Stock Flow Consistent Input Output Models (SFCIO)

Stock Flow Consistent Input Output Models (SFCIO)

 

SFCIO  = SFC + IO Models

SFC = Stock Flow Consistent

IO = Input Output

Stock Flow Consistent Input Output Models (SFCIO)

 

Integrating Varieties of Modeling Methods

  • Monetary Input Output Models
  • Physical Input Output Models
  • Stock Flow Consistent Models
  • System Dynamics Models

 

For integrating:

  • Physical Flows (Resources and Products)
  • Monetary Flows

 

 

From Ecological Macroeconomic Models: Assessing Current Developments

 

0

 

 

From A stock-flow-fund ecological macroeconomic model

ecology13

 

 

From Stock-Flow Consistent Input–Output Models as a Bridge
Between Post-Keynesian and Ecological Economics

One effort to explicitly represent the dynamics of debt, finance, and other monetary factors has been the post-Keynesian stock-flow consistent (SFC) approach. At the same time, input–output (IO) models have been widely used to investigate sectoral interdependencies within the real economy, while environmentally extended input–output models have been used to analyze the relationship between the economy and ecological subsystems. However, the role of monetary dynamics has been left relatively unexplored in IO models (Caiani et al., 2014). This paper proposes a synthesis of elements from both SFC and IO models with insights from ecological economics to provide an avenue for investigating the interrelations between the monetary economy and the physical environment.

 

From Stock-Flow Consistent Input–Output Models as a Bridge
Between Post-Keynesian and Ecological Economics

By combining SFC models and IO models, financial flows of funds can be integrated with flows of real goods and services. Lawrence Klein, who developed large scale macroeconomic models typified by the FRB-MIT-Penn model, has noted the natural synergies between the National Income and Product accounts, the IO accounts, and the FF accounts (Klein, 2003). The approach of combining both SFC and IO models with ecological macroeconomics affords one method to unite those accounts, as suggested by Klein, and to simultaneously model monetary flows through the financial system, flows of produced goods and services through the real economy, and flows of physical materials through the natural environment. Models of this type may provide additional tools to aid macro economists, ecological economists, and physicists in the task of understanding the economy and the physical environment as one united and complexly interrelated system, rather than as a colloidal agglomeration of artificially separated analytical domains. These modes of analysis are required to study pressing problems such as climate change, which are neither purely economic, nor purely environmental, nor purely physical, but rather are all of the above (Rezai et al., 2013).

 

 

Please see my related posts:

Accounting For Global Carbon Emission Chains

Stock Flow Consistent Models for Ecological Economics

 

 

 

Key Sources of Research:

 

A stock-flow consistent input–output model with applications to
energy price shocks, interest rates, and heat emissions

Matthew Berg1, Brian Hartley2 and Oliver Richters3

2015

http://iopscience.iop.org/article/10.1088/1367-2630/17/1/015011/pdf

Stock-Flow Consistent Input–Output Models as a Bridge
Between Post-Keynesian and Ecological Economics

 

Matthew Berg (The New School for Social Research)
Brian Hartley (The New School for Social Research)
Oliver Richters (International Economics, Oldenburg University)

October 7, 2015

https://www.boeckler.de/pdf/v_2015_10_23_richters.pdf

 

 

 

Integrating Energy Use into Macroeconomic Stock-Flow Consistent Models

Presented by
Oliver Richters

2015

https://www.econstor.eu/bitstream/10419/154764/1/richters-integrating-energy-use-sfc-models-2015.pdf

 

 

 

The role of money and the financial sector in energy-economy models used for assessing climate and energy policy,

Hector Pollitt & Jean-Francois Mercure

(2018)

Climate Policy, 18:2, 184-197

 

https://www.tandfonline.com/doi/pdf/10.1080/14693062.2016.1277685?needAccess=true

 

 

Ecological Macroeconomic Models: Assessing Current Developments

Lukas Hardt a,⁎, Daniel W. O’Neill

2017

 

https://ac.els-cdn.com/S0921800916303202/1-s2.0-S0921800916303202-main.pdf?_tid=4fe094ea-f4d6-4a7e-b7d6-230d3cce6c0e&acdnat=1522699485_1c1d93cd6adda3a829d89b5c8e841d13

 

Ecological macroeconomics: Introduction and review

2016

 

https://ac.els-cdn.com/S0921800915004747/1-s2.0-S0921800915004747-main.pdf?_tid=0cda7488-5f2d-4edf-966e-5b23cb7d43cd&acdnat=1522699625_aaa0756d02319c5ab25e0c1f1d8bf3f1

 

 

 

A stock-flow-fund ecological macroeconomic model

Yannis Dafermos a,⁎, Maria Nikolaidi b, Giorgos Galanis c

2016

 

https://ac.els-cdn.com/S0921800916301343/1-s2.0-S0921800916301343-main.pdf?_tid=932bb9db-d514-47b7-9be4-f345250b3f0d&acdnat=1522699759_7d965a332aad8ec5596fc4b34f22e6ec

 

 

 

Potential Consequences on the Economy of Low or No Growth – Short and Long Term Perspectives

J. Mikael Malmaeus a,⁎, Eva C. Alfredsson

 

https://ac.els-cdn.com/S0921800916300477/1-s2.0-S0921800916300477-main.pdf?_tid=6f5c6223-3f20-4d88-af15-ed8d18eff17a&acdnat=1522699926_1793a74188ac6b373bc1aec837514b30

 

 

Growth, Distribution, and the Environment in a Stock-Flow Consistent Framework∗

Asjad Naqvi†

February 6, 2015

http://epub.wu.ac.at/4468/1/EcolEcon_WorkingPaper_2015_2.pdf

 

 

 

Foundations for an Ecological Macroeconomics: literature review and model development

Tim Jackson, Ben Drake (SURREY), Peter Victor (York University), Kurt Kratena, Mark Sommer (WIFO)

https://www.econstor.eu/bitstream/10419/125724/1/WWWforEurope_WPS_no065_MS38.pdf

 

 

 

Towards a Stock-Flow Consistent Ecological Macroeconomics

Authors: Tim Jackson (SURREY), Peter Victor (York University), Ali Asjad Naqvi (WU)

March 2016

https://www.econstor.eu/bitstream/10419/146611/1/856194174.pdf

http://epub.wu.ac.at/5012/1/WWWforEurope_WPS_no114_MS40.pdf

 

Consistency and Stability Analysis of Models of a Monetary Growth Imperative

Oliver Richtersa, Andreas Siemoneitb

a Department of Economics, Carl von Ossietzky University Oldenburg, http://www.oliver-richters.de
b Berlin, http://www.ezienzkritik.de

https://www.econstor.eu/bitstream/10419/144750/1/863731139.pdf

 

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Measuring Globalization: Global Multi Region Input Output Data Bases (G-MRIO)

Measuring Globalization: Global Multi Region Input Output Data Bases (G-MRIO)

 

A special issue of Economic Systems Research published in 2013 discussed currently available GMRIO data bases.  There are two strands of research in development and use of these databases:

  • Trade flows and global supply chains
  • Environmental Impacts of Economic Growth, Trade and Globalization

 

G-MRIO

  • IDE JETRO Asian IO Tables
  • EORA
  • OECD Inter-Country Input-Output (ICIO) tables
  • GRAM (Global Resource Accounting Model )
  • World Input-Output Database (WIOD).
  • Global Trade Analysis Project (GTAP)
  • EXIOPOL (EXIOBASE)

 

Another recent development is development of Trade in Value added databases analyzing trade flows of intermediate goods and fragmented global supply chains and production networks.  These projects are currently underway at the time of writing of this post.

TIVA Databases

  • NA TiVA Project
  • The OECD-WTO TiVA database
  • APEC TiVA initiative

 

There are also EE- GMRIO (Environmentally extended GMRIO) discussed else where in a related post.

 

GMRIO Databases

 

GRAM

The Global Resource Accounting Model (GRAM) is a multi-regional input-output model (MRIO), which currently distinguishes between 62 countries and one ‘rest of the world’ region and 48 industrial sectors per country or region. The heart of the model is made up of OECD data on bilateral trade flows and input-output tables for 1995 to 2010. Combined with additional data sets, such as CO2 emissions and material extraction, the model enables production-related variables to be attributed to end consumption.

 

 

GLOBAL MULTIREGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK

Arnold Tukker & Erik Dietzenbacher
Published online: 21 Mar 2013
This review is the introduction to a special issue of Economic Systems Research on the topic of global multi regional input–output (GMRIO) tables, models, and analysis. It provides a short historical context of GMRIO development and its applications (many of which deal with environmental extensions) and presents the rationale for the major database projects presented in this special issue. Then the six papers are briefly introduced. This is followed by a concluding comparison of the characteristics of the main GMRIO databases developed thus far and an outlook of potential further developments.

 

COMPILATION AND APPLICATIONS OF IDE-JETRO’S INTERNATIONAL INPUT–OUTPUT TABLES

Bo Meng , Yaxiong Zhang & Satoshi Inomata
Published online: 21 Mar 2013
International input–output (IO) tables are among the most useful tools for economic analysis. Since these tables provide detailed information about international production networks, they have recently attracted considerable attention in research on spatial economics, global value chains, and issues relating to trade in value added. The Institute of Developing Economies at the Japan External Trade Organization (IDE-JETRO) has more than 40 years of experience in the construction and analysis of international IO tables. This paper explains the development of IDE-JETRO’s multi-regional IO projects including the construction of the Asian International Input–Output table and the Transnational Inter regional Input–Output table between China and Japan. To help users understand the features of the tables, this paper also gives examples of their application.

 

 

EXIOPOL – DEVELOPMENT AND ILLUSTRATIVE ANALYSES OF A DETAILED GLOBAL MR EE SUT/IOT

Arnold Tukker , Arjan de Koning , Richard Wood , Troy Hawkins , Stephan Lutter , Jose
Published online: 21 Mar 2013
EXIOPOL (A New Environmental Accounting Framework Using Externality Data and Input–Output Tools for Policy Analysis) was a European Union (EU)-funded project creating a detailed, global, multi regional environmentally extended Supply and Use table (MR EE SUT) of 43 countries, 129 sectors, 80 resources, and 40 emissions. We sourced primary SUT and input–output tables from Eurostat and non-EU statistical offices. We harmonized and detailed them using auxiliary national accounts data and co-efficient matrices. Imports were allocated to countries of exports using United Nations Commodity Trade Statistics Database trade shares. Optimization procedures removed imbalances in these detailing and trade linking steps. Environmental extensions were added from various sources. We calculated the EU footprint of final consumption with resulting MR EE SUT. EU policies focus mainly on energy and carbon footprints. We show that the EU land, water, and material footprint abroad is much more relevant, and should be prioritized in the EU’s environmental product and trade policies.

 

 

A MULTI-REGION INPUT–OUTPUT TABLE BASED ON THE GLOBAL TRADE ANALYSIS PROJECT DATABASE (GTAP-MRIO)

Robbie M. Andrew & Glen P. Peters
Published online: 21 Mar 2013
Understanding the drivers of many environmental problems requires enumerating the global supply chain. Multi-region input–output analysis (MRIOA) is a well-established technique for this purpose, but constructing a multi-region input–output table (MRIOT) can be a formidable challenge. We constructed a large MRIOT using the Global Trade Analysis Project (GTAP) database of harmonised economic, IO, and trade data. We discuss the historical development of the GTAP-MRIO and describe its efficient construction. We provide updated carbon footprint estimates and analyse several issues relevant for MRIO construction and applications. We demonstrate that differences in environmental satellite accounts may be more important than differences in MRIOTs when calculating national carbon footprints. The GTAP-MRIO is a robust global MRIOT and, given its easy availability and implementation, it should allow the widespread application of global MRIOA by a variety of users.

