Paul Krugman reviews Robert Reich

How much is monopoly power behind inequality?  Is the older explanation of skill-biased technical change [SBTC] still in the running?  Here is an excerpt from Krugman’s new NYRoB piece:

SBTC has fared very badly over the past quarter-century, to the point where it no longer deserves to be taken seriously as an account of what ails us.

The story fell apart in stages. First, over the course of the 1990s the skill gap stopped growing at the bottom of the scale: real wages of workers near the middle stopped outpacing those near the bottom, and even began to fall a bit behind. Some economists responded by revising the theory, claiming that technology was hollowing out the middle rather than displacing the bottom. But this had the feel of an epicycle added to a troubled theory—and after about 2000 the real wages of college graduates stopped rising as well. Meanwhile, incomes at the very top—the one percent, and even more so a very tiny group within the one percent—continued to soar. And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training.

Something else began happening after 2000: labor in general began losing ground relative to capital. After decades of stability, the share of national income going to employee compensation began dropping fairly fast. One could try to explain this, too, with technology—maybe robots were displacing all workers, not just the less educated. But this story ran into multiple problems. For one thing, if we were experiencing a robot-driven technological revolution, why did productivity growth seem to be slowing, not accelerating? For another, if it was getting easier to replace workers with machines, we should have seen a rise in business investment as corporations raced to take advantage of the new opportunities; we didn’t, and in fact corporations have increasingly been parking their profits in banks or using them to buy back stocks.

In short, a technological account of rising inequality is looking ever less plausible, and the notion that increasing workers’ skills can reverse the trend is looking less plausible still. But in that case, what is going on?

Krugman makes many other points in the review, but overall he is sympathetic toward Reich’s view that growing income inequality has a lot to do with growing monopoly power in markets.

In my view, the “epicycles” of technology plus trade with China and the rise of finance and constrained building do explain a good deal of what is going on.  I don’t feel bad that this theory has four major variables, five if you wish to throw in education.  Besides, the implied boosts in monopoly power sufficient to rationalize the observed increases in income inequality a) are huge, as opposed to the modest changes we have observed, and b) do worse either cross-sectionally, or in the time series, than the tech/trade/finance/land hypotheses.  Contra Reich, the “if these seventeen policies were different, income distribution would be very different” claim doesn’t actually count as an explanation of how the income distribution has evolved in a world which has remained within other policy ranges.  Land values aside, the world awaits a really good paper on monopoly power and American income inequality.  So far we don’t have one, so it is a very speculative hypothesis, with the “glance over the shoulder at the data test” showing mostly negative results.


"the implied boosts in monopoly power sufficient to rationalize the observed increases in income inequality a) are huge, as opposed to the modest changes we have observed"

what about modest increases in monopoly power combined with increased scale of firms and (this is the important bit) increased bargaining power of senior executives relative to workers within firms?

"increased bargaining power of senior executives relative to workers": well that's a delicate phrasing. I prefer to refer simply to executives pillaging the shareholders. My phrasing has the advantage of identifying who's being pillaged, yours of referring to the issue at hand, the disparity between execs and proles. Anyway, we are substantially agreed; but what is the cause of the execs increased power?

Indeed. While true "monopoly power" in the narrow sense is pretty rare, we do increasingly have a "winner takes all" economy, and a lot of that is driven by the increasing dominance of very large firms in our economy.

In almost every firm that has a separation of ownership and control, the top management group shares a significant share of any profits with investors, while subordinate managers and other employees have their compensation determined by the labor market rather than the firm's economic success. When economic activity predominantly takes place in very large firms, as it does in the U.S. (to a greater extent than any other country in the developed world), the number of top management group positions in the economy shrinks, while the pool of profits available to people holding those positions surges.

Corporate law, particularly in Delaware, has evolved in a manner that insulates directors and the top management group of America's big businesses (a heavily overlapping group of people) from public shareholders, heightening their capacity to appropriate a significant share of firm profits for themselves.

