Posts Tagged ‘chart’

P&B 13.5 Monopoly Smaller Output & Higher Price

It’s the most obvious criticism of mainstream, especially neoclassical, economics.

All of the major models and policy proposals of neoclassical economics—from the theory of the firm through the gains from trade to the welfare theorems—are based on the assumption of perfect competition.

But, as is clear in the diagram above, if there’s imperfect competition (such as a single seller or monopoly), the price is higher (PM is greater than PC), the quantity supplied is lower (QM is less than QC)—and, in consequence, excess profits are not competed away and the amount of employment is lower. (Of course, the monopolist can increase demand, and therefore output, through advertising, which for mainstream economists makes no sense for perfectly competitive firms since they are presumed to be able to “sell all they want to at the going price.”)

PPF

The existence of imperfect competition by itself undoes many of the major propositions of neoclassical economics—including (as I explained back in April) the idea that there’s no such thing as a free lunch (since, as in the Production Possibilities Frontier depicted above, point A inside the frontier represents an inefficient allocation of resources, and no new resources or technology would be required, just the elimination of monopolies and oligopolies, to move to any point—B, C, or D—on the frontier).

Readers may not believe it but imperfect competition is mostly an after-thought in mainstream economics. It’s there (and extensively modeled) but only after all the heavy lifting is done based on the presumption of perfect competition—and then none of the major theoretical and policy-related propositions is revised based on the existence of imperfect competition. (The usual mainstream argument is either imperfect competition isn’t extensive or, even if prevalent, imperfectly competitive firms act much like perfectly competitive firms, not restricting output or raising prices by very much. Therefore, perfect competition remains a valid approximation to real-world economies.)

market share

Now, however, imperfect competition seems to have returned as an area of concern—in the White House Council of Economic Advisers and in the Federal Reserve Bank of Minneapolis. The irony, of course, is that the market power of a few giant firms in many industries has been growing after decades of neoliberalism and the celebration of free markets.

As James A. Schmitz, Jr. explains for the Minneapolis Fed, new research

shows that monopolies are not well-run businesses, but instead are deeply inefficient. Monopolies do drive up prices, as conventional theory suggests, but because they also reduce productivity, they often ultimately destroy most of an industry’s profits. These productivity losses are a dead-weight loss for the economy, and far from trivial.

The new research also shows that monopolists typically increase prices by using political machinery to limit the output of competing products—usually by blocking low-cost substitutes. By limiting supply of these competing products, the monopolist drives up demand for its own. Thus, in contrast to conventional theory, the monopolist actually produces more of its own product than it would in a competitive market, not less. But because production of the substitutes is restricted, total output falls.

The reduction in productivity exacts a toll on all of society. But the blocking of low-cost substitutes particularly harms the poor, who might not be able to afford the monopolist’s product. Thus, monopolies drive the poor out of many markets.

The last time monopolies came to the fore in the United States was during the first Great Depression, when Thurman Arnold (from 1938 to 1943) ran the Antitrust Division at the Department of Justice, “taking aim at a broad range of targets, from automakers to Hollywood movie producers to the American Medical Association” in order to protect society from monopoly.

Is it any surprise that now, in the midst of the second Great Depression, attention is being directed once again to the idea that gigantic national and multinational corporations with growing market power are responsible for reducing productivity and crushing low-cost substitutes, thus hurting workers and the poor?

One possibility is to get tough again with antitrust legislations and rulings, and try to restore some semblance of competitive markets. The other is to resist the temptation to turn the clock back to some mythical time of small firms and perfect competition and, instead, through nationalization and worker control, transform the existing firms and allow them to operate in the interest of society as a whole.

flat

A new report from McKinsey & Company, “Poorer than Their Parents? Flat or Falling Incomes in Advanced Countries” (pdf), confirms many people’s worst fears. As it turns out, the trend in stagnating or declining incomes for most workers (including the middle-class) is not confined to the United States, but is a global phenomenon.

Brexit and Trump are just the tip of the iceberg. Because of flat or falling incomes, many workers across the rich countries are angry and want change.

According to the authors of the report, as much as 70 percent of the households in 25 advanced economies saw their incomes drop in the past decade. That compares to just 2 percent of households that saw declining incomes in the previous 12 years.*

Ex2

In the United States, fully 81 percent of households suffered a decline in market income between 2005 and 2013. But, as it turns out, after taxes and transfers, falling market incomes were turned into flat disposable incomes. (The situation elsewhere, such as in France, the Netherlands, the United Kingdom, and Italy, was even worse, in terms of both market and disposable incomes.)