 

 

THE CONSTRUCTION OF WORLD INPUT–OUTPUT TABLES IN THE WIOD PROJECT

Erik Dietzenbacher , Bart Los , Robert Stehrer , Marcel Timmer & Gaaitzen de Vries
Published online: 21 Mar 2013
This article describes the construction of the World Input–Output Tables (WIOTs) that constitute the core of the World Input–Output Database. WIOTs are available for the period 1995–2009 and give the values of transactions among 35 industries in 40 countries plus the ‘Rest of the World’ and from these industries to households, governments and users of capital goods in the same set of countries. The article describes how information from the National Accounts, Supply and Use Tables and International Trade Statistics have been harmonized, reconciled and used for estimation procedures to arrive at a consistent time series of WIOTs.

 

 

BUILDING EORA: A GLOBAL MULTI-REGION INPUT–OUTPUT DATABASE AT HIGH COUNTRY AND SECTOR RESOLUTION

Manfred Lenzen , Daniel Moran , Keiichiro Kanemoto & Arne Geschke
Published online: 21 Mar 2013
There are a number of initiatives aimed at compiling large-scale global multi-region input–output (MRIO) tables complemented with non-monetary information such as on resource flows and environmental burdens. Depending on purpose or application, MRIO construction and usage has been hampered by a lack of geographical and sectoral detail; at the time of writing, the most advanced initiatives opt for a breakdown into at most 129 regions and 120 sectors. Not all existing global MRIO frameworks feature continuous time series, margins and tax sheets, and information on reliability and uncertainty. Despite these potential limitations, constructing a large MRIO requires significant manual labour and many years of time. This paper describes the results from a project aimed at creating an MRIO account that represents all countries at a detailed sectoral level, allows continuous updating, provides information on data reliability, contains table sheets expressed in basic prices as well as all margins and taxes, and contains a historical time series. We achieve these goals through a high level of procedural standardisation, automation, and data organisation.

 

 

POLICY-RELEVANT APPLICATIONS OF ENVIRONMENTALLY EXTENDED MRIO DATABASES – EXPERIENCES FROM THE UK

Thomas Wiedmann & John Barrett
Published online: 21 Mar 2013
The impressive development in global multi-region input–output (IO) databases is accompanied by an increase in applications published in the scientific literature. However, it is not obvious whether the insights gained from these studies have indeed been used in political decision-making. We ask whether and to what extent there is policy uptake of results from environmentally extended multi-region IO (EE-MRIO) models and how it may be improved. We identify unique characteristics of such models not inherent to other approaches. We then present evidence from the UK showing that a policy process around consumption-based accounting for greenhouse gas emissions and resource use has evolved that is based on results from EE-MRIO modelling. This suggests that specific, policy-relevant information that would be impossible to obtain otherwise can be generated with the help of EE-MRIO models. Our analysis is limited to environmental applications of global MRIO models and to government policies in the UK.

 

From GLOBAL MULTIREGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK

GMRIO

 

From POLICY-RELEVANT APPLICATIONS OF ENVIRONMENTALLY EXTENDED MRIO  DATABASES – EXPERIENCES FROM THE UK

GMRIO2

From Economic Systems Research

Volume 26, 2014 – Issue 3: A Comparative Evaluation of Multi-Regional Input-Output Databases

CONVERGENCE BETWEEN THE EORA, WIOD, EXIOBASE, AND OPENEU’S CONSUMPTION-BASED CARBON ACCOUNTS

Daniel Moran & Richard Wood
Published online: 14 Jul 2014

In this paper, we take an overview of several of the biggest independently constructed global multi-regional input–output (MRIO) databases and ask how reliable and consonant these databases are. The key question is whether MRIO accounts are robust enough for setting environmental policies. This paper compares the results of four global MRIOs: Eora, WIOD, EXIOBASE, and the GTAP-based OpenEU databases, and investigates how much each diverges from the multi-model mean. We also use Monte Carlo analysis to conduct sensitivity analysis of the robustness of each accounts’ results and we test to see how much variation in the environmental satellite account, rather than the economic structure itself, causes divergence in results. After harmonising the satellite account, we found that carbon footprint results for most major economies disagree by<10% between MRIOs. Confidence estimates are necessary if MRIO methods and consumption-based accounting are to be used in environmental policy-making at the national level.

COMPARATIVE EVALUATION OF MRIO DATABASES

Satoshi Inomata & Anne Owen

Published online: 11 Aug 2014

This editorial is the introduction to a special issue of Economics Systems Research on the topic of intercomparison of multi-regional input–output (MRIO) databases and analyses. It explains the rationale for dedicating an issue of this journal to this area of research. Then the six papers chosen for this issue are introduced. This is followed by a concluding section outlining future directions for developers and users of MRIO databases.

 

Please see my related posts:

Accounting For Global Carbon Emission Chains

Development of Global Trade and Production Accounts: UN SEIGA Initiative

Stock Flow Consistent Models for Ecological Economics

 

 

Key Sources of Research:

 

The World Input‐Output Database (WIOD): Contents, Sources and Methods

Edited by Marcel Timmer (University of Groningen)

With contributions from:
Abdul A. Erumban, Reitze Gouma, Bart Los, Umed Temurshoev and
Gaaitzen J. de Vries (University of Groningen)
Iñaki Arto, Valeria Andreoni Aurélien Genty, Frederik Neuwahl, José
M. Rueda‐Cantuche and Alejandro Villanueva (IPTS)
Joe Francois, Olga Pindyuk, Johannes Pöschl and Robert Stehrer
(WIIW), Gerhard Streicher (WIFO)

April 2012, Version 0.9

http://www.wiod.org/publications/source_docs/WIOD_sources.pdf

 

 

 

Analyzing Global Value Chains using the World Input-Output
Database

Bart Los (University of Groningen)
with Marcel Timmer (Groningen), Gaaitzen de Vries
(Groningen) and Robert Stehrer (wiiw Vienna)

BBVA Foundation – Ivie Workshop, October 30, 2017, Valencia

http://www.ivie.es/wp-content/uploads/2017/10/B.-Los.pdf

 

An Overview on the Construction of North American Regional Supply-Use and Input-Output Tables and their Applications in Policy Analysis

Statistics Canada
Anthony Peluso
U.S. Bureau of Economic Analysis
Gabriel Medeiros
Jeffrey Young
U.S. International Trade Commission
Ross J. Hallren
Lin Jones
Richard Nugent
Heather Wickramarachi

ECONOMICS WORKING PAPER SERIES
Working Paper 2017-12-A

https://www.usitc.gov/publications/332/working_papers/na-tiva_white_paper_for_posting_revised_02-20.pdf

 

 

 

 

The Global MRIO Lab – charting the world economy,

Manfred Lenzen, Arne Geschke, Muhammad Daaniyall Abd Rahman, Yanyan
Xiao, Jacob Fry, Rachel Reyes, Erik Dietzenbacher, Satoshi Inomata, Keiichiro Kanemoto, Bart Los, Daniel Moran, Hagen Schulte in den Bäumen, Arnold Tukker, Terrie Walmsley, Thomas Wiedmann, Richard Wood & Norihiko Yamano

(2017)

Economic Systems Research, 29:2, 158-186

http://folk.ntnu.no/richardw/papers/Lenzen%20et%20al._2017_Economic%20Systems%20Research_The%20Global%20MRIO%20Lab–charting%20the%20world%20economy.pdf

 

 

 

 

INPUT–OUTPUT ANALYSIS: THE NEXT 25 YEARS,

Erik Dietzenbacher, Manfred Lenzen, Bart Los, Dabo Guan, Michael L. Lahr,
Ferran Sancho, Sangwon Suh & Cuihong Yang

(2013)

Economic Systems Research, 25:4, 369-389

http://eprints.whiterose.ac.uk/80151/1/Guan-ESR-2013-IO%20next%2025%20years.pdf

 

 

 

OECD Inter-Country Input-Output (ICIO) Tables, 2016 edition

http://www.oecd.org/sti/ind/inter-country-input-output-tables.htm

 

 

Trade in Value Added

OECD

http://www.oecd.org/sti/ind/measuringtradeinvalue-addedanoecd-wtojointinitiative.htm

 

 

 

The Global Resource Accounting Model (GRAM)
a methodological concept paper

Stefan Giljum a, Christian Lutz b, Ariane Jungnitz b

a Sustainable Europe Research Institute (SERI), Vienna, Austria
b Institute for Economic Structures Research (GWS), Osnabrück, Germany

April 2008
http://petre.org.uk/pdf/Giljum_et_al_GRAM_concept_paper_final.pdf

 

 

 

POLICY-RELEVANT APPLICATIONS OF
ENVIRONMENTALLY EXTENDED MRIO DATABASES – EXPERIENCES FROM THE UK,

Thomas Wiedmann & John Barrett

(2013):

Economic Systems Research, 25:1, 143-156

http://www.see.leeds.ac.uk/fileadmin/Documents/teaching-resources/Wiedmann__Barrett_-_2013_-_Policy-relevant_applications_of_evironmentally_extended_MRIO_databases_-_experiences_from_the_UK.pdf

 

 

THE CONSTRUCTION OF WORLD INPUT–OUTPUT TABLES IN THE WIOD PROJECT,

Erik Dietzenbacher , Bart Los , Robert Stehrer , Marcel Timmer & Gaaitzen de
Vries

(2013)

Economic Systems Research, 25:1, 71-98,

https://unstats.un.org/unsd/trade/events/2014/mexico/documents/session6/WIOD%20construction.pdf

 

 

System of Environmental-Economic Accounting 2012— Applications and Extensions

http://ec.europa.eu/eurostat/documents/3859598/7789413/KS-01-15-797-EN-N.pdf/9404d9b0-5c2d-48c8-b1e9-2632800162e7

 

 

Calculating Trade in Value Added

IMF

Prepared by Aqib Aslam, Natalija Novta, and Fabiano Rodrigues-Bastos1

July 2017

https://www.imf.org/~/media/Files/Publications/WP/2017/wp17178.ashx

 

 

World Input-Output Network

Federica Cerina, Zhen Zhu, Alessandro Chessa and Massimo Riccaboni

July 1, 2015

http://www.etsg.org/ETSG2015/Papers/336.pdf

 

 

 

Making Global Value Chain Research More Accessible

Lin Jones, William Powers, and Ravinder Ubee1

U.S. International Trade Commission, Office of Economics

October 21, 2013

https://www.usitc.gov/publications/332/ec201310a.pdf

 

On the Measurement of Upstreamness and Downstreamness in
Global Value Chains

Pol Antras
Harvard University and NBER
Davin Chor
National University of Singapore

October 30, 2017

https://scholar.harvard.edu/files/antras/files/upstream_ac_oct30_2017_withtables.pdf

 

 

 

THE OECD INPUT-OUTPUT DATABASE: 2006 EDITION

STI WORKING PAPER 2006/8

Norihiko Yamano and Nadim Ahmad

https://www.dartmouth.edu/~rstaiger/OECD%20Input-Output%20Database.pdf

 

 

 

GLOBAL MULTI REGIONAL INPUT–OUTPUT FRAMEWORKS: AN INTRODUCTION AND OUTLOOK,

Arnold Tukker & Erik Dietzenbacher

(2013)

Econ omic Systems Research, 25:1,1-19

https://unstats.un.org/unsd/trade/events/2014/mexico/documents/session6/UNSD%20-%20Tukker%20-%20Overview%20on%20International%20IO%20Tables%20-%202013.pdf

 

THE CONSTRUCTION OF WORLD INPUT–OUTPUT TABLES IN THE WIOD PROJECT,

Erik Dietzenbacher , Bart Los , Robert Stehrer , Marcel Timmer & Gaaitzen de
Vries

(2013)

Economic Systems Research, 25:1, 71-98

https://unstats.un.org/unsd/trade/events/2014/mexico/documents/session6/WIOD%20construction.pdf

 

