I blogged here on the upending of orthodoxy in economics and finance since the global financial crisis, which in turn has been hastened by the pandemic. Another related pandemic induced development has been the return of the state or government into several areas of the economy and our lives from where it had been ideologically banished.
The Economist has a survey on what it describes the "new interventionism". More than any financial share terms, it defines this trend more in terms of rising influence of government, especially in terms of four aspects - industrial policy, trust-busting, enhanced regulation, and taxation.
First is a renewed enthusiasm for industrial policy, defined as state support for favoured industries, technologies or specific firms, and guided by a desire to promote jobs or secure inputs needed for national security (computer chips) or the energy transition (batteries). Next is the expanding ambition of trustbusters that, tentatively in America, slowly in Europe and almost overnight in China, are moving from a focus on prices to a broader assault on corporate power to defend anything from small businesses to government itself. Third is the growth of regulation, particularly over the environment, labour standards and corporate governance, which cut across sectors and affect all large firms. And fourth is an inflection point in what had seemed an irreversible trend to lower business taxes, as politicians have followed voters in seeing unloved big business as a convenient source of revenue.
This is the crux of the argument for more government,
“Markets are good at allocating resources efficiently on a narrow understanding of efficient…What delivers highest returns to an individual investor is not necessarily in the economic interest of a nation,” says Oren Cass of American Compass, a right-leaning think-tank in Washington... Mr Cass blames the innovation drought on governments abandoning their role as midwife to technological breakthroughs, as they were for the internet and biotechnology.
There is another strategic dimension to the call for greater government, the emergence of China as a competitor. This sums up the market failure in this area,
Pat Gelsinger, boss of Intel, dislikes the flipside of being part of a sensitive industry—being barred by his government from selling products to China. “If Chinese customers want more chips from the us, we should say yes,” he suggests.
Profits trump all else, national security not even being a concern.
Nowhere has this return been felt more than in taking a leaf out of the Chinese playbook and pursuing active industrial policy,
In Japan 57 Japanese companies will get around $500m in subsidies to invest at home... The EU has doubled down on a consortium to make batteries, earmarked some €160bn ($180bn) of its covid-19 recovery fund for digital innovations, especially chips, and... launched five “missions”... In October President Emmanuel Macron unveiled the “France 2030” programme, which will spend €30bn over five years on ten areas from the specific (small nuclear reactors, medicines) to the vague (cultural and creative content production)... Tax relief for research and development, nearly half of which firms claimed for work done outside Britain in 2019, will be “refocus[ed]…towards innovation in the UK”... In one of his first acts as president, Joe Biden issued an executive order instructing government agencies to review supply chains, stretched to breaking point by the pandemic, to make them more “resilient”—which is to say more American... When a $25bn handout for semiconductor firms to make more advanced chips in America came up for a vote in the Senate in July 2020, 96 of the chamber’s 100 members voted in favour. The chip provision has since grown into $52bn and been folded into the $250bn Innovation and Competition Act, which includes $80bn for research on artificial intelligence (AI), robotics and biotechnology, $23bn on space exploration and $10bn for tech hubs outside Silicon Valley.
This is a powerful insight about practicing industrial policy,
“You don’t need the ability to pick winners. You need the ability to let losers go,” says Dani Rodrik of Harvard, whose paper in 2004, “Industrial Policy for the 21st Century”, helped to seed new interest in the notion.
The challenge is less to pick winners, but have mechanisms in place to screen out or withdraw support to losers or failures. The North East Asian success stories, as Joe Studwell demonstrates in his classic book, were successful in doing this.
Industrial policy today may be harder than in earlier times, being largely co-ordination problems.
With the Biden administration, competition policy in the US appears to be coming the full-circle,
... the antitrust philosophy that has dominated regulatory thinking and judicial decisions in the past half-century. Associated with Robert Bork, an American judge from the late 1970s, it held that consumer welfare and the protection of competition, rather than of particular competitors, should be the only goals of antitrust law. Business practices were deemed fine so long as they did not result in harm to consumers from excessive prices. Most mergers were either competitively neutral or enhanced efficiency, even if they led to oligopoly; only those creating a dominant firm or monopoly were likely to be bad for consumers. Bork’s work was itself a reaction to an earlier approach linked to Louis Brandeis, a former us Supreme Court justice. Brandeis believed that size was nefarious in itself. Curbing market power was a tool to fight other ills, such as mistreatment of workers, the stiffing of suppliers or even threats to democracy. This may have led to some perverse outcomes. In one notorious example in 1966, the Supreme Court blocked a merger between two grocers in Los Angeles with a combined market share of 8%... Mr Biden has installed “neo-Brandeisians” in senior trustbusting roles. Lina Khan, a 32-year-old academic, chairs the Federal Trade Commission (FTC). Jonathan Kanter, a long-time Google-basher, heads the Department of Justice (DoJ)’s antitrust division. Tim Wu, a law professor whose books include “The Curse of Bigness”, is the White House adviser on technology and competition. “The speed of the takeover by the neo-Brandeisians of the regulatory apparatus has been extraordinary,” says one big asset manager.
