Monopoly and its equally evil twin monopsony are destroying competition, depressing wages, and slowing economic growth. Is market concentration an inevitable outcome of capitalism, or is there a smarter solution?
Jared Bernstein: Senior Fellow at the Center on Budget and Policy Priorities, former Chief Economist and Economic Adviser to VP Biden and Executive Director of the White House Task Force on the Middle Class, and author of ‘The Reconnection Agenda: Reuniting Growth and Prosperity’.
Jonathan Tepper: Founder of Variant Perception, a macroeconomic research group that caters to asset managers. Author of ‘The Myth of Capitalism: Monopolies and the Death of Competition’, ‘Endgame: The End of the Debt Supercycle’, and ‘Code Red’, a book on unconventional monetary policy.
Further reading: https://democracyjournal.org/magazine/51/progressive-labor-standards/
Nick Hanauer: 00:01 Hey, if you’re just joining Pitchfork Economics in this episode, thank you for being here, but I’d love for you to consider going back to the first episodes. What we’re trying to do is lay out a case that neoclassical economics and neoliberalism are largely a protection racket for rich people. And some of the content in the early episodes will help you understand the content in later episodes.
So in any case, thanks for listening.
Jonathan Tepper: 00:29 If you look at the top list of shareholders across most competitors, what you find is that they’re all owned by the same people.
Speaker 2: 00:40 Facebook has bought the photo-sharing application Instagram for $1 billion.
Jared Bernstein: 00:46 These are very much politically motivated assumptions that serve one class over another, and it’s that class that’s been winning for a long time.
Speaker 3: 00:54 US Airways is no more. The carrier completed its final flight early this morning, the last leg of its merger with American Airlines.
Speaker 4: 01:03 They understood that monopolization was a threat to democracy.
Speaker 5: 01:11 From the offices of Civic Ventures in downtown Seattle, this is Pitchfork Economics with Nick Hanauer. Confessions of an American capitalist caught on tape.
Nick Hanauer: 01:29 So we choose who goes first by whoever spins higher, right?
Goldy: 01:32 Correct. I think one each. Three … look at that! Okay. So I get to … Seven. One, two, three, four, five, six, seven.
Nick Hanauer: 01:48 Chance.
Goldy: 01:49 Oh, I don’t want Chance. I wanted to … You’re going to land on Boardwalk. “Go to Jail. Go directly to jail. Do not pass Go. Do not collect $200.” Oh my God.
Nick Hanauer: 01:59 Just like real life.
Goldy: 02:01 Just like real life.
Nick Hanauer: 02:02 [Goldy 00:02:02] in this episode of Pitchfork Economics, we’re going to focus on monopoly and its evil twin monopsony. But I think it’s interesting to start out by acknowledging that the most familiar thing about monopoly to most people is actually the game of Monopoly.
Goldy: 02:22 Yeah. Do not pass Go. Do not collect $200.
Nick Hanauer: 02:25 Do not collect $200.
Yeah, and the game has a really interesting history, doesn’t it?
Goldy: 02:32 Yeah. So, you know everybody’s familiar with the Milton Bradley version, but that game was actually based on an original game that was meant as teaching tool. And it had two sets of rules. One is the familiar set that everybody plays today in which you try to be a monopolist and try to drive the other players into bankruptcy. The other, and the one that the original author of the game really intended to get out there, was an alternative way of playing in which you played more cooperatively and in which you tried to share the wealth and share the welfare.
Of course, we ended up with the latter.
Nick Hanauer: 03:13 And you know, monopoly and monopsony have become really important concepts for folks to understand who want to participate in economic debate because they’re super relevant to what’s happening in our economy today.
Goldy: 03:29 Right. Right. We’ve talked over previous episodes a lot about the plight of working and middle-class Americans, how wages have stagnated or declined over the past 40 years. And a lot of politicians and pundits, they attributed that to structural changes in the economy, to technological advances, automation, the creation of the information economy, globalization, et cetera, as if it’s inevitable.
But it turns out that a lot of this has to do with growing levels of market concentration, particularly when you mention that word monopsony, which is described as monopoly’s evil twin. It’s when you have essentially have essentially a monopoly on purchasing power.
Nick Hanauer: 04:19 Versus a monopoly in selling power.
Goldy: 04:21 Right. And the thing that matters most for wages is that growing monopsony in the labor market in which, as the economy concentrates into fewer and fewer hands and there are fewer and fewer employers to compete for your labor, it actually ends up creating this extreme power imbalance between labor and … well, to sound like a Marxist, capital.
