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Saturday, January 30, 2021

Competitive Edge: Why noncompete clauses in employment contracts are by and large harmful to U.S. workers and the U.S. economy [feedly]

Competitive Edge: Why noncompete clauses in employment contracts are by and large harmful to U.S. workers and the U.S. economy
https://equitablegrowth.org/competitive-edge-why-noncompete-clauses-in-employment-contracts-are-by-and-large-harmful-to-u-s-workers-and-the-u-s-economy/

Antitrust and competition issues are receiving renewed interest, and for good reason. So far, the discussion has occurred at a high level of generality. To address important specific antitrust enforcement and competition issues, the Washington Center for Equitable Growth has launched this blog, which we call "Competitive Edge." This series features leading experts in antitrust enforcement on a broad range of topics: potential areas for antitrust enforcement, concerns about existing doctrine, practical realities enforcers face, proposals for reform, and broader policies to promote competition. David J. Balan has authored this contribution.

The octopus image, above, updates an iconic editorial cartoon first published in 1904 in the magazine Puck to portray the Standard Oil monopoly. Please note the harpoon. Our goal for Competitive Edge is to promote the development of sharp and effective tools to increase competition in the United States economy.


Researchers in recent years have compiled a substantial and impressive body of empirical evidence on the economic effects of noncompete clauses, which are often included in labor contracts between U.S. workers and firms. While somewhat mixed, this evidence mostly indicates that noncompetes are harmful to workers and to the U.S. economy overall.

This recent empirical evidence stands in tension with older theoretical arguments claiming that noncompetes are beneficial to both workers and firms. How that tension should be resolved depends on the strength of the arguments. If the arguments were extremely strong, then it might make sense to believe them, even in the face of substantial (but imperfect) empirical evidence to the contrary. But if the arguments in favor of noncompetes are weak, or if there are valid arguments against them, then the tension disappears and the natural conclusion is simply that noncompetes are harmful.

In this column, I argue for the latter position. Specifically, I describe and critique each of the three main theoretical arguments that are commonly made in favor of noncompetes, namely that:

  • The worker and the firm both voluntarily agree to the noncompete, which justifies a strong inference that it is mutually beneficial and economically efficient
  • Noncompetes facilitate efficient knowledge transfer from firms to workers
  • Noncompetes facilitate efficient firm-sponsored investment in worker training

Let us examine each of these arguments in turn.

Noncompetes only exist because they benefit both workers and firms

The first argument goes as follows. The fact that the noncompete was agreed to by both the worker and the firm strongly indicates that it is mutually beneficial. To be sure, all else being equal, the worker would prefer not to have a noncompete because it restricts their ability to leave the job or to use the threat of leaving to improve their bargaining position. But all else is not equal. A noncompete can only exist if the worker agrees to it, and the worker does not have to agree; they always have the option to refuse and take their next-best alternative option instead.

In other words, the firm cannot impose a noncompete on the worker. Therefore, the firm can only induce the worker to accept a noncompete by offering some other contract terms that are sufficiently attractive to cause the worker to agree. That is, a noncompete will only exist if the worker has been sufficiently compensated by the firm.

The next step in this argument is that the firm will only be willing to pay that compensation to the worker if it derives an efficiency benefit from the noncompete that is at least as large as the payment. So, if a noncompete exists, the compensation must have been big enough that the worker was willing to accept it and small enough that the firm was willing to pay it—thus, it must be mutually beneficial. And if the noncompete benefits both parties, then it must also be economically efficient in the sense of increasing total economic surplus (as long as it does not harm any third parties).

This argument depends crucially on the premise that imposing a noncompete on the worker without compensation is impossible. That is, the argument requires that the worker's formal agreement to the noncompete provision can never be obtained unless the provision truly makes the worker better-off. This premise is rather obviously incorrect. There are, in fact, a number of ways that firms can impose noncompetes on workers without compensation. These include:

  • The firm can mislead the worker about the existence or the meaning of the noncompete.
  • The firm can wait until the worker starts the job before informing the worker of the existence of the noncompete, exploiting the worker's reluctance to quit and restart the job search.
  • The firm can impose on the worker an interpretation of the noncompete that is more restrictive than what was originally agreed to by exploiting the power asymmetry between the worker and the firm in the ability to bear the costs of fighting in court.
  • The firm can simply refuse to deliver the promised compensation, knowing that the worker's most powerful weapon to compel the firm to keep its promises—threatening to quit—is precisely what is deterred by the noncompete itself.

In response to the above points, it might be argued that even if it were possible for noncompetes to be imposed on workers without compensation, they would be dislodged by competition in the labor market because firms that do not require an (uncompensated) noncompete would attract workers away from ones that do. But this competitive pressure is likely to be weak, especially if noncompetes are already ubiquitous in an industry.

For a firm to succeed in attracting workers by not requiring a noncompete, it would likely have to make the absence of a noncompete a central element of its recruiting message to the exclusion of other, likely more effective messages. Moreover, if only one or a few firms did not require a noncompete, then they would tend to attract the workers who care the most about avoiding a noncompete. Those workers may be less desirable as they may be the workers most likely to quit. For these reasons, the ability of labor market competition to dislodge uncompensated noncompetes is likely to be limited.

