Wednesday, October 21, 2020

The Google Antitrust Case and Echoes of Microsoft

The US Department  of Justice has filed an antitrust case against Google. The DoJ press release is here;  the actual complaint filed with the US District Court for the District of Columbia is here. Major antitrust cases often take years to litigate and resolve, so there will be plenty of time to dig into the details as they emerge. Here, I want to reflect back on the previous major antitrust case in the tech sector, the antitrust case against Microsoft that was resolved back in 2001. 

For both cases, the key starting point is to remember that in US antitrust law, being big and having a large market share is not a crime. Instead, the possibility of a crime emerges when a company with a large market share leverages that market share in a way that helps to entrench its own position and block potential competition. Thus, the antitrust case digs down into specific contractual details.

In the Microsoft antitrust case, for example, the specific legal question was not whether Microsoft was big (it was), or whether it dominated the market for computer operating systems (it did). The legal question was whether Microsoft was using its contracts with personal computer manufacturers in a way that excluded other potential competitors. In particular, Microsoft signed contracts requiring that computer makers license and install Microsoft's Internet Explorer browser system as a condition of having a license to install the Windows 95 operating system. Microsoft had expressed fears in internal memos that alternative browsers like Netscape Navigator might become the fundamental basis for how computers and software interacted in the future. From the perspective of antitrust regulators, Microsoft's efforts to used contracts as a way of linking together its operating system and its browser seemed like anticompetitive behavior. (For an overview of the issues in the Microsoft case, a useful starting point is a three-paper symposium back in the Spring 2001 issue of the Journal of Economic Perspectives.)

After several judicial decisions went against Microsoft, the case was resolved with a consent agreement in November 2001. Microsoft agreed to stop linking its operating system and its web browser. It agreed share some of it coding so that it was easier for competitors to produce software that would connect to Microsoft products. Microsoft also agreed to an independent oversight board that would oversee its actions for potentially anticompetitive behavior for five years. 

As we look back on that Microsoft settlement today, it's worth noting that losing the antitrust case in the courts and being pressured into a consent agreement certainly did not destroy Microsoft. The firm not broken up into separate firms. In 2020, Microsoft ranks either #1 or very near the top of all US companies as measured by the total value of its stock. 

Looking at the antitrust case against Google, the claims again are focused on specific contractual details. For example, here's how the Department of Justice listed the issues in its press release: 

As alleged in the Complaint, Google has entered into a series of exclusionary agreements that collectively lock up the primary avenues through which users access search engines, and thus the internet, by requiring that Google be set as the preset default general search engine on billions of mobile devices and computers worldwide and, in many cases, prohibiting preinstallation of a competitor. In particular, the Complaint alleges that Google has unlawfully maintained monopolies in search and search advertising by:
  • Entering into exclusivity agreements that forbid preinstallation of any competing search service.
  • Entering into tying and other arrangements that force preinstallation of its search applications in prime locations on mobile devices and make them undeletable, regardless of consumer preference.
  • Entering into long-term agreements with Apple that require Google to be the default – and de facto exclusive – general search engine on Apple’s popular Safari browser and other Apple search tools.
  • Generally using monopoly profits to buy preferential treatment for its search engine on devices, web browsers, and other search access points, creating a continuous and self-reinforcing cycle of monopolization.
As noted earlier, I expect these allegations will result in years of litigation. But I also strongly suspect that even if Google eventually loses in court and signs a consent agreement, it ultimately won't injure Google much or at all as a company, nor will it make a lot of difference in the short- or the medium-term to the market for online searches. If this is the ultimate outcome, I'm not sure it's a bad thing. After all, what are we really talking about in  this case. As Preston McAfee has pointed out, "First, let's be clear about what Facebook and Google monopolize: digital advertising. The accurate phrase is "exercise market power," rather than monopolize, but life is short. Both companies give away their consumer product; the product they sell is advertising. While digital advertising is probably a market for antitrust purposes, it is not in the top 10 social issues we face and possibly not in the top thousand. Indeed, insofar as advertising is bad for consumers, monopolization, by increasing the price of advertising, does a social good." 

Ultimately, it seems to me as if the most important outcomes of these big-tech antitrust cases may not be about the details of contractual tying. Instead, the important outcome is that the company is put on notice that it is being closely watched for anticompetitive behavior, it has been judged legally guilty of such behavior, and it needs to back away from anything resembling such behavior moving forward.  

