The economic control exercised by giant companies and interest groups allows their lawyers, economists and lobbyists to confound the watchdogs – including the decent ones among them.
“Increasingly I found myself spending time with people of means — law firm partners and investment bankers, hedge fund managers and venture capitalists. As a rule, they were smart, interesting people, knowledgeable about public policy, liberal in their politics, expecting nothing more than a hearing of their opinions in exchange for their checks. But they reflected, almost uniformly, the perspectives of their class: the top one percent or so of the income scale… And although my own worldview and theirs corresponded in many ways, I found myself avoiding certain topics during conversations with them, papering over possible differences, anticipating their expectations … I spent more and more of my time above the fray, outside the world of immediate hunger, disappointment, fear, irrationality, and frequent hardship of the other 99 percent of the population — that is, the people that I’d entered public life to serve.” (“The Audacity of Hope,” Barack Obama, 2006).
Almost 10 years have passed since Barack Obama, the young senator from Illinois, wrote the book which became his campaign manifesto in the presidential elections of 2008, and those descriptions of his career-spanning shoulder-rubbing with American donors, lobbyists, leading interest groups and big corporation figures seems today, if anything, more relevant by several orders of magnitude. Not in the history of the United States has there ever been such a strong public feeling across all layers of society, from left-wing to right, that the economy is organized, tailored and sold out to a small group of people.
The Republican billionaire Bill Gross reformulated the American Pledge of Allegiance: “I pledge allegiance to the flag of the fragmented state of America, and to the plutocracy for which now it stands, a red and blue nation, under financial gods indistinguishable, with liberty and justice for the 1 (percent).” (Newsletter, PIMCO investment group, November 2012)
Obama, who arrived in the White House as the great hope of many, as somebody who vowed to overthrow the rule of money and lobbyists in Washington, failed totally, that is if he even tried. The Washington that he will leave behind him in another eight months is controlled more than it ever has been by money and interest groups that represent nobody other than themselves.
The health reforms passed by Obama widened coverage significantly for millions of Americans, yet every other line in the law enabling that reform ensures a continuation of benefits, waste, legal corruption, distortion, queues, cheating, inflated accounts and special exemptions to all the various interest groups in the system: from pharmaceutical companies, medical equipment giants, hospital monopolies, the cartel of the five biggest insurance companies who will soon merge themselves into three, all the way to unions of doctors and lawyers. In 2016 the United States will spend almost one-sixth of its gross domestic product on health, almost double what any other Western country spends but without any special resulting advantages to boast about. The price will be paid by the same 99 percent that Obama wanted to represent.
In something of a surprise last Friday, the White House revealed an additional aspect of the failure of American economic policy in the last decade: a rising consolidation in most sectors of the economy, concerns over a reduction in competition and an exceptional and worrying concentration of profits in the hands of a limited number of companies. As well as a memorandum written by economists of the White House Council of Economic Advisers, which analyzes the problem of market concentration and the weakness of competition in the U.S., Obama issued a special executive order calling for the Justice Department and all major regulatory agencies to submit to the National Economic Council within 30 days a list of actions that each of them could take in order to enhance market competition, detailing any specific market obstacles that withhold competition and choice from consumers and workers.
Within 60 days all government departments and administrative authorities relevant to competition and regulation are to submit recommendations on agency-specific actions that eliminate barriers to competition, promote greater competition, and improve consumer access to information needed to make informed purchasing decisions. These recommendations would include a list of priority actions, including rule-making, as well as timelines for completing those actions.
Obama’s executive order further stipulates that all agencies submit a report to the president every six months in which they report any additional steps they intend to take in order to increase competition. The order and the memorandum that accompanies it, which together outline the benefits to economic welfare brought by greater competition while listing the studies on rising market concentration in the United States, look like a most impressive policy step. The timing however — toward the end of Obama’s second term — illustrates the magnitude of the failure and the size of the problem at hand.
Over recent decades, the White House, Congress and the Senate have not attempted to tackle the rising concentration taking place in numerous sectors of the economy. That which prevented any economic agenda from seriously examining the concentrations of economic and political power in the hands of a small few was not just legal bribery funneled through politicians by lobbyists and interest groups, but rather the intellectual captivity into which most U.S. regulators have fallen in recent years.
