Intangible Capital: Interview with Jonathan Haskel and Stian Westlake

Janet Bush of the McKinsey Global Institute interviews Jonathan Haskel and Stian Westlake in “Forward Thinking on the transformative role of intangible assets in companies and economies” (January 12, 2022). As they point out, there can be a tendency to view “intangible capital” as synonymous with databases and software. The interviewees are at some pains to argue that they view the term as being much broader, including aspects of organizational competence, reputation, reliability of supply chains, brand names, and more.

Haskel says:

One of the examples that we try to use in the book … is Les Mills gyms. Now, this is not a tech company, but turns out to be a deeply intangible economy. For those of the listeners who may not be familiar with this, they are the people who are in charge of the exercise class and the exercise routine on Body Pump, which is one of the most popular routines. …

What’s so interesting about it is it’s not a giant firm, housed somewhere-or-other in Silicon Valley in California. It’s actually the outgrowth of a New Zealand company. Les Mills was a famous New Zealand athlete. And rather than owning a gym itself, which would be a very tangible thing, a building, and owning all of the exercise machines and so forth in that building, which would also be very tangible, that would be, as it were, plant and equipment, if I were an accountant looking at all that kind of stuff, what Les Mills owns is literally none of that. Instead, it owns lots of intangibles. It owns the reputation and the brand of Body Pump. It owns the software and the ability to put out these exercises to any exercise class you happen to be in the world.

For those of you who aren’t familiar, you go into the exercise class, so that’s the tangible bit, but then the software downloads the stuff on the screen, and there’s music. And it’s absolutely brilliant. And it owns also the kind of know-how and the relationships that Stian was talking about earlier on, about negotiating with the music companies and so forth to get the rights and so forth to play all the music. So as I said, it’s not a tech company. And in a sense, it’s not a new company, because we’ve had gyms for a very long period of time. But it is a deeply intangible economy. And we thought that therefore we wanted to capture why that was a new feature of our economic makeup.”

Here’s another example from Haskel:

The example that we use a lot is an example I ask my students all the time. I ask them, especially foreign students, to name Britain’s most famous innovation. And after lots of thinking, radar, hovercrafts, you know, all that kind of thing, I tell them what the answer is, which is completely obvious once you think about it. It’s the one British innovation that even people on remote planets have heard of, and that is, of course, Harry Potter. And the point about Harry Potter is that it exhibits the scale and the synergies that Stian was just talking about. Once you’ve written the script, you can print millions of books. Once you’ve written the script, you can make the movie, you can bring in the software that makes all the fantastic animation. You can make the theatrical production and all those synergies.

Westlake describes the human side of intangible capital this way:

I suppose the way we and other economists would define intangibles, first of all, the thing’s got to be an asset. It’s got to be something that lasts for a period of time, typically more than a year. It’s got to deliver a lasting benefit to the business that makes it. And it’s got to have some up-front cost to acquire or develop it. All of that is what you’d expect accounting bots to define. … It includes things like R&D or custom software, tech elements. …

[T]here are some of these things which are much less tech-related and much more related to human elements. So organizational development, if we look at, say, the investment that organizations make to become high-performing companies or the investments they make to develop their supply chains where those supply chains are durable and develop the benefit. Those are intangible assets, because they fit all those criteria of assets. And they’re not physical things. Those things are—although sometimes people talk about the knowledge economy and imply that it’s a synonym—those aren’t really knowledge assets. They are more emotional. They are more human. And those things are, if we look at really high-performing companies at the moment, they typically will have a bunch of really valuable intangibles. …

William Blake talked about the dark Satanic mills, these inhuman pieces of tangible capital. Intangible capital is in some ways about what makes us human. It’s about ideas, and it’s about relationships. It’s about expressiveness. Some people may think, should we be making that the basis of the economy? But we would argue this is actually making those things that matter to us as humans more central to our thriving.

There are also interesting discussions of how intangibles can often be expanded to greater scale or to synergies, why it may be hard for a conventional finance system to put money behind intangible capital, why intangible capital may widen the gap between industry leaders and laggards, and why firms that succeed because of intangible capital may be harder for new entrants to dislodge, and much else.

Dangers of High Global Debt

“The world economy today is characterised by a larger quantity of debt, relative to its level of income, than at any time in recorded history. … In the advanced economies, the average total debt of the household, business and government sectors has grown steadily and now exceeds 250% of GDP. In the emerging markets, the same average has risen more quickly in recent years and now stands at about 150% of GDP. The world is therefore highly levered in terms of its overall debt-to-income ratio … The economic dislocations caused by the Covid-19 pandemic have jolted debt ratios even higher, raising even more concerns about future debt burdens and their potential dangers, but in many respects this crisis has only served to accelerate preexisting debt trends.”

These are some of the opening comments from Laurence Boone, Joachim Fels, Òscar Jordà,
Moritz Schularick and Alan M. Taylor in their report “Debt: The Eye of the Storm”
(Geneva Reports on the World Economy 24, Centre for Economic Policy Research, 2022). Here’s a figure showing the patterns. It’s interesting to note that in advanced economies, business debt exceeded government debt in 1980 and 2000, but now government debt has taken the lead. However, in the emerging market economies, government debt used to be the highest category, while business debt has now by far taken the lead.

