Why Have There Been so Many Mergers and Consolidations in the U.S. over the Years?
Some people believe that big corporations are to blame, but they are just the ones responding to market forces by merging and acquiring other businesses. In my opinion, there are three reasons for the consolidation of businesses over the years:
- Consumption of capital—one of the few things I learned from my college economics classes was that the more capital invested per head of the population, the more productive the workers can be. On the other hand, if you consume capital, productivity declines. American real wages and productivity have been declining since 1972. Why? Governments don’t produce capital, they consume it. In short, rising taxes, rising regulations (raising the cost of doing business), rising government spending (on wasteful things like wars, welfare, and bailouts), and rising insurance because of a more litigious society. In a free market, a higher interest rate encourages people to save their money. Savings becomes capital when invested in capital goods. As people accumulate savings and the demand for that savings declines, interest rates drop. This signals people to save less, until interest rates rise again. That’s how prices work…in this case the price of money. But when the Fed interferes with the markets’ signals, people either don’t save, or they have to look elsewhere for a return on their savings (read someplace more speculative). Recently, with interest rates at a record low for a record length of time, the incentive to save has been punished in the U.S. The capital that’s needed to make people more productive isn’t there. More consolidation will occur.
- Lower purchasing power—the value of the U.S. dollar has been declining since 1914 when the Federal Reserve Bank was put in charge of maintaining its value. As the dollar value declines, it takes more dollars to purchase the same quantity of goods. It also takes more dollars to produce those goods. Many businesses fail as a result of the increased costs…they can’t keep up with the price increases. In short, there is a reduction in the number of businesses in business. The remaining businesses may take over the failing ones or merge with other marginal businesses in an attempt to stay competitive. There is also a change of direction in the economy when price inflation exists. The newly printed dollars are first used for purposes the printer (government) deems to be a priority. Consumers’ demands take a back seat to government demands. This loss/change of demand will re-direct funds away from some businesses and toward others (think toward weapons and other military gear and away from consumer goods). Manufacturers of consumer goods must go elsewhere for capital and labor (read China). Any remaining manufacturers, especially of consumer goods, are fewer and further between.
- International competition—as the rest of the world has saved and invested their capital, they have become more productive and their standards of living have grown. Many large businesses can be found outside the United States these days and they may not be as closely regulated (allowed to pollute and pay low wages). Thus their costs are lower and so they can ship their goods more cheaply to the U.S. It’s cheaper to manufacture things outside the U.S. and ship the goods to the U.S.
In the meantime, the U.S. government is also knee-capping the bigger American businesses with anti-trust suits, to keep them small. This makes it more difficult to compete with the large non-U.S. businesses that aren’t subject to anti-trust laws.
And let’s not forget about tariffs, boycotts, and trade wars that restrict where the U.S. businesses are allowed to sell their stuff and buy raw materials. All in the name of security (that means government security). If American businesses were free to do business around the world, they could be so much more productive. Security through productivity, not force of arms…that’s the way to go. That was the American way!
Robert F. Sennholz