Macro Roundup

James Pethokoukis, "Countries with lots of billionaires per capita also tend to have high levels of well-being and competitiveness," American Enterprise Institute, February 21, 2019, https://www.aei.org/economics/countries-with-lots-of-billionaires-per-capita-also-tend-to-have-high-levels-of-well-being-and-competitiveness/

Countries with lots of billionaires per capita also tend to have high levels of well-being and competitiveness

Granted, this sounds like something you might read in a bank report: “The number of millionaires in a country and its trend over time is often seen as a sign of a country’s economic health and its ability to generate opportunities for wealth creation.”

And what Credit Suisse notes about millionaires easily applies to billionaires in advanced economies like America’s. But not just America’s. As I noted in a recent The Week column. “The egalitarian Nordic nations have as many billionaires, relatively, as the US and more concentrated wealth, at least as measured by the share of wealth controlled by the top 10 percent.”

More on this in a New York Times column by Will Wilkinson, who writes, “Inspect any credible international ranking of countries by democratic quality, equal treatment under the law or level of personal freedom. You’ll find the same passel of billionaire-tolerant states again and again. If there are billionaires in all the places where people flourish best, why think getting rid of them will make things go better?”

Indeed, what country doesn’t need more billionaires who get that way by providing stuff that consumers really value? (This is more the case in America that it used to be, by the way.) That hardly sounds like the result of policy failure, much less the sign of an inherently immoral economic system. It’s also worth noting, I think, that a list of global economies thought most competitive is also filled with those billionaire-heavy countries such as the US, Singapore, Switzerland, and Sweden.

New NBER finds that immigrant entrepreneurs outperformed native entrepreneurs in 15/16 innovation sectors, copyright and trademarks being exception

"....We estimate differences in innovation behavior between foreign versus U.S.-born entrepreneurs in high-tech industries. Our data come from the Annual Survey of Entrepreneurs, a random sample of firms with detailed information on owner characteristics and innovation activities. We find uniformly higher rates of innovation in immigrant-owned firms for 15 of 16 different innovation measures; the only exception is for copyright/trademark. The immigrant advantage holds for older firms as well as for recent start-ups and for every level of the entrepreneur’s education. The size of the estimated immigrant-native differences in product and process innovation activities rises with detailed controls for demographic and human capital characteristics but falls for R&D and patenting. Controlling for finance, motivations, and industry reduces all coefficients, but for most measures and specifications immigrants are estimated to have a sizable advantage in innovation....."
J. David Brown, John Earle, Mee Jung Kim, Kyung Min Lee, "Immigrant Entrepreneurs and Innovation in the U.S. High-Tech Sector," National Bureau of Economic Research, February 2019, https://www.nber.org/papers/w25565

NBER paper finds that secrecy during WWII reduced commercialization/diffusion of break thoughts, though the program was effective at keeping discoveries out of public domain

".....This paper studies the effects of the USPTO's patent secrecy program in World War II, under which approximately 11,200 U.S. patent applications were issued secrecy orders which halted examination and prohibited inventors from disclosing their inventions or filing in foreign countries. Secrecy orders were issued most heavily in areas important to the war effort — such as radar, electronics, and synthetic materials — and nearly all rescinded en masse at the end of the war. I find that compulsory invention secrecy was effective at keeping affected technology out of the public domain, but it appears to have reduced and delayed follow-on invention, reduced entry into patenting, and restricted commercialization. The results shed light on the consequences of invention secrecy, which is widely used by inventors to protect and appropriate the returns to innovation, and yield lessons for ongoing policy debates over potential measures to protect U.S. invention against the growing incidence of foreign IP theft today.... Secrecy orders are still issued today, under the authority of the Invention Secrecy Act of 1951, but at lower frequency than during the war.More recently, motivated by recurrent theft of U.S. IP by foreign firms and governments, the USPTO solicited public comments in 2012 about the feasibility of expanding secrecy orders to “economically significant” patents. The request for comments elicited strong negative reactions from several legal trade groups, whose concerns included some of the questions studied in this paper. As of yet it has not evolved into legislation or agency action, but policymakers continue to debate solutions to foreign IP theft and illegal technology transfer, which could conceivably include promoting, or imposing, invention secrecy. The focus of this paper is on the repercussions of concealing new invention. An important question this paper leaves for future research is the incentive effects of this policy: by suspending patent examination and precluding commercialization, secrecy orders may discourage subsequent patenting or invention in sensitive subject matter by those who receive them. Concerns about the detrimental impact on domestic invention, namely stifling U.S. innovation and driving R&D abroad, were among those raised by the ABA and IPOA in their responses to the USPTO’s 2012 request for comments. An answer to this question would complement existing literatures on both the incentive effects of intellectual property rights and the decision to patent...."

