Edward Conard

Top Ten New York Times Bestselling Author

  • “…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
  • “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
  • “…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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, January 16, 2019

AI Summary. Periods when unemployment fell below 4% have been accompanied by only moderate wage growth of roughly 3-4% annually, suggesting very low unemployment does not necessarily produce rapid wage increases. Globalization, technological change, and reduced unionization are cited as limits on workers' bargaining power, while labor force participation below pre-recession levels indicates possible remaining labor market slack.

Daniel J. Wilson Federal Reserve Bank of San Francisco
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@DanielJWilson @FederalReserveBank of San Francisco: Despite low unemployment, evidence suggests wage growth may not accelerate sharply, with moderate 3-4% annual increases even when unemployment falls below 4%.

Does very low unemployment produce rapid wage growth?

Core argument: Unemployment fell to 3.7% in 2018 while wage growth was just 3.1%, echoing the late 1990s and mid-2000s when sub-4% unemployment coincided with annual wage gains of only 3–4%.

Despite historically low unemployment rates, evidence suggests that wage growth may not accelerate sharply. Data from the late 1990s and mid-2000s show that even when unemployment fell below 4%, wage growth remained moderate, increasing by only 3-4% annually. Recent trends indicate a similar pattern, with unemployment at 3.7% in 2018, yet wage growth was just 3.1%. Factors such as globalization, technological advancements, and a decline in unionization have contributed to this phenomenon by limiting workers' bargaining power. Additionally, the labor force participation rate [LFP] has not fully recovered to pre-recession levels, indicating potential slack in the labor market. These dynamics suggest that while low unemployment is a positive economic indicator, it does not necessarily translate into rapid wage increases, challenging traditional economic models that predict a strong correlation between tight labor markets and wage inflation.

Takeaways by Macro Roundup® AI

  1. Unemployment fell to 3.7% in 2018 while wage growth was just 3.1%, echoing the late 1990s and mid-2000s when sub-4% unemployment coincided with annual wage gains of only 3–4%.
  2. Globalization, technological advancements, and declining unionization have limited workers' bargaining power, contributing to moderate wage growth despite historically low unemployment rates.
  3. The labor force participation rate has not fully recovered to pre-recession levels, indicating potential slack in the labor market.

Sylvain Leduc, Chitra Marti, and Daniel J. Wilson, "Does Ultra-Low Unemployment Spur Rapid Wage Growth?," Federal Reserve Bank of San Francisco, January 14, 2019, https://www.frbsf.org/economic-research/publications/economic-letter/2019/january/does-ultra-low-unemployment-spur-rapid-wage-growth/

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.

AI Summary. Research estimates industrial robots displace 2–3 human workers each, and up to 3–4 among less-educated, female, and automatable-occupation workers, making their displacement effects 2–3x those of immigration. The number of robots per worker remains modest, but continued exponential growth could disrupt labor markets within a decade.

George Borjas and Richard B. Freeman National Bureau of Economic Research
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According to @GeorgeBorjas @nberpubs, the influx of industrial robots has been modest but is poised to surpass the impact of additional immigration on labor markets.

Do robots displace more workers than immigrants do?

Core argument: An additional industrial robot is estimated to substitute for 2–3 human workers, and 3–4 in specific groups, a displacement effect the authors put at 2–3 times that of additional immigrants.

The influx of industrial robots has been modest but is poised to surpass the impact of additional immigration on labor markets. Robots have been shown to reduce employment and wages, particularly affecting lower-educated workers and those in automatable jobs. An additional robot is comparable to 2-3 human workers, and up to 3-4 in specific groups, indicating a more significant displacement effect than immigrants. While the number of robots per worker has not yet majorly influenced wages and employment, continued exponential growth could disrupt job markets in the next decade. The displacement effects of robots are estimated to be 2-3 times greater than those of immigrants, with more pronounced impacts on less educated, female, and automatable occupation workers. This suggests that the future of work could be significantly altered by technological advancements, warranting close monitoring by labor analysts.

