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The Great Reversal: How America Gave Up on Free Markets
In this much-anticipated book, a leading economist argues that many key problems of the American economy are due not to the flaws of capitalism or the inevitabilities of globalization but to the concentration of corporate power. By lobbying against competition, the biggest firms drive profits higher while depressing wages and limiting opportunities for investment, innovation, and growth.
Why are cell-phone plans so much more expensive in the United States than in Europe? It seems a simple question. But the search for an answer took Thomas Philippon on an unexpected journey through some of the most complex and hotly debated issues in modern economics. Ultimately he reached his surprising conclusion: American markets, once a model for the world, are giving up on healthy competition. Sector after economic sector is more concentrated than it was twenty years ago, dominated by fewer and bigger players who lobby politicians aggressively to protect and expand their profit margins. Across the country, this drives up prices while driving down investment, productivity, growth, and wages, resulting in more inequality. Meanwhile, Europe―long dismissed for competitive sclerosis and weak antitrust―is beating America at its own game.
Philippon, one of the world’s leading economists, did not expect these conclusions in the age of Silicon Valley start-ups and millennial millionaires. But the data from his cutting-edge research proved undeniable. In this compelling tale of economic detective work, we follow him as he works out the basic facts and consequences of industry concentration in the U.S. and Europe, shows how lobbying and campaign contributions have defanged antitrust regulators, and considers what all this means for free trade, technology, and innovation. For the sake of ordinary Americans, he concludes, government needs to return to what it once did best: keeping the playing field level for competition. It’s time to make American markets great―and free―again.
Why are cell-phone plans so much more expensive in the United States than in Europe? It seems a simple question. But the search for an answer took Thomas Philippon on an unexpected journey through some of the most complex and hotly debated issues in modern economics. Ultimately he reached his surprising conclusion: American markets, once a model for the world, are giving up on healthy competition. Sector after economic sector is more concentrated than it was twenty years ago, dominated by fewer and bigger players who lobby politicians aggressively to protect and expand their profit margins. Across the country, this drives up prices while driving down investment, productivity, growth, and wages, resulting in more inequality. Meanwhile, Europe―long dismissed for competitive sclerosis and weak antitrust―is beating America at its own game.
Philippon, one of the world’s leading economists, did not expect these conclusions in the age of Silicon Valley start-ups and millennial millionaires. But the data from his cutting-edge research proved undeniable. In this compelling tale of economic detective work, we follow him as he works out the basic facts and consequences of industry concentration in the U.S. and Europe, shows how lobbying and campaign contributions have defanged antitrust regulators, and considers what all this means for free trade, technology, and innovation. For the sake of ordinary Americans, he concludes, government needs to return to what it once did best: keeping the playing field level for competition. It’s time to make American markets great―and free―again.
368 pages, Hardcover
First published October 29, 2019
About the author
Thomas Philippon
6 books26 followersThomas Philippon is the Max L. Heine Professor of Finance at the Stern School of Business, New York University. He was named one of the top 25 economists under 45 by the IMF and won the Bernácer Prize for Best European Economist. He currently serves as an academic advisor to the Financial Stability Board and to the Hong Kong Institute for Monetary Research. He was previously an advisor to the New York Federal Reserve Bank and a board member of the French prudential regulatory authority.
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Displaying 1 - 30 of 93 reviews
April 28, 2020
This is a must-read for all Americans who believe or reject "free markets." The truth is that we do not have one. Our economy is controlled by rent-seeking monopolies and the legislatures and regulators who love them. Our healthcare system is a private cabal that suffers 0 competition. Our cell phone companies, airlines, and other large industries have enough market share that they've stopped trying to compete on price. Philippon is not ideological and he's not here to sell you a theory of or against free markets. He just observes the differences in enterprises in Europe and America and proves (sufficiently, in my opinion), that while Americans love to talk about the wonders of market competition, Europeans are currently practicing it. Except in Healthcare, which he rightly points out should be more public than private (as opposed to say, our mostly public mortgage finance market).
November 23, 2019
A great read on an important topic that advances a bold thesis about the United States economy, a counterintuitive re-thinking of the economic institutions of the European Union, and a synthesis of a lot of Thomas Philippon's research.
The bold thesis about the U.S. economy is that that concentration has risen across the economy with a smaller number of businesses dominating in each industry, an idea that a number of economists have advanced in recent years with Thomas Philippon among the leading ones in this group. In his telling the rise of concentration has resulted in a host of economic maladies, but the one Philippon makes most vivid is the higher prices and larger increase of prices for many goods and services relative to Europe, most notably airlines and cell phone bills. Philippon understands that increased concentration itself may be a consequence of more competition (that weeds out inefficient businesses) or a cause of less competition. He uses retail as an example of the more competition story where innovation has helped some companies, like Wal-Mart, grow and bring low prices. But he also shows the evidence that the less competition story predominates in much of the economy, including his previous papers finding that much of the investment gap--the reduction in investment below what one would predict from the economic fundamentals--is explained by the reduced competition. All told Philippon estimates that this is costing American consumers $1 trillion.
Philippon blames the rise in concentration on the fact that American institutions lend themselves to lobbying for a variety of reasons including our lack of restrictions on many forms of political contributions and the way a single set of national institutions matters. The lobbying chapters of the book were an excellent synthesis of the economic literature on the returns to lobbying and a subtle discussion of the empirical challenges that make forming precise conclusions difficult (e.g., how do you measure a lobbying campaign whose victory is defined by inaction when you don't see inaction in the data).
I do not think Philippon was fully convincing in establishing that this lobbying rose extremely rapidly, that it had a huge influence on the issue of antitrust in particular, and that this influence manifested itself in enough of a policy shift that it could yield the large changes he shows. This is especially true when ideas and ideology do matter in antitrust enforcement, but crass lobbying matters much less than it does with, say, your typical regulatory issues. Philippon does not really explore an alternative thesis for the decline in antitrust enforcement which is changing ideas, specifically the rise of the Chicago School and its increased influence in the judiciary which increasingly thought that outside of cartels there was nothing particularly to be worried about in mergers or conduct. Of course, the ideas themselves were related to set of powerful economic interests but the story is a different one than lobbying. Even with the Chicago School story, I think it is hard to see this as such a large abrupt change that it or any other policy changes could do more than explain part of the shift in recent decades.
The counterintuitive rethinking of the European Union's economic institutions is that they are not a large, cumbersome bureaucracy but instead have developed to reduce regulation and promote markets that would otherwise be restrained by the large, cumbersome bureaucracies that the individual member states would have. The origins of the European Coal and Steel Community were in attacking excessive concentration in that sector. Philippon discusses a theoretical model he developed with Germán Gutiérrez in which individual countries will tend to overregulate but when they give up their sovereignty to a higher level entity it will be rational for them to have less regulation than they would prefer because they will be reducing that higher level entity's ability to steer things in the direction of another country. Philippon goes through the ways that the EU's harmonization of rules, antitrust enforcement, anti-state aid efforts, and the like have helped create more of a market not less of one, with some particularly striking examples like airlines which were deregulated with the resulting spectacular rise in prices. All told, European institutions--especially DG Competition which enforces competition rules--were built in a more robust and resilient manner than the United States.
Philippon only briefly speculates on how European institutions might evolve when its most pro-market member (the United Kingdom) is exiting and two of its leading members (France and Germany) were recently highly critical of the blocking of the Siemens-Alstom merger. I personally think the former is a worry but the later is actually a testament to the strength of European institutions, but we will see.
Finally, the book concludes with a series of topic chapters, including the pay of bankers, the rise of digital giants, and monopsony in the labor markets. In some cases Philippon is describing his own research (e.g., his paper on the fall and rise of banker's pay over the last century) and in others he is thoughtfully synthesizing and summarizing the research of others.
Philippon clearly has a perspective on the direction policy should go but his book eschews making policy recommendations, and in his opening he cites that as an important virtue in a social scientist. I think this was probably the right choice since he sets up a great direction for others to go in. But I do wish we could understand how much of the $1 trillion loss to consumers he estimates could be regained by a shift in policy. Is this toothpaste back into a tube? Are these changes as much economic as policy so they cannot be reversed by policy? Or is the scope for policy impacts in this area quantitatively large? I think the promise is large enough I am for more of it but to start to understand the potential magnitude of impact we would need to get more tangible about the proposed changes.
Overall, a great and highly readable contribution to the debate from the first book that looks at the rise of concentration from more of a macroeconomic/finance perspective and develops insights by comparing U.S. and European institutions and outcomes.
The bold thesis about the U.S. economy is that that concentration has risen across the economy with a smaller number of businesses dominating in each industry, an idea that a number of economists have advanced in recent years with Thomas Philippon among the leading ones in this group. In his telling the rise of concentration has resulted in a host of economic maladies, but the one Philippon makes most vivid is the higher prices and larger increase of prices for many goods and services relative to Europe, most notably airlines and cell phone bills. Philippon understands that increased concentration itself may be a consequence of more competition (that weeds out inefficient businesses) or a cause of less competition. He uses retail as an example of the more competition story where innovation has helped some companies, like Wal-Mart, grow and bring low prices. But he also shows the evidence that the less competition story predominates in much of the economy, including his previous papers finding that much of the investment gap--the reduction in investment below what one would predict from the economic fundamentals--is explained by the reduced competition. All told Philippon estimates that this is costing American consumers $1 trillion.
