How concentrated are U.S. industries?

See Three Questions for the Antitrust Moment by Tim Taylor. The HHI is something I cover in my micro classes.

We discuss mergers and when the government (Justice Department or Federal Trade Commission) might challenge mergers.

If two firms merge, the new firm, of course, has a bigger share of the market than either of the old firms. When does this gain in market share threaten competition enough to be challenged in court?

Waldoch mentions the Herfindahl–Hirschman Index HHI. The market share of each firm in an industry is squared and then all those numbers are added up to get the HHI. There are 3 categories according to Justice:

Unconcentrated Markets: HHI below 1500
Moderately Concentrated Markets: HHI between 1500 and 2500
Highly Concentrated Markets: HHI above 2500

One thing to add is that if a merger increases the HHI by more than 100 points and the new HHI of the industry is Moderately Concentrated, then the merger is likely to be challenged.

Excerpt from Taylor's post:

"For example, here's a figure from an article by  Tim Sablik, "Are Markets Too Concentrated?" published in Econ Focus, from the Federal Reserve Bank of Richmond (First Quarter 2018, pp. 10-13). The HHI is a standard measure of market concentration: it is calculated by taking the market share of each firm in an industry, squaring it, and then summing the result. Thus, a monopoly with 100% of the market would have a HHI measure of  100² , or 1,000. A industry with, say, two leading firms that each have 30% of the market and four other firms with 10% of the market would have an HHI of 2200. The average HHI across industries has indeed risen--back to the level that prevailed in the late 1970s and early 1980s.



A couple of other points are worth noting:

In some of the industries where concentration has risen, recent legislation is clearly one of the important underlying causes. For example, healthcare providers and insurance firms became more concentrated in the aftermath of restrictions and rules imposed by the Patient Protection and Affordable Care act of 2010. The US banking sector became more concentrated in the aftermath of Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank act). In both cases, supporters of the bill saw additional concentration as a useful tool for seeking to achieve the purported benefits of the legislation.

The rise in bigness that seems to bother people the most is the dominance of Apple, Alphabet,  Amazon, Facebook, and Microsoft. The possibility that these firms raise anticompetitive issues seems to me like a very legitimate concern. But it also suggests that the competition issues of most concern apply mostly to a relatively small number of firms in a relatively small number of tech-related industries."

Related posts:

Herfindahl-Hirschman at the Movies

The Herfindahl-Hirschman Index & The Anheuser-Busch InBev/Grupo Modelo Merger

Is The Airline Industry An Oligopoly?

How much cash is out there and where is it?

See Cash Flow or Cash Stash? How Money Moves Around: A record amount of dollars are circulating, but much of it may be hoarded, particularly outside the U.S. by Jo Craven McGinty of The WSJ. Excerpts:

"A record level of U.S. cash is circulating, but Americans aren’t spending the bulk of it.
So, where’s the money?

Up to two-thirds—or as much as $1.07 trillion—is held abroad. About $80 billion is held domestically by depository institutions. And the rest—as little as $453 billion—is in the hands of domestic businesses and individuals.

The exact distribution is unknown because once cash is transferred out of the Federal Reserve’s vaults, it’s virtually impossible to track.

Estimates about the holdings are deduced from orders placed by depository institutions, subsequent reports to the Fed’s Board of Governors and what can be discerned based on denominations in circulation.

Although the Treasury prints more than twice as many $1s, $5s, $10s and $20s combined as it does $100s, the vast majority of the value of circulating currency is represented by Benjamins.

Last year, according to figures published by the Fed, $1.6 trillion was in circulation, including $1.3 trillion in $100 bills, or 80% of the total."

"the bulk of U.S. cash sent abroad is in the form of $100 bills.

“We know this because we see what denominations are sent to international depository institutions,"

"The circulating currency held abroad could range from one-half to two-thirds of the total, the Fed estimates, or a range of $800 billion to $1.07 trillion."

"In 2016, cash accounted for 31% of the number of payments made by Americans—more than any other single payment instrument—but only 7.9% of the value,"

"Debit and credit cards together accounted for 45% of the number of payments and 26% of the value. Electronic transfers accounted for 14% of the number of payments and 43% of the value.

