On this side of the Atlantic, the European Commission takes its task as guardian of competition seriously. The single market needs this in order to function well: replacing national monopolies with continental ones would be disastrous. The Commission is not very receptive to arguments promoting European champions in specific sectors, an attitude for which consumers can be grateful.
The United States is going the other way. The share of profits in GDP has increased over the last thirty years, with a corresponding decrease in the wage share. Several recent studies highlight the increase in corporate margins as a driver of this change. These margins represent market power, not compensation for factors of production other than labour.
Why are margins increasing?
While it is true the rising profits trend is not limited to the United States, as an IMF analysis in 2019 shows, it is particularly pronounced there. The analysis shows that margins are rising more in sectors where a few companies dominate, and the higher margins occur mostly for those companies instead of their competitors. Moreover, we are not in a situation where innovative startups challenge the established order, but where a few existing companies in a position of strength boost their margins.
The GAFA (Google, Apple, Facebook and Amazon) are the clearest illustration of this pattern. However, the work of the economist Thomas Philippon documents a broader problem. Taking the analysis to the regional level, he shows that American consumers are worse off than the Europeans ones, for instance in access to high-speed and air travel, due to the existence of local monopolies.
The dominant position of a few companies has several consequences. While the impact on innovation is theoretically ambiguous, the IMF shows that beyond a certain threshold a dominant position leads to less innovation as firms rest on their laurels. Similarly, investment weakens without pressure from competitors.
The consequences are also observed at the macroeconomic level, with a decline in the wage share, as mentioned above. A recent study by US Federal Reserve economists shows that when firms have more power in the goods and labour markets, they raise prices and put pressure on wages. But doesn’t this merely mean that households receive their income in the form of dividends and stock market gains rather than wages? This shift would not be a concern if households were homogeneous, but this is by far not the case. Rising market power instead leads to increased inequality of income and wealth. As high-income households are more inclined to save than to consume, this inequality contributes to the secular decline in interest rates and the indebtedness of poorer households, with the associated risk of financial crisis.
Adam Smith’s limited trust
The United States is at a key moment in its history. Either it re-elects a president whose main policy has been a sharp tax cut for the wealthiest, and continues on that path, or it changes direction and elects an administration that is willing to make the necessary adjustments. Yes, this will lead to regulations aimed at limiting corporate power. But let’s remember that a liberal vision of the economy means being pro-market, not pro-business. After all, Adam Smith himself was wary of the tendency of corporations to collude at the expense of consumers.
This article was published in Le Temps on 9 October 2020 as part of a special dossier, “L’Amérique et nous”.