Philippon blames the rise in concentration on the fact that American institutions lend themselves to lobbying for a variety of reasons including our lack of restrictions on many forms of political contributions and the way a single set of national institutions matters. The lobbying chapters of the book were an excellent synthesis of the economic literature on the returns to lobbying and a subtle discussion of the empirical challenges that make forming precise conclusions difficult (e.g., how do you measure a lobbying campaign whose victory is defined by inaction when you don't see inaction in the data).
I do not think Philippon was fully convincing in establishing that this lobbying rose extremely rapidly, that it had a huge influence on the issue of antitrust in particular, and that this influence manifested itself in enough of a policy shift that it could yield the large changes he shows. This is especially true when ideas and ideology do matter in antitrust enforcement, but crass lobbying matters much less than it does with, say, your typical regulatory issues. Philippon does not really explore an alternative thesis for the decline in antitrust enforcement which is changing ideas, specifically the rise of the Chicago School and its increased influence in the judiciary which increasingly thought that outside of cartels there was nothing particularly to be worried about in mergers or conduct. Of course, the ideas themselves were related to set of powerful economic interests but the story is a different one than lobbying. Even with the Chicago School story, I think it is hard to see this as such a large abrupt change that it or any other policy changes could do more than explain part of the shift in recent decades.
The counterintuitive rethinking of the European Union's economic institutions is that they are not a large, cumbersome bureaucracy but instead have developed to reduce regulation and promote markets that would otherwise be restrained by the large, cumbersome bureaucracies that the individual member states would have. The origins of the European Coal and Steel Community were in attacking excessive concentration in that sector. Philippon discusses a theoretical model he developed with Germán Gutiérrez in which individual countries will tend to overregulate but when they give up their sovereignty to a higher level entity it will be rational for them to have less regulation than they would prefer because they will be reducing that higher level entity's ability to steer things in the direction of another country. Philippon goes through the ways that the EU's harmonization of rules, antitrust enforcement, anti-state aid efforts, and the like have helped create more of a market not less of one, with some particularly striking examples like airlines which were deregulated with the resulting spectacular rise in prices. All told, European institutions--especially DG Competition which enforces competition rules--were built in a more robust and resilient manner than the United States.
Philippon only briefly speculates on how European institutions might evolve when its most pro-market member (the United Kingdom) is exiting and two of its leading members (France and Germany) were recently highly critical of the blocking of the Siemens-Alstom merger. I personally think the former is a worry but the later is actually a testament to the strength of European institutions, but we will see.
Finally, the book concludes with a series of topic chapters, including the pay of bankers, the rise of digital giants, and monopsony in the labor markets. In some cases Philippon is describing his own research (e.g., his paper on the fall and rise of banker's pay over the last century) and in others he is thoughtfully synthesizing and summarizing the research of others.
Philippon clearly has a perspective on the direction policy should go but his book eschews making policy recommendations, and in his opening he cites that as an important virtue in a social scientist. I think this was probably the right choice since he sets up a great direction for others to go in. But I do wish we could understand how much of the $1 trillion loss to consumers he estimates could be regained by a shift in policy. Is this toothpaste back into a tube? Are these changes as much economic as policy so they cannot be reversed by policy? Or is the scope for policy impacts in this area quantitatively large? I think the promise is large enough I am for more of it but to start to understand the potential magnitude of impact we would need to get more tangible about the proposed changes.
Overall, a great and highly readable contribution to the debate from the first book that looks at the rise of concentration from more of a macroeconomic/finance perspective and develops insights by comparing U.S. and European institutions and outcomes.
March 9, 2021
Free markets are the exception, not the rule.
With incredible expertise and data, Philippon makes a compelling argument that US market has become not only incredibly concentrated over at least the last 20 years but that they are historically anti-competitive. Philippon goes on to argue that the EU now outpaces the U.S. in terms of competitive markets. Traditional metrics used to show how the economy are doing don't show the full picture. People talk about GDP and not GDP-per capita. They talk about great unemployment rates but leave out labor share. They talk about lowering corporate taxes to induce economic growth but leave out the fact that corporations funnel those savings directly into dividends and stock by-backs and not into their labor force.
In the US the labor share had decrease by 5% the last 20 years. This trend is not seen in the EU. Labor share must be taken into account when discussing the GDP. GDP is meaningless if it is not spread out among the labor force. The US has higher prices than the EU and rich higher concentration of markets. US firms do no reinvest their concentrated capital back into jobs or development.
American lobbying has a lot to do with the concentration, however it is hard to measure the impact. Philippon discuss the problem with endogeneity which is where the outcome itself is influenced by the system. For example, a person who goes to the doctor more often may have worse health outcomes but this may because they are more sick at baseline so you can't come to he conclusion that going to the doctor is bad for your health. Does lobbying concentrate wealth? Hard to measure because it may correlate with huge and successful companies already. Philppon works around this by simply looking at how much companies spend on lobbying: clearly it affects their bottom line. Lobbying is much less prevalent in the EU.
The top 0.1% of all US earners contributes 40% to all political donations. <-read that again. Because it's insane. Those that have the most funds usually (not always) win. You'll get a nice discussion of super-PACs and dark money flow through non-profits. Campaign contributions in the US are 50x greater than in the EU<-read that again. Because it's bonkers.
The US spends 20% of GDP on healthcare despite worse outcomes and life expectancy. The issue is price and monopoly, not inventory or scarcity. Merging hospital systems can charge insurance companies whatever they want. Americans say they don't want government in healthcare when the government is heavily involved in tons of other markets like housing. The EU has cheaper and better healthcare distribution with better regulation and without a single payer system.
Philippon makes an interesting argument that star tech companies aren't the pillar of the US economy thatchy would have us to believe. Tech companies are not too big to fail. He argues that tech company profit margins are on par with historical large companies. What is new about tech companies is that they have small imprints on the economy and smaller employment than previous big firms.
The irony of this whole book is that the EU has adopted the past winning strategies of the US while the US has abandoned them to higher concentration, monopolization and much less competitive markets. Free markets are very fragile, and they are the exception not the rule.
US wealth concentration is a failure of policy. Plain and simple. This book was on par with Dark Money, The Shock Doctrine, Break 'em Up.
With incredible expertise and data, Philippon makes a compelling argument that US market has become not only incredibly concentrated over at least the last 20 years but that they are historically anti-competitive. Philippon goes on to argue that the EU now outpaces the U.S. in terms of competitive markets. Traditional metrics used to show how the economy are doing don't show the full picture. People talk about GDP and not GDP-per capita. They talk about great unemployment rates but leave out labor share. They talk about lowering corporate taxes to induce economic growth but leave out the fact that corporations funnel those savings directly into dividends and stock by-backs and not into their labor force.
In the US the labor share had decrease by 5% the last 20 years. This trend is not seen in the EU. Labor share must be taken into account when discussing the GDP. GDP is meaningless if it is not spread out among the labor force. The US has higher prices than the EU and rich higher concentration of markets. US firms do no reinvest their concentrated capital back into jobs or development.
American lobbying has a lot to do with the concentration, however it is hard to measure the impact. Philippon discuss the problem with endogeneity which is where the outcome itself is influenced by the system. For example, a person who goes to the doctor more often may have worse health outcomes but this may because they are more sick at baseline so you can't come to he conclusion that going to the doctor is bad for your health. Does lobbying concentrate wealth? Hard to measure because it may correlate with huge and successful companies already. Philppon works around this by simply looking at how much companies spend on lobbying: clearly it affects their bottom line. Lobbying is much less prevalent in the EU.
The top 0.1% of all US earners contributes 40% to all political donations. <-read that again. Because it's insane. Those that have the most funds usually (not always) win. You'll get a nice discussion of super-PACs and dark money flow through non-profits. Campaign contributions in the US are 50x greater than in the EU<-read that again. Because it's bonkers.
The US spends 20% of GDP on healthcare despite worse outcomes and life expectancy. The issue is price and monopoly, not inventory or scarcity. Merging hospital systems can charge insurance companies whatever they want. Americans say they don't want government in healthcare when the government is heavily involved in tons of other markets like housing. The EU has cheaper and better healthcare distribution with better regulation and without a single payer system.
Philippon makes an interesting argument that star tech companies aren't the pillar of the US economy thatchy would have us to believe. Tech companies are not too big to fail. He argues that tech company profit margins are on par with historical large companies. What is new about tech companies is that they have small imprints on the economy and smaller employment than previous big firms.
The irony of this whole book is that the EU has adopted the past winning strategies of the US while the US has abandoned them to higher concentration, monopolization and much less competitive markets. Free markets are very fragile, and they are the exception not the rule.
US wealth concentration is a failure of policy. Plain and simple. This book was on par with Dark Money, The Shock Doctrine, Break 'em Up.
Want to read
March 1, 2020WSJ review: https://www.wsj.com/articles/the-grea... (Paywalled. As always, I'm happy to email a copy to non-subscribers)
Excerpt: ‘The idea that US markets are the most competitive in the world has been widely accepted in economics for several decades,” economist Thomas Philippon writes in “The Great Reversal.” The thrust of his argument is that this idea is largely a myth. Even before the financial crash of 2007-08, he says, many Americans felt that there was something not right about the economy—that it wasn’t performing as advertised. . . . .
“Why on earth are US cell phone plans so expensive? . . . Why do consumers in Europe or in Asia pay less for cellular service and, on average, get much more?” He points to a 2017 study showing that American consumers could save as much as $65 billion a year if mobile rates were comparable with German ones. Another study from 2015 makes the same point about the cost of internet service, which in the U.S. is as much as 3½ times higher than it is in France. . . ."
