DEFORM BY STEALTH

While the tax changes at least are happening in the public eye, there is another very major transformation in the US economy that could have a direct bearing on growth: the increasing concentration of economic activity.

Companies that innovate need access to markets to sell their products. And some evidence suggests this is becoming increasingly difficult for new entrants. At the national level, most sectors (including technology, but not only) are increasingly dominated by a few companies. A 2016 report by the Council of Economic Advisers, for instance, finds that the share of the top fifty corporations in the national revenue of each of their sectors increased across most sectors between 1997 and 2012.⁶² This concentration is largely accounted for by a growing share of the “superstars,” partly the result of a fairly liberal attitude on mergers in the United States.⁶³ For example, the share of the top four companies in a sector’s revenues has increased in every sector. In manufacturing, the top four accounted for 38 percent of revenues in 1980 and 43 percent in 2012. In retail trade, the share more than doubled, moving from 14 percent to 30 percent.⁶⁴

It is not entirely clear that this increased concentration has been bad for consumers. Depending on the data source and computation methods, some economists find huge increases in markups⁶⁵ (the difference between what a firm charges and its costs) but others do not.One thing that has protected consumers is that in the retail sector there has been concentration at the national level but not at the local level. When Walmart or other superstores come to town, they displace some mom-and-pop operations.

But the problem with the increased concentration at the national level is that to the extent it reflects a decline in the competition faced by these behemoths, it may actually lead to reduced innovation because it creates higher barriers for new entrants to disrupt an industry. In the logic of Aghion and Howitt, the promise of (temporary) monopoly power, through a patent, spurs innovation, and this innovation in turn results in the new technologies everyone will eventually be able to use. This is what causes growth. But if monopoly is guaranteed forever anyway, innovation and growth may slow down; a monopolist can sit on their hands and never invent anything new. Some evidence suggests something like this is happening now. In particular, a study found that when a large planned merger and acquisition in a sector narrowly fails to happen for some unpredictable reason (the judge was not lenient enough or the deal fell through), the sector remains more competitive for several years afterward. These sectors with “near misses” see the entry of more new firms, more investment, and more innovation. This result does suggest that the relatively low growth in TFP may in part be explained by the increase in concentration.⁶⁸