political economy – Michael Sykuta

Why Sen. Warren is Wrong on Trust-busting Big Ag

Several Democratic presidential candidates courted rural voters in Iowa at last weekend’s Heartland Forum. Both Sen. Amy Klobuchar (D-MN) and Sen. Elizabeth Warren (D-MA) decried the plight of farmers, with Warren promising trust-busting policies to break up Big Ag. But Warren’s call for aggressive antitrust is more populist politics than sound economic policy.

Warren claimed that, “A generation ago, 37 cents out of every food dollar went into a farmer’s pocket. Today, it’s 15 cents. And one of the principal reasons for that has been concentration in agribusiness. You’ve got these giant corporations that are making bigger and bigger profits for themselves, for their executives and for their investors, but they’re putting the squeeze on family farms.” But there are several problems with that argument.

First, the farmer’s share of the food dollar is a pretty worthless measure of how well-off farmers are in the food economy. From an economic perspective, it is completely meaningless. In response to the perennial reactions by farmers’ lobbies to the USDA’s “Farm Dollar” report in 2018, Jayson Lusk provided a nice example of how focusing on farmers’ share of the food dollar actually can lead to very poor conclusions. Even more to the point, Gary Brester, John Marsh and Joseph Atwood demonstrate what agricultural economists have long understood:

“[S]ome have argued that decreases in FS (farmer share) statistics…are indicators of anti-competitive behavior in the food processing industry. Agricultural economists have long noted that such relationships cannot be justified on theoretical grounds. … We have empirically demonstrated that FS statistics and, by construction, farm-to-retail marketing margins, are not reliable measures of changes in producer surplus (welfare)… Consequently, these data should not be used for policy purposes.”
Brester, et al., “Evaluating the Farmer’s-Share-of-the-Retail-Dollar Statistic,” 34 Journal of Agricultural and Resource Economics 213 (2009)

Second, even if one could make any reasonable inferences from the farmers’ share numbers, they do not support the story Warren is trying to sell. While farmers’ share of the food dollar has declined over the past 24 years, the decline is not near as big as Warren suggests: from 16% to 12% of the real (2009) dollar value of domestic food sales, as shown in the nearby Table 1. But a closer look at the numbers reveals what is driving the overall decline: when people eat away from home, the share of the dollar that goes to the farmer is much smaller, because more of the dollar is going to the people that add additional value by processing and preparing the food away from home. And eating away from home has become more and more prevalent.

Table 1: Farmer Share of Total Domestic Food Dollar, 1993-2016

Truth be told, the microcosm of food eaten at home or away from home illustrates the larger issue: as consumers choose foods that have been further processed and prepared, more of the dollar goes to the people that add the additional value in the form of preparedness, packaging, convenience, etc., that consumers value. That’s why, over the last century, the farmers’ share of the food dollar has dropped from near 50% to only 12%.

But what about the big bad ag companies that Warren blames for this problem? Doesn’t the consolidation of Big Ag share some of the blame? Warren blames mergers of companies like Bayer-Monsanto on the farm inputs side or large multinationals like JBS on the farm output side for squeezing farmers’ share of the food dollar. What about them?

As it turns out, firms in the farm inputs industry (like Bayer or Corteva (the offspring of Dow-Dupont)) and firms in the food processing industry (like JBS or Tyson) also have seen their share of the food dollar decline, as shown in the nearby Table 2. For farm inputs, the share has dropped over 40%, even more than the farmers’ share; and food processing companies’ share has dropped over 20%, almost as much as farm shares. Not even the banking industry, another of Warren’s favorite regulatory targets, has seen an increase in its share of the food dollar. In fact, the only food industry segments experiencing any appreciable increase in food dollar share are retail sales and food service–again, where more of value-adding convenience and food preparation are being contributed.

Table 2. Share of Domestic Food Dollar by Industry Segment, 1993-2016

Antitrust is currently seeing a lot of renewed interest in political circles because big, bad corporations make easy populist political targets. And it may be true that increased concentration in some industries could stand more antitrust scrutiny, possibly even in agriculture. But broad antitrust enforcement is a very blunt, and potentially dangerous, policy tool that shouldn’t be invoked carelessly. Nor with as little understanding of an industry as Sen. Warren appears to have of the food system.

