Category: Equitablog

Must-read: Paul Krugman: “Robber Baron Recessions” (Competition Policy)

Posted on by Brad DeLong

Must-Read: A few words on judicial doctrine, economic thinking, and political economy…

Back when Robert Bork in his The Antitrust Paradox proposed large-scale rewriting of laws from the bench to privilege “economic efficiency” above all of the other somewhat-conflicting goals of our competition policy and so bring order to a disordered piece of the law, I saw it as neutral-to-good. But the default judicial judgment of any merger then became:

  1. It must reduce costs via economies of scale
  2. It is not inefficient unless it reduces the quantity supplied–and companies these days are so clever at price discrimination that they can still find a way to serve those low-value consumers whose willingness-to-pay is only a little bit larger than monopoly cost.

And the government faced a very steep Sisyphean uphill boulder-rolling to rebut those presumptive judgments and block, well, block much of anything.

And it has turned out that, in practice, both (1) and (2) have been largely wrong…

Paul Krugman: Robber Baron Recessions: “Profits are at near-record highs…

…Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service…. Such an economy… would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short….

Do we have direct evidence that such a decline in competition has actually happened? Yes, say a number of recent studies, including one just released by the White House…. The obvious next question is why competition has declined. The answer can be summed up in two words: Ronald Reagan… [who] didn’t just cut taxes and deregulate banks; his administration also turned sharply away from the longstanding U.S. tradition of reining in companies that become too dominant in their industries. A new doctrine, emphasizing the supposed efficiency gains from corporate consolidation, led to what those who have studied the issue often describe as the virtual end of antitrust enforcement….

Still, better late than never. On Friday the White House issued an executive order directing federal agencies to use whatever authority they have to ‘promote competition.’… For we aren’t just living in a second Gilded Age, we’re also living in a second robber baron era. And only one party seems bothered by either of those observations.

Must-read: Paul Krugman: “Robber Baron Recessions”

Posted on by Brad DeLong

Must-Read: But… but… but…

Is this the wrong graph somehow?:

FRED Graph FRED St Louis Fed

Yes, investment spending is weak relative to its past business-cycle peak values. But all of the relative weakness is in residential construction:

FRED Graph FRED St Louis Fed

You can say that business investment should be even stronger–high profits, high profit margins, depressed wage costs mean that capital’s complement labor is cheap, very low financing costs (if you can borrow risk-free). But business investment is also a function of capacity utilization, and you would not expect it to be high in a low-pressure economy, especially one in which confidence is low that the trend growth of nominal GDP will be sustained.

Why is this the wrong graph?

Paul Krugman: Robber Baron Recessions: “Profits are at near-record highs…

…thanks to a substantial decline in the percentage of G.D.P. going to workers. You might think that these high profits imply high rates of return to investment. But corporations themselves clearly don’t see it that way: their investment in plant, equipment, and technology (as opposed to mergers and acquisitions) hasn’t taken off, even though they can raise money, whether by issuing bonds or by selling stocks, more cheaply than ever before….

Suppose that those high corporate profits don’t represent returns on investment, but instead mainly reflect growing monopoly power… [with] corporations… able to milk their businesses for cash, but with little reason to spend money on expanding capacity or improving service… an economy with high profits but low investment, even in the face of very low interest rates and high stock prices.

And such an economy wouldn’t just be one in which workers don’t share the benefits of rising productivity; it would also tend to have trouble achieving or sustaining full employment. Why? Because when investment is weak despite low interest rates, the Federal Reserve will too often find its efforts to fight recessions coming up short. So lack of competition can contribute to ‘secular stagnation’ — that awkwardly-named but serious condition…. If that sounds to you like the story of the U.S. economy since the 1990s, join the club.