The remainder, around 10% of the payments representing 23% of the value, was made with other instruments including checks, money orders and prepaid cards."

"participants used cash for payments of less than $25. Credit and debit cards were used more frequently for payments between $25 and $100, and checks and electronic payments were generally used for transactions of $100 or more.

There is also evidence that Americans, like people abroad, hoard cash."

"Only half the survey participants were willing to reveal how much cash they had stashed"

Related post: Let’s Not Start a War on Cash by James A. Dorn of The Cato Institute

The trend line for the percentage of 25-54 year olds employed

If you look at yesterday's post, you can see that after this percentage fell from about 80 to 75 from Dec. 2007 to Oct. 2009, it stayed there for about two years. So the trend line I have starts in Oct. 2011. Maybe that is when the recovery actually began.

So I start the trend line there. Early on, it looks like about 12 months are above the trend line. Then for awhile there are points both above and below the trend line. But each of the last 10 months is above the trend line. Not sure if this is a good sign or not (is the economy overheating?).

The percentage of 25-54 year olds employed rose in June

It went from 79.2% to 79.3%. See Employment Population Ratio: 25 - 54 years from the St. Louis Fed. Here is a graph they show. If you go to the link and click the "download button" you can get the exact monthly numbers going back to 1948.

In most countries the gender pay gap has decreased in the last couple of decades

See Six key facts about the gender pay gap by Esteban Ortiz-Ospina of Our World in Data. Excerpt:

"How is the gender pay gap changing over time? To answer this question, let's consider the following chart, showing available estimates from the OECD. These estimates include OECD member states, as well as some other non-member countries, and they are the longest available series of cross-country data on the gender pay gap that we are aware of.

Here we see that the gap is large in most OECD countries, but it has been going down in the last couple of decades. In some cases the reduction is remarkable. In the UK, for example, the gap went down from almost 50% in 1970 to about 17% in 2016.

These estimates are not directly comparable to those from the ILO, because the pay gap is measured slightly differently here: The OECD estimates refer to percent differences in median earnings (i.e. the gap here captures differences between men and women in the middle of the earnings distribution); and they cover only full-time employees and self-employed workers (i.e. the gap here excludes disparities that arise from differences in hourly wages for part-time and full-time workers).

However, the ILO data shows similar trends for the period 2000-2015.

The conclusion is that in most countries with available data, the gender pay gap has decreased in the last couple of decades."

A Strange Effect Higher Oil Prices Can Have On The Natural Gas Market

See Side Effect of Rising Oil Drilling: Indigestion for Gas Frackers: As companies step up oil production, the natural gas byproduct is weighing on already low gas prices and on gas producers by Christopher M. Matthews of The WSJ. Excerpts:

"As companies respond to rising oil prices by drilling more for it, they often unearth gas as a byproduct. That has further weighed on already low gas prices, pressuring shale frackers in regions that primarily produce gas.

The average share price for the five top companies focused on the oil-rich Permian Basin in Texas and New Mexico are up more than 16% over the past year. Share prices for the top five producers focused on the Marcellus Shale in Appalachia, the country’s largest deposit of natural gas, are down more than 9%."

"Natural-gas futures for July delivery closed at $2.939 a million British thermal units on Tuesday and have been below $4 since 2014. Prices passed $10 in 2008 and had stayed above the $4 mark before 2012. Many banks and analysts predict average prices will be below $3 for years. Meanwhile, U.S. oil prices have climbed to more than $65 a barrel for the first time since 2014."

E-Commerce Might Help Solve the Mystery of Low Inflation

By Patricia Cohen and Jim Tankersley of The NY Times. Excerpts:

"The spectacular growth in online shopping, it turns out, is not only tamping down inflation more than previously thought, but also distorting the way it is measured.

The studies reinforce the views of Federal Reserve officials who see the internet’s increasing influence as a leading suspect in a continuing mystery: why inflation routinely falls short of their 2 percent target, considered the sweet spot for keeping the economy humming without overheating."

