Category: regulation

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.

 

More Evidence Against the Common Ownership Problem

“The U.S. stock market is having another solid year. You wouldn’t know it by looking at the shares of companies that manage money.”

That’s the lead from Charles Stein on Bloomberg’s Markets’ page today. Stein goes on to offer three possible explanations: 1) a weary bull market, 2) a move toward more active stock-picking by individual investors, and 3) increasing pressure on fees.

So what has any of that to do with the common ownership issue? A few things.

First, it shows that large institutional investors must not be very good at harvesting the benefits of the non-competitive behavior they encourage among the firms the invest in–if you believe they actually do that in the first place. In other words, if you believe common ownership is a problem because CEOs are enriching institutional investors by softening competition, you must admit they’re doing a pretty lousy job of capturing that value.

Second, and more importantly–as well as more relevant–the pressure on fees has led money managers to emphasis low-cost passive index funds. Indeed, among the firms doing well according to the article is BlackRock, “whose iShares exchange-traded fund business tracks indexes, won $20 billion.” In an aggressive move, Fidelity has introduced a total of four zero-fee index funds as a way to draw fee-conscious investors. These index tracking funds are exactly the type of inter-industry diversified funds that negate any incentive for competition softening in any one industry.

Finally, this also illustrates the cost to the investing public of the limits on common ownership proposed by the likes of Einer Elhague, Eric Posner, and Glen Weyl. Were these types of proposals in place, investment managers could not offer diversified index funds that include more than one firm’s stock from any industry with even a moderate level of market concentration. Given competitive forces are pushing investment companies to increase the offerings of such low-cost index funds, any regulatory proposal that precludes those possibilities is sure to harm the investing public.

Just one more piece of real evidence that common ownership is not only not a problem, but that the proposed “fixes” are.

Calm Down about Common Ownership

“Calm Down about Common Ownership” is the title of an article Thom Lambert and I published in the latest (Fall 2018) issue of Regulation. The article is a condensed version of our full paper, “The Case for Doing Nothing About Common Ownership of Small Stakes in Competing Firms,” which I posted about in May.

While I’ve not been posting here much in the past few months, Thom and I have written a series of blog posts at Truth On The Market about the perceived problem of common ownership (specifically by institutional investors) across competing firms, and the problems both with the alleged antitrust harms and the proposed “fixes”. Those posts both summarize and expand upon some of the arguments and issues in our paper. To make it easier to find them, I’ve listed them below in chronological–and logical–order:

This issue of common ownership and whether antitrust authorities should deal with it is currently a fairly hot topic. In fact, today the Federal Trade Commission (FTC) is opening up its Hearings on Competition and Consumer Protection in the 21st Century. which include the topic of common ownership. Thom and I submitted comments in advance of the hearing based on our paper. Next week I’ll attend a debate forum on the issue with other scholars (including some aggressive pro-enforcement folks we take to task in our paper), regulators, and members of the investment community. It should be an interesting time.

Isn’t there a Chinese curse about that?

The Case for Doing Nothing About Common Ownership

“Common ownership,” the case of investors owning shares in more than one company–specifically, in shares of companies that compete in the same industry–is currently a hot topic in the antitrust arena. In particular, the alleged effects of common ownership on industry competition are receiving a lot of attention.

Einer Elhague, in the Harvard Law Review, proclaimed “[a]n economic blockbuster has recently been exposed.” Eric Posner, Fiona Scott Morton and Glen Weyl, in the Antitrust Law Journal, assert that “the concentration of markets through large institutional investors is the major new antitrust challenge of our time.”  These claims are based on a handful of empirical studies claiming to have identified a causal relationship between the degree of common ownership and such competitive yardsticks as airline prices, banking fees, executive compensation, and even corporate disclosure patterns.

Of course, such a blockbuster antitrust challenge deserves an aggressive policy response, ideas for which both Elhague and Posner, et al., are more than happy to provide.

However, it’s not so clear that the problem is as big as suggested–if it exists at all. It’s also not clear that the proposed policy solutions would make anyone better off (except perhaps antitrust law “experts”)–and could possibly make many people worse off.

