Republicans and Democrats now generally agree that we must make more stuff in America but no consensus exists about how to do that. Under President Joe Biden, the strategy was to offer subsidies to key industries, like microchip manufacturers, and then use targeted tariffs to protect those efforts. Under President Donald Trump, the plan apparently is to impose, or threaten to impose, high tariffs on a shifting set of nations and products while threatening to cut Biden’s targeted financial incentives and replace them with across-the-board tax cuts, mostly for the well-to-do.

Considering how central the goal of reindustrialization is to both parties, it’s noteworthy that the range of policy levers being debated is by and large limited to just three: tariffs, the tax code, and direct public investment. Yet while these can be useful tools, they are hardly the only ones, or even the most powerful. Indeed, historically, fostering America’s industrial strength depended far more on deploying regulations to steer market behavior. 

When Americans hear the word regulation they tend to think of the environmental and consumer protection measures put in place by federal agencies mostly since the 1970s. But for a century before that, a huge body of regulation of a different kind steered the course of the nation’s economic development. It was regulation that set market rules of competition. Which kinds of banks could operate where and how much interest could they charge or pay? What rates could railroads or airlines set for transporting various types of cargo or passengers over different distances? How much profit could investors in electric utilities or telecommunications companies make, and what customers were they required to serve and at what prices? Working with industry, federal lawmakers and regulators hashed out rules that determined who could enter and exit different key sectors, what terms of service they could impose, and with whom they could merge.

During America’s century-long rise as a capitalist superpower, such market rules fit together to form an increasingly sophisticated and pervasive system that the political scientist and economic historian Gerald Berk has dubbed “regulated competition.” It was a uniquely American system for governing industrial capitalism, and it delivered broad prosperity for decades. It did so first by catalyzing a virtuous cycle of innovation. Firms in key industry sectors like transportation and electricity were guaranteed modest but predictable profits that allowed them to attract more capital, and to take greater risks, than they otherwise could. In exchange, companies were obliged to serve all market segments, rather than cherry-pick the most profitable. This enabled smaller cities, towns, and rural areas to compete on a more equal footing with large cities on the coasts, thus spreading economic development and wealth creation more equitably across the country while also serving as a check on the growth of financiers and oligarchy. But then, beginning in the 1970s, policy makers from both parties largely dismantled this well-calibrated system of political economy in a rush to “deregulate” the economy and unleash “the market.” 

An especially vivid example of how America’s system of regulated competition once worked is aviation. This essay tells the story of how careful federal marketplace rules fostered the growth of air travel, domestic airplane manufacturing, and commerce in smaller cities across America—and how the demise of that system eroded all three. The same story could be told of other crucial industries, from finance to retail to shipbuilding. Washington’s abandonment of regulated competition explains much of what’s gone wrong with the American economy over the past 40 years, and its restoration could be the key to the country’s industrial revival. 

To understand how smart market regulation spurred innovation and equitable growth in aviation it’s useful to begin with the way the country dealt with the previous big revolution in transportation technology. Throughout the late 19th and early 20th centuries, policy makers had wrestled with what had come to be known as “the railroad problem,” a seemingly intractable dilemma involving a vicious mix of monopoly and ruinous competition. Early railroads held local monopolies in many places, which they used to extract wealth from the local community and retard its economic development. Yet early railroads also often faced cutthroat competition in many other markets due to duplicative lines and other forms of excess capacity. As a result, railroad owners repeatedly engaged in self-destructive rate wars, often moving freight and passengers at below cost in a desperate attempt to help defray their high fixed costs. Largely because of the effects of these price wars, by the end of the 1870s, railroads accounting for more than 30 percent of domestic mileage had failed or fallen into court-ordered receivership.

Seeking to redress the railroad problem, Congress passed the Interstate Commerce Act in 1887. The resulting Interstate Commerce Commission attacked the twin problems of monopoly and ruinous competition primarily through rate regulation. The ICC mandated that railroads publicly post their rates and that they charge all passengers and shippers roughly the same price per mile for the same level or category of service. This eliminated price discrimination based on sheer market power, thereby reducing regional inequalities and market distortions caused by local railroad monopolies. The ICC also used rate regulation to guard against ruinous competition by setting rates high enough to enable railroads to attract the capital they needed to maintain their infrastructure and finance a wave of new technologies, including much larger, more powerful locomotives and much safer rolling stock made of steel rather than wood. 

Starting in 1916, Congress extended this same basic regulatory framework to maritime transportation by passing the Shipping Act. It created a new agency, the U.S. Shipping Board, which was charged with ensuring that all ocean carriers publicly posted their prices and offered all “similarly situated” shippers roughly equal terms of service. To limit destructive price wars and to advance other public purposes, the Shipping Act and subsequent legislation also limited access to many domestic ports to U.S. flagged ships. Under this regime of regulated competition, the industry was able to finance a dramatic transition from wind-powered to steam-powered ships. 

In 1935, Congress extended the same regulatory model to interstate trucks and buses by giving the ICC jurisdiction over these modes. In this instance the twin challenge of limiting ruinous competition while avoiding monopoly was accomplished through a combination of rate regulation and high regulatory barriers to entry. For example, by limiting the number of commercial interstate truck licenses and the markets that individual truckers could serve, the ICC prevented ruinous competition, thereby ensuring that truckers could earn a living wage, trucking companies could earn their cost of capital, and truck manufacturers could finance the cost of innovation.  

So it is hardly surprising that the United States would wind up applying the same principles to aviation. The story begins in the decade following Charles Lindbergh’s celebrated 1927 solo flight across the Atlantic. During these years, rapid advances in aviation technology promised a revolutionary new age of public air transport if only a viable airline business model could be found.

In 1933, Boeing introduced its model 247, a monoplane capable of hauling 10 passengers at 155 miles per hour. Soon came a series of other revolutionary passenger planes, including the Lockheed Electra and the iconic Douglas DC-3, which could carry 21 passengers at a cruising speed of 180 miles per hour for as far as 1,200 miles. Thanks to these technological advances, by 1935 air traffic had increased to an annual rate of nearly 200 times what it had been in 1926.  

Yet the airline industry was in a state of near economic collapse. The primary reason was the destructive competition that existed among carriers. Starting a new airline required no regulatory approval, and the financial barriers to entry did not extend much beyond the cost of buying a plane and hiring a small crew. As more and more “fly-by-night” carriers flooded into the market, margins became slim or nonexistent. This lack of profitability—worsened, of course, by the effects of the Great Depression—left the industry unable to attract the capital it needed to take full advantage of new technology or even maintain existing planes. By 1938, an estimated 50 percent of all capital invested in commercial aviation had disappeared and the number of airlines offering scheduled service had shrunk from a hundred to less than a score. 

Carriers that survived this era did so mostly by winning lucrative, exclusive federal contracts to haul air mail along specific routes. But the process for the letting of such contracts generated repeated charges of widespread corruption involving collusion between the postmaster general and favored carriers. Responding to the scandals, President Franklin D. Roosevelt canceled all air mail contracts. Confronted with this darkening atmosphere, Roosevelt and Congress began debating how to create a regulatory structure that would enable the aviation industry to at last become economically viable while also serving the public interest. The result was the Civil Aeronautics Act of 1938, which laid out a system for regulated competition in aviation markets that would last into the jet age and beyond. 

For the architects of the Civil Aeronautics Act, a key goal was to stem the deleterious effects of unrestrained airline competition. “We are interested,” noted Senator and future President Harry Truman, “… in seeing that ‘fly-by-night’ operations do not start up and bring down prices and create chaos.”

A House committee report on the proposed legislation charged that excessive airline competition was undermining the government’s previous investments in aviation: “The government cannot allow unrestrained competition by unregulated air carriers to capitalize on and jeopardize the investment which the government has made during the last 10 years in their transport industry through the mail service.” West Virginia Democratic Representative Jennings Randolph went further, noting, “Air transport today is the only mode of transportation and communication for which there exists no comprehensive and permanent system of Federal economic regulation.” He concluded that “unbridled and unregulated competition is a public menace,” citing as examples “rate war[s], cutthroat devices, and destructive and wasteful practices.”

In the eyes of regulation advocates, these and other market failures were unlikely to go away on their own as the industry matured. Instead, they were thought to be built into the cost structure of flying. For example, when an airline operates a plane, it faces fixed costs that must be paid regardless of how many passengers are on board. At the same time, the cost of adding one more passenger to a flight is marginal. This means that an airline can be tempted to sell seats at below the average fare needed to meet expenses if that’s what it takes to fill the plane. Even if an airline can only fill seats by offering some or all passengers money-losing discounts, this practice will at least partially cover the high fixed cost of operating the plane, thereby allowing the airline to lose less money on the flight than it otherwise would. 

To overcome these and other structural sources of destructive fare wars and inequitable pricing policies, Congress settled first on a system of entry control. In the future, to start a new airline or offer service on any route, carriers would need to apply to a new regulatory agency called the Civil Aeronautics Board (CAB) for a certificate of “public convenience and necessity.” 

The meaning of this phrase allowed for differing interpretations. As the aviation icon Amelia Earhart testified before a House committee, “I defy anyone at the present period to define convenience or necessity as applied to aviation. I feel that mere study cannot determine that matter, as we have no background yet of sufficient experimentation to afford adequate interpretation.” 

In practice, however, the standard became clearer. Once the CAB was up and running it grandfathered in most incumbent carriers by granting them regulatory authority to continue operating on their existing routes. It then used a two-step process to control new entry and routes. First it would determine how many carriers a given market could profitably support. If it found sufficient demand to support a new carrier, it would then choose among competing applicants based on their own financial viability and ability to serve the public’s “convenience and necessity.” 

The Civil Aeronautics Act also required CAB regulators to avoid facilitating monopoly power even as they constrained competition. In response to this mandate, the CAB tended to favor smaller over larger carriers in issuing operating authorities. In some cases, the CAB would enhance the economic viability of smaller carriers by allowing them to extend their limited route structures to serve particularly lucrative market segments. To ensure air service to sparsely populated destinations, the CAB sometimes required incumbent carriers to provide the money-losing service using returns on higher-margin routes. This was consistent with Congress’s mandate that the CAB ensure “any citizen of the United States a public right of freedom of transit in air commerce through the navigable air space of the United States.”

The Civil Aeronautics Act also empowered the CAB to mitigate the effects of concentrated market power by using two other policy levers. First, it gave the CAB statutory authority to block any airline mergers or acquisitions that it found to be not in the public interest. More significantly, the act also gave the CAB authority over what rates carriers could charge and mandated that they be fair and reasonable. 

In setting rates, the CAB began by compiling industry cost and revenue figures. Then it calculated what the industry’s cost and revenue would have been if the average flight had been 55 percent full. Fares were then set at a level no higher than what the CAB determined would be sufficient to generate this “revenue requirement” plus a projected 12 percent return on investment for airline stockholders.

An important additional provision of the Civil Aeronautics Act required that CAB rate setting promote “adequate, economical, and efficient service by air carriers at reasonable charges, without unjust discriminations, undue preferences or advantages, or unfair or destructive competitive practices.” Mindful of the mandate to prevent “unjust discriminations,” the CAB ensured that the per mile cost of flying was roughly the same on all routes, regardless of distance, destination, or volume of demand. Similarly, the CAB required that all passengers on any plane pay identical fares for the same class of service, thus denying airlines the ability to engage in discriminatory practices commonly used by airlines today, such as charging some passengers more than others depending on when they bought their ticket or on what their destination is when they change planes. Finally, to guard against price wars that might threaten the industry’s overall financial viability, the CAB also generally prohibited any single carrier on a route from lowering fares unless all its competitors did as well. 

During the years that the U.S. was engaged in fighting World War II, civilian airline travel virtually vanished. Yet by 1955, more Americans were already traveling by air than by train, and airliners had replaced ocean liners as the dominant mode of transatlantic travel. 

A huge factor behind the explosive growth in air travel in this era was continuing dramatic advancement in aviation technology, much of it developed by the military and defense contractors during the war years. Aircraft manufacturers introduced a succession of new, increasingly larger, safer, and more efficient four-engine airliners, including the Douglas DC-4, Lockheed’s Constellation, the Douglas DC-6, the Douglas DC-7, and the Boeing 377 Stratocruiser. Starting in the late 1950s, these were followed by a series of still-faster jets offering still-greater capacity and lower operating costs per passenger. By 1968, a single DC-8 could produce more annual seat miles than the entire industry did 30 years before. By 1970, the first “jumbo jet,” the Boeing 747, went into service. 

This technological revolution did not occur, however, independent of the political economy governing aviation during this period. The other huge, and often overlooked, factor was the system of regulated competition overseen by the CAB. Because of CAB market regulation, airlines escaped the self-destructive rate wars and negative margins that had previously prevailed and instead earned consistent, modest rates of return throughout the next three decades. This in turn allowed the aviation sector to attract the capital it needed to develop and deploy rapidly improving but highly expensive new generations of aircraft. 

In short, technology and regulation combined to create a virtuous cycle. Airlines under CAB regulation still faced considerable competition with each other and so were incentivized to invest in faster, safer planes. But because of the carefully balanced limits the CAB placed on competition, aircraft manufacturers in turn understood that if they developed new and better planes, airlines would have both the incentive to buy them and enough capital to afford them. CAB regulation led to airlines investing heavily in more and better planes, and as they did so, the industry grew and became more efficient, allowing more and more Americans to enjoy the benefits of air travel. 

Largely because of this virtuous cycle, the cost of flying fell dramatically under CAB regulation while the safety, speed, and quality of air travel improved even more. Real revenue per passenger mile declined under CAB regulation by an average of 1.8 percent per year between 1946 and 1978. Reflecting this trend line, the inflation-adjusted cost of a typical flight between Los Angeles and Boston fell from $4,439 in 1941 to $915 in 1978, a 79 percent decrease, even as the new generation of jets made the travel time much shorter and the journey much safer. Because of the falling cost and improving value of air travel, by 1977, nearly two-thirds of all Americans over 18 had taken a trip on a plane, up from just one-third in 1962. 

The regulated competition provided by the CAB also allowed the industry to earn enough surplus to support a comparatively well-paid, highly trained, unionized workforce during this era. Another benefit was the promotion of regional equality and more balanced economic development. By requiring high-volume, high-margin routes to effectively cross-subsidize low-volume, low-margin routes, the CAB enabled a larger airline network, thereby creating positive network effects that included allowing businesses in smaller and heartland cities to better compete in larger markets. 

This was key to the flourishing of smaller cities in this era and to the increase in regional equality. The equalization of railroad rates had already allowed heartland cities like St. Louis to compete on equal terms as manufacturing and distribution centers during the first half of the 20th century. By extending the same principle to airlines, heartland cities also became better able to compete nationally and internationally in key service industries. In the early jet age, for example, St. Louis’s abundant air service allowed the city to become a major hub for advertising and public relations firms serving national and global brands, as well as a frequent host of lucrative trade conventions. In no small measure because of their freedom from price discrimination in the transportation sector, heartland cities converged with major money-center coastal cities like New York and Boston in their per capita income during this era, while overall regional inequality fell sharply. 

In summary, under the CAB’s watch, a high-risk venture with vast national economic potential had become by the 1970s a secure and stable backbone of American civic and commercial life. But the regulatory regime had its flaws, and a growing chorus of well-placed critics.

Throughout its existence, the CAB faced criticism from different quarters. An early complaint was that it set airfares too high because it used cost estimates based on flights being little more than half full on average. No doubt the CAB did not always get pricing right. But part of the rationale for this formula was to ensure adequate revenue not just during the top of the business cycle but also during economic downturns. Another consideration was that encouraging higher load factors would erode the quality and reliability of the flying experience. Not only would planes have been more crowded, but there also would have been fewer seats available to rebook passengers whose flights were canceled due to bad weather or mechanical problems. Today’s frequently overbooked planes and lack of capacity to deal with stranded passengers are just two of many ways in which the quality of air travel has declined since the days of the CAB. 

Another line of criticism charged that the CAB, particularly over time, erred in giving incumbent carriers too much protection from start-ups and from each other. Through the mid-1970s, the CAB refused to allow a single new trunkline carrier to enter the business, leading to charges that it had created a protected oligopoly. 

Somewhat inconsistently, other critics charged that airlines were competing too much with each other over the wrong things. The CAB set rates in ways that virtually eliminated price competition. Yet airlines still had to worry about losing passengers to other carriers as well as to other modes like autos or trains for short or intermediate-length trips. So they wound up competing over quality instead of price. This included competition over service standards like on-time performance, safety, leg room, baggage handling, and frequent, convenient scheduling, but they also included, critics charged, competition over “frills,” like inflight meals served on chinaware by comely stewardesses.

Another key argument leveled against the CAB was that it kept airfares unnecessarily high by underestimating the elasticity of demand for air travel. Led by the academic economist turned policy entrepreneur Alfred Kahn, these critics argued that if airlines were allowed to reduce fares to marginal costs and offer deep discounts to price-sensitive consumers, this would fill seats that otherwise would go empty. And with more passengers per plane available to share the fixed cost of flying, Kahn argued, the average cost for everyone could be allowed to fall without endangering airline solvency.

Informing the growing attacks on the CAB was the growing prestige of so-called neoclassical economics. More and more academic economists insisted on the power of unregulated markets to allocate resources to their highest valued use. According to this analytical framework, which became part of the influential law and economics movement championed by Richard A. Posner, virtually any form of market regulation was likely to cause a “dead weight loss” in society’s total welfare. Another influence was the rise of public choice theory, which emphasized how regulation could create barriers to entry that allowed established industries to escape competition and earn “monopoly rents.” 

Still another line of attack came from the era’s rising consumer movement. The consumer advocate Ralph Nader became a leading champion of airline deregulation, arguing that by creating regulatory barriers to new airlines, the CAB had allowed both airline management and unions to become overpaid and sclerotic at the expense of “the consumer.” Meanwhile many liberals, including U.S. Senator Ted Kennedy and his then Judiciary Committee staffer Stephen Breyer, the future Supreme Court justice, reasoned that deregulation would lead to more competition and lower consumer prices—a high priority at a time when the OPEC oil cartel had set off an inflationary spiral. 

