Category: Economics

Concentration in product markets

Here are some new results:

This paper uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. The paper’s main contribution is to construct concentration measures that reflect narrowly defined consumption-based product markets, as would be defined in an antitrust setting, while accounting for cross-brand ownership, and to do so over a broad range of consumer goods and services. Our findings differ substantially from well established results using production data. We find that 42.2% of the industries in our sample are “highly concentrated” as defined by the U.S. Horizontal Merger Guidelines, which is much higher than previous results. Also in contrast with the previous literature, we find that product market concentration has been decreasing since 1994. This finding holds at the national level and also when product markets are defined locally in 29 state groups. We find increasing concentration once markets are aggregated to a broader sector level. We argue that these two diverging trends are best explained by a simple theoretical model based on Melitz and Ottaviano (2008), in which the costs of a firm supplying adjacent geographic or product markets falls over time, and efficient firms enter each others’ home product markets.

That is a new NBER working paper by C. Lanier Benkard, Ali Kurukoglu, and Anthony Lee Zhang.  It is very supportive of recent research by Estaben Rossi-Hansberg (here and here, with co-authors) that market concentration simply has not been going up in recent times.

New results on Work From Home

By Jose Maria Barrero, Nicholas Bloom, and Steven J. Davis, there are several points of note, with emphasis added by this author:

COVID-19 drove a mass social experiment in working from home (WFH). We survey more than 30,000 Americans over multiple waves to investigate whether WFH will stick, and why. Our data say that 20 percent of full workdays will be supplied from home after the pandemic ends, compared with just 5 percent before. We develop evidence on five reasons for this large shift: better-than-expected WFH experiences, new investments in physical and human capital that enable WFH, greatly diminished stigma associated with WFH, lingering concerns about crowds and contagion risks, and a pandemic-driven surge in technological innovations that support WFH. We also use our survey data to project three consequences: First, employees will enjoy large benefits from greater remote work, especially those with higher earnings. Second, the shift to WFH will directly reduce spending in major city centers by at least 5-10 percent relative to the pre-pandemic situation. Third, our data on employer plans and the relative productivity of WFH imply a 5 percent productivity boost in the post-pandemic economy due to re-optimized working arrangements. Only one-fifth of this productivity gain will show up in conventional productivity measures, because they do not capture the time savings from less commuting.

Here is the link to the NBER working paper.

The American economy circa 2021

Spending on cars and trucks is 15.1 percent higher than it would have been on the 2019 trajectory; spending on furnishings and durable household equipment is 16.6 percent higher; and spending on recreational goods is a whopping 26 percent higher.

Altogether, durable goods spending is running $348.5 billion higher annually than it would have been in that alternate universe, as Americans have spent their stimulus checks and unused travel money on physical items.

The housing sector is experiencing nearly as big a surge. Residential investment was 14.4 percent above its prepandemic trend, representing $90 billion a year in extra activity. And that was surely constrained by shortages of homes to sell, and lumber and other materials used to make them. It is poised to soar further in coming months, based on forward-looking data like housing starts.

Another bright spot is business investment in information technology. The tech industry has been comparatively unscathed by the crisis. Spending on information processing equipment in the first quarter was 23 percent higher than its prepandemic trend, and investment in software 7.4 percent higher.

But:

Spending on transportation services remains 23 percent below its prepandemic trend, recreation services 31 percent, and restaurants and hotels 19 percent.

Those three sectors alone represent $430 billion in “missing” economic activity — largely equivalent, it’s worth noting, to the combined shift of economic activity toward durable goods and residential real estate.

A corollary shows up in trade data. Services exports are down 26 percent compared with the prepandemic trend, which reflects in significant part the freeze-up in global travel.

Here is the full NYT story.

The Disastrous J&J Pause

We were told that the J&J pause was necessary to prevent vaccine hesitancy. I never understood the certainty people expressed on this point, even people who were relatively good on other issues. In anycase, as the excellent Daniel Bier argues, the best explanation for the data right now is that the J&J pause increased vaccine hesitancy.

