Asher Schechter: “Why Argue With the Government When You Can Buy the Government?”

Great article on antitrust and how it fosters innovation. An excerpt:

"In a modern IT economy, we have network effects at a very strong level. We’ve always had some network effects—for the telegraph, the telephone—but network effects are really pervasive in the software industry and, since at least 1986, economists have been pointing out that that is fertile ground for predation.

Companies that understand how those markets work, that get a lead in those markets and then use predatory conduct to suppress their competitors, they can stay in control for a very long time, perhaps indefinitely.

These economic forces are different from traditional markets like agriculture or steel smelting, where there may be a small network effect. The fact that you drive a Chevrolet isn’t going to convince me to drive a Chevrolet. [However,] in software, the fact that you use Microsoft means I have to.

I remember after Joel Klein²⁾ had brought the case against Microsoft, we were chatting and he said to me, in a lot of industries it’s like a mile run: if somebody gets ahead on a false start, over a mile the better guys will win anyway. But these industries, they are like a 100-meter dash where, if somebody gets an unfair advantage, the race is over before everyone else gets up to stride. I think that’s a very good analogy, and that is why governments have to be even more vigilant in these industries than they have to be in other industries."

The whole thing is worth reading. It's encouraging to see more attention being paid to the tyranny of corporations here in the US - and I don't mean that sarcastically. I often hear this as a "left" or "progressive" issue, that in some sense enforcing antitrust legislation is supposed to be antithetical to business growth. The reality is the exact opposite. Monopolies and oligopolies prevent market forces from working, they limit consumer choice, and stifle innovation.

Those that know me have heard me (on more occasions than I would like to admit) go on filibuster-style rants against companies such as Comcast and Anthem. One of the things that makes me so angry about them both is that I am stuck with them. Comcast runs a government sponsored monopoly on high speed internet and television service in my city. Despite the fact that my service is so poor that I generally only have internet access about 30% of the time, Comcast will do nothing to improve their network. Why? Because they don't have to. I can either pay them exorbitant fees for an awful product or go without high speed internet. Anthem is part of a health insurance cartel that provides miserable service and doesn't care if I don't like it. In their case, I am legally required to carry insurance so either I use them (through my employer), or I pay a fine. That's the type of business plan that Warren Buffet dreams about.

President Obama urged the government to address noncompetitive industries in the US, and politicians on both sides have campaigned on the issue. The common refrain I hear against more intervention is that government is putting a ceiling on growth for companies that do their job very well. If everybody wants to use Comcast (I know, but just go with it for the example), then why should we stop them from using Comcast? Maybe Comcast has the best product. That may be possible that a certain business captures such a significant portion of the market share that they become a sort of natural monopoly. If that happens, the role of government becomes as sort of referee to make sure that market share is maintained through monopolistic practices. One of the most common ways this happens now is through acquisition. Facebook feels threatened by Snapchat? Facebook buys Snapchat; competition extinguished. Reback even goes so far as to say if a company does achieve a durable natural monopoly, the company should have to go through a government orchestrated break up, just as AT&T and Microsoft did.

The article doesn't provide specifics about how to reduce anti-competitive practices in the US, but it does bring up the influence of corporate money in politics. Reback says it isn't so much regulatory capture, but purchased influence that is hampering antitrust enforcement. Because companies develop alliances with politicians, they get "overlooked" by regulatory and enforcement agencies. If we want to see a more competitive marketplace, we have to stop companies from buying allies.

Guy Rolnik: Political Rents and Profits in Regulated Industries

Great article on the Pro-Market blog about political rent-seeking. Bessen recently wrote a piece about how corporate profits are increasing due to rent-seeking behavior and regulatory capture, the article is a Q&A with Bessen on some of his findings.

Noah Smith: Trump happened because conservatism failed

In a good article over at Noahpinion, Noah Smith gives a bit of an explanation as to why Trump has been so successful in this election. He points to a failure what he calls the three main pillars of conservatism: economic, social, and foreign policy conservatism. I agree that the Republican version of all three of these platforms has failed or no longer fits with current views (for example, Republicans and Democrats held many of the same views on social policy up until the Bush years).

