Author: conversableeconomist

When I meet Americans who self-identify as “socialists,” it is quite uncommon for them to advocate the abolition of private property and the “collective or governmental ownership and administration of the means of production and distribution of goods”–which is the dictionary definition of socialism. Instead most of the American “socialists” I meet favor a more expansive set of government benefits, including national health insurance, government-provided day care, more generous unemployment insurance, and the like. They favor what they perceive to be policies that are common across the European Union, especially the Scandinavian countries of northern Europe, and perhaps especially Sweden.

But Sweden, like many countries that had a geographically nearby seat to watch the activities of the Union of Soviet Socialist Republics, does not view itself as “socialist.” Johan Norberg tells the story in an extended essay “The Mirage of Swedish Socialism: The Economic History of a Welfare State” (Fraser Institute 2023). Norberg describes Sweden’s patterns over the long-run like this:

Sweden has a tradition of sticking to the path it has chosen and ignoring
problems until they become too big to deny and everybody changes their minds at the same time. Then Swedes move fast in the opposite direction. Far from following the famed “middle way,” Sweden has often been a country of extremes. It liberalized the economy more than other countries did in the mid-1800s, socialized more than others in the mid-1900s, and then reversed course and liberalized again faster than others in the late 20th century.

As Norberg tells the history, what most Americans think of as Sweden’s “socialism” is a set of policies Sweden enacted in the 1970s, and then rethought and revised extensively in the 1990s.

I will skip over Nordberg’s discussion of the pro-democracy, pro-market reforms in Sweden that happened between 1840-1870, and their evolution in the decades that followed, and jump to the state of Sweden’s economy in 1950. From being a poor country in 1870–GDP per capita about 40% of Great Britain–Sweden’s market-based economic development had been a great success. Nordberg writes (citations, footnotes, and references to figures omitted):

In 1950, … Sweden had achieved the fourth highest per capita GDP in the world, just behind the United Kingdom to that point. Sweden was by then a success story, the envy of the world. Between 1870 and 1950, life expectancy had increased from 45 to 71 years. Child mortality declined from 22.1 to 2.7 percent. Maternal mortality declined by over 90 percent ….

In 1950, Sweden was the third freest economy in the developed western world, after the United States and Switzerland, according to attempts to extend the Economic Freedom index retrospectively … Public spending as a share of GDP … was below 20 percent, well below countries like Britain, France, and West Germany. Taxes as a share of GDP were slightly lower than in the United States, and the highest marginal tax rate was 20 percentage points lower than in that country. In other words, Sweden was one of the richest, healthiest, and most successful societies the world had ever seen—and that was before it was a generous welfare state and had started experimenting with socialist ideas.

In the 1970s, Sweden decide that it was time for a major shift to larger government, higher taxes, and bigger social benefits. While the government did not literally take over companies, it imposed extensive price controls and took control of labor rules that had previously been negotiated between unions and firms. Norberg writes:

In the 1960s Sweden was on top of the world. The country had globally admired companies, an educated work force, and an open and competitive economy that delivered high growth, decent profits, and higher wages. … and West Germany. The conclusion many drew was that now the economy could afford a very big government indeed. The time for patience was over. … In just 20 years, public spending more than doubled, from 25.4 to 58.5 percent [of GDP] between 1965 and 1985. This came primarily from a rapid expansion of social services like health care, elderly care, and child care, and transfers like pensions and housing allowances. The marginal tax rate for blue collar workers increased from less than 40 percent in 1960 to more than 60 percent in 1980, and for white collar workers to above 70 percent. The payroll tax rose from 12.5 percent in 1970 to 36.7 percent in 1979. Capital gains were taxed as income, at progressive rates. In a series of steps, the corporation tax increased to almost 60 percent in the 1980s, even though it also offered generous deductions.

At the same time, the government raised the costs of doing business with a whole battery of regulations aimed at solving every conceivable problem and inequity. In 1970, Sweden introduced an opaque system of price controls, which forced businesses to negotiate price changes with business groups and government authorities. When Sweden devalued its currency it often implemented temporary bans on all price increases. Now it also gave up on the traditional Sweden model where labour market affairs were left to negotiations between business organizations and trade unions. Starting in 1974, the government regulated labour protection substantially, defining lawful reasons for termination and requiring that workplaces needing to fire staff for redundancy do so according to seniority (“last in, first out”).

Thus, Sweden appeared to outsiders in the 1970s and into the 1980s to be an example of a high-income country that had made a transition from a small-government capitalist orientation to a large-government welfare state with a socialist orientation. There was talk of Sweden as the “middle way” between capitalist United States and communist USSR.

But when you set aside the happy talk and looked at economic statistics, Sweden’s experiment was leaking from the seams almost immediately. The combination of high labor costs and inflexible regulatory control basically took down Sweden’s steel, shipbuilding, textile, and mining industries by the late 1970s. Investment sank, productivity gains dropped. Norberg: “Fewer companies were created in Sweden and the ones already in existence did not expand. In fact, by 1990, the Swedish economy had not created a single net job in the private sector since 1950, even though the population had increased by one and a half million people.” Sweden became more equal by subtraction: “Many of the country’s most important companies, entrepreneurs, and individualists left the country, primarily because taxation was suffocating and often made it impossible to pass family companies on to the next generation.”

Attitudes toward the generosity of Sweden’s welfare state also shifted. An earlier generation had welcomed the greater security, but also had strong feelings about only using the safety net when needed. A newer generation had less guilt about exploiting the system.

