Mergers Reflect Natural Evolution of Dynamic, Complex Economy
The recent wave of mergers and acquisitions, such as Walt Disney Co.’s purchase of Capital Cities/ABC Inc., Time Warner Inc.’s move to acquire Turner Broadcasting System Inc., and the Chemical Bank Corp.-Chase Manhattan Corp. merger, has led to populist cries of greed and foul play. We hear dire predictions of consumers paying more and even of recession resulting from layoffs. A little perspective on all this punditry may prove useful.
Americans are fortunate to live in a complex, dynamic, evolving economy. While every individual and family faces numerous risks, our overall standard of living is vastly higher with such an economic system than with a static one, where few new goods are produced, few new firms are started, and little quality improvement is made to existing goods. Would anyone want to swap our economy for one such as the former centrally planned economies? When excess capacity developed there, the state firms just ran losses covered by government subsidies, which led to suppressed inflation. Unemployment and inflation, as measured by the authorities, were close to zero. But there was nothing to buy and as Soviet workers put it, “they pretend to pay us and we pretend to work.”
To be sure, mergers of large companies not only receive lots of headlines, but are complex to consummate, and often involve a reduction in the work force of the merging firms. Sometimes this occurs through normal attrition, causing little economic hardship to the work force. Sometimes, a large portion of the work force reduction comes from layoffs.
For example, in the merger several years ago between Chemical Bank and Manufacturers Hanover, thousands of jobs were eliminated. Some came from attrition, some from layoffs. But most of those who lost their jobs were eventually able to find work elsewhere, some comparable, some not.
Economists call the notion that there is a fixed and immutable number of jobs available the “lump of labor” fallacy. In a dynamic, complex economy such as ours, there is a vast amount of movement from job to job, most of it voluntary, as workers seek jobs that conform to their needs and abilities, and firms do likewise. Except during prolonged recessions, or in some particularly depressed regions (such as Southern California in the early 1990s), workers tend to find jobs in other firms, including new and growing small companies. Indeed, the median duration of a spell of unemployment is about two months.
Usually the successor firm is a stronger regional, national or global competitor. This means that the surviving workers have greater rather than lesser job security. In fact, eventually the successor firm starts hiring again. For example, Chemical Bank has been hiring again. And while Chemical and Chase have indicated they will reduce employment by about 12,000 workers worldwide, reaping cost savings by eliminating duplicate operations, the expectation is that a stronger bank will emerge and eventually the new Chase will hire again.
It is not correct to assume that the same number of jobs would have continued in the absence of the merger. Had the firms not merged, each might have been compelled by competitive pressures to reduce costs through layoffs (and/or attrition) and each may have been a less viable competitor in the long run, implying risks to future jobs and even subsequent sale or bankruptcy of the firm. Were there other options for now defunct PanAm or Eastern Airlines that would have redeployed the capital and workers more effectively with less economic disruption to the many workers involved?
Finally, place all this in perspective. The labor force is 131 million, employment is 124 million and unemployment is 7 million in an economy that is generally considered to be doing OK, if not spectacularly. The layoffs contemplated from these large mergers add up to tens of thousands of jobs (the total number of announced corporate layoffs is in the hundreds of thousands, but most have nothing to do with mergers). In an economy that produces many times that every quarter, the overall temporary job loss is relatively modest. Of course, for those who lose their jobs, they are temporarily 100% unemployed. Some will find jobs quickly, comparable or not; others will struggle and rely on severance packages and/or unemployment insurance while they search for new jobs.
The merger wave in industries such as telecommunications and banking reflects the historical evolution of the industries, dramatic changes in government regulation and the confluence of changing technology and globalization offering new challenges and opportunities on the one hand, and the prospect of vastly greater competition on the other. In the end, consumers are likely to benefit with more choices, more products and services, at lower costs.
Undoubtedly, some of the mergers won’t work out nearly as well as management, shareholders, the Justice Department and financial analysts expect. Others will do better. But it is hard to imagine in the exploding information revolution, with access to vastly more entertainment outlets and options, that consumers will do anything but benefit in the long run; likewise in financial services where the reduction in cost by removing excess capacity occurs in the context of severe competitive pressure, it would be extremely difficult for any one bank, for example, to price out of line with competitive market conditions.
The Justice Department must remain vigilant for those pockets of monopolization that may occur--for example, in a particular geographic market, or for a particular product--but that is part of what it is supposed to do routinely in approving mergers. When it finds such problems, it can block the merger (Microsoft Corp.-Intuit Inc. is a recent example) or require divestiture that is competitive to protect consumers.
Despite all the rhetoric, these mergers should be seen as part of the natural evolution of a complex, dynamic, flexible American economy that, for all of its problems, provides the highest standard of living in the world.
