Sunday, July 23, 2023

"The New Corporatism That’s Killing Capitalism"

The author of this piece, Joel Kotkin, is sort-of the anti-Richard Florida of urbanism but a bit more down-to-earth and with a wider ambit, here, meta-political economy. 

One quick note: over the course of the next few months we'll be looking at various aspects of corporatism. The guiding light for this exploration is something Jeremy Grantham was writing about over a decade ago, profit margins. Grantham made the point that profit margins are (probably) the most mean-reverting series in capitalism, mainly because high profit margins bring in competition which lowers profit margins.

The fact that profit margins have hit and held a permanently high plateau that has lasted much longer than Professor Irving Fisher's use of the phrase to characterize of the stock market*, means, by definition, that the current economic system is not capitalism.

From Mr. Kotkin's personal website, July 17:

Over the years since the financial crisis, economic power and wealth has become ever more concentrated in fewer hands. This is something leaders have acknowledged, and policymakers have tried to do something about. And yet, despite brave talk of breaking up mega-giant companies, anti-trust efforts have been anemic, as most recently demonstrated by the failure to stop Microsoft from swallowing game maker Activision.

The future looked a little brighter in the immediate aftermath of the pandemic. There were signs of a grassroots resurgence, with a strong uptick in new business formations in the United States. But since then, as interest rates have risen and regulatory pressures have increased. there has been a slackening off of new firms. Outside of high-growth areas like artificial intelligence, where most small companies are usually allied with the mega-giants, bigger is better in today’s economy.

Consolidation has been especially dramatic in the financial sector. Since the 2008 financial crisis the power of the largest investment banks has greatly expanded and they now account for almost half of the sector. The rapid concentration of US banking assets accelerated with the collapse of several regional banks and could be further accelerated by bad commercial loans. The steady loss of smaller banks — their numbers down by half over the past twenty years — removes the predominant source of credit for smaller businesses. Between 1983 and 2018, the number of banks fell from 11,000 to barely 4,000. By itself JP Morgan accounts for 13 percent of the nation’s deposits and over 20 percent of all credit cards. Profits for these large financial instutions have soared amidst a stagnant economy due to rising intersst rates.

Tech, once the bright hope for a new, innovative grassroots economy has followed suit with five or six major companies dominating the space. In fields such as social media, search, online retail, cell and computer operating systems, there is no serious challenger in sight. Stock market values are increasingly dominated by a handful of players, with large tech firms increasing their share of S&P companies from 14 percent in 2001 to almost 30 percent two decades later. Microsoft and Apple now account for over 13 per cent of the entire stock market. The current AI driven stock market bubble is accelerating this pattern. Apple, now with an unprecedented $3 trillion and its seven closest tech rivals have expanded their US technology-stock dominance. The eight most heavily valued tech companies in the US — Alphabet, Amazon, Apple, Meta, Microsoft, Netflix, Tesla and Nvidia — have risen in the past year from 22 percent to 30 percent of the S&P 500’s market capitalization.

This same pattern of concentration can be seen in industries ranging from food to media. Meanwhile small businesses, accounting for half of all US private sector employment are being pummeled by rising interest rates while tech startups outside of artificial intelligence have fizzled miserably. Today in the US, nearly two in five small businesses cannot pay their rent and many are cutting back hiring plans even as big chains, like McDonald’s and Starbucks, enjoy rising sales. Small business optimism in the US is at its lowest point in ten years.

America has always been a bright spot of entrepreneurship. Today, though, it looks to be developing an economy more reminiscent of the corporatism of pre-World War Two Japanese zaibatsu or German cartels. A recent study in the Review of Finance notes that three-quarters of American industry have become more concentrated since the 1970s. A tenth of the US economy is made up of industries where four firms dominate more than two-thirds of the market, with finance and information technology now among the most concentrated.

The consequences of this consolidation are political as well as economic. The new corporate state dominates politics and culture through a stifling government-sanctioned orthodoxy. This is reflected in the ESG movement which, dominated by the largest investment banks, helps keep the allocation of capital in step with the “party line” on everything from the environment to gender and race-related issues — even if doing so harms investors and customers. The agenda may be ambitiously “progressive” as opposed to megalomaniac nationalism, but, to extend the 1930s analogy, Mussolini and co would recognize the virtue of harmonizing the state and corporate interests. Sometimes, as in the case of Bud Lite and Target, this progressive hive mind can misfire. But even these missteps reveal the insulation of the corporate elite and their separation from the values of many, if not most, Americans.

In many ways, the today’s compelling script is not that of  fascist Italy — hardly a sterling success — but the “China model.” In both the West and the Middle Kingdom, as Rana Foroohar pointed out in the Financial Times recently, we see the melding of corporate and government interests. Political leaders may rail about the Chinese “threat,” but the financial and corporate hegemons are happy to enhance the autocratic state’s industrial and financial power to boost their profits. Greens back such things as the forced march to electric vehicles that exacerbate our dependence on Beijing....

*Although Professor Fisher made the comment six weeks after the DJIA peaked, it was just eight days before Black Thursday when the market dropped 11% (the equivalent 3400 point drop today would certainly make headlines)

We'll get into the error of conflating Mussolini's use of the Italian concept of corporations with the Anglo meaning of business corporations at another time. For now, a Canadian announcement of a new book release by Richard Florida back in 2017: 

"Gadabout Urbanist Richard Florida Has a New Book..."

"It advises cities on what to do about problems that result from advice he gave them in his previous books..."
I take it the writer is not a fan....