New research from @ArnaudDyevre finds a 1% decline in public R&D spillovers caused a 0.17% decline in productivity growth in the United States. Notably, the decline in public R&D can explain a third of the deceleration in TFP since 1995.
Using a unique firm-level dataset with patent and balance-sheet information covering 70 years (1950-2020), I estimate the impact of the decline in public R&D in the US on long-run productivity growth. I first document three new facts about publicly-funded innovations: they are (i) more reliant on science, (ii) more likely to open new technological fields, and (iii) more likely to generate knowledge spillovers, especially toward smaller firms. I then use two instrumental variable strategies–a historical shift-share IV and a patent examiner leniency instrument–to estimate the impact of the decline in public R&D on the productivity of firms through spillovers. I find that a 1% decline in public R&D spillovers causes a 0.17% decline in productivity growth. Public R&D spillovers are three times as impactful as private R&D spillovers for firm productivity and their impact persists at the sector level. Moreover, smaller firms experience larger productivity gains from public R&D spillovers.
Overall CPI inflation was flat in October but remains above 3% Y/Y; the economy slowing might bring inflation back to target without further tightening. @jasonfurman
The CPI data was a pleasant surprise. Headline was 0 inflation in October, which happened because volatile gasoline fell 5%. More important, core CPI (excluding food and energy) was 2.8% annualized in October, lower than expected. Not out of woods: still 3%+ over 3/6/12 months. Looking at core but with new rents instead of all rents you get annual rates of: 1 month: 1.8% 3 months: 1.3% 6 months: 0.8% 12 months: 1.6% (Would caution that I don't expect all rent ever to slow to this extent since marginal rent still above all rent.) Here is overall inflation. Annual rate: 1 month: 0.5% 3 months: 4.4% 6 months: 3.1% 12 months: 3.2%. Overall this is reassuring about no reacceleration of inflation. But it remains true that we've only had two unambiguously good inflation prints in 2-1/2 years (June & July). And IF inflation is running at 3%+ that would mean more work to do. A slowing economy may do that work.
Analysis by Loukas Karabarbounis finds that labor’s share of US national income declined 5pp btw 1929-2022, and labor’s share globally has declined 6pp since 1980. He proposes capital-augmenting technology as the most likely driver of these declines.
The headline estimate for the United States is a roughly 5pp decline of the labor share between 1929 and 2022. The decline after World War II is even larger, at around 7pp. The great majority of U.S. industries exhibited labor share declines in recent decades. The United States is not unique, as we observe labor share declines in most countries of Europe and Asia and in emerging markets. It helps to organize factors affecting the labor share in five categories: technology, product markets, labor markets, capital markets, and globalization. The factors that have contributed to the labor share decline are intertwined. My view is that the most plausible causes have technological origin. Developments such as the information age and automation, manifesting through changes in the cost of capital and the structure of product markets, caused the labor share to decline. If technological advancements continue to favor capital indefinitely, the natural outcome is a transition to a world in which capital on its own produces the entire global income.
Real hourly compensation is above 2019 levels but below the 2015-19 trend line. @JosephPolitano
Cumulative growth in hourly compensation has exceeded inflation since the end of 2019, though it remains slightly below the trend of strong growth seen in the latter half of the 2010s. The real wage distribution has compressed—that is, lower-wage workers have seen proportionally larger gains than higher-wage workers, although this effect is lessened by the fact that low-income households have faced greater inflation than high-income households.
Wage growth for workers in the bottom quartile dropped to 5.9% in October from 7.2% in January, according to data from the Federal Reserve Bank of Atlanta.
Workers in the bottom quarter of the wage distribution received a 5.9% raise in October compared with a 7.2% increase in January, according to data from the Federal Reserve Bank of Atlanta. Workers overall saw a smaller decline over the same time frame, from growth of 6.3% to 5.8%. The measure is based on the 12-month moving average of median wage growth, on an hourly basis.
.@verdadcap uses Gross Profits/Assets as a proxy for quality, and notes that there has been a sharp deterioration in quality for US small caps. Chris Satterthwaite writes that foreign small caps have similar quality but lower price than US small caps.
