1. Kaldor and Piketty’s facts: The Rise of Monopoly Power in the US
Gauti Eggertsson
Jacob Robbins
Ella Getz Wold
Brown University

2. Kaldor’s “stylized facts” not facts anymore
In social sciences, especially economics, a stylized fact is a simplified presentation of an empirical finding. A stylized fact is often a broad generalization that summarizes data, which although essentially true may have inaccuracies in the detail.
-- Constant interest rates
-- Constant Labor and Capital Share
”Is no doubt that they are stylized, though it is possible to question whether they are facts”
Robert Solow, 1969

3. Failure of Kaldor’s facts associated with several broader pattern’s including Piketty’s “puzzles”
Wealth to output ratio has increased while savings gone down and capital to output stagnant.
An increase in pure profits with a decrease in the capital and labor share.

4. Other “puzzles” from perspective of neoclassical model
3. A decrease in the real interest rate while the measured average return on capital is relatively constant 4. An increase in Tobins Q to a level permanently above A decrease in investment to output, even given historically low borrowing costs and a high value of empirical Tobins Q.

5. (1) “Wealth is back”

6. Wealth was accumulated despite historically low savings rates

7. Wealth accumulation
Wealth is not embodied in new productive capital goods. Replacement value of capital to output has stagnated.
Instead, wealth was accumulated through capital gains
Capital gains of 3% per year from 1970 to the present on wealth

8. (2) Growth in Tobin’s Q macrodata
Bob Hall (2001)
Phillipon and Gutierres (2017)
𝑄= 𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑠𝑡𝑎𝑙𝑙𝑒𝑑 𝑐𝑎𝑝𝑖𝑡𝑎𝑙 𝑅𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑐𝑎𝑝𝑖𝑡𝑎𝑙

9. Compustat Tobin’s Q
microdata

10. (3) Interest rates have decreased

11. (3) … but the average return on capital has stayed constant
Gomme, Ravikumar, and Rupert (2011)

12. (4) Labor/capital share has decreased, pure profit share has increased

13. (5) Despite low interest rates / high Tobin’s Q, investment has been sluggish
NIPA
Phillipon and Gutierres (2017)

14. Summing up: Want to to explain
Five

15. Key Hypothesis 1: Increase in market power
Council of Economic Advisors

16. Increase in concentration
Source: Philippon & Gutierrez (2017)

17. Rise in monopoly power: markups
Source: De Loecker, Eekhout (2017)

18. Key hypothesis #2: Decrease in r*
Decrease in natural rate of interest rate, combined with increase in markups, can potentially explain constant average return on capital
In conjunction with markups, can also explain trends for investment and capital

19. Key hypothesis #2: Decrease in r*
Follow Eggertsson, Mehrotra, Robbins (2017) and model r* as being driven down by slower productivity and population growth

20. Test Hypothesis
(1) Build quantitative model that can explain joint evolution of all five macro trends
(2) Estimate the change in markups from 1970 to the present / decline in interest rates
(3) Quantitatively test hypothesis

21. Literature review
Each of these facts has been the subject of intense recent debate and interest
Wealth to output, Tobin’s Q: Piketty (2014), Piketty, Saez, Zucman (2016)
Labor share: Karabarbounis and Neiman (2013), Elsby et. al. (2013).
Pure profit share / markups: Barkai (2017), De Loecker and Eekhout (2017)
Average return on capital versus interest rates: Gomme et al (2011,2015), Eggertsson, Mehrotra, Robbins (2017)
Slack investment and relation to Tobin’s Q: Guttierez and Phillipon (2016)
Decrease in competition in the US: Autor et. al. (2017), CEA (2016), Furman (2015)

22. How we are difference
Our model quantitatively explains the joint evolution of five variables. Most other consider smaller pieces of the story. We synthesize, quantify, formalize previous work.
We have new estimates for how much markups have increased
Our quantitative model has several novel features, and matches the data well

23. Our model
Standard neoclassical model cannot address many of the changes seen over the past 40 years
Cannot explain divergence between wealth and capital, average and marginal return, or increase in pure profit shares

24. Modifications to basic neoclassical model
General model of market power that nests a number of specific market structures (Monopolistic competition, Cournot, Bertrand, Monopoly, etc)
Claims to the pure profits are traded as assets
Structure in which r* can change
Major implication for macro

25. Model – focus on production
Unit mass of identical final goods firms
Production function
Final good aggregate
Symmetric equilibrium

26. Final goods firms
Crucial assumption: final goods firms have market power
Markups follow AR(1) process
Aggregate profits are given by

27. Firm dynamics
Introduce simple, reduced form, firm entry and exit dynamics
Firm exit a la Melitz (2003). Each period, a final goods firm i has a probability Δ of exiting
Entry is also exogenous – each period, mass Δ of new final goods firms enters.

