Earlier this morning, the U.S. Bureau of Labor Statistics released new data on the U.S. labor market during the month of April. Below are five graphs compiled by Equitable Growth staff highlighting important trends in the data.
1.
The employment rate for prime-age workers declined slightly in April, but remains on its upward trajectory as the unemployment rate reaches its lowest level in almost 50 years.
2.
Wage growth is approaching healthy levels, with a 3.2% year-over-year increase in average hourly earnings as of April.
3.
There was an increase in the amount of workers who entered their jobs from being out of the labor force in April, demonstrating how a tight labor market brings in people left out of the labor market.
4.
An increasing proportion of unemployed are reentrants to the labor force, signaling confidence about job prospects.
5.
Fewer workers are working part-time involuntarily, while those who are working part-time by their own choice has changed little.
A growing body of research has found that the market power of the United States’ largest companies has grown significantly since the 1980s. Due to increased market power, firms are earning higher profits by raising prices and paying their workers less, then transferring wealth from consumers and workers to shareholders. Because shareholders, on average, are wealthier than customers and workers, this dynamic, in principle, should exacerbate inequality. Recent empirical work confirms this result.
Researchers have proposed different explanations for rising market power, such as reduced antitrust enforcement and the rise of “winner-take-most” markets. Reduced antitrust enforcement appears to be a compelling explanation, at least in part, since the U.S. government relaxed its antitrust enforcement at the same time that market power began to grow. Moreover, market power has grown more in the United States than in other countries, suggesting that U.S. policy has played a role.
This issue brief examines the latest evidence on how market power has grown, how it has increased inequality, and different explanations for growing market power.
Markups and corporate profits have been on the rise since the 1980s. A markup is the difference between a product’s price and its marginal cost, or the cost of making one additional unit. High markups are a common measure of monopoly power because when a firm has less competition, it has more leverage to charge high prices. Similarly, high corporate profits are a sign of market power since they represent the rents that firms are able to capture.
While average markups in the U.S. economy were relatively stable between 1955 and 1980, they have tripled since 1980, from 21 percent above firms’ marginal costs to 61 percent above marginal costs today, according to a recent paper by Jan De Loecker of KU Leuven, Jan Eeckhout of UPF Barcelona, and Gabriel Unger of Harvard University.1 Recent papers by Robert E. Hall of Stanford University2 and James Traina of the University of Chicago3 also find that U.S. markups have risen since the 1980s, although they find more modest increases than De Loecker, Eeckhout, and Unger’s paper.
Markups are rising across the developed world. In advanced economies, markups have risen by an average of 39 percent since 1980, while rising less in developing countries, according to a recent paper by Federico Diez, Daniel Leigh, and Suchanan Tambunlertchai of the International Monetary Fund.4
Nonetheless, markups have risen more in the United States than in the rest of the world, suggesting that higher U.S. markups may be a result of U.S. policy. U.S. markups have risen more than the global average since 1980, according to a paper by KU Leuven’s Jan De Loecker and UPF Barcelona’s Jan Eeckhout.5 (See Figure 1.) A new analysis by the International Monetary Fund finds that markups have risen twice as much in the United States as in the average advanced economy since 2000.6 In the eurozone, in contrast, market power has remained stable in recent years, and markups have actually declined, according to a recent European Central Bank paper.7
Figure 1
Rising corporate profits can also be a sign of increased market power.8 In a perfectly competitive economy, profits would be competed down to zero. As a firm faces less competition, it can capture more of the surplus, increasing its profits that would otherwise go to consumers or workers. By multiple measures, corporate profits have surged since the 1980s. The before-tax profit share of Gross Domestic Product has more than doubled since 1980 to 14 percent of GDP, according to a new paper by Ufuk Akcigit of the University of Chicago and Sina T. Ates of the Federal Reserve.9 Average profits have risen from 1 percent of sales to 8 percent of sales since 1980, according to De Loecker, Eeckhout, and Unger’s paper.10 Simcha Barkai of London Business School finds that since 1984, profits have increased from 2.2 percent gross value added to 15.7 percent.11 (See box.)
