The US economy is &#%!@?! huge

Always keep that in mind.

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People can’t comprehend how big the US economy is. It's me, hi, I'm the problem. But it’s not just me that is the problem.

Every week there's a new headline about layoffs at a major company. “Microsoft to lay off 1,000 employees,” “Target to cut workforce by 500,” “Twitter slashes headcount in half.” For the individuals affected, losing a job is devastating. I’m not saying anything about that. But if you zoom out, 1,000 lost jobs is less than a rounding error in an economy of 160 million workers. That headline tells us nothing about how “the economy” is doing.

The US has around 160 million workers. Even if you hear “200,000 jobs created in April,” that’s net jobs. Behind that, there were 5.6 million hires and 5.4 million total separations (quits, layoffs). In that context, 1,000 lost jobs, while terrible for those 1,000 people, is not even a blip on the radar. It's 0.000625% of the total workforce and 0.0178% of the workers losing their jobs in a single month. You could collect these headlines all you want, they will give you approximately zero information about the overall economy.

This same problem shows up in many discussions about the economy. It’s important to keep some macro numbers in the back of your mind.

• There are around 160 million people in the labor force.

• There are around 6 million firms with employees and 8 million establishments.

• The US GDP is around $28 trillion.

160 million workers or $28 trillion for GDP could just as well be a kajillion bajillion.

This opens up a disconnect between the stories (which we can relate to) and the macroeconomy (which is abstract data).

I want to go through a few examples of this disconnect.

The China Shock

Sticking with jobs for a bit, in the early 2000s, China’s rapid economic growth and integration into the global trading system led to a surge in Chinese exports to the United States. This phenomenon, dubbed the "China Shock," has been widely studied by economists and frequently invoked in political debates about trade policy.

At a local level, the impacts of the China Shock were significant and painful. David Autor, David Dorn, and Gordon Hanson found that US labor markets that were more exposed to Chinese import competition experienced significant job losses, reduced wages, and increased uptake of disability benefits. These effects were concentrated in manufacturing sectors and in regions that specialized in producing goods that competed with Chinese imports.

According to Autor, Dorn, and Hanson's estimates, the China Shock led to a net reduction in US manufacturing employment of 548,000 workers between 1990 and 2000 and a further reduction of 982,000 workers between 2000 and 2007. Let’s just accept those values as fact. That’s about 5,000 workers a month on average. In any month, is the economy in a different shape if it adds 200,000 net jobs (without China Shock) vs 195,000 net jobs (with China Shock)?

Again, that seems like a lot, but is it really a defining aspect of the labor market or the economy over a 30-year period? Is it really what you’ll blame (insert some other thing that happened since 2000) on? There seems to be a disconnect to me, and that’s even the most macro-y thing I’m discussing this week. It was a HUGE event but still not US labor market huge.

Earnings Calls and Inflation

In the ongoing debate about the causes of inflation, corporate profits have come under scrutiny. Some commentators and politicians have pointed to strong earnings reports and confident statements from CEOs as evidence that companies are using inflation as a cover to raise prices and that their profits are “causing” inflation. Instead of repeating my previous blog posts on this, read Chris Conlon’s thread.

Today, I want to focus on something more narrow. Some commentators pointed to earnings calls as the smoking gun of inflation. Lindsay Owens “listened in on big business” and wrote about it in the New York Times. These stories have shown up again and again in discussions of inflation.

Even if you looked at every publicly traded company, you’re still only at about half of US output. If you’re trying to understand the macroeconomy by looking at 20, 30, or 100 calls, I’m skeptical of what you’ve learned about the macroeconomy. There are roughly 6 million firms with employees. Maybe you’ve learned a lot about those industries or those firms you listen to, but what have you learned about prices rising at the other millions of firms?

And, yes, some industries are interesting when discussing inflation. Used cars seemed especially important at one point. But prices rose across the board, across all sorts of industries, over a multiple-year period.

Robinson-Patman Act and Inflation

The Robinson-Patman Act, a Depression-era law aimed at preventing price discrimination, has recently gained renewed attention. It seems the FTC is about to bring a case. Previously, Stacy Mitchell argued (what is it with the New York Times and these arguments) that stricter enforcement of this act could help combat inflation. Put aside the merits of the law or a particular case, the scale of the issue once again suggests that the impact on overall inflation would be minimal.

Even if we assume that price discrimination by large retailers is widespread and that the Robinson-Patman Act could effectively curtail it (a debatable assumption), the effect on economy-wide prices would likely be a rounding error. It would even be a rounding error on groceries, for example. Large retailers, while undoubtedly influential, still make up only a fraction of the total retail market, let alone the entire economy. Changing their pricing practices might impact their specific suppliers and customers, but it's unlikely to move the needle on the Consumer Price Index. Personally, I think Robinson-Patman cases will generally raise prices (which was the original goal) in the affected market. But it won’t affect inflation.

Antitrust and the Macroeconomy

If you’re writing a paper on some problem in the US economy over the past 30 years, it’s common to throw in a line about it being caused by “lax antitrust” or something to that effect. Do you find rising markups? Maybe it’s antitrust. Do you find falling business dynamism? Antitrust!

Again, the scales are off. Take a company like Google/Alphabet. Their revenue is around $300 billion. Assume half of that is value added. That’s 0.5% of GDP. In your most optimistic estimate of the benefits of antitrust, does the Google Search case increase other companies' outputs by 1% of Google’s overall (not just search revenue)? 2%. You’re talking 0.005-0.01% of GDP. Again, that’s a lot of money and if you could snap your fingers and increase GDP by 0.05%, you should. But it’s a rounding error in macro terms. More antitrust will affect the macroeconomy in either direction. even if some papers throw in a line suggesting antitrust is to blame for some problems.

Indirect evidence for my point comes from the Stigler Center event on antitrust. Last year, Chad Syverson suggested that bringing more cases on the margin could be beneficial, but it would not affect macroeconomic outcomes. This year, the first panel centered on the question: Could antitrust increase productivity? There were many insightful points, but no one actually argued against Syverson’s point.

To be clear, the argument also cuts the other way. If you think an antitrust case is a bad one (as tends to be the case with me and current cases), it’s not going to tank the US economy. I can still argue they are bad, but if we enter a recession next year, it won’t be because of the bad cases being brought.

The broad takeaway is that we shouldn't confuse the micro for the macro. The US economy is a vast, complex system, more like the weather than a machine. Understanding the complexity and the relative scale of different actors within it is essential for clear-eyed analysis and effective policy.

So the next time you see a headline about job cuts at a tech company or the profits of a major bank, take a deep breath. Yes, it matters, and yes, it may deserve coverage. But keep it in perspective. In an economy as staggeringly large as ours, even the giants are smaller than they appear.