Janet Yellen on Jobs, Debt, Taxes, Climate and Cryptocurrency [feedly]

Yellen speaks to the NY Times. Commentary?

text-only below

Janet Yellen on Jobs, Debt, Taxes, Climate and Cryptocurrency
https://www.nytimes.com/2021/02/23/business/dealbook/janet-yellen-dealbook.html

Janet L. Yellen, the Treasury secretary, has given only a handful of interviews since taking up her post about a month ago. Business leaders and investors hang on her every word, trying to divine how she and the Biden administration will steer policy and how this will impact the economy and the markets. Ms. Yellen, previously the chair of the Federal Reserve, is skilled at staying on message, but in an interview with me for the DealBook DC Policy Project, she hinted at some policy priorities in her typically understated way.

Here are the highlights of what she said about some of the biggest issues — and my interpretation about what it means.

On jobs

When I asked Ms. Yellen what metric she would use to measure success in her new role, she made it clear that one issue rose above all others: "A simple one would be how long is it going to take us to get unemployment down to the levels we enjoyed prior to the crisis," she said.

But don't just look at the headline unemployment rate as the gauge. She is using an even tougher measure, which means she is likely to push for stimulus and other policies to goose the economy beyond what may be expected. "Remember, the unemployment rate was at a 50-year low of 3.5 percent," she said of the situation before the pandemic, contrasting it with the current rate of 6.3 percent. "Really, though, if you count in addition to the almost 10 million who are registered as unemployed, if you add in the four million who have dropped out of the labor force — for health reasons, because they have child care responsibilities — and two million people who have reduced hours or pay, we're looking at an unemployment rate that really is close to 10 percent."

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On debt

How much is too much? That's the key question economists are debating as government debt soars, with some arguing that the old fiscal rules no longer apply. Ms. Yellen, who was known for her dovish tendencies at the helm of the Fed, doesn't go that far. However, she made an argument that "traditional metrics" like the debt-to-G.D.P. ratio are the wrong things to look at to judge whether the country can afford more debt. "I remember back in 2007, the debt-to-G.D.P. ratio before the financial crisis was 35 percent. And now it's around 100," she said.

Refer someone to The Times.

They'll enjoy our special rate of $1 a week.

A more important measure, for her, is the cost of debt. "Just look, for example, at interest payments on the debt as a share of G.D.P. Currently that's under 2 percent," she said. "And it's no higher than it was in 2007. So, I think we have more fiscal space than we used to because of the interest rate environment. And I think we should be using it now to address an emergency."

On taxes

Ms. Yellen said that she wasn't planning a wealth tax à la Senator Elizabeth Warren — "it's something that has very difficult implementation problems" — but in her most direct comments yet on the topic, the Treasury secretary said that she was prepared to look at ending tax treatment that could have a similarly profound effect. She plans to explore stopping a rule that allows assets to be passed on after death at their current — or "stepped up" — value, without paying taxes on the gains accrued over time. The Center on Budget and Policy Priorities crunched the numbers and estimated that unrealized capital gains account for as much as 55 percent of assets in estates worth more than $100 million.

Private-equity executives should also take note: She hinted that she wanted to look at "carried interest," which allows some financiers to pay taxes on their income at capital gains rates as if they had invested the money themselves.

Ms. Yellen seemed less convinced about a financial transactions tax, which some have suggested could raise $80 billion a year by imposing a small charge on every trade, which would hit Wall Street most of all. "It could deter speculation but it might also have negative impacts," she said.

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On cryptocurrency

Ms. Yellen doubled down on a "buyer beware" message to investors in Bitcoin. "I don't think that Bitcoin — I've said this before — is widely used as a transaction mechanism. To the extent it's used, I fear it's often for illicit finance," she said. "It's an extremely inefficient way of conducting transactions. And the amount of energy that's consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware. It can be extremely volatile, and I do worry about potential losses that investors in it could suffer."

Ms. Yellen is more interested in the prospect that the Federal Reserve could develop a so-called digital dollar, the first time she appears to have made public comments about that prospect. Crypto supporters may interpret this as an endorsement of the idea — Ms. Yellen's predecessor, Steven Mnuchin, seemed less interested in it — which shares some of the technologies that underpin Bitcoin and other cryptocurrencies. "It makes sense for central banks to be looking at it," she said. "We do have a problem with financial inclusion. Too many Americans really don't have access to easy payment systems and to banking accounts, and I think this is something that a digital dollar — a central bank digital currency — could help with. I think it could result in faster, safer and cheaper payments."

