Market Power and the Big Pizza Industry

I hate it when I see things (companies, celebrities, etc.) I like do something I dislike. So it goes in the world of pizza. Apparently the pizza industry is staunchly Republican and anti-regulation. Interestingly, the industry has fairly small political spending, yet it exerts substantial power.

They’re not throwing money around — pizza’s biggest spenders devoted less than $500,000 to lobbying last year and just $1.5 million in political contributions in the last two election cycles.

I don’t feel particularly bad about that though because the biggest spenders, like Pizza Hut, also make the worst pizza. Hopefully the best pizza places (Vace!) are not subverting our political system, though I have known at least one hard-core Republican small-pizza-business owner. I would also imagine that there is an important distinction to be made between frozen and non-frozen pizza makers, and that the frozen pizza industry is a subtle and malignant force that commands the market for school lunch. I can’t help but think there is a significant problem with market power in the school lunch market. It follows that the business would be extremely lucrative, leading to violently powerful special interest/lobbying responses to any existential threat.

And in testimony before Congress in August of that year, Karen Wilder, chief nutritionist for Schwan Food, said many foods packed with nutrients, including pizza, risked elimination from school lunch by the proposed rules. A subsidiary of Schwan supplies 70 percent of school lunch pizza.

Prof. Krugman made a small introduction to the literature that examines the relationship between obesity and politics.

There are outliers — Utah especially, but also Montana and Wyoming, of which more in a minute, but overall the relationship is really clear. At the county level, the “diabetes belt” — that’s the CDC’s term, not mine — is clearly very Republican.

Again, I imagine this has to do with market power, regulation, environmental/lifestyle and, maybe, ideology drives some of those differences (I doubt the difference has to do with heredity).

I was interested, so I found a 2011 NYTimes article that discusses some of the causes and policy proposals to address the rise in obesity. It looks a lot like the industries related to cars, housing/urban development and regional planning, soft drinks, and all of our food changed a lot post-WWII, especially starting in the 1970s, and our bodies ended up changing with them.

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Interesting (?) thoughts on wage growth and good jobs

I thought this blog post by Prof. Vollrath was very clear and interesting in informing how to think about technology and “good jobs.”

Hoping or trying to recreate the employment structure of 1950 is stupid. We don’t needthat many people to assemble stuff together any more because we are so freaking good at it now. The expansion of service employment isn’t some kind of historical mistake we need to reverse.

Any job can be a “good job” if the worker and employer can coordinate on a good equilibrium. Costco coordinates on a high-wage, high-benefit, high-effort, low-turnover equilibrium. Sam’s Club coordinates on a low-wage, low-benefit, low-effort, high-turnover equilibrium. Both companies make money, but one provides better jobs than the other. So as technology continues to displace workers, think about how to get *all* companies to coordinate on the “good” equilibrium rather than pining for lost days of manly steelworkers or making the silly presumption that we will literally run out of things to do.

It seems like the Walmart/low-wage workers raises may be an indication that employers realize the importance of making better jobs, but the U.S. is not nearly there yet. It seems like EPI is very focused on the issue of how to create good jobs. It’s tough with little collective organizing by/for workers.

When we think about a post-recession world, it is interesting to consider than the slow wage growth is related to “pent-up wage cuts” resulting from downward nominal wage rigidity. Still, unsatisfactory wage growth and low job quality have been issues for a while. Workers wages and productivity have decoupled. First, we had polarized job creation (growth in the top and the bottom). Now, we mostly have job growth at the bottom of the income distribution. Those lower-paying jobs are going to workers who are better educated (and presumably more indebted).

There are two trends that I have come across in the academic research, and I wonder if (and how) they might be related:

1) The labor market and firms have become less fluid and less dynamic. “[T]hat reduced fluidity has harmful consequences for productivity, real wages and employment.”

This seems like an observation that should raise a red flag for rent-seeking/market power watchers. [From the more conservative side, there have been attempts to attribute the decline in U.S. dynamism  (a “start-up deficit”) to increasing or more stringent regulations. This hypothesis, as conceptualized by Prof. Tabarrok, did not return any discernible results that related regulation to business dynamism.]

