In a “Bloomberg View,” Noah Smith says America’s Superstar Companies Are a Drag on Growth.
Amazon is gouging consumers? Walmart? Google?
The article did not mention a single superstar company that is gouging consumers. Instead, Smith cites studies that also fail to mention a single company that is gouging consumers.
Amazon, Walmart, etc., real “superstars” are huge deflationary forces. The Fed wants no part of it.
The Fed is hell bent on forcing prices up in an inherently price-deflationary world. With near-zero interest rates, it’s no wonder profits are high (until of cousre the bubble collapses).
Here is a snip from a research paper, by Gustavo Grullon, Yelena Larkin and Roni Michaely that takes another look at industrial concentration.
I call that economics gibberish just as the Phillips Curve is economic gibberish.
The article Investment-less Growth: An Empirical Investigation by Germán Gutiérrez and Thomas Philippon claims companies are not investing enough. Here is a snip.
Such economic bullsh*t goes on for pages as if the authors know how much companies should be investing.
I propose that if companies invested more, it would be in ways to get rid of more workers.
Pricing Power
Smith also links to a paper by economists Jan de Loecker and Jan Eeckhout, that allegedly caused “quite a stir” in the economics press and on the blogs.
The “stir” was little more than Smith’s own “Noah Opinion” blog comments that in turn links to claptrap that ends with this disclaimer: “The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests.”
Noah, Please Get a Grip on Reality
I agree with Noah Smith regarding buybacks.
But why are buybacks happening?
The primary answer, and none of these studies ever look at the obvious, is the Fed and central banks have cheapened interest rates to the point that speculation looks more attractive than expansion.
When Did This Start?
It’s perfectly obvious when this all started. I have talked about it many times.
Explaining Balance of Trade
The seeds of trade imbalances were sewn in 1971 when Nixon closed the gold window. The trade deficit rose, then skyrocketed.
Total Credit Market Debt Owed
Following Nixon closing the gold window on August 15, 1971, credit soared out of sight to the benefit of the banks, CEOs, the already wealthy, and the politically connected.
Scapegoating
- Trump blames Mexico and China.
- Larry Summers blames “Secular Stagnation”.
- Ben Bernanke blames a “Savings Glut”.
Scapegoating Mexico and China helped get Trump elected. Scapegoating also allows the Fed and central banks to blame anything and everything but lack of a gold standard.
“Our Currency but Your Problem”
The source of global trading imbalances, soaring debt, declining real wages, and the massive rise of the 1% at the expense of the bottom 90% is Nixon closing the gold window.
At that time, Nixon’s treasury secretary John Connally famously told a group of European finance ministers worried about the export of American inflation that the “dollar is our currency, but your problem.”
Balance of trade issues, soaring debt, declining real wages, and the demise of the US middle class are now our problem.
The Fed, ECB, Larry Summers, Paul Krugman, Donald Trump, and economists in general, cannot figure out what caused the problem. Instead, Bernanke, proposes a “savings glut”, and Larry Summers proposes “secular stagnation”.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Useless Studies
Smith and others cite useless studies. Not a single one of the studies trace the problem back to the root cause.
The amazing thing in all of this is Smith’s bandwagon claim that companies are gouging consumers. Smith never said where, nor did the articles he referenced.
I will tell you precisely where: Everywhere government interfered in the free markets, especially healthcare, education, and housing.
In places where the government did not interfere, we have downward price pressures. Amazon and Walmart are key “superstar” examples.
Related Articles
- Secular Stagnation Theory: Challenge to DeLong, Summers, Bernanke, Krugman
- Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold’s Honest Discipline Revisited
- Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List
Smith is blind to the obvious. He needs to be. He has to be. Why? Because the obvious does not mesh well with his socialist plus inflation-supporting claptrap.
Smith hasn’t a clue about how much companies should be investing or what interest rates should be. Neither do I. Nor does anyone else, especially the Fed.
Mike “Mish” Shedlock
Awesome.
