Macro Roundup

Important Research helps support Rossi-Hansberg findings (that we cited in chapter) that found that the consolidation uptick in fragmented sectors (retail, restaurants, and wholesale distribution) lead to an increase in competition in those sectors.

This Research' core finding, "...Efficient firms in single product markets enter each others’ “home” product markets, thereby increasing aggregate concentration while reducing product level concentration. The model suggests that this process is welfare improving for consumers. While it is possible, or even likely, that multiple forces are at work, this simple model can also explain observed trends in corporate profits..."
This concentration doesn't seem be driving an increase in market power, "However, while we find high concentration levels,we reiterate that we find no evidence that market power has been getting worse over time in any broad-based way. On the contrary, concentration in the most concentrated industries has fallen as fast as the median industry.In our data the number of industries in the “highly concentrated” range fell from 44.4% in 1994 to 36.6% in 2019.This finding is particularly interesting because it contradicts the prevailing popular opinion (Shapiro, 2018). We speculate that popular perception may be driven by a few prominent large firms, such as Facebook, Apple, Amazon, and Google, which have grown enormously in recent years, as well as high profile mergers in industries such as hospitals (Gaynor, 2018) and airlines..."
Core of paper, "...uses new data to reexamine trends in concentration in U.S. markets from 1994 to 2019. The paper’s main contribution is to construct concentration measures that reflect narrowly defined consumption-based product markets, as would be defined in an antitrust setting, while accounting for cross-brand ownership, and to do so over a broad range of consumer goods and services. Our findings differ substantially from well established results using production data. We find that 42.2% of the industries in our sample are “highly concentrated” as defined by the U.S. Horizontal Merger Guidelines, which is much higher than previous results. Also in contrast with the previous literature,we find that product market concentration has been decreasing since 1994. This finding holds at the national level and also when product markets are defined locally in 29 state groups. We find increasing concentration once markets are aggregated to a broader sector level. We argue that these two diverging trends are best explained by a simple theoretical model based on Melitz and Ottaviano (2008), in which the costs of a firm supplying adjacent geographic or product markets falls over time, and efficient firms enter each others’ home product markets...."
Some individual findings, "... Figure 1 presents the median HHI concentration measure over time for four market definitions that differ in their level of geographic and product aggregation. Our central finding is that we document a decrease in median product market concentration across a broad range of goods and services since 1994. This result lies in distinct contrast to the findings from production data in the Census. The level of concentration is higher when accounting for the geographic location of consumers in 29 state-groups, but decreases at a similar rate to national concentration. The latter result confirms the main finding in Rossi-Hansberg, Sarte and Trachter (2020), who show that local market concentration has decreased in the establishment data from NETS. However, Rossi-Hansberg, Sarte and Trachter (2020) find increased national concentration in the NETS data even for the most narrow industry classifications, in contrast to our findings. When product markets are aggregated into broader sectors, our findings reverse: we find increases in concentration over time. After accounting for geographic location at the state level, the rise in concentration at the sector level is small. We find little evidence of firms entering adjacent geographies, as can be seen by the fact that the trends in local and national HHIs are nearly identical. Instead, the joint finding of rising sector concentration and decreasing product market concentration implies that firms are expanding into adjacent product markets within the same sector. Our sector level measurements are more consistent with the results in existing work using establishment-level data, likely because the sector level of market aggregation matches the establishment data more closely. While we find broad-based decreases in concentration over time, using our market definitions, concentration levels are much higher than in the establishment-level data. In our data the median HHI over all periods is 2180, with 42.2% of industries having an HHI above 2500, the level that is considered “highly concentrated” in the U.S. Horizontal Merger Guidelines. Thus, using this (admittedly too simple) antitrust screen, our data suggests that market power is potentially much higher than previously thought in a large fraction of U.S. product markets. Applying the same simple antitrust screen to the Census data would lead to the opposite conclusion that market power is generally low in U.S. product markets. Autor et al. (2020) report average HHIs from the Census ranging from a low of about 85 in the Services sector in 1987 to a high of 950 in manufacturing in 2007. Even the stricter pre-2010 merger guidelines labeled all of these as “unconcentrated”...."

