The Corner Newsletter, May 31, 2018: Warren Buffett's Monopoly Win — Corporate Buyers Contribute to Wage Stagnation — Growing Support for Single-Price Health Care

In this issue of The Corner, we explain Open Market's new campaign to address the various threats Facebook poses to American society and democracy. We then detail how Warren Buffett's dominant position in making and selling mobile homes will benefit from the newly-passed bank deregulation bill, look at how powerful retailers like Walmart drive down wages at their suppliers, and track the building support for OMI's recent "single-price" health care proposal. Finally, we invite you to OMI's upcoming conference on the intersection of news, tech monopoly, and democracy.

Citizens Against Monopoly Launches “Freedom from Facebook” Campaign

Last week, Open Markets’ grassroots arm, Citizens Against Monopoly, spearheaded a diverse coalition to address Facebook’s failure to protect Americans’ privacy, and the dangers that the corporation’s power and business model pose to democracy.

In addition to Citizens Against Monopoly and Open Markets, founding members of the coalition include Demand Progress, Sum of Us, Public Citizen, MoveOn, Content Creators Coalition, Jewish Voice for Peace, and MPower Change. These organizations represent millions of individuals and reflect the increasingly broad-based understanding that the American people must address Facebook’s extraordinary amount of power to protect basic liberties and democracy itself.

Coalition members launched Freedom from Facebook with a petition citizens can use to demand the Federal Trade Commission wield its authority to spin off WhatsApp, Instagram, and Messenger. As Open Markets has made clear, the government already has all the tools it needs to force Facebook to spin off these subsidiaries, which would break Facebook’s monopoly and provide users with real choice. Open Markets has also made clear that the government has the power to demand that all social networking systems fully interconnect with one another, in much the way that different phone companies interconnect, to make it easier to communicate across platforms.

You can learn more about Freedom from Facebook here. You can also check out the extensive news coverage of the coalition in publications ranging from Vanity Fair to CNBC to Gizmodo to Variety.

And in its very first days, the campaign made a mark in Europe. When Mark Zuckerberg testified before the European Parliament in Brussels last week, Manfred Weber, a German MEP, put it this way: “I think it’s time to discuss breaking up Facebook’s monopoly, because it’s already too much power in only one hand.”

How Warren Buffett’s Mobile Home Monopoly Wins With the New Bank Bill

The bank deregulation bill that President Trump signed into law last week is expected to encourage more mergers and acquisitions among small and regional banks. But the law’s effects extend beyond banking. One lesser-known provision will further empower the corporation that dominates the building and selling of mobile homes in the United States. That corporation, Berkshire Hathaway, has been widely accused of targeting working class and poor Americans with predatory lending tactics, and the new law will make it even harder to protect buyers from such actions.

According to market research firm IBISWorld, Berkshire, directed by celebrity investor Warren Buffett, today builds 52 percent of all mobile homes sold in America, with one subsidiary, Clayton Homes, accounting for 31 percent of all sales of mobile homes. Berkshire is also the biggest financier of mobile homes in America, as two of its subsidiaries issue 37 percent of all loans used to finance mobile home purchases. The next biggest manufacturer and retailer is Cavco Industries, which has an 11 percent market share in manufacturing and a 3 percent share in retailing. The next biggest mobile home lender, Wells Fargo, accounts for 3.5 percent of mobile home financing. Berkshire holds a large stake in that corporation as well.

The new law specifically aims to make it easier for mobile home dealers like Clayton to steer customers’ toward the dealers’ affiliated financing corporation. Critics of the provision expect mobile home sellers like Clayton to use their new power under the law to drive buyers toward their own financial products to pay for the houses they buy from Clayton.

In a competitive market where financing and mobile home selling are separate, buyers benefit from competition among different home sellers and different lenders. But the combination of extreme consolidation and vertical integration can make it easier for dominant corporations like Clayton to steer buyers toward loans with bad terms and high interest rates. This is especially harmful for mobile home buyers, who often have low incomes and low credit scores.

Reporters for BuzzFeed, The Seattle Times, and the Center for Public Integrity have uncovered evidence of this exact kind of abuse. Reporters found that Clayton employees rushed buyers through the signing of loan documents they didn’t understand, and encouraged buyers to acquire loans from a Clayton subsidiary, even though the employees were legally prohibited at the time from such steering. Further, the reporters found that loans originated by Clayton Homes’ subsidiary, Vanderbilt Capital, charged higher interest rates to black, Latinx, and Native American borrowers than those charged to white borrowers.