Examined our favorite quality metric, gross profit/assets (GP/A), over time by sector for “small” US companies, which we define as between $400M and $4B in market cap today, or the equivalent percentile rank by market cap historically. We made the decision to exclude the health-care industry entirely given the significant proliferation of unprofitable pharma and biotech stocks, which tripled in proportion from 5% of small stocks in 1995 to 16% of stocks in 2021. We were curious whether the degradation in quality still held once we excluded this mix shift impact. The chart below shows the contribution to aggregate small-cap US GP/A by sector (e.g., IT GP/A multiplied by IT proportion of total market cap). Most notable is the broad-based decline in quality from the early 2010s to today. The most impacted sectors include IT, consumer discretionary, and industrials. We find it notable that US large caps trade at a premium to the rest of the world, while the median US small cap stock.
.@Brad_Setser argues “the right measure of Sino-American decoupling is when the United States is no longer the outlet for China’s surplus.” Cumulatively, global surpluses and deficits have to match, and the US is supplying the majority of global deficits.
Now that Europe's current account is back in balance, and Japan is back in surplus, the question of who balances China's current account surplus begs to be answered. There is a risk here, namely that the global economy -- albeit with frictions -- remains relatively integrated. Global politics is far more fractured. There isn't an easy way to solve this dilemma so long as China and others need outlets for their surpluses and equally the US external deficit far exceeds what now can be financed by G-7 countries. Politics and economics diverge, even if the mechanics of measuring bilateral trade and financial flows don't quite capture it.
Justin Lin Yifu argues China’s rapidly aging population won’t be a headwind for economic growth as increasing levels of human capital will increase productivity growth. @scmpnews
Our analysis of micro-data of the provinces and aggregate data from previous censuses, as well as sample surveys of 1 percent of the population, showed that a shrinking and ageing population has no significant negative impact on economic growth. In 2001, China officially entered an ageing society [with 7 percent of the population over 65 years old]. Since then, many people in China have become increasingly wary that they may ‘get old before becoming affluent.’ China is ushering in a new and higher-quality human capital dividend that is conducive to technological innovation and industrial upgrading.
.@M_C_Klein estimates that Chinese capital flight is at least $500b annually; he suspects that the official Chinese current account surplus is understated by a similar amount.
There are enough oddities within China’s official balance of payments statistics to suggest that the country’s actual current account surplus may be nearly 3x the official figure. If so, that would make China’s current account surplus not just the largest that it has ever been in absolute terms, but about as large as it has ever been relative to the rest of the world’s economy. Perhaps surprisingly, the emergence of this massive surplus has coincided with downward pressure on the Chinese yuan, with the People’s Bank of China (PBOC) selling $43 billion in foreign exchange reserves in 2023 Q3. The likeliest explanation is that the Chinese are now pulling about $500 billion/year out of the country. In other words, capital flight pressures have intensified over the past few years, perhaps in response to the Chinese government’s increasingly arbitrary exercises of power against its subjects.
.@jburnmurdoch cites evidence from separate studies showing that AI Tools boost performance most for less-skilled workers and that the introduction of ChatGPT negatively impacted opportunities for freelancers.
Boston Consulting Group staff randomly assigned to use GPT-4 when carrying out a set of consulting tasks were far more productive than their colleagues who could not access the tool. Not only did AI-assisted consultants carry out tasks 25% faster and complete 12% more tasks overall, their work was assessed to be 40% higher in quality than their unassisted peers. Employees right across the skills distribution benefited, but in a pattern now common in generative AI studies, the biggest performance gains came among the less highly skilled in their workforce. This makes intuitive sense: large language models are best understood as excellent regurgitators and summarisers of existing, public-domain human knowledge. The closer one’s own knowledge already is to that limit, the smaller the benefit from using them.
The Indian stock market’s strong performance has been driven by robust total factor productivity growth of 1.3% from 2007-2022 vs. 0.9% for 1990-2006, stemming mainly from improvements in basic infrastructure. @rbrtrmstrng @EthanYWu
The strongest reason for weighing this slice towards India is not just that the country has averaged real GDP growth of more than 6% a year for the past 30 years; that growth has also translated into stock market returns in a way that China’s growth, for example, has not. Over the past 30, 20, 10, and five years, the Sensex has performed as well or better than the S&P 500, leaving other big markets far behind. India’s growth story is built on its remarkable increase in total factor productivity, the economy’s ability to generate output from a given amount of labour and capital. Aditya Suresh of Macquarie notes that TFP’s contribution to headline growth has averaged 1.3% between 2007 and 2022, against 0.9% in 1990-2006, far outpacing other EMs. Partly, the TFP boost has come from efficiency improvements in certain sectors, such as services exports (think ecommerce or consulting). But the biggest improvement is undoubtedly from better basic infrastructure.
