Tuesday, February 20, 2018

More evidence on business concentration

Here is the short-history of 21st century capitalism. Despite global savings glut, ultra-low interest rates, and massive corporate surpluses, the dynamics of modern capitalism has delivered business concentration and declining competition, regulatory capture, resource misallocation away from productive investments towards financial market speculation, higher profits and wage stagnation, greater share of income going to capital and away from labour, and widening of inequality. The evidence continues to mount. 

The latest comes from Gauti Eggertsson, Ella Getz Wold, and Jacob Robbins who argue that the driving force behind this dynamic is "an increase in monopoly power together with a decline in interest rate". They find,
An increase in firms’ market power leads to an increase in monopoly rents - economic parlance for profits in excess of competitive market conditions - and thus an increase in the market value of stocks (which hold the rights to these rents). This leads to an increase in financial wealth and to what’s known as Tobin’s Q, the ratio of a firm’s financial value (market capitalization) to the value of its assets (book value)... With an increase in market power, the share of income consisting of pure rents increases, while the labor and capital shares both decrease. Finally, the greater monopoly power of firms leads them to restrict output. In restricting their output, firms decrease their investment in productive capital, even in spite of low interest rates.

Their suggestion carries great relevance,  
Greater monopoly power tends to depress economic growth and increase income and wealth inequality. With high levels of monopoly profits, it may be optimal to have higher taxes on corporate income than would be suggested by analyses that assume perfect market competition.
If businesses are anyways unlikely to invest and most certain speculate in financial markets, higher levels of taxation can both curb such speculation and also generate more public revenues without crowding out any productive economic activity. 


Unknown said...

I agree with the problem definition. But, I am not sure of the solution - higher levels of taxation. We might be a little bit rushing here - towards solutions that have been tried and failed. Also, remember asymmetry. Lower taxes may not make businesses invest. But, higher taxes can surely make it worse. We should just observe and let the problem sink into our consciousness. Over time, the mind will come up with a more realistic and feasible solution that recognises and accepts asymmetry and other such behavioural constraints.

Gulzar Natarajan said...

Thanks Ananth. I am coming from the view that there is no one policy whose efficacy remains the same at all times and that governments need to be flexible opportunistically. For that reason, asymmetry too varies in time. It is in that spirit that I am sympathetic to their suggestion. My belief is that a higher corporate tax causing any significant enough disincentive to investments is very remote, especially in the current environment.

Why can't we have counter-cyclical corporate tax policy?

At the least, corporate incomes coming from financial investments should be taxed at a higher rates. If, as the Credit Suisse report shows, tech corporates are equivalent to the largest investment banks in the bond markets and their share buybacks are distorting stock markets, what is wrong with taxing the negative externality causing activities?

In a modern historic perspective, we live today at a time when tax rates are at their lowest levels. There is no evidence that the decline in tax rates has contributed to higher investment during the Great Moderation. Can we say that the very sharp Bush and Clinton tax cuts boosted investment in any meaningful way? So how can we say that higher taxes will make it bad/worse?

Further, we have politically and socially got entrapped in an environment where taxes can only go down, never up. Why should this be the case? With the recent Trump tax cuts, corporate taxes in the US have reached a level where any fiscal expansion through tax cuts in a future recession is simply off the table. Almost like zero bound with interest rates. Just as interest rates in normal times should be somewhat high so as to provide the cushion for cuts during slowdowns, should we not have a reasonably high corporate tax rates to stimulate with cuts during similar slowdowns?