In my mind, (at this moment, at least) there might be two factors that might be causal (or at least correlated) with decreasing dynamism and fluidity. One, I suspect, is an insufficient social safety net. It would be interesting to see a comparison of start-ups and dynamism in an economy with a basic income, for example. The idea is that people would be more willing to take risks–start businesses, quit their jobs, innovate, etc.–if they had a more attractive fall-back option, if they ended up failing. It might have something to do with debt (which is the same social safety net story, more or less) caused by education, health, or housing costs. The second thing related to reduced dynamism, and the second research area I wanted to mention, is the rise of finance.

2) Profs. Cecchetti and Kharroubi recelty released a paper through the BIS (very interesting place for this to come from) that lays out a comprehensive argument for why and how finance has crowded out real economic growth. They also have a pithily titled blog post “Finance is great, but it can be a real drag, too.” Prof. Cecchetti starts out with a couple anecdotal paragraphs about how college students have gone from wanting to work on “galactic structures, superconductors, computer algorithms, subcellular mechanisms, and genetic coding” to wanting to get “high-paying jobs” in finance. This rings true with my experience. Although, personally, I think attitudes may have changed, but another important factor is where the jobs/money actually are/is. Anyway, here is the briefest summary of the results:

For the past few years, one of us (Steve) has been studying the relationship between economic growth and finance. The results are striking. They come in two categories. First, the financial system can get too big – to the point where it drags productivity growth down. And second, the financial system can grow too fast, diminishing its contribution to economic growth and welfare. …

We can think of additional reasons why finance causes problems for economic growth, and we’ve written about them extensively on this blog (see, for example, our pieces on credit ratings, conflict of interest, Ponzi schemes, and leverage). Most important, when intermediaries fail to perform the critical screening and monitoring necessary to ensure efficient allocation of resources, productivity suffers and the financial system as a whole can become vulnerable to crises.

So, what should we conclude? Many observers (especially the largest financial intermediaries themselves) are critical of the increased regulation of the financial sector following the crisis of 2007-2009, arguing that it will slow economic growth. We, too, can think of some misdirected regulatory efforts that may diminish long-run efficiency without reducing systemic risk (see, for example, our take on raising the maximum loan-to-value ratio for mortgages to 97%).

But, we strongly support the authorities’ efforts to raise capital requirements in order to make the financial system safer. If anything, the research on finance and economic growth strengthens that view, suggesting that there will be little, if any, cost in terms of economic growth even if further increases in capital requirements were to lead to some shrinkage of the size of the financial sector in the advanced economies.

I’m not sure how direct the linkages are, but I think that the rise of finance has been important in wage growth and job quality. I have the same impression (picked up in large part from my time at CAP and UNC CCC) that Prof. Cecchetti expressed, that finance greatly improves people’s lives when properly harnessed. Today though, the evidence has begun to accumulate to a point where it is pretty clearly that the U.S. financial sector has gotten too large. I find it hard not to suspect that the overgrowth has led to rent-seeking behavior and market power accumulation, and that has had effects on business dynamics and the labor market that we have not teased out completely (yet).

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At least one German policymaker is talking sense: its Joschka Fischer (surprise!)

In college, one of mine (and Mattis’) favorite politicians was Joschka Fischer, a leader in the German Green Party and former Foreign Minister and Vice Chancellor. It is encouraging to see him publishing at Project Syndicate, and I certainly hope more German policymakers see problems in Europe the same way he does. If they don’t, Germany may be in trouble, because an export-led growth model is, by definition and by experience, not built to last. German domestic demand certainly looks fairly weak. We will have to see what happens, but after the continuing low inflation/negative yields and continued downward revisions to economic growth, something had to give, and hopefully that something will be Greece and Yanis Varoufakis.

