Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, January 11, 2019

AI Summary. The wage premium from working in cities is increasingly offset for low-skilled workers by rising housing costs, diminishing the urban advantage. Analysis attributes part of this to the decline of middle-skilled jobs with higher wages and benefits, replaced by low-skilled service and retail work lacking those advantages.

Emily Badger and Quoctrung Bui New York Times
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David Autor’s analysis highlights the decline of middle-skilled jobs that offered higher wages & benefits, but low-skilled service & retail jobs lack these advantages. Housing expenses surge, low-skilled workers face low incomes & high living costs.

Do housing costs erase the urban wage premium for low-skilled workers?

Core argument: The urban wage premium that once benefited low-skilled workers is increasingly offset by rising housing costs, leaving urban low-skilled workers facing both low incomes and high living expenses.

The urban wage premium, once a significant advantage for low-skilled workers, is increasingly offset by rising housing costs in cities. While David Autor's analysis highlights the decline of middle-skilled jobs that offered higher wages and benefits, the replacement by low-skilled service and retail jobs lacks these advantages. As housing expenses surge, low-skilled workers face the dual challenge of low incomes and high living costs. Autor acknowledges the difficulty in quantifying how much of the remaining urban wage premium is consumed by these costs, but it is evident that the urban advantage for low-skilled workers is diminishing. This shift underscores the need for policymakers to address the economic pressures on urban low-skilled workers and consider strategies to mitigate housing affordability issues.

Takeaways by Macro Roundup® AI

  1. The urban wage premium that once benefited low-skilled workers is increasingly offset by rising housing costs, leaving urban low-skilled workers facing both low incomes and high living expenses.
  2. David Autor's analysis highlights the decline of middle-skilled jobs that paid higher wages with benefits, replaced by low-skilled service and retail jobs that lack those advantages.
  3. Autor acknowledges the difficulty of quantifying how much of the remaining urban wage premium is consumed by housing costs, while holding that the urban advantage for low-skilled workers is diminishing.

New York Times reporting on the David Autor lecture, reporting implies he is thinking about what percentage of the small urban wage premium is eaten up by housing, maybe he will manage to come up with some numbers

"...But other scholars have been studying pieces of this picture for some time. The sociologist William Julius Wilson has documented the disappearance of precisely the kinds of urban jobs Mr. Autor describes. Mr. Wilson said in an email that he was not surprised by the pattern in Mr. Autor’s analysis, adding that these middle-skilled jobs once offered not just higher wages but also union benefits, retirement, paid vacation and some sense of stability. Low-skilled jobs in the service industry and retail that have replaced that work seldom offer those benefits. Today, as housing has grown much more expensive in many of the cities that once held out the hope of higher wages for them, low-skilled workers face both low incomes and steep costs. Mr. Autor can’t say how much of the small urban wage premium that remains in his data today is eaten up by these higher housing costs.But it is clear to him, he said, that the urban advantage that once existed for low-skilled workers is vanishing...."
Emily Badger and Quoctrung Bui, "What if Cities Are No Longer the Land of Opportunity for Low-Skilled Workers?"New York Times, January 11, 2019, https://www.nytimes.com/2019/01/11/upshot/big-cities-low-skilled-workers-wages.html

Monday, January 14, 2019

AI Summary. Research indicates trade's net effect on U.S. employment is small: Chinese imports were associated with a net loss of about 200,000 jobs over roughly 16 years, against 3.3m export-driven job gains, and export growth created demand for 6.6m jobs including 4m in services.

Michael R. Strain Bloomberg
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Trade’s impact on domestic employment is minimal, as evidenced by research showing a net loss of only 200,000 jobs from 1991 to 2007 due to Chinese imports, offset by 3.3m export-driven job gains. @MichaelRStrain

Does trade create more jobs than it destroys?

Core argument: Research cited finds Chinese imports produced a net loss of 200,000 U.S. jobs from 1991 to 2007, offset by 3.3m jobs gained from exports.

