[Joint House and Senate Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 117-64
A SECOND GILDED AGE:
HOW CONCENTRATED CORPORATE POWER
UNDERMINES SHARED PROSPERITY
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VIRTUAL HEARING
BEFORE THE
JOINT ECONOMIC COMMITTEE
OF THE
CONGRESS OF THE UNITED STATES
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JULY 14, 2021
__________
Printed for the use of the Joint Economic Committee
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.govinfo.gov
__________
U.S. GOVERNMENT PUBLISHING OFFICE
45-447 WASHINGTON : 2022
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JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
HOUSE OF REPRESENTATIVES SENATE
Donald S. Beyer Jr., Virginia, Martin Heinrich, New Mexico, Vice
Chairman Chairman
David Trone, Maryland Amy Klobuchar, Minnesota
Joyce Beatty, Ohio Margaret Wood Hassan, New
Mark Pocan, Wisconsin Hampshire
Scott Peters, California Mark Kelly, Arizona
Sharice L. Davids, Kansas Raphael G. Warnock, Georgia
David Schweikert, Arizona Mike Lee, Utah, Ranking Member
Jaime Herrera Beutler, Washington Tom Cotton, Arkansas
Jodey C. Arrington, Texas Rob Portman, Ohio
Ron Estes, Kansas Bill Cassidy, M.D., Louisiana
Ted Cruz, Texas
Tamara L. Fucile, Executive Director
Vanessa Brown Calder, Republican Staff Director
Colleen J. Healy, Financial Director
C O N T E N T S
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Opening Statements of Members
Hon. Donald Beyer Jr., Chairman, a U.S. Representative from the
Commonwealth of Virginia....................................... 1
Hon. Mike Lee, Ranking Member, a U.S. Senator from Utah.......... 3
Hon. Amy Klobuchar, a U.S. Senator from Minnesota................ 5
Witnesses
Dr. Thomas Philippon, Max L. Heine Professor of Finance, New York
University, Stern School of Business, New York, NY............. 8
Dr. Kate Bahn, Director of Labor Market Policy and Interim Chief
Economist, Washington Center for Equitable Growth, Washington,
DC............................................................. 9
Ms. Stacy Mitchell, Co-Director, Institute for Local Self-
Reliance, Washington, DC....................................... 12
Mr. Chris Edwards, Director of Tax Policy Studies, Cato
Institute, Washington, DC...................................... 13
Submissions for the Record
Prepared statement of Hon. Donald Beyer Jr., Chairman, a U.S.
Representative from the Commonwealth of Virginia............... 34
Prepared statement of Hon. Mike Lee, Ranking Member, a U.S.
Senator from Utah.............................................. 35
Prepared statement of Dr. Philippon, Max L. Heine Professor of
Finance, New York University, Stern School of Business, New
York, NY....................................................... 37
Prepared statement of Dr. Kate Bahn, Director of Labor Market
Policy and Interim Chief Economist, Washington Center for
Equitable Growth, Washington, DC............................... 46
Prepared statement of Ms. Stacy Mitchell, Co-Director, Institute
for Local Self-Reliance, Washington, DC........................ 54
Prepared statement of Mr. Chris Edwards, Director of Tax Policy
Studies, Cato Institute, Washington, DC........................ 66
Response from Dr. Philippon to Questions for the Record Submitted
by Senator Kelly............................................... 76
Response from Dr. Bahn to Questions for the Record Submitted by
Senator Kelly.................................................. 76
Response from Ms. Mitchell to Questions for the Record Submitted
by Senator Kelly............................................... 77
A SECOND GILDED AGE:
HOW CONCENTRATED CORPORATE POWER
UNDERMINES SHARED PROSPERITY
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WEDNESDAY, JULY 14, 2021
United States Congress,
Joint Economic Committee,
Washington, DC.
The WebEx virtual hearing was convened, pursuant to notice,
at 2:30 p.m., before the Joint Economic Committee, Hon. Donald
S. Beyer Jr., Chairman, presiding.
Representatives present: Beyer, Beatty, Pocan, Peters, and
Schweikert
Senators present: Klobuchar, Hassan, Lee, and Warnock
Staff present: Vanessa Brown Calder, Sean Gogolin, Devin
Gould, Tamara Fucile, Owen Haaga, Erica Handloff, Colleen
Healy, Jeremy Johnson, Christina King, Adam Michel, Michael
Pearson, Alexander Schunk, Nita Somasundaram, Sydney Thomas,
Jackie Varas, and Emily Volk
OPENING STATEMENT OF HON. DONALD BEYER JR., CHAIRMAN, A U.S.
REPRESENTATIVE FROM THE COMMONWEALTH OF VIRGINIA
Chairman Beyer. This hearing will come to order. I would
like to welcome everyone to today's hearing focused on the
economic impact of concentrated corporate power. I was
encouraged to see President Biden's signing of an Executive
Order just last week taking action on this very issue.
I want to thank each of our distinguished witnesses for
sharing their expertise today. We have a world-class panel, and
I know we are all going to be excited to hear from them.
Access to opportunity, open markets, and fair competition
are fundamental to advancing shared prosperity in our country.
Competition in markets leads to lower prices and higher
quality goods and services, ensuring that consumers do not
overpay for the products and services they rely on, whether it
is a vital medication or broadband internet.
Workers also benefit when businesses compete for their
labor. Competition for worker incentivizes firms to pay good
wages or risk losing their workers to competitors, and thereby
serving as a counterbalance to rising corporate power and
enabling workers to bargain for better working conditions. And
competitive markets allow everyday Americans to take a chance
on an idea and start a business. Or maybe they innovate on a
product and make it more affordable.
Research shows the possibility of new entrants into a
market compels existing firms to continue investing in people
and capital to stay ahead, which also elevates the United
States as a leader in the global economy.
We are here today because corporate concentration imperils
shared prosperity and exacerbates economic inequality.
Across industries--including health care, financial
services, telecommunications, agriculture and more--we are
seeing much higher levels of concentration than were there
three decades ago. And evidence shows this has led to weaker
business investment, higher prices for consumers, and lower
wages for workers.
This consolidation of corporate power has allowed the
wealthiest at the top to capture a larger share of the gains
from economic growth. Amid record-breaking profits,
corporations are paying less in taxes today than they did 30
years ago, while investing 10 cents less per dollar of profit.
All of this has led to reduced productivity gains in
concentrated industries and slower growth economy-wide.
This is a problem because consumers are bearing the burden.
On average, we pay about twice as much for cellphone plans than
some of our friends in other advanced economies with more
providers. The same is true for broadband access. With more
competition, hard-working Americans could save billions each
year.
Our workers are also paying for this in the form of
stagnant wages. Research shows the median American household
loses an estimated $5,000 each year through reduced wages and
higher prices caused by a lack of competition.
Now how did we get here?
The explosion of mergers and acquisitions have played a key
role in the consolidation of industries. Over the past 40
years, they have been allowed to proceed at an unprecedented
pace, and the same holds for an array of anticompetitive
practices by industry leaders.
This is due in part to our failed experiment with a more
lax enforcement of antitrust laws and the under-funding of
Federal enforcement agencies.
During this time, our economy has lost half of its firms on
a per capita basis. This has disproportionately impacted
marginalized communities where we've seen a disappearance of
independent grocery stores, pharmacies, and community banks.
The rise of non-compete agreements is also part of the
story. At least 1 in 3 businesses require that workers sign
non-compete agreements, which suppress workers' wages, hinder
the ability to pursue better opportunities and contribute to
persistent racial and gender disparities. And about 1 in 5
workers without a college education is subject to these non-
compete agreements.
The good news is that there are steps that we as a country
can take to reduce this concentration of corporate power, and
we will hear more about these proposals from our expert panel
today.
Additionally, there have been productive bipartisan
conversations here on Capitol Hill about how to best tackle
these challenges. Following a bipartisan investigation that
uncovered evidence of ample anticompetitive practices, the
House Judiciary Committee recently approved six bipartisan
bills to address business concentration and bolster competition
on digital platforms.
In the Senate, my dear friend and colleague Senator
Klobuchar wrote an entire book about antitrust, the challenges
we face, and what we can do to make our economy more
competitive. Earlier this year, the Senator introduced the
Competition and Antitrust Law Enforcement Reform Act. Among
other things, this bill would give Federal enforcers more
resources to do their jobs and strengthen prohibitions on
anticompetitive conduct. The Senator will tell us more about
this and some of her other ideas shortly.
We have an opportunity now to restore a competitive economy
and advance shared prosperity. President Biden's Executive
Order advances a whole-of-government approach to promote fair
competition, and it is now our turn to act here in Congress
with bold and decisive action. And this is why I look forward
to the testimonies and insights of our witnesses today.
Now I would like to turn this over to Senator Mike Lee,
another leading voice in this space, for his opening statement.
Senator Lee, the floor is yours.
[The prepared statement of Chairman Beyer appears in the
Submissions for the Record on page 34.]
OPENING STATEMENT OF HON. MIKE LEE, RANKING MEMBER, A U.S.
SENATOR FROM UTAH
Senator Lee. Thank you very much, Mr. Chairman.
From our earliest days, it has been businesses both large
and small that have been the backbone of our country. And as
Calvin Coolidge once put it: The chief business of the American
people is business. From colonial farmers to pioneering
homesteaders, to merchants, craftsmen, and professionals,
American entrepreneurs have sought to build a better life for
themselves and achieve the American Dream.
For centuries, Americans who are innovative have come
together through commerce and competition to improve life for
themselves and their families and their communities.
It is no surprise, then, that American businesses are a
source of local and national pride. They are often more than
just a place to work. They add vitality into our neighborhoods,
our towns, our cities, and communities.
Businesses are also the heartbeat of our economy. Small
businesses in particular represent about half of all private-
sector jobs in the United States, nearly half of the U.S. GDP,
and they account for two out of every three jobs created in the
United States today.
Over the years, we have seen the rise of a number of big
businesses, and today we are again witnessing the increasing
market power of a few large firms. Of course this raises some
important questions, that a lot of people are concerned,
understandably, that the largeness of certain enterprises makes
them dangerous--some say, inherently dangerous to small
businesses and to consumers and to workers.
However, the fact is that big is not always bad. But
neither is it always good. And we should not be forced to
pretend that it is either one way or the other. To imply that
we should support or defend a business simply based on its size
is unserious and it is meant to move the conversation away from
a firm's specific conduct.
The rise of some highly visible large firms is oftentimes a
product of their greater market-based innovations. The prospect
of gaining a larger market share incentivizes competition that
can lead to better products and services at lower prices.
Market share won through competition should be celebrated not
punished.
Changing technology and increasing investment in software
processes and R&D may also be an important factor. In
industries where these investments are protected by patents,
policy has explicitly created government-granted monopolies. We
allow this because the prospect of collecting monopoly profits
acts as an incentive for firms to innovate and invest in new
ideas.
In other areas, new investments are associated with higher
productivity gains, especially in the high-tech and consumer
sectors, suggesting that these businesses have gained greater
efficiencies through market competition. But there are other
factors behind industry concentration, factors that could
indeed be cause for concern and deserve our attention.
For instance, government regulations impose huge, stifling
barriers to new business creation and protect existing firms
from competition. From 2010 to 2020, the U.S. Government
imposed an average of 365 new regulations each year affecting
everything from how farmers make their living, to which
employees small business owners are legally allowed to hire, to
how many workers they can afford to pay.
These regulations impose tremendous costs on American
businesses, workers, and taxpayers, costing an average of $81
billion per year and requiring 77 million hours of paperwork
annually.
This burden disproportionately falls on small businesses
and startups. In fact, there is plenty of evidence showing that
regulatory accumulation reduces the number of small businesses
relative to larger ones. In this regard, Federal, State, and
local regulations are locking out small businesses from
competing, and thus further entrenching big businesses.
Reducing regulatory requirements on American business would
help foster more market competition. With more market
competition, the more competition any time you are going to
increase quality and reduce prices, and that is good for
consumers.
Antitrust enforcement has also been declining for decades.
Some monopolies are indeed bad, and those that rise or remain
through anticompetitive and exclusionary conduct and not
through competition on the merits stand in the way of free
markets, and they degrade the options available to consumers.