For the above reasons, noncompetes likely can be imposed on workers without compensation. And if that is true, then the presumption that noncompetes must be mutually beneficial disappears—and with it the presumption that they are economically efficient. Rather, it becomes possible, even likely, that noncompetes are instead largely a means by which firms extract value from workers.

Commonly claimed positive effects of noncompetes

It is worth noting that the above argument does not depend on any specific claim regarding possible positive effects of noncompetes. Rather, according to that argument, the mere existence of a noncompete, and its voluntary nature, are taken to be sufficient to demonstrate that it must have large positive effects, otherwise the firm would not have been willing to pay the compensation necessary for the worker to agree to it. But, as discussed above, this argument is badly flawed, and noncompetes likely can, in fact, be imposed without compensation. This does not necessarily mean that noncompetes do not have positive effects (more on this below), but it does mean that those positive effects must be demonstrated and not merely inferred from the fact that the noncompete exists.

We now turn to the specific claims of positive effects that are commonly made in favor of noncompetes. There are two such claims. The first is that they facilitate efficient transfer of knowledge from firms to workers, and the second is that they facilitate efficient worker-funded employee training. We consider each claim in turn.

Noncompetes facilitate efficient knowledge transfer from firms to workers

The first claim is that noncompetes facilitate efficient information sharing, which, in turn, provides stronger incentives to produce valuable information. The claim is that a firm will have greater incentive to share knowledge with a worker, and even to generate new knowledge in the first place, if the knowledge is protected by a noncompete to prevent the worker from taking that information to a new firm. But there are a number of reasons to doubt this benefit is large, including:

  • Much information sharing will occur with or without a noncompete simply because it is impossible to operate the business any other way. The efficiency benefit is only the increment of information sharing that is induced by the noncompete (that would not have occurred otherwise), and that increment may not be large.
  • Noncompetes impede the efficient flow of information across firms. The experience of California, which does not enforce noncompetes but is a world-leading center of innovation, suggests that the benefits of this cross-fertilization of knowledge may be so large that impeding it with noncompetes is harmful to innovation, on balance. At a minimum, it strongly suggests that any innovation benefits from noncompetes are not very large.
  • By the same logic that the noncompete increases the firm's incentive to generate new knowledge, it decreases the worker's incentive to do so. The fact that a worker who creates new knowledge cannot use that knowledge to make themselves more attractive to outside employers reduces the incentive to create the knowledge in the first place.
  • Noncompetes also impede the efficient flow of people across firms. Some job matches are inefficient, and noncompetes impede them from being dissolved in favor of more efficient ones.
  • To the extent that noncompetes do facilitate efficient information sharing, those benefits can often be achieved through other, less restrictive means, including nondisclosure and nonsolicitation agreements.

Noncompetes encourage efficient firm-sponsored investment in worker training

The second claim of positive effects of noncompetes is that they facilitate efficient firm-funded worker training. The idea is that a firm will have a greater incentive to train the worker if a noncompete prevents the worker from taking that training to a new firm. But there are a number of reasons to doubt that this benefit is large, namely:

  • Some training will occur with or without the noncompete simply because it is impossible to operate the business any other way. Once again, it is only the increment of training that is induced by the noncompete that matters (that would not have occurred otherwise), and that increment may not be very large.
  • A noncompete does remove a barrier to firm-funded training because the firm no longer has to worry that the worker will use that training to get a better job offer. That is, with a noncompete, the firm can capture the benefit of the training and so is more willing to pay the cost of it. But standard economic theory indicates that, in a competitive labor market, training with benefits that exceed the costs will occur regardless. With a noncompete, the firm will pay the cost and receive the benefit, but without a noncompete, the worker will pay the cost (through formal schooling and/or lower wages early in a career) and receive the benefit. The training will occur regardless.

Appropriate policy response

If noncompetes are, in fact, largely a means for firms to extract value from workers, the question becomes what the appropriate policy response might be. In a companion article, I argue that noncompetes can reasonably be viewed as a problem appropriately dealt with in the context of the antitrust laws. In another article, FTC Commissioner Rohit Chopra and researcher Lina Khan argue that this problem can be addressed using the FTC's rulemaking authority.

Conclusion

The empirical evidence, combined with the weakness of the arguments in favor of noncompete contracts and the existence of strong arguments against them, suggests that noncompetes are harmful, on balance. This harm may extend beyond the measures that economists normally consider, such as effects on job mobility, entrepreneurship, worker training, innovation, and wages. Rather, it is likely that noncompetes have other, even worse, effects. By making it more difficult to leave a job, noncompetes increase worker vulnerability to nonmonetary harms such as abuse and degradation. A predatory employer or manager who knows that the worker cannot leave will be more unrestrained in their predation.

Aside from all measurable harms, the ability of human beings to take their body and their labor where they choose is a fundamental human right. Perhaps some extremely strong economic efficiency benefits would be sufficient to outweigh this, but both the evidence and the theoretical arguments indicate that such benefits do not exist.

—David J. Balan is an employee of the Federal Trade Commission. The views expressed in this column are solely those of the author.


 -- via my feedly newsfeed

Is China Now Number One? [feedly]

Barkley Rosser is Prof of Economics at James Madison University. A Minskyite and Complexity theorist.