Excerpt: ‘The idea that US markets are the most competitive in the world has been widely accepted in economics for several decades,” economist Thomas Philippon writes in “The Great Reversal.” The thrust of his argument is that this idea is largely a myth. Even before the financial crash of 2007-08, he says, many Americans felt that there was something not right about the economy—that it wasn’t performing as advertised. . . . .
“Why on earth are US cell phone plans so expensive? . . . Why do consumers in Europe or in Asia pay less for cellular service and, on average, get much more?” He points to a 2017 study showing that American consumers could save as much as $65 billion a year if mobile rates were comparable with German ones. Another study from 2015 makes the same point about the cost of internet service, which in the U.S. is as much as 3½ times higher than it is in France. . . ."
January 10, 2020
Philippon is an academic financial economist who actually looked at empirical data and spent about 300 hours researching and writing this book. It is not a book written based on ideology. He had spent equal amounts of time in his native France and America and was surprised when he looked at competition between the 2 regions. Europe used to have less competition, higher prices and lower growth. Those have been reversed since the 21st century.
1. There is more market concentration in America than Europe. This led to higher prices, poorer services, less investment, lower wages and higher return for owners.
2. He investigated the Chicago school’s Star hypothesis that big companies are more efficient and thus deserved their high prices. He found that to be untrue. Big companies just spend more on lobbying and stock buy backs and nothing much else.
3. Europe’s external competition regulators (The Brussels bureaucrats) are actually more independent from regulatory capture, because it’s hard to capture other countries’ Politicians. They are thus able to ask Google to pay back Ireland owed taxes, and to improve competition in airlines and broadband services.
4. Foreign competition is often used to justify mergers. He found the results to be mixed at best, meaning that bigger companies may not be able to compete well, just like smaller ones.
5. American financial and health care markets are actually less efficient than European ones.
6. Big firms now can charge Low prices (Amazon) because they have monopsonies. That is the power to charge suppliers and Labor by insisting on lower prices from those. That is the reason middle class income in America had dropped relative to Europe.
What to do?
1. Ensure free entry to markets.
2. Let regulators fail. Regulators are fallible human beings after all.
3. Protect privacy. Let users own their data and not big firms like Google and Facebook own it.
4. Ensure competition with anti-trust laws. Facebook should never had been allowed to buy WhatsApp and Instagram. At least those apps still exist. Sometimes Google would just buy ascending competitors and then kill the App.
One of the best economic books I have read.
1. There is more market concentration in America than Europe. This led to higher prices, poorer services, less investment, lower wages and higher return for owners.
2. He investigated the Chicago school’s Star hypothesis that big companies are more efficient and thus deserved their high prices. He found that to be untrue. Big companies just spend more on lobbying and stock buy backs and nothing much else.
3. Europe’s external competition regulators (The Brussels bureaucrats) are actually more independent from regulatory capture, because it’s hard to capture other countries’ Politicians. They are thus able to ask Google to pay back Ireland owed taxes, and to improve competition in airlines and broadband services.
4. Foreign competition is often used to justify mergers. He found the results to be mixed at best, meaning that bigger companies may not be able to compete well, just like smaller ones.
5. American financial and health care markets are actually less efficient than European ones.
6. Big firms now can charge Low prices (Amazon) because they have monopsonies. That is the power to charge suppliers and Labor by insisting on lower prices from those. That is the reason middle class income in America had dropped relative to Europe.
What to do?
1. Ensure free entry to markets.
2. Let regulators fail. Regulators are fallible human beings after all.
3. Protect privacy. Let users own their data and not big firms like Google and Facebook own it.
4. Ensure competition with anti-trust laws. Facebook should never had been allowed to buy WhatsApp and Instagram. At least those apps still exist. Sometimes Google would just buy ascending competitors and then kill the App.
One of the best economic books I have read.
November 19, 2019
I agreed with the thesis of this book before I read it, so I am clearly biased. The thesis is that competition in the USA has been declining in the USA since the late 1990s. There are too many mergers that increase pricing power and too many barriers to entry. As the author puts it, there is a measured increase in market concentration in many industries. This means that payouts to shareholders and managers is increasing while the consumer is not seeing the benefit through lower relative prices.
His high level take on finance is insightful. He claims that the cost of finance to consumers has not decreased despite all the technology thrown in its direction. No one is actually paying less for many of the services than they did in the past (i.e. borrowing money). Of course convenience banking (i.e. ATMs, online banking, etc.) becomes subjective in the analysis. Nonetheless, his point is that consumers are not getting the competition they had in the past. I feel personally along with Philipon that this has a lot to due with lack of antitrust enforcement. It seems that the government is looking for excuses to approve mergers rather than the other way around.
It is always refreshing to get a foreigners take on the USA, especially when they now live in the USA.
His high level take on finance is insightful. He claims that the cost of finance to consumers has not decreased despite all the technology thrown in its direction. No one is actually paying less for many of the services than they did in the past (i.e. borrowing money). Of course convenience banking (i.e. ATMs, online banking, etc.) becomes subjective in the analysis. Nonetheless, his point is that consumers are not getting the competition they had in the past. I feel personally along with Philipon that this has a lot to due with lack of antitrust enforcement. It seems that the government is looking for excuses to approve mergers rather than the other way around.
It is always refreshing to get a foreigners take on the USA, especially when they now live in the USA.
January 15, 2020
It turns out it takes a lot of work to keep markets free and competitive, and over the last twenty years Europe has been doing a better job in this regard than the US, as evidenced by lower prices on air travel and cellular service. Economist Philippon gets a little deep in the wonky weeds, but he shows why the US should be more aggressive on antitrust, reduce the power of lobbyists, remove barriers to market entry, and not be afraid to regulate the big internet companies.
December 15, 2019
This has been the year when the reading public was deemed ready to deal with the topic of market power. A wide variety of great books have come out, like Tim Wu’s treatise on Bigness, Uwe Reinhardt’s posthumous book on American health care, a full legal manual on antitrust by Jonathan Baker and of course the two books that hatched from Barry Lynn’s Open Market Institute: Rana Faroohar’s polemic against the FANGs, “Don’t be Evil” and Matt Stoller’s very readable and comprehensive history of 20th century American populism, the appropriately named “Goliath.”
It’s also been the year of tremendous popular Economics books like Shleifer and Gennaioli’s “Crisis of Beliefs,” Alesina, Favero and Giavazzi’s “Austerity” and blockbuster sequels from both Acemoglu & Robinson and the prolific Thomas Piketty.
Thomas Philippon trumps them all. He’s written the book of the year. The Great Reversal succeeds at so many levels, it’s impossible you will not find something to like about it.
It’s in five parts (even if they are labelled as four):
1. The Economics of market power in America
2. The European Experience of increasing competition
3. Corruption of the US political system as a potential explanation of market power
4. Industry examples in the US
5. What’s to be done
Comfortably the best, and worth buying the book for, is the first part, which is itself split into five chapters.
In the first chapter Philippon explains that the essence of capitalism is competition. Competition for resources allows us to discover prices (p.22) and prices drive the allocation of resources. Free competition allows new companies to enter a profitable field and allows us employees to quit our jobs and go work for a competitor of our employer. Philippon quotes my favorite author, Mancur Olson, here, to ominously add that spontaneous defense of competition is unlikely, because the interests who stand to lose from competition are far more concentrated than all of us are, who stand to benefit.
In the second chapter he defines the opposite of competition, market power. He tells us where to look for it (high concentration, high profits and high prices are the tell-tales) and lays out the economic ills it entails:
1. inequality, as consumer surplus becomes economic rent that accrues to the much more concentrated managers and owners of corporations
2. dead weight losses, shown on a chart, amounting to profits neither the producers nor the consumers make when oligopoly leads to cuts in production relative to output under competition
Philippon also explains what’s good about market power: super-efficient producers like Walmart can often channel profits into even more efficient production, from which we all benefit.
In the third chapter he establishes that over the past two decades market power has soared in the US. He does the math first, to account for all sorts of issues, including that
1. some markets are local, some national and some international
2. efficiency in some industries has increased due to the concentration among market leaders
3. we enjoy more free goods than we used to
4. there was no escaping domestic consolidation in industries facing foreign competition
and still arrives at the inescapable conclusion that the US is much less of a free market than it used to be. There are fewer companies than before, profits have soared as a percent of GDP, and companies make much bigger distributions to their owners as a percent of the assets they control.
In the fourth chapter he lists the evidence regarding the decline in corporate American investment and productivity: relative to what went before, the past two decades have seen unmistakable overall declines in net investment as a part of corporate profits, and even larger declines for high concentration industries. The decline also holds for investment in intangible assets such as patents.
The conclusion is clear: yes, we cannot a priori know if market power will lead to more or less investment. Sensible arguments can be made both ways. The evidence, however, is of (i) significantly higher concentration having gone hand-in-hand with (ii) significantly higher payouts to the owners of capital and (iii) significantly lower investment. That’s the way it’s gone, period. And that’s bad for long-term growth.
The fifth chapter about America shows a potential source for this lack of dynamism over the past two decades: any way you care to measure things, there’s fewer young firms in the US. Additionally, the number of IPOs is a shadow of its former self and there’s fewer listed companies as well, with mergers among existing companies running at twice the levels experienced today than when Michael Douglas starred in Wall Street. What’s stopping free entry? The author argues that increased regulation probably has a lot to answer for.
