Macro Roundup

Autor Comment 2/2:My data suggest a fall in full-time hourly wages for workers with high school or lower education concentrated in metro + urban areas. Accounting for rising rental price in these areas would definitely accentuate this trend. But a substantially smaller share of working-age adults have high school or lower education in 2015 than did in 1980 (see below). So one could have falling wage levels for low education workers with generally rising wages across the unconditional distribution.

If you are willing to write a blurb, I would need it by June 13th. (Time is short but luckily the introductions and conclusions to each chapter convey 80% of the content with 20% of the words.)

No reader will agree with all of my conclusions. Hopefully, your blurb can carve its way to common ground between us. Of my last book for example, Andrei Shleifer chose a point he agreed with strongly and wrote: “Edward Conard’s book represents the most cogent and persuasive analysis of the financial crisis to date. It is deeper and likely more accurate than what we have seen so far from journalists, academics, and particularly former government officials.” Nouriel Roubini, who sits on the opposite side of the aisle from me, wrote: “Edward Conard 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.”

I know my views on trade and immigration are somewhat controversial, but I hope you will agree that I have written a serious book about conservative economics that addresses opposing sides of each issue fairly.

Throughout the book, I argue that properly trained talent and the economy’s capacity and willingness to take risk now constrain growth. If that’s true, then spreading these constrained (American) resources over more low-skilled workers (i.e., immigrant and offshore workers) ought to slow American low-wage wage growth relative to the rest of the economy. From my perspective, your recent work documents the downstream effects of the upstream structural forces my book tries to describe.

My second book, The Upside of Inequality: How Good Intentions Undermine the Middle Class(attached), is slated for publication September 13th. I would be honored if you would take the time to read the book and consider blurbing it.

David,

David

Thanks for the invite. I’ll give this some thought, and will try to find time to read the Intro and Conclusion, seeking inspiration for a blurb. No promises, but I appreciate your reaching out. And congratulations again on the second book!

Hi Ed,

Pages 7-14, 185-192, and 260-262 summarize the the book’s arguments more broadly.

Thank you for considering this. Despite the provocative title, I hope you find the arguments carefully considered even if you disagree with some of them. Your work is quote on page 57 in Chapter 2.

book! I enjoyed it thoroughly. It stimulated a whole set of new ideas in me."

Tyler Cowen offered to write a book review if I didn't need his blurb but privately said: "Great

Others are still reading (I hope!), but Glenn Hubbard said: “This provocative new book by Ed Conard is a must-read for serious students of economic policy. Conard’s core thesis—that advancement in living standards is constrained by risk capital and properly trained talent—suggests an inequality borne of returns from innovation. Many of his arguments will rankle either the left or the right, but his solutions are sensible and all the more compelling in the context of this paean to risk taking.”

Mitt Romney said: "Page after page, Conard challenges conventional wisdom about the causes of growing inequality, the constraints to growth, and the feasibility of commonly proposed solutions to advance a thought-provoking blueprint for growing middle- and working-class incomes in a world with an abundance of workers. Whether you agree or not, this is serious thinking for serious thinkers."

Any chance of you blurbing my book? I would be honored to include it but I would need it by Monday, so its down to the wire. Again, thank you for considering this.

Associate Department Head

Professor of Economics and

David

Best wishes,

I am hoping to get to it this weekend. But I cannot promise as I’m dealing simultaneously with many external and familial deadlines.

Dear Ed,

I understand. Thank you. If you do take the time, I hope you will see that even if you disagree with some of it, all of the arguments are well within the boundaries of serious economic thought.

Let me finally say that I’d be more than glad to find time when we are in the same city for a serious discussion of these issues. I’m no more of a fan of Piketty’s book than you are, and I think the single-minded focus on the 1% is misguided and counterproductive (indeed, I made that argument in a 2014 article inScience). I’m strongly opposed to vilifying success, and I’m strongly in favor of investing in skills. So, I’m sure we’d have much to discuss. No action required of course.

Given the above, I’m sort of a loss for a blurb that would be particularly useful for your book. I feel that if I endorsed one part of the argument (“rightly rejects the unsupported claim that the top 1% are the cause of all our troubles”), I’d want to qualify that with (“but asserts that they are in fact that cause of most of our prosperity, which is also unsupported”). But at least you can be sure that I did spend the time to take the book seriously.