This problem is aggravated by Berkshire Hathaway’s immense power over the entire mobile home industry. Clayton and other subsidiaries of the corporation have little reason to provide better products, as Berkshire’s dominance all but guarantees that enough customers will keep buying from the sector’s biggest manufacturer.

Buying and forging monopolies has been one of the keys to the success of Berkshire Hathaway; Buffett is famous for preaching the importance of business’ having an “economic moat,” or advantages that allow it to earn high profits, often by wielding market power over their competitors. The corporation holds large stakes in companies that have dominant positions in their respective markets, including the country’s four major airlines, the seed giant Monsanto, two of the country’s biggest banks, the processed food and beverage behemoth Kraft Heinz, and Verizon and Charter Communications, among others.

In response to the reports by BuzzFeed and The Seattle Times, lawmakers including Rep. Maxine Waters (D-CA) and Rep. Keith Ellison (D-MN) urged the Justice Department and the Consumer Financial Protection Bureau to investigate Clayton Homes and its lenders. Earlier this month, a spokesman from the Department of Housing and Urban Development said an investigation into Clayton was ongoing.

ANTI-MONOPOLY RISING:

• U.S. District Court Judge for the Southern District of New York Katherine B. Forrest argued that defining competition in an era of big data must “includ[e] freedom from unreasonable manipulation of captive data sets,” and not fixate solely on price and output effects. Judge Forrest gave the Milton Handler Lecture to the New York City Bar Association on May 16, 2018 titled “Implications of Big Data for Competition Policy and Practice.”

• The cities of Mountain View, Cupertino, San Francisco and East Palo Alto are all considering new taxes aimed at the big tech companies headquartered within their borders. Their efforts, patterned after Seattle’s successful passage of a $50 million annual tax on big employers including Amazon, could help the cities better answer the inequality, homelessness, and infamously high housing costs that have accompanied the growth of companies like Google, Facebook, and Apple.

WHAT WE’VE BEEN UP TO:

• Open Markets participated today in the Department of Justice’s Antitrust Division roundtable on the “consumer costs of anticompetitive regulations.” Open Markets pointed out that regulations can in fact promote competition, and that fixating on public regulations risks overlooking the anticompetitive harms that can result from private regulation. You can read the full letter here.

• Lina Khan was quoted in a Vox article, “Trump’s Trying to Fight Amazon and Jeff Bezos from the White House.” She points out that Amazon’s central role in today’s economy presents a serious political question: “If Jeff Bezos wants to tax all of our economy, are we okay with that?” Read her groundbreaking Yale Law Journal article on the subject here.

• Barry Lynn worked extensively with CBS on the 60 Minutes report,”How Did Google Get So Big?,” which aired on Sunday, May 20. The report covered how Google wields enormous power over the internet, and how European, not American, antitrust enforcers have taken the lead in addressing the giant’s power thus far.

• Kevin Carty‘s article from a March Food & Power was quoted in EcoWatch‘s criticism of the 2018 Farm Bill. Carty pointed out that lax antitrust enforcement helped prompt the rise of giant agribusinesses.

• Lina was quoted in Wired‘s article reporting on the Supreme Court’s decision in Epic Systems v. Lewis, which held forced arbitration in employment contracts to be enforceable. She pointed out that the decision encourages all corporations to require forced arbitration clauses in their employment contracts since those that don’t “will now be at a competitive disadvantage.”

• Lina was interviewed by Derek Thompson for his “Crazy/Genius” podcast. She argued alongside NYU professor Scott Galloway that Amazon’s low prices can still exist alongside anticompetitive practices.

Powerful Retailers Drive Down Wages at Their Suppliers, New Study Shows

A series of recent studies have shown that concentration in labor markets can have a huge effect on workers’ earnings, depressing wages by 20 percent or even more (as we previously reported), In a recent publicationfor the American Sociological Review, Nathan Wilmers, an incoming assistant professor of work and organizations at the Massachusetts Institute of Technology’s Sloan School of Management, found that extreme concentration of power in giant retailers such as Walmart and Amazon can end up driving wages down not only among retail and warehouse workers – as the other recent studies suggest – but also at the corporations that supply the goods these giants sell.

