Results for “concentration”
182 found

A new idea (really)

I am not convinced by the argument which follows (see Cowen’s Third Law), but I am committed to passing new ideas along, and the researchers — Liu, Mian, and Sufi — have a strong track record.  Here goes:

A unique prediction of the model is that the value of industry leaders increases more than the value of industry followers in response to a decline in the interest rate, and, importantly, the magnitude of the relative increase in value of the leaders versus followers when the interest rate declines is larger at a lower initial level of the interest rate.

And:

The model’s prediction is confirmed in the data.

And finally:

The model provides a unified explanation for why the decline in long-term interest rates has been associated with rising market concentration, reduced dynamism, a widening productivity gap between leaders and followers, and slower productivity growth.

I will ponder this further, anyway here is the link to the paper, 88 pp. long.  If they are right, this is big, big news.  Here is a WSJ summary.

For further background, see also Alex’s earlier post about population/labor force decline and economic stagnation.  It is easier for me to believe that their real interest rate effect is working through the propagation mechanism of population and labor force participation.  Furthermore, I have read too many papers which seem to imply that real interest rates do not much, within normal limits, have a big effect on firm investment decisions.  Their model would seem to imply the opposite, and I would like them to test their implied elasticity against the actual elasticities other researchers have measured.

Why have countries moved away from wealth taxes?

From the excellent Timothy Taylor:

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: “Overall … from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes.”

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth…

It’s interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: “In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland … Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries …” However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren’t worth the bother. In addition, it suggests that a US wealth tax which doesn’t kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

There are many more excellent points at the link.  Here is another:

A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial.

Tim concludes:

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals.

Recommended.  If you would like another point of view, Saez and Zucman respond to some criticisms here.

Columbus Lowered World Temperature

European germs killed 90% of the population of the Americas in the century after 1492 causing millions of hectacres of farm land to revert to forest which increased the uptake of carbon and reduced the planetary temperature. That is the upshot of a new paper that joins together previous estimates of population decline, farm land and carbon sequestration to push the onset of the Anthropocene to before the industrial revolution.

Earth system impacts of the European arrival and Great Dying in the Americas after 1492.

Abstract: Human impacts prior to the Industrial Revolution are not well constrained. We investigate whether the decline in global atmospheric CO2 concentration by 7–10 ppm in the late 1500s and early 1600s which globally lowered surface air temperatures by 0.15C, were generated by natural forcing or were a result of the large-scale depopulation of the Americas after European arrival, subsequent land use change and secondary succession. We quantitatively review the evidence for (i) the pre-Columbian population size, (ii) their per capita land use, (iii) the post-1492 population loss, (iv) the resulting carbon uptake of the abandoned anthropogenic landscapes, and then compare these to potential natural drivers of global carbon declines of 7–10 ppm. From 119 published regional population estimates we calculate a pre-1492 CE population of 60.5 million (interquartile range, IQR 44.8–78.2 million), utilizing 1.04 ha land per capita (IQR 0.98–1.11). European epidemics removed 90% (IQR 87–92%) of the indigenous population over the next century. This resulted in secondary succession of 55.8 Mha (IQR 39.0–78.4 Mha) of abandoned land, sequestering 7.4 Pg C (IQR 4.9–10.8 Pg C), equivalent to a decline in atmospheric CO2 of 3.5 ppm (IQR 2.3–5.1 ppm CO2). Accounting for carbon cycle feedbacks plus LUC outside the Americas gives a total 5 ppm CO2 additional uptake into the land surface in the 1500s compared to the 1400s, 47–67% of the atmospheric CO2 decline. Furthermore, we show that the global carbon budget of the 1500s cannot be balanced until large-scale vegetation regeneration in the Americas is included. The Great Dying of the Indigenous Peoples of the Americas resulted in a human-driven global impact on the Earth System in the two centuries prior to the Industrial Revolution.

Declining Labor Force Growth Explains Declining Dynamism

The best paper I have read in a long time is Hopenhayn, Neira and Singhania’s From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship and the Labor Share. HNS do a great job at combining empirics and theory to explain an important fact about the world in an innovative and surprising way. The question the paper addresses is, Why is dynamism declining? As you may recall, my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship?, somewhat surprisingly answered that the decline in dynamism was too widespread across too many industries to be explained by regulation. HNS point to a factor which is widespread across the entire economy, declining labor force growth.

