Macro Roundup

Speed of evolution

“…In a paper published last month in Science, researchers reported that a new animal species had evolved by hybridization — and that it had occurred before their eyes in the span of merely two generations. The breakneck pace of that speciation event turned heads both in the scientific community and in the media. The mechanism by which it occurred is just as noteworthy, however, because of what it suggests about the undervalued role of hybrids in evolution….”

Jordana Cepelewicz, “New Bird Species Arises From Hybrids, As Scientists Watch,” Quanda Magazine, December 13, 2017,

https://www.quantamagazine.org/new-bird-species-arises-from-hybrids-as-scientists-watch-20171213/

New Bird Species Arises From Hybrids, as Scientists Watch

The rapid, unorthodox emergence of a new finch in the Galápagos hints that speciation isn’t rare. New hybrid species may quietly appear and disappear without anyone noticing.

It’s not every day that scientists observe a new species emerging in real time. Charles Darwin believed that speciation probably took place over hundreds if not thousands of generations, advancing far too gradually to be detected directly. The biologists who followed him have generally defaulted to a similar understanding and have relied on indirect clues, gleaned from genomes and fossils, to infer complex organisms’ evolutionary histories.

Some of those clues suggest that interbreeding plays a larger role in the formation of new species than previously thought. But the issue remains contentious: Hybridization has been definitively shown to cause widespread speciation only in plants. When it comes to animals, it has remained a hypothesis (albeit one that’s gaining increasing support) about events that typically occurred in the distant, unseen past.

Until now. In a paper published last month in Science, researchers reported that a new animal species had evolved by hybridization — and that it had occurred before their eyes in the span of merely two generations. The breakneck pace of that speciation event turned heads both in the scientific community and in the media. The mechanism by which it occurred is just as noteworthy, however, because of what it suggests about the undervalued role of hybrids in evolution.

In 1981, Peter and Rosemary Grant, the famous husband-and-wife team of evolutionary biologists at Princeton University, had already been studying Darwin’s finches on the small Galápagos island Daphne Major for nearly a decade. So when they spotted a male bird that looked and sounded different from the three species residing on the island, they immediately knew he didn’t belong. Genetic analysis showed he was a large cactus finch (Geospiza conirostris) from another island, either Española or Gardner, more than 60 miles away — too great a distance for the bird to fly home.

Tracking the marooned male bird’s activity, the Grants observed him as he mated with two female medium ground finches (G. fortis) on Daphne and produced hybrid offspring. Such interbreeding by isolated animals in the wild is not uncommon, though biologists have usually dismissed it as irrelevant to evolution because the hybrids tend to be unfit. Often they cannot reproduce, or they fail to compete effectively against established species and quickly go extinct. Even when the hybrids are fertile and fit, they frequently get reabsorbed into the original species by mating with their parent populations.

The new lineage of birds began when a male Geospiza conirostris finch marooned on Daphne Major island mated with a native G. fortis females. (These photos show birds representative of those species, and not the actual parental birds.)

But something different happened with the hybrids on Daphne: When they matured, they became a population distinct from Daphne’s other bird species by inbreeding extensively and exclusively — siblings mating with siblings, and parents mating with their offspring.

In short, an incipient hybrid species, which the researchers dubbed the Big Bird lineage, had emerged within two generations. Today, six generations have passed, and the island is home to around 30 Big Bird finches. “If you were a biologist none the wiser to what had happened,” said Leif Andersson, a geneticist at Uppsala University in Sweden and one of the study’s co-authors, “and you started studying these birds, you’d think there were four different species on the island.”

Where Hybrids Thrive

On Daphne Major, the conditions may have been just right for hybrid speciation. “It shows what is possible, given the right circumstances,” Peter Grant said, and it sends “a valuable message about the importance of rare and unpredictable events in evolution. These have probably been underestimated.”

The Big Bird lineage became reproductively isolated so quickly because those birds could not successfully attract mates among the island’s resident species, which preferred their own kind. Big Bird finches couldn’t pass muster: They had relatively large beaks for their body size, and they boasted a unique song. These differences prevented gene flow between the hybrids and the native medium ground finches from which they had descended, leading to a distinct hybrid population. (In their Science paper, the Grants and their colleagues noted that the species status of Big Bird finches is still unofficial because no one has yet tested whether the birds will breed with their ancestral finches on Española and Gardner. But they cited reasons to suspect that the Big Bird lineage is reproductively isolated from them as well.)

The fact that this niche was available for Big Bird to occupy is likely a result of the particularly young, isolated and often extreme environment of the Galápagos. “Conditions on the islands really help drive the speciation process,” said Scott Edwards, an ornithologist at Harvard University.

