Right-Sizing American Capitalism

In 2006, 2008, 2010, 2014, 2016, and 2018, Americans voted to change their political leadership. Clearly, Americans are unhappy with our political and economic elite.It’s not hard to see why. Small business formation is down, income inequality is up. The heartland has been turned into a set of economic colonies whose wealth is moved to distant financiers. Our corporations, having been allowed to concentrate into monopolies, are now used against us to extract our wealth and constrain our liberties.This is the problem that entrepreneur and venture capitalist Nick Hanauer is trying to tackle with his latest policy proposals to restructure our corporate apparatus. It is a welcome moment for such ideas. How we engineer our markets is a question intimately tied not just to our economy, but to whether we have a democratic society.

Hanauer diagnoses our current malaise as emerging from our concentrated corporate institutions, in everything from airlines to search engines. This monopolization is relatively new. In the post-World War II “New Deal” era, American businesses largely operated in concert with social harmony, providing decent wages for workers and increasing broad prosperity. Today, they do not. Instead, we are in the ‘trickle-down era,” an age of terrible inequality, political chaos, and monopolization, the capture of market power by big business.

The problem, in other words, is bigness. With this line of thinking, Hanauer is in good company. Louis Brandeis made a similar argument in Other People’s Moneya century ago, and legal scholar Tim Wu’s new book, The Curse of Bigness: Antitrust in the New Gilded Age, is making it again.

Hanauer offers two policy solutions. The first is at the level of the worker. Americans are rightly afraid of being tossed into the unemployment heap, and this fear is useful as a leverage point for employers. So Hanauer’s plan names portable benefits, including health care, pensions, parental leave, and so forth. This is a social safety net organized not around stable corporate employment but the modern reality that people change jobs a lot.

His second set of reforms doesn’t operate at the level of the employee, but at the level of the employer, through what he calls “progressive labor standards.” He proposes that government regulations should discriminate between large and small businesses; the bigger and more powerful the company, the stricter the labor standard. A large company like Amazon can afford to pay a higher wage to its employees, whereas smaller competitors cannot. Companies should be regulated on a sliding scale. Hanauer doesn’t propose this as a substitute for aggressive anti-monopoly action, but a complement.

Discrimination based on size is already a potent part of the American political economy. Smaller banks have lower capital requirements than large complex ones, because they pose less risk to the economy. Small businesses have exemptions from the Affordable Care Act and the Family Medical Leave Act. And there are federal benefits that are ostensibly targeted to small businesses, often centered around the Small Business Administration and its various lending programs.

There’s a deep and rich history of discriminating in favor of the small. As an example, Hanauer cites progressive state taxes on chain stores in the 1920s and 1930s. These laws set tax rates based on the number of stores owned by a chain: the more outlets in a state, the higher the rate.

The chain store fight was fundamental to the development of the mid-century American capitalism that produced broad-based prosperity. As Harvard Business School professor Laura Phillips Sawyer argues in American Fair Trade, this movement against chain stores, or what was sometimes known as the “fair trade” movement, emerged out of the anti-monopoly tradition of nineteenth-century American merchants, who saw structuring fair business practices for smaller merchants as an important part of democracy.

In an important Supreme Court dissent in 1933, Louis Brandeis framed the point of these chain store taxes, which discriminated against the big in favor of the small businessman. Chain stores, as Brandeis put it, furthered the concentration of wealth and power, neglected small towns, and “thwarted American ideals.” It denied “equality of opportunity,” turned “independent tradesmen into clerks,” and sapped “the resources, the vigor, and the hope of the smaller cities and towns.”

Brandeis was arguing that the construction of market structures is a political act. Markets in which citizens were made free and independent are engineered to do so. Many of the greatest statesmen from the 1940s to the 1970s, like Harry Truman, Thurgood Marshall, and Harvey Milk, ran independent stores or had family members who did. Hanauer’s thesis, that we should discriminate against bigness and in favor of smallness, follows in this important American tradition.

Right now, American capitalism is tilted in favor of goliaths. Large companies have embedded market advantages for many reasons. One of them is sheer size, which can mean certain advantages related to scale, but more often means the ability to access capital. For example, large conglomerates like United Technologies have the resources to offshore production of cooling and heating systems. A strike against such power is pointless. Workers will go hungry, and United Technology executives would barely notice as their business is cross-subsidized from other factories and divisions.