As a whole, wage growth in the 1979-2014 period was anemic and much lower than wage growth in the 1955-1978 period. Wilmers estimates that roughly 10 percent of the stagnant wage growth in the recent period can be attributed to increased buyer power over suppliers. He cautions that researchers have not fully disaggregated the effects on wages due to globalization, technological change, and diminished union power from the effects that derive from increased concentration over markets for labor and products. But, he writes, “the effects of buyer power appear large enough to have made a substantial contribution to wage stagnation since the 1970s.”

Looking at data from Securities and Exchange Commission filings from 1978 to 2014, Wilmers found that intermediary or supplier companies – including manufacturing, wholesale, transportation, and resource extraction – have generally become more reliant on one or a handful of corporate buyers. Wilmers also found that the longer a supplier depends on large buyers, the greater their workers’ wages will tend to fall.

Open Markets recently spoke with Wilmers about his study.

OMI: What are the basic mechanics of how concentration among buyers results in lower workers’ wages in the companies that supply them? 

Wilmers: There’s a few things going on here. One part of the effect is due to basic dependence, where if a given supplier is heavily reliant on one or a small number of large buyers for sales, those buyers are going to be able to pressure the supplier companies to lower prices, which results in pressure to lower pay for workers at those suppliers.

But I also think that these buyers tend to have what I call social distance from their suppliers’ workers. If you think about a direct manager of workers, they’re interacting every day and there’s some sort of social tie there that would make it harder to cut wages, for instance. But these large buyers aren’t interacting directly with workers at their suppliers, so I think they’re more able to impose cost cutting.

OMI: In what industries do we tend to see dangerous concentration of power among buyers?

Wilmers: It’s actually not big manufacturing companies that have been growing since the early 1980s. It’s these large retailers, like Walmart, Amazon, and others, that are contracting with a ton of different suppliers and trying to impose a lot of price pressure. I also see some increase in technology companies on the buyer side. These companies don’t do a lot of manufacturing or other services in-house so they then contract with suppliers for those services.

When I first started this project I was thinking mostly in terms of these big manufacturing companies, and I think that was a lot more true in the early ’80s, where my data starts, than it is now, where it’s these big retailers that are important.

 WHAT WE’RE READING:

• “What the Microsoft Antitrust Case Taught Us,” (The New York Times, Sen. Richard Blumenthal and Tim Wu): Connecticut Senator Richard Blumenthal and Columbia University law professor Tim Wu compares the late 1990s’ Microsoft antitrust cases to today’s tech giants, both for the corporations’ popularity and the free nature of their products. The two ultimately argue that addressing today’s tech giants’ power requires a courage akin to that of the late 1990s enforcers.

• “Killer Acquisitions,” (Working paper, Colleen Cunningham, Florian Ederer, and Song Ma): A new working paper written by researchers from the Yale School of Management and the London Business School finds that pharmaceutical corporations with market power “acquire innovators to terminate competition and as a consequence inhibit technological progress.” How much? They find that such “killer acquisitions” make up at least 7 percent of all pharmaceutical acquisitions and leave society with 5 percent fewer new drugs.

• “Financing Dies in Darkness? The Impact of Newspaper Closures on Public Finance,” (Working paper, Pengjie Gao, Chang Lee, and Dermot Murphy): The decline of local newspapers has long been lamented as bad for democracy. A new study from researchers out of the University of Notre Dame and the University of Illinois at Chicago quantifies some of the specific social and political ills that derive from the decline of newspapers, and argues that the closure of local papers can increase local communities’ borrowing costs by .05 to .11 percent. Such a difference, when spread over large borrowing amounts, can represent significant costs to municipalities. One reason for the increase, the authors theorize, is that the loss of local newspapers makes it easier for shoddy local governance to go unchecked.

Momentum Builds for Using “Single Price” System to Counter Hospital Monopolies

A recently published and widely noted study provides fresh evidence of how monopoly is driving up health care costs. The Commonwealth Fund-backed paper finds that hospitals with major local market shares charge commercial insurers and their customers prices that are about 12.5 percent higher than prices charged by hospitals with four or more local competitors. The study also found that hospitals that have monopolized local health care markets are generally able to resist pressure from insurers to cut back on unnecessary treatment, thereby driving up even further the cost of treatment by these institutions.

