Month: August 2017
Let’s assume away cyclical factors, so full employment always holds.
If every sector of an economy becomes monopolistic, output will contract in each sector, and it might appear that productivity will decline. But for the most part this output reduction will not be achieved by burning crops in the fields. Rather, less will be produced and factors of production will be freed up for elsewhere. New sectors will arise, and offer goods and services too, perhaps with monopolies as well. In any case, the consumer surplus gains from those new sectors might be especially high, because they will be selling to the highest points on demand curves that previously were unsatisfied altogether.
You can cite the deadweight loss of monopoly all you want, but we’re getting more outputs of other stuff. Value-added could be either higher or lower, productivity too.
The Schumpeterian tradition, of course, suggested that market power would boost innovation. There are at least two first-order effects pushing in this direction. First, the monopoly has more “free cash” for R&D, and second there is a lower chance of the innovation benefiting competing firms too. I don’t view the “monopoly boosts innovation” hypothesis as confirmed, but it probably has commanded slightly more sympathy from researchers than the opposite point of view. Bell Labs did pretty well. In any case, partial equilibrium output restrictions won’t get you to any kind of smooth conclusion about monopoly causing low productivity growth.
Let’s say instead that every sector is ruled by monopolistic competition, a’la Chamberlin. In the model, that puts firm production at points on the AC curves above minimum AC for each firm or sector. You might consider that to be a productivity problem, though of course you must compare it to the rise in product diversity that follows from monopolistic competition.
But under those same conditions, profits are zero and so the mark-up arguments from the DeLoeker and Eeckhout paper do not apply and indeed cannot hold.
I find most of what is written on monopoly and productivity these days to be under-theorized.
He has a long post, with many points of interest, here is the concluding section:
If, like me, you buy the standard “free entry” argument for zero expected economic profits of early entrants, then the only remaining explanation left is an increase in fixed costs relative to variable costs. Now as the paper notes, the fall in tangible capital spending and the rise in accounting profits suggests that this isn’t so much about short-term tangible fixed costs, like the cost to buy machines. But that still leaves a lot of other possible fixed costs, including real estate, innovation, advertising, firm culture, brand loyalty and prestige, regulatory compliance, and context specific training. These all require long term investments, and most of them aren’t tracked well by standard accounting systems.
I can’t tell well which of these fixed costs have risen more, though hopefully folks will collect enough data on these to see which ones correlate strongest with the industries and firms where markups have most risen. But I will invoke a simple hypothesis that I’ve discussed many times, which predicts a general rise of fixed costs: increasing wealth leading to stronger tastes for product variety. Simple models of product differentiation say that as customers care more about getting products nearer to their ideal point, more products are created and fixed costs become a larger fraction of total costs.
As always, I am very pleased to have Robin as my colleague and friend. And from Karl an excellent post, his conclusion:
The sweeping away of the small generalized firm made room for the rise of increasingly specialized local businesses, offering what might think of as a more artisanal experience. These firms have increased markups, but those markups don’t represent a lack of competition. Instead, they represent a return to the particular skills or vision necessary to make a specialized product. Economists refer to this market pattern as monopolistic competition, and it is the source of variety that consumers in a wealthy developed economies desire.
If my story is correct, then the trend towards higher markups is indeed linked to the major changes sweeping the American economy. However, it isn’t the cause of them. Its another consequence of the massive changes introduced by globalism and the radical changes in retailing.
There are additional points of interest at the link.
That is the topic of my latest column from Bloomberg, here is one excerpt:
If you could directly alter your kids’ genetic profile, what would you want? It’s hard to know how the social debate would turn out after years of back and forth, but I was dismayed to read one recent research paper by psychologists Rachel M. Latham and Sophie von Stumm. The descriptive title of that work, based on survey evidence, is “Mothers want extraversion over conscientiousness or intelligence for their children.” Upon reflection, maybe that isn’t so surprising, because parents presumably want children who are fun to spend time with.
Would a more extroverted human race be desirable, all things considered? I genuinely don’t know, but at the very least I am concerned. The current mix of human personalities and institutions is a delicate balance which, for all of its flaws, has allowed society to survive and progress. I’m not looking to make a big roll of the dice on this one.
It’s also not difficult to imagine parents wanting children who are relatively well-behaved. The same research paper found that mothers, after extroversion, preferred the trait of “agreeableness” in their children, again over both intelligence and conscientiousness.
I was struck by a recent Chinese report that some parents are asking for children who are able to drink socially, for business purposes, and thus trying to avoid some genes that make it difficult to process alcohol. Caveat emptor.
Best sentence: “I don’t trust people to take so much control over the future of human nature.”