"“We don’t have as good measures of the economy as we should, in part because there are many new digital goods and new online channels,” said Erik Brynjolfsson, director of the M.I.T. Initiative on the Digital Economy. “At the same time, digitization of more and more of commerce creates a huge opportunity for much better measurement.”

One opportunity has come from the Digital Price Index, a compilation of data scraped from the web that Adobe Systems recently started collecting.

An analysis of that information by Austan Goolsbee of the University of Chicago and Peter Klenow of Stanford found that prices for goods sold on the internet rose much more slowly from 2014 to 2017 than indicated by barometers like the Consumer Price Index, or C.P.I.

Online prices of personal computers fell by 12.3 percent, for example, but the C.P.I. showed just a 6.9 percent drop. Toy prices online slumped 12 percent, while the C.P.I. put the drop at just 7.8 percent. Online prices for photographic equipment and supplies fell 9.2 percent compared with the 0.6 percent decline registered by the official measure.

The government said on Tuesday that the C.P.I. increased 2.8 percent in May from 12 months earlier, with much of that jump coming from higher prices for gasoline and other energy items. Not including food, energy and housing, which tend to change a lot from month to month, the index was up a much more modest 1.3 percent. The monthly figures are based on a sampling of 140,000 products sold both in stores and online. Adobe’s digital index solely includes internet sales, but the range of products covered is much bigger: 2.1 million transactions every month.

“A lot of what’s in the C.P.I. is not bought on the internet, like health care and housing,” said Mr. Goolsbee, who was also an adviser to former President Barack Obama. But if you compare the same set of goods, he said, “there is massively more deflation” online — by as much as 2.5 percentage points. A deflationary cycle, where prices keep dropping, as has happened in Japan, can mire an economy in decline.

“Prices are going down a whole lot faster than the C.P.I. shows for the same things,” he said.

After all, as bargain hunters know, comparison shopping is a cinch online. The result is that merchants are leery of raising prices. The ease of entering the marketplace, regardless of location, further ratchets up the competition. At the same time, internet retailers can often operate at a lower cost than their brick-and-mortar competitors.

Jerome H. Powell, the Federal Reserve chairman, has called it “the Amazon effect story.”"

"Figuring out just how much of an impact online shopping has had on inflation, however, remains a challenge.

There are several measures of inflation — like the C.P.I., used to calculate cost-of-living increases in Social Security, and personal consumption expenditures (P.C.E.), an index favored by the Fed — and they all try to take account of buying and selling on the web."

"And as e-commerce grows and new products proliferate, some economists argue, the traditional measures have a harder time capturing the full scale of price changes online.

Mr. Goolsbee and Mr. Klenow discovered that new and updated products — from the iPhone X and digital assistant devices to electric bikes and toy monkey Fingerlings — were flooding online marketplaces much faster than estimated.

Putting aside apparel, where designers offer new fashions every season, the research found that 44 percent of the products sold online did not exist in the previous year. And nearly a quarter disappeared from one year to the next."

"Online spending now accounts for 10 percent of all retail spending, and in some categories 50 percent.

This isn’t the first time innovations in shopping have upended pricing structures. Over time, the introduction of the Sears catalog similarly held down prices compared with the small, local stores where people had always shopped, said Mr. Gordon, the Northwestern economist."

Reckoning With the Robots

Automation rarely outright destroys jobs. It instead augments—taking over routine tasks while humans handle more complex ones. Oren Cass reviews “The Future of Work” by Darrell M. West and “Human + Machine” by Paul R. Daugherty and H. James Wilson.

From The WSJ. Excerpts:

"In “The Future of Work,” Brookings Institution scholar Darrell West presents his version of a now-popular claim: that robotics and artificial intelligence really do make this time different.

Mr. West describes a future in which “older positions will be eliminated faster than new ones are created,” leaving “workers with few skills . . . unable to find jobs.” He warns of “social unrest” and the prospect of “dystopias that are chaotic, violent, and authoritarian in nature.” Accelerating technology requires us, he concludes, to “rethink the concept of work itself.”"

The author provides an interesting glimpse at the latest innovations: nimble robots, sophisticated software, an “Internet of Things” through which everyday objects communicate with one another. He shows how these innovations might affect existing industries and spawn new ones, reducing the need for some types of jobs and increasing the need for others, as well as changing the way people work in whatever jobs they have.

