Edward Conard

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  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “…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
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, August 15, 2017

AI Summary. A study of US Current Population Survey data from 1980–2015 finds that minimum wage increases are associated with a decline in the share of automatable jobs held by low-skilled workers, with the sharpest declines among older workers. The authors argue higher wage floors give firms an incentive to adopt labor-replacing technologies.

James Pethokoukis American Enterprise Institute
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A study by @JamesPethokoukis finds that minimum wage hikes accelerate automation, displacing low-skilled workers, particularly older employees. The trend is likely to continue with future wage increases, highlighting the need for policies addressing adverse effects.

Do minimum wage increases push firms to automate low-skilled jobs?

Core argument: A study using Current Population Survey data from 1980–2015 finds that minimum wage increases reduce the share of automatable employment held by low-skilled workers, with older workers showing the sharpest decline.

Minimum wage hikes significantly impact the labor market by accelerating automation, as evidenced by a study analyzing CPS [Current Population Survey] data from 1980-2015. The study found that increasing the minimum wage decreases the share of automatable employment held by low-skilled workers, with older workers experiencing the sharpest decline. This shift suggests that firms are incentivized to adopt technologies that replace human labor, creating employment challenges for low-skilled workers who lack the skills for new tasks. While automation can lead to higher productivity and economic growth, it also displaces workers, particularly in industries where older employees are major income contributors. The study highlights the need for policies that address these adverse effects, as the trend towards automation is likely to continue with future minimum wage increases.

Takeaways by Macro Roundup® AI

  1. A study using Current Population Survey data from 1980–2015 finds that minimum wage increases reduce the share of automatable employment held by low-skilled workers, with older workers showing the sharpest decline.
  2. The study's authors argue that minimum wage hikes incentivize firms to adopt labor-replacing technologies, creating employment challenges for low-skilled workers who lack the skills required for new tasks.
  3. The study notes that automation can raise productivity and economic growth while displacing workers, particularly in industries where older employees are major income contributors, and calls for policies addressing these adverse effects.

James Pethokoukis, "New study finds that minimum wage hikes are great news for robot workers," American Enterprise Institute, August 14, 2017, https://www.aei.org/economics/new-study-finds-that-minimum-wage-hikes-are-great-news-for-robot-workers/

New study finds that minimum wage hikes are great news for robot workers

Back in 2014, I wrote a post that asked, “Why are minimum wage proponents dismissing automation risk?” I just wasn’t getting a sense from the “Fight for 15” crowd that it had thought much about the possibility that dramatically raising the minimum wage might worsen the competitive position of low-skill humans versus machines.

Or maybe it had, but the politics were so tantalizing that they took precedence over sound policy. My conclusion back then: “Pushing for an unprecedented boost in the minimum wage given both the weak economy and automation risk seems like foolhardy public policy.” That, especially given the low-risk alternative of raising and expanding the Earned Income Tax Credit.

Now comes the new NBER working paper, “People Versus Machines: The Impact of Minimum Wages on Automatable Jobs” by Grace Lordan and David Neumark (bold is mine):

Based on CPS data from 1980-2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers. The average effects mask significant heterogeneity by industry and demographic group. For example, one striking result is that the share in automatable employment declines most sharply for older workers. An analysis of individual transitions from employment to unemployment (or to employment in a different occupation) leads to similar overall conclusions, and also some evidence of adverse effects for older workers in particular industries. … Our work suggests that sharp minimum wage increases in the United States in coming years will shape the types of jobs held by low-skilled workers, and create employment challenges for some of them. … Therefore, it is important to acknowledge that increases in minimum wage will give incentives for firm to adopt new technologies that replace workers earlier. While these adoptions undoubtedly lead to some new jobs, there are workers who will be displaced that do not have the skills to do the new tasks. Our paper has identified workers whose vulnerability to being replaced by machines has been amplified by minimum wage increases. Such effects may spread to more workers in the future.

Three things: First this study is a great companion piece to a recent one by Daron Acemoğlu and Pascual Restrepo analyzing the effect of increased industrial robot usage between 1990 and 2007 on US local labor markets: “According to our estimates, one more robot per thousand workers reduces the employment to population ratio by about 0.18-0.34 percentage points and wages by 0.25-0.5 percent.”