Daniel Gross, "The Consequences of Invention Secrecy: Evidence from the USPTO Patent Secrecy Program in World War II," National Bureau of Economic Research, February 2019, https://www.hbs.edu/faculty/Publication%20Files/19-090_0c1138eb-2518-48df-a05b-881d5183df0d.pdf

"...A commonly held view of the housing bubble is that excessive mortgage growth fueled the price surge. However, other economists believe the opposite: The bubble sentiment created the rising home values (used as collateral) necessary to support rapidly rising mortgage borrowing. Annual data from the recession (and aftermath) period 2006-18 support neither view. In fact, since 2006, there has been essentially no relationship between the growth rate of mortgage borrowing and the change in value of the housing stock. This period, together with the unresolved nature of the earlier dispute, suggests we still do not have a clear understanding of the relationship between mortgage borrowing and housing values...."

• Excessive mortgage borrowing inflated the housing bubble (in the form of rising house prices)
• The housing bubble enabled households to borrow profligately.2
  • Some believe an increase in mortgage credit availability allows homebuyers to bid up house prices. This is the credit supply view, most prominently espoused by Atif Mian and Amir Sufi in a 2014 book, House of Debt, and other writings.
  • Others believe rising house prices support greater household borrowing. This is the irrational exuberance view, proposed by economist Robert Shiller in his book of the same name.

Most notably, mortgage debt increased significantly in 2007 and 2008, but the aggregate value of the housing stock declined sharply in those years. Conversely, mortgage debt decreased in 2012, 2013 and 2014 but housing values rose briskly.

As indicated by the correlation coefficient being close to zero for this period, there may be little to no relationship at all. Thus, changes in mortgage borrowing are not necessarily—or are not always—tied to house price changes in the same direction.

A Debtless House Price Boom

A commonly held view of the housing bubble is that excessive mortgage growth fueled the price surge. However, other economists believe the opposite: The bubble sentiment created the rising home values (used as collateral) necessary to support rapidly rising mortgage borrowing.

Annual data from the recession (and aftermath) period 2006-18 support neither view. In fact, since 2006, there has been essentially no relationship between the growth rate of mortgage borrowing and the change in value of the housing stock. This period, together with the unresolved nature of the earlier dispute, suggests we still do not have a clear understanding of the relationship between mortgage borrowing and housing values.

Notes and References

1All data presented is provided by the Federal Reserve Board in the Financial Accounts of the United States. Housing wealth is homeowners’ equity in household real estate, which is calculated as the total value of housing assets minus home-mortgage debt. Aggregate homeowners’ equity was $6.1 trillion at the end of the first quarter of 2009 and $15.4 trillion at the end of the third quarter of 2018.

2 For a review of recent economic research that explores the connection from several different perspectives, see section 1 of Emmons, William R.; and Ricketts, Lowell. “Household Debt at the Tipping Point: When and Why Does Household Borrowing Hurt the Economy?” Working Paper, June 22, 2017.

3 The correlation is between the annual percent changes of aggregate home-mortgage debt outstanding and the annual percent changes of the aggregate value of households’ real estate.

A variety of empirical methods have been employed to provide evidence for and against these hypotheses with no clear resolution emerging.