Looking back at the aftermath of the Microsoft case, for example, some commenters have suggested that it caused Microsoft to back away from buying other upstart tech companies--like buying Google and Facebook when they were young firms. A common complaint against the FAANG companies— Facebook, Apple, Amazon, Netflix, and Google--is that they buying up companies that could have turned into their future competitors. A recent report from the House Judiciary Committee ("Investigation of Competition in Digital Markets") points out that "since 1998, Amazon, Apple, Facebook, and Google collectively have purchased more than 500 companies. The antitrust agencies did not block a single acquisition. In one instance—Google’s purchase of ITA—the Justice Department required Google to agree to certain terms in a consent decree before proceeding with the transaction."

It's plausible to me that the kinds of contracts Google has been signing with Apple or other firms are a kind of anticompetitive behavior that deserves attention from the antitrust authorities. But the big-picture question here is about the forces that govern overall competition in these digital market, and one major concern seems to me that the big tech fish are protecting their dominant positions by buying up the little tech fish, before the little ones have a chance to grow up and become challengers for market share. 

Mark A. Lemley and Andrew McCreary offer a strong statement of this view in their paper "Exit Strategy (Stanford Law and Economics Olin Working Paper #542, last revised January 30, 2020).  They write (footnotes omitted): 

There are many reasons tech markets feature dominant firms, from lead-time advantages to branding to network effects that drive customers to the most popular sites. But traditionally those markets have been disciplined by so-called Schumpeterian competition — competition to displace the current incumbent and become the next dominant firm. Schumpeterian competition involves leapfrogging by successive generations of technology. Nintendo replaces Atari as the leading game console manufacturer, then Sega replaces Nintendo, then Sony replaces Sega, then Microsoft replaces Sony, then Sony returns to displace Microsoft. And so on. One of the biggest puzzles of the modern tech industry is why Schumpeterian competition seems to have disappeared in large swaths of the tech industry. Despite the vaunted speed of technological change, Apple, Amazon, Google, Microsoft, and Netflix are all more than 20 years old. Even the baby of the dominant firms, Facebook, is over 15 years old. Where is the next Google, the next Amazon, the next Facebook?
Their answer is the "exit strategy" for the hottest up-and-coming tech firms isn't to do a stock offering, remain an independent company, and keep building the firm until perhaps it will challenge one of the existing tech Goliaths. Instead, the "exit strategy," often driven by venture capital firms, is for the new firms to sell themselves to the existing firms. 

This particular antitrust case against Google's allegedly anticompetitive behavior in the search engine market is surely just one of the cases Google will face in the future, both in the US and around the world. The attentive reader will have noticed that nothing in the current complaint is about broader topics like how Google collects or makes use of  information on consumers. There's nothing about how Google might or might not be manipulating the search algorithms to provide an advantage to Google-related products: for example, there have been claims that if you try to search Google for websites that do their own searches and price comparisons, those websites may be hard to find. There are also questions about whether or how Google manipulates its search results based on partisan political purposes. 

Looking back at the Microsoft case, my suspicion is that the biggest part of the outcome was that when Microsoft was under the antitrust microscope, other companies that eventually became its big-tech competitors had a chance to grow and flourish on their own. With Google, the big issue isn't really about details of specific contractual agreements relating to its search engine, but whether Google and the other giants of the digital economy are leaving sufficient room for their future competitors. 

For more posts on antitrust and the big tech companies, some previous posts include:

Tuesday, October 20, 2020

Will Vote-by-Mail Affect the Election Outcome?

For the 2020 election, the United States will rely more heavily on vote-by-mail than ever before. Is it likely to affect the outcome? Andrew Hall discusses some of the evidence in "How does vote-by-mail change American elections?" (Policy Brief, October 2020, Stanford Institute for Economic  Policy Research).

There are several categories of vote-by-mail. The mild traditional approach was the absentee ballot, used by people who knew in advance that they wouldn't be able to make it to the polls in person on Election Day for some specific reason (like being an out-of-state college student or deployed out-of-state in the military). Over time, this has evolved in many states into "no excuses" absentee voting, where anyone can request an absentee ballot for pretty much any reason. 

