Explainers

Regional Inequality and Monopoly


Americans today witness many forms of inequality: the wealth of the “one percent,” the gender pay gap, the educational divide, and the racial wealth gap. But another type of inequality, frequently overlooked, is just as politically hazardous and economically damaging: inequality of wealth, income, and opportunity among different regions of the United States.

Consider the growing disparities incomes among the different geographical sections of America. Throughout most of the country’s history, and until the early 1980s, the income of people living in different regions tended to converge. As late as 1940, per-capita income in Mississippi, for example, was still less than one-quarter that of Connecticut. Over the next 40 years, Mississippians saw their incomes rise much faster than did residents of Connecticut, until by 1980 the gap in income had shrunk to 58 percent.

After 1980, however, regional inequality stopped declining and began to grow. Specifically, the per capita income of a few elite, coastal cities, has soared relative to the nation as a whole. In 1980, Washington, D.C.’s per capita income was 29 percent above the average for Americans as a whole; by 2013, it had risen to 68 percent. In the San Francisco Bay area, per capita income went from being 50 percent above the national average to 88 percent.

Another measure of growing regional inequality is the increasing geographic disparities in rates of new startup businesses. During the 1970s, a third of metro areas met or exceeded the national startup rate. Today, only one in seven areas meet this threshold. The decline of entrepreneurship has hit rural America particularly hard. Whereas 20% of the country’s new businesses were launched outside of metro areas during the late 1970s, today, only 12% of the country’s new companies are started in rural areas.

Growing reginal inequality is also revealed by data on venture capital investments. Just three states –California, Massachusetts, and New York–now receive 78 percent of all venture capital investments. Meanwhile half of America’s 366 metro areas have failed in recent years to capture any new investment funding. Similarly, corporate headquarters are increasingly concentrated in certain cities. St. Louis, for instance, once home to 12 Fortune 500 companies in 2000, now is home to only eight.

So, what’s exactly behind the trend of growing regional disparities?

One explanation points to deindustrialization—the flight of factory jobs in “Rust Belt” cities that hollowed out Cleveland and Detroit. But that explanation fails to account for growing per capita income disparities between “Sun Belt” cities and coastal areas like New York. In Metro Houston, for instance, per capita income was 1 percent above metro New York’s in 1980. By 2011, Houston’s per capita income fell to 15 percent below the Big Apple’s.

Another account suggests technological advances and globalization. Improved communications technologies have ushered in a post-industrial, professional services-based economy, largely centered in “creative class” cities—home to wealth, jobs, and college-educated workers. But this explanation falls short. Futurists in the 1970s predicted that new digital technologies would “be the death of distance,” and would level the playing field by letting anyone work anywhere. Yet, the exact opposite has happened; instead of dispersing young creative class workers throughout the United States, they instead have clustered in cities like San Francisco and New York City.

Another explanation that should be considered is the weakening of anti-monopoly laws over the past three decades Previous generations of Americans used competition policy to structure the economy in ways that promoted regional equality and preserved local control of business. Building on principles dating back to the nation’s founding, Congress enacted most of these efforts at the federal level between the 1880s and 1960s, and then began reversing course in the 1970s Understanding these changes sheds light on the growing phenomenon of regional inequality.

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During the 19th and 20th centuries, Congress adopted new policies directly or indirectly promoted regional equality. A key example is the Interstate Commerce Act of 1887 which targeted price discrimination by railroads against sparsely populated regions. By ensuring that railroad rates did not favor one community over another, the law sought to create an equal playing field for businesses in all regions.

Similarly, the government also enforced antitrust laws to contain the forces that were resulting in greater—and more unequal—regional concentrations of wealth. In 1911, for instance, the government broke up New-York headquartered Standard Oil into 34 regional companies ensuring that oil wealth would not be transferred away from local areas. Woodrow Wilson, who, vastly strengthened antitrust enforcement for his adminstration, expressed the basic aim in 1913: “If America discourages the locality, the community, the self-contained town,…she will kill the nation.”

Federal Reserve Act of 1914), one of the signature achievements of Wilson’s presidency, is another example. The law shifted control of monetary policy from private bankers in New York City to 12 member banks headquartered in cities from Richmond to Minneapolis to Kansas City.