Another change is the rise in cross-border debt claims:

In 1970, cross-border debt claims represented much less than 100% of GDP in most advanced and emerging market economies. These ratios more than doubled in almost all advanced economies by 2015 and drifted up by almost as much in most emerging markets. Notable outliers include major financial centres such as the United Kingdom and the Netherlands, where not all liabilities are of resident end-debtors, and heavily debt-laden Greece, which is now classified as an emerging market. We can thus see that over time, the ever-larger debt stocks in the world have not just landed in the hands of other domestic creditors but have also increasingly been absorbed in the portfolios of overseas creditors, another trend which also now stands at an historically high level.

A central insight of the argument is that the quantity of debt is rising at the same time that the price of debt–the interest rate–has been falling. That combination of a higher quantity and a lower price is a giveaway that the effects are being driven by an increase in supply: in this case, a rise in the global supply of savings: “These data have persuaded most economists that the savings glut is the key global macroeconomic story of our times. To a first approximation, the urge of creditors to acquire more and more debt has outpaced any shifts in borrowers’ desire to issue debt, leading to a shifting credit market equilibrium with ever-higher quantities of debt and ever lower real interest rates.”

The authors argue that the rise in global saving can be accounted for by three overlapping factors. Global populations have aged, and the middle-aged and elderly tend to have more saving than young. Inequality of incomes has risen around the world, and those with higher incomes tend to save a greater share of income. And a rise in saving in certain parts of the world (for example, think Japan and China) has driven higher cross-border debt flows. They go through detailed discussion of household, corporate, and public-sector debt.

Overall, how much should this rise in debt be feared? Perhaps unexpectedly, these authors argue that the combination of high saving, high debt, and low interest rates seems fairly sustainable. They write in the conclusion:

In sum, the picture that this report paints is one of cautious and perhaps unexpected optimism. As long as credit supply remains plentiful relative to debt issuance, and thus
interest rates remain low, higher levels of debt are sustainable. We are not blind to the
challenges policymakers will have to face. Nor are we blind to the possibility, in a world
awash with debt, that negative shocks will generate more bouts of instability, which will
inevitably spill over onto innocent bystanders in a globalised economy. However, the
trends behind the oversupply of credit will likely continue for a long time. Debt should
not be ignored. But neither should it be feared.

The authors do suggest that there will be areas of excessive corporate and household borrowing, but this has always been true from time to time. The main concern they point out is public debt:

Arguably the greatest challenge will be the management of public debt in the years to come. … The levels remain manageable in most countries, not least given current interest rates. However, the legacy debts from two big crises within the last 10 to 15 years, in some cases decades of mismanagement of public spending, and the substantial burdens of public spending anticipated by governments in the years to come make the medium-term challenges appear enormous. Countries need to maintain the necessary fiscal space to manage future shocks while at the same time financing the transition to greener economies as well as the pension and health demands of ageing populations. As long as interest rates stay low and growth returns to a healthy pace, scenarios are possible where these new demands on public spending can be met while stabilising the public debt-to-GDP trajectory.

You can decide for yourself how much comfort to take from the “if this, then scenarios are possible” kind of thinking.

The report also emphasizes that the large global economy most exposed to debt concerns is probably China. The rise in debt in China has been particularly striking.

Even for China, the report suggests that while certain sectors like real estate developer loans are clearly under stress, an overall “hot” financial crisis seems unlikely. One reason is that China’s high debt also reflects high domestic savings in China: thus, the outflow of international capital that has caused such problems for other indebted economies will not be a problem in China. Another reason is that so much of China’s debt is, in one way or another, state-owned. The report notes about debt in China:

“[State-owned enterprise] debt is thus close to 100% of GDP. In addition, central government and local government debt together account for close to 70% of GDP. Meanwhile, the lenders to SOEs, highly indebted local governments and quasi-fiscal local government investment vehicles are banks that are directly or indirectly controlled by regulators and hence the government. This implies that ‘extend and pretend’, controlled defaults and gradual recognition of non-performing loans (NPLs) are the norm, rather than large-scale
sudden lending stops.”

In other words, China’s debt is a real problem, but China has policy tools to avoid a meltdown. My own sense is that this is a report where one does well to consider the caveats: if saving rates stay high, if interest rates stay low, if growth recovers from the pandemic shock, if most of the borrowing has been done wisely, if policymakers response to localized debt issues appropriately as they arise, if no major global events require a surge of new borrowing–then the current levels of debt can work out fine. When the number of “ifs” exceeds two or three, I tend to worry.

Global Plastics

I’m confident that plastic waste in the environment is not a good thing, but I confess that in my personal list of things to worry about–economic, environmental, hot war in Europe–I’m not sure how high to rank the issue. For background, the OECD has just published “Global Plastics Outlook: Economic Drivers, Environmental Impacts and Policy Options” (February 2022, freely readable online, although you need to pay for a PDF or hard copy).