Perhaps the most aggressive version is universal vote-by-mail, where the state mails a ballot to every registered voter. The vote can then vote by mail, bring the mailed ballot in person to vote, or ignore the mailed ballot and just vote in-person on Election Day. Hall notes: "Prior to 2020, only Colorado, Hawaii, Oregon, Utah, and Washington employed universal vote-by-mail, while California was in the process of phasing it in across counties. In response to COVID-19, three more states, Nevada, New Jersey, and Vermont, along with the District of Columbia, have implemented the policy, while California accelerated its ongoing implementation. Montana has also begun to phase in the practice."

In 2020, most states are experimenting with something in-between: not quite universal vote-by-mail (in most states), but often more encouragement for vote-by-mail than had been common in the previous situation of no-excuses absentee voting. Thus, thinking about what will happen in 2020 requires looking back at earlier experience. 

For example, the universal mail-in states often phase in the process a few randomly chosen counties at at time. Thus, social scientists can compare, in the same election, how voting behavior changed when mail-in voting first arrived. Hall writes: 

In our first study, published recently in the Proceedings of the National Academy of Sciences, we examined historical data from California, Utah, and Washington, where universal vote-by-mail was phased in over time, county by county ... We found that, in pre-COVID times, switching to universal vote-by-mail had only modest effects on turnout, increasing overall rates of turnout by approximately two percentage points. Because universal vote-by-mail has such modest effects on overall turnout, it’s not surprising that we also found that it conveyed no meaningful advantage for the Democratic Party. When counties switched to universal vote-by-mail, the Democratic share of turnout did not increase appreciably, and neither did the vote shares of Democratic candidates. Our largest estimate suggests that universal vote-by-mail could increase Democratic vote share by 0.7 percentage points---enough to swing a very close election, to be sure, but a very small advantage in most electoral contexts, and a much smaller effect than recent rhetoric might suggest.
Of course, this evidence is about a move to universal mail-in voting, and what is actually happening in most states is more like a dramatic expansion of no-excuse-needed absentee balloting. However, I confess that I am less sanguine than Hall about a swing of "only" 0.7 percentage points. If the presidency or control of the US Senate comes down to a few key, close-run states, that amount may represent the margin of victory. Also, this pre-COVID evidence may underestimate the partisan difference in 2020, given that there is some survey evidence from April and June suggesting that Democrats are more enthused about mail-in voting than Republicans. But what has seemed to happen in other states is that while Democrats are more likely to vote by mail, overall turnout and voting margins are not much affected. 

As another piece of evidence, Hall discussed the Texas run-off primary on June 14. For research purposes, it's useful that this vote happened when the pandemic was already underway. Also, it's useful that in this election, only those 65 and over could vote-by-mail with no reason needed. Thus, one can compare voting patterns of those just under 65 and just over 65, and see whether among voters who were close in age but had different rules for mail-in voting, did the pandemic change the patterns? For example, would the 64 year-olds who did not have easy access to a mail-in ballot vote less? The short answer is that gap between 64 and 65 year-old voters did not change. 

I'll admit here at the bottom that although I've had to vote absentee a couple of times in my life, I'm not a big fan of vote-by-mail. I like the idea of most people voting at the same time, with the same information, and early mail-in voting raises the problem that if new news arrives and you want to change your vote, you're out of luck.  In addition, I'm a big fan of the secret ballot. No matter what you say to other people, when you are alone in that voting booth, you can choose who you want. Vote-by-mail will inevitably be a less private experience, where those who might wish to defy their family members or friends or those in their apartment building or their assisted care facility may find it just a little harder to do so. 

There are also security concerns about mail-in ballots being delivered and practical concerns about difficulties of validating them and counting them expeditiously. I'm confident that in at least one state in the 2020 election, probably a state with little previous experience in mail-in voting, the process is going to go wincingly wrong.  As Hall writes: "That being said, there are important November-specific factors our research cannot address. The most important issue concerns the logistics of vote-by-mail. Historically, mail-in ballots are rejected at higher rates than in-person votes. Capacity issues in the face of an enormous surge in voting by mail could drive these rejection rates higher. And if Democrats cast more mail-in ballots than Republicans, as looks extremely likely, these higher rejection rates could mean that vote-by-mail paradoxically hurts Democrats."

Of course, vote-by-mail is only one of the multiple differences across states in how voting occurs, including differences in voter registration, voter ID, recounts, and others For an overview, see "Sketching State Laws on Administration of Elections" (September 26, 2016). 

