Growing market concentration is threatening the US economy


World Economy

Monday, March 18, 2019

The world’s advanced economies are suffering from a number of deep-seated problems. In the US, in particular, inequality is at its highest since 1928, and GDP growth remains woefully tepid compared to the decades after World War II.

After promising annual growth of “4, 5 and even 6 percent,” US President Donald Trump and his Republican enablers in the US Congress have delivered only unprecedented deficits.

According to the US Congressional Budget Office’s latest projections, the federal budget deficit will reach US$900 billion this year and surpass the US$1 trillion mark every year after 2021 — and yet the sugar high induced by the latest deficit increase is already fading, with the IMF forecasting US growth of 2.5 percent this year and 1.8 percent next year, down from 2.9 last year.

Many factors are contributing to the US economy’s low-growth-high-inequality problem. Trump and the Republicans’ poorly designed tax “reform” has exacerbated existing deficiencies in the tax code, funneling even more income to the highest earners.

At the same time, globalization continues to be poorly managed, and financial markets continue to be geared toward extracting profits — rent-seeking, in economists’ parlance — rather than providing useful services.

However, an even deeper and more fundamental problem is the growing concentration of market power in the US, which allows dominant firms to exploit their customers and squeeze their employees, whose own bargaining power and legal protections are being weakened. CEOs and senior executives are increasingly extracting higher pay for themselves at the expense of workers and investment.

For example, US corporate executives made sure that the vast majority of the benefits from the tax cut went into dividends and stock buybacks, which exceeded a record-breaking US$1.1 trillion last year.

Buybacks raised share prices and boosted the earnings per share-ratio, on which many executives’ compensation is based. Meanwhile, at 13.7 percent of GDP, annual investment remained weak, while many corporate pensions went underfunded.

Evidence of rising market power can be found almost anywhere. Large markups are contributing to high corporate profits. In sector after sector, from little things like cat food to big things like telecoms, cable providers, airlines and technology platforms, a few firms now dominate 75 to 90 percent of the market, if not more; and the problem is even more pronounced at the level of local markets.

As corporate behemoths’ market power has increased, so, too, has their ability to influence the US’ money-driven politics. And as the system has become more rigged in businesses’ favor, it has become much harder for ordinary citizens to seek redress for mistreatment or abuse.

A perfect example of this is the spread of arbitration clauses in labor contracts and user agreements, which allow corporations to settle disputes with employees and customers through a sympathetic mediator, rather than in court.

Multiple forces are driving the increase in market power. One is the growth of sectors with large network effects, where a single firm — like Google or Facebook — can easily dominate. Another is the prevailing attitude among business leaders, who have come to assume that market power is the only way to ensure durable profits.

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