I agree that the U.S. cultural of entrepreneurialism is fabulously important and a unique national asset. I concur that those who assert that the top 1% are “the cause” of stagnant median incomes and, moreover, are mostly a bunch of crony capitalists have no real evidentiary ground to stand on. But similarly, I’d say the claim that the top 1% are the key drivers of U.S. economic growth, or that taxing them more would have strongly deleterious consequences on further growth prospects, is equally unsupported by high quality evidence. (And to the extent that a substantial share of top 1% incomes derives from purely from exotic financial innovations, I think the claims are especially dubious.) Fundamentally, it is extremely hard to rigorously assess the marginal social product of the top 1%. Similarly, it is extraordinarily difficult to definitively assess the role that taxation plays in hindering or fostering entrepreneurship in the U.S. Pundits who claim that they definitely “know” the answers to these questions are either intellectually dishonest, self-deluded, or just sycophants.

As another example, the U.S. has not had better per capita growth performance than other rich countries to the best of my understanding. And most of the reason that the U.S. has higher median incomes than other rich countries is that U.S. households work more hours, not because U.S. workers and companies are more productive per hour (Japan is an exception: high hours, low productivity, though a lot of those ‘hours’ are really on the job recreation). Median income growth in the U.S. really has been quite stagnant, and real wages have fallen by more here among low-skilled workers than in almost any other advanced country.

I read the pages that you recommended, and I believe that I’ve gotten the gist of the book. I’m having trouble producing a blurb because I’m not persuaded by the arguments and — at the risk of giving offense, and taking it on faith that you’d prefer a candid answer — I do not think they are well supported by the evidence. Sure, it’s uncontroversial and doubtless correct to say that North Korea is a failed economic experiment and South Korea a successful one, but this tells us little about whether it is Germany or the U.S. that has too much or too little taxation, redistribution, or public investment.

Dear Ed,

PS I'd love to stop by and see you in Boston, or take you out for an A+ meal if/when you are in New York.

Again, thank you for taking the time to read/consider this.

You may not have read enough to buy/see all that, but how about giving the same (unsolicited) blurb Greg Mankiw gave my first book: "this book is more thoughtful than most economic books written for popular audiences."

Ultimately, this is a popular book, not an academic book, that express a point of view, explains why I have drawn the conclusions I have, (endeavors to) fairly explains the opposing points of view, and modulates my certianty in the body of chapters, albeit less so when I am expressing my own conclusions at the end of each chapter (mainly what you read). I warn readers that economists often work backward from their conclusions to a set of unprovable beleifs, that academics have gradually narrowed the boundaries of those beliefs, and that I have endeavored to stay within those boundaries.

As well US employment has grown 50% since 1980--2x Germany and France, 3x Japan. And the US has been more successful integrating immigrants and low socioeconomic workers.

Below-the median, America has provided a home for 55 million lesser-skilled Hispanics. US academic test score are lower. 20% of US student are low socioeconomic status vs 15% in high-wage Europe. Longer hours, yonger workers, lower unemployment rates, more women, and more first-generation immigrants all indicate a lower US marginal product of labor. And still the median is as higher or higher than high-wage Europe..

I think it's generous, however, to say Europe performs as well as the US, despite your per hour argument. Europe's productivity is pulled up by US innovation. The pay of above-the-median US workers relative to Europe is much higher than the median worker, higher still for Scandinavian-Americans, Asian-American, and other statistically significant demographics for which we have data. Similarly, high IQ US workers earn more (per your article in Science) than their counterparts elsewhere.

I warn readers that even if Europe cut taxes, it would take decades to build the institutional capabilities necessary to close this gap, and that Europe may never be able to close it (unless different technologies become the primary driver of growth). I concede that America's success could be the result of economies of scale. And I say that cutting US taxes would blow a huge hole in the deficit. I even mock Republicans who sell tax cuts by overpromising immediate growth. (And I propse swapping a lower corporate tax rate for a higher capital gains rate = the ordinary income rate to avoid enlarging the deficit). I also criticize Diamond and Saez for assuming the long term effects of lower taxes are zero with no confidnce interval whatsoever.

