Oct 26, 2018

In a market bloodbath, questions about behemoths

Illustration: Sarah Grillo/Axios

Amid the worst stock market plunge since the financial crash, stark new questions are arising about the concentration of global profit and wealth in a few "superstar" firms, and the economic power that they wield.

Among concerns about Google, Facebook, Amazon, Apple and others is the historic scale of wealth at the apex of some industries, alongside decades-long wage stagnation for the middle and lower classes.

  • Such companies seem to be insulated from competition, when economic theory says rivals should arise in a more even fight over the wealth, according to reporting by Kaveh Waddell, Erica Pandey and me.

Driving the news: In a new report, McKinsey Global Institute points out that so-called "superstar companies," the 10% most valuable firms across industries around the world, are not only extraordinarily profitable, but are profitable compared with prior superstars.

  • They produce 1.6 times as much "economic profit" as superstar companies did 20 years ago (profit adjusted to correct for a company's size).

In short, today's big companies are dominating the economy to a degree not seen since the Gilded Age in the late 19th century, says Tim Wu, a law professor at Columbia University.

The big picture: Economists have increasingly linked market concentration with nagging economic problems, such as the stubbornness of relatively flat U.S. wages despite 3.7% unemployment, the lowest in almost a half century.

  • "Something is funny with the economy" when companies are earning the scale of profits of the most prominent U.S. tech companies, says Wu, author of the forthcoming "The Curse of Bigness."
  • "In a state of competition, you expect the profits to be competed away," he tells Axios. "If you have five companies selling widgets, they should keep lowering their price until it's close to cost."

Many economists link the superstar companies to stark inequality in the economy. Companies are so big that they can suppress wages, especially in more rural areas with relatively few places to work.

  • "Those companies create enormous profits, plus increase inequality in terms of exec pay — largely paid in stocks — to median worker pay," says Clair Brown, economics professor at UC Berkeley.

McKinsey also thinks something fishy is going on economically — but in the bottom tier of global companies, not necessarily the top, according to Sree Ramaswamy, co-author of the report.

  • The bottom 10% of firms generated 1.5 times the economic loss as such companies did 20 years ago, McKinsey says.
  • A fifth of such companies cannot pay the interest on their debt.
  • But rather than sell, declare bankruptcy or otherwise release their assets to the market, such companies are being kept afloat by investors or other lenders, Ramaswamy tells Axios.
  • "What is happening in the economy to allow this to go on?" he says. "They continue to grow larger even as they are destroying value."

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