for the more than 40 million Americans who have applied for unemployment in the last three months, especially lower income people in industries like tourism and hospitality. If you don’t have a job, a payroll tax cut does you not good at all. Even among those who are working, such a tax cut would be highly regressive. High-income people would get far more than low-wage workers.

Cutting payroll taxes would not help business cash flow, since the CARES Act already allows many firms to defer paying payroll taxes until 2021 and 2022. Many economists say a payroll tax holiday alone isn’t enough to bolster consumer spending, a prime driver of the economy, and spur companies to begin hiring.

Supporters of Social Security and Medicare also oppose the president’s proposal. They claim any payroll tax cuts that reduce revenue flowing into the trust funds would threaten Social Security’s ability to continue paying benefits to 64 million Americans who depend on them for their economic survival. Seniors directly affected by taking their money from the trust fund will not see a dime of relief since most of them are not working.

There are alternatives to the payroll tax cut that would provide more direct economic stimulus. One way to keep workers on payrolls and help businesses stay afloat would to be expand the existing employee retention tax credit that was part of the CARES Act. This provision provides eligible employers a tax credit against employment taxes equal to half of qualified wages. There is bipartisan support to increase the credit from 50 percent to 80 percent of wages and benefits. It would be raised to cover $45,000 of wages and benefits instead of the $10,000 currently offered.

Other proposals that merit consideration, such as an infrastructure package, a tax credit to incentivize domestic manufacturing, and another round of stimulus checks to directly address the pandemic-induced economic downturn.

Hopefully the parties will overcome their ideological differences and compromise on additional injections of public resources. The downside is that acting in a fiscally responsible way may significantly affect each party’s presidential candidate. Now is not the time to prioritize election prospects over staring down a depression.

What went wrong in China ?

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The news today is totally dominated by talk of the coronavirus pandemic, with occasional relief provided by the weather report. Little effort is made to review how we got here, or what to do about it.

For decades, Western academics, policy makers, captains of industry, and politicians assumed that China’s embrace of capitalist economic policies would set the stage for democratic reform. George Orwell was right when he said: “Some ideas are so stupid that only intellectuals believe them, for no ordinary man could be such a fool.”

Put in simple terms, the theory was that economic freedoms would cause the Chinese people to begin to demand political freedom, resulting in a democracy. That has not happened in China, where the Chinese Communist Party (CCP) remains firmly in power.

China has been ruled by the CCP since 1949. The regime doesn’t tolerate political competitors. It is authoritarian, an all or nothing proposition. Its goal is to control all aspects of public and private life. It controls the army, the courts, the police, the media, and the economy.

The Chinese people are merely the state’s subjects. Just consider the CCP’s version of Soviet gulags, called reeducation centers, where up to a million Muslims have been incarcerated. Student-led pro-democracy demonstrations in Hong Kong show that millions of Chinese people want to be free of the party’s yoke.

Calling out the CCP and their role in the COVID-19 pandemic is not racist. It began in China and could have been stopped at its source. But the CCP lied about this deadly virus, which cost the rest of the world many weeks of preparation, countless lives, and forced shutdowns of the American and other world economies.

No year in recent history has brought such devastation. As of April 26, there are over 202,000 deaths around the world and over 55,000 in the United States from COVID-19, according to numbers compiled by the Johns Hopkins University. People worldwide are struggling to get comfortable with the uncomfortable realities of a new normal.

The US and other countries face a Sophie’s choice: They cannot directly attack the CCP over the pandemic and its role in triggering an unparalleled global economic and public health crisis, nor hold it accountable for the COVID-19 outbreak when the world depends upon the CCP for medical supplies and protective equipment. Name-calling and demands for reparations come out of Washington, but the harsh reality is that payback is not in the cards. The CCP’s list of transgressions may be long and shameful, but the US is dependent on them for life-saving exports.

