Everything you know is wrong, economics edition

Monopoly and oligopoly firms don't earn higher returns, according to research by Kewei Hou of Ohio State and David T. Robinson of Fuqua (Duke). Their paper, Industry Concentration and Average Stock Returns, finds:

Firms in more concentrated industries earn lower returns, even after controlling for size, book-to-market, momentum, and other return determinants. Explanations based on chance, measurement error, capital structure, and persistent in-sample cash flow shocks do not explain this finding. Drawing on work in industrial organization, we posit that either barriers to entry in highly concentrated industries insulate firms from undiversifiable distress risk, or firms in highly concentrated industries are less risky because they engage in less innovation, and thereby command lower expected returns. Additional time-series tests support these risk-based interpretations.

(HT: Paul Kedrosky)

Meanwhile, 25 years of giant trade deficits haven't changed the United States to a debtor nation, according to Harvard's Ricardo Hausmann and Federico Sturzenegger. In their paper U.S. and global imbalances: can dark matter prevent a big bang?, they suggest the United States has remained in the same net creditor position for decades:

In a nut shell our story is very simple. The income generated by a country’s financial position is a good measure of the true value of its assets. Once assets are valued accordingly, the US appears to be a net creditor, not a net debtor and its net foreign asset position appears to have been fairly stable over the last 20 years. The bulk of the difference with the official story comes from the unaccounted export of knowhow carried out by US corporations through their investments abroad, explaining why the US appears to be a consistently smarter investor, making more money on its assets than it pays on its liabilities and why the rest of the world cannot wise up. In addition, the value of this dark matter seems to be rather stable, indicating that they are likely to continue to compensate for the measured trade deficit.

(HT: Bryan Caplan)

Finally, the officially reported 2005 federal budget deficit came in around $300 billion, lower than the originally expected $400 billion. But, if tallied using the same rules that apply for private companies, the 2005 federal budget deficit was $760 billion. And, once increases in Social Security and Medicare liabilities are counted, the 2005 deficit was actually $3.5 trillion. Yes, that's deficit not debt and trillion with a 't'.

Dennis Cauchon covered the issues in his USA Today story, What's the real federal deficit? -- and the problem reaches back even to the 'surplus' years of the late 90s:

Congress and the president are able to report a lower deficit mostly because they don't count the growing burden of future pensions and medical care for federal retirees and military personnel. These obligations are so large and are growing so fast that budget surpluses of the late 1990s actually were deficits when the costs are included.

The Clinton administration reported a surplus of $559 billion in its final four budget years. The audited numbers showed a deficit of $484 billion.

In addition, neither of these figures counts the financial deterioration in Social Security or Medicare. Including these retirement programs in the bottom line, as proposed by a board that oversees accounting methods used by the federal government, would show the government running annual deficits of trillions of dollars.

Tags: economics, trade+deficit, budget+deficit, deficits, debt, accounting, monopoly, oligopoly

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