Economist's View

Effects of Copyrights on Science

Barbara Biasi and Petra Moser at VoxEU:

Effects of copyrights on science: Summary Copyrights grant publishers exclusive rights to content for almost a century. In science, this can involve substantial social costs by limiting who can access existing research. This column uses a unique WWII-era programme in the US, which allowed US publishers to reprint exact copies of German-owned science books, to explore how copyrights affect follow-on science. This artificial removal of copyright barriers led to a 25% decline in prices, and a 67% increase in citations. These results suggest that restrictive copyright policies slow down the progress of science considerably.

Employer Concentration and Stagnant Wages

From the NBER Digest. "Two studies suggest that an increase in employers' monopsony power is associated with lower wages.":

Employer Concentration and Stagnant Wages: Stagnant wages and a declining share of labor income in GDP in recent decades have spawned a number of explanations. These include outsourcing, foreign competition, automation, and the decline of unions. Two new studies focus on another factor that may have affected the relative bargaining position of workers and firms: employer domination of local job markets. One shows that wage growth slowed as industrial consolidation increased over the past 40 years; the other shows that in many job markets across the country there is little competition for workers in specific job categories.

In Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages? (NBER Working Paper No. 24307), Efraim Benmelech, Nittai Bergman, and Hyunseob Kim analyzed county-level census data for industrial firms for the period 1977 to 2009 to study the impact of employer concentration on wages in local labor markets. By focusing on manufacturing, they were able to control directly for worker productivity. The researchers found that, although there was substantial cross-sectional and time series variation in concentration, average local-level employer concentration increased between 1977-81 and 2002-9, based on the Standard Industrial Classification four-digit code for industry groups. Their measure of concentration is the Herfindahl-Hirschman Index (HHI), which is defined as the sum of the squares of the employment shares for all of the firms in a given industry. The employment-weighted mean value of this index rose from 0.698 to 0.756 during the study period, an increase of 5.8 percent. Forty percent of the plant-year observations were associated with manufacturing facilities in counties dominated by just a few firms. The researchers found a negative relationship between employer concentration and wages; it was twice as strong in the second half of their data sample as in the first half; a one standard deviation increase in the HHI was associated with a wage reduction of between 1 and 2 percent. They estimate that a firm operating in a labor market in which it was the only employer would pay wages 3.1 percent lower than those of a firm that operated in a less concentrated market. Most of the decline in wages appeared to occur as labor markets approached the pure monopsony case, namely the situation in which only one firm is hiring workers. In addition to finding lower wages in monopsony markets, the researchers also found that, over time, firms that dominate their labor markets were less likely to share productivity gains with employees. A one standard deviation decline in the HHI mapped to an increase in the elasticity of wages with respect to productivity of about 25 percent, from 0.38 to 0.47. Over the course of the study period, U.S. imports from China increased. The researchers found that import competition from China, which was associated with the closure or relocation of plants in a number of industries, accelerated the trend toward greater employer concentration in some local labor markets. This finding suggests that import competition not only reduced the demand for workers who previously produced the now-imported products, but that it may also have depressed wages for workers in other industries in affected labor markets as a result of increased labor market concentration. The only employees who did not experience wage stagnation in markets with high plant concentration were those who belonged to unions. About one quarter of the plants studied were unionized; the fraction was lower in the later than in the earlier years. Because this study focuses on workers employed by industrial firms, the fraction of workers who are union members is higher than for the U.S. labor market more broadly. To assess the robustness of their results, the researchers compared plants in the same industry owned by the same company but operating in different locations; they found that "those located in a more concentrated local labor market pay significantly lower wages."

In Concentration in U.S. Labor Markets: Evidence from Online Vacancy Data (NBER Working Paper No. 24395), José A. Azar, Ioana Marinescu, Marshall I. Steinbaum, and Bledi Taska found that in most locations employers have substantial monopsony power. The researchers studied job vacancies in the 709 federally delineated commuting zones, which depict the bounds of local economies. Drawing on a database compiled by Burning Glass Technologies from 40,000 employment websites, they calculated the level of labor market concentration by commuting zone, occupation, and quarter for the year 2016. They selected the top 200 occupations as classified by the Bureau of Labor Statistics' six-digit code, capturing 90 percent of the job postings in the database. As a yardstick for labor market concentration, the study calculated the Herfindahl-Hirschman Index measure, similar to the application in Working Paper 24307. The results suggested that the higher the market concentration, the stronger an employer's bargaining position. The average market had the equivalent of 2.5 recruiting employers. Under the standards that federal antitrust officials use when determining whether product markets exhibit excessive levels of concentration, 54 percent of the markets were highly concentrated, meaning they had the equivalent of fewer than four firms recruiting employees. Eleven percent of markets were moderately concentrated, and only 35 percent had low concentration. Nationwide, among the 30 largest occupations, marketing managers, web developers, and financial analysts faced the least favorable job markets; markets were most favorable for registered nurses, tractor-trailer drivers, and customer service representatives. The actual picture for job seekers, however, was brighter than these figures would indicate because commuting zones vary widely in employment levels. Commuting zones encompassing large cities had lower levels of labor market concentration than those around small cities or in rural areas. Accounting for the unequal distribution of employment, the researchers found that 23 percent of the national workforce is in highly or moderately concentrated labor markets. They argue that traditional market concentration thresholds underestimate workers' loss of bargaining power over time. They point out that those thresholds are geared to gauging the impact of mergers on the consumer marketplace, and that while consumers can buy products without the producers' explicit agreement, workers must find employers who agree to hire them.

Angus Deaton on the Under-Discussed Driver of Inequality in America: “It’s Easier for Rent-Seekers to Affect Policy Here Than In Much of Europe”

"In an interview with ProMarket, Nobel Prize-winning economist Angus Deaton talks about the connection of rent-seeking and monopolization to rising inequality":

Angus Deaton on the Under-Discussed Driver of Inequality in America: “It’s Easier for Rent-Seekers to Affect Policy Here Than In Much of Europe”: In December, the United Nations’ special rapporteur on extreme poverty and human rights, Philip Alston, embarked on a coast-to-coast tour of the United States. Alston’s fact-finding mission, conducted at the invitation of the federal government, resulted in a grim report that declared the US “the world champion of extreme inequality” and highlighted the vast inequities that plague American society: The US is one of the world’s wealthiest countries, yet 40 million of its inhabitants live in poverty, its infant mortality rates are the highest among developed nations, and Americans lead “shorter and sicker lives, compared to people living in any other rich democracy.” The US also has the lowest rate of social mobility of any rich country, rapidly turning the American Dream—its national ethos—to “an American illusion.”

Rising inequality has been the focus of countless articles, books and debates in recent years, as more and more empirical studies show that in the decades since 1980, income gains have gone overwhelmingly to the top 1 percent and 0.1 percent. Much of the debate, however, is concerned with the implications of inequality: Does rising inequality negatively affect economic growth? Does it undermine democracy? Did it contribute to the rise of populist politics in America and around the developed world?

Those, says Nobel Prize-winning economist Angus Deaton, are the wrong questions to ask if we wish to understand inequality. In fact, he suggested in a recent piece for Project Syndicate, it’s possible that the term “inequality” itself might be ill-fitting. A better term might be “unfairness”: Inequality, he argued, is the consequence of economic, political, and social processes—some good, some bad, and some very bad. The key to addressing its rapid increase is to address the processes that can be deemed “unfair.”

Examples are plenty. In his piece, Deaton focuses on several processes and policies that have allowed the rich to get richer while holding down middle- and working-class wages. Among them: rising health care costs, market consolidation, diminishing labor power, and corporations’ political power. These processes do not stem from “unstoppable processes” like technology or globalization, argues Deaton, but are the result of rent-seeking. 

Deaton, the recipient of the 2015 Nobel Prize in Economics, is one of the world’s foremost experts on inequality. The groundbreaking research on US mortality rates he conducted together with Anne Case revealed an increase in midlife mortality rates among white non-Hispanic Americans, led by death related to drugs, alcohol and suicide—what they called “deaths of despair.”

To better understand the connection between inequality and rent-seeking in America, we spoke with Deaton, a Senior Scholar and the Dwight D. Eisenhower Professor of Economics and International Affairs Emeritus at the Woodrow Wilson School of Public and International Affairs and the Economics Department at Princeton University. In his interview with ProMarket, Deaton discussed the connection of rent-seeking and monopolization to rising inequality, and explained why he believes it’s easier for rent-seekers to influence policy in the US than in Europe. ...[continue]...

Net Neutrality Likely to Accelerate the Trend in Media Consolidation

The conclusion of a post by Harold Feld at ProMarket:

Will Repeal of Net Neutrality Accelerate the Trend in Media Consolidation? The History of Cable Suggests “Yes,” by Harold Feld, ProMarket: ...Based on the history of both the cable industry and the broadband industry (which is, after all, almost entirely derived from the cable industry), we should expect repeal of the net neutrality to rules to accelerate the trend toward vertical and horizontal consolidation. This is particularly true in light of the public statements of chairman Pai and other Republican commissioners indicating they believe that consolidation can offer benefits to consumers and that the dangers of anticompetitive behavior are exaggerated. This is not only true about net neutrality, but generally. Although chairman for less than a year, Pai has already announced that the FCC will simply defer to the Department of Justice on antitrust and to the Federal Trade Commission on consumer protection, and has either repealed or begun the process of repealing the FCC’s longstanding limits on vertical and horizontal media ownership.

Additionally, although Pai and the other Republican commissioners repeatedly refer to state consumer protection laws as providing an additional layer of protection, the draft order repealing net neutrality also contains sweeping language preempting the states from any laws “inconsistent” with the “deregulatory policy” the FCC will adopt on December 14. Charter Communication (which now owns Time Warner Cable) has already rushed to use this language to file a motion to dismiss a lawsuit by the New York state attorney general relating to Time Warner Cable’s 2014 conduct denying New York subscribers access to Netflix. Whether or not this particular motion to dismiss succeeds, we can expect broadband provider to use the broad preemption language in the net neutrality repeal order to block precisely the kind of state consumer protection statutes chairman Pai claims will make FCC oversight unnecessary.

In short, the net neutrality repeal order does for broadband exactly what the 1984 Cable Act did for cable—create an environment with virtually no effective restraint on the ability of providers to favor their own content and discriminate against rivals. We should therefore expect the same result: rapid horizontal and vertical consolidation. While chairman Pai and other supporters of the repeal order dismiss these concerns, they offer no plausible explanation for why this round of deregulation should produce different results beyond an airy wave that all that consolidation is ancient history and how could that possibly happen again?

As we all know, those who refuse to learn from history are doomed to repeat it.

How Market Power Leads to Corporate Political Influence

 From ProMarket:

How Market Power Leads to Corporate Political Influence, by Asher Schechter: Neoclassical economic theory assumes that firms have no power to influence the rules of the game. A new paper by Luigi Zingales argues: This is true only in competitive product markets. When firms have market power, they will seek and obtain political influence and vice versa.

In 2016, the advocacy group Global Justice Now published a report showing that 69 of the world’s largest 100 economic entities are now corporations, not governments. With annual revenues of $485.9 billion, Walmart topped all but nine countries. As the world’s corporations continue to grow bigger and more profitable, so does the power and influence they wield: multinational corporations employ vast armies of lobbyists, lawyers, and PR people across borders and continents, and they have more than enough resources to capture regulators and elected representatives the world over.

Yet, the prevailing economic definition views firms as merely “a nexus of contracts” with “no power of fiat, no authority, no disciplinary action any different in the slightest degree from ordinary market contracting between two people.” How is it possible to reconcile these two views? A new paper by Luigi Zingales (Faculty Director of the Stigler Center and one of the editors of this blog) tries to bridge this gap.

