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

 

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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/

Low Interest Rates and Monetary Policy Effectiveness

Low Interest Rates and Monetary Policy Effectiveness

 

World economy is stuck in low interest rates environment.   Euro area, japan have even negative interest rates.  US Fed Reserve since December 2016 has started raising interest rates.

Attempts by Central Banks have not been effective in increasing economic growth.  Many Economists now are presenting counter intuitive reasons for low growth.

 

Please see my earlier related posts.

Business Investments and Low Interest Rates

Mergers and Acquisitions – Long Term Trends and Waves

 

Since 2016, there are several new studies published exploring effectiveness of monetary policy in low interest rates environment.

 

Is monetary policy less effective when interest rates are persistently low?

by Claudio Borio and Boris Hofmann

April 2017

Is Monetary Policy Less Effective When Interest Rates are Persistently Low?

 

In March 2017, Brookings Institution published the following study by the economists of the US Federal Reserve.

Monetary policy in a low interest rate world

 

Fed Reserve of Chicago published speech given by Charles Evans in 2016.

Monetary Policy in a Lower Interest Rate Environment

 

Lecture by Vítor Constâncio, Vice-President of the ECB, Macroeconomics Symposium at Utrecht School of Economics, 15 June 2016

The challenge of low real interest rates for monetary policy

 

Journal of Policy Modeling published a paper by Ken Rogoff.  Paper was presented at American Economic Association, 2017.

Monetary policy in a low interest rate world

 

Eight BIS CCA Research Conference on “Low interest rates, monetary policy and international spillovers”, hosted by the Board of Governors of the Federal Reserve System, Washington DC, 25-26 May 2017

Low interest rates, monetary policy and international spillovers

 

Economist Magazine published an article on views of Bill Gross and others.

November 2015

Do ultra-low interest rates really damage growth?

 

Bloomberg Business Week published an article describing views of Charles Calomiris and others.

June 2017

Is the World Overdoing Low Interest Rates?

 

Claudio Borio and Boris Hofmann

The Paper was prepared for the Reserve Bank of Australia conference
“Monetary Policy and Financial Stability in a World of Low Interest Rates”,

16-17 March 2017, Sydney

Is monetary policy less effective when interest rates are persistently low?

 

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

Claudio Borio and Leonardo Gambacorta

February 2017

Monetary policy and bank lending in a low interest rate environment: diminishing effectiveness?

 

Negative Interest Rate Policy (NIRP):
Implications for Monetary Transmission and Bank Profitability in the Euro Area

Prepared by Andreas (Andy) Jobst and Huidan Lin

IMF

August 2016

Negative Interest Rate Policy (NIRP): Implications for Monetary Transmission and Bank Profitability in the Euro Area

 

James Bullard, President and CEO of Federal Reserve Bank of St. Louis

March 24, 2009

The Henry Thornton Lecture, Cass Business School, London

Effective Monetary Policy in a Low Interest Rate Environment

 

Federal Reserve Bank of New York

Monetary Policy, Financial Conditions, and Financial Stability

Tobias Adrian
Nellie Liang

Monetary Policy, Financial Conditions, and Financial Stability

 

Monetary policy, the financial cycle and ultra-low interest rates

Mikael Juselius of Bank of Finland

DNB Workshop on “Estimating and Interpreting Financial Cycles”

Amsterdam, 2 September 2016

Monetary policy, the financial cycle and ultra-low interest rates

BIS Paper

Monetary policy, the financial cycle and ultra-low interest rates

 

The dynamics of real interest rates, monetary policy and its limits

Philippe d’Arvisenet

May 2016

The dynamics of real interest rates, monetary policy and its limits

 

Output Gaps and Monetary Policy at Low Interest Rates

By Roberto M. Billi

Output Gaps and Monetary Policy at Low Interest Rates

 

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

Steve A. Sharpe and Gustavo A. Suarez

2014-02

The insensitivity of investment to interest rates: Evidence from a survey of CFOs

 

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

Prepared by Stephen Cecchetti, Tommaso Mancini-Griffoli, and Machiko Narita

February 2017

Does Prolonged Monetary Policy Easing Increase Financial Vulnerability?

 

The Microeconomic Perils of Monetary Policy Experiments

Charles W. Calomiris

Cato Institute

The Microeconomic Perils of Monetary Policy Experiments

 

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Mickey D. Levy

Cato Institute

Why Have the Fed’s Policies Failed to Stimulate the Economy?