In the early 1980s, 82 percent of Swedes said it was never justifiable to claim government benefits to which you are not entitled. Thirty years later just 55 percent agreed with that statement. After generous sick leave benefits were implemented, Swedes who were objectively healthier than any other population on the planet were suddenly “off sick” from work more than almost any other population. As early as 1978, one of the founding fathers of Sweden’s welfare state, the economist Gunnar Myrdal, complained that the traditionally honest Swedes were obsessed with escaping tax, and were turning into “a population of cheats” …

By the early 1990s, Sweden’s economy was in a crisis: think three years of severe negative growth, high inflation, and nominal interest rates that at one point hit 500 percent. Unemployment rose to over 10%, where it remained for years. Government budget deficits rose to more than 10% of GDP.

It as time for another major set of reforms, and the prominent Swedish economist Assar Lindbeck was chosen to head a commission that would set an agenda. (Lindbeck wrote about the experience in “The Swedish Experiment” in a 1997 issue of the Journal of Economic Literature.) Sweden did not return to its pre-1970 model, but the changes were substantial. Here’s a partial list from Nordberg:

[D]uring the next few years, Sweden cut public spending substantially, moving both expenditures and revenue closer to the OECD average. The country also reduced the benefit levels in its social security systems. Nineteen state-owned companies were privatized and public investment funds that had interfered with the investment decisions of private businesses were abolished. Private and commercial radio and television stations were permitted for the first time. Railways, buses, and domestic aviation were deregulated. The telecom and energy sectors were opened up to competition. Private employment agencies were permitted, and unemployment benefits reduced. The last vestiges of the price control system were abolished, with the infamous exception of rent control, which has continued to make it very difficult to get a rental apartment in growing cities like Stockholm. The central bank was given an explicit inflation target of 2 percent annually.

In 1992, Sweden initiated an ambitious opening up of public services when it created a national school voucher system, which gave families the freedom to choose independent schools for their children’s education. Private alternatives in government-subsidized childcare, elderly care, and health care started to proliferate. … In 1994, parliament decided to introduce a new pension system, which replaced defined benefits with defined contributions and included a “break” that automatically reduces payments in bad times. It also included individual accounts, which can be invested according to personal preference.

In this most recent shift, Sweden remained a country with a welfare state that is large by US standards, although not especially large by western European standards. However, this welfare state operates along-side an economy that is quite deregulated and open to international trade–my common measures, more so than the US economy. As part of this change, Sweden gave up the idea that it could pay for its welfare state by sticking corporations and the rich with the tax bill. Instead, the middle classes pay the bulk of taxes (for example, through a value-added tax), but also receive the bulk of benefits. Nordberg writes:

In the 1990s, Sweden also gave up the pipe dream of making the wealthy pay for it all. Swedes learned that you could either have a big government or make the rich pay for it all, but you couldn’t have both. High earners and successful businesses are too few and too important for the country’s economy to deter or chase away with high taxes. Scaring off high earners and successful businesses had not just hurt innovation and risk-taking, it had also threatened the long-term financial basis for the welfare state. Now Sweden relies more on consumption taxes and flat payroll and local income taxes that it did before the reforms, which means that most citizens pay for most public services out of their own pockets and that the country is once again a more attractive place to do business … The overall effect is that Sweden’s tax system is now one of the least progressive in the OECD …

Nordberg offers considerably more detail on Sweden’s evolution over time, but I hope my encapsulated description here makes the main point. There’s a lot to reflect on and to admire about how Sweden’s system manages tradeoffs between social equity and economic efficiency. But it’s not socialism: indeed, it explicitly focuses on supporting market-based energies of capitalism as a method of funding the welfare state. For a sense of Sweden’s attitude toward “socialism,” Nordberg starts his discussion by quoting an exchange with Göran Persson, who was Sweden’s Prime Minister from 1996-2006, and a member of the Social Democrat party:

“What do you think of socialism?”
“I’m a Social Democrat.”
“Not a socialist?”
“No, if you call yourself a socialist, they confuse you with a lot of
crazies.”

About a month ago, I wrote a “Is the US Economy Seeing an Upsurge of New Firms?” based on some patterns I had noticed in the data. I didn’t realize that I was about to be big-footed–that is, some real experts on this subject were just about to weigh in. At the Fall 2023 Brookings Papers on Economic Activity conference, held yesterday and today, Ryan Decker and John Haltiwanger presented “Surging Business Formation in the Pandemic: Causes and Consequences?” A draft of the paper, along with drafts, slides, and full video for the conference as a whole, is available at the conference website.

Decker and Haltiwanger confirm the basic facts of my earlier post (I write thankfully). But they also put the facts in a broader perspective, by emphasizing that formation of new businesses was one of the ways in which the US economy pivoted during the dislocations of the pandemic recession, as well as in response to certain opportunities opened up by the recession like more widespread acceptance of remote work.

Here’s are the basic patterns under discussion. When starting a new firm, it’s common to apply to the Internal Revenue Service for an Employer Identification Number, which is needed if the plan is (someday) to hire employees. Such applications spike after the pandemic. Moreover, the government statisticians also try to keep count of which applications seem likely to turn into firms that employ people–not just a business for one person. Here are the patterns:

The obvious question is then whether these applications for employer ID numbers are followed by actually opening a new firm. The available quarterly data here is about “establishments,” which refers to a business operating at a certain location. One firm can have multiple establishments. This data is collected through the Quarterly Census of Employment and Wages, and it based on the fact that employers need to pay into state unemployment insurance funds–and thus need to report where they are operating. Here’s the data on formation of new establishments for several categories spelled out in more detail in the paper.