The Medici vicious circle

The neoclassical model of the firm, notes Zingales, is a reasonable description of firms operating in highly competitive markets, where firms have little incentives and fewer resources to distort the rules of the game. Little incentives because in a neoclassical framework firms are relatively small, and thus the costs of these activities tend to exceed their share of the benefits. Fewer resources, because a competitive market does not provide firms with abnormal profits to spend in lobbying activities. 

The opposite is true in concentrated markets, where firms enjoy sufficiently high profits to spend in lobbying activity. Some market power is particularly important to gain political influence when cash bribes are relatively rare, writes Zingales. In such an environment, firms gain political power through promises of future benefits. Only if firms have significant market power do they have rents to allocate. At the same time, firms’ promises of future rents are credible only to the extent that firms are expected to be around in the future, a prospect greatly enhanced by the existence of some barrier to entry in the markets in which they operate. Thus, firms can gain political power only when they have significant market power. ...

W. Arthur Lewis and the Tradeoffs of Economics and Economists

From Vox EU:

W. Arthur Lewis and the tradeoffs of economics and economists, by Ravi Kanbur, VoxEU: There is nothing new under the sun. The passionate political economy discourses of today consume us entirely. But they are in fact perennials, broaching the fundamental questions of economic policy that have ruled supreme since economics gained an independence of sorts from moral philosophy 250 years ago.¹ The nature of market failure, the case for government intervention on grounds of efficiency and equity, and the interplay between economic and political forces are some of the tracks on which discourses have run for generations. The life and work of W. Arthur Lewis, winner of the 1979 Nobel Prize in economics, is a testament to the tradeoffs of economics, and of economists.

Arthur Lewis was born in the British West Indies in 1915. He won a scholarship to study at the London School of Economics, graduating with first class honours in 1937.² And yet Lewis’s path was not entirely smooth. Even at the LSE, an institution founded by Fabian socialists, he faced the racism that he also met in the streets of London. When he was considered for a temporary one year appointment at the LSE in 1938, the Director of the LSE wrote to the Board of Governors that: “The appointments committee is, as I said, quite unanimous but recognise that the appointment of a coloured man may possibly be open to some criticism. Normally, such appointments do not require confirmation of the Governors but on this occasion I said that I should before taking action submit the matter to you” (Tignor 2006: 21).³

Lewis became involved with the burgeoning decolonisation movement in Britain, and consorted with the likes of C L R James, George Padmore, Eric Williams, and Paul Robeson. The 1930s and 1940s were a period of ferment not just on the decolonisation front. Economic policy in general was under discussion and dispute. From Cambridge, John Maynard Keynes had excited a generation of students with his critiques of ‘the Treasury View’ in the face of massive and persistent unemployment. Arthur Lewis was Keynesian in macroeconomic matters, but also more interventionist in microeconomic and structural policy. This set him against Sydney Caine, an influential official in the Colonial Office, in the work of the Colonial Economic Advisory Committee, on which Lewis served. Lewis described Caine as “a religious devotee of laissez-faire, and his headship of the Economic Department at this juncture is fatal” (Mine 2006).

In 1951, Kwame Nkrumah won a sweeping victory in the elections in the British colony of the Gold Coast (soon to become the independent country of Ghana) and in 1952 Lewis was invited by Nkrumah to write a report on industrialisation (Lewis 1953).⁴ At this very time, Lewis was fashioning his Nobel Prize winning argument on ‘surplus labour’, which he argued was the state of affairs in the West Indies, in Egypt, and in India (Lewis 1954). In these situations, the main brake on development was inadequate investment in manufacturing, and to the extent that this investment was held back by market failures in the manufacturing sector, the government should intervene to address them.

However, Lewis’s thrust in his report was that the Gold Coast, unlike India, did not present a situation of surplus labour. Rather, it was one of labour shortages given the large amount of land available in agriculture. In this situation the way of releasing labour for manufacturing, without pushing up wages so much that investment would be choked off, was to increase agricultural productivity. In labour shortage economies, that would have been priority number one. The Gold Coast industrialisation report revealed the evolving balance of Arthur Lewis as the economist. Identify the nature of the market failure first, then design the intervention.

Arthur Lewis was present in Accra for the celebrations when the Gold Coast became Ghana on 6 March 1957.⁵ But he was to return in October of 1957 for a fateful stint as the government’s chief economic adviser, at the invitation of Kwame Nkrumah. His 15 months as resident adviser in Ghana were tumultuous. There were some policy areas in which he sided with the government and Nkrumah. Perhaps the most famous of these is his general agreement that the surpluses from the cocoa price boom should be collected by the government and used for development purposes rather than passed through to cocoa farmers, a view very different from positions being advanced by Bauer (1954) at that time. However, in the main Lewis clashed with Nkrumah, especially on various ‘white elephant’ projects that were being considered and approved, many of them in the name of industrialisation.

The letters of this time provide a real insight into the clash between the economist and the politician. After a series of attempts by Lewis to intervene in the drafting on the Five Year Plan, his verdict on the plan was that it made “inadequate provision for some essential services while according the highest priority to a number of second importance….Alas, the main reason for this lack of balance is that the plan contains too many schemes on which the Prime Minister is insisting for ‘political reasons’” (Tignore 2006: 167). Nkrumah’s responses to Lewis were to be expected from a man who had famously said “seek ye the political kingdom first”. In an exchange that brought to a head Lewis’s decision to leave his post as economic adviser, Nkrumah emphasised “political decisions which I consider I must take. The advice you have given me, sound though it may be, is essentially from the economic point of view, and I have told you, on many occasions, that I cannot always follow this advice as I am a politician and must gamble on the future” (Tignor 2006: 173).

How can one explain the seeming contradictions in Lewis? On the one hand was the critic of laissez-faire economic policies, whom the radical anti-colonialists expected to be on their side. On the other was the economist who acted as a check on the extreme statist interventions proposed by this same tendency in economic policy discourse, arguing against heavy state subsidy to industry on purely economic grounds, even leaving aside its propensity for corruption and use as political patronage.

As a student, Lewis must have read John Maynard Keynes’s clarion call in his essay “The End of Laissez Faire” (Keynes 1926).⁶ This was, seemingly, a call to abandon the tenets of 19th century economic liberalism in favour of a more interventionist credo – “let us clear from the ground the metaphysical or general principles upon which, from time to time, laissez-faire has been founded” (Keynes 1926: 287-8). This is Keynes presaging the Lewis of the 1930s and 1940s railing against Sydney Caine and his laissez-fair policies for the colonies. And yet in the same essay Keynes hints at a different world view, a more nuanced perspective on state intervention:

“We cannot therefore settle on abstract grounds, but must handle on its merits in detail what Burke termed ʹone of the finest problems in legislation, namely, to determine what the State ought to take upon itself to direct by the public wisdom, and what it ought to leave, with as little interference as possible, to individual exertion’” (p. 288-91).

How like Lewis, or rather how like the economist Lewis became in Ghana.⁷ I have argued elsewhere that Edmund Burke’s question is the eternal question of political economy and accounts for the cycles of thought in economics (Kanbur 2016). This is what allowed Lewis to support some industrial intervention in his first report on the Gold Coast, while at the same time asserting the primacy of agricultural development. It is what allowed him to support substantial taxation of cocoa while at the same time railing at the (economic and political) misuse of the funds so raised. That was Arthur Lewis in Ghana, but it was Arthur Lewis all along. It has also been political economy all along, and will continue to be so.

References

Aryeetey, E, and R Kanbur (eds.), The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Bauer, P (1954), West African Trade: A Study of Competition, Oligarchy, and Monopoly in a Changing Economy, Cambridge University Press.

Kanbur, R (2016), “The End of Laissez Faire, The End of History and The Structure of Scientific Revolutions”, Challenge, 59 (1), 35-46.

Kanbur, R (2017), “W. Arthur Lewis and the Roots of Ghanaian Economic Policy”, In E Aryeetey and R Kanbur (eds.) The Economy of Ghana Sixty Years After Independence, Oxford: Oxford University Press.

Keynes, J M (1926), “The End of Laissez-Faire”, in The Collected Writings of John Maynard Keynes, Volume IX, Essays in Persuasion, Royal Economic Society, Palgrave MacMillan, 1972.

Lewis, W A (1953), Report on Industrialization of the Gold Coast, Accra.

Lewis, W A (1954), “Economic Development with Unlimited Supplies of Labour”, Manchester School, 22 (2), 139-191.

Mine, Y (2006), “The Political Element in the Works of W. Arthur Lewis: The 1954 Lewis Model and African Development”, The Developing Economies, XLVI-3, 329-355.

Tignor, R L (2006), W. Arthur Lewis and the Birth of Development Economics, Princeton University Press.

Endnotes

[1] The conventional dating for this is of course the publication of Adam Smith’s Wealth of Nations in 1776.

[2] I draw liberally on the comprehensive and excellent biography by Tignor (2006).

[3] Tignor (2006: 37) also recounts the story of how, despite his by then brilliant academic qualifications, his appointment to a Chair at Liverpool was blocked for reasons of “other considerations than high academic standing.” Finally, however, he did get his Chair, the Stanley Jevons Chair at the University of Manchester in 1948.

[4] Lewis’s transmittal letter on the report, written to Minister of Commerce and Industry K A Gbedemah and dated 5th June, 1953, notes the details of the assignment: “I have the honour to transmit herewith my Report on industrialization and economic policy, which I was commissioned to write by letter No. MCI/C,16/SF.3/18 from your Ministry, dated November 29, 1952. I visited the Gold Coast from December 15th, 1952, to January 4th, 1953, and travelled extensively in the country, covering about 1,800 miles by road and by air. I had the opportunity of visiting many industrial establishments, and I discussed the subject with as many persons as possible in the time available.” (Lewis, 1953, p. i).

[5] For an assessment of Ghana’s economy in the sixty years since independence, see Aryeetey and Kanbur (2017).

[6] For an assessment of this essay in the broader context of the evolution of economic thought, see Kanbur (2016).

[7] Tignor (2006) and Kanbur (2017) further discuss Lewis’s post-Ghana life and work.

How America Could Save $65 Billion in Mobile Phone Bills

Tim Taylor:

How America Could Save $65 Billion in Mobile Phone Bills: It is a fact of nature that all countries have the same electromagnetic spectrum of radio frequencies. It is a fact of politics that countries have different rules for allocating these frequencies. And it is a fact of economics that people in different countries pay very different rates for their use of spectrum. Mara Faccio and Luigi Zingales ask: "Why does the price of the same basket of mobile phone services vary around the world from $10.07 to $47.25? Why does the price of a 1GB mobile-broadband internet plan vary from $11.24 to $100.28?" They investigate the question in a January 2017 working paper "Political Determinants of Competition in the MobileTelecommunication Industry"...  For those who prefer to get their economics via cartoon, the most recent issue of the Chicago Booth Review has you covered with on this topic.

Countries can affect the competitive situation of telecommunications industries in many ways, including the rules that govern entry, the extent of price regulation, whether phone numbers are easily portable when shifting between carriers, whether voice-over-internet calls are permitted, and so on. These rules vary substantially across countries. ...

The ... authors ... argue that the relatively small differences in quality cannot explain the relatively large differences in prices paid by consumers; indeed, the higher prices paid by consumers help to explain the high stock prices for major US carriers like AT&T, Verizon, T-Mobile, and Sprint. In looking at their overall data set, the authors write: "We test this hypothesis and we find no evidence that a higher degree of competition leads to lower quality of service or less investments. If anything, the results go in the opposite direction."

In the United States, the Federal Communications Commission just completed in March 2017 its first "incentive" auction, in which the broadcast TV companies that were allocated huge chunks of spectrum decades ago, but now deliver most of their content via cables, have an chance to sell off that spectrum to mobile services. As the FCC writes: "In the auction, TV broadcasters could voluntarily give up their current broadcast channel in exchange for a share of the proceeds from an auction of their channel to commercial wireless service providers to provide expanded mobile broadband services." This is a step in the right direction. But American consumers have every reason to keep comparing their mobile bills to those in Germany, Denmark, and elsewhere, and to get an answer from their government on why the electromagnetic spectrum that is naturally available everywhere should cost more in the United States.

