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


Tuesday, December 13, 2016

AI Summary. The ARPANET, the precursor to the internet, grew from 4 nodes to 35 nodes over four years, an expansion built on government investment in technology infrastructure. E-commerce sales reached an estimated $4.2tn as the internet became a central component of global trade.

David Newbury workergnome
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1969-73: ARPANET nodes surge from 4 to 35 (+775%). Early gov investment spawned internet economy: global e-commerce hits $4.2tn by 2020. Network effect drives private sector tech infrastructure spend into 100s of bn annually.

How did early government network investment grow into trillions in e-commerce?

Core argument: The ARPANET grew from 4 nodes in 1969 to 35 nodes by May 1973, a rise of over 775% in four years, as documented in the ARPA Network Logical Map of May 1973.

The ARPA Network Logical Map of May 1973 marks a pivotal moment in the evolution of the internet, highlighting the nascent stages of what would become a global economic powerhouse. By 1973, the ARPANET had expanded to include 35 nodes, a significant increase from its initial 4 nodes in 1969, reflecting a growth rate of over 775% in just four years. This expansion laid the groundwork for the internet's role in driving GDP growth, fostering innovation, and reshaping industries worldwide. The network's development underscored the importance of government investment in technology infrastructure, which has since been mirrored by private sector investments totaling hundreds of bn annually. As the internet evolved, it became a critical component of global trade, contributing to an estimated $4.2tn in e-commerce sales by 2020. The ARPANET's early growth trajectory exemplifies how strategic technological advancements can yield substantial economic benefits over time.

Takeaways by Macro Roundup® AI

  1. The ARPANET grew from 4 nodes in 1969 to 35 nodes by May 1973, a rise of over 775% in four years, as documented in the ARPA Network Logical Map of May 1973.
  2. The ARPANET's expansion rested on government investment in technology infrastructure, since mirrored by private sector investments totaling hundreds of billions of dollars annually.
  3. The internet that grew out of ARPANET became a component of global trade, with e-commerce sales estimated at $4.2tn by 2020.

David Newbury, “The Enture Internet,” December 10, 2016, https://twitter.com/workergnome/status/807704855276122114

Matt Olsen Comment:Thought this was pretty cool. The poster’s dad was the business manager for the computer science department at Carnegie Mellon at the time.

Friday, March 31, 2017

AI Summary. Market moves tied to expectations for Trump's agenda — rising stocks, a stronger dollar, and higher bond yields — have faded as investor confidence in policy implementation weakens. U.S. equities now track global markets rather than outperforming them, the dollar has given up about half its postelection gains, and high-tax companies underperform the S&P 500.

James Mackintosh Wall Street Journal
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The Trump trade has lost momentum as investor confidence in Trump’s policy implementation wanes. US equity performance now aligns with global markets & trails Europe. The dollar has relinquished about half its postelection gains.

Are market bets on the new administration's agenda unwinding?

Core argument: The dollar has given up about half its postelection gains, the Mexican peso has nearly recovered its postelection drop, and the dollar's gains against Asian currencies tied to trade-restriction expectations have reverted.

The Trump trade, initially characterized by rising stocks, a stronger dollar, and higher bond yields, has lost momentum as investor confidence in Trump's policy implementation wanes. U.S. equity performance, once outpacing global markets, now aligns with them and trails Europe slightly. The dollar has relinquished about half its postelection gains. Corporate tax cut hopes, which initially boosted shares, have diminished, with high-tax companies underperforming the S&P 500. Trade restrictions initially strengthened the dollar against Asian currencies, but it has since reverted. The Mexican peso has nearly recovered from its postelection drop. Health care stocks have stabilized post-Obamacare repeal failure, while bank stocks remain buoyed by deregulation prospects. The Trumpflation trade has declined, aligning more with global growth than U.S.-specific factors. Coal and infrastructure stocks have also retreated from their peaks, reflecting broader market adjustments rather than Trump-specific optimism.