A proper response in this regard is to modernize antitrust
laws to find the right balance between over-enforcement and
under-enforcement. That is exactly why I have introduced the
Tougher Enforcement Against Monopolists, or TEAM Act, which
would preserve free-market competition by codifying the
Consumer Welfare Standard and strengthening enforcement against
companies that engage in anticompetitive behavior.
Other efforts like the Administration's recent Executive
Order on competition unfortunately missed the market by
overstepping the President's authority and massively expanding
Federal regulatory power. But whatever action we take, we ought
to remember that big businesses are not necessarily harmful if
workers continue to find well-paying jobs and consumers
continue to benefit from high-quality, diverse, and low-cost
goods and services. The ability for them to do that of course
is always enhanced by robust competition.
The beauty of our free-market economy is that whatever your
cause or your career, your success depends on your service. The
way to look out for yourself is to look out for those around
you. The way to get ahead is to help other people do the same,
and to put your God-given talents and efforts to work in the
service of your neighbor.
In the process of earning money and building wealth,
individuals can add value to other peoples' lives. In all of
our efforts going forward, we ought to ensure that businesses
both large and small are able to keep doing just that. And I am
hopeful that today's hearing will aid us in achieving this
goal.
Thank you.
Chairman Beyer. Senator Lee, thank you very much. And thank
you for introducing the team effort. That is very much in the
right direction.
[The prepared statement of Senator Lee appears in the
Submissions for the Record on page 35.]
It is now my honor to introduce the distinguished Senator
from Minnesota, Senator Klobuchar, who has just written a book
titled Antitrust. There is no confusion about what the book is
about. If I can quote from a review of The New York Times, it
says, ``It is an impressive work of scholarship, deeply
researched, highly informative, and it is surprisingly readable
in the bargain.''
Senator Klobuchar, we will never forget the picture of you
announcing for President in the snow storm, but we would love
to hear what you have to say about antitrust, so we look
forward to it.
OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM
MINNESOTA
Senator Klobuchar. Well thank you, Mr. Chairman. And since
I have the floor, I will now read all 600 pages of the book
into the record. No, I will try to give a summary of my views.
I first want to thank you for having the foresight of
having this hearing. I want to thank my colleague, Senator Lee.
We had a hearing yesterday in our subcommittee together on what
we can do about pharmaceutical prices, and we have introduced a
number of bills together, including one with Representatives
Buck and Cicilline to give the State Attorney General more
tools to use as we take on this major problem of monopolies.
I think we all know in our different ways that America has
a monopoly problem. Whether you are a cattle producer trying to
bring your beef to market, whether you are someone that is
trying to get a deal on online travel and suddenly find out
that all the websites you go to, 90 percent of them are owned
by really two companies, whether you are someone that wants to
get a fair price on a prescription drug where we know we have
seen such enormous price increases in America over the last few
decades. And then finally, of course, if you are someone that
is trying to get the truth off of social media platforms, or
you are trying to protect your privacy. And you wonder why
there are not all these bells and whistles that would do that,
or why Google was able to, or Facebook, hold an entire country
hostage, which is the country of Australia when they simply
tried to charge for content and make sure that the news
organizations were getting a fair deal.
Well, this is about monopolies. And I truly appreciated the
title of your hearing because this is something that has gone
on since the gilded age, and it could be well characterized, as
you called it, as the second gilded age in this country. And I
think the answers are right before us.
There is a focus, as there should be, on some specific
solutions. Senator Lee and I had an incredible hearing on App
Stores in which we actually had to push Apple to even get us a
witness. And we did, and we had companies from Spotify to
Match.com testify about how much they had to pay out just to
use the App stores, which are pretty much today's modern
websites.
There are things we can do in that area. There are things
we can do from patents, patent thickening, patent thickets to
the issues that we have with pay-for-delay in pharma. There is
privacy legislation to be passed.
But then let's go a step further. I think we need an
overhaul of our antitrust laws, if you really want to get at
all these things at once, switching the burden for the big mega
mergers, looking back into some very consolidated industries,
not all industries, but the most consolidated ones where you
have dominant players to figure out what needs to be done. Do
some assets have to be divested? Do we have to put better
bumpers in place on consent decrees and agreements? And all of
this, to me, leads to something that Senator Lee mentioned,
which is enforcement.
And I don't think that our agencies can take on the biggest
companies the world has ever known with Band-Aids and duct
tape. And that is why Senator Grassley and I passed in the U.S.
Senate our bill to change the merger fee structure, which has
not happened for decades, which is now over in the House and I
know has some good, strong bipartisan support which, without
hurting any small companies or mergers in small companies,
would actually bring in over $100 million because of the way we
changed the structure for the FTC and for the DOJ Antitrust
Division.
So that is number one.
Number two is what I have already mentioned, the standard
change.
And number three is something that you had the foresight to
look at, which is other things that can be done like allowing
workers to go to another job if they want to go, very radical,
with non-compete agreements being used only in the
circumstances that fit them, as opposed to the front-line
workers. Making sure that, to me, immigration reform is a piece
of this. And making sure that we have the workers that we need
when we are facing a labor shortage.
And then also looking at our STEM education and allowing
new workers to go into the workforce. I just bring up a few of
those ideas, but there are many, many more. And I just want to
thank you, Mr. Chairman, for this hearing and the Ranking
Member. And I am really excited. And I think there are some
really good things in the White House's, President Biden's
Executive Order. And if you don't think he means business when
he is governing right now, he just came over to the Senate
Caucus today and I think we all know he means business.
And, secondly, the work that we can do here on a bipartisan
basis in Congress. And I do want to say that I have gotten to
know Representative Buck, and of course Cicilline, quite well,
and I really appreciate their bipartisan efforts over in your
House of Representatives.
So thank you for allowing me to say a few words.
Chairman Beyer. Senator Klobuchar, thank you very much. And
thank you for writing the 600-page book that gives us a
blueprint for much of what we can do. It is wonderful to have
you on this committee.
Senator Klobuchar. Thank you.
Chairman Beyer. I would now like to introduce our four
distinguished witnesses. Dr. Thomas Philippon is the Professor
of Finance at New York University Stern School of Business. He
has published widely on macroeconomics and finance, including
the market power of large firms. His 2019 book, The Great
Reversal, explores the causes and consequences of increased
concentration and decreased competition in the U.S. economy.
His research finds that American consumers, workers, and
potential new entrants are shouldering the cost of rising
corporate consolidation. Dr. Philippon has a Ph.D. in Economics
from the Massachusetts Institute of Technology, and is in Paris
tonight on Bastille Day, and I would like to note that we freed
him from the prison today in order to testify.
Dr. Kate Bahn is the Director of Labor Market Policy and
Interim Chief Economist at the Washington Center for Equitable
Growth. Her research focuses on gender, race, and ethnicity in
the labor market, care work, and monopsony. She has written
extensively about the impact of the lack of competition in
labor markets, and how it gives employer's unfair wage-setting
power, to undercut the earnings of workers and increase their
own profits. Her work shows how increasing workers' bargaining
power has strengthening the unions can counteract the effects
of employers' market power. Dr. Bahn received her Ph.D. in
Economics from the New School for Social Research.
Ms. Stacy Mitchell is the Co-Director of the Institute for
Local Self-Reliance where she directs its independent business
initiative. Her research and reporting have focused on the
importance of small businesses, and the public policies driving
their decline and she has analyzed the shift in antitrust
policy toward maximizing efficiency over promoting fair and
open markets for all competitors. She is the author of the book
Big Box Swindle, which details how mega retailers are fueling
many of our most pressing social and economic challenges. Ms.
Mitchell has a Bachelor's Degree in American Economic and Labor
History from McAllister College.
Finally, Mr. Chris Edwards is a prior legacy employee from
the Joint Economic Committee, and Chris is now the Director of
Tax Policy Studies at the Cato Institute. He previously served
as senior economist for the Republican staff for the Joint
Economic Committee. He is recognized for his work on Federal
and State tax and budget issues. In addition to his work with
the JEC, Mr. Edwards has served as a manager with
PriceWaterhouseCoopers, and as an economist with the Tax
Foundation. Mr. Edwards has an M.A. in Economics from the
George Mason University.
Dr. Philippon, let's begin with your testimony and then we
will continue in the order of introductions. Dr. Philippon, the
floor is yours.
STATEMENT OF DR. THOMAS PHILIPPON, MAX L. HEINE PROFESSOR OF
FINANCE, NEW YORK UNIVERSITY, STERN SCHOOL OF BUSINESS, NEW
YORK, NY
Dr. Philippon. Thank you, Chairman Beyer, Vice Chairman
Heinrich, and Ranking Member Lee for giving me the opportunity
to testify in front of you today.
So I would like to divide my remarks into two parts: just a
quick review of the evidence, what we know and what we do not
know. And then I would like to explain the main consequences of
existing market power and growth. And then in conclusion, I
will give some policy options.
So first the evidence. While obviously the first, the most
discussed, the most popular evidence is concentration. And
indeed, we have seen that many industries have become more
concentrated over the past 20 years. Now concentration is an
important warning sign because it can suggest that some firms
have increased their market power.
But concentration is not by itself a concluding indicator.
And the main reason is concentration can increase for various
reasons. Like was just said, big is not always bad. So instead
of looking at market share at a point in time, which is what
concentration does, I find it useful to consider how market
shares can change over time. And in a competing industry, we
might very well have a departure at the point in time, but if
the industry is competitive, we don't expect that firm to
remain dominant forever.
And unfortunately, if you look at the data, this kind of
hasty reshuffling has increased over the past 20 years. If you
look at the largest 100 firms in the U.S. in the year 2000, you
will see that 55 out of these 100 firms were relative
newcomers.
If you look at 2019, and again you look at the 100 largest
firms in the U.S., the fraction of newcomers instead of being
55 percent is now down to 29 percent. The 71 auto firms had
been in the top 100 for every year over the past 10 years. So
this reshuffling has decreased over time.
Another indicator which is important, obviously, is
profits, payouts, and investments. Now the share of after-tax
corporate profits and GDP has increased by roughly 50 percent
in 2000. Again, that might not be an issue if high profits led
to high investment. The problem is, as you know, what happened.
Investment in fact has been relatively weak, and instead firms
have not chosen their higher profit to include investment.
Instead, they have used their profit to increase their payout
to shareholders. So the ratio of payout to total assets has
roughly doubled since 2000.
Now there are many other industry studies that are detailed
and show that consumers pay higher prices that are too high.
They also are studies that look at the labor market. But let me
now turn to the consequences.
So there is a broad review of the evidence and I think that
prices in the U.S. are somewhere between 7 or 8 percent higher
today than they would be if competition had remained as healthy
as it was in the late 1990s. So what are the consequences?
Well, first, higher prices. So the median household spends
about $5,300 a year. I estimate that they pay about 7 or 8
percent to high prices. That means that they pay about $3,700
each year in monopoly rent. If you add that for all the
households in the U.S., you get about $600 billion in excess
monopoly rent.
Now this is to a lower living standard and higher
inequality. Now the study at the end of the story does not take
into account the impacts of competition and growth on
investment and productivity. Once you factor in the impact of
competition on investment, then you find that if we could
return to the high level of competition that we had 20 years
ago, GDP would increase by about 5 percent, which is a trillion
dollars.
Finally, because increased investment would lead to higher
real wages, it also would gain not just a consumer prices but
also as workers, higher real wages. So, if you go back to this
median household, we discussed earlier, the improvement in
living standards would be something like $5,000 once you take
into account the growth, lower prices and higher wages.
So to conclude, I think that this shows that the stakes are
high. To make it short, if you improve competition, the same as
cutting taxes for working families by $600 billion per year,
except you don't have to actually increase the deficit to do
it.
We will also boost the economics something like a trillion
dollars each year, so the stakes are high. The policy changes
are real, because we don't know for sure what are the better
tools, and exactly which to act first, but I think that if you
review the evidence very broadly you see four goals that would
be useful in all cases.
First, tighten up the reviews.
Second, reduce barriers to entry.
Third, improve price transparency.
And fourth, reduce switching costs for consumers.
Thank you very much for the opportunity to testify.
[The prepared statement of Dr. Philippon appears in the
Submissions for the Record on page 37.]
Chairman Beyer. Thank you, Dr. Philippon, very much. We
will come back to you with many questions in the minutes to
come. Now let me introduce Dr. Kate Bahn for her testimony.
