Evidence Piling Up that Might Explain Sustained Low Growth In the U.S.

Let me state out front that I do not have a predisposition to believe this set of arguments. But I’m watching the evidence pile up higher.

First, growth rates in the U.S. have not been as good as we might like for about 40 years.

Second, there are theories in which growth can be stifled by monopolies accumulating profits that they use to stifle more efficient entrants.

And third, we’re starting to get some evidence pointing to this being the case. Noahopinion summarizes:

... I see the case of the Market Power Story - or any big economic story like this - as detective work. We're collecting circumstantial evidence, and while no piece of evidence is a smoking gun, each adds to the overall picture. IF the economy were being throttled by increased market power, we'd expect to see:

1. Increased market concentration (Check! See Autor et al.)

2. Increased markups (Check! See De Loecker and Eeckhout)

3. Increased profits (Check! See Barkai)

4. Decreased investment (Check! See Gutierrez and Philippon)

5. Increased prices following mergers (Probably check! See Blonigen and Pierce)

6. Weakened antitrust enforcement (Check! See Kwoka)

7. Decreased output (Not sure yet)

So, as I see it, the evidence is piling up from a number of sides here. Economists need to investigate the question of whether output has been restricted.

Now, do note that there are many other papers that could be cited under each number, and many criticisms of each one. But there’s a story building up here that’s getting hard to ignore. More importantly, the criticisms are piecemeal — there doesn’t seem to be a a small set of arguments that take down that whole list.

How does he suggest we test # 7:

I think the answer is that it's very hard to know a counterfactual. How many more airline tickets would people be buying if the industry had more competition? How much more broadband would we consume? How many more bottles of shampoo would we buy? How many more miles would we drive? It's hard to know these things.

Still, I think this question could and should be addressed with some event studies. Did big mega-mergers change output trends in their industries? That's a research project waiting to be done.

If you’re thinking about graduate school in economics, this is going to be a hot topic over the next few years. As I write this, the cite in # 2 is just out, so there’s a lot of talk amongst economists that’s reminiscent of paleontological searches for missing links.

Fakers? Not All of Them

It’s a common thing to view welfare recipients as unmotivated. (Personally, I don’t hold that view, but it’s common enough for me to put it in the title of this post).

That has some overlap with lazy, but it isn’t quite the same thing: you could be one without the other, or both.

However, unmotivated could also be a function of background or environment. So it’s possible that if a welfare recipient is unmotivated to get a job, it’s because they were previously unmotivated to get the skills to be gainfully employed.

Whatever. Can we test for this with data from the real world? Manal Dashpande, a recent Ph.D. student from MIT, now on the faculty at the University of Chicago, has been researching this (here is an older draft of her paper, and here is a summary more accessible to undergraduates).

To do work like this, you look for a “natural experiment”. In short, this means that somehow the circumstances of the people you’re interested were changed, and they had to respond to this change, but they weren’t capable of influencing how or when their circumstances were changed.

Deshpande looked at the change in welfare in 1996. There was a “bright line” cutoff that made the natural experiment possible: children were treated differently based on whether or not they turned 18 before or after August 22, 1996. For a particular form of welfare (SSI), prior to that cutoff, if you got it before the cutoff you automatically got it afterwards. After that cutoff, if you got that form of welfare as a child, you had to be reevaluated when you turned 18. About 40% of childhood recipients were denied as adults. The motivation for that was that some conditions, say mild mental retardation, may incur extra expenses in childhood, but don’t affect a person’s ability to get and hold a job.

One comparison Deshpande made was the income performance of people whose benefits were removed at 18 versus three other groups. One was those who stayed on SSI after age 18 (they were not denied benefits at 18). A second were those who applied for the first time as adults but who were denied (you might call those “fakers”). The third were children whose families had received AFDC (that program was replaced by TANF, which we still have), a program targeted at low income families rather than disabled children (you might call these “poor yet able”). Here’s a chart of their income performance:

The “poor yet able” are the red points: their income rose through time. The “fakers” are the purple points: their incomes also rose. In both cases the rise was up to an average of about $15,000 per year in income. That’s not a lot, but since it’s an average, it indicates that some portion of them were able to do better than minimum wage employment.

The people who were retained on SSI are the dark blue dots at the bottom. Their incomes outside of welfare stayed close to zero, but were supplemented by those continued welfare payments.

The light blue dots indicate that welfare reform may have been to aggressive. Children who were denied benefits when they turned 18, on average, had income that never approached those of more advantaged youth. Deshpande estimated the present value of their income loss at $76,000 over the ages of 18 to 34.

Basically, welfare reform was a big tax on some low income people.

Via Marginal Revolution.