Must-reads: April 18, 2016

Posted on by Brad DeLong

Should-reads:

Must-read: Paul Krugman (2013): “Friedman and the Austrians”

Posted on by Brad DeLong

Must-Read: Paul Krugman (2013): Friedman and the Austrians: “Still thinking about the Bloomberg Businessweek interview with Rand Paul…

…in which he nominated Milton Friedman’s corpse for Fed chairman. Before learning that Friedman was dead, Paul did concede that he wasn’t an Austrian. But I’ll bet he had no idea about the extent to which Friedman really, really wasn’t an Austrian. In his ‘Comments on the critics’ (of his Monetary Framework) Friedman described the ‘London School (really Austrian) view’

that the depression was an inevitable result of the prior boom, that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt, that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it by ‘easy money’ policies thereafter; that the only sound policy was to let the depression run its course, bring down money costs, and eliminate weak and unsound firms.

and dubbed this view an ‘atrophied and rigid caricature’ of the quantity theory. [His version of the] Chicago School, he claimed, never believed in such nonsense. I have, incidentally, seen attempts [by Larry White and company] to claim that nobody believed this, or at any rate that Hayek never believed this, and that characterizing Hayek as a liquidationist is some kind of liberal libel. This is really a case of who are you gonna believe, me or your lying eyes. Let’s go to the text (pdf), p. 275:

And, if we pass from the moment of actual crisis to the situation in the following depression, it is still more difficult to see what lasting good effects can come from credit expansion. The thing which is needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production to the proportion between the demand for consumers’ goods and the demand for producers’ goods as determined by voluntary saving and spending.

If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand, it must mean that part of the available resources is again led into a wrong direction and a definite and lasting adjustment is again postponed. And, even if the absorption of the unemployed resources were to be quickened in this way, it would only mean that the seed would already be sown for new disturbances and new crises. The only way permanently to ‘mobilize’ all available resources is, therefore, not to use artificial stimulants—whether during a crisis or thereafter—but to leave it to time to effect a permanent cure by the slow process of adapting the structure of production to the means available for capital purposes.

And so, at the end of our analysis, we arrive at results which only confirm the old truth that we may perhaps prevent a crisis by checking expansion in time, but that we can do nothing to get out of it before its natural end, once it has come…

If that’s not liquidationism, I’ll eat my structure of production…

Regress in macroeconomic knowledge over the past 83 years

Posted on by Brad DeLong

Today, in 2016, Raghu Rajan thinks helicopter drops are “a step too far into the dark…”

His predecessor 83 years ago at the University of Chicago, Jacob Viner, thought they were one of the obvious technocratic steps to take, along with further raising the monetary base (i.e., in his day going off of the gold standard) even with short-term safe nominal interest rates at the zero lower bound (as they also were in his day).

Here’s Raghu:

Raghuram Rajan 2016): “If you read the writings of economists…

…it is not clear what’s keeping us still so slow, seven or eight years after the crisis. Ken Rogoff would say it is still the debt overhang and the deleveraging. [Robert] Gordon and others might say it is low productivity and still others may say it is the poorly understood consequences of population aging. But what do we do? And here I think there is more of a consensus that monetary policy pretty much has run its course. There are still guys who are looking for helicopter drops of money but I think that is a step sort of too far into the dark, where I am not sure there is a political consensus to do that in the major economies, if it comes to that…

Here’s Jacob:

Jacob Viner (1933): Balanced Deflation, Inflation, or More Deflation: “If going off the gold standard were as simple a matter for us…

…as for England and Canada, I would not only advocate it, but if [it]… did not suffice to lower substantially the internal purchasing power of the dollar I would recommend its accompaniment by increased government expenditures financed by the printing press or by loans…. England and… the other countries which went off the gold standard in 1931… [made] too restrained use of the freedom which the departure from the gold standard gave them them…. The countries that went off the gold standard have nevertheless weathered the economic storm much better…

We all agree that economies today are “so slow” and inflation pressures are by and large absent. What does Raghu think he knows today that Jacob did not–what have we learned in the past 83 years–that has turned helicopter drops from an obvious technocratic step to take to “a step too far into the dark”? What did Jacob think he knew that Raghu does not–what doctrines, true, false, or uncertain–because we have forgotten them?