 

 

A review of recent multi-region input–output models used for consumption-based
emission and resource accounting

Thomas Wiedmann

2009

http://wedocs.unep.org/bitstream/handle/20.500.11822/19433/a_review.pdf?sequence=1&isAllowed=y

 

 

World Input-Output Network

Federica Cerina, Zhen Zhu, Alessandro Chessa, Massimo Riccaboni

2015

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4519177/pdf/pone.0134025.pdf

 

 

A Network of Networks Perspective on Global Trade

Julian Maluck, Reik V. Donner

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4510408/pdf/pone.0133310.pdf

 

 

 

THE ‘REST OF THE WORLD’ – ESTIMATING THE ECONOMIC STRUCTURE OF MISSING REGIONS IN GLOBAL MULTI-REGIONAL INPUT–OUTPUT TABLES,

Konstantin Stadler, Kjartan Steen-Olsen & Richard Wood

(2014)

Economic Systems Research, 26:3, 303-326

http://folk.ntnu.no/richardw/papers/Stadler,%20Steen-olsen,%20Wood_2015_Unknown_the%20‘%20Rest%20of%20the%20World%20’%20–%20Estimating%20the%20Economic%20Structure%20of%20Missing%20Regions%20in%20Global%20Multi.pdf

 

 

“Trade, Environment, and Growth: Advanced topics in Input-Output Analysis”*

Professor: Erik Dietzenbacher (U. Groningen)

March 9-13, 2015

https://www.bc3research.org/images/stories/events/Trainingoneconomics_2015/outline___trade_growth_and_the_environment_.pdf

 

 

 

 

Wassily Leontief and the discovery of the input-output approach

http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2016/memo-18-2016-versjon-2.pdf

 

 

Networks of value added trade,

Amador, João; Cabral, Sónia

(2016)

ECB Working Paper, No. 1931, ISBN 978-92-899-2179-4,

https://www.econstor.eu/bitstream/10419/154364/1/ecbwp1931.pdf

 

EXIOPOL – DEVELOPMENT AND ILLUSTRATIVE ANALYSES OF A DETAILED GLOBAL MR EE SUT/IOT,

Arnold Tukker , Arjan de Koning , Richard Wood , Troy Hawkins , Stephan
Lutter , Jose Acosta , Jose M. Rueda Cantuche , Maaike Bouwmeester , Jan Oosterhaven ,
Thomas Drosdowski & Jeroen Kuenen

(2013)

Economic Systems Research, 25:1,50-70

http://folk.ntnu.no/richardw/papers/Tukker%20et%20al._2013_Economic%20Systems%20Research_Exiopol%20–%20Development%20and%20Illustrative%20Analyses%20of%20a%20Detailed%20Global%20Mr%20Ee%20SutIot.pdf

 

 

 

The World Input-Output Database (WIOD) project

Robert Stehrer

OECD-WPTSG meeting

November 18, 2009 – OECD, Paris

http://www.oecd.org/sdd/its/44197850.pdf

 

 

The World Input-Output Database (WIOD): Construction, Challenges and Applications

Abdul Azeez Erumbana, Reitze Goumaa, Bart Losa,b, Robert Stehrerc, Umed
Temurshoevb, Marcel Timmer a,b,*, Gaaitzen de Vries

Paper prepared for World Bank workshop
“The Fragmentation of Global Production and Trade in Value Added”,
June 9-10, 2011.

https://siteresources.worldbank.org/INTRANETTRADE/Resources/Internal-Training/287823-1256848879189/6526508-1283456658475/7370147-1308070299728/7997263-1308070314933/PAPER_13_Erumban_Gouma_Los_Stehrer_Temurshoev_Timmer_deVries.pdf

 

The World Input-Output Database: Content, Concepts and Applications.

Timmer, M. P., Dietzenbacher, E., Los, B., Stehrer, R., & de Vries, G. J.

(2014).

GGDC Working Papers; Vol. GD-144).

https://www.rug.nl/research/portal/files/15514485/gd144.pdf

 

 

Measuring Global Value Chains with the WIOD (World Input-Output Database)

Marcel Timmer

Groningen Growth and Development Centre
University of Groningen
(presentation at OECD conference,
Paris, 21 September, 2010)

https://www.rieti.go.jp/jp/events/10102201/pdf/1-3_Timmer.pdf

 

 

 

Global value chains, trade, jobs, and environment: The new WIOD database

Hubert Escaith, Marcel Timmer

13 May 2012

https://voxeu.org/article/new-world-input-output-database

 

Wassily Leontief and the discovery of the input-output approach

Olav Bjerkholt

2016

https://www.econstor.eu/bitstream/10419/165961/1/877412162.pdf

 

 

 

WHO PRODUCES FOR WHOM IN THE WORLD ECONOMY?

Guillaume Daudin (Lille-I (EQUIPPE) & Sciences Po (OFCE), Christine Rifflart, Danielle
Schweisguth (Sciences Po (OFCE))1

This version: July 2009

https://www.ofce.sciences-po.fr/pdf/dtravail/WP2009-18.pdf

 

 

 

An Anatomy of the Global Trade Slowdown based on the WIOD 2016 Release

Marcel P. Timmer, Bart Los,
Robert Stehrer, and Gaaitzen J. de Vries

December 2016

https://www.rug.nl/ggdc/html_publications/memorandum/gd162.pdf

On Inequality of Wealth and Income – Causes and Consequences

 On Inequality of Wealth and Income – Causes and Consequences

 

Disparity in Wealth and Income of American workers/household is a hot public policy/economic/social/political issue.

  • Wealth (Stock)
  • Income (Flow)

what are the causes and consequences of Inequality on economics and society?

 

From TRENDS IN INCOME INEQUALITY AND ITS IMPACT ON ECONOMIC GROWTH (OECD)

The disparity in the distribution of household incomes has been rising over the past three decades in a vast majority of OECD countries and such long-term trend was interrupted only temporarily in the first years of the Great Recession. Addressing these trends has moved to the top of the policy agenda in many countries. This is partly due to worries that a persistently unbalanced sharing of the growth dividend will result in social resentment, fuelling populist and protectionist sentiments, and leading to political instability. Recent discussions, particularly in the US, about increased inequality being one possible cause of the 2008 financial crisis also contributed to its relevance for policy making. But another growing reason for the strong interest of policy makers in inequality is concern about whether the cumulatively large and sometimes rapid increase in inequality might have an effect on economic growth and on the pace of exit from the current recession. Is inequality a pre-requisite for growth? Or does a greater dispersion of incomes across individuals rather undermine growth? And which are the short and long-term consequences of redistributive policies on growth?

From Causes and Consequences of Income Inequality: A Global Perspective (IMF)

Widening income inequality is the defining challenge of our time. In advanced economies, the gap between the rich and poor is at its highest level in decades. Inequality trends have been more mixed in emerging markets and developing countries (EMDCs), with some countries experiencing declining inequality, but pervasive inequities in access to education, health care, and finance remain. Not surprisingly then, the extent of inequality, its drivers, and what to do about it have become some of the most hotly debated issues by policymakers and researchers alike. Against this background, the objective of this paper is two-fold.

First, we show why policymakers need to focus on the poor and the middle class. Earlier IMF work has shown that income inequality matters for growth and its sustainability. Our analysis suggests that the income distribution itself matters for growth as well. Specifically, if the income share of the top 20 percent (the rich) increases, then GDP growth actually declines over the medium term, suggesting that the benefits do not trickle down. In contrast, an increase in the income share of the bottom 20 percent (the poor) is associated with higher GDP growth. The poor and the middle class matter the most for growth via a number of interrelated economic, social, and political channels.

Second, we investigate what explains the divergent trends in inequality developments across advanced economies and EMDCs, with a particular focus on the poor and the middle class. While most existing studies have focused on advanced countries and looked at the drivers of the Gini coefficient and the income of the rich, this study explores a more diverse group of countries and pays particular attention to the income shares of the poor and the middle class—the main engines of growth. Our analysis suggests that

  • Technological progress and the resulting rise in the skill premium (positives for growth and productivity) and the decline of some labor market institutions have contributed to inequality in both advanced economies and EMDCs. Globalization has played a smaller but reinforcing role. Interestingly, we find that rising skill premium is associated with widening income disparities in advanced countries, while financial deepening is associated with rising inequality in EMDCs, suggesting scope for policies that promote financial inclusion.

  • Policies that focus on the poor and the middle class can mitigate inequality. Irrespective of the level of economic development, better access to education and health care and well-targeted social policies, while ensuring that labor market institutions do not excessively penalize the poor, can help raise the income share for the poor and the middle class.

  • There is no one-size-fits-all approach to tackling inequality. The nature of appropriate policies depends on the underlying drivers and country-specific policy and institutional settings. In advanced economies, policies should focus on reforms to increase human capital and skills, coupled with making tax systems more progressive. In EMDCs, ensuring financial deepening is accompanied with greater financial inclusion and creating incentives for lowering informality would be important. More generally, complementarities between growth and income equalityobjectives suggest that policies aimed at raising average living standards can also influence the distribution of income and ensure a more inclusive prosperity.

From World changes in inequality: an overview of facts, causes, consequences and policies (BIS)

Public concern about inequality has grown substantially in recent years. Politicians and journalists descant with increasing frequency on the increase in inequality as a threat to social stability, laying the blame on globalisation and its attendant so-called neo-liberal policies. There is certainly much truth in such views. However, the lack of rigour in the public debate is striking, and one may doubt whether a constructive discussion of inequality, its causes and its economic, social and political consequences can take place without more clarity. Is it really the case that inequality is everywhere increasing more or less continuously, as actually seems to be happening in the United States? What type of inequality are we talking about: earnings, market income, household disposable income per consumption unit, wealth? What matters most: the inequality of opportunity or the inequality of economic outcome, including income? What kind of measure should be used? The recently highly publicised share of the top 5, 1.1% taken from tax data may not evolve in the same way as the familiar Gini coefficient defined on disposable incomes. And, then, what is known about the nature of the unequalising forces that seem to affect our economies and what tools might be available to counteract them?

In an international survey conducted in 2010, people were asked how they thought inequality had changed over the previous 10 years.1 In few countries was the perception of inequality trends in agreement with what could be observed from standard statistical sources about inequality. US citizens felt inequality had remained the same, whereas it was surging by most accounts, Brazilians found it was also increasing despite the fact that, for the first time in over 40 years, inequality was declining, while French and Dutch people thought that inequality had increased although the usual inequality coefficients were remarkably stable.

Good policies must rely on precise diagnostics. It is the purpose of this paper to take stock of what is known at this stage about the evolution of inequality around the world. In so doing, it will be shown that an ever-increasing degree of inequality at all times and everywhere over the last 30 years is far from the reality, and that there is a high degree of specificity across countries. In turn, this suggests that the combination of equalising and unequalising forces may be quite different from one country to another. Some factors may be common and truly global but others may be country-specific, the outcome being quite variable across countries. It also follows that tools to correct inequality, if need be, may have to differ in nature depending on the causes of increased inequality.

Tackling all these issues in depth is beyond the scope of this paper. My aim is only to offer an overview of what is observed and the main ideas being debated in the field of economic inequality. The paper is organised as follows. It starts with a quick “tour d‘horizon“ of the evidence for the evolution of various dimensions of economic inequality. It then tackles the issue of the potential causes, identifying what may be seen as common to most countries and what may be specific. Finally, it touches upon the consequences of excessive inequality and the tools available to counter it, emphasising the rising constraints imposed by globalisation.

