Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, March 31, 2016

AI Summary. Corporate profits near record highs may reflect increased market power rather than higher productivity, supported by rising industry concentration, a merger wave, greater profit persistence among large firms, fewer new businesses, and more overlapping ownership of competitors. The authors argue monopoly power raises profits while restraining investment and interest rates.

Larry Summers Financial Times
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Corporate profits are near record highs, which may indicate increased market power rather than enhanced productivity. This trend is supported by several factors: many industries have become more concentrated, a major merger wave has occurred, and there is evidence of greater profit persistence among major companies.

Do record corporate profits reflect rising market power rather than productivity?

Core argument: Summers argues that corporate profits near record highs may reflect increased market power rather than enhanced productivity, citing rising industry concentration, a major merger wave, and greater profit persistence among major companies.

Corporate profits are near record highs, which may indicate increased market power rather than enhanced productivity. This trend is supported by several factors: many industries have become more concentrated, a major merger wave has occurred, and there is evidence of greater profit persistence among major companies. Additionally, new business formation has declined, and overlapping ownership of competing companies has become more common. These developments suggest that monopoly power has increased, leading to higher profits, lower investment as firms restrict output, and lower interest rates due to reduced capital demand. This divergence between profit rates and the behavior of real interest rates and investment highlights the need for economists to focus on the implications of growing market power.

Takeaways by Macro Roundup® AI

  1. Summers argues that corporate profits near record highs may reflect increased market power rather than enhanced productivity, citing rising industry concentration, a major merger wave, and greater profit persistence among major companies.
  2. Summers cites declining new business formation and more common overlapping ownership of competing companies as further evidence that monopoly power has increased.
  3. Summers contends that greater monopoly power raises profits while lowering investment as firms restrict output and lowering interest rates through reduced capital demand, a divergence he says economists need to address.

Summer's on theEconomistarticle on corporate profits,

"... A high market value of corporations implies that “old capital” is highly valued and suggests a high payoff to investment in new capital. This is an apparent problem for the secular stagnation hypothesis I have been advocating for some time....If monopoly power increased one would expect to see higher profits, lower investment as firms restricted output, and lower interest rates as the demand for capital was reduced. This is exactly what we have seen in recent years.... only the monopoly power story can convincingly account for the divergence between the profit rate and the behavior of real interest rates and investment, along with the suggestive evidence of increases in monopoly power, makes me think that the issue of growing market power deserves increased attention from economists and especially from macroeconomists...."

The combination of the fact that only the monopoly power story can convincingly account for the divergence between the profit rate and the behavior of real interest rates and investment, along with the suggestive evidence of increases in monopoly power, makes me think that the issue of growing market power deserves increased attention from economists and especially from macroeconomists.

Is the increased monopoly power theory plausible? The Economistmakes the best caseI have seen for it noting that (i) many industries havebecome more concentrated; (ii) we are coming off amajor merger wave; (iii) there is some evidence of greater profit persistence among major companies; (iv) new business formationhas declined; (v) overlapping ownership of companies that compete has become more common with the rise of institutional investors; (vi) leading technology companies such as Google and Apple may be benefiting from increasing returns to scale and network effects.

Third, it could be that higher profits do not reflect increased productivity of capital but instead reflect an increase in monopoly power. If monopoly power increased one would expect to see higher profits, lower investment as firms restricted output, and lower interest rates as the demand for capital was reduced. This is exactly what we have seen in recent years.

On top of that, if Treasuries were in short supply,one would expect that their yield would be bid down relative to market-synthesised safe instruments. Yet the so-called swap spread is actually negative and Treasury yields (vs swaps) are unusually high relative to history.

A second explanation could be that a heightened demand for liquidity and a shortage of Treasury instruments, perhaps created by quantitative easingprogrammes, has driven down bond yields, widening the spread between the rate of profit and these yields. This story does not provide a natural explanation for the relatively weak behavior of business investment. Further asSam Hanson, Robin Greenwood, Joshua Rudolph and Ipointed out in earlier work, the market is today being asked to absorb an abnormally high rather than an abnormally low level of long termFederal debt.