Takeaways by Macro Roundup® AI

  1. The dollar has given up about half its postelection gains, the Mexican peso has nearly recovered its postelection drop, and the dollar's gains against Asian currencies tied to trade-restriction expectations have reverted.
  2. U.S. equities, which initially outpaced global markets, now move in line with them and trail Europe slightly as investor confidence in Trump's policy implementation wanes.
  3. High-tax companies, which rallied on corporate tax cut hopes, now underperform the S&P 500, and coal and infrastructure stocks have retreated from their peaks, while bank stocks remain buoyed by deregulation prospects.

James Mackintosh, "These Trump Trades Just Aren’t Working Anymore,"Wall Street Journal, March 30, 2017, https://www.wsj.com/articles/these-trump-trades-just-arent-working-anymore-1490885367

These Trump Trades Just Aren’t Working Anymore

The “Trump trade” has become market shorthand for stocks up, dollar up, bond yields up—and while it has had a rough ride recently, shares remain more than 10% above election day.

This isn't a vote of confidence in Donald Trump. It pays to tease out the details of market performance, which show just how disheartened investors are about the prospects of the new president getting his policies through.

The basic distinction is between global growth, which was happening anyway and has sped up this year, and a U.S. boom induced by Donald Trump’s promised policies. In the aftermath of the election investors bet on American greatness, but the effect has faded. Other Trump trades have also dwindled, and in some cases vanished entirel

These Trump Trades Just Arent Working Anymore: Extended Excerpt Image 1


U.S. growth. The idea that the U.S. would power ahead of the rest of the world was reflected in sharp U.S. stock market outperformance, as well as the stronger dollar. No longer. U.S. equity performance since the election is now merely in line with the rest of the world and slightly behind Europe, in constant currency terms, while the dollar’s given back about half its postelection gains.

Corporate tax cuts. The hope that a lower tax rate would boost profits put a rocket under share prices, but has now faded entirely. Companies with the highest tax rates ought to be the biggest beneficiaries of a simpler and smaller tax, but after initially soaring, their shares are now lagging behind the S&P 500 since election day, according to an index created by Goldman Sachs. Alternative measures such as the shares of smaller companies, which tend to be more domestic and so have fewer opportunities to dodge taxes via complex offshore transactions, have also been underperforming since mid-December as tax cut hopes fade.

Trade restrictions. Mr. Trump’s (since broken) promise to name China as a currency manipulator on day one of his administration helped the dollar gain more than 3% against trade-sensitive Asian currencies in the six weeks after the election. The dollar has fallen back almost to where it started, according to J.P. Morgan’s Asian Dollar index. The Mexican peso, meanwhile, has regained almost all the ground it lost in the postelection emerging-market rout.

Health care. The Republican failure to agree on a replacement for Obamacare helped patch up the wounds inflicted on shares of hospital groups by the election. The managed health-care stocks that might be beneficiaries of “Trumpcare” gave back some of their gains, but remain ahead. The sectors are small, and politics isn’t the only driver, but it looks like investors expect further attacks on Obamacare—rightly.

Bank red tape. It is hard to split out bank stocks from bond yields, as the two have moved tightly together recently, but an administration packed with former Wall Street executives pledging to slash financial bureaucracy ought to be great for banks. Investors are still giving credence to the idea of a bonfire of regulations, with U.S. bank stocks 12% ahead of the market, about double the outperformance of banks in the eurozone.

Trumpflation. Economists think tax cuts and infrastructure spending when unemployment is low lead to inflation, and the markets reacted accordingly: expectations for inflation, already on the up since the summer, leapt after the election. The “Trumpflation” trade has been slowly declining since late November, as measured by inflation swaps for the five years starting in five years’ time—a common measure used to strip out short-term fluctuations. A comparison with Europe suggests it is now mostly about global growth, not Trumpflation, with the rise since the election in expected inflation identical in the eurozone and the U.S., although from a lower base.

