Market concentration is not rising because of inadequate antitrust concentration

See Superstar firms and market concentration from Tyler Cowen.

"A new paper by Autor, Dorn, Katz, Patterson and Van Reenen (some real heavyweights) rebuts the notion that market concentration is rising because of inadequate antitrust concentration:

The fall of labor’s share of GDP in the United States and many other countries in recent decades is we ll documented but its causes remain uncertain. Existing empirical assessments typically rely on industry or macro data obscuring heterogeneity among firms. In this paper, we analyze micro panel data from the U.S. Economic Census since 1982 and document empirical patterns to assess a new interpretation of the fall in the labor share based on the rise of “superstar firms.” If globalization or technological changes push sales towards the most productive firms in each industry, product market concentration will rise as industries become increasingly dominated by superstar firms, which have high markups and a low labor share of value-added. We empirically assess seven predictions of this hypothesis: (i) industry sales will increasingly concentrate in a small number of firms; (ii) industries where concentration rises most will have the largest declines in the labor share; (iii) the fall in the labor share will be driven largely by reallocation rather than a fall in the unweighted mean labor share across all firms; (iv) the between-firm reallocation component of the fall in the labor share will be greatest in the sectors with the largest increases in market concentration; (v) the industries that are becoming more concentrated will exhibit faster growth of productivity; (vi) the aggregate markup will rise more than the typical firm’s markup; and (vii) these patterns should be observed not only in U.S. firms, but also internationally. We find support for all of these predictions.

Here is coverage from Peter Orszag.  As I’ve said before, people are opting for Philippon’s Great Reversal story because of ideology and convenience and mood affiliation, but it is not supported by the facts."

Elizabeth Warren’s Tax Plan Would Bring Rates Over 100% for Some

Presidential hopeful proposes wealth tax and levy on unrealized gains, a combination that could alter investing

By Richard Rubin of The WSJ. Excerpts:

"She wants to return the top income-tax rate to 39.6% from 37%, impose a new 14.8% tax for Social Security, add an annual tax of up to 6% on accumulated wealth and require rich investors to pay capital-gains taxes at the same rates as other income even if they don’t sell their assets.

Consider a billionaire with a $1,000 investment who earns a 6% return, or $60, received as a capital gain, dividend or interest. If all of Ms. Warren’s taxes are implemented, he could owe 58.2% of that, or $35 in federal tax. Plus, his entire investment would incur a 6% wealth tax, i.e., at least $60. The result: taxes as high as $95 on income of $60 for a combined tax rate of 158%."

"tax rates of over 100% on investment income would be typical, especially for billionaires."

"Ms. Warren has talked most about her plan, announced in January, to impose a 2% annual tax on wealth above $50 million and 3% above $1 billion, which she doubled to 6% this month to pay for Medicare for All. Sen. Bernie Sanders of Vermont, a rival for the nomination, proposed a similar tax."

"Currently, capital gains are taxed only when an asset is sold and the gain is “realized,” and those gains escape income taxes at death. That means gains on assets that never sold are never taxed, so fortunes can grow without triggering any income taxes."

"Under current law, investors without dividends can add their annual gains to their fortunes and pay little or no income tax. After Ms. Warren’s one-two punch, some billionaires who generate pretax returns could pay annual taxes that would leave them with less money than they started with."

"Under Ms. Warren’s plan, their unrealized capital gains outside retirement accounts would be taxed at 39.6%, just like ordinary income, plus an existing 3.8% investment-income tax. Add to that her new 14.8% investment-income tax to bolster Social Security, and state taxes, and combined tax rates could reach 70% in California and New York City.

"The effective tax on business investment could actually be higher because these personal taxes would come after a company has already paid a corporate tax rate, under Ms. Warren’s plan, of 42%, up from 21% now."

"The Penn Wharton Budget Model, a research group, estimates in a preliminary report that a 3% wealth tax above $50 million, which isn’t exactly Ms. Warren’s plan, would reduce the growth rate of gross domestic product over the next decade by an annual average of 0.2 percentage point and the capital stock—all the equipment, structures, and intellectual property that companies employ—by 4.3%."

