Donald Marron's  Instablog

As Jeff Horwitz notes in the Washington Post this morning (”Google Says It’s Actually Quite Small“, previously posted on Slate), the search giant will likely face close scrutiny from the Obama administration.  Indeed, Google is already the subject of at least three separate antitrust reviews.

How will Google try to defend itself?

As Horwitz reports, Google will undoubtedly employ two classic defenses:

Defense 1.  Being a monopolist isn’t illegal.  If firms achieve market dominance through “superior skill, foresight, and industry” (as Justice Learned Hand put it decades ago), that’s fine under our system.  We want to reward firms that gain market share by being innovative and delivering value to customers.

To overcome that argument, antitrust authorities (or private plaintiffs) will need to identify some specific actions that Google has taken to “restrain trade”, gaining market share by interfering with competition, rather than by demonstrating superior skill etc.

Google will then reply with:

Defense 2.  Furthermore, we aren’t a monopolist.  To identify a monopolist, you first have to identify a market.  That sounds simple, but it actually inspires lots of debate in antitrust cases (and, in the process, enriches a certain cadre of economists who specialize in such issues). As Horwitz notes, commentators usually characterize Google as enjoying 70% or more of the revenue in the search advertising business, which certainly sounds like a big share. But Google thinks that market definition is too narrow.  If you look at all advertising, for example, Google’s share is microscopic, less then 3%.  Thus, Google will argue, it isn’t even a monopolist.  (The truth is somewhere in the middle. Banner ads certainly compete with search ads, and thus may fall in the same market. But billboards?)

What happens if those two arguments aren’t sufficient to deflect further antitrust scrutiny? Well, Google has at least one more arrow in its quiver — an arrow that got stronger with this week’s launch of Bing, the new search engine from Microsoft:

Defense 3. Our business constantly faces new competition.  Even if we are a monopolist right now (which we’re not), there’s no guarantee that will last.  This argument emphasizes the dynamic nature of competition.  If new firms can enter the market — and, in fact, are entering the market — then any monopoly power may be transient.  Faced with new competitors, leading firms must continue to innovate if they want to stay at the top of the market.  In short, pressure from new competitors may prevent a dominant firm from exploiting any temporary market power.

The lawyers at Google probably welcomed Bing’s arrival, because it makes this line of argument much more plausible.  Other new competitors — anyone remember Cuil?  – haven’t posed much of a threat to Google, but Bing may be different.  So may Wolfram Alpha, which provides a really different approach to search.

If antitrust scrutiny heats up, you should expect to hear Google extolling the virtues of both those competitors.

Dislcosure: No position in any search company, including GOOG and MSFT.

Markets greeted this morning’s jobs reports with enthusiasm, as the headline measure of job losses in May — 345,000 — came in significantly lower than expected.  Under normal circumstances, losing more than 300,000 jobs would be bad news.  Of course, these aren’t normal circumstances.

The unemployment rate in May was much less welcome, rising to 9.4% from 8.9% in April.  Part of the increase was due to the labor force expanding — a positive sign — but most was due to an increased number of people being unemployed.

These figures all refer to the headline measure of unemployment (U-1, in the lingo), which focuses on workers who have lost a job and are looking for a new one.  The government also publishes several broader measures of unemployment that account for other ways in which workers may be less employed than they desire.  The broadest of these, known as U-6, adds two groups to the regular measure: those who are marginally attached to the labor force (people who are willing to work and have worked in the past, but aren’t actively looking; this includes discouraged workers) and those who are working part-time even though they want to work full-time.

As shown in the following chart, the U-6 paints a grimmer picture of the U.S. labor market:

Clearly, there is enormous slack in U.S. labor markets.

The following chart shows the difference between the two measures of unemployment; in other words, it shows the fraction of workers who are marginally attached or working part-time when they’d prefer to work full-time.  Not surprisingly, this group of workers has increased sharply during the recession:

Government deficits have skyrocketed in the past year, yet the U.S. as a whole is borrowing much less from the rest of the world.  What’s going on?

As shown in the following chart, the answer is simple: Americans are saving more and investing less.

The chart shows how our current account deficit — the amount that we have to borrow from abroad — changed from the first quarter of 2008 to the first quarter of 2009.  One would usually expect that soaring government deficits — which have increased more than $540 billion at an annual rate — would translate into more borrowing from abroad.   Indeed, if other factors had stayed the same, U.S. borrowing from abroad would have needed to increase from $693 billion in Q1:2008 to $1,236 billion in Q1:2009.

But other factors didn’t stay the same.  Individual Americans started saving again, reducing our nation’s borrowing needs by $455 billion at an annual rate.  And private investment plummeted, reducing borrowing needs by another $458 billion. Together, those two changes largely explain how U.S. borrowing from the rest of the world could fall by $400 billion over the past year, despite booming government deficits.

In the long run, the increase in personal saving will be a welcome development, as Americans rebuild their wealth and help finance government deficits (in the short run lower consumer spending may weaken the recovery).  The decline in private investment is more troubling.  In the short run, some of that decline is healthy as we work through excess inventories of products, houses, and some types of commercial real estate.  In the long run, however, we will need growing investment to boost the nation’s productive capacity. 

Notes on the data: All figures are reported as seasonally-adjusted annual rates (SAAR).  The chart uses the National Income and Product Account (NIPA) measure of government deficits, including government investment expenditures.  The “Other” category includes consumption of fixed capital” (i.e., depreciation) and the statistical discrepancy (i.e., the placeholder that makes everything balance).  BEA will release official data on international transactions in mid-June; the figures on the current account deficit here come from the recent GDP release.