STATEMENT OF DR. KATE BAHN, DIRECTOR OF LABOR MARKET POLICY AND
INTERIM CHIEF ECONOMIST, WASHINGTON CENTER FOR EQUITABLE
GROWTH, WASHINGTON, DC
Dr. Bahn. Thank you, Chair Beyer, Ranking Member Lee, and
Members of the Joint Economic Committee, for inviting me to
testify today. My name is Kate Bahn and I am the Director of
Labor Market Policy and Interim Chief Economist at the
Washington Center for Equitable Growth.
We seek to advance evidence-backed ideas and policies that
build strong, stable and broad-based growth. Mounting evidence,
which I will review today, demonstrates how the rising
concentration of corporate power has increased economic
inequality, which has dragged down economic growth. I will
explain what causes an economic concept called ``Monopsony''
and how it impacts different workers. And finally, how policy
can push back on employers having significant monopsony power
over the market and over workers.
The United States boasts one of the wealthiest economies in
the world, but decades of increasing income inequality, job
polarization, and stagnant wages for most Americans has plagued
our labor market. This has demonstrated that a rising tide does
not lift all boats.
Monopsony is a key economic concept to understand in this
discussion. Monopsony is the labor market equivalent of the
better-known phenomenon of monopoly, but instead of having only
one seller of a good or service, there is effectively only one
buyer of a good or service. Like monopoly, this phenomenon is
not limited to when a firm is strictly the only buyer of labor.
When employers have outsized powers, they are able to set
wages for their workers rather than wages being determined by
competitive market forces. Given this monopsony power,
employers undercut workers.
One recent survey of all economic research on monopsony
finds that on average across studies employees have the power
to keep wages over one-third less than what they would be in a
perfectly competitive market. Firms can use monopsony powers to
lower workers' wages through a number of common occurrences in
the labor market.
First, if there are few potential employers.
Second, if workers face job mobility constraints.
Third, if workers can only gather imperfect information
about employers and jobs.
Fourth, when workers have divergent preferences for job
attributes.
And finally, when workers lack the ability to bargain over
wages and working conditions.
While concentrated labor markets are not the norm, they are
pervasive across the U.S. Research has found that 60 percent of
U.S. local labor markets are highly concentrated. This accounts
for 20 percent of employment in the United States, and it has
been particularly pernicious in rural areas.
When markets are very concentrated, employers can give
workers smaller yearly raises or make working conditions worse,
knowing the workers have nowhere to go to find a better job.
But as I noted, competition is not the only source of monopsony
power. Job mobility, which is the ability to move between jobs,
also affects the market and in turn may give employers the
power to keep wages below competitive levels.
Job mobility can be limited by non-compete agreements where
workers are compelled to sign away their rights to go work for
a direct competitor of their employer. Asymmetric information
between employers and workers also influences how workers sort
between jobs and puts downward pressure on wage offers.
Workers often know little about the salary range at
potential employers, even within their own firms. In contrast,
employers know what all their employees are paid and often
require applicants to disclose their current salaries or
competing job offers, giving them much more information to work
with.
And finally, varied worker preferences also give employers
the power to undercut wages. Workers who are more likely to
face hostile work environments, among them Black workers in
primarily White occupations or women in male-dominated fields,
may look for workplaces that are more inclusive. Or parents who
have primary responsibility for case making for their children
may need a more predictable schedule or autonomy over their
schedules. This lack of mobility lowers wages. The
concentration of corporate power has dire consequences for
workers who are already disadvantaged in the U.S. Economy.
Workers facing hiring discrimination, pregnant women, Black and
Latinex workers, have fewer job offers so they will be forced
to accept substandard opportunities. And having an unstable
fallback position, without personal wealth or adequate income
support, may reduce the ability of a worker to search for a job
that is both the best fit and garners the highest possible
wages. Employers are able to exploit these conditions by
undercutting workers' wages without risking losing their labor
supply, amplifying the negative consequences of rising
corporate power.
Reversing the trends that caused this ``Second Gilded Age''
starts with ensuring that the U.S. economy is competitive. The
Biden Administration is starting to strengthen enforcement
against anticompetitive conduct, but this can go further,
including new laws that codify, clarify, and strengthen
antitrust law for labor markets.
But antitrust laws are not sufficient. Another important
way to address the concentration of corporate power is to build
countervailing power for workers--such as the Protecting the
Right to Organize Act--that would expand the ability of unions
to organize workers, while limiting the employer's ability to
exploit workers along multiple axes.
One feature of a monopsonistic labor market is that wages
are artificially suppressed, so there is room to raise the
floor with tools such as increasing the minimum wage.
Finally, giving workers universal protections and investing
in social infrastructure will provide a stable foundation for
workers to search for quality jobs.
Building the foundation of security for workers not only
directly impacts their well-being, but also provides the
foundation for productivity growth through better job matchers
and stronger economic growth through increased incomes.
Thank you, and I look forward to your questions.
[The prepared statement of Dr. Bahn appears in the
Submissions for the Record on page 46.]
Chairman Beyer. Thank you very much, Dr. Bahn. The
questions will come, I promise. Let me now introduce Ms.
Mitchell, Stacy Mitchell, for your testimony.
STATEMENT OF MS. STACY MITCHELL, CO-DIRECTOR, INSTITUTE FOR
LOCAL SELF-RELIANCE, WASHINGTON, DC
Ms. Mitchell. Thank you, and good afternoon, Chairman
Beyer, Ranking Member Lee, Senator Klobuchar, and Members of
the Committee. Thank you for inviting me to this important
hearing.
I am the Co-Director of the Institute for Local Self-
Reliance. Several years ago, I set out to study a crucial
question: What is killing America's small, independent
businesses?
In the 1980s, businesses with fewer than 100 employees
accounted for 40 percent of all business revenue. Today, their
share has dropped to 20 percent. And this trend has been
accelerating. In the last decade, we have lost tens of
thousands of small retail owners, distributors, manufacturers,
and more.
The story about the decline of small business is that they
cannot keep up. We assume big corporations are inherently
better and more efficient, but in fact research shows that in
many sectors independent businesses outperform. They deliver
better products at cheaper prices, and more innovation.
The real answer to what is killing small businesses is
rooted in policy choices. Forty years ago, we abandoned our
anti-monopoly policies. This has allowed a few corporations to
amass extraordinary market power and yield it with impunity. We
hear this every day from business owners. People like Ben
Oglethorpe who owns the only pharmacy serving a large rural
region of Maine. Oglethorpe's family pharmacy is beloved by the
community and busy as can be, and yet he worries that he is
going to be driven out of business. And that is because CVS and
two other powerful pharmacy benefit management companies
control how much he is reimbursed for filling prescriptions.
These companies also compete with him. He has watched--CVS
has slashed reimbursement rates of independent pharmacies
across the country and forced them to close.
We have heard similar stories from craft brewers like Bob
Jensen who is an award-winning artist brewery in Chicago who
struggled to get his store shown because in his region
distribution is controlled by Anheuser-Busch and Coors. And
there are many businesses that are blocked from being able to
compete online because of Amazon's out-sized market power.
People like Doug Mordaza in Michigan who launched an online
business selling hair care products. At first, he did well. He
quickly grew to nearly 50 employees. But Amazon's dominance
meant that he depended on his marketplace for nearly 90 percent
of his sales. Taking advantage of this, Amazon began to ratchet
up the fee it charges sellers like Mordaza. By 2020, Amazon was
taking nearly half of every dollar his company earned in sales,
pushed his business into the red, and forced him to lay off
most of his staff.
America has a monopoly problem. It has rendered our economy
less innovative. It has fueled rising inequality, and racial
injustice. Concentrated market power has made the already steep
barriers faced by Black entrepreneurs all but informidable.
As Chairman Beyer noted, many Black and Brown communities
lack basic services like grocery stores and pharmacies because
of consolidation. The roots of all this can be traced to the
1980s when the antitrust agencies and the courts made radical
changes to our antitrust policies.
They abandoned the long-standing goals of these policies,
and instituted a new framework known as the consumer welfare
standard. It sounds benign, but this approach has blinded
antitrust enforcement. It has allowed, for example, large
corporations to use their financial muscle to bankrupt smaller
competitors and take market share without actually having to
compete for it.
It has led, for example, to predatory pricing which
involves selling goods or services for low cost for a sustained
period. We have seen Amazon repeatedly do this. It took light
that big corporations can win simply by being bigger. A small
business might have a better product, but it lacks the
financial resources to sustain similar losses.
Predatory pricing was effectively legalized by the Supreme
Court in 1992. We see it in many other ways. Antitrust agencies
and the courts, for example, allow vertical integration. I
mentioned with CVS and Anheuser-Busch and how they have used
that to block their smaller competitors from being able to
compete.
And third and finally, the current approach has allowed a
few tech giants to seize control of our online market. Amazon
is so dominant to online shopping traffic that retailers and
brands left the site to reach their own market. So, Amazon also
directly competes with these same businesses. Amazon routinely
uses its gatekeeper power to exploit the businesses selling on
its site and finally sellers appropriated their data and copied
their best-selling products. And of course, it pockets the
growing share of their fees, as I noticed.
If Congress does not act to check Amazon's out-sized power,
you are effectively allowing Amazon to function as a kind of
private government that regulates and taxes the Nation's
commerce and rules over those who engage in it.
In my testimony, I outline several actions that I hope you
will take, but I want to underscore particularly the importance
as I close here of supporting the big tech legislation that is
coming out of the House Judiciary Committee. It is the most
important legislation for restoring fair markets for
independent businesses.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Mitchell appears in the
Submissions for the Record on page 54.]
Chairman Beyer. Ms. Mitchell, thank you very much. We
really appreciate it. And now, finally, we hear from Mr. Chris
Edwards with the Cato Institute.
STATEMENT OF MR. CHRIS EDWARDS, DIRECTOR OF TAX POLICY STUDIES,
CATO INSTITUTE, WASHINGTON, DC
Mr. Edwards. Thank you very much, Chairman Beyer, and
Ranking Member Lee. Thanks for inviting me to testify today.
There are growing concerns about rising corporate power and
some measures of industry concentration has certainly
increased. However, globalization and technology are creating
intense competition for big corporations today.
Back in 1980, companies on the S&P 500 list stayed on the
list an average of 30 years. Today companies stay on the S&P
500 list an average of just 20 years. The fear of many big
corporations today is that their businesses and industries will
get disrupted and overtaken by technology-driven startups.
The leading electric car company today in America is Tesla,
not any of the major car companies. The MRNE technology behind
COVID-19 vaccination was pioneered by biotech firms Moderna and
Biointech, not any of the big pharma giants.
We have seen startups displace corporate giants many times
in history. In the 1970s, IBM dominated the computer industry,
and the government prosecuted a 13-year antitrust case against
them, But then along came Apple Computer and changed
everything. In financial services today, swarms of big tech
startups are cutting fees and challenging the big banks. This
is all benefiting consumers. Tech startups are pushing prices
down to zero in some cases. WhatsApp was a startup that now
provides free phone service to 2 billion people around the
world. Spotify was a startup that is now number one in music
streaming, with its YouTube popular free service ahead of
giants Amazon and Apple.
The great majority of these tech-driven startups got off
the ground with the risk capital funding from angel investors
and venture capital. To limit corporate power, Congress should
support policies to keep investment flowing to high-growth
startups. Airbnb was an angel and venture capital funded
startup that now competes against the big hotel companies.
Elon Musk did not found Tesla. Instead, he was actually the
original angel investor in Tesla back in 2004. So, Musk helped
Tesla get off the ground. Moderna and Biointech were funded by
hundreds of millions of dollars of angel and venture capital
investments for an entire decade before the pandemic struck
last year.
In the news recently I noticed that Breeze Airwaves was
launched in 2021 by the same entrepreneur who founded Jet Blue
a couple of decades ago. The new airline is funded by $100
million of angel and venture capital investments that plans to
undercut the big airlines with super low-cost flights to under-
served markets.
So how can policymakers support startups and take on the
big corporations? Well, first I think we need to keep capital
gains taxes low. Capital gains are the reward for the high risk
that investors undertake in investing in companies like Moderna
and Tesla. Unfortunately, President Biden is proposing to
sharply increase the capital gains tax rate, but our capital
gains rate is already higher than the OECD average. I think a
big capital gains tax increase, if applied to startup
investing, would be a crushing blow to America's tech
industries in particular.
