Category Archive for: Market Failure [Return to Main]

Wednesday, July 01, 2015

Did Dodd-Frank Fix Too Big To Fail?

Gara Afonso and João Santos at the NY Fed's Liberty Street Economics blog:

What Do Bond Markets Think about “Too-Big-to-Fail” Since Dodd-Frank?: In our previous post, we concluded that, in rating agencies’ views, there is no clear consensus on whether the Dodd-Frank Act has eliminated “too-big-to-fail” in the United States. Today, we discuss whether bond market participants share these views.
As we discussed in our post on Monday, the Dodd-Frank Act includes provisions to address whether banks remain “too big to fail.” Title II of the Act creates an orderly liquidation mechanism for the Federal Deposit Insurance Corporation (FDIC) to resolve failed systemically important financial institutions (SIFIs). ...
Since the Dodd-Frank Act makes it easier to intervene at the holding company level, we predict that, relative to the pre-Dodd-Frank era, investors’ perceptions of the risk of holding bonds of a parent company would have increased relative to the risk of holding bonds of its subsidiary bank. To test this hypothesis, we compared how bond spreads evolved for a matched pair of bonds—one issued by the parent company and one by its subsidiary bank. This approach lets us isolate any differential effect of the new resolution procedure on the parent company relative to its subsidiary. A downside, though, is that there are only a few cases where both the parent and the subsidiary have the same bonds traded in financial markets.
Contrary to our hypothesis, the difference in option-adjusted spreads to Treasuries of the parent companies and their subsidiary banks ... has not widened since the Dodd-Frank Act was enacted. ...
Our previous post demonstrated that rating agencies do not have a unanimous view of the current level of government support of U.S. commercial banks and their holding companies. The results here indicate that market participants’ perceptions of the relative risk have not increased as one would have expected given the new resolution framework introduced by the Dodd-Frank Act. ...
Together the evidence suggests that rating agencies and market participants may have some doubts about the ability, so far, of the Dodd-Frank Act to deal with “too big to fail.” However, some observers have argued that once all provisions of the Dodd-Frank Act are implemented, any remaining expectations of government support will disappear. Time will tell.

Tuesday, June 30, 2015

'The Problem with Completely Free Markets'

I have a new column:

The Problem with Completely Free Markets: The Supreme Court’s decision last week saved Obamacare from the Republican’s latest attempt to get government out of health care. But if Republicans can find another way to attack the Affordable Care Act, they surely will. 
Healthcare is not, of course, the only place where Republicans object to government intervention in private markets. They believe that markets free of government rules and regulations almost always outperform markets where the government is involved. So it’s a good time to review why this faith in free markets is sometimes misplaced, and how government involvement in some markets can improve their performance. ...

Wednesday, May 27, 2015

'Whatever Happened to Antitrust?'

Robert Reich believes, as I do, that monopoly power is one of the reasons that the distribution of income has been skewed toward the top:

Whatever Happened to Antitrust?: Last week’s settlement between the Justice Department and five giant banks reveals the appalling weakness of modern antitrust. 
The banks had engaged in the biggest price-fixing conspiracy in modern history. Their self-described “cartel” used an exclusive electronic chat room and coded language to manipulate the $5.3 trillion-a-day currency exchange market. It was a “brazen display of collusion” that went on for years, said Attorney General Loretta Lynch. 
But there will be no trial, no executive will go to jail, the banks can continue to gamble in the same currency markets, and the fines – although large – are a fraction of the banks’ potential gains and will be treated by the banks as costs of doing business.
America used to have antitrust laws that permanently stopped corporations from monopolizing markets, and often broke up the biggest culprits. 
No longer. Now, giant corporations are taking over the economy – and they’re busily weakening antitrust enforcement. 
The result has been higher prices for the many, and higher profits for the few. It’s a hidden upward redistribution from the majority of Americans to corporate executives and wealthy shareholders. ...
Antitrust has been ambushed by the giant companies it was designed to contain.
Congress has squeezed the budgets of the antitrust division of the Justice Department and the bureau of competition of the Federal Trade Commission. Politically-powerful interests have squelched major investigations and lawsuits. Right-wing judges have stopped or shrunk the few cases that get through. 
We’re now in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. But unlike then, today’s biggest corporations have enough political clout to neuter antitrust. 
Conservatives rhapsodize about the “free market” and condemn government intrusion. Yet the market is rigged. And unless government unrigs it through bold antitrust action to restore competition, the upward distributions hidden inside the “free market” will become even larger.

Saturday, April 18, 2015

'Are We Kidding Ourselves on Competition?'

This seems implausible to me, yet there seems to be evidence for it:

Are we kidding ourselves on competition?, by Joshua Gans: ...Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.
So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.
In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that. ...
Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone. ...
The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.

[There's a bit more in the original post.]

Friday, March 27, 2015

How Idealism Can Fight Climate Change

Robert Shiller:

How Idealism, Expressed in Concrete Steps, Can Fight Climate Change: Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solve the seemingly intractable problem of global warming.
Despite periodic flurries of optimism, diplomacy has been largely disappointing. ... From an economic standpoint, international efforts until now have foundered on a fundamental “free rider problem.” ... Why not just take a “free ride” and let others do the hard work? ...
But there are other ways to look at this... In a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the “Copenhagen Theory of Change,” they say that we should be asking people to volunteer to save our climate by taking many small, individual actions. ...
The world is a diverse and complicated place, however. In order to combat global warming, social movements aren’t enough. We also need a concrete framework on a global scale.
In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls “climate clubs”..., a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club. ...
To actually solve the extremely challenging problem of climate change, we may want to rely on both theories...

Tuesday, March 24, 2015

'The Real Cost of Coal'

David Hayes and James Stock:

The Real Cost of Coal, NY Times: Congress long ago established a basic principle governing the extraction of coal from public lands by private companies: American taxpayers should be paid fair value for it. They own the coal, after all.... Studies by the Government Accountability Office, the Interior Department’s inspector general and nonprofit research groups have all concluded that taxpayers are being shortchanged.
This is no small matter. In 2013, approximately 40 percent of all domestic coal came from federal lands. ... Headwaters Economics estimates that various reforms to the royalty valuation system would have generated $900 million to $5.6 billion more overall between 2008 and 2012.
This failure by the government to collect fair value for taxpayer coal is made more troubling by the climate-change implications of burning this fossil fuel. ... The price for taxpayer-owned coal should reflect, in some measure, the added costs associated with the impacts of greenhouse gas emissions. ...
Industry is sure to oppose this, even though coal is the planet’s most carbon-intensive energy source. Others will argue that an across-the-board carbon tax is a more efficient way to account for climate impacts. With no near-term prospects for such legislation, however, the Interior Department should set a royalty that provides fair value to taxpayers by addressing the climate costs of burning coal. ...

Monday, March 09, 2015

'Publicly Funded Inequality'

Kemal Derviş

Publicly funded inequality, Brookings: One of the factors driving the massive rise in global inequality and the concentration of wealth at the very top of the income distribution is the interplay between innovation and global markets. In the hands of a capable entrepreneur, a technological breakthrough can be worth billions of dollars, owing to regulatory protections and the winner-take-all nature of global markets. What is often overlooked, however, is the role that public money plays in creating this modern concentration of private wealth.
As the development economist Dani Rodrik recently pointed out, much of the basic investment in new technologies in the United States has been financed with public funds. The funding can be direct, through institutions like the Defense Department or the National Institutes of Health (NIH), or indirect, via tax breaks, procurement practices, and subsidies to academic labs or research centers.
When a research avenue hits a dead end – as many inevitably do – the public sector bears the cost. For those that yield fruit, however, the situation is often very different. Once a new technology is established, private entrepreneurs, with the help of venture capital, adapt it to global market demand, build temporary or long-term monopoly positions, and thereby capture large profits. The government, which bore the burden of a large part of its development, sees little or no return. ...
A combination of measures and international agreements must be found that would allow taxpayers to obtain decent returns on their investments, without removing the incentives for savvy entrepreneurs to commercialize innovative products.
The seriousness of this problem should not be understated. The amounts involved contribute to the creation of a new aristocracy that can pass on its wealth through inheritance. If huge sums can be spent to protect privilege by financing election campaigns (as is now the case in the US), the implications of this problem, for both democracy and long-term economic efficiency, could become systemic. The possible solutions are far from simple, but they are well worth seeking.

["Several ways to change such a system" are also discussed.]

Wednesday, February 25, 2015

'The Cost of Delaying Action to Stem Climate Change'

Jason Furman, Ron Shadbegian, and Jim Stock:

The cost of delaying action to stem climate change: A meta-analysis, Vox EU: Summary The cost of delaying climate action has been studied extensively. This column discusses new findings based on a meta-analysis of published model runs. A one-decade delay in addressing climate change would lead to about a 40% increase in the net present value cost of addressing climate change. If anything, the methodology used in this analysis could understate the cost of delay. Uncertainty and the possibility of tipping points provide a motivation for more action as a form of insurance against worse outcomes.