There are a number of "issues" to be resolved before central banks get into digital currencies, she said. "What would be the impact on the banking system? Would it cause a huge movement of deposits out of banks and into the Fed? Would the Fed deal with retail customers or try to do this at a wholesale level? Are there financial stability concerns? How would we manage money laundering and illicit finance issues? There's a lot to consider here, but it's absolutely worth looking at."

On the climate

Ms. Yellen has said that dealing with climate change is part of a broader mandate for the Treasury, as it is for other departments under President Biden. One of the most fascinating comments she made had to do with the role of financial institutions, and the risk they face by investing or lending to companies that are exposed to climate change. "There's a new movement now toward stress testing of financial institutions," she said, which acknowledges that finance firms face risks from the changing climate, in terms of "physical risks and also risks due to price changes, stranded assets and the like."

It is "encouraging" that the Fed is looking into this, she said, "and I think that's something that at Treasury we may be able to discuss and facilitate." She added, "It's not envisioned that these tests would have the same status in terms of limiting payouts and capital requirements, but I think they would be revealing to both regulators and to the firms themselves."


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Mission impossible [feedly]

Mission impossible
https://thenextrecession.wordpress.com/2021/02/20/mission-impossible/

A very good intro and review of Mariana Mazzucato, who has become a global celebrity of sort while remaining a serious intellectual force in government economic policy. Despite his unnecessarily snarky conclusion, I think 'Brother Roberts' has some affection and infatuation with Prof. Mazzucato.

Italian-American economist, Mariana Mazzucato, who works and resides in London, has become a big name in what we might call 'centre-left' or even in mainstream economic and political circles.  She has a new book out, Mission Economy: a moonshot guide to changing capitalism.

Mazzucato was briefly an economic adviser to the UK Labour Party under Corbyn and McDonnell; she apparently "has the ear" of radical Congress representative Alexandria Ocasio-Cortez; she advised Democratic presidential hopeful, Senator Elizabeth Warren and also Scottish Nationalist leader Nicola Sturgeon.  She was even accorded the title of "the world's scariest economist" because her ideas were apparently really shaking up things among the great and good.  According to the London Times newspaper, "admired by Bill Gates, consulted by governments, Mariana Mazzucato is the expert others argue with at their peril".

However, whereas she appeared to start out as adviser to the left of the political spectrum, more recently she has become available to all.  She quickly dropped her role as adviser to Corbyn.  According to one reviewer of her new book, "Mazzucato quickly recognised that there was no real role as a Corbyn adviser and resigned after two months."  She said: "The actual people pulling the strings were Seumas Milne and others. I felt like well, if you want to do your own thing, do it. But don't do it in my name,' she told the Daily Mail. The Mail commented: "After this brief flirtation with the wrong sort of politician, she is keen to point out that she has worked closely with the Tories, advising Greg Clark, among others, on his industrial strategy when he occupied the constantly changing role of Business Secretary.".

Mazzucato now advises governments and institutions internationally (Policy Papers : Mariana Mazzucato) and appears on various headline forums and seminars. The World Health Organization appointed her chief of its Council on the Economics of Health for All in 2020. Indeed, she recently praised the appointment of (unelected) former ECB chief and central banker, Mario Draghi, as Italy's prime minister, presumably because he is going to save Italy's economy.  Not so scary after all, then.

I have reviewed Mazzucato's previous (much weightier) books, The Entrepreneurial State and the Value of Everything in other posts. In this latest book, she continues her main argument that she made in those other books that the public sector should lead the way in modern economies. "Instead of acting as investors of first resort, far too many governments have become passive lenders of last resort, addressing problems only after they arise. But as we should have learned during the post-2008 Great Recession, it costs far more to bail out national economies during a crisis than it does to maintain a proactive approach to public investment."  Rightly, she points out that "the more we subscribe to the myth of private-sector superiority, the worse off we will be in the face of future crises." The role of public funded innovation and publicly owned research and development has been deliberately downplayed by the mainstream. And yet it has been publicly funded research that has led to the speedy rollout of vaccines for the COVID pandemic and it's been the publicly owned and run health services that have provided the best response in reducing deaths from the pandemic.

Mazzucato rightly wants to restore and proclaim the "narrative of government as a source of value creation." (although as I argue in my review of her last book, government does not create value (as profit for capital), but use values (for society) – a distinction that Mazzucato does not recognise, but capitalists do). She notes, for example, that an Obama administration loan was crucial to the success of Tesla, and that a 1980s BBC computer literacy program led to the founding of a leading software development firm and the creation of a low-cost computer used in classrooms around the world.

But above all, in this book, she aims to promote the model of the Apollo space mission to the moon as the way forward to develop innovations and diffuse them across the economy; what she calls a 'mission-oriented' approach.