The consequences of growing market power
As a matter of theory, growing market power can aggravate economic inequality because the shareholders that benefit are richer than the consumers and workers that lose out. The top 1 percent in net worth owns 50 percent of all stocks held by U.S. households, according to research by Goldman Sachs Group Inc. analyzing Federal Reserve data.22 The very richest derive the bulk of their income from investments, and market power increases the value of their portfolios. In contrast, as a group, consumers who pay higher prices or workers whose wages stagnate own less stock.
A recent paper by Joshua Gans of the University of Toronto, Andrew Leigh of the Parliament of Australia, Martin Schmalz of the University of Oxford, and Adam Triggs of Australian National University confirms that increased markups are likely to increase inequality.23 The paper finds that the top 20 percent of the U.S. income distribution owns 89 percent of all stocks, while the bottom 60 percent owns just 7 percent of stocks. In contrast, the top 20 percent spends as much as the bottom 60 percent. Thus, when markups rise, the gap between the top 20 percent and the bottom 60 percent widens. The paper finds that market power has decreased the bottom 60 percent’s share of income and increased it for the top 20 percent.
Market power has increased inequality globally by transferring wealth from consumers to shareholders. In rich countries, market power boosts the wealth of the top 10 percent and reduces the incomes of the bottom 20 percent because the rich own stakes in businesses that rise in value, while the poor get hurt by higher markups, according to a paper by Sean Ennis, Pedro Gonzaga, and Chris Pike of the Organisation for Economic Co-operation and Development.24
Rising market power entrenches inequality because the rich save and invest at higher rates, becoming larger shareholders over time. The rich can afford to save more because of their higher incomes. The wealthiest 1 percent saves 20 percent to 25 percent of their income on average, while the bottom 90 percent saves only 3 percent of their income on average, according to a paper by Emmanuel Saez and Gabriel Zucman of the University of California, Berkeley.25 As the rich build their savings, the benefits of market power compound over time, as they invest more and more in stocks that rise in value, allowing them to amass even more wealth. On the other hand, the higher prices and lower wages that result from market power make it more difficult for most people to save and build wealth.
Market power has harmed the nonrich not only as consumers, but also as workers. The share of national income going to workers has fallen significantly since the 1970s, and recent research suggests that this is due to growing market power.26 The rise of superstar firms and “winner-take-most” markets has led to a decline in the labor share of income, according to a paper by David Autor of the Massachusetts Institute of Technology, David Dorn of the University of Zurich, Lawrence Katz of Harvard University, Christina Patterson of MIT (and a visiting scholar at the Washington Center for Equitable Growth), and John Van Reenen of MIT.27 They attribute this to growing market concentration driven by greater efficiency: A small number of dominant firms are capturing a growing share of total sales, and these firms tend to pay a lower share of their income to workers. (See box above.)
Causes of increased market power and its implications
It appears that a decline in antitrust enforcement has played a role in growing market power, but researchers also have proposed additional explanations. Some economists claim that leading firms are gaining market power because they’re more efficient. Autor, Dorn, Katz, Patterson, and Van Reenen write in their paper on superstar firms that markets have become “winner-take-most” because of stronger network effects and greater competition due to globalization and new technology.28 Thus, they write, “firms with superior quality, lower costs, or greater innovation reap disproportionate rewards relative to prior eras.” Van Reenen also writes in a recent paper that leading firms are gaining market share because they are more productive, and this may be partly due to their investment in intangible capital.29
Some researchers, such as Herbert Hovenkamp of the University of Pennsylvania, suggest that leading firms may be charging higher markups to pay for technology that has high fixed costs.30 Top research and development spenders include major companies such as Amazon.com Inc. and Alphabet Inc.31
This increased investment has made it harder for other firms to catch up. A new paper by Ufuk Akcigit of the University of Chicago and Sina T. Ates of the Federal Reserve finds that reduced knowledge diffusion between firms has boosted markups and the profit share of GDP, and thus market power.32 They find evidence suggesting that increased use of patents by firms on the technological frontier may be reducing knowledge diffusion. They find that the share of patents held by the top 1 percent of firms with the most patents has risen from 35 percent in the early 1980s to nearly 50 percent today, while the share of patents held by new businesses has plunged from 7 percent to 4 percent. Moreover, top firms are solidifying their lead by buying up patents from other companies: The share of patent purchases by the top 1 percent of firms has risen from around 30 percent in the early 1980s to around 50 percent today.
