When I got on the phone with Vivek Ramaswamy one afternoon, I was
not expecting to find common cause. Ramaswamy is a tech entrepreneur, a
frequent contributor to conservative outlets including The Wall Street
Journal’s editorial page and author of a book whose very title sounds as if it
were formulated in a lab at Fox News to maximally tickle the base and trigger
the libs: “Woke, Inc.: Inside Corporate America’s Social Justice Scam.”
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I had reached
out to Ramaswamy to discuss his new venture, Strive Asset Management, an
investment firm that he says will urge corporations to stay out of politics.
Among Strive’s funders, though, is one of the more politically active people in
business, Peter Thiel, a billionaire venture capitalist who supported Donald
Trump and is now funding a slate of Trump-loving congressional candidates.
It turned out I
was right: I did not agree with a lot of what Ramaswamy had to say. Not only
are our politics radically at odds, we also differ on what “politics” means in
modern American capitalism. Yet despite our disagreements, something odd
happened. I found myself nodding along with what is perhaps Ramaswamy’s
fundamental point: that three gigantic American asset management firms —
BlackRock, Vanguard and State Street — control too much of the global economy.
The American economy is lumbering under monopoly and oligopoly. In many industries, from airlines to internet advertising to health care to banks to mobile phone providers, Americans can do business with just a handful of companies.
The firms manage
funds invested by large institutions such as pension funds and university
endowments as well as those for companies and, in some cases, individual
investors such as me. Their holdings are colossal. BlackRock manages nearly $10
trillion in investments. Vanguard has $8 trillion and State Street has $4
trillion. Their combined $22 trillion in managed assets is the equivalent of
more than half of the combined value of all shares for companies in the S&P
500 (about $38 trillion). Their power is expected to grow. An analysis
published in the Boston University Law Review in 2019 estimated that the Big
Three could control as much as 40 percent of shareholder votes in the S&P
500 within two decades.
Why is this a
problem? Ramaswamy argues that the main issue is that the firms are using their
heft to push companies in which they hold large investments into adopting
liberal political positions — things such as focusing on climate change or
improving the diversity of their workforce. I think that is a canard.
The real danger
posed by the three is economic, not political. The American economy is
lumbering under monopoly and oligopoly. In many industries, from airlines to
internet advertising to health care to banks to mobile phone providers,
Americans can do business with just a handful of companies. As journalist David
Dayen has argued, this increasing market concentration reduces consumer choice,
raises prices and most likely harms workers.
BlackRock, Vanguard and State Street have been
extraordinarily good for investors — their passive-investing index funds have
lowered costs and improved returns for millions of people. But their rise has
come at the cost of intense concentration in corporate ownership, potentially
supercharging the oligopolistic effects of already oligopolistic industries.
John Coates, a professor
at Harvard Law School, has written that the growth of indexation and the Big
Three means that in the future, about a dozen people at investment firms will
hold power over most American companies. What happens when so few people
control so much? Researchers have argued that this level of concentration will
reduce companies’ incentives to compete with one another. This makes a kind of
intuitive sense. For example, because Vanguard is the largest shareholder in
both Ford and General Motors, why would it benefit from competition between the
two? If every company is owned by the same small number of people, why fight as
fiercely on prices, innovations and investments?
Indeed, there is
some evidence that their concentrated ownership is associated with lower wages
and employment and is already leading to price increases in some industries,
including in airlines, pharmaceuticals and consumer goods. The firms dispute
this. In a 2019 paper, Vanguard’s researchers said that when they studied lots
of industries across a long period of time, “we do not find conclusive
evidence” that common ownership led to higher profits.
But if the Big
Three keep growing, the effects of their concentrated ownership will get only
worse. Einer Elhauge, also of Harvard Law School, has written that concentrated
ownership “poses the greatest anti-competitive threat of our time, mainly
because it is the one anti-competitive problem we are doing nothing about”.
In late 2018, a
few months before his death, John Bogle, the visionary founder of Vanguard who
developed the first index fund for individual investors, published an
extraordinary article in The Wall Street Journal assessing the impact of his
life’s work. The index fund had revolutionized Wall Street — but what happens,
he wondered, “if it becomes too successful for its own good?”
Bogle pointed
out that asset management is a business of scale — the more money that
BlackRock or Vanguard or State Street manages, the more it can lower its fees
for investors. This makes it difficult for new companies to enter the business,
meaning that the Big Three’s hold on the market seems likely to persist. “I do
not believe that such concentration would serve the national interest,” Bogle
wrote.
Bogle outlined
several ideas for limiting their power, but he pointed out problems with a
number of them. For example, regulators could prohibit index funds from holding
large positions in more than one company in a given industry. But how then
would they offer an index fund that invested in all companies in the S&P
500, one of the most popular kinds of funds?
Coates, of
Harvard, argues that policymakers will have to move carefully to manage the
dangers of concentration without limiting the benefits to investors of these
firms’ low-cost funds.
“No doubt getting
the balance right will require judgment and experimentation,” he wrote.
But the most pressing
issue is for us to recognize the problem. The growing influence of three large
fund managers is not likely to diminish. Ramaswamy’s take on the problem is
wrong, but he’s right that it’s a problem. How much power do the three
companies have to accumulate before we decide it’s too much?
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