Next, Philippon moves on to Europe, which, remarkably, has travelled in the opposite direction! First, he shows conclusively that Europe has not suffered from the same increases in profit margins, rises in industry concentration or fall in the labor share of income as the US. Next, he shows that prices have risen a lot slower in Europe than in the US over the past two decades, with at most half of the difference being potentially attributable to differences in income growth.
From there, the author hazards an explanation: clearly, the competition authorities in Europe have more teeth than their US counterparts; perhaps that is because it’s more important to Germany, for example, that they be independent from French influence, than it is that they accommodate occasional German interests. So Europe has had more success running the American model than America itself. And then again, Philippon argues, maybe we need to wait a bit longer and regulatory capture will also make it to the East coast of the Atlantic. But for now, it resolutely hasn’t and the benefits are there for all to see.
The next part of the book, regarding lobbying, money and politics in the US was, quite simply, sickening. The math is laid out and (astonishingly clever!) research is listed that proves beyond a shadow of a doubt that lobbying (i) is targeted very well and (ii) bears results. The numbers actually are not enormous, but a very strong argument is made that money spent to buy influence is an “endogenous” variable, and thus impossible to measure correctly. This observation apart, however, there’s nothing Philippon notes that you cannot read elsewhere. Regardless, many people will read here first that the prime occupation of a US representative is to raise money. Not good.
Chapters follow on how these findings relate to Banking, Healthcare and the FANGS. I found all three rather facile and not to the standard of the rest of the book. The observations made are of the kind you’d make from 10,000ft: finance still takes the same vig out of the economy as it did a century ago; US healthcare delivers poor results for money that is not explainable by observing that the US is a rich country that should consume more of high-end stuff (like healthcare) and the FANGS are no bigger a part of the S&P 500 than GM once was but are less well-integrated in the economy because they hardly employ anybody. Yawn. And the connections are not made to the front of the book.
Next comes a chapter about the monopsony power our employers exercise on us when there’s so few of them left and this leads to the conclusions.
The book does get the strong closing chapter it deserves. The author first expresses his astonishment at the fact that free markets have turned out to be rather fragile. The idea that they were inevitable seems to be at odds with the facts, basically. Next, he puts a number on how much money we’ve all lost due to the rise of market power. (Buy the book and read it, it’s on page 293)
Philippon closes with three recommendations:
1. we must fight for free entry: we must protect new entrants from incumbents, and we must be very afraid of incumbents who remain perennially profitable
2. if the government is never guilty of over-regulating, then it’s not regulating enough
3. protect transparency, privacy and data ownership
amen
It’s also been the year of tremendous popular Economics books like Shleifer and Gennaioli’s “Crisis of Beliefs,” Alesina, Favero and Giavazzi’s “Austerity” and blockbuster sequels from both Acemoglu & Robinson and the prolific Thomas Piketty.
Thomas Philippon trumps them all. He’s written the book of the year. The Great Reversal succeeds at so many levels, it’s impossible you will not find something to like about it.
It’s in five parts (even if they are labelled as four):
1. The Economics of market power in America
2. The European Experience of increasing competition
3. Corruption of the US political system as a potential explanation of market power
4. Industry examples in the US
5. What’s to be done
Comfortably the best, and worth buying the book for, is the first part, which is itself split into five chapters.
In the first chapter Philippon explains that the essence of capitalism is competition. Competition for resources allows us to discover prices (p.22) and prices drive the allocation of resources. Free competition allows new companies to enter a profitable field and allows us employees to quit our jobs and go work for a competitor of our employer. Philippon quotes my favorite author, Mancur Olson, here, to ominously add that spontaneous defense of competition is unlikely, because the interests who stand to lose from competition are far more concentrated than all of us are, who stand to benefit.
In the second chapter he defines the opposite of competition, market power. He tells us where to look for it (high concentration, high profits and high prices are the tell-tales) and lays out the economic ills it entails:
1. inequality, as consumer surplus becomes economic rent that accrues to the much more concentrated managers and owners of corporations
2. dead weight losses, shown on a chart, amounting to profits neither the producers nor the consumers make when oligopoly leads to cuts in production relative to output under competition
Philippon also explains what’s good about market power: super-efficient producers like Walmart can often channel profits into even more efficient production, from which we all benefit.
In the third chapter he establishes that over the past two decades market power has soared in the US. He does the math first, to account for all sorts of issues, including that
1. some markets are local, some national and some international
2. efficiency in some industries has increased due to the concentration among market leaders
3. we enjoy more free goods than we used to
4. there was no escaping domestic consolidation in industries facing foreign competition
and still arrives at the inescapable conclusion that the US is much less of a free market than it used to be. There are fewer companies than before, profits have soared as a percent of GDP, and companies make much bigger distributions to their owners as a percent of the assets they control.
In the fourth chapter he lists the evidence regarding the decline in corporate American investment and productivity: relative to what went before, the past two decades have seen unmistakable overall declines in net investment as a part of corporate profits, and even larger declines for high concentration industries. The decline also holds for investment in intangible assets such as patents.
The conclusion is clear: yes, we cannot a priori know if market power will lead to more or less investment. Sensible arguments can be made both ways. The evidence, however, is of (i) significantly higher concentration having gone hand-in-hand with (ii) significantly higher payouts to the owners of capital and (iii) significantly lower investment. That’s the way it’s gone, period. And that’s bad for long-term growth.
The fifth chapter about America shows a potential source for this lack of dynamism over the past two decades: any way you care to measure things, there’s fewer young firms in the US. Additionally, the number of IPOs is a shadow of its former self and there’s fewer listed companies as well, with mergers among existing companies running at twice the levels experienced today than when Michael Douglas starred in Wall Street. What’s stopping free entry? The author argues that increased regulation probably has a lot to answer for.
Next, Philippon moves on to Europe, which, remarkably, has travelled in the opposite direction! First, he shows conclusively that Europe has not suffered from the same increases in profit margins, rises in industry concentration or fall in the labor share of income as the US. Next, he shows that prices have risen a lot slower in Europe than in the US over the past two decades, with at most half of the difference being potentially attributable to differences in income growth.
From there, the author hazards an explanation: clearly, the competition authorities in Europe have more teeth than their US counterparts; perhaps that is because it’s more important to Germany, for example, that they be independent from French influence, than it is that they accommodate occasional German interests. So Europe has had more success running the American model than America itself. And then again, Philippon argues, maybe we need to wait a bit longer and regulatory capture will also make it to the East coast of the Atlantic. But for now, it resolutely hasn’t and the benefits are there for all to see.
The next part of the book, regarding lobbying, money and politics in the US was, quite simply, sickening. The math is laid out and (astonishingly clever!) research is listed that proves beyond a shadow of a doubt that lobbying (i) is targeted very well and (ii) bears results. The numbers actually are not enormous, but a very strong argument is made that money spent to buy influence is an “endogenous” variable, and thus impossible to measure correctly. This observation apart, however, there’s nothing Philippon notes that you cannot read elsewhere. Regardless, many people will read here first that the prime occupation of a US representative is to raise money. Not good.
Chapters follow on how these findings relate to Banking, Healthcare and the FANGS. I found all three rather facile and not to the standard of the rest of the book. The observations made are of the kind you’d make from 10,000ft: finance still takes the same vig out of the economy as it did a century ago; US healthcare delivers poor results for money that is not explainable by observing that the US is a rich country that should consume more of high-end stuff (like healthcare) and the FANGS are no bigger a part of the S&P 500 than GM once was but are less well-integrated in the economy because they hardly employ anybody. Yawn. And the connections are not made to the front of the book.
Next comes a chapter about the monopsony power our employers exercise on us when there’s so few of them left and this leads to the conclusions.
The book does get the strong closing chapter it deserves. The author first expresses his astonishment at the fact that free markets have turned out to be rather fragile. The idea that they were inevitable seems to be at odds with the facts, basically. Next, he puts a number on how much money we’ve all lost due to the rise of market power. (Buy the book and read it, it’s on page 293)
Philippon closes with three recommendations:
1. we must fight for free entry: we must protect new entrants from incumbents, and we must be very afraid of incumbents who remain perennially profitable
2. if the government is never guilty of over-regulating, then it’s not regulating enough
3. protect transparency, privacy and data ownership
amen
December 11, 2019
The thesis is interesting--the US has become less competitive over the past 20 or so years while the EU has become more competitive. My anecdata suggests this is true.
The majority of the book is a theoretical analysis, with a lot of data. Philippon does as good a job as you can do with this; he explains economics clearly for the layperson. It makes a lot of the book a little dry, though; the more narrative sections, such as the discussion of EU politics and how the EU has developed a more independent competition regulator, have more verve. The last third looks at specific industries, which helps put the principle into practice.
I would have enjoyed more narrative and more details of specific examples, such as concentration in the airline industry, but I learned a lot.
The majority of the book is a theoretical analysis, with a lot of data. Philippon does as good a job as you can do with this; he explains economics clearly for the layperson. It makes a lot of the book a little dry, though; the more narrative sections, such as the discussion of EU politics and how the EU has developed a more independent competition regulator, have more verve. The last third looks at specific industries, which helps put the principle into practice.
I would have enjoyed more narrative and more details of specific examples, such as concentration in the airline industry, but I learned a lot.
December 31, 2022
I read a book like this several years ago called Saving Capitalism by Rob Reich—that book and this book are both written by people who are functionally socialists, so the titles are a bit misleading—but at the time, Reich’s book was sort of revolutionary for me. It was the first time I learned properly about the ways capitalism militates against democracy, and it shaped a lot of the ways I taught modern US history: Reagan and Clinton eras, campaign finance, 2008 crisis etc.
