Increasingly, the problem of corporate concentration, and in its more extreme form, monopoly, is returning to the American political debate. In 2016, senators from both parties lambasted the failure of the Federal Trade Commission and the Department of Justice for failing to enforce anti-merger laws.
During last year’s presidential campaign, everyone from Donald Trump to Bernie Sanders to Hillary Clinton talked about the accumulation of corporate power in a few hands, a nod to growing concern that it may be leading to inequality or imbalances of political power. (Just weeks before the election, Trump comically said of the proposed ATT-Time Warner merger that “deals like this destroy democracy.’) But there has been bizarrely little research on what corporate concentration actually does to the income of ordinary citizens. As Lina Khan, my colleague at the New America Foundation who looked into this issue in 2014 put it, “A paper from 1975 was the only thing we found on the links between concentration and inequality.”
Now, because of elevated recent interest in corporate power, experts are coming up with data showing just what it’s costing Americans. And last week, economist Simcha Barkai presented his recent paper at a conference at the Stigler Center at the University of Chicago, suggesting corporate concentration leads to substantial declines in money going to workers across the country.
According to the paper, there’s been roughly a 10 percent decline in what’s known as “labor share” over the past 30 years. (Barkai’s paper looked at the non-financial corporate sector, which encompasses roughly 80 million workers.) What this means is that out of the total number of goods and services produced by corporations, less of it by percentage terms (10 percent less) is going to pay for salaries and benefits—a.k.a. income.
What’s behind this significant drop in this percentage of wealth going to labor? Various arguments have been presented over the years, like cheap Chinese imports displacing workers; there is some evidence for this. But perhaps the most popular explanation is that robots are taking jobs. This idea comes in part from Silicon Valley and was popularized by venture capitalist Marc Andreessen in a 2011 essay titled “Why Software Is Eating the World.”
Andreessen posited that a lack of education was behind the decline of job opportunities. “Qualified software engineers, managers, marketers, and salespeople in Silicon Valley can rack up dozens of high-paying, high-upside job offers anytime they want, while national unemployment and underemployment is sky-high,” he wrote. “This problem is even worse than it looks because many workers in existing industries will be stranded on the wrong side of software-based disruption and may never be able to work in their fields again. There’s no way through this problem other than education, and we have a long way to go.”
But Barkai found no evidence for this in his study, which used government data from the Bureau of Economic Analysis. In fact, he found that spending on capital inputs, which includes robots, is declining even faster than spending on labor. As Barkai put it, “Measured in percentage terms, the decline in the capital share (30 percent) is much more dramatic than the decline in the labor share (10 percent).”
So where is all the money going? “Profits have been rising over time,” Barkai said last week. And he put a number on it. “To give you a sense of how large these profits are, if you look over the past 30 years… per worker, how much have these dollars increased? It’s about $14,000 per worker. And that’s a really big number because, in 2014, personal median income was about $28,000.” Barkai’s models show that this effect is more pronounced in concentrated industries and less pronounced in competitive ones. Had concentration remained at the levels we saw 30 years earlier, one model in his paper suggested that wages, output, and investment would be substantially higher.
Barkai worked with Professor Luigi Zingales, director of the Stigler Center who organized the conference on concentration. Their work is part of a wave of new research on how changes in the corporate sector and concentration are having a significant impact on the labor force, prices across the economy, investment, and productivity.
Among others, one trend that has puzzled some economists is why productivity, or the amount that an American worker produces with the same amount of machinery, isn’t increasing as fast as it once did. But one younger scholar in this field, German Guitierrez, a PhD student at New York University, has shown (with his French economist co-author Thomas Philippon) that corporate concentration may reduce firm investment and could potentially explain that, too.
Likewise, economist John Kwoka has shaken up the antitrust profession with work showing that mergers allowed by the Federal Trade Commission in concentrated industries lead to price hikes. And Justin Pierce, an economist at the Federal Reserve, found that companies that acquire manufacturing plants simply raise prices for the products those plants make, without increasing the efficiency of how those plants operate. Mergers are often justified as bolstering the efficiency of the companies being bought; Pierce’s paper may undercut this rationale.
This change in thinking is also taking place at the upper rungs of America’s economic regulatory apparatus. In 2016, Federal Reserve Chair Janet Yellen noted that the 2008 financial crisis might prove a “turning point” for thinking in the economics profession—one as significant as that of the 1970s, when the Establishment became substantially friendlier to big business. She suggested that the failure of small business to recover as quickly as larger corporations was a potentially significant factor in the ability of the Federal Reserve to organize an economic recovery.
“These findings bring to the fore critical and troubling trends that would otherwise be hidden from view,” said Sabeel Rahman, a professor at Brooklyn Law School who specializes in the intersection between money and democracy. “Economic power and concentration increases inequality while also undermining economic dynamism. We need findings like these—and hopefully there will be further such studies to build on these papers—to shape a new wave of policy reform and debate over how to make the 21st-century economy inclusive, fair, and vibrant.”