What is missing, however, is evidence that such breakthroughs reduce the economy’s demand for work. Instead, the American firms that Mr. West describes using technology seem invariably to end up employing more people. He describes Dynamic, a manufacturer that once employed four people to operate a press but then bought a $35,000 robot “that was effective at doing their jobs.” But the cited article reports that no one was laid off. The robot still needed an operator. And now the firm needed a maintenance technician, too. Another manufacturer, Taco Comfort Solutions, achieved extraordinary productivity gains in the past decade—and doubled its workforce along the way. At the industry level, Mr. West asserts that “the number of jobs lost in the retail sector exceeds the number of new jobs being created,” but the cited article shows an industry-wide job increase in every year since 2010.

Though technology’s dystopian consequences have not yet emerged, perhaps they soon will. To make that case, Mr. West leads with an infamous Oxford study finding that half of U.S. workers will likely see their jobs automated in the next 20 years. But the study assigns ridiculous probabilities of automation to many occupational categories: tour guides, real-estate agents and fashion models rank among the most automatable. So does school-bus driver, as if parents might lock unsupervised children into self-driving metal boxes each day.

The approach’s broader problem is its binary view, in which jobs either can or cannot be “automated,” rendering a worker unnecessary. Outside a few iconic examples like toll-takers, machines rarely replace people in that way. Instead, they augment, doing the most routine elements of a job while humans focus on hard cases and interpersonal interaction.

Careful studies using a task-based view of this sort find that, although substantial parts of many jobs can be automated—that is, technology can help still-needed workers become more productive—only 5% to 10% of jobs can have the human element removed entirely. The rate of productivity growth implied by the coming wave of automation would thus look similar to historical rates. Mr. West acknowledges this contrary view but never explains why the seemingly implausible Oxford forecast is the better one."

"If firms need workers to make new technology function, then they can deploy it only as fast as they can train workers to use it."

"The authors explain, for instance, why making robots operate more safely alongside humans has been critical to factory deployment—the very breakthrough emphasized by Dynamic’s CEO, but ignored by Mr. West. They describe AI’s role alongside existing workers in decidedly unsexy fields like equipment maintenance, bank-fraud detection and customer complaint management."

See also last week's post The Robots Are Coming And It Might Not Be A Case of Structural Unemployment

U.S. Inflation Rate Hit 6-Year High in May

Increase of 2% in a key price gauge shows the growing economy is on healthier footing

By Harriet Torry of The WSJ. Excerpts:

"the Fed believes a little bit of inflation at a consistent and predictable rate is needed to keep the economy growing steadily and at a healthy pace.

The Commerce Department’s price index for personal-consumption expenditures, excluding food and energy costs, rose 2% in May from a year earlier after running below that mark every month since April 2012."

"Economists have blamed factors like weak economic demand, a strong dollar and a slowly recovering labor market for low inflation in recent years. The strong dollar makes imports cheaper, and soft labor markets hold down wages.

Structural factors are also thought to have played a role, like an aging population spending less, cheap imports due to globalization and the “Amazon effect” of consumers spending less on goods online.

But demand is picking up and unemployment falling. Many forecasters estimate the U.S. economy grew at near 4% or even faster in the second quarter, twice the rate of the 2% average for much of the expansion. More demand tends to push prices higher."

"In recent months, businesses have seen their own costs rise, in part because of high energy prices and labor shortages putting some mild upward pressure on wages. Now, some businesses say they are trying to pass those costs on to consumers."

"For the broader economy, hitting the 2% inflation target is “encouraging,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., said in an interview. It means the economy is in better balance after slow growth in the wake of the severe 2007-2009 recession. However, “touching 2% isn’t grounds for victory” after the long run of low inflation, Mr. Feroli said. Fed officials “want to see it sustained.”"