Here’s what the U.S. numbers mean: employers were able to take advantage of declining labor incomes (since only upper-income households experienced strong wage growth, which is really just a distribution of the surplus to most of them), thus increasing corporate profits; while workers, through taxes on their wages (and thus not a distribution of the surplus), were forced to pay to finance programs that helped reverse some of the effect of declining market incomes.

Ex18

Another major consequence of flat or falling incomes is a dramatic increase in inequality over the course of the past two decades. Since I’m quite critical of comparing inequality indicators (e.g., Gini coefficients) across countries (as I explained here), what is most relevant is the change in inequality indicators for individual countries and, especially, the difference between market-income and disposable-income indicators. Thus, for example, when the authors of the report calculate “net Gini” (market Ginis minus the effect of taxes and transfers, the middle line for each country in the chart above), the United States ends up reversing market inequality the least—scoring 35 in 1993 and 37 in 2005 and 2012.**

Ex4

The final major economic consequence, in the United States and elsewhere is that today’s younger generation—regardless of level of education—is increasingly at risk of ending up poorer than their parents. As readers can see in the chart above, wage incomes declined for all segments of the labor force in the 2002–12 period but, in all three countries, wage income declines were most severe for younger workers (under the age of 30). The average decrease in the wage income of these young workers ranged from 2 percent (for higher educated workers in France) to 27 percent (for medium educated workers in Italy). In the United states, lower educated young workers faced a decline of 15 percent, similar to that of medium educated workers; while even higher educated young workers saw a decline in their incomes.

Ex8

And then, of course, there are the political consequences of flat or declining incomes. The authors of the report note that

The people who felt they were not advancing and believed this was a persistent problem expressed sharply negative views of foreign trade and immigration. They were nearly twice as likely to believe that “Legal immigrants are ruining the culture and cohesiveness of our society” as those who were advancing or neutral, and one-and-a-half times as likely as those who were not advancing but hopeful about the future. Nearly 70 percent of them also agreed with the statement “Cheaper foreign labor is creating unfair competition to our domestic businesses,” compared with 43 percent of those who were advancing or neutral. Fifty-six percent of them also believed that “The influx of foreign goods and services is leading to domestic job losses,” compared with 29 percent of the advancing or neutral respondents and 41 percent of those who were not advancing but hopeful about the future.

By implication, failure to correct flat or falling incomes could lead to a rise in the number of people who see flat or falling incomes as a persistent problem and lose faith in tenets of the global economic architecture.

That’s the source of the challenge to the self-professed expertise of mainstream economists (who tend to celebrate a market-based global economy), as well as movements as diverse as Brexit, the Trump campaign, and the insurgency within the Democratic Party represented by Bernie Sanders.

But the authors of the report are not done. The natural final question is, what are the prospects for the future? Their conclusion is, to say the least, sobering. If present trends continue—including the decline in labor unions, the continuation of job-displacing digital technologies, the rise in temporary and part-time work, and overall slow growth—it is likely

an even larger proportion of income groups in advanced economies—from 70 to 80 percent—could experience flat or falling real market incomes in the next decade to 2025 than did during the 2005–12 period.

As I see it, the existing set of economic institutions can neither accommodate nor preclude the possibility of an even larger portion of flat or falling incomes for the foreseeable future. The current economic system has failed, even on its own terms.

The situation is so dire that the authors of the report (who, remember, did this research for McKinsey, the most prestigious management consultancy in the world) note that “the idea of a guaranteed basic income has attracted renewed interest as policy makers seek to grapple with flat or falling incomes in the middle class, high youth unemployment, and the prospect of further job losses to digitization.”

A universal basic income is certainly a start. It’s a recognition of how dire the current situation is and how ominous the future prospects are for the majority of the population—workers, the middle-class, call them what you will—within the advanced countries.

But it’s only a start. The widespread nature of flat or falling incomes in the United States and across the rich countries, and then the dire forecast looking forward, mean it’s time to imagine and create a radically different way of organizing economic and social life.