I do argue that relatively higher risk-adjusted payoffs for risk-taking motivates increased risk-taking, although I'm careful not to attribute higher payoffs to lower taxes but rather to a gradually compounding feedback loop where successful risk-taking creates companies like Google and Facebook that give US workers relatively more valuable on the job training. (I argue that) This coalesces into communities of experts, like Silicon Valley with synergistic and spillover benefits. It also put risk-bearing capital into the hands of investors with inside knowledge/expertise. Together these institutional capabilities increase risk-adjusted returns. The success of others also raises the bar for status. In turn, talent is more motivated to get the training and take the risks that produce innovation.

Nevertheless, I agree that the data on incentives is inconclusive, but largely because there simply aren't enough data points (although I think the evidence on the other side of the debate--economies with high taxes that have significantly outperformed their true peers--is asymmetrically thin).

I don't see incentives as the central thesis of the book. I see binding constraints as the core thesis--i.e., the economy's capacity and willingness to take risk, namely it's equity, and properly trained talent (2 sides of the same coin), and not labor or (risk-averse) savings, where economists (who don't acknowledge these constraints) tells displaced workers that competition between opportunistic entrepreneurs and other investors will restore capital per work, productivity, and wages, when the entrepreneurs have move to California and outsourced the blue collar jobs to Foxcom.

Thank you for taking a look.

Associate Department Head

Professor of Economics and

David

Hope that’s not prolix. Other deadlines call, but I know you needed a reply today.

“Conard makes a fresh argument for the productive value of inequality, which is that scarce entrepreneurial effort and risk-tolerant capital are the resources that are both most central to economic growth and most sensitive to the potential distortions imposed by taxation and regulation. Whether or not one accepts this argument, it’s an argument well worth having.”

Blurb wise, how about:

Yes, I’d be delighted to get together in either NYC or Cambridge, MA. Let’s look for an opportunity.

Dear Ed,

I also wondered about the “after-rent” wages of middle-skilled (and lower-skilled) urban workers. I believe/guess those workers are largely paid more to cover the higher cost of urban real estate, but that little of their incrementally higher pay ends up in their pocket after paying their incrementally higher rent. With the growing success of the most successful workers (and an influx of low-skilled immigrants willing to work for low wages) bidding up the value of urban real estate, it’s not hard to imagine the urban after-rent wages (and the other non-pecuniary costs of urban living for lower-paid workers) of middle and lower-skilled urban workers is not as high as it appears to be and might even be lower today than it has been.

I’m sure I’m not the first person to ask this question after watching your presentation, but I couldn’t help but wonder how the distribution of income by population density has changed over time independent of educational attainment. I’m skeptical that a college education creates much value for middle-skilled students (except where it provides technical training like nursing). If that’s true, then the pool of middle-skilled workers might have sorted into more talented workers with previously higher wages on average whose successive generations now earn college degrees but don’t earn more money (relative to the overall distribution of income, which has shifted upward within most statistically significant demographics, and partially downward from a mix shift to lesser paid demographics) but who now appear in your higher educated pool, and lesser-skilled workers who remain in the middle pool but appear to have lower wages on average, once the more talented middle-skilled workers are no longer included in the average of that pool. Seeing the changing distribution of income by population density independent of educational attainment would make that easier to adjudicate.

I watched your AEA presentation (as I do all your work). I am still pondering its implications. I appreciate this work and all your extraordinary contributions.

Ed Comment 1/2:

David

Best,

Good Q's, of course!

Sorry for the run-on sentences. As usual, your high-quality work has been on my mind. Thanks for that.

Yes, that only makes the story more troubling. No question that cost of living has risen faster in urban areas than elsewhere. So the declining non-COL urban wage gradient for non-college workers portends an even steeper fall in COL-adjusted real earnings for non-college workers in these places.

I also wondered about the “after-rent” wages of middle-skilled (and lower-skilled) urban workers. I believe/guess those workers are largely paid more to cover the higher cost of urban real estate, but that little of their incrementally higher pay ends up in their pocket after paying their incrementally higher rent. With the growing success of the most successful workers (and an influx of low-skilled immigrants willing to work for low wages) bidding up the value of urban real estate, it’s not hard to imagine the urban after-rent wages (and the other non-pecuniary costs of urban living for lower-paid workers) of middle and lower-skilled urban workers is not as high as it appears to be and might even be lower today than it has been.