Monday, October 19, 2020

The Ada Lovelace Controversies

 Ada Lovelace (1815-1852) is generally credited with being the first computer programmer: specifically, after Charles Babbage wrote down the plans for his Analytical Engine (which Britannica calls "a general-purpose, fully program-controlled, automatic mechanical digital computer"), Lovelace wrote down a set of instructions that would allow the machine to calculate the "numbers of Bernoulli" (for discussion, see here and here). Suw Charman-Anders gives an overview of the episode and some surrounding historical controversy in "Ada Lovelace: A Simple Solution to a Lengthy Controversy" (Patterns, October, 9, 2020, volume 1, issue 7). 

The historical controversy is whether Lovelace really truly deserves credit for the program, or whether her contemporaries who gave her credit for doing so were just being chivalrous to a fault (and perhaps being generous to the only daughter of Lord Byron and his wife). For example: 

In a letter to Michael Faraday in 1843, Babbage referred to her as “that Enchantress who has thrown her magical spell around the most abstract of Sciences and has grasped it with a force which few masculine intellects (in our own country at least) could have exerted over it”. Sophia De Morgan, who had tutored the young Lovelace, and Michael Faraday himself were both impressed with her understanding of Babbage’s Analytical Engine. Augustus De Morgan, Sophia’s husband and another of Lovelace’s tutors, described her as having the potential, had she been a man, to become “an original mathematical investigator, perhaps of first-rate eminence” ...

 Apparently, some modern writers have pored over what remains of the imprecisely dated correspondence between Lovelace and her tutor Augustus de Morgan, and decided that Lovelace didn't know enough math to have written the program. (Personally, I shudder to think of what judgments would be reached about my own capabilities if I was judged by the questions I sometimes felt the need to ask!) But Charman-Anders makes a persuasive case that the whole controversy is based in a mis-dating of Lovelace's mathematical education in general and her correspondence with de Morgan in particular; that is, critics of Lovelace were mistakenly treating early questions she asked her tutor as if they were questions asked several years later. 

For me, the more interesting point that Charman-Anders makes is to emphasize that writing a computer program was its own conceptual breakthough. There had long been mechanical computing machines, where you plugged in a problem and it spit out an answer. But the breakthrough from Lovelace was to see that the Babbage's Analytical Engine could be viewed a set of rules for working out new results; indeed, Lovelace  hypothesized that such a machine could write music based on a set of rules.   Charman-Anders writes (quotations in first paragraph from Lovelace's 1843 notes, footnotes omitted): 

Although Lovelace was the first person to publish a computer program, that wasn’t her most impressive accomplishment. Babbage had written snippets of programs before, and while Lovelace’s was more elaborate and more complete, her true breakthrough was recognizing that any machine capable of manipulating numbers could also manipulate symbols. Thus, she realized, the Analytical Engine had the capacity to calculate results that had not “been worked out by human head and hands first,” separating it from the “mere calculating machines” that came before, such as Babbage’s earlier Difference Engine. Such a machine could, for example, create music of “any degree of complexity or extent”, if only it were possible to reduce the “science of harmony and of musical composition” to a set of rules and variables that could be programmed into the machine. ...

While calculating devices have a long history, the idea that a machine might be able create music or graphics was contrary to all experience and expectation. Lovelace and her peers would have been familiar with the artifice of the automaton, clockwork machines which looked and acted like humans or animals but were driven by complex arrangements of cams and levers. And indeed, Babbage is said to have owned one called the Silver Lady, which could “bow and put up her eyeglass at intervals, as if to passing acquaintances”. But the Analytical Engine would have been in a category all its own.

One of the biggest leaps the human mind can make is extrapolating from current capabilities to future possibilities. The “art of the possible”, as it has been called, is an essential skill for innovators and entrepreneurs, but envisioning an entirely new class of machine is something for which few people have the capacity. Babbage’s design for the Analytical Engine was astounding, but none of his peers seemed to truly grasp its meaning. None except Lovelace.

Saturday, October 17, 2020

Interview with Gary Hoover: Economics and Discrimination

The Southwest Economy publication of the Federal Reserve Bank of Dallas has published "A Conversation with Gary Hoover" (Third Quarter 2020, pp. 7-9). Here are some of Hoover's comments: 

On  his own career path: 

Although I have been successful in economics, it has not come without some amount of psychological trauma. When I arrived at the University of Alabama in 1998, the economics department had never hired a Black faculty member. Sadly, that is still the case at more economics departments than not. I would not call those initial years hostile, but they were not inviting either.

