A few top firms may be reshaping economy
Mainstream economists are discussing if ‘monopsony’ — the outsize power of a few consolidated employers — is part of the problem of low wage growth
Two of the most important economic facts of the last few decades are that more industries are being dominated by a handful of extraordinarily successful companies and that wages, inflation and growth have remained stubbornly low.
Many of the world’s most powerful economic policymakers are now taking seriously the possibility that the first of those facts is a cause of the second — and that the growing concentration of corporate power has confounded the efforts of central banks to keep economies healthy.
Mainstream economists are discussing questions like whether “monopsony” — the outsize power of a few consolidated employers — is part of the problem of low wage growth. They are looking at whether the “superstar firms” that dominate many leading industries are responsible for sluggish investment spending. And they’re exploring whether there is an “Amazon Effect” in which fastchanging pricing algorithms by the online retailer and its rivals mean bigger swings in inflation.
If not yet fully embraced, the ideas have become prominent enough that this weekend, at an annual symposium in the Grand Tetons, leaders of the Federal Reserve and other central banks discussed whether corporate consolidation might have broad implications for economic policy.
“A few years ago, questions of monopoly power were studied by specialists in a very technical way, without linking them to the broader issues that animate economic policy,” said Jason Furman, an economist at Harvard’s Kennedy School of Government, who advanced some of these ideas in his former job as the Obama White House’s chief economist. “In the last few years, there’s been an explosion of research that breaks down those walls.”
Central bankers tend not to chase the latest research fads, as Mr. Furman put it. But they, too, are wrestling more intensely with the possibility that the details of how companies compete and exert power matter a great deal for the overall wellbeing of the economy.
While these topics more commonly show up in debates around antitrust policy or how the labor market is regulated, it may have implications for the work of central banks as well. For example, if concentrated corporate power is depressing wage growth, the Fed may be able to keep interest rates lower for longer without inflation breaking out. If online retail makes prices jump around more than they once did, policymakers should be more reluctant to make abrupt policy changes based on short-term swings in consumer prices.
Esther George, the president of the Federal Reserve Bank of Kansas City, the host of the conference, has been intrigued by the weak lending to small and midsize businesses in recent years, even amid an economic recovery. She and her staff have explored whether the increasing concentration of the banking industry among a handful of giants might be a cause.
“Looking at the size and footprint of firms has not been mainstream,” Ms. George said, “but it appears to be very broadbased and a signal of something worth taking seriously.”
For example, more of the investment of modern corporations takes the form of intangible capital, like software and patents, rather than machines and other physical goods. That may be a reason low interest rate policies by central banks over the past decade didn’t prompt more capital spending, said Nicolas Crouzet and Janice Eberly of Northwestern University in a paper presented at the conference.
Banks are generally disinclined to treat intellectual property or other intangible items as collateral against loans, which could mean interest rate cuts by a central bank have less power to generate increased investment spending.
Alan Krueger, a Princeton economist, argued that monopsony power is most likely part of the apparent puzzle of why wage growth is low. By his estimates, wages should be rising 1 to 1.5 percentage points faster than they are, given recent inflation levels and the unemployment rate.
When workers have few potential employers to choose from, he said, they may have less ability to demand higher pay, and it becomes easier for employers to collude to restrict pay, whether through explicit back-room deals or more subtle signaling.
But he said monetary policy might have some power to reduce that effect. By keeping interest rates low and allowing the labor market to strengthen, employers may eventually find they have no choice but to increase worker pay. “Allowing the labor market to run hotter than otherwise could possibly cause collusion to break down,” Mr. Krueger said. “If the collusion does wither, wages and employment would rise.”
Another paper, by the Harvard economist Alberto Cavallo, presents evidence that the algorithms used by Amazon and other online retailers, with their constantly adjusting prices, may mean greater fluctuations in overall inflation in the event of swings in currency values or other shocks.
The biggest firms may be influencing inflation and wage growth, possibly at the expense of central bankers’ power to do so