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Could the plunge timing have been a coincidence? Perhaps the eager had already gotten their vaccinations, leaving only the less eager and more hesitant. Maybe. But note that younger people were getting vaccinated rapidly before the pause and at increasing rates in line with the rates of the older people who had been vaccinated before them. But then the vaccination rates of the young plummeted, just as for the old. In other words, the plunge started in all age groups at the same time but at very different levels of vaccination. The similar timing across age groups is easy to explain if it was the J&J pause (everyone saw the pause at the same time) but it requires multiple coincidences to explain why every age group would reach their hesitancy point at different levels of vaccination but at the same time.

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My view is that neither the CDC nor the FDA should be playing psychological games with the public. Just give it to us straight. In this case, since there was never much doubt that the J&J vaccine was much safer than COVID, a bulletin to physicians would have been appropriate to the circumstances. We don’t know for certain what would have happened under that counterfactual (although the data from Britain v. Europe on the AZ pause suggest a bulletin would not have generated the same hesitancy) but it would have been the right decision on the evidence.

See Bier’s tweet thread for further breakdown of the data.

Let’s not raise the capital gains tax

That is the topic of my latest Bloomberg column, the vitriol of the Twitter response of course confirms my point.  Here is one excerpt:

First and foremost, any system of taxation is about values. And a much higher rate of capital taxation would undermine some of America’s core values.

A society’s values and its tax regime have to be mutually compatible or they will undermine each other. So the first question about a taxation system is which values it promotes.

The values that the U.S. should prioritize are a valorization of wealth, the encouragement of saving, and the encouragement of children. People may disagree with these priorities — in fact, they disagree quite strenuously! — but for me, it’s important to know whether a proposed tax reform supports or weakens these values. This is a more important consideration than economic calculations of “deadweight loss.”

And:

Values are all the more important for taxation because America is a nation of immigrants. Which is the better message to potential new arrivals? Should it be “America is a great country to get really rich”? Or “Americans are pretty egalitarian, so they won’t let the wealthy get too rich”?

The first message is far preferable — and this is true even if you personally hold fairness to be an important value. It is more important to encourage ambition in those newly arrived to the U.S., if only to take in creative (and yes, sometimes greedy) people who will help solve America’s social problems. Immigrants are responsible for so many of this country’s best and most successful startups.

And note this:

It may well be true that the U.S. has more efficient ways of encouraging ambition and wealth accumulation than the current approach to capital gains taxation. But to make that argument, advocates of the higher capital gains rate need to say what else they would do to boost the valorization of American wealth. Somehow, however, such explanations are never forthcoming — because this debate really is about a clash of values, not just efficiency, and one side wants to lower the status of accumulated wealth.

Like Godot, I will wait forever for an alternative proposal on this matter.  p.s.:

Only a few weeks ago, the prevailing opinion was that it was fine for the federal government to spend an additional $1.9 trillion, because at current margins, deficits don’t matter. Maybe so. But that nonchalance is now mysteriously absent. That too is a sign that, for most people, the values represented by any decision about taxation are paramount.

Of course, if you are doing the comparative statics, the wealthier and more open the rest of the world, the more American should favor its innovators to an extreme.  So the tax on innovation should be falling over time, not rising.

India Authorizes Any Vaccine Authorized by a Stringent Regulator

Mint: In a move that could potentially pave the way for Pfizer and Johnson & Johnson’s covid-19 vaccines in India, the Centre on Tuesday said it would allow the granting of emergency licensure for vaccines that have received authorization in the US, UK, Europe, Japan or from the World Health Organization (WHO).

This is good news and a smart move. But what’s frustrating is that Pfizer was the first company to apply for an EUA from India in December of 2020 but India demanded that they conduct a clinical study on the Indian population and Pfizer pulled its application. In other words, India could have had a third vaccine approved and in use but “vaccine nationalism” reared its ugly head. Only now, as the bodies burn in the streets, has the Indian government acknowledged that the FDA and the EMA are reasonably careful judges of safety and efficacy.

It’s true that the cold storage requirements make the Pfizer vaccine somewhat difficult to use in India’s villages but it would have been fine to use in the major cities.

