The Size Question
By Doug Henwood
A few weeks ago, I got a call from a guy who tries to get leftish pundits into the Rolodexes of mainstream journalists. What, he wondered, did I think of the Chase-J.P. Morgan merger?
I knew what I was about to say wasn’t what he wanted to hear, but I couldn’t stop myself. It went something like: "I just don’t see how it matters that much. Two big banks join and become a bigger bank. So what? It’s long been an article of faith across most of the American political spectrum that fragmented finance is a good thing. Where’s the proof? We’ve got the most unequal distribution of income in the First World–and the most fragmented financial system. I’m not saying that concentrated finance is good in itself, but maybe we should think twice about whether fragmented finance is all that great." Needless to say, this opinion wasn’t circulated any further than our phone call.
I don’t mean to single out my questioner for criticism or abuse; I like him a lot personally, and he does good work. Nor do I want to argue that the left is uniquely prone to policing its ideological perimeters; I doubt the Heritage Foundation would want to circulate the name and opinions of a pundit who embraced same-sex marriage or a steeply progressive income tax. But the whole "small good, big bad" thing, and not just in finance, is badly in need of a rethink.
Let’s start with finance. Almost from the first, Americans have believed that it was best to keep banks from getting too big. There were all kinds of restrictions on branching across state lines–even county lines, in some states. And the proliferation of banks through the 19th century–many of them run by provincials, incompetents and even criminals–helped contribute to the intense instability of the late 19th century: of the 46 years between 1854 (when the official stats begin) and 1900, almost 20 were periods of panic or depression (19 years and eight months, to be precise).
During the 1930s, further restrictions were placed on finance, keeping commercial and investment banks apart, and keeping banks of either kind from owning industrial enterprises. This was supposed to foster stability and keep wealth from becoming too concentrated. Financial life after the 1930s was indeed a lot more stable than before, though this probably had more to do with better regulation, smarter central banking and higher government spending than it did with having a fragmented financial system. But it’s hard to argue that the financial structure contributed to a more egalitarian distribution of wealth and income. The U.S. has long had a very lopsided distribution, far more polarized between rich and poor than our rich industrial peers, most of which had (and have) far more concentrated financial systems than ours. Canada is financially dominated by a handful of national banks, and stock ownership is concentrated in relatively few hands. In Germany, controlling stock positions in big companies are usually held by a handful of giant banks.
This structure of American finance is closely related to the way our corporations are owned and run–with relatively numerous and dispersed shareholders rather than concentrated ownership by big banks. Paradoxically, it’s that very dispersion that increases the owners’ influence. American managers are under tremendous pressure to get the stock price up–it’s the prime directive of their work lives, in fact. But it’s hard to blame anyone for this arrangement: it’s just The Market making them downsize, outsource and speed up. In countries with more concentrated systems, unions or progressive governments know exactly who’s pulling the strings. It’s no accident, as the vulgar Marxists used to say, that the architects of the European economic union, who’d dearly love to create a more U.S.-style labor market (meaning lots of people more tenuously employed at lower wages), want to create U.S.-style financial markets and ownership structures. It’s surprising how few people have figured this out yet.
But it’s not just finance where bigness isn’t so bad. People across the political spectrum love to romanticize small business as a font of jobs and innovation. In fact, small business doesn’t create jobs as prodigiously as the cliches would have it. The share of the workforce employed at small firms has barely budged over the last two decades; if small firms had been a great source of job creation, their share should have increased. In general, smaller firms innovate less, pay less, are less likely to offer fringe benefits and are more dangerous places in which to work than larger ones. Larger firms are easier for governments to regulate and for unions to organize. Just ask anyone working for the greengrocers on the Lower East Side, or any of the union people trying to organize them, about the beauties of small, locally owned enterprises.
And it’s not just business either. People across the political spectrum, including quite a few leftists, tout the virtues of decentralized government. For a country that professes to hate government, we sure produce lots of them: at last count, the U.S. had more than 87,000 governmental units. It’s hard to say that this has resulted in a great popular democracy: we have one of the most alienated and politically disengaged populations in the civilized world. What it has produced, though, is a wondrous competition among jurisdictions to see who can offer the biggest tax breaks and infrastructure subsidies to businesses who masterfully play one city or county against another. Business lobbyists and their wholly owned politicians understand this very well; it amazes me that lots of people who’d consider themselves the political enemies of such interests don’t seem to.
I think the underlying problem is that people on the left haven’t thought through their position on competition. You often hear people like Ralph Nader–whom I admire in lots of ways, enough to vote for, don’t get me wrong–talking up the need for more competition. Smaller units, whether they’re banks, businesses or governments, tend toward increased competition, and competition is a relentless disciplinarian that forces participants to cut costs or offload them onto somewhere else. It encourages the war of each against all rather than a more cooperative, collective spirit.
Big doesn’t have to be beautiful, but small can get really ugly.
(Doug Henwood edits Left Business Observer. His book, A New Economy?, will appear late this year from Verso.)
Carl
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