Deloitte has just released The Shift Index, a study of long-term trends in the U.S. economy. Two interesting graphs follow which put some numbers on conventional wisdom. The US economy has become much more competitive over time. We can see this in the economy wide Herfindahl-Hirschman Index, a measure of market concentration, which has halved in the latest forty years (click to enlarge) and also in the topple rate.
The topple rate is a measure of how the rank of large firms on return of assets changes over time. The topple rate has increased by about 60% over the past forty years (ignoring the recent blip up). What this means is that the firms on top are less likely to stay on top today than in the past – the recent blip up indicates the upheaval in firm rankings during the current recession. Notice also that an increased topple rate implies an increase in stock market volatility which we have also seen over the long-run (not just in recent years).
As a result of increased competition and also, I believe, greater wealth and reduced interest rates, the economy wide return on assets has decreased by 75% (see the report).
If the return on assets has decreased but productivity and wealth are up then where has the wealth gone? To consumers and the creative class. Thus, increased competition in the economy has driven down the return to capital and at the same time has increased the return to the complementary input which is in greatest fixed supply, creative labor. More data in the full report.
Query: would the increased topple rate favor “actively managed” vs. “indexed” equity investing? Put another way, which is more likely to accurately anticipate decline’s in a firm’s ROA – an inquisitive investor or the silent herd?
I guess this is why they want to make antitrust law tougher now.
Of course Tyler- too much competition for the pols’ taste! Got to rein that in.
The Obama administration just announced that henceforth free lunches will be regulated to ensure quality and to discourage uncompetitive pricing practices.
Of what possible value is an economywide HHI index? What can this possibly tell us about what is happening within industries. Notice that the full report does not even tell us how it is calculated. Normally, Alex would wonder. Are industries weighted by size? How many industries are used? Or is this the really stupid index that looks at the top 50 firms in the overall economy ignoring which industry they are in? So as variety expands the number of industries expands, each one led by a dominant firm, but the HHI for the economy shrinks dramatically.
These indexes don’t really tell us much at all, except that people like pictures that conform to a story they want to tell.
“the creative class”? Artists?
> return on assets has decreased by 75%
aka ‘we had an asset price bubble’
aka ‘asset prices increased without reference to their ability to create economic value’
ionides, by greatest fixed supply I mean the complementary inputs that are hardest to expand (most inelastic supply). Barry, good points but see the appendix for more information on the methods.
As a result of increased competition and also, I believe, greater wealth and reduced interest rates, the economy wide return on assets has decreased by 75%
The alternative explanation is the amount of real productive capital has increased slower than the savings increases in anticipation of retirement chasing a relatively smaller pool of assets, driving up the asset prices and thus driving down returns.
When the retirees begin selling their assets faster than younger workers save and buy assets, the prices will fall, and returns will increase, but that won’t indicate competition has decreased.
Lots of really, really creative lawyers.
John Dewey,
Retirees, by definition, live off their savings. If part of those savings are financial assets, they will gradually sell them off and live off that money. Young people will (hopefully) be saving, but they are demographically outnumbered by the huge baby boom bulge. The result will likely be net selling pressure.
A high topple rate looks good to me perhaps because My company is small. Perhaps we can do a roll up and scramble up.
To bad Governments can not participate in the high topple rate. It might be good to the California state government replaced a leaner competitor.
So true GDM, so true. I wish there was a way that we could make gov. have this effect too. Making government more responsive to revealed preferences as opposed to stated preferences may be a beginning. The mass migration to Texas and other low welfare oriented states for states such as NY and Cali suggests that the people have a revealed preference for low welfare states, but the problem is they often bring their ideology with them.
I am not sure how to deal with this problem.
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I have a deep distrust of reports with stylized graphs that consist of straight lines from 1965 to now. People who make such graphs usually already knew the outcome of their research before they did it.
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