The report points out at the start that the benefits of plastics are also the source of the environmental concerns:

The first manufactured plastic, Parkesine, was developed from cellulose in the mid-19th century and found applications as a clothing waterproofer and as synthetic ivory. Almost half a century later, Bakelite became the first truly synthetic plastic to be developed. However, it was not until 1950 that global plastics production began its unprecedented growth, which has seen it expand 230-fold to the present day. The rapid growth of plastics is due to their unique properties: high strength-to-weight ratio, high moldability, impermeability to liquids, resistance to physical and chemical degradation, and low cost. They can easily substitute for other materials (such as glass, metal, wood and natural fibres) in a wide range of applications.
However, some of the desirable qualities of plastics are also their key limitations. Plastics are highly resistant to physical and chemical degradation, which also means that they can persist as waste in the environment for decades or even centuries.

Use of plastics has been rising substantially, as has plastic waste.

Globally, the annual production of plastics has doubled, soaring from 234 million tonnes (Mt) in 2000 to 460 Mt in 2019. Plastic waste has more than doubled, from 156 Mt in 2000 to 353 Mt in 2019. After taking into account losses during recycling, only 9% of plastic waste was ultimately recycled, while 19% was incinerated and almost 50% went to sanitary landfills. The remaining 22% was disposed of in uncontrolled dumpsites, burned in open pits or leaked into the environment. … Almost two-thirds of all plastic waste comes from applications with lifespans of less than five years: packaging (40%), consumer products (12%) and textiles (11%). Only 55 Mt of this waste was collected for recycling, but 22 Mt ended up as a recycling residue that needed further disposal.

How bad is plastic waste for the environment? The main focus of the OECD report is on tracking and forecasting production and waste flows of plastic around the world, and the report devotes relatively little space to this issue. Indeed, the report is forthright that the existing knowledge on environmental/health costs of plastic still has real gaps: “A major challenge posed by plastics in the environment is the considerable uncertainty about the magnitude of the damage. Firstly, there are still important gaps in the current understanding of the plastic health-biosphere links. Secondly, there are important uncertainties surrounding the quantities of plastics entering the environment and their accumulation.”

With that reality duly noted, here’s a sample of the concerns and evidence from the report:

In aquatic environments, the most visible negative effects on marine wildlife are the entanglement of marine organisms in floating plastic debris and increased mortality following the ingestion of macro and microplastics by marine species such as mussels, turtles, fish and sea birds. At least 690 wildlife species, as well as coral reefs, are known to be affected (Gall and Thompson, 2015[65]). However, the negative consequences of plastics extend beyond these first order impacts. Microplastics have been documented in the digestive tract of several types of mussels and fish destined for human consumption (Lusher, Hollman and Mendoza-Hill, 2017[66]). Thus, the ingestion of seafood contaminated with microplastics has
also been identified as a potentially substantial exposure pathway for humans.

Microplastic contamination is not exclusive to marine environments – it has also been documented in freshwater and terrestrial environments, as well as in food and beverages, such as tap water, bottled water and beer (Kosuth, Mason and Wattenberg, 2018[67]; Mintenig et al., 2019[68]). Humans are also exposed to microplastics by inhaling airborne particles and fibres, and microplastics have been reported both in indoor and outdoor environments (Gasperi et al., 2017[69]; Allen et al., 2019[61]). The main studies of human health impacts of airborne microplastics have looked at exposure to non-exhaust road traffic emissions

Plastics may also act as a sink and transportation media for chemicals and persistent organic pollutants (POPs), which accumulate on the surface of plastics while in seawater. Adsorbed chemicals found on sampled plastic debris include PCBs, PAHs, DDE (a breakdown product of DDT) and trace metals (Engler, 2012[70]; Teuten et al., 2007[71]). Plastic fragmentation may enhance leaching of chemical substances to the surrounding environment. Nanoplastics are of particular concern because their small size allows them to potentially be transferred to tissues or cells (SAPEA, 2019[72]).

Furthermore, marine plastic leakage has substantial economic costs for coastal communities due to potential negative impacts on fishing and tourism. Plastics can affect the sustainability of fisheries, while plastic leakage on beaches deters visitors, causing financial distress to local communities reliant on tourism. Beaumont et al. (2019[73]) estimate the economic costs of the loss of marine ecosystem services to be around USD 3 300 per tonne of marine plastic per year.

None of this is good, of course, and it certainly makes a prima facie case for focusing on some ways to reduce plastic waste. But the reader will also notice that evidence on the spread of plastic waste is more clear than evidence on harms to the size or health of marine populations, or to human health. And of course, substituting other materials for plastics or recycling plastics has costs, too.

The report discusses various options, like developments in recycling. I was discouraged to learn that efforts to create plastics which biodegrade naturally, which seemed relatively promising to me a few years ago, have not gained much traction and now seem to be faltering.