Nick Hanauer: 04:47 Yeah. And you know, while in theory based on neoclassical economic ideas, people are free to sell their labor to anyone in a perfectly efficient market, as a practical matter that just doesn’t obtain, that in fact for all intents and purposes, large employers effectively collude on keeping wages low and, in many places, people just don’t have a choice about where they can choose to work.
And so as a practical matter, as industries in our country have consolidated, and they have consolidated enormously, that has massively changed the power dynamic between workers and owners of businesses. And that has contributed, to a huge extent, to the diminishment of wages.
Goldy: 05:35 Right. And while market concentration, monopoly, monopsony have been getting a lot of buzz recently, actually this is at the heart, at the very beginning of economics, of the whole field of economics. It is what prompted Adam Smith to write The Wealth of Nations. It was actually a reaction to the legal monopolies of the mercantilist era in which he lived.
Nick Hanauer: 06:01 Right, and the Tea Party itself.
Goldy: 06:04 Right.
Nick Hanauer: 06:05 Right? The actual Tea Party, Boston Tea Party, was of course a reaction to the monopolistic behavior of the West India Company.
Goldy: 06:17 Okay, here we go.
Nick Hanauer: 06:18 Ten!
Goldy: 06:24 … Four, five, six, seven, eight, nine, ten.
Nick Hanauer: 06:27 Of course, luxury tax.
Goldy: 06:29 I get the luxury tax!
Nick Hanauer: 06:30 Luxury tax.
Goldy: 06:32 Ugh.
Nick Hanauer: 06:32 A ha ha!
Goldy: 06:36 So, Nick, with all this market concentration, I’ve got a question for you. Is this actually capitalism ?
Nick Hanauer: 06:46 Well, not according to a new book by a guy named Jonathan Tepper, who has written this really cool book called The Myth of Capitalism: Monopolies and the Death of Competition. And in it, he argues, and I think very, very persuasively using great examples and a ton of data, that we actually don’t really have the kind of capitalist system that we had or we should have, which is a system in which lots and lots of companies are competing both for customers and for workers. What we have ended up with over the last 40 years, since the rise in neoliberalism, are monopolies or oligopolies or duopolies that both take advantage of their customers, but also their workers.
And the changing regulatory framework, which enabled a huge amount of corporate concentration, is what is driving the record amount of economic inequality and the record amount of corporate profits that we see in our economy today.
Jonathan Tepper: 07:52 Hello?
Nick Hanauer: 07:52 Jon?
Jonathan Tepper: 07:53 Yes.
Nick Hanauer: 07:54 Hey, it’s Nick.
Jonathan Tepper: 07:55 Hi, how are you?
Nick Hanauer: 07:56 I’m great. How’s it going?
Jonathan Tepper: 07:58 Great. Thank you so much for having me on your podcast.
Nick Hanauer: 08:01 Yeah. Happy to do it.
So, Jon, to the best of your ability, can you try and characterize what’s happened to corporate concentration in the United States over the last 30, 40 years?
Jonathan Tepper: 08:12 Yes. So, when people think about industrial concentration, the average person thinks about the word “monopoly.” And essentially, the idea is in a perfectly competitive market, there are a lot of companies competing to offer a good or a service. And at the opposite end of that, you have monopolies, where there’s only one company that provides that good or a service.
And unfortunately, over the last 40 years in the United States, what’s happened is that since the Reagan administration changed the merger guidelines in 1982, companies have been able to merge more easily with each other.
And so if you think of the Sweet 16, for example, or the World Cup, you start with 16 teams, then you go down to 8, then 4. So in many industries in the United States, what we’ve seen in competitors disappeared as they’ve been swallowed up by bigger companies. And so if you think, for example, of the airline industry. It’s gone from having more than nine players now down to four major players that completely dominate the market. And this has happened after the financial crisis where we’ve seen huge wave of bank mergers. And in industry after industry, we end up with less competition and fewer players, and so that’s what we talk about when we talk about industrial concentration.
Nick Hanauer: 09:26 Yeah, and so just to draw out a point that you elaborate on in the book and using the airline example, it’s actually worse than it sounds, because as a practical matter, market by market, it’s even more concentrated than before.
Jonathan Tepper: 09:44 Absolutely.
Nick Hanauer: 09:45 Yeah. It’s not like all four of those airlines are equally competitive in each market. They’ve actually carved up the geography in a way that makes it even worse than that.
Jonathan Tepper: 09:56 Yes. And this happens in many industries. So for example, if you look at the airline industry, Delta controls Atlanta, American controls Charlotte, American also controls Dallas, and so these are called “fortress hubs” which allow them essentially to have, for all intents and purposes, local monopolies. And so these fortress hubs are very, very profitable for them. They can raise prices; they can charge whatever they want for baggage fees.
