Ever since the 1980’s – there have been huge changes in the global economy.

And many of these changes have led to the rich getting richer – the poor getting poorer – and the rest of us being squeezed dry.

And while the mainstream financial media argues over the minor causes to these problems. There’s a major issue that hardly anyone’s been talking about. . .

And that is – ever since the 1980’s – US corporations have grown increasingly concentrated in every major sector of the economy (esp. post-2008). This has prevented competition; thus adding to a cocktail of structural issues. (Such as higher prices, lower wages, moral hazard, declining investment, fewer startups, and most importantly – less freedom).

Let me explain. . .

Competition’s been the lifeblood of US corporate dynamism. It’s created wealth while leading to innovative products, lower prices for consumers, and high wages for workers.

But since the 1980’s – businesses have been aggressively consolidating to gain market share. Thus limiting competition while leading to higher prices, lower wages, and declining quality.

So – what’s caused this reversal?

Well – there are a few reasons – but here are two big factors:

First off – surging mergers-and-acquisitions (aka M&A) volumes (thanks in-part to Federal Reserve ‘easy-money’ policies). . .

To put this into perspective: since the 1890’s (130 years ago) – there’s been seven major M&A waves in the US. And yet four-out-of-the-seven (60%) have occurred in just the last 40 years.

Keep in mind that almost all M&A waves happened during stock market booms. (That’s because higher share prices allowed firms to use their shares as currency – allowing them to buyout other firms easily).

Thus Wall Street and bigger firms have benefited significantly from the Fed’s cheap-money agenda. (Meaning: decades of Fed easing have helped inflate asset prices and made debt cheaper than ever).

And – second off – declining federal antitrust enforcement. . .

(For context: the Sherman Antitrust Act was passed in 1890 to break up, and prevent, future monopolies. It was most known for breaking up John D. Rockefeller’s massive oil-firm – Standard Oil – and J.B. Dukes’ tobacco monopoly – American Tobacco).

Ever since the 1980’s ‘Reagan Revolution’ (aka the supply-side and free-market agenda promoted by President Ronald Reagan’s administration) – there’s been a permanent shift in antitrust enforcement policy.

To put it simply: antitrust enforcement in the US has completely collapsed.

And even though this trend began with Reagan – there’s been 32 years since with equal time shared between Republicans and Democrats in office. All of which have more-or-less allowed greater concentration to go un-challenged.

Thus – between lax-antitrust enforcement and easy-money fueling M&A’s – inequality has spread aggressively throughout corporate America.

Or – putting it another way: big companies have gotten bigger by absorbing competitors while smaller companies struggle to gain any market share.

This has led to older and bigger firms dominating markets. . .

To put this into perspective – roughly half of all public companies vanished in the last 20-so-years. And those that still remain have gotten significantly bigger. . .

According to Harvard Law School – there were more than 8,000 public U.S. companies in 1996 that had an average market capitalization of $1.8 billion (in 2017’s dollars).

But by 2016 – just 20-years later – there were less than 4,500 public companies with the average market cap of $7.4 billion.

Thus – there’s been a near 50% decline in publicly-traded companies while the ones still around have grown on average over 400% bigger.

And to put this concentration problem into perspective – the largest 1% of public companies now represent 30% of the total market capitalization.

But it doesn’t end there. . .

The number of new public firms being born via initial public offerings (aka IPO’s) has plunged during the same 20-year period.

For instance: there used to be an average of 400-700 IPO’s per-year in the mid-late-1990’s to less than 100-200 per-year since 2008 (with the decline especially sharp among smaller-firms).

These two charts show a huge dilemma in the economy: an absence of new public firms being created while older firms are concentrated into fewer and fewer hands.

Now – it’s become clear at this point that the government isn’t just a passive bystander. But instead – actively participating in this concentration problem.

Keep in mind that most regulations are only really burdensome enough to effect small businesses, not big ones.

In fact – big business sees most regulations as an asset since it keeps competition out via raising barriers and costs of entry. (meaning: big firms use regulations as a way to help themselves only).

Thus it shouldn’t come as a surprise that big firms have rapidly increased their ‘lobbying-power’ (aka how much firms spend to sway politics) over the last few decades.

And it seems to have paid off handsomely. . .

For instance – since the early-2000’s – political activity and regulations have played an increasingly large role in corporate profit margins and valuations.

This indicates that as industries grew more concentrated – each ‘lobby-dollar’ has had a greater return by preventing harmful regulations and instead encouraging beneficial ones (such as tax breaks, higher barriers of entry, etc).

Thus no wonder that between 2009 and 2018 – the Strategas Lobbying Index (aka a basket of 50-firms that focus on lobbying-power) had outperformed the S&P 500 by roughly 5% per year on average. . .

(This is why Warren Buffet has a track record for buying firms with monopoly powers. They set prices and effectively keep out competition).

Firms that’ve spent heavily influencing politics have seen phenomenal returns (some as high as 22,000%). And this is a trend I imagine will only deepen going forward. . .

So – as we’ve seen – further regulation only amplifies market powers and profits for the big companies. While making barriers of entry higher and costs harsher for smaller firms (limiting competition).

This creates a vicious feedback loop: greater corporate concentration –> greater market share –> higher margins –> increased lobbying-power –> more favorable regulations –> greater corporate concentration; repeat.

It’s times like these why it’s so important to remember the great Austrian economist – Ludwig Von Mises’ – words:

“Monopolies owe their origin not to a tendency imminent in a capitalist economy, but to governmental interventionist policies directed against free trade. . .”

Remember: prices are the most mean-reverting thing in finance (aka if prices are too high, it attracts competition – which eventually lowers prices from the added supply). So if prices aren’t reverting, then something is artificially holding them up. (Such as government regulations keeping out competitors (giving big business pricing-powers).

So – in summary – over the last few decades (especially since 2000’s), industries have grown increasingly concentrated.

For example – in the US alone – we’ve seen: 90% of air-travel dominated by just four airlines. Only two companies control 90% of the domestic beer market. The five big banks control over 60% of total banking assets. Only three health insurers dominate the nation.  And roughly 75% of US households have only one option for internet.

The list goes on and on. . .

This has led to a handful of companies having greater and greater market share while exerting their dominance via lobbying to keep out potential competition.

Now – keep in mind that big business itself isn’t necessarily ‘bad’ (many have done great things). But more often than not their size comes about through aggressive M&A’s and lobbying power. Both of which have undermined the economy.

And as new firms are squeezed out – competition fades – thus leading  to anemic wages, higher prices, and declining innovation.

All of which have widened wealth inequality steadily over the last 40-years.

And will continue to do so in the coming years. . .

*PS – for further reading on this concentration problem – I highly recommend reading ‘The Myth of Capitalism’ by John D. Tepper + ‘The Great Reversal’ by Thomas Phillipon. Both are excellent reads and are part of the Speculators Anonymous  Comprehensive Reading List.