Together, these forces created a unique moment in which both leading Republican and Democratic policy makers, as well as putative academic experts, formed a consensus in favor of ending regulation of airline markets. Implementation of these ideas began when President Jimmy Carter appointed Alfred Kahn to head the CAB in 1977. In that capacity, Kahn took administrative measures that allowed airlines to serve any routes they wanted under a policy known as “multiple permissive entry.” By 1978, the CAB had amended its rate-setting policies to allow airlines downward pricing flexibility of up to 70 percent. When airlines responded with deep fare cuts, the traveling public cheered, helping to build political support for disbanding the CAB altogether. In short order this caused Congress to pass, and Carter to sign, the Airline Deregulation Act of 1978, which ended any government role in managing entry, pricing, and route network structure in airline markets. 

The early years of airline deregulation saw a burst of new entrants along with steep price declines on many high-volume, long-distance routes. But it also brought a sharp decline in air service to cities in what we today call “flyover country.” In 1986, West Virginia Senator Robert Byrd publicly apologized for having voted to abolish the CAB:

This is one Senator who regrets that he voted for airline deregulation. It has penalized States like West Virginia, where many of the airlines pulled out quickly following deregulation and the prices zoomed into the stratosphere—doubled, tripled and, in some instances, quadrupled. So we have poorer air service and much more costly air service than we in West Virginia had prior to deregulation. I admit my error; I confess my unwisdom, and I am truly sorry for having voted for deregulation.

Overall, airline prices did continue to fall on most remaining routes. This caused much of the public, particularly those living in well-served, large coastal cities, to view airline regulation as a success. But with the benefit of hindsight a far different picture emerges. 

First, it’s now clear that the initial reductions in fares on high-volume routes were in large measure not the result of any increase in efficiency, but of a coincidental fall in global energy prices that occurred during the early years of deregulation. A 1990 study by the Economic Policy Institute concluded that, after adjusting for changes in the cost of jet fuel, overall airline fares fell faster in the 10 years before 1978 than they did during the 10 years after. A study published in the Journal of the Transportation Research Forum confirms that this pattern continued for many years. Except for a period after the 9/11 terrorist attack, the study found, real air prices continued to fall more slowly through the mid-2000s than they had before deregulation. Accounting for declines in the quality of airline service over this period would show real prices falling still more slowly. For example, due to the move to a hub-and-spoke system and the decline in the number of direct flights that occurred under deregulation, the time, distance, and inconvenience required to travel to many destinations lengthened substantially during this period.

The initial seeming success of deregulation was further belied during the aughts by the reemergence of ruinous competition, which evaporated airline profit margins and eventually turned major carriers into wards of the state. During all but three years of that decade, U.S. airlines had negative net income, racking up cumulative losses of more than $68 billion. Major airlines like United and US Airways declared bankruptcy and defaulted on their pension debts, requiring expensive taxpayer bailouts. Some of this distress was caused by recessions or spikes in fuel costs, but the larger structural cause was the loss of market regulation. Airlines were no longer assured of adequate margins or protection from price wars. 

Relatedly, the dramatic improvements in aviation technology that had occurred under the CAB disappeared under deregulation. The fuel efficiency of jet engines has marginally increased over the past 40 years, but otherwise, today’s commercial jet liners are little changed from what they were in the late 1970s. In large measure this was a result of deregulated airlines engaging in price wars that prevented them from covering their routine capital costs and accrued liabilities, let alone investing in dramatically improved planes and service quality.

Eventually, in an attempt to reverse their declining economic fortunes under deregulation, airlines not only cut service standards but also consolidated massively, taking advantage of lax antitrust enforcement standards that existed for much of that period. After a series of mega mergers, by 2015, a single airline controlled a majority of the market at 40 of the 100 largest U.S. airports. Through control of gate access at major “fortress hubs,” incumbent airlines faced virtually no competition on most of their routes, or even the threat of it. By 2021, the four largest remaining airlines controlled nearly two-thirds of the entire domestic market. Adding to the cartelization of the industry was the fact that the four remaining major carriers each counted among its largest stockholders the same four large institutional investors, creating an interlocking ownership structure rivaling that of the big colluding corporate trusts of Gilded Age. 

Along with the rise of concentrated ownership came a sharp rise in predatory pricing and other business practices, such as frequent-flyer rewards programs designed to further dampen competition among existing carriers and deter the formation of new airlines. At the same time, the airlines continue to add fees and lower service standards while eliminating flights altogether to many smaller and midsize cities, all while raising fares and engaging in massive stock buybacks. Not only does the traveling public suffer, but so does the promise of aviation itself. Now that they operate as an unregulated oligopoly, airlines once again have the profits needed to invest in new breakthrough technologies but no longer have any incentive to do so. 

The retreat from regulated competition did not just apply to airlines. Market regulation of railroads ended at roughly the same time, for example, and with much the same result. Thousands of American cities lost all rail service or became captive to a single monopolistic railroad, thereby losing their ability to compete as centers of manufacturing or distribution. Similarly, a retreat from regulated competition led to a near-total collapse of American domestic shipbuilding and ocean shipping industries after the 1980s. 

The federal government also retreated from the regulated competition model in many other key realms. These included the gas and oil sectors, electrical generation and distribution, communications, and, above all, finance. 

Until the 1980s, regulated competition of banks and other financial institutions controlled what interest rates they could charge or pay and where they could operate, while also strictly limiting mergers and their investments in adjacent lines of business. State and federal laws fostered a dense web of small-scale community banks and locally operated thrifts and credit unions. This not only prevented the growth of banks that were “too big to fail,” it also prohibited an increase in giant, unregulated hedge funds and private equity firms. Under this policy regime, the role of Wall Street over industrial firms was tightly contained, allowing the management of great American industrial companies like Boeing, General Motors, and General Electric to remain mostly in the hands of engineers committed to innovation rather than financiers intent on stripping out assets to maximize short-term profits. 

Yet the historical role of regulated competition in building the U.S. industrial economy is so poorly understood that the very phrase seems like a contradiction in terms to many Americans. Under the thrall of “neoliberal” doctrines popularized over the past 40 years, too many of us are conditioned to view “free market” competition as inherently productive, and to view government intervention in markets as inherently the opposite. But history shows that without smart rules, market competition is often ruinous to the firms involved, to the pace of technological progress, and ultimately to the larger public interest. Fortunately, history also shows that government measures that channel competition toward productive and socially useful ends are not only possible; they were fundamental to the creation of the world’s greatest, most innovative, most broadly prosperous capitalist nation.

Can we ever get back to a system of regulated competition? At a time when the Trump administration is slashing what remains of America’s regulatory state and “abundance liberals” are bemoaning excessive red tape as a key obstacle to prosperity, reestablishing the system of market regulation might seem like a political nonstarter. But we have already seen dramatic movement in both parties over the past decade in their rediscovery of the importance of effective antitrust enforcement. This has occurred not because of any great change in their respective ideologies. It has happened because of the sheer accumulation of documented harms caused by unregulated, predatory monopolies and a growing awareness among policy intellectuals and elected officials that century-old antitrust laws could be revived and repurposed to address new conditions. 

Similarly, it’s probably only a matter of time before wide-scale downward mobility, particularly the decline of heartland communities in key electoral states, leads policy makers to rediscover the merits of regulated competition. It is not hard to imagine, for instance, politicians from both parties who represent “flyover” cities banding together to demand more equitable, affordable, and practical air service through a new regulatory regime—perhaps one that takes advantage of AI and other modern data-processing tools to make pricing and other regulatory functions more precise than under the old CAB system. 

Taking the next step back to the future by applying market regulation to key existing and emerging industries might take time. But it seems increasingly inevitable as the alternatives variously advocated by Republicans and Democrats continue to fail or prove inadequate to the political economic challenges we face.

The post The Secret to Reindustrializing America Is Not Tax Cuts and Tariffs. It’s Regulated Competition. appeared first on Washington Monthly.

This article is from a cover package of essays entitled Ten New Ideas for the Democratic Party to Help the Working Class, and Itself. Find the full series here.

According to exit polls, the top reason voters gave for not supporting Kamala Harris was inflation. Yet by the time of the election, official measures showed that inflation had moderated to historical norms. Meanwhile, other conventional economic indicators showed that wages had been rising far faster than prices for the previous two years. So why were so many voters convinced that their standard of living was falling? 

Here’s one factor that has been largely overlooked. Everyone complains about the high price of drugs and hospital stays. But few people are aware of how hidden health care costs that don’t show up in the Consumer Price Index are profoundly eroding their purchasing power. 

To understand how this giant rip-off works and how to fix it, you need some background. Most working- and middle-class Americans receive their health care coverage through employer-sponsored insurance plans. Most of us covered by such plans know full well that we are perpetually being asked to pay higher deductibles and co-pays. Most of us also know when our premiums go up. Individual workers covered by such plans typically pay around 20 percent of the cost of the premium in the form of a paycheck deduction. Workers who insure a spouse and two children under an employer plan typically see about 32 percent of the cost of the premium deducted from their paycheck. 

But here’s what most people miss. They think their employer pays the rest, which is true, but only literally. Your employer does send a check to the insurance company, but it’s a shell game. Any economist will tell you that workers in an employer-sponsored plan pay nearly all the cost of their benefits, and that it’s a very, very big number. This year, according to the Milliman Medical Index, for a typical middle-aged worker who enrolls their spouse and two children in a typical employer-sponsored family plan, the annual cost of their insurance has reached a staggering $32,066. 

The reason workers bear nearly all the cost of such plans is simple. When employers compensate workers with health care benefits, they almost always offset this expenditure by offering that much less in wages. They do this because they can and have no reason not to. All that matters to them is that the total compensation package allows them to recruit or retain the workers they want. For employers, their contributions to the health care plan are thus effectively free so long as they reduce other forms of compensation by the same amount. But for workers, the employers’ contribution to the health care plan usually means less take-home pay and other benefits. 

A corollary to this truth is that when the costs of a health care plan go up, employers compensate by either laying people off or giving lower raises than they otherwise would. For businesses that are losing money or operating at small margins, there often is literally no other choice. And for others, holding down salaries in the face of rising health care costs is the rational choice even if they could afford to do otherwise. 

This poorly understood reality has huge consequences for the finances of ordinary Americans. The employee-benefits expert Syl Schieber has calculated how much rising health care costs have lowered what he calls the “kitchen table” income of workers with employer-sponsored health care plans—that is, the income they have available each month to pay for housing, groceries, gas, and other day-to-day expenditures. He finds that due to the wage suppression caused by the rising cost of their health care plans, lower-income workers with family coverage had $2,500 less kitchen table income in 2019 (adjusted for inflation) than they brought home two decades earlier. In effect, health care inflation gobbled up all of the meager raises they received as they gained seniority, and more.

The hit on lower-income workers is particularly hard because employer-sponsored plans are financed by what is effectively a hidden and regressive head tax. The plan imposes the same flat costs on all employees regardless of how much they make. This means that the janitors on the plan pay a much higher share of their earnings than do the C-suite executives for the same coverage. 

Yet even workers in the top 10 percent of the income distribution are getting hosed. In his book Healthcare USA: American Exceptionalism Run Amok, Schieber shows that between 2000 and 2019, such high-income workers saw more than half of the total increase in their compensation over the period diverted into the cost of their health care plan. Put another way, that’s like finding, as you gain seniority and obtain increasingly valuable job skills, that your purchasing power is going up at only half the rate as the value you’re adding to your employer’s bottom line because (unknown to you) your employer has diverted the other half to covering the mounting cost of health care inflation. 

And that cost keeps rising. Since 2010, health care costs for the average family of four with an employer-sponsored plan have risen by more than $13,000, or over 71 percent. Currently, the cost for individuals covered by such plans is rising by 6.7 percent a year, roughly double the official rate of inflation. No wonder so many Americans, even those “privileged” enough to have employer-sponsored health insurance, feel like the economy is not working for them. 

The Princeton economists Anne Case and Angus Deaton attribute the rising death rates among working-class Americans in part to the economic hardships created by these plans. In their book Deaths of Despair and the Future of Capitalism, they write, “The cost of employer-provided health insurance, largely invisible to employees, not only holds down wages but also destroys jobs, especially for less skilled workers, and replaces good jobs with worse jobs.”

What can be done? Abolishing our employer-based health care finance system and replacing it with something like a government-financed, “Medicare for All” program might be a good idea. But it hardly needs saying that it is a political nonstarter at the moment.

Fortunately, there’s another way. 

It turns out that in addition to all their other faults, employer-sponsored plans are terrible at negotiating with health care providers for lower prices. That’s supposed to be one of their key functions. They are supposed to go to hospitals, doctors, and drug companies and say, “If you want to be part of our network of preferred providers, you have to give us discounts.” Yet it turns out that on average, when people on these plans go to the hospital to have a specific procedure done, the hospital charges an average 254 percent more than they do when they perform the same operation on a Medicare patient. Hospitals also charge commercial plans more than 100 percent more for any drugs they administer, according to a massive ongoing survey conducted by the RAND Corporation. 

This disparity is not entirely the fault of the plans. Thanks to rampant hospital mergers and the roll-up of independent doctors and other providers, many health care markets these days are dominated by a single mega health care provider with so much market power that it can simply dictate prices even to the largest purchasers of health care. In other places, insurers and providers have merged into a single, self-dealing conglomerate. Either way, in the face of so much monopoly power, most employer-sponsored plans are not providing any real value to their members when it comes to negotiating for fair prices.

So here’s the solution. Just mandate, going forward, that all employer-sponsored plans pay providers the same, or close to the same, prices Medicare does. And further mandate that employers share the enormous resulting savings with their workers. 

Will hospitals object? Of course. But their case is weak. Abundant evidence shows that the U.S. hospital system could easily sustain itself with prices that are much closer to Medicare reimbursement rates. This should come as no surprise, since Medicare sets these rates by calculating what a well-run hospital needs in revenue in order to cover its costs and earn a respectable profit. (“See Don’t Blame Medicare for Rising Medical Bills,” June 19, 2023.) Most hospitals are classified as nonprofit, charitable institutions for tax purposes. It’s time they operated as such, rather than behaving as profit maximizers. And it’s time American workers stopped seeing so much of their well-deserved earnings siphoned off by medical monopolies charging predatory prices. 

In 2018, the Washington Monthly published an article that worked through the details of how such a plan could be implemented and how much it would save workers. In 2020, we reported on how a similar plan had been successfully implemented by Montana on behalf of its state employees. 

Maybe now, as Democrats look for ways to improve the real and perceived economic security of working- and middle-class voters, it’s time to consider implementing “Medicare Prices for All.” It’s a plan that doesn’t require raising taxes or forcing anyone to give up their private insurance. But it offers a way to squeeze the monopoly rents out of the health care system and return them to the American people.  

The post Medicare Prices for All appeared first on Washington Monthly.

This article is from a cover package of essays entitled Ten New Ideas for the Democratic Party to Help the Working Class, and Itself. Find the full series here.

Donald Trump has vowed to pursue sweeping deregulation of the economy in his second term. He has also called for elimination of at least one federal agency—the Department of Education—and set Elon Musk and Vivek Ramaswamy to work deconstructing the remaining administrative state. 

So it might seem like an epic case of not reading the room to now propose that Democrats advocate for a new regulatory agency with broad powers over the single most critical sector of economy. Yet I am going to do just that, while hastening to point out to skeptical Republicans that if they get behind this proposal they will not only be more likely to achieve many of their stated goals, such as revitalizing heartland America and loosening ties to China, they will also be undoing the work of key Democrats of the last generation, from Ted Kennedy to Ralph Nader and Jimmy Carter. 

Starting in the late 1970s, Democrats enacted, with Republican support, a radical new policy idea. The press mostly treated it as a banal, technical matter. But over time this quiet policy shift would profoundly tilt the balance of political economic power in the United States and wind up hurting tens of millions of people in both blue states and red states. 

The radical idea was to get the government out of the business of regulating prices and terms of service in transportation markets. In all of American history, nothing like this had ever been tried before. In colonial times, Americans applied English laws dating back to the Middle Ages that prevented the owners of ferries, toll roads, and stagecoaches from charging some customers higher fares than others for the same trip. Later, American governments, at first at the state and local levels and later federally, banned this kind of discrimination whenever a new form of transportation came along, from canals, railroads, and steamships to trucks and airlines.

By the late 19th and early 20th centuries, as more and more commerce flowed by rail across state lines and came under the control of giant corporations, even the most conservative advocates of laissez-faire came to understand that Washington had to join in setting market rules for this increasingly dominant mode of transportation. The free enterprise system—let alone democracy—would not work if the winners and losers in American life were determined not by who came to market with the best products but by who got the best deal from the self-dealing financiers who controlled the railroads. 

At the same time, even the plutocratic owners of giant rail systems came to advocate for federal regulation in this sector as a way of avoiding the ruinous price wars that frequently broke out among them. Railroads often charged predatory prices where they enjoyed a local monopoly. But where more than one railroad competed, they often had to set rates below cost in order to defray their high fixed expenses, leading to massive bankruptcies. In the 1870s, railroads accounting for nearly a third of domestic mileage failed or fell into court-ordered receivership.

Thus, in 1887, Congress created one of the federal government’s first regulatory agencies, the Interstate Commerce Commission. By the early 20th century, the ICC was effectively setting the industrial policy of the United States by ensuring that the prices railroads charged were publicly posted and nondiscriminatory. Under ICC price regulation, all rail shippers, regardless of their market power or geographic location, paid roughly the same price per ton and per mile for transporting the same kinds of goods for the same distance. Similarly, railroads had to charge passengers the same price per mile regardless of whether their trip was long or short, or between major cities or remote destinations. The ICC set rates at a level that allowed railroads to maintain their infrastructure and earn a fair return on their capital. But the carriers had to use some of the profits they earned on highly profitable mainlines to cross-subsidize service on less profitable or money-losing routes or lines of business. Finally, railroads could not abandon routes or cancel service without ICC permission. 