How can this anomaly be resolved? There are a number of logical possibilities. First, the riskiness associated with capital investment might have gone up and so higher rates of return could be simply compensating for higher risk rather than implying attractive investments. There are two major problems with this story. One is that available proxies for risk have not been especially high in recent years. The chart below depicts realised stock market volatility and the Vix measure of expected volatility as implied by options. Another problem is that if capital returns have become far more uncertain, thenthe stocks should have become less attractive in recent years rather than more. In the last seven years, the stock market has risen to 250 per cent of its spring 2009 levels.

Yet matters are more complex. For some years now, real interest rates on safe financial instrumentshave been lowand, for the most part, declining. Andbusiness investmentis eitherin line with cyclical conditionsora little weakerthan would be predicted by cyclical conditions. This isanomalous, as in the most straightforward economic models the real interest rate is therisk adjusted rate of returnon capital. And an unusually high rate of investment would be expected to go along with a high rate of return on existing capital.

This is an apparent problem for thesecular stagnationhypothesis I have been advocating for some time. Secular stagnation is the idea that the US economy is stuck in a period of lethargic economic growth. Secular stagnation has as a central element a decline in the propensity to invest leading tochronic shortfalls of aggregate demandand difficulties in attaining real interest rates consistent with full employment.

All this might be taken as evidence that this is a time when the return on new capital investment is unusually high. The rate of profit under standard assumptions reflects the marginal productivity of capital. A high market value of corporations implies that “old capital” is highly valued and suggests a high payoff to investment in new capital.

As thecover storyin this week’s Economist highlights, the rate of profitability in the US is at a near-record-high level,as is theshare of corporate revenuegoing to capital. The stock market isvalued very highly by historical standards, as measured by Tobin’s q ratio of the market value of nonfinancial companies to the value of their tangible capital. And the ratio of the market value of equities in thecorporate sector to its GDPis also unusually high.

Corporate profits are near record highs — why is that a problem?

Summers, Lawrence, "Corporate profits are near record highs — why is that a problem?"Financial Times "Larry Summers Blog", March 30, 2016. Available at:http://blogs.ft.com/larry-summers/2016/03/30/corporate-profits-are-near-record-highs-why-is-that-a-problem/

Thursday, April 7, 2016

AI Summary. Twin-based estimates attribute 54–65% of individual differences in UK national exam scores at the end of compulsory education to genetic factors, compared with 14–21% for shared environments such as home and school. Intelligence at age 16 is estimated to be 56% heritable, with shared environment accounting for 5%.

Kaili Rimfeld, Yulia Kovas, Philip S. Dale, and Robert Plomin Scientific Reports
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Genetic factors account for 54-65% of individual differences in academic performance at the end of compulsory education, compared to 14-21% for shared environmental factors.

How much of exam performance differences do genetic factors explain?

Core argument: Heritability estimates for General Certificate of Secondary Education exam performance at the end of compulsory education range from 54–65%, compared with 14–21% for shared environmental factors such as home and school.

At the end of compulsory education, genetic factors account for a significant portion of individual differences in academic performance, with heritability estimates for GCSEs ranging from 54-65%, compared to 14-21% for shared environmental factors like home and school. Intelligence at age 16 also shows high heritability at 56%, with shared environmental influences contributing only 5%. These findings suggest that genetic differences play a more substantial role than previously understood, potentially influencing educational policy and resource allocation by highlighting the need for personalized learning approaches that consider genetic predispositions. Understanding the genetic basis of educational outcomes could lead to more effective strategies in addressing educational disparities and optimizing student potential.

Takeaways by Macro Roundup® AI

  1. Heritability estimates for General Certificate of Secondary Education exam performance at the end of compulsory education range from 54–65%, compared with 14–21% for shared environmental factors such as home and school.
  2. Intelligence measured at age 16 shows heritability of 56%, with shared environmental influences contributing 5%.
  3. The authors suggest genetic differences play a more substantial role in academic outcomes than previously understood, with implications for educational policy, resource allocation, and personalized learning approaches.

"...All GCSEs were highly heritable, demonstrating that genes explain a larger proportion of the individual differences (54-65%) than shared environmental factors, such as home and school environment combined (14-21%), as illustrated in Fig. 1.Intelligence at 16 also demonstrates substantial heritability (56%), with negligible effect of shared environmental influences (5%). (Twin intraclass correlations and full model fit statistics with confidence intervals are shown in Supplementary Table S1.)..."

