Boom or Bust? Expect America's Economy To Change In The 2020s

January 20, 2020 Topic: Economics Blog Brand: The Buzz Tags: U.S. EconomyTechnologyInnovationTax ReformGDP Growth

Boom or Bust? Expect America's Economy To Change In The 2020s

Looking to the future, how might population growth, trade, Big Tech, and new innovations all affect America’s capacity for economic growth? 

Ok, so let me at least say why I think it’s a golden age. I mean this in terms of the amount of data we’re getting. Some of it is administrative data like tax records of companies and individuals, population censuses, and censuses of firms’ activities. So we’re getting much more data than we had before that we can use to understand how people behave and what phenomena are happening. That could be used to measure the benefits of new technology.

I also think it’s a golden age because computing power has enabled us to do modeling better and understand complex aspects of the economy. One of the criticisms of economics that I think is rather out of date is the idea that we aren’t aware that there’s lots of heterogeneity out there in terms of workers, firms, and consumers. For example, simply saying that free trade is good misses all kinds of suffering that happens as a by-product. So because of better data we’re much better at measuring that and much better at coming up with ways to think about how to address it and predict what would happen if we, say, expanded trade adjustments.

And there’s a third strand of this golden age — related to the most recent Nobel prize — which is running experiments. Some of those are natural experiments, and some of them are deliberate policy experiments by researchers or NGOs or some combination. Those are enabling us to get at causal effects of policies much better than we could before. That’s why people have talked about a credibility revolution in economics, where we’ve got more random variation we can use to understand welfare effects of policy changes.

Those are the forces that make me think we’re in the middle of a golden age in terms of economic research and our understanding of economic behavior.

Getting back to the productivity issue, are big technology firms — whether it’s Apple, Amazon, or Google Alphabet — are they helping productivity or are they hurting productivity? People make the case for both.

On one hand, these are certainly very productive firms, and they spend a lot on research. But on the other hand, critics say, “Well, they’re so big that they’re preventing new competitors from starting. Nobody wants to go against them, they buy up these small companies before they can get big, so they’re part of the problem.”

So are Big Tech firms part of the solution or part of the problem, at least if you want faster economic growth?

I think, at least in a direct effect, I’m very confident they’re part of the solution, at least in a sense that the innovations they’ve carried out have benefitted people enormously. Not just their stockholders, but consumers as well.

I think the harder question is what you also touched on, which is whether their ascendancy and their success in terms of their innovation, whether that’s made it more difficult for further innovation to occur, because they have so much market power, or maybe even in terms of Facebook having a network externality, or even Amazon’s marketplace could be viewed as a network that’s hard for some other online retailer to really crack. Or Uber for that matter.

We can talk about network effects or incumbent advantages that could deter future innovation. So I am concerned about that, but that’s much more speculative. So even though I have some research pointing out that is a possibility, and other people do as well, I think that’s more conjecture at this point. We’re more kind of flailing, trying to understand why productivity growth is so weak. One natural candidate is that concentration and market power at the top has increased, and maybe that’s deterring future innovation.

To me there seems to be research on this topic, and there’ll be more research, but activists and policymakers have already seen enough. They’ve already decided that these companies are bad for innovation because they’re suppressing new companies from rising, so people don’t even want to start the next great company if it’s in a sector that those companies are involved in.

So what advice would you give policymakers about this sort of big company, and specifically the Big Tech company issue?

I think that’s a great question. I wish I could tell you exactly what to do, and I guess I don’t know, basically. What I think is hard basically is, I’m tempted to say, “Well, we need to understand it more before we take any action like breaking up one of these big firms.” But that kind of gives a default to no intervention, no regulation. That makes me uncomfortable as well. Why is that the default? We know that the growth rate is down. This is one candidate to explain why, so maybe we should take action.

And I guess one of the biggest difficulties when it comes to something like breaking up a big firm is that I really want to have evidence-based policy, I really want to use systematic evidence to decide what will improve economic outcomes. In these cases, it’s hard to have systematic evidence because you’re talking about a few big players. It’s not like you have a lot of different experiments you’re using to understand.

Here’s an example of something we understand better: the US raised the threshold for anti-trust examination of mergers from $10 million to $50 million and there was this surge in mergers that was between values of $10 and $50 million. And there were horizontal mergers of competitors — they weren’t vertical mergers of buyers and suppliers. So it really looks like anti-competitive behavior.

I would be much more comfortable looking at those cases because there’s so many of them and we can study what did the change in that threshold did to competition in markets that were affected versus those that were unaffected. It’s just much harder to do this systematic analysis when you have a huge player like Amazon or Apple or Google.

If you’re worried about competition in the economy, a lot of talk has been about the very largest tech firms. But if you were a regulator that worked at the Justice Department or the FTC, is that the first area you would look at, or are there other areas that aren’t as sexy because everybody’s involved with Amazon and we love reading stories about Apple? Are there other areas that you would focus on first?

Actually, yes, because we looked at the rise in concentration, and it’s most pronounced in sectors like services. So think of like Southern Health buying up a lot of different local health providers. So you see it in the health care sector, that rise in concentration. You also see it in retail. So services broadly — and retail wholesale — are the sectors where you see the biggest increase in national concentration.

At the same time that I say that though, one of the other things that people are finding is that local concentration isn’t necessarily rising. This might be a kind of corollary to what people found where airlines were deregulated. There was this big shakeout of national airlines, a lot fewer national airlines and national concentration, and airline market share went way up. But they were competing a lot more head to head on individual routes, so you actually had more competition route by route.

Something similar might be going on in these other sectors: national concentration is up, and at the same time local concentration is down. You know, Wal-Mart is facing off some other big retailer more than it did in the past. So it’s in more markets, but it’s also facing off against other non-trivial players. So that’s an example where concentration might be up and is a source of concern for regulators, but they also have to really look at whether mark-ups and market power are up, not just concentration.

We certainly want to have a highly competitive economy where companies rise, but then if there’s a company that does it better they can rise and their founders can get rich — this process of creative destruction.

You’ve written about creative destruction, but also about another kind of innovation, which you call “iterative.” That’s where you’re not creating some brand new product, you’re just making that product better. And they both have a sort of role to play, right?

Definitely. It’s one of these things where, if you just try to look at it through introspection to figure out which is more important, you can’t really come up with an answer. Because it’s easy to think about existing incumbents like coming up with new versions of iPhones or car models every year. And those look like important improvements — they might not be as dramatic as the first iPhone or the first mini-van —

I think of the third camera lens on the iPhone versus the second camera lens.

Right. So it’s easy to look at them individually and they don’t look as transformative as the first smartphone that came in where Apple grabbed a bunch of market share at the expense of Blackberry or Nokia. It looks like those are bigger innovations, but on the other hand, there are tons of these smaller ones happening all the time at all of these firms, and so one can’t use introspection to try to figure out which is more important. It’s too easy to just tell stories like, “Well most R&D and patenting is done by incumbent firms that are pretty large, so maybe they do most of the innovation.”