“Show me the incentive and I’ll show you the outcome.” – Charlie Munger
Over the past two weeks, I’ve been working on a new initiative at BIG, which is more deep dive investigative work, building on the piece Basel Musharbash wrote on fire trucks. Next week, we’ll have a series on the price of eggs. We will show how a small set of firms in the egg supply chain consolidated the industry, and led to the mess we’re dealing with today. So stay tuned. Oh and if you’re in that industry, adjacent to it, or know someone who is, send me your thoughts.
In the meantime, the latest Organized Money podcast is a conversation with Lina Khan, so if you haven’t listened to that yet, you should. What we’re trying to do with Organized Money is talk to business people about how they operate in concentrated markets. And what I’ve noticed from those conversations, and in the upcoming series on eggs, is a trend in virtually every industry I’ve looked at, from baby formula to beef to Boeing. It’s an incentive problem that most people in corporate America will recognize, to do things that are good for the individual but bad for the company.
The immediate problem with eggs, for instance, is high prices and shortages, but the longer-term problem is that the industry is destroying itself. Usually what happens is that monopolists or cartels impose bureaucratic hurdles inside an industry, which manifest as endless red tape, junk fees, bullshit certification requirements, exclusive dealing arrangements, kickbacks, or otherwise fake prices. The increasing Soviet-style experience we’re having opens the space for someone like Elon Musk to make a broad claim about an unaccountable bureaucratic elites running roughshod over everyone else, and use it to dismantle public institutions. Musk is framing America as in crisis, unable to build or solve problems. And he’s not wrong about the diagnosis.
Take food, writ large. When North Carolina farmer Jeff Bender talked with us a few weeks ago about risks that go beyond avian flu, he noted a historic anomaly. America has some of the most fertile land in the world, and has always been a place with cheap food, so much abundance in fact that we were a powerhouse exporter. But today, we don’t actually grow enough food, because the knowledge passed down from generations of farmers is being destroyed.
And the data bears this observation out. A few months ago, the USDA reported something quite shocking. As of 2023, the U.S. is now a net food importer. Here’s a chart put together by Bloomberg:
For decades, the conversation about trade has been about how our manufacturing sector has been destroyed by foreign imports. The political deal underpinning this arrangement was that America would provide global security through our military, Wall Street would be the center of global finance, and U.S. farmers would export surplus grains. Meanwhile Europe would send us luxury cars and East Asia would send us everything else. There’s a reason trade agreements had their strongest support on Wall Street and among midwest farmers selling to China.
The worrisome future in this framework was that the U.S. would ultimately become a mere provider of agricultural commodities, and import critical manufactured goods, like a colony. But what we are now seeing is that this deal was a mirage; the same trends that hit our manufacturing sector are hitting our agricultural sector. The U.S. isn’t even an agricultural commodity net exporter anymore.
There’s a very scary implication. If trade shuts down, as it did during the Covid era, there will be shortages of food. Indeed, we started to see such shortages in certain narrow areas before we went into a broad agricultural deficit. In 2021, I interviewed Bill Bullard, a former cattle rancher, to explain why consumers experienced shortages of beef during Covid. The big four packers had shut down so much capacity, and were manipulating the market so extensively, that the independent U.S. cattle ranching industry was going into structural unprofitability. Our cattle inventory is the smallest it has been since the 1950s. Here’s what he said about the consequence:
In March of 2020, for the first time in memory, consumers went to the grocery store and couldn’t buy beef. And it wasn’t that we didn’t have enough cattle to produce the beef that consumers wanted; the distribution system and the market system completely broke down. So consumers began to look for alternatives, such as farmers and ranchers who could actually sell beef directly to consumers.
This was a wake up call for America. We have so skeletonized the entire live cattle and beef supply chains that they are no longer capable of withstanding a shock, whether it be the covid pandemic or a climatic circumstance. The industry is incapable of meeting our national food security needs.
The reason for this trend in beef Bullard highlights is very obvious – monopoly power. It’s the same as the current egg crisis, which Trump is trying to “fix” with imports. Now, the farming and food industry is a right-wing coded space, but they have their own way of talking about the perils of big business. They complain about over-regulation, climate change initiatives by big firms, putting solar panels on otherwise good land, and so forth, but the gist of what they’re saying is that they can’t make money growing food anymore because the middlemen are taking all of it. They happen to think the middlemen are hippy DEI consultants, but it’s essentially the same anger as any Taylor Swift fan screwed by Ticketmaster or independent pharmacists being harmed by a PBM. It’s not some left-wing sad sad sack story that they are living paycheck to paycheck while billionaires get rich, it’s that shit doesn’t work like it should.
