Why the Rise of Mega-Companies May Damage the Global Economy

podcast that brings the global economy to you. And it has been a bump a week for America's tech giants, with Amazon, Apple, Facebook, Microsoft, and Google all reporting yet another big jump in sales and profits in the first three months of the year. Between them, those five companies now make more in sales in a week the McDonald's manages in an entire year. The economist Philippe a Yon thinks the rise of big tech was great for US innovation and economic growth for a while. Now not so much.

He's written a book about creative destruction and the wealth of nations, and he has a plan for getting the best out of capitalist You can find out what it is a bit later. France economy reporter William Horribon is also going to explain why the campaign to extract tax revenues from the tech giants just got a lot more interesting.

But first, let's set the scene with some new research from Bloomberg Economics which brings home just how big the world's largest firms are today compared to a generation ago. The biggest fifty businesses in the world make profits of nearly eight hundred billion dollars. That's close to one percent of global GDP. That may not sound so much, but that's three times higher than it was thirty years ago. Thirty years ago, there were also no Chinese companies in

that group of fifty. Now there are eight, and surprise, surprise, tech firms much more evident than they were. Twenty one of the top fifty businesses are in the tech sector, up from just three in and as a prize at the end for anyone who can name those three, here's what else we know about those firms. They employ fewer workers, and they pay less in tax. These fifty companies, on average pay a tax rate of seventeen percent of their profit and earn an average profit margin of eighteen percent.

Back in it was thirty four of their profits that were taxed away and the profit margin was a puny seven percent. So the numbers make clear why the tax authorities around the world should be so keen to do a global deal on corporate tax. More on that later, But there are broader implications from this changing global landscape for policy and for the shape of the economy. So time now to dig deeper with chief economist Tom Ulick, who co wrote the research with his colleague Justin him Enis. Tom,

Welcome back to Stephanomics. At at one level, I guess it's not surprising these numbers showing that the biggest firms are now much bigger than they were. But when you went through the numbers with Justin what stood out for you? You you hit a bunch of the big takeaways Stephanie. The big firms are getting bigger, They're getting tech here, they're getting more Chinese. A couple of other things which stood out for me. Firstly, that shift east has come

mainly at the expense of Europe. If you look at the geographical composition of the top fifty, the US is holding onto its share, China is rising, Europe is shrinking. That's pretty striking, especially when you consider the hostility to China that we see coming out of Washington, d C and the relatively friendly approach that we still hear from Berlin,

Brussels and other European capitals. The other big thing which I took away from it, and perhaps this is something we can get into in the conversation, is that with their increasing profitability, big firms are now sitting on a huge stash of cash. Back in cash holdings for the biggest fifty firms in the world was about nor point three percent of global GDP. Fast forward to and it's all the way up to two point two of global GDP.

And that has pretty far reaching implications, especially for central banks. If the bigger firms are getting bigger and they don't really need to borrow, well, that raises some questions about the effectiveness of interest rates as a policy tool. Yeah, there's there's a lot to get in there. I mean, I guess one thing is that I already mentioned that they paid less in tax and they have got a

higher profit margin. I guess one clear result of that is it's maybe not surprising that they're sitting on a big mountain of cash. But I guess another reason why they've got lots of cash is that they don't invest as much as maybe they're sort of predecessors might have done the other big companies of of into your thirty years ago. Is that something that's borne out in your research not just fewer workers, but also a bit less investment,

less capital, that's right stuff. So as we've seen the rise of the tech platforms, we've also seen capital spending starting to come down. Back in the top fifty firms in the world, and back then we're talking about big industrial firms like g E or x on, they're spending the equivalent of about seven percent of their revenue on

capital spending digging new oil wells, building new factories. With the rise of the tech platforms, who are more likely to expand by buying more capacity in the cloud than they are to do so by building a new factory. KPEX in twenty is just above four of revenue for the biggest firms. So less workers, less capital spending as well. That's an important change in the way the economy operates.