The same might be said for small and isolated environments elsewhere, such as mountaintops or ponds. By contrast, speciation isn’t likely to occur this way in less isolated regions, said Trevor Price, an ecologist at the University of Chicago. In those areas, where competition for resources is already fierce, a new hybrid species like Big Bird would find no niche for itself.

But hybrid species may have had more widespread opportunities to establish themselves in the past. Perhaps, Price suggested, this rapid production of species could have occurred in the aftermath of the meteorite impact that caused mass extinction on Earth millions of years ago. At that time, there were resources and potential niches, and not enough species to fill them.

Fractal Speciation

Some experts think that even today hybrid speciation may be far from rare. Under the most commonly accepted speciation model, called allopatric speciation, populations get geographically separated — by a change in a river’s course, say, or the formation of a mountain, or diverging migrations — and then adapt to distinct competitors and environments over long periods. If the groups ever meet again, they may no longer be similar enough to interbreed.

But very fast hybrid speciation events like the one the Grants saw on Daphne may often occur in bursts — only to end with the new species dying out before we have time to observe it. “Speciation is common. It’s happening all around us,” said James Mallet, an evolutionary biologist at Harvard University. “It’s just that usually we don’t recognize the divergent lineages that are appearing as separate species.”

He continued, “I believe that speciation is more of a continuum than people have been thinking.” At one extreme, species can be cleanly divided from one another, with no interbreeding and exchange of genes. But to greater or lesser degrees, hybridization could also allow genes to flow into a species from others, and the resulting hybrids could sometimes develop an identity of their own, even if only temporarily.

Mallet argues that hybrid species could very well be appearing all the time, only to collapse and disappear just as quickly, with the hybrids either going extinct or being absorbed back into a parent population. “To me, that shows the abundance of opportunities for speciation,” he said. Just because many hybrids go extinct — a fate that is still very likely to befall the Big Bird lineage, according to Mallet — doesn’t mean that hybridization is not a real source of new species in nature.

Instead, he sees speciation as an almost fractal process that can be observed in ecosystems over different timescales. “If you look at the macro level over millions of years,” Mallet said, “you’ll see a few species evolving and going extinct.” But at the micro level, on the order of dozens of years or less, species may be forming and dissolving all the time. Most biologists simply don’t have the long-term data to show it, he said.

What made it possible to identify such an event in Darwin’s finches was the Grants’ decades of careful fieldwork, followed by detailed genomics studies. The new paper illustrates “the value of continuous, long-term studies in nature,” Peter Grant said. Without that, “we would not have detected or been able to interpret the immigration of an individual of one species and interbreeding with a member of the resident species.”

Although biologists do not yet know how much animal hybrid speciation occurs outside the Galápagos, they are becoming increasingly aware of hybrids as a powerful agent of evolution. “I think this paper really increases that signal,” Edwards said. “Researchers like me are going to be looking for it much more regularly.”

Jeanna Smialek, "Robots Are Making Your Sushi, and That’s Good for the Economy,"Bloomberg, December 19, 2017, https://www.bloomberg.com/news/articles/2017-12-19/robots-are-making-your-sushi-and-that-s-good-for-the-economy

Robots Are Making Your Sushi, and That’s Good for the Economy

In the belly of a machine about the size of an office printer, a plastic roller presses sticky rice onto a bed of seaweed. The oxygen-to-grain ratio has been precisely calibrated with the aid of X-ray tests. A razor slices the sheet into a flawless rectangle, which plunks down onto a steel tray ready to be stuffed with ruby-red tuna or smoked eel.

The $14,000 robot can help a food prep worker churn out 200 sushi rolls an hour—up from the 50 or so a chef could make by hand, according to Autec USA Inc., the Torrance, Calif., company that sells the machine. Chief Executive Officer Taka Tanaka says orders have quadrupled over five years amid rising sushi consumption and a growing chef shortage. Among his customers are Whole Foods Market and Sushirrito, a mini-chain of restaurants that specializes in a burrito-sushi amalgam.

Service industries have lagged other sectors in spending on labor-saving equipment during this economic expansion, because as long as workers were plentiful and wages stagnant, it made more sense to hire than to invest in automation. As U.S. labor markets tighten, the calculus is changing. “You’re investing in capital because you grudgingly have to pay workers more,” says Carl Riccadonna, chief U.S. economist at Bloomberg.

Analysts at Morgan Stanley expect a pickup in capital investment in services, which span luxury retail to internet services, to carry over into next year. That bodes well for worker productivity, which has been depressed for a decade but began showing signs of life sometime around midyear. If the improvement is sustained, it could boost the growth potential of the U.S. economy, lead to raises for workers, and even allow the Federal Reserve to lift interest rates more. Stronger productivity is “the salve for everything,” says Ellen Zentner, chief U.S. economist at Morgan Stanley. “It’s something that has been sorely needed in the U.S., and it is finally here.”

