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Thursday, January 9, 2020

Politics of monopoly capitalism

Matt Stoller has a nice blog about the politics of monopoly, which shines light at, among other things, financialisation and other excesses of modern capitalism.

This piece on management consulting talks about how federal government agencies hire consulting organisations at insanely expensive rates, 
The Boston Consulting Group, charges the government $33,063.75/week for the time of a recent college grad to work as a contractor. Not to be outdone, McKinsey’s pricing is much much higher, with one McKinsey “business analyst” - someone with an undergraduate degree and no experience - lent to the government priced out at $56,707/week, or $2,948,764/year.
This just about sums up the typical consultant's work,
Does McKinsey do a good job? The answer is that it’s probably no better or worse than anyone else. I’m sure there are times when McKinsey is quite helpful, but it’s in all probability vastly overpriced for what it is, which is basically a group of smart people who know how to use powerpoint presentations and speak in soothing tones.
This trend with management consulting is representative of outsourcing industry itself,
In 2011, an antitrust attorney did a report on how we overpay for government contracting. In service of ‘shrinking government,’ policymakers chose to set up a system where instead of hiring an engineer as a government employee for, say, $120,000 a year, they paid a consulting firm like Booz Allen $500,000 a year for a similar engineer. The resulting system is both more expensive and more bureaucratic.
This description of private equity is very apt,
On a deeper level, private equity is the ultimate example of the collapse of the enlightenment concept of what ownership means. Ownership used to mean dominion over a resource, and responsibility for caretaking that resource. PE is a political movement whose goal is extend deep managerial controls from a small group of financiers over the producers in the economy. Private equity transforms corporations from institutions that house people and capital for the purpose of production into extractive institutions designed solely to shift cash to owners and leave the rest behind as trash. 
And this about its emergence,
In 1982, William Simon turned into a leader of the financial revolution. He pulled off the first large scale leveraged buyout, of a company called Gibson Greeting cards, a deal that shocked Wall Street. He and his partner paid $80 million for Gibson, buying the company from the struggling conglomerate RCA. The key was that they didn’t use their own money to buy the company, instead using Simon’s political credibility and connections to borrow much of the necessary $79 million from Barclays Bank and General Electric, only putting down $330,000 apiece. They immediately paid themselves a $900,000 special dividend from Gibson, made $4 million selling the company’s real estate assets, and gave 20% of the shares to the managers of the company as an incentive to keep the stock price in mind. Eighteen months later, they took Gibson public in a bull market, selling the company at $270 million. Simon cleared $70 million personally in a year and a half off an investment of $330,000, an insanely great return on such a small investment. Eyes popped all over Wall Street, and Gibson became the starting gun for the mergers and acquisitions PE craze of the 1980s...

PE firms serve as transmitters of information across businesses, sort of disease vectors for price gouging and legal arbitrage. If a certain kind of price gouging strategy works in a pharmaceutical company, a private equity company can roll through the industry, buying up every possible candidate and quickly forcing the price gouging everywhere. In the defense sector, Transdigm serves this role, buying up aerospace spare parts makers with pricing power and jacking up prices, in effect spreading corrupt contracting arbitrage against the Pentagon much more rapidly than it would have spread otherwise. 
More fundamentally, private equity was about getting rid of the slack that American managers had to look out for the long-term, slack that allowed them to fund research and experiment with productive techniques. PE replaced slack with brutal debt schedules and massive upside for higher stock prices, and no downside for the owner-financiers should the company fail. The goal is to eliminate production in favor of scalable profitable things like brands, patents, and tax loopholes, because producers - engineers, artists, workers - are cost centers. Production can also be eliminated by fissuring the workplace, such as the mass move to offshore production to lower cost countries in the 1980s onward... this paper by Brian Ayash and Mahdi Rastad... noted that companies bought by private equity are ten times more likely than comparable companies to go bankrupt. And this makes sense. The goal in PE isn’t to create or to make a company more efficient, it is to find legal loopholes that allow the organizers of the fund to maximize their return and shift the risk to someone else, as quickly as possible. Bankruptcies are a natural result if you load up on risk, and because the bankruptcy code is complex, bankruptcy can even be an opportunity for the financier to restructure his/her investment and push the cost onto employees by seizing the pension.
This is particularly corrosive,
PE funds are job sinecures for out of power elite Democrats and Republicans, a sort of shadow government of financiers who actually do the managing of American corporations while the government futzes around, paralyzed by the corruption PE barons organize.
As Stoller describes, PE is indeed "legal arbitrage", using debt to juice up equity's returns, shifting assets (especially real estate) around to maximise returns, and leveraging the differential tax rate between capital gains and corporate tax rates.