Is There a Case to be Made for Political Antitrust?

Asher Schechter at ProMarket:

Is There a Case to be Made for Political Antitrust?: After decades of approaching antitrust through purely economic analyses, are economists once again willing to take into account political considerations as well?Should political considerations play a role in antitrust? In the last four decades, the predominant approach was that antitrust enforcement should only be guided by economic considerations such as efficiency and consumer welfare. Now, if a panel at the recent Stigler Center conference on concentration in America is any indication, it seems that some economists are once again willing to take into account the political dimensions of antitrust.

 In 1979, former FTC chairman Robert Pitofsky published a seminal paper on what he termed the “political content” of antitrust. Contrary to the view that antitrust should be concerned exclusively with economic questions, Pitofsky argued that “political values” should be incorporated into the enforcement of antitrust laws. 

Among those values, Pitofsky listed “the fear that excessive concentration of economic power will foster anti-democratic political pressures, the desire to reduce the range of private discretion by a few in order to enhance individual freedom, and the fear that increased governmental intrusion will become necessary if the economy is dominated by the few.” Ignoring those concerns, Pitofsky asserted, would be tantamount to ignoring “the bases of antitrust” and the “rough political consensus that has supported antitrust enforcement for almost a century.”

The notion that economic power can be politically dangerous has played an integral part in American political culture since the founding of the republic. While in Paris in 1787, Thomas Jefferson famously supported the inclusion of a “restriction against monopolies” in the Bill of Rights. Since then, the fear that concentration of economic power engenders political power has been taken up as a cause by many, most notably by Supreme Court Justice Louis Brandeis in the early 20th century. In the 1930s, University of Chicago economist Henry Simons discussed the anti-democratic nature of monopoly power. “Political liberty can survive only within an effectively competitive economic system,” he wrote. “Thus, the great enemy of democracy is monopoly, in all its forms.” ...

Market power in the U.S. economy today

Jonathan B. Baker at Equitable Growth:

Overview The U.S. economy has a “market power” problem, notwithstanding our strong and extensive antitrust institutions. The surprising conjunction of the exercise of market power with well-established antitrust norms, precedents, and enforcement institutions is the central paradox of U.S. competition policy today.

Market power in the U.S. economy today: As this policy brief explains, the harms from the exercise of firms’ market power may extend beyond individual markets affected to include slower overall economic growth and increased economic inequality. The implications for future economic productivity and welfare are troubling, but before detailing these consequences, it is necessary to understand why market power is a major issue despite well-established antitrust enforcement institutions and legal precedents. ...

The Neoclassical Theory of the Firm Does Not Consider Political Engagement

From an interview with John C. Coffee at ProMarket:

Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?

The problems in expanding the theory of the firm to consider political engagements are considerable. Of course, political engagement by firms can be viewed as merely rent-seeking. Unavoidably, this produces waste... (and possibly also corrupt[s] the political system).

But before one jumps to the conclusion that therefore corporations should be denied the right to influence political decisions in the interests of efficiency, more must be considered. For example, this week, over one hundred public corporations, most of them high-tech firms, filed a brief opposing the legality of the executive order signed by President Trump barring various immigrants.¹⁾ This can be viewed as collective action by firms in defense of capitalism and the free flow of goods and services. Those opposed to firms lobbying regulatory agencies would probably approve this defense by corporations of human rights. Nor was this case unique. Corporations, like Apple, Facebook, and Google, have regularly defended human rights.

What this implies is that any absolute, prophylactic rule against political engagement may be undesirable. How then should we distinguish between “good” and “bad” political engagements by corporations? One approach might be to refine the rules of corporate governance and give shareholders greater rights in the process. To the extent that shareholders are diversified, they should rationally oppose rent-seeking by competing firms, as such activity just raises the costs for both sides.

Conversely, however, in concentrated industries where collusion is more likely than competition, diversified shareholders might rationally support rent-seeking (and even reduced competition) by the firms in which they invest. Some empirical evidence suggests that investors in the highly concentrated airline industry have behaved this way. Hence, stronger corporate governance may supply a partial answer sometimes, but hardly always. At best, it can add transparency to the process, thereby making rent-seeking less feasible.

Theorists of the firm who wish to restrict political engagements by firms face a serious problem that they have not yet recognized: at least in the United States, corporate political engagement may be protected by the First Amendment. This means that reforms such as disclosure are possible (and, I think, desirable), but stricter, prophylactic rules are probably not. ...

“Political Engagement by Corporations Derives from and is Focused on Seeking Monopolistic Power”

From ProMarket:

“Political Engagement by Corporations Derives from and is Focused on Seeking Monopolistic Power," Interview of Joseph Bower: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big of an omission do you think this is?

There has been extensive writing about the power and scope of corporations going back at least to Edward Mason and Carl Kaysen. In a chapter I wrote,1) I explored the role of large corporations in terms of their impact on factors other than the product market. Echoing Kaysen I emphasized location, employment, product line choices, vendors that because of their scale and scope give firms powers far beyond those conceived in the neo-classical model and unconstrained by traditional notions of price competition. The neo-classical model simply does not comprehend the modern corporation.

But if we are talking about a theory carefully constructed on a set of axioms, the theory really can’t consider political engagements. The essence of the neo-classical theory is the constraint on choice imposed by given and widely shared technology and competitive markets for resources and vendors. Political engagement derives from and is focused on seeking monopolistic power. The various theories of monopolistic competition are instructive but fall far short of the standard sought by neoclassical theory. ...

How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter

ProMarket interviews Daniel Carpenter "ahead of the upcoming conference on the theory of the firm, in which he will be taking part, Carpenter shared some of thoughts on the role of corporations and government interference in the market:

How Incomplete is the Theory of the Firm? Q&A with Daniel Carpenter: ...Q: The neoclassical theory of the firm does not consider political engagement by corporations. How big an omission do you think this is?

I think it’s an immense omission. For one, we can’t even talk about the historical origins of many firms without talking about corporate charters, limited liability arrangements, zoning, public contracts and grants, and so on. To view these processes as legal and not political is a significant mistake. I’m currently writing a lot on the history of petitioning in Europe and North America, and in areas ranging from railroads, to technology-heavy industries, to extractive industries, to banking, firms (or their investors) had to bring a case before the legislature, or an agency of government, or both. They usually used petitions to do so. 

Beyond the past and into the present, there are a range of firm activities that we can’t understand without looking at politics. ...

And in the future, the profitability and survival prospects of many firms in the coming years will depend heavily, in a polarized environment, on the political skills of managers. ...

Q: Some people describe Donald Trump’s economic policies as “corporatism.” Are you more worried by Trump’s interference in the market economy or by companies’ ability to subvert markets’ rules?

I don’t see those as binary opposites but as complements. If regulation is constitutive of marketplaces (fraud standards, disclosure and labeling requirements, evidentiary requirements), then companies’ ability to subvert market rules will in fact interfere in the proper functioning of a market economy.

I think we’re likely to see both Trumpian interference and company subversion, in other words.

That said, I am concerned about Trump’s interference in markets, for example his bullying of companies and the idea of imposing border taxes. In the U.S. and elsewhere, we are going to see the need for legislative and judicial constraints upon this kind of executive action.

How Pro-competition Rules Can Benefit Consumers: A Look at the Wireless Industry

From Guy Rolnik at ProMarket:

How Pro-competition Rules Can Benefit Consumers: A Look at the Wireless Industry: During the summer of 2014, SoftBank-controlled Sprint abandoned its plans to merge with T-Mobile. The alleged reason was antitrust regulators who “would block a deal in an industry that is dominated by just a few large players.”

Following a meeting of SoftBank’s CEO Masayoshi Son with Donald Trump last December, both Sprint and T-Mobile signaled that the merger might still happen. ...

How would a T-Mobile-Sprint merger affect U.S. consumers?” A new Stigler Center working paper, “Political Determinants of Competition in the Mobile Telecommunication Industry,” by Mara Faccio and Luigi Zingales may help to answer this question. ...

The takeaway

... A lax antitrust enforcement can cost American consumers billions of dollars every year.

Monopsony Takes Center Stage

Marshall Steinbaum at ProMarket:

Monopsony Takes Center Stage: In October, the Council of Economic Advisors released a report about monopsony in the labor market. That alone was rather astonishing—employer power and its consequences for labor market outcomes has been a distinctly minority concern in the economics profession for quite a while, notwithstanding mounting evidence of its importance coming from a number of subfields.

For that agenda to gain a hearing at the apex of economic policy-making is evidence of the shifting ground in matters of public economic debate. It is also reminiscent of the last time inequality was so high: then, as now, it sparked a sea change in the economics profession, including both the mainstreaming of labor exploitation as a subject of economic research and the founding of the American Economic Association. ...

Market Failure and Income Distribution

John Quiggin:

Market Failure and Income Distribution: Notes for Economics in Two Lessons: For quite a while now, I’ve been working through my book-in-progress...

Thinking about the standard market failures (monopoly, externality and so on), I’ve come to the conclusion that I need to say more about the interaction between market failure and income distribution. I’ve already looked at the opportunity costs involved in income redistribution and predistribution, but different kinds of questions are coming up in relation to issues like monopoly, privatisation and for-profit provision of public services.

The discussion here and at my blog has been very helpful in stimulating my thoughts, but I need to do a lot more clarification. Some preliminary thoughts are over the fold: comments and criticism much appreciated...

Do Mergers Benefit or Harm the Economy? Q&A with Bruce Blonigen

An interview of a colleague:

Do Mergers Benefit or Harm the Economy? Q&A with Bruce Blonigen: Do large mergers benefit or harm consumers? Over the years, corporations and economists have argued that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices.

A new paper by economists Justin Pierce of the Federal Reserve Board of Governors and Bruce Blonigen from the University of Oregon, however, shows the opposite is the case. By utilizing new techniques to isolate the effects of mergers, they find no evidence that mergers increase efficiency, but do find evidence that they increase market power, meaning they allow companies to generate higher profits by raising prices.

Blonigen and Pierce focus on the manufacturing sector, which is responsible for roughly 25 percent of M&A deals in the U.S. Relying on data covering the entire sector from 1997 through 2007, they are able to compare data from factories that were acquired during mergers to similar factories that weren’t, and to factories where an acquisition has been announced, but not yet completed.

While they find no statistically significant evidence that mergers have a positive effect on productivity or efficiency, Blonigen and Pierce do find substantial price increases following mergers, with markups ranging from 15 percent to 50 percent.

In the past two years, as issues related to antitrust and concentration came back to the forefront of American political discourse, economists and policymakers have been increasingly concerned that competition is weakening in most U.S. industries. In order to better understand the effect that mergers have on the economy, and the methods used to generate this new data, we recently interviewed Blonigen, the Philip H. Knight Professor of Social Science at the University of Oregon. ...

Jeb Hensarling and the Allure of Economism

James Kwak:

Jeb Hensarling and the Allure of Economism: The Wall Street Journal has a profile up on Mike Crapo and Jeb Hensarling, the key committee chairs (likely in Crapo’s case) who will repeal or rewrite the Dodd-Frank Wall Street Reform and Consumer Protection Act. It’s clear that both are planning to roll back or dilute many of the provisions of Dodd-Frank, particularly those that protect consumers from toxic financial products and those that impose restrictions on banks (which, together, make up most of the act).

Hensarling is about as clear a proponent of economism—the belief that the world operates exactly as described in Economics 101 models—as you’re likely to find. He majored in economics at Texas A&M, where one of his professors was none other than Phil Gramm. Hensarling described his college exposure to economics this way:

“Even though I had grown up as a Republican, I didn’t know why I was a Republican until I studied economics. I suddenly saw how free-market economics provided the maximum good to the maximum number, and I became convinced that if I had an opportunity, I’d like to serve in public office and further the cause of the free market.”

