I have been trying to decide if this is worth another try, so far whatever I write is given a canned response because apparently I am not communicating what is happening very well; the generic “Free Market versus Protectionism” responses are tiring and completely irrelevant to the Market strategies that are being employed.
Maybe this will help, I think everyone agrees that a Monopoly is a bad thing for any economy for most goods and services; please spare me the fallacy that only governments can create Monopolies so this does not become a rabbit trail to avoid what I am about to write.
Also I want say that my goal here is to describe what is happening and show that it is not a good thing for our economy, I am not presenting a solution for this issue; mainly because most “cures” for this will likely be worse than the disease. But I do believe there can be a solution once enough people comprehend the totality of what is going on and think it through; a mind like Gingrich maybe.
Here is the scenario that is played out domestically in an ever growing number of communities in America.
Town A has;
A Hardware Store
An Appliance Store
A Lamp and Electrical fixture Store
A Lumber Yard
A Landscaping Supply Store
A Paint Store
A Tool Store
A Window and Door Supply Store
All of these stores are owned and operated independently by people who live in this town, the town is not large enough to support multiple instances of these stores but competition is supplied by neighboring towns with similar stores.
Then a Home Depot is built in this town and this one new store provides direct competition for all of those previously mentioned individual stores, on the surface this seems like regular dog eat dog Capitalism that always brings about the best quality for the best price and the ensuing economic efficiency creates investment and growth; but that is not what happens. The reason is not because Capitalism has failed, the reason is because a popular strategy to establish a Monopoly legally has been figured out by some very smart corporations.
Home Depot knows that the 8 individual local store owners cannot pool their resources, they are individuals and they must operate as individual businesses; but Home Depot is all 8 stores in one so they can target their competition individually.
This does not happen all at once, the local competition is targeted one at a time; so the box store selects one (say the lumber yard) and they set the prices in their lumber section at cost minus 10 percent; the rest of the box store departments can easily carry the small loss being incurred by the lumber department for as long as it takes to put the local lumber yard out of business.
Once this succeeds the box store targets another of the local stores, their lumber department is returned to profitability and they employ the same strategy with their appliance department (cost minus 10 percent) until the local appliance store goes out of business.
The consumer is trained to accept the fallacy that these low prices are the result of a large corporations buying power and operational efficiency, they lament the loss of their local businesses but the belief in Capitalism coupled with the belief that they are getting a better deal seems like a forward thinking positive trade off that will reap greater dividends in the long run.
But that is not the case;
Large corporations cannot operate as efficiently as small businesses, the “break” that bulk purchasing provides is not sufficient to overcome the bureaucracy and waste inherent in a Corporate chain; the employee mandates alone would render the corporate chain impotent not to mention the legal fees, insurance costs and immense expense associated with trying to match the service of a competitor who owns and operates his own store. A store owner will stay open late to help out one of his own customers who got in a bind on a job, it builds goodwill and costs nothing but a late dinner; the corporation store must have a “policy” to do this and somebody gets overtime if it happens at all.
But the targeted strategy will enable the box store to clear its competition over time, there is no defense apart from unlimited wealth that a local store owner can employ to compete with cost minus 10 percent.
Once the competition goes under, the prices rise to a number that is profitable for the box stores department, the public sees this gradually and attributes it to inflation since they assume the big box store is always pricing at the best possible price; after all they BUY BULK!
The end result is higher prices and no competition, a legal monopoly since anyone can open up a store to compete with any of the box store departments if they want RIGHT?
Wrong and here is why.
While the public thinks this was just Capitalism at work the former lumber yard owner knows exactly what happened, so do the banks who fund new businesses. While this owner may very well be sitting at home thinking “Wow, I could do fine with the prices the box store is charging for lumber right now” he is not thinking “Maybe I should mortgage my house and open another lumber yard”. The reason he won’t is because he KNOWS that the box store can re-implement their cost minus 10 percent strategy any time they want, before he even got his doors open again he would be priced out of the Market and be looking at losing the home he mortgaged.
So the effective monopoly holds, and the town loses in two ways.
The first loss is directly economic, they are paying more than if there was direct competition for the goods and services offered by the box store.
The second loss is secondarily economic, the profits from 8 separate stores was kept local and invested in the community in a multitude of ways but the profits of the box store belong to the corporation that is most definitely NOT local; the wages they pay their employees is the only economic benefit that stays in that town.
There is no doubt that there was a strong benefit for the town during the period where the monopoly strategy was being executed but this only lasts until the competition is pushed out, the long term result is higher prices for that town than they would have if genuine competition existed in perpetuity.
Two individual lumber yards could not employ this strategy against each other, the one trying to push out the other would likely run out of money before his competitor folded, but a corporate store that houses 8 individual stores under one roof and one ownership can do this for as long as it takes; and that is what they do and why the last 15 years has seen a preponderance of these box type store models arise and dominate the Markets they serve.
I don’t have a solution for this system of establishing a legal monopoly and I know of no economic theory that even understands this relatively new approach, which is why the responses I get are always limited to “Well, they would just go out of business if their too cheap” or “Well, someone will open a competing store if their prices get too high”; the strategy prevents these checks and balances from being viable.
I wrote all that to say this, China is Home Depot and the United States is the 8 individual business owners; as a Communist nation China operates all of its sectors as one big enterprise that can target individual Markets with the profits of other Markets.
In this way they can “compete” in Markets that they could not possibly compete in head to head and the result is ultimate higher prices and expatriated money that only returns in ways that benefit China; sometimes these repatriated dollars benefit our economy but that is not the agenda of China so when it happens it is a coincidence. The job losses and degradation of our industrial sector has many consequences and none of them are positive; if we were losing these competitions due to head to head competition we would be all the stronger for it but losing when we are able to beat the competition if were not for the Communist control that the competition enjoys does not benefit us.
In the past I have tried to summarize this by saying that China subsidizes their Markets but that is misleading, a subsidy sounds like they are taxing their people and giving us the proceeds; nations with private sector ownership of their businesses who try this will fail miserably.
But China is Home Depot, they control it all and they decide how the profits will be spent just like Home Depot does; they can “Loss Lead” forever if they want to but the economic benefit of the lower prices we get is short lived; it only lasts until China has the Market share they want in a given sector.
Trump understands exactly what is happening because he has been in the building industry long enough to see these Markets come full circle, during the campaign I interpreted his rhetoric as ignorant and protectionist because he chose words and phrases that are commonly associated with those traditional, failed ideas. But his actions have so far convinced me that he knows exactly how these Markets are being manipulated and how we are losing battles that we would be winning if our politicians were smart enough to understand the long game that is being used against us.
I don’t know what his full strategy is to deal with this but targeted tariffs chosen carefully as to have as little effect on us as possible and make our trade partners nervous about what restrictions will be included in the Trump era Trade Deals seems like a good start to me. Easing regulations and taxes on our domestic sectors is another signal to me that Trump “gets it”, he is trying to make sure that any nation who beats us does so by actually competing with our best effort; that may in some cases mean higher prices but only because the higher price was collected before from unrelated sectors.
We don’t win when a monopolistic strategy is employed, it just makes it harder to spot where we are losing because the ones monopolizing are diversified beyond the average persons understanding.