Antitrust advocates need to be careful what they wish for. Breaking Alphabet (NASDAQ: GOOG); or Google up, could make the rich richer and income inequality far worse.
The US Justice Department and 11 state governments filed an antitrust lawsuit against Alphabet (GOOGL) on 20 October 2020. Reuters claims the suit is the biggest antitrust action since a suit against Microsoft (MSFT) in 1998.
The suit charges that Alphabet monopolizes internet traffic and suppresses rivals by manipulating Google searches. That helps Alphabet make money by enabling it to charge higher prices for advertising.
How Antitrust can make the Rich Richer
History shows that antitrust actions can make the rich richer and more powerful. For instance, a 1911 antitrust action against the Standard Oil Company made John D. Rockefeller Sr. the richest private individual in history.
The antitrust lawsuit broke Standard Oil, which dominated the American oil market, into 34 separate companies. Rockefeller; Standard Oil’s founder and majority shareholder, owned huge blocks of stock in the new companies.
Over the next three decades, the huge popularity of the automobile led to enormous demand for oil products. All the new companies made more money and Rockefeller and his family got richer and richer.
Antitrust can make Billionaires richer
Similarly, I think breaking up Alphabet (GOOG) could double or triple the fortunes of Alphabet founders Larry Page and Sergey Brin and former CEO Eric Schmidt.
In October 2019 analyst Kamil Franek analyst estimated Page owned 5.7% of Alphabet’s equity, Brin owned 5.5% of Alphabet’s equity, and Schmidt owned 1.2% of Alphabet’s equity.
Brin, Schmidt, and Page are already billionaires. Forbes estimates Brin was the world’s ninth richest person with a $69.15 billion fortune on 21 October 2020. Forbes named Page the world’s eighth richest person with a $71.1 billion net worth on the same day. Schmidt had a fortune of $15.8 billion on 21 October 2020.
Breaking up Alphabet (GOOGL) will make three billionaires wealthier and increase their power and influence. A related problem is that they often pay corporate executives such as Schmidt which stock options. That gives executives a reason to lobby for antitrust action.
Hence, the real motivation for the conservative Donald J. Trump (R-Florida) administration’s interest in antitrust is to create more millionaires not to limit corporate power. To explain, millionaire executives are more apt to make donations to politicians such as Trump and US Speaker of the House Nancy Pelosi (D-California).
The Problem with Antitrust
John D. Rockefeller Sr. became the world’s most influential philanthropist after President William Howard Taft (R-Ohio) broke Standard Oil Up. Rockefeller’s story shows antitrust is a poor method of reducing income inequality and the power of the rich.
Antitrust does not reduce rich people’s power because the source of the rich’s power is cash not corporate brands. Giving rich people more money in the form of more stock will make them powerful.
For instance, Microsoft founder Bill Gates is still the world’s second richest man with a personal fortune of $116.8 billion on 20 October 2020. That was 22 years after the antitrust lawsuit to break Microsoft’s power
If Uncle Sam breaks Google up, Schmidt, Brin, and Page will still be in a position to buy politicians and influence public opinion with their money. In particular, the three will have piles of cash to pour into philanthropy. Sadly in today’s world philanthropy means promoting a person’s personal philosophy and ideology.
To be fair, John D. Rockefeller Sr. did not use his money to push idea. Instead, his Rockefeller Foundation financed scientific and medical research that improved ordinary people’s lives. For example, the Foundation financed the development of a yellow fever vaccine and bankrolled the research that led to the Green Revolution that fed tens of millions of people.
Why Antitrust Fails
Antitrust fails because it does not address the real cause of income inequality. Income inequality develops because small classes of people develop the ability to accumulate enormous amounts of wealth.
The solution for income inequality is a combination of confiscatory taxes and income redistribution. America broke the power of billionaires such as John D. Rockefeller Jr. with a 91% marginal income tax rate on the super-rich in the 1950s. To explain Americans who made over $400,000 a year paid an 84.357% income tax rate in the 1950s and a 91% income tax rate in the 1960s, Stanford University estimates.*
High taxes can help end income inequality by taking cash away from the rich. However, high taxes only reduce inequality when you combine them with income redistribution.
How to Fight Income Inequality
High taxes alone will just move wealth from one group of rich people to another politically connected group of wealthy individuals. For example, high taxes alone will put more money into defense contractors’ pockets at the expense of the middle class.
To eliminate income inequality, a nation needs active wealth redistribution programs. America had such programs in the 1950s in the form of high union wages in some industries, and welfare state programs such as the GI Bill and farm subsidies. Remember the GI Bill gave veterans free college, low-cost mortgages, and business loans.
The problem with America’s mid-20th wealth redistribution efforts is that they only benefited some groups. Union autoworkers in Michigan got high wages, free healthcare, and new cars, but sharecroppers in Mississippi got nothing.
Similarly, racist politicians designed America’s welfare state to exclude blacks. Racist lenders could direct GI mortgages only to white buyers, for instance. In addition, racist bureaucrats kept farm subsidies from African Americans.
History shows that if we want to combat income inequality, American needs higher taxes and aggressive wealth redistribution programs. Such efforts could include basic income, free college, Medicare for All, Social Security increases, minimum wage increases, and reparations for African Americans.
History demonstrates that antitrust will not reduce income inequality or limit the power of the rich. Only taxes and wealth redistribution can fight income inequality.