The Republican administrations of the 1920s similarly aimed to prevent the concentration of economic power in a few places. The Capper Volstead Act of 1922 provided a way for local farmers to stand up to the power of giant agribusiness by encouraging and protecting the growth of farmers co-ops. The McFadden Act of 1927, limited interstate branching of national banks. By advantaging state-chartered banks, the Act preserved the flow of capital within local communities and made it easier for local entrepreneurs to access local capital.

During the 1930s, the administration of Franklin Roosevelt made sure that emerging technologies, like radio and air transport, would serve all citizens and regions equally. The Federal Communications Act of 1934,  for instance, enabled the wide distribution of local ownership over radio stations. The Civil Aeronautics Act of 1938 helped ensure that air transportation served all American regions and served “the public convenience and necessity.”

By the mid-20th century, policies to ensure regional equality had become widespread and thoroughly embedded in America’s public philosophy. In a court case that blocked a merger between two shoe companies, Supreme Court Chief Justice Earl Warren explained the anti-monopoly laws’ purpose in keeping forms of business small and local: “Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets. It resolved these competing considerations in favor of decentralization. We must give effect to that decision.”

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Beginning in the mid-1970s, however, both Democrats and Republicans came under the thrall of economic doctrines that claimed monopolies were not to be feared, and that any attempts by government to structure competition would lead to inefficiency and higher prices for consumers. This lead to the dismantling of a large and carefully constructed body of law and regulation that for generations had been reducing inequalities of wealth and power across regions.

In 1978, for instance, President Jimmy Carter signed the Airline Deregulation Act, which abolished the Civil Aeronautics Board. This cleared the way for massive industry restructuring that concentrated airline service in fewer and fewer cities and sharply cut service into once vibrant Heartland cities like St. Louis, Pittsburgh, and Cincinnati, making it harder for these cities to compete in the national economy.

Under Carter, a vast deregulation of the nation’s financial sector also began. This would eventually lead to most locally controlled banks, Savings and Loans, credit unions and thrift institutions becoming displaced or absorbed by financiers and banks “too big to fail” headquartered in New York and other distant money centers.

The process of dismantling anti-monopoly policies that had promoted regional equality accelerated during Ronald Reagan’s presidency. Reagan’s Justice Department wrote new guidelines, for example, that rejected regional equality and local control as considerations in deciding whether to block mergers or prosecute monopolies.

The greater market concentration that resulted in almost all sectors of the economy greatly reduced rates of entrepreneurship across much of the American landscape. During the 1980s, independent retailers supplied about half of the goods Americans bought in stores; today their share is down to about one quarter. Between 1997 and 2012, firms with fewer than 100 employees collected nearly one-fifth less total business revenue, dropping from 29 to 24 percent.

Under President Bill Clinton, continuing deregulation of nation’s financial sector further undermined community banks and other locally controlled financial institutions, while other policy changes eroded locally controlled media as well. In 1996, Clinton signed the Telecommunications Act which lifted a limit on the number of media outlets a broadcast network could own and removed a ban on one company owning both radio and TV companies. This led to a shift from America’s traditional system of locally owned media companies to a collection of a few nationally owned media giants. Today, six media companies control 90 percent of the market in the U.S., down from fifty companies in 1983.

Today, the hollowing out the American heartland continues apace, as more and more communities see giant distant platform monopolies threatening the last of their locally controlled businesses, and by extension, their cultural, civic, and political institutions as well. While Walmart and Amazon displace local retailers, Google and Facebook erode the economic foundation of locally controlled media, and platforms such as Uber take away the power of local communities to regulate commerce within their borders.

As the dynamic unfolds, rates of civic involvement continue decline. Studies have shown that when major corporate headquarters leave cities after mergers, the replacement of locally based executives by “absentee” managers tends to result in less local corporate giving, civic engagement, employment, and investment. This in turn leads to a negative feedback loop causing further regional decline, and eventually to the emergence of a polarized politics poisoned by resentment of distant, self-dealing elites.

 

 

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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