I stuck to my plan, which was to publish articles to the best of my ability and teach good classes. The pressures were there to mentor Black students, serve on countless committees to “diversify” things and be a role model. I took on the extra tasks but never lost track of my goal. I saw so many of my Black counterparts fall into the trap. They had outsized service burdens compared to their peers, which they took on with the encouragement of the administration. However, when promotion and tenure evaluation time arrived, they were dismissed for not “meeting the high standards of the unit.”
On labor market impediments for black workers:
The impediments begin for Blacks seeking employment from the very outset. Some research has shown that non-Black job applicants of equal ability receive 50 percent more callbacks than Blacks. To further amplify on the issue, some research has shown that Black males without criminal records receive the same rate of callbacks for interviews as white males just released from prison when applying for employment in the low-wage job market.

With such handicaps existing from the start, it is no surprise that a wage gap exists. Some estimates show that gap to be as large as 28 percent on average and as large as 34 percent for those earning in the highest end (95th percentile) of the wage distribution. ,,,

Employers want workers who are trainable and present. Black workers, who have been poorly trained or suffer inferior health outcomes, will suffer disproportionately. In addition, the impacts of the criminal justice system cannot be overlooked. Some recent research has shown that for the birth cohort born between 1980 and 1984, the likelihood of incarceration transition for Blacks was 2.4 times greater than for their white counterparts. Given this outsized risk of incarceration, the prospects of long-term unemployment are dramatically increased.
On whether "the economy will evolve quickly enough to ensure the success and prosperity of minority groups":
I think that I must be optimistic about the future. What employers are yet to realize, but will have to come to grips with, is that successful market outcomes for minority groups mean success for them also. By that I mean, this is not a zero-sum game where one group will only improve at the expense of the other. In fact, history has shown us the opposite. Once minorities are fully utilized and integrated in the labor force, the economy as a whole will enjoy a different type of prosperity than has ever been experienced in the U.S. Once again, we must remember the introductory idea we teach to our college freshmen about the circular flow of the economy in that those fully engaged minority employees become fully engaged consumers.
For more on Hoover's thoughts about racial and ethnic diversity in the economic profession, a useful starting point is his co-authored article in the Summer 2020 issue of JEP, written with Amanda Bayer and Ebonya Washington. "How You Can Work to Increase the Presence and Improve the Experience of Black, Latinx, and Native American People in the Economics Profession" (Journal of Economic Perspectives, 34: 3, pp. 193-219).

For an overview of how economists seek to understand discrimination in theoretical and empirical terms, and how the views of economists differ from sociologists, a useful starting point is the two-paper
symposium on "Perspcctives on Racial Discrimination" in the Spring 2020 issue of JEP: 

Friday, October 16, 2020

COVID-19 Risks by Age

It seems well-known that the health risks of COVID-19 are larger for the elderly. But how much larger? And what is the trajectory of risk across age?  Andrew T. Levin, William P. Hanage, Nana Owusu-Boaitey, Kensington B. Cochran, Seamus P. Walsh, Gideon Meyerowitz-Katz provide a set of estimates "Assessing the Age Specificity of Infection Fatality Rates for COVID-19: Meta-Analysis & Public Policy Implications" (NBER Working paper 27597, as revised October 2020, also available via medRxiv, which is a "preprint server for the health sciences"). 

Also, Andrew Levin is the genial and informative talking head in a 15-minute video discussing the main approach and results. 

As the title implies, the paper is an effort to pull together evidence on the health effects of COVID-19 by age from a variety of sources. Two figures in particular caught my eye. This figure shows the "infection fatality rate"--that is, the the ratio of fatalities to total infections. The different kinds of dots on the figure show results from different kinds of studies. The red line is their central estimate, which is surrounded with estimates of the uncertainty involved. 

As the authors write: "Evidently, the SARS-CoV-2 virus poses a substantial mortality risk for middle-aged adults and even higher risks for elderly people: The IFR is very low for children and young adults but rises to 0·4% at age 55, 1·3% at age 65, 4·2% at age 75, 14% at age 85, and exceeds 25% for ages 90 and above." 

