As we know, there is a lot of American frustration about a “rigged economy.”  This frustration is demonstrated by the candidacies of Donald Trump and Bernie Sanders and the support they have garnered.    This month’s edition of The Economist has a briefing, exploring the role excess profits plays in this economy.  It is an enlightening look at why these excess profits might be the worst enemy of the free enterprise we Americans so value.

The Economist observes that profits are at a near record level for large American companies.  These profits, when coupled with the concentration of ownership of large firms means that ecomomic growth is being hoarded.  In a normal economy, this hoarding could not continue because new companies would see the profits and jump in to compete.  In this economy, however, these large companies have built “moats” around themselves, keeping competition away.  Companies acquire other companies and get out of businesses where they do not dominate.  Since 2008, the American economy has seen a huge number of mergers, allowing companies to increase their market share while driving out competition.  These merged companies have not grown larger, but have narrowed their focus on areas where they can dictate prices because nobody else competes.  Record cash flow and return on investment have not been reinvested in the companies nor passed down to employees as higher wages.

But profits are good, right?  Well, yes, but hoarding profits can result in a shortage of demand, which makes for a sick economy.  The stock market keeps going up, while Americans have not had a raise.  If Americans don’t get raises, they cannot afford that new car or that new house.  The American middle class is feeling squeezed, and for good reason.  There is no trickle-down, folks!

According to the Economist, prices should be a lot lower in an economy the size of America, but the “naughty little secret” is that the return on investment is 40% higher at home than abroad.  You know those pharmaceuticals that are cheaper in Canada than in the United States?  That’s a good example.  Big Pharma charges Americans more, but new companies cannot compete because of the difficult regulation in the drug industry and patent laws which protect the big pharma companies.  Big Pharma gripes about regulation, but the bureaucracy actually protects them once they know how to negotiate around the regulations.  Hence, the “moat” around Big Pharma.

The creation of new American small businesses is at the lowest point since the 1970’s.  It’s no wonder that two thirds of Americans believe the economy is rigged to favor those already at the top.  When is the last time you heard about someone opening a new pharmacy, lumber yard, hardware store or any small business?  Is all this concentration of money really good for main street America?

About a quarter of these excess profits are in the health care industry, where a group of pharmacy and medical equipment companies make an astonishing 20% to 50% aggregate return on their capitol.  Of course, the moat is deep and broad around these firms, with protectionist regulations and patents.  It is important to remember that most health care purchasing is ultimately done by insurance companies.    The largest health insurers are planning to merge into two companies in the near future.  Can you imagine the moat around those two new companies?

Do you kids remember when Microsoft was being sued for violating anti-trust laws because it bundled “Explorer” with “Office?”  That was in 2000.  Microsoft’s operating profits are twice what they were when they were being sued.  So much for anti-trust enforcement.

Why don’t anti-trust laws keep these excess profits from being hoarded?  The Economist suggests two limitations.  First, the  Federal Trade Commission and Department of Justice can only enforce violations of the law and the hoarding of excess profits alone is not unlawful.  Second, the current philosophy is not to automatically suspect anti-trust activity.  Prior guidelines created a presumption of anti-trust activity if a deal included a company with a 35% market share; but that presumption has been abandoned.  Instead, now each situation is examined individually to see if consumers have less choice or if a company is allowed to raise prices.  Consequently, it is much more difficult to make a case absent the presumption of anti-trust activity.

Clearly, this excess profit hoarding is not good for the larger economy.  There have been calls for higher corporate taxes, increased regulation and forced higher wages.  Instead of protectionist measures, the Economist suggests a burst of competition to shake up the large companies who have grown fat and sassy.  This effort would require a loosening of occupational licensing regulations and regulations protecting intellectual property.  It would also require more active pursuit of anti-trust actions and an examination of whether it is a good idea to have most of the country’s data in the hands of a few large firms.  Finally, more competition would require that we look at the practice of corporate lobbying.  We all know that lobbying is how most of these companies protect themselves.  Whether we bust the trusts or break them through competition, we need somehow to limit the influence of corporate lobbyists.