And so the competition appears on paper, but actually in practice, you have very little choice in terms of who you might fly for many airlines. But this is true in many other industries as well.
So for example in the agricultural industry, generally you have these very large meat companies, and they have production contracts with farmers. And the big meat companies don’t really compete with each other because people need to sell their hogs or chickens and they don’t really … The meat doesn’t travel more than 50-100 miles. And so, as long as you’ve carved up your territory in the same way that the airlines do, you can enjoy a local monopoly. And that’s one reason why there’s an article this morning in the Wall Street Journal talking about farmers’ bankruptcies are rising quickly, and they’ve been at horrible levels for many years.
And at the same time, you have some tremendous profitability when it comes to the agricultural giants and the meat-packing companies. So in the book, I rather provocatively talk about the mob commission, which divided up the US by geography. In a way, what we’ve actually seen is companies do this in practice in many different industries. Sometimes, speaking to each other, but often just in terms of tacit collusion where they just agree not to compete in practice.
Nick Hanauer: 11:41 And that’s just the visible concentration. In your book, you talk about horizontal shareholding. Could you explain a bit what that is and what its effect is?
Jonathan Tepper: 11:52 Yes. So horizontal shareholding is the best way to think about it, and we talk about this in the book where my co-writer wrote this wonderful chapter. Basically if you think of JP Morgan back in the day, he owned many different railroads. And likewise, many of the other big robber barons as they were called back then, they might have been five or six or seven companies, but in fact they were all owned by the same person. And so that was called “horizontal shareholding,” where you might see different companies, but in fact it was one owner.
What’s happened over the last 10-15 years in the United States, is happening previously but it’s become much worse, is that if you look at the top list of shareholders across most competitors, what you find is that they’re all owned by the same people.
And this matters an enormous amount. In a competitive world, if you own one airline and I own another, I might want to go eat a little bit of your pie. I might want to take some market share. I might want to expand. But if both of our airlines are owned by Warren Buffet, and by the way Warren Buffet does own all the airlines, then he doesn’t want that competition, right? What he wants to see is that they’re all keeping pretty high margins, not competing, not over expanding, charging a lot of money.
And so Warren Buffet has the horizontal shareholding across the entire industry. He’s not made a bet on Delta; he’s not made a bet on American. He’s making essentially a holding company, if you will, in practice. And so that’s the big problem that we see. Some of this is due to passive investing where you end up with people just put money into ETFs or … BlackRock is one of the biggest holders of companies. But there’s no active owner pushing for real competition. And instead what you have is, all these companies are owned by the same small, narrow group of people like JP Morgan back in the day.
Nick Hanauer: 13:49 There’s this marvelous quote you have in the book from the president of Archer Daniels Midland saying, “Our competitors are our friends. Our customers are our enemies.” That about sums it up, doesn’t it?
Jonathan Tepper: 14:01 Well, pretty much. For a lot of different industries that you look at, customers are viewed as essentially being … They can be taken advantage of egregiously. This happens, unfortunately, in the medical industry and in hospitals. And that’s not to say, obviously, that every doctor or hospital or drug company is bad, but rather that some industries, and the medical one in particular, has what economists call “inelastic demand.” It means that you’re going to pay for whatever that procedure is, because you feel it’s important and your life depends on it.
And so when you view your customer as the enemy and you want to gouge them, then the sky’s the limit. And unfortunately that’s what we’ve seen over the last couple years with the patents with function as an effective form of monopoly over a particular drug. We’ve just seen tremendous price-gouging.
Nick Hanauer: 14:49 Yeah. You know I’m most familiar with the technology business where a lot of my experience has been. And the tech businesses have taken this to 11.
Jonathan Tepper: 15:03 Absolutely.
Nick Hanauer: 15:03 Yeah. So let’s talk about that. We call it “network effects,” which is a kinder, gentler way to say “monopoly,” right?
Jonathan Tepper: 15:13 Yes. So network effects basically … The idea is, for example, if you think of PayPal, if you have one account and I have one account, then … It’s interesting, you know I can send you money, you can send me money, but it’s not that interesting. If, on the other hand, we both live in Seattle and there are thousands of people on PayPal, then that’s pretty interesting. You can start paying for goods and services. The number of possible connections goes up exponentially, as you’re not just going to get a thousand possible payments. It’s going to be a factor of that. And when you get millions and millions of people on … That’s what’s called “network effects” where you want to have, for example, payers and receivers, you want to have buyers and sellers, and in social networks with Facebook, you obviously, the more people who are on there, the better it’s going to be. No one wants to be on a network with nobody there. There’s no one to make connections to.