Now, why are big businesses so important in the U.S. economy and growing every more so? Ultimately, my inclination is to think that falling barriers to interstate and international commerce that increase the size of the relevant economic markets, in tandem with the Iron Law of Oligarchy which states that any given market tends towards oligopoly and away from perfect competition and monopoly respectively, remains a powerful attractor in the phase space of firms in markets.

The exceptions that prove the rule - such as uber-wealthy individuals in investment banking, corporate law, big accounting firms and management consulting largely reflect the fact that these outsourced individuals are still fundamentally members of the top management team of large publicly held companies even though they aren't formally employed by the firms that they work for in the organizational chart.

I wouldn't call this analysis exactly "monopoly power", but it does flow from secular trends in economic logic as opposed to skills gaps or technology, for example.

The other big factor in rising inequality, in my view, is not what has happened, but what hasn't happened. Major disruptive episodes like the Great Depression, the many preceding but less well known economic "panics" of U.S. history, the World Wars, and the Civil War, for example, all had major leveling effects on income inequality. But, a prolonged era of relative peace and prosperity in the U.S. since the end of the Vietnam War, has allowed the U.S. economy to escape these leveling events for a historically almost unprecedented length of time. Europe and Japan have also been relatively peaceful and prosperous in this time period, but the extent to which WWII leveled the playing fields in those countries was much more profound than the combined impact of the Great Depression and WWII in the U.S., so it takes longer for those countries to drift into greater inequality (and until very recently with the maturation of the EU and EFTA, each of the European countries was a much smaller market than the U.S. domestic market).

@ohwilleke - good analysis. I would also say that Keynesianism in particular and economists in general favor the status quo, as does the law ("grandfather clause", "precedent", "coming to the nuisance" just a few examples I remember before I flunked out of law school), and government regulations, and this leads to sclerosis of the economy, which can be mistaken for monopoly power. Keynesianism is an attempt to artificially create previous demand, which any Austrian will tell you is bad ('never let a good crisis go to waste, in restructuring the economy' might be the Austrian response). However, Keynesianism doesn't work, just adds to the government debt, so it's not that potent a factor, nor are economists paid that much attention to; so on balance it's the law and government regulations that inhibit growth and entrench the status quo. Re law: patent law gives most of anything an employee does to the employer, due to the clause in standard employment contracts giving all inventions invented on company time to the employer. Isn't this bad? It should be a labor law violation (as it is in Japan and German, in special cases).

"increased bargaining power of senior executives relative to workers within firms" except that in the 1% the share of non-finance executives has actually been falling over time;

Like Tyler I am of the opinion that increased inequality is probably due to many complex causes, probably the most important in my view is that we have a more meritocratic environment now, so your genetic endowment is more important than before. Its like if everyone is raised closed to starvation, everyone will be short. If there is plenty of food, the range of heights between people is much larger as tall genes can now express themselves and therefore "height" inequality is greater. The greater meritocratic society is actually ironically a result of more progressive policies allowing even poor bright people access to higher education. A very smart kid today, regardless of their background, is very likely to get access to elite Universities and make the necessary contacts early in their life to success at the highest level. In times past, these opportunities were more reserved for rich children, regardless of the intelligence.

Simply put - as countries become richer and more progressive - inequality should increase.

"A very smart kid today, regardless of their background, is very likely to get access to elite Universities and make the necessary contacts early in their life to success at the highest level" I'm really not sure there is any evidence to support this. I know measures of social mobility aren't great, but from what I've seen the US does terribly and has in fact got worse in this regard.

"Social mobility" is not the same as "smart kids can find their way into elite universities."

If you looked at IQ distributions among income bands, and then looked at college admissions among income bands, you would find the elite schools making an effort to search for talent from the lower bands.

"parking their profits in banks"?

What does the Swedish Bank award winner think banks do with the deposits?

These days they park them at the Fed to get 0.25% risk free. You weren't implying that they lent them out, were you?

I imagine he thinks they lend some of them out and keep some of them on reserve. The issue is how much of each.

Do you imagine that bank lending is determined totally by supply and has nothing at all to do with loan demand?

Do you hate Krugman so much that you think he knows less than you do about banks?

Be careful.

Hatred can destroy the ability to think clearly. You're close to the edge.