Figure Two of the paper (at right) looks complicated but it tells a consistent and significant story. The top row of the figure shows three measures of declining dynamism: the rise in concentration which is measured as the share of employment accounted for by large (250+) firms, the increase in average firm size, and the declining exit rate. The bottom row of the figure shows the same measures but this time conditional on firm age. What we see in the bottom figure is two things. First, most of the lines jump around a bit but are generally flat or not increasing. In other words, once we control for firm age we do not see, for example, increasing concentration. Peering closer at the bottom row the second thing it shows is that older firms account for a larger share of employment, are bigger and have lower exit rates. Putting these two facts together suggests that we might be able to explain all the trends in the top row by one fact, aging firms.

So what explains aging firms? Changes in labor force growth have a big influence on the age distribution of firms. Assume, for example, that labor force growth increases. An increase in labor force growth means we need more firms. Current firms cannot absorb all new workers because of diminishing returns to scale. Thus, new workers lead to new firms. New firms are small and young. In contrast, declining labor force growth means fewer new firms. Thus, the average firm is bigger and older.

HNS then embed this insight into a dynamic model in which firms enter and exit and grow and shrink over time according to random productivity shocks (a modified version of Hopenhayn (1992)). We need a dynamic model because suppose the labor force grows today, this causes more young and small firms to enter the market today. Young and small firms, however, have high exit rates so today’s high entry rate will generate a high exit rate tomorrow and also a high entry rate tomorrow as replacements arrive. Thus, a shock to labor force growth today will influence the dynamics of the system many periods into the future.

So what happens when we feed the actual decline in labor force growth into the HNS dynamic model (calibrated to 1978.) Surprisingly, we can explain a lot about declining dynamism. At right, for example, is the startup rate. Note that it jumps up with rising labor force growth in the 1950s and 1960s and declines after the 1970s.

The paper also shows that the model predictions for firm age and concentration also fit the data reasonably well.

Most surprisingly, HNS argue that essentially all of the decline in the labor share of national income can be explained by the simple fact that larger firms use fewer non-production workers per unit of output. That is very surprising. I’m not sure I believe it.

If HNS are correct it implies a very different perspective on the decline in labor share. In the HNS model for example non-competitive factors do not play a role so there’s no monopoly or markups . Moreover, if the decline in labor share is caused by larger firms using fewer non-production workers then this is surely a good thing. In their model, however, there is only one factor of production so declining labor share means increasing profit share which I find dubious. If production and non-production labor are distinguished it may also be that declining non-production share will redound to production labor so the labor share won’t fall as much. Nevertheless, the ideas here are intriguing and the results on dynamism, which are the heart of the paper, do not rely on the arguments about the labor share.

Saturday assorted links

1. Are animals getting better at acting? (NYT)

2. “TSA Administrator David Pekoske said at a recent visit to Dulles Airport (IAD) in Washington, DC, that the agency is making a “conscious effort” to deploy floppy-eared canines because they are less frightening to some flyers.

3. “More than half of Baltimore’s 309 homicide victims in 2018 were shot in the head, according to the police department’s annual homicide analysis released Wednesday.

4. C’mon people, should we give the Northwest Angle back to Alex?

5. Does market concentration in homebuilding matter?

6. Our countryside is aging a lot, our cities barely so.

7. For writers, “morals clauses” are being used more and more (NYT).  The days of Henry Miller are gone, it seems.

Tuesday assorted links

1. The father of Kamala Harris.  Here are remarks from the economist father.

2. New estimate of the death toll from the kidney shortage.  Yikes.

3. Claims people DMed anonymously to Austen Allred.

4. Arizonans attack self-driving cars (NYT).  Yikes.

5. AEA panel with Powell, Yellen, and Bernanke.

6. “With Caesars Entertainment’s Buffet of Buffets pass, you pay one price and get access to up to five buffets in Las Vegas for a 24-hour period.”  Yikes, welcome to 2019.