Now currently the Tax Code allows investors in some
startups to defer or to eliminate their capital gains taxes.
However, I fear that the general thrust of the current
proposals such as Senator Wyden's plan to use mark-to-market or
accrual accounting for capital gains would kill the benefit of
investing in startups. No other OECD country uses accrual or
mark-to-market accounting for capital gains.
And lastly, I think policymakers should support open entry
in markets. Rising regulatory burdens, as some of the other
panelists mentioned, often advantage big companies over small
ones. Many reforms during the 1970s and 1980s show that
deregulation increases competition and benefits consumers such
as airline deregulation and telecom deregulation.
Deregulation allowed startup FedEx in the 1970s to
revolutionize package delivery. One of the other panelists
mentioned the craft beer industry. Deregulation in the beer
industry in the 1970s and 1980s allowed an explosion of craft
beer making with hundreds of new producers challenging the big
beer oligopoly.
So, in sum, we can limit corporate power to the benefit of
consumers by vigorous competition from startups, and I think
policymakers should remove barriers to entry where they can,
and they should support low capital gains taxes to encourage
investment in high-growth startups.
Thank you very much for holding the hearing.
[The prepared statement of Mr. Edwards appears in the
Submissions for the Record on page 66.]
Chairman Beyer. Mr. Edwards, thank you very much. And thank
you, all of you, for your testimony. We will now begin the
round of questions, and I get to go first.
So, Ms. Mitchell, in Senator Lee's opening statement he
talked about regulation being the cause of corporate
concentration. Mr. Edwards just gave some examples of how
deregulation led to more small business growth. But in your
talking about the challenges that small businesses face, you
did not mention regulation at all. Do you see regulation as the
primary reason why small businesses are failing to thrive? Or
is it the absence of antitrust enforcement?
Ms. Mitchell. It is something of a combination of both but
let me put a little bit of perspective on that, which is that
what we are seeing is that as large companies amass market
power, they also gain political power. And they are using that
power to rewrite legislation and regulation in their own favor,
and to disadvantage their smaller competitors.
One place where we see this is in the Tax Code. The very
complicated Tax Code with lots of loopholes that large
corporations that are designed to large corporations to put
through. As a result, you have a situation where Amazon for
many years has paid effectively no Federal taxes, income taxes.
And meanwhile, the local store down the street in your
neighborhood is paying an effective Federal tax rate of about
25 percent. That is an example of how our regulations are being
warped by concentrated market power to disadvantage fair
competition and small businesses, workers, and communities.
Chairman Beyer. Thank you. Let me move on, limited time.
Dr. Philippon, among your charts you showed that the high
profits that corporations have, 9 percent of GDP rather than 6
percent, has not led to higher investment, but rather an
increase in share buybacks.
Do you see a specific policy proposal that could rein in
those share buybacks?
Dr. Philippon. Well, I think the best place for your
proposal in general in that case would be to improve
competition. The fact that they make a lot of money is not,
again, by itself, a bad thing. But in a competitive economy,
they would be eager to reinvest their profits in order to grow
their company faster.
So if we make competition more intense, I think that the
pay-outs by themselves will decrease simply because some will
be forced to reinvest more of their profits. Now the difference
between dividends and buybacks is not, in my view, necessarily
a faster duration.
Chairman Beyer. You also said that if we had competition--
if we had not had this concentration of corporate power, the
GDP could be 5 percent higher. Is this a one-time increase of 5
percent? And would the economy grow more quickly if we had this
decrease in corporate concentration?
Dr. Philippon. So, this is a very deep question. The number
I quoted was for the one-time increase, because this is the one
that we can know more. Because it is only assumed that some
have more pressure and hire more, which is not a controversial
statement. It is every economy that can agree with that.
And so, then you can quantify the 5 percent one-time gain.
And there is also evidence that competition is good for
innovation, in which case it would also improve the growth rate
of the economy. I did not include that number because it is
hard to quantify, but it is definitely positive. So that would
add something.
Chairman Beyer. Good. Thank you very much. Dr. Bahn, I have
a complicated question for you. On page 3 of your remarks, you
have this beautiful graph, the Herfindahl-Hirschman Index. And
it shows the concentration of monopsonistic labor market power.
It reminded me awful much about a political map on how
Presidential elections are. Is there an alignment, do you
think, between political leanings and monopsonistic market
share? How would you interpret that?
Dr. Bahn. What I am really saying in that map that I
included is that rural areas kind of have really high levels of
concentration, and so when there is a lower population there
are fewer suppliers who end up being dominant in a really small
area, but I don't know if we can say anything speculative about
the connection between later market competition and political
leanings in that area.
Chairman Beyer. I do think we need to take that wonderful
chart and give it to some political scientists across the
political spectrum to see how to interpret that. That is very,
very interesting.
I will be back with more, but now since Senator Lee is off
voting, I believe, I will now recognize the Ranking Member on
the House side of the Joint Economic Committee, my friend Mr.
Schweikert, from Arizona.
Representative Schweikert. Thank you, Chairman Beyer, This
is actually an area that Mr. Beyer and I have actually had
conversations with over the years, and it is of great interest.
But I think I am going to give you my perspective on why the
regulatory side is part of the problem in our failure of
design. Let me give you a specific example, and then I am going
to turn to Dr. Philippon and Mr. Edwards to see if my
disruption theory fits some of your own writing.
I have spent years sitting through hearings on Dodd-Frank.
The promise of Dodd-Frank was it was going to become a
disruption in financial markets, and we were going to see all
sorts of new products and new competition.
Now, a decade later, we functionally see a concentration of
the money center banks. And it turns out there is this term
called ``regulatory arbitrage.'' Which means you now needed a
much bigger book of business to spread your regulatory costs,
therefore it wiped out small regional institutions. Yet, we had
facts and the data that said the ultimate thing that created
safety and soundness was equity capital.
You could have dramatically dropped the regulatory burden
on those regionals and small institutions and kept them
dramatically safer and had them chip away at the size of the
book of business of the money centers. I use that only as an
example because I believe I can show you that from everything
from health care to pharmaceuticals, to manufacturing, we are
going to have to look in the mirror, Chairman Beyer, that much
of what we do in Congress, whether we want to recognize it or
not, we act somewhat like it's a protection racket. We design
legislation specifically directing certain types of products,
certain types of technologies, certain types of reimbursement,
instead of understanding the disruption of technology that
surrounds us.
The last example I will give before the questions is, to
think about all of our discussions in parts of our country that
are under-served with broadband, but yet how often in those
very conversations do we understand low Earth orbiting
satellites now cover every part of North America and have
broadband. But yet we still promote the same type of
legislative subsidies that we have been doing for 20 years,
instead of understanding the technologies that create the
disruption.
Mr. Edwards, I understand your focus is on capital markets.
Beyond just capital gains, what else would you do in capital
markets to allow those small entrepreneurial upstarts, whether
it be from a minority community or just some folk's creative at
universities, to be able to have an equity capital access so
that their business plan is not to just be bought out by one of
the dominant players? What would you do in the capital markets?
Mr. Edwards. Right. Well, Congress has actually made quite
a bit of progress in that respect particularly with the Jobs
Act in 2012.
Representative Schweikert. And I would like to mention two
of those bills were mine.
Mr. Edwards. Well thank you very much. I think that idea of
opening up investment in private equity, in venture capital, in
angel investment to more regular Americans, not just wealthy
accredited investors, was the way to go. The legalization of
equity crowd funding. I think that is fantastic. I think that
opens up more diverse flows of money to more diverse types of
startups. So I think that was all fantastic.
You know, there is a basic problem that the regulatory cost
of being a public company have gone up, which is one of the
reasons why we have far fewer IPOs today, and far more of these
companies like Uber and the like stay private longer, which I
think is a real problem because it deprives middle class
investors from gaining the benefits of these big boosts in
value from these startup companies.
Representative Schweikert. Thank you, Mr. Edwards.
Dr. Philippon, in the last half a minute, touch on some
regulatory arbitrage as being one of the barriers to disruption
in our marketplace to bringing new products, new costs and new
opportunities.
Dr. Philippon. Right. So, it's specifically financing----
Representative Schweikert. It could be anything,
particularly health care as the most regulated.
Dr. Philippon. Yes. So, I think that finance and health
care stand up as two industries where the balance of regulation
and efficiency has not been very good. So, in finance, clearly,
we set the tradeoff between safety and competition, and we try
to balance the two. But if you look clearly at the data, you
see that I don't think we have found the right balance.
The one thing I would point out, though, about Dodd-Frank
and the lack, it gets better but it is not perfect. And some of
the lack of competition actually comes from the lack of access
to data from some of the new startups.
But the two main advantages of income from large banks are
(a) the--insurance and (b) the data that they have. If you
could induce them to share their data more, you would have more
entries into the market.
Representative Schweikert. We actually have new legislation
for securitized debt to flow information out.
Chairman Beyer, thank you for your patience.
Chairman Beyer. Thank you, Congressman Schweikert. And now
I present our distinguished author, Senator Klobuchar.
Senator Klobuchar. Thank you very much, Mr. Chairman. I
want to say one thing I did not say in the opening. I really
come at this from a point of wanting to rejuvenate our
capitalist system. And as someone who was in the private
sector, as I was, representing companies for nearly 15 years, I
am not as successful in the private sector as you, Mr.
Chairman, but I come at it that way: How can you spur
innovation? And how can you make sure that indeed we have the
next Google, and we have the next Pfizer, and that we are
making sure that these startups have an environment where they
cannot only start but they can thrive?
Mr. Philippon, could you talk about--you have some shocking
data there about the decline in the amount of competition, and
the effect that if that continues really across industry. I am
not just talking about tax. Without us at least doing something
to enforce the antitrust laws, and why Adam Smith himself, the
Godfather of capitalism, warned against a standing army of
monopolies that we must always be aware of in order to make
capitalism work.
Dr. Philippon. Thank you very much, Senator.
So, yes, I think the issue of monopoly is an old one. But
to be fair, the reason it is tricky to solve, and I think it is
something I do not of course have time to talk about in my
remark, is we have to acknowledge that we still have a lot of
uncertainty. To return to something that was said earlier, we
do not know for sure what is good concentration and what is bad
concentration. And in the modern knowledge economy, it is also
that intangible assets have become more and more important.
And so, with the rise of this type of asset, it becomes
sometimes difficult to decide, especially in real time, what
looks like legitimate concentration, earned by just being small
term--from illegitimate concentration.
So that is why I think that in the policy framework,
especially today given the uncertainty, I think that we should
have a very broad approach. I don't think that antitrust itself
could solve the issue. I don't think regulation can solve all
the issues, especially as we discussed that regulation can cut
both ways.
So, I think we need at the same time revival of antitrust,
reviewing of regulations, and specifically geared toward again,
price transparency; in all the markets where we see the biggest
abuse, we see lack of price transparency and barriers to entry.
If we focus on these two things, we go a long way toward
improving the situation.
Senator Klobuchar. OK, thank you. Dr. Bahn, along those
same lines, as you know I have introduced legislation that is a
broader approach to reforming our antitrust laws. And do you
think we should--and I appreciate the work of the House in
their incredible hearings on tech, and we are working with
Representatives Cicilline and Buck to introduce versions of
their bills. But could you talk briefly about updating our
antitrust laws to address concentration in markets, including
by the way labor markets, something you have talked about?
Dr. Bahn. Yes, Senator Klobuchar. The new legislation that
was included in your proposal would codify, clarify, and
strengthen antitrust law to protect workers, and this is a
really important guide for Federal antitrust agencies and
judges in antitrust cases to have the authority to address
anticompetitive conduct but clearly lack the means to do so.
So, it is really critical that they have that guide, and that
it is clearly defined as an issue in labor markets that need to
be addressed.
Senator Klobuchar. Very good. And maybe you, Ms. Mitchell--
by the way, thank you for having the smart decision to go to
McAllister College in Minnesota--Ms. Mitchell, could you talk a
little bit about the President's Executive Order and why you
think it is so important? Because as we look to update our
antitrust laws, as so many Congresses before us have done from
the Clayton Act to Taft Hartley and beyond, and work that has
been done in the past with labor and other things, what do you
think we could be doing with the Executive Order? And why is it
important to do both things at the same time?