Theories about House Prices and Debt Collapsed with the Bubble

As noted above, recent evidence suggests there may be no connection between changes in mortgage debt and housing values, at least in some time periods. The correlation between annual aggregate mortgage growth and aggregate housing-value changes was small and negative (correlation coefficient of -0.14) between 2007 and 2018, as seen in the figure below. This is not consistent with either causal interpretation.

Economists have looked for evidence that causation may run in one direction or the other:

Less frequently discussed is the possibility that neither hypothesis is valid—namely, that the underlying assumption is incorrect, and house prices and mortgage growth may be unrelated to each other. Yet, that has been the case for the last decade or so as we show below.

Mortgage Borrowing and House Prices before 2007

The simple correlation between the annual growth rates of aggregate home-mortgage debt and the value of the aggregate housing stock was moderately strong and positive (0.65) starting in 1953 and ending in 2006, as seen in the figure below.3 This suggests a close association between mortgage borrowing and house price changes. The existence of a strong correlation does not provide any insight into whether one causes the other, however.

William Emmons, Ana Hernández Kent and Lowell Ricketts,"Debtless" Housing Boom Leads Household Wealth Recovery," Federal Reserve Bank of St. Louis, February 18, 2019, https://www.stlouisfed.org/on-the-economy/2019/february/debtless-housing-boom-leads-household-wealth-recovery

"Debtless" Housing Boom Leads Household Wealth Recovery

Aggregate housing wealth has increased more than 150 percent since its recent low point in the first quarter of 2009.1 Meanwhile, all other wealth of households and nonprofit organizations has increased just over 80 percent. Both housing wealth (i.e., homeowners’ equity) and total household net worth reached post-recession highs at the end of the third quarter of 2018.

Even though housing wealth has more than doubled since 2009, the value of home mortgages owed by households has actually decreased by $312 billion (about 3 percent). The recent divergence between trends in housing wealth and housing debt is particularly striking because, in the aftermath of the housing bubble, economists largely have assumed there is a positive relationship between mortgage borrowing and house prices.

The debate has been whether:

Please send this one today. Ed right is your wheelhouse, they find that "genius' share" (so talents, they define it as the top 3% of all US labor income * by the total US non-financial corporate labor income) ) of income increased from a nadir of 6.7 percent in 1984 to a peak of 31.4 percent in 2006.

