One knows an economic phenomenon has reached a critically high level of public attention when a new acronym appears to describe it. Over a decade ago, when the rapid rise of newly industrializing countries affected international trade and investment flows, the term BRICs was coined to describe the most important of these countries: Brazil, Russia, India and China.
More recently, attention is focusing on the technology super-giants spawning a new popular acronym, FAANG, to describe Facebook, Amazon, Apple, Netflix and Google. One reason for the increased attention is the amazing concentration of wealth in the hands of these company’s leaders. Jeff Bezos of Amazon is now the wealthiest person in the world at over $100 billion. Mark Zuckerberg of Facebook rose to the top five wealthiest recently. Although the Forbes annual list of billionaires has always captured the attention of the public, the increasing number of them, from 470 in 2000 to 2,208 in 2018, shines a spotlight on the rising inequality of income and wealth around the world. In the aftermath of the worldwide financial crisis in 2008, the real income of the top 1% of income earners rose by 31%. During that same period median income and wealth actually declined indicating a decline in well-being for the average middle-class household. Inequality is growing rapidly in the US and around the world for a variety of reasons and it is beginning to have profound effects.
One of the most-cited reasons for the increased inequality is the growing concentration within many industries. Greater concentration in an industry occurs through mergers and acquisitions, faster growth of larger firms relative to the smaller ones, or through the failure of some companies, thereby reducing the number of competing firms in an industry. A reduction in competition enables the remaining dominant firms to acquire monopoly power and raise prices to the benefit of profits and shareholders, but to the larger detriment of the consuming public. Because firm owners and shareholders are among the top percentiles in income and wealth, apparent industry successes will also be associated with growing inequality.
The FAANG companies provide the most obvious example of increased dominance of some firms in prominent industries, but they do not capture the whole of it. In the US the five largest banks control almost 50% of total assets in the system. In cable TV and internet provision, three companies control 65% of the market. Six national news companies control 90% of US media outlets. Four firms control more than 70% of the retail drug store retail market. For products including cigarettes, beer, turbines, petrochemicals and many more, four firms account for more than 85% of their respective markets.
Among the most significant effect of the increase in inequality may be the rise of populism in the US and around the world. When a majority of citizens in the middle and lower income groups are feeling like hope for a better future for their children is being thwarted by high educational debt, real estate prices that make it impossible to purchase a first home, and a decades-long stagnation in real income, then it is only natural that they will support politicians who speak of upsetting the status quo. Most popular will be politicians who offer quick responses to the most obvious sources of economic insecurity including protection from foreign imports and foreign immigration. Each of these foreign influences increases competitive forces and accordingly puts pressure on low income wages. In addition, successful populist messages often propose measures to force wealthy citizens to contribute a greater share to support public programs and reduce tax burdens for the middle and lower income groups.
In the US, populist pressures have roused support for unconventional candidates on both the right and the left. While Donald Trump’s popularity stems in part from his tough talk on immigration and trade with China, it also arises from the fact that he is not a Washington insider and does not play by the same rules as conventional politicians. At the same time, similar pressures on the middle and lower income groups also fueled support in the last US election for another politician with an unconventional message, Bernie Sanders. Sanders espouses a democratic socialist message than would never have been as widely acceptable just a few years before. His alternative solutions of higher taxes on the wealthy and government-provided healthcare and college education appeals to the same aggrieved groups in the country as Trump.
In his influential treatise on inequality, Capital in the 21st Century, Thomas Piketty highlighted the historical regularity that highly unequal income and wealth disparities often leads to political and social instability. He also contended that as inequality continues to worsen in the US and elsewhere, action will be needed to equalize outcomes. How to best achieve that result will be the topic of much discussion in upcoming years. Piketty and many others, including Sanders and the young popular newly-elected US Congresswoman, Alexandria Ocasio-Cortez have proposed higher taxes, in the form of a global wealth tax or significantly higher marginal tax rates on income for the super wealthy. While this approach is very appealing to the aggrieved population it suffers from several serious flaws.
First, higher taxes will meet with strong resistance from the wealthy overlords in business and industry who indubitably have an outsized influence in the political process in democratic countries. Thus, it will be difficult to get measures such as these passed into law. Second, even if higher taxes could be implemented, and thereby assuage populist demands, it would quite likely be implemented only if there remained sufficient legal backdoor mechanisms the wealthy could use to avoid the higher rates. Thirdly, and most importantly, these mechanisms do not get at the main sources of the problem; a policy of higher taxes tries to alleviate the symptoms and it does so, as the wealthy may well contend, by confiscating and redistributing legitimately earned income.
Although rising monopolization is surely not the only source of growing inequality, it is undoubtedly an important contributor. As such, an alternative approach to rising inequality is to target new policies at the source of the inequality rather the symptoms. This may include enhanced budgets and stricter enforcement of antitrust laws including the restriction of more mergers and acquisitions. It may also require rethinking intellectual property protections and reducing the length of the monopoly privilege that is granted in some circumstances. Although measures such as these will also lead to resistance by corporate special interests, some of the changes can be made by greater enforcement efforts using current laws.
The key strength of this approach is that effective, even if slow, implementation would focus policy attention on the goal of achieving more efficient markets. Government rules and regulations can and should be used to level the playing field and enable markets to work more effectively. In contrast redistributive policies are government policies that add greater market distortions with the intention of correcting the negative outcomes that arise largely because of the exploitation of market imperfections such as monopolization. The effect of redistribution is an economy with even greater complexity that can and will be leveraged by dominant corporations that will have an informational advantage. Government intervention to arrest growing inequality is inevitable, but how it is done will make a significant difference. Targeting policy at the heart of the problem will always prove more effective than trying to correct the problem by redistributing the outcome.