Trade's impact on domestic employment is minimal, as evidenced by research showing a net loss of only 200,000 jobs from 1991 to 2007 due to Chinese imports, offset by 3.3m export-driven job gains. From 1995 to 2011, export growth created demand for 6.6m jobs, including 4m in services, while imports reduced demand, yet overall labor demand increased. The U.S. labor market's churn is significant, with 5.7m separations in September 2018 alone, and trade accounts for a small share of this churn. Policymakers should focus on aiding workers in adjusting to economic changes rather than blaming trade, which offers benefits like lower consumer prices and efficiency gains.

Takeaways by Macro Roundup® AI

  1. Research cited finds Chinese imports produced a net loss of 200,000 U.S. jobs from 1991 to 2007, offset by 3.3m jobs gained from exports.
  2. Export growth created demand for 6.6m jobs from 1995 to 2011, including 4m in services, and overall labor demand rose even as imports reduced demand.
  3. The U.S. labor market recorded 5.7m separations in September 2018 alone, with trade accounting for a small share of that churn.

“…. the right answer to the question is that trade doesn’t reduce overall employment. It doesn’t increase it, either. It’s a wash. Careful research by the economist Robert Feenstra and his co-authors shows that this simple conclusion is basically correct. In one paper, they find that the U.S. lost around 3.5 million manufacturing jobs due to Chinese imports from 1991 to 2007. At the same time, export-driven job gains totaled about 3.3 million. So the net effect was about 200,000 fewer jobs. Looking over the full two decades of the 1990s and 2000s, Feenstra finds even more balance between jobs gained due to exports and lost due to imports. In a second paper, Feenstra and Akira Sasahara use a different method to study the effects of U.S. exports and imports on labor demand. They found that export growth led to demand for 6.6 million jobs from 1995 to 2011, including 4 million service-sector jobs, while imports reduced demand. But on net, overall labor demand increased due to trade over this time period — with increases in services and declines in manufacturing. Of course, the level of employment is not the only outcome worth considering when thinking about the effects of trade. One is churn. Let’s take Feenstra’s estimate of 2 million fewer manufacturing jobs due to trade with China. That works out to an average loss of about 10,000 jobs per month over the 17 years in his estimate. To put this in context, compare it to the total level of turnover in the U.S. economy for September 2018, the most recent month for which data is available. That month, 3.6 million workers quit their jobs. Companies laid off or discharged 1.7 million workers. In total, 5.7 million workers separated from their employer. The amount of churn in the U.S. labor market is staggering. Trade causes a small share of that churn….”

Michael R. Strain, “You Can’t Be Pro-Jobs Without Being Pro-Trade,” Bloomberg, December 10, 2018, https://www.bloomberg.com/opinion/articles/2018-12-10/elizabeth-warren-is-wrong-about-jobs-and-trade

If Elizabeth Warren really wants to help workers, she could start with the facts.

Senator Elizabeth Warren, a likely 2020 presidential contender, recently laid out her vision for foreign policy in a speech at American University and an essay in Foreign Affairs. The Massachusetts Democrat was highly critical of traditional U.S. trade policy.

She writes that the trade deals negotiated by leaders of both political parties “mainly lifted the boats of the wealthy while leaving millions of working Americans to drown.” Her conclusion: “Policymakers were willing to sacrifice American jobs in hopes of lowering prices for consumer goods at home and spreading open markets abroad.”

Supporters of free trade would disagree with this characterization, of course. But they might agree that among the main benefits of trade are, as the senator says, lower-priced goods in U.S. stores and new markets around the world for American business.

But what about jobs?

From President Donald Trump’s bleak inaugural vision of American carnage to Warren’s drowning American workers, there is a growing bipartisan consensus that free trade reduces employment.

This view seems to forget that free trade should increase a country’s exports as well as its imports.

Increasing demand for imports can reduce demand for similar domestically produced goods and services. This can hurt employment opportunities and wages in those domestic industries. But the opposite is true of exports. As export demand increases, the demand for workers in those industries should rise, putting upward pressure on their wages and increasing jobs.

It’s also hard to square the trade-reduces-employment view with the existence of macroeconomic policy designed to achieve full employment. More specifically, if free trade creates a large number of unemployed workers, then the Fed will keep the economy running hot long enough to allow those workers to find new jobs.