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mish
been following you for years, consistently it amazes how much you can read and absorb and forth forward cogent and succinct commentary
thank you for all your efforts.
S
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The fact that the cited MIT paper with all those calculations failed to state a real life example is a major shortcoming… they just got called out.
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Frankly, to call these studies total claptrap and incomprehensible gibberish is an insult to claptrap and gibberish. These people have not the foggiest idea about business. These attempts to make economics look more like physics by presenting their nonsensical ideas in the form of mathematical equations in equilibrium models assuming “perfect competition” are so utterly pathetic, one is almost at a loss for words. The modern-day version of economic science is a reservoir for appalling intellectual mediocrity and vicious statism. These people should all go and look for a real job. Pitiful.
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Excellently stated PT
Thanks
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Great blog.
Low rates are also stifling innovation too.
An incumbent faced with innovative, troublesome, smaller competition simply buys them. Particularly true in manufacturing. The innovation is blunted as part of a bigger organisation and the headcount reduces as overlaps are removed. Innovative SMEs are fodder to the machine.
What passes for succesful innovation are companies developing online services at low headcount, no profit but relatively high revenue.
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Wasn’t that the same argument at junk bond rates? No shortage of the same in the 80’s and early 00’s.
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When asset prices are high, compared to goods and service prices and salaries in productive sectors, it becomes relatively more lucrative/profitable to focus on exactly who “owns”, “has the rights”, “controls”‘ etc., existing assets (economically, rent seeking), rather than on doing productive work. That was true in the 80s, and is even more true now. So you get more of the former, less of the latter. Which over time leads to less innovation, less downward price pressure, less competition, and hence a net transfer of wealth: From consumers and workers, to those who happen to own existing assets. So it is not strictly wrong to say that the so called “superstars” are gouging.
Sadly enough, even many of those sentient enough to at least recognize that deflation in so called “consumer” prices are a positive, rather than the evil the banksters like to pretend it is; still fail to recognize the same is equally true for assets. The lower the price of anything, the better off people are, as it allows them to afford more of it. Things aren’t any more complicated than that. If they seem to be, it is due to nothing more than either willful or clueless obfuscation.
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Major shortcoming of that cited MIT paper (the stuff with all the useless calculus) to leave out real world examples of their “superstar company” theory.
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Low interest rates (a mistake) were implemented by the Fed to paper over other Fed mistakes. Break is the traditional way to describe how to get out of this feedback loop, and it aptly fits here.
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The conclusions should have been obvious. The larger companies become and the fewer competitors a company has the more it acts like an oligopoly. And its not just innovation that suffers, but pricing of goods, service and labor. Large companies merge so they have more pricing control and can cut down on r&d and staff and exert pricing power.
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They can’t see the elephant in the room. Or they don’t WANT to see it.
If you cheapen money, if you expand credit endlessly, if you pervasively erode creditworthiness requirements, if you run regular budget deficits while issuing debt to “pay” for them, if you debase the coinage, rig interest rates, wage rates, indices, asset prices and asset values…well, LOGIC should tell you you get speculation, price inflation, price deflation, chaos, and, when debt is taken into account, falling overall living standards.
But logical deduction and the drawing of logical conclusions therefrom is disdained. These are the same people who worship experts, PhDs., charts, graphs, models and who believe an economy is something man-made that can be tinkered with to achieve “social goals”…
We are SO screwed. “Buying” gold is probably the best we can do…
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Agreed. How the hell are we going to get out of this death trap?
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Smith isn’t blind, he’s a political ideologue hack, who when challenged tries to change the narrative through rhetoric – These folks all suffer from the same thing: Hubris. None of them will ever admit they are wrong or could be wrong, just like the political narratives (and politicians) they serve.
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Noah wants to warn us about superstar companies but doesn’t want to name any of them. Even Bloomberg isn’t pitiful enough to give him column space, right? Wrong.
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Political ideologue hack is exactly right. Add some sort of propagandist. Add many if his commentators too.
