A Little Competition Between Friends

The Pitch: Economic Update for February 29th, 2024

Friends,

Last week, Capital One announced that it was planning to spend $35.3 billion to buy Discover, which would result in one of the biggest credit card companies in the world. Discover is the 31st biggest financial institution in the nation and Capital One sits at number 12, so the merged company would likely wind up in the top ten largest financial institutions in the nation, too.

Senator Elizabeth Warren responded immediately, warning that the deal “threatens our financial stability, reduces competition, and would increase fees and credit costs for American families,” warning that ultimately the deal would “harm working people.”

Unlike many of the high-profile mergers that the Biden Administration has shot down or discouraged over the last two years, some experts argue this particular merger seems to be more likely to pass through regulatory scrutiny, in large part because the credit card space is still dominated by the Big Two — Visa and Mastercard — and some argue that the new Capital One-Discover merger would introduce competition into that duopoly.

But consumer advocacy groups still have some very valid concerns. Adam Rust, head of financial services at the Consumer Federation of America, told NBC News that “We should be worried about the functionality of the credit card market in general. This merger probably heightens that.” Jess Van Tol of the The National Community Reinvestment Coalition warned that “The deal also poses massive antitrust concerns, given the vertical integration of Capital One’s credit card lending with Discover’s credit card network.”

In general, the middle-out rule of thumb is that more competition is a good thing, and multi-billion dollar mergers are virtually always intended to stifle competition. Using even bigger rivals as an excuse to merge feels ultimately like a trickle-down shell game — fighting anti-competitive monopolies through further market consolidation doesn’t make sense. It’s hard to imagine a scenario in which consumers don’t pay more in fees if this merger ultimately goes through.

Meanwhile, another major merger — the proposed Kroger-Albertsons grocery store megachain, which would be the largest grocery merger in US history — was just challenged by the FTC, who argue that if allowed to close, the merger would “most likely result in higher prices for groceries for consumers and, with fewer supermarkets, reduce the ability for grocery-store employees to negotiate higher wages and better working conditions.”

The FTC aren’t the only ones claiming this deal will be bad for consumers and workers. In his monopoly-focused BIG! Newsletter, Matt Stoller reports that the discovery process has uncovered the fact that executives at both Kroger and Albertsons agree that the merger would raise prices and lower wages.

In internal emails, grocery store executives admitted that a prospective merger is “basically creating a monopoly in grocery…like AT&T and Verizon wanting to merge,” and that the resulting larger entity can “margin up” their prices. This is saying the quiet part loud — acknowledging that the merger would kill competition and allow the grocery giants to raise prices and shrink wages. The companies also acknowledge that even though they announced they would sell grocery stores in locations where Kroger and Albertsons overlap, they also engage in unethical behavior — overstuffing the stores with useless stock, failing to advertise or maintain the stores before the sale, and generally doing everything in their power to ensure that the grocery stores that they sell will close shortly afterward.

This is exactly the opposite of what Albertsons claimed in its statement announcing the merger, when they announced that the company “plans to invest in lowering prices for customers and expects to reinvest approximately half a billion dollars of cost savings from synergies to reduce prices for customers.”

But even more shocking was the fact that before the merger, Kroger and Albertsons were actively colluding in an effort to reduce wages, benefits, and bargaining power in their workers. Stoller writes:

The Colorado Attorney General Phil Weiser published evidence in his complaint that the two firms routinely colluded to not hire each other’s workers in order to suppress wages and break their unions. This dynamic was particularly bad in early 2022, when unionized workers at a Kroger supermarket chain, King Soopers, went on strike after their contract expired. And let’s be clear, these firms hate unions. Kroger executives, for instance, had previously considered “closing” unionized stores in Washington state “for a period of time to make them nonunion.”

