U.S. Economy

Big Companies Are Getting a Chokehold on the Economy

Even Goldman Sachs is worried that they're stifling competition, holding down wages and weighing on growth.

Maybe competition would help.

Source: Embassy Pictures/Getty Images

A recent report by Goldman Sachs’ global research team highlights a new study showing that large, dominant superstar companies are paying lower wages and earning higher profits. I’ve flagged that research myself, but when Goldman says it’s worried, you know things have really gotten serious. American industry is increasingly dominated by a shrinking handful of giant companies:

It's Good to Be Big

Change in sales concentration between 1982 and 2012 of top four companies.

Source: "Concentrating on the Fall of the Labor Share," David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen

Why is Goldman complaining about the trend? After all, the big bank presumably has many ways to make money off of corporate behemoths. Oligopoly raises profits, which sends stocks higher, contributing to fatter fees for financial companies like Goldman that do things like asset management, brokering and market-making. Goldman also handles mergers and acquisitions, which are a key way that markets become more concentrated.

Of course if market concentration gets out of hand, it could start to cut into the bottom lines of even big financial firms. One reason is that concentration reduces idiosyncratic volatility in markets, meaning individual stocks don’t go up and down as much. That means traders have less reason to trade, since there are fewer bargains to be had under those conditions. Less trading means less profit for brokers, dealers and market-makers. In a recent paper, economists Söhnke Bartram, Gregory Brown and René M. Stulz show that the increasing domination of public markets by large old companies -- the superstars that economists are warning about -- is responsible for the increasing correlations between stocks.

Stulz also has another new paper, along with Craig Doidge, Kathleen Kahle and G. Andrew Karolyi, illustrating just how much the U.S. public markets are devoid of small, fast-growing companies. The days when a new company such as Amazon.com Inc. -- which went public in 1997 at a market value of just $438 million -- would rush to list itself on the exchanges are long gone. Uber Technologies Inc., for example, is still private, but is valued at about $50 billion. It’s not just tech startups, though -- smaller companies in general are moving off of the exchanges. This is one big reason why the public markets are shrinking:

In the Public Eye

Number of companies listed on U.S. stock exchanges

Source: Craig Droidge, G. Andrew Karolyi and Rene M. Stulz via Bloomberg

So far, that hasn’t been bad for the public markets. Even after the recent selloff, the rising stock market has steadily set new records during the past few years. Profit margins -- which companies with market power can extract by holding down wages and hiking prices -- are probably driving the higher valuations. So pension funds and 401(k) savings plans are doing well (though much of the gain will be siphoned off to management fees).

The biggest threat from the increasing dominance of big companies isn’t to Goldman Sachs, or even to retirement plans; it’s to workers and consumers. When companies squelch wages and raise prices, it reduces economic activity. It pushes workers out of the labor force entirely, sending them home to play video games on the couch as their job skills and work ethic rot. And it can result in lower output too -- fewer plane rides, fewer people buying broadband internet, few people buying new cars.

In past eras, the government acted to stop companies from getting too big. It could do the same now by strengthening antitrust enforcement, preventing big mergers and reviewing them after the fact. Some politicians, such as Massachusetts Senator Elizabeth Warren, have declared their desire to open up a new era of trust-busting. And to his credit, President Donald Trump did block AT&T’s attempted takeover of Time Warner, though his decision may have been driven by personal bias.

But the fact that the stock market increasingly depends on dominant companies may stop the government from ever really cracking down. If monopoly profits are the main thing keeping upper-middle-class Americans’ retirement accounts afloat, most politicians will be very reluctant to do anything that fosters greater competition.

The risk is that economy becomes trapped in a toxic cycle. As industries grow more concentrated, dominant companies become a bigger piece of the stock market, and their profit margins push stock valuations higher. Politicians naturally will be less willing to take steps to make markets more competitive, allowing superstar companies to become even more powerful. All the while, retirement accounts do OK, but workers’ wages and the economy suffer from decreasing competition.

It’s important to reverse this vicious cycle before the problem becomes too severe. A bit of antitrust now would go a long way toward preventing oligopoly from turning into oligarchy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Noah Smith at nsmith150@bloomberg.net

    To contact the editor responsible for this story:
    James Greiff at jgreiff@bloomberg.net

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