He failed to demonstrate knowing basic mechanics when I asked him about the equation and it’s solution pertaining to a mass on a spring osculating back and forth. I did this for two or three reasons. He claimed to have studied it. He staunchly defends equilibrium and eschews dynamics which would contradict studying mechanics and passing. This was an example of the simplest dynamic cyclic system indicating some thing real and the ability to model non equilibrium systems. The economy is partly cyclic. Percent change in Debt level is cyclic.
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Here is data. Graphs of cyclic percent change in private non financial debt.
Euro Area:
https://fred.stlouisfed.org/graph/?g=f0go
Both US and Euro area:
https://fred.stlouisfed.org/graph/?g=f0gm
Employment ratio is cyclic and there is a private debt relation Prof Keen points out. Also there is a GDP relation.
https://fred.stlouisfed.org/graph/?g=f0gD
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Efficient consumer price discovery makes retail goughing much more difficult. Online price comparison is the consumers best friend and is killing oldline brick and mortars like Sears, Kmart and JCP.
Walmart hybrid with Jet is another step forward. Sears/kmart disaster needs to find a hybrid solution to compete.
the internet/cable duopoly needs to be killed,
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“the internet/cable duopoly needs to be killed,”
That duopoly rests firmly on the same zoning and land use laws and regulations that are in place for no other reason than to prop up every other facet of the “real estate” rackets: Bans on building and renting out infrastructure the market demands. In this specific case, poles, ditches and transmitters/receivers. In other cases, residences and commercial space. In addition, a similarly customary overly restrictive enforcement of “ownership” of radio spectra.
Anyone building anything, laying any cable, setting up any transmitter, anywhere anytime for any reason without restraint (that quaint thing known as a free society…), completely eliminates even the possibility of monopoly/oligopoly pricing power over internet access. Even a slightly less radical movement in that direction, goes a long way towards making it a moot issue.
The reason we are not seeing that, is exactly the same as the reason the hordes of people wanting to move to San Francisco to get closer to the tech bubble epicenter, are not being served by a corresponding increase in space for them to live and work in: Entrenched leeches, aided by puppeteer government, are flat out banning the market from working the way a market does. So that they can live comfortably off of stealing other people’s stuff, instead of having to do something useful with their pathetic, self righteous, useless little selves.
Until that problem is recognized and dealt with; productivity, growth, competitiveness, living standards, along with all the other benefits freedom brings with it, will never again do anything but keep declining. No society has ever prospered long term, when the focus is solely on facilitating rent seeking by a small privileged class. Rather than on exposing that class, as well as everyone else, to relentless, unconstrained competition of the creative destruction kind.
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Where is all the real and massive gouging occuring?
Anything that government touches to make things “fair”
Health Care
Housing
Higher Education
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Scapegoating Mexico and China helped get Trump elected. Scapegoating also allows the Fed and central banks to blame anything and everything but lack of a gold standard.
When I see scapegoating, I interpret that to mean, “we were too stupid to see it coming.” Stupid begets stupid. It warns me what I’m dealing with.
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I read Noah Smith many years ago when his column, “Noah Opinion” we posted on economic blog sites such as Naked Capitalism. He was a graduate student in economics then and i must say that he has not learned much since those days. Truly a progressive idiot of the first water. So I was not surprised at his PhD thesis nor his employment at Bloomberg. I used to read Bloomberg before it became intellectually challenged and drove many of its best people away. Well, everything changes and not always for the best.
It is very difficult to make the case of gouging the consumer (not that it isn’t done by a few) in general when “American Superstar Companies”, read multinational corporations tend to outsource labor to the lowest wage markets, have the power to keep the cost of materials lower by the shear size of their buying power, and have eliminated most of the competition. Funny thing is, as the various labor groups within a country must settle for lower paying employment, their propensity to consume lessens. Hence, it is rather difficult to engage in pricing policies that “gouge” the consumer. And with so many foreign competitors willing and ready to provide what consumers want and at a lower price it would seem counter intuitive to plead the case of gouging the consumer.
