Weekend reading: “the economic rents are too high” edition

Posted on by Maria Monroe

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

This week, Equitable Growth published two new working papers in its Working Paper Series.

The first paper, “Who Profits from Patents,” is by Heidi Williams at the Massachusetts Institute of Technology, Neviana Petkova at the U.S. Department of the Treasury, Patrick Kline at the University of California, Berkeley, and Owen Zidar at Princeton University. They found evidence that firms who secure patents do share the financial benefits from them with workers—but only those already earning the most. Read more about the study and its findings in Raksha Kopparam’s post on our Value Added blog.

The second working paper, “How does market power affect wages? Monopsony and collective action in an institutional context,” is by economists Mark Paul of New College of Florida and Mark Stelzner of Connecticut College. They construct a labor market model to better understand the theoretical implications of firms’ monopsony power. As the authors explain in a column on their paper, one of the main findings of their work is that unions, and collective labor action in general, are rent-reducing and efficiency-enhancing when monopsony power is present.

Equitable Growth also launched its new landing page for its Competitive Edge blog series, a monthly series featuring leading experts in antitrust enforcement on a broad range of competition-related topics, in a post by Raksha Kopparam providing an overview of the entries published so far. The latest entry is by John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, who explains how a structural presumption in U.S. merger control policy would strengthen modern antitrust enforcement.

Michael Kades writes about the key takeaways for antitrust enforcement from Equitable Growth’s recent event, “Building a new consensus on antitrust reform,” which included a keynote address by Senator Amy Klobuchar (D-MN).

Greg Leiserson and Adam Looney, a senior fellow in Economic Studies at Brookings and the Director of the Center on Regulation and Markets at Brookings, have authored an issue brief setting out a new framework for economic analysis of tax regulations. Leiserson and Looney argue that the analysis of regulations should focus on the revenues raised and the economic burden imposed on the public, rather than attempting to quantify the net benefit or cost of a regulation, as doing the latter would require the agencies to make controversial assumptions about the social value of revenues and the appropriate distribution of the tax burden.

Read Brad Delong’s latest worthy reads.

Links from around the web

The Economist’s pick of the decade’s eight best young economists included five Equitable Growth grantees: Nathaniel Hendren of Harvard, Emi Nakamura of the University of California-Berkeley, Stefanie Stantcheva of Harvard, Amir Sufi of the University of Chicago Booth School of Business, and Heidi Williams of MIT. [economist]

The latest guidance from the Federal Reserve indicates that it plans to raise interest rates in 2019 in order to hit the inflation target half of its dual mandate. Narayana Kocherlakota, former President and CEO of the Federal Reserve Bank of Minneapolis, points out that the other half of its dual mandate, ensuring full employment in the economy, could suffer, as unemployment would likely rise as a result. [bloomberg]

As new businesses and jobs concentrate in urban areas, it’s difficult to design policies to help rural economies keep up. Eduardo Porter argues for policies that would encourage and help people to move where the jobs are. [nyt]

High school students from low-income families are less likely to enroll in selective four-year colleges even when they have the grades and test scores to get in. But a study by researchers at the University of Michigan found that just by sending a personalized letter to these students telling them that they qualify for existing financial aid programs increased applications by 40 percentage points and enrollment by 15 percentage points compared to a control group. [wapo]

Friday Figure

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Brad DeLong: Worthy reads on equitable growth, December 13–19, 2018

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Patent publication turns out to be a very valuable societal institution indeed, viewed as a way of disseminating knowledge, write Deepak Hegde, Kyle Herkenhoff, and Chenqi Zhu in “Patent Publication and Technology Spillovers”: “[I]nvention disclosure through patents (i) increases technology spillovers at the extensive and intensive margins; (ii) increases overlap between distant but related patents and decreases overlap between similar patents; (iii) lowers average inventive step, originality, and scope of new patents; (iv) decreases patent abandonments; and (v) increases patenting…”
  2. Workers—but only high-paid workers—capture about 30 cents of every extra dollar in revenue generated by the monopoly power conferred by a patent. This is another piece of evidence that workers—but again, only high-paid workers—are, to a substantial but not overwhelming extent, effective equity holders in American businesses. See “Who Profits from Patents? Rent-Sharing at Innovative Firms,” by Patrick Kline, Neviana Petkova, Heidi Williams, and Owen Zidar: “Comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected … patent allowances lead firms to increase employment, but entry wages and workforce composition are insensitive to patent decisions. … Workers capture roughly 30 cents of every dollar of patent-induced surplus in higher earnings. … These earnings effects are concentrated among men and workers in the top half of the earnings distribution, and are paired with corresponding improvements in worker retention among these groups…”
  3. Equitable Growth Steering Committee Member Karen Dynan, in a video conversation with Jay Shambaugh and Eduardo Porter about whether the U.S. government is properly prepared to fight the next recession, makes clear that the answer is no, in “What Tools Does the U.S. Have to Combat the Next Recession?” To paraphrase: Today’s lower equilibrium interest rates make it more likely that monetary policy would need to make use of unconventional tools to spur the economy. On the fiscal front, we have a much larger level of government debt relative to GDP than we did prior to the financial crisis. However, viewing this level of debt to GDP as a reason to restrain stimulus spending in case of a crisis could make the problem worse. Whether the government uses fiscal policy to stimulate the economy will depend more on political willingness, than on the actual limits on fiscal policy…
  4. An excellent interview with Equitable Growth Research Advisory Board Member Lisa Cook, “On invention gaps, hate-related violence, discrimination, and more,” where she says: “One of the first things I do [in Dakar, Senegal] is to buy a Bic pen. … Each one was 10 dollars! Ten dollars! This completely stunned me. I knew how poor most people were. I knew students had to have these pens to write in their blue books. It just started this whole train of thought…”

Worthy reads not from Equitable Growth:

