Schafer: Minneapolis Fed economist explains how modern monopolies hurt workers

Living on a low-wage job seems tough enough, but what's worse is having no practical options for a lot of the stuff the family needs, all because the providers to well-off families have blocked lots of far cheaper products from the market.

This was the conclusion of Federal Reserve Bank of Minneapolis senior research economist James A. Schmitz Jr., who put his finger on monopolies as a particular problem for lower-income families in a new essay. It's one reason income inequality is even worse than it might appear from just looking at the household income numbers.

Schmitz wasn't talking about corporate bullies like Microsoft back when the federal government tried to break it up or whatever critics think Google and Facebook represent now. He's working with a broader definition of monopoly.

Just getting that understanding of this problem is an important step in fixing it.

Income didn't come up a lot in Schmitz's paper. Instead it was more about just how well-off people are — how secure and healthy, or if the kids can thrive in school. What's available for people to buy that makes life better is a big part of that. That's where monopolies get in the way.

One strategy, when customers don't want to pay up for what the monopolist is selling, is to look for a cheaper substitute. That's not exactly the same thing at a lower price but something a little different that will work well enough.

Consumers know how to find substitutes, such as buying hamburger for the grill instead of steak after an unexpected financial hiccup.

The people doing this won't look like the corporate executives in a typical antitrust case. A government can help form that kind of monopoly. So can a trade or professional association if it's powerful enough.

Single-family homebuilding has a lot of providers, competing on price, quality, brand reputation and other factors. It doesn't seem much like a textbook monopoly, yet it might be the best example of what Schmitz is talking about.

Houses usually are built by hand, one at a time and on-site. Because of how this model works, bigger homes are more profitable.

Houses can also be built in factories and trucked to the site. Schmitz prefers calling them "small-modular homes," and he wrote that they can be so much more than what people think of when they hear the term manufactured housing.

Not only are these houses much cheaper per square foot of living space, they also can be a moneymaker even in small sizes. That's because in manufacturing, a factory can make a lot of money cranking out little houses if the plant is the right size and the production kinks have been worked out.

The traditional builders' monopoly, assembled with trade associations and allies in government, doesn't affect the prices paid by upper-middle-class families very much. But it can keep these much smaller modular houses mostly out of the market.

The same problem can crop up in the service business, too.

There are people who could really benefit from legal advice, for example, if only it were available. The need likely arises from trying to secure the basics of daily life, like working out a lease modification with the landlord before all of the family's stuff is carried out to the sidewalk.

A downtown law firm partner's billing rates keep them well out of reach, although upper-middle-class people could afford the fees for help on a real estate deal. But why couldn't there be far cheaper, "midlevel" professionals to help out?

They wouldn't be lawyers but instead a form of consultant. They would have enough legal training and experience to offer practical advice on things like recovering damage deposits from landlords.

These lawyer monopolies "are instrumental in passing Unauthorized Practice of Law (UPL) statutes that prohibit a nonlawyer from giving legal advice of any kind, whether paid or not," Schmitz wrote. "A whole range of midlevel professionals including paralegals [who must be employed by lawyers] are blocked from providing advice to low-income households."

There are nonprofits and others offering legal help to people such as renters, but there could be a lot more options if only the market were allowed to work better.

This topic of monopolies hurting less well-off Americans has been explored in other recent research pieces by the Minneapolis Fed, and this paper was just the latest. One reason this kind of thing persists might be that we have grown accustomed to seeing it. That makes it easier to agree that consultants maybe shouldn't offer legal advice out of a storefront office, never mind that there's a tax-prep office next door without any CPAs in it.

To really grasp it, try imagining this sort of monopoly forming in an industry where nothing quite like it exists now. Let's say General Motors, Volkswagen, Toyota and the other auto companies got together to cajole enough legislators into banning riding a bike or taking the bus to work.

They would have had to argue something that sounds reasonable — maybe that streets are safer without bikes and buses. Hard to imagine that's persuasive, but let's say it worked. Then, when workers need to get to their job, they either walk or take a car.