Those new service sectors jobs — lots of ’em!

…we find that total employment rises substantially in industries with rising concentration.  this is true even when we look at total employment of the smaller firms in these industries.  This evidence is consistent with our view that increasing concentration is driven by new ICT-enabled technologies that ultimately raise aggregate industry TFP.  It is not consistent with the view that concentration is due to declining competition or entry barriers…as those forces will result in a decline in industry employment.

That is from a new paper by Chang-Tai Hsieh and Esteban Rossi-Hansberg.  The paper presents a larger picture too:

…the secular changes the U.S. economy has experienced for the last four decades…amount to a new industrialization process.  One that allows firms to expand geographically and deliver its goods and services to customers locally.  We have argued that this evolution was the result of an underlying technological change that led to reductions in variable costs (and establishment-level fixed costs) in exchange for larger firm-level fixed costs.



So less competition and more monopolies is better for everyone?

Well, Prof. Cowen fervently hopes that enough people will believe this - monopolies have been given a bad name, and are likely worth a love letter too.

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Monopoly libertarians are a different sub-tribe from pro-competition libertarians. A lot of them are NeverTrump Republicans.

Why do you reject capitalism?

If Elon Musk can raise money to spend $20 billion on fixed cost capital, eg, factories, machinery, charging infrastructure, vehicle monitoring infrastructure, while paying hardware design engineers to advance Tesla technology faster than competitors, technology Tesla has opened up patents on to competitors, plus software controls. Tesla is not opening up its big data to competitors, not that it would be useful, which is used to train Tesla AI used for driving and navigation.

Most AI are tied tightly to sensors and the hardware, and then require lots of real world training with the specific hardware to train. Most Teslas on the road upload real world data which requires lots of vehicle driving on the road. But Tesla has far fewer vehicles on the road than GM, Ford, etc, but they have not invested in the high fixed costs of obtaining real world data to train AI. Uber tried to obtain real world data by paying drivers to drive repeated around one city on likely the same routes, a task that drove its drivers to distractions.

Jeff Bezos picked an area which had lots of cash flow to invest in extremely high fixed costs, and thus by GAAP losing money for 20+ years has built SWAG $25 billion in capital assets. Competing with Amazon would require a commitment of $50 billion to build capital assets, fixed costs, over a decade.

But the equity market in the US is over $10 trillion, so funding $10-50 billion fixed cost startups over a decade is hardly moving the needlle in equity markets.

The problem is since the 70s, the expectations on return on invested capital has soared even as interest on debt has plummeted. This makes no sense. High fixed cost firms like Sears have been loaded up with debt, the fixed costs sold off, and rented, but with investments slashed. Sears was the original Amazon. But updating Sears mailout to compete with "home shopping networkers" was considered money losing. In the 80s, high fixed cost assets were built to serve hsn, but they were quickly retasked to online retailers like Amazon. But they didn't invest in order taking fixed costs like Amazon. Plenty of equity was available in the 90s for anyone with the vision of Bezos, but those close had too shorrt a time frame to exit at high profit, instead of GAAP losing money building up fixed costs. (Lots of new capital means lots of depreciation which translates into losses.)

SpaceX and Blue Origin are two high fixed cost businesses, started by Elon Musk and Jeff Bezos over 15 years ago, and with "no exit" possible to today for 99% off private equity today.

That is different from before the 70s. Even small towns had high fixed cost businesses, with the "equity" living in the town. Farms are high fixed cost businesses, so the mindset in small towns was much the same for farming and factories. In the 80s, the "equity" moved out of the small town. Then medium. Production shifted to Asia where the US pre-70s mindset remained.

"So less competition and more monopolies is better for everyone?"

Nope, Medicare for all is a still a dumb idea.

'amount to a new industrialization process'

Since when did taking products manufactured in another country and distributing become a new industrialization process?

The iPhone being a perfect example in relation to America, a country unable to actually manufacture the iPhone.

Its all about slashing fixed costs.

Apple gets other companies to make huge investments in fixed costs, and then dumps them if it finds a better alternative. In Asia, the capitalists are more nimble are they find a buyer for the high fixed cost tech they developed for Apple, and generally end up competing with Apple. It helps that Asia has lots of people invested in high fixed cost enterprise.

Can't think of a higher fixed cost business than metal refining and production. Asia built lots of steel mills when the US was shutting down steel mills based on too much fixed costs in steel production for the total global demand, which was projected to keep falling.

Since the mid 90s, China has added twice the US steel production in 1980. In the 80s, the US closed high fixed cost steel and replaced it with lower fixed cost steel: mini mills recycling mostly scrap and small amounts of ore.

Of course, the framework for nimble skilled workforce is a high fixed cost that has been a Chinese government priority. One that China was happy to develop with help from mortal enemies, Japan and Taiwan.

Cowen is quoting from the paper, not the abstract. I don't have access to the full paper, and the abstract isn't clear as to what firms were studied or the results, but the title of the paper is The Industrial Revolution in Services. From the abstract:

"The rise in national industry concentration in the US between 1977 and 2013 is driven by a new industrial revolution in three broad non-traded sectors: services, retail, and wholesale. Sectors where national concentration is rising have increased their share of employment, and the expansion is entirely driven by the number of local markets served by firms. Firm employment per market has either increased slightly at the MSA level, or decreased substantially at the county or establishment levels."

In other words, local firms and employment are shrinking as national and international firms and employment grow, the former the losers in the new economy, the latter the winners. Big is beautiful, might be how some describe the phenomenon. Others might describe it as winners and losers. You know who you are.

So improved IT, communications, and perhaps rapid freight enable national scale service firms (e.g. Starbucks or CarMax) to replace local only firms?

Which amounts to a new industrialization process - Starbucks is undoubtedly as revolutionary to industrialization as the steam engine.

I was actually in CarMax last week to sell an old car, and remarked at the time on the “industrial scale” process they have. Efficient, relatively high volume, obviously well organized, IT heavy.

Of course, this makes consensus for setting monetary policy impossible, as prices for many goods have been falling due to the efficiencies of the new economy while prices for services and goods not produced in the new economy have been rising and rising substantially (tuition, health care, pharmaceuticals, housing). Should the Fed raise interest rates or lower them? Trump and the latest rumored choice for the Fed (Judy Shelton) want to cut interest rates to zero! Are they right? Or dreadfully wrong?

According to Presidential candidate Andrew Yang, technology advances will lead to the loss of over 3 million jobs in the near term. His argument is persuasive. I don't want to spend $5 to buy the NBER paper but do wonder what industries they are looking at. Even financial services which have had a lot of growth are being replaced by robo advisors based on ETFs. Banks are all automated and the only time I see a teller is if I have large check to deposit (very rare).

Big question for me is why Tyler Cowen didn't get a Presidential Medal instead of Art Laffer. This blog has contributed more than Laffer ever did.

"Banks are all automated..." I've worked in IT at a number of major international banks, and I was shocked by now much is still "manual", as in requiring a human to click something on a desktop computer. I'd assumed it was all a big clockwork plugging away behind the scenes before that. But the reason is that in fact these processes can't be automated by current tech.

Maybe, maybe not... How does environmentalism affect concentration...?

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