I think one place Noah goes off the rails a little is when he calls Republican policy low tax, low regulation. I generally believe that the economic policy of Republicans has been much more corporatist - that it favors large institutions or powerful lobbies. He then goes on to say that "alternative policy paradigms like protectionism, socialism, and industrialism are now being openly considered." This is true, protectionism, socialism, and industrialism are being considered. The Bernie Sanders candidacy is an example of just how much traction these ideas have gained. But do we really think a world built on protectionism and industrialism is an improvement?

Yglesias: I was too hard on Mike Pence, and I'm sorry

In an article on Vox, Matthew Yglesias has a sort of apology for Mike Pence, but not in the way the title suggests. I agree with much of the article and it is very good - you should read the whole thing. One of my favorite parts:

"What now surprises me is when I come across a member of Congress who really does understand a particular issue in detail. And this sometimes does happen. Little pockets of expertise are scattered hither and yon all throughout Capitol Hill — especially when members dig in to work on idiosyncratic pieces of legislation that are off the radar of big-time partisan conflict. But on most issues, most of the time, most members of Congress are more or less blindly following talking points that they got from somewhere else and that they don’t really understand.

Members form identities as a certain kind of politician — a New Democrat or a progressive, a leadership ally or a rock-ribbed true conservative — and then they take cues from how a politician like that ought to respond to the controversy of the day, and their staff hastily assembles some stuff to say about it."

I am regularly disappointed when I listen to elected officials spout off the same garbage based off of the same dubious arguments (if they even bother trying to provide any justification at all) that I hear on talk radio. Talk radio is our intellectual hurdle for policy?! With such a high bar for public service, no wonder we have such brilliant minds running this country.

Timothy Lee: Pokémon Go is everything that is wrong with late capitalism

In a new article on Vox, Timothy Lee laments what he calls "late capitalism." From the article:

"If you were looking to have fun with some friends 50 years ago, you might have gone to a bowling alley. Maybe you would have hung out at a diner or gone to the movies.

These were all activities that involved spending a certain amount of money in the local economy. That created opportunities for adults in your town to start and run small businesses. It also meant that a teenager who wanted to find a summer job could find one waiting tables or taking tickets at the movie theater. 

You can spend money on Pokémon Go too. But the economics of the game are very different. When you spend money on items in the Pokémon Go world, it doesn’t go into the pocket of a local Pokémon entrepreneur — it goes into the pockets of the huge California- and Japan-based global companies that created Pokémon Go. 

There are, of course, some good things about this. Pokémon Go can be a much more affordable hobby than going to a bowling alley or the movies. In fact, you don’t have to spend any money on it. And the explosion of options made possible by online platforms creates real value — the average teenager has vastly more options for games to play, movies to watch, and so forth than at any time in American history."

According to Mr. Lee, Pokemon Go is hurting local economies because the money I might have spent going out to dinner with friends will now be spent on more Pokeballs (maybe some Master Balls?) to make sure I get that Charizard I find down the street. Since my money is now going to some developer in San Francisco that is majority owned by a company in Japan, I am basically committing harikiri on my community. And not only are Pokemon casting their evil spell on me as a consumer, but they are also destroying the local financial markets too! Lee again:

"In the 20th century, new industries tended to create a lot of demand for capital. It took a lot of cash to build assembly lines and movie studios, of course. But beyond that, thousands of people all over the country would go to their local banks to finance the construction of movie theaters, auto dealerships, and so forth. 

This meant that people with capital to lend could almost always find people eager to borrow it to finance new business ventures. This, in turn, made the job of America’s central bank, the Federal Reserve, relatively easy. Anytime the Fed wanted to boost growth, it could cut interest rates and get a burst of entrepreneurs starting new businesses. 

But the Pokémon Go economy is different. Nintendo and its partners obviously needed to invest some cash in hiring programmers and designers to build the game. But the sums involved here are tiny compared with the cost of building a new car assembly line. And Pokémon Go seems unlikely to produce very many opportunities for complementary local businesses. People play on their smartphones, so there’s no need for Pokémon cyber cafes. Smartphones are too cheap for smartphone repair shops to be a good business."

