David Cay Johnston latest book, The Fine Print: How Big Companies Use ‘Plain English’ to Rob You Blind is another outstanding compilation of corporate abuses. While the book covers a lot of ground, the parts I find most fascinating are the discussions of sectors of the economy in which competition has virtually been eliminated due to growing concentration. Some of these sectors I have familiarity with in my daily life, such as phone and Internet companies (okay, those are the same companies). Others, like freight railroads, I have less occasion to deal with.
The discussion of railroads is especially interesting for two reasons. First, lack of competition in the railroad industry was one of the main causes of the original push for anti-monopoly regulations. In the 19th century the populist movement was propelled in large part by the price gouging by the railroad companies. Of course this mattered much more when close to half the population was living off of agriculture compared to today; but as Johnston points out, the higher fees charged for hauling grain, coal and other products will all eventually come out of consumers’ pocketbooks.
The other reason why the story of railroad concentration and anti-competitive practices is so interesting is that Warren Buffett, everyone’s favorite capitalist, plays a starring role as a villain. It turns out that Buffett’s foray into the railroad business was not about rebuilding a central cog in the nation’s infrastructure, but rather seeing a great profitmaking opportunity in an industry where many routes had near monopoly pricing power with little government regulation.
Buffett appears at several points in Johnston’s book, perhaps most notably as a reference point in the bailout of Goldman Sachs in 2008. Both Buffett and the Treasury Department invested in Goldman at the peak of the financial crisis, but Buffett’s return was more than twice as high as was the Treasury got on its investment. Of course, the Treasury bailout also helped to secure Buffett’s own stake.
Certainly Buffett does not stand out as an especially evil businessperson. My guess is that Johnston is simply trying to set the record straight on an extremely successful investor who has been incredibly effective in manipulating his media image. Buffett invests to make money. Sometimes this has all the positive benefits that we identify with a thriving business – jobs, better products, rising living standards –but sometimes Buffett makes his money from tax schemes and anti-competitive practices. That’s capitalism in America today: get used to it.
Having been a victim (like everyone else) of the billing practices of credit card companies, banks, etc., I found Johnston’s discussion here quite interesting. People will find the ways in which these companies have managed to maximize monthly payments fascinating. Everyone should read it.
The basic point is straightforward. These companies have you as a largely captive customer. This is especially true with a telephone or Internet company where they may be little or no effective competition. But even in the case of banking, where there may be many options, few people want to go through all the hassles associated with changing accounts, especially in a world where you may have a variety of direct deposit/withdrawal arrangements, all of which would have to be changed with a new account. And there is no guarantee that a new bank would be any better. As a result, companies can engage in a wide variety of practices that could be regarded as abusive.
Johnston has his own remedies for the problems he identifies at the end of his book, but I want to conclude with one of my own. As it currently stands there is an enormous asymmetry between consumers and corporations when it comes to paying bills properly. As Johnston points out, consumers can face large fees for everything from paying a bill a day late or overdrawing their checking account by a dollar. The company basically sets the rules.
But what happens when the mistake is on the other side? What happens when the credit card company charges you a late fee that you don’t owe or the phone company charges you for a service they didn’t provide? After you spend an hour fighting with their computer answering system and then going through sales clerks and supervisors, you will likely get the charge removed. You don’t get to impose a penalty.
I don’t know if any companies deliberately issue false charges, but this is clearly a no lose proposition for them. If the customer doesn’t catch the charge, it’s free money. If the customer does notice the mistake and takes the time to pursue it, then the company is no worse off as a result of its mistake.
Suppose we made the risks here a bit more balanced? For example, we could require that companies have to pay their customers a 20 percent surcharge in addition to removing any incorrect charges. This would give companies a real incentive to get things right. Given that they have expensive and sophisticated computer systems, this should not be very hard for them to do.
Above all, as an economist I can’t wait to hear the argument against a measure like this. Will the Chamber of Commerce come out with a study showing that a regulation like this would cost their members trillions of dollars? I can hardly wait.
Anyhow, that’s a digression. Johnston has given us another great book full of fascinating accounts of how corporations profit not by delivering a better product or being a more efficient producer but by gaming the system. This is not a pretty picture.
[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions. Please take other conversations to a previous thread. - bev]