Monday, February 23, 2015

Paul Krugman: Knowledge Isn’t Power

A skills gap is not the problem, it's economic power:

Knowledge Isn’t Power, by Paul Krugman, Commentary, NY Times: ... Just to be clear: I’m in favor of better education. Education is a friend of mine. And it should be available and affordable for all. But ... people insisting that educational failings are at the root of still-weak job creation, stagnating wages and rising inequality. This sounds serious and thoughtful. But it’s actually a view very much at odds with the evidence, not to mention a way to hide from the real, unavoidably partisan debate.
The education-centric story of our problems runs like this: We live in a period of unprecedented technological change, and too many American workers lack the skills to cope with that change. This “skills gap” is holding back growth, because businesses can’t find the workers they need. It also feeds inequality, as wages soar for workers with the right skills... So what we need is more and better education. ...
It’s repeated so widely that many people probably assume it’s unquestionably true. But it isn’t..., there’s no evidence that a skills gap is holding back employment...
Finally, while the education/inequality story may once have seemed plausible, it hasn’t tracked reality for a long time..., the inflation-adjusted earnings of highly educated Americans have gone nowhere since the late 1990s.
So what is really going on? Corporate profits have soared as a share of national income, but there is no sign of a rise in the rate of return on investment..., it’s what you would expect if rising profits reflect monopoly power rather than returns to capital... — all the big gains are going to a tiny group of individuals holding strategic positions in corporate suites or astride the crossroads of finance. Rising inequality isn’t about who has the knowledge; it’s about who has the power.
Now, there’s a lot we could do to redress this inequality of power. We could levy higher taxes on corporations and the wealthy, and invest the proceeds in programs that help working families. We could raise the minimum wage and make it easier for workers to organize. It’s not hard to imagine a truly serious effort to make America less unequal.
But given the determination of one major party to move policy in exactly the opposite direction, advocating such an effort makes you sound partisan. Hence the desire to see the whole thing as an education problem instead. But we should recognize that popular evasion for what it is: a deeply unserious fantasy.

Monday, February 16, 2015

Drug Prices are Bankrupting America

Jeff Sachs:

The Drug that is Bankrupting America: America is the land of breakthrough science ... in the case of the new hepatitis C virus (HCV) cure named sofosbuvir, sold under the brand name Solvadi by the drug company Gilead Sciences. There is no question that Solvadi is a godsend - a lifesaver for millions ... around the world ... Yet Solvadi is also the poster child of a US healthcare system that is being bankrupted by greed, lobbying and indefensible policies on drug pricing.
The basic facts are these. ... Gilead set the price for a twelve-week treatment course of Solvadi at $84,000... According to researchers at Liverpool University, the actual production costs of Solvadi for the twelve-week course is in the range $68-$136. ...
The standard defense by the drug companies ... is that drug discovery is costly and their high profits reimburse the R&D costs. Here is where the story of Solvadi gets even more interesting. The total private-sector outlays on R&D were ... almost surely under $500 million, meaning that the decade-long R&D outlays were likely recouped in a few weeks of drug sales.
Here is the background. Sofosbuvir was developed under the leadership of Prof. Raymond Schinazi, a brilliant professor of biochemistry at Emory University. The US Government heavily funded Prof. Schinazi's research...
Solvadi ... shows how publicly financed science easily turns into arbitrarily large private profits paid for by taxpayers. The challenge facing the US is to adopt a rational drug pricing system that continues to spur excellent scientific breakthroughs while keeping greed in check. Big Pharma and the US public are on a collision course when they should be partners for the advancement of health.

Sunday, January 04, 2015

'Let This be the Year When We Put a Proper Price on Carbon'

Larry Summers:

Let this be the year when we put a proper price on carbon: The case for carbon taxes has long been compelling. With the recent steep fall in oil prices and associated declines in other energy prices it is overwhelming. There is room for debate about the size of the tax and about how the proceeds should be deployed. But there should be no doubt that starting from the current zero tax rate on carbon, increased taxation would be desirable.
The core of the case for taxation is the recognition that those who use carbon-based fuels or products do not bear all the costs of their actions. ...
Progressives who are concerned about climate change should rally to a carbon tax as the most important step for mobilising against it. Conservatives who believe in the power of markets should favour carbon taxes on market principles. .... Now is the time.

Monday, November 17, 2014

Paul Krugman: When Government Succeeds

Sometimes, government is the best solution:

When Government Succeeds, by Paul Krugman, Commentary, NY Times: The great American Ebola freakout of 2014 seems to be over. ...
When the freakout was at its peak, Ebola wasn’t just a disease — it was a political metaphor. It was, specifically, held up by America’s right wing as a symbol of government failure. ... Leading Republicans suggested ignoring everything we know about disease control and resorting to extreme measures like travel bans, while mocking claims that health officials knew what they were doing.
Guess what: Those officials actually did know what they were doing. The real lesson of the Ebola story is that sometimes public policy is succeeding even while partisans are screaming about failure. And it’s not the only recent story along those lines.
Here’s another: Remember Solyndra? It was a renewable-energy firm that borrowed money using Department of Energy guarantees, then went bust, costing the Treasury $528 million. And conservatives have pounded on that loss relentlessly... Last week the department revealed that the program that included Solyndra is, in fact, on track to return profits of $5 billion or more.
Then there’s health reform. As usual, much of the national dialogue over the Affordable Care Act is being dominated by fake scandals drummed up by the enemies of reform. But if you look at the actual results so far, they’re remarkably good. ...
One last item: Remember all the mockery of Obama administration assertions that budget deficits, which soared during the financial crisis, would come down as the economy recovered? ... Well,... the deficit has indeed come down rapidly...
The moral of these stories is ... that ... government-hating politicians can sometimes turn their predictions of failure into self-fulfilling prophecies, but when leaders want to make government work, they can.
And let’s be clear: The government policies we’re talking about here are hugely important. We need serious public health policy, not fear-mongering, to contain infectious disease. We need government action to promote renewable energy and fight climate change. Government programs are the only realistic answer for tens of millions of Americans who would otherwise be denied essential health care.
Conservatives want you to believe that while the goals of public programs on health, energy and more may be laudable, experience shows that such programs are doomed to failure. Don’t believe them. Yes, sometimes government officials, being human, get things wrong. But we’re actually surrounded by examples of government success, which they don’t want you to notice.

Friday, November 14, 2014

Paul Krugman: China, Coal, Climate

Are we finally getting somewhere in the battle against climate change?:

China, Coal, Climate, by Paul Krugman, Commentary, NY Times: It’s easy to be cynical about summit meetings. Often they’re just photo ops, and the photos from the latest Asia-Pacific Economic Cooperation meeting, which had world leaders looking remarkably like the cast of “Star Trek,” were especially cringe-worthy. At best — almost always — they’re just occasions to formally announce agreements already worked out by lower-level officials.
Once in a while, however, something really important emerges. And this is one of those times: The agreement between China and the United States on carbon emissions is, in fact, a big deal.
To understand why, you first have to understand the defense in depth that fossil-fuel interests and their loyal servants — nowadays including the entire Republican Party — have erected against any action to save the planet.
The first line of defense is denial: there is no climate change; it’s a hoax concocted by a cabal including thousands of scientists around the world. ... Indeed, some elected officials have done all they can to pursue witch hunts against climate scientists.
Still, as a political matter, attacking scientists has limited effectiveness. It ... sounds like a crazy conspiracy theory, because it is.
The second line of defense involves economic scare tactics: any attempt to limit emissions will destroy jobs and end growth. ... Like claims of a vast conspiracy of scientists, however, the economic disaster argument has limited traction beyond the right-wing base. ...
Which brings us to the last line of defense, claims that America can’t do anything about global warming, because other countries, China in particular, will just keep on spewing out greenhouse gases. ... But ... China has declared its intention to limit carbon emissions. ...
But consider the situation. America is not exactly the most reliable negotiating partner on these issues, with climate denialists controlling Congress ...
But the principle that has just been established is a very important one. Until now, those of us who argued that China could be induced to join an international climate agreement were speculating. Now we have the Chinese saying that they are, indeed, willing to deal — and the opponents of action have to claim that they don’t mean what they say.
Needless to say, I don’t expect the usual suspects to concede that a major part of the anti-environmentalist argument has just collapsed. But it has. This was a good week for the planet.

Wednesday, November 12, 2014

The Climate Breakthrough in Beijing

Jeff Sachs seems to be pleased:

The climate breakthrough in Beijing gives the world a fighting chance: Today’s US-China joint announcement on climate change and energy is the most important advance on the climate change agenda in many years. ... What they’ve said gives the world a fighting chance – and no doubt the last one – for climate safety. ...
An announcement is just an announcement, of course. .. The US and China have yet to put their cards on the table on how they intend to achieve deep decarbonization. ...
Not surprisingly, the incoming Republican Senate majority leader Mitch McConnell piped up immediately that he and his colleagues would oppose the deal. No doubt they will try. Yet my guess is that Mr McConnell and his buddies are soon going to learn a lesson in real democracy.
While the fossil fuel lobby may have helped finance the Republican victories last week, the US public cares about its own survival and the world that their children will soon inherit. ... The Koch brothers may have bought some 44,000 paid ads this fall to help put favoured coal and oil candidates over the top, but they did not buy the souls of the American people, who by a large majority will be gratified today by the announcements from Beijing. ...

I'm not so sure that Republican opposition can be overcome so easily.

Monday, October 27, 2014

'Climate Change: Lessons for our Future from the Distant Past'

David Hendry at Vox EU:

Climate change: Lessons for our future from the distant past, by David F. Hendry: Summary Climate change has been the main driver of mass extinctions over the last 500 million years. This column argues that current evidence provides a stark warning. Human activity is producing greenhouse gases, and as a consequence global temperatures and ocean heat content are rising. Such trends raise the risk of tipping points. Economic analysis offers a number of ideas, but a key problem is that distributions of climate variables can shift, invalidating stationarity-based analyses, and making action to avoid possible future shifts especially urgent.