Anyone? Anyone? Bueller?

Must-read: Dylan Matthews: Barack Obama: One of the Most Consequential Presidents

Posted on by Brad DeLong

Must-Read: Dylan Matthews: Barack Obama: One of the Most Consequential Presidents: “You can celebrate or bemoan these accomplishments…

…But no one can deny that the changes Obama has wrought are enormous in scale. Obamacare: a big ** deal…. National health insurance has been the single defining goal of American progressivism for more than a century… ever since its inclusion in Teddy Roosevelt’s 1912 Bull Moose platform…. It was the big gap between our welfare state and those of our peers in Europe, Canada, Australia, New Zealand, and Japan. And for more than a century, efforts to achieve national health insurance failed…. Then on March 23, 2010, President Obama signed the Affordable Care Act….

When you consider the law in the context of 100 years of progressive activism, and in the grand scheme of American history, it starts to look less like a moderate reform and more like an epochal achievement, on the order of FDR’s passage of Social Security or LBJ’s Great Society programs….

The Affordable Care Act was hardly Obama’s only accomplishment. He passed a stimulus bill… Dodd-Frank Act…. executive action to… curb greenhouse gas emissions… protect nearly 6 million undocumented immigrants from deportation… ended the ban on gay and lesbian service… made it easier for women and minorities to fight wage discrimination, cut out wasteful private sector involvement in student loans… hiked the top income tax rate… reprofessionalized the Department of Justice….

There are obviously places Obama fell short…. Monetary policy… combating HIV/AIDS and other public health scourges abroad… deport[ing] millions of unauthorized immigrants… perpetrators of torture and other war crimes from the Bush administration should have been criminally prosecuted. But… it could never be said that he accomplished little…. And on foreign issues, Obama’s record is perhaps the most successful of any Democratic president since Truman. He has reestablished productive diplomacy as the central task of a progressive foreign policy….

You can generally divide American presidents into… [the] ultimately forgettable … and the hugely consequential for good or ill (FDR, Lincoln, Nixon, Andrew Johnson). Whether you love or hate his record, there’s no question Obama’s domestic and foreign achievements place him firmly in the latter camp.

Must-reads: April 16, 2016

Posted on by Brad DeLong

et al.: Breaking the Oil Spell: The Path to Diversification
* **Pro-Market Writers: The White House Acknowledges: The U.S. Has a Concentration Problem; President Obama Launches New Pro-Competition Initiative
* Nick Bunker: How concerned should we be about business investment and productivity growth? – Equitable Growth
* William Cavanaugh and Jack Figura: Merrick Garland on Efficiencies
* Larry Summers: Corporate Profits Near Record Highs Is a Problem

Should Reads:

Must-watch: Min Zhu et al.: Breaking the Oil Spell: The Path to Diversification

Posted on by Brad DeLong

Must-Watch: Min Zhu et al.: Breaking the Oil Spell: The Path to Diversification: “H.E. Obaid H. Al Tayer… Zeti Akhtar Aziz… J. Bradford DeLong… Simon Johnson… Reda Cherif… Fuad Hasanov…

…Imagine a future in which oil is no longer the main source of energy. Such a future is not necessarily cataclysmic for oil exporters if they succeed in diversifying their economies. To achieve this, however, they must change the prevailing economic model. In the past, countries such as Brazil, Korea, Malaysia, and Singapore have made major strides in economic diversification, and this book distills lessons from their experiences to help guide the Gulf countries and other oil exporters today. Their stories reveal that incentives for firms and workers need to be realigned to develop technologically sophisticated export-oriented industries. More important, their stories show that standard growth policy prescriptions may not be enough and changing incentives for firms and workers is essential. Breaking the Oil Spell sheds light on what constitutes true economic diversification and the role of the state in achieving it.

http://www.imf.org/external/np/seminars/eng/2016/mcd/index.htm | http://bcove.me/5yk1fp5o

Must-note: Pro-Market Writers: The White House Acknowledges: The U.S. Has a Concentration Problem; President Obama Launches New Pro-Competition Initiative

Posted on by Brad DeLong

Must-Note: The Economist has long had a house style of no bylines–a deliberate institutional decision about the voice with which they want to speak that has, I think, more downsides the upsides. But we can argue about that.