The authors summarize their overall findings this way (again, much more detail in the paper itself):

This set of facts lends itself to a compelling narrative of pandemic business and labor market dynamics. The pandemic sparked rapid, dramatic changes to the composition of consumer demand and to preferences for work and lifestyle, and these patterns have continued to evolve through mid-2023. From the standpoint of potential entrepreneurs, these dramatic changes presented opportunities—both to meet newly formed consumer and business needs and to change the career trajectories of the entrepreneurs themselves. Entrepreneurs made plans and applied to start businesses both early on and through mid-2023; some of these plans have resulted in new firms and establishments that hired workers in large numbers. Entrepreneurial opportunities and the demand for employees at these new firms appear to have played an important role in the “Great Resignation,” as some quitting workers likely flowed toward new businesses (as either entrepreneurs or new hires). Taken together, these patterns imply significant economic restructuring across industry, geography, and the firm size and age distribution. The extent to which these changes will be long lasting has yet to
be seen. …

The rise in applications and employer entry is highly concentrated in a few industries that are conducive to pandemic patterns of work and life (such as online retail and other high-tech industries), consistent with the changing sectoral structure of the economy. We also observe substantial spatial variation in the surge in applications and business entry, consistent with geographic restructuring. The surge in applications and business entry is especially notable in the South, with states such as Georgia standing out. Within large cities we observe a “donut effect” with applications surging more in the suburbs of metropolitan areas than in central business districts. …

We find a tight spatial correlation—at the state and county level—between surging business applications and quits (or excess separations, a close proxy for quits), with a much weaker correlation between applications and layoffs (or job destruction, a close proxy for layoffs). Among other possible explanations,
these results are consistent with workers quitting their jobs to start or join new businesses—and somewhat less consistent with job loss being a key driver of business formation. …

We also document a pandemic pause—and modest reversal—of the longer-run shift in activity toward large, mature businesses. The share of activity accounted for by young and small firms has risen; young and small firms exhibit a higher pace of dynamism than large and mature firms, so one might anticipate an ongoing increase in the pace of dynamism. In other words, we find early hints of a revival of business dynamism; but in many respects it is too early to ascertain whether a durable reversal of pre-pandemic trends is occurring.

I sometimes say that the pandemic recession had the affect of dramatically accelerating some changes that were already underway, but at a slower pace: telemedicine become common for a time; online education boomed for a time; online purchases and home delivery continued to grow; and work-from-home increased as well. The greater flexibility to start one’s own business may turn out be another shift.

It is a common belief, applicable across many different kinds of markets, that if you could just “cut out the middleman” and “pass the savings along to consumers,” everyone would be better off. Pharmacy benefit managers are quintessential middlemen. Thus, when it comes to addressing high drug prices, going after them has considerable political appeal. Matthew Fiedler, Loren Adler, and Richard G. Frank offer some useful background in “A Brief Look at Key Debates About Pharmacy Benefit Managers” (Brookings Institution, September 7, 2023).

What do pharmacy benefit managers (PBMs) do? The authors put it this way:

A PBM is an entity that administers a health insurance plan’s prescription drug benefit. One core function of a PBM is to negotiate drug prices with manufacturers; when negotiating prices, a PBM generally offers a drug a place on the plan’s “formulary” (which specifies which drugs the plan covers and on what terms and, thus, determines how much enrollees use the drug) in exchange for below the
manufacturer’s “list price.” PBMs also negotiate with pharmacies, generally offering the pharmacy a place in the plan’s network (which increases how many of the plan’s enrollees use the pharmacy) in exchange for accepting specified prices to dispense drugs. And PBMs perform administrative functions, notably processing pharmacy claims. Most of these functions (e.g., setting coverage terms, negotiating prices, establishing networks, and processing claims) parallel functions that insurers perform for non-drug benefits, but PBMs’ specialized knowledge of drug markets may allow them to perform them more effectively.

Who are the main PBM companies? Here’s a list. Note that about 75-80% of all claims are handled by three companies.

The list probably oversimplifies the role of PBMs. As the Brookings authors note, the PBMs are typically integrated with major health insurance companies. Here’s a chart showing major health insurance companies across the top, and who they use as PBMs for various purposes below.

What are the specific complaints against PBMs? Given that the big three control a huge share of the market, there is concern that the lack of competition might give them power to raise prices. Some concerns are more detailed. “The prices that PBMs charge payers for pharmacy claims often differ from the prices that PBMs pay the pharmacies that fulfill those claims,” so there is a “spread” that might be reduced. Sometimes, the rules that require patients to share costs for a certain drug are calculated in a way that is based on the original price of the drug, not on the discounted price negotiated by the PBM. When there is a manufacturer rebate for use of a certain drug, this money can sometimes flow to the PBM, rather than directly to patients. Overall, the notion is to find a way to squeeze these middlemen, and get lower drug prices for consumers as a result.

In their essay, it seems to me that Fiedler, Adler, and Frank are managing expectations about how much this approach is likely to achieve. For example, they point out: “Pre-tax operating margins for the three largest PBMs averaged a bit more than 4% of their revenues in 2022. Since PBMs’ revenues encompass both the
administrative fees charged to PBMs and payers’ net payments for claims, this implies that even completely eliminating PBMs’ margins would only modestly reduce payers’ drug-related costs.”

The potential cost savings from some of the steps being discussed are uncertain. For example, if you favor more competition among a larger number of PBMs, it’s important to recognize that a bigger PBM has more negotiating leverage. If you are in favor of the US government using its considerable financial clout to negotiate lower drug prices for Medicare and Medicaid patients, you understand the principle that a small-scale PBM will have less leverage when negotiating with pharmaceutical producers and with pharmacies than a larger one. It turns out that PBMs on average retain about 9% of rebates from manufactures, so reducing this to zero percent will not have much effect on final prices.

