For the first time in decades, the question of corporate power has become central to the US presidential campaign. Senators Elizabeth Warren, Cory Booker, and Bernie Sanders have all emphasized the threat that monopolies pose to our politics and our economy. Still, there’s a basic fact that the public has yet to fully internalize: US industries are far more concentrated than they were 20 years ago, and the economy may even be as concentrated as it was during the middle of the 20th century.
Consider the metaphors we use to understand how our economy works now compared with how it worked in the past. For many, the period from the 1940s to the 1970s was one of Big Business and large conglomerates. We think of the TV show Mad Men, with men in gray flannel suits who work for large corporations. In contrast, we often picture today as an era of plucky start-ups and leaner, smaller businesses—think Silicon Valley.
But a wave of recent research has pushed back against this notion. In 2017 the economists Gustavo Grullon, Yelena Larkin, and Roni Michaely authored a groundbreaking study, “Are US Industries Becoming More Concentrated?” The definitive answer, they found, is yes. In the past two decades, more than 75 percent of industries have become more concentrated.
In the industries with the highest corporate concentration, businesses have seen the highest spikes in their profit margins. Other research, most notably from the economists Thomas Philippon and Germán Gutiérrez, found that concentration and short-term pressures by shareholders drive down how much these firms invest. This is all occurring in a period of low interest rates, and in a healthy economy, this should be impossible. You shouldn’t be able to have low investment, high profits, and low interest rates. Competitors should fight over those profits, and incumbent firms should expand investment to sell more in a market that is highly profitable.
There’s significant debate about the consequences of these findings. Economists and lawyers who don’t think this is a problem argue this concentration is necessary in a globalized world. Yet if this were the case, we shouldn’t be seeing high profits and low investment. But what’s not up for debate is that this is a massive change from just two decades ago.
One interesting question is how far back this trend goes. Is the economy more concentrated now than in the 1970s? This is surprisingly difficult to answer. We know a lot about publicly traded companies since the 1930s, especially after the New Deal required formalized reporting. But there are a lot of private firms as well, and data on them is harder to come by. There’s also the problem of how to standardize classifications of industries and profits so that we can compare them over generations.
Yet we can make out a few trends. The first is that people today are more likely to work for a large firm with over 10,000 people than they were in 1977. In addition, among publicly traded companies, concentration is higher today than it was in the 1970s. That tells us only so much, but we can combine it with other information. A measure of how much market power a firm has, the Lerner index, is slightly higher today than it was in the 1970s for publicly traded companies. If private firms were able to be more competitive and therefore take up more of the economy, we’d expect to see that profitability decline instead of increase in today’s economy. Though it is tough to see farther into the past than that, there’s little reason to think that the 1950s were more concentrated than the 1970s.
This affects our political imagination. Some view the mass prosperity of the midcentury period as possible only because businesses were so large and profitable. Workers could form unions because there was less competition and thus could share in the wealth of this high-profit environment. Unfortunately, we don’t see this today. New evidence shows that in recent decades, the premium for working at a large firm has declined substantially. While workers today must compete relentlessly to secure the basics in our society, large corporations don’t face the same pressure. With every year, industries get more concentrated, and businesses have to do less to reap ever higher profits.