The COVID-19 risk for the elderly is clearly substantial. But how does one think about the risk for those, say, in the 45-65 age bracket. Their COVID-19 risk is clearly lower than for the 85 year-olds. But how does their COVID-19 risk compare with other everyday risks? In his talk, Levin offers a comparison with risks of death from an automobile crash by age. 

One wouldn't want to pretend that this comparison literally apples-to-apples. For example, the risks of driving are somewhat under the control of the drive, while the risk of dying after being infected by COVID-19 is not. In addition, this is comparing the risks of dying after being infected, which applies to only a subset of the population, with the overall risk of driving for the entire population. 

However, the comparison nonetheless seems quite useful to me, in the sense that many of us accept that driving a car has some risk, but it's a risk we take almost every day without excessive concern. Thus, seeing that for the average person under age 34, the COVID infection fatality rate is below the auto fatality rate gives a sense that for that age group taken as a whole (and of course with exceptions for a small number of people with certain pre-existing conditions), the personal risk of COVID-19 shouldn't bother them much. 

Interpreting the risks of those in the age brackets from, say, 35-64 is a little trickier. The COVID-19 risk number for these age brackets do not look especially high in absolute terms, certainly not as compared to the risks for the 85+ group. But from another perspective, for the 45-54 group, the COVID-19 risk is something like 16 times the auto fatality risk; for the 55-64 group, the COVID-19 rise is more than 54 times the auto fatality risk. 

Most people, myself included, are not good at thinking about these kinds of small risks. If I take a risk that I think of as negligible, and multiply it by 16, does "16 x negligible" equal something I should worry about? Maybe "16 x negligible" is like the risk of driving home in the dark on a snowy day, which is a risk I think about, but not one that stops me from driving home. 

What about about "54 x negligible" for the 55-64 age group, of which I have the honor to be a member? Is that enough to do more than raise my eyebrows? For my age group, the risk of dying if I got COVID-19 is 0.7%. which is like saying 1 chance out of 143. There are a lot of contexts where I wouldn't pay much attention to 1 chance in 142. But if it's life and death, I'm willing to take some steps to reduce the risk of that outcome. 

There are certain risks I don't take while driving, like driving with alcohol in my system. Granted, I don't take the risk of driving under the influence not so much because I fear I will kill myself, but because I fear accidents and, even worse, harming someone else. But if the COVID-19 danger to me is in some way comparable to driving while intoxicated, then consistency in thinking about risks suggests that I should make efforts to avoid being exposed to the disease--and also to avoid being a carrier to my wife or any other above-age-35 people with whom my life intersects. 

To put it another way, many of us adjust our behavior in a variety of ways to reduce moderate health risks, like wearing a helmet while bicycling, or not driving in an unsafe manner, or throwing away food that seems to have spoiled in the refrigerator. The reduction in risk from these behavior may not be large in absolute terms, but they feel worth taking. In a similar sense, the health risks of COVID-19 for those in the 35-64 age group are probably not exceptionally high in absolute terms, but for many of us who act to reduce other risks in our lives, the COVID-19 risks are also high enough to justify efforts that will reduce those risks. 

Of course, these sorts of comparisons are about averages, not at individuals who will be above- or below-average in various risks. But general public health guidance needs to be aimed at averages. 

Thursday, October 15, 2020

Will Services Trade Lead the Future for US Exports?

At least for a time, one legacy of the pandemic is likely to be a decrease in physical connections around the world economy, from tourism and business travel to shipping objects. But international trade in services is delivered online. For the US, trade in services has been becoming a bigger part of the overall trade picture, and the pandemic may give it an additional boost. Alexander Monge-Naranjo and Qiuhan Sun provide some background in "Will Tech Improvements for Trading Services Switch the U.S. into a Net Exporter?" (Regional Economist, Federal Reserve Bank of St. Louis, Fourth Quarter 2020). 