Ms. Mitchell. Thank you, Senator. And I really appreciate
your leadership on this issue and the legislation that you have
introduced. The Executive Order is extraordinary in that it is
a repudiation of I think where we have gone wrong. As President
Biden said, we have run a 40-year experiment and it has really
failed. America is worse off on so many fronts.
The Executive Order I think will begin to harness a variety
of tools within the agencies to address concentration and
create more fair markets for farmers, small businesses, working
people, and communities. I also think it is really important to
underscore that this is not a problem that can be solved
without Congress, because the courts have taken our laws so far
off track that it is really absolutely imperative and urgent
that Congress step in.
Senator Klobuchar. Alright, thank you very much. And thank
you, Mr. Chair. Fourteen seconds over, for a Senator that is
pretty good.
Chairman Beyer. [Laughing], thank you, Senator, very much.
Let me now recognize our honorable friend from Columbus Ohio,
Congresswoman Beatty.
Representative Beatty. Thank you so much, Chairman Beyer,
and certainly to all of my colleagues, and to the witnesses.
Thank you for all of your expertise.
My first question is going to go back to you, Dr. Bahn. In
your testimony you discuss the rising usage of the non-compete
agreement, even in the case for low-wage workers. You also
quoted a lot of information by the 20th Century Economist Joan
Robinson, who has also examined the lack of--how the lack of
competition led to unfair and inefficient economic outcomes.
I read the study, and according to the study of business
owners by the Economic Policy Institute, they found that nearly
a third of businesses ask all of their employees to sign a non-
compete agreement. The Biden Administration recently signed
Executive Orders on competition, asking the FTC to ban this
practice, with very few exceptions.
What effect do you think this will have on workers in
competition?
Dr. Bahn. Thank you so much, Representative Beatty. I think
that the non-compete agreement issue is a really perfect
example of a competitive model not bearing out in the real
world. If anything, we think workers paid more for accepting a
non-compete are finding the opposite and were finding that they
are particularly prevalent for low-wage workers, too. Over 20
percent of low-wage workers are bound by a non-compete.
But what happens when you ban the enforcement of the non-
compete, for example as Oregon did in 2008, wages in Oregon
went up more quickly for workers in jobs that were previously
covered by a non-compete compared to jobs that were not
previously covered by a non-compete. So, there is evidence that
shows that when you ban them, they the wage will go up more
quickly.
The key piece to this that I just also want to mention is
that enforcement of labor protections through the Department of
Labor is also a critical tool to ensure that workers are not
exploited by anticompetitive conduct. So, I think it is really
critical to make sure that our enforcement agencies,
particularly the Department of Labor, can go after some of this
misconduct as well.
Representative Beatty. Thank you so much. Maybe Ms. Wilson
or Dr. Philippon, for the last--or the past 30 years, our
economy has seen a troubling trend of increasing wealth
inequality. I am Chair of the Congressional Black Caucus, and
we look at the inequities in the racial wealth gap.
It is important for me to ask this question: I was reading
another study, and according to the St. Louis research, in 1889
the top 10 percent of Americans owned 67 percent of the United
States' wealth. And then more recently, in 2016 or 2018, that
number was 77 percent. The bottom 50 percent of United States
households saw their share of wealth decrease by 67 percent
over that same period of time.
Has growing the market in a monopolistic behavior market
contributed to this inequality, do you think? And if so, how?
Ms. Mitchell. Sure. Thank you for the question. And, yes,
when you concentrate economic power and decision-making, you
inevitably concentrate income and wealth. So, we have seen a
small number of people gain enormously in this economy, and
more and more people are being left behind and harmed by this
consolidation. Are the geographics mentioned in this? So, we
see a few areas that are seeing good jobs, and lots of other
cities and regions in rural areas that are being left behind.
And there is a very profound racial dimension to this.
We have lost lots of Black-owned businesses and banks. We
have seen, as Dr. Bahn talked about, the effects on wages that
have been particularly felt in industries that
disproportionately employ people of color. More and more
employers are able to take advantage of both racism and
economic power to undermine their workforce, and that is
serious.
Representative Beatty. I will give you my last 30 seconds.
Dr. Philippon. Thank you very much. So, I fully agree with
what has been said. Both monopoly power and monopoly power will
increase inequality. Very much along the line of Dr. Bahn said
earlier, people who happen to be in the wrong labor market are
going to see their wages depressed by the monopoly power of
local employers. The same thing happens at the more
microeconomic level, because when monopoly rents are high, the
shareholder will gain more. Now of course if every family was a
shareholder, then everything would be fine. But if you look at
the actual distribution of share of stock, it is very
concentrated.
So, when you shift money away from workers, you also
increase inequality significantly.
Representative Beatty. OK, thank you. And my time is up.
Thank you, Mr. Chairman.
Chairman Beyer. Thank you, Congresswoman Beatty. Now let me
recognize the gentleman from Madison, Wisconsin, Congressman
Pocan.
Representative Pocan. Thank you very much, Mr. Chairman,
and thanks to all the witnesses. It is a great hearing. I
appreciate it.
I think, Dr. Philippon, let me ask you the first question.
I know you have done a lot of work around broadband. I have co-
chaired a bipartisan Rural Broadband Task Force--I'm sorry, a
caucus, and I also served on Jim Clyburn's Rural Broadband Task
Force. I live in a rural town of 830 people, and about three or
four years ago I finally got broadband. Prior to that, I paid
$300 a month for 40 measured gigs of broadband because I got a
half-price sale for that amount.
Many states like Wisconsin, and I think the majority of
states have laws that you pretty much have to get broadband
from the provider that has your area. We were not allowed to
form a co-op. We were not allowed to buy from a neighboring
community. So, we either went without broadband, or when a
company got free money from the Federal Government, they
decided to expand it into our area.
You have done a lot of work in this area. Can you talk a
bit about this, what we can do to try to make it so that people
can have affordable broadband? My broadband now is about $90 a
month in that rural area.
Dr. Philippon. Thank you very much for the question. That
hits close to home, because that is one of the motivations for
writing the book, because I came to the U.S. from Europe 20
years ago. And at that time, connections to the internet were a
lot cheaper in the U.S. than in Europe because that market was
highly competitive. And so it was a shock for me to see that.
Over the following 20 years, it completely turned around
and so now it is actually cheaper to get broadband access in
Paris or Germany than it is to get access in Washington, or New
York.
So clearly the name of the game will be to increase
competition. One of the issues you have in the U.S. is that the
setup of democracy is state-by-state. And so, it is very hard
to find a solution that would work across the entire country.
It has to be state-by-state.
And that means that also I don't think every extension is a
solution. We think that including competition by bringing in a
new provider is going to be tricky, at least in the short term,
which is why probably you have to go state-by-state by first
getting directly the prices that are charged, and then state-
by-state bring competition. I don't think jumping directly to
having many more providers is going to be practical, even
though it would be ideal.
Representative Pocan. Great. Thank you very much. Ms.
Mitchell, I have a question for you. So, I am a small business
owner since I was 23 years old, but a small business of 5
employees. These days, they refer to that as a micro business,
which most of us hate as a terminology if you are under 20
employees.
But as you have pointed out, the amount of business revenue
for small businesses has halved since the 1980s. And even when
we were putting together regulation to help small businesses
through COVID, honestly, I fought with my own Party at times in
understanding small businesses, because we don't have the same
year-to-year sort of sales. We don't have, you know, issues
that a bigger business has.
Can you talk a little bit about what are the main threats
that you are seeing to those small, independent businesses?
And, you know, what we could do in the short term around that?
Ms. Mitchell. Thank you for the question. Yes, micro
business. The other one I think is ``Mom & Pop'' that people
really hate. That was a sort of derogatory comment and I think
many business owners hear it.
Yeah, in our research and in the surveys we have done, we
have done large national surveys of independent businesses, we
do see issues of market power really top that list. There are
other concerns, you know, the high cost of health insurance for
example is one. But we have seen lots of different kinds of
market power issues. The incredible fees that Visa and
MasterCard are able to charge, and you can't say no to the
credit cards. You have restaurants that, the DoorDashes of the
world who have also become sort of gatekeepers charging these
big tolls, and there is not enough competition there for
regulation.
I am really particularly struck by the fact that I think
Amazon has just an incredible reach in a different market. Its
gatekeeper power across a lot of different sectors. The online
is where everything is moving. And if you have a company that
controls your access to the online market and competes against
you, it is a fundamental problem. And that is why I think the
big tech breakup bill is so crucial.
Representative Pocan. Yes, and we also let our employees go
to the restroom and that somehow makes us less competitive
against the Amazons of the world, unfortunately. But I fully
appreciate that.
I have 10 seconds, Mr. Chair, and I will yield back.
Chairman Beyer. Thank you, Congressman, very much. And now,
if Senator Lee is there--I notice his camera is on. I see his
staff person occasionally. But if not, I would love to yield to
my good friend from San Diego, Congressman Peters.
Representative Peters. Thank you, Mr. Chairman. Thanks for
holding this hearing. At the risk of repeating some of what
Congresswoman Beatty was talking about, I did want to ask a
little bit about non-competes.
According to analysis from the Economic Innovation Group,
greater enforceability of these contracts reduces new firm
entry by 18 percent. And states that enforce non-competes tend
to have lower prevailing wages than states that do not enforce.
Overall, one in five workers without a college degree is
subject to a non-compete agreement, and 30 to 40 percent are
not asked to sign the agreements until they have accepted the
position.
Dr. Bahn, I know you have looked at this, and I want to
just clarify. Is there any reason a worker that does not have
access to proprietary information should be subject to a non-
compete agreement? What would those circumstances be?
Dr. Bahn. I think there are very few circumstances in which
non-compete agreements are especially being compelled to sign a
non-compete agreement has an economic justification such as
trade secrets. I think, as you are noting, by and large it
seems that workers are facing less than optimistic conditions.
They cannot bargain over the conditions of the wage offer that
they receive, so they have to accept them anyway, and it tends
to be some of these low-wage workers with Jimmy Johns, or in
the ArcTech example of a player who had non-compete workers for
no economic justification.
And as I mentioned to Congresswoman Beatty, it lowers
wages. It reduces wage growth. It really is not good for
particularly low-wage workers in these markets.
Representative Peters. So, you mentioned that. Are there
other particular industries where we know this has been
especially damaging going from the ability from this labor
market to be effective?
Dr. Bahn. I am not aware that there are particular
industries, but I do know it is something like 20 percent of
workers who earn below the median wage in the U.S. are subject
to a non-compete agreement, which is a really high level if we
consider that low-wage workers are less likely to be in those
occupations that we could say justifiably have some sort of
economic justification for signing a non-compete agreement.
Representative Peters. There was a mention earlier of the
President's Executive Order, which I certainly welcome, and I
hope it goes a long way to help workers, although I do think
that--and maybe you could tell me if you agree--Congressional
action is important in this space. I introduced the Workforce
Mobility Act, which effectively bans non-compete agreements
except in limited circumstances like protecting trade secrets.
In San Diego, the innovation ecosystem is the backbone of
the economy. We need policies to make sure that workers can
compete everywhere.
Do you believe, Dr. Bahn, that Congressional action is
important in this space?
Dr. Bahn. I absolutely do. And I think encouraging mobility
in the labor market is one of the most important things we can
do to have a dynamic and healthy economy. So I think policies
that are exclusively designed to encourage worker mobility are
what we need to have growth in our labor market going forward
from the crisis. And we need explicit legislation.
The current Executive Order is a good start, but it is just
that. It encourages the people to address the issue, and I
think the responsibility of the Department of Labor is really
critical. They have the infrastructure to address labor market
violations, and they need to do so.
Representative Peters. Maybe I will ask, Ms. Mitchell, do
you have an opinion on the extent to which non-compete
agreements are a downward force on starting new small
businesses in local economies that have been hurt by the
pandemic lately?
Ms Mitchell. It is absolutely a problem. I mean, not only
can workers covered by these non-compete agreements not go out
and start their own enterprises in that same field that they
have skills in, but it also means if you are a new startup your
ability to track those skilled workers is also key. So, it has
a huge effect on startups.
Representative Peters. Right. Thank you. I wanted to ask a
question of Mr. Edwards. Your testimony talked about the
importance of open markets. And I wanted to give you the chance
to respond to this notion, this concern that has been raised
about firms that control the market and compete against the
people who are allowed in that market. Doesn't that create an
anticompetitive situation that inhibits the ability of private
capital invested in new innovation?
