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The growing economic gap between prosperous coastal cities and struggling cities in Middle America is often blamed on impersonal forces like globalization and technological progress. But some thinkers have started pointing to another culprit: little-noticed shifts in antitrust enforcement, beginning in the 1980s, that allowed a string of mega-mergers.
The argument goes something like this: Back in the 1980s, the Reagan administration changed antitrust policy to be more friendly to mergers. As a result, we got a lot more mergers, resulting in massive conglomerates that are disproportionately headquartered in a handful of big cities. The result: A few big cities have gained so many jobs that it’s producing a housing crisis. Meanwhile, a lot of midsize cities, like St. Louis, Cleveland, and Pittsburgh, have suffered from anemic economic growth. And having so much economic activity squeezed into a handful of cities may be holding back the American economy as a whole.
“Virtually all cities and metropolitan areas have seen precipitous declines in the number of locally owned corporations,” Mark Muro, an expert on urban policy at the Brookings Institution, told me earlier this year. That has “seriously degraded the quality and local focus of regional business leadership, philanthropy, and other resources.”
There are still some open questions about this theory — experts told me that more research is needed. But if it’s true, it would have big political and economic implications. Simmering public anger at coastal elites was a major force in American politics in 2016. Donald Trump is a merger skeptic, while Sen. Elizabeth Warren (D-MA) has argued that antitrust enforcement has been too lax. That suggests that cracking down on big corporate mergers could become a populist issue in future elections in a way it hasn’t been in many decades.
The Reagan administration gave a green light to big mergers
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In the mid-20th century, a company that wanted to acquire an out-of-state rival could expect a chilly reception from antitrust officials. Antitrust law has never explicitly been about preserving local control of companies or maintaining regional balance of economic power, but aggressive enforcement of antitrust law naturally acted as a brake on the concentration of economic power.
But starting in the 1960s, economists began to question the prevailing antitrust orthodoxy. They argued it was irrational to worry about “non-economic” issues like preserving local control over business. Antitrust law should focus on maximizing economic efficiency, they believed. And because merging two companies often allowed them to exploit economies of scale, that suggested a lot more mergers should be approved.
These arguments convinced the Reagan administration and quickly became the conventional wisdom. The result was a massive wave of mergers that began in the mid-1980s and has basically continued ever since.
Mergers may have led to the decline of Midwestern cities
This is the part of the argument where we know the least. Antitrust supporters — especially those at New America — argue that declining antitrust enforcement played a significant role in the decline of midsize cities.
To see how that might have happened, it’s helpful to look at this deeply reported 2016 article in the Washington Monthly from New America’s Brian Feldman. It focuses on St. Louis, which in 1980 was the home of major US companies like McDonnell Douglas, Ralston Purina, and Anheuser-Busch. As I write this, regulators are considering whether to allow the German drugmaker Bayer to acquire St. Louis-based Monsanto.
Overall, Feldman calculates that St. Louis has gone from hosting 23 Fortune 500 headquarters in 1980 to hosting just nine in 2015.
The loss of so many corporate headquarters had a number of important knock-on effects. St. Louis used to have a vibrant market for white-collar services like advertising, public relations, and legal services built on personal relationships with big local clients. As corporate headquarters left, these agencies went into decline as well.
Valuable infrastructure in St. Louis started to go underutilized. In the 1990s, St. Louis served as a hub for TWA. But TWA was acquired by American Airlines, which decided after 2001 that it didn’t make sense to continue treating the city as one of its hubs. The number of daily flights out of the Lambert St. Louis airport fell.
Feldman told me that employment at Anheuser-Busch fell from 6,000 people before the 2008 merger to 4,000 people in 2011. Boeing laid off 7,000 people in St. Louis after it acquired McDonnell Douglas in 1997.
At a certain point, this became a vicious cycle. The shortage of top-tier ad agencies and law firms makes it harder to attract new corporate headquarters. The lack of major employers makes it harder to convince talented young workers to stay, which in turn makes it harder for local businesses to grow.
Muro points to banking as another area where many midsize cities have been harmed by consolidation. St. Louis was home to a major bank called Boatmen’s that was acquired by NationsBank in 1996. And Muro told me that this kind of bank plays a crucial role in economic development, because major investments are often built on a foundation of personal, face-to-face relationships.
“What you often find in some of these cities is that there's nobody home when it comes to making investments in the regional economy,” he said.
Of course, there are two big questions here. One is about the direction of cause and effect. Maybe St. Louis declined for reasons that have little to do with mergers — like poor policy decisions by local politicians. And maybe the loss of corporate headquarters was just another symptom of that broader decline.
The other question is whether you can tell the same story about other declining cities. Detroit, for example, seems to have been brought low by the decline of the auto industry, something that didn’t have much to do with antitrust policy.
The economists I talked to said this is an area where more research is needed. Muro believes lax antitrust enforcement likely played a significant role, but that there’s not enough evidence to be sure. The importance of corporate headquarters to a city’s development is “something that's been discussed for as long as I've been in this field,” he said. But he wasn’t able to point me to research that explored the role of antitrust enforcement in that decline.
Enrico Moretti, a leading expert on the geography of economic growth, was more skeptical. “I'm not aware of any direct study that studies that,” he told me. He suspects that other factors — like globalization and the decline of manufacturing — have played a much bigger role. But he told me he’d like to see more research done.
How regional inequality can hold back national growth
The conventional economist’s response is that while this might be a bummer for St. Louis, there are offsetting benefits for workers in the other cities. If jobs shift from St. Louis to Chicago or New York, the solution is for ambitious young workers to move as well. In the economist’s stylized view of the economy, it doesn’t matter where jobs are created as long as they’re being created somewhere. And as more and more companies crowd into a few cities, those cities could get more and more innovative.
This argument would have seemed completely reasonable in the 1980s because back then cities were getting more equal over time. Here’s a chart compiled by Phillip Longman, another researcher at New America:
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Before 1980, economic opportunities seemed to become more evenly distributed over time. If that was a natural process, then there wasn’t much need to worry about mergers exacerbating regional inequality, because everything should even out in the long run.
But things look a lot different today. In the early 1980s, that decades-long trend toward regional convergence reversed course. Big cities like New York, San Francisco, and Washington, DC, started to see their incomes pull away from those of their peers.
Meanwhile, a shortage of land and strict housing regulations have prevented real estate developers from building enough housing in cities like New York, Los Angeles, Boston, and San Francisco. The result: Rapid job and income growth at the high end led to skyrocketing housing costs, pricing less affluent renters out of the area. Things have gotten so crazy in Silicon Valley that the city of San Jose has started to complain about construction projects because they might “add far too many jobs.”
The growth of the economy as a whole is largely driven by the growth of its most dynamic companies. So having so many corporate headquarters crammed into a handful of large cities can’t be good for the nation’s economy — even if any particular company benefits from being at the center of the action in a city like New York or San Francisco.
And that means that what’s efficient for a particular company may not be efficient for the economy as a whole. Mergers might save costs and boost profits in the short term, but stuffing more and more economic activity into fewer and fewer cities acts as a long-term brake on economic growth.