  1. Scale economies are not growing in the American economy. But monopoly power is, writes Jonathan Baker in “Market Power or Just Scale Economies?”: “Growing market power provides a better explanation for higher price-cost margins and rising concentration in many industries, declining economic dynamism, and other contemporary U.S. trends, than the most plausible benign alternative: increased scale economies and temporary returns to the first firms to adopt new information technologies (IT) in competitive markets. The benign alternative has an initial plausibility. … Yet six of the nine reasons I gave for thinking market power is substantial and widening in the U.S. in my testimony cannot be reconciled with the benign alternative. … None of the reasons is individually decisive: There are ways to question or push back against each. But their weaknesses are different, so, taken collectively, they paint a compelling picture of substantial and widening market power over the late 20th century and early 21st century…”
  2. Brink Lindsey, Will Wilkinson, Steven Teles, and Samuel Hammond write, in “The Center Can Hold: Public Policy for an Age of Extremes”: “We need both greater reliance on market competition and expanded, more robust, and better-crafted social insurance … government activism to enhance opportunity … less corrupt and more law-like governance … a new ideological lens: one that sees government and market not as either-or antagonists, but as necessary complements…”
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Equitable Growth antitrust conference presents incoming 116th U.S. Congress and the two antitrust agencies with potential new merger enforcement ideas

Posted on by Maria Monroe

In the wake of the November midterm elections and in preparation for the arrival of the new 116th Congress in January, the Washington Center for Equitable Growth held an event, “Building a new consensus on antitrust reform,” to discuss how to improve U.S. antitrust enforcement. In her opening remarks, Equitable Growth’s Executive Director and chief economist Heather Boushey explained that there is growing evidence that the United States suffers from a monopoly problem, and that “today’s conversation is about bringing together experts to discuss how to make antitrust more effective.” Echoing those concerns in his closing remarks, economics professor Carl Shapiro at the University of California, Berkeley pointed to a mismatch that is driving the need for reform: “We need antitrust more than in a long time because we have big firms with economic power, and yet we have less antitrust,” he said, because the courts have shrunk the scope of antitrust doctrines over the past 40 years.

The keynote address by Sen. Amy Klobuchar (D-MN) set the overarching framework for the event. As both chairwoman and ranking member of the Subcommittee on Antitrust, Competition Policy, and Consumer Rights, Sen. Klobuchar has promoted competition policy before it became fashionable, raising concerns about troubling mergers such as Comcast/Time Warner Cable and Canadian Pacific/Norfolk Southern, and criticizing anticompetitive practices that increase prescription drug prices. She introduced two significant antitrust bills in 1997: the “Merger Enforcement Improvement Act” and the “Consolidation Prevention and Competition Promotion Act.” (As a counsel detailee for Sen. Klobuchar, I worked on both bills.)

In her address, Sen. Klobuchar stressed the problems created or exacerbated by a lack of competition: higher prices for consumers, lower wages for workers, fewer entrepreneurs successfully starting new businesses, and less innovation. Both “inaction from Congress, paralyzed inaction” and “a very conservative court” are obstacles to addressing monopoly power in the U.S. economy, she said, finishing her address with a challenge to those interested in reform: “I believe the time has come to get movement on antitrust,” but it will take a “political movement to get this done.”

How to restore antitrust enforcement? Twice before (in 1914 and 1950), Congress modified the law to reinvigorate antitrust enforcement. Taking a page from the original antitrust expert Louis Brandeis, Benton Senior Fellow and former senior federal antitrust attorney Jon Sallet discussed the principles for reform: “Brandeis believed that legislators creating antitrust laws should consider broad economic and social issues.” At the same time, Brandeis believed that the legal standards themselves need to be objective and focus on economic outcomes. These changes should be based on expertise. Further, competition may not solve all market problems, in which case sector-specific regulation may be necessary. Finally, Brandeis encouraged a spirit of experimentation.

Taking up Brandeis’ call for innovation and experimentation were Sandheep Vaheesan, legal director at the Open Market Institute, Northeastern University economics professor John Kwoka, and Renata Hesse, former acting assistant attorney general for antirust, all of whom joined Sallet to discuss potential improvements in antitrust law. There was broad consensus that the legislative branch has been somewhat of an absentee landlord when it comes to the antitrust laws. As Vaheesan put it, “It is time for Congress to fully reclaim authority,” or as Hesse said, “We need to hear from Congress what its expectations are” for antitrust enforcement. There was further agreement that antitrust enforcement can be improved. Kwoka described a “hardening of the arteries of the competitive process.” Finally, there was general agreement that complexity in antitrust cases may be increasing costs without improving accuracy.

That increase in complexity has been the direct result of courts demanding more proof before finding a violation. UC Berkeley’s Shapiro suggested that Congress could remedy this problem by identifying factual conditions in which mergers are likely to be anticompetitive, or what is known as a presumption. In those situations, a court would have to find the challenged conduct illegal unless the defendants could show that the specific case is an exception to the general rule.

Currently, one presumption exists in merger law: the structural presumption. In horizontal mergers (mergers between competitors), if a merger significantly increases concentration in a highly concentrated market, then it is presumed anticompetitive and is illegal, unless the defendants come forward with evidence that the deal is not anticompetitive.

The panelists supported strengthening the structural presumption. In addition, they discussed potential new presumptions that Congress could create to improve antitrust enforcement. Sallet suggested developing a presumption for when a vertical merger (a combination between firms at different levels of the supply chain) is likely to be anticompetitive. Shapiro suggested Congress should identify the conditions that trigger a presumption when close competitors merge, when a merger eliminates a maverick competitor, or when a dominant firm acquires a potential competitor.

On process, both Hesse and Kwoka advocated for increased resources for the two antitrust enforcement agencies, the U.S. Antitrust Division of the Department of Justice and the Federal Trade Commission. According to Hesse, based on her experience, the antitrust division has been resourced-constrained since 2013.

