The U.S. Only Pretends to Have Free Markets

The U.S. Only Pretends to Have Free Markets. By Thomas Philippon.

When I arrived in the United States from France in 1999, I felt like I was entering the land of free markets. Nearly everything—from laptops to internet service to plane tickets—was cheaper here than in Europe.

Twenty years later, this is no longer the case. Internet service, cellphone plans, and plane tickets are now much cheaper in Europe and Asia than in the United States, and the price differences are staggering. In 2018, according to data gathered by the comparison site Cable, the average monthly cost of a broadband internet connection was $29 in Italy, $31 in France, $32 in South Korea, and $37 in Germany and Japan. The same connection cost $68 in the United States [or Australia!], putting the country on par with Madagascar, Honduras, and Swaziland. …

None of this has happened by chance. In 1999, the United States had free and competitive markets in many industries that, in Europe, were dominated by oligopolies. Today the opposite is true. French households can typically choose among five or more internet-service providers; American households are lucky if they have a choice between two, and many have only one. The American airline industry has become fully oligopolistic; profits per passenger mile are now about twice as high as in Europe, where low-cost airlines compete aggressively with incumbents.

This is in part because the rest of the world was inspired by the United States and caught up, and in part because the United States became complacent and fell behind. In the late 1990s, legally incorporating a business in France took 15 administrative steps and 53 days; in 2016, it took only four days. Over the same period, however, the entry delay in the United States went up from four days to six days. In other words, opening a business used to be much faster in the United States than in France, but it is now somewhat slower.

The irony is that the free-market ideas and business models that benefit European consumers today were inspired by American regulations circa 1990. Meanwhile, in industry after industry in the United States — the country that invented antitrust laws — incumbent companies have increased their market power by acquiring nascent competitors, heavily lobbying regulators, and lavishly spending on campaign contributions. Free markets are supposed to punish private companies that take their customers for granted, but today many American companies have grown so dominant that they can get away with offering bad service, charging high prices, and collecting, exploiting, and inadequately guarding their customers’ private data. …

Instead of debating more regulation versus less — as ideologues on the left and right tend to do — Americans should be asking which regulations protect free markets and which ones raise barriers to entry.

Creeping monopoly power has slowly but surely suffocated the middle class. From 2000 to 2018, the median weekly earnings of full-time workers increased from $575 to $886, an increase of 54 percent, but the Consumer Price Index increased by 46 percent. As a result, the real labor income of the typical worker has grown by less than one-third of 1 percent a year for nearly two decades. This explains in part why much of the middle class distrusts politicians, believes the economic system is rigged, and even rejects capitalism altogether. …

In my research on monopolization in the American economy, I estimate that the basket of goods and services consumed by a typical household in 2018 cost 5 to 10 percent more than it would have had competition remained as healthy as it was in 2000. Competitive prices would directly save at least $300 a month per household.

And this figure captures only half of the benefits that increased competition would bring. Competition boosts production, employment, and wages. When firms face competition in the marketplace, they also invest more, which drives up productivity and further increases wages. Indeed, my research indicates that private investment — broadly defined to include plants and equipment, as well as software, research and development, and intellectual property — has been surprisingly weak in recent years, despite low interest rates and record profits and stock prices.