Low Interest Rates and Banks’ Profitability : Update July 2017

Low Interest Rates and Banks’ Profitability : Update July 2017

 

Please see my previous posts.

Impact of Low Interest Rates on Bank’s Profitability

Low Interest Rates and Banks Profitability: Update – December 2016

 

Since December 2016, there are several new studies published which study low interest rates and Banks profitability.

 

 

Liberty State economics – a Blog of New York Federal Reserve has published a new column in June 2017.

Low Interest Rates and Bank Profits

 

 

Reduced Viability? Banks, Insurance Companies, and Low Interest Rates

CFA Institute

2016

CFA Institute Blog: Low Interest Rates and Banks

 

 

Changes in Profitability for Primary Dealers since the Financial Crisis

Benjamin Allen

Skidmore College

2017

Changes in Profitability for Primary Dealers since the Financial Crisis

 

 

Deloitte Consulting has published a new report in 2017 on Bank Models viability in environment of low interest rates.

Business model analysis European banking sector model in question

 

THE EFFECT OF NEGATIVE INTEREST RATES ON EUROPEAN BANKING
July 7, 2016
International banker

 

https://internationalbanker.com/banking/effect-negative-interest-rates-european-banking/

 

 

Low interest rates place a strain on the banks

bank of Finland

2016

https://www.bofbulletin.fi/en/2016/2/low-interest-rates-place-a-strain-on-the-banks/

 

 

The profitability of EU banks: Hard work or a lost cause?

KPMG

October 2016

 

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/10/the-profitability-of-eu-banks.pdf

 

 

The influence of monetary policy on bank profitability

Claudio Borio

2017

http://onlinelibrary.wiley.com/doi/10.1111/infi.12104/abstract

 

 

Can Low Interest Rates be Harmful: An Assessment of the Bank Risk-Taking Channel in Asia

2014

Asian Development Bank

 

https://www.adb.org/sites/default/files/publication/31204/reiwp-123-can-low-interest-rates-harmful.pdf

 

 

Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

Paula Cruz-García, Juan Fernández de Guevara and Joaquín Maudos

 

http://www.uv.es/inteco/jornadas/jornadas13/Cruz-Garcia,%20Fernandez%20and%20Maudos_XIII%20Inteco%20Workshop.pdf

 

 

Dutch Central Bank has published a new study in November of 2016 on Banks’ Profitability and risk taking in a prolonged environment of Low Interest Rates.

Bank profitability and risk taking in a prolonged environment of low interest rates: a study of interest rate risk in the banking book of Dutch banks

 

 

Net interest margin in a low interest rate environment: Evidence for Slovenia

Net interest margin in a low interest rate environment: Evidence for Slovenia

 

Global Financial Stability Report, April 2017: Getting the Policy Mix Right

IMF

2017

IMF Global Financial Stability Report April 2017

 

 

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

Stefan Kerbl, Michael Sigmund

Bank of Finland

Negative Interest Rates: Forecasting Banks’ Profitability in a New Environment

 

 

Low Interest Rates and the Financial System

Remarks by Jerome H. Powell
Member Board of Governors of the Federal Reserve System
at the 77th Annual Meeting of the American Finance Association
Chicago, Illinois
January 7, 2017

https://www.federalreserve.gov/newsevents/speech/powell20170107a.pdf

 

 

Bad zero: Financial Stability in a Low Interest Rate Environment

Elena Carletti  Giuseppe Ferrero

18 June 2017

https://www.dnb.nl/en/binaries/paper%20Carletti_Ferrero_18June2017_tcm47-360758.pdf

Low Interest Rates and Banks Profitability: Update – December 2016

Low Interest Rates and Banks Profitability: Update – December 2016

 

This post is an update to my previous post published in May 2016.  You can access it below.

Impact of Low Interest Rates on Bank’s Profitability

There have been several developments in this research area since my post.  I list them below.

 

Sources of Research:

BIS Annual Report released in 2015 discussed causes and concequenses of Persistent Low Interest rates.

BIS Annual Report 2014-15

 

IMF released Global Financial Stability Report in October 2016 which discussed in Chapter 1 causes and effects of Low interest rates.

Global Financial Stability Report October 2016

 

The Office of Financial Research of the USA Department of Treasury released its Annual report 2015 in which it warned of impact of low interest rates on Banks and other financial Institutions.

US Office of Financial Research Annual Report 2015

 

European Central bank released its Financial Stability Review report in November 2016 in which low interest rates environment was discussed.

