Category Archives: History

The consequences of increasing concentration and decreasing competition—and how to remedy them

By William A. Galston and Clara Hendrickson – Our paper, “A policy at peace with itself: Antitrust remedies for our concentrated, uncompetitive economy,” shows why antitrust has become an object of public concern and documents the urgent need to reform antitrust enforcement, which has failed, in recent years, to stem rising concentration and prevent declining competition.

Not only are today’s firms astoundingly profitable, they are persistently profitable. While a profitable American firm in the 1990s had a 50 percent chance of finding itself similarly successful 10 years on, a very profitable American firm today enjoys over an 80 percent chance.

That persistently high profits remain unchallenged suggests many firms may be receiving a return on market power.

Under-enforcement has harmed consumers as many mergers have led to higher prices. Declining competition has also resulted in rising inequality as inter-firm earnings disparities deepen the economic divide among workers. more>

Updates from GE

Power Play: This Software Takes The Guesswork Out Of Energy Demand
By Bruce Watson – Predicting power demand used to be a simple science: People use more power during certain times — like the morning, when they cook breakfast and turn on their lights — and less during others, like when they hit the sack. Relying on predictable sources of electricity — like gas- and coal-fired power plants — utilities were able to balance supply and demand with some fairly straightforward math based on historical records and other data.

But the steady rise of renewable energy made the power landscape infinitely more complicated. On the supply side, changes in wind or cloud cover can sharply shift the amount of power available. Demand has also become harder to nail down as more consumers manage their power use with smart thermostats and appliances like connected ACs.

At the same time, market forces demand better power forecasts. Power plants and fuel are expensive, and they don’t want to operate or buy more equipment than they may need. “In some countries, regulators are asking power generators to guarantee the quality of their forecasts,” says Olivier Cognet, CEO of Swiss-based startup Predictive Layer.

“It’s no longer possible to say ‘We’ll sell you 20 turbines and see what they produce.’ It’s ‘We’ll produce x amount of energy by noon, y amount of energy in two hours and z energy in one month.” more>

When Welfare Sabotages Lives

BOOK REVIEW

Scarcity: Why Having Too Little Means So Much, Authors: Sendhil Mullainathan and Eldar Shafir.

By Ngaire Woods – The first lesson is that people – rich and poor – often make bad choices when they lack a key resource, like money or time. For example, ruinously expensive “payday loans” can be appealing to cash-strapped borrowers, even if the terms of these loans tend to push people deeper into debt.

This is not because people lack education. But poor decisions can result from conditions of scarcity and stress.

Britain’s new program was championed as a way to reduce costs and incentivize better decisions, thereby moving more people into work and reducing benefit claims. But, so far, there is little evidence to support this rosy scenario.

By reducing benefits received by the poor, the government is ensuring that scarcity surges and poor decisions multiply. And by changing the system frequently and making it more complicated to access, Britain’s leaders are also forcing the poor to consume more mental bandwidth. Taken together, these factors are leaving welfare recipients worse off. <a href="http://Britain’s new program was championed as a way to reduce costs and incentivize better decisions, thereby moving more people into work and reducing benefit claims. But, so far, there is little evidence to support this rosy scenario.

By reducing benefits received by the poor, the government is ensuring that scarcity surges and poor decisions multiply. And by changing the system frequently and making it more complicated to access, Britain’s leaders are also forcing the poor to consume more mental bandwidth. Taken together, these factors are leaving welfare recipients worse off." more>

Can capitalism be saved from itself?

By Homi Kharas – 2018 may yet turn out to be the year when a great battle of ideas takes place between those who argue for unfettered markets and those who would try to save capitalism from itself.

The first battle is about getting prices right. Capitalism is a great engine, but the road it takes is signposted by prices.

Get the prices wrong and the engine moves fast but in the wrong direction. And, going into 2018, many prices are wrong.