The panelists offered other ideas. Vaheesan argued for eliminating the consumer welfare standard as the guiding principle of antitrust law. Kwoka pointed out that currently the antitrust agencies are not challenging a significant number of mergers that are presumptively anticompetitive under their own Horizontal Merger Guidelines. The agencies’ strictly adhering to those guidelines would result in significantly more enforcement actions.

There needs to be more discussion of these ideas and others, but the participants in this lively event provided an overview of the potential tools to improve antitrust enforcement that the incoming 116th Congress and the two antitrust agencies should consider.

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A framework for economic analysis of tax regulations

Posted on by Maria Monroe

In April 2018, the U.S. Treasury and the Office of Management and Budget (OMB) agreed to a new process under which OMB would review tax regulations prior to their release. Under this agreement, the analytic requirements imposed on economically significant non-tax regulations apply to many more tax regulations than in the past. However, neither OMB nor Treasury have issued a formal statement about their approach to conducting economic analysis of tax regulations. Moreover, applying OMB’s standard guidance for regulatory analysis to tax regulations would bias the regulatory process against raising revenue and stopping abuse, and would impair the effective administration of tax law.

This brief outlines an alternative framework for the economic analysis of tax regulations that can aid Treasury and the IRS in the development of effective regulations. The resulting analysis would also provide legislators and the public with the relevant information for assessing tax regulations’ economic merits.

Treasury and the IRS should conduct a formal economic analysis of regulations in two cases. First, for regulations that implement recent tax legislation, the agencies should conduct an analysis if they have substantial discretion in designing the regulation and if different ways of doing so would vary substantially in their economic effects. Second, for regulations unrelated to recent legislation, the agencies should conduct an analysis if the regulation would have large economic effects relative to current practice.

The economic analysis conducted in these cases should focus on the revenues raised and the economic burden imposed on the public as a result of the agencies’ exercise of discretion or the new application of existing authority. The revenues raised and the burden imposed reflect the fundamental tradeoff in taxation, and thus determine a regulation’s costs and benefits. However, the analysis should not attempt to quantify the net benefit or net cost of a regulation as doing so would require the agencies to make controversial assumptions about the social value of revenues and the appropriate distribution of the tax burden. Treasury’s Office of Tax Analysis is well-equipped to provide estimates of revenues and burden as they can be built from analyses the Office already produces: revenue estimates, distributional analyses, and compliance cost estimates.

We are optimistic that an increased role for economic analysis has the potential to improve tax regulations, but the experience since the April agreement raises significant concerns. The new review process has delayed the release of guidance implementing the 2017 Tax Act, and it has increased the resources required to complete each regulatory project. However, there is little evidence to suggest it has improved the resulting regulations. Should that continue to be the case, it raises a more fundamental question of whether the new review process should be continued. Absent improvements, a future administration may want to consider reverting to the more limited review of tax regulations that existed prior to the recent agreement between Treasury and OMB.

Download the full issue brief. Download File
ES_20181220_Looney-OIRA-Tax-Regs

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Rethinking collective action and U.S. labor laws in a monopsonistic economy

Posted on by Maria Monroe
CHICAGO, ILLINOIS – NOVEMBER 28, 2014: Striking Walmart workers and supporters protest against low wages and charge that Walmart retaliates against employees who push for better working conditions.

Discussions today are pervasive among economists and policymakers about the increasing rise of firms’ market power and the potential negative effects of that power on the U.S. economy. Of particular concern is the rise of new technologies and the dominance of platform giants—such as Amazon.com Inc., Alphabet Inc.’s Google unit, Apple Inc., and Uber Technologies Inc., among others—which are not improving the U.S. socioeconomic landscape by reaping gains from potential economies of scale, but rather are throwing around their weight to suppress wages, raise prices on consumers, and enter the political arena to ensure the federal government allows the U.S. economy to continue on the path of market consolidation.

Many economists point to this disconcerting rise in market power as leading to a simultaneous rise in monopsony power—the ability of the firm to have an influence over the determination of workers’ wages—which may contribute to the persistence of stagnant wages despite relatively low headline unemployment numbers in recent times. This is in stark contrast to decades of research and modeling in economics following the so-called marginalist revolution in the discipline, which resulted in most economists simply treating monopsony power as a special case only existing in the now long-gone company towns of Homestead, Pennsylvania, and Pullman, Illinois, of the 19th century or in highly concentrated island economies of introductory economics textbooks.1

Recent empirical investigations into U.S. labor markets no longer allow reasonable economists to bury their heads in the sand about market power and assume that workers’ wages are simply equal to the value of their marginal product or service. There’s now insurmountable evidence that monopsony power is prevalent throughout the U.S. economy, though the degree to which it may contribute to widening income inequality and underemployment remains an open question. These findings imply that employers can siphon off “rents”—economic parlance for excessive profits beyond the cost of production—from workers through the exercise of monopsony power. These findings are the complete opposite of the dynamic formulated in most current labor market models.

In our new Washington Center for Equitable Growth working paper, “Monopsony and Collective Action in an Institutional Context,” we seek to better understand the theoretical implications of this new and growing empirical literature on monopsony power and the resulting lower wages for workers. We construct a monopsony-wage model that integrates the strategic interaction between workers and employers in the wage-setting process into an institutional context where we consider the support, or lack thereof, of institutions such as the government and the courts for workers, as opposed to firms.

To better understand these ideas, we construct a labor market model with monopsony power as the starting point and workers’ collective action as a form of countervailing power. Borrowing the term countervailing power from the late economist John Kenneth Galbraith, we use it to represent the fact that workers’ collective action can act as an alternative to the regulation of labor markets to improve socioal efficiency, though the two should certainly be thought of as complements.2

By taking monopsony power as the starting point, we paint a very different picture than the traditional Econ 101 understanding of labor markets. Our model leads to a reconceptualization of some of the important dynamics within labor markets, with significant implications for how economists understand many important outcomes such as the current rise in income inequality, the trajectory of strike activity, and in clarifying the role of unions with regard to the overall social efficiency of labor markets.