In 1916, Congress extended these same principles, known as “common carriage” law, to maritime transportation. The Shipping Act created a new agency, the U.S. Shipping Board, and charged it with ensuring that all ocean carriers publicly posted their prices and offered all “similarly situated” shippers roughly equal terms of service. In 1935, Congress extended the same regulatory model to interstate trucks and buses by giving the ICC jurisdiction over these modes. Then it followed up three years later by applying the same models to airlines, putting the newly created Civil Aeronautics Board in charge of enforcement. 

Under this regulatory regime, the United States developed into an industrial powerhouse, with a transportation system that, while far from perfect, was unrivaled in its efficiency, equity, and levels of innovation. Prairie farmers gained access to global markets, and both small and large manufacturers in heartland cities like Buffalo, St. Louis, and St. Paul could compete on an even playing field. Operating under the same market rules, air transport expanded rapidly after World War II, becoming safer and cheaper to the point that by the mid-1970s, two-thirds of all Americans over 18 had traveled by plane, and jet travel to tourist destinations in Florida, the Caribbean, and Europe was becoming routine. 

Yet beginning in the Carter administration, key Democrats decided to remove these crucial, regulatory ingredients from America’s trademark formula for broad-based, capitalist prosperity. In 1978, at the urging of Ted Kennedy and the consumer activist Ralph Nader, Jimmy Carter signed legislation that permitted airlines to engage in systematic price discrimination and to abandon or roll back service that did not offer high volumes of profitable traffic. Two years later, Carter did the same for railroads and trucking firms, again at the urging of leading Democrats. Then in 1984, President Ronald Reagan followed through by signing legislation that ended price regulation and reduced common carriage requirements in ocean shipping. 

At the time, policy makers hoped that this wave of deregulation would foster more market competition and cheaper prices. And it did, at least partially and at first. After deregulation, many small new airlines popped up offering bargain fares, for example. But as unmanaged competition drove down fares below cost, most of these new carriers soon failed or wound up merging into bigger, monopolistic systems. Service to midsize cities in what became known as “flyover” America either disappeared or became much more expensive, fueling regional inequality by helping to concentrate economic growth in a handful of elite coastal cities. Meanwhile, flying became a miserable experience, marked by ever-shrinking seats, baggage fees, delays, and restrictions, as airlines merged into a handful of giant systems with overlapping ownership that sought to maximize profits by cutting costs and engaging in more refined methods of personalized pricing. 

The deregulation of railroads also seemed to work at first. But in combination with lax antitrust enforcement, it led to financiers and private equity firms exacting monopoly rents from captive rail shippers, thus making heavy manufacturing in the United States increasingly expensive and logistically difficult. The railroads’ abandonment of all but the most profitable routes and lines of business has also disrupted supply chains, causing shortages and inflation. Meanwhile, it has led to unregulated, energy-inefficient, pollution-spewing trucks hauling a rapidly growing share of the nation’s freight while also causing surging numbers of highway deaths and harm to roads and bridges. 

Finally, the deregulation of ocean shipping has also proved to be a failure. In the absence of price regulation, ruinous price wars broke out among domestic carriers, causing many to go broke and contributing eventually to the near-total collapse of the nation’s merchant marine fleet. Deregulation has led to an ocean shipping system dominated by a handful of foreign-owned cartels that have a stranglehold not only over American commercial life but over its military sea lift capacity as well. 

There were, to be sure, faults with the Interstate Commerce Commission and the other agencies that were once involved in regulating transportation markets. But these faults provided arguments for reform, not for abolishment, and now we are paying the price. If Republicans are serious about reindustrializing America and overcoming our economic and military vulnerability to China, then they need to join Democrats in building a new agency to manage and coordinate competition across the transportation sector. And if Democrats also want to lower carbon emissions, reduce highway deaths, and fight the “greedflation” caused by unregulated transportation monopolies, they need to embrace the same program to make 21st-century America truly great. 

The post Make Transportation Fair Again appeared first on Washington Monthly.

In 2012, a diminutive, whip-smart, newly minted college graduate named Lina Kahn was trying to find a home for the serious policy journalism she aspired to produce. Impressed by her research on the airline industry, I proposed that we co-write a piece for the Washington Monthly. In it, we showed how airline deregulation, though still widely celebrated among policy wonks and the mainstream business media, had turned into a giant policy failure, leading to higher prices and degraded service, particularly across what had come to be known as “flyover” America.  

Soon, I was working with Lina again as editor as she went on to produce a series of key articles for the Monthly that challenged received “neo-liberal” ideas about how the U.S. political economy worked. For example, at a time when most people believed that America remained a beacon of entrepreneurialism, Lina collaborated with a colleague at the New America Foundation, Barry Lynn, to show that the per capita rate of business formation had been falling in the U.S. since the 1970s as giant corporations dominated more and more of the economy. Similarly, she produced stunning investigative reporting showing how nominally independent chicken farmers now operated at the mercy of giant meat-packing monopolies.  

Lina, of course, went on to do greater things. After graduating from Yale Law School and publishing a hugely influential law review article on Amazon’s monopoly power, she led a massive Congressional investigation into corporate concentration. From there, she served as chair at the Federal Trade Commission, where she has spearheaded a wholesale revolution in the U.S. competition policy for the last four years. At the Washington Monthly, we take pride in having had the chance to mentor Lina early in her career, as we have with many others who have gone on to make a big difference in journalism and government.  

Donate now to the  Washington Monthly. 

If you think the Monthly’s brand of solutions-based policy-focused journalism is essential, there’s something you can do: Make a donation. In fact, do it right now. 

As a nonprofit, we cannot do our work without your support. I can’t think of a better gift. Plus, as a token of our gratitude, if you give $50 or more, you’ll receive a free one-year subscription to the print edition of the Washington Monthly. 

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Senior Editor

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For all our differences, Americans are remarkably united on one key point. Partisan Democrats and Republicans, business and labor leaders, and just about all the folks sitting in think tanks or on barstools across this great land agree that we must start making more stuff in America.

President Donald Trump, of course, pursued this goal primarily by imposing tariffs and ran for a second term promising to impose far more. The Biden-Harris administration maintained many of Trump’s original tariffs and added some new ones while also creating deep subsidies for many forms of domestic manufacturing, particularly computer chips and green technology.

Responding to these incentives as well as to the supply chain fragilities revealed during the pandemic, many corporations have started building more factories in the U.S. or have announced plans to do so. Some of the deals sound impressive. In March, Intel announced plans to invest $28 billion in the world’s largest chipmaking complex on a site in New Albany, Ohio, for example. 

But overall, the scale of actual and planned manufacturing construction is rather modest. According to an analysis of current trends sponsored by the Commercial Real Estate Development Association, the total number of square feet devoted to major factories is expected to rise by just 6 percent to 13 percent over the next 10 years.

Why so little? Many well-known factors work against the growth of American manufacturing, including shortages of appropriately skilled labor. Permitting requirements and other red tape can also make building a new factory in the U.S. cumbersome and expensive. But even if these challenges were overcome, there is another huge factor threatening the rebuilding of America’s industrial base and transition to a greener economy. 

In order to make stuff in the U.S., you must be able to efficiently transport not just finished goods to consumers but also lots of heavy raw materials and components to your factories. For example, making EV batteries in the U.S. requires making synthetic graphite, and making synthetic graphite requires transporting huge volumes of feeder stock like coal tar or petroleum coke, which are by-products of steel production and oil refining. You can’t use trucks to move that much heavy material for more than short distances—not even trucks running on battery power. You need freight trains. 

Yet our freight rail system is melting down. After being deregulated in 1980, freight railroads merged into a handful of giant monopolistic systems that became highly profitable. Those profits, plus the lack of regulation, in turn attracted financiers who over the past decade have taken control of major railroads and forced them to adopt a new predatory business model. Financiers are maximizing short-term profits and returns to shareholders by effectively liquidating the rail system through radical downsizing and degraded service, all while further damaging the prospects for American manufacturing by charging higher and higher freight rates. 

To deal with their diminished capacity and crew shortages, railroads have frequently imposed embargoes—refusals to accept new traffic—causing freight to stack up in warehouses and in railcars that remain stranded in yards and sidings for days and even weeks. At one point in 2023, millions of chickens faced starvation because of Union Pacific’s failure to deliver animal feed trains on time. Shippers who depend on railroads are often reluctant to voice public criticism for fear of retaliation, but through their trade associations they describe systematic breakdowns in service that prevent them from growing. In September, Jeffrey Sloan of the American Chemistry Council testified before the Surface Transportation Board that railroads threaten the safety and growth in the chemical industry through “excessive rates and charges, unreliable service, and a lack of network resiliency.” 

This state of affairs does not bode well for a manufacturing renaissance. Today’s stripped-down U.S. rail system does passably well at moving Chinese imports from West Coast ports to retailers like Amazon and Walmart. And it still handles large reverse flows of bulk commodities like coal and grain. In this, American railroads have become like the ones the British Empire once constructed in India and other colonies: optimized for importing manufactured goods and for exporting natural resources. But under their current ownership and operating plans, America’s downsized freight railroads are not configured to accommodate any significant reshoring of heavy industry, whether it’s petrochemicals, steel and shipbuilding, or EV batteries and windmills.

Meanwhile, the continuing degradation of the freight rail system is causing many other harms to the public. For example, it’s forcing many shippers to shift from rail to pollution-spewing heavy trucks that cause extensive damage to roads and bridges and that kill or injure a surging number of Americans every year. Freight transportation may seem like a banal subject. But getting it right is key to everything from fixing global warming and improving public health to overcoming dangerous dependencies on geopolitical rivals. 

To understand this problem, we have to know what has caused it. In short, this is a story of what happens when you deregulate an essential infrastructure, allow its managers to extract monopoly prices from captive customers, and then let assorted wolves of 21st-century Wall Street to gain control and take the whole system over the edge. 

By the late 19th century, even proponents of laissez-faire had come to realize that without regulation railroads threatened to distort the workings of the free enterprise system. In most places, a single railroad held a local monopoly, which it used to extract wealth from the community and retard its economic development. Meanwhile, in places served by more than one railroad, typically large mid-Atlantic cities, the competing carriers often engaged in price wars, giving those places an unfair and unearned economic advantage over rural America and midsize heartland cities. 

In response to these and other inequities, many states began regulating railroads as far back as the 1860s. In 1887, Congress extended railroad regulation to the federal level by passing the Interstate Commerce Act, which forbade railroads from charging more to transport “like kind of property, under substantially similar circumstances and conditions, for a shorter than for a longer distance over the same line.” 

It would be many years before the Interstate Commerce Commission overcame resistance from reactionary judges and gained full statutory power over railroad rates. But by the early 20th century it was effectively setting the industrial policy of the United States by controlling how much railroads could charge for shipping different kinds of products to different places. The ICC also gained the power to end the widespread, market-distorting practice of railroads offering discounts or rebates to powerful shippers, such John D. Rockefeller’s Standard Oil monopoly. 

Guiding the ICC’s approach to regulation was a principle known as “common carriage,” which is akin to what we today call “net neutrality” in debates over internet governance. Shippers, regardless of their market power, had to pay roughly the same price per ton and per mile for transporting the same kinds of goods for the same distance. Where railroads lost money on low-volume and high-cost services, such as serving a grain mill at the end of a branch line used by local farmers only at harvest time or running local passenger trains, they were expected to make up the difference from their high-profit routes and lines of business.  

The bureaucratic processes the ICC used to enforce a neutral, public rate structure were often protracted. It had to determine, for example, what should be the relative price of shipping a hog versus a ham 50 miles. Yet this regulatory structure was nonetheless critical to ensuring fair terms of competition between different businesses and different places and thereby helped launch America as a broadly prosperous economic powerhouse. 

Many other resource-rich countries, like Argentina and Australia, were slow to develop domestic industries in the late 19th and early 20th centuries. The U.S., by contrast, not only took off early but also developed in a way that distributed growth to midsize cities across its hinterlands. Rural America was also unusual in that it supported a large class of free-holding, independent farmers who had access to distant markets. What explains the difference? In a recent essay, Noam Maggor, a historian at Queen Mary University of London, documents one often overlooked factor: the great and unusual advantage the U.S. gained by regulating railroads in ways that preserved equal pricing and terms of service across all regions. 

Starting in 1935, the ICC began applying the same principles to interstate trucking. This was critical to ensuring that railroads and truckers competed under the same rules. By limiting the number of commercial interstate truck licenses and the freight markets individual truckers could serve, the ICC also preserved at least the possibility of each mode being put to its optimal use, such as using trucks for local and expedited regional deliveries, and fuel-efficient railroads for longer hauls. 

All this went by the board just as the country faced an energy crisis and a growing environmental movement. In 1980, President Jimmy Carter signed legislation that stripped the ICC of nearly all its power to regulate rail rates and substantially reduced common carriage requirements as well. That meant railroads were free to offer secret discounts to powerful shippers just as they once did for Standard Oil. It also meant that railroads could exercise virtually unrestrained pricing power over what’s known in the industry as “captive shippers”—that is, mines, factories, or refineries that are served by a single railroad and that are unable to use trucks as a substitute because of the bulk and weight of what they need to move. And finally, deregulation meant that railroads could simply refuse to serve individual shippers and whole communities, as they were prone to do so long as they could make more money pursuing different lines of business. 

At the time, many policy makers thought that deregulation would put off a pressing issue. The decline of manufacturing in the Northeast and the industrial Midwest was causing many railroads to fail, raising the specter of the government having to engage in a permanent takeover. Policy makers in both parties hoped that deregulation would help them avoid that scenario. Many were also influenced by sustained ideological attacks on regulation that were being mounted in that the era not only by “free market” conservatives but also by many Democrats worried about inflation and U.S. competitiveness. The consumer activist Ralph Nader and liberal Democratic Senator Ted Kennedy were united in their calls for abolishing ICC regulation of both railroading and trucking, just as they had successfully worked two years before to dismantle regulation of airlines. 

At first, the plan seemed to work. The bankrupt railroads in the Rust Belt merged into a regional monopoly called Conrail, which then became highly profitable by abandoning unprofitable or low-margin lines and customers, and by taking advantage of its ability to price-gouge captive shippers. The federal government even made money on the emergency loans and equity infusions it had once used to get Conrail started. Other privately owned railroads also became highly profitable by merging and taking advantage of their freedom from price regulation and common carriage obligations. But before long, the railroads’ monopoly power began to attract the attention of financiers, and that’s when the real destruction began.

Over the past decade, “activist” investors have gained effective control over most rail management. Their first order of business was to install new managers who would drive up short-term profits through ruthless cost cutting and downsizing. The most notorious of these was the hard-charging railroad executive E. Hunter Harrison, who pioneered a new business model called “precision-scheduled railroading,” or PSR, that has now been almost universally adopted by the nation’s major railroads. Despite its label, PSR has little to do with running trains on time. Instead, it mostly involves the common private-equity playbook of driving up share prices by downsizing workforces, selling off assets, and degrading services while raising prices. It is estimated that Harrison, who was affectionately known as the “trains whisperer” by Wall Street, created $50 billion in increased returns to shareholders during his tenure as CEO of four major North American railroads. 

Using this strategy, railroads have cut expenses to the point that they now spend as little as 60 cents for every dollar in revenue they take in. But this has come at great expense to individual shippers and increasingly to the economy as whole. Railroads have raised the cost of shipping by rail nearly 30 percent faster than the rate of general inflation since 2004, with captive shippers facing especially steep price hikes and other added fees. Meanwhile, railroads have cut their workforces by approximately 30 percent since 2014, scrapped thousands of locomotives and freight cars, and abandoned many branch lines and low-margin lines of business—all while also running longer and longer trains on less and less track to fewer and fewer places less and less often. 

After Harrison brought the PSR business model to the rail giant CSX in 2017, the effects on shippers were devastating. A typical complaint came from the Charles Ingram Lumber Company, of Effingham, South Carolina, a third-generation, family-owned company that shipped approximately 130 million board feet of lumber made from southern yellow pine per year—or tried to. The company’s troubles began when CSX, which controls roughly half of all rail infrastructure east of the Mississippi River, decided to tear up the low-volume branch line leading to the Effingham mill. This forced the lumber company to use trucks to reach the nearest remaining railhead, seven miles away. Then CSX began refusing to provide the company with enough railcars to fill its orders or to provide timely pickup, forcing the company to tie up $750,000 in inventory that it could not get delivered to its furious customers. These days, as railroads continue to downsize their rolling stock, many shippers who want to use rail cannot even count on railroads to supply the freight cars they need and wind up having to buy or lease their own, driving up the incentive to switch to trucks whenever possible. 

Railroads have also been purposely driving away customers by eliminating direct service. For example, in 2017 CSX announced that as part of its new PSR operating plan, it would no longer handle movements of containers between 327 different city pairs. It followed up in 2018 by eliminating intermodal service between another 230 city pairs, including all service to Detroit and service between Miami and such major cities as Baltimore, Philadelphia, Memphis, Nashville, and Cincinnati. During an earnings call with investors, CFO Frank Lonegro made clear that CSX’s goal for its intermodal business was to “take 7 percent of the volume off the railroad intentionally every year, because we shouldn’t be doing that kind of work.” 

Why brag to stock analysts about losing customers? By shedding lower-volume, lower-margin business, CSX and other railroads free up their diminishing track capacity and shrinking train crews for more lucrative business. For instance, hauling lumber from a single mill down a weedy branch line is a low-margin business because it involves comparatively low volume and a higher handling cost. For the same reason, moving containers less than 500 miles between midsize cities is also less lucrative. By contrast, hauling large volumes of grain or coal long distances for shippers who cannot economically use trucks is a high-margin business, as is hauling containers full of merchandise made in China from the West Coast ports to major East Coast metro areas. So railroads optimize their systems to handle the latter two kinds of movements while demarketing anything less profitable. 

