Results for “concentration” 203 found
The Increased Competitiveness of the US Economy
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.
Reforms for money market funds
»» Tighten the portfolio maturity limit currently applicable to money market funds and add a new
portfolio maturity limit.
»» Raise the credit quality standards under which money market funds operate. This would be
accomplished by requiring a “new products” or similar committee; encouraging advisers to follow best practices for determining minimal credit risks; requiring advisers to designate the credit rating agencies their funds will follow to encourage competition among the rating agencies to achieve this designation; and prohibiting investments in “Second Tier Securities.”
»» Address “client risk” by requiring money market fund advisers to adopt “know your client” procedures and requiring them for the first time to disclose client concentrations by type of client and the potential risks, if any, posed by a fund with a client base that is strongly concentrated.
»» Enhance risk disclosure for investors and the market and require monthly website disclosure of a money market fund’s portfolio holdings.
»» Assure that when a money market fund proves unable to maintain a stable $1.00 NAV, all of its
shareholders are treated fairly…
»» Enhance government oversight of the money market by developing a nonpublic reporting regime for all institutional investors in the money market, including money market funds, and encouraging the SEC staff to monitor higher-than-peer performance of money market funds.
»» Address market confusion about money market institutional investors that appear to be—but are not—money market funds.
pp.7-8 tell you what they don't want to do, take a look. Maybe that above list sounds reasonable, but it also sounds designed to prevent money market-like institutions from…guess what…competing with money market funds. It also sounds designed to preserve the good name of money market funds next time something goes screwy. It is designed to preserve p (share) =1 without requiring a legal commitment to that effect and without instituting overly burdensome regulation. Pretty neat, huh? It's a circle the wagons approach, combined with a reluctance to ante up any cash on the table. You don't suppose they are still planning to depend on the Fed as a lender of last resort, do you?
You'll see a lot more proposals like this from industry participants. "Help me look good again," but with little recognition of the toothpaste tube metaphor and with few remedies for wherever the next bout of systemic risk gets squeezed to. I don't blame the money market sector for not solving this problem (economists can't solve it either), but at the same time it's important to recognize such proposals for what they are: the new financial services sector equivalent of NIMBY. Put your systemic risk junk somewhere else. But where?
The marginal value of health care in Ghana: is it zero?
Megan McArdle points us to this scary report:
2,194 households containing 2,592 Ghanaian children under 5 y old were
randomised into a prepayment scheme allowing free primary care
including drugs, or to a control group whose families paid user fees
for health care (normal practice); 165 children whose families had
previously paid to enrol in the prepayment scheme formed an
observational arm. The primary outcome was moderate anaemia
(haemoglobin [Hb] < 8 g/dl); major secondary outcomes were health
care utilisation, severe anaemia, and mortality. At baseline the
randomised groups were similar. Introducing free primary health care
altered the health care seeking behaviour of households; those
randomised to the intervention arm used formal health care more and
nonformal care less than the control group. Introducing free primary
health care did not lead to any measurable difference in any health
outcome. The primary outcome of moderate anaemia was detected in 37
(3.1%) children in the control and 36 children (3.2%) in the
intervention arm (adjusted odds ratio 1.05, 95% confidence interval
0.66-1.67). There were four deaths in the control and five in the
intervention group. Mean Hb concentration, severe anaemia, parasite
prevalence, and anthropometric measurements were similar in each group.
Families who previously self-enrolled in the prepayment scheme were
significantly less poor, had better health measures, and used services
more frequently than those in the randomised group.
Why the market has been down on the Euro and European banks
Austria’s bank exposure to emerging markets is equal to 85pc of GDP
– with a heavy concentration in Hungary, Ukraine, and Serbia – all now
queuing up (with Belarus) for rescue packages from the International
Monetary Fund.Exposure is 50pc of GDP for Switzerland, 25pc for Sweden, 24pc for
the UK, and 23pc for Spain. The US figure is just 4pc. America is the
staid old lady in this drama.Amazingly, Spanish banks alone have lent $316bn to Latin America,
almost twice the lending by all US banks combined ($172bn) to what was
once the US backyard. Hence the growing doubts about the health of
Spain’s financial system – already under stress from its own property
crash – as Argentina spirals towards another default, and Brazil’s
currency, bonds and stocks all go into freefall.Broadly speaking, the US and Japan sat out the emerging market
credit boom. The lending spree has been a European play – often using
dollar balance sheets, adding another ugly twist as global
“deleveraging” causes the dollar to rocket. Nowhere has this been more
extreme than in the ex-Soviet bloc.The region has borrowed $1.6 trillion in dollars, euros, and Swiss
francs. A few dare-devil homeowners in Hungary and Latvia took out
mortgages in Japanese yen. They have just suffered a 40pc rise in their
debt since July. Nobody warned them what happens when the Japanese
carry trade goes into brutal reverse, as it does when the cycle turns.