The statue, which was unveiled by Indian President Pranab Mukherjee during his visit to Ghana in June, was meant to symbolize friendship between the two countries, according to Ghana’s Ministry of Foreign Affairs. But professors and students at the University of Ghana called the statue “a slap in the face” because of Gandhi’s “racist identity.” They started an online petition calling for the statue’s removal.
The petition, which had more than 1,700 supporters on Thursday, cited letters Gandhi wrote during his time in South Africa as evidence that he advocated for the superiority of Indians over black Africans. It also took issue with his use of the derogatory term kaffir to refer to native Africans and criticized the lack of statues of African heroes and heroines on campus.
Robo-Adviser Tries to Reach Muslim Investors (WSJ, on-line header differs)
And just to remind you this truly is 2017, here is another of today’s headlines (NYT):
France’s Macron Looks to Confront Eastern Europe Over Cheap Labor
Macron: overrated, as I’ve said from the beginning. As for the robo-advisers, we’ll have to see.
1. Noah Smith responds on market power. I say concentration alone doesn’t mean much; that’s been accepted since the 1970s, and I still see no evidence for market power showing up as retail output restrictions at a higher pace, and that is the most direct and welfare-relevant prediction of the theory. Without that evidence, the story doesn’t have support, and the burden of proof is on that side of the argument. (Furthermore I am worried that they don’t even mention this test, much less perform it.) And if intermediate input market power doesn’t “trickle down” into consumer goods output restrictions…it’s like that proverbial tree falling the forest.
And here is a Matt Yglesias dialogue with the authors, I haven’t heard it yet.
5. Julia Galef lists (but does not endorse) unpopular ideas. I agree with very few of them, by the way, but they are intrinsically interesting to ponder. What also strikes me is the implicit terms of debate, mostly moves toward greater social liberalism. How about Christian or extremely non-egalitarian ideas?
A good video on the endowment effect–these people are crazy!
Veterans’ issues — something that almost never make the national conversation unless the Veteran’s Administration has a juicy scandal for us to gape at — loomed much larger in the questioning than health-care reform, which has obsessed the national media for the past nine months. That shouldn’t really be surprising. The number of veterans in the country is roughly equal to the widely touted figure of 20 million people who gained insurance because of Obamacare.
Veterans’ issues were the most notable way that the local conversation differed from the national one, but far from the only one. I heard more about school policy than climate change, and a great deal about very local issues indeed — problems with asbestos in the water table, a local community college that someone said was doing a poor job of preparing kids for work. In the El Paso leg of the trip, which I didn’t cover, Hurd says that the conversation was dominated by flooding, as heavy rains had recently filled normally dry arroyos, damaging property and displacing families.
That is from Megan McArdle, who is touring the politics of Texas, national level politics I might add, a House race.
These aspects raise an uncomfortable possibility for libertarians: is there a sort of law of conservation of coercion in well-functioning societies? A community with a minimal state can only function if it is thick enough and homogeneous enough to enforce sanctions for antisocial behavior that are almost state-like in their severity, and, furthermore, can make them stick. Freeing individuals from their smothering parochialisms will lead to a compensating increase in the scope and reach of the state as people search for a new solution to social dilemmas formerly handled via informal means. Conversely, attempts to suddenly curtail state power may lead to chaos in the intervening period when social institutions have not yet reasserted themselves. Principled libertarians might still have good reasons to prefer the non-state forms of compulsion—among them the arguments from public choice economics and a federalist preference for decisions being made at the lowest feasible level, where actors are most likely to have relevant information. But “increased freedom” may not be one of them.
Here is more:
Kuznicki thinks the engineering mindset in political theory is an antidote to what he sees as a philosophical tradition of abstract theorizing that puts the state on a pedestal and makes it into an almost metaphysical nexus of the human condition. But as I look around, much of the vapid theorizing seems to be in favor of liberalism writ large, while the best current example of a state built on hard-nosed pragmatism is Singapore. Kuznicki himself is a representative of a currently fashionable sort of cosmopolitan libertarianism that has never existed in governmental form, and which I suspect is the least likely form of government ever to exist. What if a practical politics that took account of human frailty implied a world formed from a combination of cosmopolitan but illiberal city-states, unified but homogeneous nation-states, and sprawling empires that vacillate between centrifugal and centripetal tendencies? In fact, this is the world that has existed for most of recorded history. Perhaps the real ideological blinders are those which tell us that we have transcended this condition and can replace it with something else.
That means the top 10 universities in the United States – a country of over 315 million people – at any given time are educating a grand total of only 62,150 students.
By contrast, here are the rough numbers of undergraduates at the top 3 Canadian universities:
That is from Joseph Heath, via Alessandro S. Now, you might wish to argue that the United States is optimally anti-egalitarian in having relatively small classes for its best elite universities. But then I wonder how much more widely that logic might generalize. I, for one, still favor Harvard and other top schools trying to do 3x or 5x with respect to their admissions.