Research shows that blocking mergers improves innovation? Not so fast!

By Mark Jamison of AEI.

"“Theory and practice should not contradict one another.” George J. Stigler

Sometimes researchers make claims that can grab headlines, but upon further investigation, their theories don’t line up with reality.

A recent paper and accompanying blog follow this pattern. They conclude that merger policy in tech should block more mergers, including mergers that would make consumers better off, because doing so increases innovation. That’s pretty surprising! Even if each approved merger makes consumers better off, the overall effect is consumer harm? How could that be?

The paper develops a theory in which blocking even good mergers makes more consumers drop their old services in favor of those offered by new entrants, leading to more successful startups. More startups mean more innovation because incumbents never innovate, according to this paper’s theory.

To show that the theory works in practice, the paper looks at nine tech acquisitions and concludes that, true to the theory, investment in startups declined once an acquisition occurred. Less investment means fewer startups, which means less innovation, according to the paper.

But does the theory really align with the cases as the paper and blog claim? No.
The theory makes a few key assumptions that drive its results. These include:

1. The entrant offers the same type of product as the incumbent, but better.
2. Early adopters have to spend money to learn to use the entrant’s new product, but only if there is no merger. There is no cost to learning about the upgraded product if there is a merger.
3. Customers can choose either the entrant’s product or the incumbent’s product, but not both (i.e., no multi-homing).
4. Customers don’t know how good the entrant’s product is before trying it and once they try it, they cannot switch back to the incumbent if they are disappointed. And if customers don’t leave the incumbent at their first opportunity, they never leave.
5. The incumbent never innovates.

These assumptions (and others) are pretty questionable. But let’s see if they align with the cases. The cases involve either Google (whose core products are search and associated advertising) or Facebook (whose core products are social media and associated advertising).

Of the nine acquisitions considered, none of the five key assumptions apply to:

• Google’s acquisition of YouTube (core product was video sharing)
• Google’s acquisition of Postini (core product was filtering email for spam and malware) [Note: It is unclear that Google was doing much in this space before the acquisition]
• Google’s acquisition of Waze (core product was crowdsourced mapping service) [Note: Customers appear to be divided on whether pre-Google Waze was better than Google Maps, but both continue to exist]
• Facebook’s acquisition of Instagram (core product was sharing photos linked into stories) [Note: Customers appear to be divided on their preferences for Facebook or Instagram, but both continue to exist]
• Facebook’s acquisition of WhatsApp (core product was texting using the internet)

Only the first assumption, and none of the others, applies to:

• Google’s acquisition of DoubleClick (core product was online advertising)
• Google’s acquisition of AdMob (core product was mobile advertising)
• Google’s acquisition of ITA Software (core product was searching for airline prices) [Note: Google’s general search might have been useable for finding prices, but probably not.]
• Google’s acquisition of Apigee (core product was web programming interfaces and analytics)

So four of the five important assumptions listed above apply to none of the cases. And the first assumption applies to only four of the nine cases. So the “theory” in the paper isn’t even a theory. As economist George Stigler said, a real theory aligns with evidence. Otherwise, what is offered as a theory doesn’t even rise to the level of fable.

There are other reasons to be skeptical of how the paper and blog use these cases. For example, Instagram has leapt in value since the Facebook acquisition, implying that Facebook improved the product (or at least its business model). And innovation is more than just an idea: Innovation requires an idea, turning the idea into a real product, developing a viable business plan, and executing the business plan.

Sometimes incumbents can do a better job with the last two steps than entrants, making an acquisition a good thing for all affected parties, including consumers. Microsoft’s acquisition of DOS is a clear example.

What’s the bottom line? As I have explained before, profit potential drives startups. And options have value to startups, including options of selling an idea or product to an incumbent that has proven business acumen."