Thom Lambert and I recently posted a new paper that takes on both the claims of a major problem and the proposed solutions. In The Case for Doing Nothing About Institutional Investors’ Common Ownership of Small Stakes in Competing Firms, we explain the problems with the problem itself–both the theoretical logic and the empirical evidence–and the problems with the proposed policy responses.  Over the next several days we’re going to unpack those arguments over at Truth on the Market. Thom already made the introductory post that goes into a bit more detail on the issue.

If you’re interested, I encourage you to click over to TOTM and read the posts there. Once we’re done, I’ll post a summary and set of links to each of them here. For now, the abstract of our paper is available below:

Recent empirical research purports to demonstrate that institutional investors’ “commonownership” of small stakes in competing firms causes those firms to compete less aggressively, injuring consumers. A number of prominent antitrust scholars have cited this research as grounds for limiting the degree to which institutional investors may hold stakes in multiple firms that compete in any concentrated market. This Article contends that the purported competitive problem is overblown and that the proposed solutions would reduce overall social welfare.

With respect to the purported problem, we show that the theory of anticompetitive harm from institutional investors’ commonownership is implausible and that the empirical studies supporting the theory are methodologically unsound. The theory fails to account for the fact that intra-industry diversified institutional investors are also inter-industry diversified and rests upon unrealistic assumptions about managerial decision-making. The empirical studies purporting to demonstrate anticompetitive harm from commonownership are deficient because they inaccurately assess institutional investors’ economic interests and employ an endogenous measure that precludes causal inferences.

Even if institutional investors’ commonownership of competing firms did soften market competition somewhat, the proposed policy solutions would themselves create welfare losses that would overwhelm any social benefits they secured. The proposed policy solutions would create tremendous new decision costs for business planners and adjudicators and would raise error costs by eliminating welfare-enhancing investment options and/or exacerbating corporate agency costs.

In light of these problems with the purported problem and shortcomings of the proposed solutions, the optimal regulatory approach — at least, on the current empirical record — is to do nothing about institutional investors’ commonownership of small stakes in competing firms.

An Open Letter to President Trump

Eighty-eight years ago on the third of May, 1,028 economists signed an open letter to Congress to oppose the Smoot-Hawley Tariff Act, explaining that protectionist tariffs are harmful to the U.S. economy. On May 3, 2018, over 1,100 economists (including yours truly) signed an open letter to President Trump and Congress expressing concern about the President’s threatened (and enacted) trade tariffs–using substantially the exact same letter that was sent 88 years before. That is because–and to illustrate that–the basic economic principles have not changed. Protectionist tariffs harm consumers, harm a large majority of producers, and harm the economy overall .

The letter has been covered by a variety of news sites, including:

The Smoot-Hawley Act is generally viewed as having contributed to the severity of the Great Depression, despite Congress’s (misguided) intent. While the modern economic environment is not necessarily in as fragile a state as it may have been in 1930, and the extent of the implications may not be as severe, the current administration’s threats of trade restrictions nonetheless risk a dampening of economic activity and reduced social well-being.

This is the kind of thing that happens when people don’t pay attention to history.

Or even pop culture…

To “Nudge” or Not To “Nudge”

Congratulations to Alessandro Lizzeri and Leeat Yariv for receiving the American Economic Journal: Microeconomics “2018 AEJ Best Paper” award for their paper titled “Collective Self-Enforcement.” in which they model the desirability of various forms of ‘collective action’ in the form of government intervention to influence individuals’ self-control decisions. The abstract of the paper reads:

Behavioral economics presents a “paternalistic” rationale for a benevolent government’s intervention. We consider an economy where the only “distortion” is agents’ time-inconsistency. We study the desirability of various forms of collective action, ones pertaining to costly commitment and ones pertaining to the timing of consumption, when government decisions respond to voters’ preferences via the political process. Three messages emerge. First, welfare is highest under either full centralization or laissez-faire. Second, introducing collective action only on consumption decisions yields no commitment. Last, individuals’ relative preferences for commitment may reverse depending on whether future consumption decisions are centralized or not.

Lizzeri, Alessandro, and Leeat Yariv. 2017. “Collective Self-Control.” American Economic Journal: Microeconomics, 9 (3): 213-44. DOI: 10.1257/mic.20150325

Who’s the Boss? It’s not just a franchising question.

Who’s the boss?