There is also evidence suggesting that laxer antitrust enforcement has allowed market power to grow in the United States. The signs of increased market power—especially higher markups and higher corporate profits—date back to the early 1980s. At the same time, during Ronald Reagan’s presidency,33 the Chicago School of economics revolutionized antitrust enforcement to make it more hands-off, with the argument that most mergers were efficient.34
Experts are concerned that once companies reach a certain level of dominance, they can use their significant resources to thwart competition by buying potential competitors or through other anti-competitive measures. However, regulators have largely stayed on the sidelines as big firms have acquired or merged with their competitors. Mergers have consolidated many U.S. industries as antitrust enforcement has declined, according to an Equitable Growth report by John Kwoka of Northeastern University.35
The number of antitrust cases filed by the Justice Department under the Sherman Antitrust Act of 1890 has fallen precipitously since the 1970s, according to Justice Department data.36 For instance, the Justice Department filed only one district court monopoly lawsuit under Section 2 of the Sherman Act between 2008 and 201737—down from 62 district court monopoly lawsuits between 1970 and 1979.38
The U.S. government revamped its merger guidelines in 1982 to make them friendlier to mergers, writing: “In the overwhelming majority of cases, the Guidelines will allow firms to achieve available efficiencies through mergers without interference from the Department [of Justice].”39 Merger policy became more lenient after the adoption of the 1982 Merger Guidelines, and market concentration levels began to rise around the same time, according to a recent paper by Carl Shapiro of the University of California, Berkeley.40
Judges have increasingly sided with dominant firms. Courts have a tradition of respecting the precedents set by the highest courts, and in two major cases—Verizon v. Trinko41 and Credit Suisse v. Billing42—the Supreme Court ruled in favor of alleged monopolies, in decisions that united both liberal and conservative justices. Howard Shelanski of Georgetown University suggests in a paper that these Supreme Court decisions would have led the United States to lose its landmark anti-monopoly case against AT&T Inc., which led to the breakup of AT&T in the early 1980s, if it had happened today.43 It appears that declining antitrust enforcement and changing court attitudes toward monopolies have allowed dominant firms to grow bigger and more powerful, leading to increased market power.
Conclusion
Equitable Growth has made it a priority to investigate monopoly power and its link to economic inequality. There is growing evidence that market power has grown since the 1980s, and this has contributed to increased economic inequality by transferring wealth from consumers and workers to shareholders. Market power has raised prices and suppressed wages, while boosting corporate profits. There is also evidence that declining antitrust enforcement has played a role in increased market power. Many questions still need to be answered, and this research increases the urgency of better understanding the causes and consequences of market power.
—Bonnie Kavoussi is a policy fellow at the Washington Center for Equitable Growth.
This week, House Ways and Means Chairman Richard Neal (D-MA) announced the first-ever hearing in the House of Representatives to focus exclusively on the issue of paid family and medical leave. Following on the heels of the reintroduction of the FAMILY Act in February and the introduction of the New Parents Act and the Child Rearing and Development Leave Empowerment, or CRADLE Act in March, this year is quickly shaping up to be one featuring new ideas and options for policies to help the millions of Americans who are forced to choose between work and caregiving in ways that are harmful not only to families’ economic security and well-being, but also to the U.S. economy.
The policies proposed to date differ dramatically in the details, and a rapidly growing body of research tells us a great deal about whether and how different elements of policy design affect a variety of outcomes, ranging from economic security to firm performance to broader macroeconomic indicators such as labor force participation. In a new fact sheet from the Washington Center for Equitable Growth, we summarize what this research tells us about some of the policy design choices.
This new work builds on our ongoing project catalyzing new research on paid leave using data from the three states (California, New Jersey, and Rhode Island) that have had paid family and medical leave policies in place for years. The project, called the Paid Leave Research Accelerator, also is laying the groundwork for additional research in the three states (New York, Washington, and Massachusetts) and Washington, D.C., all of which have new programs in various stages of implementation. In addition to a comprehensive review summarizing what policymakers and academics know and what they have left to learn about paid family and medical leave, Equitable Growth also has surveyed the data landscape and offered up recommendations to practitioners and researchers who are committed to creating evidence-backed social policy tackling the caregiving conundrum in America.
As federal policymakers dig into this critical issue, the Washington Center for Equitable Growth will continue to provide resources, such as our newly released fact sheet, to inform and advance the debate.