Why didn’t Kroger shut down union stores temporarily? The answer is competition. If they had done so, rivals would have taken their customers

A different path, rather than shutting stores, was to work with a rival to collude against workers, which is what Albertsons and Kroger did. And there are emails. This isn’t surprising, though it’s always shocking to read stuff this blatant. On January 9, 2022, the SVP of Labor Relations at Albertsons, Daniel Dosenbach, wrote his counterpart at Kroger, Jon McPherson, who was the VP for Labor & Associate Relations at Kroger, and pledged not to hire any striking workers.

All of this evidence flies directly in the face of public statements that Kroger and Albertsons made when they announced the merger. Which leads me to wonder: What are executives at Capital One and Discover saying to each other right now that they haven’t put in their public-facing statements? What were they saying to each other a year ago? And given this mountain of anti-competitive evidence from the Kroger and Albertsons deal that has just come to light, why on God’s green earth would we ever take Capital One and Discover at their word about their merger?

The Latest Economic News and Updates

How Are Americans Feeling About the Economy?

This week, let’s begin by checking in on the economic health of Americans. After four months of big gains, consumer confidence dipped again, according to Josh Schaefer at Yahoo Finance. “Notably, consumer worries in February were less about how much they’re paying at the gas pump or the grocery store but were more focused on recent headlines highlighting an uptick in white-collar layoffs and an increased focus on the looming presidential election,” he writes.

Self-reported figures are always tricky — especially in hyper-polarized times like 2024. And that’s why I prefer looking at actual behavior (are consumers still spending money? Yes, they are) over people’s feelings. But consumer spending is such an overwhelmingly important part of the economy and consumer sentiment does impact how people spend so it’s important to watch it — even if it can be misleading. What are the biggest problems facing individual Americans right now?

For one thing, food prices are taking up more of our paychecks than at any point in the past three decades. While food manufacturers are finally slowing down their regime of price increases, Americans are still experiencing sticker shock when they visit the grocery store or order food in a restaurant.

For another thing, household savings are way down from the peak of the pandemic, though Americans have more savings than they did before March of 2020. And low-income families saved a lot of money during the pandemic thanks to government stimulus programs, which makes the return to normal savings feel especially acute.

But as I’ve been saying for months now, the single biggest price pressure on Americans is housing, and though economists have promised that home prices and rents will level any minute now, the fact is that housing prices are still on the rise, though not nearly at the speed and heights we saw last year. Business Insider reports, “The Federal Housing Finance Agency on Tuesday said home prices climbed 6.5% year-over-year in the fourth quarter [of 2023,] up 1.5% from the third quarter, and up 0.1% on a seasonally-adjusted basis in December compared to November.”

And here’s where I have to repeat myself again: The best way to bring down home prices would be for the Fed to lower interest rates and make mortgages more affordable. Doing so would loosen up the housing market and make more homes available to buy. RIght now, an uncountable number of Americans would like to move, but aren’t interested in locking in a mortgage at the high interest rates that the Fed has ramped up over the last three years. We do also need policy solutions to build more affordable housing virtually everywhere in the country, but the Fed has the fastest potential solution to the problem of high housing prices that are dragging down the American consumer.

A Cure for Greedflation?

“A measure of inflation closely watched by the Federal Reserve continued to cool on an annual basis in January, the latest sign that price increases are coming back under control even as the economy continues to chug along,” writes Jeanna Smialek at the New York Times.

“After stripping out food and fuel costs, which can move around from month to month, a “core” price index climbed 2.8 percent from January 2022. That followed a 2.9 percent December reading,” Smialek added. But the signals weren’t all green: “Still, the closely watched core measure climbed more quickly on a monthly basis: It picked up by 0.4 percent, quicker than a 0.1 percent December pace.”

As to be expected, trickle-down economist Larry Summers responded to reports that inflation ticked up with his usual blend of made-up percentages and proclamations of potential doom.

