By Karen Petrou
It’s easy enough to miss the macroeconomic and financial-sector impact of giant tech-platform companies in the swirl of concern about privacy, political integrity, concentration, and corporate governance. However, big tech also has massive macroeconomic impact with far-reaching financial-system implications. We explored safety-and-soundness implications in here and economic-equality impact in here. Now comes a sweeping IMF study linking and even attributing structural economic transformation to these same big-tech behemoths. Although inconclusive in critical respects, it’s worth a careful look.
The IMF study looks at one million companies across 27 mostly advanced countries over the past two decades. Key findings are that:
- Corporate power has risen “moderately” across advanced economies. The U.S. leads the way to monopoly-land with a sharp increase in high-productivity, high mark-up non-manufacturing (i.e., tech) firms.
- Market power reduces innovation as it increases, contributing also to the sharp drop in private fixed investment (25% since the crisis) in advanced economies that otherwise might have been corrected by ultra-low interest rates, higher profitability rates, and higher expected returns on capital.
- Following the 2008 financial crisis, rising market power may have marginally amplified the recession, pushed central banks to rely even more on unconventional monetary policies, or both.
- The U.S. exhibits “winner take most” network effects in which high-productivity firms generate high mark-ups by driving out inefficient companies. This increases innovation, but only to a point – the more market power, the less innovation over time.
- Adverse output and unexpected monetary-policy results may derive not only from increased market power, but also from the combination of this power with increased globalization and reduced antitrust enforcement.
- Rising market power reduced labor’s share of income by about ten percent of the overall decline, contributing markedly to growing wage inequality. Because powerful U.S. firms gained share at the expense of weaker firms, the labor-share inequality impact is even stronger here.
How could four or five companies exert so much macroeconomic impact? They couldn’t do it on their own, but the lack of a robust U.S. middle class combines with tech-platform dominance to transform the macroeconomic impact of traditional monetary-policy transmission. This fuels yield-chasing which gives still more of a financial lift to big-tech companies that in turn suppresses output growth to result in one heck of a negative feedback loop.