Second, Lordan and Neumark note that minimum wage literature often, in effect, ends up focusing on teenager employment as it presents aggregate results. But that approach “masks” bigger adverse impacts on some subgroups like older workers who are “more likely to be major contributors to their families’ incomes.” This seems like an important point.

Third, some policy folks argue that it’s a feature not a bug that a higher minimum wage will nudge firms to adopt labor-saving automation. (Thought not those arguing for robot taxes.) The result would be higher productivity and economic growth. But perhaps we are “getting too much of the wrong kind of innovation.”

Wednesday, August 23, 2017

AI Summary. Banks are issuing more long-term loans at fixed low rates, with 27.5% of bank assets locked in for over five years, the highest share since 1984, and 33.7% at midsize banks. Regulators warn that if interest rates rise sharply, banks could face a profit squeeze from higher deposit rates.

Rachel Louise Wall Street Journal
Date Posted:
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Banks are locking in 27.5% of assets for over 5 years, the highest since 1984, with midsize banks at 33.7%.

Are banks betting against rising rates by locking in long-term fixed loans?

Core argument: U.S. banks had 27.5% of assets locked into fixed rates for over five years as of Q2 2017, the highest share since 1984, with midsize banks at 33.7%.

Despite expectations of rising interest rates, banks are increasingly issuing long-term loans at fixed low rates, with 27.5% of bank assets locked in for over five years as of Q2 2017, the highest since 1984. This trend is more pronounced in midsize banks, where the figure is 33.7%. Commercial real estate loans, which often have fixed-rate periods of 3-10 years, now constitute 31.5% of assets at these banks, up from 25.7% in 2012. While this strategy has supported earnings growth—U.S. banks' earnings rose 10.7% to $48.3bn in Q2 2017—regulators warn of potential risks if interest rates rise sharply, as banks may face a profit squeeze from higher deposit rates. The growth rate for commercial real-estate loans, now around 9%, has helped offset a slowdown in general business lending. However, the concentration in long-term and commercial real-estate loans could pose risks if credit conditions deteriorate.

Takeaways by Macro Roundup® AI

  1. U.S. banks had 27.5% of assets locked into fixed rates for over five years as of Q2 2017, the highest share since 1984, with midsize banks at 33.7%.
  2. Commercial real estate loans, often carrying fixed-rate periods of 3–10 years, reached 31.5% of assets at midsize banks, up from 25.7% in 2012, with growth near 9% offsetting a slowdown in general business lending.
  3. U.S. bank earnings rose 10.7% to $48.3bn in Q2 2017, though regulators warn that sharply rising rates could squeeze profits through higher deposit rates.

Rachel Louise Ensign, "Think Rates Are Going Up? Banks Don’t,"Wall Street Journal, August 22, 2017, https://www.wsj.com/articles/think-rates-are-going-up-banks-dont-1503419152

Think Rates Are Going Up? Banks Don’t

Think Rates Are Going Up? Banks Dont: Extended Excerpt Image 1


After years of waiting for interest rates to rise, some banks are lending as if that day will never come, loading up on a record amount of loans and securities that carry low rates for long periods.

The percentage of bank assets that won’t mature or change rates for more than five years reached a new high in the second quarter, according to Federal Deposit Insurance Corp data released Tuesday. That means banks are allowing more borrowers to lock in low rates for long periods, a potential risk should rates move sharply higher.

“The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded to this environment by ’reaching for yield’ through higher-risk and longer-term assets,” FDIC Chairman Martin Gruenberg said in remarks accompanying the data.

Banks largely make money in two ways: from lending and fees. Midsize and smaller lenders tend to rely more on lending profits than bigger banks that have fee businesses like wealth management. Lending profits typically come from the difference between what banks pay out on deposits and what they earn on loans and securities.

But rock-bottom interest rates following the financial crisis eroded those margins across the industry, leading some banks to lend for longer so they can capture more yield. Growing their volume of loans also helped them compensate.