As in most economic discussions about the role of middlemen, it’s important to remember that they (usually) don’t just sit around with their hands out, collecting money. Some entity needs to negotiate on behalf of health insurance companies with drug manufacturers and pharmacies. Some entity needs to process insurance claims for drug prices. I do not mean to defend the relatively high drug prices paid by American consumers compared to international markets, nor to defend the costs and requirements for developing new drugs, nor to defend some of the mechanisms used by drug companies to keep prices high. But while it might be possible to squeeze some money out of PBMs for slightly lower drug prices, and it’s certainly possible to mess up PBMs in a way that leads to higher drug prices, it doesn’t seem plausible that reform of PBMs is going to be a powerful lever for reducing drug prices.

The Federal Trade Commission and 17 state attorneys general have sued Amazon.com, as the FTC press release says, “alleging that the online retail and technology company is a monopolist that uses a set of interlocking anticompetitive and unfair strategies to illegally maintain its monopoly power.” The FTC complaint filed with the US District Court for Western Washington is here. A first reaction from the bigwigs at Amazon is here. I’m still digesting the arguments, but here, I’ll offer some initial reactions about what to watch as the case–and the reporting on the case–proceeds.

1) Being a monopolist is not illegal under antitrust law. If a firm achieves a monopoly by providing a highly desired set of goods and services, that is legal and allowed. However, a firm with a dominant position does become limited in how it seeks to defend its monopoly and to fight off potential new entrants. I’ve seen a number of headlines that refer to the case as an “anti-monopoly” case, which isn’t quite right. Instead, it’s about actions to block potential competitors. As the FTC press release notes: “The complaint alleges that Amazon violates the law not because it is big, but because it engages in a course of exclusionary conduct that prevents current competitors from growing and new competitors from emerging.” Or as the legal complaint says more formally: “This case is about the illegal course of exclusionary conduct Amazon deploys to block competition, stunt rivals’ growth, and cement its dominance.”

2) Thus, this antitrust case is not about “breaking up Amazon.” It is about whether Amazon needs to stop certain business practices.

3) What does the FTC point to as the “exclusionary practices”? As best as I can tell, it boils down to alleged actions that discourage third-party firms that sell on Amazon from selling at a lower price on other websites, and pressures from Amazon to have third-party firms use Amazon’s “Prime” shipping service and to advertise on Amazon.

4) Many retailers offer some form of “price match guarantee,” in the form of “if you find the same item for a lower price, we will match that lower price.” But economists have observed for some time that price matching can have anticompetitive aspects. Consider the case of an incumbent airline with most of the traffic between two cities. A new airline starts up, offering a lower price. The incumbent airline matches the lower price, so the new airline can’t attract customers. And when the new airline goes out of business, the incumbent firm can then raise prices again.

In its original form, Amazon sold Amazon-branded goods. Starting in 1999, it started selling third-party goods as well. The Amazon response says that these third parties now consist of 500,000 companies that account for 60% of total sales on the Amazon website. Thus, in some cases, it seems possible that Amazon-branded goods would be in competition with third-party goods. A scenario could unfold where, if Amazon continually matches any price cuts from others, the others would learn that there isn’t any business to be gained by cutting prices.

5) Because Amazon (of course) controls the formatting of the website, it has the power to list third-party sellers either higher or lower in the search results. It can list firms more highly if they pay Amazon for advertising. It also can offer links to its “Prime” shipping service, so that customers may find it easier to buy from a firm that is directly linked to Prime shipping, and harder to buy from firms that use other shipping. In other words, Amazon has some power to levy charges on its third-party sellers. The FTC complaint asserts: “For example, Amazon has hiked so steeply the fees it charges sellers that it now reportedly takes close to half of every dollar from the typical seller that uses Amazon’s fulfillment service.” (It’s worth noting that the word “reportedly” carries some heavy weight in that sentence.)

6) Putting these pieces together, the FTC claim is that many small retailers feel that they have to be on Amazon, because it’s where the customers are. However, many small retailers also feel mistreated by Amazon: discouraged from cutting prices, and under pressure to pay fees to use Amazon-owned shipping and advertising. As a result, the argument goes, these retailers are constrained from offering lower prices and perhaps a wider range of services to customers. But it seems fair to say that the primary focus of the complaint is not on customers directly, but on how third-party sellers are unfairly treated by Amazon.

7) In some ways, this case is about the multiple kinds of fees that Amazon charges its third-party sellers, and the interaction of these fees. The FTC complaint says: “Amazon charges sellers four primary fees to sell on its Marketplace. First, Amazon requires sellers to pay a selling fee, which can be a monthly fee or a fee for each item sold. Second, Amazon charges all sellers a commission or “referral fee” based on the price of each item sold on Amazon. Third, Amazon charges sellers for the use of Amazon’s fulfillment and delivery services. Fourth, Amazon charges sellers for advertising services.” So, if a firm pays Amazon the basic selling and referral fees, but doesn’t advertise with Amazon, then is it “unfair” if firms that do advertise are featured more prominently?

8) At least some of these accusations seem to me may eventually be illuminated by the factual record. For example, Amazon says: “The FTC’s allegation that we somehow force sellers to use our optional services is simply not true. Sellers have choices, and many succeed in our store using other logistics services or choosing not to advertise with us. We also enable sellers to use the trusted Prime badge when other logistics services are able to meet our Prime customers’ high expectations for fast, reliable delivery.” I’m sure that third-firms selling on Amazon technically have the ability to use methods of delivery other than Prime, and that they are not technically required to advertise on Amazon. But it would be interesting to know how many firms exercise those choices–and to see some systematic evidence on whether Amazon uses its power over formatting the website to pressure third-party sellers.

