Archives: 07/2011

How Concentrated Was Investment Banking?

In the fall of 2008 a considerable amount of ink was spilt arguing that we needed to save the then big-five investment banks, or else our financial markets would come to a halt.  One could easily get the impression from the debate that these five firms were the entire industry.  At the time these five included Goldman Sachs, JP Morgan, Merrill Lynch, Lehman and Bear Stearns.  Before we go around rescuing companies, it would seem reasonable to ask if the rest of the industry could pick up their capacity.  Of course, if there is no “rest of the industry” then that question is easily answered.

So what exactly did the investment banking industry look like in 2008?  The best source of public information we have is the 2007 Economic Census, conducted by the U..S. Census Bureau.  According to the Economic Census, there were a little over 3000 individual investment banking firms.  The vast majority had only one office with often no employees (just a few partners).  Only about 400 firms had more than one office location (or establishment, as the Census calls them).  Only about 20 firms had more than 10 offices and really could be considered significant players in the industry.

Another way of measuring the importance of the largest firms is to look at market share.  The four largest firms were just over half the industry,  in terms of investment banking sales/receipts.    Of course that also means that the rest of industry was also half.  The top 8 firms held about three-fourths of the market.  Top 20 firms gets you to 90 percent of the market.

So what does this tell us?  Yes, the industry had a high level of concentration (even higher now), but it also seem likely that no one company was large enough to bring down the industry.  There were, and still are, a handful of mid-sized players that could have absorb the market share of either a Bear or Lehman, or at least some part of their business.  Either way, the lesson we should learn is that policy should be encouraging more competition and depth in the investment banking field, so that the market is not left largely in the hands of a few companies.

More on Over-Interpreting the Oregon Medicaid Study

Matt Yglesias writes:

a new rigorous study from Oregon confirms that Medicaid does, indeed, save lives

As The Atlantic’s Megan McArdle writes: “This is exactly what the study does not find.”  Like McArdle, I read the study, and can confirm this.  Or perhaps Yglesias can direct us to the part of the study where he read that….

If Yglesias could see in this rigorous study something that isn’t actually there, does that mean there’s a chance that the motivations he assigns to ObamaCare opponents – they “want to deny life-saving medical care to the poor” – may not comport to reality either?

Yet More U.S. Trade Policy Incoherence

In hailing this week’s ruling by a World Trade Organization dispute settlement panel that certain Chinese government restrictions on raw material exports violate China’s WTO commitments, U.S. Trade Representative Ron Kirk made the point that such restrictions hurt U.S. manufacturers who rely on those imported raw materials.

Today’s panel report represents a significant victory for manufacturers and workers in the United States and the rest of the world. The panel’s findings are also an important confirmation of fundamental principles underlying the global trading system. All WTO Members – whether developed or developing – need non-discriminatory access to raw material supplies in order to grow and thrive.

And, simultaneously, by artificially increasing domestic supply, the same export restrictions advantage Chinese manufacturing consumers of those materials.

China’s extensive use of export restraints for protectionist economic gain is deeply troubling. China’s policies provide substantial competitive advantages for downstream Chinese industries at the expense of non-Chinese users of these materials.

And here’s how the USTR website described the central issues of the case:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products…These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

I agree.

But what you won’t find in the USTR’s statements is any acknowledgement that the U.S. government, in defiance of Ambassador Kirk’s logic, maintains import restrictions on three of the nine raw materials at issue in the China WTO case. That’s right! While arguing correctly that Chinese restrictions on exports of magnesium, silicon metal, and coke raise production costs and subsequently reduce U.S. manufacturing competitiveness, the U.S. government maintains antidumping restrictions on the same inputs, which raises U.S. production costs and reduces U.S. manufacturing competitiveness. (See pages 14-17 of this new Cato paper to learn what happened to certain U.S. industrial consumers of these raw materials)

How can such dissonance persist, you ask? Under the U.S. antidumping law, manufacturing consumers of subject imports have no legal standing to participate in the proceedings. In fact, the U.S. administering agencies are forbidden by statute from even considering the impact of antidumping duties on the downstream, consuming industries. Nor is an assessment of the costs of prospective antidumping restrictions on the broader economy permitted to carry any weight under the statute.

Instead, in the present case, those producers hurt by our own import restrictions had to take the circuitous route of enlisting the support of the USTR to pursue a WTO case to secure – what will eventually be – only a half-a-loaf solution. Even if and when China relents with respect to its export restrictions, the U.S. antidumping restrictions on imported raw materials will persist because the law effectively insulates the patrons of antidumping measures from competition.

It should be embarrassing to the administration that it rigorously pursues a WTO case to end an economic injustice committed by another country that we gleefully inflict upon ourselves. We are committing economic self-flagellation by ignoring antidumping reform in this country, where 80 percent of all antidumping measures in place restrict crucial manufacturing inputs. And it’s not like President Obama doesn’t understand the relationship between manufacturing competitiveness and access to manufacturing inputs. Here’s what the president said less than one year ago, when he signed into law a tariff liberalization bill:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers—some of whom are represented here today—often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

But, then, at some point, that logic no longer resonates with this administration.