His conclusions:

Economic analysis offers many insights – externalities need to be either priced or regulated, and climate change is the largest ever worldwide externality. All approaches are affected by the possibility of abrupt changes and the resulting unknown uncertainty when distributions shift, making action more urgent to avoid possible future shifts. Adaptation is not meaningful if food, water, and land resources become inadequate. Conversely, mitigation steps need not be costly, and could stimulate innovation. International negotiations are more likely to succeed if the largest players act first in their own counties or groups – also creating opportunities for their societies as new technologies develop.
Planet Earth will survive whatever humanity is doing – the crucial issue is the effect of climate change on its present inhabitants. It is a risky strategy to do nothing if there are potentially huge costs when the costs of initial actions are small. The obvious time to start is now, and the obvious actions are the many low-cost implementations that mitigate greenhouse gases (see Stern 2008 for a list) – just in case.

[See also "U.N. Climate Change Draft Sees Risks of Irreversible Damage - Scientific American".]

Friday, October 24, 2014

Market Power, 'the Profits-Investment Disconnect,' and the Mal-Distribution of Income

Maybe we'll finally start discussing something I've been writing about for years with little traction, how market power affects the distribution of income (the disconnect between income and the contribution to final product that occurs when market power exists):

The Profits-Investment Disconnect, by Paul Krugman: I caught a bit of CNBC in the locker room this morning, and they were talking about stock buybacks. Oddly — or maybe not that oddly, given my own experiences with the show — nobody brought up what I would have thought was the obvious question. Profits are very high, so why are companies concluding that they should return cash to stockholders rather than use it to expand their businesses?
After all, we normally think of high profits as a signal: a profitable business is one people should be trying to get into. But right now we see a combination of high profits and sluggish investment...
What’s going on? One possibility, I guess, is that business are holding back because Obama is looking at them funny. But more seriously, this kind of divergence — in which high profits don’t signal high returns to investment — is what you’d expect if a lot of those profits reflect monopoly power rather than returns on capital.
More on this in a while.

Monday, October 20, 2014

Paul Krugman: Amazon’s Monopsony Is Not O.K.

I've been harping on the lack of concern about market power since I began blogging almost 10 years ago. Nobody much listened or cared -- so this is very welcome:

Amazon’s Monopsony Is Not O.K., by Paul Krugman, Commentary, NY Times: Amazon.com, the giant online retailer, has too much power, and it uses that power in ways that hurt America. ...
If you haven’t been following the recent Amazon news: Back in May a dispute between Amazon and Hachette, a major publishing house, broke out into open commercial warfare. Amazon had been demanding a larger cut of the price of Hachette books it sells; when Hachette balked, Amazon began delaying their delivery, raising their prices, and/or steering customers to other publishers.
You might be tempted to say that this is just business — no different from Standard Oil, back in the days before it was broken up...
Does Amazon really have robber-baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales...
So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down. ...
So can we trust Amazon not to abuse that power? The Hachette dispute has settled that question: no, we can’t. ...
Specifically, the penalty Amazon is imposing on Hachette books is bad in itself, but there’s also a curious selectivity in the way that penalty has been applied. Last month the Times’s Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman’s “Sons of Wichita,” a profile of the Koch brothers; the other is “The Way Forward,” by Paul Ryan, who was Mitt Romney’s running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan’s book Amazon offers the usual free two-day delivery. What about “Sons of Wichita”? As of Sunday, it “usually ships in 2 to 3 weeks.” Uh-huh.
Which brings us back to the key question. Don’t tell me that Amazon is giving consumers what they want, or that it has earned its position. What matters is whether it has too much power, and is abusing that power. Well, it does, and it is.

Sunday, September 21, 2014

'Climate Realities'

Robert Stavins:

Climate Realities: ...It is true that, in theory, we can avoid the worst consequences of climate change with an intensive global effort over the next several decades. But given real-world economic and, in particular, political realities, that seems unlikely..., let’s look at the sobering reality.
The world is now on track to more than double current greenhouse gas concentrations in the atmosphere by the end of the century. This would push up average global temperatures by three to eight degrees Celsius and could mean the disappearance of glaciers, droughts in the mid-to-low latitudes, decreased crop productivity, increased sea levels and flooding, vanishing islands and coastal wetlands, greater storm frequency and intensity, the risk of species extinction and a significant spread of infectious disease.
The United Nations has set a goal of keeping global temperatures from rising by no more than two degrees Celsius above preindustrial levels. ... Meeting this goal would require a worldwide reduction in greenhouse gas emissions of 40 to 70 percent by midcentury, according to the Intergovernmental Panel on Climate Change. That’s an immense challenge. ...
Of course, the political climate in the United States presents its own challenges. It will require immense effort — and profound good fortune — to find political openings that can resolve the debilitating partisan divide on climate change. But if destructive politics have been at the heart of the problem, the best hope may be that creative politics and leadership can help provide a solution.

He also talks about the cost of climate change (saying it will be large), as do Peter Dorman  (in response to Paul Krugman) and John Quiggin. See also Scientists Report Global Rise in Greenhouse Gas Emissions.

Thursday, September 18, 2014

'What's So BadAbout Monopoly Power?'

At MoneyWatch:

What's so bad about monopoly power?: Google (GOOG) has been negotiating with European regulatory authorities since 2010 in an attempt to settle an antitrust case concerning its search engine, and its third attempt to settle the case has been rejected. Google may also face new antitrust problems over its Android mobile operating system, and it's not alone in facing tough antitrust scrutiny in Europe. Microsoft (MSFT) has also been the subject of a long-running battle in Europe over market dominance issues. But what's motivating this scrutiny from European regulators? What's so bad about a company amassing monopoly power? ....

[Also, from yesterday, What do economists mean by "slack"?]

Saturday, August 16, 2014

Monopoly Power

Tim Harford:

Monopoly is a bureaucrat’s friend but a democrat’s foe: ...Large companies are all around us. ... Monopolists can sometimes use their scale and cash flow to produce real innovations – the glory years of Bell Labs come to mind. But the ferocious cut and thrust of smaller competitors seems a more reliable way to produce many of the everyday innovations that matter.
That cut and thrust is no longer so cutting or thrusting as once it was. ... That means higher prices and less innovation, but perhaps the game is broader still..., large companies enjoy power as lobbyists. When they are monopolists, the incentive to lobby increases because the gains from convenient new rules and laws accrue solely to them. Monopolies are no friend of a healthy democracy. ...
No policy can guarantee innovation, financial stability, sharper focus on social problems, healthier democracies, higher quality and lower prices. But assertive competition policy would improve our odds, whether through helping consumers to make empowered choices, splitting up large corporations or blocking megamergers. Such structural approaches are more effective than looking over the shoulders of giant corporations and nagging them; they should be a trusted tool of government rather than a last resort.
As human freedoms go, the freedom to take your custom elsewhere is not a grand or noble one – but neither is it one that we should abandon without a fight.

Monday, August 11, 2014

Paul Krugman: Phosphorus and Freedom

Markets are not always magic:

Phosphorus and Freedom, by Paul Krugman, Commentary, NY Times: In the latest Times Magazine, Robert Draper profiled youngish libertarians ... and asked whether we might be heading for a “libertarian moment.” Well, probably not. Polling suggests that young Americans tend, if anything, to be more supportive of the case for a bigger government than their elders. But I’d like to ask a different question: Is libertarian economics at all realistic?
The answer is no. And the reason can be summed up in one word: phosphorus.
As you’ve probably heard,... Toledo recently warned its residents not to drink the water. Why? Contamination from toxic algae blooms in Lake Erie, largely caused by the runoff of phosphorus from farms.
When I read about that, it rang a bell. Last week many Republican heavy hitters spoke at a conference sponsored by the blog Red State... A few years back ... Erick Erickson, the blog’s founder ... suggested that oppressive government regulation had reached the point where citizens might want to “march down to their state legislator’s house, pull him outside, and beat him to a bloody pulp.” And the source of his rage? A ban on phosphates in dishwasher detergent. After all, why would government officials want to do such a thing? ...
Smart libertarians have always realized that there are problems free markets alone can’t solve — but their alternatives to government tend to be implausible. ...
More commonly, self-proclaimed libertarians deal with the problem of market failure both by pretending that it doesn’t happen and by imagining government as much worse than it really is. ...
Libertarians also ... don’t want to believe that there are problems whose solution requires government action, so they tend to assume that others similarly engage in motivated reasoning to serve their political agenda... Paul Ryan ... doesn’t just think we’re living out the plot of “Atlas Shrugged”; he asserts that all the fuss over climate change is just “an excuse to grow government.”
As I said at the beginning, you shouldn’t believe talk of a rising libertarian tide..., real power on the right still rests with the traditional alliance between plutocrats and preachers. But libertarian visions of an unregulated economy do play a significant role in political debate, so it’s important to understand that these visions are mirages. Of course some government interventions are unnecessary and unwise. But the idea that we have a vastly bigger and more intrusive government than we need is a foolish fantasy.

Friday, July 25, 2014

'Ignoring Climate Change Could Sink the U.S. Economy'

Robert Rubin:

How ignoring climate change could sink the U.S. economy, by Robert E. Rubin: ...When it comes to the economy, much of the debate about climate change ... is framed as a trade-off between environmental protection and economic prosperity. Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But from an economic perspective, that’s precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view — and in the view of a growing group of business people, economists, and other financial and market experts — the cost of inaction over the long term is far greater than the cost of action.
I recently participated in a bipartisan effort to measure the economic risks of unchecked climate change in the United States. We commissioned an independent analysis, led by a highly respected group of economists and climate scientists, and our inaugural report, “Risky Business,” was released in June. The report’s conclusions demonstrated the ... U.S. economy faces enormous risks from unmitigated climate change. ...
We do not face a choice between protecting our environment or protecting our economy. We face a choice between protecting our economy by protecting our environment — or allowing environmental havoc to create economic havoc. ...