Rimfeld, Kaili, Yulia Kovas, Philip S. Dale, and Robert Plomin, "Pleiotropy across academic subjects at the end of compulsory education,"Scientific Reports, 2015, http://www.nature.com/articles/srep11713

Ed Comment:Eureka! I hate when studies show it's 50% heredity and journalist write as if the other 50% is shared environment when it's split between shared, not shared, and unexplained, where unexplained is generally the largest of the 3 components.

AI Summary. Immigrants founded 44 of the 87 privately held U.S. startups valued at $1bn or more, firms collectively worth $168bn, and are key members of management or product development teams at 62 of the 87. Each immigrant-founded company has created roughly 760 U.S. jobs on average.

Scott Anderson National Foundation for American Policy
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Immigrants have started more than half of the nation’s $1bn+ startup companies, creating 760 jobs on average per company & holding a value of $168bn, nearly half Russia’s stock market value.

How large is immigrants' role in founding billion dollar US startups?

Core argument: Immigrants founded 44 of the 87 privately held U.S. startups valued at over $1bn as of January 1, 2016, and those immigrant-founded firms are collectively worth $168bn, nearly half the stock market value of Russia or Mexico.

Immigrants have significantly contributed to the U.S. economy by founding more than half (44 of 87) of the nation's startup companies valued at $1bn or more. These immigrant-founded firms collectively hold a value of $168bn, nearly half the stock market value of Russia or Mexico. Immigrants are also key members in over 70% (62 of 87) of these companies' management or product development teams. On average, each immigrant-founded company has created approximately 760 jobs in the U.S., underscoring their role in job creation and economic growth. The data, derived from interviews and information on 87 privately-held U.S. startups valued at over $1bn as of January 1, 2016, highlights the critical role immigrants play in fostering innovation and entrepreneurship in high-value sectors, including software and industrial firms like SpaceX. These companies, backed by venture capital, have the potential to become publicly traded, further enhancing their economic impact.

Takeaways by Macro Roundup® AI

  1. Immigrants founded 44 of the 87 privately held U.S. startups valued at over $1bn as of January 1, 2016, and those immigrant-founded firms are collectively worth $168bn, nearly half the stock market value of Russia or Mexico.
  2. Immigrants hold key management or product development roles at 62 of the 87 U.S. billion-dollar startups, which span software and industrial firms including SpaceX.
  3. Each immigrant-founded billion-dollar startup has created roughly 760 jobs in the U.S. on average, based on interviews and data covering the 87 venture-backed companies.

"...Immigrants play a key role in creating new, fast-growing companies, as evidenced by the prevalence of foreign-born founders and key personnel in the nation’s leading privately-held companies.Immigrants have started more than half (44 of 87) of America’s startup companies valued at $1 billion dollars or more and are key members of management or product development teams in over 70% (62 of 87) of these companies.The research finds that among the billion dollar startup companies, immigrant founders have created an average of approximately 760 jobs per company in the United States. The collective value of the 44 immigrant-founded companies is $168 billion, which is close to half the value of the stock markets of Russia or Mexico. The research involved conducting interviews and gathering information on the 87 U.S. startup companies valued at more than $1 billion (as of January 1, 2016) that have yet to become publicly traded on the U.S. stock market and are tracked by The Wall Street Journal and Dow Jones VentureSource. The companies, all privately-held and with the potential to become publicly traded on the stock market, are today each valued at $1 billion or more and have received venture capital (equity) financing...."

Anderson, Scott, "Immigrants and Billion Dollar Startups,"National Foundation for American Policy, March 2016. Available at:http://nfap.com/wp-content/uploads/2016/03/Immigrants-and-Billion-Dollar-Startups.NFAP-Policy-Brief.March-2016.pdf
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the measure is current unicorns (so excludes now public firms) they included privately held firms that were valued > $1 as of 1.1.2016 (total of 87) some of these firms are hardly startups (some are over a decade old) and they are broadly software firms but some are industrial - say SpaceX