Macro Roundup

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

breaking rule as this quote might be useful for National Review oped, "even liberal Alan Blinder...."

"...Readers of these pages know that I’ve been critical of the president. But it must be said that his economic policies have been the shining stars in a dismal policy firmament. Like most liberal economists, I did not like the way he structured his tax cuts. And like many economists of all stripes, I thought the tax cuts might overheat an already-hot economy. But the latter worry appears to have been wrong, at least so far. The tax cuts seem to have boosted growth without exciting inflation.Thanks to the government shutdown, fourth-quarter numbers haven’t been released, but the available data for 2018 show a surge in business investment in the quarter immediately following the tax cut and a strong overall investment level for the year. The slowdown toward the end of the year, however, bears watching...."
Alan Blinder, "The Obama-Trump Economic Boom,"Wall Street Journal, February 25, 2019, https://www.wsj.com/articles/the-obama-trump-economic-boom-11551138008

Michael Pettis, "Why U.S. Debt Must Continue to Rise,"China Financial Markets, February 7, 2019, https://carnegieendowment.org/chinafinancialmarkets/78304

"...I will not pretend to offer a complete analysis of debt in the U.S. economy here, but there are at least two reasons that the United States has no choice but to encourage an increase in debt to prevent a rise in unemployment. The first reason is the U.S. role in the global balance-of-payments system and the second one is high levels of U.S. income inequality.Although these two factors seem like two different things, they work in the same way and for the same reasons.....that the United States runs trade deficits mainly because the rest of the world exports its excess savings there...because of distortions in income distribution in the rest of the world, developed economies suffer from excess savings and insufficient demand...if the excess savings are exported to an advanced economy whose domestic investment needs are not constrained by an inability to access domestic savings, these savings do not result in an increase in investment, so the world is left with lower demand.As I will explain below (see Where Might This Argument Be Wrong?), when excess savings flow into the United States, these savings do not cause investment to rise. This is a classic case of beggar-thy-neighbor policies, in which one country benefits at the greater expense of its trade partners. Much of the world’s excess savings flow to rich countries where these funds are not needed, rather than to developing countries that can use them productively. It is typically the countries with the most open, most flexible, and best-governed financial markets that end up on the receiving end, mainly the so-called Anglo-Saxon economies and especially the United States. The United States runs capital account surpluses, in other words, not because it is capital short, but because the world has excess savings and the United States is the leading safe haven into which to hoard these savings.Some observers might object to this interpretation. After all, they might say, doesn’t the United States have a low savings rate, well below its investment rate? And doesn’t that prove that the United States needs foreign savings? Not necessarily. While this was the case in the nineteenth century, when the United States imported capital because it lacked sufficient domestic savings to fund its investment needs, it is no longer true in the twenty-first century. Rather than assuming, as most economists still do, that the United States imports foreign savings because U.S. savings are too low, it is vital to recognize that U.S. savings are low because the United States imports foreign savings. This is because a country with a capital account surplus must, by definition, run a current account deficit, and because investment in that country must, also by definition, exceed savings. Most economists see this tautology and mistakenly assume an automatic direction of causality in which foreign capital inflows drive U.S. investment above the level of U.S. savings. The main reason for this assumption, it turns out, is because if inflows don’t drive up investment, they must drive down savings, and people have a difficult time understanding how foreign capital inflows can drive down savings.But, as I will show later (see What Drives Down Savings?), there is nothing mysterious or unlikely about this process.....It may seem surprising at first that income inequality has the same economic impact as forced imports of foreign capital. By itself, income inequality tends to force up the savings rate, simply because rich households save more than ordinary or poor households. Put differently, if $100 is transferred from an ordinary American household, which consumes perhaps 80 percent of its income and saves 20 percent, to a rich household, which consumes around 15 percent of its income and saves 85 percent, the initial impact of the transfer is to reduce consumption by $65 and increase desired savings by the same amount. But that is not the end of the story. In any economic system, savings can only rise if investment rises. If the United States cannot invest the additional savings—for reasons which I will discuss below (again, see Where Might This Argument Be Wrong?)—if rising income inequality causes U.S. savings in one part of the economy (the rich household that benefitted from the increase in savings) to rise, this must also cause savings in some other part of the economy to decline. Again, the point is fairly simple. Total savings cannot rise unless these savings are invested. If savings in one part of the economy rise because of a transfer of wealth from poorer households to richer households, and if this does not cause investment to rise, this very transfer must then repress savings in another part of the economy. Notice how similar this is to the way the trade deficit works: rising savings in one part of the world are exported to the United States and cause savings in the United States to decline. In either case, if investment doesn’t rise, savings cannot rise, so an increase in savings in one sector or country must cause a reduction of savings in another.....Another way of looking at it is that both trade deficits and high income inequality reduce domestic demand, so returning the economy to its expected growth rate requires a new source of demand, and this new source is almost always generated by debt. By the way, this explains in part why economists are generally unable to find a correlation between the trade deficit and unemployment, or between income inequality and unemployment. Rather than cause unemployment to rise, these conditions can simply force an increase in debt....."

New Pettis, worth reading

“…Mayor Bill de Blasio is canceling one of his signature education initiatives, acknowledging thatdespite spending $773 million he was unable to turn around many long-struggling public schools in three years after decades of previous interventions had also failed…” Eliza Shapiro, “$773 Million Later, de Blasio Ends Signature Initiative to Improve Failing School,” New York Times, February 26, 2019, https://www.nytimes.com/2019/02/26/nyregion/renewal-initiative-de-blasio.html $773 Million Later, de Blasio Ends Signature Initiative to Improve Failing Schools

“The era of closing schools has come to an end,” the mayor said.