. . .
Just in case you were wondering. Here is the link. By the way, this is further evidence that the driving force behind the earlier boom was the global savings glut, and sheer giddiness, not the excessively loose monetary policy of Greenspan’s Fed. The ECB has pursued a relatively tight monetary policy since its origin. It also will be interesting to see what trouble arises in Spain, since Spanish banking regulation has been considered a model of how to keep these problems under control.
And here’s Romania fact of the day:
Romania raised its overnight lending to 900pc to stem capital flight…
Is the Sweden plan so much better?
Paul Krugman, Brad DeLong, and Matt Yglesias are all endorsing the Swedish plan for partial bank nationalization. Maybe it’s better than what we’ll get (I haven’t read through the latest draft), but I don’t think they are addressing the weaknesses of the idea. Namely:
1. Solvent banks don’t need to be nationalized. Insolvent banks should be shut down. Maybe they’re mostly insolvent, but that is second-guessing market prices just as much as Paulson’s view that bank assets can be bought on the cheap. The implicit view is that current equity markets are overvaluing these banks. (It is complicated, however, because current equity prices are not independent of the government plan and there can also be hovering in the neighborhood of insolvency.) An alternative proposal, of course, is to reveal which banks are solvent and which are not.
2. There is much talk about taxpayers participating in the upside. First, bank ownership is probably not an efficient way of redistributing wealth (is it what you want for Christmas?). Second, Greg Mankiw’s friend scored a telling point:
…we
would all be better off if high schools taught the Modigliani-Miller
theorem. MM implies that the price of the asset (again,assuming the
auction gets it right) will adjust to offset the value of any warrants
Treasury receives. In this case of a reverse auction, imagine that the
price is set at $10. If Treasury instead demands a warrant for future
gains of some sort, then the price will rise in the expected amount of
the warrant — say that’s $2. Then the price Treasury pays for the
asset will be $12. Some people might prefer to get $12 in cash and give
up a warrant worth $2 in expected value. Fine, that’s a choice to be
made. But the assertion that somehow warrants are needed is simply
wrong.
I haven’t seen a good response.
3. Swedish governance is in many ways of higher quality than American governance. It involves lower transactions costs, more social unity, and it is more inclusive of many different interest groups. For one thing, the concentration of wealth in Stockholm makes it harder to use policy to redistribute wealth across regions. Instead they redistribute wealth across genders and age groups but those forms of redistribution don’t distort the banking system so much. The Swedish banking system is also "small as a whole" compared to surrounding markets; you can’t say that about the USA. Note also that Swedish banks, circa the early 1990s, were simpler creatures than today’s American banking firms.
4. The U.S. doesn’t have any tradition of successful nationalization. We’ve had plenty of interventions, but for whatever reasons nationalization has not been the preferred model. I don’t think it is just ideology. The diffuse and highly federalistic American political system is lacking in accountability and thus it is poorly suited for such policy actions.
5. Nationalization makes it harder to raise private capital next time there is a crisis. It is a high time preference solution.
6. Presumably the government wants to show it is doing a good managerial job, but in fact the sector needs to shrink. And would a government-owned bank cut off the flow of credit to, say, Chrysler?
The Eureka Hunt
This stimulating New Yorker essay (right now gated, but worth buying the issue for) focuses on where creative moments come from. Excerpt:
Many stimulants, like caffeine, Adderall, and Ritalin, are taken to increase focus — one recent poll found that nearly twenty percent of scientists and researchers regularly took prescription drugs to "enhance concentration" — but, accordingly to Jung-Beeman and Kounios, drugs may actually make insights less likely, by sharpening the spotlight of attention and discouraging mental rambles. Concentration, it seems, comes with the hidden cost of diminished creativity. "There’s a good reason Google puts Ping-Pong tables in their headquarters," Kounios said. "If you want to encourage insights, then you’ve got to also encourage people to relax." Jung-Beeman’s latest paper investigates why people who are in a good mood are so much better at solving insight puzzles. (On average, they solve nearly twenty percent more C.R.A. problems.)