So as a first pass, the right answer to the question is that trade doesn’t reduce overall employment. It doesn’t increase it, either. It’s a wash.

Careful research by the economist Robert Feenstra and his co-authors shows that this simple conclusion is basically correct. In one paper, they find that the U.S. lost around 3.5 million manufacturing jobs due to Chinese imports from 1991 to 2007. At the same time, export-driven job gains totaled about 3.3 million.

So the net effect was about 200,000 fewer jobs. Looking over the full two decades of the 1990s and 2000s, Feenstra finds even more balance between jobs gained due to exports and lost due to imports.

In a second paper, Feenstra and Akira Sasahara use a different method to study the effects of U.S. exports and imports on labor demand. They found that export growth led to demand for 6.6 million jobs from 1995 to 2011, including 4 million service-sector jobs, while imports reduced demand. But on net, overall labor demand increased due to trade over this time period — with increases in services and declines in manufacturing.

Of course, the level of employment is not the only outcome worth considering when thinking about the effects of trade. One is churn. Let’s take Feenstra’s estimate of 2 million fewer manufacturing jobs due to trade with China. That works out to an average loss of about 10,000 jobs per month over the 17 years in his estimate.

To put this in context, compare it to the total level of turnover in the U.S. economy for September 2018, the most recent month for which data is available. That month, 3.6 million workers quit their jobs. Companies laid off or discharged 1.7 million workers. In total, 5.7 million workers separated from their employer.

The amount of churn in the U.S. labor market is staggering. Trade causes a small share of that churn.

But trade-caused disruption does create winners and losers. Although economists have long understood this simple fact, some recent
research has demonstrated that the speed with which the U.S. economy adjusts to the disruption has been much slower than had been previously understood. This left local areas especially exposed to import competition with higher unemployment, fewer jobs and lower wages for much longer than many economists would have predicted.

And even if workers who lose a manufacturing job because of trade are able to get a job in the services sector, that doesn’t mean they will necessarily be happy about it. Those jobs often pay less, with fewer benefits, and are less stable than the job they lost to trade.

Policymakers should focus their efforts on dealing with those frustrations, and not on trade.

As we have seen, the problem with the U.S. labor market isn’t trade — trade does not have a significant impact on the level of employment or on churn in the labor market. And trade delivers a host of benefits to the U.S. economy, including a greater variety of and lower prices for consumer goods, along with productivity and efficiency gains.

But for a worker who loses his job due to trade, the macroeconomic picture hardly matters. The answer is not to erect walls around the U.S. Instead, public policy needs to do a much better job of helping workers manage the difficult adjustments that are required by a dynamic economy — whether those adjustments are driven by trade, or by anything else.

On this score, Warren’s speech and essay fall flat. Using trade agreements to go after tax havens, curtail large multinational firms and address climate change isn’t the answer. The same goes for her vague call for workers to “be meaningfully represented at the negotiating table.”

In the next two years, presidential aspirants will need to come up with policy ideas that pair global openness with support for workers. This is so difficult precisely because it is so needed, after decades of unsatisfactory attempts.

AI Summary. A global input-output analysis estimates that U.S. imports from China reduced labor demand by 2m jobs while U.S. exports supported demand for 6.6m jobs — 2m in manufacturing, 0.5m in resource industries, and 4.1m in services — leaving a net gain in labor demand driven by service exports.

Robert C. Feenstra and Akira Sasahara National Bureau of Economic Research
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Feenstra finds a fall in labor demand due to trade but a rise in labor demand due to service exports overall positive for job growth.

Do U.S. exports support more jobs than Chinese imports displace?

Core argument: The analysis finds the "China Shock" produced a net loss of 300,000 U.S. jobs, while the overall impact of trade on U.S. job creation from 1995–2011 was positive.

The analysis reveals that while the "China Shock" resulted in a net loss of 300,000 U.S. jobs, the overall impact of trade was positive for domestic job creation. From 1995-2011, U.S. exports spurred demand for 6.6m jobs, including 2m in manufacturing, 0.5m in resource industries, and 4.1m in services. Notably, service exports contributed significantly to job growth, with two-thirds of service sector jobs stemming from direct service exports. In contrast, U.S. imports from China reduced labor demand by 2m jobs, primarily in manufacturing and services. The net effect of U.S. merchandise exports relative to imports from China was a gain of 1.7m jobs. While merchandise trade showed a decline in net labor demand, the rise in service exports led to an overall increase in labor demand, underscoring the positive role of service exports in job growth.