No, I’m not referring to the hit 1980s sitcom that launched Alyssa Milano’s career and took Tony Danza from a dimwitted, cab-driving boxer (in Taxi) to lovable hunky housekeeper. It’s a more important question than that.

Who’s the boss at a local business? Especially if that business has close relationships with another, larger company?

That’s the question at the heart of the Save Local Business Act (H.R. 3441) that is currently waiting action in the U.S. Senate. And how that question is answered could have big implications for hundreds of thousands of small business owners. For starters, and perhaps most specifically, for every locally owned franchised business in the United States. But that’s not all.

The issue stems from a 2014 National Labor Relations Board (NLRB) ruling in which the Board voted 3-2 to find that McDonald’s Corp. was a “joint employer” with all of their franchisees. In that case, labor union activists filed a complaint against McDonald’s directly rather than having to work against multiple individual franchisees, claiming that because McDonald’s Corp provides training and recommends employment standards and work policies for the local business owners that use the McDonald’s brand, the franchisor is effectively a joint-employer. And therefore, any labor violations that can be levied against one joint-employer apply to the local business as a whole. The NLRB agreed.

Prior to this ruling, the NLRB treated local franchisee owners as the sole employer of the local business. That meant that any labor complaints had to be filed against each individual franchisee. By expanding its definition of joint-employer, the NLRB made it easier for labor groups to a) file complaints against and b) potentially unionize an entire franchise network.

The NLRB doubled down on its expanded definition of joint employer in its 2015 decision in Browning-Ferris Industries, 362 NLRB No. 186, where is defined “joint employer” as:

two or more entities are joint employers of a single workforce if (1) they are both employers within the meaning of the common law; and (2) they share or codetermine those matters governing the essential terms and conditions of employment.

This is not just an issue for franchises (indeed, Browing-Ferris was not about a franchise case). In fact, the above definition could be read to mean that any company that hires another company to provide services could be considered a joint employer of the contracted company’ employees, even if only on a temporary basis as part of their otherwise full-time job. That includes anything from temp agencies to security companies to housekeeping or maintenance contractors; even to agricultural producers.

For instance, many farmers raise chickens or hogs under contract with a meat processing company. Those companies may require the farmer and any farm employees to follow certain routines or practices to ensure the health and well-being of the animals being raised. Under Browning-Ferris, one could argue the processor is a joint-employer with the farmer, making the farmer subject to a host of employment laws that typically do not apply to small businesses.

Local business owners breaking ground for their new franchised store, the first Sonic restaurant in Rhode Island.

Likewise with franchisees, whether owners of restaurants, hotels, tax preparation companies, cleaning companies, home healthcare companies, or retail outlets. Most franchisees are small, local business owners that pay the franchisor for the rights to use the franchisor’s brand name and business format, to gain access to training resources, and perhaps to access inventories and supplies. Because the franchisor provides training resources and may recommend things like staffing levels, training processes, etc., as part of their business plan (which is one of the reasons to buy the franchise in the first place), most franchisors could be deemed joint employers with their local business owner franchisees.

That creates new risks for franchisors (since they have no direct control over local store operations) and exposes small business owners to regulations that only apply to larger businesses. Moreover, it puts any franchisee at even greater risk for the behavior of other franchisees and their employees. And that is a powerful disincentive for franchising. Since franchised businesses have been the fastest growing sector of the economy, such regulations could have far-reaching implications.

Joint employer status creates new risks for franchisors (since they have no direct control over local store operations) and exposes small business owners to regulations that only apply to larger businesses. And that is a powerful disincentive for franchising.

Fortunately for now, a new presidential administration in 2017 led to a change in the composition of the National Labor Relations Board. The new NLRB board voted 3-2 to overturn Browning-Ferris and restore its previous definition of joint employer.

And therein lies part of the problem. Change presidents, change NLRB composition, change the rules. That is what the Save Local Business Act is intended to fix. The Act provides a legislative solution to the problem of agency (NLRB)) discretion in defining what constitutes a joint employer. Can laws change? Yes. But that requires more than a change of one person (as in the case of the NLRB) to change the law.

So who’s the boss? For now, it’s the local business owner. It’s up to Congress to remove the uncertainty about how that question will be answered in years to come.