Has “The Long Tail” been refuted?
Prof. [Anita] Elberse looked at data for online video rentals and song
purchases, and discovered that the patterns by which people shop online
are essentially the same as the ones from offline. Not only do hits and
blockbusters remain every bit as important online, but the evidence
suggests that the Web is actually causing their role to grow, not
shrink.
Here is the summary article. Here is the Elberse paper. Here is Chris Anderson’s response. Overall I cannot call this one for Elberse. If you take a genre as given, the web looks less revolutionary but part of the long tail is the creation of new genres. We have blogs now, for instance, and we didn’t fifteen years ago, even though blog readership is quite concentrated among the top sites. Or maybe the "Quickflix rental distribution" isn’t so skewed to the left (the least-rented titles aren’t so popular) but where were Quickflix, Netflix, and other such services fifteen years ago?
Static estimation by deciles and related measures is often misleading since in part the "long tail" effect is to make the top deciles thicker than before, not necessarily to raise the status of the bottom decile relative to the top. In his response, Chris Anderson nails this point:
The best example of this is in what she describes as a growing
"concentration" of sales around a relatively small number of
blockbuster titles. In the Rhapsody data, she finds, the top 10% of
titles (out of more than a million in that data sample) accounted for
78% of all plays, and the top 1% account for 32% of all plays. That
sounds pretty concentrated around the head, until you reflect, as she
notes, that "one percent of a million is still 10,000–[…]equal to
the entire music inventory of a typical Wal-Mart store."
Nor does showing that most of the sales are in the top of the distribution refute the claim. Arguably it is the middle tail which is suffering and the long tail, and the best sellers, are growing in import. That seems compatible with Anderson’s core thesis. The long tail hypothesis may be oversold but the data in the Elberse piece don’t really dent it.
Elberse wants to define the Long Tail hypothesis as claiming there is
more money to be made in the niches than in the blockbusters; while I believe you might find a quotation to that effect from Chris Anderson the more
general idea is simply how important the niches are
becoming. Elberse concedes a lot at one point:
It is undeniable that online commerce has significantly broadened
customers’ access to products of all varieties, including the most
obscure. However, my findings suggest that it would be imprudent for
companies to upend traditional practice and focus on the demand for
obscure products.
You could have rewritten that as "The Long Tail hypothesis is basically true, just don’t sell to the Long Tail alone." On that we should all be able to agree.
“eBay ordered to pay damages in sale of fake goods”
That’s the headline, the country is France. Is there any efficiency rationale for this decision? The alternative equilibrium involves a fair number of fakes, some good discounts for real items, an overconcentration of trading activity is easily verifiable or not worth faking items, and of course a diminution in the value of brand names. The latter effect may even be welfare-improving once you consider price discrimination and the association of brand names with monopoly rents. You can put the penalty on the seller but how is eBay to detect possible fakes? Buy and inspect the wares? Shut down trade in any fakeable item? I would think it is also easy enough to "buy fakes" from your buddy, in essence keep the cash, give him a percentage, and then sue eBay for the "loss." If the owner of the brand can sue would not the French court consider a suit from the buyer of the fakes as well?
How To Spend It
Have you ever read that FT supplement and wondered how and why the mix of products is changing with increasing income inequality? Anna Yurko tackles this question:
The
distribution of consumer incomes is a key factor in determining the structure
of a vertically differentiated industry when consumer’s willingness to pay
depends on his income. This paper computes the Shaked and Sutton (1982) model
for a general specification of consumers’ income distribution to investigate
the effect of inequality on firms’ entry, product quality, and pricing
decisions. The main findings are that greater inequality in consumer incomes
leads to the entry of more firms and results in more intense quality competition
among the entrants. This is due to the elasticity of consumer demand for
quality being higher in more inegalitarian economies. More intense quality
competition among firms causes them to locate their products in higher ranges
of the quality spectrum, closer to each other, decreasing the degree of product
differentiation. Competition between more similar products tends to reduce
their prices. However, when income inequality is very high, the top quality
producer chooses to serve only the rich segment of the market, and the low
price elasticity of demand of these consumers allows him to charge a higher
price. The conclusion is that income inequality has important implications for
the degree of product differentiation, price level, industry concentration, and
consumer welfare.