You know, if monetary policy is is partly about increasing growth by making money more or less expensive to borrow for investment, say, you know, that's what when we learn what monetary policy is that's one of the sort of traditional ways that you would learn you reduce interest rates if you want to encourage businesses and households to borrow

more and do more investment and support growth. I mean, I guess the message of these numbers is that that is a very old fashioned way of looking at the world. So at least when it comes to these big businesses, because the cost of borrowing isn't going to make any difference to them because they don't need to borrow at all. They have always cash. We talked about the dropping capital spending,

we talked about the increase in cash. Now, if you put those two trends together, one of the really interesting things to come out of the data is that back in kpex was about three times cash on hand for the biggest firms in the world. In the biggest firms in the world have enough cash easily to cover all of their kpex for the year. They just don't need to borrow. And that immediately raises questions about how effective interest rates are as a tool for managing the ups

and downs of the business cycle. Now, central banks could argue there's also a portfolio rebalancing effect right when you cut interest rates yes, you're not going to change the investment saving decision for these firms, but you are going to encourage them to move their cash out of money market funds, for example, and put it into risk assets like equities, for example, and that will have an impact on risk appetite and drive growth for the broader economy.

There's some truth in that argument, but relative to the kind of textbook definition of the kind of the muscular way in which interest rate policy changes investment decision by firms, that's a pretty weak read on which to lean for central banks. I mean, we're going to hear more about creative destruction um later on in the program, but you know, obviously there is a big debate about where they're having these big firms actually is good for for growth and

good for your economy. One of the things which comes through in the data is that the process of creative destruction is still at work. If we look at the top fifty firms in and compare that to the list of the top fifty firms in about of the names and new and of course that's related to the capacity of firms, especially in technology, to innovate on new products and new services and sweep away the position of what

looked at the time like unassailable monopolies tomblic Thanks very much. Now, regular listeners will know this isn't the first time we've talked about the challenge of extracting a bit more tax out of big global companies, big tech companies in particular are France economy reporter William Horrobin gave us the heads up at the end of the year about the global talks on this that were underway at that think tank headquartered in Paris, the O e c D. And we

also in that program had an exclusive interview with the top O e c D official who was tasked with getting this big global deal. He said that this was going to be a make or break year for the global corporate tax debate. And I think I thought at the time that I've heard that before, but you know, it just might be thanks to President Biden. So will

Horribin is back with us now to explain what's happening. Well, you might have to talk very slowly and carefully, but what has happened and why does it matter what President Biden has done? Okay, so it is notoriously complicated how to unpick these negotiations that are going on. But I think that I found a simple way of thinking about it is to say that we're looking at how much

big films pay worldwide and tax and where they pay it. So, um, these are the two things that basically, really the O c D has been negotiating for years and years, but they've been blocked in sort of political in transigence and impossibility of getting a deal with Trump mainly. Um. So along comes Biden and he says, look, I've got I'm going to make two proposals, one for each of your problems of where do you pay tax and how much is paid? So let's start with the question of how much.

Which is this idea of a minimum tax? Actually that was actually pretty uncontroversial in these talks. Everyone agrees that would be a great idea to have a minimum tax. But what Biden does is he really gives the proposal, gives it some teeth because he's putting he's suggested a twenty one minimum tax rate, while talks until now had been focusing on twelve and a half percent. So how

does the minimum tax work? Very simplistically, and this is very simpathically, Um, say a US company pays ten percent corporate tax in in country A with a minimum rate at the US would then be able to say I'm going to take the missing eleven in tax, so effectively they're going to be paying. Now the question is will

this actually happen. Our countries are quite optimistic on agreeing on the architecture of how you can put this together, although the rate may not end up being partly because that would depend on the US Congress Um and Biden

getting agreement there. Also, there are countries like Ireland for years have made themselves competitive places to attract investment by having rates as I think they're rate is twelve, So you may end up with a rate that's you know, a bit a bit below that, a bit below if there's an agreement, I mean, I guess we should ask ourselves what's at stake here? How much more tax could

this use for the world's government. Well, according to the o e c D at the end of last year, before Biden made the proposals, based on their work, that with this minimum tax of twelve point um, you'd be increasing global tax revenues by one billion dollars. So it's a pretty big question. Now Biden comes along with a rate that's you know, significantly higher than that, and so you're talking about potentially much bigger numbers. And what about

where now, where where this tax is paid? Where? That has for a long time been the much more trickier, much thornier issue. That's been a bigger divide intellectually between the US and Europe, with Europe saying, hey, the big winners are the digital companies, and we want to go

