What do the beef, cable TV, smart phone and soybean
markets have to do with eroding middle class income? In this blog I will
discuss one root cause of the US middle class' ever-withering income: the
ever-increasing market power of industrial employers. This cause has not
received much notice. Other reasons for the declining economic welfare of our
middle class have been far more discussed – the weakening of labor unions and
more international competition (aka, globalization). It is my contention that
these reasons are, in fact, based on the ever-increasing power of relatively
few, very large firms. These firms' power radiates directly from their
concentrated market power.
Eons ago when I was sitting in graduate-school
economics classes there was much discussion in my favorite slice of microeconomics
(the economics of individual markets and/or decision-makers) - industrial
organization – about the "concentration ratios" of important
industries. These ratios provided one measure of how competitive an industry
might be by measuring an industry's largest firms' market share. The more
concentrated the market (the higher the market share), the less competitive it is
likely to be, despite protestations from the largest firms' CEOs.
If the largest 4 firms in an industry capture more
than one-half of the total market, this industry historically was judged to be
concentrated and thus not terribly competitive. In bygone times, such
concentration provoked the US Department of Justice (DOJ) or the Federal Trade
Commission (FTC) to initiate an anti-trust assessment and lawsuits of the
largest firms in this industry to reduce their market power. No longer. Mergers
between an industry's largest firms routinely are approved by the DOJ or FTC,
with minor concessions, if any.
In general, the more competitive an industry
behaves, the greater are the benefits that accrue to customers in the form of
lower prices and greater choices. Classic examples of significant industrial
concentration include the Standard Oil Trust in the early 1900's oil industry,
steel makers, tobacco manufacturers and the telephone company (the original AT&T). Large,
integrated firms that dominated these markets were split up by the government's
successful anti-trust actions.
However, over the past several decades when
increased industrial concentration has proliferated across many US industries,
the DOJ and FTC seem asleep at their anti-trust wheels. This lack of proper
judicial and regulatory oversight has had important – and detrimental –
consequences.
With stout market power, large firms can
dominate not only the markets they sell products in – and thus set
non-competitive retail prices and/or conduct anti-competitive behavior – but
they also can dictate the markets they buy their inputs from (like labor and
materials). The current class-action anti-trust lawsuit brought by 64,613 software engineers
against Google, Apple, Intel and Adobe accuses these companies of agreeing not
to solicit one another’s employees in a scheme developed and enforced by Steve
Jobs of Apple. These workers allege they were unable to apply for jobs at these
prominent high-tech employers in Silicon Valley because of a collusive "do
not raid" agreement among the firms regarding their competitors'
employees. This agreement thus thwarted these workers' opportunities to
increase their income and job responsibilities. That's concentrated market
power in action infecting employees' opportunities and livelihoods.
Here are other examples of strong market
concentration. For Internet searches in the US, the top 2 search engines Google
and Microsoft's Bing, control 85% of the search market. To no one's
surprise, Google itself dominates with 67% of the market. In many other
countries the top 2 search engines account for more than 90% of all searches.
The top 2 producers of the fast-growing smart
phone operating system market –Google/Android and Apple – together control 91% of the world market. In the smart phone
market (250.2M units in 2013), the top 2 producers –Samsung and Apple – control
42.2% of the world market (the top 4
producers capture 54.1% of this market) which in 2013Q3 represents 55% of total
cell phone world sales – the first time smart phones outsold
"regular" cell phones worldwide.
The recently proposed merger between the US's
2 largest cable TV providers – Comcast and Time-Warner Cable (TWC) – will place
over 30% of the retail pay-TV market across
America within one huge, vertically-integrated corporation. As one news article
noted, if approved this merger would place Comcast as the dominate cable
provider in 19 of the 20 largest US TV markets, and could give
it unprecedented leverage in negotiations with content providers and advertisers.
Comcast now owns NBC-Universal (a TV network as well as a major producer of TV
shows and movies). It is no surprise that this week Netflix publicly stated it
was opposed to the Comcast-TWC merger. And, according to Comcast, such
increased market power will not affect its well-documented ability to
considerably and continuously raise customer prices. To believe that, you must
also believe in Tinkerbelle and the Tooth Fairy.
