In a reversal from a few decades ago, American consumers are facing oligopolies while Europeans benefit from competition
When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper here than in Europe. Twenty years later, American free markets are becoming a myth. Internet service, cellphone plans, and plane tickets are now cheaper in Europe and Asia than in the US. In 2018, the average monthly cost of a broadband internet connection was $31 in France, $39 in the UK and $68 in the US. American households also spend twice as much on cellphone services as households in France or the UK.
This is a result of policy choices. In 1999, the US had free and competitive markets while European markets were dominated by oligopolies. The airline industry is a prime example. Over the past two decades a wave of mergers has turned the US airline industry into an oligopoly while Europe has opened its skies to competition, thanks in part to low-cost carriers such as Ryanair and EasyJet. US regulators allowed these mergers to happen without meaningful challenges. EU regulators, on the other hand, encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.
There are many layers of irony in this historic reversal. One irony is that the free market ideas and business models that benefit European consumers today were inspired by US markets. Another irony is that some leftwing US politicians are now contemplating policies that most Europeans would find extreme. We do not think private health insurance companies should be abolished. We favor wealth taxes, but we do not think they are a cure for all ills.
The polarization of the political debate is partly the result of ignorance. The American left sees Europe as an El Dorado of free healthcare, free education and workers rights. The American right sees it as a socialistic nightmare with no growth and no innovation. Theyre both wrong, and the result is misguided policies and time wasted tilting at windmills.
But we are also witnessing a justified backlash against the corruption of American free markets. A powerful system of lobbying and campaign finance contributions is largely responsible for the growing monopolization of the US economy.
Implementing a pro-competition policy in America will be no easy task. Incumbent companies maintain their power with an array of unfair tactics to exclude rivals acquisitions of nascent competitors, heavy lobbying of regulators, and lavish expenditures on campaign donations. To be successful in todays economy, a pro-competition policy would need to tackle the new monopolies as well as the old ones the Googles and Facebooks and the pharmaceutical and telecom companies alike.
The payoffs would be large, however. Based on my research, I estimate that monopolies cost the median American household about $300 a month. Taking into account all the other inefficiencies monopolies entail, I estimate that the lack of competition deprives American workers of about $1.25tn of labor income every year. No wonder, then, that American workers are angry.
There is also another ironic lesson for Europe. The quality of existing European institutions is partly due to the beneficial influence of the UK. Historically France and Germany did not have a tradition of strong and independent regulators able to stand up to lobbyists and resist short term political pressures. The European Central Bank and the EU Directorate General for Competition (DG Comp) have demonstrated that they can. These institutions, while imperfect, are a public good that benefits all European citizens.
Brexit will have a significant impact on competition policy in Europe. When the UK leaves, the EU will need to keep its free market spirit alive. The UK, on the other hand, risks losing the competitive benefits of the single market. Many commentators view it only as a loss of market access, but this is just part of the story. Equally important, in my opinion, are the benefits of unfettered competition in protecting consumers, keeping domestic monopolies in check, and forcing regulators to stay ahead of the curve.
The final irony is that US policymakers are now looking to Europe for clues about modern market regulations. The same pundits who made fun of the EUs General Data Protection Regulation (GDPR) two years ago are now thinking about the best way to create its US equivalent and offer much-needed privacy protection to US consumers. Europes antitrust actions against big tech are no longer derided but carefully studied instead.
-
Thomas Philippon is the Max L Heine Professor of Finance at the Stern School of Business at New York University. He was named one of the top 25 economists under 45 by the IMF and won the Berncer Prize for Best European Economist. He is the author of the new book The Great Reversal: How America Gave Up on Free Markets
Recent Comments