One of the main findings of our work is that unions, and collective labor action in general, are rent-reducing and efficiency-enhancing when monopsony power is present. Essentially, collective action neutralizes, to some degree, the wage-setting power of firms by reducing the rent that firms siphon from workers via their wage-setting power. Increases in wages may reduce profits but will decrease rents. This is completely contradictory to how most economists conceive of workers’ collective action, which they see as costly and rent-seeking. But this misplaced view is contingent on the starting point of whether monopsony power exists.

Recent empirical work that shows firms have wage-setting power led us to use monopsony power as the starting point, completely re-centering the role of collective action from one of rent-seeking to rent-reducing. A natural conclusion from this starting point and our subsequent findings is that the U.S. economy needs more unions, and we certainly do. But unions don’t exist in a vacuum. Understanding the potential effects of the institutional setting in which they operate, including the government and the courts, how workers collective action takes place is critical to understanding how to build a more equitable and just labor market.

Institutional support for workers in the United States used to range from judicial backing of unions in the early 19th century to statute legislation that protects workers collective bargaining activity such as the National Labor Relations Act, and including social norms that prescribe, at least to a degree, certain anti-union activities such as the usage of permanent replacement workers during economic strikes in the mid-20th century. Today, more recent court rulings and government regulatory action do not support workers. A recent example of a major rollback of institutional support of unions can be seen in the Janus v. American Federation of State, County, and Municipal Employees case, where the U.S. Supreme Court devastated public-sector unions by ruling that these unions may not charge nonmembers “agency fees” for contract negotiation and other services that affect all employees in the same workplace.

Of course, there are other examples reaching beyond unions such as the courts and policymakers allowing the proliferation of noncompete clauses to further hamstring workers. But when we built institutional support into our model, we found that when the government is more supportive toward laborers, then workers will engage in more collective action. This is because greater levels of support from government or the courts increases the probability of labor winning from collective action, which then leads to more collective action taking place. As a result, firms have a greater catalyst to raise wages as they seek to reduce workers’ wage-setting activities.

In contrast, we also find that a lack of institutional support will devastate unions’ ability to function as a balance to firms’ monopsony power, potentially with major consequences. And as things stand today, the balance of power between workers and their employers pertaining to institutional support rests with big business rather than workers. In turn, we find that labor market outcomes will be less socially efficient, and a portion of the current rise in income inequality in the United States over the past four decades partially stems from the wages of many workers being pushed below the value of the marginal product. In other words, firms are pushing wages to artificially low levels by leveraging their power over their workers.

Indeed, the largest employer in the United States today is Walmart Inc., which is famously opposed to any type of collective worker activities. Several studies demonstrate that a Walmart store moving into a community decreases wages. In the mid-20th century, General Motors Co. helped build the U.S. middle class through compromises between the nation’s giant firms and unions. Today, the Walmart model defines much of current labor market interactions across firms but without unions to balance the power of firms.

The path ahead for U.S. workers remains precarious. Despite a relatively tight labor market, nonmanagerial workers have been unable to make much progress in terms of real wage gains. Our new working paper highlights the role of monopsony power in suppressing workers’ wages when it is unchecked by countervailing power from both unions and our public institutions at large. Further, we demonstrate that building worker power without also building public power will be unlikely to rebalance the seesaw between workers and capitalists.

It’s time for economists and policymakers alike to face up to this market-power problem. We cannot allow firms to set all the terms in an unbridled labor market. Rebalancing the power of workers vis-à-vis their employers can only be achieved through rebuilding a progressive and inclusive labor movement in the United States, while simultaneously pressing our increasingly conservative courts to protect workers.

As Adam Smith once wrote, “We rarely hear, it is said, of the combination of masters [to obtain power over the wage], though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of this subject. Masters are always and everywhere in a sort of tacit and uniform combination, not to raise the wages of labor above their actual rate.”3

—Mark Paul is an assistant professor of economics at New College of Florida and a fellow at the Roosevelt Institute. Mark Stelzner is an assistant professor of economics at Connecticut College.

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Introducing the “Competitive Edge” blog series

Posted on by Maria Monroe

Today marks the fifth installment of Equitable Growth’s recently launched “Competitive Edge” blog series, which features experts in antitrust law on a broad range of subjects, including the state of enforcement today, proposals for reform, potential policies that promote competition, and the practical realities that enforcers face. Competitive Edge provides a platform for experts, particularly those with enforcement experience, to add their voices to the important antitrust policy debates that are occurring.

The image for this blog series (seen above) reflects our goals. A harpoon is aimed squarely at an octopus that controls various industries. The octopus is an updated version of an iconic image for monopoly, taken from a 1904 publication of Puck magazine that portrays the then-monopolistic stranglehold of Standard Oil Co. We hope this blog series helps promote and sharpen effective tools to increase competition in the United States economy. Equitable Growth now has a landing page for the series, where readers can find all the contributions.

In the inaugural post, Fiona Scott Morten, former deputy assistant attorney general for economics at the Antitrust Division of the U.S. Department of Justice, takes up the challenge of describing what more antitrust enforcers could be doing under current law—specifically, what types of cases enforcers should investigate. Discussing papers (supported by Equitable Growth) presented at The Yale Law Journal symposium (also supported by Equitable Growth), Morten explains that “The Yale Law Journal issue lays out an initial roadmap of cases that are well-grounded in economic analysis and legal precedent” and “would make U.S. markets more competitive.” Potential targets for enforcement identified by Morten include conduct deterring challenges to online platforms, market power possessed by buyers, predatory pricing, and vertical mergers.