Similarly, Amazon might be paying its warehouse workers $15/hour, but it also has the scale and capital to invest in technologies like tracking the movements of its employees and firing them via algorithm if they don’t move quickly or often enough. Large companies can systemically engage in wage theft, and use complex legal contracts like mandatory arbitration and non-compete agreements to discipline or threaten wayward workers. Smaller companies may or may not want to do this, but they have to focus on keeping their business going, not investing in deep control of their workers.

This is not just innate to size. There is policy behind the rise of giants. The thinking from the current policymaker establishment encourages bigness. The Department of Justice and the Federal Trade Commission, which are charged with reducing corporate concentration, instead attack cartels of smaller companies or even workers when those institutions attempt to stand up to monopoly. For example, in 2013, the Obama Department of Justice sued book publishers attempting to create a competitor to Amazon’s Kindle book reader. DOJ saw a monopolist, Amazon, and used the sword of antitrust to go after the companies Amazon was bullying. The FTC went after 1-800-CONTACTS for trying to organize against Google’s market power in the search advertising market. Corporate cartels aren’t necessarily good, but they are often a response to a monopoly elsewhere in a supply chain.

Sometimes our regulators can be downright cruel to the little guy. The FTC has sued Uber drivers, church organists, ice skating instructors, and music teachers for organizing as “cartels.”

When you peer behind the scenes, this pro-big, anti-small policy framework is explicit, and often bipartisan. Take Bush-era FTC Chairman Timothy Muris and Obama-era FTC official Jonathan Nuechterlein, who co-authored a paper earlier this year defending the legacy of the most important chain store of the 1920s and ‘30s, the A&P grocery chain. This paper was financed by Amazon; the argument was that bigness is a reflection not of market power, but of good management. This rationalization, that big is good, animates our regulatory establishment. Among today’s policymaking elite, a group of workers seeking to protect their modest income, or small businesses trying to sustain thin margins, constitutes “rent-seeking.” Massive monopolization, they believe, is just efficiency.

The notion that big is good, as opposed to just powerful, is silly. Anyone who has had to negotiate with a big company knows that large companies are often slothful bureaucracies, but they have and use market power to dominate nimbler and smaller fry. Bigger companies don’t always have better management, but they always have more lawyers.

This is not to say that we can have an economy made solely of small companies. Even in a society where we reduce our corporate institutions to their minimally necessary size, there will be big businesses due to technical or scientific inputs. A family can’t run a steel factory or a chemical plant. Still, it makes sense to politically distinguish size as potentially dangerous, the way we organize our thinking around other problems like pollution. Bigness is something we should try to limit.

Hanauer offers a number of different approaches for imposing higher regulatory burdens. One threshold would, naturally enough, be the size of the institution. Another could be market power or the extent of exploitation. He suggests, for instance, judging companies based on whether there’s a union, the difference between the pay of a poorly paid employee and the CEO, the extent to which the company’s employees use public assistance, or the concentration of its power in a specific market. One could also geography, or the extent to which the company is headquartered in the region. A local company will keep its profits in the local community, a sort of increase in regulations based on how extractive the institution is.

All of these make sense, though each carries a potential level of administrative complexity that might, in the wrong hands, engender barriers to reasonable commerce. A good way to avoid such complexity is to situate much of the policymaking in state and local hands, as it was done during the original chain store movement. Stacy Mitchell and Marie Donahue at the Institute for Local Self-Reliance offers one model for how to do this, in their staggering report on the prevalence of rapacious Dollar Stores spreading across poor urban and rural communities. If we can pair progressive labor standards with a renewed focus on supportive programs for small businesses, and an assertive anti-monopoly regime, we can restore healthy democratic communities.

Fundamentally this is a moment for big ideas, and Hanauer is looking in the right place for them. Like Elizabeth Warren’s recent proposals to give employees board seats on corporations as part of the chartering process, his ideas are targeting what progressives envision as political, which is the market structure itself.

In offering these proposals, Hanauer is recognizing that markets and corporations are socially engineered human institutions, and that re-moralizing our political economy is the essential path forward for Democrats. Fundamentally rebuilding our democracy means engineering our corporations and markets to enable the freedom of the producer from the domination by the monopolist or financier. And that means saying that, yes, there is a curse of bigness. And we are going to put rules on the big to address it.