Naturally, the FDA and the EMA should also recognize each other as peer regulators.

How to judge economic progress right now

Bloomberg Opinion asked seventeen of us to write short bits on this question, here is mine:

Look at used-car prices and rental-car availability. If secondhand cars are getting cheaper and rentals are easy to book, then the U.S. is making progress.

The supply of cars has been significantly constrained since the fall of 2019. The reasons include a strike at General Motors, pandemic-related manufacturing shutdowns and a shortage of semiconductors. One result is that it is very hard or very expensive to rent a car, especially in the more heavily touristed parts of the U.S. In turn, fewer cars from rental fleets make their way into used-car markets.

How do these used-car prices come back down? Will more families become one-car households, selling off autos at the higher prices and thus pulling additional supply into the market? Might companies divert supply flow from other countries to the U.S.? Can America use its existing stock more effectively, for instance by sending rental Hondas from Kansas to Florida?

In the short run, the problem appears hopeless. Yet market supply typically ends up being more responsive than observers expect; think of face masks.

The question is not just how all this will affect your summer vacation plans. It’s how much faith you should have in market economies. Will the U.S. get stuck in its supply-side problems or overcome them?

Some say shipping containers will be a problem.  Here you will find the other takes.

Has Andrew Granato solved for the capital gains tax equilibrium?

Obviously there may be caps on such deductions, as discussed in the chain of tweets, and furthermore, if I understand this correctly it is normalizing the basis at zero.  So you don’t have to take this entirely literally, but nonetheless it is an interesting comparison to consider — the return to selling shares just might not be that high, especially if you can get some non-tax benefits from the donation.

So if you compare the decision to buy equities to a real estate investment, which is probably not going to lose its more favorable capital gains treatment…

Here is the link, via Amihai Glazer.

Shout it From the Rooftops and Sometimes People Will Listen

Shout it from the rooftops and sometimes lots of other people will start shouting and then sometimes other people will listen!

The U.S. will begin sharing its entire pipeline of vaccine from AstraZeneca once the COVID-19 vaccine clears federal safety reviews, the White House told The Associated Press on Monday, with as many as 60 million doses expected to be available for export in the coming months.

The move greatly expands on the Biden administration’s action last month to share about 4 million doses of the vaccine with Mexico and Canada. The AstraZeneca vaccine is widely in use around the world but not yet authorized by the U.S. Food and Drug Administration.

…About 10 million doses of AstraZeneca vaccine have been produced but have yet to pass review by the FDA to “meet its expectations for product quality,” Zients said…That process could be completed in the next several weeks. About 50 million more doses are in various stages of production and could be available to ship in May and June pending FDA sign-off.

Let’s also get our J&J vaccine factories up and running and soon we will have Moderna and Novavax to export as well. Keep it coming! An American plan to vaccinate the world.

Scott Sumner on capital gains taxation

You also see the media discuss the “principle” that capital gains should be taxed the same as wage income.  That’s about as sensible as saying that “in principle”, a gallon of gasoline should pay the same tax as a gallon of Scotch whiskey.  Exactly what principle is that?  Capital gains income is nothing like wage income, indeed calling both “income” is nonsensical.  For instance, the real and nominal tax rate on wage income is identical, and the real and nominal tax rate on capital gains is very different.  So if it’s a matter of “principle”, then why should we set the nominal tax rates equal?  Why not equalize the real tax rates?  And if they are merely two forms of “income”, then why don’t we allow full deduction of capital losses from wage income?

A wage tax essentially taxes current and future consumption at the same rate.  A capital gains tax taxes future consumption at a higher rate than current consumption.  What “principle” suggests that patient people should be taxed at higher rates than impatient people—even if they have the same lifetime wealth?

Here is more.

Me on the end of the Great Stagnation

Here is some (edited) transcript from an AEI symposium, via Jim Pethokoukis:

We’ve come up with great new ideas, took a little while to figure out how to use them and how to spread throughout the economy, and eventually they made big differences. Are we assuming that these new technologies are like the ones in the past and they’ll have that eventual impact?