The second contribution, by former Director of the Federal Trade Commission’s Bureau of Economics Howard Shelanski and Equitable Growth’s Director of Markets and Competition Policy Michael Kades, discusses what then-U.S. Court of Appeals Judge Brett Kavanaugh’s elevation to the U.S. Supreme Court might mean for antitrust law, examining his dissents in two antitrust cases. Specifically, they write, his rigid Chicago School approach holds the potential to weaken the antitrust law’s limitations on mergers. His high bar for finding violations hints at a preference for loosely enforced antitrust laws.

Next, former Deputy Assistant Attorney General in the Antitrust Division of the U.S. Department of Justice Jonathan Sallet weighed in on the Federal Trade Commission’s series of hearings regarding the current state of competition and the debate over the “consumer welfare” standard: what it is, what role it plays in antitrust law, and whether it is still the appropriate standard today. He explains both sides of the argument but ultimately states that discussions around the protection of competitive processes are key to solidifying the strength of antitrust enforcement.

In November, former Federal Trade Commissioner Terrell McSweeny addressed the challenges artificial intelligence and algorithms pose for antitrust enforcement. McSweeny recommends an independent bureau within the enforcement agencies that is dedicated to the enforcement of antitrust laws in the technology sector. In addition, she emphasizes the need for enforcers to educate themselves on the changes in technology and how such changes impact competition.

Earlier today, John Kwoka, the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University, provided one recommendation for improving merger enforcement: restore the 50-year-old legal doctrine called the structural presumption. Under this rule, mergers that lead to concentration above certain levels are presumed illegal. Over the past several decades, both the courts and the antitrust enforcement agencies have weakened the structural presumption. Using data on the effects of mergers and agency enforcement rates, Kwoka advocates for the revival of the structural presumption as a means of advancing antitrust enforcement without burdening agency resources.

Keep an eye out for the next installments of the Competitive Edge blog series, coming in 2019!

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Competitive Edge: Structural presumption in U.S. merger control policy would strengthen modern antitrust enforcement

Posted on by Maria Monroe

Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call “Competitive Edge.” This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. John Kwoka has authored this month’s contribution.

The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.

John Kwoka

In remarkably short order, the discussion about competition in the U.S. economy seems to have arrived at the substantial consensus that a problem exists. True, there are some economists and policymakers who still want more evidence, and others for whom no amount of evidence is likely to suffice. But the reality that stares consumers in the face every day is diminishing choice in airlines, brewing, cable TV, dog food, eyeglasses, financial services, grocery stores, hospitals, and, yes, “the entire alphabet of U.S. industries.” This impression is corroborated by economywide data documenting the rising levels of market concentration, the reduced rates of entry of firms into the economy and the overall decline in the number of firms, and the above-normal rates of profit, especially for leading companies. And these forces, in turn, have been associated not only with higher prices and reduced choice of goods and services, but also with longer-term adverse effects on innovation and productivity, worker wages and income equality, and other social objectives.

The time has come to move on to the question of how to fix this problem of diminished competition. My own analysis, in “Reviving Merger Control: A Comprehensive Plan for Reforming Policy and Practice,” has identified several distinct weaknesses of merger control and proposes 10 changes in policy and practice that would help remedy it. Among these, one stands out as uniquely important because it would simultaneously make merger control more effective and more efficient. It would make it more effective by preventing a higher fraction of anticompetitive mergers and more efficient by relieving the antitrust agencies of some of their current burden of proof.

What is this seemingly magical policy potion? It is nothing more than restoring the 50-year-old legal doctrine known as the structural presumption. The structural presumption says simply that large mergers in highly concentrated markets are so likely to be anticompetitive that they can be presumed anticompetive unless proven otherwise. This proposition effectively shifts the burden to companies proposing to merge, so that they have to demonstrate why their merger is the rare exception to the general rule and will not harm competition. This contrasts with the current process, where the antitrust agency bears the full burden of predicting exactly how each merger—no matter how obviously problematic—will harm competition in order to act against it.

Reviving the old tool of structural presumption to strengthen modern merger control

The structural presumption doctrine was advanced by the U.S. Supreme Court in its 1963 decision in United States v. Philadelphia National Bank. In that ruling, the court noted that merger analysis is a difficult exercise in prediction and urged “simplify[ing] the test of illegality” in certain cases by “dispensing … with elaborate proof.” Specifically, the court stated that “a merger which produces a firm controlling an undue percentage share of the relevant market, and results in a significant increase in the concentration of firms … is so inherently likely to lessen competition substantially that it must be enjoined in the absence of evidence clearly showing that the merger is not likely to have such anticompetitive effect.” This doctrine reflected economic research at the time that showed a statistical relationship between high market concentration and prices or profit margins. It was intended to ease the process of merger control in those cases where competitive harm was fully predictable, without requiring the same detailed analysis as otherwise might be necessary.

A clearer statement of policy could hardly be imagined. What remained was to set out the applicable thresholds of share and concentration, and to identify the possible factors that might offset the presumption. These should, in principle, be found in the Horizontal Merger Guidelines issued jointly by the the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission. Reality differs. The share and concentration thresholds for mergers in those guidelines do not constitute a true presumption but rather, simply varying degrees of scrutiny. In addition, the relevant thresholds have twice been relaxed, exempting ever more mergers from the highest level of scrutiny—and, in any event, mergers exceeding the stated thresholds are often approved.

This last point—the deviation of practice from policy—is clear from Federal Trade Commission data on the number of merger investigations and the number of challenges made by that agency from 1996 through 2011. These data show that for mergers in markets with more than four remaining significant competitors—which, the FTC suggested, might be one with at least a 10 percent share—the FTC has challenged an ever-smaller fraction over time. The agency challenged more than one-third of mergers with five to eight such firms in the period 1996 to 2003, but only one-sixth in 2004 to 2007, and then literally none—zero—starting in 2008.

While the agency continued to challenge mergers in the very highest category of concentration, all mergers—every single one in this medium-to-high-concentration group—were nonetheless approved. This evidence leaves little doubt that weakened antitrust policy has contributed directly to rising concentration.