Thursday, July 17, 2014

'Do Patents Stifle Cumulative Innovation?'

Joshua Gans

Do patents stifle cumulative innovation?: There has been a movement that began with the notion of the anti-commons that suggested that, whatever the other benefits and faults might be with the patent system, a fault that really matters for the operation of the system and for growth prospects (a la endogenous growth theory) is how patents might stifle cumulative or follow-on innovation. ...
The standard, informal theory of harm here is that follow-on innovators, feeling that they can’t easily deal with the patent holder on the pioneer innovation, decide that the risks are too high to invest and so opt not to do so. To be sure, this ‘hold-up’ concern is not good for anyone, including possibly the patent rights holder who loses the opportunity to earn licensing fees from applications of their knowledge. Suffice it to say, this has been a big feature of the movement against the current strength and, indeed, existence of the patent system.
One issue, however, was that the evidence on the impact of patents on cumulative innovation was weak. Mostly that was due to the problem of finding an environment where impact could be measured. ...
For this reason, all previous attempts concerned intermediate steps — most notably, the impact of patents on citations whether in publications or in patents. This includes work by Fiona Murray and Scott Stern, Heidi Williams and Alberto Galasso and Mark Schankerman. While there is some variation, this work showed, using various clever approaches, that patent protection (or other IP changes) might deter cumulative innovation upwards of 30%. That’s a big effect and a big concern even if the results were somewhat intermediate.
At the NBER Summer Institute a new paper by Bhaven Sampat and Heidi Williams (the same Williams from the previous paper) actually found a way to examine the impact of patents on follow-on innovations themselves. ... The ... paper presents pretty convincing evidence that you cannot reject zero as the likely prediction. That is, the effect patents on follow-on research appears to be non-existent. ...
Suffice it to say, while it is only a particular area, this is evidence enough that should cause many to identify and change their bias regarding the impact of patents on cumulative innovation. ...

The original post has a much longer discussion of the theory and evidence.

Thursday, June 12, 2014

'Synthesis Lost'

As someone who had a series called "Market Failures in Everything" when this blog first started over nine years ago, and as someone who believes market failures remain important even when the economy is operating at full capacity, I'm glad to see views evolving. (Market failures and business cycles form the basis for my calls for government intervention, though as I have written many times, I am coming around to the idea the intervention may also be needed to redistribute income as an offset for those who reap where they never sowed. That is, redistribution is needed to claw back income that flows unjustly according to my definition of equity to those at the top as a result of their economic and political power, e.g. monopoly power that distorts incme flows, and political power that allows rent-seeking behavior. Markets have had 40 years to solve the inequality problem, and it has only gotten worse -- being at full employment for many of those years has not reversed the growing inequality problem. A "hands off" policy when the economy is operating at full capacity, a capacity that can be limited by market failures, is not helpful in this regard.)

This is from Paul Krugman:

Synthesis Lost: Brad DeLong has some notes on the evident trouble we’ve been having maintaining the “neoclassical synthesis” — the doctrine, made famous by Paul Samuelson but actually there in Keynes too, that macroeconomic policy is needed for full employment but once you have that a relatively free-market policy works.

As it happens, I wrote a longish post about this back in 2010. ...

I’d add that I agree with Robert Waldmann: the policy judgement that you shouldn’t have too much detailed government intervention mainly reflects an appreciation for imperfect government, not faith in perfect markets.

And I still think that the Keynes/Samuelson view is reasonable, although market imperfections loom larger in my mind than they used to. But these are not reasonable times …

Tuesday, June 10, 2014

'The Rich Have Advantages That Money Cannot Buy'

Larry Summers says:

The rich have advantages that money cannot buy, by Lawrence Summers: ... There is every reason to believe that taxes can be reformed to eliminate loopholes for the wealthy and become more progressive, while also promoting a more efficient allocation of investment. In areas ranging from local zoning laws to intellectual property protection, from financial regulation to energy subsidies, public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services. There is a compelling case for policy measures to reduce profits from such rent-seeking activities as a number of economists, notably Dean Baker and the late Mancur Olson, have emphasised.
At the same time, unless one regards envy as a virtue, the primary reason for concern about inequality is that lower- and middle-income workers have too little – not that the rich have too much.
So in judging policies relating to inequality, the criterion should be what their impact will be on the middle class and the poor. ...
It is vital to remember, however, that important aspects of inequality are unlikely to be transformed just by limited income redistribution. Consider two fundamental components of life – health and the ability to provide opportunity for children.

He goes on to explain the vast difference between the rich and the poor in the areas of health and education, and I have no problem at all with his call to reduce inequality in these areas.

The question I have is whether we should not be worried "that the rich have too much." As he notes earlier, "public policy now bestows great fortunes on those whose primary skill is working the political system rather than producing great products and services." Those "great fortunes" give the ultra-wealthy the influence they need to capture the political system, and as the fortunes grow larger and larger it becomes harder and harder to change the system to eliminate this rent-seeking behavior (so I don't think "there is every reason to believe" that the system can be reformed). When this happens, when income flows to the top because they have captured the system -- income that could (and in my view should) be going elsewhere -- I think it's worth asking if they have "too much."

Monday, May 26, 2014

'The State, Corporations, and Markets'

Simon Wren-Lewis:

The state, corporations and markets: ... In this post I explain why ... the optimal private/public split will depend on a number of particular and highly contextual issues, about which economics will have a lot to say but where it is unlikely to generally point in one direction. It seems worth making this - I hope uncontroversial - point when the current UK government seems keen to privatise or outsource by one means or another so much of the public sector.
There are two claims ... associated with those who argue in favour of privatisation. One is that markets provide a better allocation system (e.g. here, and follow-ups here and here). For many activities this is undoubtedly true... However much public sector activity is in areas where market imperfections and informational problems of various kinds are endemic. In that situation, market based systems may perform worse than alternatives... Economics is not a discipline that tells us market allocation is always best, but one that tells us when it may work well and when it may not. ...
The second general argument ... is that the profit motive provides an effective incentive system for ensuring efficiency. Yet this argument alone is not enough. It is perfectly possible to run parts of government like a company, where the explicit aim is to maximise profits. Take the East Coast mainline rail company in the UK, for example. ... It appears to have been run very successfully under public ownership...
What this all suggests to me is that the costs and benefits of privatisation will vary from case to case, and that this is an area where microeconomic analysis will be central. ... In such cases, an ideology that says that the private sector ... is always better can be exploited by rent seeking firms. It can lead governments to privatise on unfavourable (to the public) terms, or with inadequate mechanisms in place to ensure value for money and prevent exploitation. At worst, rent seeking firms may be able to exert sufficient control over the political process to make this happen. ...

'Behavioural Artists and Piracy'

Joshua Gans:

Behavioural artists and piracy: Piracy is everywhere... There is evidence that piracy has reduced straight-up music sales revenue but overall it is unclear whether digitization has impacted adversely on artist returns (because they make up losses with concert revenue and the like) or through lower distribution costs. But when it comes to piracy or music sharing, in general, Joel Waldfogel has convinced me that artists’ incentives to enter and supply quality music hasn’t been harmed and may have even been improved. ...
Today I have released a new NBER Working Paper (or here for the SSRN version) that tries to reconcile these ‘stylised facts’: namely, that artists seem to care about money yet entry incentives haven’t been harmed by piracy. To do this, I assume that artists themselves do not act strictly rationally and are instead time inconsistent in a manner familiar to behavioural economics. Put simply, if music artists aren’t hyperbolic discounters I’m not sure who would be. ...[explains theory]...
Of course, it is just a theory and  it is not clear whether it plays a real role or not but it does suggest that our welfare concerns about piracy would be lower than a model with perfectly rational artists would predict. The paper also considers the role of publisher contracts in mediating these outcomes but that doesn’t change things too much.

Saturday, May 24, 2014

'Buying Insurance Against Climate Change'

Robert Shiller:

Buying Insurance Against Climate Change: The third National Climate Assessment report ... warns us about our hazardous future... We must face facts: There is a real risk of new kinds of climate-related disaster. ... We are taking major gambles with our environment... Expect surprises.
In March, a United Nations report identified with “high confidence” a number of risks that will be visited on different people unequally. ... In short, we need to worry about the potential for greater-than-expected disasters, especially those that concentrate their fury on specific places or circumstances ... we cannot now predict.
That’s why global warming needs to be addressed by the private institutions of risk management, such as insurance and securitization. They have deep experience in smoothing out disasters’ effects by sharing them among large numbers of people. The people or entities that are hit hardest are helped by those less badly damaged.
But these institutions need ways to deal with such grand-scale issues. Governments should recognize that by giving these businesses a profit incentive to prepare for these unevenly distributed disasters. ...

Thursday, May 15, 2014

'Are Banks Too Large?'

