Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, February 17, 2016

AI Summary. The authors argue that chief executive pay rose because firms granted a roughly constant number of stock options whose value climbed with equity returns, alongside downward rigidity in salary and bonuses. They attribute to this "number rigidity" the widening pay dispersion across firms, faster US pay growth than abroad, and tighter links between pay and firm-specific equity returns.

Richard Townsend National Bureau of Economic Research
Date Posted:
Is Database:
Database

Research by @RichardTownsend finds CEO pay has increased due to firms granting consistent stock options, whose value has risen with firm equity returns, averaging 30% annually during the Tech Boom.

Does granting a fixed number of stock options explain rising CEO pay?

Core argument: CEO pay has risen since the 1990s as firms grant a rigid number of stock options whose value tracks firm equity returns, which averaged 30% annually during the Tech Boom.

Since the 1990s, CEO pay has increased significantly due to firms granting a consistent number of stock options, whose value has risen with firm equity returns, averaging 30% annually during the Tech Boom. This rigidity in the number of shares granted, coupled with downward nominal rigidity in salary and bonuses, has led to a rise in executive compensation. The phenomenon explains the increased pay dispersion across firms, the disparity in growth rates between the US and other countries, and the heightened correlation between pay and firm-specific equity returns. Regulatory changes mandating disclosure of option grant values contributed to a moderation in executive pay in the late 2000s. Additionally, evidence suggests that number-rigidity in executive pay is influenced by money illusion and reference-dependent motivation.

Takeaways by Macro Roundup® AI

  1. CEO pay has risen since the 1990s as firms grant a rigid number of stock options whose value tracks firm equity returns, which averaged 30% annually during the Tech Boom.
  2. Number-rigidity in option grants, combined with downward nominal rigidity in salary and bonuses, is offered as an explanation for rising pay dispersion across firms, faster US pay growth than in other countries, and a stronger link between pay and firm-specific equity returns.
  3. Regulatory changes requiring disclosure of option grant values contributed to a moderation in executive pay in the late 2000s, and evidence suggests number-rigidity in executive pay is influenced by money illusion and reference-dependent motivation.

New paper on executive compensation. Short tack, all the increase in CEO pay since the 1990's function of firms granted same # of options (whose value has gone up) check out Figure 4 "Executive Compensation Over Time"

"...In this paper, we explore a rigidity-based explanation of the dramatic and off-trend growth in US executive compensation during the late 1990s and early 2000s. Weshow that executive option and stock grants are rigid in the number of shares granted.In addition, salary and bonus exhibit downward nominal rigidity.Rigidity implies that the value of executive pay will grow with firm equity returns, which averaged 30% annually during the Tech Boom. Rigidity also explains the increased dispersion in pay across firms, the difference in growth rates between the US and other countries, and the increased correlation between pay and firm-specific equity returns. Regulatory changes requiring the disclosure of the value of option grants help explain the moderation in executive pay in the late 2000s.Finally, we find suggestive evidence that number-rigidity in executive pay is generated by money illusion and reference-dependent motivation..."

Kelly Shue and Richard Townsend, "Growth through Rigidity: An Explanation for the Rise in CEO Pay,"National Bureau of Economic Research, February 2016, http://www.nber.org/papers/w21975

Monday, February 22, 2016

AI Summary. The authors estimate global long-term real interest rates fell about 450 basis points over three decades, attributing roughly 400 of those to demographics, higher within-country inequality, greater emerging-market government saving, cheaper capital goods, lower public investment, a wider gap between returns on capital and risk-free rates, and weaker expected trend growth. They argue central banks are largely rate takers.

Lukasz Rachel and Thomas Smith Bank of England
Date Posted:
Is Database:
Database

Global long-term real interest rates have decreased by 450bps over 30 years, driven by demographic forces, higher inequality, and reduced public investment. Central banks are more rate takers than makers.

What explains the decades-long decline in global real interest rates?

Core argument: Global long-term real interest rates fell roughly 450 bps over the past 30 years, with lower trend growth expectations (100 bps), demographics (90 bps), within-country inequality (45 bps), and post-Asian-crisis emerging market government saving (25 bps) among the drivers.

Over the past 30 years, global long-term real interest rates have decreased by about 450 basis points, driven largely by demographic forces (90bps), higher inequality within countries (45bps), and a shift towards higher saving by emerging market governments post-Asian crisis (25bps). Despite stable global saving and investment ratios, desired investment levels have fallen due to a decline in the relative price of capital goods (50bps) and reduced public investment (20bps). The spread between the rate of return on capital and risk-free rates has widened, further lowering desired investment and risk-free rates by 70bps. These factors, combined with lower expectations for trend growth (100bps), account for 400bps of the decline, indicating that central banks are more rate takers than makers, as looser monetary policy is a consequence, not a cause, of falling long-term rates.

Takeaways by Macro Roundup® AI

  1. Global long-term real interest rates fell roughly 450 bps over the past 30 years, with lower trend growth expectations (100 bps), demographics (90 bps), within-country inequality (45 bps), and post-Asian-crisis emerging market government saving (25 bps) among the drivers.
  2. Desired investment has fallen despite stable global saving and investment ratios, with a declining relative price of capital goods accounting for 50 bps and reduced public investment 20 bps of the drop in real rates.
  3. A widening spread between the return on capital and risk-free rates lowered desired investment and risk-free rates by a further 70 bps, and the identified factors together account for 400 bps of the decline, indicating that central banks are more rate takers than rate makers.

BofE working paper that will be presented @ Brookings in March, evidence central banks have limited control over long term interest rates

"....Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptionswe think we can account for around 400 basis points of the 450 basis points fall....Our analysis suggests the desired savings schedule has shifted out materially due todemographic forces (90bpsof the fall in real rates),higher inequality within countries (45bps)and a preference shift towards higher saving by emerging market governments following the Asian crisis (25bps).If this had been the whole story, we would have expected to see a steady rise in actual saving rates globally. But global saving and investment ratios have been remarkably stable over the past thirty years suggesting desired investment levels must have also fallen.We pin this decline in desired investment on a fall in the relative price of capital goods (accounting for 50bps of the fall in real rates) and a preference shift away from public investment projects (20bps). Also, we note that the rate of return on capital has not fallen by as much as risk free rates. The rising spread between these two rates has further reduced desired investment and risk free rates down (by 70bps). Together these effects can account for 300bps of the fall in global real rates....When combined, lower expectations for trend growth and shifts in desired savings and investment can account for about 400bps of the 450bps decline in the global long-term neutral rate since the 1980s...100bps explained by the deterioration in the outlook for trend growth....ever looser monetary policy is not the cause, but the consequence of the fall in long -term rates. .."

Rachel, Lukasz and Thomas Smith, Secular drivers of the global real interest rate, Bank of England, December 2015, http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/swp571.pdf
--