Commercial banks put far more of their money into secured real estate lending than investment in business capital.

Also, big businesses that are "parking their profits in banks" aren't necessarily doing that in the completely literal sense of putting money in a checking account at the bank around the corner. Frequently, they are actually investing their profits in short term money market funds, Treasury bonds, and other cash equivalent investments rather than true bank deposits in the literal sense.

"In my view, the “epicycles” of technology plus trade with China and the rise of finance and constrained building do explain a good deal of what is going on."

I agree. While this has been slow to be accepted, I think it does explain essentially everything. The shift in global inequality seems to confirm it. The global poor got richer while the American poor stagnated.

That says to me that we should celebrate the global billions lifted out of poverty, but also be open to action here in the USA, where individual failure might less about individual failings than was once the case.

I have some relations who used to have decent jobs selling stuff on eBay, but places like alibaba will ship direct from China for $1 shipping, and apparently the professional seller market on eBay has been kneecapped.

They can only do this due to some stupid postal agreement made before ecocommerce became big.

And the us government must be hemorrhaging money on each package from China they deliver

So do you think the American poor will begin to get richer when the global poor (esp., in China) stagnate?

Once there is no labor to arbitrage then local wages will increase or decrease base on demand

But does that mean inequality will reverse to former levels or just stop increasing?

I was wondering what is meant by 'constrained building' and how it leads to income inequality. Any explanations would be very much appreciated.

I presumed this was zoning related, and that in blocking choices we block progress ...


I believe he means rules that make it difficult, expensive, time-consuming, or impossible to build housing. This inflates the value of housing (thus increased income to the already rich) while driving up rental prices (thus decreased savings among renters). In this model the rich get richer from the rental expenses of the poor.

Moreover because limited housing stock growth limits how many people can move into cities, and because cities have large and growing network effects this further concentrates gains among the urban rich while (relatively) locking out the rural poor, which again raises inequality. People already owning homes in Silicon Valley in year N find it easier and less expensive to live in Silicon Valley in year N+1 than the people in Iowa do; in this model the rich get richer and the poor get to stay in Iowa.

Any combination of these two effects leads to increased inequality.

Back in the 50's my economics professor told us that his profession overemphasized the marginal productivity aspects of wage theory because it was rational, lent itself to a mathematical treatment, and appeared to be ideologically neutral. He said that the zeitgeist - a word I had to look up - also played a role in determining how much the people at the top of a large company would pay themselves because the cost to a large company of doubling the compensation of the top executives was insignificant compared to other business expenses. I thought he was right then and I still feel that way. I'm less sure about the pay of the rank and file. I don't think our form of democracy can survive twenty more years of increasing inequality, but I have no idea about what to do about it.

Good old fashioned supply and demand pricing in a market for largely interchangeable labor inputs and marginal productivity does a pretty decent job of explaining the way the rank and file compensation is handled in the economy in the absence of monopsomy dealings with labor unions, and political regulation (e.g. minimum wage laws, prevailing wage contracting, public sector wage politics, etc.).

It is pay for the people at the top the old fashioned Econ 101 doesn't do a remotely good job of modeling, mostly because it neglects the fact that the process by which top management sets its own salaries when management and control are separated is inherently a self-dealing process and not an arms length negotiation to determine fair market value. And, it is in this less well understood compensation context where inequality is skyrocketing and where tax policies and other legal constraints, many devised with the hope of reducing inequality, have failed to work as anticipated.

@Stan- but in financial corporations like Goldman Sachs, executive pay is often the vast majority of expenses. There's not just one 'top' executive but nearly every employee is paid like a CEO.

Also I do feel, having lived outside the USA, that inequality can be dealt with: it's called razor wire and (my favorite) broken bottles on top of 12 foot high concrete walls, like in South America and here in the Philippines.

"the increasingly ugly turn taken by American politics"

Krugman has no self awareness at all.

You write like a Very Serious Person.

"And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training."

This is his argument? He's kidding, right? Is this the Formal training = Backside time in chair theory.

Credentialism is the love that dare not speak its name.

This is the worst statement in the whole extract. A gap opening up between hedge fund managers and teachers is exactly what we would see if the returns to intellectual ability were increasing.