And so this often leads to natural monopolies in the tech world, which is why tech entrepreneurs and venture capitalists love it. The problem is that these are often unregulated monopolies, so the network effect exists. It leads to essentially winner-take-all dynamics, but these are not like, for example, water utilities where water is a basic human need and so almost all water companies in the world are essentially regulated utilities. And so no one can charge you $100 just to be able to provide some water for your family for dinner.
That’s not really the case with these tech giants, and so they can and do abuse their position.
Goldy: 16:43 Are we even equipped to deal with thee types of industries, the Facebooks and Googles? Do we have the governing philosophy that is even capable of regulating it?
Jonathan Tepper: 16:54 See there are some rules on the books that could be enforced, and one of the big problems I point out in the book is that people will often point to the dominance of these companies and say that it was inevitable. I mean some cases, network effects may have made it inevitable. But what’s often the case is that the regulator is essentially captured and doesn’t want to do his job and so, believe it or not, then over, as I mentioned in the book, 400 acquisition in the last five years by a lot of these companies, some of these acquisition were small, some were big. But all of these got approved. None of them got challenged.
For example, if you look at the digital duopoly, Google and Facebook essentially control online ads. Google was allowed to buy DoubleClick, so google does search, DoubleClick did display ads. Suddenly they were able to capture most of the market, and then Facebook would have had competition from Instagram. And WhatsApp essentially was able to buy both of those and now anyone who wants to serve ads wants to serve them on the platforms that have the most data on the users. And so what you’ve ended up with is essentially the network effects working in the favor of google and Facebook, even though their dominance wasn’t inevitable. It was a result, to a large part, I would argue, in the digital ad duopoly, which is an outright monopoly on the social and an outright monopoly on the search side, due to the lack of enforcement of standards and laws. To answer your question, that’s something could have been done, and it was not.
Nick Hanauer: 18:21 Yeah, so, Jon, what do you think? What do we have to do? I mean we have really painted ourselves into a corner economically and politically by allowing all this consolidation. What do we do to get out of this mess?
Jonathan Tepper: 18:37 So in the last chapter of the book, we offer humbly some specific proposals. So while the situation is slightly depressing in some ways, there certainly are solutions to the problems, and I do think there is light at the end of the tunnel. We know that Wall Street made about $21 billion with a “B” pushing mergers and acquisitions. There are quite of very well-paid lawyers and economists who push mergers. So there’s, unfortunately, a lot of money on the other side of the table.
But the good news is that as you and I are seeing as we speak to people … I’ve been traveling around on the book tour and you talk to a lot of people as you speak, there clearly is a groundswell in the other direction. And I think that what we have to do is to pressure politicians to make sure that we get proper anti-trust reform.
So one of the first things is prevent future mergers that are anti-competitive to make sure that we don’t end up with more oligopolies and duopolies and monopolies. We also need to break up past mergers that were anti-competitive, which is something that the US has been extremely loath to do for decades. They didn’t even break up Microsoft back in the way. It did, by the way, allow for the rise of Google. I mean, if Microsoft had simply controlled Internet Explorer to favor MSN Search, there would be no Google. So anti-trust and reigning in monopolists does work.
That’s the sort of second thing, I think what we need is much more pro-competitive and better regulations, rather than regulatory capture and lobbying. So on the regulatory capture side, we certainly need to make sure that people can’t go, for example, straight out of the FTC and then go for a K Street law firm to argue in favor of mergers, arguing in front of their former colleagues. And that’s just one, but there are many other parts of government where we see this revolving door in regulatory capture.
Goldy: 20:36 So the large tech companies like Facebook, Google, Amazon, Apple … Break them up or regulate them as common carriers? Both?
Jonathan Tepper: 20:47 I think both is probably a good solution. I think that … Certainly earlier I talked about Google and Facebook and mentioned a few specific acquisition. Google vertically integrated online advertising by buying AdMob. There’re quite a lot of acquisition that have been terribly anti-competitive. I think the online ad world would be much better served by having more competition, and I certainly think that Facebook users would be much better off if Facebook itself were broken up. And in terms of common carrier provisions which you referenced, for example UPS and Fed Ex can’t decide that they’re going to favor your packages over mine. And unfortunately what happens right now is that you have, for example, in the case of Amazon, Amazon is actively competing and using its information it has to compete with its own people. And then Google effectively uses its information and regulates, essentially, its own homepage to its own advantage for Google services, for example, versus … There’s Yelp, but there’s the Europe case of [inaudible 00:21:43]. These are not acting, essentially, like common carriers.
Nick Hanauer: 21:48 Yeah. Interesting.
Well, yikes. There’s a lot to do to fix this problem. It is daunting. But I think one of the most encouraging pieces of this is that people are finally waking up to it, and 24 months ago, 36 months ago, no one was talking about monopoly and monopsony. And it’s everywhere today, and I take that as a good sign that there is at least the beginning of a groundswell of support, politically, to begin to address these issues.