Is China Now Number One?

http://feedproxy.google.com/~r/espeak/~3/gRacHlp6faI/is-china-now-number-one.html

 Actually I think focusing on such questions can be a not very useful exercise, but here I am asking it anyway.  As it is, indeed the Peoples' Republic of China (PRC) is indeed Number One on a number of important grounds, although probably the bottom line is that the world is now dominated by a G2, the US and China, with it unclear which is Number One overall.  What has happened is that up until quite recently there was no question: the US was Number One as it had been for a long time.  That is not the case now.

Probably the most important fact lying behind PRC moving into a possible Number One position is that it indeed does have in real PPP terms the world's largest aggregate GDP, probably on the order of 30% higher than the US's, with this gap continuing to grow.  Most people are unaware of this, and it is hidden by the fact that the US continues to be Number One on nominal GDP, which gets constantly reported in the US media with no commentary or recognition of the situation regarding PPP GDP.  As it is this complicated situation signals the likely current quasi-equality, because indeed nominal GDP is important as it reflects the ability of a nation to assert itself globally.  But PPP does show how much it is really producing. And, assuming current trends hold, PRC probably will surpass the US even on nominal GDP within the next several years, almost certainly before the end of the decade.

Another important matter is that sometime in the last few years China replaced the US as the world's leading financier of development. Indeed, the PRC has accepted this role in a coordinated plan of action, its Belt and Road Initiative, which has come under some criticism by some nations for various reasons, including that it is an effort to achieve a dominance over the nations involved in this.  But whatever the truth or falsity of that, this initiative is indeed leading to large scale infrastructure expansion in many nations that will aid their future economic growth.  The US is not remotely providing such aid, and also is not going to be doing so.  This places China in a very important position regarding the world economy, a position once held by the US.

Of course there are some areas where the US is still ahead. One involves military.  China's military is growing and expanding, and it probably has the ability to cause US forces more damage in a conflict than many might expect, such as the ability to knock out an aircraft carrier and compete seriously in cyber and space warfare.  But the bottom line is that if there were a full-blown war, the US continues to maintain an overwhelming edge.  But let us hope we do not have to see such a test, although such comparisons are obviously important.

Certainly there are many other areas where the US retains the edge, even as PRC is rising in many of them. So in the crucial area of scientific and intellectual developments there is rising competition, but the US continues to broadly have the lead, even as China is taking it in various areas, some of them quite important, such as developing solar energy technology.

Needless to say the last four years has seen the US shooting itself in the foot on all this during the presidency of Donald J. Trump.  "America First" led to America Second or worse.  Angering allies and simply removing the US from so much going on in the world and violating treaties, left China as the relatively responsible party at the global level, and while China has engaged in hostile actions towards some neighbors, at the global level it looks more responsible than has the US, although this latter may be changing with the change in administrations in the US.

Anyway, clearly these two nations are global level competitors, with a long run trend tending toward the advantage of China, at least as it seems now.  But let us hope this relationship can be managed without actual war breaking out.

Barkley Rosser


 -- via my feedly newsfeed

The Economic Recovery Has a Child-Care Problem [feedly]

The Economic Recovery Has a Child-Care Problem
https://www.bloomberg.com/news/articles/2021-01-29/the-economic-recovery-has-a-child-care-problem

When the pandemic broke out, significant help arrived quickly for working parents in many rich countries, with one notable exception: the United States.

Now, nearly a year later, President Joe Biden aims to address what has become one of the most daunting obstacles to a full economic recovery, with policy proposals such as more money for child care and families.

"If people don't have care, then they can't get to work," said Heather Boushey, a member of Biden's Council of Economic Advisers, in an interview. Bigger changes to the system "are urgent," she said, to help families during the pandemic and beyond. "They are core to how we need to be thinking about the economic recovery."

Biden's fix may come too late. The pandemic crippled the already fragile U.S. child-care system, exacerbating inequalities for women and the poor that economists warn will hold back the world's largest economy.

Child Care Woes

Women have left the labor force to care for their children amid Covid-19

Source: Bureau of Labor Statistics

More than 2 million women have dropped out of the workforce since the virus hit. More than one-third of parents — mostly women — have yet to return to jobs they lost, largely because there's no one to look after their kids, according to a December report by the U.S. Chamber of Commerce Foundation.

Lawmakers provided some help for the problem last year in two rounds of stimulus. Biden's plan goes further but faces a divided Congress. His massive $1.9 trillion stimulus plan includes billions of dollars to help reopen schools and provide additional paid leave to struggling parents.

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He wants an additional $25 billion to help stabilize the industry and also aims to expand tax credits to help families cover child-care costs, which, with other changes, could help cut child poverty in half, according to Columbia University. That's separate from broader reforms he campaigned on, such as universal preschool and better pay for early educators, which face even more political hurdles.

Unlike the U.S., governments in Australia and across Europe were quick to provide robust aid to address the problems posed by schools and day-care closures shortly after the pandemic broke out.

There's evidence it helped.

Women in U.S. Leave Jobs to Care for Kids

Change since January 2020 in male-female labor-force participation gap

Source: Peterson Institute for International Economics, using a 3-month moving average for each country.

Australia provided free care and funding to child-care centers, and since then female labor-force participation has come back stronger than it has for men, according to a study by the Peterson Institute for International Economics. The gender gap also narrowed in the U.K. and Norway, where leave or other programs were swiftly implemented, the report found.