Coal. There has been a rally in U.S. coal stocks in the past week as Mr. Trump followed through on his vow to roll back environmental regulations. But they remain lower than on election day and have fallen by 25% since their postelection peak, because the price of the main alternative fuel, natural gas, matters much more.

Infrastructure. The most obvious winners of the infrastructure and “buy American” push by Mr. Trump were suppliers of steel and other materials needed if roads, bridges and a border wall are to be built. The postelection bounce has faded, and U.S. steel stocks, while up, are no longer ahead of European or Japanese steel, with the notable exception of U.S. Steel.

The fading Trump trades don’t have to be bad news for investors so long as global growth picks up the slack. They also present an opportunity for those who think the president and congressional Republicans will overcome the divisions the health care debate revealed, as it is now cheaper to bet on tax cuts or infrastructure coming through after all. But only so long as optimism about global growth continues to insulate the overall market from Trump disappointment.

AI Summary. Demand for long-dated government bonds remains robust because regulations require banks, life insurers, and pension funds to hold sovereign debt for liquidity and to match long-term liabilities. Governments are issuing longer-maturity debt in response, but supply falls short of the appetite, pushing investors toward alternatives such as real estate and infrastructure.

Jon Sindreu Wall Street Journal
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Demand for long-dated bonds remains robust, driven by regulatory requirements & structural needs of financial institutions, with yields on 30-year Treasurys at 3% & U.K. 50-year bonds at 1.6%.

Why does demand for long-dated government bonds stay strong?

Core argument: Yields on 30-year U.S. Treasurys stand at 3% and U.K. 50-year bonds at 1.6%, reflecting sustained demand for long-dated sovereign debt despite rising interest rates.

Despite rising interest rates, demand for long-dated bonds remains robust, driven by regulatory requirements and structural needs of financial institutions. Banks, life insurers, and pension funds are compelled to hold sovereign bonds to meet liquidity requirements and match long-term liabilities, with recent regulations in the U.S. and Europe amplifying this demand. Yields on 30-year Treasurys are at 3%, while U.K. 50-year bonds yield 1.6%, reflecting sustained demand. Eurozone insurers and pension funds, holding over €9.4tn in assets, are extending their holdings of long-maturity bonds as derivatives become costlier due to postcrisis rules. This structural demand is pushing governments to issue longer-term debt, yet supply struggles to meet the appetite, leading investors to explore alternative long-term investments like real estate and infrastructure.

Takeaways by Macro Roundup® AI

  1. Yields on 30-year U.S. Treasurys stand at 3% and U.K. 50-year bonds at 1.6%, reflecting sustained demand for long-dated sovereign debt despite rising interest rates.
  2. Banks, life insurers, and pension funds are compelled to hold sovereign bonds to meet liquidity requirements and match long-term liabilities, with regulations in the U.S. and Europe amplifying this demand.
  3. Eurozone insurers and pension funds holding over €9.4tn in assets are extending their long-maturity bond holdings as postcrisis rules make derivatives costlier, while supply struggles to meet the appetite and investors explore real estate and infrastructure.

Jon Sindreu, "Insatiable Demand for Long Bonds Isn’t Short Term,"Wall Street Journal, March 30, 2017, https://www.wsj.com/articles/investors-insatiable-appetite-for-bonds-shows-little-sign-of-abating-1490879737

Insatiable Demand for Long Bonds Isn’t Short Term

Even as interest rates rise, bond buyers’ needs for long-term debt are growing, meaning yields are likely to stay low.

Regulations aimed at making the financial system safer mean that banks, life insurers and pension funds need sovereign bonds to meet liquidity requirements and match liabilities. This month, more rules came into effect in the U.S. and Europe that could make that demand even stronger.

Bonds maturing in 30 years, 50 or even later, will likely continue to see the sort of demand that last year helped push their yields to record lows.

Some investors had predicted these bonds would sell off amid increased expectations that central banks will raise interest rates and start tapering their massive bond-buying programs.

But the continued demand from investors and banks due to the regulatory changes could keep long-term yields much lower than they were before the 2008 financial crisis, others say. That is even as healthier economies push central banks to tighten monetary policy.