The authors point out that shifts in transportation routes or shipping method like containerization have had large effects on international trade in the past. They write: 

The U.S. is a world leader in most high-skilled professional service sectors, such as health, finance and many sectors of research and development. Moreover, leading American producers have been ahead of others in the adoption of ICT in their production networks. The global diffusion of ICT—including possibly the expansion of 5G networks—is prone to make many of these services tradeable for servicing households and businesses....  Similarly, the day-to-day activities of many businesses all involve tasks that can be automated and/or performed remotely and, of course, across national boundaries. Thus, a natural prediction would be that the U.S. should become a net exporter of high-skilled, knowledge-intensive professional services because of its comparative advantage.
Here are some illustrations of the patterns already underway. This figure shows the US trade balance separating out goods and services. The US trade deficit in goods plummetted from the early 1990s up to about 2006--with an especially sharp drop after China entered the World Trade Organization in 2001 and China's global exports exploded in size. But notice that US trade in services has consistently been running a trade surplus over this time, and the services trade surplus has been rising in recent years. 

Indeed, the long-run pattern seems to be that for the US economy, services have stayed about the same proportion of total imports in recent decades, but have become a rising proportion of total exports. 

Some of the big areas of gains for US services exports have been information technology and telecommunications services, insurance and financial services, and other business services (which includes areas like "professional and management consulting, technical services, and research and development services"). 

Monge-Naranjo and Sun don't actually make a case that a rise in services exports could be enough to turn the overall US trade deficit into a surplus; in that sense, the title of their short article overstates their case. But they do show that trade in services is not only a large and rising part of US exports, but may be the part of US economic output with the biggest upside for expanding US exports in the future. 

Supporting this potential for rising US exports in services requires a different public-sector actions. It's not about better transportation systems for physical goods, but rather about faster and more reliable virtual connections across the US and to other places around the world. A substantial and ongoing improvement in this virtual infrastructure also seems potentially quite important for the US economy as it adapts to a new reality of online meetings, online healthcare, online education, online retail, online work-from-home, and more. The US economy isn't going to move back to its manufacturing-dominant days of several decades ago, and at least in the medium-term, it probably isn't going to move back to to the social-clustering times way back in January 2020, either.   

In addition, there is "A Fundamental Shift in the Nature of Trade Agreements," as I called it in a post a few years ago, where the emphasis is less about tariffs and import quotas, and more about negotiating the legal and regulatory frameworks to open up foreign markets for US exporters of services. The kinds of trade agreements needed to facilitate, say, US insurance companies operating overseas, are quite different from the trade agreements about tariffs on objects like tariffs or steel.  

Wednesday, October 14, 2020

Are We Staying at Home By Choice or Because of Government Rules?

If the government removed all rules about social distancing, limited capacity, and mask-wearing in restaurants, stores, workplaces, entertainment venues from theaters to sports, churches, and other places, would you go back?  How people answer to that question is important to answering a bunch of questions. 

For example, have people been taking these kinds of precautions more because of government restrictions, or because of their own private concerns about health conditions? If government removed the restrictions, how much would people's behavior actually change? If many people are unlikely to change their avoidance behavior for a sustained period of time, then a full economic recovery from the effects of  the recession will be delayed. Moreover, the shape of that economic recovery may require a permanent reallocation of jobs from some sectors to others. 

In the October 2020 World Economic Outlook report from the IMF, Chapter 2 ("Dissecting the Economic Impact") has a discussion of government lockdowns vs. people's voluntary behavior in an international context. The authors write: 

This chapter’s first goal is to shed light on the extent to which the economic contraction was driven by the adoption of government lockdowns instead of by people voluntarily reducing social interactions for fear of contracting or spreading the virus. ... If lockdowns were largely responsible for the economic contraction, it would be reasonable to expect a quick economic rebound when they are lifted. But if voluntary social distancing played a predominant role, then economic activity would likely remain subdued until health risks recede. ...

Regression results show that lockdowns have a considerable negative effect on economic activity. Nonetheless, voluntary social distancing in response to rising COVID-19 infections can also have strong detrimental effects on the economy. In fact, the analysis suggests that lockdowns and voluntary social distancing played a near comparable role in driving the economic recession. The contribution of voluntary distancing in reducing mobility was stronger in advanced economies, where people can work from home more easily and sustain periods of temporary unemployment because of personal savings and government benefits. 

(For the record, when talking about government lockdowns: "The analysis uses a lockdown stringency index that averages several subindicators—school closures, workplace closures, cancellations of public events, restrictions on gatherings, public transportation closures, stay-at-home requirements, restrictions on internal movement, and controls on international travel—provided by the University of Oxford’s Coronavirus Government Response Tracker.")