There are lots and lots of business practices that could and should be ruled illegal restraints on trade. Read Colleen Cunningham, Florian Ederer, and Song Ma’s working paper, “Killer Acquisitions,” in which they write: “This paper argues incumbent firms may acquire innovative targets solely to discontinue the target’s innovation projects and pre-empt future competition. We call such acquisitions “killer acquisitions.” We develop a parsimonious model illustrating this phenomenon. Using pharmaceutical industry data, we show that acquired drug projects are less likely to be developed when they overlap with the acquirer’s existing product portfolio, especially when the acquirer’s market power is large due to weak competition or distant patent expiration. Conservative estimates indicate about 6 percent of acquisitions in our sample are killer acquisitions. These acquisitions disproportionately occur just below thresholds for antitrust scrutiny.”
An event coming on May 16: Preparing for the next recession is perhaps the most productive and urgent policy analysis task today. Here are the details for “Preparing for the Next Recession: Policies to Reduce the Impact on the U.S. Economy”: “A Hamilton Project and Washington Center for Equitable Growth Policy Forum … Historically, the United States has responded to recent recessions with a mix of monetary policy action and discretionary fiscal stimulus. However, since monetary policy options may be limited during the next recession, policymakers should consider adopting a range of fiscal policy measures now to help stabilize the economy when a future downturn inevitably occurs. This can be achieved with a range of fiscal policy responses aimed at expediting the next recovery through strengthening job creation and restoring confidence to businesses and households.”
In the real world, sometimes threats need to be exercised to move prices, and sometimes they don’t. I have high hopes that we will learn a lot about this from Antoine Arnoud’s forthcoming dissertation, “Automation Threat and Wage Bargaining.” The details can be found in this Equitable Growth 2018 grantee announcement: “One doctoral grant will support research on how economic inequality affects the quantity and quality of innovation, and whether technological innovations, in turn, impact inequality: Antoine Arnoud (Ph.D. candidate, Yale University) proposes to study a novel mechanism through which automation in the labor market might have an impact on wages through the threat, rather than the actuality, of automation.”
Greatly looking forward to another 2018 Equitable Growth grantee research paper, “The impact of antitrust on competition.” Here is the announcement with the details: “Fiona Scott Morton (Yale University School of Management) will collect empirical metrics of antitrust enforcement outcomes to create a novel dataset, which she will use to analyze merger effects beyond prices such as employment, and to determine whether mergers in the high-tech sector are motivated by increased efficiencies or by the elimination of competitors.”
Worthy reads not from Equitable Growth:
An impressive finding. Heartwarming. Much stronger than I thought it would be, so very nice to know. Read Barbara Biasi, “School Finance Equalisation Increases Intergenerational Mobility,” in which she writes: “Rates of intergenerational mobility vary widely across the United States. This column investigates the effects of reducing differences in revenues and expenditures across school districts within each state on students’ intergenerational income mobility, using school finance reforms passed in 20 U.S. states between 1986 and 2004. Equalization has a large effect on mobility, especially for low-income students. The effect acts through a reduction in the gap in inputs and in college attendance between low-income and high-income districts.”
Okay, but what drives these differential rates of return, anyway? And how much can this really approach the dream of taxing luck and inheritance rather than enterprise? Read Fatih Guvenen, “Use It Or Lose It: Efficiency Gains from Wealth Taxation,” in which she writes: “When individuals differ from each other in the rate of return they earn … capital income and wealth taxes have opposite implications for efficiency, as well as for some key distributional outcomes. Under capital income taxation, entrepreneurs who are more productive … pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity … A revenue-neutral tax reform that replaces capital income tax with a wealth tax raises average welfare by about 8 percent in consumption-equivalent terms … The optimal wealth tax is positive, yields larger welfare gains than the tax reform, and is preferable to optimal capital income taxes … Wealth taxes can yield both efficiency and distributional gains.”