This book is probably better than that one. While Reich is a political economist, and his analysis of policy does sometimes veer into polemics, Philippon is a financial economist who ground everything in data. Our economy, and by extension our political system, is controlled by a handful of monopolies whose unchecked power has made us all poorer, sicker, and less innovative. It useful to have that laid out here in plain sight, in language and charts we can all understand and explain to our “fiscally conservative” cousins over dinner.
This book is probably better than that one. While Reich is a political economist, and his analysis of policy does sometimes veer into polemics, Philippon is a financial economist who ground everything in data. Our economy, and by extension our political system, is controlled by a handful of monopolies whose unchecked power has made us all poorer, sicker, and less innovative. It useful to have that laid out here in plain sight, in language and charts we can all understand and explain to our “fiscally conservative” cousins over dinner.
December 22, 2019
When Thomas Philippon first arrived in America, he noted how much cheaper things like flights and phone connections were than in Europe. But now, he says, the situation is reversed. The Great Reversal is about how competition in America has declined, or at least is not as stiff as it should be. He explores the various causes of this phenomenon, including swampish lobbying, lacklustre enforcement of antitrust rules, and uncompetitive practices from big incumbents. As a Brit arriving in America it felt nice having something to blame for some relatively high prices I saw. And it built on priors built up by reading The Economist's Hour by Binyamin Applebaum and The Chickenshit Club by Jesse Eisinger. The book will obviously not be the last word on the topic, which is unsettled. But it lays out clearly and powerfully the case to be concerned.
September 26, 2020
A thorough analysis of the US and EU economies over the last 2 decades. He presents LOTS of compelling data to show how many US markets have concentrated in the absence of antitrust enforcement, to the detriment of consumers compared to the EU. He covers a lot of angles, including concentration, profit, productivity, entry of new firms, M&A, and corporate lobbying & campaign financing. The first 3 sections of the book are very high level analyses of the different economic factors, and the last section applies a lot of this analysis with deep dives on specific sectors, and I'm grateful for those or else the book feels a tad abstract. Overall I think he made a solid argument, and made me a stronger believer in antitrust.
July 16, 2022
This book could be code named something like ECON 605
Narrated like a professor and written like an economist, Thomas Philippon presents a controversial, and somewhat counter-intuitive, argument in this book. He posits that the markets in the US are becoming increasingly concentrated and presents a lot of data to back that up. He also compares the US with Europe, and claims that the competitive scene in Europe is improving thanks to their better policies and regulatory environment (e.g. GDPR). The best parts of the book are towards the end, where the author double clicks on specific industries in the US: banking, healthcare, and internet companies.
A couple of striking facts that I encountered in this book-
First, despite the $ trillion valuations for today's star companies (Apple, Alphabet, Microsoft, etc) their share of market value in the overall economy is much smaller compared to their historical counterparts (for instance, AT&T held ~7% of total market in 1950/60s whereas Apple only holds ~3% in 2010s).
Second, the amount of money spent by corporations and institutions on lobbying and campaign financing to drive their self interests is mind boggling. Today's US politicians must be living a life of their dreams with all that money thrown around!
Narrated like a professor and written like an economist, Thomas Philippon presents a controversial, and somewhat counter-intuitive, argument in this book. He posits that the markets in the US are becoming increasingly concentrated and presents a lot of data to back that up. He also compares the US with Europe, and claims that the competitive scene in Europe is improving thanks to their better policies and regulatory environment (e.g. GDPR). The best parts of the book are towards the end, where the author double clicks on specific industries in the US: banking, healthcare, and internet companies.
A couple of striking facts that I encountered in this book-
First, despite the $ trillion valuations for today's star companies (Apple, Alphabet, Microsoft, etc) their share of market value in the overall economy is much smaller compared to their historical counterparts (for instance, AT&T held ~7% of total market in 1950/60s whereas Apple only holds ~3% in 2010s).
Second, the amount of money spent by corporations and institutions on lobbying and campaign financing to drive their self interests is mind boggling. Today's US politicians must be living a life of their dreams with all that money thrown around!
July 18, 2020
Not exactly pleasure reading, but just the same this macroeconomic argues that the US has become laggard to the European model. In the last twenty years US has become less competitive resulting in higher costs to its people. Example-Average monthly cell service is $65 in US. The same service in Germany/ France is $35....
US medical services are very expensive, and the quality compares unfavorably to most of Europe/ Japan / New Zealand / Australia. US life expectancy is among the lowest in the advanced world.
The author claims to be optimistic for the US, as long as we initiate changes.
The book is well written, but does have the feel of a text book, or required reading for college.
US medical services are very expensive, and the quality compares unfavorably to most of Europe/ Japan / New Zealand / Australia. US life expectancy is among the lowest in the advanced world.
The author claims to be optimistic for the US, as long as we initiate changes.
The book is well written, but does have the feel of a text book, or required reading for college.
December 8, 2019
Noi Europei (e specialmente noi Italiani) non ci rendiamo conto che, pur con tutti i suoi limiti e le tante cose da completare e modificare, l'Unione Europea è quanto di meglio lo sviluppo sociale ed economico è riuscito a produrre. Non saremo così competitivi come gli USA dal punto di vista tecnologico e militare, ma l'anima e il sogno Europeo sono straordinari elementi di speranza.
Lavoriamo per rafforzarla e completarla.
Lavoriamo per rafforzarla e completarla.
July 11, 2022
Bad book summaries: For the US to not fall away like the Roman empire, it needs to free its legislators from the grip of lobbyists and give importance to data protection.
From the chapter on the internet giants: “the stars of today are not making much more than the stars of the past. They just keep more of it.”
“The defining feature of the new stars is not how much money they make or how high their stock market values are. If we exclude Amazon, the defining feature of the new stars is how few people they employ and how little they buy from other firms.”
And finally I enjoyed this diss at the expense of UK:
“All countries have their irrational sides. France believes its social model is the envy of the world. The UK believes it has a special relationship with the US.”
From the chapter on the internet giants: “the stars of today are not making much more than the stars of the past. They just keep more of it.”
“The defining feature of the new stars is not how much money they make or how high their stock market values are. If we exclude Amazon, the defining feature of the new stars is how few people they employ and how little they buy from other firms.”
And finally I enjoyed this diss at the expense of UK:
“All countries have their irrational sides. France believes its social model is the envy of the world. The UK believes it has a special relationship with the US.”
January 28, 2020
The approach Philippon uses in this book is really to be commended: he sets out clearly that he doesn't have all the answers and states his priors (he is an economist who believes markets are usually good solutions to provide welfare, albeit with a strong government as regulator), and takes you on his quest for answers to a couple of straightforward questions: how come phone and internet subscriptions are so expensive in the US? What could be the reason for market concentration in the US? How come the EU is better than the US in enforcing competition rules? Great reading.
August 17, 2022
Dense, even for a total economics nerd like myself. Reads like a cross between a literature review and a textbook.
April 7, 2023
I really enjoyed this book. Not only did it present data and analysis which were new to me, but it also provided insights into many of the key issues, their causes, and how to address them.
June 25, 2020
I would give this 5 stars as it is very well written and incredibly insightful, but I'm not familiar enough with the literature to check most of his claims.
July 13, 2020
This book argues that American markets have become increasingly concentrated over the last 20 years due chiefly to the rise in lobbying and the resulting skewing of the playing field in terms of lax M&A enforcement and increases in costly market entry-related regulations.
The book begins by pointing out how many of our daily tasks are done via services/products from dominant companies. It also points out some well-known stats about profits in key industries in the US vs. abroad (e.g., airlines in the US make about $22 in profit per passenger, as opposed to about $8 in Europe).
Chapter 1 tracks stats on the rise in concentration.
It starts with grappling with why we've had slow GDP growth over last couple decades. An interesting stat that GDP per capita in the US has been only about 0.6 per annum since 2010, and 0.8 per annum from 2000-2010. (This shows how bad of an idea it is to cut back on immigration. Without more laborers, that's glacial growth in post-Industrial Revolution terms. We could also try to increase the labor force participation rate, but that's a thicker task than keeping laborer numbers high.) Also flags how we basically haven't done a better job educating the population over the last twenty years--still 10% don't graduate from HS, and 50% don't complete a college or associates degree. Then highlights how total factor productivity (TFP) has slowed down ~across all advanced economies~ since 2000, suggesting we may be at the limits of our current tech (or haven't yet figured out how to use it better). And then he shows some leg on the fact that corporate R&D and capital investment is down across the US.
He then turns to inequality. Taught me something--college and post-grad wage premia boomed in the 80s and 90s, but have been basically flat for 20 years. Why? As documented above, it's not as though more folks are getting educations in 2019 than in 1999. He then turns to the inequality as reflected by wealth of super-rich, but I'm now doubtful of a lot of that Saez/Zucman/Piketty wealth stuff given recent findings of how bad their results are.
How about actual standard of living? This often gets overlooked, but it is fair to say that real annual incomes of those without HS degrees or only some college has basically stayed flat over 40 years. Then again, I bet the PPP-adjusted living standard has increased. And real income doesn't include social welfare spending. I continue to believe that the inequality argument is better cast as fairly dividing a pie AND fostering equality of opportunity. It's not really a material deprivation argument.
He then turns to competition directly. Begins by rather blandly surveying the basic arguments for why competition is better (lower prices, better quality, more business investment developing new and better products/services). Does include an interesting proposal that the best way to deal with global trade impacts on certain industries (e.g., localized job losses from trade with China) probably isn't TAA assistance or stuff that hasn't ever worked, but instead a more progressive tax system. I agree there, probably.
