In the introduction to his new book, The Great Reversal, economist Thomas Philippon tells a wonderful story about landing in Boston in 1999 as a native of France, eager to start his Ph.D. program in economics at MIT. After finding a place to live and taking care of the basics, he goes to buy a laptop and is delighted to find that computers in the U.S. are at least 30% cheaper than in France. Internet connections too are surprisingly affordable. In 1999, the age of dial-up, connecting to the internet requires making a local call – and local calls in the U.S. are free, while in France, you’re charged by the minute. And then Philippon discovers that air travel too is much cheaper than in Europe – so much so that he actually can afford to fly as a student. Together, Philippon’s experiences affirm that the U.S. is a land of free markets where healthy competition makes consumers big winners.
But according to Philippon, something has changed in the intervening decades – something profound and alarming. In the last 20 years, internet access, plane tickets, and cell phone plans have become much cheaper in Europe and Asia than in the U.S. What’s more, this has happened because the U.S. has allowed its industries to become dominated by a handful of powerful players who feel little incentive to lower prices or raise quality. Surprisingly, it is Europe that has fostered more competitive and freer markets.
This is the “Great Reversal” of Philippon’s book. It also is a great irony. The U.S. always has been the world’s champion of free markets. It invented modern antitrust laws in the late 19th century. It spread its free-market doctrine around the globe – and its economic strengths demonstrated why it worked. And yet, according to the book, something started changing around the year 2000. American consumers — once the globe’s winners — are now its losers.
Take broadband internet access. In 2017, the U.S consumer paid nearly twice as much as the average price around the world. How is it that the average American pays $66 monthly for broadband when a South Korean pays $30, and in France of all places, the price is $38? (Korea I get, but France?) Moreover, most Americans can choose from two internet providers at most, while in France, the average number of choices is seven. That means that not only is price better in France, but quality is too.
Or take air travel. U.S. consumers enjoyed a big win when the airlines deregulated in the late 1970s. As new competitors entered the market, ticket prices dropped 8-11% over the next 15 years and air travel boomed. But more recently, consolidation has dramatically reduced the number of carriers and increased their pricing power. Philippon cites a 2017 Economist article about the lack of competition in American aviation hurting passenger experience. Fierce competition in Europe was spurring a fare war, but U.S. prices didn’t budge. And while European airlines could make a profit of $7.84 per passenger, the less competitive environment in the U.S. meant North American carriers could make $22.40.
So where is the outrage? You might argue that Americans are pretty outraged at airlines, but what about everything else? Why isn’t someone saying something?
One argument is that it’s been hard to notice the changes because they’ve happened so gradually over 20 years. We’re not the frog who knows it’s been placed in boiling water and jumps to safety. We’re the frog that’s unaware it’s slowly being warmed to a deathly temperature. The other reason more outrage isn’t expressed is that economic shifts like this always have winners and losers. Here the losers are consumers, who are many, dispersed, and difficult to organize. In contrast, the winners – the corporate giants – are few and have ample resources to organize vigorous lobbying efforts.
Because Philippon is well aware of the many possible counterarguments to his ideas, he takes a very data-driven approach. Data point after data point is presented, along with explanations on how profit margins, capital investment, wages, and productivity work into his story. In the end, he presents a very convincing argument that for many reasons, the American consumer today is worse off, corporations are better off, and none of this is good for overall economic growth.
The book is worth the read – and a good one for non-economists. But if you don’t read the book, next time you buy something, think about how many choices you have and whether it’s you or the seller who has the power. In competitive markets, it may well be you, and you could get an “overprovision of quality” or a great price. But in cell phone plans, it’s definitely not you.