The economic downturn is a completely artificial event and any economic rebound will depend on when the public health containment policy ends and a safe and scalable vaccine is developed. The longer pandemic containment lasts, the more parts of the economy deteriorate. Truth is, the economic pain will continue into the foreseeable future.

Congress and the White House may put together another economic relief package that they will characterize as a stimulus package similar to the CARES legislation. This is a misnomer, for much of the $2.2 trillion CARES act simply made up for lost wages; it won’t generate additional spending. Politicians in Washington will be out campaigning this summer rather than engaging in serious discussions about how to decouple essential supplies coming from China.

A modest start would be to slap “buy American” provisions on government agencies and provide tax incentives for American companies to bring back their supply chain to the US or American allies. Notions about introducing legislation to allow Americans to sue China in domestic courts to “recover damages for death, injury, and economic harm caused” by the CCP’s reckless response to the COVID-19 outbreak will simply result in the party giving the middle finger to any adverse judgments, just as they do to other international institutions.

The CCP plays by its own rules.

Lessons from the coronavirus

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The United States is in the thick of the Chinese Communist Party (CCP) virus crisis. It leads the world in the number of deaths, with reported cases in all 50 states assuming you believe the numbers coming out of the CCP. Nearly 26 million Americans have filed for unemployment benefits, which means millions of people have lost their employer-provided health insurance.

Working class Americans feel like they are living through Daniel Defoe’s Journal of the Plague Year. They are learning to live with uncertainty, constantly practicing hand hygiene and prioritizing needs from wants. The economy has come to a sudden stop, induced into a coma to deal with the public health crisis.

They are living through a disaster movie. It was business as usual until less than two months ago; now it’s business as unusual with virus precautions engulfing nearly every aspect of American life. Their lives now depend on staying home and doing nothing. A lot of thought is put into doing nothing. Even comedy is becoming tiresome – there is nothing to joke about. They are cooped up with no end in sight. It’s difficult not to be paranoid when the sky is falling and the walls of their daily existence are caving in on them and their families.

Of course, the wealthy are in a twist, grappling with the traumas of cancelled golf games and visible roots. While health care employees are working 14-hour days risking everything, Ellen DeGeneres is comparing living in her sprawling mansion to being stuck in jail.

Americans are searching for elected officials willing and able to work together and put aside their partisan bickering in the face of a national crisis. They want authority figures who do not engage in self-aggrandizement and can draw upon their experience to assuage the fears of an anxious country.

There is much Americans don’t know, and much that they think they know is probably wrong, thanks to Chinese Communist Party dissembling. It’s payback time for the globe’s fatal attraction to the CCP and dependency on foreign sources of medical supplies. It may well be that the ordinary working American will be thankful that the peak of globalization will be behind them when the country emerges from this crisis.

A key question is why the country was so utterly unprepared for this crisis. Leave it to history and to a national commission to interrogate this question. But a book published by Barbara W. Tuchman in 1984, The March of Folly: From Troy to Vietnam, may be a good place to start to answer this question. Tuchman explains how smart people in power can do stupid things. The book illustrates how governments act against their own best interests, making policy mistakes and strategic blunders. A fundamental lesson is that humanity seems unable to learn the lessons of history. In other words, why do countries keep shooting themselves in the foot?

As for history repeating itself, there was a 2019 Pandemic Flu exercise called “Crimson Contagion” run by the U.S. Department of Health and Human Services from January to August of 2019. The purpose of the exercise was to simulate the spread of a respiratory virus from China to the United States and killing nearly 586,000 Americans. The results of the exercise were defined by “confusion” and “bureaucratic chaos,” with friction emerging between the state and federal governments on issues ranging from equipment shortages to guidelines for social distancing. Sound familiar?

There’s more. Among the most tangible results of “Crimson Contagion” was an “inability to quickly replenish certain medical supplies, given that much of the product comes from overseas.” The U.S. is paying a high price for being caught so flatfooted and the government is now playing catch up.

Best to recall the words attributed to Winston Churchill: “Americans can always be counted on to do the right thing after they have exhausted all other possibilities.”

