Entering the No-Merging Zone

The Pitch: Economic Update for January 18th, 2024

Friends,

“A federal judge blocked JetBlue Airways purchase of budget rival Spirit Airlines after the Justice Department sued to stop the merger, alleging it would drive up fares for some of the most price-sensitive consumers,” Leslie Josephs wrote on Tuesday for CNBC.

This is a huge deal. Obviously, the $3.8 billion proposed merger would have made flying more expensive for millions of Americans who look to Spirit Airlines as the only alternative for traveling on a budget. But it’s especially meaningful that the judge acknowledged that the merger would have killed competition in the marketplace, writing that Spirit’s absorption into JetBlue “would harm cost-conscious travelers.”

This matters so much because for the entire trickle-down era, judges and politicians argued that big corporate mergers and monopolies were an essential part of a healthy economy. The most influential thinker in this space was conservative Judge Robert Bork, who argued throughout the late 1970s and 1980s that consumers benefited from mergers because they allow corporations to cut costs and provide customer service more efficiently. This became the mainstream view on mergers, and the government took very few actions to disrupt potential mergers and monopolies for most of the last four decades.

But as the Biden Administration has fought virtually every major merger to cross their transom over the last three years, an interesting shift has occurred. Both politicians and judges started to notice that consumers largely don’t benefit from monopolies — in fact, mergers tend to kill competition, driving prices up and wages down. This Spirit-JetBlue decision in fact acknowledges that giant mergers like these are by definition non-competitive, and a growing middle-out judicial understanding of monopoly power is beginning to emerge to counter the trickle-down Bork argument.

The day before the JetBlue-Spirit merger was killed, Washington State Attorney General Bob Ferguson announced that he was suing to stop the merger between Kroger and Albertsons, which would bring more than half of the grocery stores in Washington State under the ownership of one giant entity — what would be the second-largest grocery chain in the United States.

“Free enterprise is built on companies competing, and that competition benefits consumers. Shoppers will have fewer choices and less competition, and, without a competitive marketplace, they will pay higher prices at the grocery store. That’s not right, and this lawsuit seeks to stop this harmful merger,” Ferguson wrote in a press release.

It’s heartening to watch our collective understanding of mergers and monopolies suddenly shift so quickly. For 40 years, Bork’s fallacious trickle-down understanding was virtually indisputable in legal and political spaces. But now that leaders are actually prioritizing working Americans when they consider the value of prospective mergers, we’re starting to see a dramatic shift in what we consider to be acceptable.

The Latest Economic News and Updates

How the IRS Got Its Groove Back

The Inflation Reduction Act of 2022 assigned $80 billion to the Internal Revenue Service over the next ten years, with about half of that money specifically allocated to the IRS to increase its enforcement budget. The Biden Administration specifically called on the IRS to target wealthy tax cheats in their audits with the enforcement funds, and not middle-class Americans. Last year, the Washington Post reports, House Republicans clawed back $20 billion of that enforcement money.

But the good news is that the IRS has made good use of the enforcement funds they’ve already received. Andrew Keshner reports for MarketWatch, “IRS officials said they’ve pulled in a further $360 million from millionaire households with at least $250,000 in tax debts. That follows an October IRS announcement that $160 million in delinquent taxes had been raked back from wealthy households.”

Keshner continues, “That’s $520 million altogether — and a strong initial return on investment for a multibillion-dollar funding influx, according to IRS Commissioner Danny Werfel.”

Indeed. The IRS pulling in more than half a billion dollars in delinquent taxes from millionaires over the span of less than a year shows that those investments are already paying off, and they’re likely to collect even more in the coming tax season.

This windfall makes a great case for re-expanding the IRS budget — House Republican claims of “wasteful spending” that will hurt ordinary Americans looks pretty silly now. And even better, when stories like these show that the IRS is finally, after decades of austerity budgets, cracking down on scofflaws and taking back the taxes that they’re owed, other millionaire tax cheats are likely to pay their bills rather than go through embarrassing audits and trials.

Biden’s Fight Against Student Loan Debt Continues

Last week, I wrote about the Biden Administration’s Saving on a Valuable Education (SAVE) student loan repayment plan, which slashes student loan payments for working Americans and drastically reduces the amount of debt that they’ll have to repay. With the Supreme Court overwhelmingly shutting down the Biden Administration’s student loan debt cancellation plan last year, SAVE is a clever way for the Biden Administration to drastically reduce the debt burden that millions of Americans are paying.

Turns out, the Biden Administration wasn’t done with SAVE yet. The day after last week’s Pitch went out, the Administration announced that SAVE’s benefits would apply retroactively to the people who have been most burdened by student loan debt.

