The Scale and Policy Implications of Nonfinancial Business Rents

Abstract

The behavior of monopolies has been in the news. A federal judge, for example, recently decided that Google’s monopolistic behavior with respect to its search engine violated antitrust law. The FTC has brought actions against other large businesses, challenging what they allege are illegal attempts to create or enhance monopoly power.

Regardless of how these individual legal actions play out, there is abundant evidence that barriers to competition and the market power of firms have increased over time. Since market power allows firms to earn rents – i.e. supra-competitive profits – an empirical measure of aggregate rent can serve as an index of market power. Moreover, when rents are large enough, they affect the distribution of income.

This paper estimates rent as a share of gross value added for the nonfinancial business sector (NFB), and for the nonfinancial corporate sector (NFC), using distinct estimation techniques. The results are remarkably similar, and the estimates indicate that rent extraction is an important mechanism by which the income distribution has been skewed upward. Estimated NFB rents, for example, were $1.7 trillion in 2023.

The results point to an important policy option: a tax on rents to support important social programs such as Medicare/Medicaid, which will at the same reduce the economic and political power of the largest monopolies and their owners.