OUR INCOME DISTRIBUTION IS FAST BECOMING NON-NORMAL.That's not good.

Anyone who has struggled with poverty knows how extremely expensive it is to be poor. ~ James Baldwin

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.

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[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.