The Kansas City Federal Reserve, one of the dozen reserve banks in the U.S., gathered on Friday in Jackson Hole, Wyoming, to discuss a signature puzzle of our times: How can the economy hum along, with unemployment falling for years, without wage growth? How have the gains from the economy been segregated from most Americans who do the work, instead flowing into the hands of a small group at the top? And what can the Fed, or anyone, do to reverse this?
The main culprit discussed at the economic policy symposium was increasing corporate concentration: the limited number of firms in any one industry. A series of working papers and speeches examined monopolization’s impact on various aspects of the economy, from worker bargaining power to capital investment to inflation. While the Fed isn’t singularly responsible for policing market competition, it does have the power of the megaphone, and the implications of the research unveiled last week should signal a sea change across government: either tame the corporate giants, or watch helplessly as they eat everything not nailed down.
Northwestern University’s Nicolas Crouzet and Janice Eberly submitted a paper about what they call “intangible capital”—intellectual rather than physical property, such as patents, software, or even copyrighted brands. Over the last two decades, businesses have invested more in these intangibles than in physical capital like factories and workers; according to the authors, this can account for nearly all of the drop in physical capital investment since 2000. If you have a patented product that nobody else can manufacture, why bother to spend money attracting top talent?
Crouzet and Eberly show this dynamic is most pronounced in the tech and health care sectors, where patents are particularly valuable. “The platform developed by an online retailer is just as crucial to producing revenue as an oil platform is to an energy firm,” the authors write. And they see a link to market power, as large firms use intangibles to exclude competitors.
This is important to the Fed because in economic downturns, it lowers interest rates to entice capital expenditures and give the economy a boost. Similarly, Congress often tries to kick-start the economy with investment tax credits. If apps and drug patents are more critical to the modern economy, these interventions won’t work as well.
An even more intriguing paper, from Alberto Cavallo of the Harvard Business School, scrutinizes the rise of online retail and the algorithms that cause prices to constantly fluctuate. If Amazon finds that more people buy pens in the morning, pens could be more expensive then, for example. And because the retail world has a “follow-the-leader” mentality when it comes to Amazon, this has been widely replicated, leading to a high degree of uniformity across the country.
In other words, Amazon has created its own ecosystem, with precise, rapid swings in prices not necessarily related to the common factors of supply and demand. You might expect that Amazon’s presence lowers prices generally, as it tries to undercut the competition. But by studying thousands of prices, Cavallo finds that the “Amazon effect” can react faster to “shocks” like spiking gas prices, natural disasters, a sudden change in the value of the dollar, or tariffs. When these shocks happen, companies can transfer the price to customers faster than ever. “The implication is that retail prices are becoming less insulated from these common nationwide shocks,” Cavallo writes.
With consumer spending encompassing most of the U.S. economy, this dynamic pricing has made the country more vulnerable to surprise events. It’s expressly tied to concentration, Cavallo notes: “A few large retailers using algorithms could change the pricing behaviour of the industry as a whole.” Part of the Fed’s job is managing inflation, but this paper implies that it’s out of their hands and more at the whim of an algorithm somewhere in Seattle.
Alan Krueger of Princeton University didn’t write a paper, but his remarks at Jackson Hole reflected growing research into “monopsony.” Monopoly means too few sellers in a market; monopsony means too few buyers, and in this context, too few employers. If there aren’t as many bidders for a worker’s services, their ability to bargain for a higher wage is reduced. To Krueger, this can help explain the lack of wage growth, despite low unemployment. “If employers collude to hold wages to a fixed, below-market rate, or if monopsony power increases over time, then wages could remain stubbornly resistant to upward pressure from increased labor demand in a booming economy,” Krueger said.
All of these events—the rise of intellectual property, dynamic pricing, and weakened labor bargaining power—have links to monopoly. These researchers are saying, collectively, that the economy has fundamentally changed as a result. The normal tools used to manage economic growth, like shifting interest rates or containing inflation, used to be enough to ensure that the market would bring higher wages and broadly shared prosperity. But those channels have been broken, and may stay broken until dominant firms are cut down in size and power.
This lack of control over the economy is incredibly dangerous. The Fed has tools to regulate and even break up the banking sector, though they are not using them. But the agencies that oversee business competition—the Justice Department’s antitrust division and the Federal Trade Commission—have the primary authority to guard against harmful market concentration. If the conclusions from Jackson Hole are correct, economic policymakers desperately need their help.