Monopolies worsen economic inequality, financial stability, Fed says

  • A new paper from Federal Reserve researchers finds that the concentration of market power in a select few firms exacerbated economic inequality and increased financial instability.
  • The team pointed to the income share for the top 5% of households growing from 21% in the early 1980s to 34% in 2008. The same households saw their net worth swell by 186% from 1983 to 2016, they added.
  • While such households benefited from a shrinking amount of competition, poorer households were forced to take on more debt just to keep up, the researchers said.
  • Redistributing wealth to poorer Americans by taxing monopolistic entities can help prevent financial crises and close the wealth gap, according to the paper.
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The growth of some companies to near-monopoly status exacerbated several plights in the US economy, Federal Reserve researchers found in a recent study. 

Rising market power in a select few firms fueled income and wealth inequality and boosted financial instability, economists Isabel Cairó and Jae Sim wrote. A lack of competition also slammed labor share, the measure of economic output enjoyed by workers, they said.

The income share of the top 5% of households grew from 21% in the early 1980s to more than 34% just before the financial crisis, according to the paper. Those same households saw their net worth balloon by roughly 186% from 1983 to 2016. In all, the concentration of wealth among the richest households forced poorer populations to borrow more just to get by, the researchers wrote.

The fact that such trends “have realized over a time period in which the investment-to-output ratio has steadily declined suggests that the rise in market power” was the “driving force” in widening the wealth gap, they added.

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The harm doesn’t stop with lower- and middle-income Americans, according to the study. The trends collectively increase financial instability throughout the economy by ratcheting up the credit-to-GDP ratio and leaving companies with an increasingly large share of earnings. When the US fell into the 2008 recession, those shifts escalated the country’s economic damage.

Likewise, “redistribution policies” for combatting economic inequalities can serve as “strong macroprudential tools in preventing financial crises,” the economists said.

Raising the dividend income tax for massive corporations and using such revenues to boost social spending is just one such policy that can counteract the decades-long concentration of market power, they added.

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