"Anything that negatively affects workforce participation — and productivity of workers — has a huge effect on our global competitiveness," said Robert Kaplan, president of the Federal Reserve Bank of Dallas, in an interview earlier this month. "We need to find ways to grow faster."

Susan Cano, a 32-year-old single mom, tried everything to keep her job at a bank when her daughters' schools closed. She flew her mother out to her California home, relied on her teenager to home-school her then-six-year-old, used vacation days and took advantage of a government leave program that quickly expired.

"It was just overwhelming," Cano said. "I was struggling, then I was depending on my 13-year-old to basically become an instructor for the younger one."

She eventually quit her job and moved to Texas to be closer to family. It took her three months and more than 50 applications to land a new job.

Payrolls Plummet

Only half of the child care jobs lost to the pandemic have returned so far

Source: Bureau of Labor Statistics

Economists call the pandemic's disproportionate impact on women the first female recession. Making it even worse is the child-care industry itself — a patchwork of private centers, smaller in-home operations, after-school programs, nannies and the friends, neighbors and grandparents who pitch in — is unraveling.

One out of three child-care jobs, held mostly by women, disappeared by mid-April, and only half of those jobs have returned, according to government data. Most care is offered by small businesses — some 700,000 of them — a majority of which are also female-owned.

Even at Bright Horizons Family Solutions Inc., one of the largest chains, enrollment is averaging 35% to 40% at centers that are open.

Jerletha McDonald in Arlington, on Jan. 23.Photographer: Laura Buckman/Bloomberg

There's not one kid enrolled at the day care Jerletha McDonald, 41, runs out of her house in Arlington, Texas. She's got space for 12. She said parents aren't sending their kids because they're scared they might get sick; others can't afford it right now.

"It's really, really rough right now for a lot of providers," said McDonald, who can stay open because she has other income sources. "Where is the essential funding for this essential work that we do?"

The cost of child care is overwhelmingly borne by parents — and, at a price for infant care that in 21 states exceeds 20% of the median household income — it's not cheap.

Sacrifices and Uncertainty

A November survey of child care providers paints a bleak picture of the industry

Source: National Association for the Education of Young Children

Note: Survey completed Nov. 13-29

Care also isn't guaranteed in most of the U.S., unlike in other rich countries, for kids who aren't school-aged. Many Americans live in child-care deserts, primarily in low-income and rural areas, where demand far exceeds capacity. For others, school closures during the pandemic removed a system of both education and care.

Lawmakers implemented some changes last year that have helped, including $10 billion in subsidies to the industry. Parents and providers are also counting on the Covid-19 vaccine. In some places, teachers are already being inoculated.

Covid has opened the eyes of corporate America to the need for more parental support. Bank of America Corp. is reimbursing employees for some costs. Intel Corp. and Cisco Systems Inc. are providing some financial support for back-up care. Google and Facebook Inc. have extended paid leave programs.

Economists say more permanent changes are still needed. Better pay is one thing that could help: Early educators, two out of every five of which are women of color, earn just $12.12 an hour on average, and about half rely on public assistance, according to the Center for the Study of Child Care Employment at the University of California, Berkeley.

"We did not have a robust child-care system coming into this crisis, and it has really just been upended," said Lea Austin, the center's director. It's "harming working mothers, it's harming the women who are doing this work and really, potentially, causing everyone all around to face greater economic hardship."

— With assistance by Ian King

When the pandemic broke out, significant help arrived quickly for working parents in many rich countries, with one notable exception: the United States.

Now, nearly a year later, President Joe Biden aims to address what has become one of the most daunting obstacles to a full economic recovery, with policy proposals such as more money for child care and families.

"If people don't have care, then they can't get to work," said Heather Boushey, a member of Biden's Council of Economic Advisers, in an interview. Bigger changes to the system "are urgent," she said, to help families during the pandemic and beyond. "They are core to how we need to be thinking about the economic recovery."

Biden's fix may come too late. The pandemic crippled the already fragile U.S. child-care system, exacerbating inequalities for women and the poor that economists warn will hold back the world's largest economy.

Child Care Woes

Women have left the labor force to care for their children amid Covid-19

Source: Bureau of Labor Statistics

More than 2 million women have dropped out of the workforce since the virus hit. More than one-third of parents — mostly women — have yet to return to jobs they lost, largely because there's no one to look after their kids, according to a December report by the U.S. Chamber of Commerce Foundation.

Lawmakers provided some help for the problem last year in two rounds of stimulus. Biden's plan goes further but faces a divided Congress. His massive $1.9 trillion stimulus plan includes billions of dollars to help reopen schools and provide additional paid leave to struggling parents.

The day's biggest stories
Get caught up with the Evening Briefing.
Email
Sign Up
By submitting my information, I agree to the Privacy Policy and Terms of Service and to receive offers and promotions from Bloomberg.

He wants an additional $25 billion to help stabilize the industry and also aims to expand tax credits to help families cover child-care costs, which, with other changes, could help cut child poverty in half, according to Columbia University. That's separate from broader reforms he campaigned on, such as universal preschool and better pay for early educators, which face even more political hurdles.

Unlike the U.S., governments in Australia and across Europe were quick to provide robust aid to address the problems posed by schools and day-care closures shortly after the pandemic broke out.

There's evidence it helped.