What about a non-digital market ? Glad you
asked. Here's the market for beef, chicken and pork in the US. Four companies produce
85% of America’s beef and 65% of its pork. Just 3 companies make almost half
of all chicken sold in America. These figures probably understate the reach of
these modern meat oligopolies, which includes companies like Tyson
Foods and Cargill. Today’s vertically-integrated meat conglomerates control
each level of the food system in a way that that firms in the past could only
dream about. Companies like Tyson Foods have pioneered a new model of food
production that gives them ownership and control over virtually every stage of
the business. By controlling the supply of meat, these producers control retail
prices that consumers face for all types of meat, from T-bone steaks to turkey
breasts.
Other agricultural markets beyond meat are similarly
concentrated, belying economics professors' statements to their students that
agriculture is a classical example of competition. It no longer is. A mere
46,000 of the 2.2 million US farms (2.1% of all farms) account for 50% of total sales of agricultural
products. US behemoths such as Cargill and Archer Daniels Midland (ADM) – remember
them from the above paragraph – control significant agricultural markets as
diverse as cocoa and corn to soybeans and wheat. ADM and several of its
executives were convicted of participating in an international cartel to fix
the price of lysine, a widely-used animal feed additive.[1]
The world's 4 largest food producers-processors-traders – that go by the
acronym ABCD derived from their names: ADM, Bunge, Cargill and (Louis) Dreyfus
– account for between 75% and 90% of the global grain trade. Forget
about the little farm on the prairie.
And don't forget about the banking sector, one
of the most reviled by the public. As one astute observer noted: At some
distant point in the past the banks have transformed from being the lubrication system for the engine of our
economy to being treated as the engine itself. How did this happen? And the
answer please…
The financial services/banking industry has
increased in size, concentration and power with the explicit support of the federal
government. After the 2008 bankruptcy of Bear Sterns and as part of the
disastrous "credit crisis" the government not only allowed, but often
coerced financial institutions to merge (e.g., the Bank of America's take-over
of failing Merrill Lynch). Once again[2]
our government – meaning taxpayers – provided beaucoup funds to bail-out the
largest banks and required virtually nothing in return – other than eventual payment
for certain provided funds. This bail-out of Wall Street (and many, many other
firms including GM and AIG) by Main Street cost us $700 billion (B) via the Troubled
Asset Relief Program (TARP) plus more than $960B in other direct and indirect
financial "assistance" to the financial sector and beyond.
During the past 30 years, the financial
industry's share of the US GDP has doubled. Heretofore big banks have gotten
much, much bigger. According to the Federal Deposit Insurance Corp. (FDIC) in
2013, the nation's 5 largest banks controlled 40% of all bank deposits, and 44% of all financial institutions'
assets. In 1990, the 5 largest banks accounted for only 9.7% of total market
assets.
Most regions of the US are even more dominated
by a few giant banks. For the San Francisco-Oakland- Hayward area in June 2013,
the top 4 banks controlled 71% of
all bank deposits; the top 2 banks (BofA and Wells Fargo), control 64.7%,
illustrating a very high degree of market concentration and power. With such
power you shouldn't be wondering why the 2010 Dodd-Frank Act's useful bank
reforms and regulations, and consumer protections have been watered down and not
yet fully implemented.
It is not a coincidence that as corporate
power has dramatically swelled, the compensation provided to the CEOs of
gigantic businesses has stratospherically grown relative to the pay of ordinary
workers. Recent headlines like, "CEO-to-worker pay ratio ballooned 1,000
Percent since 1950"and "CEO-to-worker pay gap is obscene" describe
this inequitable trend.
So, the market power of colossal businesses
has steadily multiplied – along with their CEO's compensation – in no small
part because of the neglect and/or active persuasion of the government. What
has been happening to workers' income? The answer in two words, nothing
positive.
The US income distribution is fast becoming non-normal;
it's becoming bimodal, with many more poorer people and
more higher-income folks. The middle income earners are withering both in
numbers and in wages.
The 2013 median annual wages of workers was
$35,090 according to government statistics; that is $16.87/hr. The US median,
real annual household income in Feb 2013 was $51,404, 7.9% lower than when the great
recession officially started (Dec 2007), and 8.4% lower than in Jan 2000. The
figure below illustrates this depressingly downward decline in median household
income since 2008. The Bottom 50% of taxpayers earned a mere 11.6% of total adjusted gross income (AGI)
in the U.S. according to 2011 tax returns (the latest available for analysis).