Biodegradable plastics gained some popularity with the idea they would degrade in the natural environment into carbon dioxide, water and biomass. They are currently used for packaging, agriculture, horticulture, textiles and consumer goods. Global production capacities of biodegradable plastics was 1.2 Mt in 2019 or less than 0.3% of total plastics (Crevel, 2016[4]; European Bioplastics, 2019[5]). Innovation in biodegradable plastics, measured by the number of patented inventions, doubled between 1995 and 2017. Between 2013 and 2017, 228 patent families for biodegradable plastics were granted every year (Dussaux and Agrawala, forthcoming[2]). However, since 2013, the speed of innovation has
slowed down, probably because the environmental impact of compostable plastics has become controversial due to the issues related to biodegradation in natural environments

The concerns over biodegradable plastics seem to come in two forms. One is that biodegrading requires certain conditions, which often aren’t present: “Biodegradation also requires optimal conditions, such as the concentration of enzymes, strains of microorganisms, temperature, pH value, humidity, oxygen supply and light. These optimal conditions are rarely present in natural environments …” In other words, when you put “biodegradable” plastics in landfill, they don’t actually break down. The other issue is that some biodegradable plastics have extra ingredients added, like certain metals, to help the breakdown process–but the metals themselves can be a source of environmental concerns, too.

For some previous posts on plastics, see:

Interview with Emi Nakamura: All Things Macro

Noah Smith serves as interlocutor in an insightful interview with Emi Nakamura (“Interview: Emi Nakamura, macroeconomist,” Noahpinion, February 21, 2022). The interview isn’t overlong and should probably be read in full. But here are a couple of tastes:

On Why Inflation Has Risen

The recent increase in inflation is much more than historical experience would have predicted (which is about an increase in inflation of 1/3% for every 1% decrease in unemployment). I think several factors have been important. 

First, after a long hiatus from playing a major role in inflation, supply shocks are back! The most dramatic of these is the disruptions to the labor market. US labor force participation is down by roughly 1.5%, and so far the decline is pretty persistent. And the shocks to labor supply go far beyond that: many workers are out sick, or quarantined (or are at risk of this). … There have also been other important supply shocks: it’s more expensive to operate a daycare or a factory than it used to be due to safety restrictions due to COVID. It used to be hard to come up with good examples of negative supply shocks in teaching undergraduate economics classes, but COVID certainly counts as one!

Second, there has been a historic shift in demand from services to goods. In the Great Recession, the fraction of expenditures spent on goods fell. The opposite happened during COVID: the fraction of spending on goods rose pretty dramatically. This is another tectonic shift in the economy that I think is putting enormous pressure on supply chains among other things. Many more people are working from home, and they all need computers, and the semi-conductors needed to build those computers. All those goods have to be shipped to the United States and to people’s houses. This is a supply “pressure” but not really a “supply shock” because its ultimate cause is an increase in demand (at least for certain kinds of goods). But a recent Jackson Hole paper points out that secular shifts in demand can lead to the same inflationary pressures as supply shocks. …

Third, there has been a very rapid recovery and a lot of government support for spending. Households have a huge buildup in savings, and spending this down is no doubt contributing to demand.  …

One graph that strikes me as interesting in assessing the role of these different factors is this one. This graph shows the inflation rate for the shelter and non-shelter components of the CPI [Consumer Price Index] along with the unemployment rate. I graphed these series back to 1990 because that’s roughly when long-run inflation expectations started to stabilize in the US. Here you see very clearly the fact that the shelter component of the CPI is quite cyclical, whereas the non-shelter component is much more volatile (for example, the big commodity-driven fluctuations in 2008). Even during the COVID period, the shelter component of the CPI has a reasonably stable relationship versus the unemployment rate whereas the non-shelter component has increased pretty dramatically. It’s important to recognize that the shelter component of the CPI in the US is based on rental costs: so this isn’t exposed to either supply chains or labor market shortages. So one interpretation of this graph is that it suggests a big role for the first two factors I emphasized, as opposed to only conventional aggregate demand factors. However, some are predicting a big catch-up in rent inflation soon, and perhaps some of these patterns also have to do with demand shifts related to housing. We have to be humble in extrapolating past relationships to the present given the fundamental shifts that COVID has imposed on the economy.

One thing that hasn’t contributed much to inflation so far is an unhinging of longer run inflation expectations. Both survey and market-based measures of longer run inflation expectations look pretty stable … There has been a notable uptick in longer run inflation expectations in the very recent past, but so far it is small. It’s one of the Fed’s primary goals these days to keep it that way. 

Question Assumptions

When I was an undergraduate at Princeton, I remember sitting in the office of one of my advisors, Bo Honore, and pondering the sign he had on the wall: “Question Assumptions.” When I came for my job interview at Berkeley a few years ago, I was sitting in the office of the department chair at the time, Jim Powell. I looked up and saw exactly the same sign: “Question Assumptions.” After recovering from the deja vu, I learned that the sign was acquired from a counterculture hippie when Bo and Jim were strolling around downtown Berkeley. I’m pretty sure the sign wasn’t originally intended as research advice for aspiring economists, but I still think of this as some of the best advice I’ve gotten, and some of the best advice to pass on.

The interview also includes some discussion of how Nakamura thinks about doing empirical macroeconomics, and in particular the role of using microeconomic data to help discipline and guide macroeconomic models. Some of the discussion draws up on an article by Nakamura and Jón Steinsson in the Summer 2018 issue of the Journal of Economic Perspectives,  “Identification in Macroeconomics.” 