Causes of Inequality

  • Shareholder Capitalism
  • Focus on Cost Minimization
  • Focus on ROIC and Economic Value Added (EVA)
  • Consolidation – Mergers and Acquisitions
  • Free Trade Agreements – NAFTA
  • Increased Outsourcing
  • Global Commodity Chains
  • Global Production Networks
  • Global Value Chains
  • Lack of Educated Workforce
  • Lack of protection for Low income earners
  • Compensation for Executives vs Labor
  • Unemployment, Underemployment
  • Value of High Skilled Technical Workers
  • Technological Change
  • Skills Obsolescence

Consequences of Inequality

  • Impact on Effective Demand
  • Slows Economic Growth
  • Decreased Economic Mobility
  • Health and Social effects
  • Living Standards at the Bottom (Poverty)
  • Intergenerational Mobility
  • Democratic Process and Social Justice
  • Reduced Consumption
  • Financial Crisis
  • Social Cohesion
  • Global Imbalances
  • Hampers Poverty reduction
  • Access to Health services
  • Access to Financial Services
  • Access to Education

 

Key Sources of Research:

 

The Age of Inequality

Edited by Jeremy Gantz

2017

 

 

The Price of Inequality

Joseph Stiglitz

2012

A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Jason Furman

Peter Orszag

October 16, 2015

http://gabriel-zucman.eu/files/teaching/FurmanOrszag15.pdf

Firming Up Inequality

Jae Song, David J. Price Fatih Guvenen, Nicholas Bloom

2015

http://eprints.lse.ac.uk/62587/1/dp1354.pdf

 

 

 TOWARDS A BROADER VIEW OF COMPETITION POLICY

 

Joseph E. Stiglitz

University Professor, Columbia University,

Chief Economist at the Roosevelt Institute

June 2017

https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Towards%20a%20Broader%20View%20of%20Competition%20Policy_0.pdf

 

 

ACCOUNTING FOR RISING CORPORATE PROFITS: INTANGIBLES OR REGULATORY RENTS?

Boston University School of Law
Law & Economics Working Paper No. 16-18

November 9, 2016

https://www.bu.edu/law/files/2016/11/Accounting-for-Rising-Corporate-Profits.pdf

Inequality: Facts, Explanations, and Policies

Jason Furman
Chairman, Council of Economic Advisers

City College of New York New York, NY

October 17, 2016

https://obamawhitehouse.archives.gov/sites/default/files/page/files/20161017_furman_ccny_inequality_cea.pdf

Domestic Outsourcing, Rent Seeking, and Increasing Inequality

 Eileen Appelbaum

First Published July 21, 2017

http://journals.sagepub.com/doi/abs/10.1177/0486613417697121

 

Global Concentration and the Rise of China

Caroline Freund and Dario Sidhu

Peterson Institute for International Economics

http://econ.au.dk/fileadmin/Economics_Business/Research/Seminars/2016/Global_Concentration_Final.pdf

How Could Wage Inequality within and Across Enterprises Be Reduced?

Columbia Business School Research Paper No. 17-62

Posted: 10 Jun 2017 Last revised: 17 Aug 2017

Christian Moser

Columbia University

Date Written: December 15, 2016

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2983691

 

 

 

The Fall of the Labor Share and the Rise of Superstar Firms

David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, John Van Reenen

NBER Working Paper No. 23396
Issued in May 2017

http://www.nber.org/papers/w23396

Inequality: A Hidden Cost of Market Power

Posted: 29 Mar 2017 Last revised: 31 Mar 2017

Sean F. Ennis  Pedro Gonzaga  Chris Pike

Organization for Economic Co-Operation and Development (OECD) – Competition Division

Date Written: March 6, 2017

https://papers.ssrn.com/Sol3/papers.cfm?abstract_id=2942791

 

 

Wealth and Income Inequality in the Twenty-First Century

Joseph E. Stiglitz
International Economic Association World Congress
Mexico City
June 2017

https://www8.gsb.columbia.edu/faculty/jstiglitz/sites/jstiglitz/files/Wealth%20and%20Income%20Inequality%2021st%20Century.pdf

 

 

The Globalization of Production and Income Inequality in Rich Democracies

Matthew C Mahutga
Anthony Roberts
Ronald Kwon

Social Forces, Volume 96, Issue 1, 1 September 2017, Pages 181–214,

 

INCOME AND WEALTH INEQUALITY: EVIDENCE AND POLICY IMPLICATIONS

EMMANUEL SAEZ

Contemporary Economic Policy

Vol. 35, No. 1, January 2017, 7–25
Online Early publication October 14, 2016

 

https://eml.berkeley.edu/~saez/SaezCEP2017.pdf

 

 

Consequences of Rising Income Inequality

BY KEVIN J. LANSING AND AGNIESZKA MARKIEWICZ

October 17, 2016

Economic Research Department of the Federal Reserve Bank of San Francisco.

 

http://www.frbsf.org/economic-research/files/el2016-31.pdf

 

 

 

Top Incomes, Rising Inequality, and Welfare

Kevin J. Lansing
Federal Reserve Bank of San Francisco

Agnieszka Markiewicz

June 2016

http://www.frbsf.org/economic-research/files/wp12-23bk.pdf

 

 

Causes and Consequences of Income Inequality: A Global Perspective

Era Dabla-Norris, Kalpana Kochhar, Frantisek Ricka, Nujin Suphaphiphat, and Evridiki Tsounta
(with contributions from Preya Sharma and Veronique Salins)

IMF

June 2015

https://www.imf.org/external/pubs/ft/sdn/2015/sdn1513.pdf

 

 

Piketty, Thomas. 2014.

Capital in the Twenty-First Century.

Cambridge, MA: Harvard University Press.

 

 

Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze—an Update to 2007

Edward N. Wolff

Levy Economics Institute of Bard College

March 2010

http://www.levyinstitute.org/pubs/wp_589.pdf

 

 

 

CONSUMPTION AND INCOME INEQUALITY IN THE U.S. SINCE THE 1960S

Bruce D. Meyer James X. Sullivan

NATIONAL BUREAU OF ECONOMIC RESEARCH

August 2017

http://www.nber.org/papers/w23655.pdf

 

 

Top Income Inequality in the 21st Century: Some Cautionary Notes

Fatih Guvenen Greg Kaplan

April 2, 2017

https://gregkaplan.uchicago.edu/sites/gregkaplan.uchicago.edu/files/uploads/top_income_inequality_web_April2_2017.pdf

 

FIFTY YEARS OF GROWTH IN AMERICAN CONSUMPTION, INCOME, AND WAGES

Bruce Sacerdote

May 16, 2017

http://www.dartmouth.edu/~bsacerdo/Sacerdote%2050%20Years%20of%20Growth%20in%20American%20Wages%20Income%20and%20Consumption%20May%202017.pdf

http://www.nber.org/papers/w23292.pdf

 

 

The Inequality Puzzle

BY LAWRENCE H. SUMMERS

 

http://democracyjournal.org/magazine/33/the-inequality-puzzle/

 

 

 

 GLOBAL INEQUALITY DYNAMICS: NEW FINDINGS FROM WID.WORLD

Facundo Alvaredo Lucas Chancel Thomas Piketty Emmanuel Saez Gabriel Zucman

NATIONAL BUREAU OF ECONOMIC RESEARCH
February 2017, Revised April 2017

 

http://www.nber.org/papers/w23119.pdf

 

 

 

Power and inequality in the global political economy

NICOLA PHILLIPS

March 2017

https://academic.oup.com/ia/article-lookup/doi/10.1093/ia/iix019

 

 

 Outsourcing governance: states and the politics of a ‘global value chain world’

Frederick W. Mayer & Nicola Phillips

04 Jan 2017

 

http://www.tandfonline.com/doi/full/10.1080/13563467.2016.1273341

 

 

What’s caused the rise in income inequality in the US?

https://www.weforum.org/agenda/2015/05/whats-caused-the-rise-in-income-inequality-in-the-us/

Why are American Workers getting Poorer? China, Trade and Offshoring

Avraham Ebenstein, Ann Harrison, Margaret McMillan

NBER Working Paper No. 21027
Issued in March 2015

http://www.nber.org/papers/w21027

 

 

 

The Geography of Trade and Technology Shocks in the United States

David H. Autor, David Dorn, and Gordon H. Hanson

American Economic Review

May 2013

https://www.aeaweb.org/articles?id=10.1257/aer.103.3.220

 

Economic Consequences of Income Inequality

Jason Furman
Joseph E. Stiglitz

https://pdfs.semanticscholar.org/cee6/1573cd50b9c8eae3379cf1f1c92301f40927.pdf

 

Labor’s Declining Share of Income and Rising Inequality

https://www.clevelandfed.org/newsroom-and-events/publications/economic-commentary/2012-economic-commentaries/ec-201213-labors-declining-share-of-income-and-rising-inequality.aspx

 

 

World changes in inequality: an overview of facts, causes, consequences and policies

by François Bourguignon
Monetary and Economic Department
August 2017

BIS working paper

http://www.bis.org/publ/work654.pdf

“Trends in Income Inequality and its Impact on Economic Growth”

OECD Social, Employment and Migration Working Papers, No. 163

http://www.oecd.org/social/inequality.htm

http://www.oecd.org/els/soc/trends-in-income-inequality-and-its-impact-on-economic-growth-SEM-WP163.pdf

 

Causes of income inequality in the United States

https://en.wikipedia.org/wiki/Causes_of_income_inequality_in_the_United_States

 

Economic inequality

https://en.wikipedia.org/wiki/Economic_inequality

 

 

Income inequality in the United States

https://en.wikipedia.org/wiki/Income_inequality_in_the_United_States

 

 

Redistribution, Inequality, and Growth

Prepared by Jonathan D. Ostry, Andrew Berg, Charalambos G. Tsangarides

 

April 2014

IMF

 

https://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

 

 

 

Understanding the Economic Impact of the H-1B Program on the U.S.

John Bound† Gaurav Khanna‡ Nicolas Morales§

April 20, 2017

 

http://www.nber.org/chapters/c13842.pdf

Rising Profits, Rising Inequality, and Rising Industry Concentration in the USA

Rising Profits, Rising Inequality, and Rising Industry Concentration in the USA

 

There is a need for holistic/systemic understanding of causal relations among

  • Low Economic Growth
  • Low Real Long Term Interest Rates
  • Decreased Business Investment
  • Mergers and Acquisitions Activity
  • Industry Concentration
  • Decreased Competition
  • Rising Profits
  • Income Inequality
  • Shareholder Capitalism
  • Dividends Payouts
  • Buyback of Shares
  • Superstar Firms
  • Too Big to Fail
  • Oligopoly Economy / Oligarchy
  • Decreased Number of Stocks/Equities
  • Focus on Costs Minimization
  • Increased Outsourcing
  • Global Value Chains
  • Free Trade Agreements
  • Market Power (Increased Market Share)
  • Decreased Dynamism
  • Herding by Suppliers
  • Labor Vs Executive Compensation
  • Unemployment
  • Concentration in Occupations

And don’t forget managerial focus on

  • Economic Value Added (EVA) since 1990s

 

There are two views to look at these issues

  • Aggregated View – Corporate Agglomeration and Spatial Dispersion / Extension
  • Disaggregated View – Micro Motives, Macro Behavior ( Bottom up Agent based view)

 

As the research papers below indicate, the scholarship is recent and need much more attention by the Economists and Policy makers.

 

From Is There a Connection Between Market Concentration and the Rise in Inequality?

The rise in wealth and income inequality has been at the forefront of the political debate in the U.S. in the last few years. At the same time, issues like market power and concentration, bigness, and antitrust have also come back into prominence, propelled by a growing body of research that points to diminishing competition across multiple American industries.

The possible connection between inequality and market concentration, however, has been relatively understudied for many years—until recent years, that is, when a sheafof new studies examining the interactions between concentration, market power, and inequality began to appear.

A 2015 paper by Jonathan Baker and Steven Salop, for instance, examined the connection between inequality and market power and argued that “because the creation and exercise of market power tend to raise the return to capital, market power contributes to the development and perpetuation of inequality.” Harvard Law School’s Einer Elhauge also found that horizontal shareholding likely leads to anti-competitive price raises and has regressive effects. Daniel Crane of the University of Michigan, however, contends that the connection between antitrust and wealth inequality has been grossly oversimplified by advocates of tougher antitrust enforcement.

