The coming global backlash against corporate consolidation.
An emerging body of economic research may have finally found the root of inequality.
This article was published in “What I Learned This Week,” on January 19, 2017. To subscribe to our weekly newsletter, please visit 13D.com, or find us on Twitter.
From Davos to the press and social media sphere, inequality took centerstage this past week. “Responsible and Responsive Leadership” was the headline of the 2017 World Economic Forum (WEF) — a call-to-arms for the titans of politics, industry, and academia to confront and combat the inequality underlying electorate fury in the advanced world. Meanwhile, a simple and shocking statistic, provided by Oxfam, lit the internet on fire: the world’s eight richest men now control as much wealth as the poorest 50%. Yet, while blame is being cast far and wide — from corporate and individual greed to policy inadequacy and the failure of the neoliberal order — debate still remains about the exact forces exacerbating global inequality and thus, how to counteract them.
However, an emerging body of economic research may finally have found the problem’s root. For the past 30 years, corporate profits have risen while corporate investment and labor’s share of GDP have fallen. As a result, capital is concentrating and remaining stagnant, depressing growth and exacerbating the wealth gap between business stakeholders and the global workforce. And evidence suggests, sector consolidation — compounded by technology — is the single correlating factor determining the severity of this dynamic.
Which begs a question with seismic implications: With populism transitioning from insurgency to governance, are we on the precipice of a large-scale backlash against corporate consolidation?
No doubt globalization and technology have positively transformed quality of life for most people around the globe. Consider just one example: over the past two decades, an average of 130,000 people have been pulled out of poverty each day. Yet, middle-class wages in the developed world tell a very different story. According to the WEF, median-per-capita incomes fell by an average of 2.4% between 2008 and 2013 (the latest data available) across 26 advanced nations. And while the U.S. saw wage growth last year for the first time since the Great Recession, the nation still ranks 23rd globally — worse than Estonia, the Czech Republic, and South Korea — in the WEF’s Inclusive Development Index, which measures a combination of growth and development, inclusion, and intergenerational equity and stability.
Given the U.S. is the epicenter of the digital revolution, it is not surprising the nation faces a grave inequality challenge. In these pages, we have often explored the monopolizing powers of digital technologies. From Google and Facebook to Amazon, Uber, and Apple, the titans of Silicon Valley have leveraged technological leads to dominate entire sectors and drive unprecedented industry and capital consolidation. Yet, they are only marquee examples of a fundamental shift in the dynamics of the global economy. As CUNY economist Douglas Rushkoff has written (WILTW March 17, 2016): “What is new here is that by applying our technological innovations to growth above all else, we have set in motion a powerfully destabilizing form of digitally-accelerated capitalism.”
Examining the U.S. economy reveals the statistical reality of this acceleration. In a working paper, “Declining Labor and Capital Shares,” Simcha Barkai — a PhD candidate at the Booth School of Business — explores 30-year trends in capital allocation within the U.S. corporate non-financial sector. His data accounts for roughly 70% of the total private economy and covers three categories: how much corporations compensated workers (labor), how much they invested in operations and growth initiatives (capital), and how much revenue companies accumulated after expenses (profit). His findings are as simple as they are troubling: “shares of both labor and capital are declining and are jointly offset by a large increase in the share of profits.”
Or to put that in numerical terms, he finds labor’s share of gross value added declined 10% while capital’s share declined 30%, or a combined shortfall of $1.2 trillion. Meanwhile, profits rose from 2% of gross value added in 1984 to 15.7% in 2014, “which is equal to $1.35 trillion or $17,000 for each of the approximately 80 million employees in the corporate non-financial sector.”
And according to Barkai, the one common factor determining the severity of this dynamic across sectors: consolidation. As he writes, “those industries that experience larger increases in concentration of sales also experience larger declines in the labor share.” Then adding, “Taken together, the results suggest that the increase in concentration can account for the entire decline in the labor share.”
Others have also recognized this dynamic. In a working paper released last year, “Investment-less Growth,” economists German Gutierrez and Thomas Philippon examine escalating consolidation within the U.S. corporate economy and the impact on corporate investment. They employ U.S. Census Bureau data to measure economic dynamism and find that the number of firms both entering sectors and exiting has been in steady decline since the 1980s, resulting in fewer average firms per sector and thus, less competition and greater markups for established companies.
In addition, they find that net investment relative to net operating surplus declines in tandem with the decline in economic dynamism, confirming companies are investing less in operations and growth initiatives and as a result, seizing more profit.
These findings align with Digital Age dynamics we’ve explored in these pages time and again. Corporate return on assets has been declining for 50 years, a fact company after company has been obscuring by reallocating profits to artificially boost stock values through share buybacks. Meanwhile, companies are storing more cash than ever before, led by tech giants who face a backlash across the globe for the size and location of their assets. And recently, we wrote about Trump’s technology advisor Peter Thiel (WILTW November 17, 2016), who believes rampant risk-aversion and stagnant R&D spending are driving a “great technology slowdown,” which has inhibited the seismic innovation necessary to propel global growth.
If consolidation is the key factor driving inequality and slowing global growth, will populist leaders take action? It is a question with pressing implications. On the campaign trail and since his election, Donald Trump has regularly attacked some of the most powerful and profitable companies in the country on antitrust grounds, from Apple and Amazon to AT&T. Just last week, he met with AT&T CEO Randall Stephenson to discuss the company’s merger with Time Warner. Whether or not the President-elect seeks to block that deal may prove a decisive revelation about how his administration will approach consolidation. If he does indeed take action, it could grind M&A activity to a halt and prove a bellwether for antitrust intervention against tech giants.
However, keep in mind, if Trump decides in favor of the AT&T/Time Warner merger, it does not mean the time bomb will stop ticking. As we’ve discussed previously, artificial intelligence is poised to exaggerate the upside and downside dynamics of today’s digital economy. Due to its data concentration requirements, it will prove the most powerful monopolizing force in history. Moreover, the looming automation threat it presents is guaranteed to hit low- and middle-wage workers hardest. If consolidation is indeed the primary driver of inequality, AI likely means today’s populist revolution is only the tip of the iceberg for corporate powers.
This article was published in “What I Learned This Week,” on January 19, 2017. To subscribe to our weekly newsletter, please visit 13D.com, or find us on Twitter.