According to @damienics and @hzsong, China is heading toward a protracted debt crisis which will see 40% of local government financing vehicles default with total losses of $5T or ~30% of China’s GDP. @MacroPoloChina
China is likely heading into a messy and protracted debt debacle that will be at least equal in magnitude to the state-owned enterprises (SOEs) debt drama in the late 1990s. Except the outcome this time will likely be a prolonged economic malaise. At a fundamental level, most if not all economic crises are essentially debt crises in various guises. China’s is no exception. We believe the property sector crisis, which has largely peaked, is just a preview of the main event, which will see around 40% of local government financing vehicles (LGFVs) default on their debt. Defaults of this magnitude will affect regional banks that are most exposed to LGFV lending. We estimate total loss for LGFV creditors (including financial institutions such as banks and LGFV supplier/contractors) to be in the neighborhood of $5 trillion, or ~30% of China’s GDP.
Among 400,000 people who graduated from Ivy League schools between 1970 and 2021, athletes earned 3.4% more than non-athletes over the course of their careers. @NateeA1
Combining team-level information on all Ivy League athletes from 1970 to 2021 with resume data for all Ivy League graduates, we examine both post-graduate education and career choices as well as career outcomes. Athletes are far more likely to go into business and finance-related jobs than their non-athlete classmates. Athletes attain higher terminal wages and earn cumulatively more than non-athletes over the course of their careers controlling for school, graduation year, major, and first job. In addition, they attain more senior positions in the organizations they join. Collectively, our results suggest that non-academic human capital developed through athletic participation is valued in the labor market and may support the role that prior athletic achievement plays in admissions at elite colleges.
John Fernald @sffed finds that the trajectory of productivity growth post-pandemic is consistent with its pre-pandemic productivity track since 2004.
The black line shows the level of American labor productivity. The blue dashed line is a statistically estimated trend, estimated through 2019 and then extended. The trend is allowed to change after 2004; the slowdown in trend captures the end of the late-90s/early 2000s Internet-led boom. Starting in 2020, you can see the sizeable productivity boom, as the black line moved well above the trend. Press discussions at the time were often quite exuberant about the possibilities. Unfortunately, since that bump, productivity has retreated right back to its pre-pandemic trend or, even, by early 2023, a little below the trend.
Evidence from Belgian btw 2002-14 suggests that large firms generate significant TFP spillovers to domestic suppliers. Firms that start a serious relationship with a superstar firm increase their TFP by 8% three or more years after the relationship is formed.
We use an event study approach, examining what happens when a firm begins supplying a foreign multinational for the first time. We uncover a sharp increase in productivity (which rises by about 8% after three years) and other performance measures (e.g. sales to firms other than the new multinational partner). The fraction of aggregate value accounted for by multinationals declined by about ten percentage points in Belgium in our sample period (2002 and 2014), which would suggest a strong headwind against productivity growth. However, in a novel result we are also able to document that when we look at similar events of starting a serious relationship with other “superstar firms” - defined as those who are in the top thousandth of the size distribution and/or export intensively - we find very similar performance impacts.
Caroline Hoxby argues that Anne Case and Angus Deaton’s recent findings on the divergence btw Americans with a BA and those without is largely driven by a compositional shift that has occurred as more Americans have graduated college.
I find it entirely plausible that selection accounts for most or even all of the widening mortality gap. Measures of achievement have not risen among 12 graders and other high school students for essentially the entire period since we started to measure them in a consistent way (i.e. since the early 1970s). However, the share who obtain a BA degree has increased quite dramatically over the same period. An NLSY [National Longitudinal Survey Youth] exercise shows that non-BAs are increasingly negatively selected. A comparison between the NLSY79 (1979) and the NLSY97 (1997) shows that the distribution of ASVAB [Armed Services Vocational Aptitude Battery] percentiles of non-BAs is shifted to the left for 97 vis-a-vis 79.
Lower life expectancy for America’s poor is largely driven by opioids and gun deaths. Among the 10% of Americans who die youngest, the mean age of death is 36.
My calculations suggest the average age of death in [the shortest-lived 10%] is just 36 years old, compared with 55 in the Netherlands and 57 in Sweden. It hasn’t always been this way. In the 1980s, the most disadvantaged Americans lived about as long as their counterparts in France. By the early 2000s, lives at the bottom had lengthened considerably, and while a deficit was opening up, it wasn’t worrisome. But in the past decade, the lives of America’s least fortunate have shortened by an astonishing eight years. Wealthy Americans who live in the parts of the country with high opioid use and gun violence live just as long as those who live where fentanyl addiction and gunshot incidents are relatively rare. But poor Americans live far shorter lives if they grow up surrounded by guns and drugs than if they don’t.