“Demand for longer-dated higher-yielding cash flows is very, very present,” said Scott Thiel, portfolio manager at BlackRock Inc., the world’s largest investor with more than $5 trillion under management. “It gets at the heart of why I don’t think the selloff will be disorderly.”

Last October, bond markets came under pressure amid signs of stronger global growth and inflation. Since the turn of the year, though, bonds have traded sideways even as stocks have risen.

Yields on long-dated debt are still near their historic lows. Yields on 30-year Treasurys are now at 3% compared with 2.3% in October. Surprisingly, debt of even longer maturities has reacted less. In the U.K., 50-year bonds yield 1.6%, surprisingly below the 1.8% returns offered by 30-year debt.

Insatiable Demand for Long Bonds Isnt Short Term: Extended Excerpt Image 1


Bonds are also a crucial—and increasingly scarce—source of collateral for investors that borrow in short-term markets.

Another major source of demand comes from insurers and pension funds, especially in Europe.

Eurozone insurers, most of them German, hold more than €7 trillion ($7.6 trillion) worth of assets, while pension funds account for another €2.4 trillion. Promises from these investors to pay beneficiaries and policyholders span far into the future. Whenever rates plummet, the value of these liabilities surges at an accelerated rate compared with their assets and, to square their books, they have to buy assets with long maturities.

As yields fell between 2013 and 2016, German insurers extended by roughly 25% their holdings of bonds maturing in 20 or more years, while shedding some of their shorter-term bonds.

Insurers and pension funds also use derivatives such as interest-rate swaps, to hedge their exposure to the risk of rates going lower.

Derivatives have become more expensive to use after postcrisis rules constrained banks’ trading in these markets. Rules have also pushed transactions to be centrally cleared. European pension funds have so far been exempt, but that is set to change. Also, from this month, regulators will demand more collateral to do such transactions.

All this has increased the reliance on extra-long bonds.

“Ten years ago it was almost all swaps and very few bonds, but the way we have arranged our portfolio over the next 10 years is more bonds and less swaps,“ said Kasper Arndt Lorenzen, chief investor at Danish pension provider ATP.”Derivatives are just more complex and more costly.”

J.P. Morgan Chase & Co’s London derivatives structuring desk said that instead of using swaps, some of their clients were now flocking into 40-year and 50-year issues of debt.

As demand has increased, supply has followed. Last year European governments locked in ultralow borrowing costs by issuing debt at ever longer maturities. Ireland and Belgium even sold 100-year paper.

Even so, there isn’t enough to satisfy ever growing demand, investors say. Pension funds are even buying into real estate and infrastructure, which are also long-term investments, at the cost of keeping a less-liquid portfolio.

“The bond market isn’t deep enough for us,” said Paul Van de Moosdijk, senior treasurer at Dutch pension fund PGGM. “Liquidity risk from pension funds is significantly rising."

Insatiable Demand for Long Bonds Isnt Short Term: Extended Excerpt Image 2


Bond yields move opposite to prices and tend to broadly track where interest rates are expected to go, but investors traditionally apply a “term premium” for locking their money away for longer.

The Federal Reserve has nudged up rates twice since December to offset expectations of higher inflation. From next month, the European Central Bank will slow down the pace of its monthly bond purchases to €60 billion ($64 billion) from €80 billion.

Some analysts say that the continued low yields on long-dated bonds are a sign that investors expect less stellar economic growth over the long term.

Other analysts have a simpler take: these bonds are simply in demand, making the term premium shrink.

“Far from being a window on the future that reveals insights that no individual market participant has, low yields may, instead, reflect very ordinary motives of individual investors,” said Hyun Song Shin, head of research at the Bank for International Settlements in a speech this month.

These motives are often structural.

Banks’ appetite for sovereign debt has increased because, to meet new postcrisis liquidity requirements, they need assets that are easy and quick to sell during times of distress. Government bonds also carry very little risk, so banks aren’t required to raise much extra capital to hold them.