The Docility and Groupthink of Academics

Irina Dumitrescu, a professor of English and medieval studies at the University of Bonn, offers some thoughts about the incentives for academics not to rock the boat in “The Frenzied Folly of Professorial Groupthink” (Chronicle of Higher Education, February 16, 2022).

North American academic culture (especially in the humanities) thrives on revolutionary rhetoric: Its stars are those who can think in new ways, intellectual radicals ready to overthrow past orthodoxies. It would seem to follow that the more successful a scholar becomes, the more capable they are of breaking away from the herd. The opposite is true. Years of apprenticeship and evaluation on the way to a tenured position, along with the extended emotional adolescence this experience fosters, render academics docile. We learn to anticipate the reactions our superiors will have to our work, our teaching, even to the way we spend our free time. We learn to ward off potential criticism, especially from those whose scholarly work intersects with our own, since it is their opinions that will count the most for continued employment. We rebel only in ways we know will be palatable to a substantial cohort of our peers. True iconoclasts have a tendency of finding their way to the door.

It would be hard to prove it, but I suspect that academe’s inclination toward groupthink has been made worse by a series of developments in the past decades. The collapse of the academic-job market means scholars spend a lengthy amount of time on the defensive. The growth of the grant system in the humanities extends this survival mode beyond tenure, since peers review grant applications and can use that influence to pursue their political ends and settle personal scores.

The most powerful factor, however, is social media. Scholars who might have presented themselves to their field only a few times a year at conferences now spend enormous amounts of energy crafting and maintaining public profiles, some of which are visible to the entire world. The marriage of social media and university life is not always a happy one. Academe used to have spaces that were primarily devoted to experimentation: The classroom and the conference allowed people to try out new ideas, face opposition (friendly or not), and sharpen arguments accordingly. Now, both classroom instruction and conference presentations can be made available to the general public in real time. Even when well-intended, this immediate translation to the public sphere means that scholars are justifiably anxious about presenting work that is vulnerable to attack. …

Social media can be used to spread news about a new article or book, but also invites immediate commentary. I have seen scholars tearing apart a colleague’s book online right after publication, before they could have had time even to read the entire work — thus shaping the field’s perception of it long before anyone else had a chance to make up their own mind. Even the harshest reviews used to take a year or two to go to press. The awareness that any intellectual position can be, within minutes, reduced to a flat caricature and widely denounced leads to a reasonable unwillingness to express independent thought.

What is “The Sort of Person Who Has a Position at the University”?

This one-paragraph 1997 short story by Lydia Davis, “A Position at the University,” captures, at least for me, some of the ambivalence involved in identifying myself as an academic–that is, about being “the sort of person who has a position at the university.” Davis wrote:

I think I know what sort of person I am. But then I think, But this stranger will imagine me quite otherwise when he or she hears this or that to my credit, for instance that I have a position at the university: the fact that I have a position at the university will appear to mean that I must be the sort of person who has a position at the university. But then I have to admit, with surprise, that, after all, it is true that I have a position at the university. And if it is true, then perhaps I really am the sort of person you imagine when you hear that a person has a position at the university. But, on the other hand, I know I am not the sort of person I imagine when I hear that a person has a position at the university. Then I see what the problem is: when others describe me this way, they appear to describe me completely, whereas in fact they do not describe me completely, and a complete description of me would include truths that seem quite incompatible with the fact that I have a position at the university.

It was published in her collection of stories, Almost No Memory.

Did Antitrust Really Used to Be So Tough?

There’s a current argument that the antitrust enforcers at the US Department of Justice and the Federal Trade Commission used to be really tough on big business, at least from the 1940s into maybe the 1970s. But then there was a counterrevolution, often referred to as “Chicago school,” which provided a justification for the legal system to retreat from tough antitrust enforcement, and since then corporate power has run unchecked. This pocket history is far too glib. Brian R. Cheffins provides some relevant background about those supposed good old days of tough antitrust in “History and Turning the Antitrust Page” (Business History Review, Winter 2021, 95:4, pp. 805-821). Here are a few points that occur to me in reading it.

1) As a matter of history, it’s not clear that antitrust enforcement was exceptionally active from the 1940s into the 1970s. Think of some of the giant US companies back around 1970: General Motors, Standard Oil of New Jersey (which was later renamed as Exxon), General Electric, IT&T, US Steel, Dupont, and others. Those firms had been around for a long time, and the antitrust authorities had not broken them up. When I was first learning some economics in high school in the late 1970s, one of the best-selling books was Global Reach: The Power of Multinational Corporations.

In the Business History Review essay, Cheffins points out that back in the 1960s in particular, there were plenty of complaints that antitrust wasn’t nearly strong enough. One prominent example was “Richard Hofstadter’s well-known 1964 essay “What Happened to the Antitrust Movement?” Hofstadter argued that because of `growing public acceptance of the large corporation,’ antitrust was `a faded passion’ that had become `specialized, and bureaucratized.'” The Kennedy and Johnson presidential administrations sometimes talked a big game on antitrust, but didn’t actually do much. Cheffins continues:

Humorist Art Buchwald speculated in a 1966 Washington Post column that by 1978 all corporations west of the Mississippi River would have merged into a single corporation, that the same would have happened east of the Mississippi, and that the two companies wouldsoon be looking to merge so there would be only one corporation in the United States. Those responsible for administering and applying America’s antitrust laws were far from sanguine themselves. Victor Hansen, head of the Antitrust Division from 1956 to 1959, said while in office, “Economic concentration is increasing.” The Wall Street Journal reported in 1961 that “trust-busters are convinced many industries set prices by follow-the-leader techniques.”