9) Amazon also argues that in exchange for fees, its third-party sellers receive an array of other business management services: “We have invested billions of dollars in people, resources, and services to support sellers at every stage of their journey. We regularly provide them with new data and insights about selling on Amazon, the capability to tailor products and listings to customer needs, and recommendations and advice to help grow their businesses. We also offer features that help sellers create and manage product listings, track sales, fulfill orders, respond to customers, and more.” Again, I’m sure all of these services are available, but it would be interesting to see evidence on how widely such services are used and valued by third-party sellers.

9) A standard issue in antitrust cases is an argument over the size of the market. For example, way back in 1987 there was a merger between two intercity bus companies: Greyhound and Trailways. The government antitrust authorities argued that this would give the merged company a monopoly over intercity bus traffic. The companies argued that the relevant market for their case was not intercity bus traffic, but all methods of intercity transportation: private car, rental car, charter bus, limo, taxi, rail, and plane. Within this much broader context of all intercity transportation, the merged Greyhound-Trailways firm had only a small share of the market.

In the Amazon case, the FTC asserts at several points that Amazon is a monopolist; in particular, that it has monopoly power in the “online superstore market.” Amazon seems certain to argue for a broader conception of the retail market as a whole. As Amazon writes in its response: “Consumers today still buy over 80% of all retail products in physical stores. And as any shopper knows, you can buy the same products at any number of different retailers that compete vigorously with each other, including brick-and-mortar stores, online stores, and quickly growing hybrid models like buy-online-pick-up-in-store.” I expect Amazon to argue that even within the “online superstore market” it has serious competitors like WalMart, and in the overall market for retail sales, Amazon is a relatively small player.

10) What is Project Nessie? The FTC legal complaint refers at a number of places to how Amazon uses “Project Nessie” as part of its pattern of exclusionary conduct. However, when the FTC releases a legal complaint, the subject of the complaint can request to have certain parts of the complaint that might provide information about the inner workings of the firm redacted. Thus, when you look at the section of the FTC complaint about Project Nessie, it looks like this:

At the TechCrunch website, Devin Coldewey looks for clues to answer the question, “What is Amazon’s [redacted] ‘Project Nessie’ algorithm?” As Coldewey notes, it seems likely to be an algorithm that either manipulates prices (maybe up a little and down a little when profitable) or search (to favor Amazon products or third-party firms that advertise with Amazon)–but perhaps could be something more arcane. In the next few weeks, and especially it the case eventually goes to trial, we are likely to learn more about Project Nessie.

11) I wouldn’t be at all surprised if, when all is said and done, the FTC case causes Amazon to announce that it is altering some of its business practices. Given the internal pressures at Amazon (as at any company) to increase profits, I wouldn’t be at all surprised if some of the algorithm designers did things that–when viewed in the cold light of day–qualify as “exclusionary conduct.” I also wouldn’t be at all surprised if such actions happen in the form of a settlement in which Amazon does not admit any guilt. In Amazon’s relationship with its third-party sellers, it has power to adjust multiple fees, multiple services, along with search results and website presentation. My guess is that even when or if the FTC pressures Amazon to change some of its practices, it will be able to pivot to other choices that have similar effects.

Remember the major antitrust case against Microsoft, settled in 2001? Here in 2023, Microsoft is the second-largest company in the world by market capitalization, a tick behind Apple and a tick ahead of Saudi Arabian Oil. After all the sound and fury, I don’t expect that this particular lawsuit will have much affect on Amazon a few years down the road, either.

Gross investment refers to the total amount invested. However, in any given year, part of gross investment just goes to replace capital that has depreciated and worn out. Thus, the US Bureau of Economic Analysis also calculated net investment, which is the addition to the overall US capital stock after taking replacement of depreciated capital into account. What’s interesting, and disturbing, is that the gap between gross and net investment is rising.

Here’s a figure showing the patterns for the US economy. Gross investment has typically been 20-25% of GDP overt time, although in recent years it’s been closer to the lower end of that range. From the 195os up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock.

But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.

What’s going on here, as I understand it, is that the life expectancy of capital investment has been declining. If a firm bought a large piece of physical equipment for a factory back in the 1960s or 1970s, it was probably hoping to get at least 10 or 20 years of use from that investment. But if a modern firm makes a major investment in new computers, databanks, and software, that investment will depreciate over a much shorter time period.

In short, it’s not just how much an economy invests in capital equipment, but also how long that equipment can reasonably be expected to last. The data shows that the typical US capital investment, with its greater emphasis on rapidly evolving information technology, is depreciating faster than it used to.

As recently as 1967, about 80% of all black college students graduated from “historically black colleges and universities.” But the ground was shifting. The 1954 Supreme Court desegregation decision in Brown v. Board of Education, along with the Civil Rights Act of 1964, helped lead to a surge in high school graduates and then rapid growth in black college graduates: “The University of Washington for example, saw its black student enrollment increase from 136 in 1967 to 1,110 in 1971.” As enrollments of black college students expanded dramatically, the share of black students attending the historically black colleges and universities has dropped dramatically, now to about 9%. Of necessity, the role of such institutions is evolving.