As she puts it: "The Apollo program demonstrated how a clearly defined outcome can drive organizational change at all levels, through multi-sector public-private collaboration, mission-oriented procurement contracts, and state-driven innovation and risk taking. Moreover, such ventures tend to create spillovers – software, camera phones, baby formula – that have far-reaching benefits."  And what this model shows, she claims, is that "landing a man on the moon required both an extremely capable public sector and a purpose-driven partnership with the private sector."

So what modern capitalism needs is a 'purpose-driven' partnership between the public and private sectors: "moonshots must be understood not as siloed big endeavours, perhaps the pet project of a minister, but rather as bold societal goals which can be achieved by collaboration on a large scale between public and private entities."  Apparently, we need "a bold portfolio approach, a redesigning of tools like procurement and a proper economic theory to confront the directionality of growth head on" – whatever "confronting the directionality of growth" means.

Mazzucato recognises that so-called public-private partnerships in the past have often not turned out in the public interest. We must "not repeat the failures associated with today's digital economy, which emerged in its current form after the state provided the technological foundation and then neglected to regulate what was built on it. As a result, a few dominant Big Tech firms have ushered in a new age of algorithmic value extraction, benefiting the few at the expense of the many."  Instead, we must "capture a common vision across civil society, business, and public institutions."

She argues that public–private partnerships have focused on de-risking investment through guarantees, subsidies and assistance. Instead, they should emphasize sharing both risks and rewards. So governments and capitalist companies are to share the risks and then share out the rewards.  That idea shows the difficulty inherent in the mission approach.  The mission for overcoming the COVID pandemic has already shown which sector has taken the risks and which will gain the rewards- as did the Apollo mission.

Mazzucato reckons that a fundamental reappraisal of the role of the public sector is required that goes beyond the traditional 'market failure' framework derived from neoclassical welfare economics to a 'market co-creating' and 'market-shaping' role. "It is not about fixing markets but creating markets".

But should the mission of government be to 'create markets' or 'shape markets'? Is it really possible that the public sector will be allowed to take the lead in investment for social purpose over investment for profit under capitalism?  Is it really possible that a 'common vision' can be 'captured' between big business in its drive for profits for its shareholders and governments which may have different objectives?  Can climate change and global warming be reversed while the fossil fuel industry remains untouched by governments?  Can rising inequality be reversed through some public-private 'common vision'?  Can technological unemployment be avoided when the big tech companies apply robots and AI to replace human labour?  Can a mission 'moonshot' approach based on partnership with big business and 'creating markets' really succeed, given the social structure of modern capitalism?  When you pose these questions, I think the answer becomes clear.

Indeed, some of the mission-approach schemes that Mazzucato cites in her book have been just as unsuccessful as previous 'public-private 'partnerships.  She advised Germany's Energiewende (energy transition to renewables), which has failed to deliver any better than others in reducing carbon emissions. She advised the Scottish Nationalists on launching its Scottish National Investment Bank.  Within two months, the SNP government cut its funding from £241m to £205m, a pathetic amount to start with.  When Labour under Corbyn first proposed such a SNIB, it was to be capitalised with £20bn!  And as for UK PM Johnson's 'Operation Moonshot' for mass test and tracing, say no more.

And how are these missions to be democratically controlled to achieve 'a common vision'?  Mazzucato says it will need "involving citizens in solving societal challenges and creating wide civic excitement about the power of collective innovation".  Wading through this jargon, she seems to be saying that policy makers, researchers (like herself) and businesses will get together and listen to 'citizens' somehow and out of this will come a widely approved set of 'missions' for innovation.

Mazzucato sums it up: "Mission Economy offers a path to rejuvenate the state and thereby mend capitalism, rather than end it."  In my view, that is a mission impossible.

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The Dependence of US Higher Education on International Students [feedly]

The Dependence of US Higher Education on International Students
https://conversableeconomist.blogspot.com/2021/02/the-dependence-of-us-higher-education.html

US higher education in recent decades had beeome ever-more dependent on rising inflows of international students--a pattern that was already in likely to slow down and now is being dramatically interrupted by the pandemic. John Bound, Breno Braga, Gaurav Khanna, and Sarah Turner describe these shifts in "The Globalization of Postsecondary Education: The Role of International Students in the US Higher Education System" (Journal of Economic Perspectives, Winter 2021, 35:1, 163-84). They write: 

For the United States, which has a large number of colleges and universities and a disproportionate share of the most highly ranked colleges and universities in the world, total enrollment of foreign students more than tripled between 1980 and 2017, from 305,000 to over one million students in 2017 (National Center for Enrollment Statistics 2018). This rising population of students from abroad has made higher education a major export sector of the US economy, generating $44 billion in export revenue in 2019, with educational exports being about as big as the total exports of soybeans, corn, and textile supplies combined (Bureau of Economic Analysis 2020).