In his most recent column, Nobel Prize-winning economist Paul Krugman explains why he doesn’t believe that January’s inflation reports were anything more than a blip on the path to recovery. He points out that Goldman Sachs accurately predicted this bump in inflation, which happened because “there is a ‘January effect’ on prices, because many companies raise their prices at the beginning of the year. And Goldman argued, in advance, that the official numbers wouldn’t be sufficiently adjusted to reflect this effect, leading to a spurious bump in measured inflation — a bump that will vanish in the months ahead.”

Krugman sums up his debunking of the doomsayers: “Despite some disappointing numbers last week, the basic narrative hasn’t changed. The U.S. economy continues to look like an amazing success story.” And in a quick blog post on Friday of last week he notes that grocery prices — one of the biggest complaints for working Americans — have largely leveled off:

And Americans’ understanding of what is causing those price increases is evolving. Navigator Research has found that the number of Americans who think greedflation is a major factor in rising prices has grown by 15% since January of 2022. In fact, now 84% of all Americans believe that corporations raising profits higher than costs is a cause of inflation.

I’m not sure if anyone is tracking Americans’ feelings toward the CEOs of large corporations, but anecdotal evidence suggests that corporate executive approval ratings are in rapid decline. For instance, the Guardian’s Ramon Antonio Vargas writes that Gary Pilnick, the “multimillionaire chief executive officer of the US food processing giant Kellogg’s has drawn scorn from some quarters after recently suggesting that families with strained finances could cope by eating ‘cereal for dinner.’”

And as the social network Reddit approaches its initial public offering, reports show that the company lost a little over $90 million last year, while in the same year Reddit CEO Steve Huffman received a salary of $193 million. You’re reading that right: the CEO’s annual pay is more than double the company’s losses in 2023.

At the same time, fast food chain Wendy’s has been roundly criticized online for suggesting that it might adopt a “surge pricing” model that would raise the price of items like burgers, fries, and chicken nuggets when they are most popular during the day, and lower the prices when demand decreases. The backlash was so strong that Wendy’s almost immediately announced it was no longer pursuing a surge pricing model.

Outrage is a totally normal and acceptable response to this kind of out-of-touch behavior from people who are supposed to be the leaders of the business community, but outrage can only get you so far. People know that corporations are jacking up prices and executives are scooping up the excess prices for themselves. But what can anyone actually do about it?

Congressional Democrats this week announced a new bill that would actually solve many of these problems. According to Wisconsin Senator Tammy Baldwin, The Price Gouging Prevention Act would:

• Prohibit price gouging at the federal level — anytime and anywhere. The proposed bill would clarify that price gouging is an unfair and deceptive practice under the FTC Act. It would allow the FTC and state attorneys general to stop sellers from charging a grossly excessive price, regardless of where the price gouging occurs in a supply chain or distribution network.
• Create an affirmative defense for small businesses acting in good faith. Small and local businesses sometimes must raise prices in response to crisis-driven increases in their costs because they have little negotiating power with their price-gouging suppliers. This affirmative defense protects small businesses earning less than $100 million from unjustified litigation if they show legitimate cost increases.
• Target dominant companies that have exploited the pandemic to boost profits. The bill would create a rebuttable presumption of price gouging against firms that exercise unfair leverage and companies that brag about increasing prices during periods of inflation.
• Require public companies to clearly disclose costs and pricing strategies. During periods of exceptional market shock, the bill requires public companies to transparently disclose and explain changes in their cost of goods sold, gross margins, and pricing strategies in their quarterly SEC filings.
• Provide additional funding to the FTC. The bill appropriates $1 billion in funding to the FTC to carry out its work.

Of course, there’s no way that trickle-downers in the House and Senate as they’re currently established would allow this legislation to pass. But this is an election year, and progressive candidates up and down the ballot should do their part to let the American people know that they do have a solution ready to send to the president’s desk for signing that would address the problem of greedflation on a federal level. This is a popular topic that would benefit a huge majority of working Americans. If I were running for office, I would make sure every voter in my district knew about the Price Gouging Prevention Act, and where every candidate stood on its passage, before they cast their ballots this November.