This is not a unique story...

Introductory economics, and particularly the competitive market model, can be seductive that way. The models are so simple, logical, and compelling that they seem to unlock a whole new way of seeing the world. And, arguably, they do: there are real insights you can gain from a working understanding of supply and demand curves.

The problem, however, is that the people ... forget that the power of a theory in the abstract bears no relationship to its accuracy in practice. ...

Hensarling, who likes to quote market principles in the abstract, doesn’t appear to have moved on much from Economics 101. ... This ritual invocation of markets ignores the fact that there is no way to design a contemporary financial system that even remotely resembles the textbook competitive market: perfect information, no barriers to entry, a large number of suppliers such that no supplier can affect the market price, etc. ...

Regulatory policy that presumes well-functioning markets that don’t exist is unlikely to work well in the real world. Actually, Bill Clinton and George W. Bush tried that already, and we got the financial crisis. But to people who believe in economism, theory can never be disproved by experience. Hensarling is “always willing to compromise policies to advance principles,” he actually said to the Journal. That’s a useful trait in an ideologue. It’s frightening in the man who will write the rules for our financial system.

Milton Friedman is Dead ... and Really Misunderstood

Maximilian Auffhammer at the Berkeley Blog:

Milton Friedman is dead ... and really misunderstood: ...The GOP has long prayed at the temple of Milton Friedman ... who was ... at the forefront of arguments that markets are incredibly effective at allocating scarce resources. At the heart of (t)his argument lies the assumption that markets are “perfectly competitive”. ... If such a unicorn market is left alone, agents in it will maximize social welfare, so there is no need for government intervention.

Well, the problem is that perfectly competitive markets are about as common as Susan B. Anthony coins. Most markets are in fact not perfectly competitive, which Milton Friedman of course acknowledged. Market failures abound. The key question is whether the costs of intervening in the markets to address the failure outweigh the benefits.

The classic case of a market failure is an externality. If a power plant emits a pollutant, which causes kids in a neighboring city to fall ill, the absence of government intervention will lead to an inefficiently large amount of pollution.

Government should intervene to maximize welfare at the output level where the marginal benefit from emitting the last unit of pollution is equal to the marginal damage it causes. That amount in most cases is not zero, which upsets many folks..., but this is economics 101. If the government does not intervene, however, the power plant produces more than the optimal amount of pollution, thereby sort of “stealing” welfare from the kids downwind.

This point is undisputed...

But no matter where you look, there is almost obsessive talk of “government overreach”. My excessive consumption of media coverage leads me to believe that the plan may more likely be a gutting of regulation instead. While killing off the Clean Power Plan will not bring coal back from the dead, it will certainly significantly hamper the necessary progress on the rollout of renewables and energy efficiency required ... to avoid the worst consequences from climate change. The possible abandonment of the Paris Agreement will surely result in a higher emissions path for the US and possibly the rest of the world. ... Further, we have recently learned that the Social Cost of Carbon in federal rulemaking is at risk. The Social Cost of Carbon is a number used in federal benefit cost analysis, to incorporate the global damages from greenhouse gas emissions. The president could, for example, instruct agencies to use a domestic cost of carbon, which is a fraction of the true damages from carbon emissions. This would further increase emissions.

Finally, agencies interpret rules and I am afraid that there will be some very lax interpretations of regulations to protect the environment. ... While president elect Trump has said he likes clean air and water, his appointments would suggest that this is just hot air. Which leads me to the second point.

Purging climate experts from the federal government would harm future generations ...

I have said this before. The GOP is the party of markets. ... I hope that the GOP and Trump administration will relearn what free market economics is all about. It’s not about the absences of regulation. It’s about sensible regulation. We have no right to steal from our fellow humans alive now or in the future. That said, I’m not optimistic. I will now go back to breathing into my paper bag.

Minimum Wage Increases and Earnings in Low-Wage Jobs

Brad DeLong:

I think I have to change my mind: Back when Card and Krueger first suggested that there was substantial effective monopsony power in the low-wage labor market and thus that there would be no disemployment effect from (modest) increases in the minimum wage to make it binding, I said: "Clever, but nahhh." The reason for their findings, I thought, was that labor demand is just inelastic in the short and perhaps the medium run--but maybe not in the long run.

I confess that I think I have to change my mind. Economists do not fail to find disemployment effects from (modest) increases in the minimum wage that make it binding because labor demand is inelastic and statistical power is insufficient. Employers actually do have substantial monopsony power in the low-wage labor market--even though they shouldn't. And the minimum wage is best thought of as an anti-monopsony rate-regulation policy that raises low-wage employment, raises average low-wage earnings, and brings the market closer to its competitive equilibrium:

Sandra Black, Jason Furman, Laura Giuliano and Wilson Powell: Minimum Wage Increases and Earnings in Low-Wage Jobs ...

Is the Obamacare Problem a Public or a Private Problem?

Jared Bernstein:

Is the Obamacare problem a public or a private problem?: My WSJ greets me on the front stoop this AM with the banner headline on the “Depth of Health Law Woes,” based on the rise of “thin” markets with too few private insurers to generate cost-saving competition. ...

First, while the Journal article is surely informative, it violates my rule #1 in this space: when writing about private exchanges, declare up front that we’re talking about 7 percent of the population. That’s the share that get coverage through the ... the exchanges. ...

Those shares don’t negate the thin market problem at all, but they do give it essential context. Most people still get their coverage through their employer (about 50 percent) and Medicare or Medicaid (34 percent).

But my question today is whether this spate of articles is accurately framing this problem. That is, diminished competition among insurers in various markets is invariably framed as an architectural flaw in Obamacare, and thus, a government failure. But it could just as easily be seen as market failure, or more specifically, a pricing-calibration problem. If so, the problem isn’t too much government intervention; it’s too little.

The theory of the case when the law was being crafted was, for both policy and political reasons—the latter being buy-in from private insurers, whose powerful lobby couldn’t be ignored—that the exchanges would be populated by private insurers competing for customers in the (relatively small!) non-group market.

The insurers would get a bunch more customers, most of whom would come to the table with a tax credit to help pay the cost of their subsidy, a non-trivial deal sweetener for the private insurers (not to mention the mandate, further nudging customers into the exchanges). In return, they’d have to accept a set of rules designed to promote adequate coverage, like accepting applicants with pre-existing conditions and “community rating:” no price discrimination based on health status.

At the time, there was a robust argument about the wisdom of this path. While it was the least disruptive to a major industry, the long history of the uneasy relationship between health care and markets, along with the experience of other advanced economies, led many to worry that private insurers could not be depended on to meet the demands of a newly regulated individual market. They had an incentive, for example, to set their initial prices too low to get customers, which would mean actuarial losses and a big jump in premiums (one solution was to add a program to limit losses to such insurers: the so-called “risk corridors”).

This was partially the motivation for adding a public option, but the politics blocked that option (some will argue that the administration, of which I was then a member, didn’t push hard enough; I’d argue the votes just weren’t there). The private folks didn’t want to compete with anything like Medicare, which consistently posts lower price growth than the privates—it is non-profit, after all—and their message was thus, “we got this.”

Well, it turns out they don’t got this, though again, this is less a failure in the structure of the program than growing pains as insurers learn to price their products based on the health of those coming into the exchanges. If there’s a structural flaw in Obamacare, it’s that it doesn’t include the public option. Those of us who pulled for it had it right in that we saw the need for just such a backstop.

To be fair, a public option is itself a tricky bit of work, and it’s too easy to make it sound like a hand-wave, miracle solution (see Jacob Hacker’s excellent discussion of these issues here). But you know what else is a big, old hand wave?: the miracle of competition, allegedly solving everything that ails the health care market.

Obamacare is a public/private hybrid, and this recent episode with the 2017 premiums should teach us that dialing back the public side is not the way forward. To the contrary, the private sector never has and never will provide the health care Americans want and need on its own.

How Waning Competition Deepens Labor’s Plight

Eduardo Porter:

How Waning Competition Deepens Labor’s Plight: ...collectively, mergers ... are reconfiguring the American economy in ways that seem to be tilting the scales toward the interests of ever-larger corporations, to the broad detriment of labor. ...

Three years ago, the Nobel laureate economist Joseph Stiglitz proposed that increasing profits from companies managing to avoid normal competitive forces — what economists refer to as “rents” — appeared to be an important factor in the rising share of the nation’s income flowing toward corporate profits and top executive pay in recent years. He surmised that weak labor unions ... did not have the clout to protect the workers’ share.

Since then, several other studies have presented various channels through which a lack of competition between employers could keep wages down. ...

Waning competition in employment can muck up the economy in more ways than one. It slows wage growth, of course. Lacking outside options, workers are much less likely to leave a job. But economic output and employment will suffer, too, because fewer workers will be willing to work for the lower wage. ...

Policy makers can push back against employers’ market power. Strengthening labor unions... Raising the minimum wage... But it seems there is an opportunity to rethink the nation’s approach to antitrust law, too. It shouldn’t be seen exclusively as a tool to protect consumers from sticker shock.

In a speech in September, Renata Hesse, the Justice Department’s acting assistant attorney general for antitrust, argued forcefully that “the antitrust laws were intended to benefit participants in the American economy broadly — not just in their capacity as consumers of goods and services.”

Antitrust enforcement efforts, Ms. Hesse said, “also benefit workers, whose wages won’t be driven down by dominant employers with the power to dictate terms of employment.” ...

The Anti-Trust Election

I have a new column:

The Anti-Trust Election of 2016: A report on the “Benefits of Competition and Indicators of Market Power” from the White House Council of Economic Advisors documents that monopoly power has been increasing the last few decades, and it argues persuasively “that consumers and workers would benefit from additional policy actions by the government to promote competition within a variety of industries.” The report is part of an initiative by the Obama administration last spring to promote a “fair, efficient, and competitive marketplace” through stricter enforcement of antitrust regulations, and through other measures such as patent reform and the reform of occupational licensing. 

To those who believe more aggressive enforcement of antitrust laws is needed, and I am one of them, Hillary Clinton’s recent announcement of “A new commitment to promote competition, address excessive concentration and the abuse of economic power, and strengthen antitrust laws and enforcement” is an encouraging sign that if Clinton is elected the Obama administration’s initiative will not end when he leaves office. 

The presence of monopoly power harms the economy in several ways. ...

Donald Trump has promised to make deregulation one of the focal points of his presidency. If Trump is elected, the trend toward rising market concentration and all of the problems that come with it are likely to continue. We’ll hear the usual arguments about ineffective government and the magic of markets to justify ignoring the problem. If Clinton is elected, it’s unlikely that her administration would be active enough in antitrust enforcement for my taste. But at least she acknowledges that something needs to be done about this growing problem, and any movement toward more aggressive enforcement of antitrust regulation would be more than welcome.

A Giant (Firm) Problem

At The Economist:

A giant problem: Disruption may be the buzzword in boardrooms, but the most striking feature of business today is not the overturning of the established order. It is the entrenchment of a group of superstar companies at the heart of the global economy. Some of these are old firms, like GE, that have reinvented themselves. Some are emerging-market champions, like Samsung, which have seized the opportunities provided by globalisation. The elite of the elite are high-tech wizards—Google, Apple, Facebook and the rest—that have conjured up corporate empires from bits and bytes.

As our special report this week makes clear, the superstars are admirable in many ways. They churn out products that improve consumers’ lives, from smarter smartphones to sharper televisions. They provide Americans and Europeans with an estimated $280 billion-worth of “free” services—such as search or directions—a year. But they have two big faults. They are squashing competition, and they are using the darker arts of management to stay ahead. Neither is easy to solve. But failing to do so risks a backlash which will be bad for everyone. ...