A few examples: the price of carbon, the price of dumping plastic into oceans, and the price of unpaid family care. As a broad proposition, there is a paradox in our system; in most countries, labor is taxed and fossil fuels are subsidized, while politicians and citizens in these countries insist they want more jobs and less pollution. With carbon emissions rising to record levels and employment rates falling, the price distortions are taking a toll.

In 2017 alone, natural disasters cost America $306 billion—almost equal to what economic growth last year added to GDP ($364 billion).

The second battle is around competition. Capitalism delivers for society as a whole when there is strong competition. It delivers for individual companies and their shareholders when competition is weak.

Today’s economies are seeing more concentration. In the U.S., 75 percent of industries have become more concentrated over the past two decades, generating abnormal returns. With more companies enjoying economic rents from patent and copyright returns, competition is becoming harder to achieve and winner-take-all companies are emerging.

Individual countries are unlikely to drive systemic change—this is a case where collective action on a negotiated path forward is most desirable. Yet wholesale change is also the least likely scenario. more>

Restoring Social Cohesion: A Project For 2018 And Beyond

By Michael D. Higgins – Addressing the changes and the fracture in the relationship between the citizen and society has been a matter of great importance for me throughout my Presidency.

It is a relationship that was fraying long before the onset of the Global Financial Crisis, but it has markedly lost cohesion in these last ten years, aggravated by a global macro-economic policy response that saw the losses in so many economics socialized while the gains of the financial sector were not just privatized, but concentrated at the peak of the wealth and income pyramid. Unprecedented programs of austerity became mainstream for citizens and countries reeling from the consequences of an era characterized by a new form of lightly regulated speculative capital.

The transition, in its day, between The Theory of Moral Sentiments (1759) of Adam Smith and his Wealth of Nations (1776) drew a more extensive debate in the eighteenth century than the changes in contemporary international economies, that are in our time presented as near inevitable, and that are being delivered as their sole policy choice to publics suffering the burden of what Pope Francis has called a ‘plague of indifference’. This includes not just the authors of policies but weary publics that are looking away, averting their gaze from deepening inequalities, the welfare of workers, the plight of migrants. He was referring to publics that, in the absence of technical literacy, felt they could not initiate change, were forced to accept what was socially damaging as ‘inevitable’.

The persistence of a failure to critique or challenge a political economy which maintains and even deepens existing inequalities of income, wealth, power and opportunity within societies and between nation-states is eroding social cohesion. more>

The real Adam Smith

By Paul Sagar – If you’ve heard of one economist, it’s likely to be Adam Smith. He’s the best-known of all economists, and is typically hailed as the founding father of the dismal science itself.

As he put it in The Wealth of Nations: ‘People of the same trade seldom meet together, even for merriment and diversion but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.’

The merchants had spent centuries securing their position of unfair advantage. In particular, they had invented and propagated the doctrine of ‘the balance of trade’, and had succeeded in elevating it into the received wisdom of the age.

The basic idea was that each nation’s wealth consisted in the amount of gold that it held. Playing on this idea, the merchants claimed that, in order to get rich, a nation had to export as much, and import as little, as possible, thus maintaining a ‘favorable’ balance. They then presented themselves as servants of the public by offering to run state-backed monopolies that would limit the inflow, and maximize the outflow, of goods, and therefore of gold.

But as Smith’s lengthy analysis showed, this was pure hokum: what were needed instead were open trading arrangements, so that productivity could increase generally, and collective wealth would grow for the benefit of all.

When he argued that markets worked remarkably efficiently – because, although each individual ‘intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention’ – this was an appeal to free individuals from the constraints imposed upon them by the monopolies that the merchants had established, and were using state power to uphold. The invisible hand was originally invoked not to draw attention to the problem of state intervention, but of state capture. more>

Instability, Not Productivity, Is The Economic Problem

By Gerald Holtham – If slow growth is real, what causes it?

I don’t claim to know but it is noticeable that periods of slow productivity growth often follow large macroeconomic shocks. Quite possibly productivity will pick up again as the global economy settles down, just as it did before.