2. On political anger (pdf). And methods to limit violence at demonstrations. And “Do black Americans have the courage and conviction to look the hateful monsters in the eye and offer a love so radical that it reminds them their hatred does not define them?”
3. “Users would be able to earn “Karma Coins” by meditating and teaching Buddhism. The coins could be spent within a special Buddhist community called the “Lotos Network.”” Link here.
7. Kevin Drum offers a rebuttal on market power, but he cedes the entire ground on mark-ups. Concentration is up somewhat, but that is not the debate at hand. Bookstores are an excellent example of where concentration has gone up, and real choice has gone up too. Nor do I see a big problem with pricing (Amazon used anyone?), though of course the marginal cost of producing an extra book copy is pretty low and thus the measured mark-up should be high. Pharma? A given drug has falling mark-ups over time, for new drugs the price falls from infinity. For phone service, these days prices are tumbling. Airfares falling too. Search engines? p = 0. An unusual “fail” from Kevin.
Gab is an app similar to twitter but it has a more permissive speech policy. According to company spokesman Utsav Sanduja, “Whatever is permissible under the First Amendment is what Gab allows onto its site.” Gab has attracted some users from the alt-right and seemingly for this reason Gab has been banned by both Google and Apple. I wouldn’t go so far as Aaron Renn who argues that “Google and Apple have used their duopoly status to revoke the First Amendment on mobile phones” but I do find these actions troubling.
I have no problem with Twitter or Facebook policing their sites for content they find objectionable, such as pornography or hate speech, even though these are permitted under the First Amendment. A free market in news doesn’t mean that every newspaper must cover every story. A free market in news means free entry. But free entry is exactly what is now at stake. Gab was created, in part, to combat what was seen as Facebook’s bias against conservative news and views. If Gab or services like cannot be accessed via the big platforms that is a significant barrier to entry.
When Facebook and Twitter regulate what can be said on their platforms and Google and Apple regulate who can provide a platform, we have a big problem. It’s as if the NYTimes and the Washington Post were the only major newspapers and the government regulated who could own a printing press.
In a pure libertarian world, I’d be inclined to say that Google and Apple can also police whom they allow on their platforms. But we live in a world in which Google and Apple are bound up with and in some ways beholden to the government. I worry when a lot of news travels through a handful of choke points.
I also fear that Google and Apple haven’t thought very far down the game tree. One of the arguments for leaving the meta-platforms alone is that they are facially neutral with respect to content. But if Google and Apple are explicitly exercising their power over speech on moral and political grounds then they open themselves up to regulation. If code is law then don’t be surprised when the legislators demand to write the code.
These problems are arising in many fields not just news. As Politico noted, OKCupid has banned users accused of being white supremacists and asked members to report “people involved in hate groups.” AirBnb took it even one step further and “jettisoned the accounts of users it suspected of renting rooms to attendees of the “Unite the Right” event.” So it wasn’t even white supremacists who were banned but people who rented to them. What is next? Will white supremacists be banned from lunch counters? Sure, that prospect might generate a frisson of excitement but is that the kind of society we want to live in? And are we so sure that the tables will never turn again?
Tim reaffirms his status as one of the great (greatest?) contemporary popular writers on economics, this time turning his attention to technology. From a Smithsonian interview:
So what made you decide to write a book looking at the modern economy through specific inventions?
I think it was a slight sense of frustration. I’m an economist, and economics often feels abstract and very impersonal, even though I don’t think it’s abstract or impersonal. As an economics writer, I’m also looking for a way to tell a good story and get some ideas across. I realized if I produced a kind of technological history with lots of ideas and examples I could teach some economics lessons through these very specific stories.
What’s your favorite invention in the book?It varies, but right now it’s paper. I just loved the realization that there was an alternative to talking about the Gutenberg press. Obviously I have nothing but admiration for the Gutenberg press – it’s a tremendously important innovation. But everybody told me, ‘oh, you’ve doing fifty inventions that shaped the world, you must do the Gutenberg press.’ And I thought, ‘yeah, but it’s so obvious.’ Then I was looking at the Gutenberg Bible in the New York Public Library, and thinking, ‘this bible is printed on something. It’s not printed on nothing. It’s printed on a surface.’ It turns out that the Gutenberg press works perfectly well with parchment, technologically speaking, but economically speaking it doesn’t make any sense without paper. Parchment is just too expensive to produce a long print run. So as long as all you’re doing is handwriting bibles and making them look beautiful, there’s no need to use paper at all. But with paper you’ve got a mass-produced writing surface. It’s often the very cheap inventions that get overlooked, but nevertheless change the world.