Up until 2008, the prevailing myth in Washington and in most American research institutions held that the U.S. economy is competitive and that the financial boom primarily reflects American-owned wealth created for the benefit of the entire society. Following the financial crisis, that myth was replaced by one that considered the American economy to be powerful in its own right, with the problem centering only on the banks.
Obama’s executive order, like a number of books and studies that have been published in recent years, paints a picture of much deeper economic distortions: the enormous concentration in the financial system is part of a much wider story. In the last decade most major economic sectors in the U.S. underwent a process of mergers and acquisitions that shrunk competitive pressures, enlarged the market power of giant companies and thus transformed some of them into such large entities that the regulators cannot even properly monitor them.
American antitrust laws, which are supposed to prevent companies from accumulating such market power as enables them to block off competition, raise entry barriers, form cartels, discriminate and use their economic power malevolently, were written more than 125 years ago, and around them has been propagated no shortage of myths.
Yet a more thorough inspection of the history of restrictive practices will reveal that only in relatively short periods, of decades at most, have they been aggressively enforced. During most of the last century giant companies have been busy in campaigns of delegitimization and weakening of the laws.
A good example surfaced about a year ago in The Wall Street Journal. An internal memorandum of the U.S. Federal Trade Commission revealed the recommendation of staffers at the FTC’s Bureau of Competition to take action against the titanic monopoly, perhaps the strongest in the world – Google. The top echelon decided against taking action, and the ball was instead passed to the competition authorities in Europe – who did decide to do something.
Three years ago the judge and academic, Richard Posner, who made a big impact on the antitrust world, wrote in his book “The Crisis of Capitalist Democracy” that in his work in the field of economics, he, too, fell for the mirage that “markets were perfect, which is to say self-regulating, and that government intervention in them always made things worse.”
Many of those who were trusted to uphold the antitrust regulations in America forgot the fundamental basics: the antitrust laws were born long before the development of real economic analysis of markets and certainly long before any economic analysis of the law. The antitrust laws were born primarily out of a rising public fear from the political power accrued by giant companies, their executives and their controlling shareholders.
The growing concentration in the United States, the progressive president’s soft-handed and often late treatment, if any, of the enormous power concentrated in a handful of huge companies, and the takeover of Washington by research institutes, rich donors and interest groups, must all serve as a warning signal to Israel.
Thanks to the social protests that posed a momentary threat to Benjamin Netanyahu’s government, the problems of market concentration, absence of competition and the power of a handful of tycoons rose to the top of the socioeconomic agenda in Israel. A number of captive regulators who had sought the confidence of tycoons were forced out of their positions and replaced by a new generation more attuned to the wider and more diffuse public interest.
The most prominent technical and legalistic expression of this was the recommendation included in the Trachtenberg Report — written rather hastily a few weeks after hundreds of thousands of people thronged into the streets — to double the manpower of the Israel Antitrust Authority and to grant it a mandate to take effective steps to boost competition in all sectors of the economy, instead of only acting as if they were doing so, as they hitherto had been, when companies approached and requested permission to merge.
Yet the fighting spirit that the antitrust authority started to show from 2012 began to seep away again after the prime minister effectively forced the resignation of the Antitrust Authority Director General professor David Gilo, because the latter’s stance on the issue of the Israeli offshore gas monopoly wasn’t to his liking.
Today’s antitrust authority is divided into two invisible camps. The first identifies itself with the dominant culture of the United States for the past 30 years, which sees no place for market intervention and which usually explains away every merger and unreasonable concentration of power through the narrative of “efficiency benefits.”
Those in the second camp believe that what may seem today like an efficiency-optimizing merger deteriorates in many cases into concentrated market sectors, restrictive trade practices, hidden cartels, price-fixing and an aggressiveness that sometimes filters down the industry value chain and occasionally ends in political power. This enables the concentration of power to fashion or preserve laws and amendments that block the entry of competitors and subjugates the consumer, the investor, the taxpayer and the worker.
Into this regulatory authority comes Michal Halperin, the new director general of Israel’s antitrust authority, who took up the position three months ago. The professional and social circles from which she sprang and to which she’ll return when her term ends are likely to influence the approach she’ll employ when tackling those fields; whether she’ll preserve the status quo or raise the banner of competition and seek to break the clusters of power produced by competition’s absence.