 

*In general, the analysis in the report appears to be carefully done. I do, however, have one criticism. The major comparison is between two periods: 1993-2005 (when most incomes were rising) and 2005-2014 (when they were falling). That’s fine. All of the data of which I am aware (such as real wages and average 90-percent incomes) confirm much the same trends. The problem is, it was in the mid-1990s that workers’ incomes were at their lowest. If we extended the analysis back to the mid-1970s, then we’d discover that, across the entire 1973-2014 period, workers’ incomes have been generally flat (with both short-term increases and decreases within that long-term trend).

**On a scale of 0 to 100, where a score of 100 indicates complete inequality (one person earns all of the income) and a score of 0 represents completely even distribution of income across the population (each citizen earns the same amount). Numbers in the high 40s for market income and high 30s in the net Gini coefficient (after taxes and transfers) indicate an obscenely unequal distribution of income in the United States.

wages-2015

According to Neil Irwin, “the job market is fine.”

I suppose that’s the way it looks in the short view. The official unemployment rate in the United States remains below 5 percent and real hourly wages have continued to increase as the labor market has tightened. Clearly, as unemployment has declined after the worst crisis of capitalism since the first Great Depression, employers have been forced to pay more in order to get access to employees’ ability to work.

However, throughout the entire period of the so-called recovery (from June 2009 through May 2016), real wages for non-managerial labor have risen only 3.8 percent (from $20.48 an hour to $21.25)—and only 4.8 percent above their recessionary low (of $20.27 in October 2012)—and, in both cases, that’s mostly because inflation has been so slow.

If we take a longer view, things look even worse. Real hourly wages (in 2015 dollars) remain less than what they were in April 1978 ($21.48) and even further below their post-1964 peak ($22.37 in January 1973).

So, even though workers’ wages have been climbing, unevenly, from their absolute low (of $18.07 in August 1994), they still remain below what they were more than five decades ago.

In the long run, then, the U.S. labor market has been anything but fine.

Source

The data on wages (hourly wages for production and nonsupervisory employees) and inflation (the Consumer Price Index for urban workers) are from the Federal Reserve Economic Database. I transformed the 1982-84 price index into 2015 dollars and then calculated real hourly wages for the entire period.

real wages

The movements in the chart mirror those in a chart using the existing 1982-84 price index, which is still the only one available in the FRED database.

inequality

This is my own chart—showing the dramatic changes in the average incomes (excluding capital gains) of the top 1 percent compared to those of the bottom 90 percent, expressed as a ratio, from 1920 to 2015—from the World Wealth and Income Database.

Thus, for example, the ratio first peaked in 1928 (when, on average, top 1-percent incomes were 32.7 times those of the average of the bottom 90 percent), eventually decreased to a low in 1972 (of 10.2), then peaked once again in 2012 (with a value of 32.5). As of 2015, the ratio stood at 31.7.

Other charts in this series can be found here, herehere, and here.

Emmanuel Saez, Thomas Piketty, and the rest of the team need to be credited for making their data available. Readers should feel free to use this chart and reproduce it as they wish. . .

public

The existence of public colleges and universities is the way the American working-class has traditionally been able to achieve a higher education and broaden their individual and social worlds. It started with the land-grant universities and then expanded, especially in the 1960s, with enormous increases in facilities, professors, and public financing. The children of U.S. workers were thus able to enroll in state institutions that, in many cases, provided them a high-quality, affordable education.

As we all know (and, if we didn’t, Bernie Sanders has been quick to remind us), that is no longer the case. The decrease in state funding for public colleges and universities, which has led them to increase tuition and fees and to chase out-of-state (and, increasingly, out-of-country) students, together with stagnant incomes for the majority of the population, has made public education less and less affordable for many workers and their children. The result is that many students have been forced to choose lower-quality schools (including for-profit colleges and universities), extend their time in school (because they have to hold one or more jobs while going to school), and take on more and more debt (both student debt, to finance their education, and consumer debt, to make other purchases).

In creating the chart above, I calculated the cost of public four-year colleges and universities (as reported by the College Board) as a percentage of the average income of the bottom 90 percent of Americans (from the World Wealth and Income Database). Thus, for example, in 1975-76, annual tuition and fees amounted to about 7 percent of 90-percent incomes; adding room and board increased that figure to 24 percent. Now, tuition and fees alone are 28 percent and the total cost (including room and board) is up to 59 percent.

