Economic Facts of Week: Rise of corporate giants & New Gilded Age June 10, 2018
‘The Gilded Age’ was a satirical novel written by Mark Twain and Charles Dudley Warner, which was first published in 1873. The book’s title became synonymous with graft, materialism, and corruption in American public life in the years after the end of the Civil War. The International Monetary Fund (IMF) asked at a recent conference titled ‘Digitalization and the New Gilded Age’ “Are technological advances leading to greater market concentration in firms such as Google and Facebook and, in turn, creating what could be described as a New Gilded Age?” — see video below.
The IMF says that the rise of corporate giants extends beyond Big Tech and has raised fresh questions about whether this trend might continue and, if so, whether some rethinking of policy is needed to maintain fair and strong competition in the digital age. However, corporate market power is hard to measure and common indicators such as market concentration or profit rates can be misleading.
The chart above is based on an upcoming IMF working paper using data for publicly listed companies from 74 countries. It tracks average markups on goods and services across all companies, comparing pricing in advanced and emerging and developing economies. A markup — the ratio between the cost of a good or service and its selling price — provides a measure of market power.
The IMF says markups among advanced economies have significantly increased since the 1980s, by 43% on average, and this trend has accelerated during the present decade. Second, among emerging market and developing economies, the rise of markups is much more moderate, a 5% increase on average since 1990.
Further analysis shows that the increase in markups in advanced economies is mostly driven by “superstar” firms that managed to increase their market power further, while markups in other firms have essentially been flat. Interestingly, this pattern is found in all broad economic sectors, not just in information and communication technology.
The IMF paper finds that, starting from low levels, higher markups are initially associated with increasing investment and innovation, but this relationship becomes negative when market power becomes too strong. Further, the link between markups and investment and innovation is more strongly negative in industries featuring higher degrees of market concentration.
The paper also finds a negative association in firms between labour shares and markups, implying that the labour share of income declines in industries where market power rises. In other words, with higher market power, the share of firms’ revenue going to workers decreases, while the share of revenue going to profits increases.
The above are two images issued by the offices of Chancellor Merkel and President Macron, of a confrontation with the US president on trade tariffs, at the acrimonious annual meeting of the leaders of the Group of Seven industrialised countries (US, Germany, Japan, the UK, France, Italy and Canada) held in Charlevoix, Quebec, Canada on Friday and Saturday this week. Washington Post report
Trump, speaking to reporters at the end of the meeting, said that eliminating all trading barriers would be “the ultimate thing” but he railed about what he termed “ridiculous and unacceptable” tariffs on American goods and vowed to end them.
“It’s going to stop,” he said, “or we’ll stop trading with them. And that’s a very profitable answer, if we have to do it.” He added, “We’re like the piggy bank that everybody’s robbing — and that ends.”
New York Times analysis:
Mr. Trump’s unvarnished post-summit Twitter insults aimed at Mr. Trudeau (Canada’s prime minister) — “weak & dishonest,” “false statements,” “meek and mild” — left the Canadian-American relationship at its most overtly hostile since, perhaps, the War of 1812. Indeed, Mr. Trump had already clashed with Canada before the summit meeting by reportedly accusing it of burning down the White House during that war (it was really the British).
This week we outlined why Trump will not win his “Trade War”:
The delusion that currency devaluations can trigger prosperity:
and Ireland’s poor record of employer firm startups — the second worst among advanced countries:
The Wall Street Journal's Real Time Economics blog says:
The disconnect between personal financial interest and partisan lean may be partly explained by the fact that increasingly, other things matter more than money when it comes to political affiliation. According to Gallup polling, the proportion of Americans who say the gap between rich and poor is America’s most important problem, at 2%, is much smaller than those who cite immigration (11%) or race relations (7%). And there is evidence that factors including location, race and religion influence party affiliation more than income does. In 2016, Pew research suggested 47% of those in families with incomes between $30,000 and $50,000 identified as Republican –more than the 46% of those with incomes over $150,000. Compare that to the 55% to 33% gap between rural and urban support for Republicans, or the 76% Republican support amongst white non-Hispanic evangelical Protestants compared to the 7% support amongst black Protestants.
The WSJ says on the "gig economy:"
WSJ labor reporter Eric Morath sums up a new government survey: The emergence of the gig economy in the past decade has scarcely changed the U.S. labor market. Indeed, all those Uber drivers, contractors and temp workers added up to a scant 6.9% of the labor force last year, down from 7.4% in 2005, the last time the survey was taken. More than 90% of Americans were on the payroll of the firm for which they performed work. “This should throw some cold water on those hyping the explosion of freelancing and the rapidly changing nature of work,” said the Economic Policy Institute’s Lawrence Mishel.