This is not right. Prospectively, Robert Barro was modeling a permanent supply-side boost to the level of Gross Domestic Product driven by higher investment to the tune of an extra $800 billion annually. Barro’s prospective model conclusion was not of a temporary demand-side boost. His shift to the demand side in his paper with Jason Furman was a six-month-later climb-down. I know this. He knows this. I know he knows this. He knows I know he knows this. Why bother saying this? I think the point is to fuzz the issue. Barro made three assessments: one, that the Tax Cuts and Jobs Act of 2017 would boost output by 4 percent and it might achieve its full effect in 10 years; one, that the TCJA would boost output by 7 percent with an 0.4 percent first-year effect; and one with Jason Furman that was not so much a model-based forecast of the impact, but a reduced-form claim if past correlations held. It is this last one that he now focuses on. Read Robert Barro, “My Best Growth Forecast Ever,” in which he writes: “America’s real GDP growth rate of 3.2 percent for the first quarter of this year is impressive, as was the 3 percent average growth in 2018 (measured from the fourth quarter of 2017 to the fourth quarter of 2018). Since the end of the Great Recession—from 2011 to 2017—the U.S. economy grew by only 2.1 percent per year, on average. What accounts for the recent acceleration?”
As economic inequality increased over the past several decades, there’s beengrowingconcern that the trend is hurting U.S. economic mobility, with the consequences of downward economic mobility growing worse. This infographic vividly illustrates those consequences.
The top panel shows that between 1950 and 1980, when economic growth was shared equitably across income quintiles (see the green bars), children born to middle-income households were likely to experience upward mobility even if they slipped down the income ladder a bit. In other words, those children born in 1950 were likely to have a higher income than their parents even if their relative position on the income distribution was a little lower than their parents’ place on the ladder.
The story is different between 1980 and 2010, as shown in the bottom panel. Children born to middle-income households in 1980 would be unlikely to have a higher income than their parents even if those children managed to hold on to middle-income status as adults. The reason: The income gains from growth between 1980 and 2010 were highly concentrated at the top of the income distribution while those in the middle saw less, and those in the bottom two income groups actually lost ground (see the red bars). Children born in 1980 needed to move up the income distribution substantially just to have the same inflation-adjusted income as their parents had.
In the past, economic growth was more equitably distributed and therefore typically raised standards of living in the United States such that upward mobility was considered the norm and was synonymous with the concept of the American Dream. This infographic captures how growth that has unequally accrued to the top of the income distribution threatens the promise of the American Dream and raised the stakes on the consequences of falling down the income ladder.
Recent research from Equitable Growth grantee and Harvard University Ph.D. candidate in economics Alexander M. Bell and co-authors Harvard economist Raj Chetty, London School of Economics economist Xavier Jaravel, U.S. Treasury economist Neviana Petkova, and Massachusetts Institute of Technology economist John Van Reenen suggests that efforts to provide children ages 0 to 16, particularly from disadvantaged groups, with early exposure to careers in innovation are more effective than financial incentives in stimulating innovation in the United States.
In a new working paper released in January, the authors develop a model of inventors’ careers consistent with prior research findings and the authors’ new analysis of patent data linked with tax data for 1.2 million inventors between 1996 and 2014. This paper follows up on a previous empirical study in a companion paper by the five authors—featured in Equitable Growth’s working paper series—using the same data. This first study found that exposure to innovation through families and neighborhoods has a strong causal effect on children’s likelihood of inventing and helps explain much of the disparity in innovation rates across gender, race, and socioeconomic class.
In their new analysis of patent and tax data, Bell, Chetty, and their colleagues present evidence that financial returns to inventions are highly concentrated among a small group of “star inventors,” whose inventions also have the most scientific impact in the form of academic citations. After summarizing the trends in inventors’ income, as well as the number and impact of their patents over their lifetimes, the authors combine these results with those of their previous paper on exposure to innovation to develop a model of career choice with three key determinants: financial incentives, exposure to innovation, and preferences.
This model sheds light on why financial incentives, including tax cuts, have a modest impact on aggregate innovation. The first reason for this weak relationship is that financial incentives to encourage innovation only affect the incentives of people who have already been exposed to and obtained access to a career in innovation, which is a small subset of the full population of potential inventors. Additionally, financial incentives have limited impact on the decisions of “star inventors,” who already receive huge financial returns from their inventions.
Because these types of inventors are responsible for much of the economic and social impact of innovation, financial incentives can only induce a few low-impact inventors on the margin to enter the market, which is less relevant to aggregate levels of innovation, according to the authors, than efforts to draw in more “Einsteins” and “Marie Curies.”