Takeaways by Macro Roundup® AI

  1. The analysis finds the "China Shock" produced a net loss of 300,000 U.S. jobs, while the overall impact of trade on U.S. job creation from 1995–2011 was positive.
  2. U.S. exports generated demand for 6.6m jobs over 1995–2011, comprising 4.1m in services, 2m in manufacturing, and 0.5m in resource industries, with two-thirds of service sector jobs traced to direct service exports.
  3. U.S. imports from China reduced labor demand by 2m jobs, mainly in manufacturing and services, leaving a net gain of 1.7m jobs from U.S. merchandise exports relative to imports from China.

1/2 of the paper’ Strain flagged, it’s a Feenstra paper we looked at when it was released. (aside, we also “know” him (he helps oversee the Penn tables and was nice enough to check our data on evolution of the GDP/Capital Stock for the US and some peer economies)

net the “China Shock” left the US down 300,000 jobs; whereas overall trade was positive for domestic job creation, “… We find that the growth in U.S. exports led to increased demand for 2 million jobs in manufacturing, 0.5 million in resource industries, and a remarkable 4.1 million jobs in services, totaling 6.6 million. One-third of those service sector jobs are due to the intermediate demand from merchandise (manufacturing and resource) exports, so the total labor demand gain due to merchandise exports was 3.7 million jobs. In comparison, U.S. merchandise imports from China led to reduced demand of 1.4 million jobs in manufacturing and 0.6 million in services (with small losses in resource industries), with total job losses of 2.0 million. It follows that the expansion in U.S. merchandise exports to the world relative to imports from China over 1995-2011 created net demand for about 1.7 million jobs. Comparing the growth of U.S. merchandise exports to merchandise imports from all countries, we find a fall in net labor demand due to trade, but comparing the growth of total U.S. exports to total imports from all countries, then there is a rise in net labor demand because of the growth in service exports…”

Robert C. Feenstra and Akira Sasahara, The ‘China Shock’, Exports and U.S. Employment: A Global Input-Output Analysis,” National Bureau of Economic Research, November 2017, https://www.nber.org/papers/w24022.pdf