Women in U.S. Leave Jobs to Care for Kids

Change since January 2020 in male-female labor-force participation gap

Source: Peterson Institute for International Economics, using a 3-month moving average for each country.

Australia provided free care and funding to child-care centers, and since then female labor-force participation has come back stronger than it has for men, according to a study by the Peterson Institute for International Economics. The gender gap also narrowed in the U.K. and Norway, where leave or other programs were swiftly implemented, the report found.

"Anything that negatively affects workforce participation — and productivity of workers — has a huge effect on our global competitiveness," said Robert Kaplan, president of the Federal Reserve Bank of Dallas, in an interview earlier this month. "We need to find ways to grow faster."

Susan Cano, a 32-year-old single mom, tried everything to keep her job at a bank when her daughters' schools closed. She flew her mother out to her California home, relied on her teenager to home-school her then-six-year-old, used vacation days and took advantage of a government leave program that quickly expired.

"It was just overwhelming," Cano said. "I was struggling, then I was depending on my 13-year-old to basically become an instructor for the younger one."

She eventually quit her job and moved to Texas to be closer to family. It took her three months and more than 50 applications to land a new job.

Payrolls Plummet

Only half of the child care jobs lost to the pandemic have returned so far

Source: Bureau of Labor Statistics

Economists call the pandemic's disproportionate impact on women the first female recession. Making it even worse is the child-care industry itself — a patchwork of private centers, smaller in-home operations, after-school programs, nannies and the friends, neighbors and grandparents who pitch in — is unraveling.

One out of three child-care jobs, held mostly by women, disappeared by mid-April, and only half of those jobs have returned, according to government data. Most care is offered by small businesses — some 700,000 of them — a majority of which are also female-owned.

Even at Bright Horizons Family Solutions Inc., one of the largest chains, enrollment is averaging 35% to 40% at centers that are open.

Jerletha McDonald in Arlington, on Jan. 23.
Photographer: Laura Buckman/Bloomberg

There's not one kid enrolled at the day care Jerletha McDonald, 41, runs out of her house in Arlington, Texas. She's got space for 12. She said parents aren't sending their kids because they're scared they might get sick; others can't afford it right now.

"It's really, really rough right now for a lot of providers," said McDonald, who can stay open because she has other income sources. "Where is the essential funding for this essential work that we do?"

The cost of child care is overwhelmingly borne by parents — and, at a price for infant care that in 21 states exceeds 20% of the median household income — it's not cheap.

Sacrifices and Uncertainty

A November survey of child care providers paints a bleak picture of the industry

Source: National Association for the Education of Young Children

Note: Survey completed Nov. 13-29

Care also isn't guaranteed in most of the U.S., unlike in other rich countries, for kids who aren't school-aged. Many Americans live in child-care deserts, primarily in low-income and rural areas, where demand far exceeds capacity. For others, school closures during the pandemic removed a system of both education and care.

Lawmakers implemented some changes last year that have helped, including $10 billion in subsidies to the industry. Parents and providers are also counting on the Covid-19 vaccine. In some places, teachers are already being inoculated.

Covid has opened the eyes of corporate America to the need for more parental support. Bank of America Corp. is reimbursing employees for some costs. Intel Corp. and Cisco Systems Inc. are providing some financial support for back-up care. Google and Facebook Inc. have extended paid leave programs.

Economists say more permanent changes are still needed. Better pay is one thing that could help: Early educators, two out of every five of which are women of color, earn just $12.12 an hour on average, and about half rely on public assistance, according to the Center for the Study of Child Care Employment at the University of California, Berkeley.

"We did not have a robust child-care system coming into this crisis, and it has really just been upended," said Lea Austin, the center's director. It's "harming working mothers, it's harming the women who are doing this work and really, potentially, causing everyone all around to face greater economic hardship."

— With assistance by Ian King


 -- via my feedly newsfeed

The GameStop Game and Financial Transactions Taxes [feedly]

The GameStop Game and Financial Transactions Taxes
http://feedproxy.google.com/~r/beat_the_press/~3/Pf7azCjrm3E/

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It's worth sorting this one out a bit and answering the question everyone is asking (or should be), would a financial transactions tax fix this problem.

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company's stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Their shorting provides information to the market and brings the price closer to its "true" value (yes, we're coming back to this), in the same way that an investor's decision to buy stock brings its price closer to its true value. There is no more reason to be upset about a short position than an investor buying stock.

A short position carries a large inherent risk in a way that buying the stock doesn't. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.

For this reason, most investors taking short positions cover their bet in some way. For example, they could purchase a call option at a price that is substantially higher than the price they shorted. This would allow them to limit their losses by exercising the call option.[1]

Covering their bet however also means that they will make less money from their short, if it pays off, since they had to also spend money on this insurance. As a result, some investors don't cover their short and take the full risk themselves. This seems to have been the case with Melvin Capital.

Holding an uncovered short position leaves an investor exposed to the sort of risk posed by the Robinhood-Reddit gang. When they started buying GameStop, the price began to rise rapidly. This put Melvin Capital more in the hole.

The hedge fund's creditors wanted them to limit their losses, which meant that they had to rush out and buy shares, covering their position. This sent the price still higher. The net result was that the price rose by more than 1500 percent, from just under $20 a share earlier this month, to a peak of over $400 on Wednesday. The price has since fallen some, but it is still hugely above its levels from earlier this month.