I think the new innovations will be special in at least one significant way: A lot of them will not contribute that much to per capita GDP. So, if you take the mRNA vaccines, they’re influencing what would normally be called the “cyclical component.” If you think of older people as more likely to die from COVID-19 . . . by saving lives — I’m not suggesting per capita GDP will go down — but the impact on human welfare will be much greater than what would appear to be the long-term secular trend in GDP. Also, two of the big advances that might happen are a vaccine against HIV/AIDS and an effective vaccine against malaria. Those would be incredible advances for humanity, but I don’t know how much they would show up in US per capita GDP or productivity — possibly not really much at all.

The other new wave of innovations, which you could call green energy — again, you could be very optimistic about those, but the main thing they’re doing is helping us avoid a catastrophe. So they’re boosting GDP relative to a quite awful counterfactual of just continuing to burn coal and other fossil fuels. But I’m not sure we’ll feel we have higher standards of living relative to what we were used to simply because there’s a solar panel on your home. It might in some ways make your energy supply better, but again, it will be hidden by the counterfactual. So, it will be a very strange kind of technology boom when I look at the two main areas where I see a lot of progress.

If we go through a period where none of this stuff is really showing up in data and maybe it’s not obvious that people’s living standards are rising, do we risk having less societal tolerance for the kinds of disruptions that economic growth and progress naturally make?

Here’s one of my fears: The biomedical innovation progress is so fast but the rest of the economy stays relatively static, so we become older as a society more quickly than we had been expecting. You could have a lot more status quo bias — just more entrenchment, 10 years more of a problem — and we could, in a funny way, innovate ourselves into a tighter complacency and a tighter stagnation.

I’m not rooting against increases in life expectancy. Ceteris paribus, I would take them, obviously. But that said, you want to be careful about the order in which progress comes, and I’m not sure if we’re going to get it in an optimal order.

Here is the complete excerpt.

Falling prices prediction bleg

Over the next six to nine months, which things in the American economy will see falling nominal prices?

Don’t count goods and services for which the current price is de facto infinity, such as a cruise or a twenty-block of seats at an NBA game.

What are your predictions?  And what is your underlying model for that sector of the economy?

Will used car prices be falling by then?

At a dinner table discussion, one person I know picked “the price of TV streaming services” (falling viewing time plus excess capacity?), but this was much disputed.

Response to Questions from Senator Ted Cruz on Vaccine Passports

In my Congressional testimony I got into a little back and forth with Senator Ted Cruz on vaccine passports. Subsequently, I was asked to respond to a series of follow-up questions of the form:

If a vaccine passport or any other type of vaccine credential is required by individual private companies, do you have any concerns with a [educational institution/airline/grocery store…] refusing service or otherwise discriminating against an individual that:

(a) chooses not to receive the vaccine?
(b) is not a suitable candidate to receive the vaccine for medical reasons?

My response:

During the pandemic it was common for bars and restaurants, churches, gyms, shopping malls, entertainment venues, schools and universities and even parks and beaches in the United States to be closed for everyone. Similarly, international travel has been severely restricted for everyone. I think it an improvement to move from closed-for-all to open-for-some. Thus vaccine passports represent a lifting of restrictions and an increase in freedom on the path back to normality. Greece, for example, is scheduled to open to anyone with a record of vaccination, negative COVID test, or previous infection. This is good for Greece which relies on tourist revenues for a significant share of its economy and good for the world who want to visit sunny beaches and ancient ruins.

Moving in stages, from closed-for-all to open-for-some to fully-open, is reasonable. The aim, of course, is to be open-for-all, an achievable aim if a large enough proportion of the population is vaccinated. As we move to normality we should also make it possible for the non-vaccinated to access as many services as possible on reasonable grounds, for example, through the use of testing and masks.

It bears repeating that the best way to avoid these difficult decisions is for as many people as possible to be vaccinated, thus making social life safe for the unvaccinated as well as the vaccinated. For these reasons I have supported free vaccinations, stretching doses to vaccinate more people quickly through policies such as delaying the second dose and testing fractional doses, using single-shot vaccines, and developing nasal and oral vaccines.

Sincerely,

Alex Tabarrok
Department of Economics
George Mason University