Chapter 2 looks at whether concentration is always bad and concludes that's too simple.
To get everyone situated, he first makes the point that the sheer level of concentration in an industry isn't a reliable indicator of whether it's a problem industry. He contrasts easy cases like deregulation of AT&T or the French cell phone markets--gov't broke up big monopolists/oligopolists, and consumers got better, cheaper services. He contrasts those with a case like Walmart, where actually it seems like it's made everyone better off as a whole even though it killed lots of mom&pop stores (he estimates that Walmart led to a ~30%~ drop in average US consumer retail costs!). From all this, he fairly concedes that just looking at the concentration number (HHI number) isn't nearly enough to figure out if the level of concentration in an industry is a problem. (Also, natural monopolies wouldn't become better for consumers necessarily if they were broken up.). He also points out that often what matters for measuring concentration is ~local~ markets, and it can be devilishly hard to measure local concentration well.
Interesting bit on Amazon. Amazon ~hasn't~ really reduced prices on most goods like Walmart did. Instead, Amazon has improved the shopping experienced tremendously and cut out the need to go to stores. Philippon wisely points out that, in this sense, Amazon has been a boon to middle/upper-middle/rich people whose "time is money" in a way that going to Nike for a pair of shoes isn't worth it. Whereas Walmart helps the working class and poor more by simply offering Nikes for less than anywhere else. Philippon also points out that Amazon has a low profit margin and invests a lot. So, at the moment, can't say Amazon is bad for markets or consumers. But we need to keep an eye on them.
Chapter 3 deals with the rise in market power by big firms. Begins by documenting that the market share of the top 50 US firms in most industries started going up a bunch in the late 1990s. He then tees up the key debate: is concentration increasing in the US because (a) companies are gaming the system; or (b) some superstar firms are getting incredibly good and through sheer efficiency they're crowding out the competition? Here, Philippon is in a major battle with Autor et al.
First he points out that there's now less churn at the top of markets as of late 1990s. This doesn't really tilt either way as between Philippon and Autor. He also points out that profit margins and share buy-backs have been on the rise since around the same time. That helps undercut notion that globalization is leading to fewer, better firms that are desperately struggling to fend off the Chinese. But it doesn't clearly cut in favor of Philippon or Autor.
Chapter 4 turns to stats about (a) investment rates and (b) firm productivity to try to tease out who's right, Autor or Philippon. He first points out that top firms invest a lot less than they used to, as of 2000. He also points out that the decline in investment is especially pronounced in the most concentrated industries. I agree this cuts in his favor, though I wonder if IT-based co's like Fbook can become super productive without many investment costs/needs. He presents some tentative evidence suggesting this can't be the whole explanation, though, because over the last 20 years intangible asset investment has slowed somewhat. *But it's still probably PART of the explanation, and in any event slowing investment doesn't get around idea that the Google search engine needn't require much updating to remain market dominant* He then looks to productivity and finds that the more concentrated an industry is, the less productivity growth it sees.
Overall--I think the truth is somewhere in the middle of Philippon and Autor. I think the evidence from this book and more recent detailed Autor research suggests dominant firms are using non-productivity levers to get more power, though the dominant firms are also more productive than the non-dominant firms. this overall still calls for more antitrust regulation since the reason firms are concentrating isn't just the sheer productivity of the dominant firms.
Philippon then turns to WHY concentration has increased, since the story isn't purely that very productive firms are crowding out less productive firms. Philippon estimates the cost of concentration is about 8% of consumer spending. That's a lot, even if the truth is still like 3-4%. Anyway, Philippon thinks the reason we have so much concentration is an increase in policy lobbying and political campaign donations. I'm not sure I'm totally convinced but he is surely right that this is part of it.
He then looks at a bunch of particular industries. Thinks sheerly high prices due to hospital network local oligopoly is a big underrated part of high US health care costs.
The book begins by pointing out how many of our daily tasks are done via services/products from dominant companies. It also points out some well-known stats about profits in key industries in the US vs. abroad (e.g., airlines in the US make about $22 in profit per passenger, as opposed to about $8 in Europe).
Chapter 1 tracks stats on the rise in concentration.
It starts with grappling with why we've had slow GDP growth over last couple decades. An interesting stat that GDP per capita in the US has been only about 0.6 per annum since 2010, and 0.8 per annum from 2000-2010. (This shows how bad of an idea it is to cut back on immigration. Without more laborers, that's glacial growth in post-Industrial Revolution terms. We could also try to increase the labor force participation rate, but that's a thicker task than keeping laborer numbers high.) Also flags how we basically haven't done a better job educating the population over the last twenty years--still 10% don't graduate from HS, and 50% don't complete a college or associates degree. Then highlights how total factor productivity (TFP) has slowed down ~across all advanced economies~ since 2000, suggesting we may be at the limits of our current tech (or haven't yet figured out how to use it better). And then he shows some leg on the fact that corporate R&D and capital investment is down across the US.
He then turns to inequality. Taught me something--college and post-grad wage premia boomed in the 80s and 90s, but have been basically flat for 20 years. Why? As documented above, it's not as though more folks are getting educations in 2019 than in 1999. He then turns to the inequality as reflected by wealth of super-rich, but I'm now doubtful of a lot of that Saez/Zucman/Piketty wealth stuff given recent findings of how bad their results are.
How about actual standard of living? This often gets overlooked, but it is fair to say that real annual incomes of those without HS degrees or only some college has basically stayed flat over 40 years. Then again, I bet the PPP-adjusted living standard has increased. And real income doesn't include social welfare spending. I continue to believe that the inequality argument is better cast as fairly dividing a pie AND fostering equality of opportunity. It's not really a material deprivation argument.
He then turns to competition directly. Begins by rather blandly surveying the basic arguments for why competition is better (lower prices, better quality, more business investment developing new and better products/services). Does include an interesting proposal that the best way to deal with global trade impacts on certain industries (e.g., localized job losses from trade with China) probably isn't TAA assistance or stuff that hasn't ever worked, but instead a more progressive tax system. I agree there, probably.
Chapter 2 looks at whether concentration is always bad and concludes that's too simple.
To get everyone situated, he first makes the point that the sheer level of concentration in an industry isn't a reliable indicator of whether it's a problem industry. He contrasts easy cases like deregulation of AT&T or the French cell phone markets--gov't broke up big monopolists/oligopolists, and consumers got better, cheaper services. He contrasts those with a case like Walmart, where actually it seems like it's made everyone better off as a whole even though it killed lots of mom&pop stores (he estimates that Walmart led to a ~30%~ drop in average US consumer retail costs!). From all this, he fairly concedes that just looking at the concentration number (HHI number) isn't nearly enough to figure out if the level of concentration in an industry is a problem. (Also, natural monopolies wouldn't become better for consumers necessarily if they were broken up.). He also points out that often what matters for measuring concentration is ~local~ markets, and it can be devilishly hard to measure local concentration well.
Interesting bit on Amazon. Amazon ~hasn't~ really reduced prices on most goods like Walmart did. Instead, Amazon has improved the shopping experienced tremendously and cut out the need to go to stores. Philippon wisely points out that, in this sense, Amazon has been a boon to middle/upper-middle/rich people whose "time is money" in a way that going to Nike for a pair of shoes isn't worth it. Whereas Walmart helps the working class and poor more by simply offering Nikes for less than anywhere else. Philippon also points out that Amazon has a low profit margin and invests a lot. So, at the moment, can't say Amazon is bad for markets or consumers. But we need to keep an eye on them.
Chapter 3 deals with the rise in market power by big firms. Begins by documenting that the market share of the top 50 US firms in most industries started going up a bunch in the late 1990s. He then tees up the key debate: is concentration increasing in the US because (a) companies are gaming the system; or (b) some superstar firms are getting incredibly good and through sheer efficiency they're crowding out the competition? Here, Philippon is in a major battle with Autor et al.
First he points out that there's now less churn at the top of markets as of late 1990s. This doesn't really tilt either way as between Philippon and Autor. He also points out that profit margins and share buy-backs have been on the rise since around the same time. That helps undercut notion that globalization is leading to fewer, better firms that are desperately struggling to fend off the Chinese. But it doesn't clearly cut in favor of Philippon or Autor.
Chapter 4 turns to stats about (a) investment rates and (b) firm productivity to try to tease out who's right, Autor or Philippon. He first points out that top firms invest a lot less than they used to, as of 2000. He also points out that the decline in investment is especially pronounced in the most concentrated industries. I agree this cuts in his favor, though I wonder if IT-based co's like Fbook can become super productive without many investment costs/needs. He presents some tentative evidence suggesting this can't be the whole explanation, though, because over the last 20 years intangible asset investment has slowed somewhat. *But it's still probably PART of the explanation, and in any event slowing investment doesn't get around idea that the Google search engine needn't require much updating to remain market dominant* He then looks to productivity and finds that the more concentrated an industry is, the less productivity growth it sees.
Overall--I think the truth is somewhere in the middle of Philippon and Autor. I think the evidence from this book and more recent detailed Autor research suggests dominant firms are using non-productivity levers to get more power, though the dominant firms are also more productive than the non-dominant firms. this overall still calls for more antitrust regulation since the reason firms are concentrating isn't just the sheer productivity of the dominant firms.