Legalized Price-Fixing in Public Construction?

Imagine you wanted to have your house painted, remodeled, or even have a new house built, but all the contractors had agreed to charge the same prices. What if your local government passed a law requiring you to pay the same price no matter which contractor you chose? Sound like a good idea?

For over 100 years, US antitrust law has prohibited sellers from conspiring to fix prices. According to the US Federal Trade Commission’s “Guide to Antitrust Laws” price fixing is defined as:

“…an agreement (written, verbal, or inferred from conduct) among competitors that raises, lowers, or stabilizes prices or competitive terms. Generally, the antitrust laws require that each company establish prices and other terms on its own, without agreeing with a competitor. When consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.”

Compare that first line to the following language:

“…a wage of no less than the … wages for work of a similar character in the locality in which the work is performed shall be paid to all workmen employed…”

One might think that sounds like an agreement to “stabilize prices or competitive terms” for labor services. But in fact, it’s an excerpt from Missouri Revised Statutes Section 290.220, otherwise known as the Prevailing Wage Law, which reads:

“It is hereby declared to be the policy of the state of Missouri that a wage of no less than the prevailing hourly rate of wages for work of a similar character in the locality in which the work is performed shall be paid to all workmen employed by or on behalf of any public body engaged in public works exclusive of maintenance work.”

The effect of the prevailing wage law is to require all public construction projects, from State to local school districts, from new building construction to repainting existing buildings, to pay workers a wage determined by the Missouri Department of Labor as being the ‘prevailing wage’ for the specific type of work in that local area. From a practical perspective, the prevailing wage law amounts to little more than a legalized form of price fixing, facilitated by the State.

Proponents of the law–particularly labor unions and contractors that hire union workers–argue the law helps ensure higher quality work because it eliminates contractors’ incentive to hire lower skilled labor. Critics argue that the law does nothing but protect union interests by eliminating competition in the labor market, and increases the cost to tax payers of all public construction projects. (Some critics would add that the law infringes on individuals’ freedom to contract).

Empirical research on the effect of prevailing wage laws is mixed. Some researchers find that prevailing wage laws increase the cost of public works projects by anywhere from 9 to 30%. Other researchers have found that even though the cost of public projects is significantly higher in prevailing wage states, those differences are negligible when other factors are controlled for.

However, what does not seem to get much attention in the empirical literature is how the prevailing wage is determined, and how that process itself may affect the cost of construction projects in both the private and public sectors due to the incentives the process creates.

At least in Missouri, the Annual Wage Order is based on wage information voluntarily reported by contractors. Contractors are “heavily encouraged” to submit wage reports for any commercial construction projects. Only contractors that participate in public contract bidding have incentive to submit wage reports since they are the only ones with an interest in the established wage. This incentive to report may inflate the prevailing wage calculation because companies that specialize in private commercial construction may pay lower wages in attempt to be more competitive.

Because accepting a public contract would require paying (higher) “prevailing wages”, contractors whose business is primarily private commercial construction may have even less incentive to participate in public project bidding. Contractors may find it difficult to pay their workers more for some projects than for others. Accepting public contracts may put the contractor in a position of being less competitive in the private construction market, since it would not be able to lower wages for those projects. The end result? Only higher wage contractors participate in public bidding and report their wages to the Department of Labor, further skewing the “prevailing wage”.

To the extent contractors participate in both public and private construction projects and do manage to pay different wage rates, contractors still can be selective in which wages they report to the Department of Labor. Contractors can submit wages for their public contracts and their more generous private commercial contracts and withhold information about any lower-wage contracts.

This endogenous wage-setting problem is even more likely in the case of construction projects that are uniquely public in nature. Almost all road construction in the US is done by public entities. Companies that specialize in road construction are the only firms submitting wage reports that determine the prevailing wage for road construction work. As a result, there is absolutely no competitive check on the potential escalation of wages for such projects.

