Posts Tagged ‘concentration’

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We’re all done singing to “days gone by” (even though no one really knows the lyrics). But, unless we change our tune and resolve to fundamentally alter the way the economy is organized, we’re going to have to face up to the problem that’s been haunting the United States for decades now: growing inequality.

And it’s only getting worse.

Part of the problem stems from the increase in market concentration in the United States. According to a recent research paper by Joshua Gans et al., the rise in mark-ups by large U.S. corporations is a two-edged sword: it increases the prices consumers pay but, at the same time, rewards shareholders. The problem is, the ownership of corporate stocks is more unequal than consumption—and it’s been getting more unequal in recent decades. Thus, the majority of Americans are forced to pay higher prices for the goods they consume but they don’t own much in the way of corporate equity—and the distribution of income, which was already obscenely unequal, is made even worse.

expnditure

For example, the distribution of consumption expenditures is profoundly unequal but has remained relatively stable over time: the 20 percent of families with the lowest incomes accounted for 9 percent of all expenditure in 1989, the same figure as in 2016. The 20 percent of families with the highest incomes comprised 38 percent of all expenditure in 1989, rising to 39 percent in 2016.

equity

Meanwhile, the ownership of corporate equity, which was grotesquely unequal in 1989, has become even more unequal over time. The lowest-income fifth of families had 1.1 percent of corporate equity in 1989, and still only 2.0 percent in 2016. By contrast, the highest-income quintile had 77 percent of corporate equity in 1989, and even more—89 percent—in 2016. In other words, corporate equity is about 13 times as concentrated as expenditure.*

income

The authors estimate that the rise in market power in the United States has lowered the bottom 60 percent income share (from 21 to 19 percent) and raised the income share of the top 20 percent (from 61 to 64 percent).*

The other, more recent cause of growing inequality is of course the 2017 Republican tax cut, which has allowed large corporations to reshuffle their books, reduce their federal tax obligations and use their higher retained earnings to increase stock buybacks and the dividends they pay to already-wealthy individuals (who, in turn, have been able to use their higher post-tax incomes to purchase more shares in U.S. corporations).

taxes

As is clear in the chart above, corporate taxes—in both absolute terms (the red line, measured on the left) and as a share of federal tax receipts (the blue line, on the right)—have declined precipitously since the tax cuts were enacted.

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Meanwhile, as readers can see in the chart above, the dividends corporations are paying out to the richest Americans (as well as foreign stock owners) continue to hit record highs—thus adding fuel to the fire of rising inequality in the United States.

Both increased corporate concentration and last year’s tax cut have widened the gap between the haves and have-nots in the United States. That much is clear. But Americans have to face up to a much more fundamental problem, both in days gone by and now, which neither antitrust measures nor repealing the tax cut will fix.

The fact is, the surplus created by American workers is appropriated and distributed not by them, but by the boards of directors of the corporations where they are employed. Those who do most of the work have no say in what is done with the surplus they create—nor do they receive the proceeds, either in the form of increased pay (which has barely budged in recent decades) or stock dividends (which have soared).

Unless Americans resolve to tackle that problem, the economic “seas between us braid” will continue to roar.

 

*But the authors also make clear that rising concentration is only part of the problem: “The rise in income inequality over the period that we study has been considerable, and even in the absence of market power, incomes would be more concentrated in 2016 than they were in 1989.”

**According to my own calculations, in 2014, the top 1 percent owned almost two thirds of the financial or business wealth, while the bottom 90 percent had only six percent. That represents an enormous change from the already-unequal situation in 1978, when the shares were much closer: 28.6 percent for the top 1 percent and 23.2 percent for the bottom 90 percent.

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wage share

It’s obvious to anyone who looks at the numbers that the wage share of national income is historically low. And it’s been falling for decades now, since 1970.

Before that, during the short Golden Age of U.S. capitalism, the presumption was that the share of national income going to labor was and would remain relatively stable, hovering around 50 percent. But then it started to fall, and now (as of 2015) stands at 43 percent.

That’s a precipitous drop for a supposedly stable share of the total amount produced by workers, especially as productivity rose dramatically during that same period.

The question is, what has caused that decline in the labor share?

The latest story proffered by mainstream economists (such as David Autor and his coauthors) has to do with “superstar” firms:

From manufacturing to retailing, giant companies have managed to gobble up a larger and larger share of the market.

While such concentration has resulted in enormous profits for investors and owners of behemoths like Facebook, Google and Amazon, this type of “winner take most” competition may not be so good for workers as a whole. Over the last 30 years, their share of the total income kitty has been eroding. And the industries where concentration is the greatest is where labor’s share has dropped the most. . .

Think about the retail sector, where mom-and-pop stores once crowded the landscape. Now it is dominated by a handful of giants like Walmart, Target and Costco.

It is true, industry concentration has increased dramatically in recent decades (as I explain here). And the wage share has declined (as illustrated in the chart above).

Here’s the problem: exactly the opposite argument is the one that prevailed in the United States for the earlier period. Economists at the time argued that American workers earned a relatively high share of national income because they worked in concentrated industries, such as cars and steel. Thus, their collectively bargained wages included a portion of the “monopoly rents” captured by the firms within those industries.