I don't think this issue can be addressed without also considering the political power of large banks -- their ability to shape legislation in their favor in a way that increases the risk of financial meltdown:

Are Banks Too Large? Maybe, Maybe Not, by Luc Laeven, Lev Ratnovski, and Hui Tong, iMFdirect: Large banks were at the center of the recent financial crisis. The public dismay at costly but necessary bailouts of “too-big-to-fail” banks has triggered an active debate on the optimal size and range of activities of banks.
But this debate remains inconclusive, in part because the economics of an “optimal” bank size is far from clear. Our recent study tries to fill this gap by summarizing what we know about large banks using data for a large cross-section of banking firms in 52 countries.
We find that while large banks are riskier, and create most of the systemic risk in the financial system, it is difficult to determine an “optimal” bank size. In this setting, we find that the best policy option may not be outright restrictions on bank size, but capital—requiring  large banks to hold more capital—and better bank resolution and governance.
Large banks increase systemic, not individual bank risk
Large banks have significantly grown in size, and become more involved in market-based activities since the late 1990s..., the balance sheet size of the world’s largest banks increased two to four-fold in the 10 years prior to the crisis. ...
Also, large banks appear to have a distinct, seemingly risky business model. They tend to simultaneously have lower capital..., less stable funding..., more market-based activities..., and be more organizationally complex..., than smaller banks. ...
In addition, our study confirms that large banks create most of systemic risk in today’s financial system. ... Large banks create especially high systemic risk when they have insufficient capital or unstable funding. And, large banks create high systemic risk...
Too-big-to-fail and empire building
What drives the size and the business model of large banks? Our study suggests the following:
Implicit too-big-to-fail subsidies ... This predisposes large banks to use leverage and unstable funding, and to engage in risky market-based activities.
Possible empire building. ...
Economies of scale. While a good explanation for the size of large banks, recent studies suggest that they are modest. ...
Optimal bank size inconclusive
The evidence that large banks respond to too-big-to-fail and empire building incentives, and in process create systemic risk suggests that banks might become “too large” from a social welfare perspective. But there is an important caveat. We know too little about the value that large banks bring to their customers (e.g., large global corporations). The potential for economies of scale in large banks cannot be dismissed. As a result, we cannot draw conclusions as to the socially optimal bank size. And it also implies that outright restrictions on bank size or activities may be imprecise and hence costly. ...

Wednesday, April 30, 2014

'Begging the Inequality Question'

Chris Dillow:

Begging the inequality question, by Chris Dillow: ... many of us dislike inequality not because we envy the mega-rich but because it is (sometimes) a symptom of malfunctioning markets... The fact that so many bosses get paid millions even for failure suggests that they are not paid their marginal product. Instead, some mix of agency failure, efficient wage considerations (bosses must be paid not to steal corporate assets) and arms races force pay above marginal product.
Sure, you can write models in which inequality emerges as if it were the product of free choices in a free market economy. You can also model a man's empty house as if he had called in the removal men - but if he has in fact been burgled, your models miss something.
I fear that some free market advocates - not all by any means, but some - are mistaking the map for the terrain. They forget that the textbook perfect competition model is not a description of reality but rather of a utopia against which to assess actually-existing markets. And sometimes - not always but in some important respects - they fall well short. ...

Monday, April 21, 2014

'House Prices and Secular Stagnation'

Simon Wren-Lewis:

House prices and secular stagnation: This post starts off talking about the UK, but then goes global
 ...Housing is becoming more and more unaffordable for first time buyers. Yet prices are currently booming (at least in London), and demand is so high estate agents are apparently now holding mass viewings to cope. In the UK the media now routinely call this a bubble, and the term ‘super bubble’ is now being used. ...
Bubbles are where prices move further and further away from their fundamental value, simply because everyone expects prices to continue to rise. ...
If we think of housing as an asset, then the total return to this asset if you held it forever is the weighted sum of all future rents, where you value rents today more than rents in the future. Economists call this the discounted sum of rents. (If you are a homeowner, it is the rent that you are avoiding paying.) So why would house prices go up, if rents were roughly constant and were expected to remain so? The answer is that prices would go up if the rate at which you discounted the future fell. The relevant discount rate here is the real interest rate on alternative assets. That interest rate has indeed fallen over much the same time period as house prices have increased, as Chapter 3 of the IMF’s World Economic Outlook for March 2014 documents. ...
It is the expected return on other assets that matters here. The fact that actual real interest rates have fallen in the past would not matter much if they were expected to recover quickly. A key idea behind today’s discussion of secular stagnation is that real interest rates might stay pretty low for a long period of time. That in turn implies that house prices will be much higher relative to incomes than they were when real interest rates were higher.
So what appears to be a bubble may instead be a symptom of secular stagnation. ...
Does this mean we should stop calling what is happening in the UK a bubble? The first point is that secular stagnation is just an idea, and it may prove wrong, and if it does house prices may come tumbling down. Second, even if it is not wrong, it is still possible to have a bubble on top of the increase implied by lower interest rates. Indeed one of the concerns about the lower real interest rates associated with secular stagnation is that, by raising asset prices not just in housing but elsewhere, it may encourage bubbles to develop on top. So all we can say with certainty, for the UK at least, is that the Financial Policy Committee will have their work cut out when they next meet in June.

Thursday, April 17, 2014

'Antitrust in the New Gilded Age'

Robert Reich:

Antitrust in the New Gilded Age, by Robert Reich: We’re in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. Those laws should prevent or bust up concentrations of economic power that not only harm consumers but also undermine our democracy — such as the pending Comcast acquisition of Time-Warner. ...
In many respects America is back to the same giant concentrations of wealth and economic power that endangered democracy a century ago. The floodgates of big money have been opened...
Remember, this is occurring in America’s new gilded age — similar to the first one in which a young Teddy Roosevelt castigated the “malefactors of great wealth, who were “equally careless of the working men, whom they oppress, and of the State, whose existence they imperil.”
It’s that same equal carelessness toward average Americans and toward our democracy that ought to be of primary concern to us now. Big money that engulfs government makes government incapable of protecting the rest of us against the further depredations of big money.
After becoming President in 1901, Roosevelt used the Sherman Act against forty-five giant companies, including the giant Northern Securities Company that threatened to dominate transportation in the Northwest. William Howard Taft continued to use it, busting up the Standard Oil Trust in 1911. 
In this new gilded age, we should remind ourselves of a central guiding purpose of America’s original antitrust law, and use it no less boldly. 

Sunday, March 23, 2014

On Greg Mankiw's 'Do No Harm'

A rebuttal to Greg Mankiw's claim that the government should not interfere in voluntary exchanges. This is from Rakesh Vohra at Theory of the Leisure Class:

Do No Harm & Minimum Wage: In the March 23rd edition of the NY Times Mankiw proposes a 'do no harm' test for policy makers:

…when people have voluntarily agreed upon an economic arrangement to their mutual benefit, that arrangement should be respected.

There is a qualifier for negative externalities, and he goes on to say:

As a result, when a policy is complex , hard to evaluate and disruptive of private transactions, there is good reason to be skeptical of it.

Minimum wage legislation is offered as an example of a policy that fails the do no harm test. ...

There is an immediate 'heart strings' argument against the test, because indentured servitude passes the 'do no harm' test. ... I want to focus instead on two other aspects of the 'do no harm' principle contained in the words 'voluntarily'and 'benefit'. What is voluntary and benefit compared to what? ...

When parties negotiate to their mutual benefit, it is to their benefit relative to the status quo. When the status quo presents one agent an outside option that is untenable, say starvation, is bargaining voluntary, even if the other agent is not directly threatening starvation? The difficulty with the `do no harm’ principle in policy matters is the assumption that the status quo does less harm than a change in it would. This is not clear to me at all. Let me illustrate this...

Assuming a perfectly competitive market, imposing a minimum wage constraint above the equilibrium wage would reduce total welfare. What if the labor market were not perfectly competitive? In particular, suppose it was a monopsony employer constrained to offer the same wage to everyone employed. Then, imposing a minimum wage above the monopsonist’s optimal wage would increase total welfare.

[There is also an example based upon differences in patience that I left out.]

Thursday, March 06, 2014

'Why DRM'ed Coffee-Pods May be Just the Awful Stupidity We Need'

Speaking of anti-competitive behavior, here's Cory Doctorow:

Why DRM'ed coffee-pods may be just the awful stupidity we need, by Cory Doctorow: I've been thinking about the news that Keurig has added "DRM" to its pod coffee-makers since the story first started doing the rounds a couple of days ago. I've come to the conclusion that while the errand is a foolish one, and the company deserves nothing but contempt for such an anti-competitive move, that there might be a silver lining to this cloud. As I've written recently, there's not a lot of case-law on Section 1201 of the Digital Millennium Copyright Act (DMCA), the law that prohibits "circumventing...effective means of access control" to copyrighted works. In the past, we've seen printer companies and garage door opener manufacturers claim that the software in their devices was a "copyrighted work" and that anyone who made a spare part for their products was thus violating 1201. But that was 10 years ago, and it's been a while since there was someone stupid and greedy enough to try that defense.
I think Keurig might just be that stupid, greedy company. The reason they're adding "DRM" to their coffee pods is that they don't think that they make the obviously best product at the best price, but want to be able to force their customers to buy from them anyway. So when, inevitably, their system is cracked by a competitor who puts better coffee at a lower price into the pods, Keurig strikes me as the kind of company that might just sue. And not only sue, but keep on suing, even after they get their asses handed to them by successive courts. With any luck, they'll make some new appellate-level caselaw in a circuit where there's a lot of startups -- maybe by bringing a case against some spunky Research Triangle types in the Fourth Circuit.
Now, this is risky. Hard cases made bad law. A judge in a circuit where copyright claims are rarely heard might just buy the idea of copyright covering pods of coffee. The rebel forces that Keurig sues might be idiots (remember Aimster?). But of all the DRM Death Stars to be unveiled, Keurig's is a pretty good candidate for Battle Station Most Likely to Have a Convenient Thermal Exhaust Port.

[Boing Boing is licensed under a Creative Commons License permitting non-commercial sharing with attribution.]

'Did Robert Bork Understate the Competitive Impact of Mergers?'