2) Much of the active antitrust enforcement of the 1950s and 1960s was focused on “horizontal mergers,” which refers to when two companies in the same industry seek to merge. This is different from “vertical mergers,” where a company buys one of its suppliers; it’s different from conglomerate mergers, where two firms in different industries combine; and it’s also different from when a dominant firm uses anticompetitive behavior to ward off actual or potential competitors. The antitrust authorities did win a lot of horizontal merger cases, but on grounds that look a little silly today.

One of the prominent cases of the time was the 1966 Supreme Court case of United States v. Von’s Grocery Co. (384 U.S. 270). The Supreme Court described the fact pattern in this way:

The market involved here is the retail grocery market in the Los Angeles area. In 1958, Von’s retail sales ranked third in the area, and Shopping Bag’s ranked sixth. In 1960, their sales together were 7.5% of the total two and one-half billion dollars of retail groceries sold in the Los Angeles market each year. For many years before the merger, both companies had enjoyed great success as rapidly growing companies. From 1948 to 1958, the number of Von’s stores in the Los Angeles area practically doubled from 14 to 27, while at the same time, the number of Shopping Bag’s stores jumped from 15 to 34. During that same decade, Von’s sales increased four-fold and its share of the market almost doubled, while Shopping Bag’s sales multiplied seven times and its share of the market tripled. The merger of these two highly successful, expanding and aggressive competitors created the second largest grocery chain in Los Angeles … In addition, the findings of the District Court show that the number of owners operating single stores in the Los Angeles retail grocery market decreased from 5,365 in 1950 to 3,818 in 1961. By 1963, three years after the merger, the number of single store owners had dropped still further to 3,590. During roughly the same period, from 1953 to 1962, the number of chains with two or more grocery stores increased from 96 to 150.

The US District Court had held that when the two firms combined were 7.5% of the market, the merger did not pose an anticompetitive risk. The US Supreme Court overturned this verdict, essentially saying that antitrust law should focus on preserving single-owner grocery stores and that if there was a trend to more concentration, it should be stopped. The possible benefits to consumers of letting popular (and efficient) grocery store chains expand in a modest way barely gets mentioned.

Antitrust enforcement against these kinds of small mergers was highly uneven, and often seemed to depend on underlying political pressures. Moreover, while the antitrust authorities were focusing on small grocery store mergers, the giant firms mentioned earlier mostly went along their merry way. Cheffins writes: “As George David Smith and Davis Dyer maintain in a 1996 essay on the history of the American corporation, `During the 1950s and ’60s, most leading U.S. industrials held their dominant positions in domestic markets without substantial price competition.’ Historian Gabriel Winant agrees, saying, `The postwar years of the 1950s and ’60s were the age of ‘monopoly capitalism,’ as the Marxists then called it, or, less polemically, an era of ‘administered prices.’”

3) The shift in antitrust doctrine in the 1970s had other major causes. For example, the late 1970s under the Carter administration were a time of industry deregulation, often led by such congressional Democrats like Ted Kennedy. The 1970s are also a time when the US economy comes under dramatically more pressure from international competition. Cheffins writes:

In 1991, the Economist focused on foreign competition to explain why America’s trustbusters had become “timid”: “America’s economy is more open today, exposing many big firms to foreign competition. This does not make it impossible for a domestic market to be dominated and then abused, but it is far less likely to happen. If General Motors, Ford and Chrysler were foolish enough to conspire to fix prices, they would quickly lose market share to Toyota, Volkswagen and Hyundai, at home as well as abroad.” The rise of foreign competition dovetailed with the intellectual trends in operation to reshape thinking about antitrust. … The percentage of goods that Americans used that were imported increased from 8 percent in 1969 to 21.2 percent in 1979. By the end of the 1970s, over 70 percent of goods produced in the United States were actively competing with foreign-made goods. As the 1980s got underway, foreign competition had sideswiped various major industries, including apparel, automobiles, footwear, shipbuilding, steel, and televisions. Moreover, concerns were growing that American business was stumbling in response to the challenge foreign firms were posing.

As foreign competition rose, the idea that US firms lacked competition in a way that called for aggressive antitrust enforcement diminished.

4) It’s not obvious that concentration is in fact substantially higher in most industries today than it used to be. It is quite possible to argue that greater antitrust activity might be warranted for some companies like Amazon, Alphabet (formerly Google) Microsoft, Apple, or Facebook (now Meta), or for specific situations like certain mergers between local hospitals, but not to believe that the US economy is dramatically more concentrated than in the past. As one example, Berkeley economics professor Carl Shapiro (who was a member of Council of Economic Advisers and also a Deputy Assistant Attorney General in the Antitrust Division of the US Department of Justice during the Obama administration) has taken a skeptical view of the idea that US industry concentration is up overall, while still advocating for targeted antitrust interventions for certain companies and situations.

