From a story in The Economist:
Profits have risen in most rich countries over the past ten years but
the increase has been biggest for American firms. Coupled with an
increasing concentration of ownership, this means the fruits of economic
growth are being hoarded. This is probably part of the reason that
two-thirds of Americans, including a majority of Republicans, have come
to believe that the economy “unfairly favours powerful interests”,
according to polling by Pew, a research outfit. It means that when
Hillary Clinton and Bernie Sanders, the Democratic contenders for
president, say that the economy is “rigged”, they have a point." ...
Since 2008 American firms have engaged in one of the largest rounds of
mergers in their country’s history, worth $10 trillion. Unlike earlier
acquisitions aimed at building global empires, these mergers were
largely aimed at consolidating in America, allowing the merged companies
to increase their market shares and cut their costs. The companies in
question usually make no pretence of planning to pass the savings they
make this way on to their customers; take their estimates of the
synergies involved at face value and profits in America will rise by a
further 10% or so...High profits can deepen inequality in various ways. The pool of income
to be split among employees could be squeezed. Consumers might pay too
much for goods. In a market the size of America’s prices should be lower
than in other industrialised economies. By and large, they are not.
Though American companies now make a fifth of their profits abroad,
their naughty secret is that their return-on-equity is 40% higher at
home.
The problem is that these profits stem from monopoly and not from innovation.
This is an interesting read and brings me back to the discussion in class about the shrinking middle class and the growing income inequality here in the US. I think the aftermath of the great recession has created a perfect storm for outsider presidential candidates like Trump to capitalize on people's frustration. It is not surprising that employees are frustrated, as the above reading points out that US companies are seeing higher profits but employees are not seeing higher wages.
ReplyDeleteI got to wonder if US antitrust laws are well established or well enforced. I am not sure if Fed's decision to raise the target interest rate for the first time since June 2006 by 0.25 percentage points in December has impacted US M&A market negatively yet or even will be. Though M&A deals have been going down since last November, a lot of people are expecting 2016 to be another robust year for M&A deals, just like it did in 2015, since relatively(historically) low interest rate allows cheap financing even with an increase last year. Some say that rising interest rates may actually encourage M&A deals with expected limited growth and inflation.
ReplyDeleteAnd the biggest reason that M&A deals are much more compelling than developing actual technology is that the latter requires prohibitive R&D costs.
(I personally think M&As indeed promote innovation in certain industries, like the tech industry especially for start-up companies.) But I believe US has to find a way to stimulate innovation, while preventing anti-competitive actions, aka M&A deals within oligopolistic or monopolistic industries, especially when such actions are hurting the consumers and workers.
http://www.factset.com/websitefiles/PDFs/flashwire/flashwire_3.16
ReplyDeleteIts first page shows the US M&A Market Index, showing the M&A trend from Nov 14 to Feb 16.
I can see why American firms have seen the largest increase in profits over the past ten years. With a lot of large businesses in the United States, and the desire for more profits, these companies are willing to do anything to gain more power. Since these companies are so large, they are able to set up business practices that smaller companies cannot. Large companies utilize economies of scale, significantly decreasing their production costs, as well as cheap labor overseas. Smaller companies do not have this ability when starting out. This, for example, decreases the incentive to produce in that industry.
ReplyDeleteAnother issue is that these large companies want to buy out all possible competition and gain as much power in that industry as possible. Antitrust laws do prevent too much power from being gained, but companies do try to minimize competition in order to gain some power. The ability for companies to do this has made many companies content with the current way of doing things and innovation is not encouraged.
If a company has complete monopoly power, they can control the price and quantity that is being produced. With no other competitors in that industry, there is no incentive to innovate because no one is going to create a better product or find a way to produce a cheaper product. This in tern had hurt the industry and the consumers.
I personally believe that it has become pretty clear that the stock market is no longer moving in tandem with the real economy. A few years ago when the stock market started setting new record highs, the US economy didn't even look good on the extremely simple metrics. Unemployment was still above 6% and average wages had not budged a bit. That's not to mention the more complicated metrics showing that unemployment should probably be higher. Meanwhile, now unemployment has finally come down to a point where you can argue that we are at full employment and wages actually rose in real terms throughout the last year, but at the start of the year the stock market dropped significantly. This could be related to the added monopoly power. The stock market was recognizing these increased profits which came as a result of monopoly power rather than innovation. As a result the increased profits really were not benefiting the real economy.
ReplyDeleteI found that the American companies are making more returns at home because a similar situation in South Korea. Samsung has the biggest market share in Korea even though its market share has decreased from 60% to 46%. The average price for smartphones in Korea is the highest among all Organization for Economic Cooperation and Development (OECD) states. For high-end smartphones, the average price is $512.24 a bit higher compared to the U.S. price, $505.38. Samsung deceives the consumers by setting a high price. However, because it is a one of the major companies with strong market power, its price could possibly be more efficient than those from smaller firms. In order to stop Samsung from monopolizing, Korean government is about to enact a subsidy that "must fit rules of proportionality in accordance with the actual price of the phone." This could possibly lower the price of smartphones in Korea.
ReplyDeletehttp://technews.co/2014/10/15/samsung-smartphones-more-expensive-at-home-than-in-u-s/
I found that the American companies are making more returns at home because a similar situation in South Korea. Samsung has the biggest market share in Korea even though its market share has decreased from 60% to 46%. The average price for smartphones in Korea is the highest among all Organization for Economic Cooperation and Development (OECD) states. For high-end smartphones, the average price is $512.24 a bit higher compared to the U.S. price, $505.38. Samsung deceives the consumers by setting a high price. However, because it is a one of the major companies with strong market power, its price could possibly be more efficient than those from smaller firms. In order to stop Samsung from monopolizing, Korean government is about to enact a subsidy that "must fit rules of proportionality in accordance with the actual price of the phone." This could possibly lower the price of smartphones in Korea.
ReplyDeletehttp://technews.co/2014/10/15/samsung-smartphones-more-expensive-at-home-than-in-u-s/