“And this divergence evidently had little to do with education, since hedge fund managers and high school teachers have similar levels of formal training.”

While technically true, it's silly to equate all "formal" training by the time spent on it. 6 Years getting a Masters in Physical Education is not the equivalent of a Masters in Engineering, Math or any hard Science. And your average hedge fund manager is substantially smarter than your average high school teacher. I'd even dare say that your average Economics Professor is substantially smarter than your average high school teacher; and makes a lot more money.

Tyler, does Peter Orzag's recent work give any sufficient support to the monopoly/oligopoly idea in your opinion?

The high profit firms have high wages. Intra - firm inequality hasn't increased. This goes against the monopoly idea as it relates to stagnant wages.

@Kevin Erdmann- did you read the Orzag article or is your comment derived from first principles? Just look at the first figure from the Bloomberg article. Average is Over, and if you're an employee of Google you get rich even if you're mediocre. Notice the return on capital has increased for the top 10% firms since 1997, Orzag's point. I personally think this effect must be small (the top 10% of corporations don't have that many employees I would imagine) but I could be wrong.

Some more monopoly power, absolutely. Are margins up? Far from clear. Explanation of growing income inequality? Very far away.

Or Nobel Prize winning economist reviews Rhodes Scholar...

Professor Cowen- I don't think Krugman would deny any of your first four variables, even if he would put less weight on them. His most recent column was about (4) and he certainly agrees on (3).

At a time in history of exponential rates of increase in scientific knowledge, which creates opportunities, the tech/trade/finance/land hypotheses really explain the observations. In particular, how do we really answer the question of why all these innovative opportunities are not being utilized?

We need to note that the one area where innovation is happening is in the permissionless areas of electronics and software. With a good idea, you don't need permission from any government agency to give it a try. Other areas of our economy where any innovation needs approvals, we see little innovation being pushed forward. Try and get funding for a project that will take 10 years of regulatory review and standards revision to get it approved.

With the expansion of science, the opportunities are increasing but being killed by the expanded regulatory state, where all is forbidden except where allowed. For an example, they have been trying to get a permit to convert ocean water in water short So. California into drinking water for 11 years with a cost of an estimated 50 million dollars in paperwork going to the educated elite (all top 10%) of our society (lawyers, lobbyist, activists, bureaucrats, politicians, etc.). It would be "Joe Median" worker, who actually knows which way a wrench turns, who would build, operate and maintain this facility providing 50 million gallons/day of fresh water.

The slow step in most innovations and new jobs (the real source of economic growth) is becoming regulatory, official standards and the IP jungle of lawyers. We also need to note that all new regulations can interact with all existing regulations, creating new complexity at an N! rate of growth. Factorial growth rates are even faster growing that exponential growth rates like electronics. Even Google Automated Cars are hitting regulatory delays.

Over the last decade, I have seen a lot of fantastic opportunities be skipped because of regulators and potential delays being the dominant factors in the economic analysis. I have consulting clients on business developments where my recommendations are to build the same system south of the border, (not for lower wages) and adsorbing the added logistics costs just to avoid agencies like the Calif. Coastal Commission, Fish and Wildlife, Cal EPA and the federal agencies out of the loop. I want projects done in my remaining lifetime and not just funding bureaucrats spouting ignorance.

While there might be a regulation factor, remember that software can now be developed (at least prototyped, bootstrapped) at zero cost. Computing power is cheap, and any number of cloud providers will set you up with a free development environment. I know of no other area of technology where the means of production are free.

Hardware prototyping costs are now crashing as well, as explained here

If, hypothetically, someone spent their days posting comments to be immediately deleted, it would be high irony for that person to say "Time’s not free."

(And that person should expect that his 'opponent' is more likely an Asian sub-contractor than a highly paid westerner.)

I describe the current (past 30 years) circumstances as the perfect storm for the rise in inequality (i.e., no one factor dominates the others). I am also confident that markets will correct the rise in inequality, absent intervention; excessive inequality contains the seeds of its own destruction. If the beneficiaries of the rise in inequality had any intelligence (or knowledge of history), they would try to figure out how to soften the landing rather than trying to defend inequality. But the wealthy are not distinguishable so much by their intelligence as by their greed.

