Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “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
  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “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
  • “…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
  • “…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 is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, January 18, 2019

AI Summary. Research estimates that 75% of business pass-through income reflects owners' labor rather than capital, indicating most top earners are "working rich" whose income stems from human capital. Firm profitability falls by up to 72.9% after the death or retirement of a top 1% owner, underscoring reliance on active management.

Matthew Smith, Danny Yagan, Owen M. Zidar, Eric Zwick National Bureau of Economic Research
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Contrary to Piketty and Saez’s recent claim, new @nberpub research by Matt Smith @dannyyagan @omzidar and Eric Zwick provides persuasive evidence that a majority of top 1% and 0.1% income is labor income—chiefly business owners.

Does top business income reflect owners' labor rather than capital?

Core argument: Research attributes 75% of business pass-through income to owners' labor income, indicating that most top earners are "working rich" whose income stems from human capital rather than physical or financial capital.

Recent research indicates that 75% of business pass-through income is attributable to owners' labor income, challenging the notion that top earners primarily derive their wealth from capital. The study finds that most top earners are "working rich," with income stemming from human capital rather than physical or financial capital. This is evidenced by a significant drop in firm profitability—up to 72.9%—following the death or retirement of top 1% owners, underscoring the reliance on active management. Furthermore, firms owned by top 0.1% earners show profitability per worker more than double that of firms owned by individuals in the lower half of the top decile. The growth in entrepreneurial income is largely driven by rising labor productivity and an increasing share of value added accruing to owners, rather than changes in organizational form or firm scale. This data suggests a reevaluation of income inequality drivers, emphasizing the role of human capital in wealth accumulation among top earners.

Takeaways by Macro Roundup® AI

  1. Research attributes 75% of business pass-through income to owners' labor income, indicating that most top earners are "working rich" whose income stems from human capital rather than physical or financial capital.
  2. Firm profitability falls by up to 72.9% following the death or retirement of top 1% owners, evidence cited for firms' reliance on owners' active management.
  3. Firms owned by top 0.1% earners show profitability per worker more than double that of firms owned by individuals in the lower half of the top decile, with entrepreneurial income growth driven by rising labor productivity and a larger share of value added accruing to owners.

Contrary to Thomas Piketty’s far-fetched claim that “ is far less consequential than one might imagine,” a newNBER paperfinds “top earners are predominantly working rich,” mainly “undiversified working-age owners of midmarket firms in skill-intensive industries,” who “derive most of their income from human capital, not physical or financial capital,” and that, “Less than 13% of people in the 99.9thpercentile derive most of their income from interest, rents, and other capital income.”

“Match 83% of top 1% individuals born in 1980-1982 to their parents,” and “classif an individual as self-made if her parents were not in the top 1%,” the researchers find, “More than three out of four of these top earners did not have top 1% parents.” They authors note, “This is a conservative classification, as many children of the top 1% do not work for their parents' firms and do not receive especially large financial inheritances.”

To estimate the share of business income attributable to owners’ labor, the researchers measure the effects of owner deaths and retirements on firm profitably. They find a “-72:9% impact of top 1% owner-deaths and a noisier -92:3% impact of top 0.1% owner-deaths.” Their “preferred owner-retirement percentage impact of -82:5% … is nearly identical to owner-deaths estimate. From this, they conclude, “Three-quarters of private business profit” is “human capital income.” They caution, “We may in fact understate the working-rich share of top owners because pass-through income is not the only form of “capital" income that includes disguised wages.”

Bolstering their claim, the authors find:

Superior firm profitability is a persistent and systematic characteristic of high earners. Firms owned by top 0.1% earners enjoy profitability ($14K per worker) that is over twice as large as the profitability ($5K per worker) of firms owned by individuals in the bottom half of the top decile.

The authors note:

Our classification of three-quarters of pass-through income as labor income reverses the earlier finding in that a minority (45%) of top 1% imputed national income is labor income. Even among million-dollar earners, 71% of fiscal income and 50% of imputed national income is labor income. In the top 0.1%, labor income shares fall to the still large numbers of 69% and 46%, respectively.

Turning to growth in the share of business income, the authors conclude:

Growth in entrepreneurial income is explained by both rising labor productivity and a rising share of value added accruing to owners. In contrast, after accounting for the growth due to organizational form changes, rising firm scale in the form of employment plays no role in the growth of top entrepreneurial income. From 2001 to 2014…63% of the growth in top 1% entrepreneurial income … comes from rising labor productivity, -24% comes from lower employment, and the remaining 61% comes from a growing owner share of value added.