Are Unions the Future of the American Workforce?

“Starbucks and the union organizing its US workers said on Tuesday they have agreed to begin talks with the aim of reaching labor agreements,” writes David Dayen at the American Prospect, adding that “Starbucks said on Tuesday that, in a sign of goodwill, it will provide workers in unionized stores with benefits it announced in May 2022, including the ability for customers to add a tip to their credit card payments.”

Many discussions between unions and employers involve a lot of back-and-forth, so please bear in mind that this promising news could be the big step forward that happens just before two big steps back. But it’s tremendous progress from just a couple of years ago, when Starbucks leadership all but declared war on unions.

Perhaps Starbucks’ leadership just sees the writing on the wall. The United Auto Workers’ union, high off its victories last year for union membership, announced it was devoting $40 million toward organizing non-union auto plants around the country. Last year saw 33 major strikes in the United States, which is the highest total of labor actions in 20 years.

“In total, 458,900 workers participated in major strikes, defined as involving 1,000 or more workers, according to the Labor Department,” writes Lauren Kaori Gurley. “That’s more than three times the number of workers as in 2022, according to the agency’s data, which excludes a lot of strikes at smaller workplaces.”

But don’t forget that these dramatic gains are arriving after decades of declining union power, and that the unionized portion of the workforce is much smaller than it’s been for decades. The vast majority of workers are not unionized.

The American workforce is undergoing tremendous changes. For one thing, workers are aging. “​​Last year, the average retirement age was 62, according to a Gallup survey, up from 59 in the early 2000s,” writes Whizy Kim at Vox. “Older people aren’t just delaying retirement, but working longer hours: On average, this group’s annual work hours are almost 30 percent higher than they were in 1987.”

And all of the talk in conservative media about immigration fails to mention that the immigrant workforce has supercharged our economy: “Immigration has propelled the U.S. job market further than just about anyone expected, helping cement the country’s economic rebound from the pandemic as the most robust in the world,” notes the Washington Post. “That momentum picked up aggressively over the past year. About 50 percent of the labor market’s extraordinary recent growth came from foreign-born workers between January 2023 and January 2024, according to an Economic Policy Institute analysis of federal data.”

The American workplace is different than it was before the pandemic. In the trickle-down era, workers consistently lost rights as their wages stagnated. In the dawning middle-out era, it seems that workers are more emboldened to demand higher wages and improved working conditions. What remains to be seen is whether unions can incorporate the changing demographics of our workforce to revitalize American labor.

This Week in Middle Out

• In addition to the Biden Administration’s strong actions against the Kroger-Albertsons merger, the government this week filed a suit against the six largest tire companies in the nation, alleging that they “contracted, combined and/or conspired to fix, raise, maintain, or stabilize” tire prices through “coordinated lock-step price increases.” In other words, the tire companies seemingly teamed up to kill competition and instead jack up tire prices on consumers. (Forgive the pun.)
• The Biden Administration is taking another route to cancel student loan debt, charging the Department of Education to consider “a one-time debt relief program that would automatically cancel debt in circumstances where its data suggests that borrowers are at least 80 percent likely to default on their debt within the next two years.”
• “The Biden administration on Monday announced a $1.5 billion award to the New York-based chipmaker GlobalFoundries, one of the first sizable grants from a government program aimed at revitalizing semiconductor manufacturing in the United States,” notes the New York Times. The investment will triple New York state’s semiconductor output over the next decade.
• After a door plug exploded off one of their 737 jets and several other planes were found to be missing crucial bolts, the Federal Aviation Administration is cracking down on Boeing, demanding that the airplane manufacturer resolve its safety problems within 90 days.
• Hundreds of American children suffered lead poisoning last year from tainted applesauce packets. The New York Times investigated where the Food and Drug Administration’s regulatory structure failed, and they found a system that was hobbled by lax inspections, a failure to examine the safety structures of other nations, and other critical failures. The company that sold the tainted applesauce hadn’t been inspected in five years, and it recently received an A+ safety rating, even as children were being poisoned by its products. Hopefully this terrible story will encourage a revamping and empowering of the FDA, which has been limping through the trickle-down era of budget cuts and deregulation.
• Anna Phillips at the Washington Post explores why home builders are actively fighting state energy efficiency codes. This story is especially noteworthy because Phillips does a great job of pushing back on the trickle-down talking points that these regulations are way too costly and impede progress: “A federal study found that North Carolina’s proposed code update would have added at most about $6,500 to the price of a newly built home, not $20,400. According to the analysis, these changes would have paid for themselves through lower power bills and, during the first year alone, reduced carbon dioxide emissions by the equivalent of taking 29,000 cars off the road.”