You look at the inequality as some sort of malevolence instead of simply three to four decades of thrift run amok. Back by the bad economic theory that broke the one to one connection between worker and consumer.

"I want to pay workers $5000 but sell households $10,000."


If you want $10,000 in consumer spending, you must have $10,000 in labor costs.

Obviously you've never heard of asset inflation and mortgage equity withdrawal.

He's also never heard of economic growth.

We see growing income inequality virtually everywhere in the developed world. The changes elsewhere aren't as big as in the US, mostly, but they are real.

So according to Riech/Krugman there's titanic monopolies so big they impact the entire world, but nobody knows who or what they are ...

This is not economic, it's the X-Files

Evaluating inequality in the context of one country- ignoring in the addition of overseas labor is so stupid. Why are people fooled so easily by Krugman?

I don't see how you can just toss out SBTC because the trend growth rates in different quintiles shift over time, because the college wage premium stalls out or because a lot of the growth is in the top 1%. The mix of factors driving wages is going to shift over time. Assuming trend differential growth rates to be stable over extended periods of time is ridiculous. Similary, the idea that a college degree is a perfect, or even good, indicator of the relevant skill set is also absurd. And is it really that hard to believe that the top 1% are exceptionally skilled compared to the remaining 99%? A lot of this stuff is really hard and the biggest rewards go to those who combine extremely strong technical skills with good interpersonal skills. That's a rare combination.

The top 0.1% might be a different story, but that's only part of what's going on. You have the 90-98th percentile maintaining their income share. That's completely consistent with SBTC. You have the 99-99.8th growing their share at expense of bottom 90, also consistent. And you have the top 0.1% growing their share a bit more. The idea that you can completely discount SBTC at this point is ludicrous. Especially when combined with the evidence on inequality in intra-firm wages. Some companies just employ nearly all the smart people. We know their names.

Also, the claim that income as a share of GDP is dropping is simply untrue. We just went over it a few months ago - in nominal terms there has been no change in income/GDP ratio. The difference comes from using different deflators and mean vs median change. Krugman has no business throwing that in there.

The last paragraph appears to miss what Krugman is pointing out. It is not a question of Income as a percentage of GDP, but of Labor as a percentage of Income. The stat he cites about Labor declining & Capital increasing as a percentage of National Income since "after about 2000" is one I have seen elsewhere, originally from Megan McArdle

Does this index use the same deflator for numerator and denominator? I'd like to see that confirmed.

It is not a price index. It is a percentage. Questions about inflation are irrelevant, since it just divides nominal amounts at a point in time.

There was just an interesting Atlantic article on how monopolies influence the diverging economic fates of American cities.

Amazing how supermarkets were not permitted to serve over 7% of a local market in the 1960s whereas Walmart today serves over 50% of shoppers in many areas.

I think it was:
1. Leverage. I mean a broad definition of the word. The bigger the audience the more LeBron James can make. In banking/mutual funds/hedge funds the more investors mean more money for the managers. The bigger the company the more the CEO can make (look how many more of restaurants are chains now.)
2. Trade with China increases competition for low skill requiring jobs.
3. Slow growth policies keeping real-estate prices rising.
4. Deceleration of inflation.

Is the current wage stagnation merely a result of world wide wage convergence? If information and trade barriers have been greatly reduced between the average Chinese (or third world worker) and the average American (or first world) worker, the average American worker's wages will be under downward pressure and the average Chinese worker's wages will be under upward pressure. Sticky wages (theory?) will tend to cause wages to stagnate rather than drop quickly, until the pressure reduces. The American workers under wage pressure will tend to jump to other jobs paying better, putting downward pressure on positions that are free from direct pressure.

The US doesn't manufacture iPhones.

"Land values aside, the world awaits a really good paper on monopoly power and American income inequality. "

Harberger (1954)

One confusing element of this is that returns on capital are low, but capital gains have been high. Thus, we can have labor's share of national income constant but people holding equity getting very rich.