7. Glen Weyl offers a critique of liberaltarianism on Twitter, I am not sure how to thread it, here is his account just scroll down.  Here is one bit: “The key point is that the focus on social insurance, “regulation” and a simplistic conception of the migration issue and total lack of attention to enormously growing concentrations of private power, lack of fundamental research funding, news quality”

Demographics matters more and explains more than you think

The US economy has undergone a number of puzzling changes in recent decades. Large firms now account for a greater share of economic activity, new firms are being created at a slower rate, and workers are getting paid a smaller share of GDP. This paper shows that changes in population growth provide a unified quantitative explanation for these long-term changes. The mechanism goes through firm entry rates. A decrease in population growth lowers firm entry rates, shifting the firm-age distribution towards older firms. Heterogeneity across firm age groups combined with an aging firm distribution replicates the observed trends. Micro data show that an aging firm distribution fully explains i) the concentration of employment in large firms, ii) and trends in average firm size and exit rates, key determinants of the firm entry rate. An aging firm distribution also explains the decline in labor’s share of GDP. In our model, older firms have lower labor shares because of lower overhead labor to employment ratios. Consistent with our mechanism, we find that the ratio of nonproduction workers to total employment has declined in the US.

That is from a new NBER working paper by Hugo Hopenhayn, Julian Neira, and Rish Singhania, via the excellent Kevin Lewis.

Underargued claims, installment #1437

From Tim Wu, in a recent NYT Op-Ed, he presents a polemic against “monopoly”:

Postwar observers like Senator Harley M. Kilgore of West Virginia argued that the German economic structure, which was dominated by monopolies and cartels, was essential to Hitler’s consolidation of power. Germany at the time, Mr. Kilgore explained, “built up a great series of industrial monopolies in steel, rubber, coal and other materials. The monopolies soon got control of Germany, brought Hitler to power and forced virtually the whole world into war.”

To suggest that any one cause accounted for the rise of fascism goes too far, for the Great Depression, anti-Semitism, the fear of communism and weak political institutions were also to blame. But as writers like Diarmuid Jeffreys and Daniel Crane have detailed, extreme economic concentration does create conditions ripe for dictatorship.

The first ten words are already a give-away, as is the beginning of the second cited paragraph.  For contrast, this is from Thomas Childers, well-known historian of Nazi Germany:

In his biography of Henry Kissinger, historian Niall Ferguson notes that “old man Thyssen” — that is, German steel magnate Fritz Thyssen — “bankrolled Hitler.” Businessmen such as Thyssen using their financial assets to assist the Nazis was “the mechanism by which Hitler was funded to come to power,” according to John Loftus, a former U.S. attorney who prosecuted Nazi war criminals.

But the Nazis were neither “financed” nor “bankrolled” by big corporate donors. During its rise to power, the Nazi Party did receive some money from corporate sources — including Thyssen and, briefly, industrialist Ernst von Borsig — but business leaders mostly remained at arm’s length. After all, Nazi economic policy was slippery: pro-business ideas swathed in socialist language. The party’s program, the Twenty-Five Points, called for the nationalization of corporations and trusts, revenue sharing, and the end of “interest slavery.”

And Wu’s two other cited sources?  Both focus mainly on IG Farben.  Diarmuid Jeffreys is “an award-winning journalist and television producer with thirty years’ experience in the media industry.”  He does have a book on IG Farben and the making of the German war machine, but it does not demonstrate how economic concentration brings totalitarian regimes to power, instead focusing on how IG Farben profited from Nazi war aims and helped build the Holocaust.  Earlier in the 1930s, IG Farben had in fact resisted Nazification. though the company did jump on board once it saw Nazification as inevitable.

Here is the Daniel Crane essay on antitrust and democracy.  Try this excerpt: “… it does not necessarily follow that Farben’s monopolistic position in the German chemical industry is causally related to the rise of fascism—or that monopoly enabled Nazism. Two matters should give us pause before making such an inference.”  Read p.14 to see what follows, but here is one tiny bit: “Though gigantic, Farben remained smaller than three American industrial concerns—General Motors, U.S. Steel, and Standard Oil. Nor was Farben’s wartime market power exceptional.”  On the other side of the ledger, Crane does note that fascistic governments, once in power, find it easier to take over and co-opt more highly concentrated industries, Farben being an example of that.  So there is an argument here, but mainly one data point and also some very serious qualifiers.

Does that all justify the sentence “But as writers like Diarmuid Jeffreys and Daniel Crane have detailed, extreme economic concentration does create conditions ripe for dictatorship.”?  “Ripe” is such a tricky, non-causal word.

I would instead stress that war, civil war, scapegoating, and deflation create the conditions “ripe for dictatorship.”  You might want to toss Russia and China into the regression equation, or how about Cuba and North Korea and Albania and Pol Pot’s Cambodia?  How would the coefficient on industrial concentration end up looking?  I’d like to know.