Takeaways by Macro Roundup® AI

  1. An additional industrial robot is estimated to substitute for 2–3 human workers, and 3–4 in specific groups, a displacement effect the authors put at 2–3 times that of additional immigrants.
  2. Robots are found to reduce employment and wages, with more pronounced effects on less educated workers, female workers, and those in automatable occupations.
  3. The number of robots per worker has not yet majorly influenced wages and employment, but continued exponential growth in robot adoption could disrupt job markets within the next decade.

A new NBER paper from Harvard’s George Borjas and Richard Freeman suggests the robot supply shock has been modest but is likely to exceed the impact of additional immigration going forward.

"....The influx of industrial robots into an industry over time is associated with a substantial fall in employment and earnings that is concentrated on lower educated workers and on those in occupations that experts view as “automatable”.The entry of an additional robot reduces employment and wages by more than the entry of an additional immigrant, suggesting that one industrial robot is comparable to 2 to 3 human workers and upwards of 3 to 4 in particular groups.While the number of robots per worker is too modest to be a major determinant of wages and employment patterns in the period covered by our study, our estimates suggest that continued exponential growth of robots could disrupt job markets in the next decade or so and thus merits monitoring and analysis by labor analysts.....Treating the deployment of industrial robots as a supply shock in a demand supply model that includes the influx of immigrants as a separate measure of changes in supply offers a unique perspective on the development of technological substitutes for labor. It highlights the critical importance of the displacement parameter that connects the numbers of robots to the shift in supply of equivalent workers and provides a natural comparison metric in terms of the shift in supply due to immigrants.In our calculations robots had a negative impact on wages and employment overall and in most groups, with the negative impact of robots substantially larger than the negative impacts of immigrants on wages and employment.Taking the table 4 and 5 IV calculations for all workers as the best estimate of the overall impacts, the displacement effects of robots are on the order of 2-3 times the effects of immigrants. Honing down to narrower groups suggests that the impacts are larger for less educated workers, for female workers, and for workers in occupations viewed as more automatable, ranging upward to robot displacement effects of 3-4 time.....Despite the media uproar about robots, the robot supply shock has been too modest through the mid-2010s to disrupt the labor market. On the other side, the evidence that the increased supply of industrial robots has depressed employment and wages in affected industries, with a robot adding the equivalent of 2 to 3 workers to labor supply on average and 3-4 workers in particular groups, suggests that it would be foolhardy to dismiss the concerns about the future of work.Reasonably large supply shock effects of technology and exponential growth of robots and related technologies have the potential to shake up the world of work in the foreseeable future.....Increased use of robots has roused concern about how robots and other new technologies change the world of work. Using numbers of robots shipped to primarily manufacturing industries as asupply shock to an industry labor market, we estimate that an additional robot reduces employment and wages in an industry by roughly as much as an additional 2 to 3 workers and by 3 to 4 workers in particular groups, which far exceed estimated effects of an additional immigrant on employment and wages. While the growth of robots in the 1996-2016 period of our data was too modest to be a major determinant of wages and employment, the estimated coefficients suggest that continued exponential growth of robots could disrupt job markets in the foreseeable future and thus merit attention from labor analysts....."

George Borjas and Richard B. Freeman, "From Immigrants to Robots: The Changing Locus of Substitutes for Workers," National Bureau of Economic Research, https://www.nber.org/papers/w25438

Thursday, January 17, 2019

AI Summary. Raising the top US marginal tax rate from 50% to 75% could raise 2.5% of GDP in revenue before behavioral responses, but a model of idea-driven growth estimates it would reduce innovation and lower long-run GDP per person by about 6%. Because ideas are nonrival, the model implies an optimal top rate far below traditional calculations, possibly negative.

Charles Jones National Bureau of Economic Research
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Raising top marginal tax rate from 50% to 75% in the US could generate 2.5% of GDP in revenue but reduce innovation & lower GDP per person by 6% in the long run.