“….We find that the growth in exports led to demand for 2 million jobs in manufacturing, 0.5 million in resource industries, and a remarkable 4.1 million jobs in services over 1995-2011, totaling 6.6 million. Two-thirds of those service sectors jobs are due to the export of services themselves, whereas one-third is due to the intermediate demand from the manufacturing and resource – or what we call merchandise – exports, so the total demand gains from merchandise exports are 3.7 million jobs, with 1.9 million in manufacturing, 0.45 million in natural resource industries, and 1.3 million in services. That 1.9 million jobs in manufacturing is much the same as the 1.9 million added jobs for an earlier 16 year period, 1991-2007, estimated by Feenstra, Ma and Xu (2017)…..We find that the growth in U.S. merchandise exports over 1995-2011 led to demand for 1.9 million jobs in manufacturing, 0.45 million in resource industries, and 1.3 million jobs in services, totaling 3.7million. In comparison, U.S. merchandise imports from China over 1995-2011 led to reduced labor demand of 1.4 million jobs in manufacturing and 0.6 million in services (with small losses in resource industries), for total job losses of 2.0 million. It follows that the expansion in U.S. merchandise exports relative to imports from China over 1995-2011 led to the net demand for about 1.7 million jobs. Comparing the growth of U.S. merchandise exports to merchandise imports from all countries, we find a fall in net labor demand due to trade, but comparing the growth of total U.S. exports to total imports from all countries, then there is a rise in net labor demand because of the growth in service exports….The added demand for 1.9 million jobs in U.S. manufacturing exports that we have found much the same as the equilibrium increase of 1.9 million jobs for a 12 year period, 1999-2011, estimated by Feenstra, Ma and Xu (2017). That added demand for manufacturing jobs explains about one-half of the overall demand increase of 3.7 million jobs due to merchandise exports. The offsetting reduction in labor demand of 2.0 million jobs due to imports from China, mainly manufactures, is very close to Acemoglu, Autor, Dorn, Hanson and Price (2016), who find about 1.0 million manufacturing jobs lost in equilibrium during 1999- 2011, and another 1.0 million jobs lost by intermediate demand throughout the economy….Because the input-output analysis relies exclusively on the demand side of the labor market, one might have expected to get considerably larger shifts in demand that would then be offset by upward-sloping labor supply curves to obtain the (smaller) equilibrium changes. Instead, our findings are that the demand shifts from the input-output analysis are similar to the equilibrium changes in employment identified by regression analysis. There are two possible explanations for this result. The first is that there are near-horizontal labor supply curves at the regional level, reflecting movement in and out of unemployment or labor force participation, or movement between regions. But that is an unrealistic explanation: generally there is limited mobility across regions, except for immigrants who do respond to wages difference across regions (Caneda and Kovak, 2016). A different explanation for this finding is that regions with negative employment shocks from imports also have positive shocks from exports, so that the net shocks in regions are smaller than the gross (export and imports) shocks. That explanation is explored further in Feenstra, Ma and Xu (2017). Caliendo, Dvorkin and Parro (2015) and Dix- Carneiro and Kovak (2017) also incorporate careful specifications of the employment decisions and regional movement of individuals….We quantify the impact on U.S. employment from imports and exports during 1995-2011, using the World Input-Output Database. We find that the growth in U.S. exports led to increased demand for 2 million jobs in manufacturing, 0.5 million in resource industries, and a remarkable 4.1 million jobs in services, totaling 6.6 million. One-third of those service sector jobs are due to the intermediate demand from merchandise (manufacturing and resource) exports, so the total labor demand gain due to merchandise exports was 3.7 million jobs. In comparison, U.S. merchandise imports from China led to reduced demand of 1.4 million jobs in manufacturing and 0.6 million in services (with small losses in resource industries), with total job losses of 2.0 million. It follows that the expansion in U.S. merchandise exports to the world relative to imports from China over 1995-2011 created net demand for about 1.7 million jobs. Comparing the growth of U.S. merchandise exports to merchandise imports from all countries, we find a fall in net labor demand due to trade, but comparing the growth of total U.S. exports to total imports from all countries, then there is a rise in net labor demand because of the growth in service exports….

AI Summary. The authors estimate that US job losses from Chinese imports exceeded job gains from export expansion by roughly 0.2–0.3m jobs, and that over a longer window the net employment effect of import and export exposure was roughly balanced across local labor markets.

Robert C. Feenstra National Bureau of Economic Research
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Btw 1991 and 2007, US exports generated significant job opportunities but were slightly insufficient to offset job losses from Chinese imports, netting a 0.2-0.3m job loss.

Do export gains offset job losses from Chinese imports?

Core argument: The US lost a net 0.2–0.3m jobs between 1991 and 2007 from Chinese import competition, as employment created by global export expansion fell slightly short of offsetting those losses.

Between 1991 and 2007, the US experienced a net job loss of approximately 0.2-0.3m jobs due to the impact of Chinese imports, despite significant job creation from global export expansion. While US exports generated substantial employment opportunities, they were slightly insufficient to offset the job losses caused by Chinese imports. Extending the analysis to 1991-2011, the net job effect of import and export exposure was roughly balanced at the commuting zone level. The geographic correlation between job losses and gains suggests that local labor markets reached equilibrium despite limited regional mobility. This highlights the complex interplay between global trade dynamics and domestic employment trends, emphasizing the need for nuanced policy responses to address these challenges.

Takeaways by Macro Roundup® AI

  1. The US lost a net 0.2–0.3m jobs between 1991 and 2007 from Chinese import competition, as employment created by global export expansion fell slightly short of offsetting those losses.
  2. Extending the window to 1991–2011, the net job effect of import and export exposure was roughly balanced at the commuting zone level.
  3. The geographic correlation between trade-related job losses and gains suggests local labour markets reached equilibrium despite limited regional mobility.

