America’s Hidden Duopoly
We all know our political system is “broken” — but what if that’s not true? Some say the Republicans and Democrats constitute a wildly successful industry that has colluded to kill off competition, stifle reform, and drive the country apart. So, what are you going to do about it?
A few weeks ago, Michigan congressman Justin Amash announced that he was leaving the Republican Party to become an independent. Amash said the partisan rancor in Washington, D.C., was just too much and counterproductive; he also said he has long had concerns about the country’s two-party system.
For decades, we’ve been hearing from both sides of the aisle that Washington is “broken.” But what if the Washington-is-broken idea is just a line? Maybe even a slogan that the country’s two dominant political parties approved? What if they’re just selling and we’re buying? What if it’s not broken at all? What if, instead, it’s doing exactly what it’s designed to do?
This week on Freakonomics Radio, we brought back an episode that we first put out last fall, just before Election Day. The episode is called “America’s Hidden Duopoly.” It explores whether Washington, D.C., is an industry just like any other, one in which two powerful players have colluded to drive the country apart.
Imagine a gigantic industry that’s being dominated by just one or two companies. Actually, you don’t have to imagine. Google has more than 90% of the global search engine market. So, not quite a monopoly, but pretty close. Such cases are rare; but not so rare is the duopoly — when two firms dominate an industry. Like Intel and AMD in computer processors. Boeing and Airbus in jet airliners. The Sharks and the Jets in the fictional-gangs-from-the-’50s industry.
There are plenty of reasons why duopolies exist, and they’re not necessarily all sinister. In capitalism, scale is really important: There are all sorts of advantages to being big, which lead big companies to get even bigger, gobbling up smaller companies and essentially dictating the rules of their market. (You can afford to make big acquisitions when you’ve got a ton of cash on hand, when you’re one of just two companies sharing a huge market.) And there’s another advantage to being half of a duopoly: self-perpetuation.
Surely the most famous duopoly is Coca-Cola and Pepsi-Cola. The rivalry between these firms goes back to the 19th century. Today, even as soda consumption falls, the rivalry rages on, with both companies adding juices, teas, and waters to their portfolios.
But there’s one other duopoly, a mighty one, in the United States today that you probably don’t even think about as an industry: Our political system.
Michael Porter is a professor at Harvard Business School and a highly regarded scholar of strategy and competitiveness. He says that while it may seem wrong to compare our political system to Coke and Pepsi, our political system is actually worse.
Coke and Pepsi control only about 70% of the soft drink market. They still have the Dr. Pepper–Snapple alliance to worry about. Not so for Republicans and Democrats. You can take all the Libertarians and independents, the Green Party, the Working Families Party, the American Delta Party, and the United States Pirate Party — which is a real thing — and add them all together, and they’re not even close to Dr. Pepper.
As an undergrad, Porter studied aerospace and mechanical engineering; then he got an MBA and a PhD in business economics. So he understands systems, as well as how things are made within those systems. He’s best known for creating a popular framework that outlines five forces that determine the competitiveness of different industries. The five forces are the threat of new entrants, the threat of substitute products or services, the bargaining power of suppliers, the bargaining power of buyers, and rivalry among existing competitors.
Porter, however, had never thought about applying his framework to our political system.
Then he met Katherine Gehl, CEO of Gehl Foods, a dairy products company in Wisconsin. Gehl’s great-grandfather founded the company well over a century ago.
Under Katherine Gehl, the firm had more than 300 employees and was doing nearly $250 million a year in sales. But it also faced challenges. The food industry is incredibly competitive. There are new competitors all the time, also new technologies and new consumer preferences. So, to plot a path forward, Gehl turned to Michael Porter.
In addition to her family business, Gehl had another abiding interest: politics. During high school, she was a Republican. Over time, however, she drifted left. In 2007, she joined the national finance committee of Barack Obama’s presidential campaign and became one of his top fundraisers. A couple years after Obama was elected, Gehl joined the board of a government organization called the Overseas Private Investment Corporation, which helps U.S. firms do business in emerging markets. In that role, she paid close attention to the happenings in Washington, D.C. Gehl did not like what she saw.
“It became really clear to me that this fight was not about solving problems for the American people. This fight was about one party beating the other party,” Gehl says. “[O]nce it became clear to me that it was a systems problem, I switched from investing my time in searching for the next great candidate and turned an eye to the fundamental root-cause structures in the political system that pretty much guarantee that, as voters, we are perpetually dissatisfied.”
It was around this time that Gehl began meeting with Porter. She brought him in to Gehl Foods to help figure out the company’s strategy going forward, keeping in mind his five famous forces about industry competitiveness: new rivals, existing rivalries, substitute products, supplier power, and customer power. In their discussions about the future of Gehl Foods, Gehl also convinced Porter that his five-forces framework could be applied to politics.
“[W]hat we came to see is that politics is really about competition between largely private actors,” Porter says. “And these actors are, at the core of it, what we call the duopoly.”
Having come to the conclusion that the political system operated more like a traditional industry than a public institution, Gehl and Porter set down their ideas in a Harvard Business School report called “Why Competition in the Politics Industry Is Failing America.” When you read the paper, right there under “Key Findings,” is this sentence, in bright red print: “The political system isn’t broken. It’s doing what it is designed to do.” In other words, it was no coincidence that politics had become self-sustaining, self-dealing, and self-centered. They were the blue team and the red team — kind of like Pepsi and Coke.