Where railroads cannot fully get rid of lower-margin business they find ways of at least discouraging it. For example, every day in Chicago, thousands of containers bound to and from small and midsize cities are unloaded from trains, then “rubber-wheeled” across the city by trucks and reloaded onto other trains for the rest of the journey. The process adds between $200 and $400 to the cost of each container, and is also very time consuming. Faced with this kind of delay and inefficiency, many shippers just switch to trucks exclusively. 

Why don’t railroads just offer direct through services between midsize cities? Because they don’t want to displease their shareholders by using their limited track capacity for lower-margin, short-haul business. And they don’t want to invest in new capacity, as that would leave less money available for rewarding today’s shareholders with dividends and stock buybacks even if it would help grow new business in the long run. 

The payouts to shareholders have been extraordinary. From 2010 to 2021, railroads spent an astounding $183 billion on dividends and stock buybacks, which is far more than the $138 billion they spent on their infrastructure. It was also far than more than the cash flow railroads had available even after reducing operating costs to the bone and liquidating assets. To make up for the gap, railroads have deferred maintenance of their tracks and other capital assets while taking on more and more debt.

Take Union Pacific, for example. It operates the original “transcontinental railroad” that linked Omaha with the West Coast in 1869. Today, through a series of mergers, it also controls roughly half the rail infrastructure west of the Mississippi. Though it uses the motto “Building America,” mostly what it builds today are returns to shareholders, due to its capture by hedge funds. In 2021, for example, UP used nearly $4 billion more paying out dividends and engaging in stock buybacks than it had available from its cash flow, which is akin to paying out more in rent than you have available after taxes when you cash your paycheck. Meanwhile, because of shrinking capacity and crew shortages, UP declared more than 1,000 embargoes in 2022 alone, thereby aggravating supply chain bottlenecks and inflation. 

Yet Union Pacific’s downsizing was still not enough to satisfy Soroban Capital Partners, a hedge fund that in early 2023 used its $1.6 billion stake in the railroad to demand that UP sack its CEO and replace him with someone who could wring out still higher returns to shareholders. As a result of this ongoing pressure to maximize profits, UP has had less money for keeping up its track and other physical assets, which in turn has resulted in a tab of $100 million for deferred maintenance. Succumbing to hedge fund demands has also encumbered the company with soaring financial debt. From the end of 2017 to the end of 2023, the burden of UP’s debt soared from 1.6 times its net income to 5.1 times. 

Similarly, from 2016 to 2023, Norfolk Southern, which along with CSX controls most rail infrastructure east of the Mississippi, spent $8.4 billion more on dividends and stock buyback than its cash flow provided. The money likely would have been better spent on safety and operational maintenance. After the 2023 wreck of a Norfolk Southern train in East Palestine, Ohio, that sent a mushroom cloud of toxic chemicals across 16 states, federal investigators laid blame on the company’s insufficient investment in wayside sensors that could have detected a failing roller bearing. Norfolk Southern subsequently tried to restore investment in improving service and attracting new customers, but once it began to do so, it was attacked by hedge funds demanding that its managers either boost returns to shareholders or step down. In response, the railroad has recently hired a Hunter Harrison protégé to help it more fully implement PSR. 

The breakdown of the freight railroads has deep consequences that go beyond America’s industrial potential. In a 2021 speech, Martin J. Oberman, then chairman of the Surface Transportation Board, noted that there would be 1 million fewer trucks on the road and 8.2 million fewer tons of carbon in the atmosphere if railroads had not ceded so much market share to trucks over the previous two decades. 

And that’s hardly a full accounting. Trucks are much less energy efficient than trains, mostly because rubber tires rolling on asphalt create a lot more friction than steel wheels rolling on steel rails. Railroads can carry a ton of cargo for 472 miles on a single gallon of diesel fuel, making them at least three times more fuel efficient than trucks. Trucks also cause almost five times more fatalities, and almost a dozen times more injuries, for every ton of cargo they carry. And they, of course, impose costs on the rest of us in the form of traffic congestion and damage to publicly maintained roads and bridges. Taking into consideration all these direct and indirect costs, the Congressional Budget Office calculated in 2014 that the societal cost of moving a ton of freight by truck was about eight times higher than moving it by rail. 

The high environmental cost of relying on trucks will remain even if all trucks in the future run on batteries charged with renewable energy. The consulting firm Oliver Wyman has calculated the effects of converting the nation’s entire truck fleet to EVs while continuing the current trend of moving an ever smaller share of freight by rail. Because trucks are so much less energy efficient than trains, under this scenario the U.S. would have to generate an extra 230 terawatt hours of electricity by 2050. To produce that much electricity using solar power would require covering 800 square miles of land with solar panels. 

What can be done? Going forward, we minimally need to find a way to loosen the monopoly power of railroads over captive shippers. So long as manufacturing in America entails being at the mercy of a predatory rail monopoly, both foreign and domestic companies have powerful incentives to avoid building new manufacturing facilities here. The Biden-Harris administration took a step in the right direction by supporting new “reciprocal switching” regulations that will, in some egregious cases, give some shippers more options in which railroads they use. But the many deeper problems remain. 

Tackling those will probably take some combination of reregulation and direct public investment in rail infrastructure. Regulation needs to ensure that railroads still have obligations as common carriers, meaning that they must not engage in price discrimination and purposeful demarketing of all but the most profitable lines of business. Regulation also needs to be extended to and harmonized with other transportation modes so all modes can compete on even terms and in ways that serve the public interest. This means setting rules of competition that favor trucking for short hauls and express service but that shift as much freight as is feasible to safer, more efficient, less environmentally destructive trains. 

Enacting this kind of regulation would probably cause most vulture capitalists to quickly sell off their stakes in railroads because it would severely reduce the opportunities for monopoly pricing in the sector. That will leave the problem of how railroads can attract the capital they need to serve shippers and communities that don’t necessarily offer opportunities for earning high returns. 

Some of this challenge can be met, as it was under the ICC, by using common carriage and price regulation in ways that effectively create cross-subsidies. Regulation can force railroads, for example, to use some of the high profits they earn from hauling coal on heavily trafficked mainlines to support lower-margin service, such as hauling boxcars or containers along branch lines or between midsize cities. But in some instances, direct government support may be needed to achieve these ends. This could include direct subsidies to private owners so long as they are attached to clawback provisions for poor performance, or it could include public ownership of specific rail infrastructure needed for passenger service and lower-volume freight. 

As during the era before America deregulated its freight transportation sector, finding the right mix of policy tools will not be easy. But at a time when we need a vital, efficient, and equitable freight system more than ever to achieve key national purposes, we cannot afford to ignore the challenge.

The post Train Drain  appeared first on Washington Monthly.

As Kamala Harris campaigns for president, one of her challenges is the economic record of the administration she still serves. Of course, she can point out that we have the strongest economy in decades, seen in metrics such as the Dow Jones Industrial Average, GDP growth, and jobs paying a living wage. She can also highlight the administration’s success in passing landmark economic legislation, which has resulted in massive investments in long-neglected infrastructure, rebuilding America’s hollowed-out industrial base, and regaining America’s competitive edge in critical technologies.

Yet, polls show that most Americans think the administration has done an abysmal job on the economy and that Donald Trump has done and will do better.

One oft-cited explanation is inflation. Even though it’s slowed dramatically over the last two years, the cost of living is up more than 20 percent since the Biden-Harris team took office in January 2021. When swing voters think of “Bidenomics,” they too often think first of high-priced eggs. Worse, though wages have been rising faster than inflation since early 2022, they are not fully back to the levels seen at the end of the Trump administration.

So what can Harris do? Continuing to tell voters they are better off than they think they are risks seeming out of touch. Defending the status quo is dangerous when the electorate is desperate for change.

However, Harris has a profound opportunity to present herself as a change agent while embracing Joe Biden’s legacy. To do that, she must do a better job than the president in explaining how their administration has been rebalancing power in favor of the little guy. It’s a populist revolution that most people have never heard of.

One reason most voters and much of the media are oblivious to this story is that Biden has always viewed himself, and been viewed by others, as an institutionalist who values regular order and working across the aisle. Yet when Biden first sat behind the Resolute Desk in 2021, he made appointments and policy changes that challenged principles that elites in both parties have used for 40 years to entrench their power and privilege.

These principles have gone under different banners in different decades. In the 1990s, policy wonks often referred to them as “the Washington Consensus.” Today, the mindset is called “neoliberalism,” a core belief that market capitalism is a self-stabilizing system and that if left undisturbed by government regulation, it will spread broad prosperity and freedom across the globe.

Just as fish don’t know they are in the water, it can be easy to miss how completely the governing principles behind this mindset have transformed America’s political economy over the last two generations. An early example was Jimmy Carter’s administration’s sharp turn from the New Deal order when it joined Republicans in deregulating key industries like airlines and railroads.

The same principles soon animated Ronald Reagan’s case against “Big Government” while informing the thinking of many mainstream Democrats who supported the Gipper’s banking deregulation and retreat from antitrust enforcement. As a result, Wall Street gained over Main Street, and leverage buyout artists picked apart industrial America.

Similarly, a bipartisan consensus that the government must not “pick winners and losers” led to the defunding and dismantlement of many of America’s long-standing industrial policies. These included bipartisan votes under Reagan virtually eliminating America’s shipping and shipbuilding industries.

In the 1990s, a similar faith in free markets informed Bill Clinton’s embrace of free trade with China. Later, it prevented Barack Obama from proposing anywhere near the levels of stimulus spending needed for a speedy recovery from the Great Recession. Like all the “serious people” in Washington, Obama and his advisors believed that government spending for big-ticket items, such as matching the Europeans and the Chinese building a high-speed rail network, would make the nation poorer by “crowding out” productive private investment in the “real” economy.

Biden bought into the neoliberal mindset for most of his adult life. Just a year after passing a modest fiscal stimulus to get the economy back on track, the Obama-Biden administration proposed a leaner budget while millions of Americans remained unemployed. After the disastrous 2010 midterms, they signed on to spending cuts. Yet 11 years later, when Biden dealt with the pandemic-caused recession, he broke from the Washington Consensus by pushing a massive $1.4 trillion stimulus program, the American Rescue Plan, through Congress. Lawrence Summers, the National Economic Council chair during the Obama administration, articulated the outraged Washington Consensus when he blasted President Biden for enacting the “least responsible” economic policy in 40 years.

At the same time, Biden pulled other policy levers to undo the long reign of neoliberalism. There was his switch on industrial policy. According to the Washington Consensus, this term was categorically suspect and akin to socialism because it implied that voters and public officials could know better than “the market” where society should put its resources.

Biden not only didn’t hesitate to use the term but also put his shoulder into passing three foundational laws—the Infrastructure and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act—that established an overt, well-funded industrial policy of a kind and of a scale not seen the days of Franklin Roosevelt. It wasn’t a matter of picking individual winners and losers. It was a matter of returning to a long American tradition, stymied during the reign of neoliberalism, of using government to channel market competition toward national purposes and socially valuable ends.

Similarly, Biden broke free of the Washington Consensus on trade. While steering clear of the clumsily drawn and often self-defeating tariffs levied by the Trump administration, Biden embraced a radical new trade policy. As coordinated by his trade ambassador, Katherine Tai, it makes selective use of tariffs to check unfair competition and build supply chain resiliency while also bargaining for trade agreements that elevate labor and environmental standards.

Most consequentially, Biden challenged the Washington Consensus on antitrust and other competition policies. This break began with his appointment of Lina Kahn as chair of the Federal Trade Commission and Jonathan Kanter as head of the Department of Justice’s Antitrust Division. Both were leading figures in a burgeoning anti-monopoly movement that viewed the increasing concentration of corporate power—including the growing control of giant platforms like Facebook and Google over the information environment—as grave threats to economic security, regional equality, and a healthy democracy.

Biden followed through with an unprecedented, all-of-government executive order that called on agencies to take 72 actions to foster competition and protect consumers and workers against monopolies. This led not only to an aggressive crackdown on things like junk fees and non-compete contracts but also to revolutionary new prosecutorial guidelines in antitrust enforcement. The Justice Department began filing and winning antitrust cases based not just on how monopolies affected consumer prices but on how they hurt small businesses and independent contractors.

Sadly, the Biden administration never quite figured out how to properly communicate the epoch-making significance of the new course on which it was steering the ship of state. Part of the problem is unavoidable—akin to one President Harry Truman faced as he wooed voters who worried more about post-war high prices than rebuilding Europe. While Biden’s policies will, if continued, rebalance political and economic power over time, many have little identifiable impact on people’s day-to-day lives.

But there’s also been a problem with the messaging. In describing “Bidenomics,” the administration often said it was a program to “grow the economy from the middle out and bottom up—not from top down.” That’s so vague that a swing voter might conclude that Bidenomics means taking money from some people and giving it to others, which sounds suspiciously like socialism. Instead, Bidenomics is mostly about rolling back monopoly power so that we can preserve our democracy and compete equally in pursuing the American dream.

The administration also missed an important opportunity two years ago when it did little to connect the price spike Americans felt at the pump and in the supermarket to monopolies. Abundant evidence existed then, and even more is available now, that corporations used shortages caused by the pandemic as a cover for jacking up prices and reaping windfall profits. Failure to drive home this message left voters believing that the Biden-Harris administration caused inflation through excess government spending.

Failure to communicate the administration’s war on monopoly and its rationale carries another danger. Swing voters may conclude that Republicans, not Democrats, are defenders of the little guy. This is especially true after the elevation of Senator J. D. Vance, who, despite his ties to Silicon Valley billionaires famous for defending monopoly, often poses as a trust-busting tribune of the people. Vice President Harris will serve herself and the country if she shows why she’s the real defender of the common man and how her policies are working to save our democratic republic from the oligarchs.

The post Biden and Harris Broke the Suffocating “Washington Consensus” on Economics appeared first on Washington Monthly.

“Hey Journalists, Nobody Is Coming to Save Us.” So reads the headline of a recent opinion piece in Nieman Reports, a venerable publication affiliated with Harvard University that describes itself as “covering thought leadership in journalism.” 

Just within the past year, the article reports, major layoffs and buyouts have occurred in every type of media organization under every form of ownership and business model. Examples range from the billionaire Jeff Bezos’s Washington Post to nonprofits like The Texas Tribune; from public media outlets like New York Public Radio to scrappy, entrepreneurial, multimedia web publications like Buzzfeed News and Vox Media. Despite the many innovative attempts over the past quarter century to “save journalism,” seemingly the only news in the news business is that it continues to shrink away at an accelerating pace. On our current course, by the end of 2024 the country will have lost a third of its newspapers since 2005. In more than half of all U.S. counties, people either have no access to local news from any source or have to rely on a single surviving outlet, usually a weekly newspaper. 

So, what’s to be done? The Nieman Reports opinion piece advises journalists to adopt a four-part personal plan that includes developing more marketable skills, stepped-up networking, and staying abreast of industry trends like increasing reliance on charitable contributions and the use of artificial intelligence. 

But while that’s no doubt practical advice for anyone trying to build or hold on to a career in journalism, it’s also obtuse to the real nature of the problem and needlessly fatalistic. The decline of journalism—and the concomitant rise of a poisoned, “post-truth” information environment that deeply threatens democracy—is not a development that journalists, or society at large, must accept as inevitable. Contrary to received ideas, it’s not an unavoidable consequence of digital technology, generational change, or immutable market forces. 

Instead, it is a direct result of specific, boneheaded policy choices that politicians in both parties made over the past 40 years. By repealing or failing to enforce basic market rules that had long contained concentrated corporate power, policy makers enabled the emergence of a new kind of monopoly that engages in a broad range of deeply anticompetitive business practices. These include, most significantly, the cornering of advertising markets, which historically provided the primary means of financing journalism. This is the colossal policy failure that has effectively destroyed the economic foundations of a free press.

Fortunately, Joe Biden’s administration, along with other governments around the world, is already taking important steps to repair the damage. But perversely, the press itself barely covers the story while many reporters and editors, including some of the industry’s “thought leaders,” remain focused on individual actions or on small-bore reforms that are not remotely adequate to the problem. It’s time to wake up and join the big fight.

A key first step to understanding what’s gone wrong with the business of journalism is to focus on the largely forgotten history of the First Amendment. Most Americans learn in school that it prevents the government from abridging freedom of speech and of the press. Less well known is that until about 40 years ago, both the courts and public opinion viewed the amendment, and the spirit of the Constitution generally, as also requiring that government take positive steps to protect these freedoms from interference by monopolists.

This tradition in America’s political economy found early expression in the Postal Act of 1792. Reflecting the founding generation’s belief that a democratic republic required an informed citizenry, the law stated that the largest and most crucial communications network of the era had to treat all users equally by offering the same prices and terms of service to everyone. It was the same principle that in much later debates over the governance of the internet would be known as “net neutrality.”

Congress also importantly set rates for the mailing of printed material low enough to make the production and distribution of newspapers, pamphlets, and books economically viable. The result was a spectacular flourishing of media in early-19th-century America. As the sociologist Paul Starr has noted, “When the United States was neither a world power nor a primary center of scientific discovery, it was already a leader in communications,” thanks to public investment in a universally accessible postal system and the innovations of its flourishing free press.

Americans once again deployed extensive government interventions after monopolists gained control of a new communications network that had become essential to journalism by the mid-19th century. The dominant telegraph company of the day, Western Union, which fell under the control of the financier Jay Gould, and the dominant newswire provider, the Associated Press, became so intertwined that they were called “a double-headed monopoly.” Both colluded to force independent newspapers into signing exclusive contracts, so if a paper chose not to use Western Union for telegraph services, it was denied access to the Associated Press for newswire services, and vice versa. 