The U.S. should reconsider its relationship with the CCP

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America is in crisis. In the midst of a pandemic, society is locked down, the economy is stalled and the death count mounts. As of March 30, three-quarters of Americans were living under stay at home mandates or advisories in the fight against the spread of the Chinese Communist Party (CCP) virus.

Americans are buying all the food and supplies they can find and downloading Zoom, everyone’s new favorite hangout. One of the ironies of the moment is that staying home and doing nothing with freshly sanitized hands can actually save lives. Americans are told to work together to flatten the curve, and practice social distancing, altering the rhythms and texture of everyday life.

A sense of anxiety and fragility is everywhere.

The economic fallout has been swift and dramatic. The unemployment rate climbed to 4.4 percent in March from 3.5 percent in February, the largest one month increase since January 1975. The economy lost 701,000 jobs in March, but the numbers only begin to capture the beginning of a job market collapse. Weekly initial jobless claims reports reveal nearly 10 million new unemployment insurance claims in just the last two weeks of March.

These numbers are a coming attraction for what is to come, thanks to our pals in the CCP and the business, political, and academic grandees who encouraged offshoring American jobs to China. The increased reliance on worldwide production and long supply chains has undermined America’s national security.

This crowd traded American industrial strength and technology for access to China’s huge market and cheap consumer goods. The price they were willing to pay was teaching China how to manufacture their products and sharing their cutting–edge intellectual property, which helped China join the superpower club. The CCP has been brilliant in exploiting the imprudent greed, myopia, and corporate vanity of western business leaders who kowtow before the CCP regime.

It is not certain whether Vladmir Ilyich Ulyanov, better known as Lenin, actually said: “The capitalists will sell us the rope with which we will hang them.” But if he didn’t, he certainly thought it, and if he were still around, he would likely claim the prophecy as his own. The ruling class in Washington, Wall Street, and the academy sent the CCP the money to buy the rope.

The board overseas the nearly $600 billion Thrift Savings Plan, a retirement savings plan similar to a 401(k), for 5.6 million federal employees and members of the military. The index fund includes companies involved in the Chinese government’s military activities and companies being sanctioned by the US government. To cite one specific example, the index includes China’s state -owned Aviation Industry Corporation. This firm is the sole supplier of military aircraft to the Chinese People’s Liberation Army. Federal employee money is being used to support an adversary, undermining the country’s national security and fueling China’s economic growth.

A group of lawmakers introduced bipartisan, bicameral legislation to ban the investment of Thrift Savings Plan funds in securities listed on mainland China exchanges. Pushing back, the board’s general counsel said that the 1986 legislation that created the plan shows the accounts are private, not federal property.

“The employees owns it and it cannot be tampered with by any entity including Congress,” the general counsel went on to say, neglecting to mention the fund consists of taxpayer money, not private capital.

This decision is another egregious example of an organization facing no consequences for refusing to act in the best interests of the United States and never having to say you are sorry. It’s bad for the United States and good for a strategic foreign adversary.

COVID-19 is another gift from the Chinese Communist Party

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Many of the world’s recent pandemics have been traced to China: the Asian Flu in 1956, the Hong Kong Flu in 1968, SARS in 2002, and the Swine Flu in 2009. Now COVID-19 is another gift from the Chinese Communist Party (CCP).

COVID-19 is believed to have originated at a wet market in Wuhan, China. Wet markets are a cross between a zoo and a slaughterhouse. They put people in constant contact with both live and dead animals, including illegal wildlife. That makes it easy for diseases to be transmitted to humans.

According to a study published by the University of Southampton in England, if CCP authorities had disclosed the outbreak of the COVID 19 virus three weeks earlier, the number of coronavirus cases could have been reduced by up to 95 percent, thereby mitigating the global public health crisis.