The National Center for Education Statistics describes term “historically black colleges and universities” this way (citations omitted):

Historically Black colleges and universities (HBCUs) are institutions that were established prior to 1964 with the principal mission of educating Black Americans. These institutions were founded and developed in an environment of legal segregation … In 2021, there were 99 HBCUs located in 19 states, the District of Columbia, and the U.S. Virgin Islands. Of the 99 HBCUs, 50 were public institutions and 49 were private nonprofit institutions. The number of HBCU students increased by 47 percent (from 223,000 to 327,000 students) between 1976 and 2010, then decreased by 12 percent (to 287,000 students) between 2010 and 2021 …

Although HBCUs were originally founded to educate Black students, they enroll students of other races as well. The composition of HBCUs has changed over time. In 2021, non-Black students made up 25 percent of enrollment at HBCUs, compared with 15 percent in 1976. While Black enrollment at HBCUs increased by 14 percent between 1976 and 2021, the total number of Black students enrolled in all degree-granting postsecondary institutions (both HBCUs and non-HBCUs) more than doubled during this period. As a result, the percentage of Black students enrolled at HBCUs fell from 18 percent in 1976 to 8 percent in 2014 and then increased to 9 percent in 2021.

Gizelle George-Joseph and Devesh Kodnani of Goldman Sachs describe several elements of the evolution in “Historically Black, Historically Underfunded:
Investing in HBCUs” (Goldman Sachs Research, June 13, 2023). They emphasize and complement the main themes developed in the article by Gregory N. Price and Angelino C. G. Viceisza in the Summer 2023 issue of the Journal of Economic Perspectives (where I work as Managing Editor): “What Can Historically Black Colleges and Universities Teach about Improving Higher Education Outcomes for Black Students?” 

For concreteness, here’s a table of the larger and some of the more prominent HBCUs, with enrollments and graduation rates, from Price and Viceisza:

Here are a few of the main themes common in both essays:

Although the HBCU’s now educate 9% of black college students, they “punch above their weight” in terms of impact, especially in terms of science, technology, engineering, and mathematics (STEM) majors. From the Goldman Sachs report:

Moreover, a disproportionate share of black college students who get PhDs from all institutions started out at HBCUs. Price and Viceisza point out:

Almost one-quarter (23.2 percent) of Black graduates who earned a doctorate in science and engineering between 2015 and 2019 earned their bachelor’s degree from a historically Black college or university (National Science Foundation 2021). Historically Black institutions produced particularly large shares of baccalaureate recipients who later earned doctoral degrees in agricultural sciences and natural resources (almost 50 percent of all Black graduates who earned such a degree), computer and information sciences (over 30 percent), and mathematics and statistics (over 30 percent). The top producers were Howard University and Spelman College.

Moreover, HBCUs accomplish these outcomes while enrolling a disproportionately large share of students coming from lower-income households. One measure of this difference is in the share of HBCU students receiving federal Pell grants or student loans. From the Goldman Sachs report:

In their JEP essay, Price and Viceisza discuss the evidence HBCUs are finding ways to overcome the disadvantaged for the socioeconomic background of the students they are admitting. It turns out that if one adjusts for characteristics of students and their families (like income and parental education) and for characteristics of colleges (like selectivity and funding), black students at HBCUs are more likely to graduate and to enter science and technology careers than black students at other institutions. These gains for HBCUs are especially large when comparing black students entering college with lower test scores. In studies that seek to measure what colleges have the biggest effect in leading to intergenerational gains in earnings (a measure that combines both the student’s family background, the chance of graduating, and the after-graduation work experience), HBCUs often rank near the top.

In their evolution during the last few decades, the HBCUs have clearly figured out how to do more with less. The problem of underfunding at the HBCUs is longstanding. It of course goes back to the times of legalized segregation, but persisted after that. As Goldman Sachs authors note: “In 1986, Congress amended the Higher Education Act of 1965 to increase funding for HBCUs in response to their finding that state and federal institutions had engaged in discriminatory practices that had financially disadvantaged HBCUs.”

Whatever the merits of the 1986 law, the financial gaps have persisted. Price and Viceisza write:

Finally, a substantial boost in funding for historically Black colleges and universities seems appropriate and overdue. These institutions were dramatically underfunded on a per-student basis during decades of legalized segregation (Smith 2021). Colleges and universities are long-lived institutions, and underfunding from decades ago will affect the physical inheritance of these institutions today: academic buildings, library resources, greenspaces, athletic facilities, and more. This underfunding has continued up to the present. Lawsuits about underfunding of historically Black institutions have been settled in recent years by Maryland, Alabama, and Mississippi, and a similar lawsuit was recently announced in Florida. Two journalists at Forbes calculated that Black land-grant universities have been underfunded at the state level, relative to their primarily white counterparts in the same states, by $12.8 billion in the last three decades (Adams and Tucker 2022).

I don’t want to over-claim what HBCUs can accomplish. After all, their successes come from students who choose to attend these institutions. It’s not obvious to me that they have some secret sauce that would work equally well for all Black students, or for students of all racial/ethnic backgrounds, at other institutions as well. But clearly, they do know something, and the successes of HBCUs in reaching out to student who traditionally have had a lesser chance of flourishing in college makes them a worthy object of increases in both attention and funding.

The US produces almost no coffee, other than small quantities from Hawaii. However, the US market imports about 15% of global coffee production each year, and thus is fully exposed to global coffee prices–which have been on the rise. Angela Cantor describes the recent supply and demand patterns in “Historic coffee prices percolated after a bitter global supply crisis” (Bureau of Labor Statistics: Beyond the Numbers, September 2023). I pass them along here because, as Cantor reports, Americans drink more coffee than any other beverage, including tap water. Also, it’s a relatable supply and demand story for students.

Here are prices of coffee imports on the world market since 2007. The current spike is clearly not without precedent, but it’s still pretty abrupt.

A sharply higher price can be the result of either a rapid increase in quantity demanded or a rapid decrease in quantity supplied, and in this case the latter factor is dominant. The supply shock has two causes: weather disruptions that reduced coffee harvests in key producer countries and pandemic-related difficulties in shipping coffee to the US market.