28. Asset pricing
There are security markets in which the rights to the future profits of final goods firms are bought and sold
Securities S(t) are traded, receive dividend d from final goods firms with price X(t). 1 share outstanding.
For entering firms, shares distributed to individuals as ‘IPO Securities’

29. Intermediate goods firms
Representative firm
Adjustment costs as in Jermann (1998)

30. Wealth and Tobin’s Q
Define aggregate wealth as the total market value of physical capital and securities
Empirical Tobin’s Q is defined as
Note that the existence of securitized pure profits allows there to be a wedge between wealth and capital, and allows Tobin’s Q to be permanently above one

31. Asset Pricing – Long run risk
Long-run productivity risk enters our model as in Bansal and Yaron (2004) and Croce (2014)
Will allow us to match equity premium

32. Household preferences
Unit mass of individuals with Epstein-Zin utility:
D is additional wedge between current and future utility
Used as reduced form way of modeling factors such as demographics that affect the real interest rate in non rep-agent models

33. Budget constraint

34. Equilibrium

35. Model discussion Model nests a number of specific market structures:
Perfect competition: μ=1, no entry and exit
Standard New Keynsian monopolistic competition: Δ= 0,
Dixit-Stiglitz (1977)

36. Model discussion
Bilbiie, Ghironi and Melitz (2012), Etro and Colciago (2010), Melitz (2003) – monopolistic competition, Bertrand, Cournot competition
Set G(.) in line with love of variety, Δ in line with entry and exit, add fixed costs in line
Since these models nest the endogenous growth models of Aghion and Howitt (1992), Romer (1990), and Grossman and Helpman (1991), our model does as well

37. Comparative statics – increase in markups
Effect of a permanent increase in μ is straightforward:
Increase in security value X, and thus increase wealth to output and Tobin’s Q

38. Comparative statics – increase in markups
Also leads to an increase in the profit share
And a corresponding decrease in the labor and capital share

39. Comparative statics – increase in markups
Increase in the average return on capital
And a larger gap between the average return and the risk free rate

40. Comparative statics – increase in markups
Finally, the increase in the markup means a larger wedge between the MPK and the rental rate of capital
This depresses investment

41. All together now…

42. Effect of change in r
Now consider a decrease in r, perhaps due to a slowdown in productivity or demographics
Average return is thus pulled down

43. Effect of change in r
Note that this is the opposite effect of a change in markups
Thus an increase in markups combined with a decrease in r could lead to a unchanged average return on capital.

44. Effect of decrease in r
Decrease in r would also tend to increase investment and the capital to output ratio
Once again pushing in the opposite direction of markups

45. Quantitative Analysis
We’ve seen how an increase in monopoly power combined with a decrease in r can potentially account for the five facts
But are these effects quantitatively important?
We need an estimate of how markups have changed
Use 3 estimates: De Loecker, Nekarda & Ramey, our own estimates

46. Markups: De Loecker and Eeekhout

47. Markups from Nekarda and Ramey (2013)

48. Old method for estimating markups
With Cobb Douglas / CES preferences, easy formula for markup:

49. Our method
We use the fact that under CRTS production markups are proportional to the profit share of the economy. We can thus estimate markups as

50. Implied markups

51. Compared to Ramey et. al.

52. Quantitative exercise
Test to what extent the increase in markups, along with changes in the real interest rate, can explain the five facts discussed above

53. Exercise Comparative statics exercise, 1970 to 2015
Calibrate the model to 1970 data
Then “plug in”
(1) changes in markups from
(2) changes in other fundamentals from that will effect equilibrium r
Compare changes in model moments to changes in data moments

54. Quantitative Exercise
Several categories of parameters
Markup μt estimated from before
Second category taken from literature
Third category chosen to match 1970 data
Minimize objective function

55. Parameters chosen from the literature

56. Parameters calibrated to 1970 moments

57. Calibration results

58. Calibration
Note that we are choosing parameters to match only 1970 moments
In particular, we do not choose any parameters to match 2015 moments, or to try and match any change in the moments from 1970 to 2015
The success or failure of the exercise will be comparing changes in our model moments to change in the data moments

59. Results – change in markups

61. Results – change in markups, interest rates

62. Results – De Loecker Markups

63. Implication #1: Inequality
Income inequality: greater share of income go to owners of equity capital (upper portion of the distribution), lesser share goes to labor
Wealth inequality: huge rise in stock prices once again benefits the owners of equity capital

64. Implication #2: Growth
With higher markups, lower investment, capital, and labor supply.
Leads to lower GDP
Indirect costs of monopoly power: rent seeking
Traditional political rent seeking
Spending on product differentiation, branding, and advertising

65. Implication #3: Tax policy
Economic theory suggests it is a good idea to tax pure profits, perhaps not such a good to tax capital income
With moderate levels of pure profits, relatively high levels of corporate income taxes are optimal
Result is amplified with interest deductibility and accelerated depreciation

66. Implication #4: Income and wealth accounting
Measuring level of pure profits in the US economy is of first order importance
Whether intangible investment should be capitalized depends on whether it is productive or spending purely to increase barriers to entry

67. Conclusion
Analysis relies heavily on estimates of markups, which are difficult to measure. Having said that, an increase in markups should lead to…
Negative impact on GDP growth
Increase in income inequality and wealth inequality
Changes analysis of tax on capital income

68. Intangible capital story
Another story --- there is a still a large stock of unmeasured intangible capital
This would lead to a high measured Q, average return, and W/Y

69. However…
Last two revisions to NIPAs have included massive revisions of intangible capital
Most expenditures on R&D, software, training, etc are now counted as investment
What potential intangible investment is missing? Advertising, marketing, etc. But is this investment? In any case not large enough.

70. Back to the 5 facts
(1) Increase in W/Y, stagnation in K/Y: match pretty well
(2) Increase in Q: match pretty well the change. Don’t get levels – Q is measured very poorly in the data!
(3) Decrease in r*, slightly increasing average return: match r* decrease, have a moderately increasing average return

71. Back to the 5 facts
(4) Increase in pure profit share, decrease in labor share and capital share: markups were essentially estimated to match this fact
(5) Decrease in I/Y, despite low r*: we have too large a decrease in I/Y. We better match data if we used net investment, since depreciation has increased substantially over the time period (see Gutierrez and Phillipon (2016))

72. Profit distribution

73. Impulse Response Function

74. Change in D

75. Change in productivity growth