What Does It Mean?

Let's assume that Melvin Capital was right in its assessment of the stock. (I have not studied the market prospects for GameStop, but the attraction of a brick and mortar store selling video games does seem limited.) In effect, we saw a group of small investors manipulating the stock price to the detriment of a high-flying hedge fund.

It's hard to shed any tears for Melvin Capital. They are supposed to be the grownups in the room. They should have understood the risk of an uncovered short position. If for some reason they chose to take the risk, and lost, well them's the breaks.

What about the idea of people acting collectively to manipulate stock prices? Well, this is bad, but it needs some additional context.

First, the point about it being bad is that there are smaller investors out there who buy and sell stock all the time (e.g. people with 401(k)s), and if they happen to get into the market at a bad time because of this manipulation, this will be bad news for them. To be concrete, suppose some sucker put $10,000 in GameStop when it was at $400 and at this time next month its is back down to $20. They lost 95 percent of their money.

As a practical matter, small investors should never be buying individual stocks, but you can still have a story where the not very sharp manager of a fund held by small investors buys into GameStop at $400. Presumably, that didn't happen in this case, but it is easy to imagine investors being the victim of smaller manipulations of say 5 or 10 percent.

The GameStop case shows us an example of a large group of small investors acting collectively to manipulate stock prices. We can say this is bad, but what about when a large single investor, who controls billions of dollars of assets, does it themselves?

This is clearly illegal, but it nonetheless happens. In principle an investor can be fined and even imprisoned, but stock manipulation is difficult to detect and prove. The cases that are prosecuted are surely a small subset of the cases that actually occur.

There are also variations of what the Robinhood and Reddit gang pulled. For example, a prominent stock commentator may invest in stocks they tout (or get kickbacks). This was the accusation against Henry Blodget, a prominent stock analyst in the dotcom bubble. It is very hard to distinguish a situation where a commentator is making a pronouncement about a company because it is what they actually believe, from a situation where the comment is due to some carefully concealed financial interest.

Anyhow, long and short, the Robinhood/Reddit gang basically got into the game of stock manipulation. This is not especially to be applauded. They did catch a big hedge fund with its pants down, but many of the people involved are likely to end up losers – the people who bought GameStop at a grossly inflated price.

 

How Do We Fix It and Do We Need To?

It would be good if we could crack down on efforts to manipulate stock prices, whether they come from big actors like hedge funds, corporate CEOs timing their options, or the collective action of small investors. This will always be a difficult task, but unfortunately it is easiest when it is on open display, as appears to have been the case with the Robinhood/Reddit deal.

To be clear, if a group of people debate a company's value and decide that a stock is grossly under-valued, there is no issue. But, if a group of people collectively say "hey, let's try to drive up the price of GameStop," you have a clear case of manipulation.

I'm not advocating a massive crackdown on the Robinhood/Reddit crew, but there should be consequences for this action. And, it would be reasonable to make the companies involved, Robinhood and Reddit, pay the costs. They should not allow their platforms to be used for stock manipulation.

A Financial Transactions Tax to the Rescue?

As a huge fan of financial transactions taxes (FTT), I would love to be able to say that a FTT would stop this sort of game-playing. Unfortunately, this isn't true. FTTs of the size being discussed would barely place a dent in what we saw with GameStop.

The FTT just introduced by Representative Peter DeFazio is a tax of 0.1 percent. This means that an investor playing with $10,000 would pay $10 in taxes.[2] That isn't likely to discourage a person determined to get rich while sinking a hedge fund. FTTs are great at limiting high frequency trading, which operates on very low margins, and will reduce the volume of trading more generally, eliminating waste in the financial sector, but they will not have much impact on those looking to make big bets.

One thing that they will do is ensure that the government gets a cut. In this sense, we should think of it as a tax on gambling. Other forms of gambling, like casinos or state lotteries, are subject to very high taxes. It shouldn't be a big deal to impose a tax of 0.1 percent on Wall Street gambles.

If the Robinhood/Reddit deal ends up leading to an extra $50 billion in trades (a very crude guess), that would net the government $50 million in revenue with the DeFazio FTT in place. That is not big bucks compared to a $5 trillion federal budget (it comes to 0.001 percent), but it is substantial compared to some of the items that are occasionally subject to big political debates.

For example, it's more than 10 percent of the $450 million that the Federal government is currently spending on the Corporation for Public Broadcasting. It's roughly 30 percent of the National Endowment for the Arts $170 billion annual budget. In short, the money raised by a FTT from this deal would at least allow us to pay for some nice things.

 

The Message of the GameStop Affair for Financial Transactions Taxes

One argument that opponents of FTTs like to make is that they will inhibit the process of "price discovery," so that the market price of stocks and other assets will be further removed from their true price. In this story, the distortions will cause capital to be more poorly allocated and therefore lead to a less productive economy.

This argument suffers from the fact that relatively little money for investment is raised through the stock market. Usually, initial public offerings are done to allow the original investors to cash out. Established companies raise only small a portion of their investment funds through issuing shares.

However, this episode shows us all the craziness that can have a huge impact on stock prices. Should GameStop be worth $20 a share or $400 a share? That is a huge difference. Let's imagine that the DeFazio tax could result in GameStop's price being 5 percent too high or too low for limited period of time. (That would be a huge effect for a tax of 0.1 percent.) We would be talking about a range between $19 and $21. Does anyone still want to tell us that that a FTT will undermine the process of price discovery?