"...An increasing share of income is being paid to neither traditional capital nor traditional labor. At the same time interest rates, investment rates, and total factor productivity growth are low. Informed by the economics of digitization, we provide a simple macroeconomic model that generates these relationships.... We show that when increasingly digitized capital and labor are sufficiently complementary to inelastically supplied genius, innovation in either of the first two factors can decrease wages and interest rates in the short and long run. Growth is increasingly constrained by the scarce input, not labor or capital.....Figure 5 presents the share of US non- financial corporate gross value added that is not paid to traditional labor, traditional capital, or to the government. The rst component of genius corresponds to exceptional labor income. Brynjolfsson and Saint-Jacques (2015) conceptualizes the US labor force as consisting of individuals of normal and exceptional abilities (or luck). Normal workers face a log- normal distribution of labor income which is consistent with a multiplicative model of normally-distributed abilities. But exceptional workers sort themselves into sectors with superstar-style returns, such as digital and networked industries, and draw their incomes from a Pareto distribution. This approach explains the fractal nature of top labor income percentiles. In 2008, the top 25 percent of US workers earned more than half of all labor income, the top 2.5 percent of workers earned over 20 percent of labor income, the top.25 percent of workers earned over 7 percent of total labor earnings, and so on. Using a maximum likelihood approach, they study US data and find that approximately 3 percent of workers draw from this `power-law economy' while the rest draw their incomes from log-normal distribution. They also fi nd that there has been significantly increasing skewness in this part of the economy, and that has further the increased share of income accruing to superstar workers. Accordingly, we use their 3 percent cutoff to motivate our distinction between traditional and `genius' labor. The fi nal component of genius is what is measured as pro ts: i.e. income earned by fi rms surpassing what they implicitly pay to labor, owner-operators, traditional capital, and the government. This share was slightly negative in the mid-1980s, but was 10.8 percent of corporate gross value added in 2012. While some of this share may correspond to `true' pro ts, we argue in the micro-foundations section that the majority of this share is better interpreted as payments to extremely talented individuals or returns to inelastically supplied intangible assets. All together, genius' share of income increases from a nadir of 6.7 percent in 1984 to a peak of 31.4 percent in 2006.... Roughly half of this increase is due to an increase in corporate intangible income and half from an increase in genius labor income. These trends are robust to variations in the calculation of capital's share of income (Barkai (2016) and (Barkai and Benzell, 2018)) or the precise labor income percentiles considered exceptional (Brynjolfsson and Saint-Jacques, 2015). To those in the business world, the result that non-traditional factors are increasingly scarce will come as no surprise. Many employers complain about the rarity of exceptional talent. In the words of Elbert Hubbard, "One machine can do the work of fifty ordinary men. No machine can do the work of one extraordinary man."...The good news is that when inputs can be digitized, perfect copies can be made at virtually zero cost. The bad news is that not all types of inputs can be digitized. Digital abundance leads to bottlenecks whenever an input which cannot be digitized is an essential complement. Digitization can create substitutes for many types of ordinary labor and capital, and driving down their compensation. At the same time, others earn extraordinary returns because their contributions, whether due to genius or luck, cannot be easily digitized. The most popular alternative explanation of the decrease in the traditional capital and labor share of income is increased profits. This could either be due to a decrease in oligopolistic competition or from the most pro table firms lowering their markups (slightly) while capturing a larger share of the market (Barkai (2016), De Loecker and Eeckhout (2017), Autor et al. (2017)). We see Autor et al. (2017) as a model of increasing returns to intangible assets, and therefore complementary to our paper. When industries become more competitive, there is an increased return to firms with a good productivity draw. The difference between profits and returns to unmeasured intangible assets may be a semantic one. Many have the intuition that intangible assets and superstar workers are more abundant than ever. Perhaps the most surprising thing then about our result is that these factors are increasingly scarce. We contend that this is due to confusion between the value and importance of these inputs, which are increasing, and their relative abundance, which is decreasing.We suggest several microfoundations of this aggregate relationship and explore implications. Our `microfoundations' are not mutually exclusive and may ultimately be revealed as a simpliffed representation of a complex underlying trend. But the relationship between high non-capital and labor shares, inequality, low interest rates, digital abundance and low TFP growth is a real one, and one parsimoniously captured in our framework. Perhaps, over time, Le Chatelier's principle will win out, and the bottlenecks min innovation will be overcome, simultaneously raising wages, interest rates, productivity growth and lowering inequality and genius' share. Whether or not it does, we expect these desideratum to be connected well into the future.

Seth G. Benzell and Erik Brynjolfsson, "Digital Abundance and Scarce Genius: Implications for Wages, Interest Rates, and Growth," National Bureau of Economic Research, February 2019, https://www.nber.org/papers/w25585

interesting datapoint of the upside of public markets, makes sense given informational asymmetries (Though private markets were not as deep in 2007-2009 as they are today)

"...We study the leverage of U.S. firms over their life-cycle and implications for firm growth and responses to shocks. We use a new dataset that matches private firms’ balance sheets to U.S. Census Bureau’s Longitudinal Business Database (LBD) for the period 2005-2012. A number of stylized facts emerge. First, firm size and leverage are strongly positively correlated for private firms, both in the cross section of firms and over time for a given firm. For public firms, there is a weak negative relation between leverage and size. Second, young private firms borrow more, but firm age has no relation to public firms’ leverage. Third, while private firms switch from debt to equity financing as they age, public firms slightly reduce equity financing as they age. Building on this “normal times” benchmark and using the “Great Recession” as a shock to financial conditions, we show that, for private firms, firm size can serve as a good predictor of financial constraints. During the Great Recession, leverage declines for private firms, but not for public firms. We also provide evidence that private firms’ growth is positively related to leverage, as they finance their growth during normal times with short-term borrowing, whereas the relationship between leverage and firm growth is negative for public firms. These results suggest that public firms are not financially constrained during normal times or during crisis, but private firms are...."
Emin Dinlersoz, Sebnem Kalemli-Ozcan, Henry Hyatt, and Veronika Penciakova, Leverage over the Life Cycle and Implications for Firm Growth and Shock Responsiveness," National Bureau of Economic Research, November 2018, https://www.nber.org/papers/w25226