A timeline of the early weeks of the outbreak developed by the American news website Axios shows a cover up by CCP officials. This allowed the virus to spread unchecked in Wuhan for weeks, including among the five million city residents who left going to all points of the compass without being screened, leading to a national epidemic, and inevitably to its global spread.

That should come as no surprise. CCP officials prioritize stability – even if it means suppressing information the public needs to know and threatening public health.

CCP leadership covered up the severe acute respiratory syndrome (SARS) outbreak for over a month after it emerged in 2002. Even as the virus spread CCP officials continued to undercount cases and delayed reporting information. They did not alert the World Health Organization until February 2003.

United States National Security Advisor Robert O’Brien said China’s cover up “probably cost the world community two months to respond,” exacerbating the pandemic. As the current outbreak has shown, an infectious disease that starts in one part of the world can spread to others in virtually no time.

So it came as no surprise that on March 17 the CCP said it would expel journalists from The Wall Street Journal, The Washington Post, and The New York Times. China’s Ministry of Foreign Affairs said the three American outlets, plus Voice of America and Time Magazine, would be designated as “foreign missions” and must report information about their staff, finance, operations and real estate in China.

The CCP’s aggressive and highly centralized propaganda machine continues to sow doubt about COVID 19′s origin. Zhao Lijian a spokesman for China’s Ministry of Foreign Affairs said, “It might be the U.S. Army who brought the epidemic to Wuhan.”

Chinese President Xi Jinping and Chinese diplomats are pushing the narrative that China’s response bought precious time for and made important contributions to other countries’ epidemic prevention and control. They claim China is ready to share its experience and research with countries where the disease is spreading as well as to export face masks, pharmaceutical products, and other medical supplies for which it is the dominant global supplier.

If China decided to ban such exports to the United States, the state-run news agency Xinhua noted, the United States would be “plunged into a mighty sea of coronavirus.” Last year, prominent Chinese economist Li Daokui suggested curtailing active pharmaceutical ingredient exports to the United States as a countermeasure in the trade war. His comments validated those made by Gary Cohn, former chief economic advisor to President Trump: “If you’re the Chinese and you want to… destroy us, just stop sending us antibiotics.”

Having made much of the developed world dependent on China, and because of the country’s economic and military power, the CCP will likely avoid censure or sanctions for its role in the pandemic.

Perhaps it is time to get Greta Thunberg on the case to call out the CCP, hold them responsible for COVID-19 and raise the issue of decoupling the West from China.

Selling America’s security to China

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Earlier this year, the World Health Organization (WHO) declared the outbreak of the novel coronavirus, or Covid-19, a public health emergency of global concern. The outbreak should also prompt U.S. leaders to ask some hard questions about pharmaceutical companies’ practice of outsourcing their manufacturing to China.

Coronaviruses infect animal cells. They circulate among animals, and some are known to infect humans. This one was first detected in the City of Wuhan in the “People’s Republic of China.”

It has since spread around the world. The long-term effects of the outbreak are unknown, but it has already brought devastating consequences for individuals, families, communities, and businesses far beyond China.

In addition to the immeasurable social and health impact, the spread of the virus has already affected business and economic activity, global financial markets and supply chains. A global recession is imminent.

The Chinese government has leverage over America’s economy and public health, as it has captured critical portions of global supply chains, including pharmaceutical drugs and medical equipment, without firing a shot.

According to the WHO, the Chinese knew of the “Wuhan virus” as early as Dec. 8, 2019. Yet disclosure to the WHO did not take place until around Jan. 11, 2020. This is typical when dealing with the Chinese government.

In 2002 a coronavirus had emerged in a similar wet market – where live animals are slaughtered and sold for human consumption – in Southern China. When the severe acute respiratory syndrome (SARS) outbreak hit in 2003, the Communist Party again concealed it from the Chinese people and the world until it was a full-blown epidemic.

The Wuhan market is also a wet market. These wild animals are believed to have tonic properties and are used for body- building, sexual enhancement, and fighting disease.