Asked if there was a connection between concentration and inequality, Chicago Booth professors Austan Goolsbee, Steven Kaplan, and Sam Peltzman pointed to data being inconclusive. Goolsbee said: “Probably [there is a connection]. But we don’treally know more than correlations at this point.” Kaplan said his own research “suggests that winner-take-all markets (driven by technology and scale) play a rolein inequality. However, they may not play the most important role.” And Peltzmansaid that “The timing suggests so, but there are a lot of unconnected dots in this question.”

Is rising inequality connected to monopolies, rent-seeking, and concentration, or is it a result of larger forces like globalization and technology? Can antitrust be used effectively to mitigate inequality, or is concentration a sign of greater efficiency? These questions, and others, were debated by economists and legal scholars during a panel at the recent Stigler Center conference on concentration in America.

The panel featured Peter Orszag, Vice Chairman and Managing Director of the financial advisory and asset management firm Lazard Freres; Justin Pierce, a Senior Economist at the Board of Governors of the Federal Reserve; Lina Khan, a fellow at Open Markets program at New America; Sabeel Rahman, an Assistant Professor of Law at Brooklyn Law School; Simcha Barkai, a PhD Candidate at the University of Chicago Booth School of Business; and German Gutierrez, a PhD Candidate at the New York University Stern School of Business. The panel was moderated by Matt Stoller of the Open Markets program at New America, who opened by observing that “a new kind of Brandeis School of antitrust is emerging, in terms of thinking about political economy.”

Much of the panel focused on the dramatic rise in corporate profits. A recent, much-discussed Stigler Center working paper by Simcha Barkai found that over the past 30 years, as labor’s share of output fell by 10 percent, the capital share declined even further. This finding goes against the argument that the labor share went down due to technological changes, or as Barkai put it: “We used to spend money on people, today we’re spending money on robots.”

Barkai’s paper finds no evidence to support the technological argument. “We’re spending less on all inputs. If you think of this from the perspective of a firm, this is terrific. After accounting for all of my costs—material inputs, workers, capital—I am left with a large amount of money, much more so than in the past.” What Barkai does find, however, is that profits have gone way up. From 1984 to 2014, the profit share increased from 2.5 percent of GDP to 15 percent.

“To give you a sense of how large these profits are, if you look over the past 30 years and you ask, ‘How much have profits increased?’ you can give a number in dollars. A better way to think about that is, “Per worker, how much have these dollars increased?” It’s about $14,000 per worker. That’s a really large number because, in 2014, personal median income was just over $28,000. It’s about half of personal median income,” said Barkai.

Barkai went on to say that these findings were more pronounced in industries that experienced an increase in concentration. “Those industries that have a large increase in concentration also have larger declines in the labor share,” he said. Barkai’s conclusions were echoed by a separate study that was recently published by David Autor, David Dorn, Lawrence Katz, Christina Patterson, and John Van Reenen, in which they found that higher concentration is connected to the fall in the labor share.

One way to consider the question of concentration and inequality, said Pierce, is to look at what happens to firms’ efficiency and markups as a result of a merger. In a recent paper with Bruce Blonigen, Pierce was able to utilize new techniques in order to isolate the effects of mergers in the manufacturing sector. Comparing data from factories that were acquired during mergers to similar factories that weren’t, and to factories where an acquisition has been announced but not yet completed, Pierce and Blonigen found no evidence of the standard argument that mergers benefit consumers by increasing efficiency, reducing production costs, and, in turn, lowering prices. Quite the opposite: they found evidence that mergers increase market power, allowing firms to generate higher profits by raising prices.

“What we find when we do this is that mergers on average are associated with increases in markups in a magnitude of 15 to 50 percent. When we look at the effect on productivity, we actually don’t find a statistically significant effect on productivity associated with mergers,” said Pierce.

Gutierrez, meanwhile, spoke about his 2016 paper with Thomas Philippon, in which the two found that concentrated industries with less entry and more concentration invest less. Before 2000, he explained, firms funneled about 20 cents of every dollar of surplus into investments. Since 2000, however, investments dropped by half—to 10 cents on the dollar.

Their findings, he said, rule out the argument that the drop in investments is related to control by the stock market. The data also rule out other theories, such as financial constraints, safety premiums, or globalization. “What we’re left with is competition, or lack of competition and governance,” said Gutierrez.

“What we find is that most industries have become more concentrated. That leads to a decrease in investment. It means less investment by leaders in particular, and at the industry as a whole. Some manufacturing industries have seen increased competition from China. For the U.S. in particular, we see that leaders invest more. They try and hold onto their position, but the overall effect is somewhat negative on aggregate investment in the U.S.”

How is this drop in investments connected to an increase in concentration? Gutierrez offered two hypotheses: one, that superstar firms, such as digital platforms, are more productive and are therefore capturing more market share. The second, he said, is increased regulation: “In particular, if you look at the cross section of industries, industries where regulation has increased have also tended to become more concentrated and have invested less.”

Orszag, the former head of the Office of Management and Budget and former Director of the Congressional Budget Office, co-authored a 2015 paper with former Obama economic adviser Jason Furman that explored the rise in “supernormal returns on capital” among firms that have limited competition. In the panel, he spoke about what he described as a “dramatic rise” in dispersion among firms in productivity and wages as an understudied driver of inequality.

“In general, if you look at most textbooks on economics and most discussions of public policy, firms are seen as this uninteresting thing that you have to deal with but don’t want to really get into the innards of. Why do some firms behave differently than others? Having now spent a bunch of time in the private sector, the culture in firms really is quite different. Firms do behave differently from one to another beyond just market structure. Within the same market in the same field, Firm A is not the same as Firm B, as people who work inside those firms know.”

Orszag pointed to OECD data that showed that top global firms have been largely exempted from the decline in productivity that advanced economies experienced over the last 10-15 years. “If there’s a structural explanation for that, whether it’s polarization or market structure or innovation, why is it affecting only the laggards in the industry and not those at the frontier? Secondly, why aren’t there more spillovers from the frontier firms within each sector to others? What is happening to the flow of information or the flow of technique or what have you that’s causing this broad, significant rise in productivity deltas across firms, even within the same sector?” he asked.

Orszag also suggested that contrary to media narratives that present growing gaps between CEO wages and median workers within each firm as a prominent driver of inequality, the bulk of the rise in wage gaps is happening between firms, and not within the firms themselves. Studies, he said, show a dramatic increase in between-firm wage inequality “and very little movement except at the very, very largest firms in within-firm inequality.”

Orszag added: “We don’t know exactly what’s causing this. This may be a sorting of workers. It may be sharing of rents in the form of wages for the top firms. It may be a whole variety of different things. What I do suggest is the vast majority of the discussion on income-and-wage inequality seems to just glide over this whole thing as if it doesn’t exist.”

A holistic approach to inequality and concentration

Khan, who in a recent paper with Sandeep Vaheesan explored the role of monopoly and oligopoly power in perpetuating inequality, argued that the way to understand the connection between market concentration and inequality is to take a more holistic approach.

The connection between excessive market concentration and inequality, she said, has been understudied for a long time. “We were really surprised to see that at the time, in 2014, there really wasn’t much research on this connection at all. The most comprehensive paper that we found was from 1975 by William Comanor and Robert Smiley, which found that monopoly power did in fact transfer wealth to the most affluent members of society and suggested that a more competitive economy would have more progressive redistributive effects,” said Kahn. “One way to understand why this connection between market concentration and inequality has been understudied is that the law decided that it wasn’t really important. Once we shifted from an antitrust approach that took a more holistic and multidimensional view of the effect of market power to an approach that privilege means prices, the research on these effects also took a hit.”

In their paper, Khan and Vaheesan argue that inequality not only harms efficiency, but also that firms use their market power to raise prices “above competitive levels to consumers and push prices below competitive levels for small producers.” The paper makes a case for more rigorous enforcement of antitrust laws, arguing that reinvigorating antitrust could be one possible remedy for the regressive redistributive effects of concentration and the political power of monopolies.

“I think at a very basic level, our current political economy reflects 30 years of doing antitrust in a very particular way,” said Khan, who listed several industries such as airlines, healthcare, pharmaceuticals, and telecom, where prices have risen following mergers and industry consolidation.

“New business creation and growth have been on a secular decline. It’s worth recalling that in an earlier era, owning one’s own business was a form of asset building for the middle class, a way of passing on wealth to one’s children. This is especially still true in immigrant communities, where owning your own bodega or your own dry-cleaning service is a path of upward mobility. You can imagine how markets that shut out independent businesses are also effectively closing off that path of asset building,” said Khan.

Khan went on to discuss the political implications of excessive market power and how they can further entrench inequality. “Big firms and concentrated industries enjoy a level of political power that they can use to further entrench their economic dominance. Politics is another vessel by which we see this,” she said.

Rahman, author of the book Democracy Against Domination (Oxford University Press, 2016), also advocated for a wider view of the issue. “When we’re worried about the problem of concentration, I think it goes much broader than the specific areas of mergers and firm size, although that’s a big part of it,” he said.

“When we think about the good things that we want from the economy, we want it to be dynamic, we want it to be innovative, we want it to enable mobility. These things are not natural products. They are a property of the underlying structure of firms, of labor markets, of financial markets, and of policies, including antitrust,” said Rahman, who went on to discuss two aspects of the rise in concentration: digital platforms and the “Uber-ization” of more and more economic sectors, and what he described as a “growing geographic concentration of wealth, income, and opportunity between rural and urban.”

Rahman suggested that other tools, not just antitrust, could be used to combat excessive market power—particularly when it comes to the power of digital platforms. “The way I want to frame this is as a problem of concentration and inequality that warps the structure of opportunity in our economy,” said Rahman. “You have antitrust and public utility law, corporate governance, and labor law as three parts of the larger ecosystem of law and regulation that, coming out of that Progressive era debate about power, were the three complements that together, it was hoped, would produce a high-opportunity, a high-mobility economy that was open to all.”

 

Please also see my related post.

Low Interest Rates and Business Investments : Update August 2017

 

In addition to papers listed above, also see papers and articles mentioned in the references below.

Key sources of Research:

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

http://piketty.pse.ens.fr/files/Brennan2016.pdf

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

Feb 2017

http://evonomics.com/corporate-mergers-strangle-economy-jordan-brennan/

 The Oligarchy Economy: Concentrated Power, Income Inequality, and Slow Growth

Jordan Brennan

April 2016

http://evonomics.com/the-oligarchy-economy/

Declining Labor and Capital Shares

Simcha Barkai

November 2016

 

https://research.chicagobooth.edu/~/media/5872FBEB104245909B8F0AE8A84486C9.pdf

 

Lack of market competition, rising profits, and a new way to look at the division of income in the United States

Nov 2016

http://equitablegrowth.org/equitablog/lack-of-market-competition-rising-profits-and-a-new-way-to-look-at-the-division-of-income-in-the-united-states/

Rising U.S. business concentration and the decline in labor’s share of income

January 2017

http://equitablegrowth.org/equitablog/rising-concentration-declining-labor-share/

 

Concentrating on the Fall of the Labor Share

By DAVID AUTOR, DAVID DORN, LAWRENCE F. KATZ, CHRISTINA PATTERSON AND JOHN VAN REENEN

January 2017

http://www.nber.org/papers/w23108

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

March 2017

https://www8.gsb.columbia.edu/faculty-research/sites/faculty-research/files/finance/Macro%20Lunch/IK_Comp_v1.pdf

 

Dynamism in Retreat:  Consequences for Regions, Markets, and Workers

2017

 

https://eig.org/wp-content/uploads/2017/02/Dynamism-in-Retreat.pdf

 

The Oligopoly Problem

 

NewYorker

 

http://www.newyorker.com/tech/elements/the-oligopoly-problem

 

 

DOES INDUSTRY CONCENTRATION MATTER?