AI Summary. More than 2m Scandinavians emigrated to the United States between 1820 and 1920, a large share of the region's population at the time. The article argues that the departure of more individualistic people shifted remaining values toward collectivism, reducing resistance to welfare policies and enabling Scandinavian social democracy.

Matthew Klein FT Alphaville
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Migration of individualistic types to America significantly altered Scandinavia’s political culture, facilitating social democracy. Btw 1820 & 1920, 2m Scandinavians emigrated to the US, shifting remaining population’s values towards collectivism.

Did mass emigration of individualists enable Scandinavian social democracy?

Core argument: Over 2m Scandinavians emigrated to the United States between 1820 and 1920, a substantial share of the region's population at the time.

The emigration of more individualistic types to America significantly altered the political culture of Scandinavia, facilitating the development of social democracy. Between 1820 and 1920, over 2m Scandinavians emigrated to the US, representing a substantial portion of the population at the time. This migration led to a shift in the remaining population's values towards collectivism and social cohesion, which are foundational to social democracy. The economic impact was profound, as the loss of individualistic citizens reduced resistance to policies promoting welfare and equality. Consequently, Scandinavian countries were able to implement comprehensive social safety nets and progressive taxation systems, contributing to their high GDP per capita and low income inequality. This transformation underscores the role of migration in shaping economic and political landscapes, highlighting how demographic changes can influence policy directions and economic outcomes.

Takeaways by Macro Roundup® AI

  1. Over 2m Scandinavians emigrated to the United States between 1820 and 1920, a substantial share of the region's population at the time.
  2. The emigration of more individualistic Scandinavians shifted the remaining population's values toward collectivism and social cohesion, which the argument treats as foundational to social democracy.
  3. The departure of individualistic citizens is argued to have reduced resistance to welfare and equality policies, letting Scandinavian countries adopt comprehensive social safety nets and progressive taxation alongside high GDP per capita and low income inequality.

How America made Scandinavian social democracy possible

Matthew Klein, "How America made Scandinavian social democracy possible,"FT Alphaville, March 31, 2017, https://ftalphaville.ft.com/2017/03/30/2186656/how-america-made-scandinavian-social-democracy-possible/

Ed Comment:Interesting stuff. A lot going on there. For me it's pretty simple. The long term name research shows poverty (and stupidity I'm guessing) last for centuries within families. No surprise, selective mating is powerful. I fear we are taking on immigrants who will be poor generations. WSJ today says there is a shortage of labor. I say: at what price? Serious men ask: who will pick the peaches? Should we flood the country with poor dumb labor until the wage is low enough that we can again manufacturing garments here instead of in Guatemala? Why not grow the peaches in Chile? Why do we want that labor here? Is it really cheaper to do it here than there when we give poor workers a safety net that works for people who can earn $75k/yr but demotivates those who can only earn $35k? If properly trained talent and supervision are today's binding constraints to growth, we ought to pick our supervisees very thoughtfully.

George Borjas Comment:How fascinating. This is exactly the point I make in my model of open borders. And that's why those trillion dollar bills on the sidewalk are full of s**t. I might blog about this if I ever come up from air. We are literally in the midst of downsizing and moving from Lexington to Cambridge. Thanks again.

Steve Comment: interesting"...The researchers suggest the migration flows, which were small relative to the native population of America but equivalent to about 25 per cent of the total population of Scandinavia, changed the character of Norwegian and Swedish society by removing the most ambitious and independently-minded people...."

It’s not inconceivable to believe the victory of the campaign to leave the European Union, with its heavy focus on the supposed costs of immigration, was a backlash to the rise of individualism by a collectivist rearguard as much as anything else. Whether this resurgent collectivism will make the median Briton any better off is less clear.

The UK might be the most striking case. In the decades since Thatcherclaimed“there is no such thing as society”, the composition of the UK population has changed markedly thanks to a large wave of immigration. The boom in inflows can only be partly explained by migration from southern and eastern Europe enabled by common EU membership. Regardless of the cause, over the same period, the UK became both far richer and far more unequal than it had been before.