“It’s a struggle for everybody in the industry,” said Denny Hudson, chief executive of Stuart, Fla.-based Seacoast Banking Corp. of Florida, which has $5.3 billion in assets. He said his firm tried to keep its lending in check, but added there is a downside to being too careful.

“You could be smart all day long waiting for rates to increase, and you’ll get killed by investors” rooting for loan growth, Mr. Hudson said.

Regulators and bank investors typically worry about interest-rate risk because banks borrow money at low rates on a short-term basis, usually by taking deposits, and lend it out at higher rates for a longer term. That can create a mismatch if rates move sharply higher.

An added worry: much of this lending for longer is in the booming area of commercial real estate, where borrowers finance offices and apartment buildings typically with loans that have fixed-rate periods from three to 10 years.

“Every meeting I went to, bankers said, ‘We’re not going to go past five years” on commercial real estate, said Scott Hildenbrand, chief balance sheet strategist at Sandler O’Neill + Partners. Within a year or so, the bankers were saying, ‘We’re not going to go past 10 years.”

Englewood Cliffs, N.J.-based ConnectOne Bancorp, Inc., for instance, has grown quickly in recent years largely through commercial real estate lending. These loans made up more than half of the bank’s assets at the end of 2016 and most of them were originated in the past three years, the bank said.

Competition for such borrowers was fierce, though it has slowed a bit in recent months after regulators raised concerns about the sector broadly, Chief Executive Frank Sorrentino said in an interview. While Mr. Sorrentino said his bank, which has $4.7 billion in assets, has expertise in the sector that serves it well, his firm has recently started to diversify lending.

“There’s risk in everything that we do,” Mr. Sorrentino said of banking. “That’s what we do, take credit risk and interest-rate risk.”

Across all banks, the percentage of total assets that are at a fixed rate for more than five years was 27.5% in the second quarter of 2017, its highest since the FDIC started tracking it in 1984. The metric reached 33.7% in the second quarter at banks with $1 billion to $10 billion in assets.

Commercial real-estate loans made up 31.5% of assets at those midsize and smaller banks in the quarter, up from 25.7% in the second quarter of 2012. The figure is far lower at bigger banks, at 6.4%, and has remained steady in recent years.

So far, the reach for yield hasn’t proven a problem as long-term rates have remained low, despite the Federal Reserve increasing short-term rates. The yield on the benchmark U.S. 10-year Treasury has been around 2.20% of late and hasn’t touched the 3% mark since early 2014. At the same time, credit quality of loans has stayed strong.

Indeed, the FDIC said in its report Tuesday that U.S. banks’ earnings rose 10.7% to $48.3 billion in the second quarter from a year earlier, indicating the sector is continuing its postcrisis recovery. Nearly two-thirds of banks reported their earnings were up from a year earlier.

The FDIC cautioned that the pace of loan growth is waning. U.S. banks had about $9.4 trillion in net loans and leases in the second quarter. While that was up 4% from a year earlier, the rate of growth is down from a 7% pace in much of 2016.

Problem loans also continued to decline, with banks reporting a 6.7% decrease in loans that were 90 days or more past due in the second quarter compared with a year earlier.

Still, regulators have warned that the growing share of longer-term and commercial-real estate loans at some banks could be risky.

By locking in longer terms for loans at lower rates, banks could face a profit squeeze if they have to raise deposit rates sharply in the future. And a heavy concentration in commercial real-estate loans could become an issue if credit issues begin to crop up.

Between 2015 and early 2017, commercial real-estate loans generally grew at a pace above a 10% annual rate at smaller lenders, according to Federal Reserve data.

“This was generally what they knew and knew well,” Christopher McGratty, an analyst at Keefe, Bruyette & Woods, said of commercial real-estate lending at smaller banks. Lending to businesses, for instance, often requires more specialized knowledge, which gives larger, more-diversified banks an advantage.

The growth rate for commercial real-estate loans, now around 9%, has helped banks compensate for a slowdown in general business lending, much of which is floating rate, meaning the interest rates on the loans rise and fall with market rates.