Be careful. Buybacks are really a return of cash, like dividends, but they look like capital gains in the accounting. There have been a lot of real estate capital gains, but cap gains in equities have been very low once you account for this.

Or one little American reviews another.

Who would guess from Krugman's review that since 1990 global inequality has declined?

Utterly overlooked is (as Angus Deaton says), “[l]ife is better now than at almost any time in history. More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.”

Why does Krugman care more about the rich than he cares about the poor?

Because like any decent person, he prioritizes the needs of his countrymen over those of foreigners. The economic interests of the American masses are in diametric opposition to those of the American investor class and the global poor. As it is the responsibility of American policymakers to advance the interests and well-being of Americans, their first loyalty should be to the American masses.

The median American worker (and voter) doesn't give a shit that his wage stagnation is raising millions of Chinese and Indian peasants out of poverty. To get the mass change in hearts and minds you globalists seem to want, those in your camp must convince that American worker (and voter) that he is actually better off with stagnant wages, a declining standard of living, and less opportunity for upward economic mobility. Good luck with that.


I'll leave the politics to you. But right and wrong are things you evidently better leave to others.

"I’ll leave the politics to you."

Nice try, but you can't. Your position demands that others make sacrifices to achieve your goals. You must thus justify that position to others. That is, by definition, politics.

Whether you like it or not, you're down here in the mud with the rest of us.

"But right and wrong are things you evidently better leave to others."

If you were demanding the sacrifice be made by the wealthy--those who can afford to transfer substantial portions of their wealth without consequence to their standard of living or to the opportunities afforded them and their descendants--you'd have a stronger moral case. But, you're not. Your expectation is that the sacrifice be borne by the working masses who can't afford it.

What's the over/under on how long the mentally ill troll lasts? Terry Davis has been shadow-banned at HN for years and he's still going, so it could be a while.

two clowns who if they didn't have pro-business republicans around would be hard spent to have their complaints aired.

"it no longer deserves to be taken seriously"

So Krugmanish.... No wonder he never actually persuades anybody outside his circle of anything. It's pretty much an admission he cannot argue on the merits.

IP is a monopoly. Regulation generates oligopolies. Both of those are trending higher. Since global inequality is down, it seems much more likely to me that the explanation is primarily globalization, but if I was going the monopoly route I would emphasize IP.

@Kyle - but it's acknowledged that IP has been rolled back in the last ten years (patents in particular have been made weaker in the USA). Does this affect your analysis? Maybe it's too early for this rollback to count?

When product prices fall, consolidation is inevitable to cut costs and maximize profits. Commodity prices have fallen for 40 years. Also, socialist governments encourage large businesses because government prefers to deal with large entities and policy biases are evident. The current administration hates small businesses.

What's the difference between rents and monopolies? It seems like the Right hates rent seeking and the Left hates monopolies but other then that they're the same thing.

I majored in economics in 1976-1980 and I got an MBA in 1980-82. Back then, the idea that antitrust enforcement should be reduced was a cutting edge anti-conventional wisdom one. If you'd told me back then that this rebel mindset I supported would become so popular so fast that a Democratic administration would approve the creation of ExxonMobil before end of the century, I would have thought you were nuts.

Something that is striking is how little public interest there is in antitrust these days. And it's not like immigration policy, where the billionaires and political establishment struggle to suppress public discussion of the topic. Instead, compared to the 1970s, nobody seems much interested in the topic at all, except for highbrow nerds with an interest in Larry Lessig-style intellectual property issues.

The government still intervenes sometimes to prevent the more outrageously anti-competitive mergers, such as the recent cell phone network proposal. But the public doesn't seem to much care.

If there's a center of the bullseye for inequality, somehow I feel this is close to it.

Maybe the monopoly question could also be researched from its chiral twin: what effect does anti-trust policy have on inequality? It sure seemed like cell-phone-market competition got livelier when AT&T was told it couldn't buy T-Mobile.

Americans feel instinctive mistrust of clustering political power...we have a rich infrastructure designed to thwart it. It was hard but the Founding Fathers did it. Why would we expect the clustering of monetary power to be any less maleficent?

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