5) My own view is that some of the most interesting antitrust actions of the earlier era were not about breaking up large companies, which didn’t much happen, and not about the many efforts to prevent small-scale horizontal mergers. Instead, the antitrust efforts more perhaps more applicable to today were to take a close look at how companies may use intellectual property protection to constrain competition.

As one example, it was fairly common practice in the 1940s and 1950s for the antitrust authorities to require firms to offer “compulsory licenses” to their intellectual property: that is, a firm could not use its intellectual property to shut off potential competitors. Perhaps the best-known case happened in 1956, when Bell Labs signed a consent decree that required it to put all of its patents in the public domain–a step that many industry insiders credit with allowing the birth of the US semiconductor industry. In another prominent case in 1973, antitrust authorities found that the Xerox corporation was using an ever-evolving and ever-expanding array of patents to block entry into the photocopier market. In the context of the giant modern tech companies, a related proposal is that antitrust authorities should beware when large companies buy smaller ones that could have grown into viable competitors.

Just to be clear, there’s no question in my mind that prevailing antitrust doctrine did shift in the 1970s in a direction that was less aggressive. But the ideas that antitrust enforcement of the 1960s was especially active, or that it mostly focused on breaking up big companies, just don’t seem correct. In addition, the shift to less active antitrust was not just an ideological/political lighting bolt from a blue sky, but happened in response to factors like the previous antitrust focus on smallish horizontal mergers and the rise in international competition in the 1970s. The lessons of that earlier time of antitrust regulation are more nuanced, and at least in my view, the most useful lessons for our time are focused on issues related to how competition and mergers interact with intellectual property and potential future competitors.

The Inaccuracy of Inflation Expectations

The question of whether a burst of inflation turn into permanent inflation should depend, at least in part, on expectations about inflation. If workers and firms expect higher inflation, then the workers are more likely to press for higher wages to compensate–and firms are more likely to be amenable to such increases. An inflationary cycle can emerge where expectations of higher inflation lead to more price and wage increases, and those price and wage increases lead to higher inflation.

However, the evidence of the last couple of decades is that people’s expectations of inflation aren’t very accurate. Instead, people’s expectations often react to past rises or falls in inflation after they have happened. John O’Trakoun of the Richmond Fed gives a short overview of the evidence in “Your Attention Please …” (Macro Minute, February 5, 2022). He writes:

Historically, households have not been very good at predicting inflation. Figure 1 below plots the expected one-year inflation rate from the survey against realized Consumer Price Index (CPI) inflation a year later. Since 2007, the correlation between the two measures has been -0.35, which casts doubt on whether this survey tells us much about future inflation at all. But as we explore in this post, consumers’ expectations may now have some additional weight.

Here’s an accompanying figure. The blue line shows people’s expectations of inflation a year into the future. The red dashed line shows what inflation actually happened, but shifted back by 12 months. Thus, the right hand side of the figure shows that about a year ago, people were forecasting inflation of about 3.5% a year in the future; the red line shows that the actual rate of inflation turned out to be more like 7.5%,

There are couple of patterns worth noting in the graph. First, you can see several situations where inflation expectations change in response to earlier movements in inflation–and can end up being completely wrong. For example, the left-hand side of the graph shows how inflation expectations were rising in 2008 at about the same time that actual inflation turned out to be plummeting during the Great Recession. When people tell you what inflation they are “expecting,” it often looks as if they are actually telling you what inflation they recently experienced. Second, you can see that for most of the decade from 2010 to 2020, inflation expectation just didn’t change much, even when actual inflation fell and then rose. A plausible interpretation here is that many people haven’t paid much attention to inflation for the last decade.

Thus, one possibility is that inflation expectations don’t much match inflation when people aren’t much paying attention, and when inflation is fluctuating in a fairly narrow range. But if inflation stays higher for a significant time, in a way that is salient to many people, then the chance that current inflation expectations feeding into future inflation become higher.

The Pandemic as Global Financial Shock: WDR 2022

The World Development Report is an annual flagship report of the World Bank, and the 2022 version is focused on the theme “Finance for an Equitable Recovery.” The report emphasizes that the COVID-19 pandemic was a truly global economic shock, in the sense that a greater share of countries around the world were affected than in previous economic cataclysms. The authors write (footnotes omitted):

Economic activity contracted in 2020 in about 90 percent of countries, exceeding the number of countries seeing such declines during two world wars, the Great Depression of the 1930s, the emerging economy debt crises of the 1980s, and the 2007–09 global financial crisis (figure O.1). In 2020, the first year of the COVID-19 pandemic, the global economy shrank by approximately 3 percent, and global poverty increased for the first time in a generation.

The challenge for policymakers around the world was to provide sufficient assistance to help households and firms over the worst of the pandemic, but at the same time not to pile up so much debt as to create dramatic future problems.