Perhaps it’s no coincidence that America’s greatest period of social conformity and social democracy occurred when immigration was essentially zero. Similarly, you have to wonder about the connection between the strength of anti-immigrant parties in Scandinavia — part of the ruling coalitions inFinlandandNorway, propping up the minority government inDenmark— and the strength of their social market tradition. (Swedenseems to have fared somewhat differently but even there, the anti-immigrant party is one of the largest in parliament.)

If you want a highly individualistic society, with all the benefits and pitfalls that entails, you should want large-scale immigration, particularly from places that are far away. If you prefer more tight-knit communities and a large welfare state, you might prefer to avoid taking in ambitious nonconformists from abroad and instead try to get your own “troublemakers” to leave.

This presents interesting questions for policy.

Had it not been for America’s willingness to embrace enterprising nonconformist Scandinavians, “individualism” in Norway and Sweden would have been much greater and their particularly successful form of social democracy might never have been able to take root.

Individualistic types are more prone to migrate as they feel less attached to their surrounding social environment. In the sending population, this self-selection generates a push towards collectivism.

This wasn’t just a coincidence. Focusing on the people who actually left Norway and Sweden for America, it turns out they were much more likely to have “unusual” names for their region than those who remained in Scandinavia. As the authors conclude:

They found that while “individualism” rose modestly overall, the places with more emigration became relatively more “collectivist” than those regions with less emigraton. Here’s a simple version:

The researchers have access to all the names of people who lived in Norway and Sweden throughout the great migration wave, as well as all the names of the people who left for America. They also have the same information broken down by locality for a more fine-grained analysis.

The methodology centres on names. Psychologistshave long foundthat people with relatively rare names are more likely to be “unique”, presumably because parents who consciously choose rare names for their children would be more likely to raise them to be nonconformists.

In other words, Scandinavian social democracy might not be possible without America’s historic willingness to absorb those who refused to follow the “Law of Jante”

The researchers suggest the migration flows, which were small relative to the native population of America but equivalent to about 25 per cent of the total population of Scandinavia, changed the character of Norwegian and Swedish society by removing the most ambitious and independently-minded people.

Research presented at theannual conference of the Economic History Societysuggests the stereotype fairly describes the outcome of migration from Norway and Sweden to the United States in the second half of the 19th century. (Thanks to Romesh Vaitilingam for pointing it out to us.

Hence the not-unreasonable stereotype that places largely populated by voluntary migrants and their descendants — such as the United States — are more entrepreneurial, wealthier, and more unequal than source countries, such as Europe.

Migration waves of that scale and concentration are quite rare, of course. More common is for relatively small groups to move from one place to another, with the adventurous leavers generally quite different in temperament and ability than those who stay behind. Rather than transferring their native societies’ virtues and vices wholesale, these migrants bring with them a far more individualistic version of their culture than wherever they came from.

If everyone in Mexico (about 130 million people) moved to Texas (current population: about 28 million people) tomorrow, it would be reasonable to imagine that life in Texas would become somewhat more like life in Mexico is today.

Change enough of the people in a society and you end up with different one.

AI Summary. The shift of US employment toward sectors with below-average productivity growth, such as healthcare and education, is identified as a key factor in the productivity slowdown; those sectors' share of total employment rose from 25% to 30% over a decade. Annual average productivity growth fell from 2.3% to 1% across the same periods.

James Manyika McKinsey Global Institute
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The shift to low productivity sectors has significantly impeded US economic growth. Btw 2005 and 2015, sectors with below-average productivity growth expanded their share of total employment from 25% to 30%.

Does employment shifting to low-productivity sectors explain slower US productivity growth?

Core argument: US productivity growth fell from an annual average of 2.3% in the decade before 2005 to 1% in the following decade, with labor reallocation toward low-productivity sectors identified as a key factor.