after them. We want we want a chunk of the tax that you get to collect on Google, say, because Google, Google sells all this stuff in our country and we don't get any technvenues from Google doesn't really have a physical presence maybe in our country, but it's re work, right, it's it's it's really like embedded in our economy, and we want, we want to share of that um now for for all ways, the US had said we're not ring fencing digital companies, Europe had been saying we want

digital companies. Biden comes along and says, look, actually, let's just be honest here. What we're trying to do is go after the winners of globalization. So rather than worrying about what a company does, we just say we'll will take the hundred biggest companies, look at their profitability as a measure and maybe their revenue and work out what who the hundred biggest are, and then we divide up the rights to tax them based on their presence in

their the business they do in countries. And so it's relatively simple, relatively elegant. Um has lots of advantages, it's easier to enforce, it's easy to understand. Politically, it sells well because you know, people people want to go after the big guys. They don't want to go after the small tech company that's perhaps doing a few millions of

business in country X, but not paying any tax there. Now, there's one thing that they're working on now is the parameters of how do you decide what these who these

hundred companies are? And that's when it gets tricky. And so that's that's what's going on the moment is you know, the lots of technocrats behind the scenes in various European governments trying to work out exactly exactly who which companies they might get to tax a bit off if if there isn't a deal at the o c D, all these countries are going to go ahead with these taxes on on digital revenues, which everyone agrees even though they're

using them, are a sort of unfair and economically inefficient taxation. I had the sense that the Biden proposal, the sort of change of approach coming out of the White House and response on on on these issues, was kind of opening the way to a deal on both pieces, including this digital piece. But is that is that not quite right? I mean, is it still looking quite difficult to get a deal in the next six months or so? I think. I think the big change is that there is now

political will to get a deal. Whereas before the Trump administration has made things very difficult. It was a game of cat and mouse. We didn't really know what was going on, and the whole thing stalled. But now there is a clear political will um to get a deal on both these on both these issues of of where they pay and how much they pay these big multinational companies,

and it's for a similar message. That's the political message that's coming out of the crisis, which is that you know, these companies have benefited it hugely from globalization without paying the cost. And so I understand it. Part of the narrative in many countries is explaining how globalization is still is still the answer for for the middle classes. So there's this will that comes from Biden and is shared by many European countries to find a sort of political

solution that they can sell to their cell to voters. Well, and we're going to get into that in a in a broadway with our next interviewee. But Will I could imagine, you know when you read sort of history books around about foreign correspondence, the Paris job has got a great sort of romance to it. I bet when you when you got this gig, you weren't necessarily thinking that you were going to have to become a tax expert. That

wasn't it wasn't necessarily my intention. But you know the Marshall plan put it well, you're getting out a lot of stories these days, the time in the time of the sun when it comes to textiles. Will Horribor, thank you very much, thank you. I'm delighted now to be talking to Philippe Aguillant, professor at the College de France and INCIAD and the London School of Economics, who is one of the most respected experts on the economics of

innovation and growth. He has a book out which pulled some of that thinking together, the power of creative destruction, economic upheaval, and the wealth of nations, and he seemed like just the person to talk to on this podcast about the pros and cons of this changing global landscape that we've been talking about with the rise of these enormous firms. Thank you very much, Philippe Professor Aguillon for joining us. You have always focused on innovation in your

work and the relationship between innovation and growth. If you think about the rise of these of these global mega firms, should we think that's a good or a bad thing for innovation or does the size of companies not really matter? The rise of these big firms, I mean it took place very much, you know, with the with the advant of the A T and A A revolutions. That helped a lot because with the information technology and artificial intelligence revolution,

you can do many more things. It allows anybody to do many more things. And some firms that had better connections, better networks, more advanced social capital, they could do that better than others and they took huge advantage of it. So at first that was very good for growth in the US. Between nine and two thousand and five, growth went up in the US when those firms you know, pervaded, became like a Germany invaded all the sectors of the economy. But then what happened is that once they did it

inhibited innovation. It discouraged innovation and entry by other firms, and that's where growths started to go down. And since two thousand and five in the US you observe a growth decline very much associated with the fact that these mega firms somehow they discourage others from innovative. That there is a discouragement effect. So is it good or bad? It's always good to have innovation, but you have to make sure that the firms that innovated yesterday will not

