Sam Peltzman on Antitrust and Humility

by Levi Russell

Over at the ProMarket blog, there's a great interview of Sam Peltzman on industry concentration. The whole thing is worth reading, but I thought I'd reproduce what I think are probably the most controversial of Peltzman's responses.

Q: Which industries should we be concerned with when we look at questions of concentration?

The traditional answer, embedded in the merger guidelines, is “be concerned if concentration increases in an already concentrated industry.” The evidentiary basis for this is thin. A much older literature struggled vainly for years to find a broad pattern whereby adverse effects of concentration could be localized to highly concentrated industries. I am unaware that the state of knowledge on where we should be concerned—or indeed if we should be concerned—has improved much. Basically, antitrust policy relies more heavily on beliefs rather than a strong consensus about facts.

Q: The five largest internet and tech companies—Apple, Google, Amazon, Facebook, and Microsoft—have outstanding market share in their markets. Are current antitrust policies and theories able to deal with the potential problems that arise from the dominant positions of these companies and the vast data they collect on users?

See my answer to [the question above]. It is hubris to believe that economists and antitrust officials can predict the future, which is what you need to do in this sector. Who remembers that free web browsers were once thought to be a dangerous threat to competition?

Q: President Trump has signaled before and after the election that he may block mergers and go after certain dominant companies. What kind of antitrust policies should we expect from him? Pro-business, pro-competition, or political antitrust?

See [the questions above]. I prefer humility to hubris.

Mandated GMO Labels: A Regressive Tax

by Levi Russell

The predictable effects of mandatory GMO labeling will be felt very soon in Vermont and those with low incomes will be especially hard-hit. Supermarkets in the state will lose some 3,000 products from their shelves. The video on this news story is telling: people don't seem to know much about GMOs and don't really think about the negative effects of mandatory labeling. Anti-GMO organizations such as Greenpeace have been accused of running a fear campaign that isn't supported by scientific evidence. There's no evidence that GMOs are harmful to people, but a law requiring them to be labeled very likely will be.

The federal law passed in the Senate will require companies to use QR codes or dedicated websites to provide information about the presence of genetically modified organisms in their food. The compliance costs associated with this law include the addition of the QR code or website URL to the packaging, the development of the databases with the required information, and the maintenance of this database as farming practices and ingredients change. The latter two will likely be far higher than the former and will affect food prices for the foreseeable future.

Here are some of the potential indirect effects:

1) Less consumer choice - The article linked above shows that this is already becoming a reality. I suspect those 3,000 products will come back to shelves eventually, but the development of new products is now more costly due to the necessity of adding information to GMO databases.

2) Higher prices - Additional costs to food companies will effectively shift the food supply curve to the left and raise prices.

3) Less innovation - Though "very small" food companies are exempted from the rule, many startups are created with the goal of becoming mass-market products (If you don't believe me, just watch an episode of "Shark Tank."). This requirement will be another cobweb of red tape these companies have to get through to get on consumer shelves.

Maybe all these costs are worth it. Given the lack of scientific evidence of harm and the fact that humans have been modifying the genetics of food in a far more haphazard way for a very, very long time, I have my doubts. The reality is that the costs mentioned above will fall disproportionately on those with the lowest incomes. Those with moderate to high incomes will be able to pay more for the food they really want, but for those who spend a substantial portion of their income on food already will find it harder to make other ends meet.

More Mercatus Center Research on State Tax Reform

by Levi Russell

In a previous post I shared a comparison of the results of tax reform in Utah and Kansas. That comparison was part of a broader analysis of reform efforts in 5 states: Kansas, Michigan, North Carolina, Rhode Island, and Utah. The report provides a detailed analysis of reform efforts and draws some general conclusions about how reform should be implemented.

The  authors generally report good news for the states in terms of government fiscal health. Kansas is an exception. Here's one of the "common trends" identified in the report:

The most effective tax reforms seem to be those that both lower the rates of taxation and simultaneously broaden the scope of activities that are taxed. Such reforms improve the efficiency, convenience, and transparency of a tax system.

 This is the opposite of what Kansas has done. Unlike North Carolina, Kansas politicians failed to couple the tax reform effort with orderly spending cuts. Further, as the report notes, Kansas narrowed its tax base in a distortionary way:

Kansas also made the decision to exempt “pass-through” profits from corporate taxation; that is, business income that is taxed on individual business owners’ tax returns. While this lowers the tax burden on businesses, it creates distortions in the way business owners choose to classify their operations. Moreover, it is inequitable because it disproportionately benefits high earners and creates an unfair playing field among businesses.

There has certainly been a lot of media coverage of Kansas' state government budget information. Another Mercatus paper compares state government fiscal situation data from all 50 states and Puerto Rico in 2014. Kansas is 27th of the 51 states/territories examined. This doesn't sound consistent with the dominant narrative in the media.