As the COVID-19 crisis unfolded in 2020, it became clear that many households and firms were ill-prepared to withstand an income shock of the length and scale of the pandemic. In 2020, more than 50 percent of households globally were not able to sustain basic consumption for more than three months in the event of income losses, while the cash reserves of the average business would cover fewer than 51 days of expenses. Within countries, the crisis disproportionately affected disadvantaged groups. In 2020, in 70 percent of countries the incidence of temporary unemployment was higher for workers who had completed only primary education. Income losses were similarly larger among youth, women, the self-employed, and casual workers with lower levels of education. Women, in particular, were affected by income and employment losses because they were more likely to be employed in sectors most affected by lockdown and social distancing measures, and they bore the brunt of the rising family care needs associated, for example, with the closures of childcare centers and schools. According to high-frequency phone survey data collected by the World Bank, in the initial phase of the pandemic, up to July 2020, 42 percent of women lost their jobs, compared with 31 percent of men, further underscoring the unequal impacts of the crisis by gender.

The common pattern around the world was that governments of high-income countries were able to borrow more easily and thus do spend as a share of GDP during the pandemic.

The World Bank of course focuses on issues of lower- and middle-income countries. Although the governments of these countries on average mostly did not take on large amounts of extra debt, many of them pushed the limits of what they were able to borrow. In addition, their financial systems nonetheless face the substantial challenge of firms and households that are unable to repay their loans or pay their bills.

Thus, these countries face a challenge of how to manage a situation where so many firms and households are in loan distress, in a legal context where provisions for bankruptcy law are underdeveloped, and indeed where it may be better for the economy to offer some additional loans rather than see widespread bankruptcies that eliminate a substantial share of existing firms. Of course, in giving additional loans, the challenge is to avoid subsidizing money-losing “zombie” firms that really should go out of business and stop sucking up credit that could be put to better use elsewhere in the economy. The report notes:

Past crises have revealed that without a swift, comprehensive policy response, loan quality issues are likely to persist and worsen over time, as epitomized by the typical increase in loans to “zombie firms”— that is, loans to weak businesses that have little or no prospect of returning to health and fully paying off their debts. Continued extension and rolling over of loans to such firms (also known as evergreening) stifles economic growth by absorbing capital that would be better directed to loans for businesses with high productivity and growth potential.

It’s a fragile situation. Not making extra loans has risks. Making extra loans has risks. Figuring out when to make extra loans and when not to do so is inherently difficult. It’s one reason why the report states: “The COVID-19 pandemic is possibly the largest shock to the global economy in over a century.”

India’s Economy: The Satellite Photo Tour

Last week I mentioned the Economic Survey 2021-22 published by India’s Ministry of Finance. As usual, most of this annual report is an overview of fiscal, monetary, and trade developments, along with discussions of sectors like agriculture, industry/infrastructure and services, as well as employment, social infrastructure, and sustainable development. The last chapter of this year’s report focuses on “Tracking Development through Satellite Images & Cartography.”

One prominent example is called “night lights,” which is just a satellite picture of light emissions at night. The left-hand photo shows India in 2012; the right-hand photo is India nine years later in 2021. The spread of electric lighting in India is clear.

The use of night lights data as a way of estimating economic development has been a research topic for a few years now. For economists, one advantage of night lights data is that it isn’t produced by the national government–unlike, say statistics on gross domestic product. For a discussion of using night lights data to estimate GDP, see Noam Angrist, Pinelopi Koujianou Goldberg, and Dean Jolliffe, “Why Is Growth in Developing Countries So Hard to Measure?” in the Summer 2021 issue of the Journal of Economic Perspectives. (Full disclosure: I’m the Managing Editor of the JEP, which is freely available online to all courtesy of the American Economic Association.)

These authors also point out that satellite imagery is not limited to luminosity: for example, it’s also possible to look at plant cover and even to identify different kinds of plants. For example, here’s a photo of agricultural activity near a certain reservoir after the water infrastructure was improved. Again, if the choice is between trusting a government report on the benefits of the improved infrastructure or trusting a satellite image that can be readily double-checked, the satellite image has some obvious benefits.

It’s also possible to use satellite images to look at industrial development or urban patterns. Here’s a photo of a “wasteland” area before and after it is converted to industrial uses.

In urban areas of some developing countries, attempting to count buildings and land-use through a ground-level army of census-takers (say, for purposes of calculating property taxes) may be a difficult and costly task. Satellite photos offer an overview.

One can also use satellite photos for environmental purposes: for example, to get a clear view of the size of the Amazon rain forest or the extent of cultivated land. Here’s an example from India, looking at the annual cycle of water storage at a certain reservoir.

Finally, there can be cases where good old maps, unassisted by satellite images, can tell a story. Here’s a comparison of the extent of India’s national highway system, as the network doubled its road-miles from 10 years ago up to the present.

It’s easy enough to find lengthy and legitimate lists of concerns about India’s economic growth. But these kinds of images make clear that India’s growth is indeed very real. Those who want to to read more about India’s economy from a broader perspective than this year’s Annual Survey might start with the three-paper “Symposium on the Economics of India” in the Winter 2020 issue of the Journal of Economic Perspectives:

— “Dynamism with Incommensurate Development: The Distinctive Indian Model,” by Rohit Lamba and Arvind Subramanian

— “Why Does the Indian State Both Fail and Succeed?” by Devesh Kapur

— “The Great Indian Demonetization,” by Amartya Lahiri