In contrast, the authors argue that childhood exposure to innovation, particularly at the earliest ages, can have significant effects in increasing aggregate innovation by encouraging not just more inventors, but also more “star inventors” to enter the field. By intervening in human capital development before individuals enter the labor market, programs that promote educational opportunities, mentorship, and access to neighborhoods with a disproportionate number of inventors per capita have the potential to dramatically increase the quantity and quality of inventions by drawing new high-impact inventors with new perspectives into the innovation pipeline.
In one concrete example from their paper, Bell and his co-authors calculate that moving a child from a neighborhood in the 25th percentile in innovation per capita to one in the 75th percentile would increase her propensity of innovation by 37 percent because greater exposure provides role models that can expand her professional horizons, in addition to increasing her access to the information and networks necessary to pursue a career in innovation.
In developing their model, Bell, Chetty, Petkova, Jaravel, and Van Reenen assume that opportunity is not correlated with the capability to innovate. They justify this assumption based on their prior work, in which they find that the scientific and financial impact of female and minority inventors is similar to that of white male inventors—the latter group is just larger, as white men as a whole are more frequently exposed to careers in innovation. The authors also note that disparities in the propensity to innovate remain after controlling for academic performance, again pointing to the clear role of structural factors, such as discrimination or lack of role models, which influence the opportunities available to potential inventors at each stage of their lives.
In fact, the economists calculate that gaps in rates of innovation by parental income, race, and gender are largest for students with the highest test scores at a young age. Given this considerable untapped pool of talent, Bell and his co-authors argue that increasing exposure to innovation for underrepresented students who excel in science and math at an early age would generate the largest returns for aggregate innovation. Specifically, they estimate that if women and people of color had the opportunity to innovate at the same rate as white men from the top income quintile, the number of inventors in the economy would quadruple.
While financial incentives do have some effect for low-impact inventors, they pale in comparison to efforts to increase the number of Einsteins and Katherine Johnsons, who have the capacity to produce transformative discoveries if made aware of and connected to opportunities to pursue careers in innovation. In light of the researchers’ findings on the importance of exposure to innovation in families and neighborhoods, bringing these potential high-impact inventors into the innovation pipeline will likely require investing in higher-quality and more integrated systems of education, housing, and human capital development for all children.
In addition to systemwide reforms, targeted interventions, including mentorship and affirmative action programs, should be developed to support innovation by members of groups who currently face discrimination or economic disadvantage on the basis of race, socioeconomic class, or gender. Among other scholars, Michigan State University economist and Equitable Growth Research Advisory Board member Lisa Cook has outlined why efforts to increase representation in the process of innovation on the basis of race and gender must be implemented throughout potential inventors’ educational and professional careers.
Building out the innovation pipeline in the United States by increasing the number of children who have access to the information and networks necessary to become an inventor would both improve innovators’ representativeness of the world around them and increase the responsiveness of their innovations to a wider variety of social needs. Given aggregate innovation’s importantrole in driving economic expansion, these efforts to expand the U.S. economy’s base of inventors would also fuel robust, sustainable, and broadly based growth for all Americans.
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 published this week and the second is the 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
In an op-ed in The Washington Post, Equitable Growth’s Executive Director and chief economist Heather Boushey explains that the debate over the relative newcomer economic theory of modern monetary theory is a distraction from addressing the biggest economic challenge facing the United States: the rise in economic inequality.
In the latest installment of Equitable Growth’s In Conversation series, Heather Boushey chats with Harvard University economist and founding member of the Equitable Growth Steering Committee Raj Chetty about his research into opportunity in the United States, including who becomes an inventor and the impact of race and place on economic mobility.
Catch up on Brad DeLong’s latest worthy reads from Equitable Growth and around the web.