Jonathan Tepper: 22:24 I certainly think that’s the case. No one was writing about this three years ago, and very few two years ago. And last fall, Tim wrote his book The Curse of Bigness. We wrote The Myth of Capitalism. Jonathan Baker’s coming out with a big book in the coming months. You have Jonathan Kaplan, Move Fast and Break Things, and now you get Zucked by Roger McNamy, and so everyone’s now focusing on digital monopolies, but also monopolies more broadly, and essentially the history as to how we got here in terms of the demise of anti-trust. So I think it’s very encouraging that the debate is shifting.
Nick Hanauer: 22:57 I love it. Well, Jon, thank you so much for spending time with us and talking about your work. It’s been a wonderful contribution to the conversation about where the economy and where capitalism’s gone wrong.
Jonathan Tepper: 23:11 Oh, thank you so much.
Nick Hanauer: 23:12 We wish you well. Go kick some ass out there.
Jonathan Tepper: 23:17 Thank you very much. [crosstalk 00:23:18]
Nick Hanauer: 23:18 [crosstalk 00:23:18]
Goldy: 23:19 Bye bye.
Nick Hanauer: 23:19 Okay. Take care. Bye.
Oh my God, so here are the pro tips from Mr. Monopoly for a fair, fast, and competitive game. Wow. Rule Five: “there’s no such thing as a rent immunity.” I guess that means you can’t trade free rent for friendship or anything else. Six: “Buy, sell, dream and scheme. You can swap or sell properties and Get Out Of Jail Free Cards with any player at any time. Always trade for profit, never for pity.” Perfect. “You can mortgage your property to raise money to buy houses, hotels, or other properties,” and finally and most important and most relevant to our existing economy, “Being the banker doesn’t give you the right to steal.” Take that, Goldman Sachs!
Goldy: 24:20 So it’s really astounding how concentrated the labor market has become and how that has contributed to declining wages. And so to learn a little more about the impact of monopsonies, we turn to your friend, Jared Bernstein.
Nick Hanauer: 24:33 Yes. Jared is an economist and among other things, was Vice President Biden’s chief economic advisor and is an expert on these matters.
Jared Bernstein: 24:49 Hey, baby!
Nick Hanauer: 24:50 How are things in Washington, D.C., USA? See anything new out there?
Jared Bernstein: 24:55 The swamp has yet to be drained. It’s getting swampier, in fact.
Nick Hanauer: 25:00 But he promised!
So let’s start out by talking about this economic term monopsony that has all of a sudden sort of crashed into the public consciousness, or at least is beginning to. It’s a word that you didn’t hear for a long time, and now every time I open a newspaper or read anything about economics, it’s something that’s come up. So can you talk to us about what monopsony is and why we should care about it?
Jared Bernstein: 25:33 Sure. Well listeners may be familiar with the idea of monopoly, which is when one seller controls the market. A monopsony when one buyer controls the market, specifically the market for labor. So simply put, it means an employer that has a great deal of power in setting the wages and labor standards of workers because they’re the only employer, or maybe one of a few employers. At least in a theoretical sense, that’s what a monopsony is.
In the real world what it means, and the reason its become more well-known, is because the problem that we’re talking about has grown. In the real world, what it means is that some key industries, it’s not that there’s one employer, but there’s just a few employers and their concentration within the industry is so large that they can control the terms of hiring and labor standards and wage rates. And it’s one of the reasons why we’ve been having difficulty on the wage side.
I think the simple way to say it, because I think sometimes you hear the word “monopsony” and you just sort of get scared, is “employer power.”
Nick Hanauer: 26:47 Yeah.
Jared Bernstein: 26:47 It means a level of employer power to set standards and wages in key labor markets that is going to typically redound not to the benefit of workers.
Goldy: 27:00 And to be clear, while he didn’t use the word, this is a concept that goes all the way back to Adam Smith.
Jared Bernstein: 27:08 Yes, it’s actually interesting how many of these concepts go back to Adam Smith, who has been completely misrepresented as somehow embracing what we now call “neoclassical” or excessive market economics. And Adam Smith was the one who said, I’m paraphrasing, that when employers get together, they’re going to collude and conspire to screw workers in some way or another.
Nick Hanauer: 27:08 Yes.
Jared Bernstein: 27:31 And so yeah, he really … Power, interestingly, was deeply embedded in his model and my model and your model. And monopsony is one of the ways that’s playing out in today’s economy.