Business concentration is a major problem,
According to The Economist’s calculations, two-thirds of 900-odd sectors covered by America’s economic census became more concentrated between 1997 and 2012. In half of these concentration has edged up further in the subsequent five years. In the two decades to 2017 the weighted average market share of the top four firms in each industry increased from 26% to 32%. The four biggest British firms accounted for a larger share of revenue in 2018 than a decade earlier in 58% of 600-odd subsectors. Concentration in the EU has been going in the same direction, albeit more slowly.
This is how the anti-trust movement is responding,
This new competition doctrine... expands the goals of antitrust policy in two main areas: merger control and business-model regulation. For most mergers and acquisitions (M&A), regulators used to restrict scrutiny to a small number of “horizontal” deals between firms active in the same market that, if combined, could reduce competition and allow incumbents to raise prices. Today all these tenets are going out of the window. Trustbusters now investigate “vertical” integrations between companies with separate lines of business, as well as horizontal ones with combined revenues that would not historically have warranted attention. A new procedure allows EU regulators to ask national authorities to submit deals that are potential killer acquisitions, particularly in the digital, pharma and biotech industries... In America the FTC and DoJ are making merger guidelines more stringent. M&A lawyers say the agencies are asking more questions, including about the impact of deals on the labour market. They already look beyond direct pecuniary harm to consumers. The FTC is backing a suit that seeks to break up Meta into Facebook, Instagram and WhatsApp, even though earlier regulators waved these takeovers through...The second avenue of antitrust expansion—dictating what dominant businesses can and can’t do—is more inchoate than tougher merger control. But it could prove more consequential... Several proposals would outlaw practices deemed anticompetitive. One would treat Amazon’s marketplace or Google’s search engine as essential to commerce, rather like a dominant railway operator, prohibiting them from favouring their own products over others. Another would force Apple and Google to open up their app stores to alternative in-app payment methods and search results. A third would shift the burden of proof from regulators to dominant companies, which would need to show that any merger or acquisition does not hurt competition, rather than the other way around. All three have Democratic and Republican co-sponsors. Other places are further along the regulatory route. The EU is preparing to adopt two laws, the Digital Markets Act and the Digital Services Act. South Korea has enacted one that eliminates app stores’ monopoly on payments.
This on greater regulation of businesses in a host of areas,
“Tenets of ESG are becoming hard law,” says Mr Rodrik of Harvard. A draft EU directive would require firms to monitor, identify, prevent and remedy risks to human rights, the environment and governance in their operations and business relations. France’s “Duty of Vigilance Act” of 2017 already requires French companies with over 5,000 employees in France or over 10,000 worldwide to monitor their firms, contractors and suppliers for potential abuses. By mid-2023 a Dutch law aimed at stopping child labour will take effect, after a three-year grace period. A similar supply-chain act has been passed in Germany. America’s Build Back Better bill is dotted with requirements for companies to employ unionised workers. The House of Representatives has passed a bill that would reverse many constraints on union power, some dating from 1947... Governments everywhere seem suddenly to have become much keener on labour protection... The European Commission wants common rules on minimum pay and “platform workers” who ferry passengers for Uber or meals for Deliveroo... Financial regulators are also becoming more intrusive. The Bank of England is conducting climate-risk stress tests. The European Central Bank is considering requiring firms to disclose exposure to climate-related risks, including assets that may become stranded by tougher climate legislation... A final set of rules encumbering business reflects strained Sino-Western relations.
On the final area of rising government influence, corporate taxation, the last four decades has a seen a sharp decline in tax rates.
Between 1985 and 2018 the average corporate-tax rate fell from 49% to 24%. Many tax havens charge zero... Companies have also learned to pay less tax by shifting reported earnings, which is easier with the rise of intangible assets such as brands. Although only 5% of American multinationals’ foreign staff work in tax havens, they book nearly two-thirds of foreign profits there, twice as much as in 2000. In 2016 around $1trn of global profits were booked in “investment hubs” such as the Cayman Islands, Ireland and Singapore, whose average effective tax rate on profits is 5%. According to an oecd study in 2015, this robbed public coffers of $100bn-240bn a year, equivalent to 4-10% of global corporate-tax revenues.
This trend is now reversing. However, as this article points out, this swingy-wards interventionism, by invariably spawning excesses, carries the seeds of its own destruction.
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