discourage future innovations. And that's really much the should better day dilemma. You want to give rants to innovator, but you want to make sure they don't use these rants or these runs of situation rants to prevent subsequent innervation. So you always have this contradiction. The book is called The Power of Creative Destruction, which is the class Shumpeter phrase,

and I guess that is the dilemma. You want a company to be destroying others and providing that kind of competition, but they're not just destroy all future competition as well. I guess when people hear that description, they might well think of Amazon in particular exactly. And in the book we explain how the triangle between firms, the state, and

civil society. That triangle may succeed in averting should better specific should better thought that inventors would be con conglomerates, and that the conglomerates with the successful preventing subsequent innervation. So it was very pasimistic. In this book we show that you can overcome that pasimism. You can replace it by an optimism of the will, and that you know, the state with competition policy, with barrious with the separation

of powers, can lose a lot that it needs. Also, the control of civil society and state and ciel society together can avolt the basimistic prediction of better and have creative destruction could be an ongoing process. Well, you and your book is very optimistic at least about the potential for for governments to to sort of see this this process with civil society. We'll get into that in a minute, but I guess just to step back a little bit.

You know, we're both sitting right now anyway in Europe, and there tends to be a lot of soul searching in Europe about the lack of big global firms that have come out of Europe, and even a discussion around wanting to have European champions to sort of take on the US. What you're saying, maybe the Europeans shouldn't be so concerned about having a smaller number and that top fifty. No, in fact, they should be very concerned because when the problem in the US is they are very good. They

have a fantastic ecosystem of innovation in the US. In biotech, for example, you have the National Science Foundation, the National Institute of Health the word used medical institute only that is for fundamental research in biotech. And you have ventual capital, you have institutional investors. You have a huge, fantastic ecosystem of innovation in the The problem in the US is competition policy. You have to adapt competition policy to the

digital era. For example, when deciding whether to allow or not a merger and acquisition, you should ask whether it will stiffen future innovation and entry. That's where the US the problem is called lack of competition and no being you know, that's where the problem is in Europe. The problem is that we don't even have the ecosystem of innovation.

You see what I mean. We tend to be good on competition through EU, the Competition Commission or do I don't always agree with them, but we don't have the ecosystem of innotion, what you want is both you want the innovation and the competition. Europe they don't even have the ecosystem of innovation, So competition without the innovation and yeah, they have competition without innovation, and US have a big

innovation without the without have the quate competition. But I mean the most difficult is to set up the innovation system. Just thinking briefly about this global tax debate. You know, we see the numbers that show these big companies overall paying much less in tax than years ago. If we actually got better at taxing these footloose global firms, is that Do you worry about them? That making them less dynamic, less innovative? No, I think at that stage I think

would be very good to have. You know, I'm not for taxing. In France, for example, we used to over tax you see what I mean. In France, we all with taxing inputs. Even if you make zero profit and you buy some inputs, I tax you already. That I think is very bad. So France was on the other extreme. But starting from the you know, the end of Trump period in the US, Biden is right to raise tax and the I m F is right to recommend that everywhere the corporating contacts be no less than twe. I

think that's very good. You need taxation for various reasons. You need to tax to finance education system, public health, infrastructure, good active employment policy, active labor market policy, all that you need to tax for that and uh, and that you know that that Biden is right to do it, and uh. But on the other hand, you need also competition policy. And you need also not to discourage innovators. So over taxing is not good. Taxing some is good.

Over taxing discourages innovation. But innovation is very interesting. It's good for growth, is good also for social mobility. That's what we explain you the book. It is a very spirit defense of capitalism in that sense, the sort of the right kind of capitalism. You say in the book, the governments can get the growth benefits of innovation without the inequality. But how how do you do that? You have to make sure I mean inequality to to make

sure that you have inclusive growth. That's what you're after. You want growth to be inclusive. So you have to add at several stages. The first stage is education. You need good quality education for everyone, like in Finland. You know Finland is a model of education system. So you need very good education system because at school you don't know lied on material. You learn to learn, you learn

how to learn and more and more. When you are in an economy of creative destruction where you change jobs often, you have to continuously recycle, retrain, learn new things, adapt. That's what you learn at school. Your your school, you learn to learn, You organize your mind to learn to learn. So the education is crucial. Then in at firms, you have to eacourage firms to create good jobs, jobs that valified workers. And we know that more innovative firms create

more good jobs. We showed that in the book. That's very important. And then you have, of course the other instruments like competition policy. We I told you about the big firms in the US. Competition policy is very important because it allows entry of new of new people. We know creative destruction is also not only UH force of growth, but it's also a level of social mobility. So it's important to have good competition policy and to five lobbies

in order to have entry. That's a very important dimension. Another dimension is to prevent the rich to bribe governments or to finance campaigns. I thought it was a bad thing when in the US the Supreme Court allowed private companies to finance political compaigns without limits, because then you bias the rich yaur the system. You don't want that. In Scandinavia, for example, it's very really difficult to do that.