I'm sure thataverageincomes have risen more in urban areas. I mean, they have to have. Urban areas have become much more highly skilled, high skill wages have increased, and they've increased by more in urban areas. Perhaps this will help. I'm attaching two plots of real mean log wages by five exhaustive and mutually exclusive education categories. The "1950" plot covers from 1950 to 2015. The 1980 plot covers 1980 to 2015 with more intervening years plotted (1980, 1990, 2000, 2007 2015).

I’m sure I’m not the first person to ask this question after watching your presentation, but I couldn’t help but wonder how the distribution of income by population density has changed over time independent of educational attainment. I’m skeptical that a college education creates much value for middle-skilled students (except where it provides technical training like nursing). If that’s true, then the pool of middle-skilled workers might have sorted into more talented workers with previously higher wages on average whose successive generations now earn college degrees but don’t earn more money (relative to the overall distribution of income, which has shifted upward within most statistically significant demographics, and partially downward from a mix shift to lesser paid demographics) but who now appear in your higher educated pool, and lesser-skilled workers who remain in the middle pool but appear to have lower wages on average, once the more talented middle-skilled workers are no longer included in the average of that pool. Seeing the changing distribution of income by population density independent of educational attainment would make that easier to adjudicate.

Dear Ed, Thanks for your message and for your Q's. I'm going to respondvbriefly because I'm under an urgent deadline towrite upthat Ely Lecture for the AEA conference publication.

Autor Comment 1/2:

Ed Comment 2/2:David,Thank you. No need to respond to this. I read your presentation as suggesting cities have contributed to a hollowing out the middle class. I suspect the rising price of urban real estate prices may make that true (for after-rent incomes). But I didn’t find much change to America’s distribution of income, just an upward shift (see attached). Perhaps middle-class Americas are just moving to locations where they can find higher standards of living. I can’t help but wonder how the choice of bookends (e.g., income or educational attainment) creates theappearance of a hollowing out. Anyway, I greatly appreciate your contributions.

Ed Comment:They say, “We do not foresee a sharp pickup in wage growth nationally if the labor market continues to tighten as many anticipate.” But doesn’t figure 3 say that wage inflation should reach 8% per year at 4% unemployment? The relationship between unemployment and wage gain may not be non-linear, but isn’t 8% still very high?

SF Fed (implicitly) underwhelmed by Berstein's thesis that low UI raises wages.
"...In sum, a careful look at the wage Phillips curve across states yieldslittle evidence supporting the contention that wage growth sharply rises as the labor market reaches especially tight conditions.Of course, the current period may be different from the past. For instance, the typical pattern of local wage growth in a tight local labor market may differ when all other nearby labor markets are experiencing similar tightness, as is currently the case. As a result, geographical labor mobility—which can mute wage pressures in tight markets as workers are attracted to higher-wage areas—may be playing less of a restraining role. With this caveat in mind, given the historical experiences of states in recent decades, we do not foresee a sharp pickup in wage growth nationally if the labor market continues to tighten as many anticipate...."

Dan Wilson (FRBSF) Comment: Thanks for your email. In retrospect our y-axis was not well labeled. We were plotting the estimated relationship between wage growth and the unemployment rate, but the predicted wage growth at any specific unemployment rate is a bit more complicated. It requires also adding in the predicted effects (on wage growth) of lagged inflation and productivity growth, which are the two controls in our regressions. Adding in these effects shifts down the whole wage Phillips curve by over 1 percentage point. That means that, over our 1991—2016 sample period, our estimates suggest a 4% unemployment rate would tend to be associated with a wage growth rate around 6%. While this may still seem high, it is an estimate over the 1991—2016 period, and Sylvain Leduc and I found in prior work (https://www.frbsf.org/economic-research/publications/economic-letter/2017/october/has-wage-phillips-curve-gone-dormant/) that the wage Phillips curve has flattened substantially over time, so we’d expect much smaller wage growth from a 4% urate now than in the past.