I have argued again and again that we aren't concerned enough about the concentration of economic power:

Did Robert Bork Understate the Competitive Impact of Mergers? Evidence from Consummated Mergers, by Orley C. Ashenfelter, Daniel Hosken, and Matthew C. Weinberg, NBER: In The Antitrust Paradox, Robert Bork viewed most mergers as either competitively neutral or efficiency enhancing. In his view, only mergers creating a dominant firm or monopoly were likely to harm consumers. Bork was especially skeptical of oligopoly concerns resulting from mergers. In this paper, we provide a critique of Bork’s views on merger policy from The Antitrust Paradox. Many of Bork’s recommendations have been implemented over time and have improved merger analysis. Bork’s proposed horizontal merger policy, however, was too permissive. In particular, the empirical record shows that mergers in oligopolistic markets can raise consumer prices.

Friday, February 21, 2014

'What Do Obamacare and the EITC Have in Common with Cap-and-Trade?'

Jeff Frankel has a follow-up to a post I highlighted a few days ago:

What Do Obamacare and the EITC Have in Common with Cap-and-Trade?: My preceding blog post described how market-oriented mechanisms to address environmentally damaging emissions, particularly the cap-and-trade system for SO2 in the United States, have recently been overtaken by less efficient regulatory approaches such as renewables mandates. One reason is that Republicans — who originally were supporters of cap-and-trade — turned against it, even demonized it.
One can draw an interesting analogy between the evolution of Republican political attitudes toward market mechanisms in the area of federal environmental regulation and hostility to the Affordable Care Act, also known as Obamacare. ... One can trace through the parallels between clean air and health care. ... A third example is the Earned-Income Tax Credit. ...

Wednesday, February 19, 2014

'The Rise and Fall of Cap-and-Trade'

Jeff Frankel:

The Rise and Fall of Cap-and-Trade: ...the political tide on both sides of the Atlantic has been against “cap and trade” over the last five years. In the United States, the highly successful trading system for allowances in emissions of SO2 (sulfur dioxide) has all but died since 2012.  In the European Union as well, the Emissions Trading System was in effect overtaken by other kinds of regulation in 2013.
Cap-and-trade was originally considered a Republican idea.  Market-friendly regulation was pushed by those who thought of themselves as pro-market, rather than by those who thought of themselves as pro-regulation.  Most environmental organizations were opposed to the novel approach;  many of them thought it immoral for corporations to be able to pay for the right to pollute. The pioneering use of the cap-and-trade approach to phase out lead from gasoline in the 1980s was a policy of Ronald Reagan’s Administration.  Its successful use to reduce SO2 emissions from power plants in the 1990s was a policy of George H.W. Bush’s administration.  The proposal to use cap-and-trade to reduce SO2 and other emissions further was a policy of George W. Bush’s administration ten years ago under, first, the Clear Skies Act proposed in 2002 and then the Clean Air Interstate Rule of 2005. (See Schmalensee and Stavins, 2013, pp.103-113.) ... Senator John McCain, had sponsored US legislative proposals to use cap-and-trade to address emissions of carbon dioxide and other greenhouse gases responsible for global warming. ...
Republican politicians have now forgotten that this approach was ever their policy.  To defeat the last major climate bill in 2009, they worked themselves into a frenzy of anti-regulation rhetoric.  ... The Republican rhetoric successfully stigmatized cap-and-trade.  Schmalensee and Stavins (p.113) sum it up: “It is ironic that conservatives chose to demonize their own market-based creation.”
This stance left in its place alternative approaches that are less market-friendly (Stavins, 2011)... The non-market alternatives, such as “command and control” regulation requiring that particular energy sources or particular technologies be used, are less efficient.    Nonetheless they are again the dominant regime.   ...
There is nothing inevitable or irreversible about the recent trend away from cap-and-trade.  ... Even in the US, where it began, there is still grounds for hope. ...

Monday, February 17, 2014

Paul Krugman: Barons of Broadband

We should be more worried than we are about monopoly power:

Barons of Broadband , by Paul Krugman, Commentary, NY Times: Last week’s big business news was the announcement that Comcast ... has reached a deal to acquire Time Warner... If regulators approve the deal, Comcast will be an overwhelmingly dominant player in the business...
So let me ask two questions about the proposed deal. First, why would we even think about letting it go through? Second, when and why did we stop worrying about monopoly power?
On the first question, broadband Internet and cable TV are already highly concentrated industries... Comcast perfectly fits the old notion of monopolists as robber barons...
And there are good reasons to believe ... that monopoly power has become a significant drag on the U.S. economy as a whole.
There used to be a bipartisan consensus in favor of tough antitrust enforcement. During the Reagan years, however, antitrust policy went into eclipse, and ever since measures of monopoly power... have been rising fast.
At first, arguments against policing monopoly power pointed to the alleged benefits of mergers in terms of economic efficiency. Later, it became common to assert that the world had changed in ways that made all those old-fashioned concerns about monopoly irrelevant. Aren’t we living in an era of global competition? Doesn’t ... creative destruction ... constantly tear down old industry giants and create new ones?
The truth, however, is that many goods and especially services aren’t subject to international competition: New Jersey families can’t subscribe to Korean broadband. Meanwhile, creative destruction has been oversold: Microsoft may be ... in decline, but it’s still enormously profitable thanks to the monopoly position it established decades ago.
Moreover, there’s good reason to believe that monopoly is itself a barrier to innovation...: why upgrade your network or provide better services when your customers have nowhere to go?
And the same phenomenon may be ... holding back the economy as a whole. One puzzle ... has been the disconnect between profits and investment. Profits are at a record high..., yet corporations aren’t reinvesting their returns in their businesses. Instead, they’re buying back shares, or accumulating huge piles of cash. This is exactly what you’d expect to see if a lot of those record profits represent monopoly rents.
It’s time, in other words, to go back to worrying about monopoly power, which we should have been doing all along. And the first step on the road back from our grand detour on this issue is obvious: Say no to Comcast.

Saturday, February 15, 2014

'Time to Get Real on Comcast-Time Warner'

On the proposed Comcast Time-Warner merger:

Paul Krugman:

Monoposony Begets Monopoly, And Vice Versa: Nothing to see here, folks, says Comcast. The cable giant’s defenders insist that its already awesome market power won’t be increased if it acquires Time Warner, because they serve (i.e., are local monopolists in) different geographical areas...
But elsewhere in the business section, we see clear evidence that this is nonsense. Comcast’s size gives it monopsony as well as monopoly power — it is able to extract far more favorable deals from content providers than smaller rivals. And if it’s allowed to acquire Time Warner, it will be even more advantaged...
This would, in turn, make it even harder for potential competitors to enter markets served by ComcastTimeWarner, strengthening its monopoly position.
What possible justification could there be for approving this scheme?

Joshua Gans:

Time to get real on Comcast-Time Warner, by Joshua Gans: ... with every potential harm to the public benefit is also opportunity. What would happen if, as part of the conditions to approve this merger (a) content assets were divested; and (b) Net Neutrality was enshrined? That may remove more structural impediments to competition and guarantee that this is a long-term win for consumers. It would be nice if someone were to propose that.

In general, I don't think that we pay enough attention to the problems that are associated with market power.

Monday, February 03, 2014

'Silicon Valley Billionaires Believe in the Free Market, as Long as They Benefit'

Dean Baker:

Silicon Valley billionaires believe in the free market, as long as they benefit, by Dean Baker, theguardian.com: Last week, Mark Ames published an article ... on a court case that alleges that Apple, Google, and other Silicon Valley powerhouses actively conspired to keep their workers' wages down. According to documents filed in the case, these companies agreed not to compete for each others' workers dating at least as far back as 2005. ... This means not only that they broke the law, and that they acted to undermine the market, but that they really don't think about the market the way libertarians claim to think about the market. ...

The classic libertarian view of the market is that we have a huge number of people in the market actively competing..., there is so much competition that no individual or company can really hope to have much impact on market outcomes.

This point is central to their argument that the government should not interfere with corporate practices. For example, if we think our local cable company is charging too much..., our libertarian friends will insist that the phone company, satellite television or other competitors will step in to keep prices in line. They would tell the same story if the issue were regulating the airlines, banks, health insurance, or any other sector where there is reason to believe that competition might be limited. ...

The ... Silicon Valley non-compete agreements show that this is not how the tech billionaires believe the market really works. This is just a story they peddle to children and gullible reporters. ... The fact the Silicon Valley honchos took the time to negotiate and presumably enforce these non-compete agreements was because they did not think that there were enough competitors to hire away their workers. They believed that they had enough weight on the buy-side of the market for software engineers ... to ... keep their wages down. ...

Wednesday, January 22, 2014

'The Political Economy of Populism'

Paul Krugman:

A Note on the Political Economy of Populism: All indications are that President Obama will make inequality the central theme of his State of the Union address. Assuming he does, he will face two different kinds of sniping. One will come from the usual suspects on the right, shrieking “class warfare”. The other will come from a variety of people, some of them well-intentioned, arguing that while sure, inequality is an issue, the crucial thing now is to get the economy growing and create more jobs; these people will argue that populism is a diversion from the main issue.
Here’s why they’re wrong.
First of all, even on the straight economics inequality and job creation aren’t completely separable issues. ...
Beyond that, there’s the political economy.
It has been painfully obvious, to anyone willing to see (a group that unfortunately doesn’t include a large part of the press corps) that deficit obsession hasn’t really been about deficits — it has been about using deficits as a club with which to smash to welfare state, and hence increase inequality. ...
Conversely, talking about the need to help struggling families is ... a way to shift the focus away from deficit obsession, and pave the way at least for a relaxation of austerity, if not actual stimulus.
And I think we also have to face up to an awkward political reality: moderate populism has a broad popular constituency, Keynesian macroeconomics doesn’t..., the public doesn’t “get” macroeconomics; lines like “American families are having to tighten their belts, so the government should too” still resonate. You could blame Obama for not using the bully pulpit to teach the nation why this is wrong, and I wish he had made more of a stand. Still, the fact is that this is just a hard story to get across...
So if I were Obama, I’d do what he’s apparently doing: focus on inequality, which is a valid and popular issue, and use it indirectly to move macro policy in the right direction too.