Brazil is the “coffee pot of the world,” by far the world’s producer of coffee. It produces about twice as much as second-place Vietnam, which in turn produced as much as the combination of Columbia and Indonesia, the two countries tied for third.

But the Brazil coffee harvest in 2021 was the lowest in four years, due to a variety of factors like “the tropical storm La Niña and greater variability in temperatures, along with deforestation of the Amazon.” Pandemic-related travel restrictions in Vietnam meant that many workers chose not to travel to the coffee harvest, because they feared being locked-down and unable to return to their permanent homes. Colombia experienced a national strike against a COVID-19 pandemic reform plan proposed by the president, which dramatically hindered coffee production and shipping: for example, the main Columbian port out of which coffee is usually shipped closed for 48 days. Indonesia already had a scarcity of ports and international cargo facilities, which only got worse when containers for shipping became scarce during the pandemic.

Canton concludes:

By the end of 2022, coffee traders were optimistic about seeing some stabilization in the market as they placed their bets on the expectation of the 2022–23 season being an on-year in the coffee production cycle, and the rise of breakbulk shipping as a solution for the lack of containers. At the time, rapidly decreasing prices seemed to confirm that expectation. However, at the start of 2023, prices made an unexpected turnaround to the high levels that were last seen in the fall of 2022. Throughout 2023, high U.S import coffee prices persisted, hovering just below 2022’s high price record, as Brazil continues to deal with the aftermath of the impact of severe frosts, high temperatures, and the below-average-rainfall that occurred in 2021, and as Colombian coffee yields remain low because of growers’ decision to limit fertilizer use due to its price spike. Further, there is now a shortage of coffee laborers in Central America as many have abandoned the region in search of better opportunities.

For a discussion of another part of the coffee supply chain–namely, how coffee that sells for a few dollar a pound ends up retailing in a coffee shop for a few dollars a cup, see “Coffee-nomics: A Supply Chain Story” (January 25, 2020). Those with historical interests may prefer “When Coffee was the Newly Introduced Good Under Attack” (December 24, 2019) when tells the stories of when the governor of Mecca sought to ban coffee in 1511, when a group of priests appealed to Pope Clement VIII to ban coffee later in the 1500s, and when the physicians of Marseilles attempted to discredit coffee drinking in 1679.

Larry Summers delivered the first annual lecture honoring Richard N. Cooper, with the title “What should the 2023 Washington Consensus Be?” at the Peterson Institute for International Economics (September 18, 2023, video and transcript available). He organizes his discussion around “six major misconceptions.”

First, it is supposed that the idea of economic policy is to maximize the creation of jobs rather than to maximize the availability of goods at low cost to consumers and firms. Both the officials responsible for competition policy and those responsible for international trade have explicitly rejected economic efficiency as a central guide for economic policy. This, I would suggest, is a costly and consequential error. …

The second misconception is that these have not been good decades for the American economy in international perspective. I first got to know my friend Ted Truman well when he was long into his career as the head of the Federal Reserve’s International Economic Section. and I was a new undersecretary of the Treasury for international Affairs. We were involved in making various long term economic projections for the world. None of them would have believed that US GDP as a share of global GDP would have remained robust for the entirety of the next generation. And if we had been told how spectacularly China was going to do over the next 30 years, we would have been that much more pessimistic. … The truth is that the United States has done extraordinarily well. …

Third, the world has fared very well. Relative to the time when I was chief
economist of the World Bank at the beginning of the 1990s, child mortality rates are less than half of what they were then. Literacy rates are more than twice what they were then. Poverty rates, terms of extreme poverty are less than 40% of what they were then. And in some ways most fundamental and important, this month, we celebrate the 78th anniversary of a situation where there has been no direct war between major powers. You cannot find a period of 78 years since Christ was born when that was the case. So, the idea that we’ve been doing it all wrong is, I would suggest, a substantial misconception.

Fourth, the problems that we have are not due to trade liberalization. … Yes, China’s tremendous economic progress did lead to far more sale of goods in the United States. But it is hard to imagine a less credible approach to the problem [then] the adding up all the losers from the imports without taking any account of the jobs created and the economic impacts of the goods we sold to China, of the lower cost inputs we received because of imports from China, [or] of the enhanced real wages and associated with greater spending caused by those lower prices. And the lower capital costs associated with the inflows of capital that we received from China. When those calculations have been done, as they’ve now been done by Rob Feenstra and several other teams of economists, they show that, in fact, as with NAFTA, the net benefit to the US economy has been substantial.

The fifth misconception is that domestic industrialization and some kind of renaissance of manufacturing is somehow the central issue for US
prosperity going forward. This is simply not a realistic idea. … Rapid productivity growth, relatively inelastic demand, rapidly declining relative prices created abundance without substantial and with declining levels of [manufacturing] employment. And there is nothing in the coming robotic revolution to suggest that these trends are likely to do anything other than accelerate going forward. … The idea that we can build an economy on growing our manufacturing sector is just not realistic and it is potentially counterproductive. I would just note that there are about 100 times as many workers in steel-using industries as there are in the steel industry as evidence of the potential costs of domestic content requirements motivated by the desire to create capacity.

Finally, I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power, contrary to what is often believed in what sometimes seems like a post budget constraint era of economic thinking. … The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection … This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question: How long can or will the world’s greatest debtor be able to maintain its position as the world’s greatest power?