ECB Financial Stability Review November 2016

 

Deutsche bank had issued its research note in 2013 detailing how Japanese Financial Institutions have coped with Low Interest Rates Environment.

Deutche Bank Research: Ultra Low Interest Rates: How Japanese Banks have coped?

 

Deutsche bank had issued its research note in 2012 on how low interest rates are pressuring US banks net interest margins.

DB Research: Low Interest rates Pressuring US Banks Margins

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the Long Term Challenges for the US Economy in which he commented on impact of low interest rates on financial stability.

FRB/Stan Fischer: Longer-Term Challenges for the U.S. Economy

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the causes of Low interest rates and Implications.

FRB/Stan Fischer: Why Are Interest Rates So Low? Causes and Implications

 

Stanley Fischer Vice Chairman of Federal Reserve Board gave his remarks recently on the Low interest rates.

FRB/Stan Fischer: Low Interest Rates

 

Riksbank of Sweden published paper on how do low and negative interest rates affect banks’ profitability.

MONETARY POLICY REPORT APRIL 2016

To push inflation up, the Riksbank and several other central banks have introduced negative interest rates. Critics say that negative rates counteract their purpose in that they are said to squeeze banks’ profitability, which could then lead to higher lending rates and lower credit supply. This discussion has arisen in the euro area in particular, where banks are already burdened with low profitability. The Riksbank’s assessment is that the overall effect of negative interest rates on banks’ profitability is limited and may even be positive, and that the function of Swedish banks in the monetary policy transmission mechanism is maintained even at a negative policy rate level.

Riksbank/Sweden: How do low and negative interest rates affect banks’ profitability?

 

Central Bank of Columbia has recently published article

The risks of low interest rates

Leonardo Gambacorta

 

The risks of low interest rates

 

European Parliament’s Committee on Economic and Monetary Affairs.

Karl Whelan, University College Dublin

The ECB’s QE announcement has made it clear they intend to keep interest rates in the euro area at very low levels for a long period of time. This policy should help to boost economic growth and move inflation back towards the ECB’s target. However, every economic policy produces winners and losers and certain sectors of the economy will be negatively affected by this policy. This paper presents evidence on sectoral balance sheets and household asset holdings to explain how low interest rates affect various groups. It also discusses the impact a prolonged period of low interest rates has on different types of financial institutions. The paper concludes that, at present, the risks of low interest rates provoking a new financial crisis are low.

Low Interest Rates and Financial Stability

 

Interesting Blog on Bruegel

Eurozone QE and bank profitability: Why it is too early to taper

In the eyes of the critics, the quantitative easing programs have been of little help to growth and inflation and have instead been an attack on savers, undermining the profitability of banks and insurances. Do these arguments stand scrutiny?

Eurozone QE and bank profitability: Why it is too early to taper

 

Interesting Blog on Bruegel

What impact does the ECB’s quantitative easing policy have on bank profitability?

This Policy Contribution shows that the effect of the ECB’s QE programme on bank profitability has not yet had a dramatically negative effect on bank operations.

What impact does the ECB’s quantitative easing policy have on bank profitability?

 

At the first ECB ESRB ( European Systemic Risk Board) conference Elena Carletti gave a overview of the work of the task force on Low Interest Rates and Financial Stability.

September 2016

Low interest rates and implications for financial stability – A discussion

 

See the Youtube video of conference presentations at the ECB/ESRB on Low Interest Rates and Implications for Financial Stability.

ECB: First ESRB annual conference – Low interest rates and the implications of financial stability

 

See Youtube video of Welcome Address by Mario Draghi, Chair of the ESRB

ECB: First ESRB annual conference – Welcome address: Mario Draghi, Chair of the ESRB

 

ECB/ESRB Taskforce report on Macro-prudential Policy issues arising from Low Interest rates and Structural changes in the EU Financial System.

November 28, 2016

ECB/ESRB: Macro prudential Policy Issues Arising from Low Interest Rates and Structural Changes in the EU Financial System

 

ECB/ESRB Taskforce report on Macro-prudential Policy issues arising from Low Interest rates and Structural changes in the EU Financial System.

There are several Annex of the report which can be downloaded from the link below.

The ESRB publishes a report on the macroprudential policy issues arising from low interest rates and structural changes in the EU financial system

 

Mario Draghi gave his remarks at the EU Parliament about the work of ESRB and the Taskforce report.