How has the reform effort affected the private economies in these states? Below is a graph of private GDP indices for the five states listed above, the US as a whole, and two other states that are, to put it mildly, in big trouble fiscally: California and Illinois. It's tough to draw any general conclusions. Michigan, Utah and California are all doing quite well relative to the US as a whole. Michigan and Utah have had significant tax and spending reductions; California hasn't. Illinois, Kansas, North Carolina, and Rhode Island are all lagging relative to the US as a whole. Kansas and Illinois had pretty flat growth from 2012 to early 2014, but have picked up recently. Kansas in particular seems to be catching up to the US as a whole. North Carolina has been catching up at a feverish pace.


Quantity Index for Real Private State GDP - BEA

click image to enlarge

Yet another Mercatus paper provides a short review of the literature on the relationship between state tax policy and the economic health of the state. Here's the relevant paragraph:

Research finds that higher state taxes are generally associated with lower economic performance. There is somewhat weaker evidence that state and local taxes can significantly reduce income growth within a state, particularly when the revenues raised are devoted to transfer payments. More recent research corroborates this finding in relation to net investment and employment. However, when additional tax revenue is used to improve the quality of public goods and services, economic growth may increase. When looking at business activity more broadly, more comprehensive reviews of the literature find higher taxes to be associated with less economic growth. They also find this relationship to be stronger within metropolitan areas than across metropolitan areas, which means that local taxes have a larger effect on economic growth when it is less costly for firms and taxpayers to relocate to avoid the tax.

Taxes as Social Engineering

Cornell economist Robert Frank recently appeared on probably the best economics podcast on the web, EconTalk. Frank was there to discuss his recent book on the role of luck in successful folks' lives. The conversation was interesting and Frank certainly has a unique perspective. He makes some clever observations but I wasn't convinced of his conclusions. I encourage Farmer Hayek readers to listen to the podcast and check out the comments here and here for some good counterpoints to Frank's positions if you're interested.

Instead of taking Frank's comments head on, I want to discuss what seems like a background assumption he makes. Frank's overall point is that since luck (specifically good luck) plays an under-appreciated role in our success, we should favor higher taxes on the wealthy. This would provide additional funds to beleaguered governments which he asserts are low on funds for infrastructure. More importantly, though, it would ensure that the wealthy would spend less money on things that don't make "anybody any happier."

Frank provides almost nothing in terms of evidence of his claims other than his own personal experiences (see the comments linked above), but even assuming he's correct about the particular facts he lays out, there's a more fundamental problem. It might very well be that declining quality of public infrastructure has more to do with simple mismanagement of resources, rather than a lack of tax revenue. Hayek's work implies that government planners are less effective at directing resources than decentralized owners of "several property" because the former simply can't gather the necessary information to plan efficiently. (see here, page 85) Much of the information necessary for an orderly economy is tacit and ever-changing such that any amount of computing power is insufficient to create the sort of plan Frank seems to believe we need.

To be clear, it's not that markets are perfect, simply that they are more likely to be better than centralized decision makers at allocating scarce resources. The knowledge required to do so is dispersed and tacit, As Hayek puts it:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

I can't resist a couple of final points. Though Frank disputes it, it's pretty clear that taxes on the wealthy do affect their choice of location (here and here). Frank uses a Rawlsian ethic that is quite common in business ethics courses. However, it's not altogether obvious that Rawls' ideas can be used to justify the policies Frank favors.

Equal Pay Day

I wasn't going to write about this but a (female) colleague suggested I do so.

Equal Pay Day is supposed to be the day "that symbolizes how far into the year women must work to earn what men earned in the previous year." This is hilariously crude statistical analysis. In fact, men and women in the same occupations with similar experience and education actually make almost exactly the same salaries. In some fields, women earn more. The supposed "wage gap" is mostly a function of the choices men and women make in the labor force and has very little to do with discrimination.

Here's a helpful video:

How Progressive is the Tax Code?

The federal tax code has been a big topic of discussion this election cycle. A lot of this discussion has been driven by the increased focus on income inequality. Whatever your views on this subject, I think it's useful to look at the way the tax burden is distributed across income groups. In this post, I'll present data from the Congressional Budget Office (CBO), which you can download here.

The charts below were created using three data series: market income, transfers, and federal taxes. Each series runs from 1979 to 2011 (unfortunately, 2011 is the most recent year for which this data is available) and is broken down into quintiles by market income. The top 1% is also split out into its own category. Every data point is a household average for the group. The data set linked above breaks the top quintile into a few more groups if you're interested in that.

Tradeoffs Between Social Policy and Growth

Mark Thoma's recent Fiscal Times column seems to me to be heavy on politics and light on economic analysis. He sets out to convince the reader that there is no tradeoff between social insurance provided by the federal government and economic growth, but I think there are good reasons to doubt this notion.

Acton Institute's Milton Friedman Quotes

July 31st would have been Milton Friedman's 103rd birthday. Several blogs featured tributes to Friedman, but I really enjoyed the Acton Institute's six quotes by Friedman on economics and freedom.