Let’s go back to beef. In 2021, JBS, one of the big four beef processors, took one of its huge packing plants offline because of a cyber-attack. One would think this kind of problem would ding the company. But rather than hurting JBS, removing this capacity from the market led to much higher beef prices and thus better margins. Shortages, in other words, can be profitable if there’s a middleman doing the squeezing. Extending this argument would suggest that, at its most extreme, and as we’ve seen with both the 1840s Irish potato famine and the 1770 starvation of Bengal by the East India Company, mass hunger is profitable if you’re the one managing the food supply.
While food is particularly tangible, this observation isn’t about food, per se, but mismatched incentives. If we set up an economy where business leaders make more money not doing something than doing it, then you will get an economy where business leaders spend all their time trying to figure out how not to do stuff. I wrote this up during the Covid shortages, that a monopolized economy, what I called “counterfeit capitalism,” leads to shortages and inflation.
It’s a constant theme of BIG, getting rich by doing destructive things, like private equity guys accidentally sabotaging nuclear weapons facilities or John Deere making it harder to repair their equipment, or Boeing leaders giving themselves bonuses for ruining a once-great aerospace maker. It reminds me of a note a reader sent me in 2019, that “very few white-collar workers at P&G really do anything.”
I got a software engineering internship at Procter and Gamble, but declined a cushy full-time return offer because I was interested in doing cutting-edge engineering work with big data and as far as I could tell, very few white-collar workers at P&G really did anything. All I saw was a lot of bureaucratic box-ticking and people patting themselves on the back for work that they hired consultants to do for them.
I swear to God my manager actually took me aside at the beginning of my internship and said “at the end of the day, nothing you or I do is really going to impact P&G’s bottom line, so I wouldn’t stress too much about your projects.” He meant this to be comforting, but as a kid who had grown up in a farming community (and spent summers working on farms) where a single wrong decision and a few days of slacking off might make the difference between a slight profit for the year and insolvency, it rubbed me the wrong way.
You can see this dynamic within most big businesses. I have gotten a bit obsessed with how the corporate procurement industry works, since you would think that procurement officers are the people who would be frustrated with monopolies across the board, as they have to buy everything from waste services to sugar to industrial gasses in increasingly concentrated and opaque markets. But the level of anger at monopolies there is surprisingly low. Why? Well we got a hint a few years ago. In 2022, Kraft-Heinz paid $62 million to the Securities and Exchange Commission for lying about, among other things, “bogus cost savings.” Here’s a procurement expert on what that meant:
The SEC complaint cites among its grievances that Kraft Heinz employees negotiated a range of new supplier agreements loaded with front-end and short-term benefits tied to future commitments and then “…prematurely and improperly recognize(d) the expense savings.”
This revelation caught my attention because—for multiple years now—I’ve been writing and speaking about the pervasive phenomenon I’ve been calling “fake savings,” and the underlying issues with procurement department incentive plans that perpetuate it.
It turns out, as a recent Art of Procurement podcast series shows, the incentives within procurement departments are mismatched as well. In fact, you can go up and down the system, from CEO pay to people claiming fake income thresholds to quality for Medicaid, and you’ll find that in America we have an increasingly Soviet model, where corporate activity is designed to destroy real business, not grow it.
This observation doesn’t sit neatly in either party, because the right doesn’t want to imagine there are problems in business, and the left tends to see business as greedy and overreaching instead of increasingly breaking down. That’s why no one in politics has even tried to offer a solution for Boeing, but is letting it grind itself into dust.
Behind this mismatched incentive problem is an ideological framework that came from famed economist John Kenneth Galbraith’s 1958 book The Affluent Society. In that book, Galbraith explained the wonderful performance of the 1950s American economy as an engine that automatically spewed out jobs, wealth, machines, food, and innovation. Galbraith, and his allies in what was known as ‘the New Left,’ demanded more of the cut of this prosperity go to consumers and the environment, while the ‘New Right’ wanted more to go to the rich. But neither questioned the underlying premise that the economy just kind of worked, and the politics had little to say about it. This notion was an attack on populist Democrats, who were successfully stamped out by the baby boomer generation trained by Galbraith’s arguments.
After the oil shocks, inflation, and financial crises of the 1970s, the New Right and New Left modified but did not change their underlying view, morphing the concept of affluence into the technocratic notion of efficiency. To the right, efficiency meant dramatic inequality. It might be sad, it might be unfair, but it was necessary for modernity. Great concentrations of wealth meant economic virtue. The left wing did not reject this premise, but articulated a need for more redistributive tax policies, which is why leaders like Nancy Pelosi constantly emit pity for the less well-off as their main political emotion.