Philippon then turns to WHY concentration has increased, since the story isn't purely that very productive firms are crowding out less productive firms. Philippon estimates the cost of concentration is about 8% of consumer spending. That's a lot, even if the truth is still like 3-4%. Anyway, Philippon thinks the reason we have so much concentration is an increase in policy lobbying and political campaign donations. I'm not sure I'm totally convinced but he is surely right that this is part of it.
He then looks at a bunch of particular industries. Thinks sheerly high prices due to hospital network local oligopoly is a big underrated part of high US health care costs.
April 27, 2020
I thoroughly enjoyed The Great Reversal by Thomas Philippon. This book is a must read for everyone wondering why their wages are stagnant, why the cost of living is astronomical, why healthcare is such a mess and so forth. The book offers great data and deep economic theories for those that love data. However, if you're not a fan of reading data (or like me, can't really make sense of it) then don't worry. Thomas leaves a ton of meat to let your mind chew on while you read the book.
I thought my beef with Capitalism was that it was such a failure to the American way of life. However, I gained insight to my perspective while reading this novel. I discovered that my issues with Capitalism is not capitalism in itself BUT monopoly, lobbyist and monopsony (As a Poli-Sci major, we only ever focused on monopoly). This novel really helped me understand the dynamics of these relationships with policy making decisions.
Also, typically conclusions in social science books leave me underwhelmed. However, Thomas does a fantastic job of offering policy solutions that would increase competition in America and improve our overall system.
I thought my beef with Capitalism was that it was such a failure to the American way of life. However, I gained insight to my perspective while reading this novel. I discovered that my issues with Capitalism is not capitalism in itself BUT monopoly, lobbyist and monopsony (As a Poli-Sci major, we only ever focused on monopoly). This novel really helped me understand the dynamics of these relationships with policy making decisions.
Also, typically conclusions in social science books leave me underwhelmed. However, Thomas does a fantastic job of offering policy solutions that would increase competition in America and improve our overall system.
January 11, 2020
This is a thought provoking book on the state of market competition in USA and Europe. Contrary to conventional wisdom, Europe has now more competitive markets than U.S. as a result, European consumers enjoy lower internet prices and air fare and better heath services, among other things. Thomas Philippon traces the roots of this surprising development. The main culprits are lax anti trust policies and lobbying. The book is written in a relaxed fashion, providing facts without being preachy. I recommend it highly.
May 25, 2023
Thomas Philippon’s Great Reversal details the rising market concentration and attendant higher prices in the United States economy. Unlike Europe, Philippon argues, US regulators deferred to corporate interests from the 1970s onward, resulting in inefficient outcomes across the economy from airlines to telecommunications. At the same time that I was reading The Great Reversal, I was also booking expensive flights for summer, so I couldn’t help but sympathize with the book.
Last year’s debate topic was antitrust reform, and I was accordingly familiar with most of the discussions present in the book, but Philippon persuasively and clearly presents the case for a renewed antitrust and regulatory approach.
I appreciated the uncertainty that Philippon conveys in his argument. He forcefully argues his position, but he goes to great pains to rule out every possible alternative explanation.
In fact, he spends the first 100 pages of his book trying to establish the basic fact that market concentration is increasing which feels tedious at points, albeit necessary. If that descriptive claim takes 100 pages of analysis, imagine how long it takes to justify a certain antitrust proposal. It really is mind boggling how much disagreement there is in antitrust economics, from the descriptive to the normative.
But I did appreciate this humble approach, and the book acknowledges when its argument is based on more certain evidence or more flimsy data. It was refreshing to see a book that communicated the authors’ confidence levels.
The day I finished the book, I was unrelatedly in Larry Katz’ office hours to discuss labor markets, and Katz brough up The Great Reversal when discussing monopsony. We started discussing the book in greater depth, and he started to say that the concentration data Philippon uses is incorrect and that concentration is rising just as much in Europe.
I wanted to ask more questions, but my 15-minute block of time ran out, so I am now left in a somewhat uncertain state about the fundamental claim of the book. And that’s the problem with reading one book on a topic. You either wrongly feel like an expert or you feel more lost than when you started.
Last year’s debate topic was antitrust reform, and I was accordingly familiar with most of the discussions present in the book, but Philippon persuasively and clearly presents the case for a renewed antitrust and regulatory approach.
I appreciated the uncertainty that Philippon conveys in his argument. He forcefully argues his position, but he goes to great pains to rule out every possible alternative explanation.
In fact, he spends the first 100 pages of his book trying to establish the basic fact that market concentration is increasing which feels tedious at points, albeit necessary. If that descriptive claim takes 100 pages of analysis, imagine how long it takes to justify a certain antitrust proposal. It really is mind boggling how much disagreement there is in antitrust economics, from the descriptive to the normative.
But I did appreciate this humble approach, and the book acknowledges when its argument is based on more certain evidence or more flimsy data. It was refreshing to see a book that communicated the authors’ confidence levels.
The day I finished the book, I was unrelatedly in Larry Katz’ office hours to discuss labor markets, and Katz brough up The Great Reversal when discussing monopsony. We started discussing the book in greater depth, and he started to say that the concentration data Philippon uses is incorrect and that concentration is rising just as much in Europe.
I wanted to ask more questions, but my 15-minute block of time ran out, so I am now left in a somewhat uncertain state about the fundamental claim of the book. And that’s the problem with reading one book on a topic. You either wrongly feel like an expert or you feel more lost than when you started.
July 9, 2020
A hugely important book. Philippon is a leading academic studying industrial structures and their economic implications. His findings for the US are sobering. Whereas the US was formerly a global leader in promoting free markets, there has been a sea change since around 1995.
—Industries now have fewer companies, leading to monopoly power for those that remain;
—Monopoly power results in higher prices (costly medical bills, higher cable fees, steep mobile phone plan costs);
—Higher prices boost company profits and benefit shareholders;
—But higher prices and profits are at the expense of wage earners, with their share of total income squeezed;
—Despite high profits, companies are investing less than in the past, leading to lower productivity and growth;
—This situation has come about because of a hands-off approach by state and federal regulators compared to the pre-1995 period;
—Regulators have backed off, in many cases, because of lobbying in the political system by the powerful companies.
Phillipon contrasts the above situation with that in Europe. Ironically, while Europe had a reputation for excessive state support for its industries, things have changed radically for the better. The EU has a pro-competition regulatory system that is much more independent of politics than that in the US. As a result of market liberalization and regulatory pressure, markets are now much more competitive in Europe than in the US. For example, drug prices are much lower, mobile plans and internet subscriptions are much cheaper, domestic air flights are more affordable, etc.
The book is very convincing that the US needs to rethink its approach to domestic market competition. However, those currently benefiting will fight hard to resist—whether it be drug companies, hospital chains, banks, or the internet giants (Google, Amazon, Facebook, etc.). The book has few specific recommendations, which is fair, given that change requires a new approach across a whole spectrum of policies. Hopefully, having made a convincing case, this will set the agenda for policy reforms in the coming decades.
—Industries now have fewer companies, leading to monopoly power for those that remain;
—Monopoly power results in higher prices (costly medical bills, higher cable fees, steep mobile phone plan costs);
—Higher prices boost company profits and benefit shareholders;
—But higher prices and profits are at the expense of wage earners, with their share of total income squeezed;
—Despite high profits, companies are investing less than in the past, leading to lower productivity and growth;
—This situation has come about because of a hands-off approach by state and federal regulators compared to the pre-1995 period;
—Regulators have backed off, in many cases, because of lobbying in the political system by the powerful companies.
Phillipon contrasts the above situation with that in Europe. Ironically, while Europe had a reputation for excessive state support for its industries, things have changed radically for the better. The EU has a pro-competition regulatory system that is much more independent of politics than that in the US. As a result of market liberalization and regulatory pressure, markets are now much more competitive in Europe than in the US. For example, drug prices are much lower, mobile plans and internet subscriptions are much cheaper, domestic air flights are more affordable, etc.
The book is very convincing that the US needs to rethink its approach to domestic market competition. However, those currently benefiting will fight hard to resist—whether it be drug companies, hospital chains, banks, or the internet giants (Google, Amazon, Facebook, etc.). The book has few specific recommendations, which is fair, given that change requires a new approach across a whole spectrum of policies. Hopefully, having made a convincing case, this will set the agenda for policy reforms in the coming decades.
May 16, 2020
I love this book's topic and how it was approached. The best topics to talk about for the source of American corporate concentration are antitrust legislation, political lobbying, and the recent rise of technology companies and barriers for entry of various fields.
The effects of corporate concentration and defining the problem was done by doing macroeconomic comparisons of the US over the past 4 decades, with a lot of the main reasoning coming from comparisons to Europe. Philippon goes through a couple of basic equations to show different levels of possible market concentrations, at just the right level of difficulty level to be interpretable to the layperson yet still outline the full concept. There's also good models that he uses here to compare the estimated growth and purchasing power of the consumer economy under various levels of concentration in markets like cell phones, and health care. Philippon goes through how to evaluate productivity increases in mergers and how mergers in the modern day are almost always negative. Philippon shows the fragility of the free market and where the government had to step in the past, as well as some positive modern examples of competition, like the effect Uber had on the taxi market.
Political lobbying was a somewhat straightforward chapter that just talked about the exponential increase in political lobbying input by large industries. Correlations were established between donations and voting to increase barrier of entry. I love his comments about how political lobbying dollars are a negative sum game in that they do not create product and they increase barriers for entry for an industry.
The last chapters on big tech increases the barrier for entry since not everyone has the access to the same data was somewhat weak, since I think this is only relevant for a couple a specific use cases, like online retail.