The United States depends on China for pharmaceutical products. A Department of Commerce study found that over 90 percent of all antibiotics in the United States come from China.

While depending on China for thousands of ingredients and raw materials for medicine is a security issue, Americans should also be concerned about the safety and efficacy of Chinese-made pharmaceuticals. As recently as the summer of 2018, one of China’s domestic vaccine makers sold at least 250,000 substandard doses for diphtheria, tetanus, and whooping cough. This instance was just the latest in a slew of scandals caused by low-quality Chinese drug products.

The time is long past to press pharmaceutical companies to bring manufacturing back to the United States. A nation’s first priority is to protect itself. Public health is as essential as military preparedness and economic health. Government must intervene to protect industries that are deemed vital to national security, such as telecommunications, aerospace, and yes, pharmaceuticals. Health care is a non-discretionary good.

The Chinese virus epidemic is a wake-up call that should make Americans ask some hard questions. How is national security defined? Does it only apply to military security or does it encompass industries that produce the technologies needed to ensure that the country remains economically competitive? Does domestic ownership make a difference in a world where national borders are receding in importance?

And when it comes to pharmaceuticals, can the United States survive without a safe, reliable supply? Does it make sense to depend upon foreign governments and companies to supply these products? What if China decides to stop exporting drugs to America?

Is the U.S. government really powerless to stop pharmaceutical companies from outsourcing drug manufacturing to save money and increase profits? The cold reality is that the government is loath to confront China because multinational corporations and Wall Street are the winners in a global system that has seen America hand China its industrial base – good jobs, intellectual property and global standing in exchange for alleged market access and cheap labor.

Failure to address these questions makes the ordinary American wonder if our current crop of political leaders could run a bath.

Big business dominates the American

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As demonstrated by the current presidential campaign, Americans live in an age of hostility toward economic power being concentrated in a few big firms. The breakup of big tech, big pharma, big banks, and firms in other industries such as airlines, beer, and hospitals may get a lot of media coverage, but the public shouldn’t bet on seeing much really change.

Candidates on the left sermonize that it is time to take a fresh look at antitrust laws that have not gotten much attention for the last 40 years, with the exception of the Microsoft case in the late 1990s. They want to smack down companies that have gotten too big, too powerful and make it harder for entrepreneurs to build the next Google or Facebook. The candidates argue that the U.S. economy has grown more concentrated since the early 1990s, with the spoils going to a select few in each industry.

They’re right. Beyond all the left-wing piety, American industry is increasingly dominated by a shrinking handful of giant companies.

For example, the top four domestic airlines collected 41 percent of the industry’s revenue 10 years ago; today they collect 65 percent. It’s the same story in the beer industry, where four firms control nearly 90 percent of the market despite the proliferation of craft brewers. Even in the poultry industry, Tyson’s, Pilgrim’s Pride, and Perdue all but control U.S. production. And three major drug store chains – Walgreens, CVS Health, and Rite Aid – dominate that industry.

Facebook has acquired 67 firms and Amazon 91 firms – some of which were rising, young competitors – without being challenged by regulators. And the number of companies listed on the New York Stock Exchange fell by half between 1996 and 2016. The dominant players believe that if they are to succeed, they must shore up economies of scale and erect high barriers to entry to scare off potential competitors and lock up new markets.

A handful of politicians, policy advisors, and economists contend that unrestricted concentration in certain industries is a threat to a functioning democracy. This is a fancy way of saying that the United States has massive income inequality, with the top 1 percent earning 23.8 percent of the national income and controlling 38.6 percent of national wealth. For political candidates on the left, this intensifies their meliorism and arguments that a structural dismantling of this concentrated power is necessary.

In general, Washington politicians have failed to take steps to make markets more competitive, allowing superstar companies to become even more powerful. Sure, retirement accounts do OK, but wages and the economy suffer as a result of decreasing competition.