“Starting next month, borrowers enrolled in SAVE who took out less than $12,000 in loans and have been in repayment for 10 years will get their remaining student debt cancelled immediately,” the White House wrote. “This action will particularly help community college borrowers, low-income borrowers, and those struggling to repay their loans.”

The statement also pointed out that those low-wage Americans who aren’t having their debt completely forgiven are being protected from added interest and overwhelming payment plans. As of last week, nearly 7 million people with student loan debt enrolled in SAVE, and nearly four million of those enrollees have been assigned a $0 monthly payment. Even in the face of a hostile judiciary branch, the Biden Administration has done a great job of using policy to improve outcomes for working Americans.

And you can do your part by making sure to spread the word about SAVE to your social networks — you could significantly improve the economic stability of a friend or family member.

America’s Unheralded Small Business Boom

There’s some really good news in this story, but first we have to start with the bad news. “The fast-food industry is fueling a surge in child labor violations across the United States, especially at companies with franchised locations such as McDonald’s, Sonic and Chick-fil-A,” write Lauren Kaori Gurley and Emmanuel Martinez at the Washington Post.

“Major chains that depend on the franchise business model have much higher rates of violations than those that don’t, such as restaurant companies that primarily own and operate their own stores,” they write. “Franchise-heavy McDonald’s, for example, has averaged 15 violations per 100 stores since 2020, ranking among brands with the highest rates of violations — though none were found at its corporate-owned stores. Franchised models may have higher rates of child labor violations because they’re under pressure to limit labor costs to offset steep fees, labor experts say.”

Speaking from experience, I can tell you that franchise owners tend to be the most outspoken opponents of minimum-wage increases — presumably because wages are easier to control than their franchise fees. Franchising more and more looks like an exploitative model that requires even the most successful business owners to cut corners and pass the economic pain down the ladder to workers, customers, or both. Maybe that’s why the number of businesses operating as franchises fell by nearly 10% over the last decade.

Thankfully, small businesses are on the rise. For Apricitas Economics, Joseph Politano reports that America is in the middle of a genuine small business boom. At the beginning of the pandemic, he writes, “Americans began forming new businesses at record-high rates, and they have hardly let up since. In December, 457k business applications were filed in the US, 143k more than at the same time in 2019. Of those, 150k were identified as having a high propensity of hiring due to their application characteristics or industry category and another 49k explicitly indicated they planned to start paying workers.”

I urge you to check out the whole report (and to subscribe to the newsletter while you’re at it.) This small business boom is largely unheralded in the wider media, but it reflects the changing face of American work. During the pandemic, many Americans decided to strike out on their own and become their own bosses. Leaders facing elections this year should acknowledge this growing subset of the workforce and prioritize solutions that help small businesses grow.

This Week in Middle Out

• Congress announced on Wednesday that they had reached a bipartisan agreement to increase the Child Tax Credit by nearly $80 billion. While the program wouldn’t mail checks to American families as the CTC did in 2021, NBC reports that it “would enhance refundable child tax credits in an attempt to provide relief to families that are struggling financially and those with multiple children. It would also lift the tax credit’s $1,600 refundable cap and adjust it for inflation.” It’s expected that this CTC proposal would lift 400,000 American children above the poverty line and benefit another 3 million children below the poverty line.
• “The Biden administration has begun pumping more than $2 trillion into U.S. factories and infrastructure, investing huge sums to try to strengthen American industry and fight climate change,” Ana Swanson and Jim Tankersly write for the New York Times. “But the effort is facing a familiar threat: a surge of low-priced products from China. That is drawing the attention of President Biden and his aides, who are considering new protectionist measures to make sure American industry can compete against Beijing.”
• Semafor reports that big banks are preparing to take an unprecedented step to fight regulations the Federal Reserve is putting in place to prevent mid-level bank crises like the Silicon Valley Bank collapse of last year. “Eugene Scalia, the son of the former Supreme Court justice and a well-known conservative litigator, is quietly drawing up a lawsuit seeking to block the proposed rules on behalf of the Bank Policy Institute, a trade group that represents JPMorgan, Citibank, Goldman Sachs, and others, people familiar with the matter said,” writes Liz Hoffman. “It would be the first time in recent memory that the industry has sued the Fed, and a departure from standard halls-of-power persuasion efforts that try to avoid antagonizing its chief regulator.” Meanwhile, the Center for American Progress makes a good case that the regulations don’t go far enough to fix the problem.
• Remember, though, that the same banks fighting against regulation have also been raking in huge profits for the last year. “The nation’s largest banks are churning out profits as interest rates remain high, even though the lenders have had to set aside billions of dollars to replenish a deposit insurance fund that was heavily depleted by a crisis among midsize banks last spring,” Emily Flitter and Stacy Cowley write. “Profits for the fourth quarter of 2023 reported on Friday by JPMorgan Chase, Bank of America and Wells Fargo exceeded analysts’ expectations, and the banks, which together provide accounts for roughly a third of all Americans, each reported that their customers had kept up spending.”
• In good judicial news, the Supreme Court refused to hear arguments against a modest tax on excess capital gains profits from the sales of stocks, bonds, and other assets passed by Washington State legislators two years ago. Opponents were trying to question the legality of the tax, but the Court rejected their challenge out of hand. Bill Lucia at Washington State Standard notes that “Revenue from the tax last year — the first year of collections — was nearly $900 million, money that will go to child care, education programs and school construction.”