John J. Phelan

2014

Journal of Economics and Economic Education Research, Volume 15, Number 1, 2014

 

 

http://www.alliedacademies.org/articles/does-industry-concentration-matter.pdf

 

 

Increased Concentration of Occupations, Outsourcing, and Growing Wage Inequality in the United States

Elizabeth Weber Handwerker

U.S. Bureau of Labor Statistics

April, 2017

 

http://www.sole-jole.org/17733.pdf

 

 

Measuring occupational concentration by industry

2014

 

https://www.bls.gov/opub/btn/volume-3/pdf/measuring-occupational-concentration-by-industry.pdf

 

 

Rising wage dispersion between white-collar and blue-collar workers and market concentration: The case of the USA, 1966-2011,

D. Ilhan

(2017)

 

https://www.econstor.eu/bitstream/10419/162859/1/893982539.pdf

 

 

 

Rising Profits Don’t Lift Workers’ Boats

2016

https://www.bloomberg.com/news/articles/2016-05-05/rising-profits-don-t-lift-workers-boats

Is There a Connection Between Market Concentration and the Rise in Inequality?

 A Firm-Level Perspective on the Role of Rents in the Rise in Inequality

Jason Furman Peter Orszag
October 16, 2015

 

http://gabriel-zucman.eu/files/teaching/FurmanOrszag15.pdf

 Evidence for the Effects of Mergers on Market Power and Efficiency

Blonigen, Bruce A., and Justin R. Pierce

(2016).

https://www.federalreserve.gov/econresdata/feds/2016/files/2016082pap.pdf

 

 

Market Power and Inequality: The Antitrust Counterrevolution and its Discontents

11 Harvard Law & Policy Review 235 (2017)

24 Apr 2016Last revised: 22 Feb 2017

Lina Khan / Sandeep Vaheesan

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2769132

 

Too much of a good thing

Economist

March 26 2016

https://www.economist.com/news/briefing/21695385-profits-are-too-high-america-needs-giant-dose-competition-too-much-good-thing

 

 The Fall of the Labor Share and the Rise of Superstar Firms

David Autor, MIT and NBER

David Dorn, University of Zurich

Lawrence F. Katz, Harvard University and NBER

Christina Patterson, MIT

John Van Reenen, MIT and NBER

May 1, 2017

https://economics.mit.edu/files/12979

 

 

BENEFITS OF COMPETITION AND INDICATORS OF MARKET POWER

https://obamawhitehouse.archives.gov/sites/default/files/page/files/20160502_competition_issue_brief_updated_cea.pdf

 

 

 Market Concentration Grew During Obama Administration

SAM BATKINS, CURTIS ARNDT, BEN GITIS |

APRIL 7, 2016

 

https://www.americanactionforum.org/print/?url=https://www.americanactionforum.org/research/market-concentration-grew-obama-administration/

 Antitrust, Competition Policy, and Inequality

JONATHAN B. BAKER AND STEVEN C. SALOP

2015

http://scholarship.law.georgetown.edu/cgi/viewcontent.cgi?article=2474&context=facpub

Horizontal Shareholding, Antitrust, Growth and Inequality

Are US Industries Becoming More Concentrated?

Gustavo Grullon   Yelena Larkin   Roni Michaely

Date Written: April 23, 2017

 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2612047

Horizontal Shareholding

109 Harvard Law Review 1267 (2016)

Harvard Public Law Working Paper No. 16-17    22 Apr 2016

 

Einer Elhauge

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2632024

IS THERE A CONCENTRATION PROBLEM IN AMERICA?

MARCH 27–29, 2017

Conference at University of Chicago / Stigler Center

https://research.chicagobooth.edu/stigler/events/single-events/march-27-2017

 

 

“Reigniting Competition in the American Economy”

Senator Elizabeth Warren

Keynote Remarks at New America’s Open Markets Program Event June 29, 2016

 

https://www.warren.senate.gov/files/documents/2016-6-29_Warren_Antitrust_Speech.pdf

 

 

The Rise of Market Power and the Macroeconomic Implications

Jan De Loecker† Jan Eeckhout‡

August 24, 2017

http://www.janeeckhout.com/wp-content/uploads/RMP.pdf

The Rise of Market Power and the Decline of Labor’s Share

The Financialization of the U.S. Economy Has Produced Mechanisms That Lead Toward Concentration

 June 2017

“No Convincing Evidence That Concentration Has Been a Major Factor in Explaining Poor U.S. Economic Performance”

 March 2017

Economists: “Totality of Evidence” Underscores Concentration Problem in the U.S.

“I Suspect the Major Reason for the Rise in Concentration Is Technological Change, Particularly in IT”

“The Increase in Common Ownership Corresponds to the Concentration Increase That Several Large Mergers Would Create”

Worried About Concentration? Then Worry About Rent-Seeking

“There Is Unambiguous Evidence That Concentration Is on the Rise and Widespread Over Most Industries”

A Second Gilded Age: The Consolidation of Wealth and Corporate Power

AMERICAN CONSTITUTION SOCIETY

JUNE 16, 2017

 

Low Interest Rates and Business Investments : Update August 2017

Low Interest Rates and Business Investments : Update August 2017

 

From  Explaining Low Investment Spending

USINVEST

globalinvest

 

Please see my earlier posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

The Decline in Long Term Real Interest Rates

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since my earlier posts on this subject there has been several new studies published highlighting weakness in business investments as one of the cause of slower economic growth and lower interest rates.

Other significant factors impacting interest rates are demographic changes, and slower economic growth.

I argue that there is mutual (circular) causality in weak business investment, slower economic growth, and lower interest rates which reinforce each other.

 

Decreased competition, increased concentration, corporate savings glut, share buybacks, paying dividends are also identified as factors.

Number of public companies have decreased significantly in USA since 1996 due to M&A activity.   See the data below.

Increased Mergers/Acquisitions, Increased Concentration, Decreased Competition, Decreased Number of Public Companies, Share buybacks, and Dividend Payouts are multiple perspectives of same problem.

 

From The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

USNUMUSSTAT

 

Key sources of Research:

The Low Level of Global Real Interest Rates

Remarks by
Stanley Fischer
Vice Chairman
Board of Governors of the Federal Reserve System

at the
Conference to Celebrate Arminio Fraga’s 60 Years
Casa das Garcas, Rio de Janeiro, Brazil

July 31, 2017

The Low Level of Global Real Interest Rates

 

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

German Gutierrez Thomas Philippon

Working Paper 22897

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue
Cambridge, MA 02138

December 2016

 

INVESTMENT-LESS GROWTH: AN EMPIRICAL INVESTIGATION

 

 

Explaining Low Investment Spending

The NBER Digest
NATIONAL BUREAU OF ECONOMIC RESEARCH

February 2017

Explaining Low Investment Spending

 

 

The Secular Stagnation of Investment?

Callum Jones and Thomas Philippon

December 2016

 

The Secular Stagnation of Investment?

 

 

Is there an investment gap in advanced economies? If so, why?

By Robin Dottling, German Gutierrez and Thomas Philippon

 

Is there an investment gap in advanced economies? If so, why?

 

 

The Disappointing Recovery of Output after 2009

JOHN G. FERNALD ROBERT E. HALL

JAMES H. STOCK MARK W. WATSON

May 2, 2017

The Disappointing Recovery of Output after 2009

 

 

Declining Competition and Investment in the U.S.

German Gutierrez and Thomas Philippon

NATIONAL BUREAU OF ECONOMIC RESEARCH

July 2017

 

Declining Competition and Investment in the U.S

 

 

Real Interest Rates Over the Long Run : Decline and convergence since the 1980s

Kei-Mu Yi   Jing Zhang

ECONOMIC POLICY PAPER 16-10 SEPTEMBER 2016

FEDERAL RESERVE BANK of MINNEAPOLIS

Real Interest Rates over the Long Run Decline and convergence since the 1980s, due significantly to factors causing lower investment demand

 

 

Understanding global trends in long-run real interest rates

Kei-Mu Yi and Jing Zhang

Economic Perspectives, Vol. 41, No. 2, 2017
Chicago Fed Reserve Bank

 

Understanding Global Trends in Long-run Real Interest Rates

 

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

CAMA Working Paper 19/2017 March 2017

M. Ayhan Kose

Franziska Ohnsorge

Lei Sandy Ye

Ergys Islamaj

 

Weakness in Investment Growth: Causes, Implications and Policy Responses

 

 

Are US Industries Becoming More Concentrated?

Gustavo Grullon, Yelena Larkin and Roni Michaely

October 2016

 

Are US Industries Becoming More Concentrated?

 

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

Robert Fay, Justin-Damien Guénette, Martin Leduc and Louis Morel,

International Economic Analysis Department

Bank of Canada Review Spring 2017

 

Why Is Global Business Investment So Weak? Some Insights from Advanced Economies

 

 

What Is Behind the Weakness in Global Investment?

by Maxime Leboeuf and Bob Fay

2016

Bank of Canada

 

What Is Behind the Weakness in Global Investment?

 A Structural Interpretation of the Recent Weakness in Business Investment

by Russell Barnett and Rhys Mendes

 The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

Gruber, Joseph W., and Steven B. Kamin

International Finance Discussion Papers
Board of Governors of the Federal Reserve System
Number 1150 October 2015

 

The Corporate Saving Glut in the Aftermath of the Global Financial Crisis

 

 

The Incredible Shrinking Universe of Stocks

The Causes and Consequences of Fewer U.S. Equities

March 22, 2017

GLOBAL FINANCIAL STRATEGIES

http://www.credit-suisse.com

 

The Incredible Shrinking Universe of Stocks The Causes and Consequences of Fewer U.S. Equities

 

 

They Just Get Bigger: How Corporate Mergers Strangle the Economy

Jordan Brennan

2017 February 19

They Just Get Bigger: How Corporate Mergers Strangle the Economy

 

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

Jordan Brennan

March 2016

 

Rising Corporate Concentration, Declining Trade Union Power, and the Growing Income Gap: American Prosperity in Historical Perspective

 

 

The Oligarchy Economy: Concentrated Power, Income Inequality, and Slow Growth

Corporate concentration exacerbates income inequality

 

Jordan Brennan

March 2016

http://evonomics.com/the-oligarchy-economy/

Short term Thinking in Investment Decisions of Businesses and Financial Markets

Short term Thinking in Investment Decisions of Businesses and Financial Markets

 

When companies buyback shares and pay dividends rather than investing in new capacity, it leads to low economic growth and low aggregate demand.

Central Banks respond by cutting interest rates.  Yet Businesses do not invest in new capacity.

Many studies attribute this to short term thinking dominant in corporate investment decisions.  Pressures from shareholders push corporate managers to be short term oriented.

Many economists and thinkers have criticized this recently as advanced economies are suffering from anemic growth.

Larry Summers has invoked Secular Stagnation.  He says one of the reason for Secular Stagnation is short term thinking.

Andy Haldane of Bank of England has criticized short term thinking as it prevents investments and causes low economic growth.

Key Terms:

  • Quarterly Capitalism
  • Secular Stagnation
  • Short Term Thinking
  • Low Economic Growth
  • Business Investments
  • Real Interest Rates
  • Monetary Policy
  • Income and Wealth Inequality
  • Aggregate Demand
  • Productive Capacity
  • Productivity growth
  • Long Term Investments
  • Share Buybacks
  • Dividends
  • Corporate Cash Pools

 

Capitalism for the Long Term

The near meltdown of the financial system and the ensuing Great Recession have been, and will remain, the defining issue for the current generation of executives. Now that the worst seems to be behind us, it’s tempting to feel deep relief—and a strong desire to return to the comfort of business as usual. But that is simply not an option. In the past three years we’ve already seen a dramatic acceleration in the shifting balance of power between the developed West and the emerging East, a rise in populist politics and social stresses in a number of countries, and significant strains on global governance systems. As the fallout from the crisis continues, we’re likely to see increased geopolitical rivalries, new international security challenges, and rising tensions from trade, migration, and resource competition. For business leaders, however, the most consequential outcome of the crisis is the challenge to capitalism itself.

