As the 2020 U.S. elections come in to focus, investors are turning their attention to potential policy changes that could have a major impact on the U.S. economy and stock market.
While a Democratic party sweep of the presidency and Congress could pose risks to industry as varied as higher corporate taxes, Medicare for All, or a ban on fracking, there is one threat that is likely to loom over the U.S. stock market regardless of the outcome: antitrust.
A growing bipartisan skepticism of the power of big technology firms has helped spark a renewed interest in long-dormant federal and state powers for regulating the market power of corporations.
Google parent Alphabet Inc. GOOG, +0.22%, Facebook Inc. FB, +0.16%, Amazon Inc. AMZN, -0.91% and Apple Inc. AAPL, +1.34% are all being investigated by a Republican party led Federal Trade Commission and U.S. Justice Department over antitrust concerns, while a bipartisan coalition of 47 state attorneys general have launched a separate investigation into Facebook.
These actions could be the beginning of a sea change in U.S. antitrust policy after a half-century of relatively lax enforcement and they threaten to harm stock valuations in the tech and health care sectors as well as the S&P 500 index SPX, +0.11% more broadly, analysts say. In the long term though any resulting increase in competition could be good news for the overall U.S. economy.
“Technology has grown much more oligopolistic over the last 10 to 20 years, so the number of companies at the top is few, but their size is massive,” Savita Subramanian, head of U.S. equity and quantitative strategy told MarketWatch.
She compared large tech companies today to the financial services sector from 2005 through 2007, when large banks took advantage of light regulation to grow bigger while corporate governance started to “deteriorate.”
“Thinking about how to stop that continued steamroller effect from tech companies is an area that has essentially bipartisan support in Washington at this point,” she added. “That is one reason we downgraded technology…we could see some of these regulatory concerns weigh on the multiples of these stocks.”
The costs of monopoly power
Thomas Philippon, professor of finance at the New York Stern School of Business and author of recently published book “The Great Reversal: How America Gave Up on Free Markets” said in an interview that during the past 20 years, “concentration has increased in most U.S. industries” since the 1990s, and not just in the technology sphere.
The result of this trend has been higher prices for consumers and lower pay for workers.
In his book, he pointed to a 2017 study by market research firm BDRC Continental that shows that “in most advanced economies, consumers pay around $35 a month for broad band internet connections. In the U.S., they pay almost double.”
As for airfares, in 2010 both European and U.S. airliners reaped about the same profit-per-passenger, but after a wave of mergers during the past decade, the U.S. companies reap $22.40 per passenger, while their European rivals garner just $7.84.
These trends have also impacted worker wages, as growing industry concentration reduces competition for labor, Philippon said. Growing market power has also coincided with a rising use of non-compete clauses in worker contracts that prevent them from going to work for rivals.
A return to the New Deal consensus
These trends that have harmed the consumer and the American worker have resulted in more activists and politicians calling for a return to the sort of pro-competition public policy that began to form in the 1910s and reigned supreme through the 1970s.
Matt Stoller, a fellow at the Open Market Institute, tells the story in his recently published book “Goliath: The 100-Year War Between Monopoly Power and Democracy” of the history of U.S. antitrust policy which began in 1890 when Congress passed the Sherman Antitrust Act.
In the mid-twentieth century there was a bipartisan consensus around pro-competition policy as conservative small-business owners and liberal labor interests came together to support a federal government that would block mergers and force powerful companies to license intellectual property in an effort to promote competition.
The New Deal consensus of the 1930s on antitrust policy began to fall apart in the 1970s, as the courts began interpreting antitrust laws as proscribing mergers only on the basis of consumer protection. But even by these standards, the federal government has been negligent, according to a research by John Kwoka, an economist at Northwestern University, who found that during the past 20 years, 80% of mergers have led to one form of price increase or another.
Monopoly: good for shareholders?
Politicians like Elizabeth Warren are proposing laws that would strengthen antitrust oversight and force courts to broaden their views, but business leaders are also joining the fight, with figures like Facebook co-founder Chris Hughes and Yelp CEO Jeremy Stoppleman calling for stricter antitrust oversight of big tech.
All of which raises the question: what could a reinvigorated pro-competition regime in Washington do to stock valuations?
In the short term at least, it wouldn’t be good for the S&P 500 index SPX, +0.11%. Philippon estimated that if the U.S. were readopt a strict antitrust approach, it would raise aggregate GDP by $1 trillion, while raising worker pay and benefits by $1.25 trillion. Such a result would be positive for the vast majority of Americans who earn most of their income from labor, but it would lead to a $250 billion reduction in corporate profits.
There may be bright spots for shareholders too though. Bank of America’s Subramanian, for instance, said that companies that face few competitors risk becoming complacent and sloppy in their execution. “Something we have been paying attention to in tech is that these companies…are starting to show some signs of fraying in terms of their shareholder or stakeholder focus,” she said.
While pro-competition policy may reduce shareholder value in the short run, there is also reason to believe that it leads to greater innovation and therefore faster economic growth and more valuable public companies in the long run. Stoller points to the Microsoft antitrust suit, adjudicated in the 1990s, as an example.
“In the early 2000s, Microsoft, due in part to fear of antitrust action, refrained from using its power over browsers to keep a scrappy upstart called Google from reaching users,” he wrote in a recent op-ed in The Wall Street Journal. “Antitrust oxygenated the market; a lack of antitrust has now allowed Google to turn into the monopolist of today.”
Philippon concurred, telling MarketWatch that while it is difficult to quantify, “Competition drives innovation to a great extent. More competition would likely spur innovation and increase the long-term growth of the economy.”