A new study from Federal Reserve Board economists argues that the rising market power concentration of American companies has contributed to a host of economic ills, including rising inequality and financial instability.
The study published earlier this month by Isabel Cairo and Jae Sim, titled Market Power, Inequality, and Financial Instability, uses mathematical modeling to examine the impact of monopoly power.
The authors identified a decline in competition, with large firms controlling more of their markets, as a common cause in a series of important shifts over the last four decades.
Those shifts include stagnating wage growth, a ‘dramatic increase’ in corporate profits, rising disparities in income and wealth, rising household debt and greater risk of large-scale financial instability.
‘The rise of market power of the firms may have been the driving force’ in all of these trends, Cairo and Sim write in the paper.
The study suggests that inequality has risen as the owners of assets such as stocks and property benefit from market concentration, while wage earners have suffered.
Struggling with stagnating wages, workers have borrowed more, creating rising debt that raises the risk of systemic financial instability, the study says.
The authors suggest that new government policies including higher taxation and increased spending on safety-net programs could remedy some of the ills and reduce the likelihood of financial crises.
They posit that if the tax on dividend income had been gradually raised from zero to 30 percent over the past three decades, it ‘might have been effective in preventing almost 50 percent of buildup in income inequality, credit growth and the increase in the endogenous probability of financial crisis.’
Wage growth has stagnated while corporate profits rise
The authors write that real wage growth has stagnated behind productivity growth over the last four decades and, as a result, the labor income share has steadily declined.
At the same time, the before-tax profit share of U.S. corporations has shown a dramatic increase in the last few decades, according to the Fed study.
The two trends are highly negatively correlated, meaning that as corporate profits rise, labor’s share of profits declines.
‘This correlation suggests that the rise of the profit share and the fall of the labor share may have been driven by a common cause,’ the authors write.
Income and wealth inequality have risen in the past four decades
The income share of the top 5 percent households has been steadily rising from 21 percent in early 1980s to more than 34 percent on the eve of the financial crisis in 2008, according to the study.
The authors suggest that the first two trends, stagnating wages and rising corporate profit share, may be factors in rising income inequality.
‘To the extent that the major income source of wealthy households is the profits of the firms and the major income source of the working class is labor income, the first two trends explain the trend in income inequality,’ they write.
‘This suggests that income inequality, too, may have been driven by the same factor behind the decline of the labor share and the rise of the profit share.’
Meanwhile, wealth inequality has also been exacerbated during the last four decades.
According to the Survey of Consumer Finances, the net worth of the top 5 percent households has increased about 186 percent between 1983 and 2016, the study says.
‘The rise in wealth inequality is not simply the result of rising income inequality–though related, since a bulk of the rise is due to capital gains,’ the authors write.
Household debt has increased, raising risk of instability
The household sector credit-to-GDP ratio was 45 percent at the beginning of 1980s, according to the study.
Since then, the ratio steadily increased and reached almost 100 percent in 2008 on the eve of the financial crisis.
‘This suggests that a growing share of national income has been allocated to income groups with low marginal propensities to consume,’ the authors write.
Consequently, the study finds, the risk of financial instability has risen in recent decades.
‘The secular rise of financial instability is clearly linked to credit expansion over the last few decades,’ the authors write.
The issues taken up in the study have received increased attention from both Republican and Democratic lawmakers in recent months.
Last month, the U.S. House of Representatives antitrust panel held hearings that put four of America’s most prominent tech CEOs in the hot seat.
Facebook Inc’s Mark Zuckerberg, Amazon.com Inc’s Jeff Bezos, Google owner Alphabet Inc’s Sundar Pichai and Apple Inc’s Tim Cook – whose companies have a combined market value of about $5 trillion – parried a range of accusations that they crippled smaller rivals in their quest for market share.
The videoconference hearing was the first time the four CEOs have appeared together before lawmakers.
Though it was Bezos’ first congressional testimony, he appeared the least fazed.
Cook drew fewer barbed questions than Bezos and handled them efficiently.
Zuckerberg suffered the most damage, stumbling at times when confronted with internal emails.
Pichai, CEO of both Alphabet and Google, took the most heat from conservatives on the panel and looked the worse for it, as he repeatedly told lawmakers he would be happy to look into various situations and get back to them.