Here's a figure showing the rise in international students from 2000-2017. Notice in particular the sharp rise in international students in master's degree students. 

Bound and co-authors write: 

[F]oreign students studying at the undergraduate level are most numerous at research-intensive public universities (about 32 percent of all bachelor's degrees), though they also enroll in substantial numbers at non-doctorate and less selective private and public institutions. ...  The concentration of international students  in master's programs in the fields of science, technology, engineering, and mathematics is even more remarkable: for example, in 2017 foreign students received about 62 percent of all master's degrees in computer science and 55 percent in engineering. ... Many large research institutions now draw as much as 20 percent of their tuition revenue from foreign students (Larmer 2019)."

This table shows destinations of international students from China, India, and South Korea, three of the major nations for sending students to the US. 

However, Bound and co-authors note that the US lead as a higher education destination has been diminishing: "Although the United States remains the largest destination country for students from these countries, the US higher education system is no longer as dominant as it was 20 years ago. As an illustration, student flows from China to the United States were more than 10 times larger than the flows to Australia and Canada in 2000; by 2017, those ratios fell to 2.5 to 1 and 3.3 to 1, respectively."

This pattern of rising international enrolments in US higher ed was not likely to continue on its pre-pandemic trajectory. Other countries have been building up their higher education options. In addition, if you were a young entrepreneur or professional from China or India, the possibilities for building your career in your home country look a lot better now than they did, say, back in about 1990. But the pandemic has taken what would have been a slower-motion squeeze on international students coming to US higher education and turned it into an immediate bite. Bound and co-authors write: 

Visas for the academic year are usually granted between March (when admissions decisions are made) and September (when semesters begin). Between 2017 and 2019, about 290,000 visas were granted each year over these seven months (United States Department of State 2020). Between March and September 2020, only 37,680 visas were granted—an extraordinary drop of 87 percent. Visas for students from China dropped from about 90,000 down to only 943 visas between March and September 2020. A fall 2020 survey of 700 higher education institutions found that one in five international students were studying online from abroad in response to the COVID-19 pandemic. Overall, new international enrollment (including those online) decreased by 43 percent, with at least 40,000 students deferring enrollment (Baer and Martel 2020).

Overall, it seems to me an excellent thing for the US higher education system and the US economy to attract talent from all over the world. But even if you are uncertain about those benefits, it is an arithmetic fact that the sharp declines in international students are going to be a severe blow to the finances of US higher education. 

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The Green New Deal Threatens Republicans’ Bread and Butter, it’s Not Just Competition in the Battle of Ideas [feedly]

The Green New Deal Threatens Republicans' Bread and Butter, it's Not Just Competition in the Battle of Ideas
http://feedproxy.google.com/~r/beat_the_press/~3/Q2R6u8P9KHk/

Naomi Klein has an interesting piece in the New York Times on the implications of the Texas disaster. I would disagree with some parts, which attack the Texas approach to energy as "free market." To my view, this is far too generous.

Even Texas' deregulated energy market is still highly regulated. It is possible to have hugely different outcomes and incentives by structuring the market in slightly different ways. For example, since the supply of electricity to individual homes in inherently a monopoly relationship (no one will have two electrical hookups), the burden can be placed on the provider to ensure electricity in a specified price range, rather than structuring the market so the risk lies entirely with consumers.

The latter makes little sense for free market types, since consumers both have no ability to assess the risk that their providers are taking, nor the ability to take steps to reduce the risk. If contracts were written so that the risks fell to the providers, this would provide the sort of market incentives that fans of the "free market" claim they value.

But beyond this issue, Klein correctly notes that Texas Republicans and Republicans more generally see the Green New Deal as a huge threat, which she argues is because it is a challenger in the battle of ideas:

"Because for the first time in a long time, Republicans face the very thing that they claim to revere but never actually wanted: competition — in the battle of ideas."

I see the challenge as being even stronger. The Green New Deal is a huge challenge to major financial backers of the Republican Party. The fossil fuel industry has long been a major backer of the Republican Party and right-wing causes. Many major right-wing funders, most notoriously the Koch brothers, got a substantial portion of their fortunes from fossil fuels. If this industry is whacked by policies to limit global warming, it will be serious hit to these funders.