But what I discovered today is that Pro-Market: The blog of the Stigler Center at the University of Chicago Booth School of Business has bylines only for Luigi Zingales, Asher Schechter, and Guy Rolnick. The rest are merely anonymous “Pro-Market Writers”.

This cannot be the right approach, for a large number of reasons that I’m sure you can think of as well as I:

Pro-Market Writers: The White House Acknowledges: The U.S. Has a Concentration Problem; President Obama Launches New Pro-Competition Initiative: “The White House acknowledged the steep price Americans pay due to anti-competitive behavior…

…across our economy, too many consumers are dealing with inferior or overpriced products, too many workers aren’t getting the wage increases they deserve, too many entrepreneurs and small businesses are getting squeezed out unfairly by their bigger competitors, and overall we are not seeing the level of innovative growth we would like to see. And a big piece of why that happens is anti-competitive behavior—companies stacking the deck against their competitors and their workers. We’ve got to fix that, by doing everything we can to make sure that consumers, middle-class and working families, and entrepreneurs are getting a fair deal.

The first action in Obama’s new initiative is to open the market for set-top cable boxes. The administration has singled out the set-top box market as an example of anti-competitiveness leading to inferior and overpriced products for consumers…

Weekend reading: “Unlocking the cable box” edition

Posted on by Nick Bunker

This is a weekly post we publish on Fridays with links to articles that touch on economic inequality and growth. The first section is a round-up of what Equitable Growth has published this week and the second is work we’re highlighting from elsewhere. We won’t be the first to share these articles, but we hope by taking a look back at the whole week, we can put them in context.

Equitable Growth round-up

Earlier this week, a group of researchers released a new report looking at the variation in the life expectancy across the United States. Their findings are an important reminder of the significance of both income and place in the United States.

After a huge increase in the duration of unemployment insurance in the wake of the Great Recession, economists wondered if such an increase boosts unemployment rates. The answer, according to one new study, is yes—but only by a very small amount.

Tax Day is just around the corner. If you’ve already filed, congratulations are in order: You’re administrative data. Unfortunately, getting access to the data you’ve created isn’t easy.

Earlier this morning, the Obama administration announced a number of steps to place a new emphasis on increasing competition in the U.S. economy. Spurring competition in today’s economy, though, will require some creative policy thinking.

Links from around the web

Black and Hispanic students are disproportionately underrepresented in “gifted” programs in public schools, despite becoming a larger and larger share of all students. Susan Dynarski reports on a new study that shows using a universal test instead of teacher recommendations can help boost the share of black and Hispanic students in these programs. [the upshot]

Before Silicon Valley became the technology center for the United States, many wondered if it would beat out the Route 128 Corridor outside Boston. Why did the valley win? Seems as though it was a lack of non-compete agreements, which Justin Fox argues could use some pruning. [bloomberg view]

One of the more intriguing ideas in recent years is that increased “common ownership” of competitors through mutual funds has reduced competition in the United States. While Steven Davidoff Solomon isn’t sure it’s causing outright collusions, we need to think about the root causes. [dealbook]

As household wealth increased in the United States during the mid-2000s, savings rates correspondingly dropped. And after wealth dropped after the housing bust, savings rates increased. But as wealth has started to increase again, savings rates haven’t declined as much as we’d expect, as Tim Taylor points out. [conversable economist]

There are a number of ways to improve the stability of a financial system. One of them is to require financial firms to be funded more via equity, which is called “holding more capital” for some strange reasons. Either way, Matt Klein makes the argument for more capital. [ft alphaville]

Friday figure

Figure from “What happened to the job ladder in the 21st century?” by Marshall Steinbaum and Austin Clemens