None of this is new, it’s just been forgotten. Regulating market concentration has been a leitmotif in American history, starting with passage of the nation’s first antitrust law, the Sherman Act of 1890. Later, President Theodore Roosevelt led the effort to break up the Standard Oil Company’s monopoly, and up through the 1960s many mergers were routinely challenged.

Fast forward to the 1970s, when University of Chicago scholars argued that the Sherman Act was to protect consumers from high prices, not preserve competition by protecting small businesses from big ones. They claimed that large companies contribute to economic efficiency and innovation, and government should cut back on antitrust enforcement. In effect, get government off the back of American industry.

They won the day. Other than Microsoft, antitrust enforcement on big companies has been essentially dormant for the last 40 years.

It may be time to take a fresh look at the enforcement of antitrust law – especially big tech companies. But don’t hold your breath. Big corporations spend tens of millions of dollars every year to push their objectives. According to the Center for Responsible Politics, Facebook spent $12,120,000 on lobbying in 2018 and Amazon spent $14,400,000.

Former California political power broker Jesse M. Unruh was indeed right when he said, “Money is the mother’s milk of politics.”

The Platform Economy

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As the third decade of the 21st century begins, the power of digital platforms to disrupt industries is impressive. But the time may have come for tech companies to take more responsibility for the content on their platforms.

For the uninitiated, a platform is essentially a marketplace that connects goods and services with people who want to buy them, bringing together producers and consumers in high-value exchanges that disrupt traditional industries and incumbent players. Companies such as Facebook, Google’s YouTube, Twitter, Amazon, Uber, and Airbnb have all been built around this concept.

These online platforms play an important role in the economy and have insinuated themselves into people’s everyday lives, often serving as gateways for how goods, services, and information and even people access each other. They deploy bespoke software systems to connect content creators with viewers, sellers with buyers, link riders and drivers and hosts with travelers. But the companies claim no responsibility for the products or services on their platforms.

Economists use the term “network effects” to refer to the way the value of a product or service increases in tandem with the number of people who use it. The idea is that you benefit from aligning your behavior with that of others. The argument goes that the value of a platform largely depends on the number of users on either side of the exchange. The more users a platform has, the more attractive it becomes, creating a virtuous circle.

Once a platform reaches a certain size, the thinking goes, it begins to dominate the market, dislodging incumbents and creating a formidable barrier to entry. Network effects handcuff customers to the largest player.

For example, it is much harder to switch to a different smartphone if doing so means you have to give up all your apps. Online two-sided platforms or marketplaces are among the fastest-growing Internet startups in existence. Among notable two-sided platforms that quickly reached millions of customers were Airbnb, eBay, and Uber.

Instagram is another example. The social media application allows you to follow people of interest and share posts to those who follow you. Having more people on the service means more accounts of interest to follow and more people to interact with your posts.

Social networking sites emulate the network effects strategy used by another brand that has long held a dominant position in the tech industry. When a customer buys one of Apple’s iPhones, one consideration is the number and types of apps that are available on the platform. The company has created a beautiful ecosystem, a bit like the Hotel California: Once you check in, you might never leave.

There is a dark side to these platforms. The dominance of tech companies such as Amazon, Google, and Facebook benefits customers with low prices and access to more data-driven services, but they have also become powerful monopolies, preventing new market entrants. Also, firms such as Amazon, with its considerable market power, throw their weight around by requiring some sellers to provide them with the best prices they can bestow on any online channel.

The dominance of the leading online platforms has invited bipartisan support and scrutiny from lawmakers and regulators in the U.S. and Europe for not doing enough to police platform content. Many lawmakers and regulators have criticized social media platforms such as Facebook and Twitter for the flood of misinformation during the 2016 Presidential election.

The U.S. Department of Justice and state attorneys general have initiated a review of market-dominating online platforms in response to concerns about lack of choice, privacy, transparency, and public safety. Of course, you can expect the leading firms to fight back and defy demands to police content and resist the heavy hand of regulation on their online digital platforms.

As always, they want to regulate their own businesses. You all know how that generally turns out.