Despite large expenditures by the authorities, drug violence in Mexico continues

See Mexico’s Failure to Stem Violence Strains Relationship With U.S.: Hundreds of cartel gunmen terrorized the city of Culiacán last week until authorities freed the son of drug lord ‘El Chapo’ by José de Córdoba and Jessica Donati of The WSJ. Excerpts:

"The stunning display of violence shows that drug cartels here are as strong as ever nearly 15 years after the Mexican government set about to challenge them head on, often with U.S. assistance. The government has arrested or killed many cartel leaders, weakening many crime groups and fragmenting others.

But the cost has been high. Since 2006, more than 250,000 people have been killed, according to Mexican government figures, most in the bitter internecine war between cartels for control of drug routes and territory. At least 40,000 more have been disappeared, many buried in clandestine graves, some dissolved in acid. From 2007 to 2019 the homicide rate has roughly tripled to 29 per 100,000 people.

Worse, last week’s events could further embolden the gangs to respond to threats by security forces with widespread violence and terror, cow Mexico’s stunned security forces and strain vital intelligence cooperation with the U.S., according to analysts, former and current U.S. officials and former Mexican security officials."

"Mexican and U.S. analysts as well as U.S. officials believe the events in Culiacán underscore Mexico’s broader failure to come up with a viable strategy to face the country’s powerful gangs.

Analysts say Mexico has never paid enough attention to what would be a long-term fix to its security problem: building professional police forces, especially at state and local levels. Instead, Mexico has relied on short-term solutions, leaning on the nation’s armed forces to provide security rather than creating dependable police able to investigate and arrest criminals, and a transparent and efficient judicial system able to convict them."

"Since 2007, the U.S. has provided nearly $2 billion to Mexico to help fight organized crime under the so-called Merida Initiative. The money has been spent on everything from military hardware to capacity building for Mexico’s legal system."

GM Crops Like Golden Rice Will Save the Lives of Hundreds of Thousands of Children

By Matt Ridley. Excerpts:

"Most people think the precautionary principle simply says “better safe than sorry” and helps to prevent disasters like the release of Thalidomide for pregnant women. In fact, it goes much further and is often a barrier to innovation. As applied in practice, especially in the European Union, it requires regulators to take into account all possible hazards of a new technology, however implausible, to discount all possible benefits, however plausible, and to ignore all the hazards of existing technologies that might be replaced by the innovation. As Ed Regis puts it in his new book Golden Rice: The Imperiled Birth of a GMO Superfood: “The principle focuses on theoretical or potential risks, those that are only possible or hypothetical, while ignoring the specific and actual harms that restrictions or prohibitions are likely to produce.” In this way, it creates obstacles to anything new.

Bizarrely, the Cartagena Protocol applied this principle to crops bred by the precise insertion of specific genes from other plants but not to the older technique of random genetic scrambling with gamma rays, like Golden Promise barley, even though the potential unknown risk of the latter is clearly greater. The effect on Golden Rice was twofold. First, the requirement for greater regulation tarnished all biotech crops as risky (if they’re safe, how come they have to go through so much regulation?). Second, it made the testing of different varieties impossibly expensive and time-consuming, killing a key part of the innovation process: the trial and error that is always necessary to turn a good idea into a practical product. Thomas Edison tried 6,000 different materials for the filament of a light bulb. Imagine if he had had to get separate regulatory approval for each one.

The European Union’s directive on the deliberate release of genetically modified crops includes the statement that “the precautionary principle has been taken into account in the drafting of this Directive and must be taken into account when implementing it.” This effectively killed off biotechnology on the continent, though Europe happily imports huge quantities of GM soybeans from the Americas today. Since 2005, Canada (which did not sign the Cartagena Protocol) has approved 70 different biotech crops, while the European Union has approved just one—and that took 13 years, by which time the crop was outdated.

