David R. Henderson  

Competition is a Hardy Weed, Not a Delicate Flower

The Value of the Reformation: ... Jerome Powell as Fed chair...

Two and a half weeks ago, I posted on Kevin Hassett's speech in which he claimed that a substantial cut in the U.S. corporate tax rate would suck in capital from the rest of the world. The higher amount of capital per labor would make labor more productive, thus increasing real wages. Indeed, a huge part of the cause of increasing wages over the last two centuries is the increasing amount of capital, often embodying new technology, per laborer.

Shortly after I posted, a lot of economists weighed in on both sides of the issue, including Greg Mankiw, John Cochrane, Casey Mulligan, and Steven Landsburg, tending to be on Hassett's side, and Lawrence Summers and Paul Krugman, both of whom minimized the effect of the tax rate on real wages. Important to note is that no one on either side seems to doubt that a substantial increase in the amount of capital per laborer would cause a substantial increase in real wages.The argument seems to have come down to whether the amount of capital would increase a little or a lot.

Krugman argues that it would be a little. He lists 4 factors, all of which, he argues, lead in that direction. I don't know enough to challenge 3 of his factors, but I do know enough to challenge one, his first. Krugman writes:

First, a lot of the profits we tax are rents on monopoly, brand identity, etc., and won't be competed away by capital inflows.

Let's take him at his word that "a lot of the profits we tax are rents on monopoly, brand identity, etc.," It doesn't follow that they "won't be competed away by capital inflows." The reason is my Pillar #10: Competition is a hardy weed, not a delicate flower." When foreigners invest capital in the United States, they are, all else equal, likelier to invest it where prospective profits are high. So, for example, if a company already in the United States is making high profits on its brand name, foreign investors, wanting to "get some of that," will sometimes offer competing brands. If a company already in the United States is making high profits on a monopoly position, those monopoly profits will attract foreign investors the way honey attracts ants.

What Paul Krugman might have in mind is that the monopoly power is granted by government via patents or copyright. Even there, though, investors often try to compete with other products on which they get their own patents and copyrights.

In short, high profits due to brand name or monopoly don't dissuade competition: they attract it.

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COMMENTS (1 to date)
IronSig writes:

Krugman just swerves from a mention of competitive pressures toward the end of his post. He writes that he'd expect a drop in relative prices of even goods that we can't expect to be exported easily (non-tradable), deterring further capital purchases. Why wouldn't the new and cheaper products translate into a positive income effect, if only for local consumers?

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