See also Analysis: What Will the Fed Do With an Overshoot? Officials now see unemployment dropping to 3.5% by late 2019, a full percentage point below their estimate of where it should be in the long run by Greg Ip of The WSJ. Excerpts:

"we are learning about the real location of the natural rate of unemployment as we go,”" [chairman Powell said]

"Officials’ estimates of the natural rate have dropped in the past two years, but their projection for unemployment by the end of 2019 has dropped even more, and even that may prove pessimistic if the usual relationship between unemployment and economic growth holds"

"The Fed can’t realistically move inflation much this year or next given the lags in monetary policy, but by 2020, it can. It could in theory raise interest rates by enough to slow the economy and cool the labor market so that inflation is 2% instead of 2.1% in 2020."

"For these projections to make sense, Fed officials must either raise their inflation target, assume some serendipitous boost to the economy’s potential growth rate or decline in the natural unemployment rate, abandon their economic models, or run much tighter monetary policy, especially after 2020."

The Level and Trend of Poverty in the United States, 1939-1979

By Christine Ross, Sheldon Danziger and Eugene Smolensky. Published in Demography, Vol. 24, No. 4 (Nov., 1987), pp. 587-600.

"Abstract

A detailed record of the number and characteristics of persons in poverty is available since 1959. This paper provides measures for 1939 and 1949 that correspond as closely as possible to the official poverty statistics. Poverty, as officially measured, fell from 40.5 percent of all persons in 1949 to 13.1 percent in 1979, declining most among the elderly and least among female-headed households. We estimate the effects on the aggregate poverty rate of changes between 1940 and 1980 in the distribution of the population by selected demographic characteristics of household heads and by the employment status of head and spouse. Some changes, such as the increasing proportion of two-earner families, were poverty reducing, whereas others were poverty increasing."

See also Poverty in the United States by Gwendolyn Mink & Alice M. O'Connor. Click here to see inside the book. If you click on the first picture, the numbers are clearer. (Hat tips to commenters Jason Wall and Todd Kreider at this post by Scott Sumner Do poverty programs reduce poverty? Here is a table from Mink & O'Connor's book:

Increased Supply Is Holding Down Rent Increases

See Looking for an Apartment? It Is a Great Time to Rent: Rents are flattening in major U.S. cities, landlords offer a free month, Amazon gift certificates among other perks by Laura Kusisto of The WSJ.

Rent increases have slowed down. In competitive markets, if prices rise and profits therefore go up for firms, in the long run, more firms will enter and supply will increase, bringing prices back down. This might be happening now with apartment. It might not have happened quickly because it does take time to build new apartment complexes.

Excerpts from the article:

"Driving this dynamic is a flood of new apartments and weakening demand."

"Rents rose 2.3% in the second quarter compared with a year earlier, the smallest annual increase since the third quarter of 2010 . . . due to large amounts of new supply."

"While average rents continued to grow, individual landlords cut rents in some markets. In addition, landlords are offering tenants incentives including as many as three months paying no rent, free parking, credit for ridesharing services like Uber and Lyft, and Amazon gift cards for as much as $2,500"

"Developers responded to escalating rents by building the most new apartments in 30 years, sending a flood of new high-end units to downtown areas across the country. Developers are expected to add 300,000 new units over the next year"

"The national vacancy rate ticked up to 4.8% from 4.3% in the second quarter of 2017."

South Texas’ Eagle Ford could have billions of crude barrels left to pump

By Rye Druzin of The San Antonio Express-News. Excerpts:

"The Eagle Ford Shale field could still have billion of barrels of oil to pump, potentially making it the second largest oil field in the U.S.

In a report published Friday, the U.S. Geological Survey said the Eagle Ford — which stretches from the Texas-Mexico border into Louisiana — could contain 8.5 billion barrels of undiscovered and technically recoverable oil.

That would make it second in the U.S. for oil reserves, just ahead of the 7.4 billion barrels estimated to remain undiscovered in the Williston Basin of North Dakota.

West Texas’ Permian Basin, the name for a larger set of basins that includes the Wolfcamp and Midland basins, still reigns No. 1 with 20 billion barrels of undiscovered and technically recoverable oil, according to the U.S.G.S."

"The Eagle Ford may also have 66 trillion cubic feet of natural gas, making it tied for third in the U.S. with the Niobrara Basin in Colorado and Wyoming for potential natural gas reserves."