What are the superstar firms adding to the American economy?

By Scott Benjamin

1999: From New York Times columnist Thomas Friedman's "The Lexus And The Olive Tree" (Farrar Straus and Giroux, 394 pages): "Whereas the Europeans and the Japanese believe in the state exercising power over people and markets, the U.S. believes in empowering people and free markets. This is the model that the rest of the world is being asked to emulate."

2019: From New York University Finance Professor Thomas Philippon's "The Great Reversal" (The Belknap Press, 343 pages): How America Gave Up On Free Markets : "American markets, once a model for the world, are giving up on healthy competition. Sector after economic sector is more concentrated than it was twenty years ago, dominated by fewer and bigger players. . . lobbying and campaign contributions have defanged antitrust regulators. . . Europe - once dismissed for competitive sclerosis and weak anti-trust - is beating America at its own game."

When Friedman wrote "The Lexus And The Olive Tree," Google was less than a year old, Apple's iPhone was eight years from going on the market, Facebook didn't exist and Amazon had only gone public two years earlier, and it had only been just three years since Microsoft released a version of its operating system meant for tiny computers.

Twenty years later, Philippon devoted a chapter "The Great Reversal" to the the GAFAMs - Google, Amazon, Facebook, Apple and Mircosoft.

He wrote, "What everyone seems to agree on, however, is that these companies are fundamentally different, and that the old rules of capitalism simply to not apply to them. Is that really true?"

Philippon answered, "The GAFAMs have extremely high profit margins, but so did many stars in the past"- such as General Electric, IBM, General Motors and Exxon.

"Today's superstar firms hire less and buy less from the rest of the economy compared with earlier decades.," he continued "Therefore, their stimulus for the rest of the economy is less. Since the 1950s, the share of employment represented by the five largest companies has dropped from 2.59 percent to 0.49 percent."

"Facebook, Apple, Google and Microsoft are smaller than the star companies of previous decades," wrote Philippon. "When their productivity increases it has less of an effect than a similar productivity increase at GM once had."

He stated that in 2017 Apple had a profit margin of 25 percent but in the 1960s and 1970s IBM had the same profit margin and AT&T had an even higher profit margin for 30 years.

"Facebook hires only highly skilled workers and builds everything in house," Philippon wrote. "It buys essentially nothing from other firms."

However, Robert Conrad stated in National Review: "When he [Philippon] claims that Google doesn't significantly increase productivity because its search engine doesn't employ many workers, he is pointing at the tail instead of the dog."

Phillipon explained, "In some respects, Amazon is quite different from the other four companies. Amazon has many employees, including blue-collar workers, and it does a significant amount of tangible investment."

He continued, "Is Apple's market value really unprecedented ? No Apple might be almost three percent of the market, but IBM was more than three percent throughout the 1980s, and Exxon/Mobil was 25 percent in the 2000s."

Robert Samuelson, the Washington Post economics columnist, wrote last year that, "What has changed, Philippon says, are corporate taxes. As late as 1980 they were about 50 percent, he says.. Now they're around 20 percent. The result is that although pre-tax profitability is stable, after-tax profits have risen."

Philippon stated, "The profit margin of Apple was 25 percent in 2017, but IBM had the same margin in the 1960s and 1970s, and AT&T had a higher average margin for thirty years. The stars make money ; that's why they're stars. But the stars of today are not making much more than the stars of the past. They just keep more of it."

"If there is one lessen that economic history teaches us, it is that great companies need to be challenged (and this one applies to all of the GAFAMs, Amazon included)," he declared." We need to bring in more competition. The problem in the case of the internet firms is to find the right tools to do so."

U.S. News reported last year: "A growing number of lawmakers and some Democratic presidential candidates are talking about tighter regulation of a customarily freewheeling industry or even breaking up the companies."

Philippon stated in his book that America was the model for free markets when he arrived from France in 1999 to being his doctoral studies at the Massachusetts Institute of Technology, but by 2019 even in New York City there were only two Internet providers to choose from and nationwide there are only four domestic airlines.

In criticizing Philippon's thesis, Conrad added, "Aside from the slow-growing automobile sector, America's 200 largest companies are investing twice as much in research and development as their European counterparts. The U.S. economy is investing nearly 25 percent more in tangible assets, such as software and training than Europe."

Also, in 2005, Friedman told us the world as a had changed as a result of the digital transformation ("The World Is Flat", Farrar Straus and Giroux, 488 pages).

However, University of California at Berkeley Economics Professor Enrico Moretti proclaimed in 2012 that as a result of the Internet the place to live wasn't just wherever you like, but in the innovation hubs (The New Geography of Jobs," Mariner Press, 304 pages).

He stated that the prime hubs - Silicon Valley, Seattle, Austin, the North Carolina Research Triangle and the Massachusetts Route 128 Corridor were not only attracting the millenials but for every innovation position there was up to five other jobs being created in the local economy.

Moretti exclaimed that the innovation hubs are attracting the best talent and the highest salaries and that there is a spillover impact.

On the book jacket, Moretti declared, "It shows that you don't have to be a scientist or an engineer to thrive in one of the [innovation] brain hubs. Carpenters, taxi drivers, teachers, nurses and other service jobs are created at a ratio of five-to-one in the brain hubs, raising salaries and standard of living for all."

In a review, NPR's Here and Now stated: "Friedman's argument (was) that the world is flat, and where you lived didn't matter, because with e-mail, cell phones and the Internet, you could do business all over the world. . .Moretti pretty much says, 'That is 10 years ago.' In fact, Moretti says the opposite has happened. There's a sea change going on, a redistribution of population and wealth fueled by innovative companies that need to be in ecosystems to thrive."

Moretti also noted that Bill Gates and Paul Allen established Microsoft in Albuquerque, New Mexico and when it struggled they decided to move operations to Seattle, where they had lived previously. About 15 years later, Jeff Bezos, who had lived in Albuquerque as a youngster, decided to build Amazon in Seattle since that where the brain hub talent was located.

Former Democratic President Barack Obama wrote that Moretti's book represented, "A timely and smart discussion of how different cities and regions have made a changing economy work for them and how policymakers can learn from that to lift the circumstances of working Americans everywhere." .

Former Democratic presidential candidate John Delaney wrote in his 2018 book, "The Right Answer" Henry Holt & Co., 240 pages), that the gap between the rich and poor is wider than ever.

The prominence of the innovation hubs may at least partly explain why that gap is widening.