But there’s the rub. The economy needs to avoid another shock. The real concern is that whether it is growing fast or slow the economy has become dangerously unstable and a succession of recessions is quite likely.

The world has found a solution of sorts: make credit cheap. After the dot.com crash and recession of the early 2000s easy money led to an inflation of property prices and massive equity withdrawal that allowed households to increase their spending despite static wages. This was particularly marked in the “Anglosphere” countries. But the property bubble led to a crash of the housing market eventually and a worse recession in 2008/9.

In a world of deficient demand and shortage of “jobs”, all countries want to run an export surplus. Easy money everywhere eliminates the possibility of competitive devaluation – everyone is trying it so no-one can do it. The country that expands its fiscal deficit quickly ends up with a current account deficit. Calls on surplus countries to take their share of the burden of raising demand fall on deaf ears. more>

The danger in deregulation

By Samantha Gross – In the United States and around the world, energy production depends on support from local communities, what the industry calls “social license to operate.” Especially in a democracy, public opposition can make life very difficult for energy producers. Public support for energy resource development depends on trust—in the companies doing the development and in the regulatory structure that governs their activities.

When the Trump administration dismantles energy regulation, it runs the risk of undermining the trust that underpins domestic energy development. U.S. oil and gas production has grown dramatically in recent years, but we have also seen a public backlash.

The proposal to open nearly all U.S. offshore waters to drilling is an opening salvo in a battle likely to go on for some time. Many governors, even Republicans, are vehemently opposed to drilling in waters off their states.

But the hard push toward deregulation is likely to have consequences for public trust, not just in companies, but in government itself. If the public feels that the government is being run by and for the energy industry, accomplishing many important societal goals—like modernizing infrastructure and preventing the worst impacts of climate change—become much more difficult. more>

Online giants must accept responsibility for impacts on the physical world

By Mark Muro, Jacob Whiton, and Sifan Liu – Despite record profits, these are tough times for Big Tech. In 2017, the industry and society each began to realize the full ambiguity of tech’s transformations of the wider world.

To be sure, many of the era’s disconcerting tech-related mega-trends have tangled origins and predate the current “digitalization of everything” quantified in our recent report.

Yet as tech columnist Farhad Manjoo has noted, the rise of the giant tech platforms has now been linked to a long list of troubling developments (along with the creation of much value).

These developments range from such online concerns as fake news, online echo chambers, and addictive product design to broader analog challenges such as the rise of inequality, the hollowing out of the job distribution, and the spread of the gig economy and automation.

Last year, Elise Giannone demonstrated that the divergence of cities’ wages since 1980—after decades of convergence—reflects a mix of technology’s increased rewards to highly skilled tech workers and local industry clustering. more>

Is the next financial crisis looming

By Ross Barry -The strong performance of many share markets around the world has led many to speculate that another major correction may not be too far away. History has shown us, over the past 300 years or so, that major corrections have occurred every nine to 10 years, on average, albeit some have come closer on the heels of the one before, while others have been more than 20 years apart.

History has also shown us that financial manias and crashes are almost always an outworking of three things – an accumulation of large volumes of idle capital (savings), financial innovation and leverage. Most have also occurred following a strong, speculative surge in markets and a few years into a new phase of higher interest rates.

The less opportunities there are to deploy savings to create new wealth, the more they accumulate in safer stores of wealth. And the more wealth is stored rather than used creatively, the more the return on idle savings declines. The fact that yields on cash and bonds around the world are currently at, or below, zero per cent in real terms, tells us that there is a lot of storing going on right now.

We have seen this throughout history in the shadowy practice of “melting debt” in the 1860s, the proliferation of margin lending by Wall Street firms in the 1920s, the development of futures, options and “repo” markets in the late-1980s, and again with the mass production of highly leveraged CDOs built from sub-prime mortgages in the mid-2000s.

Too often, unfortunately, when productive risk-taking in an economy dries up, clever agents turn to new and resourceful ways to repackage riskier assets and promote them as something seemingly safer.

What makes investors succumb to the lure of such things is a whole study unto itself. more>