You know, in Sweden minister had to resign because she had both a double row and chocolate with UH with the credit. Cauld of the Ministry I think was something like, so that's you know what you have to be like Sweden in that our dendmark, you know, in that respect. So it's very important that you know. I am not against having riched people. In Sweden, you have rich people because then you can reach renovating. But I want I don't want them to create a stiffen competition. I don't

want them to bias the political game. And I want entry, and I want opportunities coroll So that's education, competition, that was progressive taxation rules, propological complies. All those things are in fighting lobby's are important elements of a competition policy and inclusive goals. You have. You have a great phrase in your you say, capitalism is a spirited horse. It takes off readily, escaping control. But if we hold its

reigns firmly goes where we wish. If you look at what President Biden's been doing, bringing out packages that we discussed in the previous program, worth trillions of dollars, some of it paid for by big taxes on companies, big increases and taxes on companies, do you think he's he's seizing the reins in the right way. Look what I can say, it's a bit early to say, Okay, I have sympathy from him. Uh, it's a bit early to say.

I mean, what's true when the COVID crisis revealed is that the social model in the US is broken, with so many people losing health insurance because they lose employment because they lost employment, with so many people going because going into poverty because they lost their their other job, and so the social model is broken in US what the COVID reveal is that the innovation ecouse system in Europe is not working, so US has to build a new social model. Now by then will by then succeed

We will see is spending a lot of money. But I think what's important is to see whether and the jury is still out, whether Biden will succeed in setting up it's labor marketing institutions like you have in Denmark. You know, in Denmark, when you lose your job, you there is no negative effect on health. You know why because they have what we call flex security. When someone loves loses our job or his job, they are perfect income insurance and they are retrained and the state helps

them find a new job. If they refuse too many job of first and they lose the subgery, but at least they are never left on the road. If you lose your job in Denmark, the state takes care of you and helps you retrain and find a new job. If the US could put a system like the Danish system, that would be a big progress, you see, to to really have and to and also guarantee health access and education to everyone, that would be major progress. They are still very far from it, so it's good Biden is

aware of that. I don't know if Biden will be able to set up governmanent welfare state. You know, with this kind of institution there that the jury is still out. I hope he will. It's not yet the case. It will take very long. In Europe, the big problem is to set up innovation institutions. We need the equivalent of the band of the DAFT Power, the Defense Advanced Peche

of Project Agency. We need the equivalent of the American universities of the nset of the National Sens foundation of the we We need all that to to be You know, venture of capital is underdeveloped in Europe. Institutional investors are under developed compared to US. We need this ecosystem of innovation. So it's very interesting. US needs to reinvantage social model. Europe needs to reinvantage innovation model. And my dream capitalism is one that would combine the innovation model of the

US and the Danish social system. That would be fantastic. Stephanos, we give you our dream capitalism. Thank you very much, Professor Philly Young, thank you so much. I have to say for a different take on creative destruction and Amazon, you could do a lot worse than read my colleague

Bradstone's excellent new book Amazon, I'm abound. And in case there's anyone out there who was waiting to find out who the three tech companies were in the top fifty global firms, they were IBM, Japan's NYC Corporation, and the French tech company alcatel M. I don't know about you. I only got one of those. Now. That is it for this episode of Stephanomics. I'll be back with more next week. In the meantime, please rate the program. Thank you.

Also get more news and analysis from Bloomberg Economics by following at Economics on Twitter. This episode was produced, as ever by Magnus Hendrickson, with special thanks to Professor Philippe Begyon, Tom Orlick, just In, him Menace, and William Horribin. Lucy Meekin is the executive producer of Stephanomics and the head of Bloomberg Podcast is francesco league mm hmm