Anyway, the reason I got thinking about this post, Joschka Fischer:

Not long ago, German politicians and journalists confidently declared that the euro crisis was over; Germany and the European Union, they believed, had weathered the storm. Today, we know that this was just another mistake in an ongoing crisis that has been full of them. The latest error, as with most of the earlier ones, stemmed from wishful thinking – and, once again, it is Greece that has broken the reverie.
Even before the leftist Syriza party’s overwhelming victory in Greece’s recent general election, it was obvious that, far from being over, the crisis was threatening to worsen. Austerity – the policy of saving your way out of a demand shortfall – simply does not work. In a shrinking economy, a country’s debt-to-GDP ratio rises rather than falls, and Europe’s recession-ridden crisis countries have now saved themselves into a depression, resulting in mass unemployment, alarming levels of poverty, and scant hope.

Warnings of a severe political backlash went unheeded. Shadowed by Germany’s deep-seated inflation taboo, Chancellor Angela Merkel’s government stubbornly insisted that the pain of austerity was essential to economic recovery; the EU had little choice but to go along. Now, with Greece’s voters having driven out their country’s exhausted and corrupt elite in favor of a party that has vowed to end austerity, the backlash has arrived. Continue reading

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Wages may rise, but not as much as we think they should

Prof. Mark Thoma has another extremely accessible article arguing that achieving “full employment” alone is not nearly enough to solve the problem of stagnating wages.

I’m planning on posting some more interesting research on new trends in labor economics, but I’ve been hesitant because I’m not sure what I want to say. I am developing my own thoughts about what is happening in the U.S. labor market, but I’m not quite ready to share them.

Anyway, I want to share a lot of Prof. Thoma’s article. I really liked the quote from St. Thomas Aquinas.

The most recent employment report brought mixed news. The unemployment rate continues its slow but steady downward path and now stands at 5.6 percent, but wages remain flat. In response, most analysts made two points. First, the lack of wage growth indicates that we are not yet close enough to full employment to generate upward pressure on wages, so policymakers should be patient in reversing attempts to stimulate the economy. Second, once we do get closer to full employment the picture for wages will change and the long awaited acceleration in labor compensation will finally materialize.

I fear this trust that market forces will eventually raise wages will lead to disappointment. Inequality has been increasing for over three decades, and during that time we have been at or near full employment many times. Yet, wages over this time period have been flat. As noted by the Economic Policy Institute, “Since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline—even though decades of consistent gains in economy-wide productivity have provided ample room for wage growth.” The idea that market forces alone will increase wages sufficiently to offset increasing inequality is not supported by the evidence from these years. There’s more to the story than market forces.

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Prof Duy on the FOMC statement this week: Many hard questions

I’ve been reading Prof. Tim Duy for a few years now and love his work. Just based on my casual reading, I have found myself slightly surprised by how optimistic he is about the U.S. economy. His recent writings have made me more optimistic. I still find myself significantly less confident about the outlook for the U.S. and world economy looking at the socio-political economic atmosphere (downside risks in Europe, Russia, parts of Latin America, China, Japan). This is not to mention some strange or uncomfortable things in the U.S. recovery: weakness in housing; continued wage stagnation; low inflation; and high lending on student loans and credit cards (is this good? I doubt it), as a few examples that I think about. One of the things that I have learned, and am working to internalize for my conceptual understanding of the economy, is the resilience and underlying strength that, even with the downside risks and pressures over the past 2-3 years, the U.S. economy continues to grow.

Anyway this post shares Prof. Duy’s newest questions for Janet Yellen that I found interesting/challenging. Bottom line first:

Bottom Line: Odds are high that the Fed alters the statement to increase their policy flexibility next year. But even if they drop “considerable time,” Yellen will emphasize via the press conference that this change does not mean a rate hike is imminent. She will emphasize that the timing and pace of rate hikes remains firmly data dependent. The current oil-related disruptions in financial markets loom like a dark cloud over a both the FOMC meeting and the generally improving US outlook.