My version of the argument is this: growing income inequality means greater elasticity of demand, thus causing quality competition to displace price competition for some market segments. More concretely, there is often more profit from serving the very top, who will always pay more for something just a wee bit different or a wee bit better. So stay away from producing the mid-level cheeseburger, where price elasticity of demand will kill your profits. You can’t charge the rich very much for it, and the presence of the poor keeps the price down for the middle class. Here is the paper. Anna is currently a job market candidate at the University of Texas, here is her CV.
The Myth of the Rational Amazon Book Reviewer
Here is one review of Bryan Caplan from the Amazon.co.uk site:
The reality is a book written for the university educated and the class of society who never have to fear unemployment. The university style of writing makes it difficult to understand what he is going on about, since you have to keep looking up a dictionary. It is also rather boring, which makes it difficult to hold your concentration. The basic theme of the book is that economists think that the ordinary voter is irrational when it comes to politics and voting. The economist argues that because the economy keeps getting stronger; they are always right, and the public always wrong. Trade protectionism, mass immigration of cheap labour, downsizing which causes mass unemployment are all supported by the economist and not supported by the voter.
Here are his other reviews, he likes Sidney Bechet but doesn’t say whether or not he votes. Thanks to Bryan for the pointer.
Ruggedness: how bad terrain helped parts of Africa
There is controversy about whether geography matters mainly because of
its contemporaneous impact on economic outcomes or because of its
interaction with historical events. Looking at terrain ruggedness, we
are able to estimate the importance of these two channels. Because
rugged terrain hinders trade and most productive activities, it has a
negative direct effect on income. However, in Africa rugged terrain
afforded protection to those being raided during the slave trades.
Since the slave trades retarded subsequent economic development, in
Africa ruggedness also has had a historical indirect positive effect on
income. Studying all countries worldwide, we find that both effects are
significant statistically and that for Africa the indirect positive
effect dominates the direct negative effect. Looking within Africa, we
provide evidence that the indirect effect operates through the slave
trades. We also show that the slave trades, by encouraging population
concentrations in rugged areas, have also amplified the negative direct
impact of rugged terrain in Africa.
That’s a new paper by Nathan Nunn and Diego Puga. Some say the paper is here, not I. Others say you can get it here. I say you can get an html version here. Here is one quick summary of the argument. Here are Nunn’s other papers on the slave trade, and how it continues to affect current African development.
The Coldest Winter
…this is my first visit to Thomas Keller’s temple of haute cuisine in Yountville, California, and I can’t wait to see whether it lives up to its reputation. More importantly, however, my dining companions are three outstanding chefs from Sichuan province, a heartland of Chinese gastronomy…None of them has ever been to the West before, or had any real encounters with what is known in China as "Western food," and I am as much interested in their reactions to the meal as my own.
Driving down HIghway 29 to the restaurant, I had prepared my guests by casually remarking, "You’re very lucky, because we are going to visit one of the best restaurants in the world."
In the world? asked Lan Guijun. "According to whom?"
..as I warm up to the pleasures of this utterly satisfying dinner, I can’t help noticing that my companions are having a rather different experience. Yu Bo, the most adventurous of the three, is intent of savoring every mouthful and studying the composition of our meal. He is solemn in his concentration. But the other two are simply soldiering on. And for all three of them, I realize with devastating clarity, this is a most difficult, a most alien, a most challenging experience.
They find the creaminess of the sabayon offputting, the rareness of the lamb unhealthy, and the olives to taste like Chinese medicine. Don’t ask about the cheese, and they are amazed that "a bowl of soupy rice" [risotto] could cost so much. A few days of dining later, they find eating salad to be barbaric (it is raw), and sourdough bread to be tough and chewy.
Yu Bo, to my great satisfaction, is pleasantly impressed with the first raw oyster of his life, and even ventures to take a second. When I ask him how they taste, he nods furiously in approval. "Not bad, not bad; a bit like jellyfish."
That is from Gourmet magazine, August 2005 issue. Here is my previous post on inaccessibility and large cultures.
Is economic inequality bad for growth?