The shift to low productivity sectors has significantly impeded US economic growth. Between 2005 and 2015, sectors with below-average productivity growth, such as healthcare and education, expanded their share of total employment from 25% to 30%. This transition contributed to a deceleration in overall productivity growth, which fell from an annual average of 2.3% in the decade before 2005 to just 1% in the following decade. The reallocation of labor towards these sectors, which typically exhibit slower productivity improvements, has been a key factor in the broader slowdown. Additionally, the lack of significant technological advancements in these sectors has further exacerbated the issue, limiting potential gains in efficiency and output. As a result, the US economy has experienced a drag on GDP growth, underscoring the need for targeted policy interventions to stimulate productivity enhancements across all sectors.

Takeaways by Macro Roundup® AI

  1. US productivity growth fell from an annual average of 2.3% in the decade before 2005 to 1% in the following decade, with labor reallocation toward low-productivity sectors identified as a key factor.
  2. Sectors with below-average productivity growth, including healthcare and education, raised their share of total US employment from 25% to 30% between 2005 and 2015.
  3. The lack of significant technological advances in low-productivity sectors has limited potential gains in efficiency and output, adding to the drag on US GDP growth.

James Manyika, Jaana Remes, Jan Mischke, and Mekala Krishnan, "New insights into the slowdown in US productivity growth,"McKinsey Global Institute, March 2017, http://www.mckinsey.com/global-themes/employment-and-growth/new-insights-into-the-slowdown-in-us-productivity-growth

McKinsey read's a bunch of the same stuff that you did for the book, they don't come to hard conclusions, more of a survey but they do seem to imply they think the gains are around the corner, "we may be in a world of the Solow Paradox redux...." but though you would like those two charts

Ed Comment:I'm not sure the truth matters. Running up hill slows runners down. We have no clue what the terrain we are traversing and will traverse after that looks like. Regardless, more risk-taking and properly trained talent will accelerate progress. My guess is that AI, genetic engineering, cancer research and longevity are currently slow going but will soon deliver big gains. Lots of stuff slowing us down--demotivating safety net, opiates, single motherhood, no respect for authority, squeezed most of the juice from manufacturing and services are a lot harder to engineer and supervise, trade deficits, low skilled immigration, et al.

New insights into the slowdown in US productivity growth: Comments Image 1

New insights into the slowdown in US productivity growth: Comments Image 2

New insights into the slowdown in US productivity growth: Comments Image 3


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"....The downshift in productivity growth in the United States has been remarkable. For decades, labor productivity had been growing at an average pace of 2.1 percent year over year. Then in 2004, the rate of productivity growth began to decelerate, falling to an average of 1.2 percent, year over year, during the decade to 2014 (including a brief spike in 2009 and 2010 following the financial crisis). Since 2011, that rate has declined further to 0.6 percent (Exhibit 1). Quarter-over-quarter labor productivity growth in the business sector was even negative for three quarters between the end of 2015 and the first half of 2016.3 Disappearing productivity growth raises alarms, coming at a time when the United States, and indeed many leading economies, increasingly depend on productivity to drive economic growth. To put that in context, over the last 50 years the largest economies (G20) averaged about 3.5 percent in GDP growth with roughly 1.8 percent coming from productivity growth and 1.7 percent from the expansion of the labor supply. Over the next 50 years, labor supply growth will slow down to about 0.3 percent across these countries and for some, labor supply has already peaked.4 In recent years, US productivity growth has generated about 80 percent of total GDP growth, compared with around 35 percent in the 1970s, when the rest came from growth in labor supply.5 Therefore not only does sluggish productivity matter for economic growth now, it matters for America’s economic growth and prosperity for the next several decades.....Today we could be living in round two of the Solow Paradox (computers everywhere except productivity statistics) as technological innovations like smartphones and the internet of things seem to be everywhere but in the productivity numbers....These trends in digitization suggest thatwe may be in a world of Solow Paradox reduxand suggest that,just as in the first round of the Solow Paradox, until we see large sectors digitize, we will continue to see innovation everywhere but in the productivity numbers...."