 To illustrate just how impenetrable the EU’s regulatory thicket is, take the biotech potato developed by the German company BASF in 2005. The European Food Safety Authority (EFSA) initially approved it, but the European Commission then blocked it, citing the precautionary principle. BASF took the Commission to the European Court of Justice, which ordered another evaluation from the EFSA. This confirmed that the crop was safe and the EU was instructed by the Court to approve its use, which it did. But Hungary’s government then intervened on behalf of green pressure groups, pointing out (Kafka-like) that the EU had based its approval on the first EFSA ruling instead of the second one, even though the two rulings were practically identical. In 2013, eight years after the first approval, the EU General Court upheld Hungary’s complaint. By then BASF had lost interest in banging its head against this precautionary wall, so it withdrew the application, packed up its entire research into biotechnology and moved it to the U.S., which has never signed the Cartagena Protocol. Syngenta did the same."

"After a quarter of a century of growing biotech crops in North and South America, Asia and parts of Africa, the evidence is now clear: they have caused no human or animal illness, and have huge environmental benefit, such as greatly reduced pesticide use, less ploughing, lower greenhouse gas emissions, less land required to grow a given quantity of crop, lower costs and higher yields. This is the environmental bounty Europe has missed out on thanks to its over-zealous regulation of GM crops."

"By 2012, it was clear from studies in China that the latest version of Golden Rice, grown in secure greenhouses, gave children sufficient beta carotene to make them healthy but could not harm them, and did so far more effectively than feeding them spinach. However, the research caused a fuss. The US-based, Chinese-born researcher followed precisely the approved protocols for the research, which did not describe Golden Rice as a GMO-crop. Nevertheless, the same university which had approved the protocols, then found that not describing Golden Rice as a GMO-crop was an ethical omission. Overall, and without any credible analysis, the university found insufficient evidence that the principle of ‘prior informed consent’ from the subjects of the research had been properly applied, handing the opponents of GM foods a huge propaganda victory at a crucial time. Yet by this date, billions of meals of biotech crops had been eaten all around the world, and three independent reviews of the Chinese research concluded that the trial had been safe and effective. Nevertheless, the reputational harm lingered."

"The International Rice Research Institute developed numerous different Golden Rice strains back-crossed into commonly grown varieties, behind tough security barriers because of constant threats from activists encouraged by Greenpeace. Eventually, the Golden Rice Humanitarian Board chose one of the varieties for field testing. They would have liked to have chosen lots of different varieties, because in plant breeding it is always necessary to weed out sports that have for some reason acquired undesirable traits along the way. But the precautionary principle made this impossibly expensive and laborious since it required evaluation in advance of the potential risks of each separate variety. So they had to pick one.

Disastrously, that one variety turned out to have a genetic flaw that made it poor at yielding grain outside the greenhouse. Once again, the environmentalists crowed that the project was doomed."


"In 2015, the White House Office of Science and Technology Policy and the US Patents and Trademark Office rewarded Golden Rice with their Patents For Humanity Award. In 2017, a group of 134 Nobel-prize winners (now expanded to 150) called on Greenpeace and the United Nations Food and Agriculture Program to “cease and desist in its campaign against Golden Rice specifically, and crops and foods improved through biotechnology in general.”"

"By 2017, a new variety of Golden Rice, GR2E, had been tested in the field in the Philippines and shown to be robust, true-breeding, high-yielding and strong in its expression of beta carotene. The IRRI submitted an application to release it to farmers, in the form of eight hefty documents, one more than 800 pages long and detailing the many tests of the physical, nutritional, allergenic, and toxicity done on the plant to show that it could not conceivably be anything other than safe to grow and eat."

California’s Spending Boom Masks a Spate of Problems

Politicians are rolling in tax revenue, but they can’t seem to solve basic issues like housing and energy.

By Steven Malanga of The Manhattan Institute. Excerpts:

"High costs have strapped local governments in the Golden State, housing is often unaffordable, and gasoline and electricity are more expensive than elsewhere."

"Mr. Newsom’s budget, enacted in June, is a record $215 billion. Fueled by growing tax collections on California’s wealthy, state spending has increased $59 billion since 2014. The state’s personal income tax alone is projected to yield $102.8 billion this year, a nearly $28 billion increase in five years. That sounds like plenty of money, but it disappears fast in the Golden State."