How many times have you heard that meme? It turns out that political inequality is possibly at fault. Acemoglu et. al. report:
Is inequality harmful for economic growth? Is the underdevelopment of
Latin America related to its unequal distribution of wealth? A recently
emerging consensus claims not only that economic inequality has
detrimental effects on economic growth in general, but also that
differences in economic inequality across the American continent during
the 19th century are responsible for the radically different economic
performances of the north and south of the continent. In this paper we
investigate this hypothesis using unique 19th century micro data on
land ownership and political office holding in the state of
Cundinamarca, Colombia. Our results shed considerable doubt on this
consensus. Even though Cundinamarca is indeed more unequal than the
Northern United States at the time, within Cundinamarca municipalities
that were more unequal in the 19th century (as measured by the land
gini) are more developed today. Instead, we argue that political rather
than economic inequality might be more important in understanding
long-run development paths and document that municipalities with
greater political inequality, as measured by political concentration,
are less developed today. We also show that during this critical period
the politically powerful were able to amass greater wealth, which is
consistent with one of the channels through which political inequality
might affect economic allocations. Overall our findings shed doubt on
the conventional wisdom and suggest that research on long-run
comparative development should investigate the implications of
political inequality as well as those of economic inequality.
In other words, at least from that data set, the real problem seems to be rent-seeking behavior through the political process. Here is the link. Here is a non-gated version of the paper.
Women and wealth
This new NBER working paper has an abstract in which every sentence is interesting:
The extent of and changes in inter-generational mobility of wealth are central to understanding dynamics of wealth inequality but hard to measure. Using estate tax returns data, we observe that the share of women among the very wealthy (top 0.01%) in the United States peaked in the late 1960s, reaching almost 50%. Three decades on, women’s share had declined to one third, a return to pre-war levels. We argue that this pattern mirrors the relative importance of inherited vs. self-made wealth in the economy and thus the gender-composition of the wealthiest may serve as a proxy for inter-generational wealth mobility. This proxy for "dynastic wealth” suggests that wealth mobility in the past century decreased until the 1970s and rose thereafter, a pattern consistent with technological change driving long term trends in income inequality and mobility. Greater wealth mobility in recent decades is also consistent with the simultaneous rise in top income shares and relatively stable wealth concentration.
Do note the wealth mobility discussed toward the end might be occurring only among the relatively rich, as described by Pareto’s "circulation of elites." The pointer is from the "still excellent but why doesn’t he post more?" New Economist blog, which also references related work about the UK.
The researcher is Lena Edlund, here is her home page. Here is her article "Hermaphroditism: What’s Not to Like?" If you are in the popular press and are looking for a fascinating, undercovered economist to profile, try Lena Edlund. Here is her paper on "Sex and the City." Here is her paper on why "love marriage," as opposed to arranged marriage, is good for the economy.
Should immigration be family-based?
How should we select legal immigrants? Under the status quo, about two-thirds of new legal arrivals come through family connections; the new immigration bill would (over time) move toward a points system and favor skills. This stimulating article suggests that the change would favor the suburbs and penalize New York City. The city’s economic revival depended (and still depends) on immigrant-run, family-connected small businesses. I liked this sentence:
These days, in a Lower East Side neighborhood that has been a cradle of
family chain migration to America for 200 years, the deli at Delancey
and Allen Streets is a 24-hour operation run by a man from Bangladesh –
one of about 70 relatives to follow a Bangladeshi seaman who jumped
ship here in 1941.
The focus on skills has many advantages, but might it destroy New York City? In contrast, Northern Virginia, with its high-tech firms, would benefit from the reforms. Los Angeles, which has a higher percentage of illegals, and a higher concentration of Mexicans, stands in a very different position than does New York.
A skills-based system would probably bring more men and fewer women; in many poorer countries women do not have good educational opportunities. If the men are allowed to bring over spouses from the home country, this could mean less assimilation; female arrivals are more likely to marry out of group.
Henry Farrell pointed out that a skills-based system might drive greater "brain drain" in poor countries; in his view America’s gain would be the world’s loss. Alternatively, by sending their skilled citizens, poor countries might received improved skilled returners, more remittances, and more business connections. Arguably this has worked for India. The new entry requirements also might increase the incentive for third world residents to
acquire skills, and of course not all of the skill-seekers will end up
migrating. Overall I do not believe the net effect here is known.
If family members are left out of legal immigration, might they have the greatest demand to then come as illegals?
The bottom line: A very big change is in the works here, yet I don’t feel I have a good handle on it.
Here is George Borjas on point systems. Comments are open, but please don’t rehash the usual debates, try to make new points and please focus on legal arrivals only.