Links from around the web
U.S. Gross Domestic Product numbers for the first quarter of the year were released this morning by the Commerce Department, which showed that the economy grew 3.2 percent. But as Equitable Growth’s Executive Director and chief economist Heather Boushey tells NPR’s Scott Horsley, these GDP numbers don’t tell us where all of the income from this growth is actually going and who is feeling that growth. For that, we would need to break down GDP to understand how the economy is performing for Americans of different income levels, different regions of the country, and more. [npr]
As the federal minimum wage hasn’t been raised in 10 years and remains at $7.25/hour, increases in it at the city and state level mean that the federal minimum wage only applies to little more than 10 percent of minimum-wage employees in the United States, explains Ernie Tedeschi in The New York Times’ Upshot. [nyt]
Increasing concerns that rising economic inequality could spur populist political backlash have caused some business leaders to reconsider support for more progressive economic policies. [ft]
The Open Market Institute’s legal director Sandeep Vaheesan explains why T-Mobile US Inc.’s proposed acquisition of Sprint Corp. would result in bad outcomes not just for consumers but also workers. [ft alphaville]
Courtney Martin unpacks some of the reasons behind the racial wealth gap in the first of an upcoming three-part series. [nyt]
Go back and read Alyssa Fisher on the problem generated by underfunding the IRS. She writes in “Greater IRS funding can help ensure the wealthy pay the taxes they owe” that “[t]he majority of underreported income and underpaid taxes … occurs among the top decile … What the IRS is doing about underpayment. .. is less and less … Since 2010, congressional majorities … underfund[ed] the IRS … pressured the agency to devote greater attention and resources to some of the nation’s lowest-income working families—those who claim the Earned Income Tax Credit.”
Two years ago, we published Owen Zidar’s excellent piece on how the only tax cuts that boost aggregate demand are rate cuts for lower-income Americans. Read his “Tax cuts for whom? Heterogeneous effects of income tax changes on growth and employment,” in which he writes: “How tax changes for different income groups affect aggregate economic activity … a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM … by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups, and that the effect of tax cuts for the top 10 percent on employment growth is small.”
A tweet from Harvard University Press’ Ian Malcolm, “Fall List Preview #5,” of Heather Boushey’s Unbound: How Inequality Constricts Our Economy and What We Can Do About It. Malcolm writes: “One of Washington’s most influential voices on economic policy shows how reducing inequality can stimulate growth. HB also explains a quiet revolution for the better in the dismal science.”
Worthy reads not from Equitable Growth:
Note that even if gentrification were to boost housing demand by as much as housing supply—which is not the case—the general-equilibrium effects are enormously beneficial: much less pressure on nongentrifying neighborhoods and a much larger increase in the tax base to support urban services. Read Brian James Asquith, Evan Mast, and Davin Reed, “Does Luxury Housing Construction Increase Nearby Rents?” They write: “There are many plausible mechanisms by which an increased concentration of wealthy households could make a neighborhood more attractive … We study induced demand near new apartment complexes in gentrifying areas using listing-level data on rental prices from Zillow and exact household migration data from Infutor … difference-in-differences … In neighborhoods where new apartment complexes were completed between 2014–2016, rents in existing units near the new apartments declined relative to neighborhoods that did not see new construction until 2018. Changes in in-migration appear to drive this result. Although the total number of migrants from high-income neighborhoods to the new construction neighborhoods increases after the new units are completed, the number of high-income arrivals to previously existing units actually decreases, as the new units absorb a substantial portion of these households. On the whole, our results suggest that—on average and in the short-run—new construction lowers rents in gentrifying neighborhoods.”
Potemkin factories in Wisconsin are highlighted by Josh Dzieza in his “Foxconn is confusing the hell out of Wisconsin.” He writes: “Last summer, Foxconn announced a barrage of new projects in Wisconsin—so we went looking for them: It was summer in Wisconsin, and Foxconn seemed to be everywhere. But also: nowhere at all. … The trade war with China still looms, and Trump has personally called Foxconn CEO Terry Gou when the company wavers. This time, Foxconn can’t simply vanish without risking a backlash, but it also makes no sense for it to build what it initially promised. Shih thinks Foxconn is still figuring out what it’s going to do and that the infrastructure development, political attention, and insistence on a factory is painting the company into a corner.”
