The business concentration and political capture story marches on

Noah Smith has another excellent article on how modern capitalism is draining value from the economy. He points to signatures - corporate profits take an increasingly greater share of the total output, stock valuations have risen faster than the profits or the output. 

He points to the work of economists Daniel Greenwald, Martin Lettau and Sydney Ludvigson built a model of the economy in which the value created by businesses could be arbitrarily reallocated between shareholders and workers. Their finding is stunning,

From the beginning of 1989 to the end of 2017, 23 trillion dollars of real equity wealth was created by the nonfinancial corporate sector. We estimate that 54% of this increase was attributable to a reallocation of rents to shareholders in a decelerating economy. Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%). From 1952 to 1988 less than half as much wealth was created, but economic growth accounted for 92% of it.

While cautioning about interpreting the magnitude, Noah points to how this is consistent with a long list of corroborative evidence - labour's share of income has declined world-over, business profits have increased much faster than the value of their own capital, low business dynamism since 2000 despite high profitability. This is a good summary.

He also points to the latest paper by German Guttierez and Thomas Philippon which studies the entry and exit of firms across US industries over the last 40 years and compares it with Tobin Q (Tobin Q, the ratio of the company's market to book values, which if high attracts new competitors),

The elasticity of entry with respect to Tobin’s Q was positive and significant until the late 1990s but declined to zero afterwards. Standard macroeconomic models suggest two potential explanations: rising entry costs or rising returns to scale. We find that neither returns to scale nor technological costs can explain the decline in the Q- elasticity of entry, but lobbying and regulations can. We reconcile conflicting results in the literature and show that regulations drive down the entry and growth of small firms relative to large ones, particularly in industries with high lobbying expenditures. We conclude that lobbying and regulations have caused free entry to fail.

Need more evidence?