Two weeks ago Halperin decided to block the merger between Golan Telecom and Cellcom. It was an important signal that she has no plans to see concentration return to the sector in which the introduction of competition has become symbolic of the post-protest era, which culminated in the formulating of a business concentration law.
However it seems the merger of the two cell companies was too conspicuous, too talked-about, too symbolic, and a spate of her less-discussed decisions that are closely parallel suggests she will tend toward a return to the American model: a decision to withdraw her predecessor Gilo’s decision to fine monopolies who charge exorbitant prices due to “lack of clarity and problems of enforcement.”
In the last few weeks a number of small and large mergers have been announced: Dodi Weisman, who holds a small stake in the energy company Dor Alon, is requesting permission to purchase Sonol; the public company Brand is looking to buy the “Cor Matechet” metal company; Modan Group is attempting to buy Keter (both publishing); and SAMLAT Group received permission to franchise the brand “Automotive Equipment.”
The executives and owners of all those companies came up with many wonderful reasons why they don’t want to reduce competition, but why they are prompted to do so economically and why it will increase efficiency in the market. Perhaps in a few cases that makes sense. However the antitrust authority needs to be encouraging precisely the opposite trend: preventing mergers, unearthing ways to disarm existing cartels, fracturing concentrations of economic power and raising the pressure and threat to the monopolies.
The cases of America in 2016 and Israel in 2010 have taught us that the greatest dangers from concentrations of economic power are their ability to entrench, lock up shop, and dominate the political system and thereby the regulatory bodies, and sometimes also the media and public discourse.
Up until the introduction of social media, most media outlets in Israel supported, sometimes actively but primarily by dint of omission, an American-style system in which one simply didn’t place items on the agenda that raised questions about the concentration of economic power. Nobody challenged the handful of pyramids and banks that controlled half of the capital market. Regulators, appointed by politicians who live and depend on the media, organized for themselves a day-to-day agenda whereby they avoided dealing with the giant economic icebergs and instead focused on tackling the smallest of targets, those for whom criticism was more “legitimate.”
The economic control exercised by giant companies and interest groups allows their lawyers, economists and lobbyists to confound the watchdogs, including the decent ones among them. Time and time again they manage to portray campaigns in support of competition, breaking of power clusters, treatment of market failures and provision of information and options to consumers as “anti-business movements that drive away investment.” Meanwhile the economic literature, including that which the White House cites in its latest memorandum, proves the exact opposite: effective competition is the soul of a prosperous economy, a fair society and a healthy business sector, one which creates real value rather than funneling it from consumers and taxpayers to small groups.
Two years ago, the supervisor of the insurance and capital markets, Dorit Salinger, began operating determinedly against the oppressive arrangements in the sector. Her counterpart at the Bank of Israel, banking regulator Dr. Hedva Bar, indicated when she took up the position this year that she planned to reverse the institution’s historical resistance to competition and the establishment of new banks.
Halperin is still sitting on the fence. The heads of the biggest law firms representing the giant companies against the antitrust authority are working their magic and exerting pressure. Bar has no real political backing: it seems that the prime minister has lost his former interest in boosting domestic competition, and he is defending, by his actions and omissions, any and every tycoon who supports his rule.
This is once again the place to mention the quote we’ve been repeating every few months. This time it is especially relevant: “The basic thing is, how do you guarantee competition? Because you can have the distortion of competition, what we’d call market failures, in a supposedly free market. You have to constantly maintain this principle of competition and it’s not obvious that you’ll maintain it. First, because efficient firms get market share, and if they dominate that market share they can shut out competition at a certain point in non-competitive ways. Secondly, they can link up with other powers… the main source of power that companies can unite with is politicians, and thereby create crony capitalism.
“In our system in Israel, it’s connecting to other powers. It could be press powers that have control over political powers – that gives you crony capitalism. So you can either have it two ways or three ways – ways to prevent competition. And if you prevent competition, you raise prices and you are usually penalizing the lower segments of society, who are more dependent on lower prices for products and services as a fraction of their income. That is something that I am particularly keen on avoiding.”*
*Editor’s note: This quote is attributed to Benjamin Netanyahu, in an interview in Washington on March 3, 2014, in the publication MarkerWeek, a weekly magazine version of TheMarker, founded by the author.