In short, this episode should help us to see the stock market with open eyes. Much of what takes place there is clearly gambling. We let people gamble in other contexts, but we tax it. There is no reason we shouldn't tax it on Wall Street.

And the idea that it will distort market prices; do you want to tell me how Donald Trump really won the election?

[1] A call option gives an investor the right to buy a stock at a specified price on a specific date. For example, if a stock is currently priced at $20, I can buy a call option that gives me the right to buy the stock at $25 a share on March 31. This means that, if I am shorting the stock, the most I can lose is $5 a share, plus the cost of the call option.  

[2] Senator Bernie Sanders has proposed a tax of 0.5 percent, but that still would likely not have been a major hindrance to the Robinhood/Reddit folks.

The post The GameStop Game and Financial Transactions Taxes appeared first on Center for Economic and Policy Research.


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Friday, January 29, 2021

The G.O.P. Is in a Doom Loop of Bizarro [feedly]

I am certain Biden, or his most trusted economist, is reading this today. I support  pitching "unity" -- in Lincoln's spirit. But the political geography in the wake of the putsch shows that the social and economic crisis in the US is structural, with out of control inequities the driving force. The chasms -- industrial, technological, class, race and nationality, by health, education -- are beyond negotiation in many instances. A very sharp struggle is ahead. It was not all about Trump. Trump was  just the latest putrid reflection.

The G.O.P. Is in a Doom Loop of Bizarro

https://www.nytimes.com/2021/01/28/opinion/republican-lies.html

Here's what we know about American politics: The Republican Party is stuck, probably irreversibly, in a doom loop of bizarro. If the Trump-incited Capitol insurrection didn't snap the party back to sanity — and it didn't — nothing will.

What isn't clear yet is who, exactly, will end up facing doom. Will it be the G.O.P. as a significant political force? Or will it be America as we know it? Unfortunately, we don't know the answer. It depends a lot on how successful Republicans will be in suppressing votes.

About the bizarro: Even I had some lingering hope that the Republican establishment might try to end Trumpism. But such hopes died this week.

On Tuesday Mitch McConnell, the Senate minority leader, who has said that Donald Trump's role in fomenting the insurrection was impeachable, voted for a measure that would have declared a Trump trial unconstitutional because he's no longer in office. (Most constitutional scholars disagree.)



On Thursday Kevin McCarthy, the House minority leader — who still hasn't conceded that Joe Biden legitimately won the presidency, but did declare that Trump "bears responsibility" for the attack on Congress — visited Mar-a-Lago, presumably to make amends.



In other words, the G.O.P.'s national leadership, after briefly flirting with sense, has surrendered to the fantasies of the fringe. Cowardice rules.

And the fringe is consolidating its hold at the state level. The Arizona state party censured the Republican governor for the sin of belatedly trying to contain the coronavirus. The Texas G.O.P. has adopted the slogan "We are the storm," which is associated with QAnon, although the party denies it intended any link. Oregon Republicans have endorsed the completely baseless claim, contradicted by the rioters themselves, that the attack on the Capitol was a left-wing false flag operation.

How did this happen to what was once the party of Dwight Eisenhower? Political scientists argue that traditional forces of moderation have been weakened by factors like the nationalization of politics and the rise of partisan media, notably Fox News.



This opens the door to a process of self-reinforcing extremism (something, by the way, that I've seen happen in a minor fashion within some academic subfields). As hard-liners gain power within a group, they drive out moderates; what remains of the group is even more extreme, which drives out even more moderates; and so on. A party starts out complaining that taxes are too high; after a while it begins claiming that climate change is a giant hoax; it ends up believing that all Democrats are Satanist pedophiles.

This process of radicalization began long before Donald Trump; it goes back at least to Newt Gingrich's takeover of Congress in 1994. But Trump's reign of corruption and lies, followed by his refusal to concede and his attempt to overturn the election results, brought it to a head. And the cowardice of the Republican establishment has sealed the deal. One of America's two major political parties has parted ways with facts, logic and democracy, and it's not coming back.



What happens next? You might think that a party that goes off the deep end morally and intellectually would also find itself going off the deep end politically. And that has in fact happened in some states. Those fantasist Oregon Republicans, who have been shut out of power since 2013, seem to be going the way of their counterparts in California, a once-mighty party reduced to impotence in the face of a Democratic supermajority.

But it's not at all clear that this will happen at a national level. True, as Republicans have become more extreme they have lost broad support; the G.O.P. has won the popular vote for president only once since 1988, and 2004 was an outlier influenced by the lingering rally-around-the-flag effects of 9/11.

Given the unrepresentative nature of our electoral system, however, Republicans can achieve power even while losing the popular vote. A majority of voters rejected Trump in 2016, but he became president anyway, and he came fairly close to pulling it out in 2020 despite a seven million vote deficit. The Senate is evenly divided even though Democratic members represent 41 million more people than Republicans.

And the Republican response to electoral defeat isn't to change policies to win over voters; it is to try to rig the next election. Georgia has long been known for systematic suppression of Black voters; it took a remarkable organizing effort by Democrats, led by Stacey Abrams, to overcome that suppression and win the state's electoral votes and Senate seats. So the Republicans who control the state are doubling down on disenfranchisement, with proposed new voter ID requirements and other measures to limit voting.