2/2 of the paper Strain flagged. another Feenstra, mirrors his first

"...We examine the employment responses to import competition from China and to global export expansion from the United States, both of which have been expanding strongly during the past decades. We find that although Chinese imports reduce jobs, at both the industry level and the local commuting zone level, the global export expansion of US products also creates a considerable number of jobs. On balance over the entire 1991-2007 period, job gains due to changes in US global exports were slightly less than job losses due to Chinese imports. Using data at both the industry level and the commuting zone level, we find a net loss of around 0.2-0.3 million jobs. When we extend the analysis to 1991-2011, we find the net job effect of import and export exposure is roughly balanced at the commuting zone level.....In this paper, we have re-examined the employment impact of US exports, using exports to the world rather than just exports to China. We believe that this is a better way to evaluate the employment impact of US exports: the growth in Chinese demand as compared to the growth in demand from other countries for US goods are of equal interest when evaluating the employment impact, so there is no reason to focus on Chinese demand alone.12 But demand for US exports is endogenous, as we must correct for. Just like the `China shock' created a compelling supply-side instrument for Chinese exports to the US, i.e. by using its exports to other industrial countries, so too we have had to develop good instruments for US exports to the world. In addition to using the exports of other industrial countries to foreign markets, we have derived a gravity-like specification for US exports that uses those exports of other countries along with the tariffs charged in foreign countries, and distance. The derivation of this equation showed that the sector-year fixed effects would like reflect US supply shocks, so we have omitted those fi xed effects when constructing this second instrument.Our results t the `textbook story' that job opportunities in exports make up for jobs lost in import-competing industries, or nearly so. At the industry level, the US export of manufactured goods created enough jobs to o set all but 0.3-0.4 million of the jobs lost due to imports from China, over the entire 1991-2011 period. When we shift to considering CZ's, then the net job loss over 1991-2007 is still about 0.2 million jobs, but over the longer period 1991-2011 the job losses are just balanced with the job gains. There is also a positive geographic correlation between those losses and gains, so that CZ's with higher percentage losses are also more likely to have higher percentage gains. This result helps to explain how local labor markets reached equilibrium even in the absence of strong mobility across regions.It would be desirable to further explore the job losses and gains beyond the CZ level, such as within sector and within broader counties rather than CZ, to understand the equilibrating mechanism in local labor markets...."
Robert C. Feenstra, Hong Ma and Yuan Xu, "US Exports and Employment," National Bureau of Economic Research, November 2017, https://www.nber.org/papers/w24056

AI Summary. The share of working-age Americans with a college degree is now 20% higher in urban than rural areas, up from a 5% gap in 1970, a shift that coincides with the disappearance of mid-skilled city jobs to offshoring and automation. The urban wage premium now mainly benefits well-educated workers, with little wage boost for less-educated ones.

Economist Staff The Economist
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The share of working-age Americans with a college degree is now 20% higher in urban areas than rural ones, a significant increase from a 5% gap in 1970.

Do cities still raise wages for workers without college degrees?

Core argument: The share of the working-age population holding a college degree is now 20% higher in urban areas than rural ones, up from a 5% gap in 1970.

The share of the working-age population with a college degree is now 20% higher in urban areas than rural ones, a significant increase from a 5% gap in 1970. This shift coincides with the disappearance of mid-skilled jobs in cities, which have either moved abroad or been automated, leaving fewer opportunities for those without degrees. The urban wage premium, once benefiting all skill levels, now primarily advantages well-educated workers, while less-educated workers see little to no wage boost from urban employment. Consequently, the economic prospects for Americans without college degrees have dimmed, as they face limited job opportunities and stagnant wages, particularly in urban settings.

Takeaways by Macro Roundup® AI

  1. The share of the working-age population holding a college degree is now 20% higher in urban areas than rural ones, up from a 5% gap in 1970.
  2. Mid-skilled jobs in U.S. cities have disappeared, moving abroad or being automated, leaving fewer opportunities for workers without college degrees.
  3. The urban wage premium, which once benefited workers at all skill levels, now primarily advantages well-educated workers, with less-educated workers seeing little to no wage boost from urban employment.