That challenge did not just arise in the wake of the Great Recession. Recall that trust in business hit historically low levels more than a decade ago. But the crisis and the surge in public antagonism it unleashed have exacerbated the friction between business and society. On top of anxiety about persistent problems such as rising income inequality, we now confront understandable anger over high unemployment, spiraling budget deficits, and a host of other issues. Governments feel pressure to reach ever deeper inside businesses to exert control and prevent another system-shattering event.

My goal here is not to offer yet another assessment of the actions policymakers have taken or will take as they try to help restart global growth. The audience I want to engage is my fellow business leaders. After all, much of what went awry before and after the crisis stemmed from failures of governance, decision making, and leadership within companies. These are failures we can and should address ourselves.

In an ongoing effort that started 18 months ago, I’ve met with more than 400 business and government leaders across the globe. Those conversations have reinforced my strong sense that, despite a certain amount of frustration on each side, the two groups share the belief that capitalism has been and can continue to be the greatest engine of prosperity ever devised—and that we will need it to be at the top of its job-creating, wealth-generating game in the years to come. At the same time, there is growing concern that if the fundamental issues revealed in the crisis remain unaddressed and the system fails again, the social contract between the capitalist system and the citizenry may truly rupture, with unpredictable but severely damaging results.

Most important, the dialogue has clarified for me the nature of the deep reform that I believe business must lead—nothing less than a shift from what I call quarterly capitalism to what might be referred to as long-term capitalism. (For a rough definition of “long term,” think of the time required to invest in and build a profitable new business, which McKinsey research suggests is at least five to seven years.) This shift is not just about persistently thinking and acting with a next-generation view—although that’s a key part of it. It’s about rewiring the fundamental ways we govern, manage, and lead corporations. It’s also about changing how we view business’s value and its role in society.

There are three essential elements of the shift. First, business and finance must jettison their short-term orientation and revamp incentives and structures in order to focus their organizations on the long term. Second, executives must infuse their organizations with the perspective that serving the interests of all major stakeholders—employees, suppliers, customers, creditors, communities, the environment—is not at odds with the goal of maximizing corporate value; on the contrary, it’s essential to achieving that goal. Third, public companies must cure the ills stemming from dispersed and disengaged ownership by bolstering boards’ ability to govern like owners.

When making major decisions, Asians typically think in terms of at least 10 to 15 years. In the U.S. and Europe, nearsightedness is the norm.

None of these ideas, or the specific proposals that follow, are new. What is new is the urgency of the challenge. Business leaders today face a choice: We can reform capitalism, or we can let capitalism be reformed for us, through political measures and the pressures of an angry public. The good news is that the reforms will not only increase trust in the system; they will also strengthen the system itself. They will unleash the innovation needed to tackle the world’s grand challenges, pave the way for a new era of shared prosperity, and restore public faith in business.

1. Fight the Tyranny of Short-Termism

As a Canadian who for 25 years has counseled business, public sector, and nonprofit leaders across the globe (I’ve lived in Toronto, Sydney, Seoul, Shanghai, and now London), I’ve had a privileged glimpse into different societies’ values and how leaders in various cultures think. In my view, the most striking difference between East and West is the time frame leaders consider when making major decisions. Asians typically think in terms of at least 10 to 15 years. For example, in my discussions with the South Korean president Lee Myung-bak shortly after his election in 2008, he asked us to help come up with a 60-year view of his country’s future (though we settled for producing a study called National Vision 2020.) In the U.S. and Europe, nearsightedness is the norm. I believe that having a long-term perspective is the competitive advantage of many Asian economies and businesses today.

Myopia plagues Western institutions in every sector. In business, the mania over quarterly earnings consumes extraordinary amounts of senior time and attention. Average CEO tenure has dropped from 10 to six years since 1995, even as the complexity and scale of firms have grown. In politics, democracies lurch from election to election, with candidates proffering dubious short-term panaceas while letting long-term woes in areas such as economic competitiveness, health, and education fester. Even philanthropy often exhibits a fetish for the short term and the new, with grantees expected to become self-sustaining in just a few years.

Lost in the frenzy is the notion that long-term thinking is essential for long-term success. Consider Toyota, whose journey to world-class manufacturing excellence was years in the making. Throughout the 1950s and 1960s it endured low to nonexistent sales in the U.S.—and it even stopped exporting altogether for one bleak four-year period—before finally emerging in the following decades as a global leader. Think of Hyundai, which experienced quality problems in the late 1990s but made a comeback by reengineering its cars for long-term value—a strategy exemplified by its unprecedented introduction, in 1999, of a 10-year car warranty. That radical move, viewed by some observers as a formula for disaster, helped Hyundai quadruple U.S. sales in three years and paved the way for its surprising entry into the luxury market.

To be sure, long-term perspectives can be found in the West as well. For example, in 1985, in the face of fierce Japanese competition, Intel famously decided to abandon its core business, memory chips, and focus on the then-emerging business of microprocessors. This “wrenching” decision was “nearly inconceivable” at the time, says Andy Grove, who was then the company’s president. Yet by making it, Intel emerged in a few years on top of a new multi-billion-dollar industry. Apple represents another case in point. The iPod, released in 2001, sold just 400,000 units in its first year, during which Apple’s share price fell by roughly 25%. But the board took the long view. By late 2009 the company had sold 220 million iPods—and revolutionized the music business.

It’s fair to say, however, that such stories are countercultural. In the 1970s the average holding period for U.S. equities was about seven years; now it’s more like seven months. According to a recent paper by Andrew Haldane, of the Bank of England, such churning has made markets far more volatile and produced yawning gaps between corporations’ market price and their actual value. Then there are the “hyperspeed” traders (some of whom hold stocks for only a few seconds), who now account for 70% of all U.S. equities trading, by one estimate. In response to these trends, executives must do a better job of filtering input, and should give more weight to the views of investors with a longer-term, buy-and-hold orientation.

If they don’t, short-term capital will beget short-term management through a natural chain of incentives and influence. If CEOs miss their quarterly earnings targets, some big investors agitate for their removal. As a result, CEOs and their top teams work overtime to meet those targets. The unintended upshot is that they manage for only a small portion of their firm’s value. When McKinsey’s finance experts deconstruct the value expectations embedded in share prices, we typically find that 70% to 90% of a company’s value is related to cash flows expected three or more years out. If the vast majority of most firms’ value depends on results more than three years from now, but management is preoccupied with what’s reportable three months from now, then capitalism has a problem.

Roughly 70% of all U.S. equities trading is now done by “hyperspeed” traders—some of whom hold stocks for only a few seconds.

Some rightly resist playing this game. Unilever, Coca-Cola, and Ford, to name just a few, have stopped issuing earnings guidance altogether. Google never did. IBM has created five-year road maps to encourage investors to focus more on whether it will reach its long-term earnings targets than on whether it exceeds or misses this quarter’s target by a few pennies. “I can easily make my numbers by cutting SG&A or R&D, but then we wouldn’t get the innovations we need,” IBM’s CEO, Sam Palmisano, told us recently. Mark Wiseman, executive vice president at the Canada Pension Plan Investment Board, advocates investing “for the next quarter century,” not the next quarter. And Warren Buffett has quipped that his ideal holding period is “forever.” Still, these remain admirable exceptions.

To break free of the tyranny of short-termism, we must start with those who provide capital. Taken together, pension funds, insurance companies, mutual funds, and sovereign wealth funds hold $65 trillion, or roughly 35% of the world’s financial assets. If these players focus too much attention on the short term, capitalism as a whole will, too.

In theory they shouldn’t, because the beneficiaries of these funds have an obvious interest in long-term value creation. But although today’s standard practices arose from the desire to have a defensible, measurable approach to portfolio management, they have ended up encouraging shortsightedness. Fund trustees, often advised by investment consultants, assess their money managers’ performance relative to benchmark indices and offer only short-term contracts. Those managers’ compensation is linked to the amount of assets they manage, which typically rises when short-term performance is strong. Not surprisingly, then, money managers focus on such performance—and pass this emphasis along to the companies in which they invest. And so it goes, on down the line.

Only 45% of those surveyed in the U.S. and the UK expressed trust in business. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil.

As the stewardship advocate Simon Wong points out, under the current system pension funds deem an asset manager who returns 10% to have underperformed if the relevant benchmark index rises by 12%. Would it be unthinkable for institutional investors instead to live with absolute gains on the (perfectly healthy) order of 10%—especially if they like the approach that delivered those gains—and review performance every three or five years, instead of dropping the 10-percenter? Might these big funds set targets for the number of holdings and rates of turnover, at least within the “fundamental investing” portion of their portfolios, and more aggressively monitor those targets? More radically, might they end the practice of holding thousands of stocks and achieve the benefits of diversification with fewer than a hundred—thereby increasing their capacity to effectively engage with the businesses they own and improve long-term performance? Finally, could institutional investors beef up their internal skills and staff to better execute such an agenda? These are the kinds of questions we need to address if we want to align capital’s interests more closely with capitalism’s.

2. Serve Stakeholders, Enrich Shareholders

The second imperative for renewing capitalism is disseminating the idea that serving stakeholders is essential to maximizing corporate value. Too often these aims are presented as being in tension: You’re either a champion of shareholder value or you’re a fan of the stakeholders. This is a false choice.

The inspiration for shareholder-value maximization, an idea that took hold in the 1970s and 1980s, was reasonable: Without some overarching financial goal with which to guide and gauge a firm’s performance, critics feared, managers could divert corporate resources to serve their own interests rather than the owners’. In fact, in the absence of concrete targets, management might become an exercise in politics and stakeholder engagement an excuse for inefficiency. Although this thinking was quickly caricatured in popular culture as the doctrine of “greed is good,” and was further tarnished by some companies’ destructive practices in its name, in truth there was never any inherent tension between creating value and serving the interests of employees, suppliers, customers, creditors, communities, and the environment. Indeed, thoughtful advocates of value maximization have always insisted that it is long-term value that has to be maximized.

Capitalism’s founding philosopher voiced an even bolder aspiration. “All the members of human society stand in need of each others assistance, and are likewise exposed to mutual injuries,” Adam Smith wrote in his 1759 work, The Theory of Moral Sentiments. “The wise and virtuous man,” he added, “is at all times willing that his own private interest should be sacrificed to the public interest,” should circumstances so demand.

Smith’s insight into the profound interdependence between business and society, and how that interdependence relates to long-term value creation, still reverberates. In 2008 and again in 2010, McKinsey surveyed nearly 2,000 executives and investors; more than 75% said that environmental, social, and governance (ESG) initiatives create corporate value in the long term. Companies that bring a real stakeholder perspective into corporate strategy can generate tangible value even sooner. (See the sidebar “Who’s Getting It Right?”)

Creating direct business value, however, is not the only or even the strongest argument for taking a societal perspective. Capitalism depends on public trust for its legitimacy and its very survival. According to the Edelman public relations agency’s just-released 2011 Trust Barometer, trust in business in the U.S. and the UK (although up from mid-crisis record lows) is only in the vicinity of 45%. This stands in stark contrast to developing countries: For example, the figure is 61% in China, 70% in India, and 81% in Brazil. The picture is equally bleak for individual corporations in the Anglo-American world, “which saw their trust rankings drop again last year to near-crisis lows,” says Richard Edelman.

