Why Conglomerates are BAD for Competition — “The GE Rule”

We all feel strongly that competition is central to the success of free market economics. Our national history demonstrates over and over how competition has been central to growth, innovation, progress and success in our democracy. Surprisingly however, though we all view it as a central requirement to success in our society, we seem to avoid asking our politicians key questions like:

  • how can we increase competition to improve our society?
  • what policies in place today weaken competition and thus harm society?

Many of us think “BIG is BAD” for competition since “bigness” often leads to “corruption” and “bureaucracy”. We accept mergers justified on the basis of the cost savings through the advantages know as “economy of scale,” but we’ve seen many companies grow so large that the “waste of bureaucracy” eventually outweighs any efficiency gains due to increased size. Recently, we seen very large corporations characterized as “too big to fail.” We’ve seen corruption in which companies are subsidized for political reasons in spite of becoming obvious economic and competitive failures. (And to a lesser degree, we’ve seen the arrogance born of size that leads to risky decisions and missed opportunities for innovation.)  More on this in other posts.

But today, the news provides us with a new observation: excessive diversification is BAD for competition!

The news: GE reports profits of $15 billion worldwide ($5 billion in profits on U. S. sales) but pays ZERO in Federal taxes!

This is possible because GE is a conglomerate, making sizeable profits in manufacturing while losing (big) in their financial (loan) business.

This suggest that excessive diversification is bad for competition: GE can now make poorer jet engines than competitor X, for example, because X has to pay taxes on sales of their engines but GE does not… due to government subsidies (tax credits/deductions) bailing out their financial activities!

Diversifying investments has long been know as a way to manage risk…. failure in one area can be compensated for by success in another. But as an investor, I still pay taxes on the successful investment like anyone else and do not receive credit for failure in another!

Just like “size” offers advantages up to a point for society as well as the corporation itself, “diversification” can offer advantages up to a point.  Society benefits from the survival of a corporation after corporate failures, jobs are saved and taxes collected.  But if competition is so damaged because of the raw size of the corporation, there can be long term damage to society that outweighs these advantages.

How do we decide when a corporation is “too big” or “too diverse” for the good of a free enterprise society?  How do we structure our business laws and taxes to optimize competition for the benefit of the nation?

More in coming posts!  ….your sugestions very welcome.

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