Just an FYI so not including a tweet the Economist on Autor's lecture

"....David Autor of the Massachusetts Institute of Technology offered the most pointed characterisation, drawing on forthcoming research co-authored with Juliette Fournier, also of MIT. The earnings of workers without a college education have scarcely risen in 50 years, after adjusting for inflation; for men they have fallen. This stagnation coincided with tectonic changes in American employment. The share of jobs that require either a lot of training, or very little, has grown since 1970. Much of the production and office work that requires moderate training, which once employed vast numbers of workers without college degrees, has disappeared, either shipped abroad or offloaded on robots and computers..... Mr Autor and Ms Fournier provide important new context. In the 1950s, they show, there was almost no relationship between how densely populated a place was and the share of its residents with college degrees. That has changed utterly: the share of the working-age population with a college degree is now 20 percentage points higher in urban places than it is in rural ones. In 1970 that gap was just five percentage points. Several decades ago mid-skilled work was clustered in big cities, while low-skilled work was most prevalent in the countryside. No longer; those mid-skilled jobs that remain are more likely to be found in rural areas than in urban ones. As the geographical pattern of work has shifted, so has that of wages. Economists have long acknowledged the existence of an urban wage premium: workers in more densely populated places earn more, in part because of the productivity benefits of crowding together that nurture urban growth in the first place. This pay premium used to hold across the range of skills. In 1970 workers without any college education could expect to get a boost to their earnings when they moved to a big city, just as better-educated workers did. Since then the urban wage advantage for well-educated workers has become more pronounced, even as that for less-educated workers has all but disappeared...."
Economist, "The outlook is dim for Americans without college degrees,"The Economist, January 8, 2019, https://www.economist.com/finance-and-economics/2019/01/08/the-outlook-is-dim-for-americans-without-college-degrees

AI Summary. A model of innovation-driven growth estimates the optimal top income tax rate at 29%, far below the 92% rate that would maximize revenue if innovation spillovers are ignored. Because ideas raise productivity economy-wide, the author argues raising the top marginal rate from 50% to 75% would lower GDP per person by about 6% long run.

Charles Jones National Bureau of Economic Research
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Raising top tax rates can stifle innovation, a key driver of economic growth, according to Stanford’s Charles Jones @CharlesJones. His model suggests an optimal top tax rate of 29%, significantly lower than the revenue-maximizing rate of 92%.

How do innovation spillovers lower the optimal top income tax rate?

Core argument: Stanford's Charles Jones estimates the optimal top income tax rate at 29% once innovation spillovers are counted, below the 92% revenue-maximizing rate that ignores those spillovers.

Stanford's Charles Jones argues that raising the top tax rate can stifle innovation, which is a key driver of economic growth. His model suggests that the optimal top income tax rate is 29%, significantly lower than the revenue-maximizing rate of 92% when innovation spillovers are ignored. Increasing the top marginal tax rate from 50% to 75% could reduce GDP per person by ~6% in the long run, despite raising 2.5% of GDP in revenue before behavioral responses. This reduction in innovation impacts everyone's income, not just the top earners, as ideas are nonrival and enhance productivity across the board. The model indicates that if ideas are more crucial than assumed, the optimal tax rate could even be negative, as the income boost from subsidizing innovation outweighs redistribution benefits. Thus, high marginal tax rates may ultimately reduce social welfare by hindering the creation of new ideas that drive GDP growth.

Takeaways by Macro Roundup® AI

  1. Stanford's Charles Jones estimates the optimal top income tax rate at 29% once innovation spillovers are counted, below the 92% revenue-maximizing rate that ignores those spillovers.
  2. Jones's model implies that raising the top marginal rate from 50% to 75% could reduce GDP per person by about 6% in the long run, while raising 2.5% of GDP in revenue before behavioral responses.
  3. Because ideas are nonrival and raise productivity broadly, Jones argues reduced innovation lowers incomes for everyone rather than only top earners, and that the optimal top rate could be negative if ideas matter more than assumed.