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Today’s disappointing economic policy: EU’s Juncker Plan

There is a new proposal to save the EU economy, and it is pretty complicated. Luckily, Frances Coppola has done the research and written a clear and informative account. I’ll put some excerpts below, but the short version is that the EU is trying to get the private sector to invest EUR 315 billion by taking on the risk of the first EUR 21 billion–that 21 bil is money that either doesn’t currently exist or is already committed to EU initiatives.

The new President of the European Commission has recently unveiled his second attempt at increasing European investment without raising public debt levels. His first attempt, which envisaged leveraging the ESM, was shot down by the Germans. This version leverages both the EIB and the EU’s own budget. By committing 16bn EUR from the EU’s budget and 5bn from the EIB, Juncker reckons that upwards of 315bn of new investment could flow into EU-wide projects, increasing jobs and improving infrastructure. It sounds wonderful, doesn’t it?

I’ve drawn this up as a leveraged structure:

Note that the actual investment would be Mezzanine + Senior Debt, i.e. EIB subordinated lending plus private sector investment. The Equity portion is described in the factsheet as “protection”. There is no actual money involved. It consists of public guarantees, not real money. In effect, the EU and EIB combined are providing insurance to private sector investors – accepting “first losses” of up to 21bn Euros. The EU’s portion would guarantee the first 16bn Euros of longer-term infrastructure investment: the EIB would guarantee the first 5bn of capital investment in SMEs.

In fact, let us be completely clear. NONE of this money exists. Not a single Euro of it. This is a synthetic structure based entirely upon insurance, not actual funds.

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How will the West Coast survive? (water scarcity and economics)

Tim Taylor, THE Conversable Economist, reviewed the economic of water in the western U.S. I thought it provided a somewhat discouraging, yet extremely interesting look at a field of economics (and an important issue) that is hugely important. He cites to the these three Brookings papers that provide a more extensive look at these issues. Because of time constraints, I just wanted to share Prof. Taylor’s thoughts and maybe add a few of my own:

Fresh water doesn’t get used up in a global sense: that is, the quantity of fresh water on planet Earth doesn’t change. But the way in which the world’s fresh water is naturally distributed–by evaporation, precipitation, groundwater, lakes, and rivers and streams–doesn’t always match where people want that water to be. The man-made systems of water distribution like dams, reservoirs, pipelines, and irrigation systems can alter the natural distribution of water to some extent. But the American West is experiencing a combination of drought that reduces the natural supply of water and rising population that wants more water. Even with drought, population pressures, and environmental demands for fresh water, there is actually plenty of water in the American Southwest–at least, if the incentives are put in place for some changes to be implement by urban households, farmers, water providers, and legislators. …

Here’s a figure from Culp, Glennon, and Libecap showing the U.S. drought situation, concentrated in the southwestern United States:
These southwestern states have also experienced dramatic population growth in recent decade. Of the regions of the United States, these are the states with the highest population growth and the lowest annual rainfall even in average times. Here’s a figure from Kearney, Harris, Hershbein, Jácome, and Nantz:

Here’s my master plan for how to address the water shortfall, drawing on discussions in the various papers.

1) Reduce the incentives for outdoor watering by urban households in dry states. 
If  you had to guess, would you think that urban households in dry states of the American southwest use more or less water than other states? In general, these households tend to be heavier users of water. Here’s a figure from Kearney et al., who report (citations omitted):

Outdoor watering is the main factor driving the higher use of domestic water per capita in drier states in the West. Whereas residents in wetter states in the East can often rely on rainwater for their landscaping, the inhabitants of Western states must rely on sprinklers. As an example, Utah’s high rate of domestic water use per capita is driven by the fact that its lawns and gardens require more watering due to the state’s dry climate. Similarly, half of California’s residential water is used solely for outdoor purposes; coastal regions in that state use less water per capita than inland regions, largely because of less landscape watering . . .