Overall, sweet and simple book to put the stress into you that US antitrust is at a weak point in American history and the effect that it will have on us.
March 16, 2023
At the core of "The Great Reversal" is the argument that the United States, once a beacon of competitive markets, has experienced a significant shift towards increased market concentration and reduced competition. In contrast, Europe, which was traditionally considered less competitive, has seen improvements in market competition. Philippon attributes this change primarily to differences in regulatory policy, particularly antitrust enforcement.
The book is grounded in extensive empirical research, as Philippon presents data on market concentration, pricing, and other indicators of competition across a range of industries. The author demonstrates that increased concentration has led to higher prices, reduced investment, slower productivity growth, and increased income inequality in the United States.
Philippon attributes the decline in competition to a combination of factors, including regulatory capture, weakened antitrust enforcement, and the influence of special interest groups on policymaking. He argues that the United States must recommit to the principles of free markets by strengthening antitrust enforcement, promoting pro-competitive regulation, and reducing the influence of special interests in the political process.
"The Great Reversal" has been praised for its thorough analysis, clear presentation of data, and compelling narrative. The book has made a significant contribution to the ongoing debate around market concentration and its implications for economic growth and inequality.
Some critics, however, argue that the book may not give sufficient attention to other factors that contribute to market concentration, such as technological innovation, network effects, and economies of scale. Additionally, some critics contend that the book's focus on regulation may not fully account for the potential benefits of market concentration in certain industries, such as increased efficiency or the ability to invest in research and development.
The book is grounded in extensive empirical research, as Philippon presents data on market concentration, pricing, and other indicators of competition across a range of industries. The author demonstrates that increased concentration has led to higher prices, reduced investment, slower productivity growth, and increased income inequality in the United States.
Philippon attributes the decline in competition to a combination of factors, including regulatory capture, weakened antitrust enforcement, and the influence of special interest groups on policymaking. He argues that the United States must recommit to the principles of free markets by strengthening antitrust enforcement, promoting pro-competitive regulation, and reducing the influence of special interests in the political process.
"The Great Reversal" has been praised for its thorough analysis, clear presentation of data, and compelling narrative. The book has made a significant contribution to the ongoing debate around market concentration and its implications for economic growth and inequality.
Some critics, however, argue that the book may not give sufficient attention to other factors that contribute to market concentration, such as technological innovation, network effects, and economies of scale. Additionally, some critics contend that the book's focus on regulation may not fully account for the potential benefits of market concentration in certain industries, such as increased efficiency or the ability to invest in research and development.
January 21, 2020
I learned a *lot* from this book.
You may have seen a graph about how productivity has been increasing over time, but wages have not, leading to a divergence between the two. This graph may have (rightfully) made you mad. This book will help explain trends in the US economy which lead to some groups doing exceptionally well, while others are no better off than they were a decade ago.
https://www.vox.com/policy-and-politi...
Phillippon's thesis is as follows:
"US markets have become less competitive, and US firms charge excessive prices to US consumers. Excess profits are used to pay out dividends and to buy back shares, not to hire and invest. At the same time, barriers to entry have increased, and antitrust enforcement has weakened. These trends in the US were not exported to Europe, and in a stunning reversal of history, many European markets (airlines, cell phones, and internet providers, among others) are now more competitive and cheaper than their American counterparts."
The effect of this is illustrated by the decreasing labor share of income in the United States, but not in Europe. Phillipon clearly yet rigorously walks the reader through various competing hypotheses, evaluating the implications and flaws in each. He covers topics such as lobbying, money in politics, globalization, the healthcare and tech industries, and more. He is transparent in his analysis, freely admitting where he does or doesn't have answers, and why he reaches the conclusions he does. He has a Ph.D. in economics from MIT, but writes clearly enough for a non-economist to follow. Regardless of background, everyone can expect to learn from this book.
I would say this is one of the best 5 economics books I've ever read.
You may have seen a graph about how productivity has been increasing over time, but wages have not, leading to a divergence between the two. This graph may have (rightfully) made you mad. This book will help explain trends in the US economy which lead to some groups doing exceptionally well, while others are no better off than they were a decade ago.
https://www.vox.com/policy-and-politi...
Phillippon's thesis is as follows:
"US markets have become less competitive, and US firms charge excessive prices to US consumers. Excess profits are used to pay out dividends and to buy back shares, not to hire and invest. At the same time, barriers to entry have increased, and antitrust enforcement has weakened. These trends in the US were not exported to Europe, and in a stunning reversal of history, many European markets (airlines, cell phones, and internet providers, among others) are now more competitive and cheaper than their American counterparts."
The effect of this is illustrated by the decreasing labor share of income in the United States, but not in Europe. Phillipon clearly yet rigorously walks the reader through various competing hypotheses, evaluating the implications and flaws in each. He covers topics such as lobbying, money in politics, globalization, the healthcare and tech industries, and more. He is transparent in his analysis, freely admitting where he does or doesn't have answers, and why he reaches the conclusions he does. He has a Ph.D. in economics from MIT, but writes clearly enough for a non-economist to follow. Regardless of background, everyone can expect to learn from this book.
I would say this is one of the best 5 economics books I've ever read.
February 7, 2023
Thomas Philippon argues prices are higher in the USA because the EU is more competitive.
It’s a seductive idea, but the author does not convincingly prove his point!
• Broadband and airline costs are different in the United States and Europe. To attribute price differences to consolidation is to mistake correlation for causation. But even if these differences represented differences in competitiveness, nothing proves these industries are representative of the broader economy!
• The relationship between consolidation and productivity is deceptive. The EU Klems divides the economy into only 33 sectors. One sector is "Electricity, Gas and Water Supply." Electricity and water supply are entirely separate markets: Looking at which firms dominate across these sectors tells nothing about market power...
• Comparing growth in the USA to ex-Soviet bloc countries doesn't make sense. These countries grow faster because they can replicate the technology of developed countries. Comparing USA growth to France, Germany or Italy makes much more sense.
• The author says: "I have not seen a paper that convincingly shows that protecting incumbents through patents." IP laws need reform, but to argue for a society without intellectual property? Should musicians have no protection at all over their songs or inventors over their inventions?
Flawed analysis aside, the text is clear (though its research methods are not easily replicable) and raises interesting questions!
It’s a seductive idea, but the author does not convincingly prove his point!
• Broadband and airline costs are different in the United States and Europe. To attribute price differences to consolidation is to mistake correlation for causation. But even if these differences represented differences in competitiveness, nothing proves these industries are representative of the broader economy!
• The relationship between consolidation and productivity is deceptive. The EU Klems divides the economy into only 33 sectors. One sector is "Electricity, Gas and Water Supply." Electricity and water supply are entirely separate markets: Looking at which firms dominate across these sectors tells nothing about market power...
• Comparing growth in the USA to ex-Soviet bloc countries doesn't make sense. These countries grow faster because they can replicate the technology of developed countries. Comparing USA growth to France, Germany or Italy makes much more sense.
• The author says: "I have not seen a paper that convincingly shows that protecting incumbents through patents." IP laws need reform, but to argue for a society without intellectual property? Should musicians have no protection at all over their songs or inventors over their inventions?
Flawed analysis aside, the text is clear (though its research methods are not easily replicable) and raises interesting questions!
December 26, 2019
A must read.
The author presents the material in a manner that permits the non-economist to follow the discussion with ease.
Why are prices higher in the US for internet and prescription drugs than in Europe? The author addresses this and other related questions by moving from “impressions and anecdotes” to rigorous data-supported proofs of hypotheses of what is happening and why.
The book provides compelling support to the argument that political polarization, lobbying, bought elections, and excessive deregulation (amongst other factors) have contributed to increased concentration in the economy, reduced entry of new competitors, higher prices and profits, lower investment, falling real wages, heightened inequality, etc. Policy and politics in the US are moving the country progressively away from free markets and in so doing strengthen the negative feedback loop responsible in great measure for the current lamentable state of affairs in America.
The situation in the US stands in contrast to Europe. A generation ago, Europe was criticized for stifling free markets. By many measures, surprisingly, Europe is now more free market-friendly. As is clear in recent regulatory actions, for example. Big Tech has far more to fear in Brussels than in Washington. Europe has adopted the US liberal economic playbook, now increasingly abandoned by Americans.
As a post-script: whenever reading in this topic area, I have the same thought, “how much better we’d all be if the energy used to game the system were used to strengthen opportunities for all.”
The author presents the material in a manner that permits the non-economist to follow the discussion with ease.
Why are prices higher in the US for internet and prescription drugs than in Europe? The author addresses this and other related questions by moving from “impressions and anecdotes” to rigorous data-supported proofs of hypotheses of what is happening and why.
The book provides compelling support to the argument that political polarization, lobbying, bought elections, and excessive deregulation (amongst other factors) have contributed to increased concentration in the economy, reduced entry of new competitors, higher prices and profits, lower investment, falling real wages, heightened inequality, etc. Policy and politics in the US are moving the country progressively away from free markets and in so doing strengthen the negative feedback loop responsible in great measure for the current lamentable state of affairs in America.
The situation in the US stands in contrast to Europe. A generation ago, Europe was criticized for stifling free markets. By many measures, surprisingly, Europe is now more free market-friendly. As is clear in recent regulatory actions, for example. Big Tech has far more to fear in Brussels than in Washington. Europe has adopted the US liberal economic playbook, now increasingly abandoned by Americans.
As a post-script: whenever reading in this topic area, I have the same thought, “how much better we’d all be if the energy used to game the system were used to strengthen opportunities for all.”
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