More Data Is Good, But ...
Author | Lemieux, Pierre |
Position | The Great Reversal: How America Gave Up on Free Markets - Book review |
The Great Reversal: How America Gave Up on Free Markets By Thomas Philippon 368 pp.; Belknap Press, 2019
Two decades ago, Thomas Philippon came to the United States from France to study economics. He was pleasantly surprised to discover how inexpensive consumer goods were here. But then, over time, the situation reversed. From 2000 to 2017, average prices increased by 15% more in America than in Europe. Broadband prices in America are now about twice European prices. "How did Europe, of all places, become more of a 'free market' than the U.S.?" Philippon asks.
Now a finance professor at New York University, he decided to answer that question. His research (often done jointly with his colleague German Gutierrez) and conclusions are summarized in his recent book The Great Reversal.
Europe v. America / The answer, he argues, is that industries have become more concentrated and the economy less competitive in the United States while they have moved the other way in the European Union. "Competition," he observes, "has declined in most U.S. industries over the past twenty years." Like for telecoms, passenger air fares have dropped faster in Europe. As regulatory restrictions on market entry have grown in the American economy, they have been accompanied by a reduction in the rate of new business entries in markets. Not surprisingly, in sectors open to foreign trade, competition has not decreased or has decreased less.
Philippon finds that two factors explain this divergence: deregulation and antitrust. Product markets (not necessarily labor markets) have been deregulated in the European single market while regulation has increased in America. He shows how the growth of market restrictions in the United States--measured by use of words such as "shall" and "must" in the Code of Federal Regulations as computed by the Mercatus Center's RegData database--correlates neatly with a growth in market concentration. As for antitrust laws, they have been enforced more stringently by the EU's independent supranational agencies while the number of antitrust cases has decreased in America. The author writes:
To be clear, I don't think antitrust is necessarily the main channel through which Europe has freed its markets. The broad Single Market agenda goes beyond antitrust, and the lifting of entry restrictions has probably had more impact than merger reviews. Still, he concludes that more stringent merger control is needed in America.
One objection to antitrust is that large technology firms demonstrate that concentration can coexist with competition and efficiency. Think of the "GAFAMs": Google, Amazon, Facebook, Apple, and Microsoft. Philippon provides evidence that the GAFAMs minus Amazon are smaller than the "star" companies of previous decades. He also argues that their effect on productivity is small because they are less "integrated" in the economy.
This integration argument, based on using total economic activity instead of value added, I find...
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