November 28, 2016

Introductory statement by Mario Draghi, Chair of the ESRB, Brussels, 28 November 2016

Low Interest Rates and Risk taking channel of Monetary Policy

From Monetary Policy and Bank Risk Taking

Gianni De Nicolò, Giovanni Dell’Ariccia, Luc Laeven, and Fabian Valencia
July 27, 2010

Part of the blame for the current global financial crisis has fallen, justly or not, on monetary policy. The story goes more or less like this: persistently low real interest rates fueled a boom in asset prices and securitized credit and led financial institutions to take on increasing risk and leverage. Had central banks preempted this buildup of risk by raising interest rates earlier and more aggressively, the consequences of the burst would have been much less severe.1

This claim has become increasingly popular in both academia and the business press, partly because the crisis occurred in the wake of a prolonged period of exceptionally low interest rates and lax liquidity conditions. However, little empirical evidence has been presented to back it up. And theory has had surprisingly little to offer on the subject. Few macroeconomic models have explicitly considered the impact of policy rates on bank risk taking. And models of bank risk taking have yet to incorporate the effects of monetary policy.

From The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

A recent line of research suggests that there is a significant link between a monetary policy of low interest rates over an extended period of time and higher risk-taking by banks. This link points to a different dimension of the monetary transmission mechanism, the so-called risk-taking channel of monetary policy transmission (Borio and Zhu, 2008)

From The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

For many decades commercial banks in the USA operated under a very restrictive regulatory environment. The McFadden Act (1927) restricted commercial banks from intra- and inter-state expansion of their branch network without previous regulatory approval. Furthermore, the Glass- Steagall Act (1933) prohibited, among other things, commercial banks from offering investment services, such as corporate underwriting, securities brokerage, real estate sales or insurance. These Acts meant to increase competition, protect small banks and limit their risk-taking behavior. Eventually, both Acts were repealed by the end of the 1990s; this allowed commercial banks to freely expand their network across counties and states and to join their forces with other financial institutions. Whether the removal of these restrictions on US banking activity has led to a decrease or increase in banks’ risk-taking behavior is an open debate in economic research. Mishkin (1999), for example, argues that the separation of the banking and securities industries restricted the ability of the banks to diversify, and thus to reduce risk. Then again, the demise of the Glass-Steagall Act led to large financial institutions and the well-known moral hazard problem created by a too-big-to- fail policy. This policy seems to have encouraged increased risk taking on the part of large US banks (Boyd and Gertler, 1993).

From The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

Regardless its (questionable) impact on banks’ risk-taking behavior, the fact is that financial deregulation significantly reduced the number of insured US commercial banks from over 14,000 in 1985 to approximately 6,500 in 2010. At the same time, banking industry assets increased significantly from $2.73 trillion in 1985 to $12.1 trillion in 2010. However, this increase was not evenly distributed across the US banking industry and the sector became far more concentrated than during most of its past. For example, the asset share of the largest size group (i.e. organizations with more than $1 billion in assets) rose dramatically from 71% in 1992 to 90% in 2010.

From The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

In this paper, we do not investigate the underlying factors of this consolidation trend. Instead, our focus is primarily on identifying how the gradual restructuring of the US banking industry (in its various manifestations), along with the varying macroeconomic conditions, have influenced the linkage between interest rates and bank risk-taking over time. Hence, adding a temporal dimension to the analysis allows us to better understand the dynamics of the risk-taking channel of the US monetary policy transmission over the last two decades. Throughout this period, the federal funds rate (the primary tool used for implementing monetary policy) varied significantly in accordance with the country’s economic conditions. During the 2000s, the Fed adopted accommodative monetary policies. Following the bursting of the dotcom bubble in late 2000 and the subsequent recession in the US economy, the Federal Open Market Committee (FOMC) began to lower the target for the overnight federal funds rate. Rates fell from 6.5% in late 2000 to 1.75% in December 2001 and to 1% in June 2003. The target rate was left at about 1% for a year. At that time, the historically low federal funds rate resulted in a negative real federal funds rate from November 2002 to August 2005. Remarkably, since the first quarter of 2009 the level of federal funds rate has remained at its all-time low (0.25%). This exceptionally low level is likely to hold for an extended period of time as evidenced by the minutes of the FOMC’s meeting April 27, 2011.