Skipping to the conclusion:

The rise of the giants is a reversal of recent history. In the 1980s big companies were on the retreat, as Margaret Thatcher and Ronald Reagan took a wrecking ball to state-protected behemoths such as AT&T and British Leyland. But there are some worrying similarities to a much earlier era. In 1860-1917 the global economy was reshaped by the rise of giant new industries (steel and oil) and revolutionary new technologies (electricity and the combustion engine). These disruptions led to brief bursts of competition followed by prolonged periods of oligopoly. The business titans of that age reinforced their positions by driving their competitors out of business and cultivating close relations with politicians. The backlash that followed helped to destroy the liberal order in much of Europe.

So, by all means celebrate the astonishing achievements of today’s superstar companies. But also watch them. The world needs a healthy dose of competition to keep today’s giants on their toes and to give those in their shadow a chance to grow.

Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth

Jason Furman (the text of the report is 18 pages long, including figures and tables):

Beyond Antitrust: The Role of Competition Policy in Promoting Inclusive Growth: Thank you very much for inviting me to today’s conference. Discussions of competition often center on issues of antitrust enforcement. Those are important issues, but I will not address them in my remarks today because they are enforcement questions that are within the purview of the Antitrust Division of the Justice Department and the Federal Trade Commission (FTC). I will argue, though, that public policy can play an important role in promoting competition that goes well beyond traditional antitrust enforcement.

The Administration has focused on competition policy in a wide range of areas, from airport slots to standards essential patents to spectrum allocation. Most recently, this past April, the President signed an Executive Order calling on agencies to identify creative actions that they can take to promote competition. The Executive Order calls on agencies to maintain a focus on competition policy in the future by submitting proposed actions on a semi-annual basis. The Administration is currently reviewing the first set of proposals from agencies on how we can use public policy to promote competition, a number of which will be announced in the coming months.

The first action undertaken as part of this Executive Order was the Administration filing in support of the Federal Communication Commission's (FCC) proposed rule to bring increased competition to the market for cable set-top boxes. We have been pleased to see FCC Chairman Wheeler actively listen to the many stakeholders involved to improve the proposal, and believe that he is charting out a responsible way to address their meaningful concerns while being responsive to Congress's explicit directive to ensure a healthy set-top marketplace.

In conjunction with the Executive Order, the Council of Economic Advisers (CEA) released an issue brief documenting some of the evidence suggesting a reduction in competition throughout the economy. Our findings are consistent with recent arguments from academic papers such as Bennett and Gartenberg (2016), and other observers, including The Economist and the Center for American Progress (CAP), stating that competition in the U.S. economy has declined in recent years (The Economist 2016; Jarsulic et al. 2016).

Part of the underlying motivation for the Administration’s efforts is the belief that competition can play an important and broader role not just in static, allocative efficiency but also in dynamic efficiency—making the economy more innovative and increasing productivity growth. In addition, there is also increasing evidence that greater competition or more evenly balanced power in some areas could also play a role in reducing some of the causes of inequality.

In my remarks today, I will start by quickly reviewing some of the evidence for greater concentration in the economy, then provide some broad macroeconomic motivation, before discussing a few specific areas that the Administration is working on, with a focus on some of the difficult questions raised by the rapid evolution of technology in recent years.

What Is the Evidence on the Trends in Concentration?

...

Some Pro -Competition Policy Applications

To the extent that these macroeconomic trends are related to decreased competition, then pro - competitive policies have potential to not only benefit consumers but also improve the state of the macroeconomy by, for example, increasing productivity and ensuring that the benefits of growth are widely shared. For these reasons, the Administration has taken several significant policy actions to promote competition. I will next briefly touch on four examples.

Intellectual Property and Patent Reform...

Increasing the Bargaining Power of Workers...

Reforming Occupational Licensing...

Reforming Land-Use Regulation...

The Future of Competition in the Digital Age

One topic we have been grappling with in a range of economic issue areas, including competition policy, is the ever-increasing role that digitization plays in our economy. The digital age has the potential to increase competition in many ways, but at the same time, changing technology will bring new challenges to policymakers, challenges that will come increasingly to the fore as the digital economy expands.

So far, internet markets have tended to favor digital giants that hold high market shares, a characteristic that is traditionally associated with low competition in brick-and-mortar markets. However, understanding the competitive implications of these new markets requires a closer analysis. The markets of the digital economy are in many ways different from “old economy” markets. Some of those differences are differences of degree—the internet lowers many costs for small businesses, increasing their ability to rapidly and inexpensively scale up, collect information on potential consumers, and create new products and ideas. These differences do not transform the structure of the market; instead, they merely lower the cost of doing business. Other differences, however, are differences of type: business models may be dramatically different due to digitization. These differences of type warrant closer consideration.

One type of business model that has flourished with digitization is the “platform” model, which relies heavily on network effects to grow because the primary product is access to other customers. Examples include payment platforms like PayPal, sales platforms like eBay, and social networks like Facebook. Switching costs for customers are particularly high in these markets—no one wants to be the first and only user of a platform—and these network effects can act as a barrier to entry.

However, it is not as clear whether these “quasi-monopolies” pose the same harm to consumers as traditional monopolies. In these markets, highly concentrated market share might not be as detrimental to customers as in traditional markets because the services provided by these businesses are more valuable to consumers as their consumer base grows. This means that determining the optimal level of competition in these new markets is a dramatically different and harder task.

Even the task of measuring competition is complicated in digital markets. Usually, economists use prices as indicators of the level of competition, but we cannot necessarily do that here because many markets are two-sided and there are different types of consumer harm. Businesses on the internet are often complementary, so companies may subsidize one side of the market by profiting from the other side of the market. For example, social media sites often offer free services to users and charge for ads. However, the lack of high prices for consumers does not mean that consumer harms or other risks could not occur. Industry watchers have raised concerns 18 about whether the large companies that dominate search and social networking may be able to acquire inefficient power in ads or control people’s access to news. Another concern is that instead of raising prices or reducing quantity, these companies may reduce innovation. Firms holding quasi-monopolies may lose the incentive to keep improving the quality of their products.

Switching costs are traditionally an indicator of competition, and many may assume that switching costs in internet markets are virtually zero because competition is just a click away. This may have been true in the early ages of the internet, but to automatically assume zero switching costs now would be to miss a large part of what is happening. For example, the original search engines were merely directories of websites, and their quality didn’t depend on how many users they had. However, search engines today collect data on the behavior of their users and use it to improve their services and tailor those services to individual users. Thus, in order for other firms to be competitive, they need a large user base and the data that comes with it. Furthermore, for each individual user looking to switch services, the incumbent, with its existing knowledge of that user, has a significant advantage over a competitor that does not yet know the user and therefore cannot tailor services to him or her.

Lastly, digitization could bring a new level of opacity to businesses. Traditionally, price fixing and collusion could be detected in the communications between businesses. The task of detecting undesirable price behavior becomes more difficult with the use of increasingly complex algorithms for setting prices. This type of algorithmic price setting can lead to undesirable price behavior, sometimes even unintentionally. The use of advanced machine learning algorithms to set prices and adapt product functionality would further increase opacity.

Competition policy in the digital age brings with it new challenges for policymakers. It will be imperative that agencies continue the great work and creative solutions that came out of the President’s Executive Order to promote competition and inclusive growth in the digital age.

Conclusion

Recent trends in concentration in a range of industries suggest decreasing levels of competition, and many concerning macroeconomic trends seem to suggest that this decrease not just due to increases in economies of scale, but rather that increases in barriers to entry are playing a role. For the sake of both consumers and the macroeconomy as a whole, the Administration has used and will continue to use public policy to address these concerns. Increasing competition has the potential to drive faster productivity and output growth, faster real wage growth, and increased equity. We have moved forward in areas such as intellectual property and patent reform, increasing worker bargaining power, and reforming occupational licensing and land use regulations. While these are examples of positive changes, our work in promoting competition does not end here. The President’s Executive Order will continue to encourage agencies to develop creative solutions for increasing competition by soliciting new ideas on a regular basis. In considering the future of competition policy, we must also keep in mind the way in which changes in the economy, such as digitization, will affect how we evaluate competition effectively.

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views

Chris Sagers at ProMarket:

American Antitrust Is Having a Moment: Some Reactions to Commissioner Ohlhausen’s Recent Views: Over the summer, Federal Trade Commissioner Maureen Ohlhausen took me and several others to task in a speech, subsequently published as a journal article... The theme we’d all written about is whether we in the United States have a “monopoly problem,” and whether federal policy should try to do something about it. ...

Commissioner Ohlhausen had some pretty strong words. ... Specifically, she implies a very strong presumption against public interference in private markets, as indicated by her argument that there is not yet sufficient evidence that we have a monopoly problem. The argument seems to be that we must wait until we are very, very sure, beyond any reasonable econometric doubt, apparently, that there’s something wrong before we step in. ...

She is mistaken, and she ignores roughly a library-full of well-known..., sophisticated empirical work. ...

In the end, the irony of these remarks is captured in this point: Commissioner Ohlhausen is pretty witheringly dismissive of a certain kind of evidence of market power, and implies that it would not support increased enforcement unless it can overcome a high methodological bar. But for her own countervailing evidence that in fact American markets are “fierce[ly] competiti[ve],” she says this:  “Consider the new economy, which is a hotbed of technological innovation. That environment does not strike me as one lacking competition.”

In other words, the presumption against antitrust is so strong that evidence of harm must meet the most exacting standards of social science. To prove that markets are in fact competitive, however, needs nothing more than seat-of-the-pants anecdotes. Again, I mean no disrespect, and I think we have an honest difference of opinion. But this stance is not social science, and it is not good, empirically founded public policy. It is just ideology. ...

It’s definitely true that the agencies have brought a bunch of challenges to a bunch of nasty mergers, and perhaps total enforcement numbers have gone up a bit. But that is because we are in the midst of a merger wave in which parties have been proposing breathtakingly massive, overwhelmingly consolidating horizontal deals. While there is a track record to be proud of in the administration’s enforcement, especially, as the commissioner observes, in the Commission’s campaign against hospital mergers, reverse-payment deals, SEP problems, and patent trolls, and who knows how many other matters, the fact remains that by and large the administration has mostly not taken action that any administration would not have taken, including the Reagan and both Bush administrations. ...

When Asset Managers Go MAD

Thomas Belsham at Bank Underground:

When asset managers go MAD: What do the Cold War powers of the United States and the USSR have in common with modern day asset managers?  The capacity for mutually assured destruction.  During the 1950s game theorists described a model of strategic interaction to demonstrate how it might be that two nations would choose to annihilate each other in nuclear conflict.  Simply put, each nation had an incentive to strike first, as there was no incentive to retaliate.  Both would race to push the button.  Asset managers face a similar set of incentives.

The strategic interaction of these two superpowers was subsequently formalised as the “prisoner’s dilemma” by Albert W. Tucker.  In the prisoner’s dilemma, two rational decision makers choose to pursue an uncooperative course of action that is detrimental to both, rather than cooperate to arrive at a preferable one.  The reason the two parties can arrive at such an outcome is that for each individual, it is always better not to cooperate than to cooperate, regardless of the course taken by the other.

In the original thought experiment, there are two prisoners facing conviction of a crime, but they are suspected of a greater one.  The sentence for the less serious offence is two years.  Each is offered a deal:  snitch on your friend for the greater of the two crimes and you can go free.  But your friend gets seven years.  If both snitch, both gets five years.  So, to snitch or not to snitch?

What is clear is that it is better for both to keep quiet, and get two years, than for both to snitch, and get five each.  Yet snitching is the ‘rational’ outcome; it’s the best strategy for me regardless of what my partner does (notwithstanding the risk of reprisals after the seven years I’ve spent in the Bahamas while my partner been behind bars).