When big business is the target, and tech in particular, the standards of proof for Op-Eds seem to decline.  Somehow, because we all know that the big tech companies are bad, or jeopardizing democracy, it is OK to make weakly argued claims.

Monopoly power does not seem to be up at the actual market level

Using U.S. NETS data, we present evidence that the positive trend observed in national product-market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment.

That is from a new NBER working paper by Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter.

The rant against Amazon and the rant for Amazon

Wow! It’s unbelievable how hard you are working to deny that monopsony and monopoly type market concentration is causing all all these issues. Do you think it’s easy to compete with Amazon? Think about all the industries amazon just thought about entering and what that did to the share price of incumbents. Do you think Amazon doesn’t use its market clout and brand name to pay people less? Don’t the use the same to extract incentives from politicians? Corporate profits are at record highs as a percent of the economy, how is that maintained? What is your motivation for closing your eyes and denying consolidation? It doesn’t seem that you are being logical.

That is from a Steven Wolf, from the comments.  You might levy some justified complaints about Amazon, but this passage packs a remarkable number of fallacies into a very small space.

First, monopsony and monopoly tend to have contrasting or opposite effects.  To the extent Amazon is a monopsony, that leads to higher output and lower prices.

Second, if Amazon is knocking out incumbents that may very well be good for consumers.  Consumers want to see companies that are hard for others to compete with.  Otherwise, they are just getting more of the same.

Third, if you consider markets product line by product line, there are very few sectors where Amazon would appear to have much market power, or a very large share of the overall market for that good or service.

Fourth, Amazon is relatively strong in the book market.  Yet if a book is $28 in a regular store, you probably can buy it for $17 on Amazon, or for cheaper yet used, through Amazon.

Fifth, Amazon takes market share from many incumbents (nationwide) but it does not in general “knock out” the labor market infrastructure in most regions.  That means Amazon hire labor by paying it more or otherwise offering better working conditions, however much you might wish to complain about them.

Sixth, if you adjust for the nature of intangible capital, and the difference between economic and accounting profit, it is not clear corporate profits have been so remarkably high as of late.

Seventh, if Amazon “extracts” lower taxes and an improved Metro system from the DC area, in return for coming here, that is a net Pareto improvement or in any case at least not obviously objectionable.

Eighth, I did not see the word “ecosystem” in that comment, but Amazon has done a good deal to improve logistics and also cloud computing, to the benefit of many other producers and ultimately consumers.  Book authors will just have to live with the new world Amazon has created for them.

And then there is Rana Foroohar:

“If Amazon can see your bank data and assets, [what is to stop them from] selling you a loan at the maximum price they know you are able to pay?” Professor Omarova asks.

How about the fact that you are able to borrow the money somewhere else?

Addendum: A more interesting criticism of Amazon, which you hardly ever hear, is the notion that they are sufficiently dominant in cloud computing that a collapse/sabotage of their presence in that market could be a national security issue.  Still, it is not clear what other arrangement could be safer.

Monday assorted links

1. How not to scout for soccer talent.

2. NIMBY isn’t just CA: “Philly’s 43,000 vacant lots face a fresh political battle.

3. The new economics of Chinatowns: “Chinese restaurant jobs tend not to be in places with a high concentration of Chinese immigrants, but rather in places with a high proportion of non-Hispanic whites. In addition, the farther the jobs are from New York City, the higher the salary.”

4. MIE: Board game about alpacas.

5. IQ predicts how you vote in Denmark (multi-party system) but not America.  But note this: “In both countries, higher ability predicts left-wing social and right-wing economic views.”

6. Why Sacha Baron Cohen won’t be funny any more.

The Ex-Post Dead Are Not Ex-Ante Hopeless

It’s well known that a large faction of medical spending occurs in the last 12 months of life but does this mean that the money spent was fruitless? Be careful as there is a big selection effect–we don’t see the people we spent money on who didn’t die. A new paper in Science by Einav, Finkelstein, Mullainathan and Obermeyer finds that most spending is not on people who are predicted to die within the next 12 months.

That one-quarter of Medicare spending in the United States occurs in the last year of life is commonly interpreted as waste. But this interpretation presumes knowledge of who will die and when. Here we analyze how spending is distributed by predicted mortality, based on a machine-learning model of annual mortality risk built using Medicare claims. Death is highly unpredictable. Less than 5% of spending is accounted for by individuals with predicted mortality above 50%. The simple fact that we spend more on the sick—both on those who recover and those who die—accounts for 30 to 50% of the concentration of spending on the dead. Our results suggest that spending on the ex post dead does not necessarily mean that we spend on the ex ante “hopeless.