This Week on the Pitchfork Economics Podcast

There’s no denying that the tax code in America is rigged in favor of the wealthiest people and corporations. But it’s one thing to understand that the system is rigged, and it’s quite another thing to pinpoint the exact mechanisms that the haves use in order to concentrate their wealth at the expense of the have-nots. That’s why I’m so excited that tax expert, Pulitzer Prize-winner, and former New York Times reporter David Cay Johnston joined Nick and Goldy this week to do a deep dive into our unbalanced tax code, and how to fix it so that the handful of the richest people and corporations pay at least as much as working Americans.

Closing Thoughts

Ganesh Sitaraman appeared on last week’s episode of Pitchfork Economics to talk about his excellent new book, Why Flying Is Miserable and How to Fix It. In a world full of nuanced and complicated problems, one of the most refreshing things about Sitaraman’s latest book is that he can point exactly to the moment in time when air travel began its downward slope into its current state of cramped seating, canceled flights, endless additional charges, and other indignities.

Specifically, the problem started when Congress deregulated the airline industry in the 1970s. Before that point, the federal government required air carriers to fly to remote parts of the country and prohibited any single airline from getting too huge. The argument will be familiar to anyone who has lived through 40 years of trickle-down economics: Deregulating the airline industry, they argued, would make flights cheaper and unleash competition between air carriers.

Instead, almost the exact opposite has happened as flights become weighted down with hidden expenses and carriers drop flights to less-profitable destinations like Cincinnati. In fact, one of the architects of airline deregulation admitted just ten years after deregulation that he had made a huge mistake.

Sitaraman argues that airlines were just the first industry to go through this shift. Now, we’re seeing other industries like health care begin to move out of less-profitable centers of the country and toward big cities. Big corporations, he explains, “roll up all the healthcare providers and get rid of all the hospitals in rural areas. They’re all in cities now. And that’s a huge problem, because where do you go to get care if you live in those places? You have to ride in an ambulance for a few hours or get airlifted out.”

If you’ve ever had a canceled flight or been charged $15 for snacks, I urge you to read Sitaraman’s book. You’ll likely find it to be a cathartic experience. But even if you’ve never set foot on an airplane, the book also serves as a case study for what happens when government deregulates industries in the name of increased competition and better customer service. Without oversight, those companies get bigger and bigger, less competitive, and they get worse at providing affordable goods and services to the vast majority of people.

“It’s a fundamental problem,” Sitaraman acknowledges, “but it’s a solvable problem. And I think that’s the real point — this is a policy choice to decide how we want to govern ourselves and how we want to shape economic opportunity: in a way that works for a broad group of people? Or only people who live in a few places?”

Just because the airline industry is miserable doesn’t mean it has to be miserable forever. It’s miserable right now because of an intentional policy decision, and that means it can be repaired through policy as well. I’m thankful to smart policy wonks like Sitaraman to remind us that politics is the art of the possible, and bad choices can always be reversed for the better.

Be kind. Be brave. Take good care of yourself and your loved ones.

Zach