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The Increased Competitiveness of the US Economy
Deloitte has just released The Shift Index, a study of long-term trends in the U.S. economy. Two interesting graphs follow which put some numbers on conventional wisdom. The US economy has become much more competitive over time. We can see this in the economy wide Herfindahl-Hirschman Index, a measure of market concentration, which has halved in the latest forty years (click to enlarge) and also in the topple rate.
The topple rate is a measure of how the rank of large firms on return of assets changes over time. The topple rate has increased by about 60% over the past forty years (ignoring the recent blip up). What this means is that the firms on top are less likely to stay on top today than in the past - the recent blip up indicates the upheaval in firm rankings during the current recession. Notice also that an increased topple rate implies an increase in stock market volatility which we have also seen over the long-run (not just in recent years).
As a result of increased competition and also, I believe, greater wealth and reduced interest rates, the economy wide return on assets has decreased by 75% (see the report).
If the return on assets has decreased but productivity and wealth are up then where has the wealth gone? To consumers and the creative class. Thus, increased competition in the economy has driven down the return to capital and at the same time has increased the return to the complementary input which is in greatest fixed supply, creative labor. More data in the full report.
Posted by Alex Tabarrok on July 15, 2009 at 07:41 AM in Data Source, Economics | Permalink
Comments
Query: would the increased topple rate favor "actively managed" vs. "indexed" equity investing? Put another way, which is more likely to accurately anticipate decline's in a firm's ROA - an inquisitive investor or the silent herd?
Posted by: Peter Holstein at Jul 15, 2009 8:33:03 AM
As a rentier, I would be alarmed... if this wasn't a look in the rear-view mirror, that is.
Posted by: anonymous at Jul 15, 2009 8:45:47 AM
I guess this is why they want to make antitrust law tougher now.
Posted by: Tyler Cowen at Jul 15, 2009 9:08:46 AM
I have a deep distrust of reports with stylized graphs that consist of straight lines from 1965 to now. People who make such graphs usually already knew the outcome of their research before they did it.
Posted by: Zamfir at Jul 15, 2009 9:39:38 AM
Of course Tyler- too much competition for the pols' taste! Got to rein that in.
Posted by: Cliff at Jul 15, 2009 9:41:54 AM
I guess when we aren't building overpriced houses out in the desert with massive amounts of borrowed money, we can actually do relevant work for a reasonable wage.
Posted by: Alan Brown at Jul 15, 2009 9:44:35 AM
The Obama administration just announced that henceforth free lunches will be regulated to ensure quality and to discourage uncompetitive pricing practices.
Posted by: Andrew at Jul 15, 2009 9:50:59 AM
Alex, this is a great piece. Very interesting for something written by consultants! Thanks for bringing it to my attention! This is the ironic consequence of innovation -- as you increase efficiency, you force your competitors to also increase efficiency and therefore all the gains end up being captured by customers. Viva the Schumpeterian Revolution!
Posted by: gdm at Jul 15, 2009 9:57:39 AM
Of what possible value is an economywide HHI index? What can this possibly tell us about what is happening within industries. Notice that the full report does not even tell us how it is calculated. Normally, Alex would wonder. Are industries weighted by size? How many industries are used? Or is this the really stupid index that looks at the top 50 firms in the overall economy ignoring which industry they are in? So as variety expands the number of industries expands, each one led by a dominant firm, but the HHI for the economy shrinks dramatically.
These indexes don't really tell us much at all, except that people like pictures that conform to a story they want to tell.
Posted by: Barry Ickes at Jul 15, 2009 10:13:39 AM
The topple rate is one reason that IMO tech firms should sell at lower PEs and higher yields than other stocks. They are more likely to topple and fall than the KOs and PEPs. Yet they sell at higher PE and low yields.
Also had we let Goldman and all the other investment banks topple it is hard to imagine that in this day and age they would not have been replaced with much better systems/organizations and firms.
As a result of increased competition and also, I believe, greater wealth and reduced interest rates, the economy wide return on assets has decreased by 75% (see the report).
Is that adjusted for the rate of inflation.
Posted by: Floccina at Jul 15, 2009 10:14:28 AM
"the creative class"? Artists?
Posted by: Dirk at Jul 15, 2009 10:41:57 AM
Dirk says: "the creative class"? Artists?
