The writer is chair of Rockefeller International
The irony of the Silicon Valley Bank saga is now complete. The crisis started inside the American tech sector’s favourite bank, but the government rescue has benefited Big Tech the most. As calm returns to the market, fuelled by megacap tech stocks, investors are naturally relieved. They need to be aware, however, of where a system built on bailouts is heading.
Even two decades ago, capitalism was marked by boom-bust cycles that disrupted incumbents and created space for upstarts. While still a ubiquitous word, “disruption” is finally fading as churn in the market stalls. The big beneficiaries of post-crisis rescues are big, established companies — and this is not how capitalism is supposed to work.
After the government stepped in on March 10 to rescue SVB, megacap stocks had one of their best runs ever. Today, all of the top five US companies are tech businesses and together they represent more than 20 per cent of the stock market — the highest concentration since the 1960s and more than double the figure a decade ago.
The decline in competitive churn is a side-effect of the rescue culture that has been growing since the 1980s. Ever since the US Federal Reserve stepped in to prop up the market after the 1987 crash, the stock market has grown dramatically, from half the size of the US economy to two times larger at its peak in 2020. One might assume an expanding market should create room for more churn, but no, not in America.
The number of US companies that remain in the top 10 from one decade to the next has risen steadily, from just three in 1990 to six at the end of the 2010s. And while churn has weakened in the US, it remains relatively robust across much of the world. From the start to the end of the 2010s, just two companies remained on the top 10 list in Japan, four in Europe, four in China and two in the global list, Microsoft and Alphabet.
Today, the top five US companies are bigger than the next five by the largest margin since the early 1980s. The top two alone account for nearly half the market cap of the top 10, up from 35 per cent at the start of the pandemic. Apple is now number one, and is nearly six-times larger than UnitedHealth Group, in 10th place. Three decades ago, Exxon was number one but just over twice the size of the tenth company, BellSouth.
Competing explanations for the rise of Big Tech include the natural advantage of size on digital networks, where companies can add customers at negligible added cost. But “network effects” can’t explain why three out of every four US industries — and not just in the tech industry — have been consolidating in the hands of a few companies. Sweeping government rescues that benefit incumbents can.
In the past, disruption was particularly rapid in tech. New names rose to prominence with each new phase of the computer age, from mainframes to PCs to the internet and smartphones. Now, as the tech conversation shifts to breakthroughs such as AI, it still centres around the same old names led by Microsoft and Alphabet. And this rise of US monopolies has been accompanied by the decline of smaller US companies and start-ups.
In China, where there has been more churn at the top, the prospects of internet giants such as Alibaba and Tencent have risen and fallen mainly with the intensity of government regulation. More than network effects, Beijing is the decisive factor.
The US government is not as intrusive as China’s, but if you think Washington is not distorting markets when it rescues banks, you are not reading this in Texas. There, the mayor of Fort Worth recently said that the “main thing” worrying business leaders is this question: if SVB had served the oil industry rather than tech, would the government “have stepped up the same way?”
Inevitably, rescues distort the way capital is allocated, shifting decisions into political hands. Markets stop trying to figure out what makes economic sense, and start anticipating what the state will support. But a society exhausted by crises seems increasingly comfortable with this perversion of incentives.
Rather than question the wisdom of rescues, many mainstream commentators are asking why governments don’t just double down and nationalise banks. Leaders in other troubled sectors such as commercial real estate are spotting an opportunity, claiming that their industries also pose systemic risks and therefore merit government support.
But churn lies at the heart of capitalism. The state cannot keep all incumbents afloat. If there is any energy left in this increasingly deformed system, the coming years should see the big making way for new winners, not further entrenching themselves at the top.