Antidumping reform is an essential ingredient of U.S. manufacturing competitiveness. Anyone inclined to celebrate the U.S. WTO “victory” in the Chinese export restrictions case should understand the rest of that story.

Even the New York Times Wants to Cut Medicaid

From their editorial the other day:

There is no doubt that Medicaid… has to be cut substantially in future decades to help curb federal deficits. For cash-strapped states, program cuts may be necessary right now. But in reducing spending, government needs to ensure any changes will not cause undue harm to millions.

How would the Times cut Medicaid spending? The magic of central planning!

The best route to savings — already embodied in the reform law — is to make the health care system more efficient over all so that costs are reduced for Medicaid, Medicare and private insurers as well. Various pilot programs to reduce costs might be speeded up….

And if government were smart, rather than stupid, that would work.

I’ve got a better idea for cutting Medicaid that meets the Times’s criterion of not causing undue harm to millions.

Standards Garbage In, Standards Garbage Out

Over at Jay Greene’s blog, Sandra Stotsky riffs off an Education Week report about educators around the country not seeing the difference between their old state standards and new, “Common Core” standards. Stotsky offers a theory for why this is: Common Core – as far as anyone can tell because the standards-drafting process was so opaque – was put together largely by the same people responsible for the bad old state standards. As a result, maybe they really aren’t all that different.

The general ignorance about the standards brings up an important point. As Mike Petrilli at the Fordham Institute has pointed out, yes, the $4.35-billion federal Race to the Top pushed a lot of states to adopt the Common Core standards, but that doesn’t explain states adopting the standards after RTTT had concluded. It’s a reasonable point. So what else is at play?

Likely one part of the explanation is that many state education officials really don’t know much about either the Common Core or their state’s standards, so they’ve seen no big problem with switching over. This general ignorance has likely been exacerbated by Common Core advocates’ strategy of keeping the whole national-standardizing process out of the public eye, whether it’s been secretive drafting of the standards, or supporters’ constant mantra of “don’t worry, it’s all voluntary” while petitioning for federal adoption “incentives.” And let’s face it: Just going with the flow and adopting national standards furnishes one less thing state officials have to take responsbility for. If the standards turn out to be a disaster – or simply gutted by special interests in Washington – all that state officials have to say is ”sorry, the whole nation was adopting them. Heck, the feds were practically forcing us to adopt them. It’s not our fault.” Add to all this that No Child Left Behind likely had much of the public thinking we already had national standards, and it’s little wonder that the Common Core was able to worm its way into so many states. 

Whether it’s been adoption in response to bribery, passing the buck, or just keeping everything under the radar, the national-standards drive has been a troubling affair.  But there is still hope: Washington hasn’t cemented national standards and testing by attaching them to the big federal dollars flowing through the Elementary and Secondary Education Act, aka, No Child Left Behind. But efforts to revise the law are underway, and if the final version contains any connection between national standards and eligibility for federal taxpayer dough, then there will be no escape.

The Casey Anthony Verdict and the Criminal Justice System

The Casey Anthony case is all over the news this week.  I did not follow the case closely, but Harvard law professor Alan Dershowitz has a good article about the case and the criminal law in today’s Wall Street Journal.  One thing I do know is that this highly-publicized trial will reinforce a commonly held view about criminal justice in America–that juries weigh evidence and decide whether the accused is guilty or not.  As I note in the July issue of Reason magazine, trials are infrequent events in our legal system.

Most Americans are under the mistaken impression that when the government accuses someone of a crime, the case typically  proceeds to trial, where a jury of laypeople hears arguments from the prosecution and the defense, then deliberates over the evidence before deciding on the defendant’s guilt or innocence. This image of American justice is wildly off the mark.

Read the whole thing.  The July issue of Reason is chock full of good articles about various aspects of criminal injustice.

ObamaCare Supporters Are Over-Interpreting Oregon Medicaid Study

Columbia Business School economist Ray Fisman has a piece at Slate.com discussing the first-year results of the Oregon Health Insurance Experiment.  In brief, when Oregon transferred an average of $3,000 from taxpayers to poor people in the form of Medicaid coverage, it did those poor people some good.

Fisman’s interpretation of the results is different from mine in mainly two respects.  First, I describe the one-year benefits of Medicaid coverage as modest; he says they’re “enormous.”

A more fundamental difference concerns whether expanding Medicaid was a cost-effective use of the taxpayers’ money.  Fisman writes:

Given the added expense, did the Medicaid expansion prove to be cost-effective? That is, did the treatment group actually have better health outcomes?

That’s not what cost-effectiveness means.  For Medicaid to be cost-effective, it must (A) produce benefits and (B) do so at the same or a lower cost than the alternatives.

The OHIE establishes only that there are some (modest) benefits to expanding Medicaid (to poor people) (after one year).  It tells us next to nothing about the costs of producing those benefits, which include not just the transfers from taxpayers but also any behavioral changes on the part of Medicaid enrollees, such as reductions in work effort or asset accumulation induced by this means-tested program.  Nor does it tell us anything about the costs and benefits of alternative policies.

Just as some opponents of ObamaCare over-interpreted previous Medicaid studies, Fisman and other ObamaCare supporters are over-interpreting the OHIE.