The authors note:

If 0% of pass-through income is labor income…a minority of top-earners are wage earners. For example, among million-dollar earners … 46.8% are wage earners in the fiscal income definition and only 34.6% are wage earners in the imputed national income definition. That conclusion reverses when classifying 75% of pass-through income as labor income. For example, among million-dollar earners, 89.2% are working in the fiscal income definition and 69.8% are working in the imputed national income definition. Even among the top 0.1% in the imputed national income series, 59.3% are working.

They explain their reasoning for using two estimates:

Fiscal income has the advantage of being directly observed on personal income tax returns, but has the disadvantage of understating top capital income because some components do not appear on personal tax returns. Imputed national income has the advantage that it sums to national income, but has the disadvantage of relying on imputation assumptions. Retained earnings ($649bn in 2014) are a substantial part of national income but do not appear on personal tax returns and thus are not in fiscal income. PSZ allocate the household share of aggregate retained earnings to individuals in proportion to the sum of the individual's observed dividends and realized capital gains. However, published IRS reports indicate that at least 25% and as much as 75% of realized capital gains are not from the sale of C-corporate stock and are instead gains from real estate and other asset sales or carried interest. This fact can explain how total realized capital gains ($732B in 2014) vastly exceeds the total household share of retained earnings ($306B in 2014). Realized capital gains are much larger than dividends and much more concentrated among top earners. Hence, imputing retained earnings in proportion to each individual's sum of dividends and 100% of realized capital gains may allocate too much retained earnings to top earners and not enough to lower earners. These competing considerations motivate the presentation of our findings in both series, likely (in our view) bounding the truth.

New NBER paper finds that contrary to the view of many liberal economist that income inequality is driven by rents most top income in the United States as of 2014 was earned:

Most top income is non-wage income, a primary source of which is private business profit. These profits accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners
"....Have the idle rich replaced the working rich at the top of the U.S. income distribution? Using tax data linking 11 million firms to their owners, this paper finds that entrepreneurs who actively manage their firms are key for top income inequality.Most top income is non-wage income, a primary source of which is private business profit. These profits accrue to working-age owners of closely-held, mid-market firms in skill-intensive industries. Private business profit falls by three-quarters after owner retirement or premature death.Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners....

Matthew Smith, Danny Yagan, Owen M. Zidar, Eric Zwick, "Capitalists in the Twenty-First Century," National Bureau of Economic Research, January 2019, https://www.nber.org/papers/w25442

Atypical firm owned by the top 0.1% is a regional business with $20M in sales and 100 employees, such as an auto dealer, beverage distributor, or a large law fi rm.....Most pass-through business income accrues to undiversi ed, working-age owners of midmarket firms in skill-intensive industries. Specifically, an individual's pass-through income typically derives from one firm with one to three owners and amounts to a large share of her total income. The age distribution of these owners closely mirrors that of high income wage earners; in contrast, the owners of more passive forms of capital skew much older. Most pass-through business income derives from firms with $5M to $500M in sales, which operate across diverse geographies and sectors. Despite this diversity, most pro ts are earned in relatively labor-intensive industries, especially in those that demand skilled labor. In contrast, traditional C-corporations are more prevalent in manufacturing and capital intensive industries and are concentrated among larger firms. Together, these facts support the notion that most top pass-through earners better resemble the working rich, not idle owners of large stocks of accumulated non-human capital....In the first natural experiment, we use Social Security Administration records to identify non-elderly owners who died 2005{2010 and who earned over one million dollars in the year before their death.

Most top business income comes from private pass-through" businesses that are not taxed at the entity level; instead, income passes through to the owners who pay taxes on their share of the rm's income. This feature allows us to build a new dataset linking pass through firms to their owners for 11 million frms between 2001 and 2014. This dataset enables us to ask whether top pass-through income should primarily be thought of as labor income accruing to the human capital of active owner-managers or as capital income accruing to the financial and physical capital of idle owners. Consistent with the labor income view, we find that top earners are predominantly working rich rather than idle rich, and that the majority of top income accrues to the human capital of these wage earners and entrepreneurs....In absolute terms, that amounts to over 1.1M pass-through owners with fiscal income over $390K and 140,000 pass-through owners with fiscal income over $1.6M....

AI Summary. Median annual household income reached $63,554, its highest level since January 2000 and 4.3% above the January 2000 level after adjusting for inflation. The figure, measured before taxes, is 3.2% higher than a year earlier, 5.5% above its December 2007 level, and 15.4% above its post-recession low of $55,083.

Gordon Green Sentier Research
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According to @GordonGreen of @SentierResearch, as of November 2018, median annual household income reached $63,554, a 4.3% increase from January 2000, adjusted for inflation.

Has median household income risen above its pre-recession levels?

Core argument: Median annual household income reached $63,554 in November 2018, the highest level since January 2000 and 4.3% above the January 2000 figure of $60,947 in inflation-adjusted terms.

