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Flash Economics Summary

Core Content

The document titled Flash Economics discusses the trend of increasing monopoly power in the United States since the 1990s, contrasting it with the more competitive environment of the 1980s under Ronald Reagan's policies. It presents an analysis of several economic indicators that suggest a shift towards monopolistic behavior in the US economy.

Main Points

1. Rising Monopoly Power

• The US economy has seen a rise in monopoly power since the early 1990s.
• This is linked to several economic developments:
  • Increased profitability and profit margins.
  • Higher Tobin's q, which is the ratio of a company's market value to its book value of assets.
  • A widening spread between return on equity (RoE) and the risk-free interest rate.
  • Weak investment response to high Tobin's q levels.
  • Slower technological progress.

2. Monopoly Rents Indicators

• Monopoly rents are indicated by:
  • Higher profit margins due to reduced competition.
  • Increased market value of companies.
  • Higher RoE compared to the risk-free rate.
  • Low investment relative to profitability.
  • Weaker technological progress.

3. Profit Margins

• Charts 1A and 1B show an upward trend in profit margins in the US since the early 1990s.
• This suggests that companies are gaining more control over pricing and market conditions, characteristic of monopolistic behavior.

4. Tobin's q

• Tobin's q has sharply increased since the mid-1990s.
• This is interpreted as an indicator of higher monopoly rents, as companies with monopoly power tend to have higher market valuations relative to their asset values.

5. Return on Equity (RoE)

• Charts 3A and 3B compare RoE with the risk-free interest rate.
• The data shows a consistent increase in RoE relative to the risk-free rate since the early 1990s, indicating a shift in economic power towards monopolistic firms.

6. Tobin's q and Investment

• Monopolistic firms tend to underinvest due to reduced production pressure.
• Charts 4A and 4B show that investment has not increased in line with Tobin's q since 1998.
• The investment figure for the last quarter of 2017 reflects the impact of tax reform but does not indicate a long-term trend.

7. Technological Progress

• Charts 5A and 5B show a slowdown in both labor productivity and total factor productivity since the early 2000s.
• This is attributed to the lack of incentive for monopolies to innovate or modernize their operations.

Conclusion

• The shift from a competitive to a monopolistic environment in the US since the 1990s is marked by:
  • Higher profit margins.
  • Increased Tobin's q.
  • Higher RoE relative to the risk-free rate.
  • Reduced investment.
  • Slower technological progress.
• This trend is seen as a reversal of the competitive policies of the 1980s, which led to increased productivity and innovation.

Key Information

• Monopoly Rents: A sign of reduced competition and increased market power.
• Tobin's q: A measure of a company's market value relative to its assets, indicating potential monopoly gains.
• Investment Trends: Not responsive to high Tobin's q, suggesting underinvestment in a monopolistic environment.
• Technological Progress: Slowed since the early 2000s, which may be due to monopolistic behavior reducing innovation incentives.

Disclaimer

• The document is intended for professional and qualified investors only.
• It is confidential and must not be disclosed to third parties without prior written consent from Natixis.
• It does not constitute a financial analysis or personalized investment recommendation.
• The views expressed are those of the authors and do not necessarily reflect those of Natixis or its affiliates.
• The document is not an offer or solicitation for any investment and should not be relied upon as a basis for investment decisions.
• The information is based on public data and not subject to independent verification by Natixis.
• The document may be subject to specific disclaimers related to the stocks mentioned, which can be found at the provided link.