Now that the wage share has clearly fallen, and shows no signs of returning to its previous levels, economists have changed their story. In their view, market concentration leads to a lower, not higher, wage share.

Why has there been such an about-face in economists’ story about the causes of the declining wage share?

What all the existing stories share is that they avoid identifying anything that has been done to workers as a class. Whether the story is about technological change, globalization, or now superstar firms, the idea is that there are larger forces that unwittingly have created winners and losers—and the losers, if they want, need to acquire the education and skills to join the winners. But don’t touch the basic elements of the economic system that has created such disparate and divergent outcomes.

As it turns out, the presumed rule of a stable wage share turns out to have been an illusion, an exceptional period of relatively short duration during which workers’ wages did in fact rise along with productivity. That wasn’t the case before, and it hasn’t been true since.

The actual rule, as it turns out, is that the wage share falls, as the rate of exploitation increases. That’s how capitalism works, at least much of the time—through periods of faster and slower technological change, higher or lower levels of globalization, more or less concentrated industries.

Sure, under a particular set of postwar conditions in the United States, for two and a half decades or so, the wage share remained relatively stable (and not without pitched battles between capital and labor, as Richard McIntyre and Michael Hillard have shown). But that ended decades ago, and since then workers have been forced to have the freedom to sell their ability to work under conditions that, even as productivity continued to grow, the wage share itself declined.

Mainstream economists have finally recognized the fact that workers’ share of national income has been failing. But they continue to formulate stories that deflect attention from the real problem, the relative immiseration of workers that has them falling further and further behind.

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It comes as no surprise, at least to most of us, that corporations are getting larger and increasing their share in many different industries. We see it everyday—when we buy plane tickets or try to take out a loan or just make a purchase at a retail store.

We know it. And now, it seems, economists and the business press have finally taken notice.

According to recent research by Gustavo Grullon, Yelena Larkin, and Roni Michaely,

More than 75% of US industries have experienced an increase in concentration levels over the last two decades. Firms in industries with the largest increases in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, which suggests that market power is becoming an important source of value. In real terms, the average publicly-traded firm is three times larger today than it was twenty years ago.

That’s right. As Figures 1-A and 1-B above show, the level of concentration (measured by the Herfindahl-Hirschman Index) has been steadily increasing over the course of the past twenty years, together with a decrease in the number of public firms.

fig1-c

And the average size of firms, as shown in Figure 1-C, has also been growing.

The business press may have changed the language—they like to refer to such corporations as “superstar firms”—but the problem remains the same: corporations are growing larger, both absolutely and relative to the industries in which they operate.

What mainstream economists and the business press won’t acknowledge is those tendencies have existed since capitalism began. The neoclassical fantasy of perfect competition was only ever that, a fantasy.

Certainly one mid-nineteenth-century critic of both mainstream economic theory and capitalism understood that:

Every individual capital is a larger or smaller concentration of means of production, with a corresponding command over a larger or smaller labour-army. Every accumulation becomes the means of new accumulation. With the increasing mass of wealth which functions as capital, accumulation increases the concentration of that wealth in the hands of individual capitalists, and thereby widens the basis of production on a large scale and of the specific methods of capitalist production. The growth of social capital is effected by the growth of many individual capitals. All other circumstances remaining the same, individual capitals, and with them the concentration of the means of production, increase in such proportion as they form aliquot parts of the total social capital. At the same time portions of the original capitals disengage themselves and function as new independent capitals. Besides other causes, the division of property, within capitalist families, plays a great part in this. With the accumulation of capital, therefore, the number of capitalists grows to a greater or less extent. Two points characterise this kind of concentration which grows directly out of, or rather is identical with, accumulation. First: The increasing concentration of the social means of production in the hands of individual capitalists is, other things remaining equal, limited by the degree of increase of social wealth. Second: The part of social capital domiciled in each particular sphere of production is divided among many capitalists who face one another as independent commodity-producers competing with each other. Accumulation and the concentration accompanying it are, therefore, not only scattered over many points, but the increase of each functioning capital is thwarted by the formation of new and the sub-division of old capitals. Accumulation, therefore, presents itself on the one hand as increasing concentration of the means of production, and of the command over labour; on the other, as repulsion of many individual capitals one from another.

This splitting-up of the total social capital into many individual capitals or the repulsion of its fractions one from another, is counteracted by their attraction. This last does not mean that simple concentration of the means of production and of the command over labour, which is identical with accumulation. It is concentration of capitals already formed, destruction of their individual independence, expropriation of capitalist by capitalist, transformation of many small into few large capitals. This process differs from the former in this, that it only presupposes a change in the distribution of capital already to hand, and functioning; its field of action is therefore not limited by the absolute growth of social wealth, by the absolute limits of accumulation. Capital grows in one place to a huge mass in a single hand, because it has in another place been lost by many. This is centralisation proper, as distinct from accumulation and concentration.

Those of us who have actually read that text are not at all surprised by the contemporary reemergence of the concentration and centralization of capital. We have long understood that the forces of competition within capitalism create both the incentive and the means for individual firms to grow in size and to drive out other firms, thus leading to the concentration of capital. The availability of large amounts of credit and finance only makes those tendencies stronger.

And the limit?

In a given society the limit would be reached only when the entire social capital was united in the hands of either a single capitalist or a single capitalist company.

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