Africa is the only region in which the number of people in dire poverty continues to increase. Can industrialization help? Maybe—but it may be too late for industrial firms to be a leading sector. Read Bright Simons, “Africa’s Unsung ‘Industrial Revolution,’” in which he writes: “There is an industrial revolution underway in sub-Saharan Africa’s most entrepreneurial economies—places such as Ghana, Uganda, Senegal, and Côte d’Ivoire … Alibaba industrialization … No one is entirely sure why protectionist and state-led industrial policies of the type described earlier seem to induce large-scale industrialization in Vietnam, South Korea, and Taiwan but not in Nigeria, Laos, or Uzbekistan. Every theory adduced is racked with contradictions and does not survive granular examination … Small and medium-sized Chinese suppliers provide major chunks of the industrial jigsaw and African hustlers and unconventional industrialists act as shuttle-brokers of the various factors of production between China and Africa … Chinese SMEs are becoming sophisticated global opportunity hunters, ditching the somewhat passive role they played as cogs in the Western outsourcing wheel three decades ago … tailoring solutions for individual African country terrains, complete with logistics, training, and support packages. The effects of the modular transformation of the African industrial sector, whilst subtle, are already fascinating: reassembled knockdown luxury cars in Ghana; cutting-edge clay brick kilns in Uganda; and milk-vending now a thing in Kenya.”
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 published this week and the second is the 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
Equitable Growth Policy Director Alyssa Fisher penned a blog this week on the importance of increasing IRS funding to reduce tax evasion, especially among the ultra-wealthy. For one example of misplaced priorities, Alyssa points out the that recipients of the Earned Income Tax Credit in 2017 were twice as likely to get audited as families with earnings between $200,000 and $500,000. She concludes by calling for action by Congress and the Trump administration to increase funding for enforcement—particularly in light of the bipartisan understanding that spending on enforcement efforts ends up saving money by bringing in more revenue to the government, especially from the wealthiest taxpayers.
A study on “killer acquisitions” by London Business School economist Colleen Cunningham along with Yale University economists Florian Ederer and Song Ma was added to Equitable Growth’s working paper series. The three authors develop a model for acquisitions in which an existing firm acquires an innovative startup in order to neutralize competition. Using data from the pharmaceutical industry, they confirm this theory by showing that acquired drug projects are less likely to come to fruition when they are potential competitors for one of the existing drugs produced by the acquiring firm.
In his weekly “Worthy Reads” column, University of California, Berkeley economist and Equitable Growth columnist Brad Delong highlights recent research and writing in economics from Equitable Growth and other scholars. This week, Brad highlights Equitable Growth economist Greg Leiserson’s primer on the importance of distributional tables in analyzing the impact of tax reforms as well as my review of economist Mariana Zerpa’s study on the direct and potential spillover effects of early childhood education. Brad also points to recent writing on political economy from law professor Brishen Rogers and links it to previous path-breaking work on the symbiotic relationship between the market and the state by political economists Timothy Besley and Torsten Persson.
Links from around the web
David Harrison at The Wall Street Journal broke the news this week that the Bureau of Economic Analysis would begin releasing distributional data that illustrates how economic growth is distributed among people with different incomes. This decision follows years of research and advocacy for better measures of economic inequality by Equitable Growth computational social scientist Austin Clemens, executive director and chief economist Heather Boushey, and other scholars. Harrison points out that the BEA’s decision would help confirm work by Equitable Growth Steering Committee member Emmanuel Saez and Equitable Growth grantee Gabriel Zucman, both economists at Berkeley, that the vast majority of income growth over the past decades has been concentrated among the richest families in the United States. [wsj]
The Economist delved into data on the extent and causes of income inequality across OECD countries. Specifically, the authors compare pre-tax and post-tax levels of inequality and note that the United States particularly stands out for its high levels of income inequality before taxes. The upshot of this finding is that in addition to creating a fairer tax system, policymakers must work to address other structural features in the U.S. economy, including wage inequality, a lack of competition between firms, and insufficient economic security for many families. [economist]
Moving beyond anonymous tax data, Binyamin Appelbaum made the case in The New York Times that all tax returns should be made available to the general public. He highlights research by former Equitable Growth Steering Committee member and Harvard University economist Raj Chetty as an important example of how this data can shed light on how the economy works—and how it is not working for so many Americans. Furthermore, Appelbaum argues that full disclosure would help reduce political corruption, fraud, tax evasion, and economic inequality. [nyt]
University of Chicago economist Bruce Meyer and Charles University economist Nikolas Mittag released a working paper this week on the advantages of linking administrative and survey data to better understand income inequality in the United States. Specifically, they show that doing so can increase the accuracy of income and poverty measurements in the U.S. Census Bureau’s Current Population Survey, and they provide suggestions for other researchers interested in applying this method. [nber]