Looking at politics this way mirrors the strategy that Republicans have used successfully for decades to undermine the basis for progressive politics. They weren't just arguing in the battle place of ideas, they did things like appoint judges and National Labor Relations Board officials who would do everything they could to weaken unions and undermine the ability of workers to organize. And, they (along with leading Democrats) pushed trade and regulation policies that seriously weakened unions in sectors like manufacturing, transportation, and communications. After weakening unions in the private sector, they then designed a strategy for undermining them in the public sector as well.

They also looked to undermine other bases of support for progressive policies. For example, Reagan gutted federal support for legal services, which was a secure base from which many progressive lawyers pursued suits to benefit the working-class and the poor. They also radically cut back support for programs like the National Endowments for the Arts and Humanities, and the Corporation for Public Broadcasting.

Basically, the Republicans were more interested in destroying the financial bases for support for progressives than winning battles of ideas. It would be great if progressives could turn the table and destroy a major source of right-wing funding, while creating good-paying jobs and saving the environment.  

The post The Green New Deal Threatens Republicans' Bread and Butter, it's Not Just Competition in the Battle of Ideas appeared first on Center for Economic and Policy Research.

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Competitive Edge: Big Ag’s monopsony problem: How market dominance harms U.S. workers and consumers [feedly]

Competitive Edge: Big Ag's monopsony problem: How market dominance harms U.S. workers and consumers
https://equitablegrowth.org/competitive-edge-big-ags-monopsony-problem-how-market-dominance-harms-u-s-workers-and-consumers/

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. Hiba Hafiz and Nathan Miller 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.

---

Hiba Hafiz

Nathan Miller

Agricultural markets are among the most highly concentrated in the United States. The markets for beef, pork, and poultry, grain, seeds, and pesticides are dominated by four firms. Three firms dominate the biotechnology industry. One or at best two firms control large farm equipment manufacturing. And a small number of firms are increasingly dominating agricultural data and information markets.

Yet former Iowa Gov. Tom Vilsack (D)—President Joe Biden's nominee for secretary of the U.S. Department of Agriculture, the same position Gov. Vilsack held during the Obama administration—has come out against breaking up Big Ag firms. "There are a substantial number of people hired and employed by those businesses," he said last year. "You're essentially saying to those folks, 'You might be out of a job.' That to me is not a winning message."

Gov. Vilsack couldn't be more wrong on the economics. It is precisely Big Ag's buyer power in agricultural markets—these firms' "monopsony" power—that destroys jobs and suppresses small farmer and worker pay.

Economic theory describes monopsony power as market power on the buy side of the market—it's the analogue of monopoly power on the sell side of the market. Artificially acquiring or maintaining market power is unlawful under the U.S. antitrust laws, regardless of whether it derives from the buy or sell side. And that's because buy-side power can be just as socially harmful as sell-side power.

Firms insulated from competition in input markets can profitably suppress the pay to suppliers of goods, services, and labor below the value that those suppliers provide. And lower pay has broader economic outcomes. It means suppliers have weaker incentives to provide the same quantity of inputs or invest in capacity, innovation, and quality. So, monopsony power can decrease input suppliers' pay and the quantity of inputs buyers purchase.

Monopsony power can also harm downstream consumers. Less input means less output, and less output means more scarcity and higher prices to downstream consumers than would otherwise exist under competitive conditions.1

Taking steps to mitigate buyer power through aggressive antitrust enforcement and appropriate regulation can be a win-win for input suppliers and downstream consumers. Competition among buyers helps ensure that suppliers are paid according to their value. And competition increases output incentives and ultimately lowers downstream prices as well.

The monopsony power of Big Ag poultry, pork, and meat companies

The buyer power of companies such as Tyson Foods Corporation, Cargill PLC, and Smithfield Foods Inc. comes from high levels of market concentration in the agricultural industry. Simply put: Big Ag faces too little competition when they hire workers or procure inputs such as chicken (Tyson), hogs (Smithfield), or cattle (Cargill) from smaller suppliers.

Top Big Ag firms have merged with and acquired smaller firms in the industry over the past five decades, increasing consolidation of livestock packers, beef processors, and poultry processors. According to a recent agricultural industry report by the Center for American Progress, between 1986 and 2008, "the four-firm share of animal slaughter nationwide increased from 55 percent to 79 percent for cattle, from 33 percent to 65 percent for hogs, and from 34 percent to 57 percent for poultry." High market concentration increased Big Ag's price- and wage-setting power over cattle producers, hog and poultry farmers, and meat processing plant workers, lowering their prices for hogs, beef, chickens, and labor.

Big Ag's concentration numbers at the local level are even more stark than at the national level. Most buying and processing of poultry, hogs, and beef happens locally to avoid high transportation and storage costs. Big Ag dominates local markets as the only buyers in town. More than 20 percent of poultry growers have only one local upstream buyer for poultry and 30 percent have only two.