There are some testable hypotheses implied by the arguments above. One would be the degree of specialization in public versus private construction projects by contractors. Another would involve the trend or serial correlation of prevailing wages for construction projects that are uniquely public in nature versus construction projects that have a mix of public and private buyers. And if one were able to get the data, a third would be to test whether the types of projects for which wages are reported to the Department of Labor are systematically biased in a way that would result in biased estimates of the ‘prevailing wage’.

Private firms that engage in price fixing, even by tacit collusion (that is, by informally following one another’s lead) are subject to fairly strict antitrust prohibitions. State prevailing wage laws, especially ones that are based on selective, voluntary reporting, amount to little more than a legalized form of State-sponsored price fixing. It’s worth thinking about why price fixing should be illegal when individuals pay for things themselves, but not when politicians and bureaucrats use taxpayers’ money to buy things for them.

What Is A Police Officer Worth? Insights of Opportunity Cost

Zig Ziglar is purported to have said, “Show me your checkbook and your calendar and I will tell you what is most important in your life.” There is truth in that statement. Economists refer to it as “revealed preferences”; when faced with actual choices and opportunity costs, how you choose reveals what you value most.

Yesterday I had opportunity to visit with a local high school AP Econ class to discuss whatever they wanted about economics and various issues. At some point we got on the topic of the recently rejected “use tax” proposal floated by our city and county governments that I wrote about earlier. A primary argument for the use tax was that our city needs to hire more police officers, and online sales are diverting local sales tax dollars from the city coffers.

This raised the question of what priorities does the City government actually have? After all, the City has two ways of paying for more police officers: raising more revenue (in the form of more taxes) or reallocating its existing revenues from competing uses. If the City truly believed having more police was such an important use of tax dollars, the City could do what many households do: reallocate their budget to their higher priority items, then go back and buy those other things when there’s more income available.

I decided to take a peek at our City’s budget for FY2018. In particular, how much does the City spend to staff an “Office of Cultural Affairs” that basically uses tax dollars to pay city employees to subsidize and promote public art and local artists. Don’t get me wrong–art and cultural attractions are an important element of the quality of life in our community. But rarely do we fret about choosing between a good option and an undesirable option. The nature of economics is having to choose between two goods, and what that choice says about how we evaluate them.

Based on our City’s checkbook (budget), publicly supported art and culture is worth more than having six additional sworn police officers. That’s how many additional sworn police officers could be hired if the City redirected the Cultural Affairs budget to policing. That’s not a judgment of the trade-off–it’s simply the economic facts based on the opportunity cost of the City’s revealed preferences in its resource allocation decision. We could go down the line with any number of other City ‘services’ to draw similar comparisons of opportunity costs.

Would the average citizen agree that public funding for art is worth more than six additional police officers? I don’t know. I’m doubtful. But the citizens have never been asked that question. Instead, the City just continues to seek an increase in taxes to pay for more police so it can have its art and its police, too.

Of course, there’s a political economy angle to this that might be perceived as more cynical (or sinister?). Which is the average citizen more likely to be willing to be taxed for at the margin? More art? Or more police? That strikes me as pretty much a no-brainer. Which likely explains why the City refuses to reallocate the arts funding (or any other expenditures) to pay for the police now and ask taxpayers for more money to resume doing those other (lower-valued) things.

Either one of two alternatives would appear to be true: our city government values public art more than it does having another six police officers; or, City officials manipulate the decision options for taxpayers by allocating funding to lower-valued services (making the City less safe?) in order to request tax increases for the foregone higher-valued services that taxpayers are more likely to approve. The latter would seem a form of extortion, so I’m sure it must be the former.

This situation is by no means unique or limited to our fair city. It’s true in yours, too; and at the State and Federal levels as well. Every government entity has decisions in how to allocate its receipts. How those allocations are made speaks to what is truly important to those making the decisions, and to their ability to manipulate voters’ interests at the margin.

