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LQD: The Economist worried by "abnormal profits"

by Bernard Wed Apr 6th, 2016 at 04:02:44 PM EST

Something you wouldn't necessarily expect to find in The Economist: a piece worrying about... too much profits.

Too much profits, by US companies mostly and on their domestic market: an effect of undergoing "consolidation".

Too much of a good thing | The Economist

What is true of the airline industry is increasingly true of America's economy as a whole. Profits have risen in most rich countries over the past ten years but the increase has been biggest for American firms. Coupled with an increasing concentration of ownership, this means the fruits of economic growth are being hoarded. This is probably part of the reason that two-thirds of Americans, including a majority of Republicans, have come to believe that the economy "unfairly favours powerful interests", according to polling by Pew, a research outfit. It means that when Hillary Clinton and Bernie Sanders, the Democratic contenders for president, say that the economy is "rigged", they have a point.

You say "rigged"?
Too much of a good thing | The Economist

Profits are an essential part of capitalism. They give investors a return, encourage innovation and signal where resources should be invested. Their accumulation allows investment in bold new ventures. Countries where profits are too low--Japan, for instance--can slip into morbid torpor. Firms that ignore profits, such as China's state-run enterprises, lurch around like aimless zombies, as likely to destroy value as to create it.

But high profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand. This has been a pressing problem in America. It is not that firms are underinvesting by historical standards. Relative to assets, sales and GDP, the level of investment is pretty normal. But domestic cash flows are so high that they still have pots of cash left over after investment: about $800 billion a year.


Too much of a good thing | The Economist

None of these accounts, though, explain the most troubling aspect of America's profit problem: its persistence. Business theory holds that firms can at best enjoy only temporary periods of "competitive advantage" during which they can rake in cash. After that new companies, inspired by these rich pickings, will pile in to compete away those fat margins, bringing prices down and increasing both employment and investment. It's the mechanism behind Adam Smith's invisible hand.  

In America that hand seems oddly idle. An American firm that was very profitable in 2003 (one with post-tax returns on capital of 15-25%, excluding goodwill) had an 83% chance of still being very profitable in 2013; the same was true for firms with returns of over 25%, according to McKinsey, a consulting firm. In the previous decade the odds were about 50%. The obvious conclusion is that the American economy is too cosy for incumbents.

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Consolidation has accelerated over the past couple of years: Nokia buying Alcatel-Lucent, AT&T buying DirecTV, Alaska buying Virgin America, Dow Chemical & DuPont, Charter acquiring Time Warner to create a cable behemoth comparable to Comcast, Intel & Altera, Avago & Broadcom: no sector is spared.

Monopolistic, or at least oligopolistic pricing power has become an essential component of US capitalism.

by Bernard on Wed Apr 6th, 2016 at 04:08:32 PM EST
Although, in the case of AT&T-DirecTV, there was at least a half-decent argument for synergies on paper, since DirecTV didn't have its own Internet offering and AT&T had shitty television.

The airline and cable-Internet industries seem, to me, to be the industries where consolidation has been the most obviously awful for people.

Unfortunately, in the cable-Internet industry, consumers are basically screwed.  A handful of the really powerful networks can basically increase their fees at will, and the Comcasts of the world, who enjoy either monopoly power or, at least, strong advantages over in-market rivals (like DSL), can pass it on to consumers.

Even if the cable providers could gain enough market power to force the networks to cut fees, it's not going to get passed on to consumers.  It'd just be shifting money from ESPN to Comcast.

And the capital and regulatory hurdles make it virtually impossible for new entrants unless it's somebody like Google who's got more money than it knows what to do with.

At this point, the airlines aren't even worth bothering with unless you're going across several states or overseas.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Apr 6th, 2016 at 05:06:18 PM EST
[ Parent ]
I think it makes sense in the semiconductor industry given the economies of scale required for profitability. Unlike heavy industries, though, startups can still emerge because you can simply contract out production (fab and back end) at competitive rates and stay independent or sell to a bigger player anywhere in the evolution of the company.

Other than the issues that have come up with privacy and copyright (not to be ignored obviously) it isn't an industry prone to natural monopolies versus say anything infrastructure related like power and telecom.

you are the media you consume.

by MillMan (millguy at gmail) on Thu Apr 7th, 2016 at 02:19:41 PM EST
[ Parent ]
For an industry not prone to natural monopolies (which is certainly true), it has done not too bad in that department: Intel & Qualcomm come to mind. And yes, I've been in this industry before: back in the nineties and the aughties, there were a lot of chip making startups created every year, thanks to the foundries like TSMC or UMC.

Today, the giant foundries are still there, but the "silicon" startup have dried up. And as an equipment designer, your choice of chip set platforms keeps shrinking, even in supposedly "hot" sectors like Wi-Fi...

by Bernard on Thu Apr 7th, 2016 at 03:45:53 PM EST
[ Parent ]
Economist has been beating that drum since Day One and still claims to be surprised by the dance.  Typical neolib crapulescence.
by rifek on Thu Apr 7th, 2016 at 08:58:41 PM EST


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