All by themselves the Top 1% received 18.7% of 2011 AGI. The Top 1%ers earn at
least $390,000 per year.
Source:
New York Times and Sentier Research
The distribution of US wealth (the value of
all assets – possessions, property, money – held by a person, family or organization)
is even more skewed than that of income. In 2009, the top
20% of households held 87.2% of all wealth in the US. The top 1%
earns a bit less than 1/5th of all earned income (mentioned above) and holds 35.6% of all US wealth. The biggest winners
in the wealth arena during the last decade have been the very most moneyed people
of all (the top 0.1%); they have left even the 1% far
behind. The top 0.1% countryside often includes CEOs home territories. Unlike
CEOs, average middle-class
families, those dead center in the US income distribution, had about 90% of
their assets in their home. After the 2007-08 popping of the real-estate
bubble, between 33% to 50% of their total wealth disappeared, unlikely to
return any time soon, if ever.
On Apr 22, the New York Times offered an international perspective on the plight
of the US middle class. Using data from 9 other nations, this article concluded that the US middle class
has lost significant ground to other nations. The American middle class is no
longer the world's richest.
Middle-class (50th percentile) real disposable
incomes in Canada now appear to be higher than the US. The Times analysis shows that across the lower- and middle-income
tiers, citizens of other advanced countries have received considerably larger
raises over the last 30 years than similar people in the US. At the 20th income
percentile (representing people whose income level is exceeded by 80% of the
population), people in 5 nations have higher incomes than in the US – Norway,
Canada, Netherlands, Germany and Finland. So much for the American Dream. But for the 95th income percentile
folks, US incomes far exceed all other nations; the US real disposable income
appears over 20% larger than the 2nd-ranked nation, Canada, and 50% more than
the 5th-ranked nation, Netherlands.
Many local and state groups are now
increasingly engaged in improving the economic plight of middle-class and working-class
US families through a variety of actions. Most visible have been local group
pushing to raise the stagnated federal minimum wage. The federal minimum wage
certainly needs to be raised above $7.25/hr.
But raising the minimum wage does not address a
major structural cause of stagnated incomes – exorbitant market power. Two
economic policies must be changed to address this.
First, the Dept of Justice and FTC should
immediately establish a 24-month hiatus in approving any and all mergers and
acquisitions (M&A) involving any firm that is among the 10 largest in any
specific market it now operates in. Anti-trust policy should be removed from
its crypt at the DOJ and actively resuscitated, now. Standards for M&A
acceptance should be tightened and
enforced. In this age of multinational business, the US anti-trust authorities –
the DOJ and FTC – should cooperate more effectively with their European (and other
nations') counterparts; in particular with the European Union's Directorate-General
for Competition. To date, the record of cooperation between the US and EU on matters of competition is spotty
at best.
Federal and state authorities must immediately
revive their now-moribund commitment to improving markets' competitiveness.
This proven strategy can advance workers' incomes and offer consumers better, lower-priced
goods and services as more competition is revitalized. With this M&A
hiatus, currently-proposed mergers like Comcast-TWC, GE-Alstom, and
Facebook-Oculus would be stopped. Corporate giants would not be able to broaden
or deepen their market power. Every-day customers would have more, and
less-expensive, market choices, and eventually workers wages would not be
hammered by this country's oligarchs.
Second, there must be a supplemental, progressive
inheritance/estate tax established
for the very wealthy. Such a tax would be implemented on estates greater than $25M
(adjusted annually for inflation) at a rate of 45%. For estates exceeding $50M,
the tax rate would be 50%. The current estate tax starts with $5M estates,
taxed at 40%.
These two policy changes would
ultimately reverse eroding middle-class incomes and benefit the vast
majority of US citizens.
[1] This conspiracy was the basis of
a popular movie, "The Informant!", starring Matt Damon as one of the
ADM conspirators.
[2] The first publicly-funded
bail-out of a US bank happened in March 1792, when the nascent US government
provided funds to the failing First Bank of the United States. See The Economist for a fascinating essay about multiple financial crises
during the past 200+ years.