Mr. Edwards. Well, you know, big corporations have--I agree
with the other panelists about regulations and the like are
preventing our open entry. But a lot of huge corporations like
Amazon got where they are because they used high productivity,
and they stay ahead of the pack by investing massively in R&D
which has broad-based spillover benefits for the whole economy.
I would not----
Representative Peters. I guess the concern I would raise is
that Amazon has become the market, and they are competing
against the people in the market, and I think that creates an
issue. And I take your point on private equity investment and
on capital gains. I don't necessarily disagree with that. But I
think that is something that has not been addressed, and it is
still a concern for me.
I have exceeded my time, so I yield back. Thank you, Mr.
Chairman.
Chairman Beyer. Thank you, Scott, very much. And David and
Scott, we are going to do another round of questions while we
await the return of Senator Lee who has not had a chance to do
his first round of questions but should be back shortly.
So, I will begin, but please think about it and you are
welcome to ask again. Let me start with Dr. Philippon.
Mr. Edwards talked about supporting risk capital via lower
taxes on capital gains. Obviously, that is very much in play
with the potential Biden tax plan. How much of a challenge is
capital today in the market? And is competition essentially a
money problem?
Dr. Philippon. Thank you very much. I think it is a very
important question. My reading of the evidence today is that it
is not the volume of financing that is constraining innovation.
I mean when you talk to industry people, they tend to argue
that they--money floating around to fund----.
So, I don't think the supply of funds are the issue. So, I
don't think they think that increasing taxes is a reasonable
way would have a very large effect there. But I do think one of
the issues, if you look at the exit of firms that do get
financing, the fraction of firms that decide to go public and
remain independent has decreased significantly over time. And
more and more of the firms now, whether forcefully or not, end
up being acquired.
And so, I think that in my mind is the bigger issue.
Chairman Beyer. Thank you very much. Mr. Edwards, I will
get back to you in just a minute on that. Dr. Bahn, you talked
about labor's share of income has declined and argue that a
larger share of income would be a very good thing for workers.
Would it also lead to faster economic growth? Or what is
its impact on economic growth?
Dr. Bahn. Sure. Thank you for the question. So, as you
noted, the labor share of income has been declining. The way I
interpret this is that as far as constraining monopsony power
has decreased over time, at the same time that we have seen a
growth in capital and less to labor. As Mr. Philippon noted,
rising profits have gone to sales rather than investments for
innovation growth. And finally, economic research has suggested
that the labor share of income is positively correlated with
the growth in the long run. So, it is important for the entire
economy to ensure that workers are earning the value they
produce for growth.
Chairman Beyer. You know, one of the big issues for
Democrats and Republicans, as long as I have been here, been
trying to come up from the more anemic economic growth of the
teens, to much faster growth in the next generation.
And then, Ms. Mitchell, we now have these credit deserts
with the disappearance of community banks, and just the big,
big banks everywhere. The hope was that FinTech firms would
fill that gap. Do you see any evidence of that happening?
Ms. Mitchell. No, on the Fin side, the kind of lending at
the community banks is long term where they are engaged with
the business, helping them grow and develop over time, and
doing that with reasonable interest rates, and on reasonable
terms. The FinTech operations that we see charge very high
rates on short-term loans. They are not based in the same
community. When they are under stress during a financial
downturn, for example, they may call those loans very quickly,
exactly what you do not want to have happen to a business
facing a downturn.
So those are not good replacements. I am deeply worried
about the decline of community banks and all of our community
banks.
Chairman Beyer. Great. Thank you very much. I will now
yield to Senator Lee, who has returned to us. Senator, thank
you for coming back.
Senator Lee. Thank you so much, Mr. Chairman.
Mr. Edwards, I would like to start with you. American
businesses are some of the most innovative in the world. As you
note in your testimony, we are global leaders in computer
technology and business services, and in pharmaceutical
development, just to name a few.
The most disruptive innovators that is where American
businesses and workers are on the leading cutting edge and are
often pioneered by new companies entering an existing market to
challenge an outdated product or service.
Now you mentioned that the threat of higher taxes could
make it harder to fund future innovative startups. Can you
elaborate on how tax hikes or threatened tax hikes could make
big businesses even bigger? And why market-based competition is
such an effective check on corporate power?
Mr. Edwards. Well, venture capital is a unique American
success story. It is the reason why lists of the most
innovative companies in the world, the great majority of them
are American because we have had since the late 1970s this
massive flow of venture capital partly triggered by a famous
1978 cut in the Federal capital gains tax rate.
Chairman Beyer talked about, a little bit about the flow of
funds to startups. It is true. There is a huge flow of funds
through startups now, which is fantastic, but I hope they don't
break the American system of moderate capital gains taxes and
everything we have going on in places like Silicon Valley.
Let's not break that.
We are doing great with launching new high-growth
businesses. That is the way to challenge these big corporations
going forward.
Senator Lee. Well thank you. My own State of Utah is
fortunate to have had strong economic growth in recent years,
as well as one of the strongest pandemic recoveries. Utah
currently has one of the lowest unemployment rates in the
Nation, and its GDP growth far surpasses the national growth
rate. Our population growth over the last decade was also the
highest in the Nation.
I attribute the state's resilience and continued economic
prosperity to its business-friendly policies and its strong
communities, families, and social ties, this is a concept we
refer to as ``social capital.''
So, Mr. Edwards, as you pointed out in your research, many
entrepreneurs face increasing tax and regulatory challenges at
the Federal, State, and local level. These government
impediments make starting and maintaining a thriving business
needlessly complex and costly. And at the Federal level, the
REINS Act would give Americans an important check on costly
Federal regulation by helping to hold Executive Branch agencies
accountable. And I believe the REINS Act would make a
meaningful difference for small businesses and entrepreneurs in
the long term in particular.
In your view, what are some of the other important reforms
that might help clear the path for innovation and support the
new business formation?
Mr. Edwards. Well, I think this is a problem, and I think
Dr. Philippon has talked about this in his research. The
regulatory problems at all three levels of government block
entrepreneurship. I mean, I applaud President Biden for looking
at the issue of occupational licensing.
As you may know, the share of U.S. jobs that have the
required occupational licenses have gone up from 5 percent in
the 1950s up to over 20 percent today. At the state level,
there are Certificate of Need laws that block investment in
health care. There is a big problem with the U.S. Air Force.
The U.S. Air Force, the way they are run is monopoly governing
authority. Hence, the blocked new airline entry into the
business.
So, I think there are problems at all three levels of
government on the regulatory matters. My last point, back in
the 1970s deregulation of airlines, and trucking, and many
other industries was very much a bipartisan reform approach
that everyone agrees was very successful.
I mentioned the beer industry, which Jimmy Carter
deregulated at the Federal level. Airlines, and many other
things. So, I think deregulation to help upstart businesses can
be bipartisan.
Senator Lee. So, with regard to the airports, are you aware
of any policy proposal on how we can fix that issue today? I
have seen that, where you have got slots out there carefully
allocated, and that has made it almost impossible to have new
entrants. How do you fix that?
Mr. Edwards. So, there's some Brookings' economists who
have written extensively about that. There is a problem with
dominant carriers in hub airports who write these contracts
with a government airport authority that exclude new entrants.
The way to fix that is the way they have done it in Britain,
which is you privatize the airports like Heathrow as a private
airport has a much bigger incentive to open gates to real-time
sort of pricing to allow upstart airlines to come in and buy
gate space. And a lot of U.S. cities have blocked.
A last point on this is, we have a government authority in
New York that owns all three airports. That makes no sense. And
in D.C. the same authority owns National and Dulles. Why is
that? Why not privatize the airports and let, for example,
Reagan and Dulles compete with each other?
So, I think airports are something that again could be a
bipartisan reform area.
Senator Lee. Well said. Thank you very much. Thank you, Mr.
Chairman.
Chairman Beyer. Thank you, Senator, very much. I will now
recognize--and, Senator, we are doing a second round. So, if
you are inclined, we will come back around to you again.
Congressman Peters, the floor is yours.
Representative Peters. Thank you, Mr. Chairman. I will pick
up again with Mr. Edwards just to see if I can get your answer
on the concern raised about if it is true that Amazon might
have so much owned the market and be competing against the
market at the same time, how does that not discourage
investment innovation?
Mr. Edwards. Well, I think you can see Amazon both ways. I
mean, Amazon has been successful because it has been incredibly
productive, and it has provided opportunities for millions and
millions of small businesses.
I can see that there is an issue that they also compete
against small businesses, but there is no reason why new
platforms can't arise with a different model and compete
against Amazon. I really don't believe that--I think any big
corporation can be beat by upstart competitors.
When you look at history, I mean 15 years ago Apple
dominated music streaming. Now Spotify has blown them away. It
was a small startup in Sweden. So, I think upstarts can take on
any company, even the biggest.
Representative Peters. You are not really arguing that that
is a competitive model, but you are saying someone can just
rise up and replace Amazon or compete with Amazon is what you
are suggesting?
Mr. Edwards. Absolutely. It is not going to happen
overnight, but it could well. I don't see any reason why a
marketplace could not gravitate to new platforms in the future.
Representative Peters. Did you want to address why it is OK
to have non-compete agreements in the fast-food industry?
Mr. Edwards. So, it's interesting you mentioned you're from
California. California has had a ban on non-compete for over a
century. I think that has actually been important for the rise
of Silicon Valley and high tech in places like San Diego. So, I
actually think that is a space issue. Space can solve that
problem any time they want if they desire.
Representative Peters. I appreciate that, and I appreciate,
Mr. Chairman, the chance to hear both sides of it, and I think
we are informed. So, thank you very much and I yield back.
Chairman Beyer. So, thank you, Congressman Peters. I now
recognize Congressman Schweikert for a second round.
Representative Schweikert. Thank you, Mr. Chairman. This is
one of those conversations where I wish I had one of my charts
because there is a hierarchy here of what creates a competitive
disruptive economy, and then helps remove or compete away
dominant market players.
We see what the Biden Administration has just recently
done, and what you have actually just talked about, on some of
the Executive Orders using the regulatory mechanism.
My concern--and I want to come back to this--is that many
things you and I and our brothers and sisters in Congress do,
are actually anticompetitive. And yet often we don't realize
we're doing it.
I appreciate, Mr. Edwards, the comment on the Jobs Act, but
that is almost a decade ago. And it took how many years to even
get an incremental crowd source funding mechanism, and even
then, it barely exists because of the bureaucracy around it.
In many ways, we empower the bureaucracy in such a fashion
that an economy that should be running on disruption and that
innovation and that creates the price pressures, and the new
systems of delivery, you and I keep supporting regulatory
environments, reimbursement in health care, and others where I
don't think we realize we are not being agnostic.
Think of some of the things we are doing on energy right
now where we call out specific types of energy, instead of
doing a piece of legislation that says we're agnostic. We don't
care if it has these attributes. We don't care what the
generation source is. Instead we let innovation and disruption
take place.
Mr. Edwards--and I know your specialization has been a
taxation capital market--what do we do as policymakers to
maximize that disruptive type of economy that in many ways
gives everyone a fighting chance to be that successful
entrepreneur?
Can you think of items within both the Federal bureaucracy
and our legislative agenda that would help that happen?
Mr. Edwards. Well, I mean I am in favor of further
liberalization of the rules on accredited investors. There is a
good argument----
Representative Schweikert. That is also my other bill.
Mr. Edwards. Right. Right. I mean there's a good argument
that we shouldn't even have those rules. I think giving middle
class Americans access to investment in private equity,
expanding and liberalizing those rules, is an important thing
to do.
You know, with capital gains, capital gains is really
important not only for the investors--I mentioned angel
investors and venture capital--but for the entrepreneurs
themselves. If you have a high capital gains tax rate, people
are not going to want to be entrepreneurs. They are going to
want to go for salary jobs. And also, you know, about three-
quarters of all tech firms in Silicon Valley use stock options
for employees where the benefit, again, is capital gains.
So, Silicon Valley companies are cash poor. What they have
is they can offer stock options. That has been hugely important
for Silicon Valley and other tech clusters.
So I am saying let's not break what has worked in the
United States for our tech industry.
