What Do We Do With A Drunken Market?

Much ado is being made these days about refined gas prices – and how its all Joe Biden’s fault. Only slightly less ado is being made about the US infant formula crisis and about the generally post-Covid inflationary trend.

And there is a need to deal with these things, as they are having real, financial and psychological impacts in parts of the US, even as economic factors show few signs of abating in a way that would indicate people actually care. They also carry outsized political danger for democrats heading into mid-terms and state elections, despite the fact that the economy is actually doing relatively well – unemployment is back at pre-pandemic levels; wages have grown; the Consumer Confidence Index remains above where it was during the pandemic, but it declining slightly.

The thing is, however, this is entirely what today’s laissez faire market capitalistic consumption economy was designed to do. Take the baby formula shortage – there are 4 companies in the US producing 90% of the baby formula consumed here. One of those companies had to shutter a plant in February because it failed FDA inspections that were designed to ensure safe production. That plant is only now restarting, and apparently grudgingly because Abbot Labs seems to have thought the bottom line cost of dragging out compliance was worth it.

We got into that pickle because

The US’s industrial concentration problem isn’t anything new. The economy is at least 50% more concentrated now than it was in 2005, according to the Herfindahl-Hirschman Index, a commonly used measure of industry concentration. That means a smaller group of companies control the lion’s share of their respective sectors.

https://www.businessinsider.com/inflation-outlook-monopolies-industry-concentration-boosting-prices-boston-federal-reserve-2022-5

Meaning that US regulators, backed by Congresses and White Houses of both parties have allowed mergers to go forward that throttle competition and thus set the economy up for larger and larger failures due to smaller and smaller perturbations – and Covid was not a small perturbation.

Railroads are another industry where consolidation is now coming back to bite the US economically. Since 1970, the US Railroad industry has merged itself down to 5 American controlled class 1 railroads, with two Canadian companies owning large portions of what used to be American rail lines. Now one of those Canadian giants – Canadian Pacific (CP) is in merger discussions to buy up Kansas City Southern, all while the Surface Transportation Board is under enormous political pressure from other industries that use rail shipping to improve on time delivery rates and reduce shipping costs. Set against a back drop of 30 years of cutting labor by the Class 1’s as they merged themselves into their mega route status with the support of the government.

So what should we as a nation do to both alleviate the economic pressure and keep our business sector thriving?

The problem is in the question itself, most notably because businesses have decided that their fiduciary duty to investors to maximize profits quarter over quarter trumps any other concern – including long term survivability. For the railroads cited above, this has meant impossible to deal with schedules for employees that arise from significant slashing of labor over the years to “boost” bottom lines. Having cut themselves to the point they can’t get people to hire on as demand increases, rail carriers are now lobbying the STB to go to 1 person crews (down from the current two) to spread an already thin labor force thinner. Yet the railroads aren’t likely to change their approach to labor since their decisions to date have led to ever higher stock prices and thus ever higher dividends.

Likewise, Abbot Labs has been working with the FDA to reopen its Michigan plant, but had no back up capacity to fulfill orders because maintaining that capacity would have been expensive, and likely taken a bite out of Abbot’s profits that was equal to or greater then the bite taken by being closed for three months. In otherwords the economic incentives to do things right and prevent the need for a shut down didn’t exist.

And there’s the rub – we can’t mandate competition, and no politician these days will work to reinstate legislation meant to prevent monopolies (like Glass-Steagall). Even after the Great Recession, we as a nation have continued to socialize risk but privatize reward. Frankly, until politicians are feeling the heat from voters for inflation they are unlikely to act, and voters – ever capable of making snap decisions lacking in nuance (much less understanding)- are unlikely to elect those willing to actually do anything.

Which means that for the foreseeable future we are subject to the whims of a market economy drunk on its own success. Lets hope it sobers up soon.