"Over four decades the state has produced housing at half the rate needed to meet its population demands. Lengthy environmental reviews and labor laws requiring union workers drive up the cost of building. A U.S. Government Accountability Office study found that a single unit of affordable housing in California costs $750,000, more than anywhere else in the country."

"In 2017 Sacramento imposed new fees on real-estate transactions to fund affordable housing, expecting to reduce the cost of housing by increasing the cost of building. In October Mr. Newsom signed statewide rent controls that limit the ability of landlords to increase rents, despite overwhelming evidence that rent control exacerbates housing shortages because developers curtail building."

"Some of the money is meant to house tens of thousands of homeless people who politicians say can’t find affordable shelter. But many live on the street because of addiction and mental-health problems."

"The state has decriminalized many low-level property crimes and drug offenses, closed some of its drug courts and allowed open-air drug markets. Cities and local advocacy groups distribute needles to the homeless and provide free meals. Some shelters welcome pets. California has become a magnet for unstable street people from around the country, and disorder is growing in many cities, including outbreaks of infectious diseases like typhus."

"The state’s budget also includes $1 billion to respond to disasters like the Camp Wildfire, which started from sparks from a power line, killed 85 people in 2018, and forced Pacific Gas & Electric Co. into bankruptcy. State officials blame the fires on climate change, but PG&E and other state utilities have fallen behind on power-grid maintenance while being forced to invest billions in renewable energy mandated by California’s plans to eliminate fossil fuels. A Credit Suisse report estimated that PG&E is locked into renewable energy contracts that are five times the going rate at a cost of $2 billion. Californians already pay 50% more for electricity than the U.S. average."

"From 2014 to 2018 the average cost of teacher pensions more than doubled—to $1,020 a student from $506."

"The Public Policy Institute of California estimates that the state could lose up to $100 billion in revenue over four years from a moderate recession and up to $185 billion in a severe slowdown."

The U.S. Gave Troubled Doctors a Second Chance. Patients Paid the Price.

Indian Health Service hired dozens of physicians with trails of medical mistakes and regulatory sanctions—sometimes to disastrous effect

By Christopher Weaver, Dan Frosch and Lisa Schwartz of The WSJ. Excerpts:

"The federal agency, which provides health care to 2.6 million Native Americans, has given second chances to dozens of doctors with trails of medical mistakes and regulatory sanctions—sometimes to disastrous effect, a Wall Street Journal investigation found."

"The Journal examined 163 malpractice claims against the IHS that the government settled or lost since 2006. One out of four doctors involved in those cases worked for the IHS despite a history that should have raised red flags by the agency’s own standards, the Journal found. At least 66 of the patients died as a result of the alleged malpractice, the analysis found.

Insurance actuaries say U.S. doctors typically have one malpractice claim every 20 years or so. Surgeons and other high-risk specialists have twice that rate. The IHS was willing to hire doctors with many more lawsuits in their past, in some cases more than 10 in less than a decade."

"The Journal found that IHS managers didn’t always make basic inquiries about physicians’ work histories."

"IHS officials hired doctors whom state regulators had punished for transgressions such as drug addiction or sexual misconduct."

"The agency for decades has been criticized by Native Americans and government watchdogs for lax and dangerous care, including by the main U.S. hospital regulator."

"To examine how the IHS screened doctors, the Journal reviewed data from a Treasury Department fund that pays claims against the U.S. government. The Journal then matched those records to federal lawsuits that named 171 doctors—both full-time employees and certain contractors—who plaintiffs alleged were involved in negligent care at the IHS.

At least 44 of those doctors had histories that should have caused concern based on the IHS’s own guidelines, according to medical-board documents, court filings and other records. The guidelines urge managers to screen doctors for multiple past malpractices cases, medical-board sanctions and criminal convictions."

"Because the U.S. government covers malpractice claims, IHS doctors don’t need to carry their own coverage—nor will they pay any settlements out of their own pockets, in most cases. That can make the agency an attractive destination for physicians with past claims."