Nick Hanauer: 27:44 Yeah. I was always struck by this massive blind spot that so many economists seem to have about the dynamics of labor markets, which is this idea that people are paid what they deserve or what they’re worth. Nothing could be farther from the truth. People get paid what they can negotiate, what they have the power to negotiate. And there are a few people in the economy that have lots of power and are therefore paid a lot, but most people have no power and therefore are not paid very much. And this is why all these claims that increasing profits will lead to higher wages is just such bunk. I man there’s no reason in the world why more profits for me will turn into wages for you.
Jared Bernstein: 28:28 Yeah. I mean I think that’s right, and it’s actually the … What you’re talking about is this assumption that workers are going to get paid their marginal contribution to the firm’s output. And obviously employers, you’ve been an employer-
Nick Hanauer: 28:45 That is not true!
Jared Bernstein: 28:48 … That’s not how it works.
Nick Hanauer: 28:49 That is not how it works.
Jared Bernstein: 28:50 And it’s characteristic of the kinds of assumptions that have gotten economics in all kinds of trouble. As you were talking, I was reminded of the moment when Greenspan, in testimony after the financial crisis, essentially said to the members of Congress who were questioning him, “My model was wrong because I assumed,” this is Greenspan talking, “I assumed that financial institutions would self-regulate to protect themselves from the kinds of problems that they got themselves in.”
Well, again, Adam Smith was very clear that that isn’t the way it works.
Nick Hanauer: 29:27 No.
Jared Bernstein: 29:28 So a set of assumptions kind of arose over the years and we can look of those from the perspective of economic history, economics becoming very mathematical, or probably more germanely, we can look at them in terms of who do they serve in this power structure. And that’s the way I look at it.
And I really don’t want to lose the thread, because it’s consistent with what we’ve been talking about so far. It is commonly misunderstood that the assumptions of economics are benign or they’re mathematical or they come out of a model that may or may not be right. In fact, they come out of a model that isn’t right, A, but, B, these are very much politically-motivated assumptions that serve one class over another, and it’s that class that’s been winning for a long time.
Nick Hanauer: 30:14 Right. Absolutely. So, monopsony, increasing amounts of buyer power in labor markets, it’s not exactly a new phenomenon, but it is indisputably based on the way in which our markets have evolved in this country. An increasing phenomenon, isn’t it?
Jared Bernstein: 30:33 Yeah. If you go back 30 or 40 years, there may have been some monopsonistic parts of the labor market, but I don’t really see them in the data. Now we have very scholarly and careful papers that look at the concentration by industry and they correlate it with outcomes. Like, for example, here’s a really important one. May sound a little obscure, but it isn’t. So if you think about economic income as the part that goes to profits and the part that goes to compensation. So call it “capital share” or “profit share” and “labor share.” One of the things that the research on employer concentration, employer power, monopsony, has found is that as employer power has increased, labor share has decreased and the product share has gone up.
So the unemployment rate is around four percent right now. The last time the unemployment rate was four percent, labor share of national income was 66%. Now the unemployment rate is once again 4%, closing on full employment. The labor share is 62%. So that’s 4% of GDP, that’s $800 billion, about $4,000 bucks per worker.
So these papers now are correlating that increase in employer power with the decline in labor share of national income. And obviously as we’re talking about all this firm concentration, I think listeners might say, “Well, wait a second, I certainly see what you’re talking about on the labor side and the wage side.” You think of a monopolist often with gouging prices. And actually, you don’t see a lot of that. Prices remain pretty low; inflation remains pretty low.
One of the things that I’ve been struck by is the extent to which firms are taking their power out on labor and labor share of wages and not so much gouging consumers. I just find that to be an important wrinkle.
Nick Hanauer: 32:19 That’s right. I think you’re absolutely right, and you know I’ve had a lot of personal and visceral experience around this concentration, because one of my formative business experiences was growing up and helping build and run the family bed, pillow, and down comforter business, a home furnishings and textile business that we sold about a year ago, but that I started at when I was small.
And in the beginning, in the early days, there was no concentration in our customer base because we sold to dozens of retailers across the country that were almost all, with the exception of a couple, JC Penny, Kmart, that were regional. There was a regional department store; there was a regional discounter. There were specialists who served regions or tiny niches. And over time, virtually all of those regional players were replaced by a couple of giant sellers: Walmart, Target, Bed Bath and Beyond, and few others.
And the knock on effects of that concentration are extraordinarily important for the dynamics of the economy, but not well-understood by most people. And among them is that when you have that kind of concentration of buying power, the number of vendors that one of those companies will have in any particular product category does not go up. You have three vendors, and whereas you had 100 retailers buying from three vendors before, now if you have three retailer buying from three vendors, the number of possible vendors there can be, manufacturers who make products for those retail companies, has to diminish, too.