The bottom line is that we don't know whether we've earned more than a temporary reprieve. A president who tried to retain power despite losing an election has been foiled. But a party that buys into bizarre conspiracy theories and denies the legitimacy of its opposition isn't getting saner, and still has a good chance of taking complete power in four years.

The Times is committed to publishing a diversity of letters to the editor. We'd like to hear what you think about this or any of our articles. Here are some tips. And here's our email: letters@nytimes.com.

Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram.

Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman

A version of this article appears in print on Jan. 29, 2021, Section A, Page 22 of the New York edition with the headline: The G.O.P. Is in a Doom Loop of Bizarro. Order Reprints | Today's Paper | Subscribe

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1.3 million people applied for unemployment insurance last week: Policymakers must pass crucial relief and recovery measures [feedly]

1.3 million people applied for unemployment insurance last week: Policymakers must pass crucial relief and recovery measures
https://www.epi.org/blog/1-3-million-people-applied-for-unemployment-insurance-last-week-policymakers-must-pass-crucial-relief-and-recovery-measures/

This morning the Department of Labor (DOL) released the first official economic data collected during the Biden presidency—initial unemployment insurance claims from last week (well, half of last week was in the Biden presidency). What it shows is that Biden inherited an extremely weak labor market.

Another 1.3 million people applied for unemployment insurance (UI) benefits last week, including 847,000 people who applied for regular state UI and 427,000 who applied for Pandemic Unemployment Assistance (PUA). The 1.3 million who applied for UI last week was a decrease of 87,000 from the prior week, but the four-week moving average of total initial claims ticked up by 45,000. The four-week moving average of total initial claims has risen back to roughly where it was in mid-October.

Last week was the 45th straight week total initial claims were greater than the worst week of the Great Recession. (If that comparison is restricted to regular state claims—because we didn't have PUA in the Great Recession—initial claims last week were still greater than the second-worst week of the Great Recession.) I should note that throughout this post I use seasonally adjusted data where I can, but for comparisons to the Great Recession I use not-seasonally-adjusted data, since DOL's improved seasonal adjustments aren't available before the week ending Aug. 29, 2020.

Most states provide just 26 weeks of regular benefits, meaning many workers are exhausting their regular state UI benefits. In the most recent data (the week ending Jan. 16), continuing claims for regular state benefits dropped by 203,000. After a worker exhausts regular state benefits, they can move onto Pandemic Emergency Unemployment Compensation (PEUC), which is an additional 24 weeks of regular state UI (the December COVID-19 relief bill increased the number of weeks of PEUC eligibility by 11, from 13 to 24).

In the most recent data available for PEUC, the week ending Jan. 9, PEUC claims rose by 837,000. This increase partially reversed the prior week's drop, which was due to the temporary lapse in pandemic UI programs before Trump signed the December COVID-19 relief bill. But we can expect them to continue to rise further in coming weeks. Over 3.5 million people had exhausted the original 13 weeks of PEUC by the end of December (see column C43 in form ETA 5159 for PEUC here). These workers are eligible for the additional 11 weeks, but they need to recertify. PEUC numbers will continue to swell as this occurs.

Continuing claims for PUA increased by 1.6 million in the latest data, the week ending Jan. 9. The large jump in PUA almost fully reverses the prior week's drop, which was also due to the temporary lapse described above. The December bill extended the total weeks of PUA eligibility by 11, from 39 to 50 weeks. As workers who exhausted PUA before the extensions were signed get back on PUA, we can expect the PUA numbers to swell further.

The 11-week extensions of PEUC and PUA just kick the can down the road—they are not long enough. Congress must pass further extensions before mid-March or millions will exhaust benefits at that time, when the virus is still rampant and the labor market is still weak.

Figure A shows continuing claims in all programs over time (the latest data are for Jan. 9). As described above, the recent volatility in PUA and PEUC is due to temporary lapses in those programs before Trump signed the December bill. Continuing claims are currently nearly 16 million above where they were a year ago.

Figure A

There are now 26.8 million workers—15.8% of the workforce—who are either unemployed, otherwise out of work because of the virus, or have seen a drop in hours and pay because of the pandemic. Further, we started losing jobs again in December. More relief is desperately needed. A key reason more relief is so important is that this crisis is greatly exacerbating racial inequality. Due to the impact of historic and current systemic racism, Black and Latinx workers have seen more job loss in this pandemic, and have less wealth to fall back on. The $900 billion December COVID-19 relief bill was not nearly enough. To get the economy back on track in a reasonable time frame, we need policymakers to pass an additional roughly $2 trillion in fiscal support. In particular, it is crucial that Congress provide substantial aid to state and local governments. Without this aid, austerity by state and local governments will result in cuts to essential public services and the loss of millions of jobs in both the public and private sectors.

President Biden announced a relief and recovery package that gets the economics right; his proposal is at the scale of the economic challenge we are facing and is a clear break from the mistakes we have made in past recoveries, when we hobbled the economy by not doing enough. With their slim majority in the Senate, Democrats can now get crucial relief measures through reconciliation, and they must be bold. Top priorities include COVID and vaccine measures, aid to state and local governments, additional weeks of UI, and increased UI benefits.


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