Representative Schweikert. Any thoughts of what we could do
in the tech regulatory world for the true sort of micro
entrepreneur? Such as, the minority woman who lives down the
street from me who is actually starting a series of barbeque
trucks.
Mr. Edwards. So I just published a study a month or so ago
at Cato looking at State and local regulations, and I listed
about 15 or 16 different types of regulations.
One very interesting area that is home-based businesses.
Two-thirds of all American businesses are launched at home.
But a lot of cities have tight zoning laws that prevent home-
based businesses from starting.
Apple was started in a garage. Hewlett Packard was started
in a garage. Amazon was started in a garage. Home-based
businesses are really important, and that is something that
should be an area of bipartisan reform.
Representative Schweikert. Chairman Beyer, we are back to
the need for the chart of both the things we can do at the
regulatory level for those companies that are using their
oligopoly power, but all the way down to regulatory
bureaucracy, State and local, and those in the Federal
Government from what we do tax-wise and becoming technology
neutral, whether it be from health care to environment, to
other things. We could probably have that disruptive revolution
that creates a much more egalitarian economy. And with that, I
yield back.
Chairman Beyer. Congressman Schweikert, thank you. I am
going to have to get you together with Mr. Hagga of our Joint
Economic Committee team who is the only other person I know who
is as chartphilic as you are. And with that, let me--I want to
thank each of our witnesses today for their expert
contributions. Competition is foundational to a strong economy.
It helps place the promise of the American Dream within reach
for workers and entrepreneurs, but the concentration of
corporate market power subverts this promise, worsening
economic inequality and hindering productivity and economic
growth, as we have heard again and again this afternoon.
To promote shared prosperity, Congress must continue to
advance an economy where all can compete and contribute. So
thank you to Professor Philippon. We hope that the fireworks
are fun tonight on Bastille Day in Paris. Thanks for helping us
understand the economics of competition, how to restore open
markets, and for explaining how our failed experiment with lax
antitrust enforcement has led to reduced investment, weaker
productivity growth, higher prices, and stagnant wages.
And thank you to Dr. Bahn for breaking down the word
monopsony, and for sharing your expertise on how the erosion of
competition in labor markets impacts workers. As you made
clear, when employers must compete for labor, it leads to
higher wages, more flexible hours, and better benefits for
workers, and I am eager to share your chart, the Herfindahl-
Hirschman with some political science. There is a lot more to
be pulled from that.
And thank you, Ms. Mitchell, for sharing your insights into
the challenges that small businesses face, and specifically the
examples that you cited from around the country. This is vital
to our understanding of how they are impacted by rising
corporate power. And your focus on solutions to strengthen
communities and to restore the ability of small businesses to
compete will guide our work.
We are also grateful to Mr. Edwards. It is always good to
have somebody from Cato to come to share your thoughts and
expertise with us today.
And it is a special treat to welcome former JEC staff as
expert witnesses.
Thanks also to all my colleagues for joining this important
discussion and sharing your insights. We have the power to
restore competition and build shared prosperity by vigorously
enforcing our antitrust laws and adapting them to the 21st
Century, by funding our Federal enforcement agencies, and by
protecting the rights of workers to organize.
We commit to moving these ideas forward, and as we do this
important work we hope to continue to rely on your expertise
and good faith. So thank you all for participating today.
The record will remain open for three business days, and
this hearing is formally adjourned.
[Whereupon, at 4:04 p.m., Wednesday, July 14, 2021, the
hearing was adjourned.]
SUBMISSIONS FOR THE RECORD
Prepared Statement of Hon. Donald Beyer Jr., Chairman,
Joint Economic Committee
This hearing will come to order. I would like to welcome everyone
to today's hearing focused on the economic impact of concentrated
corporate power. I was encouraged to see President Biden's signing of
an Executive Order just last week taking action on this very issue.
I want to thank each of our distinguished witnesses for sharing
their expertise today. We have a world-class panel, and I am excited to
hear from them.
competition enables shared prosperity
Access to opportunity, open markets and fair competition are
fundamental to advancing shared prosperity in our country.
Competition in markets leads to lower prices and higher quality
goods and services, ensuring that consumers do not overpay for the
products and services they rely on, whether a vital medication or
broadband internet.
Workers also benefit when businesses compete for their labor.
Competition for workers incentivizes firms to pay good wages or risk
losing their workers to competitors, thereby serving as a
counterbalance to rising corporate power and enabling workers to
bargain for better working conditions.
And competitive markets allow everyday Americans to take a chance
on an idea and start a business. Or maybe they innovate on a product
and make it more affordable.
Research shows the possibility of new entrants into a market
compels existing firms to continue investing in people and capital to
stay ahead, which also elevates the United States as a leader in the
global economy.
the problem
We are here today because corporate concentration imperils shared
prosperity and exacerbates economic inequality.
Across industries--including health care, financial services,
telecommunications, agriculture and more--we are seeing higher levels
of concentration than there were three decades ago. Evidence shows this
has led to weaker business investment, higher prices for consumers and
lower wages for workers.
This consolidation of corporate power has allowed the wealthiest at
the top to capture a larger share of the gains from economic growth:
Amid record-breaking profits, corporations are paying less in taxes
today than they did 30 years ago while reinvesting 10 cents less per
dollar of profit. All of this has led to reduced productivity gains in
concentrated industries and slower growth economy-wide.
This is a problem because consumers are bearing the burden. On
average, we pay about twice as much for cellphone plans than some of
our friends in other advanced economies with more providers. The same
is true for broadband access. With more competition, hardworking
Americans could save billions each year.
Our workers are also paying for this in the form of stagnant wages.
Research shows, the median American household loses an estimated $5,000
each year through reduced wages and higher prices caused by a lack of
competition.
the cause
How did we get here?
The explosion of mergers and acquisitions have a played a key role
in the consolidation of industries. Over the past 40 years, they have
been allowed to proceed at an unprecedented pace, and the same holds
for an array of anticompetitive practices by industry leaders.
This is due in part to our failed experiment with a more lax
enforcement of antitrust laws and the under-funding of Federal
enforcement agencies.
During this time, our economy has lost half of its firms on a per
capita basis. This has disproportionately impacted marginalized
communities, where we've seen a disappearance of independent grocery
stores, pharmacies and community banks.
The rise of non-compete agreements is also part of the story. At
least 1 in 3 businesses require that workers sign non-compete
agreements, which suppress workers' wages, hinder their ability to
pursue better opportunities and contribute to persistent racial and
gender disparities. About 1 in 5 workers without a college education is
subject to these non-compete agreements.
proposals to make progress
The good news is that there are steps that we as a country can take
to reduce this concentration of corporate power. We'll hear more about
these proposals from our expert panel today.
Additionally, there have been productive bipartisan conversations
here on Capitol Hill about how to best tack these challenges. Following
a bipartisan investigation that uncovered evidence of ample
anticompetitive practices, the House Judiciary Committee recently
approved six bipartisan bills to address business concentration and
bolster competition on digital platforms.
In the Senate, my dear friend and colleague, Senator Klobuchar
wrote an entire book about antitrust, the challenges we face and what
we can do to make our economy more competitive.
Earlier this year, the Senator introduced the Competition and
Antitrust Law Enforcement Reform Act. Among other things, this bill
would give Federal enforcers more resources to do their jobs and
strengthen prohibitions on anticompetitive conduct. The Senator will
tell us more about this and some of her other ideas shortly.
the opportunity before us
We have an opportunity now to restore a competitive economy and
advance shared prosperity.
President Biden's Executive Order advances a whole-of-government
approach to promote fair competition, and it is now our turn to act
here in Congress with bold and decisive action.
And this is why I look forward to the testimoneys and insights of
our witnesses today. Now, I would like to turn it over to Senator Lee--
another leading voice in this space--for his opening statement.
__________
Prepared Statement of Hon. Mike Lee, Ranking Member,
Joint Economic Committee
From our earliest days, it has been businesses--both large and
small--that have been the backbone of our country. As Calvin Coolidge
once put it, ``The chief business of the American people is business.''
From colonial farmers, to pioneering homesteaders, to merchants,
craftsmen, and professionals, American entrepreneurs have sought to
build a better life for themselves and achieve the American dream. For
centuries, innovative Americans have come together through commerce and
competition to improve life for themselves, their families, and their
communities.
It is no surprise, then, that American businesses are a source of
local and national pride. They are often more than place to work; they
add vitality into our neighborhoods, towns, cities, and communities.
Businesses are also the heartbeat of our economy. Small businesses
in particular represent half of all private sector jobs in the U.S.,
nearly half the U.S. GDP, and account for two out of every three new
jobs created in the U.S. today.
Over the years, we have seen the rise of many big businesses, and
today we are again witnessing the increasing market power of a few
large firms. Of course, this raises important questions. Many people
are concerned that the largeness of certain enterprises makes them
inherently dangerous to small businesses, to consumers, and to workers.
However, the fact is, big is not always bad--but neither is it
always good. And we should not be forced to pretend that it is one way
or the other. To imply that we should support or defend a business
simply based on its size is unserious and meant to move the
conversation away from a firm's specific conduct.
The rise of some highly visible large firms is oftentimes a product
of their greater market-based innovations. The prospect of gaining a
larger market share incentivizes competition that leads to better
products and services at lower prices. Market share won through
competition should be celebrated, not punished.
Changing technology and increasing investment in software,
processes, and R&D may also be an important factor. In industries where
these investments are protected by patents, policy has explicitly
created government-granted monopolies. We allow this because the
prospect of collecting monopoly profits acts as an incentive for firms
to innovate and invest in new ideas.
In other areas, new investments are associated with higher
productivity gains--especially in the high-tech and consumer sectors--
suggesting that these businesses have gained greater efficiencies
through market competition.
But there are other factors behind industry concentration that
could indeed be cause for concern and deserve our attention.
For instance, government regulations impose huge, stifling barriers
to new business creation and protect existing firms from competition.
From 2010 to 2020, the U.S. Government imposed an average of 365 new
regulations each year, affecting everything from how farmers make their
livings, to which employees small business owners are legally allowed
to hire, to how many workers they can afford to pay.
These regulations impose tremendous costs on American businesses,
workers, and taxpayers, costing an average of $81 billion per year and
requiring 77 million hours of paperwork annually. This burden
disproportionately falls on small businesses and startups. In fact,
there is plenty of evidence showing that regulatory accumulation
reduces the number of small businesses relative to larger ones.
In this regard, Federal, State, and local regulations are locking
out small businesses from competing and thus further entrenching big
businesses. Reducing regulatory requirements on American businesses
would help foster more market competition.
Antitrust enforcement has also been declining for decades. Some
monopolies are indeed bad, and those that rise through anticompetitive
and exclusionary conduct--and not through competition on the merits--
stand in the way of free markets and degrade the options available to
consumers.
A proper response in this regard is to modernize antitrust laws to
find the right balance between over-enforcement and under-enforcement.
That is exactly why I've introduced the Tougher Enforcement Against
Monopolists, or TEAM Act, which would preserve free market competition
by codifying the consumer welfare standard and strengthening
enforcement against companies that engage in anticompetitive behavior.
Other efforts, like the administration's recent executive order on
competition, unfortunately miss the mark by overstepping the
president's authority and massively expanding Federal regulatory power.
Whatever action we take, we ought to remember that big businesses
are not necessarily harmful if workers continue to find well-paying
jobs, and consumers continue to benefit from high-quality, diverse, and
low-cost goods and services.
The beauty of our free market economy is that whatever your cause
or your career, your success depends on your service. The way to look
out for yourself is to look out for those around you. The way to get
ahead is to help other people do the same, and to put your God-given
talents and efforts to work in the service of your neighbor. In the
process of earning money and building wealth, individuals can add value
to other people's lives.
In all of our efforts going forward, we ought to ensure that
businesses both large and small are able to keep doing just that, and I
am hopeful that today's hearing will aid us in achieving this goal.
Thank you.
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Response from Dr. Philippon to Questions for the Record Submitted by
Senator Mark Kelly
1. Dr. Philippon, I'd like to ask about drug pricing. The Kaiser
Family Foundation did an analysis that found that the 250 top-selling
drugs in Part D with only one manufacturer and no generic or
biosimilar--so no competition--make up seven percent of all Part D
covered drugs, but 60 percent of Part D spending.