Does idea-driven growth lower the optimal top income tax rate?

Core argument: Raising the US top marginal tax rate from 50% to 75%, applying to roughly 10% of income, could generate 2.5% of GDP in revenue before behavioral responses, but may lower long-run GDP per person by about 6% through reduced innovation.

Raising the top marginal tax rate from 50% to 75% in the US, which applies to about 10% of income, could generate 2.5% of GDP in revenue before behavioral responses. However, this increase may reduce innovation and lower GDP per person by around 6% in the long run, negatively impacting social welfare. The nonrival nature of ideas means that reducing idea production affects everyone's income, not just the inventor's. High incomes incentivize entrepreneurs to transform research insights into consumer-benefiting products, but high marginal tax rates can diminish this effort. A model incorporating innovation suggests the optimal top tax rate is significantly lower than traditional calculations, potentially even negative, as subsidizing innovation could increase overall income more than redistribution gains. This highlights the importance of considering idea-driven growth when setting top income tax rates.

Takeaways by Macro Roundup® AI

  1. Raising the US top marginal tax rate from 50% to 75%, applying to roughly 10% of income, could generate 2.5% of GDP in revenue before behavioral responses, but may lower long-run GDP per person by about 6% through reduced innovation.
  2. Because ideas are nonrival, reduced idea production lowers everyone's income rather than only the inventor's, and high marginal tax rates can diminish entrepreneurs' effort to turn research insights into consumer-benefiting products.
  3. A model incorporating innovation suggests an optimal top tax rate well below traditional calculations and potentially negative, since subsidizing innovation could raise overall income more than redistribution gains.

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...."

"...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.... "
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

AI Summary. In an innovation-driven economy where ideas are nonrival and raise productivity broadly, the author estimates that top marginal tax rates above roughly 30% reduce social welfare by weakening incentives to innovate. Raising the top rate from 50% to 75% is projected to cut GDP per person by 6% long run.

Charles Jones National Bureau of Economic Research
Date Posted:
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A top marginal tax rate above 30% may suboptimize social welfare by stifling idea creation, reducing GDP & overall income. A utilitarian welfare function suggests a top tax rate of just 29% maximizes social welfare. @CharlesJones

Do high top tax rates reduce welfare by discouraging innovation?

Core argument: Raising the top marginal tax rate from 50% to 75% could reduce GDP per person by 6% in the long run while raising 2.5% of GDP in revenue, the analysis estimates.

In an innovation-driven economy, top marginal tax rates above 30% likely suboptimize social welfare by stifling idea creation, which is crucial for economic growth. Ideas are nonrival, meaning they can enhance productivity across the board, unlike physical or human capital. High marginal tax rates reduce the incentive for entrepreneurs to innovate, thereby lowering GDP and overall income. For instance, 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. A utilitarian welfare function suggests a top tax rate of just 29% maximizes social welfare by balancing innovation incentives with redistribution. In extreme cases, the optimal rate could even be negative, as subsidizing innovation might increase incomes more than redistribution gains.

Takeaways by Macro Roundup® AI

  1. Raising the top marginal tax rate from 50% to 75% could reduce GDP per person by 6% in the long run while raising 2.5% of GDP in revenue, the analysis estimates.
  2. A utilitarian welfare function implies an optimal top marginal tax rate of 29%, balancing innovation incentives against redistribution, with rates above 30% likely suboptimizing social welfare in an innovation-driven economy.
  3. Because ideas are nonrival and raise productivity economy-wide, unlike physical or human capital, the optimal top rate could be negative in extreme cases, where subsidizing innovation raises incomes more than redistribution gains.

Stanford'sCharles Jonescorrects glaring shortcomings in theDiamond/Saez’soptimal tax analysis to show why top marginal tax rates of 30% or less likely maximize social welfare in an innovation-driven economy. Jones concludes:

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. 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, 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.

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.... "

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...."