Most hog growers face packer monopsony at the local level, with just one or two packers offering them contracts. One telling case in point: After dominant meat processor JBS S.A. acquired Cargill's pork processing operations in 2015, the American Antitrust Institute and a coalition of farmers' unions projected that only two firms—Tyson and the merged JBS-Cargill pork processing unit—would buy and slaughter 82 percent of hogs in Illinois, Indiana, and surrounding states. Similarly, local cash markets for cattle typically feature no more than three or four packers.

Concentration at the local level means that Big Ag can artificially suppress pay to cattle producers, hog and poultry farmers, and processing plant workers below the value that their inputs provide to the industry.

Evidence of the effects of Big Ag poultry, pork, and beef companies' monopsony power

Empirical evidence of the effects of Big Ag's buyer power on rural communities and consumers nationally is mounting. Suppliers and processing workers suffer lower pay while downstream consumers are paying higher prices on essential food. Around "three-quarters of contract growers live below the poverty line," and average-sized operators lose money 2 out of 3 years.

Then, there is the evidence of rising farm bankruptcy rates. Farm bankruptcies have steadily increased every year for the past decade, due, in part, to high U.S. farm debt. Small farmers are not the only ones being undercompensated—a 2000 U.S. Department of Labor survey found that 100 percent of poultry processing plants failed to comply with federal wage-and-hour laws.

Buyer power also enables processors to impose abominable working conditions without workers quitting. Even before the coronavirus pandemic, poultry processing workers suffered occupational illnesses at five times the rate of other U.S. workers. But their conditions plummeted during the pandemic, with immigrant workers and workers of color suffering the most. A November 2020 study estimated livestock processing plants suffered 236,000 to 310,000 cases of COVID-19, the disease caused by the new coronavirus, and 4,300 to 5,200 deaths—3 percent to 4 percent of all U.S. deaths—with the majority related to community spread. Consumers have also suffer nationally by having to pay higher prices for meat products while facing fewer choices and lower quality.

More evidence of Big Ag's buyer power emerges from high-profile U.S. Department of Justice and private enforcement actions against dominant Big Ag buyers in the poultry and pork industries for colluding to fix prices, rig bids, and suppress pay to growers and processing workers. High concentration levels make it easier for Big Ag firms to collude, and in June 2020, the Department of Justice indicted leading chicken industry defendants for price-fixing and bid-rigging in the broiler chicken market. Civil suits were filed against Tyson, Pilgrim's Pride Corp., and others for price-fixing, wage-fixing, and using no-poach agreements in the markets for broiler chicken products, contract farmer services (contract farmers are farmers who grow chickens from chicks to market weight in long-term contracts with processors), and chicken-processing labor services.

The Department of Justice is currently investigating price-fixing and bid-rigging among dominant beef processors, too, and private plaintiffs have sued pork and beef processors for allegedly colluding to lower prices paid to producers and raise prices for consumers. Current litigation against the poultry, pork, and meat cartels estimates that hundreds of thousands of workers suffer poverty wages from wage-fixing conspiracies.

Big Ag is able to exercise its buyer power through its industry-transforming supply chain restructuring that allows lead firms to extract rents at each layer of their supply chain for their profit, and most especially, from small farmers and workers at the production level.2 Starting in the 1960s, poultry firms such as Tyson vertically integrated to own or control hatcheries, feed mills, veterinary care, slaughterhouses, processors, and sales contracts with poultry growers. The pork industry followed Tyson's lead in the early 1980s, extending top-down ownership or control of hog production, packing, and processing in large-scale farms and processing facilities.

The only level of the supply chain not directly owned or operated by Big Ag chicken and pork producers is the growing stage, where Big Ag processors rely on small farmers to grow and raise the broilers and hogs provided by Big Ag-provided breeders, hatcheries, farrows, and weaners to slaughter weight. Still, Big Ag firms in these two meat sectors can squeeze these growers' margins from above andbelow: Their inputs are supplied by Big Ag, and their product is sold to Big Ag.

Big Ag does this through contractual controls, forcing growers into one-sided production and marketing contracts while using their significant control over spot or cash markets to limit sales outside those contracts. Around 97 percent of chicken broilers are raised by contract growers in "take it or leave it" contractual arrangements; 63 percent of hogs were contractually raised in 2017, nearly double that in 1997.