Brad Setser, "The Case for a Significant German Stimulus Is Now Overwhelming,"Council on Foreign Relations, February 11, 2019, https://www.cfr.org/blog/case-significant-german-stimulus-now-overwhelming

"...The focus of this paper is on understanding how the production side of the economy responds to a reduction in long-term interest rates driven by consumer-side forces. The existing literature in growth either assumes no production-side response to declining interest rates, or a positive response driven by an increased incentive to invest in the face of a higher discounted present value of future profits. The point of departure from this literature lies in explicitly modeling competition within an industry and analyzing how lower interest rates effect the nature of competition. The model builds on the dynamic contests literature to show that in a fairly general set up and without relying on any financial or other forms of frictions, the effect of lower interest rates on growth in a low interest rate regime can be negative. A reduction in long-term interest rates tends to make market structure less competitive within an industry. The reason is that while both the leader and follower within an industry increase their investment in response to a reduction in interest rates, the increase in investment is always stronger for the leader. As a result, the gap between the leader and follower increases as interest rates decline, making an industry less competitive and more concentrated. When interest rates are already low, this negative effect of lower interest rates on industry competition tends to lower growth and overwhelms the traditional positive effect of lower interest rates on growth. This produces a hump-shaped inverted-U production-side relationship between growth and interest rates.The model delivers a distinctive upward sloping production-side curve in a low interest rate regime. We believe that this insight is empirically relevant and useful in understanding the slow-down in productivity growth in recent decades and the broader discussion regarding “secular stagnation.” The slowdown in productivity growth is global as it shows up in almost all advanced economies. The slowdown started well before the Great Recession, suggesting that cyclical forces related to the crisis are unlikely to be the trigger. And the slowdown in productivity is highly persistent, lasting well over a decade. The long-run pattern suggests that explanations relying on price stickiness or the zero lower bound on nominal interest rates are unlikely to be the complete explanation. This paper introduces the possibility of low interest rates as the common global “factor” that drives the slowdown in productivity growth. The mechanism that the theory postulates delivers a number of important predictions that are supported by empirical evidence. A reduction in long term interest rates increases market concentration and market power in the model. A fall in the interest rate also makes industry leadership and monopoly power more persistent. There is empirical support for these predictions in the data, both in aggregate time series as well as in firm-level panel data sets...."
Ernest Liu, Atif Mian and Amir Sufi, "Low Interest Rates, Market Power, and Productivity Growth," Social Science Research Network, February 4, 2019, https://papers.ssrn.com/sol3/papers.cfm

"...Urban U.S. labor markets today are vastly more educated and skill-intensive than they were ve decades ago. Yet, urban non-college workers currently perform substantially less skilled work than in prior decades. This deskilling reflects the joint effects of automation and international trade, which have eliminated the bulk of non-college production, administrative support, and clerical jobs, yielding a disproportionate polarization of urban labor markets. The unwinding of the urban non-college occupational skill gradient has, I argue, abetted a secular fall in real non-college wages by: (1) shunting non-college workers out of specialized middle-skill occupations into low-wage occupations that require only generic skills; (2) diminishing the set of non-college workers that hold middle-skill jobs in high-wage cities; and (3) attenuating, to a startling degree, the steep urban wage premium for non-college workers that prevailed in earlier decades. Changes in the nature of work|many of which are technological in origin| have been more disruptive and less beneficial for non-college than college workers...."David Autor, "Work of the Past, Work of the Future," National Bureau of Economic Research, February 15, 2019, https://economics.mit.edu/files/16724