The two political parties had not only divided the industry into two sides; they had also “captured” other industry players — consultants, lobbyists, policies, and candidates. Over time, the two political parties had optimized the system for, in Gehl’s words, “the benefit of private gain-seeking organizations, our two political parties and their industry allies: what we together call the political-industrial complex.” Porter estimates that during the most recent election cycle, the “industry’s” revenue was about $16 billion.
It would be one thing if this large industry were delivering value to its customers — who are supposed to be the American people. But Gehl and Porter argue that the political industry is much better at generating revenue for itself and creating jobs for itself while treating its customers with something close to disdain. Kind of like the cable TV industry on steroids.
The numbers back up their argument. Customer satisfaction with the political industry is at historic lows. Fewer than a quarter of Americans currently say they trust the federal government. In terms of popularity, it ranks below every private industry. That includes the health care and pharmaceutical industries, the airline industry, and cable TV.
Normally, in most industries, a new company, like Netflix or Hulu or Amazon Prime, appears on the scene and targets dissatisfied customers. But in politics, we still don’t see entrants outside the two political parties. Why is that?
“[I]t turns out that our political parties work well together in one particular area, and that is actually colluding together over time behind the scenes to create rules and practices that essentially erect barriers to entry, ways to keep out new competition,” Gehl explains.
In their report, Gehl and Porter identify the “five key inputs to modern political competition: candidates, campaign talent, voter data, idea suppliers, and lobbyists.” Here’s what they write: “Increasingly, most everything required to run a modern campaign and govern is tied to or heavily influenced by one party or the other, including think tanks, voter data, and talent.” This means that candidates outside the two-party system struggle to find, for example, campaign managers or accurate voter data.
Gehl and Porter argue that the political industry has also essentially co-opted the media, which spreads its messages for free. Perhaps most important, the two parties rig the election system against would-be disrupters. The rules they set allow for partisan primaries, gerrymandered congressional districts, and winner-take-all elections.
This collusion has also led to one of the more concerning trends of recent years: The two parties have stopped competing over voters in the middle and focus instead on a narrow group of “target customers” — special interests and partisans. The lack of vigorous competition, Gehl and Porter argue, has allowed the Democrats and Republicans to carve out diametrically opposed political bases, fairly narrow and extremely partisan. The parties then use those partisan bases to support the desires of the political industry’s true customers, and its wealthiest: special interests. Industries like health care, real estate, and financial services, also labor unions and lobbyists. In this duopolistic business model, polarization is a feature, not a bug.
“There is now an entire industry of politics that moves forward, independent of whether that industry actually solves problems for the American people,” Gehl says.
Gehl and Porter’s diagnosis suggests that this industry serves itself incredibly well, and that it serves the citizenry quite poorly. It also suggests that more competition would improve the industry, as is the case with nearly every industry. But just having more competition in parties doesn’t seem to be the answer alone. There are plenty of multiparty political systems around the world that have similar cases of dysfunction and corruption and cronyism.
“[I]t can’t be just another party that’s going to split our electorate into three partisan groups,” Porter says.
It’s worth noting here that some political scientists argue that Gehl and Porter’s analysis of party power has it backwards. These scholars say our political system is in bad shape because the parties have gotten weaker over time. They argue that stronger parties could help beat back special interests and produce more compromise and moderation.
Porter and Gehl disagree, arguing that there’s no guarantee that stronger parties would be a moderating force. They have instead proposed a number of structural reforms to the electoral and legislative processes.
First up are nonpartisan, single-ballot primaries, a reform already initiated by states such as California. Porter and Gehl argue this will produce more moderate candidates.
“[T]he reason a single primary where everybody’s in it is so important is that if you want to win, you want to appeal to as many voters as you can,” Porter says. “Hopefully, more people will vote in the primary. And therefore you’re going to get people that are not just trying to appeal to their particular extreme.”
Ranked-choice voting is another reform Porter and Gehl favor, because it also encourages candidates to appeal to a broader range of voters. In ranked-choice voting systems, voters rank candidates in order of preference. If no candidates receive at least 50% of the vote in the first round of tabulation, the votes of whichever candidate came in last are redistributed by voter preference to voters’ second-choice candidate. In such a system, there are no third-party, “spoiler” candidates.
Gehl and Porter have also called for nonpartisan redistricting, changes to the rules of governing, and campaign-finance reforms. They differ, however, from many reformers in one important area: They don’t believe money in politics is the root of the country’s problems.
“If you take money out of politics without changing the rules of the game, you’ll simply make it cheaper for those using the existing system to get the self-interested results that they want without changing the incentives to actually deliver solutions for the American people,” Gehl says. “Having said that, we do believe that there are benefits to increasing the power of smaller donors.”
In that vein, Gehl and Porter have proposed, for example, that the government match donations from small donors.
We should note that most of the ideas Gehl and Porter are presenting here are not all that novel if you follow election reform even a little bit. Even we poked into a lot of these ideas a few years ago, in an episode called “Ten Ideas to Make Politics Less Rotten.” Perhaps it’s one measure of how successful, and dominant, the political duopoly is that plenty of seemingly sensible people have plenty of seemingly sensible reform ideas that, for the most part, gain very little traction.
Porter and Gehl, however, are optimistic that the times are changing, pointing to the success of efforts to institute ranked-choice voting in Maine and nonpartisan primaries in several states.
“I think what seems to be building in America is a growing appetite and a growing recognition that this isn’t working for our country,” Porter says. “And I think the younger generation, you know, millennials are particularly outraged and concerned and open to all kinds of new ideas.”
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