And what that means is that has a huge impact on the geographic diversity of prosperity, right? Because in the old days, there could be a supplier in every tiny town supplying the local retailers. Today, that’s impossible.
Goldy: 34:17 Can we talk a little bit about the specific impacts that we’re seeing? Obviously there’s much greater market concentration, both in terms of buyer and seller power. How is this affecting the typical American worker?
Jared Bernstein: 34:31 Well, it’s been holding down pay in ways that are well-documented. So right now, just to use the current climate as the most recent evidence, we’re at low unemployment, as I’ve mentioned, and historically, low unemployment has been associated with climbing real pay for middle- and low-wage workers. We’ve not seen nearly enough of that. In fact, for middle-wage workers, real pay’s been flat, and nominal wages haven’t been growing very quickly, certainly not as fast as you’d expect. And one reason for that is that productivity is pretty low.
Well, if you first squeeze the competition out of the market in the way Nick’s story that he told leads to, it’s perhaps not that big a reach that you’ve got really dampened productivity growth as well. Employer power and concentration has made it extremely difficult for unions to get a foothold, and of course the American union movement is being whacked on all sides, both the loss of jobs in sectors like manufacturing, they’re unionized, but also Right to Work rules which are basically anti-union rules in states. So there’s a political dimension here.
And so I think the combination of employer power and the money in politics problem that I mentioned earlier creates this very toxic brew that not only damages the living standards of the majority of the workforce, but probably dampens the dynamism in the economy, as well.
Goldy: 36:09 Right right, there’s less reason to invest in productivity-enhancing technology if your labor costs remain very low.
Jared Bernstein: 36:18 Exactly. One of the things a lot of people have noted and kind of scratched their heads about is that the role and the number of startups has diminished over time as these other factors have developed. And one of the things that happens is the very large firms buy up the small ones before they can necessarily flourish. And so there is a concern, as you mentioned, that as long as you can run a profitable firm, either without making much in terms of capital investments, you’ll do so.
Nick Hanauer: 36:50 From the point of view of the businessperson, it’s so much easier to generate out-sized returns if you can squeeze workers rather than actually having to invest capital and innovate in ways that actually improve products and services.
Goldy: 37:06 If you were a benevolent dictator instead of the kind of would-be dictator we have right now, how would you address this problem from a policy perspective?
Jared Bernstein: 37:17 It’s interesting. When you started talking about what we have now, around Washington I’m known as “Jared the Good.” [crosstalk 00:37:26]
So anyway, we’ve used this … It’s not a four-letter word; it’s a five letter word: power. We’ve talked about that word in our conversation, and it looms large. And so I would really focus on trying to restore bargaining power to working people. The person you think of in that context of unions. And I’d certainly do what I could to try to level the playing field for union organizing, but I wouldn’t put all my eggs in that basket. That’s a 40, 50 year trend, and it’s very hard to buck such a long trend.
So I would try to think about other ways to empower workers. Or one of the things you can do is really improve labor standards. And I don’t mean nibbling at the edges, but I mean significant increase in the minimum wage, a significant increase in the overtime premium, and I’ve done a lot of research on both of those areas and you could accomplish without I think generating much in the way of downside impacts.
And then I would really focus on the macro economy. So the unemployment rate is, as I said low. There’s kind of an institutional bias in economics to start tapping and maybe hitting harder the brakes just when the economy starts to deliver the goods for working people. So I really would reinforce, as benevolent dictator, a much more careful macroeconomic process that would let us get down to truly full employment and stay there without worrying about overheating and inflation, unless, and it’s a very big caveat, I saw true evidence of that. I think one of the problems is that we slow the economy down because we’re convinced that inflationary pressures are around the corner when they’re not.
Goldy: 39:07 You were talking about using the tax code for redistributive purposes. I presume when you say that, you mean raising taxes on rich people like Nick. Isn’t that going to be a job-killer?
Jared Bernstein: 39:22 [crosstalk 00:39:22] Yeah, definitely not. I mean this was something I spent way too much time arguing about. The facts could kill this zombie of trickle-down supply-side economic theory. We’d be giving its eulogy at its graveside 20 years ago, but it is impenetrable to fact. It’s true ideology, but the historical, empirical record is clear that there is no correlation to speak of between the kinds of tax [inaudible 00:39:53] was implemented and employment or even investment.
Nick Hanauer: 39:57 Well, thank you so much for your time.
Jared Bernstein: 39:59 You’re welcome. It’s been nice talking to you guys.
Nick Hanauer: 40:00 Okay.
Jared Bernstein: 40:00 [crosstalk 00:40:00]
Nick Hanauer: 40:00 And we’ll talk soon. See you soon.