Goldman Sachs Group Inc. economists wrote in a November note to clients that capital outlays across all sectors have been the “brightest spot” in gross domestic product data and that they expect spending to continue to “modestly outperform” compared with its usual rate this late in an expansion. Their optimism is partly grounded on the expectation that the corporate tax reduction and other investment incentives contained in the tax plan that could soon pass Congress will provide a further moderate boost.

Services look poised to remain the star performer. They make up a growing share of the economy—64 percent of gross output last year, up from 40 percent in the 1950s—but their share of capital expenditures has been relatively flat over time. A Morgan Stanley analysis of 1,500 publicly traded companies found that many businesses are going beyond replacing old equipment. They’re also pouring money into new technology, along with buildings and production equipment. U.S. Department of Commerce data show that for the first time since 2000, investment in intellectual-property products (think software, as well as research and development) has surpassed 4 percent of GDP.

Surveys of corporate managers suggest capital outlays could remain robust into 2018. The Morgan Stanley six-month capital expenditure plan index is holding at levels last seen in 2006.

Nevertheless, productivity gains are happening in the context of diminished expectations. Efficiency has increased by an average 1.5 percent this year, and Morgan Stanley expects it to settle into a pattern of just above 1 percent in the future. That’s far below the 2.7 percent it averaged from 2000 to the eve of the Great Recession.

To nudge the dial toward historical norms, the capital spending pickup would have to mirror the scale of investment U.S. companies were making in the 1990s, according to J.P. Morgan chief U.S. economist Michael Feroli, who thinks that’s unlikely. What’s more, Feroli sees demographic changes weighing on productivity as a large generation of experienced older workers exits the workforce. “You have the baby boomers leaving, and they’re generally pretty skilled at this point,” he says. As of 2016 about 6.8 percent of the country’s population was 50 to 59 years old and headed toward retirement soon.

On the bright side, even a small pickup is good news for the Fed. If the economy has more productive capacity, interest rates can rise higher and the economy can expand faster without coming up against supply constraints that cause inflation to spike. That’d be a relief for policymakers, who are already concerned about how they’ll fight the next recession in a world where interest rates are at historical lows.

Efficiency improvement could also allow companies to pay workers more without taking a hit to profits. “Productivity growth has really been dismally slow in recent years,” Fed Chair Janet Yellen told lawmakers during testimony on Nov. 29. “I think to really see a faster average pace of real wage growth, we need faster productivity.”

Any uptick could be global. Citigroup Inc. reckons 2017 is shaping up to be the first year since 1995 in which the U.S., the U.K., Japan, and the euro area all witnessed accelerating productivity.

Tanaka expects demand for his robots to stay strong. His most popular machines are an example of the kind of automation that can make life easier for workers—rolling out rice over sheets of nori is one of the most difficult, and tedious, parts of sushi making—rather than make them obsolete. Customization—inserting different kinds of filling—still requires humans. “It’s half-automated,” Tanaka says. “People can still be entertained by watching the chef.”

FYI, Tyler wrote up the Alan Taylor paper we looked at over the summer

Tyler Cowen, "The rate of return on everything,"Marginal Revolution, December 19, 2017, http://marginalrevolution.com/marginalrevolution/2017/12/rate-return-everything.html

I found this to be one of the best and most interesting papers of the year.

6. The authors find support for Piketty’s r > g, except near periods of war. Furthermore, the gap between r and g does not seem to be correlated with the growth rate of the economy.

5. The equity premium is volatile too.

4. The return on real safe assets is much more volatile than you might think.

3. Equity returns across countries have become increasingly correlated, housing returns not.

2. Equity and housing gains have a relatively low covariance. Buy both!

1. Risky assets such as equities and residential real estate average about 7% gains per year in real terms. Housing outperformed equity before WWII, vice versa after WWII. In any case it is a puzzle that housing returns are less volatile but about at the same level as equity returns over a broader time span.

Here is what I learned from the paper itself:

This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. What is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.

There is a new NBER paper on that topic byÒscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor, here is the abstract:

The rate of return on everything

Chart implicitly highlights tax difference btw domestic/international facing US businesses

Theo Francis, "U.S. Businesses Find Welcome Surprises in Tax Bill,"Wall Street Journal, December 19, 2017, https://www.wsj.com/articles/u-s-businesses-find-welcome-surprises-in-tax-bill-1513679402

That rule-writing process will offer industry opportunities to shape the final tax regime. “It’s not like now we’ve got a bill and it’s done,” Mr. Bradley said

Although the final bill is expected to pass the Senate and House with Republican support and reach President Donald Trump’s desk by the end of the year, lobbyists and corporate executives are unlikely to relax in 2018. By Mr. Bradley’s count, the bill includes some two dozen provisions requiring guidance from the Treasury and IRS.