Indeed, the study showed that the role of monopoly is so profound that often patients are charged radically different prices for receiving the same treatments even within the same hospital; it all depends on whether a patient’s insurance company is consolidated enough to match the market power of the hospital. In short, the cost of health care has little to do with its quality or cost-effectiveness, and a lot to do with power.

One of the study’s authors, Zach Cooper, an assistant professor of public health at Yale, says that preventing further hospital mergers would help limit the problem, but warns that the industry is already so consolidated that there are limits to this approach, at least in the near term.

As readers of this newsletter will remember, Open Markets policy director Phil Longman, in a recent Washington Monthly article with Paul Hewitt, proposed managing hospital monopolies through “single-price” health care. The basic idea is simply to require all health care providers to charge all patients the same prices for the same treatments based on the rates that Medicare currently pays. In their article, Longman and Hewitt calculated that such an approach, if implemented today, would save the median-income family of four about $9,000 over the course of each year.

In the two months since Longman and Hewitt published their article, the idea of such “single-price” health care has gained strong support, both in the press and on Capitol Hill. Washington Post columnist Robert J. Samuelson in early April published a column that pointed to the Longman-Hewitt plan, and concluded, “There’s a genuine solution to our health-care problem.”

Then on Sunday, May 13, the Urban Institute released a reform plan that takes a similar approach. It would provide coverage to nearly all legal residents of the United States, but unlike Medicare-for-all or other “single-payer” plans, no huge tax increases would be needed. Rather the cost of the program would be largely financed by distributing the savings achieved by imposing Medicare rates across the board. The Washington Post responded to the Urban Institute study with a long editorial the next day endorsing this approach.

This past week, Senator Bill Cassidy of Louisiana, who is a medical doctor, released a paper titled “Ideas to Make Health Care Affordable Again.” Although Cassidy did not directly advocate “single-price” health care, he did call for requiring all hospitals to publish the prices of all elective procedures in the name of “price transparency.” Such an approach, Cassidy wrote, “will lower costs, reduce pricing variation between providers, improve quality, and return power to the patient.”

During previous eras of our history, Americans frequently turned to systems of price standardization to tame various types of monopoly. This includes using the Interstate Commerce Commission to set railroad ratesand state-level utility commissions to contain the monopoly power in electricity generation.

VITAL STAT: 78%

The percentage of small business owners who “believe some regulations are important to protect small business from unfair competition and to level the playing field with big business,” according to a poll released last Tuesday from the Small Business Majority.

 WHAT WE’RE WATCHING:

• Sign of the Times: On Tuesday, June 12, Senior District Judge for the District of Columbia Richard J. Leon will rule on the merger of cable and internet service provider AT&T with content provider Time Warner. We’re watching to see if Judge Leon will recognize the harms that vertical integration can pose to subscribers, artists, and viewers.

• The Swamp Gets Swampier: Last Thursday, T-Mobile revealed that former Trump campaign manager Corey Lewandowski “offered perspective to T-Mobile on a variety of topics, including” their recently-proposed merger with Sprint as a part of working with lobbying firmTurnberry Solutions. T-Mobile’s disclosure comes after AT&T was found to have paid Trump lawyer Michael Cohen for “insights”into the administration while the corporation was seeking approval for its acquisition of Time Warner.

• More Money, More Mergers: The Wall Street Journal reported that American banks are offering corporate borrowers easier terms and lower interest rates in the hopes of bringing in more business amidst a slowdown of corporate lending growth. But this trend could have the effect of encouraging more consolidation, as corporations take advantage of the cheap money to finance more mergers and acquisitions.

Save the Date: On Tuesday, June 12, Open Markets is hosting an all-day event, “Breaking the News: Free Speech and Democracy in the Age of Platform Monopoly,” at the Marriott Marquis in Washington, D.C. The guiding question will be: “How do we ensure that America’s journalists are fully independent, and that they are robustly supported to report the news, both nationally and locally, that is so vital to sustaining our democracy?” For those unable to attend, the event will be livestreamed on our website: www.openmarketsinstitute.org.

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