Table 1:  The prisoner’s dilemma

		Player 2
		Don’t snitch	Snitch
Player 1	Don’t snitch	2, 2	7, 0
	Snitch	0, 7	5, 5

But what does that have to do with the asset management industry?  Well, arguably, because it may, under some circumstances, be possible to characterise the coordination problem faced by asset managers as a prisoner’s dilemma.  That stems from two factors.  The first, relates to the high degree of concentration of the asset management industry – which results in potential spillovers from the actions of one asset manager to the payoffs of others.  The second, relates to incentives arising from the practice of using peer comparison across individual asset managers to monitor performance – which make relative payoffs important.

The combination of these two features of the market could give rise to a situation in which, in period of financial stress, when there are concerns about falls in asset prices, rather than hold one’s nerve and stand pat, individual asset managers might reason that it is preferable to sell instead.  If all asset managers reason thus, the resulting rush for the exit – and downward pressure on asset prices – could result in considerably bigger losses for everyone, than if asset managers had coalesced on the cooperative outcome.

Putting this interaction in a formal context, in the asset manager game below, in a period of financial market stress, anticipating that there may be a fall in asset prices, each player can either hold his (or her) position, or sell.  In the event that both hold, each receives a loss of 1.  But each also has the option of selling, in the hope of being first out of the door.  If successful, that player reduces his own loss to 0, but increases the loss suffered by the other player to 2.  If both players sell, this is the worst outcome of all (each loses 3).

Table 2:  The asset manager’s dilemma
(players’ relative payoffs are shown in red)

		Player 2
		Hold	Sell
Player 1	Hold	-1, -1 0, 0	-2, 0 -2, +2
	Sell	0, -2 +2, -2	-3, -3 0, 0

Now, this isn’t quite the same as the prisoner’s dilemma above.  In the classic example, the bad outcome occurs because it makes sense not to cooperate no matter what the other player chooses.  Here, it is possible that both players will be greedy and sell – gambling that the other will hold.  But if one player knows that the other will sell, it would not be rational to sell as well.  This would increase that player’s own loss from 2 to 3.  The greedy player will simply be allowed to get away with it.  So what would make it in the interest of player 1 to make losses even worse by choosing to sell as well?

This is where the practice of benchmarking comes into play.  Asset managers tend to monitor performance against each other or against common benchmarks, to help investors compare investment propositions.  As a result, benchmarking creates an externality in which the performance of one’s peers, affects one’s own payoffs.  And it becomes in an individual asset manager’s best interest to minimise deviation from the rest of the pack – because his (or her) reputation and ability to raise a new fund and operate henceforth are a function of relative performance.

Now, in ‘good’ states of the world (the cooperative outcome, or the outcome in which the greedy gamble pays off) the externality does not affect behaviour:  if an asset manager cooperates, or successfully cheats, his performance is either as good, or better than that of his peers. “Look at me!  I’m doing at least as well as the other guy!”  Happily, here, the asset manager’s incentives are aligned with those of the investor.

But, importantly, in ‘bad’ states (non-cooperation, or being cheated on), if one’s opponent is cheating, it is preferable to cheat as well, and both incur a big loss, than to be cheated on and incur a smaller loss.  Better that, than stand out as an underperformer and risk losing one’s livelihood.  “Well, we all did terribly.  See you at the fundraiser!”  As a result, selling will be that much more widespread, and asset price falls that much bigger, than otherwise.  The asset manager’s incentives are not aligned with those of the investor.

Formally, each individual player’s preferred outcome is to cheat successfully (A).  And each player prefers small losses (B) to big losses (C).  But each would also prefer that both incur a big loss, than see the other profit at his own expense (D).  A is preferred to B, B to C, and C to D.  This is the general form of the classic prisoner’s dilemma (Table 3).  Regardless of the decision of Player 1, it is in the interest of Player 2 to sell.  For the investor in the asset manager game, however, it is clear that this represents a pretty miserable outcome.

Table 3:  The general form of the prisoner’s dilemma

		Player 2
		Hold	Sell
Player 1	Hold	B, B	D, A
	Sell	A, D	C, C

The question then, is how to align the incentives of the asset manager with those of the investor?  The cooperative outcome becomes more likely, if each player’s rewards reflect the absolute return generated by the fund, rather than performance relative to benchmark.  This at least takes away some of the incentive to engage in mutually disadvantageous strategies, although greed on its own is still sufficient to yield the ‘sell, sell’ result.

To reduce the likelihood of that from happening, the academic literature on the prisoner’s dilemma suggests that in games where strategies are pursued on a probabilistic basis, a cooperative equilibrium becomes possible.  Mechanisms which lower the probability of ‘sell’ might help to nudge players towards the jointly preferred outcome.

Moreover, cooperative outcomes also sometimes result from repeated games of the prisoner’s dilemma, provided that the end point is not known (otherwise players reason that it makes sense to cheat on the last game, and knowing that the other player will reason thus, infer that it will also make sense to cheat in the penultimate game, and so on, right back to the very first interaction).  So perhaps we should embrace opportunities for players to arrive at the cooperative outcome; a little volatility may not be a bad thing.

Why Does Economics Reject New Thinking?

Hadn't heard this story before:

Why Does Economics Reject New Thinking?, by Rick McGahey: The Economist magazine is running a series on six big economic ideas that have shaped the field in recent decades, and they start with one of the best—George Akerlof’s 1970 “The Market for Lemons.”

The concepts in the paper were groundbreaking insights about the price distortions that come about when one party has more information than the other, and influence economics and regulation to this day. ...

Akerlof shared his Nobel with Joe Stiglitz and Michael Spence. All three economists questioned a basic premise of standard microeconomic theory—that parties to market transactions have equal and perfect information, and that information equality helps produce market-clearing prices (covering not only commodities, but labor and finance) resulting in fair competition between equally informed parties ... [and] ...optimal overall social returns. ...

But there is another essential part of the Akerlof story—the narrow-minded nature of academic economics. The paper was rejected from several major economics journals. His graduate students at Berkeley had to read the paper in mimeographed form, as Akerlof had trouble getting it published. He testifies that the American Economic Review and The Review of Economic Studies both rejected the paper on the grounds that the subject was trivial.

But the paper’s rejection from the Journal of Political Economy was the most telling. According to Akerlof, one reviewer recognized the profound issues in the paper, and rejected it on the basis that “if this paper was correct, economics would be different.” ...

...while it is good that The Economist and others recognize the power of Akerlof’s ideas, the story of “The Market for Lemons” also must remind us about how hard it was—and still is—for new economic thinking to be heard and accepted by most economists.

The Costs of Monopoly: A New View

James Schmitz:

The Costs of Monopoly: A New View, The Region, FRB Minneapolis: Economists overwhelmingly agree that the actual costs of monopoly are small, even trivial. This consensus is based on a theory that assumes monopolies are well-run businesses that limit their output in order to drive up prices and maximize profit. And because empirical studies have found that monopolists do not restrict output or raise prices by very much, most economists have concluded that monopolies inflict relatively little harm on the economy.

In this essay, I review recent research that upends both the theoretical and empirical elements of this consensus view.² This research shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

Outline

In this essay, I first review the standard theory of monopoly that contends it inflicts little harm, and then I introduce a new theory that refutes that view. In this new theory, groups within monopolies act as both adversaries that reduce productivity and allies that eliminate substitutes. The new theory thus demonstrates that monopolies in fact cause substantial economic harm, and that harm falls disproportionately on people with fewer financial resources.

I then provide several historical examples of monopolies from my own research and that of others. I’ll discuss monopoly subgroups in their role as adversaries in the sugar, cement and construction industries. I’ll discuss monopoly subgroups acting as allies in the dental and legal industries. But I want to emphasize that in all monopolies, subgroups engage in both roles. I’ll also take a fresh look at a familiar example of a monopoly, U.S. Steel, showing how subgroups acted as both adversaries and allies. These few examples are illustrative only and provide a narrow glimpse of a far broader economic phenomenon: Monopolies are prevalent in the U.S. (and international) economy. ...

Skipping forward to the summary and conclusion:

For decades, the theoretical understanding and empirical analysis of monopoly have themselves been monopolized by a dominant paradigm—that the costs of monopoly are trivial. This blindness to new theory and analysis has impeded economists’ understanding of the actual harm caused by monopoly. Rather than inflicting little actual damage, adversarial relationships within monopolies have significantly reduced productivity and economic welfare. And in many industries, subgroups within monopolies collaborate to eliminate competition from low-cost substitutes. This lack of competition in the marketplace has a disproportionate impact on poor citizens who might otherwise find low-cost services that would meet their needs.

I’ve described this as a “new” theory, but in truth its roots go back decades, to the ideas of Thurman Arnold. Arnold ran the Antitrust Division at the Department of Justice from 1938 to 1943, taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association.¹⁰ He argued that lack of competition reduced productivity and that monopolies crushed low-cost substitutes, hurting the poor. Arnold supported his arguments through intensive real-world research. He and his staff undertook detailed investigations of monopolies, examining the on-site operations of many industries and documenting the productivity losses and destruction of substitutes caused by monopoly.

Arnold began his work at a pivotal time—in the midst of the Great Depression, just after the United States had experimented with the cartelization of its economy. Faith in competitive markets had reached such a low that cartels and monopolies were thought to be, perhaps, better alternatives. His work and ideas played a big role in reinvigorating confidence in competitive markets. He mounted an aggressive campaign to protect society from monopoly. The campaign had two parts: forceful prosecution of monopoly through the courts, accompanied by an array of speeches and articles to educate the general public about its costs.

Economists gradually forgot Arnold and his ideas, convinced by Harberger’s empirical work and the introspection of economists, leading to, for example, the logic provided by Stigler and others. Scholars and regulators who studied monopolies focused on prices alone and found little to worry about.

But as shown by the research reviewed in this essay—and an expanding body of empirical work—the problems caused by monopoly are significant, and still pervasive. My hope is that this paper will open a new era of discussion about monopoly and its costs, and ultimately lead policymakers to encourage greater competition for the benefit of all.

Productivity, Inequality, and Economic Rents

Jason Furman at ProMarket:

Productivity, Inequality, and Economic Rents: Productivity growth—a necessary (though not sufficient) condition for rising incomes in the long run—has slowed since 1973... At the same time, inequality in the United States is higher and, in recent decades, has risen faster than in other major advanced economies. ...

These dual trends ... have many distinct sources, but insofar as they have some causes in common, there is the potential to address these causes in ways that simultaneously improve efficiency and equity. To this end, the evidence that a rise in rents is contributing to both phenomena is important. ...

The good news is that to the degree that the “rents” interpretation is correct, it suggests that it is possible to reduce inequality and promote productivity growth without hurting efficiency by changing how rents are divided—or even that it is possible to do both while increasing efficiency by acting to reduce rents in the economy. Policies that raise the minimum wage and provide greater support for collective bargaining can help level the playing field for workers in negotiations with employers, in turn changing the way that rents are divided. Measures that would rationalize licensing requirements for employment, reduce zoning and other land-use restrictions, appropriately balance intellectual property regimes, and change the incentives that have led to the expansion of the financial sector as a share of the economy would all help curb excessive rents.

Additional measures that would reduce the scope and unequal distribution of economic rents include the promotion of competition through rulemaking and regulations, as well as the elimination of regulatory barriers to competition. ...

The bad news, however, is that rents have beneficiaries and these beneficiaries fight hard to keep and expand their rents. As a result, political reforms and other steps aimed at curbing the influence of regulatory lobbying are important for reducing the ability of people and corporations to seek rents successfully. Such actions would help ensure that economic growth in the decades ahead is robust, sustainable, and widely shared.

Competition Policy and Inclusive Growth

At VoxEU:

Competition policy and inclusive growth, by Fabienne Ilzkovitz and Adriaan Dierx: Firms with greater market power can behave monopolistically, and recent research suggests that declining market competitiveness is driving income inequality. While competition authorities already measure the overall impact of their interventions by using customer savings, these measurements do not account for indirect effects of intervention. This column introduces a DSGE model to model competition policy interventions as a negative mark-up shock. Competition policy has a significant and positive impact on growth and jobs, and impacts richer and poorer households differently. Interventions have important redistributive effects that benefit the poorest in society.