Essentially we are left with a “Moral” argument that somehow large American Corporations are bad. But the argument is never really made. Mr Smith used the “Everyone knows large corporations are bad and American corporations are large, so American corporations must be bad” line of reasoning. Of course he does have the beginnings of a point about large – multinational corporations – not being in the best interest of society. Business operations that become unwieldy, excessively large and unresponsive, and generally a force unto themselves tend to pose a danger to society. The same may be said of armed forces and governments. It is not that being large is bad in of itself but that being large tends to become unresponsive to the needs of the organization and the community it serves.
So rather that wrestle the question of whether Amazon and Walmart are too large for their own good as well as everyone else’s, Mr. Smith invents a false moral argument, a distraction. One might argue that Mr Bloomberg, with all his billions, uses his money in an unresponsive manner against the public good. But for Mr Smith, that would be biting the hand that feeds him and he is college educated, or something. Mish may connect the dots that Mr. Smith still cannot see the figures.
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“I call that economics gibberish”
Does anyone understand what that equation is all about, what the author wants to say?
Even Einstein would have been scratching his head at this and wondering whether his equation was too simple.
Such inane stuff is touted as knowledge.
“Smith hasn’t a clue about how much companies should be investing or what interest rates should be. Neither do I. Nor does anyone else, especially the Fed.”
But then Smith and the bunch of jackasses you mentioned (The Fed, ECB, Larry Summers, Paul Krugman, Donald Trump, and economists in general) THINK they know for sure. The quote from Twain: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” comes to mind. Unfortunately the trouble is for the sitting ducks like the average citizens, savers, retirees and prudent people.
When the next crash happens I hope people teach the Fed a fitting lesson.
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Thought your readers would appreciate this quote from Marx: “The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and beer gives facilities to gluttony and drunkenness.” To repeat, the original and main source of credit was industry and merchants. Banking grew up around this credit. In the second half of the 19th century “nine tenths of all the deposits in the United Kingdom may have no existence beyond their record in the books of the bankers”. It was not the abandonment of the gold standard that precipitated leverage but globalisation. Even under the gold standard in the 19th century credit money exceed bank notes and gold by a factor of 12 (1892) Remember much of the trade deficit is imports from US owned but subcontracted production like Apple. Agree fully with you on deflation. With regard to mark ups that is indeed the case. Much of it is due to monopoly price. Within that, the component in GVA which has grown most is depreciation and yes for this reason consumers are being gouged particularly with reference to high tech products where it is not only structures and equipment that is being depreciated but Intellectual Property (which includes R&D) as well. Depreciation is thus being taken twice and it is this inflated depreciation which is making it appear that net investment is so abysmal. .
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Mish, you speak and the mists clear. (Leaving foreign policy aside.)
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“Thought your readers would appreciate this quote from Marx: “The cheapness of capital gives facilities to speculation, just in the same way as the cheapness of beef and beer gives facilities to gluttony and drunkenness.”
Yup! Lack of resources (costly) makes one resourceful and more of it (cheap) makes one careless. This applies to everything including money.
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No physics envy from Gustavo, Yelena, or Roni. No way. Maybe they’re actually psychohistorians and have built themselves a Prime Radiant. Or they have access to better tea leaves than the rest of us.
http://www.businessinsider.com/economists-suffer-from-physics-envy-2016-3
https://en.wikipedia.org/wiki/Psychohistory_(fictional)
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Price gouging exists today in the form of decontenting a product or service…A most recent example is the announcement by Domino’s Pizza of driverless home food delivery…The company decontents their payroll by transferring the cost of labor to a consumer at the point of final transaction—which in effect is a price increase for their product…
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Look at the stockchart of Dominos and you think wow, they must make good pizza, but it turns out the money is all on the delivery system. their product is crap but they get it to you fast
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Meet the superstars: Apple, Intel, Monsanto, GM, Gillette, McDonald’s, AT&T, HP, GE.