From The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

 

In forming its central-bank policy rates, the Fed, like other central banks, has the mandate of promoting price stability. However, unlike other banks, the Fed is additionally charged with promoting maximum employment. This dual mandate may well explain the Fed’s recent decision to embark on quantitative easing schemes in an attempt to keep interest rates at low levels in order to promote employment. Although these monetary policy decisions may potentially impair the performance of the banking sector, or change the structure of its risk-taking activities, the Fed avoids taking actions against financial volatility per se, or against banks taking losses or failing. Such actions are believed to raise moral hazard problems, which could ultimately increase, rather than reduce, the risks to the financial system (Plosser, 2007). Thus, the current (and expected) accommodative monetary policy implies that the Fed is more concerned with liquidity injections that facilitate the orderly functioning of the financial markets, rather than protecting banks from the consequences of their financial choices.

Key Research/Analysis Sources:

A) Monetary policy, interest rates and risk-taking

Mikael apel and Carl andreas Claussen; 2012

 

http://www.riksbank.se/Documents/Rapporter/POV/2012/rap_pov_artikel_4_120607_eng.pdf

 

B) Monetary Policy and Bank Risk-Taking: Evidence from the Corporate Loan Market

Teodora Paligorova∗ Bank of Canada

Jo ̃ao A. C. Santos∗

November 22, 2012

 

http://www.frbsf.org/economic-research/events/2013/january/federal-reserve-day-ahead-financial-markets institutions/files/Session_3_Paper_2_Paligorova_Santos_risk_taking.pdf

 

C) Monetary policy and the risk-taking channel 

Leonardo Gambacorta
Bank for International Settlements (BIS)

BIS Quarterly Review December 2009

http://www.bis.org/publ/qtrpdf/r_qt0912f.pdf

 

D) Capital Flows and the Risk-Taking Channel of Monetary Policy

Valentina Bruno Hyun Song Shin

December 19, 2012

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.269.6716&rep=rep1&type=pdf

 

 

E) Bank Risk-Taking, Securitization, Supervision, and Low Interest Rates: Evidence from Lending Standards

Angela Maddaloni and José-Luis Peydró

September 2009

http://www.webmeets.com/files/papers/ESWC/2010/2484/Shangai_Jan2010.pdf

 

F) Capital regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism ?

24-25 September 2009

Claudio Borio

Haibin Zhu

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.184.5606&rep=rep1&type=pdf

 

G) Monetary Policy and Bank Risk Taking

Prepared by Gianni De Nicolò, Giovanni Dell’Ariccia, Luc Laeven, and Fabian Valencia* Authorized for Distribution by Olivier Blanchard
July 27, 2010

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.172.813&rep=rep1&type=pdf

 

H) Conducting Monetary Policy at Very Low Short-Term Interest Rates

By BEN S. BERNANKE AND VINCENT R. REINHART

MAy 2004

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.480.5070&rep=rep1&type=pdf

 

I) Does Monetary Policy Affect Bank Risk?

Yener Altunbasa, Leonardo Gambacortab, and David Marques-Ibanezc

March 2014

http://asbaweb.org/E-News/enews-37/anares/05anares.pdf

 

J) Interest rates and bank risk-taking

Manthos D Delis and Georgios Kouretas

January 2010

https://mpra.ub.uni-muenchen.de/20132/2/Interest_rates_and_bank_risk-taking.pdf

 

K) Monetary Policy, Leverage, and Bank Risk-Taking

Giovanni Dell’Ariccia Luc Laeven Robert Marquez

December 2010

https://www.imf.org/external/pubs/ft/wp/2010/wp10276.pdf

 

L) The risk-taking channel of monetary policy in the USA: Evidence from micro-level data

Manthos D Delis and Iftekhar Hasan and Nikolaos Mylonidis

October 2011

https://mpra.ub.uni-muenchen.de/34084/1/MPRA_paper_34084.pdf

 

 

M) Bank Leverage and Monetary Policy’s Risk-Taking Channel: Evidence from the United States

 

 

N) Money, Liquidity, and Monetary Policy

Tobias Adrian Hyun Song Shin

January 2009

 

O) In search for yield?
Survey-based evidence on bank risk taking

Claudia M. Buch

Sandra Eickmeier

Esteban Prieto

2011

 

 https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2011/2011_05_13_dkp_10.pdf?__blob=publicationFile

 

P) DOES MONETARY POLICY AFFECT BANK RISK-TAKING?

by Yener Altunbas, Leonardo Gambacorta and David Marqués-Ibáñez

2010

 

 

Q) Monetary policy and the risk-Taking channel: Insights from the lending behaviour of banks

Teodora Paligorova and Jesus A. Sierra Jimenez

2012