There's a lot of ongoing research on the subject of lockdowns and personal choices,  and it would be unwise to treat any one study as the last word. That said, one study of the US experience that caught my eye is by Austan Goolsbee and Chad Syverson, "Fear, Lockdown, and Diversion: Comparing Drivers of Pandemic Economic Decline 2020" (Becker Friedman Institute Working Paper, June 18, 2020). From their abstract: 

This paper examines the drivers of the economic slowdown using cellular phone records data on customer visits to more than 2.25 million individual businesses across 110 different industries. Comparing consumer behavior over the crisis within the same commuting zones but across state and county boundaries with different policy regimes suggests that legal shutdown orders account for only a modest share of the massive changes to consumer behavior ... While overall consumer traffic fell by 60 percentage points, legal restrictions explain only 7 percentage points of this. Individual choices were far more important and seem tied to fears of infection. Traffic started dropping before the legal orders were in place; was highly influenced by the number of COVID deaths reported in the county; and showed a clear shift by consumers away from busier, more crowded stores toward smaller, less busy stores in the same industry. States that repealed their shutdown orders saw symmetric, modest recoveries in activity, further supporting the small estimated effect of policy. Although the shutdown orders had little aggregate impact, they did have a significant effect in reallocating consumer activity away from “nonessential” to “essential” businesses and from restaurants and bars toward groceries and other food sellers.
If personal voluntary choices are a big part or even a majority of the adjustment in the shifting patterns of hiring, work, shopping, entertainment, education, and health care--rather than government shutdowns--there are several implications looking ahead. Here are some thoughts from the IMF, based on its overview of the evidence: 

When looking at the recovery path ahead, the importance of voluntary social distancing as a contributing factor to the downturn suggests that lifting lockdowns is unlikely to rapidly bring economic activity back to potential if health risks remain. This is true especially if lockdowns are lifted when infections are still relatively high because, in those cases, the impact on mobility appears more modest. Further tempering the expectations of a quick economic rebound, the analysis documents that easing lockdowns tends to have a positive effect on mobility, but the impact is weaker than that of tightening lockdowns.
These findings suggest that economies will continue to operate below potential while health risks persist, even if lockdowns are lifted. Therefore, policymakers should be wary of removing policy support too quickly and consider ways to protect the most vulnerable and support economic activity consistent with social distancing. These may include measures to reduce contact intensity and make the workplace safer, for example by promoting contactless payments; facilitating a gradual reallocation of resources toward less-contact-intensive sectors; and enhancing work from home, for example, by improving internet connectivity and supporting investment in information technology.
The last point in particular seems worth emphasizing to me. Back in late March and early April, a common view of the pandemic was that it would be over in a few months. As one example of standard wisdom at that time, Ben Bernanke likened the economic effects of a pandemic and a lockdown to a severe snowstorm: that is, everything is disrupted for a time, but then returns to the previous normal. Thus, the early government response to the pandemic was focused on how to support income and job connections to employers for a few months. 

Of course, that view of pandemic-as-snowstorm is now outdated. It now appears that we may end up dealing with COVID-19 for the foreseeable future, From this viewpoint, supporting work and industry configurations as they existed in February 2020 is not a useful approach. Helping those whose lives have been upended by the pandemic is a worthy public policy goal, but thinking about how government can support and speed the economic adjustment to a new configuration may matter just as much. 

Just to be clear, the IMF argument does not claim that government lockdowns are "good" or "bad." Yes, lockdowns do have severe negative economic consequences. But if a lockdown stops the pandemic, then the medium-term economic results can easily be worth it. But as the IMF report says, "lockdowns are more effective in curbing infections if they are introduced early in the stage of a country’s epidemic. The analysis also suggests that lockdowns must be sufficiently stringent to reduce infections significantly." 

The widespread belief back in late March and April the pandemic would be over by, say, July 1 was also a reason that the early steps against the pandemic were relatively mild. At that time, longer and more stringent lockdown didn't seem worth it. We are still arguing up the present about different kinds of COVID-19 tests that can or should be available, and what kind of contact tracing and quarantining should happen when the results are positive. It may be that the key policy choice in a pandemic is whether or when to react very strongly for the first few months in the hope of ending the pandemic at that point and not needing to deal with it for a few years instead. But like all strong preventive actions, they are likely to be unpopular when taken. Even worse from a political point of view, if the strong actions then work, the bad outcomes they prevented will never actually be observed, and so the critics of such actions may never accept that they were needed.