Of course, some commentators would argue that this narrowing of enforcement has been desirable because it has avoided making the mistake of challenging beneficial mergers. But as noted, economic research has long documented the effect of high market concentration on prices. In addition, there is now even more compelling evidence that mergers in these high-to-moderately-high concentration markets are, in fact, generally anticompetitive. This evidence comes from so-called merger retrospectives—careful economic studies of the actual price outcomes of specific mergers. I have matched the price outcomes of about 40 of these studied mergers to their market concentration. While this is only a small fraction of all such mergers, the evidence tells two strikingly different stories.

First, it shows that of these mergers with four or fewer remaining firms, prices did, in fact, rise in all cases. This provides support for the FTC’s strong—but not quite perfect—enforcement record against mergers in the highest concentration range. But the data also show that all mergers with five remaining competitors proved to be anticompetitive. The same is true for 80 percent of those with six remaining competitors and even for 50 percent of those with seven remaining competitors. Mergers, in short, prove to be anticompetitive in a significantly wider array of cases than the narrower set most recently targeted by the FTC.

The key and crucial discrepancy between enforcement and effects arises for mergers in high-to-moderately-high concentration markets, where there remain five, six, or even seven significant competitors. Here, enforcement has ceased despite clear evidence of competitive harm. To be sure, the failure of enforcement in this range is due to several factors, not all of which are within the control of the agency. The annual budgets of the two antitrust agencies are demonstrably inadequate for their mission. The judiciary is demanding ever greater proof of predicted anticompetitive outcomes. Ideological forces outside the agency have fostered an anti-antitrust view. Regardless of all the causes, however, antitrust policy has narrowed its mission and left a range of demonstrably anticompetitive mergers free to proceed.

A solution hiding in plain sight

Fortunately, a key initiative that would help to solve this problem is hiding in plain sight, suggested by the same data just used to identify the failure of merger enforcement. It is nothing more than the approach urged by the U.S. Supreme Court more than a half-century ago. After all, if all or nearly all mergers with fewer than some number of remaining significant competitors are known to be anticompetitive, that bright line standard—the structural presumption—could be used to prohibit them, absent some compelling reason, precisely as the Supreme Court urged. The evidence just reviewed makes clear that this would not result in excessive enforcement but rather would correct recent underenforcement.

Since the structural presumption originated with the court, it breaks no new legal ground. Nonetheless, new legislation to codify the presumption would strengthen the hands of the Antitrust Division of the Justice Department and the FTC in their use of the doctrine. In addition, more economic research into the best measures and thresholds of concentration would be important. And there are some practical hurdles to overcome. Specific “antitrust markets” would need to be defined. Characteristics of a “significant competitor” might need to be further specified. Potentially offsetting factors would need to be identified—and sharply circumscribed. And the courts would have to learn, or relearn, this doctrine.

A further advantage of structural presumption is that it would restore vitality to merger analysis concerning coordination among firms. Agencies have struggled with such cases due to the difficulty of proving that a particular merger crosses some line of predictable anticompetitive effects. But the very essence of the structural presumption is that beyond some small number of firms, coordination is, in fact, fully predictable, and therefore antitrust action is fully justified. This presumption would provide the crucial necessary tool for the agencies to bring and prevail in such cases.

So, based on the best current evidence, it would seem that an appropriately designed structural approach that shifts the burden for mergers with as many as five or six remaining competitors would be both effective and efficient. Such a policy would be effective since it would appear to make few errors, and whatever errors it might make would likely be offset by correcting the errors of inadequate current policy. It would be efficient since it would spare the antitrust agencies the burden they currently face of developing detailed, case-specific analyses of the mechanism for coordination and the dollar value of harms, buttressed by evidence from documents, data, and economic models. While all those might be necessary and feasible in some cases, recent antitrust cases show how the complexity of this process can result in bad court decisions. Moreover, avoidance of this burden would free up the agencies’ resources and allow them to bring more cases where enforcement has languished.

Merger analysis in recent times has benefitted from cutting-edge advances in economic models and methods, such things as unilateral effects and upward pricing pressure, diversion ratios and critical loss assessment, and others. But for the next—and necessary—step toward strengthening merger control, antitrust should look backward, back to the method provided by the U.S. Supreme Court for proceeding against mergers where case-specific evidence is difficult to assemble but the anticompetitive effects are nonetheless clear. Modern merger control can significantly improve enforcement by reviving the use of the structural presumption.

—John Kwoka is the Neal F. Finnegan Distinguished Professor of Economics at Northeastern University.

Who profits from patents within firms and among firms? Hint: Not women and not most employees

Posted on by Maria Monroe

Traditional labor market models are premised on the theory that firms are wage-takers, meaning they pay workers the “going rate” determined by the market forces of supply and demand for labor. Yet a growing body of research presents evidence that firms themselves actually set wages and contribute to wage inequality among workers with identical skills. An array of new studies examining the relationship between between changes in a firms’ productivity and the wages earned by incumbent workers find that factors such as changes in product-market demand or labor market institutions can result in fluctuations in wages. These economic conditions can easily influence wages without indicating that firms are practicing any price-taking behavior.

Now comes a new working paper by four economists—Heidi Williams at the Massachusetts Institute of Technology, Neviana Petkova at the U.S. Department of the Treasury, Patrick Kline at the University of California, Berkeley, and Owen Zidar at Princeton University—that examines the connection between lucrative patent approvals and worker compensation. “Who Profit from Patents?” uses administrative panel data collected by the U.S. Patent and Trademark Office and business tax filings and worker earnings data to present a series of metrics that quantify firm performance as a result of having a patent approved or denied, while controlling for factors such as labor productivity.