, “…What you won't hear from progressives is that the same can be said for all the other income groups other than taxpayers earnings less than $50,000,clearly showing that there are fewer low-income tax filers! Their headcount has dropped 6.1 million since they peaked at a record 95.0 million during 2011.Since 2009, the number of returns filed by taxpayers with AGI of $50,000-$100,000 rose 5.0 million, $100,000-$200,000 rose 7.6 million, and $200,000-$500,000 rose 3.7 million….”

The IRS data show the following declines in the average tax rates (based on AGI) for the following income groups:

$0-$50,000 (down 0.1ppt from 0.7% to 0.6%)

$50,000-$100,000 (down 1.4ppt from 8.9% to 7.5%)

$100,000-$200,000 (down 1.5ppt from 12.6% to 11.1%)

$200,000-$500,000 (down 2.6ppt from 19.2% to 16.6%)

$500,000 and over (down 1.4ppt from 26.7% to 25.3%)

(6) Three cheers for the Five Percent! These numbers suggest that the biggest winners were in the $200,000-$500,000 AGI group, accounting for 4.5% of all tax returns in 2018. They aren’t in the One Percent. They are in the “Five Percent,” the upper middle class with many of them owning their own businesses, which tend to employ lots of people. Arguably, their tax break provided them with more cash to expand their businesses, which certainly explains why the labor market was so strong in 2018 and 2019.

The Biden administration has pledged that the tax increases it intends to enact will only hit taxpayers earning more than $400,000 per year. The problem is that lots of these people tend to have their own businesses. The latest data available show there were just under 32 million pass-through businesses in 2013, almost 20 times the number of C corporations. There are surely many more such proprietorships today. An increase in their tax bills reduces the cash that they have to invest in growing their businesses. One way or another, a tax increase on them will hurt the wages and employment opportunities of lots of people earning much less than $400,000. Tax increases on the rich inevitably trickle down to the rest of us.

But at least there will surely be more income equality.

(4) Taxing math. To repeat, during 2018 the One Percent reported $2.5 trillion in AGI, which accounted for 21.7% of total AGI. They paid $639 billion in income taxes, which was 25.3% of their AGI but accounted for 41.5% of total income taxes paid to the IRS.

I’m sure there are plenty of progressives who believe that the One Percent should pay at least 50% of their AGI in income taxes. That would have amounted to an extra $600 billion in their tax bill for a total of $1.25 trillion in 2018. Total tax revenues would have been $2.1 trillion, with the One Percent’s fairer share of that at 60%. There would have been plenty more tax revenues for the government to spend and redistribute.

So let’s tax the rich much more! But if their fair share is raised again and again by the progressives, what will we do when the rich are all gone?

(5) Trumped. By the way, we can slice and dice the IRS data to see how President Trump’s tax reform affected individual income tax receipts during 2018 compared to 2017, i.e., before and after tax reform. The law retained the old structure of seven individual income tax brackets, but in most cases, it lowered the rates. The top rate fell from 39.6% to 37.0%, while the 33% bracket dropped to 32%, the 28% bracket to 24%, the 25% bracket to 22%, and the 15% bracket to 12%. The lowest bracket remained at 10%, and the 35% bracket was also unchanged.

The number of tax returns increased 0.6% from 152.9 million to 153.8 million, while AGI rose 5.7% to $11.64 trillion (Fig. 7 and Fig. 8). Total individual income taxes paid fell 4.3% to $1.54 trillion as the average tax rate fell from 14.6% during 2017 to 13.2% during 2018, which was the lowest since 13.1% during 2012 (Fig. 9 and Fig. 10).

Not so fast, Robespierre.

(3) Taxes. Collectively, during 2018, the One Percent paid $639 billion in income taxes, or 25.3% of their AGI (Fig. 4 and Fig. 5). That amount represented a record 41.5% of the $1.54 trillion in federal income taxes paid by all taxpayers (Fig. 6). That’s up from 29.8% in 2009. Meanwhile, the rest of us working stiffs, the “Ninety-Nine Percent,” picked up only 58.5% of the total tax bill during 2018.

Edward Yardeni, "The One Percent: Off With Their Heads!,"Yardeni Research, May 4, 2021, http://blog.yardeni.com/2021/05/the-one-percent-off-with-their-heads.html The One Percent: Off With Their Heads!