Here is an adaptation from the book on the history of barbed wire. Here is another BBC adaptation on why electricity did not change manufacturing more quickly. You can pre-order the book here.
In 1980, average markups start to rise from 18% above marginal cost to 67% now.
That sounds like big news, and probably it is. But I don’t think the authors are doing enough to interpret their results. There are two ways these mark-ups go could up: first there may be more outright monopoly, second there may be more monopolistic competition, with high mark-ups but also high fixed costs, and firms earning close to zero profits. The two scenarios have very different distributional implications, and different policy implications as well.
Consider my local Chinese restaurant. Maybe the fixed cost of a restaurant has gone up, due to rising rents and the need to invest in information technology. That can mean higher fixed costs, but still a positive mark-up at the margin. The marginal meal ordered there probably is taken from food inventory, representing almost pure profit. They are happy when I walk in the door! Yet they are not getting super-rich, rather they are earning the going risk-adjusted rate of return.
Now, if the economy is moving more toward monopolistic competition, higher mark-ups don’t explain other distributional changes in the macro data, such as the decline of labor’s share, as cited by the authors.
The authors consider whether fixed costs have risen in section 3.5. They note that measured corporate profits have increased significantly, but do not consider these revisions to the data. Profits haven’t risen by nearly as much as the unmodified TED series might suggest. I do see super-high profits in firms such as Google and Facebook, however. Those companies for the most part have lowered margins compared to the status quo ex ante when the relevant service cost infinity. “Mark-ups over time” measurements become very tricky when new products are being introduced.
The authors argue that the rising value of the stock market (plus dividends) is further evidence for rising profits. Maybe, but keep in mind that the public market is less and less representative of corporate America. It also has significant survivorship bias, based on size, as superfirms are rising and the number of small and mid-sized companies listing has plummeted since the 1980s. I suspect what has really happened is that large firms are way more profitable, partly because of globalization, not because they are doing such a major rip-off of American consumers. In most areas we have more choice, maybe much more choice, than before. I would be very surprised if it turned out that most good ol’ normal mid-sized service sectors firms saw a nearly fourfold increase of the profit rate relative to gdp since 1980, as the authors are suggesting might be true for the American economy as a whole. Health care, maybe, I grant that.
Or consider old-style manufacturing. The authors report that “Markups have gone up in all industries…” This is in an environment where numerous other highly credible empirical pieces, backed also by good anecdotal observation, cite rising competition from Chinese and other global suppliers. How does that all square? I side with David Autor on that one, yet it is reported that those mark-ups, in the sectors where American business now competes with the Chinese, are rising as measured. I am worried the paper does not at all try to square this tension. Surely it means the measures are significantly wrong in some way.
Similarly, the time series for manufacturing output is a pretty straight upward series, especially once you take out the cyclical component. If there is some massive increase in monopoly power, where does the resulting output restriction show up in that data? Once you ask that simple question, the whole story just doesn’t add up.
Or ask yourself a simple question — in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down? Hospitals, yes. Cable TV? Sort of, but keep in mind that program quality and choice wasn’t available at all not too long ago. What else? There are Dollar Stores, Wal-Mart, Amazon, eBay, and used goods on the internet. Government schools. Hospitals. Government. Did I mention government?
I do think concentration in the American economy is up modestly, as I argue in The Complacent Class, and probably profits are up too, including relative to gdp. Hospitals are the most significant practical problem in this regard, and again that squares with the anecdotal evidence. As it stands, I don’t yet see that this paper has established its central claim that measured rising mark-ups indicate truly higher profits in a significant way.
Addendum: The section on macroeconomic implications I think is premature (they cite the declining labor share, declining capital share, decline of low skill wages, declining LFP, declining labor market flows, declining migration rates, and slower productivity growth). They should try to calibrate this, to see if the postulated effects possibly might work out as suggested, and by the way RBC research really is useful. And timing matters too! Given the mechanisms the authors cite, what kind of timing lags are possible? It would seem for instance that when mark-ups rise, real wages fall right then and there, due to the higher prices. Is that what the data show? Do the productivity growth effects, and their weird timing with 1973 and 1995-2004 breaks, fit into the same framework? And so on. I would be very surprised if the pieces fit together in even a crude sense.
And here are remarks by Rohan Shah. I thank Alex and Robin for useful comments and discussion, of course without implicating them.
I have a odd idea to improve diversity in the short run within the current system. Economists should create a convention (not rule) by setting the example that at least one of the reference letter writers should be female. I think this one small move could nudge people towards a big change. Young grad students will be more likely to work with women in a position of authority. Schools will try to find more senior level female economists for the department. And the young male colleagues might just behave a little better, if only to get a better working relationship and a reference from the female economist.