Almost 35% of Americans are engaged at work relative to just 5% of Japanese, 7% of French workers, 10% of Britons, and 17% of Germans.
Gallup suggests that remarkably few people, just about anywhere, are happily engaged with their work. The average of the 73 countries in our filtered version showed that 20% were thriving and 15% were loud quitters. The remaining 65% were quietly dragging their feet. Among big economies, America and India had the highest share of thrivers, though that was only around one-third. In Italy and Japan just 5% were thriving, the lowest shares in the sample.
Prime-age male workforce nonparticipation has risen across generations, from 5.8% in 1976 to 11.4% last year. There is evidence of generation convergence around age 40 likely driven by younger generations’ higher education attainment. @sffed
Nonparticipation rates have increased with each generation of prime-age men. Millennials experience a notably different nonparticipation rate trajectory over their lifetime compared with previous generations, with rates starting at a higher level and declining more steeply until their mid-30s. This temporarily higher level of nonparticipation is driven by school enrollment. Even though nonparticipation rates for millennials are still higher than in previous generations, given the increasing educational attainment for younger generations and the trends we observe by education groups, the pace of the sustained rise in male nonparticipation rates may slow in the future, which could benefit economic growth.
The American working-age population, and thus our potential labor force, is shrinking relative to the economy. Population aging is the main driver, as 4mm baby boomers, or 2% of the working-age population, turn 65 each year. @foxjust
About 4 million baby boomers, or 2% of the working-age population, are turning 65 each year, and while the number of Gen Zers turning 15 each year is 200,000 to 300,000 higher than that, more than 820,000 Americans ages 15 through 64 died last year, and about 700,000 died annually in the years leading up to the pandemic. Immigration is thus the only thing keeping the working-age population from shrinking. Immigration spurs economic growth while in some cases depressing wages for some native-born workers. But in the US, if the forecasts are correct, immigration will only keep the 15-to-64 population just about constant through 2100 (as opposed to the 20% decline forecast for the world’s high-income countries overall and the 62% decline forecast for China). We truly have entered a new era for working-age population growth.
The Defense Department manages schools for about 66,000 students and achieves proficiency outcomes far higher than national averages. DoD schools performed better than any US state in 2022, in part because they avoided pandemic declines. @nytimes
With about 66,000 students — more than the public school enrollment in Boston or Seattle — the Pentagon’s schools for children of military members and civilian employees quietly achieve results most educators can only dream of. On the National Assessment of Educational Progress, a federal exam that is considered the gold standard for comparing states and large districts, the Defense Department’s schools outscored every jurisdiction in math and reading last year and managed to avoid widespread pandemic losses. While the achievement of U.S. students overall has stagnated over the last decade, the military’s schools have made gains on the national test since 2013.
46,020 Americans were killed in traffic accidents in the US in 2022, up 18% from pre-pandemic levels. This was driven primarily by rising Black per-capita fatality rates, which were 26% higher than for whites last year. @foxjust
Before 2014, which is when concerns about police bias began to take center stage after a police killing in the St. Louis suburb of Ferguson, Missouri, Black Americans were at lower risk of dying in a traffic accident than White Americans (mainly because they drive much less). By 2021, Black Americans’ per-capita fatality rate was 37% higher; last year it was 26% higher. National data on traffic stops is limited, with the Bureau of Justice Statistics’ most recent Police-Public Contact Survey, conducted in 2020, finding that 9% of Americans 16 and older were involved in a traffic stop as a driver or passenger that year, down from 10.3% in 2018 and 11% in 2015.
Americans and Britons have shifted from believing “wealth can grow so there’s enough for everyone” to “people can only get rich at the expense of others.” Democrats who voted for Trump in 2016 scored very high on zero-sum beliefs. @jburnmurdoch
Every five to 10 years, the World Values Survey asks people in dozens of countries where they would place themselves on a scale from the zero-sum belief that “people can only get rich at the expense of others”, to the positive-sum view that “wealth can grow so there’s enough for everyone”. The average response among those in high-income countries has become 20% more zero-sum over the last century. Moreover, two distinct rises in the prevalence of zero-sum attitudes have coincided with two slowdowns in gross domestic product growth, one in the 1970s and another in the past two decades. The same pattern holds within individual countries. Britons and Americans have become significantly more likely to believe that success is a matter of luck rather than effort precisely as income growth has slowed.