…”Even if we zoom in further on the subsample of individuals who enter the hospital with metastatic cancer…we find that only 12% of decedents have an annual predicted mortality of more than 80%.

Thus, we aren’t spending on people for whom there is no hope but it doesn’t follow that it’s the spending that creates the hope. What we really want to know is who will live or die conditional on the spending. And to that issue this paper does not speak.

Anthony Downs on race and urbanism, that was then this is now

It always surprises me that the name of Anthony Downs is not mentioned more often in conjunction with the Nobel Prize in economics.  His An Economic Theory of Democracy is one of the best and most important books on public choice economics, and it is the major source for the median voter theorem. Yet now a new paperback copy of the book is not to be had for less than $100.  Downs also had major contributions to transportation economics (traffic expands to fill capacity) and housing and urban economics and the theory of bureaucracy.

Yesterday I learned that Downs was a major White House consultant on race and urban affairs in 1967, working with James Tobin and Kermit Gordon and other luminaries on the National Commission on Urban Problems.  What they produced fed into what was described as “The Most Courageous Government Report in the Last Decade,” namely the Kerner Commission report.  Here are some details:

1. Downs did much of the work of the commission and much of the actual writing, including of the Kerner Report, including the section on housing policy and the ghetto.

2. He was very concerned with “white flight” and thought a more radical approach to urban poverty was needed.  He thought Great Society programs had not been tried on a large enough scale.

3. In the view of Downs, major progress already had been made, but he worried that aspirations were rising faster than living standards.

4. He spelt out a “status quo approach,” a “ghetto-improvement strategy,” and a “dispersal strategy” based on integration.  He considered the latter the most ambitious and perhaps the most unikely.  He focused on outlining these alternatives, and their benefits and costs, rather than recommending any one of them.

5. Among the specific proposals considered were a Neighborhood Youth Corps, increasing the minimum wage, job training, public service programs, and a federally enforced fair employment-practices bill.  The draft also encouraged policymakers to think about educational vouchers, decentralizing urban school systems, and educational innovation.  There were arguments as to whether teachers’ unions should be held at fault and weakened.

It is striking how little these debates have progressed since more than fifty years ago.

p.s. Many on the right were critical of the report.

This is all from Steven M. Gillon, Separate and Unequal: The Kerner Commission and the Unraveling of American Liberalism.

Who Benefits from Targeted Property Tax Relief?

If you want to lower the price of housing and still house lots of people there is really only one way: build more housing. Yet politicians and voters continually seek to repeal the laws of supply and demand. A case in point, many states reduce property tax rates for seniors, veterans or the disabled or combinations thereof. Great for seniors, veterans and the disabled, right? Wrong. If supply doesn’t increase, lowering property taxes simply increases the price of housing.

If the property tax relief is targeted to a very small group then demand won’t increase much and the benefits will accrue to the targeted group but seniors and veterans are both a significant fraction of the population and an even more significant fraction of homeowners. Thus, we might expect that a significant fraction of the tax relief will be capitalized into housing prices–that’s exactly what Moulton, Waller and Wentland find in a new paper:

While property tax relief measures are often intended to aid specific groups, basic supply and demand analysis predicts that an unintended consequence of this particular kind of tax relief is that, on the margin, it increases demand for homeownership among its expected beneficiaries. Accordingly, we examine two property tax relief measures in Virginia that applied to disabled veterans and the elderly, finding that these policy changes had an immediate effect on home prices after the
voters approved them on Election Day. Overall, we find that home prices rose by approximately 5 percent in response to the increase in demand for homeownership. Indeed, the tax relief policies provide a unique, quasi-experimental methodological
setting where the treatment is exogenously assigned to specific groups within this market. We find that the effect was as much as an 8.1 percent price appreciation for homes in areas with high concentrations of veterans, 7.3 percent in areas with
more seniors, and 7.4 percent for senior preferred homes in all areas. The effect was highest, 9.3 percent, in areas with high concentrations of seniors and veterans, which translates to about $18,900, or roughly full capitalization, for the average
home. Conversely, the tax relief measures had little if any effect on homes in areas with fewer potential beneficiaries….

A cynic might argue that the true intent of the policy is to raise housing prices but this gives politicians and voters too much credit. The intent is sincere, it’s the means that are false.