The four Equitable Growth grantees find that the approval of a high-valued patent within the top quintile of value led firms with these patents to expand employment by approximately 22 percent, whereas lower-valued patents had no significant influence over a firms’ survival or expansion. The approval of these high-value patents correlates with an average $37,000 increase in revenue per worker. The co-authors also find that the pretax earnings of executive-level firm owners increased by $9,000, whereas earnings for employees rose by $3,600.

Breaking down changes to earnings between workers within a firm after a patent is granted shows that the gap between inventors at the firm and noninventors increased by an average of 18 percent after the initial granting of valuable patents. When accounting for the earnings of officers—or employees with executive-level authority—and nonofficers, the authors find that the earnings of officers increased by $3,700, whereas nonofficers saw no significant changes in response to a patent. Overall, there was no effect of the initial patent on the earnings of the bottom three quartiles of employees, whereas workers in the top quartile saw average earnings grow by roughly $8,000.

One of the takeaways from this analysis is that firms do share their “rents”—economic parlance for profits in excess of the cost of production—with workers, which indicates that workers’ earnings are attached to the outcomes of their firms, rather than being set by the labor market. Thus, firms that are awarded higher-valued patents lead to the rise of superstar firms with higher wage distributions than other firms, which, in turn, increases earnings inequality among workers with similar skills. The distribution of these economic rents also indicates that this so-called within-firm inequality grows as firms are awarded higher-valued patents and as executives earn a larger proportion of these rents, compared to the lower-skilled workers in the same firm.

A surprising result of the granting of patents was that the earnings gap widened between male and female employees following approval of the patents. The four authors find that high-value patents resulted in an approximately 10 percent increase in male earnings, whereas female earnings were unresponsive to the granting of the patents. For firms that employed both men and women, the earnings gap increased by 30 percent as a result. The takeaway from this study is that the distribution of economic rents from patents leads to increased gender wage inequality within firms, as well as between similarly skilled workers in different firms, and also that women see very minimal positive changes in their earnings as a result of the allowance of patents even when controlling for officer status and inventor status.

The authors conjecture that one reason for firms to distribute the economic rents earned from patents with their workers is because it is economically efficient to share the rent with workers rather than bear the cost of training new workers—even if the distribution is unequal. This could be because firms understand that incumbent workers are more valuable than new hires, and so incumbent workers—especially those who are highly skilled—get the largest proportion of the economic rents distributed. As such, workers who were employed at a firm during the year of the patent application saw a 61 cent increase in earnings for every dollar increase in surplus. These differences in the replacement costs of differently skilled workers further contributes to income inequality both within and across firms.

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Weekend Reading “The Robots are Taking Over” Edition

Posted on by Maria Monroe

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 Grantee Brian Callaci recently released research that compiles the history of franchising laws and finds that franchise contracts contribute to the decline in bargaining power of both franchisees and workers. Through vertical restraints, franchisors are able to set the working conditions and business models of their franchisee’s establishments, thus creating a fissured workplace where workers are unable to climb a career ladder or seek protections within the workplace. Callaci summarized his two working papers here.

Equitable Growth’s Executive Director Heather Boushey sat down with Harvard University economist and former U.S. Treasury and Federal Reserve Board official Karen Dynan to talk about the role of consumption patterns in economic inequality. They discussed Milton Friedman’s Permanent Income Hypothesis and how it provides a basepoint for models surrounding consumption behavior. Dynan, an Equitable Growth Steering Committee member, highlighted research and data that shows that low-income households have a higher propensity to consume, therefore a low propensity to save, which leaves them vulnerable in economic crises.

Brad DeLong compiles his most recent worthy reads on equitable growth both from Equitable Growth and outside press and academics.

The U.S. Bureau of Labor Statistics earlier this week released the newest data from the Job Openings and Labor Turnover Survey covering the month of October. Kate Bahn and Austin Clemens put together four graphs utilizing JOLTS data.

The U.S. House of Representatives Committee on Education and the Workforce proposed a hearing to debate the consequences of a $15 minimum wage on workers and small businesses. Kate Bahn consolidated research surrounding the $15 minimum wage discussion that indicates an increase in the federal minimum wage will boost workers’ well-being while avoiding detrimental effects on small businesses.

Links from around the web

Dylan Matthews shines light on a not-so-well-known anti-poverty bill called the American Family Act of 2017 that is similar to Europe’s child-allowance policy, which provides all but the wealthiest households approximately $3,000 annually per child. The proposed U.S. policy would expand upon the child tax credit to support low-income families’ access to high-quality child care and development. Matthews argues that research shows that child-allowance policies work abroad, thus the United States should look into adopting a similar program. [vox]

A recently-filed antitrust lawsuit in the United States against generic drug manufacturers over two drugs escalated into a major case of alleged price-fixing between 16 manufacturers and regarding 300 drugs. These manufacturing companies partook in anti-competitive agreements to drive up the prices of generic drugs, swap sensitive information about markets and prices, and discuss “fair-share” divisions of sales from over-priced drugs. U.S. antitrust investigators say that this “cartel’s” actions have targeted consumers with or without insurance, because insurance plans often have high deductibles or limitations on prescription drug benefits. [wapo]

In looking at the investment patterns of the world’s wealthiest 0.001 percent, The Economist reports that the wealthiest 0.001 percent manage their assets through the creation of “family offices”—personal investment firms that seek out global markets in the hunt for investment treasures. As billionaire-run family offices continue to grow, there are concerns that family offices can weaken the stability of financial markets, increase inequality by making the very-rich even richer, and give these billionaires the power and accessibility to exclusive information to control the markets. [economist]

Research by Massachusetts Institute of Technology economists Daron Acemoglu and Pascual Restrepo indicate a greater ratio of robots/automation to populations in the Midwest and parts of the South than in any other region of America. They find that one more unit of automation in a commuting zone reduces employment by six workers. These lost jobs are concentrated in blue-collar industries such as manufacturing. Their colleague at MIT, David Autor, explains that automation “reduces labor’s share of value-added in the industries in which it originates” while devaluing skills, disrupting the political environment, and displacing workers. [nyt]