In other words, right now, it costs the American working-class almost 60 percent of one year’s income to pay for one of their children to attend one year in a public four-year college or university.

What’s the American working-class to do? The same as in many other rich countries: demand free higher education for all high-school graduates who want to attend an in-state public college or university (and, while they’re at it, forgiveness for the student debts they’ve been forced to take on in order to attend increasingly out-of-reach public colleges and universities).

average

This is my own chart—showing the dramatic changes in the average incomes of the bottom 90 percent, the top 10 percent, and the top 1 percent—from the World Wealth and Income Database.

Incomes are in thousands of real 2015 dollars. Thus, for example, the average income of the bottom 90 percent fell between 1979 and 2015 (from $34.6 thousand to $33.2 thousand), while the average income of the top 10 percent rose (from $149.1 thousand to $273.8 thousand) and that of the top 1 percent soared (from $370.2 thousand to over $1 million).

Other charts in this series can be found here, here, and here.

Emmanuel Saez, Thomas Piketty, and the rest of the team need to be credited for making their data available. Readers should feel free to use this chart and reproduce it as they wish. . .

Top1-composition

Here’s another of my charts—this one for the composition of income of the top 1 percent—from the latest data on inequality in the United States created and disseminated by Emmanuel Saez and Thomas Piketty.

This chart shows the sources of the income going to the top 1 percent—basically, the various ways the members of the top 1 percent are able to capture a share of the economy-wide surplus: in the form of wages (defined as wages and salaries and pensions), profits (profits from S-Corporations, Partnerships, and sole proprietorship businesses plus farm income), dividends, interest, and rents.

So, for example, in 2015, the top 1 percent received their portion of the surplus as wages (53.7 percent), profits (32.3 percent), dividends (8.6 percent), interest (3.2 percent), and rents (2.2 percent).*

I’ve included the actual data below.

The previous charts are here and here. As always, readers should feel free to use this chart and reproduce it as they wish.

Wages Profits Dividends Interest Rents
1979 59.0 17.0 12.5 8.0 3.5
1980 60.5 13.3 12.5 10.0 3.6
1981 62.7 7.8 12.4 13.3 3.7
1982 62.6 8.2 12.3 12.9 3.9
1983 65.5 9.8 11.0 10.7 3.0
1984 66.1 9.9 8.9 12.4 2.7
1985 63.6 11.0 9.6 12.3 3.4
1986 65.7 11.1 10.8 10.6 1.7
1987 63.9 17.2 7.2 10.4 1.4
1988 59.8 21.2 7.6 10.0 1.5
1989 56.7 22.3 7.4 11.8 1.8
1990 57.9 22.3 6.8 11.1 2.0
1991 57.4 23.0 6.6 11.0 2.1
1992 61.6 23.6 5.4 7.1 2.3
1993 62.1 23.8 5.3 6.2 2.6
1994 59.1 26.8 5.3 6.1 2.7
1995 59.2 27.3 5.1 5.9 2.4
1996 59.7 27.0 5.2 5.7 2.4
1997 60.3 26.7 5.1 5.4 2.5
1998 61.1 26.6 4.7 5.2 2.4
1999 62.1 26.1 4.7 4.8 2.3
2000 63.0 24.7 5.0 5.1 2.2
2001 61.7 26.5 4.2 5.1 2.5
2002 61.2 27.4 4.2 4.6 2.7
2003 60.2 27.7 5.2 4.2 2.8
2004 58.4 28.4 6.5 4.1 2.6
2005 54.8 30.9 6.6 5.2 2.6
2006 53.5 30.1 7.4 6.7 2.4
2007 54.3 27.7 8.4 7.5 2.3
2008 55.7 28.3 7.5 5.6 2.9
2009 56.4 30.7 6.0 4.4 2.6
2010 57.2 29.2 7.0 4.0 2.6
2011 58.4 29.0 6.4 3.5 2.7
2012 54.9 30.0 9.2 3.2 2.8
2013 56.7 30.6 6.7 3.1 3.0
2014 55.1 31.2 7.7 2.8 3.3
2015 53.7 32.3 8.6 3.2 2.2

 

*These are the wages that distort the usual calculations of the profit-wage ratio (as I explained here and here). To obtain a more accurate sense of capital and labor shares, the wages of the 1 percent should be subtracted from the labor share and added to the capital share.