There are a variety of ways to reduce outdoor use of water: specific rules like banning outside watering, or limiting it to certain times of day (to reduce evaporation); the use of drip irrigation and other water-saving technologies; and so on. For economists, an obvious complement to these sorts of steps is to charge people for water in a way where the first “block” of water that is used has a relatively low price, but then additional “blocks” have higher and higher prices.
2) Upgrade the water delivery infrastructure. 
One hears a lot of talk about the case for additional infrastructure spending, but much of the focus seems to be on fixing roads and bridges. I’d like to hear some additional emphasis on how to fix up the water infrastructure system. As Ajami, Thompson, and Victor note:

“Water infrastructure, by some measures the oldest and most fragile part of the country’s built environment, has decayed. … Water infrastructure—including dams, reservoirs, aqueducts, and urban distribution pipes—is aging: almost 40 percent of the pipes used in the nation’s water distribution systems are forty years old or older, and some key infrastructure is a century old. On average, about 16 percent of the nation’s piped water is lost due to leaks and system inefficiencies, wasting about 7 billion gallons of clean and treated water every day …. Metering inaccuracies and unauthorized consumption also leads to revenue loss. Overall, about 30 percent of the water in the United States falls under the category of nonrevenue water, meaning water that has been extracted, treated, and distributed, but that has never generated any revenue because it has been lost to leaks, metering inaccuracies, or the like … “

This point only compounds how believable it is that real interest rates are negative (investors are paying the government to hold onto their money), and politicians are still trying to reduce government spending. The consensus in favor of raising government spending to a sane path is growing,  and spending on infrastructure will be a huge part of it (a lot of the spending we will need to do anyway, so why not do it now when it’s cheap).
3) Let farmers sell some of their water to urban areas. 
For historical reasons, a very large proportion of the water in many western states, but especially California, goes to agricultural uses. Some of these uses combine relatively high market value and relatively low use of water, like many fruits (including wine grapes), vegetables, and nuts. But the use of water for other crops is more troublesome.  Culp, Glennon, and Libecap go into these issues in some detail. As one vivid example, they write: “In 2013, Southern California farmers used more than 100 billion gallons of Colorado River water to grow alfalfa (a very water-intensive crop) that was shipped abroad to support rapidly growing dairy industries, even as the rest of the state struggled through the worst drought in recorded history …”
There are a substantial number of legal barriers to the idea of farmers trading some water to urban areas, but the possibilities are quite striking. Here’s a figure showing that 80% of California’s water use goes to agriculture, with a substantial share of that going to lower-value field crops like alfalfa, rice,  and cotton. In agricultural areas, as in urban ones, there is often considerable scope for conserving water in various ways,  like targeting the use of irrigation more carefully, making sure that irrigation ditches don’t leak while carrying water, and the like.

One approach they describe, implemented starting in 2002 in Santa Fe, New Mexico, required that any new urban construction had to find a way to offset water that would be used in that construction.

As an example, developers could obtain a permit to build if they retrofitted existing homes with low-flow toilets. Residents of these homes welcomed the chance to get free toilets, and Santa Fe plumbers jumped at the opportunity for new business. Within a couple of years plumbers had swapped out most of the city’s old toilets with new high-efficiency ones. Water that residents would have flushed away now supplies new homes.  … In short order, a market emerged as developers began to buy water rights from farmers. Developers deposited the water rights in a city-operated water bank; when the development became shovel-ready, the developer withdrew the water rights for the project. If the project stalled, the developer could sell the rights to another developer whose project was farther along. Santa Fe also enacted an aggressive water conservation program and adopted water rates that rise on a per unit basis as households consume additional blocks of water. Thanks to the innovative water-marketing measures, the conservation program, and tiered water rates, water use per person in Santa Fe has dropped 42 percent since 1995 …

4) Set up groundwater banks. 
Historically, most western states have allowed any property owner to drill a well and use groundwater without limit. But the groundwater reserves are slow to recharge, and with the drought and population pressures, they are under severe stress. Culp, Glennon, and Libecap explain (citations omitted):

