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Restoring Small Businesses and Entrepreneurs’ Bargaining Power

October 25, 2010 By Lee Egerstrom, Economic Development Fellow

Strong signs from the past couple of weeks suggest the economic recovery is gaining force and, at long last, American companies are again creating jobs at home, not just overseas.

While this is good news, it leaves legitimate questions about how great the recovery can be and what shape it will take in the future, especially for middle- and working-class Minnesotans. With that in mind, we’ve exchanged notes with University of Texas economist James K. Galbraith regarding his observations on the economy and those of his late father, Harvard’s John Kenneth Galbraith (1908-2006).

Topping the list of questions is whether the American economy as we knew it prior to 2007 could be restored or if something new, and different, must emerge or be built.

Federal and state responses to the financial crisis and past recession were geared to resorting what we had before the meltdown, Galbraith agreed. That economy was driven by individual and household consumption accounting for 70 percent of Gross Domestic Product (GDP).

“The problem with a consumption-based recovery will be the lack of collateral and credit-worthy borrowers to support it,” he said.

This would seem especially apparent for the housing market and for big-ticket items such as automobiles and electronics.

Noting that Minnesota is among states wrestling with business subsidies for factories and new developments, Galbraith was asked if this is even logical. There is excess manufacturing capacity in existing plants and basic manufacturing continues to move offshore.

“We need to get over the notion that there is something intrinsically valuable to manufacturing,” he said. “The Chinese are a fact of life, they can’t be stopped from doing what they want to do.”

The Texas economist said there might be a role for proper state and community responses. The key would be to help business and industry remodel excess capacity facilities and develop and make products and services consistent with a countervailing power strategy.

There is that term coined by his father in his 1952 book, American Capitalism: The Concept of Countervailing Power, which latter day economists and business professors have largely reduced to “bargaining power” within a supply chain.

Over time, farmers in particular formed cooperatives to pool resources and gain market strength to negotiate prices and services. Other business groups have formed similar associations, both formal and informal, to counteract excessive market power by a dominant supplier or buyer. When that fails or seems to be beyond the reach of individual or group action, the age-old American practice has been turning to government and letting it impose countervailing power.

The latter was the backbone of American farm policy for much of the past century. Small businesses or business sectors with weak positions in the supply chain have turned to government’s antitrust enforcers for protection.

More successful and especially large business groups have reversed the process, however, by extracting tax concessions from governments or in the case of the pharmaceutical industry, getting political allies to expressly forbid government from using its market strength to negotiate prices for large purchases of publicly supported medicines.

Assuming then that China will be China and Americans will continue to be a massive market for the developing world’s increasing production capacity, are there countervailing power strategies that could help us transform into a vibrant 21st Century economy?

“In my view, the country with strong standards has a lot of countervailing power if it is a large market,” Galbraith said. By being such a large market, these countries can enforce standards on the rest of the world and raise both product quality and living standards, he added. “This is the reason why strong quality/safety/environmental standards are vital.”

No one, to his knowledge, is looking at how countervailing power might form a strategy to rebuild and stimulate the economy through encouraging entrepreneurship by either individuals or groups like the large cooperative movement in Minnesota, or in helping businesses redesign or expand their products.

“What matters for us is to build and maintain systems – preferably sustainable – that enhance the quality of life,” he said.

This isn’t being done by design, but it may be slowly evolving.

An earlier Minnesota 2020 article noted that our largest corporations are accumulating massive cash holdings, as the Federal Reserve has made money cheap in an effort to stimulate the economy. 

This stash of cash doesn’t trickle down to startup companies and entrepreneurs with ideas for new companies and products or services. But recent news events suggest some of the money may be coming into play.

Intel Corp. announced it will spring $8 billion to upgrade four plants in Arizona and Oregon and build a new U.S. plant, leading to 8,000 temporary construction jobs and 1,000 permanent jobs.

Closer to home, St. Jude Medical announced it was buying another Twin Cities medical manufacturer, AGA Medical, amidst a rash of merger and acquisition activity worldwide. This might well strengthen the operations of both entities and lead to more jobs in our medical tech industries, although that isn’t often the case when industry-leading companies go on M&A binges.

But in companion news, the General Electric conglomerate announced it was giving up trying to sell its GE Appliances & Lighting unit and would invest more than $400 million to add jobs and design and build environmentally friendly refrigerators. The company earlier acknowledged it has $30 billion socked away for M&A activity and was looking worldwide for targets in $1 billion to $3 billion price ranges.

How all this shakes out remains to be seen. But if Minnesota and other states want to be players in the new global economy, it must shake free from the big business dominated lobbies that want to use their market power in the political economy to exploit would be entrepreneurs and small businesses, and the far-less powerful taxpayers.

Rather, we should develop countervailing power strategies to help innovators get started and build things that serve niche and high-tech markets that offer growth potential for the future.

References: Most public libraries continue to carry John Kenneth Galbraith’s American Capitalism book, and it is available at most major bookstores. For equally enlightened reading, check out James K. Galbraith’s The Predator State book.

Helpful web sites regarding the latter’s work can be found at utip.gov; epsusa.org; levy.org; and predatorstate.com.

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