Lawmakers trimmed the credit available under the Senate bill to drugmakers for developing “orphan” drugs, or medications affecting relatively few people, to 25% from 27.5%. The House bill would have eliminated the credit.

Life insurers no longer face an 8% surtax on taxable income, a provision included in the House bill.

Private-equity firms kept capital-gains treatment for “carried interest,” or their share of profits from portfolio investments, but only if the investment is held at least three years. Today, the treatment applies after a year.

The final legislation maintains a tax break for foreign income generated by patents or other intellectual property held in the U.S. But it drops a related tax break intended to encourage companies to transfer foreign-held intellectual property to the U.S.

Other notable changes:

One, dubbed the base-erosion and antiabuse tax, or BEAT, is triggered at large companies where at least 3% of their tax deductions stem from payments to foreign affiliates, down from a 4% threshold in the Senate bill. A House-bill provision disliked by many companies—a 20% excise tax on many transactions with foreign affiliates—was scrapped altogether.

Lobbyists and corporate tax executives are still working through changes to some of the bill’s most complex provisions, which attempt to limit efforts to shift corporate profits to low-tax foreign jurisdictions.

Lawmakers ultimately dropped another closely watched interest-deduction limit, which would have applied where a disproportionate amount of a company’s borrowing came in the U.S. The provision was designed to help prevent “earnings stripping,” or shifting profits to lower-tax jurisdictions.

That compromise could cause problems for some companies down the road, analysts say. Lawmakers could ultimately extend the more favorable calculation, but the provision as it stands creates uncertainty, said Height Securities LLC tax analyst Stefanie Miller. “Companies that are highly levered or companies that are not particularly financially stable, when this switches to EBIT it could be a problem,” she said.

The final bill uses the more generous House definition of income—for the first four years, then switches to the less generous Senate calculation in 2022. The difference isn’t trivial. The House provision was expected to raise $171 billion, barely half the $307 billion the Senate calculation would have yielded.

The final bill splits the difference between House and Senate proposals to limit the amount of business interest companies can deduct from their taxes each year. The Senate used a measure that roughly parallels earnings before interest and taxes, or EBIT, while the House also used a measure including depreciation and amortization, approximating Ebitda, for a higher income figure and therefore a more generous cap on the interest that would be deductible.

The one-time tax is meant to serve as a transition from the old “world-wide” system to a new “territorial” one in which foreign profits will generally not be taxed at all, with exceptions intended to discourage abuse of foreign tax havens. Its novelty and complexity is likely to foster further lobbying and potentially litigation.

Under existing tax law, companies have been taxed at the full 35% statutory corporate rate for foreign profits brought to the U.S., beyond what was paid to foreign tax authorities. Foreign profits indefinitely reinvested outside the U.S. went untaxed—leading S&P 500 companies to accumulate some $2.5 trillion in unremitted foreign earnings.

The final bill ratcheted up a one-time tax on accumulated foreign profits, or what is often called a repatriation tax. It is now 15.5% on liquid assets, such as cash and cash-equivalents, and 8% on illiquid assets, including factories and equipment, paid over eight years. That is up from 14% and 7% in the House bill, and well above the 8.75% and 3.5% originally proposed by Republican leaders.

“The level of gaming that would have occurred if you would have had a 35% rate in 2018 and a 21% rate in 2019, it would have been truly amazing,” said Steven Rosenthal, senior fellow at the nonpartisan Tax Policy Center think tank.

The rate takes effect on Jan. 1, a year sooner than proposed in the Senate bill. That promises firms an extra year of lower tax and avoids a delay that worried many tax experts.

Also welcome: the 21% corporate tax rate, despite being a percentage-point higher than either the House or Senate bill proposed. “That’s a home run, there’s no other way to look at it,” Mr. Bradley said.

Among the provisions that made business leaders happiest was one that went missing in the final bill: the corporate alternative minimum tax. Its survival in the Senate billprovoked widespread consternation, as business groups worried that it would undercut a variety of tax incentives, including one fostering research and development.

Late modifications to reconcile conflicting House and Senate provisions—and lobbying by companies and industries—resolved some key uncertainties in the legislation, and offered a few surprises as well.

“Overall, the business community is very pleased with the bill,” said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce. “If someone would have said 11 months ago, by the end of the year we’d able to produce a bill and get it to the president’s desk that does these things, skepticism would have been sky high.”

The final tax bill offers much of what large companies hoped to gain from the Republican overhaul: the billboard corporate rate was knocked down, cuts were accelerated and key credits were preserved.

U.S. Businesses Find Welcome Surprises in Tax Bill