This Week on the Pitchfork Economics Podcast

Margarida Jorge, the Executive Director of Health Care for America Now, joins Goldy and Nick on the latest episode of Pitchfork Economics to talk about how the Biden Administration is fighting price-gouging in the pharmaceutical industry.

Closing Thoughts

For 40 years, trickle-down Democrats treated investments in working Americans like moral issues, not good economic policy. We were told by local and national Democratic politicians who were trapped in the trickle-down way of thinking that raising the minimum wage was about “fairness,” and that we had to invest in welfare programs because it was the right thing to do. These moral arguments didn’t often win out in the court of public opinion, and investments in welfare and food stamps were continually trimmed even under Democratic leadership because the entire debate on both sides of the aisle was framed in the fallacious trickle-down belief that giving money to working Americans is a waste. .

Voters often reject eat-your-vegetables arguments about “fairness” because the trickle-down worldview false argues that the economy is a winner-take-all fight to the death, and if you’re going to expand benefits for one group of people in the name of fairness, that means others (maybe the voters themselves) will by definition have to sacrifice economically. This makes sense: If you’re continually told that self-interest is the engine that powers the economy, you’re going to act in your own self-interest when you’re asked to decide economic matters.

And to be clear, it absolutely is morally correct to feed and house the poor and to ensure that the majority of people in your society are healthy and happy. But the great discovery of middle-out economics is that doing things like raising the minimum wage, making investments in communities, and ensuring that everyone can participate in society isn’t just morally correct — it’s good economics, too.

Trickle-downers would have you believe that CEOs and the super-rich are the heroes of the economy, creating jobs and benevolently handing down prosperity to the little people. But the economy doesn’t work that way. The truth is that when more people have more money, they spend that money, and they create jobs and prosperity with their spending. We’ve seen time and again that voters will support a higher minimum wage and other worker protections when they understand that doing so will benefit not just a handful of workers, but rather everyone in the economy.

So that’s why we try in this newsletter to make a logical case for middle-out economics, not a moral one. But sometimes you read a story about economics and public policy that is so morally repugnant that all the facts just wash away and your basic humanity recoils in disgust. That’s what happened when I read a Washington Post story by Annie Gowen last week.

“Republican governors in 15 states are rejecting a new federally funded program to give food assistance to hungry children during the summer months, denying benefits to 8 million children across the country,” Gowen writes. The piece continues:

The governors have given varying reasons for refusing to take part, from the price tag to the fact that the final details of the plan have yet to be worked out. Iowa Gov. Kim Reynolds (R) said she saw no need to add money to a program that helps food-insecure youths “when childhood obesity has become an epidemic.” Nebraska Gov. Jim Pillen (R) said bluntly, “I don’t believe in welfare.”

I could do what we always do in The Pitch and make the middle-out case for feeding hungry children, pointing out with charts and graphs and links to academic studies that investments in children increase their life expectancy, academic performance, and lifelong earning potential. I could make the argument that the $2.5 billion investment in feeding hungry children creates jobs in the food manufacturing and preparation industries, and that it will be paid back again many times over in the improved economic outcomes that those children will produce over decades.

But sometimes, you just have to point out that people are wrong. This is one of those cases. Keep in mind that those 15 governors didn’t have to do anything — the federal money was being disbursed to feed children at no cost to their states. Instead, they’re going out of their way to refuse these funds, and they’re trying to score some cheap political points while they do it. It’s like someone crossing the street to kick a puppy.

A common failing of those who work with economics is that we sometimes get blinded by all the charts and percentage points and the attendant political gamesmanship, and we fail to remember that all those numbers we’re continually arguing over are people. No matter what side of the aisle you’re on, the goal of economic policies should be to improve people’s lives. Sometimes a story like this throws that truth into stark relief and reminds us of the human pain that lives behind the headlines, and the moral imperatives that we all need to keep in mind as we make our choices every day.

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

Zach