I am actually fairly confused from the article exactly what problem Pokemon Go and similar apps are creating. They make it easier for people without large sums of capital to work as entrepreneurs? They don't require a centralized work force or physical presence in a specific market? They allow consumers to have cheap, or even "free", entertainment so people with limited resources can now stretch those dollars further? I would think starving recent grads in Ames, Iowa are thrilled with this type of economy. As Mr. Lee points out in the article, not everybody can be a programmer in Silicon Valley, but the point of these new apps is that not everybody has to be. If I play Pokemon Go and get some free entertainment, those dollars I might have spent at a movie might instead go to buying ice cream with friends at a local restaurant after we all meet up to catch a few Pokemon. And hey, maybe we'll have a great idea for an app of our own as we're sippin' our milkshakes. We could start a weekend app development group and make our own million dollar game right here in somebody's basement on the north side of Indianapolis! It may not be California weather, but houses come cheap out here.

Mr. Lee is correct that this is different from the manufacturing-based economy of the 20th century, but I don't think that makes it worse. We will have some structural reform that might be painful, but overall, I expect people's standards of living to continue to increase. Technology is making things cheaper - I know because I am shopping for a new phone and am shocked at what I can buy for $200. $200! I can have piece of hardware in my pocket that does almost as much (and in some ways much more) as the $500 laptop I bought 4 years ago for less than half the price. That is amazing. Think of the implications for the working poor. That type of technology can connect them to nearly infinite resources through the internet, for only about 25 hours of work at minimum wage. And now they can enjoy Pokemon in their pocket too, without spending a dime!

While I think the article is mostly misguided in its analysis of the digital economy, I agree with a point at the end where he recommends policy changes:

"One [change] is to relax housing policy to allow more people to move to areas where high-tech products are made. While the average resident of Kansas City or Baltimore might not have the skills to create the next great mobile game, he or she probably could find work as a schoolteacher, nurse, or construction worker in San Francisco or New York — but only if he or she is allowed to live within commuting distance of technology workers."

I think zoning restrictions are a real problem, especially in high growth areas such as San Francisco. By restricting new housing development, municipalities prevent the market from working. I understand not allowing a developer to build a waste facility right behind a residential neighborhood, but loosening some of the housing restrictions would encourage more building, which leads to lower prices. Many of these types of protectionist policies are only serving those who already have amassed capital or a dominant market position. In the case of housing policy, it protects the wealthy that are already living in expensive neighborhoods by artificially inflating their property values. The real enemy isn't innovation, especially innovation that can provide cheap entertainment or productivity as well as more labor flexibility. So don't let anybody make you feel bad about your collection of Jiggly Puffs, and enjoy that double scoop for half the price of a movie ticket.

Emmanuel Saez: U.S. top one percent of income earners hit new high in 2015 amid strong economic growth

In a blog post over at Equitable Growth, Emmanuel Saez shows the real income growth for the top 1% versus the 99% since the recession. From the post:

"The top 1 percent income earners in the United States hit a new high last year, according to the latest data from the U.S. Internal Revenue Service. The bottom 99 percent of income earners registered the best real income growth (after factoring in inflation) in 17 years, but the top one percent did even better. The latest IRS data show that incomes for the bottom 99 percent of families grew by 3.9 percent over 2014 levels, the best annual growth rate since 1998, but incomes for those families in the top 1 percent of earners grew even faster, by 7.7 percent, over the same period."

It is important to note that this is factoring in cash income only, so transfers or taxes are not included. Income inequality continues to get a lot of attention, both in the form of "tax the rich" campaigns and a push for a $15 minimum wage. I have generally thought that a big part of the problem is due to wage stagnation in the labor market. With so much slack in the past decade, there has been very little growth in wages. As unemployment has declined and wages have increased, however, the political pressure for higher wages and increased taxes hasn't subsided. Saez and his colleague Thomas Piketty have been critical in drawing attention to income inequality. Again from the Equitable Growth post:

"Timely statistics on economic inequality are key to understanding whether and how inequality affects economic growth. Policymakers in particular need to grasp whether past efforts to raise taxes on the wealthy—in particular the higher tax rates for top U.S. income earners enacted in 2013 as part of the 2013 federal budget deal struck by Congress and the Obama Administration—are effective at slowing income inequality."