In another article (HT: Ananth), Stoller and Lucas Kunce describe how private equity and monopoly capitalism is fleecing the US military,
When Wall Street targeted the commercial industrial base in the 1990s, the same financial trends shifted the defense industry. Well before any of the more recent conflicts, financial pressure led to a change in focus for many in the defense industry—from technological engineering to balance sheet engineering. The result is that some of the biggest names in the industry have never created any defense product. Instead of innovating new technology to support our national security, they innovate new ways of creating monopolies to take advantage of it.  
A good example is a company called TransDigm. While TransDigm presents itself as a designer and producer of aerospace products, it can more accurately be described as a designer of monopolies. TransDigm began as a private equity firm, a type of investment business, in 1993... It achieves these returns for its shareholders by buying up companies that are sole or single-source suppliers of obscure airplane parts that the government needs, and then increasing prices by as much as eight times the original amount. If the government balks at paying, TransDigm has no qualms daring the military to risk its mission and its crew by not buying the parts. The military, held hostage, often pays the ransom. TransDigm’s gross profit margins using this model to gouge the U.S. government are a robust 54.5 percent. To put that into perspective, Boeing and Lockheed’s profit margins are listed at 13.6 percent and 10.91 percent. In many ways, TransDigm is like the pharmaceutical company run by Martin Shkreli, which bought rare treatments and then price gouged those who could not do without the product. Earlier this year, TransDigm recently bought the remaining supplier of chaff and one of two suppliers of flares, products identified in the Defense Department’s supply chain fragility report... 
The company is now the sole supplier for 80% of the end markets it serves. And 90% of the items in the supply chain are proprietary to TransDigm. In other words, the company is operating a monopoly for parts needed to operate aircraft that will typically be in service for 30 years…. Managers are uniquely motivated to increase shareholder value and they have an enviable record, with shares up 2,503% since 2009. Fleecing the Defense Department is big business. Its executive chairman W. Nicholas Howley, skewered by Democrats and Republicans alike in a May 2019 House Oversight hearing for making up to 4,000 percent excess profit on some parts and stealing from the American taxpayer, received total compensation of over $64 million in 2013, the fifth most among all CEOs, and over $13 million in 2018, making him one of the most highly compensated CEOs no one has ever heard of. Shortly after May’s hearing, the company agreed to voluntarily return $16 million in overcharges to the Pentagon, but the share price is at near record highs.
Finally, there is the story about how Google abuses its monopoly position to cow down national governments, no less. Last month Google announced a decision to cut-off Turkey's access to Android phones. 
Google has told its Turkish business partners it will not be able to work with them on new Android phones to be released in Turkey, after the Turkish competition board ruled that changes Google made to its contracts were not acceptable… The regulator had asked Google to change all its software distribution agreements to allow consumers to choose different search engines in its Android mobile operating system. The probe was triggered by a filing by Russian competitor Yandex.
The article points out how the most robust anti-trust regulator has been the Russian, motivated by the desire to provide a level-playing field for competitive local companies, especially Yandex, a search engine which is superior to Google in indexing Russian language searches. The regulator had made Google stop tying its Android mobile OS to its search engine, a move which stemmed Yandex's loss of market share and plateauing of Google's own search engine market share. 
Google tried to kill Yandex using an explicit strategy to leverage desktop search dominance into mobile search dominance... What’s interesting is that Yandex isn’t just good at indexing Russian language content, it can also index the Turkish language. This means it could be a strong competitor in the Turkish market. And what do you know, Yandex filed a complaint with the Turkish antitrust authorities over anti-competitive tactics. Google’s response wasn’t just to use the legal system to fight for its rights, but then ultimately obey the law. Instead, Google said it was willing to ‘work with’ Turkey, but as a partner and not as a corporation working within a sovereign nation. It simply said it doesn’t like Turkey’s law, and so it will stop providing Android phones for an entire country. In other words, Google has a private sanctions regime against smaller countries. There’s something of a parallel to what Google is doing to Turkey, and it’s in China...


Google is making a call to use leverage that should only be resolved for very serious foreign policy disputes by the U.S. government, and doing so to protect itself from having to obey an antitrust law in a foreign country. Pulling this kind of stunt is like using financial sanctions recklessly. It works if you’re the dominant network, but every time you use sanctions you create the incentive to build an alternative. To put it differently, it’s like overusing antibiotics. Turkey’s response will in the long-term mean leaning more on China, or Russia, or both. Or the EU and the U.S. could step in, and find ways of demanding that Google obey Turkish law.

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