Groundwater has been the saving grace for many parts of the water-starved West. Following the advent of high-lift turbine pump technology in the 1930s, many regions had access to vast reserves of water in underground aquifers that they have tapped to supply water when surface water supplies were inadequate. A recent study looked at data on freshwater reserves above ground and below ground across the Southwest from 2004 to 2013. It found that freshwater reserves had declined by 53 million acre-feet during this time—a volume equivalent to nearly twice the capacity of Lake Mead! The study also found that 75 percent of the decline came from groundwater sources, rather than from the better-publicized declines in surface reservoirs, such as Lake Mead and Lake Powell. Much of this decline occurred because some Western states, including California, have historically failed to regulate, or do not adequately regulate, groundwater withdrawals. As a result, groundwater aquifers are effectively being mined to provide water for day-to-day use. In response to the ongoing drought, California farmers continue to drill new wells at an alarming rate, lowering water tables to unprecedented depths …In the San Joaquin Valley of California, excessive groundwater pumping caused the water table to plummet and the surface of the earth to subside more than twenty-five feet between 1925 and 1977 …”

Arizona has already been taking steps toward groundwater protection, both by limiting what can be taken out and by providing incentives to save water in the form of recharging groundwater (which avoids the problem of evaporation).

Although not yet developed into a formal exchange, Arizona has been at the cutting edge in developing groundwater recharge and recovery projects and a supporting statutory framework to help enhance the reliability of water supplies. Arizona allows municipal users, industrial users, and various private parties to store water in exchange for credits that they can transfer to other users. Because water stored underground in aquifers is not subject to evaporation, groundwater that is deliberately created through recharge activity can be stored and recovered later. This recharge and recovery approach is facilitated by Arizona laws that restrict the use of groundwater in several of the state’s most important groundwater basins; these restrictions prevent open access to the resource. Restrictions on open access, combined with statutory and regulatory provisions that allow for the creation and recovery of credits, created the essential conditions for trade in stored groundwater. As a result, numerous transactions have occurred between various municipal interests, water providers, and private parties.

California passed legislation last month to regulate groundwater pumping for the first time.
It is insane if more states have not implemented policies like this. We have bodies of experience with similar environmental resources (although each is different), but it might in fact be easier to create a market for water. If I recall correctly the US has worked on similar mechanisms (as far as creating market-type mechanisms for environmental goods or bads) for NOx, SOx and particulates, carbon, wetlands, and brownfield sites, not to mention threatened and endangered species. With water, we can actually touch it and move it (without it necessarily moving of its own volition). It will be difficult, but important to get the incentives right, and I as I hoped to point out, we have experience and bodies of research that should help.
5) More research and development on water-saving technologies. 
As Ajami, Thompson, and Victor discuss at some length, there is relatively little innovative activity in water conservation and purification, as opposed to, say, energy conservation and new sources of energy. They argue that part of the reason is that energy-providing companies compete against each other, while most water companies are sleepy publicly-run local monopolies. Potential entrepreneurs have the ability to look at a lot of ways of producing and using energy, confident that if they come up with something useful, their invention will find a ready market. But entrepreneurs looking at various methods of water conservation will often find that their ideas apply only locally, or are hard to patent, or are hard to sell to water companies and users. Here’s their figure comparing spending for energy and water innovation at a global and U.S. level.
Drought is a natural problem. But the factors that determine how water is available get used represent an economic problem of the incentives and constraints that determine the allocation of a scarce resource.  In the American West, the institutional problems of water allocation seem to me even more severe than the natural problem of drought.
This one was shocking to me. The relatively small amount of money going into investment, research and innovation and water-saving technology. My takeaway is twofold: 1. the government (state and/or federal) needs to build better markets and incentives around water “production” and consumption; 2. the research and investment here could be driven by the private sector if the incentives are right, but more likely it is a ripe example of a public good (so the government should up its investments in water-related development). [I also would think there are implications for the huge population growth in the West, but, who knows, maybe the water scarcity problem won’t end up affecting the desire of people to continue going (and staying) out there]

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