These arrangements are crippling. Chicken growers' production contracts require significant sunk investments—around $1 million in mostly debt-financing—and growers are required to purchase nearly all inputs, veterinary care, and technical assistance from vertically integrated buyers. Buyers can change or terminate contracts for almost any reason. Farmers sell their chickens in a "tournament system," where their chickens compete for rankings with others given the same feed amount, but the ranking process lacks transparency—buyers weigh chickens behind closed doors and provide no standards for knowing whether a farmer is "getting the same inputs as the other farmers against whom the company makes him compete," according to Lina Khan, then-policy analyst at the New America Foundation and now an assistant professor of law at Columbia Law School.

Big Ag buyers can retaliate against resistant farmers by refusing to renew contracts or sending bad feed or unhealthy chicks in future seasons—a system likened to "indentured servitude" by former chicken farmers suing Big Ag poultry firms. Contracts for hog growers also require significant capital investments, place much of the liability and risk for raising hogs on growers, and subject growers to unilateral buyer compensation-setting with limited transparency, and similarly allow retaliation through threats of contract termination or future substandard livestock or feed supply.

The beef industry is less vertically integrated than chicken and poultry. Beef packers find vertical supply chain ownership less profitable, yet these packers have achieved a degree of de facto control over the thousands of independent feedlots that supply them. Since the 1980s, and following meatpacker consolidation into the Big Four—Cargill, JBS, National Beef Inc., and Tyson Foods—the number of packing plants nationwide dropped 81 percent, and nearly a third of all the feedlots that purchase cattle from ranchers for fattening and resale to meatpackers have left the industry.

Among the feedlots that remain, most sign long-term contracts with the Big Four. More than 75 percent of packer cattle purchases come from long-term contracts with feedlots, up from 34 percent in 2004. Because most contract prices are pegged to outcomes in a subsequent cash market, this weakens packers' incentives to bid aggressively in that cash market—bidding aggressively would just increase their payments for cattle already under contract.

So, in addition to alleged collusion among the Big Four beef packers to lower feeder pay—estimated at an average of 7.9 percent below average pay since 2015—feeders are also squeezed by the Big Four's network of contracts and bidding schemes that the packers can profitably impose upstream.

Conclusion: Anti-monopsony action is urgently needed to protect workers and consumers

The economic theory is clear, and mounting empirical evidence backs it up: Big Ag's monopsony power leads to fewer jobs, lower wages, and worse conditions dominating our nation's food supply. And local farming communities are hurting. If U.S. Agriculture Secretary-nominee Vilsack wants to help rural communities—and reduce food prices for consumers in the bargain—he must get the economics right.

President Biden committed to strengthening antitrust enforcement to "help family farms and other small- and medium-sized farms thrive." Before confirming Gov. Vilsack, Democratic senators must secure his public commitment to aggressively enforcing the Packers and Stockyards Act of 1921 and partnering with the U.S. Department of Justice to take on Big Ag's buyer power. If keeping good jobs and sustainable business in rural America is the incoming administration's priority, they can't leave small farmers and workers to face Big Ag alone.

—Hiba Hafiz is an assistant professor of law at Boston College Law School. Nathan Miller is the Saleh Romeih associate professor at the Georgetown University McDonough School of Business.

FEBRUARY 18, 2021

AUTHORS:

Hiba HafizNathan Miller

TOPICS

CONCENTRATION

MONOPSONY

END NOTES

1 It is possible for a firm to have monopsony power upstream but face competition in downstream markets in conditions that resemble perfect competition (no product differentiation and populated by many small firms with low market share). See, for example,C. Scott Hemphill and Nancy Rose, "Mergers that Harm Sellers" Yale Law Journal 127 (7) (2019). But those conditions are rare in reality, as economists recognize. See, for example, Roger G. Noll, "'Buyer Power' and Economic Policy," Antitrust Law Journal 72 (2) (2005), arguing that, "because output of the monopsonized good is less than the social optimum and other inputs are not perfect substitutes for this input, final goods will be under-supplied as well, causing real final goods prices to be higher than would be the case in the absence of monopsony …. Although some have claimed otherwise, these fundamental results about the effects of single-price monopsony do not depend on either the extent of competition or the cost structure of other firms in the downstream market." See also Peter C. Carstensen, "Buyer Cartels v. Buyer Groups," William & Mary Business Law Review 1 (1) (2010); Roger D. Blair and Jeffrey L. Harrison, "Antitrust Policy and Monopsony," Cornell Law Review 76 (2) (1991); John B. Kirkwood, "Powerful Buyers and Merger Enforcement," Boston University Law Review 92 (4) (2012).

2 Vertical integration can create real efficiencies by streamlining production and distribution that can make supply purchasing more predictable for all parties, including small farmers. But it also raises barriers to entry. Vertical integration makes it difficult, for example, for a firm engaged in chicken processing to earn a profit without also building a vertically integrated complex of breeder flocks, hatcheries, and feed mills. Forcing firms to enter two or more additional levels of the supply chain in order to be profitable deters entry and entrenches Big Ag monopsony.