Economic Models Must Account for Power Relationships

 I have a new column:

Economic Models Must Account for Who Has the Power'': Nobel Prize winning economist Joseph Stiglitz recently highlighted two schools of thought on how income is distributed to different groups of people in the economy. Which school is correct has important implications for our understanding of the forces that have caused the rise in inequality, and for the policies needed to reverse this trend. It also relates to another controversy that has flamed up recently, how economics should be taught in principles of economics courses. ...

When Markets Aren't Perfect, Government Can Help

At CBS MoneyWatch:

When Markets Aren't Perfect, Government Can Help, by Mark Thoma: In response to a question about economic theory and its role in the financial crisis, Nobel Prize-winning economist Joseph Stiglitz said:

"The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand."

Even worse, those who have pointed out the markets' limitations have often been attacked as anti-market, against capitalism or favoring large government. That' a mischaracterization of this point of view. ...

A Conversation With Joseph Stiglitz

From an interview of Joe Stiglitz:

...White: ... To what extent do you feel economist and economic theory is culpable for the crisis? What is the role of an economist going forward?

Stiglitz: The prevalent ideology—when I say prevalent  it’s not all economists— held that markets were basically efficient, that they were stable. You had people like Greenspan and Bernanke saying things like “markets don't generate bubbles.” They had precise models that were precisely wrong and gave them confidence in theories that led to the policies that were responsible for the crisis, and responsible for the growth in inequality. Alternative theories would have led to very different policies. For instance, the tax cut in 2001 and 2003 under President Bush. Economists that are very widely respected were cutting taxes at the top, increasing inequality in our society when what we needed was just the opposite. Most of the models used by economists ignored inequality. They pretended that macroeconomy was unaffected by inequality. I think that was totally wrong. The strange thing about the economics profession over the last 35 year is that there has been two strands: One very strongly focusing on the limitations of the market, and then another saying how wonderful markets were. Unfortunately too much attention was being paid to that second strand.

What can we do about it? We've had this very strong strand that is focused on the limitations and market imperfections. A very large fraction of the younger people, this is what they want to work on. It's very hard to persuade a young person who has seen the Great Recession, who has seen all the problems with inequality, to tell them inequality is not important and that markets are always efficient. They'd think you're crazy. ...

When I first started blogging, I used to do posts with the title "Market Failure in Everything." as a counter to "the prevalent ideology." Maybe I should revive something similar.

101 Boosterism

Paul Krugman:

101 Boosterism: I see that @drvox is writing a big piece on carbon pricing – and agonizing over length and time. I don’t want to step on his forthcoming message, but what he’s said so far helped crystallize something I’ve meant to write about for a while, a phenomenon I’ll call “101 boosterism.”

The name is a takeoff on Noah Smith’s clever writing about “101ism”, in which economics writers present Econ 101 stuff about supply, demand, and how great markets are as gospel, ignoring the many ways in which economists have learned to qualify those conclusions in the face of market imperfections. His point is that while Econ 101 can be a very useful guide, it is sometimes (often) misleading when applied to the real world.

My point is somewhat different: even when Econ 101 is right, that doesn’t always mean that it’s important – certainly not that it’s the most important thing about a situation. In particular, economists may delight in talking about issues where 101 refutes naïve intuition, but that doesn’t at all mean that these are the crucial policy issues we face. ...

He goes on to talk about this in the context of international trade and carbon pricing (too hard to excerpt without leaving out important parts of his discussion).

Concentration and Growth

Dietrich Vollrath:

Concentration and Growth:

A whole raft of posts and articles (here, here, here, here) has shown up recently regarding “rent-seeking”. This is kind of a catch-all for increased concentration within industries, more lenient anti-trust enforcement, and the increasing share of corporate profits in output. This is then tied to the slowdown in wages over the last few decades, increasing inequality, and even to slower aggregate growth.

The arguments made by those doing the concentrating and profit-making is that they are promoting efficiency, productivity, and hence growth. Do we know whether concentration or rent-seeking would be good or bad?

I’m going to draw a lot on one of my professors in grad school, Peter Howitt, who along with Philippe Aghion is really one of the godfathers of studying competition and growth. ...

Paul Krugman: Robber Baron Recessions

Paul Krugman made similar points in 2012, but the part about secular stagnation is new:

Robber Baron Recessions, by Paul Krugman, NY Times: ...In recent years many economists, including people like Larry Summers and yours truly, have  come to the conclusion that growing monopoly power is a big problem for the U.S. economy — and not just because it raises profits at the expense of wages. ...

The argument begins with a seeming paradox about overall corporate behavior. You see, profits are at near-record highs, thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology ... hasn’t taken off...

How can this paradox be resolved? Well, suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power. In that case many corporations would be in the position I just described...

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to “secular stagnation” ... But do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies...

The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan.

For Reagan didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement. ...

On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to “promote competition.” What this means in practice isn’t clear... But it may mark a turning point in governing philosophy, which could have large consequences if Democrats hold the presidency.

For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Are We All Rent-Seeking Investors?

From ProMarket:

Are We All Rent-Seeking Investors?, by Guy Rolnik: ...there is mounting evidence that the all-time high of the profits and margins of many sectors in the economy is not representing a healthy economy but rather the growing market power of many companies and their ability to raise prices.

Grullon, Larkin, and Michaely (2015) studied all the public firms traded on major exchanges in the United States between 1972 and 2014 and found that more than 90 percent of US industries have experienced an increase in concentration levels over the last two decades. They also found that firms in industries with the largest increase in product market concentration have enjoyed higher profit margins, positive abnormal stock returns, and more profitable M&A deals, suggesting that market power is becoming an important source of value. ... Overall they assert that the nature of US product markets has undergone a structural shift that has weakened competition. ...

...the first sets of questions should revolve around the idea that the bigger and more concentrated many companies and industries become, the more they will be able to entrench themselves, to build “moats” to insulate them from competition, to capture regulation, and to get favorable treatment from government or sometimes outright large public sector contracts.

If companies operating in the marketplace can influence prices and regulation, the theorem of profit maximization as a path to welfare maximizations falls flat. ...

The growing concentration of many industries in the United States raises many questions regarding US antitrust policy and the growing role of money in politics. Grullon, Larkin, and Michaely trace the growing concentration to lax antitrust policy. ...

In spite of the growing chatter on concentration, market prices, and political influence, it seems that these claims need more empirical studies before we can conclude ... that for S&P 500 firms these exceptional profits derived from undue market power are currently running at about $300 billion a year, equivalent to a third of taxed operating profits, or 1.7 percent of GDP.

Still, the growing anecdotal evidence from many industries and the persistence of high profits margins in the face of stagnant growth and growing inequality deserves serious consideration. One question may even loom larger: given that more and more Americans’ pensions and long-term savings today are invested in the stock market in defined contribution schemes, have we created a pension model that is based on growing sharer of investments in rent-seeking activities? Put another way, are we facing an economic model in which tens of millions of Americans’ pensions are relying on the ability of companies to extract rents from consumers and taxpayers? ...

'Make Elites Compete: Why the 1% Earn So Much and What To Do about It'

Jonathan Rothwell at Brookings:

... In his “defense of the one percent,” economist Greg Mankiw argues that elite earnings are based on their higher levels of IQ, skills, and valuable contributions to the economy. The globally-integrated, technologically-powered economy has shifted so that very highly-talented people can generate very high incomes.

It is certainly true that rising relative returns to education have driven up inequality. But as I have written earlier, this is true among the bottom 99 percent. There is no evidence to support the idea that the top 1 percent consists mostly of people of “exceptional talent.” In fact, there is quite a bit of evidence to the contrary.

Drawing on state administrative records for millions of individual Americans and their employers from 1990 to 2011, John Abowd and co-authors have estimated how far individual skills influence earnings in particular industries. They find that people working in the securities industry (which includes investment banks and hedge funds) earn 26 percent more, regardless of skill. Those working in legal services get a 23 percent pay raise. These are among the two industries with the highest levels of “gratuitous pay”—pay in excess of skill (or “rents” in the economics literature). At the other end of the spectrum, people working in eating and drinking establishments earn 40 percent below their skill level. ...

Much more here.

Putting the Client Last: A Former Investment Banker Explains How Clients are Being Systemically Sucker-Punched

From ProMarket:

Putting the Client Last: A Former Investment Banker Explains How Clients are Being Systemically Sucker-Punched: As a former London employee of a major investment bank, I am often puzzled by the tone that top managers of investment banks use when speaking to the public. There is indeed a striking gap between the official communication and the internal behaviors I have observed (and taken part in). To me, banks are experts at exploiting asymmetries of information. Furthermore, they often amplify this asymmetry themselves by complexifying the products they offer or by disclosing only fractions of the information they have.

Of course, investment banks’ clients are the principal target of this type of strategy. While banks typically claim as their main value that their clients’ interests always come first, the reality is usually quite different. ...

Interview of Kenneth Arrow

Part of an interview with Kenneth Arrow:

“There Is Regulatory Capture, But It Is By No Means Complete”: ... Q: George Stigler and the public choice school predicted that regulation will inevitably be captured by special interests, and used as a tool to prevent competition. Some people see that as a reason for deregulation, or even no regulation. Perhaps we need to construct different market structures, so that regulation won’t be captured?

There’s a famous Churchill quote: “democracy is the worst form of government, except for all the others.” That applies to regulation as well. In the late 1800s, we had a natural monopoly: railroads. The government created a regulatory enterprise – the Interstate Commerce Commission – and of course it was captured. But it still made a difference.

I think we just have to accept that capture does occur, but it’s limited. The Federal Trade Commission, for example, is a pretty active body. Monopolies have been broken up. The AT&T telephone monopoly was broken up in 1982 – Stigler was still writing about regulatory capture then. AT&T was a classic monopoly, but a pretty benevolent one. ...

So there is regulatory capture, but it is by no means complete. Regulations do play a role.

One example of non-regulatory capture fighting against effective regulation was during the run-up to the 2008 crash, when several officials argued for CDOs to be regulated, which means they would have had to meet certain requirements of transparency. This was not accepted. I’m not saying the crash could have been avoided if that happened, but that would have made a big difference.

Q: Regarding the financial industry, in recent years Luigi Zingales and other scholars have questioned its size. Some argue that most of its business today is in fact rent-seeking, while only half or a third of it is allocating resources efficiently. Do you agree with this sentiment?

I don’t consider myself an expert on the financial industry, but the fact that the financial industry is responsible for something like 30 percent of all profits seems rather remarkable. I am startled by the size of the financial industry and what it means. I can’t believe this is really needed for the allocation of resources. A lot of it is going to be rent-seeking. It creates a diversion of resources, especially human capital, and not only does it create problems for the legitimacy of income distribution, but that also means resources diverted for this purpose [rent-seeking] can’t be used elsewhere. ...

Q: A large number of industries in the U.S. today are highly concentrated. Does concentration lead to declines in innovation?

Monopolies don’t feel a need to innovate, because they’re already making money off their existing products. However, there’s an argument to be made that the incentive for innovation is the prospect for monopoly. The award for innovation is that, at least for a period of time, you have a first-mover advantage until other people catch on. Existing monopolies are bad for innovation, but the prospect of monopolies is good for innovation. That’s the paradox. ...

He also talks quite a bit about health care at the beginning of the interview.

[See also: Our Four-Decade Antitrust Experiment Has Failed - Kevin Drum]

'Economics Isn’t Textbook: Why We Need to Raise the Minimum Wage'

I have a new column:

Why We Need to Raise the Minimum Wage, by Mark Thoma: It would be nice if labor markets worked the way they do in economics textbooks. Market forces would cause workers to be paid an amount equal to the value of what they produce – what economists call the value of their marginal product – and wages would rise one to one with both changes in inflation and changes in productivity.