Stanford's Charles Jones released a new paper showing that new ideas and innovation drive economic growth; and the reward for successful innovation and the associated risk-taking is a top income. His model suggests the optimal tax rate incorporating the role of innovation is 29%; if ideas are even more important than the model’s baseline it's possible for the optimal top income tax rate to turn negative as the growth related to higher innovation is greater than the social benefits of redistribution.

From Steve:

model of the optimum tax rate which a new constraint, ideas. 1) new ideas drive economic growth, 2) the reward for creating a successful innovation is a top income, and 3) innovation cannot be perfectly targeted by a separate research subsidy finds that, "...For example, consider raising the top marginal tax rate from 50% to 75%. As we discuss below, in the United States, the share of income that this top marginal rate applies to is around 10%, so the change raises about 2.5% of GDP in revenue before the behavioral response. In our baseline calibration, such an increase in the top marginal rate reduces innovation and lowers GDP per person in the long run by around 6 percent...."

Charles Jones, Taxing Top Incomes in a World of Ideas," National Bureau of Economic Research (Preliminary), September 6, 2018, https://www8.gsb.columbia.edu/faculty-research/sites/faculty-research/files/finance/Macro%20Workshop/toptax.pdf

"...The nonrivalry of ideas is key to this result and illustrates why incorporating physical capital or human capital into the top tax calculation is insufficient. If you add one unit of human capital or one unit of physical capital to an economy—think of adding a computer or an extra year of education for one person—youmake one workermore productive, because these goods are rival. But if you add a new idea — think of the computer code for the original spreadsheet or the blueprint for the electric generator —you can make any number of workers more productive. Because ideas are nonrival, each person’s wage is an increasing function of the entire stock of ideas. A distortion that reduces the production of new ideas therefore impacts everyone’s income, not just the income of the inventor herself.....The idea creation and implementation that occurs beyond formal R&D may be distorted by the tax system. In particular, high incomes are the prize that motivates entrepreneurs to turn a basic research insight that results from formal R&D into a product or process that ultimately benefits consumers. High marginal tax rates reduce this effort and therefore reduce innovation and the incomes of everyone in the economy....Taking this force into account is important quantitatively. For example, consider raising the top marginal tax rate from 50% to 75%. As we discuss below, in the United States, the share of income that this top marginal rate applies to is around 10%, so the change raises about 2.5% of GDP in revenue before the behavioral response. In our baseline calibration, such an increase in the top marginal rate reduces innovation and lowers GDP per person in the long run by around 6 percent. With a utilitarian welfare criterion, this obviously reduces welfare. But even redistributing the 2.5% of GDP to the bottom half of the population would leave them worse off on average: the 6% decline in their incomes is not offset by the 5% increase from redistribution. In other words, unless the social welfare function puts enormous weight on the poorest people in society, raising the top marginal rate from 50% to 75% reduces social welfare.....For example, in a baseline calculation, the revenue-maximizing top tax rate that ignores the innovation spillover is 92%. In contrast, the rate that incorporates innovation and maximizes a utilitarian social welfare function is just 29%. Moreover, if ideas play an even more important role than assumed in this baseline, it is possible for the optimal top income tax rate to turn negative: the increase in everyone’s income associated with subsidizing innovation exceeds the gains associated with redistribution.....This paper considers the taxation of top incomes when the following conditions apply: (i) new ideas drive economic growth, (ii) the reward for creating a successful innovation is a top income, and (iii) innovation cannot be perfectly targeted by a separate research subsidy — think about the business methods of Walmart, the creation of Uber, or the “idea” of Amazon.com. These conditions lead to a new term in the Saez (2001) formula for the optimal top tax rate: by slowing the creation of the new ideas that drive aggregate GDP, top income taxation reduces everyone’s income, not just the income at the top. When the creation of ideas is the ultimate source of economic growth, this force sharply constrains both revenue-maximizing and welfare-maximizing top tax rates. For example, for extreme parameter values, maximizing the welfare of the middle class requires a negative top tax rate: the higher income that results from the subsidy to innovation more than makes up for the lost redistribution. More generally, the calibrated model suggests that incorporating ideas and economic growth cuts the optimal top marginal tax rate substantially relative to the basic Saez calculation.... "