Jared Bernstein: 40:00 All right, bye bye.
Nick Hanauer: 40:00 Bye.
Goldy: 40:09 Now we’re playing for your private jet, right?
Nick Hanauer: 40:12 Yeah, exactly.
Goldy: 40:14 Okay. Why don’t we put our cards up against each other? If you win, you get my Prius-C, and if I win, I get your Tesla.
Nick Hanauer: 40:24 My new Tesla. Perfect. Okay, seven. How bad is that? One, two, three, four, five, six.
Goldy: 40:24 It’s six!
Nick Hanauer: 40:31 Ah, shit!
Goldy: 40:33 Ah, Atlantic Avenue with a hotel. Do you even have this much money left?
Nick Hanauer: 40:37 How much?
Goldy: 40:38 It’s 1150.
Nick Hanauer: 40:40 Ah, shit.
Goldy: 40:42 Did I win? Did I bankrupt you?
Nick Hanauer: 40:43 Five. Hold on. Six, seven, eight hundred, fifty, nine, 69, 70. No, 975.
Goldy: 40:57 I win!
So I think, Nick, there’s a theme emerging on our podcast. When we talked about stock buybacks, it all went back to a change made during the Ronald Reagan administration. And now that we’re talking about market concentration and the way we regulate antitrust, it all goes back to a change that happened during the Ronald Reagan administration.
Nick Hanauer: 41:28 Oddly, 1982. Yeah. Yes, it’s fascinating. Yes, and for sure, you know our policies are a reflection of our ideas, and the economic ideas that were accepted both on the right and on the left of the last 40 years were neoclassical and neoliberal ideas. And we have ended up with some very, very bad policies that have harmed everyone except the rich. As we said many times before, neoliberalism is a protection racket for rich people. And the best way in the world for the rich to get richer is to enable increasing amounts of market concentration, which is, of course, what we’ve seen.
Goldy: 42:06 So, Nick, as somebody who hasn’t made a ton of money off of capitalism, I’m feeling like a loser here. It turns out that to be a good capitalist, you have to be a pad person?
Nick Hanauer: 42:19 What do you mean by that?
Goldy: 42:20 Well, for example, Peter Thiel, one of the most evil people on the planet, very successful capitalist. Very, very successful sociopath … Uh, capitalist … actually wrote in the Wall Street Journal. He had an essay, “Competition is for Losers. If you want to create and capture lasting value, look to build a monopoly.”
Nick Hanauer: 42:40 Yeah, and it is ironic that many of the most successful capitalists in the country, certainly a lot of very, very successful investors, and the people who claim to be most dedicated to the capitalist system and free markets seek to avoid free markets at all costs.
Goldy: 43:04 Because they understand their Econ 101 textbook. If you have perfect competition, there’s profit to be made!
Nick Hanauer: 43:10 That’s right, exactly. And so, my entire industry, the venture capital industry more or less, is predicated on the idea that you’ll try to create a monopoly and high amounts of profit and then consolidate industries, and so on and so forth.
And so we have a lot of work to do in the country to change the way in which we collectively think about economics and markets and build policies again that actually create competition, that actually are organized to increase innovation and to benefit everybody. This is yet another great example of the corrosive effects of neoliberal ideas on our society, our economy, and our culture.
Goldy: 43:58 And then the funny thing is, of course, that the guy who eventually copyrighted, he didn’t actually have the rights. Milton Bradley, I think, bought the copyright to his game, paid him the most amount of money anybody had ever paid for the rights to a board game, and then quietly had to buy to the game he stole, so that Milton Bradley ended up with a monopoly on Monopoly.
Nick Hanauer: 44:31 The best example I know of in the economy of the effects of monopsony on wages is the fact that millions and millions and millions of Americans are working longer and longer and longer with no extra pay. They’re working overtime without being paid for that overtime. And so in the next episode, we’re going to examine the issue of overtime pay and the policies surrounding overtime pay, because overtime is for the middle class what the minimum wage is for low wage work. And in the absence of good overtime policy, you basically can’t build a thriving middle class.
Speaker 5: 45:20 Pitchfork Economics is produced by Civic Ventures. The magic happens in Seattle in partnership with Larj media, that’s L-A-R-J media, and the Young Turks network. Find us on Twitter and Facebook @civicaction and follow our writing on Medium at Civic Skunk Works. And you should also follow Nick Hanauer on Twitter @NickHanauer. As always, a big thank you to our guests and thank you to our team at Civic Ventures. Nick Hanauer, Zack Silk, Jasmine Weaver, [Jessin 00:45:45] Farrell, Stephanie Irvine, David Goldstein, Paul Constant, Nick Cassella, and Annie Fadely. Thanks for listening.