To reverse such concentrations of control over the information environment, Americans took myriad measures. As with the U.S. Postal Service, they enacted regulations that required, for example, that telegraph and telephone companies operate as utilities providing every user, or class of users, with the same prices and terms of service. Similarly, while granted an exemption from liability for the messages people sent over their wires, telecommunications companies were not allowed to pick and choose who got to send or receive what content. Americans also used antitrust enforcement and utility regulations to prohibit such companies from vertically integrating into adjacent lines of businesses, such as advertising and publishing. Finally, by the end of the 19th century, privacy laws in every state prohibited them from disclosing or otherwise misusing the personal data generated by their users. 

These measures in combination prevented telecommunications companies from adopting the surveillance advertising business model used today by Google, Facebook, and other digital platforms. While phone companies were allowed to offset their costs by selling advertising in the “yellow pages,” they were not allowed to wiretap their own customers and use what they learned to target third-party ads, as Google and Facebook do today. Such an abuse of privacy and monopoly power to manipulate and exploit customers was simply unthinkable. 

With the introduction of radio and later television, Americans again used regulation, along with aggressive antitrust and other competition policies, to ensure that these technologies did not lead to an information environment dominated by corporate monopolies. In 1934, Congress created the Federal Communications Commission and gave it expansive authority to enforce anti-monopoly principles in broadcast markets. In the early 1940s, the FCC used these powers to force NBC to divest itself of one of its two dominant radio networks, now known as ABC, thereby preventing NBC from monopolizing the radio industry. The government also applied the same principle by forcing the Big Eight Hollywood studios of the era to divest itself of movie theater chains.

The FCC similarly put a check on monopoly by preventing the cross-ownership of radio, television, and newspaper companies. In 1970, the FCC went further by enacting its “Fin-Syn” and Prime Time Access rules. These were aimed at preventing the three dominant networks (ABC, CBS, and NBC) from monopolizing the production of television programming, including by limiting the number of hours they could broadcast their own content in prime time. The rule change led to what many have described as a golden age of television, as independent television production companies gained the ability to bring groundbreaking programming like The Mary Tyler Moore Show and Norman Lear’s All in the Family to market. 

Consistent with the view that the public had a First Amendment right to a free flow of ideas, the FCC also took special measures to ensure that broadcast license holders, whose numbers were necessarily limited in any one location, did not suppress or monopolize the news and public affairs programming going out over public airwaves. Thus, in 1949, the FCC instituted the Fairness Doctrine, which promoted viewpoint diversity by requiring that television broadcasters “affirmatively endeavor to make … facilities available for the expression of contrasting viewpoints held by responsible elements with respect to the controversial issues presented.” The Fairness Doctrine created an environment in the image of the Founders’ positivist view of the First Amendment by placing the need for a well-informed citizenry over the desire of broadcasters to use programming solely to benefit their own private interests. 

With little controversy, the Supreme Court applied a variation of this principle to print journalism as well. In a 1945 antitrust case challenging the monopoly power of the Associated Press wire service over individual newspapers, Justice Hugo Black gave a succinct summation of how the Court viewed the relationship between monopoly and free speech. “Freedom to publish is guaranteed by the Constitution,” Black wrote, “but freedom to combine to keep others from publishing is not.” 

The FCC later extended the same principle to cable TV, ruling in 1972, for example, that cable companies must maintain facilities for production of local programming and make these facilities available to the public on a nondiscriminatory basis. As late as 1994, the Court reaffirmed principles of neutrality and viewpoint diversity when it upheld a law requiring cable companies to carry content from broadcast stations. Writing for the majority, Justice Anthony Kennedy stated that people, not corporations, should decide what they watch, noting, “At the heart of the First Amendment lies the principle that each person should decide for him or herself the ideas and beliefs deserving of expression, consideration, and adherence. Our political system and cultural life rest upon this ideal.” 

Even well into the digital era, public policy continued to guard strongly against the monopolization of media and communications markets. Examples include the 2000 antitrust decision that prevented Microsoft from leveraging its dominant Windows operating system into monopolization of the internet browser market—a ruling that opened opportunities for new companies, including Google and Facebook, to develop application-based services for the emerging World Wide Web. 

The extensive use of government to manage competition in media and communications markets was foundational to the growth of a sustainable free press in America. But so was another, closely related, and too often underappreciated factor: the flourishing of open, competitive advertising markets, structured by government policy, that served as the primary means of financing journalism. 

Advertising-supported journalism has obvious downsides. Particularly at smaller media outlets lacking a broad advertising base, individual marketers can gain undue influence over reporters and editors. But broad reliance on advertising to finance journalism proved to have two overwhelming advantages. First, it enabled a critical core of publishers and broadcasters to avoid becoming financially dependent on public funds controlled by the politicians and other policy makers they covered. Second, it enabled them to produce high-quality, civic-minded journalism at a price that ordinary people were willing and able to pay. Much as is often said about democracy itself, advertising-supported journalism might be the worst way to finance a free press except for all the rest.

The importance of advertising to the development of journalism in America is hard to overstate. In the 18th century, Benjamin Franklin supported the news stories in his Pennsylvania Gazette by devoting 45 percent of its pages to advertising. In the late 19th century, newspapers like The New York Times and Joseph Pulitzer’s St. Louis Post-Dispatch relied on ad-driven business models to set their prices low enough to reach mass audiences while also having the revenue to expand their coverage of city halls, statehouses, and foreign capitals. Advertising dollars also supported a rich diversity of crusading smaller journals, including the abolitionist William Lloyd Garrison’s The Liberator and Frederick Douglass’s crusading Black civil rights newspaper, The North Star. 

In the Progressive Era, advertising underwrote the “muckraking” journalism that helped to uncover the abuses of corporate monopolies like Standard Oil and corrupt political machines like Tammany Hall. To finance the work of pioneering investigative journalists like Ida Tarbell and Lincoln Steffens, the publisher of McClure’s Magazine sold ad space to corporations hawking, among other products, the Royal Tourist, a luxury automobile described as “The Pink of Perfection.” Corporate advertising financed exposés of corporate abuses. 

Similarly, in the 20th century, advertising remained the lifeblood of serious journalism, funding media outlets ranging from Time magazine and 60 Minutes to myriad smaller publications focused on advocacy for social justice causes, including titles like Jet, Mother Jones, Mother Earth News, Ms., and The Advocate. Meanwhile, business-to-business advertising supported flourishing trade publications with titles like Aviation Week, Multi-Housing News, and Defense Contract Litigation Reporter that played an important role in the information ecosystem of the era by reporting on often obscure but critical corners of the country’s political economy.

Supporting a broad advertising base for publications of all kinds during this era was rigorous, economy-wide enforcement of anti-monopoly laws. Into the 1980s, antitrust enforcement continually constrained mergers among local banks and other financial institutions, as well as among local supermarkets and other retailers, thereby preventing the number of advertisers supporting local newspapers and broadcasters from shrinking. The 1936 Robinson-Patman Act, which checked abusive business practices by chain stores and thereby limited their spread, is another important example of how U.S. competition policies—for as long as they were still enforced—helped to ensure a diverse, locally owned retail sector and, by extension, diverse, locally owned journalism.

Even into the early internet age, advertising continued to play an important role in sustaining journalism, including local and niche publications. During the aughts, small legacy publications like this one, as well as many local newspapers, were able to rejuvenate their finances through banner ads published on their websites. These, importantly, included ads targeted to individual readers. Marketers placed such ads on small publications’ sites through a Google-controlled digital ad exchange based on Google’s knowledge of the reader’s web history and personal interests. 

Such targeted digital advertising also financed new independent voices, including Joshua Micah Marshall at Talking Points Memo and Ana Marie Cox, founder of the political blog Wonkette. It also enabled a wave of new digital publications including Gawker in 2002, Pajamas Media in 2004, and the Huffington Post in 2005. 

While other digital products like video games and social media feeds increasingly competed for consumers’ time and attention, the demand for journalism of all kinds remained strong, and with the help of digital advertising the business model for it in many ways became stronger during the early days of the internet. Yet these benefits were eventually overwhelmed by the long-building negative effects of dramatic changes in public policy that were little noticed at the time but would become the root cause of today’s crisis of journalism. 

The first of these was a sea change in antitrust enforcement that began during the Reagan administration. New prosecutorial guidelines adopted in 1982 and 1984 gave the green light to virtually all mergers and acquisitions except in cases that involved provable collusion or conclusive evidence that a merger would lead to higher consumer prices. This change in policy, combined with ongoing financial-sector deregulation, led to a rapid wave of mergers and acquisitions and to a dramatic increase in corporate concentration, including among media properties. 

At roughly the same time, self-styled market conservatives also began to target the specific regulatory regimes that Americans had long used to structure media and communications markets specifically. Under Ronald Reagan, the FCC, for example, began dismantling many of its long-standing prohibitions on cross-ownership of radio, television, and newspaper properties, while also lifting limits on the number of broadcast stations a single person or corporation could own. 

Then, in 1987, the FCC repealed the Fairness Doctrine. Within a year, an obscure radio personality named Rush Limbaugh began broadcasting the unbalanced, hyper-partisan programming that launched nationally syndicated conservative talk radio. In combination with relaxed antitrust enforcement, these and similar measures led not only to the decline of diverse, locally owned media outlets committed to balanced local journalism, but also to their replacement by giant national chains dedicated to “talking head” opinion journalism, such as NewsCorp’s Fox News and the Sinclair Broadcast Group.

The movement to overturn the traditional public systems for governing media and communications markets continued under President Bill Clinton, most notably with passage of the 1996 Telecommunications Act. This legislation repealed, for example, the FCC’s ban on cross-ownership of telephone and cable television companies. As these and other changes to the policy map erased the legal boundary lines that had historically kept the different layers of the information supply chain structurally separated, media moguls were able to forge vast, vertically integrated monopolies with names like News Corporation (now NewsCorp), Viacom, and Comcast, that combined ownership of broadcast, cable, and internet service provider infrastructure with ownership of television and radio stations, movie studios, and other entertainment enterprises. 

That same year, Congress passed the Communications Decency Act. Its stated purpose was to crack down on internet porn and encourage the responsible growth of the era’s internet chat rooms and electronic bulletin boards. But the bill contained a 26-word passage known as Section 230 that, in combination with other policy failures, would create huge, unintended consequences. 

The CDA created a unique combination of powers and privileges for entities it loosely defined as providers of “interactive computer services.” As with telegraph and telephone companies, these entities were granted an exemption from libel law, which meant that they could not be sued or prosecuted when third-party users transmitted false or illegal information across their networks. But unlike with telegraph and telephone companies, providers of these new “interactive computer services” gained the power to discriminate among their users, including by censoring the speech of some and elevating the speech of others.  

Soon, and fatefully, the courts ruled that Section 230 applied not just to chat rooms and electronic bulletin boards but also to fast-growing social media platforms like Google and Facebook. This enormously amplified the already fast-growing monopolistic powers enjoyed by the owners of these platforms. 

Thus a handful of men like Google’s Larry Page and Sergey Brin, and Facebook’s Mark Zuckerberg, gained control over what was becoming an essential communications infrastructure upon which millions of individuals and companies depended for their livelihoods. This included newspapers and other media outlets, which increasingly needed these platforms to reach their readers, viewers, and, as we’ll see, even their advertisers. 

Yet unlike with the owners of those essential networks, the owners of these platforms faced no constraints in their ability to control what messages their users got to send or receive. Nor were they prohibited, like traditional regulated utilities, from leveraging their monopoly power into other lines of business, most notably including news distribution and advertising. Nor were they prevented from surveilling their users’ personal data and monetizing it in any way they wished, including by allowing marketers and even foreign governments to use their networks to manipulate individual users and classes of users. 

Because of these policy failures, today’s dominant digital platform monopolies threaten a free press in many ways. The most crucial and straightforward of these is through a massive theft of the advertising dollars needed to finance independent journalism. 

People still consume huge amounts of journalism every day even if they are now more likely to view it through their smartphone or tablet. And advertisers are willing to pay huge sums of money to reach these consumers, in no small measure because they tend to have higher-than-average discretionary income. But much of that ad money no longer flows back to the people who produce the journalism, even when the ads appear on their own digital publications. Rather, it flows largely into the vaults of Google, Facebook, and other platforms, increasingly including Amazon, which have inserted themselves as self-dealing middlemen in digital advertising markets. 

Starting nearly 20 years ago, through a series of acquisitions that would have been blocked by regulators but for the lax antitrust enforcement standards that prevailed at the time, Google managed to gain control of key digital advertising marketplaces on which publications and marketers find each other. A study by the UK’s Competition and Markets Authority found that by 2020, Google controlled a dominant position—as high as 90 percent—in every layer of the so-called ad tech auction market, in which British publishers sell digital ad space and marketers buy it. According to an antitrust suit filed by the U.S. Department of Justice and eight state attorneys general that is likely to come to trial this spring, Google built and maintains this monopoly in the United States as well through a broad range of anticompetitive, illegal practices. These include acquiring competitors for the purpose of suppressing competition, as well as distorting and manipulating the auction process for its own benefit. 

What’s the harm? Start with advertisers. Google’s private ad tech markets operate in near-total, unregulated darkness. As a result, advertisers cannot know for sure where, how often, or sometimes even if their ads are seen. Recently, the research firm Adalytics charged that Google had cheated advertisers out of potentially billions of dollars by placing their ads in obscure, dubious corners of the internet when they thought they were buying space in popular, high-quality websites and apps. 

Then there are the harms to journalism. Google uses its monopoly control of ad tech markets to skim off an enormous fraction of the money advertisers spend when they place ads on independent websites and other digital media. By its own admission, Google siphons off an average of more than 30 cents in fees out of every dollar flowing between advertisers and publishers through its ad tech exchanges. In 2022, Google raked in at least $32 billion from ads placed on third-party websites. This is money that could and should be going to help support publishers and journalists; it is their skill and effort, after all, that attract the readers and viewers advertisers want to reach. Instead, all the money just goes straight into Google’s coffers, thanks to its control of ad tech markets. 

There’s more. Before Google, if a marketer wanted to reach a person who read The New Yorker, for example, it had to take out an ad in that magazine. But now this is no longer necessary. Thanks to the failure to apply the same privacy laws and other regulations to digital platform monopolies that long applied to owners of other essential communications infrastructure, Google can use its users’ personal data in ways that allow a marketer to serve ads to a New Yorker subscriber on cheaper sites that Google knows the subscriber also visits. This includes sites that Google itself owns, such as YouTube, for example, or the Google Search and Google Maps apps. In this way, the marketer avoids having to help pay for the expensive quality journalism that attracts The New Yorker’s audience, while the platforms capture the lion’s share of every one of these ad dollars. 

Compounding the loss to journalists is the theft of their intellectual property. The owners of platform monopolies attract eyeballs to their own properties in no small measure by offering users a way to access journalism and other editorial content produced by others, such as an article produced by a local newspaper that appears in a Facebook newsfeed or that is summarized in a Google search result. But rather than pay the fair market value of this content, the platforms consistently abuse their market power to coerce news organizations into accepting far less. 

A recent study by the Brattle Group and academic researchers estimates the magnitude of the theft. The researchers started by looking at the amount of revenue Google takes in when it sells ads on its own properties that appear next to news content. They then compared this number to the amount that Google pays news organizations for this content. The study concludes that Google coerces news organizations into accepting some $10 billion to $12 billion less each year for the use of their content than the fair market price Google would have to pay if it didn’t have monopoly power over journalists and publishers. Meanwhile, Meta, the owner of Facebook, Instagram, and many other properties, annually uses its monopoly power to purloin content worth some $1.9 billion, according to the study. 

But even this accounting doesn’t get the full measure of the theft. Together, Meta and Google properties soak up an estimated 50 percent of the $200 billion–plus U.S. digital ad market. Yet according to suits brought by the Justice Department, the FTC, and other regulators, much of the market dominance derives from illegal, anticompetitive business practices. Indeed, had regulators and the courts enforced the kind of structural separations and privacy laws that, as we’ve seen, the United States historically applied to the owners of essential communications infrastructure, these platforms would not even be allowed to be in the advertising business, let alone be allowed to monopolize the business of selling targeted ads based on surveillance of people’s personal data. 

But because of that monopoly power, today’s media organizations have no choice but to go along with whatever terms the big platforms dictate. Nor, given their increasingly abject dependence on the platforms for reader and viewer traffic as well as website hosting, can media organizations complain about such abuses without potentially paying a fatal price. In 2018, Wired ran a cover story critical of Facebook, noting, “Every publisher knows that, at best, they are sharecroppers on Facebook’s massive industrial farm.” The number of readers following links from Facebook to Wired suddenly dropped 90 percent.  

These days, even a platform like the Apple News app, which allows consumers to access a broad range of publications for a low monthly price, can create deep dependencies among newspaper and magazine publishers and the journalists who work for them. Participating in Apple’s News Partner Program can bring publications new readers and advertisers. But Apple pays nothing for the journalism on its app while taking a 30 percent cut of the revenue generated by its selling ad space next to this content. Meanwhile, participating publishers must pay Apple News an additional 15 percent commission when consumers subscribe through the app rather than directly, which more and more do. If publishers don’t agree to participate in the News Partner Program, then Apple takes 30 percent of any subscription revenue they raise when people purchase subscriptions through the Apple App Store. 

Then there is the question of what will happen when a publication dependent on Apple News publishes something that negatively affects Apple’s far-flung corporate interests. A hint came last October after the talk-show host and social critic Jon Stewart told Apple executives that he planned to air programming critical of China’s government on his Apple TV show during the next season. Apple, which takes in a fifth of its sales from China while also relying on China almost exclusively for manufacturing its smartphones and computers, canceled his show. 

What’s the solution? Recently, much of the media world has been abuzz about a long-awaited philanthropic initiative called Press Forward. The project is a coalition of 22 major charitable organizations concerned about the future of democracy that came together and collectively pledged this past September to donate $100 million a year for five years to local newsrooms. But while the size of the pledge is unprecedented and desperately needed, it’s nowhere near enough. The Pro Publica founding general partner Richard J. Tofel estimates that $100 million is perhaps 10 percent of the total money needed just to keep small local publications healthy in light of their on-going losses in revenue. 