A win for the auto cartel, a loss for Missourians

The Missouri Auto Dealer Association (MADA) has been exercising its political muscle for at least a couple years to protect its antiquated state-supported cartel over new car sales. It seems they have finally succeeded in court where their lobbying efforts have failed. In an opinion last week by Cole County Circuit Judge Daniel Green, the court ruled that Missouri state statutes governing automobile distribution prohibit Tesla from operating its own retail stores in the state.

The case, which the MADA filed against the Missouri Department of Revenue, contested the State’s issuance of two franchise dealer licenses to Tesla for Tesla to open its own “franchise” retail stores. Basically, Missouri statutes have implemented a circular argument that prohibits auto manufacturers from owning new vehicle dealerships. § 301.550.3 RSMo specifically limits new car dealers to being franchises, statutorily side-stepping the possibility of a non-franchise new car dealer. The court essentially argued (perhaps rightly) that Tesla’s self-dealing of the franchise to itself was merely a rhetorical ploy to circumvent this failure of the statutes to allow for non-franchise dealers. However, even if that side-step were permissible, § 407.826.1 RSMo specifically prohibits auto industry franchisors from “owning or operating a new motor vehicle dealership in this state.”

Judge Green’s opinion basically means the laws of the state of Missouri preclude the possibility of any auto manufacturer selling its cars in Missouri directly to consumers. While Tesla can continue to operate its two service centers in the state, it cannot make car sales there. Instead, the company must continue to sell to Missourians over the internet with a point-of-sale in another state. (So much for more sales jobs.)

I and others have written previously (here, here, and here) why bans on Tesla’s direct-to-consumer sales model are bad for consumers and for society in general. This most recent ruling in Missouri just highlights how fundamentally flawed the regulation of commerce can be. Missouri’s laws, to the extent they ever made sense, are rooted in an antiquated industry and technological setting. Advancements in information technology alone have undercut many, if not all, of the economic justifications for an auto manufacturer to use a franchised distribution system. Laws that were written to protect franchisees in a 1950s-era distribution system do nothing now but raise consumers’ costs and thwart technological and organizational innovation that make everyone better off. Everyone, that is, except the franchised auto dealer cartel that sees all too clearly how little value it now adds in the sale and distribution of new cars.

Hopefully Missouri’s legislature will have the gumption to fix the flaws in its statutes that limit all new car retailers to “franchises” and instead let auto manufacturers (or any other manufacturer) choose the model they find best for themselves and their customers.

Douglass C. North, 1920-2015

I received word today that Douglass North passed away yesterday at the age of 95 (obit here). Professor North shared the Nobel Prize in Economic with Robert Fogel in 1993 for his work in economic history on the role of institutions in shaping economic development and performance.

Doug was one of my first professors in graduate school at Washington University. Many of us in our first year crammed into Doug’s economic history class for fear that he might retire and we not get the chance to study under him. Little did we expect that he would continue teaching into his 80s. The text for our class was the pre-publication manuscript of his book, Institutions, Institutional Change and Economic Performance. Doug’s course offered an interesting juxtaposition to the traditional neoclassical microeconomics course for first-year PhD students. His work challenged the simplifying assumptions of the neoclassical system and shed a whole new light on understanding economic history, development and performance. I still remember that day in October 1993 when the department was abuzz with the announcement that Doug had received the Nobel Prize. It was affirming and inspiring.

As I started work on my dissertation, I had hoped to incorporate a historical component on the early development of crude oil futures trading in the 1930s so I could get Doug involved on my committee. Unfortunately, there was not enough information still available to provide any analysis (there was one news reference to a new crude futures exchange, but nothing more–and the historical records of the NY Mercantile Exchange had been lost in a fire).and I had to focus solely on the deregulatory period of the late 1970s and early 1980s. I remember joking at one of our economic history workshops that I wasn’t sure if it counted as economic history since it happened during Doug’s lifetime.

Doug was one of the founding conspirators for the International Society for New Institutional Economics (now the Society for Institutional & Organizational Economics) in 1997, along with Ronald Coase and Oliver Williamson. Although the three had strong differences of opinions concerning certain aspects of their respective theoretical approaches, they understood the generally complementary nature of their work and its importance not just for the economic profession, but for understanding how societies and organizations perform and evolve and the role institutions play in that process.

