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Blame government policies for the economic slowdown

Our economy is promoting the hoarding of cash and assets at the top

July 30, 2015 2:00AM ET

Around the world, financial pages report that the global economy is slowing and might even contract.

Prices of commodities are falling, with copper, cotton, grains and oil all down by about half in the last five years — a strong signal of slowing growth.

Companies are tightening their belts, with fewer perks and fringe benefits. An inadvertently leaked report showed that staff economists at the Federal Reserve are more pessimistic about the near future than the official Fed positions. And big companies with nowhere else to put their piles of cash are buying back their stock or buying up competitors, which means fewer well-paying management jobs.

Yet hardly any of these reports citing official sources and economic data connect the dots to outline what’s behind this unwelcome trend in the U.S.: government policies.

Governments are helping big industries by diminishing competition, providing abundant cheap credit for speculation rather than investment and failing to rein in price gouging. In turn, these policies produce a growing concentration of income and wealth at the top while the vast majority struggle with falling wages, flat incomes, job insecurity and a shrinking slice of investment assets.

Highly concentrated ownership

U.S. economic malaise has been clear for some time.

Net investment in privately owned U.S. businesses peaked in 2000 and has not returned. The highest level since then came in the last quarter of 2014, but it was still 3 percent shy of the record, according to the Bureau of Economic Analysis. Investment has slipped this year.

The personal savings rate, 5 percent in June, was less than half the average rate in the 1960s and 1970s. While America has enjoyed 56 straight months of job growth, it has slowed this year, and wage growth remains muted.

Everywhere you look, acquisitions, buyouts and mergers are happening, often with phenomenal profits. Warren Buffett turned $9 billion in two food industry deals into $25 billion in two years. Wall Street expects 2015 to set a new record for corporate mergers, with thousands of deals valued together at close to $2 trillion.

Highly concentrated ownership of major industries leads to higher prices and fewer consumer options, creating a drag on overall economic growth.

Since 1980 America has gone from 33 large railroads to seven. Two of those railroads dominate the East (CSX and Norfolk Southern), and two do so in the West (BNSF and Union Pacific) — a pair of duopolies that maximize profits by avoiding competing for business.

Today major railroads are more highly concentrated and have more power over shippers than in the late 1800s, when Congress created the Interstate Commerce Commission to restrict abusive freight-hauling practices.

More recent mergers have left the U.S. would just three full-service airlines — American, Delta and United — plus all-coach Southwest. The result: more crowded planes, more people squeezed into junior jets, fewer flights, higher fares and record airline profits.

On Friday the big health insurer Anthem announced it would buy Cigna for $48.3 billion. If the deal goes through, the combined company will insure more than 1 in 6 Americans. Four weeks ago, Aetna announced it would acquire Humana for $37 billion. 

Governments are helping those at the top build dams so the money does not flow down in the forms of wages, increased jobs, more research and building new factories, offices and laboratories.

These proposed combinations, together with United Healthcare, currently the largest health insurer, would allow three firms to dominate the market, giving them so much power, they could raise prices even in a weak economy.

In semiconductors, industry leader Intel is acquiring smaller Altera. More high-tech mergers are in the offing.

When many firms operate, there is robust competition, which holds down prices and encourages higher wages as firms seek the most talented and productive workers.

But when just a few firms dominate an industry, they can jack up prices not by making secret deals that are illegal but by monitoring each other’s public statements and deals with big customers. While collusion is illegal, learning is no crime, even if the result for consumers — higher prices and diminished service — is the same.

In addition, regulators are letting Wall Street rig electricity markets so prices rise. They also let monopolies, from local electric utilities to pipelines, gouge customers, as I have documented in my column since early 2014.

Growing imbalances

What the U.S. and other big economies need is not more mergers but more competition. Government policy determines how much or little competition exists.

By allowing companies to buy back their stock, defer taxes by stashing cash abroad and merge so that management ranks can be thinned, government policies produce a worsening imbalance between the have-mores and everyone else. Without enough income, assets and job security, the vast majority cannot buy more goods and services, which grows economies.

This imbalance holds back economic growth and may soon plunge the world into another global recession.

Just as water tends to flow downhill until the surface is level, economies tend naturally toward balance, toward what economists call equilibrium. When prices rise, people buy less; when they fall, they buy more, provided they have the capacity to buy more.

The imbalance also arises because the central banks in the United States, Europe, China and Japan opened their spigots but only at the top levels of the economy. Banks and other enterprises are already brimming with more cash than they can use. So the have-mores soak up this excess cash by acquiring ever more assets, including company stock buybacks.

Pumping up stock prices through buybacks causes what Harvard Business Review calls “profits without prosperity.”

In addition to sending torrents of cash to the top, governments are helping those at the top build dams so the money does not flow down in the forms of wages, increased jobs, more research and building new factories, offices and laboratories.

We need tax policies that discourage the further buildup of cash, income and assets than those at the top can productively employ. Instead we need policies that encourage companies to pay employees more, hire more workers and to invest in expanding enterprises.

Congress can do this through a host of means, including strengthening — and enforcing — existing laws limiting cash hoarding by corporations, by restricting the use of borrowed money to speculate in high-speed trading and possibly even by offering tax credits to encourage higher pay, as Democratic presidential candidate Hillary Clinton has suggested.

The natural tendency toward equilibrium in economics cannot be denied for long. And the longer action is delayed, the greater the risk that the worsening imbalance will end in catastrophe.

David Cay Johnston, an investigative reporter who won a Pulitzer Prize while at The New York Times, teaches business, tax and property law of the ancient world at the Syracuse University College of Law. He is the best-selling author of “Perfectly Legal,” “Free Lunch” and “The Fine Print” and the editor of the new anthology “Divided: The Perils of Our Growing Inequality.”

The views expressed in this article are the author's own and do not necessarily reflect Al Jazeera America's editorial policy.

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