Another coalition, Rebuild Local News, advocates for an innovative set of policies that would support local journalism with tax subsidies. It is specifically asking Congress to provide a $250 refundable tax credit for Americans who buy subscriptions to local news outlets and a $2,500 to $5,000 tax credit for businesses that advertise in local media. The coalition also calls for a government-subsidized “super-sized Newsmatch” fund that would provide at least a three-to-one match for charitable contributions to local news organizations. 

Even if this plan came to pass, however, its advocates estimate that it would raise no more than $3 billion to $5 billion for local journalism. That would be a godsend to many local publications that have lost financial viability, including the many in danger of being devoured by vulture capital funds intent on stripping out their last remaining assets. But it is nowhere near what’s needed to restore a healthy, sustainable, diverse, and independent press when each year Google, Facebook, and other platforms are using anticompetitive and often illegal business practices to rob ad revenue and editorial content worth many tens of billions. 

Getting to the root cause of journalism’s crisis is not complicated, even if it requires us all to raise our sights and see the broader pattern. Simply put, it requires returning to the same basic anti-monopoly principles that Americans used during previous revolutions in communications technology to preserve our First Amendment rights to speak, and to hear the speech of others. 

One of those principles is strict, structural separations between the different levels of the information supply chain. Thus, enforcers should use traditional antitrust laws to keep all owners of essential infrastructure, including Google, Amazon, Facebook, and other digital platforms, out of adjacent lines of business. This should include control of businesses that are horizontally adjacent, such as when Facebook purchased the rival social media platform Instagram. And it should include control of businesses that are vertically adjacent, such as Google’s takeover of the ad tech firm DoubleClick or its big acquisitions of companies engaged in cloud computing and artificial intelligence, which radically amplify its monopoly power. 

Fortunately, enforcers in the United States and around much of the world are already taking important first steps along these lines. As previously mentioned, the Justice Department is suing Google to break up its control of digital ad tech exchanges. It is also pursuing another suit, likely to be decided soon, that charges Google with unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search advertising market. Though not always successful, under Biden, antitrust enforcers are winning many tough cases, not least because they are asking for a return to the original intent of antitrust law—a position that resonates with many conservative jurists committed to “strict construction.” (See “Winning the Anti-Monopoly Game,” in the November/December 2023 issue of this magazine.) Similar antitrust suits against the platform monopolies have also been filed by the European Commission, the UK’s Competition and Markets Authority, and regulators in Germany, Korea, India, and elsewhere. 

Law enforcers should also make clear that the unprecedented combination of powers and privileges created by Section 230 applies only to small chat rooms and bulletin boards, not to providers of essential communications infrastructure. The simplest and most straightforward way to move toward these goals would be for the FTC, the FCC, or both to assert their full authority to regulate the terms of service and pricing behaviors of platform monopolists. This is essentially what the FCC did in 2015 with the Open Internet Order, which enforced net neutrality on internet service providers, but in that case it applied the principle to physical, as opposed to virtual, infrastructure. Furthermore, the FTC could stop many of the abuses in digital advertising markets, including those regarding users’ personal privacy, just by evoking its broad authority, under Section 5 of its enabling legislation, to restrict unfair methods of competition.

None of these policies taken by themselves is sufficient to fix our broken information environment. But in combination, they can significantly address the central threats to freedom of speech and of the press. To ensure that policy makers have the political cover they need to take on today’s unprecedented concentrations of corporate power over what we can say and hear, journalists have to understand, and help the public to understand, what the real stakes are.

The post How Fighting Monopoly Can Save Journalism appeared first on Washington Monthly.

In 2018, Patrick Deneen, a professor of political science at Notre Dame, published a book entitled Why Liberalism Failed. Many liberals, most notably The American Prospect’s Robert Kuttner, wrote scathing condemnations. Gabby Birenbaum and I added to the criticism last year, observing in these pages how Deneen’s conflation of liberalism with libertinism had deeply influenced Tucker Carlson and his fellow travelers. (See “Inside Tucker Carlson’s Brain.”) 

But the book also received a respectful hearing in some surprising quarters. The back cover of the paperback edition included a blurb from the New York Times columnist David Brooks, as well as one from former President Barack Obama, who praised its “cogent insights into the loss of meaning and community.” The book came at a moment when people across the political spectrum were beginning to question the bundle of “neoliberal” policies embraced by both parties since the 1970s that have contributed to the hollowing out of America’s industrial base and to the downward mobility of the working class. 

Now Deneen is out with a sequel, entitled Regime Change. This time there are no endorsements from Brooks or Obama, but the third-party presidential candidate and Black political philosopher Cornel West lends his name, as does Republican Senator J. D. Vance. In this second take, Deneen seriously turns up the volume—to say the least. While disputing that America is structurally racist, he seeks a reckoning with America’s “structurally liberal” history. Our only salvation from this shameful legacy, he claims, is a regime change that repudiates progress and meritocracy and commits to a new order of “aristopopulism.”

Structural liberalism, Deneen tells us, is implicated in nearly all that has gone wrong with America since the Puritans lost control. That includes everything from laissez-faire capitalism to today’s mounting inequality, falling life expectancy, and low birth rates. Those Republicans who spent the past 40 years advocating for lower taxes and deregulation of large corporations are liberals, too, says Deneen, whether they have done the work to realize their implicit liberalism or not. 

In Deneen’s telling, structural liberalism dates to the 17th century, when figures like the English philosopher John Locke started casting around for an ideology that would entrench a new elite made up of their own kind. These early liberals were intent on overthrowing the inherited power of kings and nobles, but not if it meant giving power to the people. So they invented a political order under which democracy was limited to industrious, self-made white men of property who would rule unconstrained by popular will, religious authority, or a strong central state. If this take sounds familiar, it’s because Deneen is basically retelling Karl Marx’s account of the rise of bourgeois democratic capitalism without giving Marx credit. 

Deneen’s next move is to describe how the “classical” liberalism of Locke and the Founding Fathers combined in the 19th century with the “experimental social libertarianism of progressive liberalism” championed by John Stuart Mill. In his 1859 essay “On Liberty,” Mill famously argued that “the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” This principle, says Deneen, committed liberalism to a relativist concept of truth and therefore to a moral order in which “individuals would be maximally free from the judgment of society altogether.” Consistent with his views on liberty, Mill was a bravely outspoken critic of slavery, yet Deneen uses out-of-context quotes to suggest the opposite and then goes on to lay Western imperialism on the door of structural liberalism as well. 

Next, Deneen tells a story about how early-20th-century progressives like Teddy Roosevelt and Woodrow Wilson were also part of the plot. “Like their classical liberal forebears, progressive liberals greatly feared and even loathed the people,” he writes. Only instead of fearing that the masses might be too revolutionary, progressive liberals feared that the people would frustrate progress by clinging to the old ways. And so liberals fought off populism by favoring rule by experts and an expansion of big imperial government. Curiously, Deneen doesn’t mention other great Progressive Era causes like the popular election of senators, government through referendum and initiative, and women’s suffrage. 

Which brings us to today. By now, says Deneen, all the different strains of structural liberalism have fused into “Woke Capitalism,” which he describes as “the perfect wedding of the ‘progressivist’ economic right and social left.” It’s a presumably same-sex marriage that, he concludes, “aims to produce a populace that is satisfied with diversion, consumption, and hedonism, and, above all, does not disturb the blessings of progress. And, if that doesn’t work, there remains the use of levers of political and corporate power to suppress populist threats.”

At this point you might expect Deneen to make a spirited defense of populism, and he does at one point praise the superior judgment of common folks. “The wisdom of the multitude arises,” he says, “… because they have the benefit of ‘common sense’ and
experience—everyday interaction with the objects or practices of the world that are so often lacking in the theoretical evaluations by experts.” 

But Deneen also believes that the “demos,” as he puts it, cannot handle much individual liberty. Without strong cultural and religious constraints on their behavior, ordinary people fall prey to all manner of degeneracy, he says, citing the breakdown in moral order he sees everywhere in America. “We have the freedom to marry, but fewer people wed,” he observes. “We have the freedom to have children, but birth rates plummet. We have the freedom to practice religion, but people abandon the faiths of their fathers and mothers.”

And so what’s needed, he concludes, is not populism or direct democracy, but “an elite cadre skilled at directing and elevating popular resentments” and at getting the people “to adopt a wider understanding of what constitutes their own good.” To restore the once pervasive human flourishing that structural liberalism has destroyed, we need to bring back, he says, “common good conservativism” led by a virtuous elite. As a model, Deneen evokes John Winthrop’s Puritanical vision of a shining city on a hill. 

What would Deneen have these new moral guardians do? He’s clear that he wants them to focus their energies on ensuring that the commoners don’t deviate from the wisdom of ancient customs, particularly those having to do with marriage, gender roles, child-rearing, and religious observance. He also hints at a few specific policy proposals that he thinks aristopopulists should insist on, like mandatory national service and a restoration of blue laws to honor “a day of rest on the Sabbath” (presumably meaning Sunday, not Saturday). 

But he evades the hard questions that would inevitable accompany any such regime change. Who gets to be among the new elect, and how is that decided? How do we ensure that the new power elites don’t abuse their power, and who is “we,” anyway? And if aristopopulists are to be responsible for guiding the masses back to the customs of the past, does that mean all the customs—primogeniture, arranged marriages, divine rights of kings? And how do the nobles get the hoi polloi to go along?

After centuries of religious wars in Europe, some people, like John Locke and the Founding Fathers, came up with at least partial answers to some of these kinds of questions. The answers broadly included a constitutional order that promised expanding equality of opportunity along with checks on concentrated political and economic power. 

And they included calls for religious freedom and tolerance, which became encoded in the First Amendment. Subsequently, though it has gone through periods of religious awakening and decline, America has remained a place marked by much higher rates of churchgoing and other forms of religious observance than any other modern nation, no doubt in large measure because no sect in America enjoys the kind of state-chartered dominion over civic life that Deneen seems to favor. 

If Deneen thinks he has answers to the hard, practical questions of statecraft needed to put America on the right course in these fraught times, he should say what they are out loud. Otherwise, it’s time to move on to more serious thinkers.

The post Can Aristopopulism Save Us? appeared first on Washington Monthly.

For years, the only supermarket serving the Pine Ridge Indian Reservation in southwest South Dakota was run-down and a threat to public health. Inspectors from the Indian Health Service repeatedly cited its distant corporate owners for food safety violations, such as mixing rotten hamburger with fresh meat and repackaging it for sale. So leaders of the Oglala Sioux Tribe were thrilled when, in 2018, they persuaded an experienced grocer to buy the store and commit to running it right. 

R. F. Buche, whose family business has operated independent groceries throughout South Dakota for four generations, started with months of demolition and extensive remodeling. Today, except for the signs written in Lakota, the store looks just like any supermarket you might find in any middle-class neighborhood. Floors are clean, and shelves generally well stocked, including with an abundance of fruits and vegetables that were never available before. This is particularly important in a community where poverty is so extreme that most people don’t own cars and the next-nearest grocery store is nearly 40 miles away. 

But two big problems remain. The first is affordability. To stock his store, Buche has to pay wholesale prices that are often nearly double what Walmart pays and must pass on much of that cost to his customers. The second is that when national shortages of critical items like baby formula emerge, Buche and the Ogala Sioux are often the hardest hit, either having to do without or enduring longer waits for critical supplies than people elsewhere. 

Yet while these problems may be extreme on the Pine Ridge reservation and in other very poor places, Americans everywhere are also harmed in serious ways by the zombie policy idea that has created these inequities. It’s a notion that’s supposed to bring everyday low prices for everyone. But in practice it has proved to have the opposite effect, creating more markets in which those with the least power pay the most, while those with the most pay the least. 

Economists use a $20 word to describe the kind of market in which this occurs. They say it’s a monopsony. Monopsony is like monopoly but it’s when big buyers, not big sellers, dominate a market. When many sellers compete for the business of just a few big buyers, that gives the big buyers the power to coerce the sellers into giving them discounts and other concessions none of their smaller competitors can get.

Concerned with the way the abuse of monopsony power could suppress fair competition and foster corporate concentration, President Franklin D. Roosevelt signed landmark legislation in 1936, known as the Robinson-Patman Act, that made this kind of business practice illegal. And for many decades afterward, the law was a key pillar of America’s political economy, helping to sustain the broad prosperity of the mid-20th century. But in what has turned out to be a colossal policy mistake, politicians in both parties decided to stop enforcing the act after the 1970s. 

That decision, combined with lax enforcement of other antitrust laws, has led to truly baleful consequences. Indeed, though it’s only dimly understood by most people—and outright denied by economists on the left and right who should know better—unrestrained growth of monopsony power has become a major source of the stubborn inflation, supply chain fragility, and gross inequities that define today’s economy. Fortunately, senior officials in the Biden administration are increasingly aware of the problem and willing to do something about it. And they don’t have to get a bill through a suddenly more hostile Congress to do so; they can just enforce a law that’s already on the books.

To illustrate how the neglect of Robinson-Patman affects his business, Buche starts with the example of the price he must pay for a box of Tide laundry detergent. Like many independent grocers, Buche belongs to a purchasing co-op called Associated Wholesale Grocers, which he uses to get volume discounts. In business since 1924, AWG is a big operation with huge economies of scale. It consolidates more than $10 billion in yearly wholesale purchases from 3,100 independent grocery stores in 28 states. As David Smith, the president and CEO of AWG, recently explained in testimony to Congress, because the co-op buys by the truckload and operates highly efficient billion-dollar-plus warehouse facilities, it can get volume discounts for its member stores that they could not get if they acted alone. 

Yet the best wholesale prices the co-op can consistently get for its members are still far above what Walmart and other giant grocery chains routinely pay to restock their shelves. When Buche buys a standard-size box of Tide from AWG, for example, he typically must pay around $21. By contrast, Procter & Gamble, the maker of Tide, sells the same product to Walmart for a much lower price. Just how low is a trade secret, but it is so low that the Walton family makes money reselling it, even in its most remote stores, at an everyday retail price of $14 dollars and change.

Why do the co-op and its member grocery stores like Buche’s have to pay P&G so much more than Walmart does for the same product? It’s not because it costs P&G more to deliver a truckload of Tide to one of AWG’s warehouses than to one of Walmart’s. In fact, it has almost nothing to do with the actual cost of making and delivering products. Instead, it’s because of Walmart’s monopsony power over its suppliers. 

If Walmart ever decided, for example, not to stock P&G products in its 10,000-plus stores, or even to just give those products less prominent shelf space, P&G sales would tank and there would be no way for the company to sell that much product to other retailers. As Albert Foer, former president of the American Antitrust Institute, pointed out in a 2006 study, P&G was at that time (and still is) one of Walmart’s largest suppliers, but it accounted for only 2 percent of Walmart’s sales. By contrast, nearly a fifth of P&G’s sales depended on its sales to Walmart. Once a supplier becomes that hooked on sales to a single buyer, Foer observed, it becomes nearly impossible to resist demands for price cuts and special favors. 

And who pays for those concessions? Giving a special discount to one retailer has the same practical effect as imposing a surcharge on its competitors. The change in relative prices skews the terms of competition and, if the discount is large enough, will lead to monopoly as it drives those who can’t get the discounts out of the market. 

Beyond that, the economist Paul W. Dodson points to what he calls the “waterbed effect.” As suppliers like P&G attempt to recoup the revenue they lose through price concessions to power buyers like Walmart, they may well feel compelled to charge weaker buyers, like Buche, still more. This is especially likely if the suppliers have previously been unable to meet the margins demanded of them by investors and now have no other way to meet their profit targets or cover their fixed costs. Lower prices for players on one side of the waterbed thus can lead to even higher prices for those on the other, putting them at an even greater competitive disadvantage. 

Power buyers are also able to dictate not just prices, but also terms of service to their suppliers in ways that can hurt many innocent bystanders. For example, during the pandemic, when supply chain disruptions caused shortages of meat, baby formula, and many other items, Walmart issued a directive to its suppliers that they must either fulfill 98 percent of its orders or face steep penalties. Consequently, smaller grocers saw their orders for scarce goods only partially filled or not filled at all. Buche says that at one point his allocation of baby formula for all his 22 stores was cut back to just 10 boxes a week. Yet demand at the Pine Ridge Store alone normally comes to 50 boxes. Raw monopsony power, not underlying cost or even the textbook laws of supply and demand, determined which hungry babies got fed and at what price. 

Some people, including highly credentialed experts, say there is no problem here that can’t be fixed with still more monopsony power. Sure, it’s too bad about the poor Native Americans, they will say. And sure, it’s sad to see independent grocers like Buche often put out of business just because a few dominant corporations have more buyer power. But all the Oglala Sioux really need, according to this point of view, is a Walmart. That would bring them lower prices and more secure supplies, and in the process, so goes the argument, increase society’s total consumer welfare. 

Indeed, for a long time, that’s been a dominant frame of analysis applied not just by many conservatives and Big Business apologists, but also by many prominent Democratic policy intellectuals. As far back as the early 1950s, the towering liberal icon John Kenneth Galbraith, for example, defended the growth of the giant retailers of his day, like Sears Roebuck and the Great Atlantic & Pacific Tea Company (A&P). His argument was that these chains provided “countervailing power” to major manufacturers in ways that benefited consumers. 

He cited the price concessions that the Big Four tire makers had to make when they sold tires to Sears, or the discounts on cornflakes that the A&P forced consolidated food processors to offer. In this way, Galbraith argued, the giant chain stores played the same role as European buyer co-ops like the Swedish Kooperativa Förbundet and the British Co-operative Wholesale Societies. The co-ops, of course, were nonprofits dedicated to the welfare of small businesses and their working-class customers, while the chain stores were controlled by Wall Street banks intent on maximizing returns to shareholders, but that did not give Galbraith pause or make him consider what the long-term effects would be. Indeed, Galbraith built a whole philosophy of government around the notion that the promotion of retailer monopsony and other forms of countervailing power had, as he famously put it, “become in modern times perhaps the major domestic peacetime function of the federal government.”