As of November 2018, median annual household income reached $63,554, marking the highest level since January 2000. This represents a 4.3% increase from the January 2000 level of $60,947, adjusted for inflation. Year-over-year, the median income rose by 3.2%, and it is 5.5% higher than the December 2007 figure of $60,231, which marked the onset of the Great Recession. Furthermore, the current median is 15.4% above the post-recession low of $55,083. These figures, expressed in November 2018 purchasing power and before taxes, indicate a clear upward trend in household incomes, countering the perception that incomes are stagnant.

Takeaways by Macro Roundup® AI

  1. Median annual household income reached $63,554 in November 2018, the highest level since January 2000 and 4.3% above the January 2000 figure of $60,947 in inflation-adjusted terms.
  2. Median household income rose 3.2% year-over-year and stands 5.5% above the December 2007 level of $60,231 that marked the onset of the Great Recession.
  3. The November 2018 median household income sits 15.4% above the post-recession low of $55,083, with all figures expressed in November 2018 purchasing power and before taxes.

New Sentier numbers, median annual household income was $63,554 for November 2018. Nominally, in November, the median household income had reached it's highest point since January 2000, yet only 4.3% above that January level of $60,947 (first year in this monthly series) after adjusting for changes in prices. Year over year median is up 3.2%. and 5.5% higher than the median of $60,231 for December 2007, start of the Great Recession and 15.4% above the post-recession low point of $55,083.

All dollar figures are expressed in November 2018 purchasing power. Their income measure is before federal and state income taxes and mandatory payroll taxes.

Gordon Green and John Coder, "Household Income Trends," Sentier Research, December 28, 2018, http://www.sentierresearch.com/Charts/HouseholdIncomeIndex_UnemploymentRate_11_2018.jpg

Household Income Trends: Extended Excerpt Image 1

Saturday, January 19, 2019

AI Summary. The US leads the global unicorn club with 151 privately held startups valued above $1bn worth a combined $556bn, or 51% of the $1.087tn global total. China has 86 unicorns worth $278bn, half the US total, while Europe including the UK and Switzerland has 33 worth $72.97bn, 13% of the US figure.

Insights Staff CB Insights
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The US leads global unicorns with 151 valued at $556bn, 51% of $1.087tn total. Europe has 33 unicorns valued at $72.97bn (13% of US total). China has 86 unicorns valued at $278bn (50% of US total). @CBInsights Insights Staff.

How does the US share of global unicorn value compare?

Core argument: The US had 151 unicorns valued at $556bn, or 51% of the $1.087tn global unicorn valuation.

As of January 2019, the global unicorn landscape reveals significant valuation disparities among regions. The US leads with 151 unicorns valued at $556bn, representing over half (51%) of the total global unicorn valuation of $1.087tn. In contrast, Europe, including the EU, UK, and CH [Switzerland], has 33 unicorns valued at $72.97bn, which is 13% of the US unicorn valuation. Meanwhile, China boasts 86 unicorns with a collective valuation of $278bn, equating to 50% of the US total. This data underscores the dominance of the US in nurturing high-value startups, producing seven times as many unicorns as Europe. The valuation gap highlights differing levels of investment and innovation ecosystems across these regions, with China emerging as a strong contender in the global market.

Takeaways by Macro Roundup® AI

  1. The US had 151 unicorns valued at $556bn, or 51% of the $1.087tn global unicorn valuation.
  2. Europe, including the EU, UK and Switzerland, had 33 unicorns valued at $72.97bn, equal to 13% of the US total, with the US producing seven times as many unicorns as Europe.
  3. China had 86 unicorns with a collective valuation of $278bn, equal to 50% of the US unicorn valuation.

Excel is attached. Fwd to the guy

I just reran the numbers, US 556B UK 37.02 EU plus CH 35.75 total72.77Bthat is 13% (7x) the US total.

As of January 19 2019 according to CB Insights there are 311 Unicorns globally; collectively worth 1.087B (USD)
US currently has 151 Unicorns valued at 556B (USD)(note that is over half, 51% the total Unicorn Valuation)Europe (EU + UK and CH) Currently has 33 Unicorns Valued at 72.97B (USD)(13% of US Unicorn Valuation)China has 86 Unicorns valued at 278B (USD) (50% of US Unicorn Valuation)Insights Staff, "The Global Unicorn Club," CB Insights, Accessed January 15, 2019, https://www.cbinsights.com/research-unicorn-companies

“Today America produces seven times as many privately held startups valued at $1 billion or more—so-called unicorns—than does Europe.”

Steve, the WSJ editor is disputing your reading of the source/data. What up? I thought you checked this. yes/no?