To follow up on the previous post, capitalism is the best economic system yet discovered for producing economic growth, but it also concentrates risk and causes people to face hardship through no fault of their own (e.g. a recession that puts someone out of work, someone who shows up for work everyday and does their job well). The solution to this is for either the private sector or the government to provide insurance against these risks -- and market failures mean it is generally the government that must step in. Yes, that means transfers from the winners to the less fortunate, much as those with fire insurance who have good outcomes -- no fire -- find their insurance premiums transferred to those who do have the bad luck to experience a fire. But the risks inherent in the system that makes those at the top so wealthy, and those at the bottom so miserable must be attenuated through government provided insurance. Unemployment insurance is a good example of this, but more social insurance is needed to protect the vulnerable from risks they had no hand in creating (e.g. the financial crisis caused great pain for workers who had nothing at all to do with creating the problems that caused the Great Recession, while those who benefitted from the lead up to the crisis and had a hand in causing it, those who are doing very well now, whine incessantly if they are asked to help to reduce the hardship of the innocent).

'Inequality in Adam Smith’s World'

I like this as far as it goes, but why not make the point that there is a role for government in solving the market failures that lead to the lack of job insurance for vulnerable workers (and *perhaps* for solving the inequality problem as well if it progresses beyond some threshold)?:

Inequality in Adam Smith’s World, by Chris House: Inequality is a fact of economic life and it is becoming more and more pronounced over time. ...
There are many forces in our economy that create income inequality. The most basic of these forces however, is tied to the nature of trade itself and can be traced all the way back to Adam Smith and the division of labor. If you read the Wealth of Nations (something I told you not to do a few blog posts back …) you will find that Smith begins by marveling at the incredible increases in productivity that can be obtained by exploiting the division of labor, that is, by specializing. ... A jack-of-all-trades is simply not valued in a market system. ...
The way you get the division of labor to work is by combining it with trade. ... A physician cannot consume only her own medical advice – she must draw on the productivity of the many other specialists in society. If you are willing to do trade, you can, by specializing, reach incredible levels of productivity. As populations grow, and as the ability to trade grows, you should see more and more specialization and higher and higher productivity. (Obviously the division of labor is not the only source of increases in productivity.)
However, there is a downside... Adam Smith’s plan exposes people to incredible variations in income and thus a market system possesses and important force which causes inequality. Specialization ties your entire wellbeing to a single industry. If you decide that you are going to become a web designer, your fate is very closely tied to the market for web designers. As a result, while Smith’s plan dramatically increases overall productivity, it also exposes us to incredible risk.
Of course, markets do have responses to risk. The typical response is for the market to provide insurance contracts to reduce risk. In this case however, the type of insurance needed is actually income or job insurance. These types of insurance contracts are not typically available. ...
I don’t mean to imply that all or even most of the alarming increase in inequality is due to the division of labor and trade. I would guess that modern technology (which allows people to leverage luck to extreme degrees by cheaply reproducing and transmitting ideas and information) and inheritance, both play a significant role in creating inequality. However, living with income inequality is an implicit part of the deal we made with Adam Smith and it will be with us in some form for a long time.

Sunday, December 29, 2013

'Mixed Thinking about Markets'

John Quiggin:

Mixed thinking about markets: ... Chris Berg ... wants to argue that all the good things that have happened in the last two centuries are the product of the “market economy”, and that we should therefore scrap our existing social arrangements in favor of radical reforms in which market forces are given free rein.
In reality, modern society is characterized by a mixed economy, in which large components of economic activity take place outside the market, within households or through publicly funded and provided services. Even within the private business sector, the majority of activity takes place within corporations whose internal operations are characterized by central planning, not markets.
All of this reflects the fact that a pure market economy doesn’t work well. Rather than list all the problems which have led modern societies to constrain the role of markets (environmental pollution, inequality and so on), I’ll focus on the one discussed by Berg, that of technological innovation. Information is what economists call a public good... And while it’s possible to keep useful information secret for a while, it gets harder and harder over time. So, a pure market system often doesn’t provide much of a reward to people who come up with new ideas.
All sorts of solutions to the problem have been developed. They include patents (a temporary grant of government-enforced monopoly), prizes and awards, and publicly funded research institutions such as universities. ...
Berg’s argument is an example of a characteristic fallacy among advocates of market liberalism. Beginning with the fact that all modern societies are, in some sense, capitalist, they point to the successes of modern society to argue in favor of a particular version of capitalism (free markets, on the US model but taken even further) and against others that have been more successful in terms of human welfare (various forms of social democracy) or that might exist in the future. ...

Monday, December 09, 2013

'What Obama Left Out of His Inequality Speech: Regulation'

Thought I'd highlight this piece from today's links:

What Obama Left Out of His Inequality Speech: Regulation, by Thomas McGarity, Commentary, NY Times: President Obama’s speech on inequality last Wednesday was important in several respects. He identified the threat to economic stability, social cohesion and democratic legitimacy posed by soaring inequality of income and wealth. He put to rest the myths that inequality is mostly a problem afflicting poor minorities, that expanding the economy and reducing inequality are conflicting goals, and that the government cannot do much about the matter.
Mr. Obama also outlined several principles to expand opportunity: strengthening economic productivity and competitiveness; improving education, from prekindergarten to college access to vocational training; empowering workers through collective bargaining and antidiscrimination laws and a higher minimum wage; targeting aid at the communities hardest hit by economic change and the Great Recession; and repairing the social safety net.
But there’s a crucial dimension the president left out: the revival, since the mid-1970s, of the laissez-faire ideology that prevailed in the Gilded Age, roughly the 1870s through the 1910s. It’s no coincidence that this laissez-faire revival — an all-out assault on government regulation — has unfolded over the very period in which inequality has soared to levels not seen since the Gilded Age. ...[continue]...

See here for more.

Monday, November 04, 2013

'Why Doesn’t Competition Drive Out Inefficient Health Care Technology?'

Nicholas Bagley at The Incidental Economist:

Why doesn’t competition drive out inefficient health care technology?: So here’s a burning question. There’s a consensus that the primary driver of escalating health-care costs is the rapid adoption of new and expensive medical technology. Much of that technology is untested and of questionable medical value. Yet private insurance plans typically cover most any intervention that physicians say is medically necessary. ...
Why? Why don’t private plans compete on price by refusing to cover costly, unproven therapies? ... One answer you sometimes hear is that the law gets in the way. ... We want to contain costs, but the courts won’t let us do it.
The law can’t be the real story, however. As it stands, a federal statute—ERISA—gives employer-sponsored plans almost complete freedom to tailor their coverage packages as they like. ... ERISA even shields a plan from liability if it negligently refuses to authorize coverage for care that it (wrongly) thinks is medically unnecessary. As safe legal harbors go, it doesn’t get any better than ERISA.
Why, then, are private plans so cautious? I’m speculating a little here... For starters, it’s really hard to make good coverage decisions. The data for making them are usually quite poor... And, absent convincing data, a plan that excludes a promising treatment risks alienating physicians and hospitals (not to mention patients). No individual plan has the right incentives to generate that kind of convincing data because, once it does, its competitors will ... take advantage of the leading plan’s research investments.
What’s more, most coverage decisions aren’t crisp (“No proton-beam therapy, period.”). They’re qualified: if a patient has a certain risk-profile, or an identifiable need, then the intervention is covered. But once a plan has said that some patients are eligible for a particular treatment, it’s hard to stop those outside that group from getting the treatment, too. ...
Against this backdrop, piggybacking on Medicare’s coverage determinations makes good sense. Not only does it allow plans to sidestep the collective-action problem that plagues efforts to develop good coverage data. It also helps plans avoid public backlash because they can be confident that their competitors will also follow Medicare’s lead. The government’s seal of approval lends legitimacy to a coverage exclusion that might otherwise appear hard-hearted.
Employer-sponsored plans aren’t the only private plans around, of course. And, as it happens, the law has more bite outside of the employer setting. ... But for employer-sponsored plans, the law isn’t the problem. Far from restraining these plans, the law enables them to tackle the rising costs of technology. There’s just not a business case for it—at least not yet.

Thursday, September 19, 2013

Waste in the Private Sector

Antonio Fatás:

Does competition get rid of waste in the private sector?: It is very common to hear comments about the waste of resources when referring to governments and the public sector. Paul Krugman does his best to argue against this popular view by showing that most of what government do is related to services that we demand and value as a society (it is not about hiring civil servants that produce no useful service). As he puts it, the government is an "insurance company with an army". But critics will argue that even if this is the case, the functioning of that (public) insurance company is extremely inefficient. In fact, we all have our list of anecdotes on how governments waste resources, build bridges to nowhere and how politicians are driven by their own interest, their ambitions or even worse pure corruption. If only we could bring the private sector to manage these services!
In addition to the anecdotal evidence there is something else that matters: we tend to use framework that starts with the assumption that in the private sector competition will get rid of waste. An inefficient company will be driven out of business by an efficient one. An inefficient and corrupt manager will be replaced by one who can get the work done. And we believe that the same does not apply to governments (yes, there are elections but they do not happen often enough plus there is no real competition there).
But is competition good enough to get rid of all the waste and inefficiencies in the private sector? I am sure there are many instances where this is the case but I am afraid there are also plenty of cases where competition is not strong enough. And just to be clear, I am not simply talking about large companies that abuse monopoly power, I am thinking of all the instances where the competitive threat is not enough to eliminate inefficiencies. ...