I’ll add the “Washington consensus” in the title of the lecture strikes me as a mischievous use of the term. For the uninitiated, the “Washington consensus” among economists refers to a specific set of policies identified by John Williamson back in 1989, in an effort to spell out what policies were being encouraged at that time by the IMF and the World Bank. But as Summers notes, “Those who speak of a new Washington consensus mostly have never heard of John Williamson.” Among non-economists, “Washington consensus” has often come to mean any policies oriented toward free markets or limited government. For those who would like an overview of what Williamson actually said, and a discussion of the evidence on how well his list of “consensus” policies has performed and aged, a useful starting point is the symposium on the “Washington Consensus Revisited” in the Summer 2021 issue of the Journal of Economic Perspectives (where I work as Managing Editor). The four papers are:

• “Some Thoughts on the Washington Consensus and Subsequent Global Development Experience,” by Michael Spence
• “The Baker Hypothesis: Stabilization, Structural Reforms, and Economic Growth,” by Anusha Chari, Peter Blair Henry and Hector Reyes
• “Washington Consensus in Latin America: From Raw Model to Straw Man,” by Ilan Goldfajn, Lorenza Martínez and Rodrigo O. Valdés
• “Washington Consensus Reforms and Lessons for Economic Performance in Sub-Saharan Africa,” by Belinda Archibong,  Brahima Coulibaly and Ngozi Okonjo-Iweala

In studies of voters, politicians, and elections, it’s common to hear a mention of the “median voter,” the voter who is in the center of the distribution. In this admittedly simplified model, if a politician can attract everyone from their side, plus the median voter, then that politician has a majority. Similarly, the household with the median income is at the 50th percentile of the income distribution. If you want to know whether a majority of households are feeling better or worse about their economic situation, median household income is one plausible starting point.

Here’s median household income, measured two ways. The red line shows “nominal” income, which you can think of as the value of income in current dollars at that time. The blue line adjusts for inflation. Thus, the two numbers are identical in for 2022, because both measures are both using current dollars in that year.

The data is from an annual report of the US Census Bureau. The most recent version is Income in the United States: 2023, written by Gloria Guzman and Melissa Kollar, and published earlier this month.

The story for the short-run past period since the pandemic and through the annual data for 2022 is clear enough. Nominal wages are rising for the median household (red line rising), but the wages aren’t keeping up with inflation, so the real wage (blue line) is falling. Real wages peaked in the 2019 data, before the pandemic hit in early 2020.

For a longer-run perspective on median household income, here’s a figure from the Census Bureau Report, which shows income for the median US household as well as for various racial/ethnic groups.

Here, I’ll just point out that over the 55 years from 1967 to 2022, the median household income rose by a little less than 50%. Remember, income gains for the top 1% or 10% or 20% will affect the average level of income, but it doesn’t affect the median household at the 50th percentile of the income distribution. Over the last half-century or so, the median household has seen income gains of less than 1% per year.

One of the biggest problems in K-12 education for a long time is how to help students who are already lagging behind in early grades catch up through middle-school and high-school, so that attending college, if they wish to do so, is a live possibility. As a result of the school closures during the pandemic, the question of how to help students catch up now applies to a substantial majority of students.

Some clues on what needs to happen come from a recent study by Alicia Demers, Ira Nichols-Barrer, Elisa Steele, Maria Bartlett, and Philip Gleason of Mathematica about “KIPP” schools, in the report “Long-Term Impacts of KIPP Middle and
High Schools on College Enrollment, Persistence, and Attainment” (Mathematica, September 12, 2023).

KIPP stands for Knowledge Is Power Program (KIPP), which is a network of public charter schools around the country. Because they are popular schools, they are oversubscribed, and because they are public schools, they are required to choose which students to accept by lottery. Because of the location of the schools in urban areas, the students are much more likely to be from lower-income families.

This study has a long enough follow-up period that the researchers can look at students who were randomly accepted to a group of KIPP middle schools with lotteries, and then compare their experience in finishing high school and college compared with students who were not randomly accepted to those middle schools. This particular study involves “2,066 students who applied to enter 21 KIPP middle schools that were popular enough to hold an admission lottery in 2008, 2009, or 2011. As of 2022, all those students were old enough to have attended college for at least three years, and the first two cohorts of students were old enough to have
graduated from a four-year college.”

Here’s a striking takeaway. Those who attended KIPP middle and high schools were 31 percentage points more likely to enroll at a four-year college (77% to 46%) and about twice as likely to graduate from a four-year college (39% to 20%).

This effect is big enough to deserve attention. As the report notes: “An effect of this size, extrapolated nationwide, would be large enough to nearly close the degree-completion gap for Hispanic students or entirely close the degree-completion gap for Black students in the United States.”

What is the secret sauce of KIPP schools? Some of the key ingredients include extra instructional time, like coming earlier in the morning or staying later in the afternoon. A substantial effort is made to assure that students don’t fall behind, including regular testing to evaluate student progress and small-group tutoring to keep students on track. More broadly, there is a culture of high expectations, including academic expectations leading to AP courses as well as behavioral expectations. There is counselling and mentoring to make college attendance thinkable and reasonable for more students.

There are various concerns here, of course. When comparing students who were admitted or not through a lottery system, you are not comparing to students whose families did not apply to the lottery at all. What works for the group of students whose families want them to enter a KIPP school is probably not going to work as well for the group of of students whose families don’t apply in the first place. Another concern is that a study based on about 2000 students can be suggestive and interesting, even if a single study isn’t conclusive proof.

Making all of this work also involves having teachers and principals who bring the training, energy, and commitment to make it happen. Helping students catch up involves substantial changes to the usual styles of teaching and expectations about how a school will operate. But the big point here is the evidence that for many students, middle- and high-schools can facilitate dramatic catch-up.