Socialists promote policies that they claim will lead to greater income equality. History shows that most countries that have embraced socialism have achieved income equality: Almost everyone is poorer than before socialism was imposed on them for their own good. Purchasing power is depressed for most people, and the quality of the goods and services they can purchase is poorer too.

Socialists often declare that the rich don't pay their “fair share” of taxes and must pay more so that the proceeds can be redistributed to boost the incomes of the poor. The problem is that the fair share that the rich must pay never seems to be enough. Higher and higher taxes on the rich result in fewer and fewer of them. Eventually, the only fat cats left are the socialist elites, who always get richer as most of the rich in the private sector get poorer. Needless to say, the poor also get poorer as a result.

In the US today, progressive politicians claim that the “One Percent” of taxpayers are compensated too much and don't pay their fair share of taxes. It's hard to deny that a few CEOs, especially the ones heading up technology and financial companies, get paid too much relative to the pay of their workers. Many professional athletes and Hollywood celebrities earn even more than top-paid CEOs. So the progressives could be right, but let’s see what the latest available data through 2018 show:

(1) Number of tax returns. The total number of all the tycoons on Wall Street, in Silicon Valley, in Hollywood, and on the playing fields—including everyone with adjusted gross income (AGI) exceeding $500,000 a year—was 1.65 million taxpayers in 2018, exactly 1.1% of the 153.8 million taxpayers who filed individual income tax returns that year, according to the latest available data from the Internal Revenue Service (IRS) (Fig. 1). Adjusted gross income is income from all sources before subtracting deductions and exemptions.

(2) Adjusted gross income. During 2018, AGI in the US totaled $11.6 trillion. The AGI of the One Percent was $2.5 trillion during 2018, accounting for 21.7% of the total, up from 13.9% during 2009 and exceeding the previous high of 21.7% during 2007 (Fig. 2 and Fig. 3). Over that same period, the share of taxpayers reporting less than $100,000 in AGI fell from 50.7% to 36.6% of total AGI.

Paul Krugman, "Return of the Family Values Zombie" Krugman Wonks Out, July 26, 2021, hhttps://www.nytimes.com/2021/07/26/opinion/child-tax-credit-family-values.html

Tyler CowenComment:“Career earnings growth in the U.S. more than doubled between 1960 and 2017, and the age of peak earnings increased from the late 30s to the mid-50s. I show that a substantial share of this shift is explained by increased employment in decision-intensive occupations, which have longer and more gradual periods of earnings growth…Experience takes longer to accumulate in high variance, non-routine jobs.”

His takeaways from the data, “…The model yields insights about the likely impact of machine learning and artificial intelligence, which are fundamentally prediction technologies…These technologies will be more effective substitutes for human labor as data quality increases, and their impact is potentially larger in occupations where work experience has previously been more important.This paper connects to a growing literature on the economics of data, which emphasizes the value of data as an input into prediction that reduces firm uncertainty but has diminishing returns…This paper also contributes to our understanding of how human capital increases earnings.,,,a standard approach assumes that human capital augments effective units of labor in a production function, so that workers with more schooling or higher ability can produce more output per hour. This paper is related to an older literature showing that human capital can increase allocative efficiency, especially in agriculture, where educated farmers are more likely to adopt new technologies….The model nests the standard productive human capital model as a special case, and integrates productive and allocative human capital together into a unified framework. Finally, it explains how behavioral decision-making errors affect worker productivity and connects to the idea….that human capital improves one’s ability to adapt to change…The third contribution of this paper is to the macroeconomics literature on educational investment and life-cycle wage growth. It is well-known that educated workers have steeper age-earnings profiles, yet the role of occupations is less well understood…The model provides a microfoundation for the learning-by-doing (LBD) model in macroeconomics and helps explain why on-the-job learning and thus wage growth might differ across occupations and countries…Jobs that allow for more worker decision-making facilitate human capital accumulation on the job, which has important implications for wage subsidy policies and for optimal taxation over the life-cycle…Machines increasingly replace people in routine job tasks. The remaining tasks require workers to make open-ended decisions and to have “soft” skills such as problem-solving, critical thinking and adaptability. This paper documents growing demand for decision making and explores the consequences for life-cycle earnings. Career earnings growth in the U.S. more than doubled between 1960 and 2017, and the age of peak earnings increased from the late 30s to the mid-50s. I show that a substantial share of this shift is explained by increased employment in decision-intensive occupations, which have longer and more gradual periods of earnings growth. To understand these patterns, I develop a model that nests decision-making in a standard human capital framework. Workers predict the output of uncertain, context-dependent actions. Experience reduces prediction error, improving a worker’s ability to adapt using data from similar decisions they have made in the past. Experience takes longer to accumulate in high variance, non-routine jobs. I test the predictions of the model using data from the three waves of the NLS. Life-cycle wage growth in decision-intensive occupations has increased over time, and it has increased relatively more for highly-skilled workers.