He goes on to give two examples of private sector waste and inefficiency resulting from insufficient competetive forces, the large amount of waste, destruction, and inefficiency caused by the financial crisis and the large amount of waste in private sector healthcare markets (he shows one estimate that excess costs are 31% of total spending on health care). He concludes with:

But ...[when it comes to].. waste in other sectors, we simply do not know about it, we do not even attempt to measure it (at least at the macro level). And the reason why we do not bother measuring it is because we assume that markets and competition must make this number close enough to zero. Maybe it is time to challenge this assumption.

Saturday, September 14, 2013

'Ronald Coase, a Pragmatic Voice for Government’s Role'

Robert Frank:

Ronald Coase, a Pragmatic Voice for Government’s Role, by Robert Frank, Commentary, NY Times: ... Nobel Memorial Prize in Economic Science [winner] ... Ronald H. Coase ... spent most of his career at the University of Chicago, where he was revered by its many free-market enthusiasts as the world’s foremost authority on ... negative externalities... He became their champion because they thought his framework provided the most cogent arguments for limiting government’s role in economic life.
That belief was profoundly mistaken. In time, I predict, Mr. Coase’s framework will instead be seen as providing not only the best explanation for why governments regulate..., but also the best advice on how they might regulate more effectively. ...
Mr. Coase’s work cannot be read as a case for minimal government. On the contrary, his message was more purely pragmatic: Because we can’t negotiate efficient private solutions most of the time, we must ask whether laws and other institutions can help steer us toward solutions we would have chosen if negotiation had been practical. ...
Because population density has been rising, behaviors with harmful side effects have been growing steadily more important. Our continued prosperity ... will require thinking clearly about how to mitigate the resulting damage. Mr. Coase has pointed the way forward.

Thursday, September 12, 2013

'Remembering Ronald Coase’s Contributions'

In his post Remembering Ronald Coase’s Contributions, Robert Stavins notes a big surprise, the Wall Street Journal's editorial page being less than forthright (he is summarizing a statement in "an effective essay" by Severin Borenstein on "the effect that Coase’s thinking had decades ago on his own intellectual development"):

the Wall Street Journal in its ... tribute to Coase ... twisted the implications of his work to fit the Journal’s view of the world

Stavins goes on to discuss "The Coase Theorem and the Independence Property":

... In our article, “The Effect of Allowance Allocations on Cap-and-Trade System Performance,” Hahn and I took as our starting point a well-known result from Coase’s work, namely, that bilateral negotiation between the generator and the recipient of an externality will lead to the same efficient outcome regardless of the initial assignment of property rights, in the absence of transaction costs, income effects, and third party impacts. This result, or a variation of it, has come to be known as the Coase Theorem.
We focused on an idea that is closely related to the Coase theorem, namely, that the market equilibrium in a cap-and-trade system will be cost-effective and independent of the initial allocation of tradable rights (typically referred to as permits or allowances). That is, the overall cost of achieving a given emission reduction will be minimized, and the final allocation of permits will be independent of the initial allocation, under certain conditions (conditional upon the permits being allocated freely, i.e., not auctioned). We called this the independence property. It is closely related to a core principle of general equilibrium theory (Arrow and Debreu 1954), namely, that when markets are complete, outcomes remain efficient even after lump-sum transfers among agents.
The Practical Political Importance of the Independence Property
...The reason why this property is of such great relevance to ... public policy is that it allows equity and efficiency concerns to be separated. In particular, a government can set an overall cap of pollutant emissions (a pollution reduction goal) and leave it up to a legislature to construct a constituency in support of the program by allocating shares of the allowances to various interests, such as sectors and geographic regions, without affecting either the environmental performance of the system or its aggregate social costs. Indeed, this property is a key reason why cap-and-trade systems have been employed and have evolved as the preferred instrument in a variety of environmental policy settings.
...Does the Property Always Hold?
...Hahn and I ... carried out an empirical assessment of the independence property in past and current cap-and-trade systems...
I hope some of may find time to read our article, but a quick summary of our assessment is that we found modest support for the independence property in the seven cases we examined (but also recognized that it would surely be useful to have more empirical research in this realm).
Political Judgments
That the independence property appears to be broadly validated provides support for the efficacy of past political judgments regarding constituency building through legislatures’ allowance allocations in cap-and-trade systems. Governments have repeatedly set the overall emissions cap and then left it up to the political process to allocate the available number of allowances among sources to build support for an initiative without reducing the system’s environmental performance or driving up its cost.
This success with environmental cap-and-trade systems should be contrasted with many other public policy proposals for which the normal course of events is that the political bargaining that is necessary to develop support reduces the effectiveness of the policy or drives up its overall cost. So, the independence property of well-designed and implemented cap-and-trade systems is hardly something to be taken for granted. It is of real political importance and remarkable social value. It is just one of many lasting contributions of Ronald Coase.

Saturday, September 07, 2013

Where are the Women (in Economics)?

"It’s something systemic to the field"

Where are the Women?, by Jesse Romero, FRB Richmond: Women earned 34 percent of economics Ph.D.s in 2011... That might sound like a lot, but it’s much lower than the 46 percent of all doctorate degrees earned by women, and the smallest share among any of the social sciences. ...
The gender gap in economics gets larger at each stage of the profession, a phenomenon described as the “leaky pipeline.” In 2012, women were 28 percent of assistant professors, the first rung on the academic ladder; 22 percent of associate professors with tenure; and less than 12 percent of full professors...
In part, this might reflect the long lag between earning a Ph.D. and attaining the rank of full professor; if more women are entering the field today than 20 years ago, more women might be full professors in the future. But the share of new female Ph.D. students is actually lower than it was in 1997,... which means women’s share of economics faculty could actually shrink.
Donna Ginther of the University of Kansa s and Shulamit Kahn of Boston University also found leaks in the pipeline. In several studies, they have shown that women are less likely than men to progress at every stage of an academic career... Furthermore, women are less likely to be promoted in economics than in other social sciences, and even than in more traditionally male fields such as engineering and the physical sciences.
In part, the disparity between men and women could be due to different choices, such as having children or focusing more on teaching than on research. ...
But even after controlling for education, ability, productivity, and family choices, Ginther and Kahn found that a gap of about 16 percentage points persists in the likelihood of promotion to full professor in economics — a much larger gap than in other disciplines. “It’s something systemic to the field,” says economist Claudia Goldin of Harvard University.
Whatever that something is, ... the problem might be the way economics is taught, Goldin says. “... We’re teaching economics the same way we did when women didn’t matter. But now women do matter. So how do we translate economics into ‘girlish’?” ...
Does it actually matter how many female economists there are? Yes, says Susan Athey of Stanford University. “You just don’t get the best al location of human capital” when one category of people is excluded. “Losing out on a chunk of the population is wasteful.” (In 2007, Athey was the first woman to receive the John Bates Clark medal, given to the American economist under 40 who has made the greatest contribution to the field.) In addition, a survey by Ann Mari May and Mary McGarvey of the University of Nebraska-Lincoln and Robert Whaples of Wake Forest University found that male and female economists have significantly different opinions on public policy questions such as the minimum wage, labor regulations, and health insurance. As the authors concluded, “Gender diversity in policymaking circles may be an important aspect in broadening the menu of public policy choices.” ...

Saturday, August 31, 2013

A Carbon Tax That America Could Live With?

I expected Greg Mankiw's latest column to be about sales of his textbook. That's important news everyone should know about. But in a complete surprise, he talked about carbon taxes instead:

A Carbon Tax That America Could Live With: ... If the government charged a fee for each emission of carbon, that fee would be built into the prices of products and lifestyles. When making everyday decisions, people would naturally look at the prices they face and, in effect, take into account the global impact of their choices. In economics jargon, a price on carbon would induce people to “internalize the externality.”
A bill introduced this year by Representatives Henry A. Waxman and Earl Blumenauer and Senators Sheldon Whitehouse and Brian Schatz does exactly that. Their proposed carbon fee — or carbon tax, if you prefer — is more effective and less invasive than the regulatory approach that the federal government has traditionally pursued.
The four sponsors are all Democrats, which raises the question of whether such legislation could ever make its way through the Republican-controlled House of Representatives. The crucial point is what is done with the revenue raised by the carbon fee. If it’s used to finance larger government, Republicans would have every reason to balk. But if the Democratic sponsors conceded to using the new revenue to reduce personal and corporate income tax rates, a bipartisan compromise is possible to imagine. ...

Mankiw once said that economists shouldn't consider the political realities of policy, they should just recommend the best policy:

Politics aside: I have finally gotten around to reading the new Ebenstein biography of Milton Friedman. Here is a quotation from Milton that I particularly like:

“The role of the economist in discussions of public policy seems to me to be to prescribe what should be done in light of what can be done, politics aside, and not to predict what is ‘politically feasible’ and then to recommend it.”

So now, when I advocate raising gasoline taxes and cutting income taxes, and my conservative friends tell me that the plan is politically unrealistic, that the government will just keep the extra revenue instead of cutting income taxes, I can quote Milton....

I get that Mankiw really wants his personal taxes to be lowered, he seems to hate the idea of paying a fair share in taxes from what he makes from the textbook he hawks at every opportunity. But why, from an economic standpoint, is lowering his personal taxes (corporate taxes too) the best option (as opposed to simply trying to find something that is politically acceptable to the right)? Has he made that argument? The revenue could be used to help low income households that would be hurt by the tax, for deficit reduction without cutting programs, there are all sorts of ways the revenue could be used and it's not at all clear that his recommendation is, from an economic rather than a political view, the best way to use the revenue from a carbon tax.