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Robert Shiller on Narrative Economics [feedly]

Robert Shiller on Narrative Economics
https://conversableeconomist.blogspot.com/2021/02/robert-shiller-on-narrative-economics.html

Robert J. Shiller (Nobel '13) delivered the Godley-Tobin Lectures, an annual lecture delivered at the Eastern Economic Association meetings, on the subject of "Animal spirits and viral popular narratives" (Review of Keynesian Economics, January 2021, 9:1, pp. 1-10).

Shiller has been thinking about the intertwining of economics and narrative at least since his presidential address to the American Economic Association back in 2017. He suggests, for example, that the key feature distinguishing humans may be our propensity to organize our thinking into stories, rather than just intelligence per se. Indeed, there are many examples in all walks of life (politics, investing, expectations of family life, careers, reactions to a pandemic) where people will often cleave to their preferred narrative rather than continually question and challenge it with their intelligence. He begins the current essay in this way: 

John Maynard Keynes's (1936) concept of 'animal spirits' or 'spontaneous optimism' as a major driving force in business fluctuations was motivated in part by his and his contemporaries' observations of human reactions to ambiguous situations where probabilities couldn't be quantified. We can add that in such ambiguous situations there is evidence that people let contagious popular narratives and the emotions they generate influence their economic decisions. These popular narratives are typically remote from factual bases, just contagious. Macroeconomic dynamic models must have a theory that is related to models of the transmission of disease in epidemiology. We need to take the contagion of narratives seriously in economic modeling if we are to improve our understanding of animal spirits and their impact on the economy.

Thus, this lecture emphasizes the parallels between how narratives spread and epidemiology models of how diseases spread:

Mathematical epidemiology has been studying disease phenomena for over a century, and its frameworks can provide an inspiration for improvement in our understanding of economic dynamics. People's states of mind change through time, because ideas can be contagious, so that they spread from person to person just as diseases do. ...

We humans live our lives in a sea of epidemics all at different stages, including epidemics of diseases and epidemics of narratives, some of them growing at the moment, some peaking at the moment, others declining. New mutations of both the diseases and the narratives are constantly appearing and altering behavior. It is no wonder that changes in business conditions are so often surprising, for there is no one who is carefully monitoring the epidemic curves of all these drivers of the economy.

Since the advent of the internet age, the contagion rate of many narratives has increased, with the dominance of social media and with online news and chats. But the basic nature of epidemics has not changed. Even pure person-to-person word-of-mouth spread of epidemics was fast enough to spread important ideas, just as person-to person contagion was fast enough to spread diseases into wide swaths of population millennia ago.

As one illustration of the rise and fall of economic-related narratives, Shiller uses "n-grams" which search for how often certain terms are used in news media. Examples of such terms shown in this graph include "supply-side economics," "welfare dependency," "welfare fraud," and "hard-working American."

Shiller's theme is that if we want to understand macroeconomic fluctuations, it won't be enough just to look at patterns of interest rates, trade, or innovation, and it won't be enough to include factors like real-life pandemics, either. The underlying real factors matter, of course. But the real factors are often translated into narratives, and it is those narratives which then affect economic actions about buying, saving, working, starting a business, and so on. Shiller writes: "As this research continues, there should come a time when there is enough definite knowledge of the waxing and waning of popular narratives that we will begin to see the effects on the aggregate economy more clearly."

I'll only add the comment that there can be a tendency to ascribe narratives only to one's opponents: that is, those with whom I disagree are driven by "narratives," while those with whom I agree are of course pure at heart and driven only by facts and the best analysis. That inclination would be a misuse of Shiller's approach. In many aspects of life, enunciating the narratives that drive our own behavior (economic and otherwise) can be hard and discomfiting work. 

For some additional background on these topics: 

For a readable introduction to epidemiology models aimed at economists, a useful starting point is the two-paper "Symposium on Economics and Epidemiology" in the Fall 2020 issue of the Journal of Economic Perspectives: "An Economist's Guide to Epidemiology Models of Infectious Disease," by Christopher Avery, William Bossert, Adam Clark, Glenn Ellison and Sara Fisher Ellison; and "Epidemiology's Time of Need: COVID-19 Calls for Epidemic-Related Economics," by Eleanor J. Murray.

For those who would like to know more about "animal spirits" in economics, a 1991 article in the Journal of Economic Perspectives by Roger Koppl discusses the use of the term by John Maynard Keynes and then gives a taste of the intellectual history: for example, Keynes apparently got the term from Descartes, and it traces back to the second century Greek physician Galen.

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