Who broke America's jobs machine? Why creeping consolidation is crushing American livelihoods.

• Author: Lynn, Barry C.
• Position: Cover story

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If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009--nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.

Many people blame the great real estate bubble of recent years. The idea here is that once a bubble pops it can destroy more real-world business activity--and jobs--than it creates as it expands. There is some truth to this. But it doesn't explain why, even when the real estate bubble was at its most inflated, so few jobs were created compared to the tech-stock bubble of the late '90s. Between 2000 and 2007 American businesses created only seven million jobs, before the great recession destroyed more than that. In the '90s prior to the dot-com bust, they created more than twenty-two million jobs.

Others point to the diffusion of new technologies that reduce the number of workers needed to produce and sell manufactured products like cars and services like airline reservations. But throughout economic history, even as new technologies like the assembly line and the personal computer destroyed large numbers of jobs, they also empowered people to create new and different ones, often in greater numbers. Yet others blame foreign competition and offshoring, and point to all the jobs lost to China, India, or Mexico. Here, too, there is some truth. But U.S. governments have been liberalizing our trade laws for decades; although this has radically changed the type of jobs available to American workers--shifting vast chunks of the U.S. manufacturing sector overseas, for instance--there is little evidence that this has resulted in any lasting decline in the number of jobs in America.

Moreover, recent Labor Department statistics show that the loss of jobs here at home, be it the result of sudden economic crashes or technological progress or trade liberalization, does not appear to be our main problem at all. Though few people realize it, the rate of job destruction in the private sector is now 20 percent lower than it was in the late '90s, when managers at America's corporations embraced outsourcing and downsizing with an often manic intensity. Rather, the lack of net job growth over the last decade is due mainly to the creation of fewer new jobs. As recent Labor Department statistics show, even during the peak years of the housing boom, job creation by existing businesses was 14 percent lower than it was in the late '90s.

The problem of weak job creation certainly can't be due to increased business taxes and regulation, since both were slashed during the Bush years. Nor can the explanation be insufficient consumer demand; throughout most of the last decade, consumers and the federal government engaged in a consumption binge of world-historical proportions.

Other, more plausible explanations have been floated for why the rate of job creation seems to have fallen. One is that the federal government made too few investments in the 1980s and '90s in things like basic R&D, so the pipeline of technological innovation on which new jobs depend began to run dry in the 2000s. Another is that a basic shift in competitiveness has taken place--that countries like India, with educated but relatively low-cost workforces, have become more natural homes for jobs-producing sectors like IT.

But while the mystery of what killed the great American jobs machine has yielded no shortage of debatable answers, one of the more compelling potential explanations has been conspicuously absent from the national conversation: monopolization. The word itself feels anachronistic,

a relic from the age of the Rockefellers and Carnegies. But the fact that the term has faded from our daily discourse doesn't mean the thing itself has vanished--in fact, the opposite is true. In nearly every sector of our economy, far fewer firms control far greater shares of their markets than they did a generation ago.

Indeed, in the years after officials in the Reagan administration radically altered how our government enforces our antimonopoly laws, the American economy underwent a truly revolutionary restructuring. Four great waves of mergers and acquisitions--in the mid-1980s, early '90s, late '90s, and between 2003 and 2007--transformed America's industrial landscape at least as much as globalization. Over the same two decades, meanwhile, the spread of mega-retailers like Wal-Mart and Home Depot and agricultural behemoths like Smithfield and Tyson's resulted in a more piecemeal approach to consolidation, through the destruction or displacement of countless independent family-owned businesses.

It is now widely accepted among scholars that small businesses are responsible for most of the net job creation in the United States. It is also widely agreed that small businesses tend to be more inventive, producing more patents per employee, for example, than do larger firms. Less well established is what role concentration plays in suppressing new business formation and the expansion of existing businesses, along with the jobs and innovation that go with such growth. Evidence is growing, however, that the radical, wide-ranging consolidation of recent years has reduced job creation at both big and small firms simultaneously. At one extreme, ever more dominant Goliaths increasingly lack any real incentive to create new jobs; after all, many can increase their earnings merely by using their power to charge customers more or pay suppliers less. At the other extreme, the people who run our small enterprises enjoy fewer opportunities than in the past to grow their businesses. The Goliaths of today are so big and so adept at protecting their turf that they leave few niches open to exploit.

Over the next few years, we can use our government to do many things to promote the creation of new and better jobs in America. But even the most aggressive stimulus packages and tax cutting will do little to restore the sort of open market competition that, over the years, has proven to be such an important impetus to the creation of wealth, well-being, and work. Consolidation is certainly not the only factor at play. But any policymaker who is really serious about creating new jobs in America would be unwise to continue to ignore our new monopolies.

It's not as if Americans are entirely unaware of how consolidated our economic landscape is, or that this is a perilous way to do business. The financial crisis taught us how dangerously concentrated our financial sector has become, particularly since Washington responded to the near-catastrophic collapse of banks deemed "too big to fail" by making them even bigger. Today, America's five largest banks control a stunning 48 percent of bank assets, double their share in 2000 (and that's actually one of the less consolidated sectors of our economy). Similarly, the debate over health insurance reform awakened many of us to the fact that, in many communities across America, insurance companies enjoy what amounts to monopoly power. Some of us are aware, too, through documentaries like Food, Inc., of how concentrated agribusiness and food processing have become, and of the problems with food quality and safety that can result.

Even so, most Americans still believe that our economy remains the most wide open, competitive, and vibrant market system the world has ever seen. Unfortunately, the...