The opportunity to work around these individuals, particularly with North and Coase, strongly shaped and influenced my understanding not only of economics, but of why a broader perspective of economics is so important for understanding the world around us. That experience profoundly affected my own research interests and my teaching of economics. Some of Doug’s papers continue to play an important role in courses I teach on economic policy. Students, especially international students, continue to be inspired by his explanation of the roles of institutions, how they affect markets and societies, and the forces that lead to institutional change.

As we prepare to celebrate Thanksgiving in the States, Doug’s passing is a reminder of how much I have to be thankful for over my career. I’m grateful for having had the opportunity to know and to work with Doug. I’m grateful that we had an opportunity to bring him to Mizzou in 2003 for our CORI Seminar series, at which he spoke on Understanding the Process of Economic Change (the title of his next book at the time). And I’m especially thankful for the influence he had on my understanding of economics and that his ideas will continue to shape economic thinking and economic policy for years to come.

Tesla, Dealer Franchise Laws, and the Politics of Crony Capitalism

About a year ago I posted a couple of pieces (here and here) related to auto dealers’ attempts in various states to shut down Tesla’s direct-to-consumer distribution system. Dan Crane (Michigan Law) has a recent paper on the issue available at SSRN. Below is the abstract:

Tesla Motors is fighting the car dealers’ lobby, aided and abetted by the legacy Detroit manufacturers, on a state by state basis for the right to distribute its innovative electrical automobiles directly to consumers. The Tesla wars showcase the important relationship between product innovation and innovation in distribution methods. Incumbent technologies may block competition by new technologies by creating legal barriers to innovative distribution methods necessary to secure market acceptance of the new technologies. While judicial review of such special interest capture is generally weak in the post-Lochner era, the Tesla wars are creating new alliances in the political struggle against crony capitalism that could contribute to a significant re-telling of the conventional public choice story.

Bye-Bye Bookstores

When you read a story about a local bookstore going out of business, you kind of expect the culprit to be lost business to on-line retailers (e.g., Amazon), e-book sellers (e.g., Amazon’s Kindle or Apple’s iBooks), or maybe, just maybe, a large brick-and-mortar bookstore (e.g., Barnes & Noble ). And while it may make one sad, at least one can understand the consequences of competition.

What you wouldn’t normally expect is that the store’s loyal customers and local citizens voted to shut it down–without even knowing it. But apparently that’s exactly what happened to the beloved Borderlands Bookstore in the Mission District of San Francisco according to the Bay Area’s ABC 7 News. As a result of the voter-approved increase in minimum wage, the bookstore can’t afford to remain open and has announced it will close at the end of March.

“You know, I voted for the measure as well, the minimum wage measure,” customer Edward Vallecillo said. “It’s not something that I thought would affect certain specific small businesses. I feel sad.”

The San Francisco Board of Supervisors seemed to have expected it though, but they forwarded the initiative to the voters nonetheless:

“I know that bookstores are in a tough position, and this did come up in the discussions on minimum wage,” San Francisco supervisor Scott Wiener said.

Apparently Wiener takes comfort that it was the will of the people, with 77% voting in favor of the increase. But this just really points out a problem in what is often a democratic-wannabe, spineless-republican form of government. Legislators pander to interests and ideas they know are bad for the economy, but pass the buck on responsibility by “letting the voters decide”.

And while Jonathan Gruber was mocked for saying Obamacare supporters had to hide the details because of the stupidity of the American voters, time and again local (and state-wide) referenda on things like minimum wage give credence to his claim. The average voter either has no clue about how markets really work or is tremendously myopic in thinking through the consequences of the policies they support…most likely, both. (Although, if voters were more economically competent, Obamacare supports would have had even more reason to hide the details.)

So the chickens have come home to roost in San Francisco. If you go there, plan to leave your heart…and your money…but don’t plan on enjoying the beloved local bookstores. Or the many other small, local businesses that can ill-afford an arbitrary (in this case, 50%) increase in their labor costs. Because that’s what minimum wage laws do.