Galbraith’s influence later waned, but his faith in the virtues of concentrated buyer power ossified into economic orthodoxy.  It’s what explains why so many liberal economists of the past two generations learned to love big-box stores. In 2006, Jason Furman, who would later become a top economic adviser in the Obama White House, called Walmart a “progressive success story,” citing its ability to drive down prices for poor and moderate-income consumers. In 2013, Charles Kenny, a senior fellow at the Center for Global Development, took up the torch when he published a piece in Foreign Policy under the title “Give Sam Walton the Nobel Prize.” 

In recent years, many well-placed Democratic economists, including both Furman and his mentor Larry Summers, have belatedly discovered the negative effects of monopsony in labor markets. Experience shows that when fewer employers compete for each worker’s labor, that drives down wages. But such is the force of received ideas that many elite policy makers continue to contemptuously reject the idea that monopsony in other parts of the economy can also be harmful. Referring to legislation offered by Senator Elizabeth Warren to curb the power of monopsony in setting prices, Furman tweeted last May, “If you think the baby formula shortage is a problem just wait to see what the world would look like if this became law.” 

But the world does not always work the way neoliberal orthodoxy presumes. As it has turned out, over time it’s not just small businesses and Main Street America that suffer when government tolerates, much less encourages, the continuing growth of private, unregulated monopsony power. We all pay a big and growing price, as consumers, producers, and citizens. Indeed, to the extent that unfettered monopsony chokes off avenues for entrepreneurship and upward mobility, it becomes a threat to economic dynamism and to the very fabric of our democracy. 

The damaging effects begin with the by now well-documented phenomenon of hard-pressed suppliers cutting quality, R&D, wages, health care benefits, pensions, and the like, or outsourcing production to foreign sweatshops, all in order to meet giant retailers’ continuing demands for more and more wholesale price concessions. Back in 2006, the respected journalist Charles Fishman published a book called The Wal-Mart Effect, in which he documented case after case of growing monopsony power already creating these kinds of harms. 

Since then, the continuing rise of monopsony power has revealed another, ultimately even graver consequence. Allowing prices to be determined according to who has amassed the most buyer power sets off massive waves of mergers and acquisitions that over time make the inflationary problems they are supposed to solve far worse. 

The dynamic starts when sellers fight back against the power of giant buyers with defensive consolidations of their own. For example, in response to concentrated buyer power at the retail level, the meat-packing industry has now consolidated to the point that just four vertically integrated giants control 85 percent of the beef market. In a wicked twist, these giant international corporations have not only managed to gain enough monopoly power to countervail against Walmart and other grocery chains, but they have also secured enough monopsony power to extract deep price cuts from their own captive suppliers. As a Biden White House study reveals, this perverse market structure has led to huge across-the-board increases in meat prices for consumers regardless of where they shop, combined with lower incomes for ranchers and farmers who have nowhere else to sell their animals, and record profits for the packers themselves. 

Other suppliers have also been madly combining with each other in order to resist the buyer power of Walmart and other large retailers like Amazon. P&G paid more than $50 billion for Gillette in 2005 and has since gone on a tear of mergers and acquisitions. That largely explains why, when P&G raised prices on a broad range of products in early 2022—from Gillette razors to Dawn dish soap and NyQuil cold medicine—it experienced a sharp boost in net sales: Thanks to relentless consolidation, consumers simply have fewer and fewer alternatives to paying more for P&G’s sundries. Other major Walmart suppliers, like the food processor General Mills, have also been on acquisition binges that today allow them to raise prices across the board while earning record profits. 

In a vicious cycle, these mergers among suppliers in turn have led to another massive round of defensive consolidations among retailers themselves. A recent example is Kroger’s $24.6 billion acquisition of Albertsons, which, if approved by regulators, will create a mega-grocer with roughly the same buying power as Walmart. Notes Stacy Mitchell, codirector at the Institute for Local Self-Reliance, if the deal goes through there will be 160 cities in America where more than 70 percent of the grocery sales are controlled by just these two massive companies. With that degree of retail domination, the duopoly will be more able to extract deep discounts from its suppliers while having less and less reason to pass along any of the savings to mere shoppers. 

The same dynamic is at play in many sectors of the economy, but perhaps most tragically in health care. Ever since health care inflation became a major societal concern in the 1970s, health care policy experts, including highly influential figures like the late Uwe E. Reinhardt, have promoted the idea that health care costs could be best reduced by increasing the monopsony power of large, private purchasers of health care, such as HMOs and other health care insurance plans. The idea was that by subjecting hospitals and other health care providers to more concentrated buyer power, they could be coerced into accepting lower reimbursement rates and other price concessions. But while round after round of mergers and acquisitions among insurers did contribute to a pause in the growth of health care expenditures in the 1990s, it soon set off a counterwave of mergers among hospitals and other providers that is still building, with baleful results.

By now, many communities are completely dominated by a single integrated giant health care system, encompassing hospitals, doctors’ practices, and labs, that faces virtually no competition. Abundant studies show that these behemoths don’t share any savings they might achieve through increased efficiency or economies of scale. Nor do they deliver any better quality of care. Rather, they swell their revenues by jacking up prices for patients and their health care plans. 

Even in markets where some competition still exists, it largely takes the form of insurance company bureaucrats and hospital chain administrators competing to see who can impose what price discrimination on whom, rather than over who can provide the best health care to the community. At the same time, consolidated hospitals have enough monopsony power to drive down the wages they pay to nurses and other health care workers, who have nowhere else to sell their labor without moving to another city whose health care sector has not yet become so thoroughly concentrated. As with meat-packing and many other industries, the combination of monopsony and monopoly power in health care makes the rich richer and leaves most everyone else paying more for less. Though classified as charitable “nonprofits,” many hospitals have found an extractive business model that targets services to the most lucrative patients and treatments while financing inflated CEO compensation packages and imperialistic building programs. In some major cities, like Pittsburgh, the cycle has culminated with the hospitals and health insurers simply consolidating into one giant platform in which buyers and sellers of health care are part of the same entity and as such can legally collude in charging patients and their insurers whatever they please. 

Efforts to control health care inflation through the promotion of monopsony power have also backfired when it comes to the supply chains for medical equipment and drugs. As far back as 1910, for example, hospitals began participating in so-called group purchasing organizations (GPOs), which allowed them to gain volume discounts by pooling their orders for hospital supplies in much the same way independent grocers have long relied on buyers’ co-ops like AWG. But in 1987, Congress perverted this cooperative system by granting GPOs exemption from anti-kickback laws. 

This led to a system in which the largest GPOs could use their buyer power to coerce special “rebates” and “administrative fees” from suppliers—which they often didn’t deign to share with hospitals. This increase in buyer power and self-dealing in turn incentivized defensive mergers up and down the health care supply chain that ultimately worsened the disease for which it was supposed to be the cure. Major GMOs became captured by major hospital suppliers, like Becton Dickinson. Meanwhile, med-tech companies like GE HealthCare and Medtronic engaged in frantic mergers and acquisitions activity to ensure that they acquired the market share needed to stand up to the increasing concentrated buyer power of GPOs. In turn, GPOs madly merged with each other to maintain or augment their own countervailing power. 

Meanwhile mega hospital chains grew so large that they could unilaterally dictate prices to their suppliers, thereby gaining an even greater, competitive advantage over smaller, community-owned hospitals. In his book The Hospital, which chronicles the decline of one such facility in rural Ohio, Brian Alexander notes that the best price it could get for a stent commonly used to open up clogged arteries was around $1,400, while big hospital chains use their monopsony power to buy the same product for roughly half that price. Adding to the social and economic harms set off by the concentration of monopsony in health care have been loss of innovation and shortages of essential drugs. As giant incumbents throughout the supply chain used mergers and decriminalized kickback schemes to suppress competition, key technologies such as lifesaving retractable hypodermic needles, for example, remained unavailable for years, while the number of companies manufacturing antibiotics and oncology drugs dangerously dwindled. 

Similar harms have flowed from the growth of so-called pharmacy benefits managers. Reformers hoped that health insurance plans and pharmacies could use these purchasing agents to boost their buyer power and wrest lower prices from drug companies. But as with GPOs, allowing those with the most buyer power to get the lowest prices set off a cycle of collusion, kickbacks, cost shifting, and corporate consolidation that ultimately not only drove up prices but also deeply compromised supply-chain resiliency. 

You might be thinking at this point that someone should pass a law to prevent these kinds of inflationary, inequitable, inefficient business practices and channel market competition back to productive purposes. But remember, someone already has. 

When FDR signed the Robinson-Patman Act, supporters hailed it as the “Magna Carta of small business.” Detractors called it the “cracker barrel bill.” 

Championed primarily by the populist Texas Democratic Congressman Wright Patman, the law was mostly intended to benefit small independent grocers, mom-and-pop pharmacies, and other locally owned enterprises. But it did so not by protecting them from competition, as some critics claimed. Instead, the law helped to prevent the abuse of concentrated corporate buyer power and create a fair and level playing field for all businesses by applying basic principles of political economy that Americans had long used to manage competition in other key sectors.

In 1887, for example, Congress passed the Interstate Commerce Act, which made it illegal for railroads to favor large powerful shippers with special rebates and discounts. When everyone paid the same rate for the same freight service, competition shifted from who had the most pull with the railroads to who had the best product. Robinson-Patman similarly made it illegal for retailers, manufacturers, and distributors operating at the wholesale level to engage in price discrimination based on buyer power. 

Under Robinson-Patman, it remained permissible to offer volume discounts or adjust prices to reflect the demonstrably different costs of serving different customers. It also remained legal to lower prices across the board to match those offered by a competitor. But it became illegal to offer different prices or terms of service to different customers based simply on their market share. This meant that a large retailer like the A&P, for example, could no longer use its monopsony power to coerce special treatment from its suppliers, such as lower prices, rebates, special advertising allowances, and the like. Under Robinson-Patman such business practices became classified as forms of commercial bribery or kickbacks. In effect, the act required all suppliers to offer the same prices and terms of service to all dealers, large and small. 

The Federal Trade Commission rigorously enforced Robinson-Patman until the mid-1970s. The results were salutary. The law encouraged competition and innovation at the retail level while also preventing ever-tightening cycles of offensive and defensive mergers leading to more and more corporate concentration. During this era, for example, American consumers benefited from the spread of modern, well-stocked supermarkets and department stores. But enforcement of Robinson-Patman ensured that most were operated by local or regional chains and not controlled, like the old A&P, by a handful of distant Wall Street banks. 

Moreover, enforcement of Robinson-Patman ensured that the growth of large retailers was based on superior efficiency, service, selection, and real economies of scale, not on using monopsony to coerce special discounts and rebates from suppliers and thereby suppress competition from other stores. America thus enjoyed a vibrant, balanced, and diverse retail sector in the postwar decades in which locally owned stores and locally owned suppliers thrived alongside national chains. In the mid-1950s, more than 70 percent of retail sales went to independent retailers with a single location. More than a fifth of all retail workers owned the store in which they worked, either as a sole proprietor or in partnership with others. Small store and restaurant ownership, from kosher groceries and Greek diners to hardware and hobby stores owned by other “hyphenated” Americans continued to provide ladders of upward mobility for generations of immigrant families. 

Despite these clear benefits, however, Robinson-Patman came under growing attack from increasingly powerful elements in both parties. As Matt Stoller chronicles in his book Goliath, by the early 1970s a new generation of Democrats tended to view Robinson-Patman and other expressions of Depression-era populism as embarrassing relics. Concerns over building inflation also caused leading voices within the party to become increasingly persuaded by Galbraith’s argument that government should encourage the unrestrained growth of giant discount stores as a way of getting better prices for consumers. 

Meanwhile, an increasingly powerful movement of “free market” conservatives also attacked the law, arguing that any tendency toward monopoly that might follow from its repeal would be automatically corrected by market forces. Robert Bork, who once attacked Robinson-Patman as the “Typhoid Mary of antitrust,” published a highly influential book in 1978 in which he blithely rejected concerns that legalizing price discrimination based on buyer power could ever lead to monopoly. “Impossible,” he wrote. If power buyers abused their market strength, he promised, “the market” would simply replace them.

Today, we know better. Congress never dared to repeal Robinson-Patman, but enforcement slowed dramatically in the late 1970s and effectively stopped after Ronald Reagan became president, with long-term results that should have been predictable. When combined with lax enforcement of other antitrust and competition policies, the retreat from Robinson-Patman gradually restructured industry after industry in ways that are today driving up prices, suppressing wages, and contributing to the undersupply and maldistribution of more and more essential goods and services—from baby formula and affordable healthy food to prescription drugs and hospital beds. 

Fortunately, key figures in both parties are waking up to the need to enforce this vital law once again. The FTC, under the chairmanship of the Biden appointee Lina Khan, announced in June that it is studying the use of Robinson-Patman to prosecute illegal bribes and rebates among pharmacy benefit managers. Alvaro M. Bedoya, an FTC commissioner, has also become an articulate champion of expanding enforcement of Robinson-Patman across the board. This follows a letter sent to Khan in March by 43 members of Congress, more than half of them Republicans, urging her and the other FTC commissioners to use Robinson-Patman to investigate the anticompetitive effects of price discrimination that “ripple through the entire supply chain—harming consumers as well as independent producers.” 

As in the 1930s, much of the support for Robinson-Patman comes from struggling small business owners in rural congressional districts—notably independent grocers like Buche as well as increasingly well-organized independent pharmacists. But today the role of monopsony in driving up prices and deepening inequities across the board gives the broader public a building case for insisting that Robinson-Patman be enforced. It may be that the act should be amended to make it clearer what companies and practices it covers and how it applies to today’s giant e-commerce platforms like Amazon. But as it is, enforcing the law provides a ready vehicle, requiring little to no appropriation from Congress or use of tax dollars, for rebuilding the fairer and more competitive economy demanded by Americans across the political spectrum. It’s high time we used it. 

The post Everyday High Prices appeared first on Washington Monthly.

On the evening of October 24, 1978, President Jimmy Carter sat up straight behind the Resolute desk in the Oval Office, interlocked his hands, and began reading from the prepared remarks laid out in front of him. “I want to have a frank talk with you tonight about our most serious domestic problem,” Carter told the camera. “That problem is inflation.”

Since the summer, the cost of living had been increasing at a rate not seen since the Ford administration. Worse, the new burst of inflation was accompanied by stubbornly high unemployment, creating a return of dreaded “stagflation.” According to one of his key advisers, Stuart Eizenstat, Carter worried that if they didn’t come up with something new and substantive to say that night, “we’ll be laughed at.”

The largest single cause of accelerating inflation during Carter’s term was monopolistic control over the flow of oil, but the president saw no palatable options for breaking up the OPEC cartel anytime soon. Nor, thanks to political opposition from both Big Business and Big Labor, could he put in the kind of mandatory wage and price controls Richard Nixon had once ordered up. 

Also off the table was giving in to Republican demands for dramatic cuts in government spending and higher interest rates. Carter was not yet desperate enough to sign on to that agenda because it risked a wholesale revolt from Democrats to his left like U.S. Senator Ted Kennedy and would quite likely induce a recession.

So Carter played another card: Blame inflation on government bureaucrats.

Carter told the nation that his administration was “cutting away the regulatory thicket that has grown up around us and giving our competitive free enterprise system a chance to grow up in its place.” As evidence, he pointed to a bill he had just signed that stripped the Civil Aeronautics Board of its power to regulate airline fares and routes. “For the first time in decades, we have actually deregulated a major industry,” Carter bragged. “Of all our weapons against inflation, competition is the most powerful,” he explained. “Without real competition, prices and wages go up, even when demand is going down.”

Carter tapped a high-energy Cornell economist turned policy entrepreneur named Alfred Kahn to oversee the dismantling of the CAB, and was so pleased with the result that he elevated Kahn to the new position of “inflation czar.” Later, Carter would double down on the idea that the most powerful tool for fighting inflation was depriving the government of its ability to regulate prices, signing bills that deregulated railroads and trucks, and passing the Depository Institutions Deregulation and Monetary Control Act, which set in motion deregulation of the financial sector. The overarching theory was that if the government would just get out of the way, market competition would lead to greater efficiency and therefore to lower prices for consumers. 

Most Republicans applauded these moves, for obvious reasons, but Carter also got support from important Democrats. Ted Kennedy was a key supporter of the airline deregulation bill Carter signed that day. Influenced heavily by Kahn and by Ralph Nader’s Center for Study of Responsive Law, many had come to believe that federal regulatory agencies like the Interstate Commerce Commission and the CAB had been captured by the industries they were supposed to regulate. Stephen Breyer, the future U.S. Supreme Court justice, successfully teamed up with another Kennedy staffer, Phil Bakes, in helping the senator to become a champion of the new liberal cause of getting better deals for consumers through deregulation. The “New Deal faith in the science of the regulatory art,” Kennedy said at one point, was “a delusion.” 

Today, we are paying a big price for that false lesson. Democrats and Republicans cooperated over the next four decades in dismantling much of the regulatory apparatus and antitrust enforcement that since the New Deal (and even before) had governed America’s financial, transportation, and telecommunication markets, foreign trade, and corporate mergers. As they did so, the underlying assumption was always that less government intervention in markets meant more competition, and that more competition would in turn bless the world’s consumers with more and cheaper stuff. But over the long term, the primary effect of this radical change in the country’s political economy was to foster an enormous growth in corporate power that set us up for today’s inflation. 

As merger frenzies concentrated markets in sector after sector, corporate giants used their increasing power at first mostly to suppress wages. Over time, they also maximized profits through downsizing plants and equipment, shrinking workforces and inventories, and relying on brittle, sole-source supply chains to reach outsourced production facilities in low-cost, mostly Asian countries. As a result, when shocks like the coronavirus pandemic and the war in Ukraine came along, the industrial system had no spare capacity and became riddled with choke points, setting off a prolonged frenzy of price gouging that doesn’t self-correct. 