Friedman was a fantastic communicator of sound economics and the benefits of free markets to the public. His interviews, debates, and televised discussions with other thinkers are still relevant informative decades later.

I've reproduced the 6 quotes below:

The conditions for freedom: “History only suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.”

On shortages: “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage.”

On private property: “Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.”

On minimum wage laws: “The high rate of unemployment among teenagers, and especially black teenagers, is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws. We regard the minimum wage law as one of the most, if not the most, anti-black laws on the statute books.”

On freedom and fairness: “’Fair’ is in the eye of the beholder; free is the verdict of the market. The word ‘free’ is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with ‘freedom.’ The word ‘fair’ is not used in either of our founding documents.”

On free markets: “What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.”

Potpourri

Jayson Lusk gives his thoughts on a (relatively) recent book that points out some flaws in the "conventional wisdom" regarding saturated fat and other food no-nos. This one is definitely going on my reading list.

I agree with a lot of what Arnold Kling says about open-access versus limited-access orders. The idea that a country can only be one or the other seems patently false.

Bob Murphy discusses the predictive failure of the Keynesian model regarding the 2013 sequester.

Steve Horwitz identifies three regulatory barriers to upward income mobility.

Potpourri

Jayson Lusk provides an update and some thoughts on meat prices. Beef prices are predicted to stay relatively high due to biological factors affecting supply.

Here's an interesting comparison of unemployment rates for European countries with and without the minimum wage. The standard supply/demand story apparently applies in the case of wage controls.

Matt Bogard productively and convincingly tackles the inequality puzzle. Real wealth consists in the goods/services available to us, not our dollar incomes.

Don Boudreaux dissects the "You didn't build that!" meme.

Potpourri

David Widmar of Purdue University suggests a rising dollar could hurt ag exports in the near future.

Bryan Caplan (George Mason U) has a post about Bob Lawson's (Southern Methodist U) offer of a wager on the relationship between economic freedom and GDP growth over the next 20 years.

Michael Giberson of Texas Tech U defends the practices of "price gouging" during a disaster.

Don Boudreaux says income inequality is just not a big deal.

Potpourri

Jayson Lusk added some interesting questions to the January 2015 Food Demand Survey. The responses are pure gold.

Elise Hilton discusses new technology for reducing the amount of trash that ends up in landfills. Markets generate conservation behavior when the benefit of reusing or recycling a given resource is greater than the cost. Entrepreneurs are agents of change who create these opportunities.

The Cato Institute Blog has a brief roundup of posts around the blogosphere regarding the "common sense" of a carbon tax.

Jeffrey Dorfman at UGA has some suggestions for budget cuts for the new bicameral Republican majority in congress.

Brent Gloy and David Widmar of Purdue discuss 2015 economic issues related to producers and ag bankers.

Don Boudreaux explains why supposed generous behavior by established firms regarding the minimum wage is likely to limit competition.

Matthew Turner of Brown University discusses the economics of land use regulations in an article at PERC.

Bob Murphy's insightful analysis of the Fed's role in recent oil price moves.

Don Boudreaux links to an interesting graph of world-wide incomes in 1820, 1970, and 2000. This graph shows that increases in income and in income equality can happen simultaneously.

Potpourri

An interesting article on Progressive Farmer about low-pressure tires and soil compaction.

Jayson Lusk has an interesting post on the basic facts (and some interesting intuition) about corporate and family farms.

An interesting post by Pete Boettke at George Mason U. on the political leanings of academic economists. Some of the loudest economic voices on the internet are staunchly anti-free-market. Paul Krugman is the most obvious example. Pete mentions a study by Dan Klein which suggests that most economists "lean left" although they do so to a much lesser degree than academics in other social science fields. I hope to conduct a similar study some day for agricultural economists.

The most recent Federal Open Market Committee minutes suggest that the Federal Reserve will not begin to raise interest rates until April or later. The Fed sees recent declines in oil costs as beneficial on net, but is concerned that inflation may not be high enough in the coming months. It's difficult to understand why someone would think that always-rising prices are good when they also believe that lower prices due to increased supply are bad.

Thomas DiBacco has an interesting piece on the one and only time the U.S. national debt was zero.

A recent entry in the Urban Dictionary is pretty hilarious considering the new criticism of the famous book on inequality by Thomas Piketty.

Potpourri

Brent Gloy of Purdue University discusses the "margin squeeze" and how to manage when input prices are high and commodity prices are low.

David Henderson gives an example of the problem with confusing "inequality" and "poverty."

The latest edition of Regulation contains some articles about GMOs and "nudging" by governments to improve health.

Matt Bogard has an excellent post on the intersection of beef consumption, the environment, and government.

A graphical food version of Leonard Read's classic monograph "I, Pencil."

Tim Fitzgerald has a long post on the economics of fracking. He summarizes several issues well. It's definitely worth a read, IMO.