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Sunday, May 22, 2022

Manju: 3 companies control almost everything. should you worry?

When I spoke to Vivek Ramaswamy on the phone on Tuesday afternoon, I did not expect to find a common cause. Ramaswamy is a tech entrepreneur who is a frequent contributor to conservative outlets, including the editorial page of The Wall Street Journal, and the author of a book titled as if it was produced in a Fox News lab to maximize base. To tickle off and trigger actions: “Voc, Inc.: Inside Corporate America’s Social Justice Scam.”

I reached out to Ramaswamy to discuss his new venture, Strive Asset Management, an investment firm that he says will urge corporations to stay out of politics. Among Strive’s funders, however, is one of the more politically active people in the business, Peter Thiel, a billionaire venture capitalist who backed Donald Trump and is now funding a slate of Trump-loving congressional candidates. Is.

It turns out I was right: I didn’t quite agree with what Ramaswamy said. Not only are our politics fundamentally heterogeneous, we also differ on the meaning of “politics” in modern American capitalism. Yet despite our disagreement, something strange happened. I found myself nodding off with Ramaswamy’s core point: that three giant US asset management firms — BlackRock, Vanguard and State Street — control much of the global economy.

Firms manage large institutions such as pension funds and university endowments as well as investment funds for companies and, in some cases, individual investors such as myself and perhaps even you. His holdings are huge. BlackRock manages investments of approximately $10 trillion. Vanguard has $8 trillion and State Street has $4 trillion. Their combined $22 trillion in managed assets is equivalent to more than half the combined value of all shares of companies in the S&P 500 (about $38 trillion). His strength is expected to increase. An analysis published in the Boston University Law Review in 2019 estimated that the Big Three could control 40% of shareholder votes in the S&P 500 within two decades.

Why is this a problem? Ramaswamy argues that the main issue is that companies are using their enormous amounts of money to propel the companies in which they make large investments to adopt liberal political positions – such as those focused on climate change or their own Improving the diversity of the workforce. I think this is a crapshoot, as I’ll explain below.

The real threat from all three is economic, not political. The US economy is rolling under monopoly and oligarchy. In many industries, from airlines to Internet advertising to health care to banks to mobile phone providers, there are only a few companies Americans can do business with.

BlackRock, Vanguard and State Street have been exceptionally good for investors — their passive-investing index funds have lowered costs and delivered better returns for millions. But their rise has come at the cost of a deeper concentration in corporate ownership, potentially supercharging the elite influences of already elite industries.

Harvard Law School professor John Coates wrote that indexation and the growth of the Big Three mean that in the future, about a dozen people in investment firms will hold authority over most American companies. Researchers have argued that this level of concentration would reduce companies’ incentives to compete with each other.

In fact, there is some evidence that their concentrated ownership is associated with lower wages and employment and is already driving up prices in some industries, including airlines, pharmaceuticals and consumer goods. Companies dispute this. In a 2019 paper, Vanguard researchers said that while they studied a lot of industries over a long period of time, “we didn’t find conclusive evidence” that common ownership led to higher profits.

In late 2018, a few months before his death, John Bogle, the visionary founder of Vanguard, who developed the first index fund for individual investors, published an extraordinary article in The Wall Street Journal assessing the impact of his life’s work. published. The index fund had revolutionized Wall Street — but what happens, he wondered, “if it becomes too successful for its own good?”

Bogle pointed out that asset management is a massive business — the more money BlackRock or Vanguard or State Street manages, the more it can reduce its fees for investors. This makes it difficult for new companies to enter the business, which means the Big Three are likely to continue to hold on to the market. “I do not believe that such concentration will serve the national interest,” Bogle wrote.

Harvard’s Coates argues that policymakers must proceed carefully to manage the risks of concentration without limiting the benefits to investors of these firms’ low-cost funds. “There is no doubt that getting the balance right will require judgment and experimentation,” he wrote.

But the most important issue for us is to recognize the problem. The growing influence of the three big fund managers is unlikely to diminish. Ramaswamy’s view on the problem is wrong, but he is right that it is a problem. How much power will the three companies have to accumulate before we decide it’s too much?

Farhad Manju is a New York Times columnist.

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