Call it “choke-flation.” With perverse irony, it now threatens Joe Biden with the same political fate as Jimmy Carter, only this time the stakes are much higher, given the authoritarian drift of the Republican Party since Ronald Reagan’s time. To avoid that fate, we must counter the false narratives peddled not only by Fox News but also by out-of-touch establishment economists who would have Americans believe that too much liberal government is to blame for inflation, and not the predations of unregulated monopolies. 

Just as Carter and Kennedy had hoped, a first-order effect of deregulating airlines was to spawn a round of price cutting. Scores of discount start-up airlines surged into the market (remember People Express, ValuJet, and Air Florida?), and incumbent carriers responded by extracting steep cuts in wages and benefits from their workers, which they initially shared with their customers. But as airlines began engaging in price wars, most of the new starts went broke within a few years, and the surviving incumbents began combining into increasingly dominant mega-carriers that no longer had any legal requirement to serve the public interest. 

By the mid-1980s, many Democrats who had voted for deregulation were already regretting it. One reason was that because the CAB no longer existed, hundreds of medium-sized cities lost air service or found themselves forced to pay much higher fares. In 1986, Senator Robert Byrd of West Virginia was unequivocal: 

This is one Senator who regrets that he voted for airline deregulation. It has penalized States like West Virginia, where many of the airlines pulled out quickly following deregulation and the prices zoomed into the stratosphere—doubled, tripled and, in some instances, quadrupled. So we have poorer air service and much more costly air service than we in West Virginia had prior to deregulation. I admit my error; I confess my unwisdom, and I am truly sorry for having voted for deregulation. 

Ted Kennedy also came to deeply regret his vote, because of the way deregulation injured another key constituency once firmly in the Democratic coalition: organized labor. At a 1988 event in Washington, D.C., Kennedy buttonholed Phil Bakes, the former staffer who, along with Stephen Breyer, had been his point person on airlines 10 years before. “This goddamn dereg … you know, Phil, you double-crossed me. You lied to me. You said the unions were going to support deregulation.” According to one account, people at the event gawked as Kennedy continued to shout at Bakes about deregulation. Bakes was then the president of Eastern Airlines, where the financier Frank Lorenzo had put him charge of driving down labor costs through union busting.

By this time, the Reagan administration, while furthering Carter’s moves to deregulate the financial sector, was also embarking on a wholesale retreat from antitrust enforcement. Under the influence of the conservative jurist Robert Bork and market fundamentalists concentrated at the University of Chicago, the Department of Justice in 1982 adopted new prosecutorial guidelines—subsequently followed by every administration until Biden—that ignored the clear statutory language of the Sherman Antitrust Act and the Clayton Act and thereby set off a frenzy of anticompetitive mergers. Meanwhile, a new generation of federal judges, many of them products of the Federalist Society and a vast, lavishly financed, conservative “law and economics” movement ensconced in the nation’s law schools, began further eroding traditional anti-monopoly policies by striking down cases against dominant firms engaged in predatory behavior, such as price gouging, loss leading, and price discrimination. 

This meant that the flying public just had to take it when consolidating airlines increasingly under the control of financiers like Lorenzo and Carl Icahn began using their unregulated market power to push through more and more reductions in the quality of the product. These include smaller and smaller seats, nonrefundable tickets, overbooked planes, fewer direct flights, and more changing planes at “fortress hubs” controlled by a single airline. The nominal cost of flying declined on high-volume routes where some competition remained, but after adjusting for the changes in the cost of energy, overall fares declined at a lower rate in the 10 years after deregulation than they had during the 20 years before when the government set prices and routes. (See “Terminal Sickness,” in the March/April 2012 issue of this magazine.)

By 1998, air service was so wracked by bankruptcies, layoffs, regional inequality in service, and increasing concentration of ownership that Alfred Kahn complained that the promise of deregulation had been undone by the failure to enforce antitrust laws. “I’ve been saying for these 20 years when you deregulate an industry, the antitrust laws become more important rather than less,” the disillusioned Kahn told a reporter for the Houston Chronicle. “That’s because now customers are dependent not on regulators to protect them but on competition.” 

Yet it is not clear that Kahn should have blamed lack of antitrust enforcement alone for the debacle; other policy shifts were also at work in making his reforms even more destructive. Early in his first term, Bill Clinton signed legislation, for example, that removed any regulatory barriers to compensating CEOs largely through stock options, thus inadvertently accelerating the trend toward “shareholder” control over corporations and the financialization of the economy. Kahn would be doing barrel rolls in his grave if he learned that all four remaining major airline carriers share common ownership by the same three gigantic investment pools. This interlocking financial control means that the major airlines don’t compete with each other any longer except over who can maximize returns to their owners by cutting costs the most and raising fares the fastest. In the first three months of 2022, average domestic airfares rose by a staggering 40 percent, with only a small portion of this attributable to rising energy costs. And that was, as we’ll see, only the beginning. 

The same pattern now recurs in sector after sector. Start with the evidence from surging profit margins. 

In April, the Economic Policy Institute issued a report that broke down the three main factors contributing to the price hikes charged by nonfinancial corporations. Since the bottom of the COVID-19 recession through December 2021, inflation in this sector, which constitutes three-quarters of the private economy, ran at an annualized rate of 6.1 percent. The rising cost of labor accounted for a small part of this, and the cost of raw material contributed substantially more. The overwhelmingly largest factor, however, was surging corporate profits, which accounted for more than half (53.9 percent) of the rise in prices.

These statistics undermine the idea, championed by the economist Larry Summers and many others, that today’s inflation is primarily caused by excessive government spending and monetary policies that have given ordinary Americans too much money. Both factors helped millions of Americans to make up for the income they lost when their jobs disappeared during the pandemic. Meanwhile, even at a time of spreading labor shortages, nominal wage growth still lags or is barely keeping up with overall inflation, signaling, as the EPI report puts it, that “labor costs are still dampening, not amplifying, inflationary pressures.” By contrast, according to an analysis published by The Guardian, between the first quarter of 2020 and the first quarter of 2022 the median profits of the top 100 publicly traded companies surged by 49 percent. 

Abundant examples illustrate the business practices behind these statistics. Last fall, the Groundwork Collaborative, a progressive think tank, listened in on the earnings calls of hundreds of publicly traded companies, in which CEOs provide investors with projections of future profits. A consistent theme: CEOs bragging that inflation was giving them cover to raise prices above costs. The CEO of Hostess told shareholders, “When all prices go up, it helps.” A survey by Digital.com of retail businesses found that 56 percent said inflation has given them the ability to raise prices beyond what’s required to offset higher costs.

Why are corporations able to get away with this profiteering? After all, every economics textbook teaches that in a competition economy, any company that jacks up prices far above costs will soon find other firms stealing away its customers with better deals. It’s why many economists oppose laws against profiteering; their models tell them that market forces will automatically correct any abuse. It may also be why even some economists who work for the Biden administration drastically underestimated how long inflation would endure. They failed to focus on the fact that we don’t have anything like a competitive economy anymore; in sector after sector, we have an economy increasingly dominated by just a few, often colluding firms that have stripped out almost all slack capacity and that don’t need to worry about competitors under selling them because they no longer really have any competitors. 

This is particularly true in sectors where we have seen the steepest price rises. In the meat-packing industry, just four large conglomerates control 55 to 85 percent of the supply chains for beef, pork, and chicken while enjoying near-total local monopolies. During the worst of the pandemic, the Big Four posted record profits by hiking up their prices by far more than their costs. According to a White House report, fully half of the rise in food costs since December 2020 is attributable to monopoly pricing by the meat-packing industry. Meat-packers give the excuse that they are just passing along higher costs—but then what explains their soaring profits? Tyson’s earnings per share have increased by 71 percent over the past year. 

Rental car companies provide another good example of how consolidation amplifies inflation. The falloff in travel following the outbreak of COVID initially hit the industry hard. Rental companies dropped their prices by more than a fifth and began selling off cars. Hertz, which also controls its former competitors Dollar and Thrifty, declared bankruptcy. But the industry was soon able to more than recoup its early losses and go on to post record profits through ongoing price gouging. 

That’s because it operates as an effective oligopoly. The Hertz group, which emerged from bankruptcy after attracting $5.9 billion in new hedge fund money, shares the market with only two remaining major players: Avis (which controls Budget and Zipcar) and Enterprise (which controls Alamo and National Car Rental). Because there was so little competition left in the industry, it didn’t have to worry about the worldwide shortage of new cars that occurred during the pandemic. It learned instead that it could pull in record profits just by selling off one-third of its inventory into a red-hot used car market while jacking up the price of renting the remaining cars in its diminished fleet. According to the Bureau of Labor Statistics, the average price of renting a car or truck is now 47 percent higher than it was in 2019 before the pandemic struck. 

To keep this sweet deal going, the Big Three rental companies don’t have to engage in illegal price fixing. With so few players, it is easy to coordinate prices and output just by sending signals to one another in public. Hertz’s CFO announced on an earnings call this April, “We don’t view inflation as necessarily a bad thing for us, as this creates more discipline across the industry in terms of pricing and asset allocation, which you can see currently.” Just to make sure investors and other members of the oligopoly got the message, he let it be known that Hertz is committed to keeping its prices high by keeping fewer cars in its fleet than is necessary to meet demand. And what is the company doing with the money it saves with this strategy? It’s redeploying its assets to engage in a $2 billion stock buyback program. 

It should come as no surprise that other members of the oligopoly are engaged in the same pricing and allocation “discipline.” Rather than build its fleet size back up to meet surging demand, the Avis Budget Group holding company, for example, bought back 20 percent of its outstanding stock in just four months late last year. According to its CFO, this represents “over $1 billion of value created for shareholders.” In May, Avis reported record first-quarter profits, further swelling its stock price by double digits. Meanwhile, anyone needing to rent a car paid more for it—if they could find one. 

Variations on this pattern prevail in many other sectors, including central industries on which the whole economy depends. Coming into the pandemic, a highly consolidated freight rail industry, now largely controlled by private equity funds focused on maximizing short-term returns, learned that it could earn record profits by laying off tens of thousands of workers and stripping out physical assets like rail yards and locomotives. Service standards deteriorated, but with the industry dominated by just six remaining major carriers that enjoy near-total local monopolies, captive shippers had nowhere else to go. (See “Amtrak Joe vs. the Robber Barons,” November/December 2021.) The consequences for inflation became clear last year when an improving economy created an increase in demand for freight transportation that overwhelmed the railroads’ remaining capacity, causing supply chain bottlenecks that continue to drive up prices for everything from energy and food to consumer electronics. 

Union Pacific, for example, having laid off thousands of workers before the pandemic and shut down a major terminal outside of Chicago as cost savings measures, had to turn away container traffic from West Coast ports for a week last year when undelivered containers started stacking up. Perversely, such bottlenecks give Union Pacific and the other five members of today’s railroad trust even more opportunities to profit through price gouging. On an earnings call in January, Union Pacific promised that due to “our disciplined pricing approach, we expect to yield pricing dollars in excess of inflation dollars”—in other words, we promise to deliver still-higher profits by further jacking up prices beyond what it costs to run the railroad. Currently, Union Pacific and other major railroads have such fat profit margins that they only spend 60 cents in operating expenses for every dollar of revenue they rake in. 

Or consider ocean shipping. Once it was a source of falling prices in the U.S., as the use of containers and super-efficient mega-ships made it economical to outsource production to distant places like Japan, China, or wherever labor and other costs were lowest. But today, thanks to a huge increase in concentrated ownership over the past 10 years, roughly 80 percent of all global shipping capacity—and 95 percent of East-West trade—is controlled by just three cartels that allow freight carrier firms to coordinate rates. This they do with gusto, raising the rates for shipping between the United States and Asia by more than 1,000 percent since the beginning of the pandemic and taking home profit margins as high as 56 percent. Studies by the Kansas City Federal Reserve and the European Central Bank suggest that such profiteering could be responsible for as much as one-sixth of the ongoing rise in inflation. 

Some observers insist that increasing corporate concentration cannot be a major cause of today’s inflation since the trend has been building since the 1980s while inflation has only surged more recently. But that is hardly a paradox. The combination of deregulation, financialization, and monopolization has been causing inflation in many sectors for decades; what’s different now is that in the aftermath of the disruptions caused by the pandemic and by the effects of decades of corporate outsourcing and downsizing, the same three forces are amplifying inflation throughout the whole economy. 

For two generations we’ve endured rampant inflation in health care, for example. The reason is not that Americans consume more health care than people in other advanced nations; it is that we pay ever-higher prices for the same pills and procedures with no better results. And that’s largely because of a surge of hospital and insurance company mergers, cartelization of medical supply chains, patent monopolies on drugs and medical devices, and, most recently, moves by private equity firms to wrest more “shareholder value” out of nursing homes, dialysis centers, and other key parts of the health care delivery system. 

Now, the same forces are causing inflation to spill out of sectors where competition is also disappearing, which had to happen eventually. Even in cases where monopolists might have at first lowered prices in the past, the effect over time has been the opposite, as per plan. As students of business history well know, John D. Rockefeller built the Standard Oil monopoly by colluding with railroads to sell kerosene for far less than any of his competitors could until he no longer had competitors and could charge whatever he liked. Later chain stores sold at below cost or forced their suppliers to do so in order to drive mom-and-pop stores out of business and gain monopoly pricing power. The abuse of such predatory pricing and price discrimination to build monopolies became so bad that Congress passed the Robinson-Patman Act in 1936 to make that business model explicitly illegal. 

But Robinson-Patman and similar fair trade laws have not been enforced since the 1980s, while enforcement of antitrust statutes has also lapsed, allowing for the return of the same monopoly play. Using gobs of Wall Street capital, Jeff Bezos sold books, Kindles, and later almost everything else on Amazon at a loss for more than a decade until he built up a retail platform with such gigantic market share that merchants must now pay monopoly prices for access to it. Google and Facebook literally give away products to consumers for free in order to build up the monopoly power they now use to charge advertisers monopoly prices—a corner that destroys competition and drives up prices across the whole economy.

Even when predatory pricing fails to build an enduring monopoly, the effect is often ultimately inflationary. Classic examples include Uber, WeWork, DoorDash, and other so-called unicorns that built gigantic market shares over the past decade by using Wall Street money to sell their services at far below cost. Because this practice drives other producers, like traditional taxi drivers and small restaurants, out of business, consumers pay more in the long run. 

A variation of this pattern occurs when deregulation brings an initial surge of competition but later an increase in corporate consolidation. In airlines, as we’ve seen, deregulation set off ruinous competition that, after a shakeout, has allowed today’s unregulated airline oligopoly to engage in fantastic price inflation combined with further cuts in quality. In April, airfares rose by another 18.6 percent, the largest one-month increase since the Bureau of Labor Statistics began tracking airline prices in 1963. Rising fuel costs account for some of this, but as Delta Air Lines President Glen Hauenstein recently told an investor conference, Delta only needs to collect an extra $30 or $40 per the average $400 roundtrip ticket to cover rising fuel costs, which it is more than getting through fare hikes. As a result, Delta is telling investors to expect a profit margin this year of 12 to 14 percent or more.

Meanwhile, Delta and the three other remaining major carriers have announced that they will be cutting the numbers of flights they offer this summer, blaming the fact that large numbers of employees are quitting. But rather than improve working conditions, airlines cut capacity. The effect on their bottom line will be to further boost their pricing power and profit margins as travelers compete for a dwindling number of airline seats. 

The effect of this monopoly behavior is not only inflationary but also likely to end in recession. In a normal competitive market, these firms would be investing in new plants and capacity—buying more cars to rent, for instance, or ordering more airplanes—which might keep the economy humming along without inflation. Instead, by merely raising prices, they are driving up inflation and all but forcing the Federal Reserve to raise interest rates, which more and more market analysts fear will lead to a recession as early as this year. 

Which brings us all the way back to Jimmy Carter and the false idea that the best way to fight inflation is by taking away the government’s ability to manage competition. It is true that excessive and poorly conceived regulation can itself become a source of monopoly by creating high barriers to entry for new businesses. One example is Carter’s deregulation of energy markets, which led to a boom in natural gas production that helped break the back of the energy crisis that was driving 1970s inflation in the first place. 

Nor were Carter-era deregulators wrong that regulatory agencies can sometimes be “captured” by the powerful industries they are supposed to be regulating. Much of today’s health care cost inflation, for instance, is due to the iron control that the American Medical Association has over reimbursement rates for Medicare and Medicaid. (See Merrill Goozner, “The AMA’s Dark Secret“.) Indeed, the deregulation movement that Carter-era liberals began has itself been captured by corporations and laissez-faire conservatives, whose well-funded think tanks, lobbyists, and allies in Congress and the courts have bollixed up the federal rulemaking system considerably. With a new conservative super-majority on the Supreme Court, they may shut it down altogether. (See Marcia Brown, “Limitations of Statute“.)

Taken together, the competition policies we have been following for the past 40 years have gone so far in the wrong direction that what we have today is not a deregulated, market-driven economy, but one regulated by financiers who have cornered different markets large and small and who are now using their monopoly power to jack up prices and profits. The Biden administration, by its words and actions—including sweeping antitrust executive orders and the hiring of tough enforcers—clearly understands this. So does the public. A recent poll showed that a strong majority of Americans blames large corporations for today’s inflation and wants the federal government to crack down. About the only people who don’t get it are a handful of economists, like Larry Summers, who are nevertheless influential in elite media and Democratic circles. If Biden is to escape the same fate as Carter, he and his allies need to avoid being led astray by economists in thrall to their own models and do a better job of showing the American people that they have a plan that addresses inflation’s root cause: abusive corporate power.

The post It’s the Monopoly, Stupid appeared first on Washington Monthly.