Zero-sum thinking in terms of political and policy views is strongly associated with lower levels of intergenerational upward mobility. @S_Stantcheva @DrNathanNunn
Zero-sum thinking is associated with more preference for liberal economic policies in general and with stronger political alignment with the Democratic Party and weaker alignment with the Republican Party. We also find that zero-sum thinking is linked empirically to important political crises experienced in the United States. Specifically, we find that individuals who view the world in zero-sum terms are more likely to believe that the conspiracy theory QAnon holds some truth for U.S. politics. We also find that zero-sum thinking is linked with empathy and understanding for the January 6, 2021 attack on the U.S. Capitol Building, an act that is more justifiable and seen as being less harmful if one presumes the world is zero-sum (rather than positive/negative sum).
After accounting for Chinese inputs into industrial imports from other countries, US exposure to China in 2018 was 4x the headline level. @BaldwinRE @freeman_reb @Angel__Theo
US exposure to foreign supply chains is much bigger than it appears at face value, but it is not that big on the macro level. By any measure, the US buys at least 80% of all industrial inputs from domestic sources. Thus, at an aggregate level, its foreign exposure is hardly alarming. However, while this may be reassuring, it is important to note that supply chain disruptions rarely occur at the macro level. The 80% figure was not relevant when the US auto sector shuttered factories due to a lack of semiconductors, or when buying home office electronics became problematic due to a demand surge and logistic snarls. Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers – what we call look through exposure – we see that US exposure to China is almost four times larger than it appears to be at face value.
According to @lee_ohanian @AEIecon, labor market conflict explains half of the decline in the Rust Belt’s share of total manufacturing employment between 1950 and 2000.
This paper hypothesizes that the decline of the Rust Belt was due in large part to the persistent labor market conflict that was prevalent throughout the region’s main industries. [Labor conflict] results in lower investment and productivity growth, which causes employment to move from the Rust Belt to the rest of the country. The model also features rising foreign competition as an alternative source of the Rust Belt’s decline. Quantitatively, labor conflict accounts for around half of the decline in the Rust Belt’s share of manufacturing employment. Consistent with the data, the model predicts that the Rust Belt’s employment share stabilizes by the mid 1980s, once labor conflict subsides. Rising foreign competition plays a more modest role quantitatively, and its effects are concentrated in the 1980s and 1990s, after most of the Rust Belt’s decline had already occurred.
A @federalreserve analysis from last year finds the manufacturing wage premium has disappeared for most manufacturing jobs as of April 2018. The decline in unionization is responsible for “more than 70% of the drop in the manufacturing wage premium.”
As measured in the CES data, manufacturing average hourly wages for all employees were 3% above wages in the private sector in 2006, a difference commonly known as the manufacturing wage premium. Since then, manufacturing wages have averaged gains of 2.3% per year, while wages in the private sector have risen 2.6% per year. While manufacturing workers used to receive a premium relative to workers in other sectors, that premium has disappeared in recent years for most manufacturing jobs. Our results indicate that the decline in unionization rates is responsible for more than 70% of the drop in the manufacturing wage premium. Notably, the unionization effect remains significant even after accounting for a large set of worker and sectoral characteristics.
US net investment has declined from its 1950-80 average of 10% of GDP to 5%. @TimothyTTaylor argues that the cause is increased investment in information technology that depreciates more quickly than plant and equipment.
Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.
.@LHSummers issues a warning that America’s fiscal trajectory is leaving it little slack for meeting contingencies, “military or non-military.”
I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power. A reasonable calculation would suggest that our budget prospects are vastly worse than they were at the time of the Clinton administration's successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range. This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question. How long can or will the world's greatest debtor be able to maintain its position as the world's greatest power?
US equities account for nearly 70% of the MSCI World index, and the 10 largest US equities are larger than the combined market capitalization of Japan, the UK, France, Canada, and Germany. European-based firms are looking at listing on US exchanges.
US equities account for nearly 70% of the MSCI World index; the next five largest — in Japan, UK, France, Canada, and Germany — total less than 20%. The top 10 constituent equities of the MSCI World index, which are all US companies including Apple at number one and ExxonMobil at number 10, aggregate to more than 20%. To put it bluntly, the 10 most valuable US equities are larger than the market capitalisations of Japan, UK, France, Canada, and Germany combined. In effect, the US has scaled up the largest companies in the world in its own public markets, creating a colossal pool of recyclable equity capital residing in domestic and non-US investor portfolios. This has created a virtuous cycle of new listings from US and overseas issuers attracted by the depth and liquidity of that equity pool.