There are about 45 million people who have Part D plans. That's a
lot of leverage that the HHS Secretary would have to make these drugs
cheaper if he were allowed to negotiate prices. Doesn't it make sense
for Medicare to be able to negotiate the price of drugs, including
those that have no competitors in the market?
Yes, it absolutely makes sense for Medicare to be able to negotiate
drug prices. If you look around the world, you see that in essentially
all countries the domestic equivalents of Medicare do in fact negotiate
prices. The U.S. is the only country where this does not happen and is
also the country where households face the highest prices.
There are several other issues with Medicare payment policies. For
instance, they create an incentive for physician practices to be owned
by hospitals, since Medicare pays more for the same service when the
practice is owned by a hospital than when it is independent (Martin
Gaynor, 2021, ``Antitrust Applied: Hospital Consolidation Concerns and
Solutions'').
2. To all witnesses:
President Biden's executive order last week included the creation
of a White House Competition Council to coordinate competition policy
across agencies to ensure a cohesive Federal approach. From your
perspective, how can this council be most effective in creating
positive outcomes for the American consumer? Is there anything in
particular you hope it takes on--or anything you hope it avoids?
I think that the creation of the Council is an excellent idea. The
council should embolden existing regulatory agencies and coordinate
their actions. Many of these agencies have not been active enough in
recent years.
In addition to health care costs, I think that prioritizing fixed
monthly bills would be useful: cell phone, internet, utilities, health
insurance. Households have little flexibility in adjusting these
expenses and any reduction in prices would immediately improve their
living standards.
__________
Response from Dr. Bahn to Questions for the Record Submitted by
Senator Mark Kelly
1. Dr. Bahn, you've done a lot of work around how a lack of
competition among employers and the inability for workers to easily
move between jobs is bad for the worker--that it can give an employer
more latitude to reduce wages and benefits.
I'm curious how this looks right now, as we are trying to claw our
way out of this pandemic. What do you predict the long-term impact of
the pandemic on lack of competition among employers to be? Is it too
soon to know?
The public health crisis may have business-side impacts that reduce
competition among employers for workers. Research has found that small
businesses are often in more financially fragile positions that make
them more likely to close during an economic crisis like the recent
recession. As small businesses risk closure, ``big box'' stores become
more economically dominant. This may exacerbate the dominance of large
businesses as employers, who will have more wage-setting power in
absence of competitors for workers. Particularly in rural areas, the
wage-setting power of large employers may lead to spillover effects and
put downward pressure on earnings across a geographic area. Research on
Walmart Supercenters has found that the opening of a supercenter will
lower wages in the surrounding areas.
But in addition to the effects of business size, the pandemic may
exacerbate limited worker mobility due to other causes. The continuing
public health crisis may increase what economists call search
frictions--hindrances to being able to easily search for and match into
an appropriate job--which ultimately reduce competition and thereby
suppress wages. For instance, the pandemic has made many workers
hesitant to take jobs that pose a health risk, reducing their potential
number of viable employers and making it harder to move between jobs as
a result. When workers aren't able to move between jobs, employers can
exploit this by paying them less. In this context, access to health
services, like health insurance, may be more critical as a labor market
policy. For instance, research on variation in Medicaid generosity has
found that better access to Medicaid increased the likelihood that
workers are able to move into a job with better pay, and this was even
before the public health crisis we continue to face.
These forces that lead to lower competition for workers are part of
a long-term trend that pre-dates the recent economic crisis and the
pandemic, and has led to stagnant wages. The pandemic risks entrenching
these forces. While it is still too soon to tell whether the pandemic-
specific forces will have a structural effect on the economy, it is
still important to increase competition in the labor market so that
workers can share in the value they create for the American economy and
reverse long-running trends in rising economic inequality.
What's critical to understand here is that factors that limit
worker mobility between jobs, not just employer concentration across
geographic space, lead to lower competition by giving employers the
power to undercut wages without losing their workforce. This points to
policy solutions. As I noted in my written testimony, supporting worker
power is a critical tool that will help balance employers' ability to
undercut wages for a variety of reasons by giving workers the ability
to collectively bargain over wages and bring them closer to the levels
that would exist in a competitive market. This is primarily done
through supporting workers' right to organize unions, including
provisions currently in the Protecting the Right to Organize Act. In
addition to this, universal worker protections, like anti-
discrimination protections, and social infrastructure policies like
income supports such as Unemployment Insurance and health insurance
programs like Medicaid, also give workers the stable foundation
necessary to finding the best job for themselves where they can be safe
and earn a secure living.
2. All witnesses:
President Biden's executive order last week included the creation
of a White House Competition Council to coordinate competition policy
across agencies to ensure a cohesive Federal approach. From your
perspective, how can this council be most effective in creating
positive outcomes for the American consumer? Is there anything in
particular you hope it takes on--or anything you hope it avoids?
The Department of Labor is a critical enforcement agency for labor
rights and job quality, including mitigating the impact of
anticompetitive conduct. Evidence has demonstrated that, even in the
presence of legal protections, many employers still violate the law
with little recourse for workers in an individual complaint-based
system. Effective enforcement not only helps workers whose employers
have charges brought against them, but it has a chilling effect so
other employers are less likely to violate labor rights or engage in
anticompetitive conduct. The Department of Labor has a vast worker
enforcement infrastructure, including the ability to carry out
strategic enforcement--where investigations are conducted in industries
and occupations that are more likely to have violations--so including
our primary labor protection agency in addressing competition is an
important piece of ensuring workers receive their fair share in an
economy currently stacked against them.
__________
Response from Ms. Mitchell to Questions for the Record Submitted by
Senator Mark Kelly
1. Ms. Mitchell, in Arizona 99 percent of businesses are considered
small businesses. These are the businesses at risk of having the scale
tilted against them by big companies who have more control over shared
suppliers. Then these businesses got hit again in the pandemic, which
is why I led the push to include the SBA Community Navigator Pilot
Program in the American Rescue Plan to provide assistance to small
businesses that faced barriers accessing COVID relief.
How do we combat both of these forces--consolidation plus the
challenges of the pandemic--to keep our small businesses strong? What
are ways that communities themselves can strengthen small business?
Thank you, Senator Kelly, for your questions. And, thank you for
your stewardship of the Community Navigator Pilot Program. It is
bringing crucial guidance and resources to thousands of small
businesses throughout the country.
Corporate consolidation has been one of the greatest threats to
small business growth and development in the United States for several
decades. In the 1980s, big box stores--Walmart, in particular--used
their outsized market leverage to undercut prices, selling products at
a loss in order to force out small businesses and control local
markets. Category killers, like Home Depot and Staples, have dominated
regional markets, eliminating small business competitors in their
respective categories. Bank consolidations have starved small
businesses of needed capital. Amazon controls the platform on which
hundreds of thousands of small businesses sell products, then uses the
information it gleans from them to unfairly compete against them. We
heard just this past week from a realtor in Rhode Island about
challenges her industry is facing from big tech platforms like Zillow,
which is gaining breadth and depth by buying both direct competitors
and also real estate transaction services.
The challenge of enforcing corporate consolidation lies largely
with the Federal Trade Commission, with the Department of Justice's
Antitrust Division, and with Congress, and this is absolutely crucial
to leveling the playing field for small businesses. But there ARE some
pre-emptive and corrective actions that communities can undertake to
strengthen small business.
First and foremost, communities can create economic development
plans that truly prioritize small businesses--businesses whose profits
remain local and that build local wealth. This has implications for
everything from a community's procurement practices to its
comprehensive plan and zoning code. It is ludicrous that low-income
communities that desperately need access to the healthy food that full-
service grocery stores provide are being overrun by dollar stores whose
limited food offerings are mostly processed and preserved, not fresh,
constricting the market for full-service grocery stores--but this is
the unfortunate byproduct of local planning practices that
underestimate the market power of dollar stores and the deep pockets of
their attorneys to challenge local planning decisions. Communities can
also ensure that ample and equitable capital is available for small
business loans and equity investments and that local lenders have
adequate liquidity to meet these needs. They can build a robust
technical assistance infrastructure to provide training and mentorship
at all levels, from young entrepreneurs to retiring owners hoping to
transition their businesses to new owners--this is at the heart of the
Community Navigator Pilot Program, a program which we hope will
continue in the future. They can invest in local solutions to delivery
and fulfillment challenges, such as supporting locally owned restaurant
meal delivery services. They can overhaul their municipal and
institutional procurement policies to streamline procurement for small
businesses and ensure that the procurement process eliminates barriers
to minority-, women-, and veteran-owned businesses and actively invites
their participation. They can insist that developers demonstrate that
there is adequate market demand to support new commercial space as a
condition of development. All of these potential actions are hallmarks
of community economic development strategies that recognize that small
businesses build local wealth, rather than extracting local wealth for
corporate expansion or for the benefit of distant investors, and that
small business development should be at the forefront of our economic
development planning.
2. Ms. Mitchell, during the state work period I visited Chandler-
Gilbert Community College, which is part of Maricopa Community
Colleges. Maricopa has partnered with Intel to create our state's first
AI certificate and degree program. As AI development accelerates, the
immediate thought is often that it's going to take away human jobs--but
that's not necessarily the case. Maricopa is providing the skills
training that becomes increasingly necessary as technology develops.
Could you talk about how AI and technology come into play when
we're talking about consolidation and market power? And more to the
skills training side, could you speak to the benefits of skills
training to give a worker greater control and autonomy over their job
movement and career progression?
The Big Tech firms use AI in a number of ways to entrench their
market power. I can't speak to skills training.
3. All witnesses:
President Biden's executive order last week included the creation
of a White House Competition Council to coordinate competition policy
across agencies to ensure a cohesive Federal approach. From your
perspective, how can this council be most effective in creating
positive outcomes for the American consumer? Is there anything in
particular you hope it takes on--or anything you hope it avoids?
President Biden signed a sweeping Executive Order (EO) aimed at
undoing concentrated corporate control and ending decades of
consolidation throughout our economy. The order includes 72 initiatives
that direct cabinet-level departments in the Executive Branch and
encourage independent agencies such as the Federal Trade Commission
(FTC) to identify and root out ``overconcentration, monopolization and
unfair competition'' in the industries they oversee. Because the
Executive Branch oversees a multitude of industries, including health
care, transportation, agriculture, and telecommunications, the order
and the directives it contains represents one of the most significant
shifts in U.S. competition policy in the past half-century. My
organization applauded the Administration for the EO, but our concern
is the agencies will not deliver on the expansive intent of the EO.
The White House Competition Council, led by the Director of the
National Economic Council, will play an important role to ensure the
agencies deliver. As described in the EO, the Competition Council will
monitor the progress and execution of the initiatives. It will also
play a key role in coordinating the Federal Government's response to
the rising power of large corporations in the economy. We would like to
see the Competition Council build in mechanisms for greater
transparency, oversight and accountability so stakeholders, advocates
and the public at large to engage with the Council. This should
include:
Create public forums to engage key stakeholders and
frontlines communities. The Competition Council should hold public
forums designed to directly engage the public on competition policy
matters. The Competition Council could coordinate ``listening
sessions'' focusing on specific industries to help identify competition
and consolidation issues and engage frontline communities, such as
business owners, workers, advocates and other key stakeholders in the
policymaking process. There is precedent for this. The Obama
administration hosted field hearings on agriculture issues. More
recently, under Chair Lina Khan, the FTC holds monthly open meetings
where the public can engage directly with the FTC. Establishing these
mechanisms to engage the public not only informs effective
policymaking, but also legitimizes government action by establishing a
public record and creating greater transparency over the process.
Establish industry-specific working groups. The EO
addresses concentration and monopolization in a range of industries
spanning from healthcare, defense, Big tech to agriculture. Each of
these industries are unique, and as such, deserve industry-specific
solutions to address competition issues. We encourage the Competition
Council to create sub-groups, organized by industry, to identify
concentration and monopoly issues in that industry and design tailored
government action. These working groups would also include, as needed,
the antitrust agencies along to consider rulemaking or other actions to
resolve those issues.
Regular reporting on the Council's activities and agency
execution of the EO. The White House should produce and publicly
release a quarterly report summarizing the Competition Council's work
and the Federal Government's progress on the EO. This should include an
analysis summarizing any barriers or challenges inhibiting the agencies
from delivering on the mandate. It should also include analysis of any
necessary legislative changes.
[all]