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By Jared Bernstein By Jared Bernstein July 27 at 6:00 AM

Jared Bernstein, a former chief economist to Vice President Biden, is a senior fellow at the Center on Budget and Policy Priorities and author of the new book 'The Reconnection Agenda: Reuniting Growth and Prosperity.'

The part of the Democrats Better Deal plan that I find most interesting is the piece that would push back on monopolistic corporate power. Its neither radical nor left. I cant say if its particularly good politics (although their internal polling suggests it is). But assuming this proposal eventually grows into something real, its likely to prove to be increasingly important economic policy with significant benefits for working families.

The broad outlines of the plan are to:

Prevent big mergers that would harm consumers, workers, and competition. Require regulators to review mergers after completion to ensure they continue to promote competition. Create a 21st century Trust Buster to stop abusive corporate conduct and the exploitation of market power where it already exists.

But wait. Dont we already have an antitrust function in the Justice Department? Yes, but based on a wide and growing body of evidence, corporate power is still becoming more concentrated, and thats leading to large chunks of market share in the hands of just a few companies.

Those companies, in turn, are generating the classical problems associated with, if not quite monopolies, then the absence of robust competition. These problems include fat profit margins and their correlate, thinner wage shares; less consumer choice; less innovation; less entrepreneurial activity; and less price competition. Theres even evidence suggesting that one of the biggest economic challenges we face right now slow productivity growth is related to the increased concentration of corporate power.

The evidence is pervasive and persuasive. Barry Lynn at the think tank New America, who dives deeply into these weeds, documents the concentration in retail (e.g., Walmart, Amazon and two other companies that control 60 percent of the mattress market, though I expect their competitors were lying down on the job sorry), health care, pharma and more. Data from Goldman Sachs that are five years old (and, thus, likely understate the problem) find that in general merchandise stores, the share of total sales of the four largest firms increased from 55.9 percent in 1997 to 82.7 percent in 2012; in air transport, the comparable figures are 20.5 percent to 57.0 percent.

By looking at the implications for profits, the figures below take this analysis to the next level. The figure on the left shows that, as fewer firms captured a larger share of their industrys revenue, industry profits rose, as well. In fact, as the scatterplot on the right shows, the change in revenue share explains 71 percent of the change in operating margins. Its a finding that comports with common sense: Concentration correlates with market power and, thus, profitability.

Whats wrong with that? Well, in the Atlantic, Lynn putnot too fine a point on it:

Monopoly is amain driver of inequality, as profits concentrate more wealth in the hands of the few. The effects of monopoly enrage voters in their day-to-day lives, as they face the sky-high prices set bydrug-company cartelsand the abuses ofcable providers,health insurers, andairlines. Monopoly provides much of the funds the wealthy use todistort American politics.

The inequality point is worth elevating in the spirit of the figures above. Think of income as having two sources: profits and wages. When the share going to profits goes up, the wage share falls. Now, inequality has gone up within both shares over time, but profits are far more skewed toward the wealthy than wages. So when more income flows to profits and less to wages, inequality rises. Importantly, numerous academic papers have documented this link between greater concentration, higher profit shares and smaller wage shares.

Why has concentration increased so much? Theres evidence that firms that most effectively tap new technologies and globalization claim the most revenue share. Policy plays a role as well; Dean Baker documents economically large distortions associated with patents, trade policy and financial markets.

But whatever the cause, the fact that Democrats recognize and are showing interest in going after the problem is a good thing. And thats not just my view. David Dayen, a hard-hitting, left-leaning journalist whos often critical of ideas from the center-left, wrote that by going after corporate power, and in particular monopoly concentration, Democrats finally hit the target.

This analysis assumes two things. First, and Dayen is clear on this point, it assumes theyll follow through. Second, because Democrats dont have the votes now to do much of anything, it assumes the issue will resonate with voters. Whether that happens is a function of Democrats credibility on follow-through and how effectively Democrats can connect these broad, macro changes to peoples lives. That may sound hard, but if youve ever flown, filled a prescription or paid a monthly cellphone bill (ouch!), you may be more primed than you think to buy into this idea.

One final point. Above, I noted that theres really nothing lefty about antimonopoly politics. Classical economists since Adam (Smith) have recognized the distortions caused by excessive concentration. This debate thus reveals one of the most pervasive myths in our contemporary political economy: that Republicans are pro-market forces and Democrats are anti-markets. Too often, both sides are all too happy to cash the checks of the corporate monopolists. If Democratstruly get back to trustbusting, theywill be making a powerful, progressive statement about what and for whom they really stand.

Go here to read the rest:
Democrats say they want to go after monopoly power. Here's why that's a great idea. - Washington Post