How Local Government Destroys the Economy

Massachusetts is in the news today, as the locally dominant Partners Healthcare prepares to gobble up more hospitals.  Partners began in 1994 with the merger of Mass General and Brigham and Women’s Hospital, a merger that granted the new entity substantial market power.  Unsurprisingly, Partners immediately began abusing said power by demanding higher prices of insurers and threatening to lock them out if they didn’t pay.  Insurers couldn’t very well lose Boston’s biggest and best hospitals and hope to retain their customers, and so they have caved and Massachusetts healthcare prices began their long and unstoppable climb ever since.

In a seemingly unrelated story, in the early 1880s there existed a grocery store in Memphis, in a neighborhood called “The Curve”.  It was the only grocery store in the Curve and run by a white man named Barrett.  Barrett was a nasty customer, and exploited his position as the only store within walking distance to charge higher prices to blacks.  This was before the formalization of Jim Crow, but of course nobody was about to file an FTC complaint about it!  So some members of the Memphis black community formed a rival, which they called the “People’s Grocery”, which broke Barrett’s local monopoly and charged fair prices to everyone.

This seems like the proverbial invisible hand of Adam Smith in action, but there’s not a happy ending here.  Barrett was an influential man in the community, and white besides – so he had some friends stir up some trouble at the People’s Grocery.  When the clerks had to act in self-defense, they were arrested and set off a wave of mob violence against the black community.  In the resulting chaos, a large proportion of Memphis’s black population fled.  Of those who remained, many had their property expropriated.  The logic of competition had little force compared to the fundamentally corrupt nature of government power in the Old South, which kept the region in poverty for many decades more.

In the larger question of what actually affects people, the best-known problems of national political economy matter little compared to the injustices and failures at the local level.  Most monopolies aren’t national monopolies, and weren’t even before the Sherman Anti-Trust Act.  They are mostly at the local level – the water, power and cable companies that we deal with every day and the hospital groups that dominate many metro areas.  And anti-competitive measures aren’t generally stemming from the US Congress, but from the Barretts of the world and their friends in local government.  In fact, a great deal of the impetus behind Jim Crow came from local businessmen and planters realizing that they could use their local governments to expropriate African-American property.  The Massachusetts story is less dramatic, but also cautionary – Massachusetts politicians that approved the 1994 merger created a monster with the economic clout to improve its market power and the political power to yank their successors around.

Local political economy is probably under-studied.


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