The compromise between the two were to have oligarchs, but “nice” ones. The “Atari Democrats” of the early 1980s were the lodestar for this new politics. Bill Gates’s billions and technological advances were one and the same, but he would also fund lots of public health infrastructure. It didn’t occur to most political leaders that software as an innovative set of industries could be distinct from the specific toll booths that Gates had set up on top of it. You can see this same dynamic today, with the endless subsidies to artificial intelligence billionaires, who are talking about a wonderful future for all that only a small number of big tech firms can bring.
What the right and left missed is that actually producing goods and services isn’t an automatic process, but a social endeavor based on a carefully structured set of laws and rules designed to block middlemen from seizing control of the arteries of commerce. The origin of these rules goes back to the medieval strictures against manipulating markets, the “engrossing, forestalling and regrating” elements of English common law, but it was embedded in the Sherman Act’s prohibition of “restraints of trade” and a whole slew of 20th century administrative arrangements, like securities law that prohibit falsifying numbers that ultimately create Soviet-style enterprises.
Normally, undermining the basis of a society’s prosperity leads to a backlash, but America has, since the 1980s, been able to plug up our fraying productive capacity with something few other countries can access without paying for them – imports. And that’s because as a hegemon since World War II, we have a very costly form of financial supremacy. The real deal that the U.S. has with the rest of the world is that Wall Street produces dollar denominated assets that foreigners can buy to keep their money safe, and in return we get real stuff – cars, clothes, computers and increasingly food.
But as John Maynard Keynes noted, finance isn’t supposed to be a the primary activity of economy, it’s supposed to support the real economic activities that allow human flourishing. Mortgages, for instance, don’t exist without houses, or at least shouldn’t. But the financial crisis of 2008 showed that the dollar denominated asset production had taken on a life of its own. We were no longer selling mortgage backed securities to European banks to finance houses, we were financing houses so that we could sell mortgage backed securities to European banks. It’s the same with all of our vital systems. We’ve transformed health care into an excuse for a lot of large monopolistic bureaucracies to grow, and farming now exists as an endeavor designed to generate higher margins for Tyson’s or JBS.
What Trump’s reelection showed is that the deal doesn’t work anymore. It’s not just because it’s bad for us, it’s because human beings don’t like living in a world of bureaucratic fake nonsense. And people will vote based on their anger at the status quo. It’s not really even a rich/poor issue, a gilded cage is still a cage. It’s more high finance vs real commerce. We want meaning, we want to be able to put effort into stuff and see it come to something, we want to have families and communities.
Right now, one political approach is that of Elon Musk, who is ripping through the U.S. Federal government, pinning the sense of fury that Americans have on our public institutions. And he’s not totally wrong. Our health care and financial industries are public-private systems, and the mismatched incentives exist within government as they do within business. I mean, Musk got his idea for DOGE by downsizing Twitter. But he’s not building, he’s destroying. (And that’s how a lot of the corporate world works, when something starts to fail, don’t fix it, just sell it to private equity to squeeze as much as possible until it fully dies.)
A different version of this approach is the activities of the crypto universe, people who grabbed the idea of institution-building and warped it into a set of weird gambling habits. On the left, there’s a similar attack on institutions. The Abundance frame, which is being launched by Ezra Klein at The New York Times and Derek Thompson at The Atlantic, is an attempt to wrestle with a government that seems dysfunctional, arguing the “supply side” is holding back more stuff that could make us prosperous.
A different approach is to give up. Here, for instance, is Annie Lowrey’s headline in an article saying the problem with eggs isn’t market power or industrial structure, it’s that we ever ate them in the first place.
None of these arguments are wholly wrong, and there are things we can learn from Trump, Musk, Klein, Lowrey, et al. But as I’m looking into markets, it seems like the real way forward is to re-examine the underpinnings of American business, and rejigger the relationship between finance and production so we’re doing real things again instead of lying about them. We have to build institutions, not tear them down.
There are plenty of business leaders, like Tim Sweeney at Epic Games, Michael Beckham at Simple Modern, Blake Scholl at Boom Supersonic trying to do so, working to re-shore and innovate, or pharmacists, doctors, grocers, et al trying to serve their communities. There are even people in private equity who get the problem. I know and talk to people across many industries, from electric utilities to mail management software. Ultimately, it’s time to rebuild American business, and there are a lot of people who want to do so.
But too many do not see that all of us are heading for an iceberg. And to that point, next week, you’ll hear about eggs.
Thanks for reading!
And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.
cheers,
Matt Stoller
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