David J. Deming, "The Growing Importance of Decision-Making on the Job," National Bureau Of Economic Research, April 2021, https://www.nber.org/papers/w28733

The Evidence:

His primary takeaway, “…Career earnings growth in the U.S. more than doubled between 1960 and 2017, andthe age of peak earnings increased from the late 30s to the mid-50s. I show that a substantial share of this shift is explained by increased employment in decision-intensive occupations,which have longer and more gradual periods of earnings growth. To understand these patterns, I develop a model that nests decision-making in a standard human capital framework. Workers predict the output of uncertain, context-dependent actions. Experience reduces prediction error, improving a worker’s ability to adapt using data from similar decisions they have made in the past. Experience takes longer to accumulate in high variance, non-routine jobs…In 1960, earnings of full-time workers peaked in the late 30s, compared to the mid-50s today, and the magnitude of life-cycle earnings growth has more than doubled over this period…

How this has impact wages, “…Figure 5 shows how life-cycle earnings growth in the U.S. has changed over the past sixty years….I group respondents in the 1960, 1980 and 2000 Censuses and the 2007-2009 and 2016-2018 ACS into five-year age bins and estimate log earnings differences relative to the age 20-24 group, controlling for year fixed effects. Age-earnings profiles in the U.S. in 1960 are similar to what Lagakos et al. (2018) find for Mexico over the 1990-2010 period. Earnings growth peaks at about 40 percent when workers are in their late thirties and early forties. This peak is followed by a gradual decline of about 10 percentage points over the next twenty years of age. The 1980 profile is shifted upward, with a peak around 50 percent, but is otherwise similar to 1960. By 2000, U.S. age earnings profiles had shifted outward dramatically, with a higher peak that occurs much later in the life-cycle. In 2000, full-time workers age 50-54 earned about 90 percent more than full-time workers age 20-24. In 2017, earnings growth peaked at nearly 100 percent and workers age 55-59 were earning substantially more than workers in their 30s….”

He first documents those three important facts, “…The rising importance of decision-making can be seen in the rapid growth of management jobs in the U.S. over the last half-century. Figure 1 shows that the total wage bill paid to management and management-related occupations in the U.S. has more than doubled since 1960, from 15 percent to 32 percent. This trend incorporates both increasing employment growth and rising relative wages,is more pronounced in the private sector and in high-growth industries, and is not driven by growth in top-end executive pay…. Figure 2 shows the rising importance of decision-making across the entire U.S. economy, using job vacancy data to directly measure employer skill demands. I combine data from Atalay et al. (2020) and from Burning Glass Technologies (BGT), covering the 1960-2000 and 2007-2019 periods respectively, and I use the actual text of job ads to form a consistent definition of decision-making over time.4 To ensure representativeness, I weight the job ad data by the actual distribution of occupations in each year.5Figure 2 shows that the share of all jobs requiring decision-making increased from 6 percent in 1960 to 34 percent in 2018, with nearly half of the increase occurring just since 2007.The grey lines show the same trend but controlling for occupation fixed effects, which diminishes the impact only slightly, implying that most of the shift toward decision-making is occurring within rather than between occupations. Excluding management occupations diminishes the growth in Figure 2 only slightly, suggesting that growing demand for worker decision-making is an economy-wide phenomenon….”

Important Research from David Demings (we will likely cite this) suggests supervision is a limiting constraint. He highlights that the employment share of jobs that require decision making (like mangers) has increased significantly since 1960. Using managers as an example the share of all wages paid to managers has increased by more than 2x, from 15 percent to 33 percent driven by the private sector (this is not driven by executive comp). During that same ~ period the share of jobs requiring decision making increased from 6% in 1960 to 34% in 2018. This has lead to an uptick in the age of peak earnings as management requires experience.