How can business leaders restore the public’s trust? Many Western executives find that nothing in their careers has prepared them for this new challenge. Lee Scott, Walmart’s former CEO, has been refreshingly candid about arriving in the top job with a serious blind spot. He was plenty busy minding the store, he says, and had little feel for the need to engage as a statesman with groups that expected something more from the world’s largest company. Fortunately, Scott was a fast learner, and Walmart has become a leader in environmental and health care issues.

Tomorrow’s CEOs will have to be, in Joseph Nye’s apt phrase, “tri-sector athletes”: able and experienced in business, government, and the social sector. But the pervading mind-set gets in the way of building those leadership and management muscles. “Analysts and investors are focused on the short term,” one executive told me recently. “They believe social initiatives don’t create value in the near term.” In other words, although a large majority of executives believe that social initiatives create value in the long term, they don’t act on this belief, out of fear that financial markets might frown. Getting capital more aligned with capitalism should help businesses enrich shareholders by better serving stakeholders.

3. Act Like You Own the Place

As the financial sector’s troubles vividly exposed, when ownership is broadly fragmented, no one acts like he’s in charge. Boards, as they currently operate, don’t begin to serve as a sufficient proxy. All the Devils Are Here, by Bethany McLean and Joe Nocera, describes how little awareness Merrill Lynch’s board had of the firm’s soaring exposure to subprime mortgage instruments until it was too late. “I actually don’t think risk management failed,” Larry Fink, the CEO of the investment firm BlackRock, said during a 2009 debate about the future of capitalism, sponsored by the Financial Times. “I think corporate governance failed, because…the boards didn’t ask the right questions.”

What McKinsey has learned from studying successful family-owned companies suggests a way forward: The most effective ownership structure tends to combine some exposure in the public markets (for the discipline and capital access that exposure helps provide) with a significant, committed, long-term owner. Most large public companies, however, have extremely dispersed ownership, and boards rarely perform the single-owner-proxy role. As a result, CEOs too often listen to the investors (and members of the media) who make the most noise. Unfortunately, those parties tend to be the most nearsighted ones. And so the tyranny of the short term is reinforced.

The answer is to renew corporate governance by rooting it in committed owners and by giving those owners effective mechanisms with which to influence management. We call this ownership-based governance, and it requires three things:

Just 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles.

More-effective boards.

In the absence of a dominant shareholder (and many times when there is one), the board must represent a firm’s owners and serve as the agent of long-term value creation. Even among family firms, the executives of the top-performing companies wield their influence through the board. But only 43% of the nonexecutive directors of public companies believe they significantly influence strategy. For this to change, board members must devote much more time to their roles. A government-commissioned review of the governance of British banks last year recommended an enormous increase in the time required of nonexecutive directors of banks—from the current average, between 12 and 20 days annually, to between 30 and 36 days annually. What’s especially needed is an increase in the informal time board members spend with investors and executives. The nonexecutive board directors of companies owned by private equity firms spend 54 days a year, on average, attending to the company’s business, and 70% of that time consists of informal meetings and conversations. Four to five days a month obviously give a board member much greater understanding and impact than the three days a quarter (of which two may be spent in transit) devoted by the typical board member of a public company.

Boards also need much more relevant experience. Industry knowledge—which four of five nonexecutive directors of big companies lack—helps boards identify immediate opportunities and reduce risk. Contextual knowledge about the development path of an industry—for example, whether the industry is facing consolidation, disruption from new technologies, or increased regulation—is highly valuable, too. Such insight is often obtained from experience with other industries that have undergone a similar evolution.

In addition, boards need more-effective committee structures—obtainable through, for example, the establishment of a strategy committee or of dedicated committees for large business units. Directors also need the resources to allow them to form independent views on strategy, risk, and performance (perhaps by having a small analytical staff that reports only to them). This agenda implies a certain professionalization of nonexecutive directorships and a more meaningful strategic partnership between boards and top management. It may not please some executive teams accustomed to boards they can easily “manage.” But given the failures of governance to date, it is a necessary change.

More-sensible CEO pay.

An important task of governance is setting executive compensation. Although 70% of board directors say that pay should be tied more closely to performance, CEO pay is too often structured to reward a leader simply for having made it to the top, not for what he or she does once there. Meanwhile, polls show that the disconnect between pay and performance is contributing to the decline in public esteem for business.

Companies should create real risk for executives.Some experts privately suggest mandating that new executives invest a year’s salary in the company.

CEOs and other executives should be paid to act like owners. Once upon a time we thought that stock options would achieve this result, but stock-option- based compensation schemes have largely incentivized the wrong behavior. When short-dated, options lead to a focus on meeting quarterly earnings estimates; even when long-dated (those that vest after three years or more), they can reward managers for simply surfing industry- or economy-wide trends (although reviewing performance against an appropriate peer index can help minimize free rides). Moreover, few compensation schemes carry consequences for failure—something that became clear during the financial crisis, when many of the leaders of failed institutions retired as wealthy people.

There will never be a one-size-fits-all solution to this complex issue, but companies should push for change in three key areas:

• They should link compensation to the fundamental drivers of long-term value, such as innovation and efficiency, not just to share price.

• They should extend the time frame for executive evaluations—for example, using rolling three-year performance evaluations, or requiring five-year plans and tracking performance relative to plan. This would, of course, require an effective board that is engaged in strategy formation.

• They should create real downside risk for executives, perhaps by requiring them to put some skin in the game. Some experts we’ve surveyed have privately suggested mandating that new executives invest a year’s salary in the company.

Redefined shareholder “democracy.”

The huge increase in equity churn in recent decades has spawned an anomaly of governance: At any annual meeting, a large number of those voting may soon no longer be shareholders. The advent of high-frequency trading will only worsen this trend. High churn rates, short holding periods, and vote-buying practices may mean the demise of the “one share, one vote” principle of governance, at least in some circumstances. Indeed, many large, top-performing companies, such as Google, have never adhered to it. Maybe it’s time for new rules that would give greater weight to long-term owners, like the rule in some French companies that gives two votes to shares held longer than a year. Or maybe it would make sense to assign voting rights based on the average turnover of an investor’s portfolio. If we want capitalism to focus on the long term, updating our notions of shareholder democracy in such ways will soon seem less like heresy and more like common sense.

While I remain convinced that capitalism is the economic system best suited to advancing the human condition, I’m equally persuaded that it must be renewed, both to deal with the stresses and volatility ahead and to restore business’s standing as a force for good, worthy of the public’s trust. The deficiencies of the quarterly capitalism of the past few decades were not deficiencies in capitalism itself—just in that particular variant. By rebuilding capitalism for the long term, we can make it stronger, more resilient, more equitable, and better able to deliver the sustainable growth the world needs. The three imperatives outlined above can be a start along this path and, I hope, a way to launch the conversation; others will have their own ideas to add.

The kind of deep-seated, systemic changes I’m calling for can be achieved only if boards, business executives, and investors around the world take responsibility for bettering the system they lead. Such changes will not be easy; they are bound to encounter resistance, and business leaders today have more than enough to do just to keep their companies running well. We must make the effort regardless. If capitalism emerges from the crisis vibrant and renewed, future generations will thank us. But if we merely paper over the cracks and return to our precrisis views, we will not want to read what the historians of the future will write. The time to reflect—and to act—is now.

 

Please see my other related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

 

Key sources of Research:

Secular stagnation and low investment: Breaking the vicious cycle—a discussion paper

McKinsey

http://www.mckinsey.com/global-themes/europe/secular-stagnation-and-low-investment-breaking-the-vicious-cycle

Case Still Out on Whether Corporate Short-Termism Is a Problem

Larry Summers

http://larrysummers.com/2017/02/09/case-still-out-on-whether-corporate-short-termism-is-a-problem/

Where companies with a long-term view outperform their peers

McKinsey

http://www.mckinsey.com/global-themes/long-term-capitalism/where-companies-with-a-long-term-view-outperform-their-peers

How short-term thinking hampers long-term economic growth

FT

https://www.ft.com/content/8c868a98-b821-11e4-b6a5-00144feab7de

Anthony Hilton: Short-term thinking hits nations as a whole, not just big business

http://www.standard.co.uk/comment/comment/anthony-hilton-short-term-thinking-hits-nations-as-a-whole-not-just-big-business-10427294.html

Short-termism in business: causes, mechanisms and consequences

EY Poland Report

http://www.ey.com/Publication/vwLUAssets/EY_Poland_Report/$FILE/Short-termism_raport_EY.pdf

Overcoming the Barriers to Long-term Thinking in Financial Markets

Ruth Curran and Alice Chapple
Forum for the Future

https://www.forumforthefuture.org/sites/default/files/project/downloads/long-term-thinking-fpf-report-july-11.pdf

Understanding Short-Termism: Questions and Consequences

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Understanding-Short-Termism.pdf

Ending Short-Termism : An Investment Agenda for Growth

http://rooseveltinstitute.org/wp-content/uploads/2015/11/Ending-Short-Termism.pdf

The Short Long

Speech by
Andrew G Haldane, Executive Director, Financial Stability, and Richard Davies

Brussels May 2011

http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2011/speech495.pdf

Capitalism for the Long Term

Dominic Barton

From the March 2011 Issue

https://hbr.org/2011/03/capitalism-for-the-long-term

Quarterly capitalism: The pervasive effects of short-termism and austerity

https://currentlyunderdevelopment.wordpress.com/2016/05/10/quarterly-capitalism-the-pervasive-effects-of-short-termism-and-austerity/

Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?

http://www.wlrk.com/docs/IsShortTermBehaviorJeopardizingTheFutureProsperityOfBusiness_CEOStrategicimplications.pdf

Andrew G Haldane: The short long

Speech by Mr Andrew Haldane, Executive Director, Financial Stability, and Mr Richard
Davies, Economist, Financial Institutions Division, Bank of England,
at the 29th Société
Universitaire Européene de Recherches Financières Colloquium,
Brussels, 11 May 2011

http://www.bis.org/review/r110511e.pdf

THE UNEASY CASE FOR FAVORING LONG-TERM SHAREHOLDERS

Jesse M. Fried

https://dash.harvard.edu/bitstream/handle/1/17985223/Fried_795.pdf?sequence=1

The fringe economic theory that might get traction in the 2016 campaign

https://www.washingtonpost.com/news/wonk/wp/2015/03/02/the-fringe-economic-theory-that-might-get-traction-in-the-2016-campaign/?utm_term=.932bc0b97758

FCLT Global:  Focusing Capital on the Long Term

Publications

http://www.fcltglobal.org/insights/publications

Finally, Evidence That Managing for the Long Term Pays Off

Dominic Barton

James Manyika

Sarah Keohane Williamson

February 07, 2017 UPDATED February 09, 2017

https://hbr.org/2017/02/finally-proof-that-managing-for-the-long-term-pays-off

Focusing Capital on the Long Term

Dominic Barton

Mark Wiseman

From the January–February 2014 Issue

Is Corporate Short-Termism Really a Problem? The Jury’s Still Out

Lawrence H. Summers

February 16, 2017

Yes, Short-Termism Really Is a Problem

Roger L. Martin

October 09, 2015

Long-Termism or Lemons

The Role of Public Policy in Promoting Long-Term Investments

By Marc Jarsulic, Brendan V. Duke, and Michael Madowitz October 2015

Center for American Progress

https://cdn.americanprogress.org/wp-content/uploads/2015/10/21060054/LongTermism-reportB.pdf

 

Overcoming Short-termism: A Call for A More Responsible Approach to Investment and Business Management

https://corpgov.law.harvard.edu/2009/09/11/overcoming-short-termism-a-call-for-a-more-responsible-approach-to-investment-and-business-management/

 

 

Focusing capital on the Long Term

Jean-Hugues Monier – Senior Parter – McKinsey & Company

Princeton University – November 2016

http://jrc.princeton.edu/sites/jrc/files/jean-hugues_j._monier_slides_final.pdf