Saez starts out saying we need to do more work and get more data to understand if and how income inequality affect growth, and then finishes by asking if current policies are doing enough to slow income inequality. For Saez, then, it seems that inequality in itself is bad regardless if it affects economic growth. I tend to sympathize more with the first part of the paragraph. While I find it hard to rationalize how CEOs are realistically worth $10 million+ in annual income, I also can't rationalize why someone would pay $1,000 to go to a Taylor Swift concert. The question is whether this is a market failure that requires intervention. For Saez, that answer seems to be yes, income inequality is a failure of capitalism that needs to be remedied by the state. Some economists (e.g. Ben Bernanke, Joseph Stiglitz) argue that as income inequality increases, there is a drop in aggregate demand as concentrations of wealth among a few will spend far less than more egalitarian levels of income. It might be true that the highest income earners do not spend as high of a percentage of their wealth on goods and services as middle- and low-income earners, but that money isn't sitting under their mattress either.

While income inequality has been rising since the 1970s, this isn't the only period in modern history in which inequality has increased. Peter Lindert of UC Davis has studied the issue for a long time and published an article, originally in the Journal of Income Inequality, that suggests that income inequality also rose during the first industrial revolution. This might sound surprising as the industrial revolution is generally thought of as the event that brought millions out of poverty. While that may be true, it didn't distribute that wealth evenly. In the article, Lindert writes that inequality likely increased in the UK from the beginning of the industrial revolution up through about 1810. He suggests that inequality may even contribute to economic growth because individuals with extremely high incomes can accumulate enough capital for high-cost endeavors, such as building a manufacturing plant, that would otherwise be much more difficult. In a recent episode of EconTalk, Russ Roberts and James Bessen discussed the industrial revolution's affect on wages in the United States. One thing that surprised me was Bessen's comment that wages for many factory workers didn't increase along with the massive increase in productivity until almost 1870, a full half century after these productivity-enhancing technologies were adopted. Bessen attributes this stagnation with firm-specific knowledge that left workers with little bargaining power because the skills they acquired on the job weren't transferable to other employers. It wasn't until many of these technologies were standardized that wages began to really improve.

Based on the work of Lindert and Bessen, I wonder if our widening gap in earned income is due to some of the same forces. In many ways, the 1970s represented the start of another industrial revolution: the computer age. Just as weavers didn't see large wage increases with productivity in the 1800s until the technology matured, perhaps the same is happening now. One problem I see now compared to the first industrial revolution is the pace of change. If wage increases generally come as technology matures and then stagnates as new technologies are adopted and worker skills become much more firm specific, then the rate of change makes a huge difference. If a technology plateaus for only a decade before new technologies are adopted, that leaves a very small window for workers to cash in on their knowledge and skills to increase wages before new technologies render their experience obsolete. In the podcast, Roberts makes the argument that maybe the best skill to have is to know how to learn quickly.

There are obviously several factors that could be causing the stagnation in wages, but I think technology is one to consider. If this is a significant cause, then simply increasing taxes or the minimum wage is unlikely to help. Rather, improving education and worker retraining or removing barriers to entry for entrepreneurs or reducing regulatory burdens (which may have been put in place to protect current industry leaders) would likely be much more effective at reducing inequality. That is, of course, if income inequality is indeed something that needs to be addressed or if it is simply a symptom of where we are in our current "industrial revolution."

Hello world!

After spending an inordinate amount of time perusing other econ blogs and financial news, I thought I might jump into the fray myself. Make no mistake, this isn't Econometrica, but I hope my little corner of the internet is at least useful to someone. I've always had an interest in economics, but I work in finance. I make no claim to any certain knowledge in any subject. I also make no promises that what I think today will be what I think tomorrow. More than anything, I started this blog as a sort of journal to put down my thoughts and enhance my own understanding of economics. All are welcome to browse, and I encourage all (helpful) feedback. I'm a bit selfish in that I mostly just care if this helps me sharpen my own thoughts.