Economists Say the Rise of Monopoly Power Explains Five Puzzling Trends - BLOOMBERG BUSINESS WEEK
“To paraphrase Thomas Piketty, ‘wealth is back in the United States,’ ” Brown University researchers say
By Peter Coy
Economists have concocted a variety of explanations for five recent phenomena in the U.S. economy that don’t match the “facts” that economists supposedly agree on. Now a Brown University economist and two of his doctoral students claim to have killed all five birds with one stone—advancing a simple explanation that accounts for all the anomalies at once.
Two changes explain all the discrepancies, they say. First, there’s been an increase in monopoly power, likely caused by an increase of power in the hands of dominant companies. Second, productivity growth has slowed and the population has aged, driving down the natural rate of interest.
The economists’ “unified explanation” has policy implications, says Gauti Eggertsson, the Brown economist who shared the work with two students, Jacob Robbins and Ella Getz Wold. The growth in monopoly profits strengthens the case for raising taxes on capital such as dividends and capital gains, and also suggests that antitrust authorities “should do more to prevent monopolies and oligopolies from forming,” they write.
The paper was released on Feb. 12 by the Washington Center for Equitable Growth, where Eggertsson is a grantee and Robbins is a junior fellow. Here is a layman’s summary by Robbins.
The researchers tackle five so-called stylized facts—economists’ lingo for observations about the real world that are so consistent over time that they come to be accepted as true. For example, one stylized fact asserted by the Hungarian-British economist Nicholas Kaldor in 1957 was that the way the national income is split between workers and capitalists tends to be roughly constant over time. In fact, labor’s share of national income, in the form of wages and salaries, has been on a steady downhill.
The paper also accounts for some new facts brought to light by the French economist Thomas Piketty, author of the surprise 2013 best-seller Capital in the Twenty-First Century: Wealth has increased in relation to investment in the economy, and the market value of corporations is way above the replacement value of their assets. (As a stock market strategist would put it, the ratio of those two measures—known as “Tobin’s Q”—exceeds 1.) “These are not your father’s growth facts,” the researchers write.
In an interview, Eggertsson discussed how the paper came about. “We were very much focused on explaining the decline in the real interest rate. As we tried to confront the new model with data, we found that there was a big missing link to make sense of stuff. And that missing link was an increase in monopoly power,” he says.
Monopoly power isn’t always bad. Any time a company develops a unique product that it can charge more for than the commodity alternative, it’s earning monopoly profits—what the authors call “pure profits.” As they write, “one of the main purposes of the firm [is] to gain and secure this market power: the celebrated ‘sustainable competitive advantage.’ ” What’s true, though, is that the shareholders of companies that have strong pricing power do very nicely, capturing a bigger share of the national income.
The authors say they can’t be sure their theory is right. For one thing, they write, it “relies heavily on our estimates of the level of pure profits and markups in the U.S. economy.” They add, “Unfortunately, there is a great deal of uncertainty around these estimates.”
They’re pretty confident, though, that economic models assuming perfect competition and no pure profits are poor descriptions of reality. Says Eggertsson: “It’s a different world than people thought we were in.”