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…Google, Twitter, Facebook, GS, Microsoft, Tesla, Amazon, Snap, Linked In and anybody else that might support Noah’s politics and therefore won’t get their brand connected to this (fake) news story.
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Your Wlamart argument is incomplete. If Honest George’s Computer Emporium charges low prices, that does not mean that Honest George here is not still benefiting from a huge markup. If you want an interesting small feature of the economy, try buying American lamb.
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“Find out just what any people will quietly submit to, and you have the exact measure of injustice and wrong which will be imposed upon them.”
— Frederick Douglass
…And there you have it.
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Ben Bernanke blames a “Savings Glut”. It’s frightening how truly stupid the Keynesian establishment is.
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That came from a paper he wrote in 2015. He was talking about China and Saudi Arabia, not the over-extended US population.
https://www.brookings.edu/blog/ben-bernanke/2015/04/01/why-are-interest-rates-so-low-part-3-the-global-savings-glut/
But then again, there’s not much we have to sell that is of interest to them, so they might as well park all those petrodollars and profits from their junk factories in T-bills and bonds.
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“Amazon is gouging consumers?”
…
Sure
Sometimes
When shopping online I usually start at Amazon to get a “base” price. Often (more so than not), I find out what I’m looking for cheaper elsewhere. Sometimes MUCH cheaper.
But, then again, I’m not one to get caught up in the Amazon hype and buy from them irregardless.
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“But why are buybacks happening?
The primary answer, and none of these studies ever look at the obvious, is the Fed and central banks have cheapened interest rates to the point that speculation looks more attractive than expansion.”
…
Yes. And turbocharged by monetary policy revealing itself much quicker in the markets than out in the “real world”,( if ever) … and reinforced by CEOs whose compensation tied to stock price (not growth / profit of company) … and the ever present activist shareholders who only care about stock price.
Frankly, you are a dope (and not likely to hold your job much longer) if you invest a $billion in a new plant rather than announce a stock buyback of the same.
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The end of the gold standard allowed foreign banks to create “dollars” out of thin air, and these foreign “dollars” enabled these foreign nations to increase their trade surpluses with the U.S. to tremendous proportions. Unfortunately for those nations, those “dollars” aren’t assets, but liabilities that must eventually be resolved, and nothing resolves financial hanky panky like a good old fashioned financial crisis.
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Great post Mish!!!
Many good comments for a change as well. Personally I attribute all of this to suckering women into the workplace. I am not against women from entering the workplace so do not take this as a male chauvinist perspective and I hope you readers do not. At one time in this country a family could make it on one person working.
For governments to continue to spend they needed to coax both family members into the workforce to inflate or cause inflation otherwise over priced whatever you consider over priced to continue to rise. Women bought this hook line and sinker and now Heart disease is their number one killer now as well.
Government intervention continues to screw people that do the right thing. Housing is just nuts and most can no longer afford housing unless both parents work. Those that live in high cost areas have to rent. Of course local officials blame landlords, yet they continue to raise taxes. Sure renters pay rent but in many cities rent now is ridiculous. $66,000 is the permit cost in many places in California to start a single family home. This does not include overpriced land values. Home building unless you are doing a McMansion with all high end finishes, appliances, and amenities with the exception of union shop states is not that different it is the land that makes most different.
Economics is not a frigging science and never will be. Real price discovery will never be allowed to happen in our country, that is dead.
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Great article. Whenever I see that the complexity of economic formulas exceeds the complexity of physics equations, I can it a plain old bs.
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Whomever wrote the equations hasn’t read “Economics in One Lesson”.
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Reblogged this on World4Justice : NOW! Lobby Forum..
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“The seeds of trade imbalances were sewn in 1971 when Nixon closed the gold window.”
The seeds were sown before that. Nixon didn’t close the gold window just for the fun of it. Guns and Butter came before closing the gold window.
The empire was living beyond its means.
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