A new report by Vox’s Dylan Scott details the argument that a Medicare-for-all system can complicate the healthcare coverage of 160 million Americans who currently receive insurance through their employers. Scott explains how 83 percent of respondents said that they consider their employer-sponsored insurance excellent or good, mainly because it covers a wide range of individuals and healthcare needs. Scott also examines evidence that shows single-payer health insurance programs prove to be more equitable and accessible to low-income individuals who don’t have access to employment with adequate health insurance. [vox]

Friday Figure

Figure is from Equitable Growth’s, JOLTS Day Graphs: October 2018 Report Edition

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Brad DeLong: Worthy reads on equitable growth, December 6–13, 2018

Posted on by Maria Monroe

Worthy reads from Equitable Growth:

  1. Apply for an Equitable Growth grant. “We are now accepting applications in response to our 2019 Request for Proposals. Letters of inquiry for academic grants are due by 11:59 p.m. EST on Thursday, January 31, 2019. Proposals for doctoral/postdoctoral grants and applications to the Dissertation Scholars Program are due by 11:59 p.m. EDT on Sunday, March 10, 2019…”
  2. If you missed Anne Case and Angus Deaton on “deaths of despair” when it came out at the start of this year, you need to go back and read it. Iris Marechal examined their paper in her column, “The Opioid Crisis: A Consequence of U.S. Economic Decline?,” in which she wrote: “The opioid epidemic continues to devastate families and communities across the United States, causing serious health and socioeconomic crises. The high prescription rate for opioids and the subsequent misuse of this medication by millions of Americans accelerated addiction and has led to a four-fold increase in the rate of overdoses since 1999 … Anne Case and Angus Deaton at Princeton University attribute the sharp increase in drug overdoses between 1999 and 2015 to ‘deaths of despair’ rather than to the increased ease of obtaining opioids: That is, their research suggests that higher drug suicides are attributable to social and economic factors such as a prolonged economic decline in many parts of the United States. They show that white Americans are more affected by the opioid epidemic, yet less affected by economic downturns than other racial and ethnic groups in the country.”
  3. Raksha Kopparam makes a very nice catch and sends us to the Center for Financial Services Innovation’s “U.S. Financial Health Pulse: 2018 Baseline Survey.” Read her “New Financial Health Survey Shows That Traditional Metrics of Economic Growth Don’t Apply to Most U.S. Households’ Incomes and Savings,” in which she writes: “Single aggregate data points do not capture how economic growth is experienced by different people in very different ways … underscoring the importance of knowing who specifically benefits from a strong economy is a new survey by the Center for Financial Services Innovation.”

Worthy reads not from Equitable Growth:

  1. All the people who say that it is really not that important to get inflation up leave me flummoxed. I try to determine what they think will happen when the next recession comes. I fail. For some insight, read Joseph E. Gagnon and Takeshi Tashiro, “Abenomics Is Working, Don’t Stop Now,” in which they write: “Japan is on track for its longest postwar economic expansion, with female labor force participation and corporate profits at record highs and unemployment at a 25-year low … [is] the goal of raising inflation to 2 percent … really necessary[?]”
  2. To what extent is geographic divergence the result of rent-seeking land-use planning run amok? Simon Wren-Lewis examines this question in his “Helping the Left Behind: Its (Economic) Geography, Stupid, in which he writes: “Martin Sandbu points us to a report from the Brookings Institution [that says] ‘for much of the 20th century, market forces had reduced job, wage, investment, and business formation disparities between more- and less-developed regions. By closing the divides between regions, the economy ensured a welcome convergence among the nation’s communities.’ But from the 1980s onwards, they argue that digital technologies increased the reward to talent-laden clusters of skills and firms.”
  3. It is becoming increasingly clear that the best road forward for the American worker on trade is to join the Trans-Pacific Partnership and keep NAFTA. Read Gary Clyde Hufbauer and Jeffrey J. Schott, “Under the Hood, the USMCA Is a Downgrade for North America,” in which they write: “Trump … called the North American Free Trade Agreement (NAFTA) the worst trade deal ever made. Trade negotiators have branded its intended replacement … a ‘modernized’ improvement. The upgrades draw heavily from the Trump-abandoned Trans-Pacific Partnership … The deal also includes costly new regulations and requirements that discourage investment, especially in the auto sector … higher prices for cars at a time when auto sales are flagging. Ford and GM are already laying off workers … The USMCA limits trade more than promoting it.”
  4. I think Rich Clarida’s argument in “Data Dependence and U.S. Monetary Policy” is wrong. I think the lower level of the neutral rate of interest and the fact that the Fed has not pursued its 2 percent per year inflation target symmetrically have consequences. Those are that medium-term risks are overwhelmingly asymmetric on the downside. What does Clarida think he is going to do to stem the next recession when it comes? Here’s what he says: “As the economy has moved to a neighborhood consistent with the Fed’s dual-mandate objectives, risks have become more symmetric and less skewed to the downside than when the current rate cycle began 3 years ago. Raising rates too quickly could unnecessarily shorten the economic expansion, while moving too slowly could result in rising inflation and inflation expectations down the road that could be costly to reverse, as well as potentially pose financial stability risks. Although the real federal funds rate today is just below the range of longer-run estimates presented in the September SEP, it is much closer to the vicinity of r-star than it was when the FOMC started to remove accommodation in December 2015. How close is a matter of judgment, and there is a range of views on the FOMC.”
  5. This ought to be the conventional wisdom about the importance of the American union movement, from Noah Smith’s “Unions Did Great Things for the American Working Class,” in which he writes: “Politically and economically, unions are sort of an odd duck. They aren’t part of the apparatus of the state, yet they depend crucially on state protections in order to wield their power. They’re stakeholders in corporations, but often have adversarial relationships with management. Historically, unions are a big reason that the working class won many of the protections and rights it now enjoys.”
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