Creative class is 21st-century speak for upper middle class. Rich people who still need a job.
Posted by: Zamfir at Jul 15, 2009 10:47:02 AM
> return on assets has decreased by 75%
aka 'we had an asset price bubble'
aka 'asset prices increased without reference to their ability to create economic value'
Posted by: babar at Jul 15, 2009 11:13:35 AM
What does "greatest fixed supply" mean?
Posted by: ionides at Jul 15, 2009 11:21:07 AM
ionides, by greatest fixed supply I mean the complementary inputs that are hardest to expand (most inelastic supply). Barry, good points but see the appendix for more information on the methods.
Posted by: Alex Tabarrok at Jul 15, 2009 11:26:01 AM
This ostensibly paints a positive image of the broad U.S. economy, which means it's undoubtedly horrendously flawed. No doubt someone without a sunshine-pumping agenda could go through this and determine that the data actually shows the U.S. has become far less competitive; in fact, we can just assume that right now simply as a function of the preponderance of global discourse about America. Please stick to the rules: gloom and doom for America, and an unstoppable future of bright lights, rainbows and puppies for China.
Posted by: MPO at Jul 15, 2009 11:32:58 AM
As a result of increased competition and also, I believe, greater wealth and reduced interest rates, the economy wide return on assets has decreased by 75%
The alternative explanation is the amount of real productive capital has increased slower than the savings increases in anticipation of retirement chasing a relatively smaller pool of assets, driving up the asset prices and thus driving down returns.
When the retirees begin selling their assets faster than younger workers save and buy assets, the prices will fall, and returns will increase, but that won't indicate competition has decreased.
Posted by: mulp at Jul 15, 2009 7:56:39 PM
Actually, since the rise of the Internet, the Herfindahl-Hirschman Index appears to be on quite the upswing.
Posted by: Daniel Horowitz at Jul 15, 2009 10:54:15 PM
Lots of really, really creative lawyers.
Posted by: Lord at Jul 16, 2009 12:01:43 AM
mulp: "When the retirees begin selling their assets faster than younger workers save and buy assets"
Why do you believe that will happen? Are you anticipating some sudden, massive sell-off of assets? Are you suggesting that the huge numbers of young people who will be entering the workforce the next two decades will not be saving?
Posted by: John Dewey at Jul 16, 2009 4:51:30 AM
John Dewey,
Retirees, by definition, live off their savings. If part of those savings are financial assets, they will gradually sell them off and live off that money. Young people will (hopefully) be saving, but they are demographically outnumbered by the huge baby boom bulge. The result will likely be net selling pressure.
Posted by: anonymous at Jul 16, 2009 10:02:51 AM
anonymous: "but they are demographically outnumbered by the huge baby boom bulge."
I don't think so. Births the past 20 years are just about equal to the births of the 20 year Boomer period. I'd give you a link, but I have to return to a meeting right now.
Posted by: John Dewey at Jul 16, 2009 10:29:21 AM
A high topple rate looks good to me perhaps because My company is small. Perhaps we can do a roll up and scramble up.
To bad Governments can not participate in the high topple rate. It might be good to the California state government replaced a leaner competitor.
Posted by: Floccina at Jul 16, 2009 10:38:59 AM
anonymous: "they are demographically outnumbered by the huge baby boom bulge. The result will likely be net selling pressure."
I suppose we've read about the "pig in the python" Boomer effect so many times that most of us have simply accepted it as fact. But U.S. births quickly returned to Boomer levels after the relatively short decline in the late 60's and in the 70's.
Boomers will not be selling all their financial assets during retirement. That's simply too risky a strategy. Many will leave sizeable estates to heirs.
Boomer dissaving will be very gradual in any case. Boomers are just starting to retire, and the tail end of the Boomers - those born in the early 60's - have 30 to 40 more years left on the planet.
Posted by: John Dewey at Jul 16, 2009 11:28:49 AM
So true GDM, so true. I wish there was a way that we could make gov. have this effect too. Making government more responsive to revealed preferences as opposed to stated preferences may be a beginning. The mass migration to Texas and other low welfare oriented states for states such as NY and Cali suggests that the people have a revealed preference for low welfare states, but the problem is they often bring their ideology with them.
I am not sure how to deal with this problem.
Posted by: Doc Merlin at Jul 16, 2009 2:50:27 PM