Of course, the real world doesn’t always work this way. ...

Worried my example is too simplistic.

Paul Krugman: Michigan’s Great Stink

The "poisonous interaction between ideology and race":

Michigan’s Great Stink, by Paul Krugman, Commentary, NY Times: ...Modern politicians, no matter how conservative, understand that public health is an essential government role. Right? No, wrong — as illustrated by the disaster in Flint, Mich.

What we know so far is that in 2014 the city’s emergency manager — appointed by Rick Snyder, the state’s Republican governor — decided to switch to an unsafe water source, with lead contamination and more, in order to save money. And it’s becoming increasingly clear that state officials knew that they were damaging public health...

This story ... would be a horrifying outrage even if it were an accident or an isolated instance of bad policy. But it isn’t. ...

In the modern world, much government spending goes to social insurance programs — things like Social Security, Medicare and so on, that are supposed to protect citizens from the misfortunes of life. Such spending is the subject of fierce political debate, and understandably so. ...

There should, however, be much less debate about spending on ... public goods — things that benefit everyone and can’t be provided by the private sector. ...

Yet ... hard-line conservatives have ... sought to cut social insurance spending on the poor. ... But what we also see is extreme penny pinching on public goods. ...

Nor are we talking only about a handful of cases. Public construction spending as a share of national income has fallen sharply... And this includes sharp cuts in spending on water supply.

So are we just talking about the effects of ideology? Didn’t Flint find itself in the cross hairs of austerity because it’s a poor, mostly African-American city? Yes, that’s definitely part of what happened — it would be hard to imagine something similar happening to Grosse Pointe.

But these really aren’t separate stories. What we see in Flint is an all too typically American situation of (literally) poisonous interaction between ideology and race, in which small-government extremists are empowered by the sense of too many voters that good government is simply a giveaway to Those People.

Now what? Mr. Snyder has finally expressed some contrition, although he’s still withholding much of the information we need to fully understand what happened. And meanwhile we are, inevitably, being told that we shouldn’t make the poisoning of Flint a partisan issue.

But you can’t understand what happened in Flint, and what will happen in many other places if current trends continue, without understanding the ideology that made the disaster possible.

'It's Time to Return to Market-Based Antitrust Law'

Kevin Drum:

It's Time to Return to Market-Based Antitrust Law: Tim Lee makes an interesting argument today. He notes that cell phone plans have gotten a lot better lately ...

Why has this happened? Because for the past couple of years T-Mobile has been competing ferociously with cheaper, more consumer-friendly plans, and the rest of the industry has had to keep up. But what prompted T-Mobile to become the UnCarrier in the first place?

Back in 2011, AT&T was on the verge of gobbling up T-Mobile, which would have turned the industry's Big Four into the Big Three and eliminated the industry's most unpredictable company....But then the Obama administration intervened to block the merger. With a merger off the table, T-Mobile decided to become a thorn in the side of its larger rivals, cutting prices and offering more attractive service plans. The result, says Mark Cooper, a researcher at the Consumer Federation of America, has been an "outbreak of competition" that's resulted in tens of billions of dollars in consumer savings. ...

Antitrust law in America has been off track for decades, and it's time to get back on. The ... feds should concentrate on one simple thing: making sure there's real competition in every industry. Then let the market figure things out. There are exceptions here and there to this rule, but not many.

Competition is good. Corporations may not like it, and they'll fight tooth and nail for their rents. But it's good for everyone else.

'Mandate Memories'

Paul Krugman:

Mandate Memories: Sarah Kliff notes that the individual mandate in Obamacare is turning out to be essential — and it’s working, with the risk pool improving as the penalties kick in. What I wrote back in 2007, when Obama was campaigning against the mandate.

Fortunately, once in office he was a stronger advocate for health reform than I feared — including for necessary pieces he opposed in the primary; what we actually ended up with was, strictly speaking, Hillarycare.

Kevin Drum:

Chart of the Day: The Uninsured Rate in America Just Keeps Dropping:

I forgot to blog about this when the numbers came out, but the CDC has now updated their survey of the uninsured through the second quarter of 2015. ...

The number of uninsured adults under 65 continues to decline...

Working Paper: The Upward Redistribution of Income: Are Rents the Story?

Dean Baker:

Working Paper: The Upward Redistribution of Income: Are Rents the Story?: In the years since 1980, there has been a well-documented upward redistribution of income. While there are some differences by methodology and the precise years chosen, the top one percent of households have seen their income share roughly double from 10 percent in 1980 to 20 percent in the second decade of the 21st century. As a result of this upward redistribution, most workers have seen little improvement in living standards from the productivity gains over this period.

This paper argues that the bulk of this upward redistribution comes from the growth of rents in the economy in four major areas: patent and copyright protection, the financial sector, the pay of CEOs and other top executives, and protectionist measures that have boosted the pay of doctors and other highly educated professionals. The argument on rents is important because, if correct, it means that there is nothing intrinsic to capitalism that led to this rapid rise in inequality, as for example argued by Thomas Piketty.

PDF  |  Flash 

'The Real Issue with Fannie and Freddie'

Dean Baker:

Private Profit with Public Guarantee: The Real Issue with Fannie and Freddie: The NYT had a column by Jim Parrot and Mark Zandi on reforming Fannie Mae and Freddie Mac. ... The article argues that the problem with Fannie Mae and Freddie Mac was that they were considered too big to fail. It therefore puts forward the case for ending their monopoly on issuing government guaranteed mortgage-backed securities (MBS).

This argument seriously misrepresents the issues with Fannie Mae and Freddie Mac. The real problem was that they issued trillions of dollars in MBS that were implicitly backed up by the government. At the time they failed in the summer of 2008, the generally held view in financial circles was that the government would be obligated to honor their MBS regardless of whether or not it kept Fannie Mae and Freddie Mac in business. ...

This was a direct result of the perverse incentives created by a system where private shareholders and top executives stood to profit by passing risk off to the government. This incentive does not exist today. ... As long as Fannie and Freddie are essentially public companies, that do not offer high returns to shareholders and pay outlandish salaries to CEOs, no one has incentive to take excessive risks.

This changes if we allow private banks to issue mortgage backed securities with the guarantee of the government. This would mean that Goldman Sachs, Citigroup and the rest would be able to issue the same sort of subprime MBS they did in the bubble years with assurance that even in a worst case scenario the government would reimbursement investors for almost the full value of their investment. This is a great recipe for pumping up financial sector profits and another housing bubble. It does not make sense as public policy.

'The Price of Oil and the Price of Carbon'

Obstfeld and Arezki:

The price of oil and the price of carbon, Vox EU: ... Fossil fuel prices are likely to stay ‘low for long’. Notwithstanding important recent progress in developing renewable fuel sources, low fossil fuel prices could discourage further innovation in and adoption of cleaner energy technologies. The result would be higher emissions of carbon dioxide and other greenhouse gases

Policymakers should not allow low energy prices to derail the clean energy transition. Action to restore appropriate price incentives, notably through corrective carbon pricing, is urgently needed to lower the risk of irreversible and potentially devastating effects of climate change (Stern 2015). That approach also offers fiscal benefits.

Oil prices have dropped by over 60% since June 2014. ...

Natural gas and coal – also fossil fuels – have similarly seen price declines that look to be long-lived. Coal and natural gas are mainly inputs to electricity generation, whereas oil is used mostly to power transportation, yet the prices of all these energy sources are linked, including through oil-indexed contract prices. The North American shale gas boom has resulted in record low prices there. ...

Technological innovations have unleashed the power of renewables such as wind, hydro, solar, and geothermal. ...

Progress in the development of renewables could be fragile, however, if fossil fuel prices remain low for long. ...

The current low fossil-fuel price environment will thus certainly delay the energy transition. That transition – from fossil fuel to clean energy sources – is not the first one. Earlier transitions were those from wood/biomass to coal in the 18th and 19th centuries and from coal to petroleum in the 19th and 20^th centuries. One important lesson is that these transitions take a long time to complete. But this time we cannot wait.

We owe to electric lighting the fact that there are still whales in the sea. Unless renewables become cheap enough that substantial carbon deposits are left underground for a very long time, if not forever, the planet will likely be exposed to potentially catastrophic climate risks. ...

Direct subsidies to R&D have been adopted by some governments but are a poor substitute for a carbon price: they do only part of the job, leaving in place market incentives to over-use fossil fuels and thereby add to the stock of atmospheric greenhouse gases without regard to the collateral costs.

Politically, low oil prices may provide an opportune moment to eliminate subsidies and introduce carbon prices that could gradually rise over time toward efficient levels. However, it is probably unrealistic to aim for the full optimal price in one go. Global carbon pricing will have important redistributive implications, both across and within countries, and these call for gradual implementation, complemented by mitigating and adaptive measures that shield the most vulnerable. 

The hope is that the success of the Paris conference opens the door to future international agreement on carbon prices. Agreement on an international carbon-price floor would be a good starting point in that process. Failure to address comprehensively the problem of greenhouse gas emissions, however, exposes all generations, present and future, to incalculable risks. ...

'Friction is Now Between Global Financial Elite and the Rest of Us'

Robert Reich at Comment is Free:

Friction is now between global financial elite and the rest of us, The Guardian: The standard explanation for why average working people in advanced nations such as Britain and the United States have failed to gain much ground over the past several decades and are under increasing economic stress is that globalization and technological change have made most people less competitive. The tasks we used to perform can now be done more cheaply by lower-paid workers abroad or by computer-driven machines.

The left’s standard solution has been an activist government that taxes the wealthy, invests the proceeds in excellent schools and in other means that people need to become more productive, and redistributes to those in need. These prescriptions have been opposed vigorously by those on the right, who believe the economy will function better for everyone if government is smaller, public debt is reduced and taxes and redistributions are curtailed.

But the standard explanation, as well as the standard debate, overlooks the increasing concentration of political power in a corporate and financial elite that has been able to influence the rules by which the economy runs. ...

'The Rigging of the American Market'

When I tweeted a link to this post by Robert Reich, it received an unusually large number of retweets:

The Rigging of the American Market: Much of the national debate about widening inequality focuses on whether and how much to tax the rich and redistribute their income downward.

But this debate ignores the upward redistributions going on every day, from the rest of us to the rich. These redistributions are hidden inside the market.

The only way to stop them is to prevent big corporations and Wall Street banks from rigging the market. ...

After explaining how concentrated many industries are, and the monopoly/pricing power that gives firms in these industries (which they exploit), he concludes:

... Add it up – the extra money we’re paying for pharmaceuticals, Internet communications, home mortgages, student loans, airline tickets, food, and health insurance – and you get a hefty portion of the average family’s budget.

Democrats and Republicans spend endless time battling over how much to tax the rich and then redistribute the money downward.

But if we didn’t have so much upward redistribution inside the market, we wouldn’t need as much downward redistribution through taxes and transfer payments.

Yet as long as the big corporations, Wall Street banks, their top executives and wealthy shareholders have the political power to do so, they’ll keep redistributing much of the nation’s income upward to themselves.

Which is why the rest of us must gain political power to stop the collusion, bust up the monopolies, and put an end to the rigging of the American market.

Nudgies

This is from Richard Thaler:

...Many companies are nudging purely for their own profit and not in customers’ best interests. In a recent column in The New York Times, Robert Shiller called such behavior “phishing.” ...

Some argue that phishing — or evil nudging — is more dangerous in government than in the private sector. The argument is that government is a monopoly with coercive power, while we have more choice in the private sector over which newspapers we read and which airlines we fly.

I think this distinction is overstated. In a democracy, if a government creates bad policies, it can be voted out of office. Competition in the private sector, however, can easily work to encourage phishing rather than stifle it.

One example is the mortgage industry in the early 2000s. Borrowers were encouraged to take out loans that they could not repay when real estate prices fell. Competition did not eliminate this practice, because it was hard for anyone to make money selling the advice “Don’t take that loan.”