Mr. de Blasio insisted on Monday that developing a close relationship with the teachers’ union has led to a stronger school system. He said that ongoing conflict between Mr. Bloomberg’s administration and the U.F.T. led to “paralysis and conflict,” and he pointed to the national turn away from education reform and toward teachers, as is evident in the recent wave of teacher strikes and growing political hostility toward charter schools.

But because the program was based on the union-friendly theory that struggling schools need more resources, rather than more effective teachers, Mr. Mulgrew may face fresh questions about not only the execution but the design of the program.

Many advocacy groups and local politicians, including Mr. de Blasio, then the public advocate, railed against school closures. The city’s teachers’ union, the United Federation of Teachers, was the most powerful lobby against closures. The union’s president, Michael Mulgrew, who has a close ear to the ground in schools, has been critical of the Renewal program’s execution.

Mr. Bloomberg’s small schools planled to an increase in high school graduation rates and students going to college, all at a lower cost to the city than students in other types of schools, according to aseries of studies.But while results were encouraging, the plan did not rescue all the schools it touched: More than a third of the schools that ended up on the original Renewal list were created during Mr. Bloomberg’s tenure.

Renewal was created in part as a rebuke to former mayor Michael R.Bloomberg’s plan to fix long-suffering schools, which relied on shuttering more than 100 schools and opening dozens of smaller schools with specific themes in their place, typically staffed by new principals and different teachers. Mr. Bloomberg put a heavy emphasis on using data to make decisions about schools, and Mr. de Blasio’s administration now seems to be heading in that direction.

Mr. de Blasio’s administration should have been quicker to replace principals in the schools that were taking the longest time to improve, according to the report, and should have avoided marking schools with a label that denoted poor performance, which scared off parents.

Suspensions also dropped by more than 50 percent across all Renewal schools during that same period, which is notable since many of the schools had discipline issues, and attendance crept up by about 4 percent over the last four years.

The Renewal schools that did succeed tended to have particularly strong principals, according to a report prepared by city officials about the end of the program, and an emphasis on using student achievement data to identify problems. The high schools in the program, which used a structured data-tracking system, made the most collective progress: The average graduation rate rose to 72 percent last year, up from 52 percent in 2014.

That strategy will technically apply to all schools in the system, though the initial focus will be on schools that State Education Department officials consider low-performing. Schools will not be publicly labeled low-performing, in part to avoid the stigma that the Renewal label gave schools, which city officials believe led to dwindling enrollment as parents searched for other options.

Renewal will not be replaced by an entirely different school improvement program. Instead, the city will direct funding and academic support to schools most in need of help, under a strategy it is calling comprehensive school support, by consulting student achievement data under a new centralized data system known as Edu Stat.

“We put ourselves on this very aggressive three-year timeline. In retrospect, that was probably an unrealistic timeline in some cases,” he said. Mr. de Blasio eventually added a fourth year to the program.

Mr. de Blasio said he is confident that those schools are “on a path for success,” even though they are taking more time to change than his administration first hoped.

Though about a quarter of the schools improved enough to exit the program after three years, another quarter closed, and the remaining 50 will remain open but in a limbo state: They will continue to receive indefinitely much of the same support they did as Renewal schools, but without the Renewal label. The city could still close any of these schools in future years, officials said.

“We defined success as whether most of the schools could move substantially in the right direction — and that, we got,” Mr. de Blasio added.

“We never said from day one, ‘We guarantee all of them will become paradise,’” he said, referring to the schools in the program. “We knew that there could well be closures and ones that didn’t work.”

Though only about 25 percent of the schools in the program have improved enough to require less investment and support on the four-year timeline Mr. de Blasio established, the mayor insisted that Renewal still achieved its “core mission.”

Mr. de Blasio said the reorganization of the Department of Education’s behemoth bureaucracy, undertaken last year by his schools chancellor, Richard A. Carranza, would help smooth out the confusing lines of authority that led to frustration among principals and teachers in Renewal schools.

“I’m at peace that with the information we had and the structure we had at the time, it was a sensible approach,” he said. But he added, “I would not do it again that way.”

In a lengthy interview on Monday, Mr. de Blasio defended the goals of the program, but said its execution was flawed.

As education fads have come and gone, politicians have flipped between school improvement models based on punitive measures like closure and teacher firing and softer approaches that rely on pouring resources into schools.

While some small cities like Lawrence, Mass., and Camden, N.J., have achieved some success with different strategies, no large school system has cracked the code, despite decades of often costly attempts.

The question of how to fix broken schools is a great unknown in education, particularly in big city school districts.

The New York Timesreported in October that Mr. de Blasio was preparing to close Renewal, and that city officials had known some Renewal schools were likely to fail but had left most of them open anyway. As a result, officials essentially kept thousands of children in classrooms where they had little if any chance of thriving.

Instead, the program has been plagued by bureaucratic confusion and uneven academic results since Mr. de Blasio began it in 2014. Though some of the nearly 100 low-performing public schools have shown better results, many have fallen short of the improvements that Mr. de Blasio predicted. The Renewal label itself caused parents to seek other options, causing enrollment in some schools to plummet.

The end of the initiative, called Renewal, is a blow to Mr. de Blasio, who had hoped that success would bolster his effort to build a national reputation for innovative policies. Urban educators around the country had also looked to Renewal as a model for improving underperforming schools in historically troubled districts, rather than closing them.

Mayor Bill de Blasio is canceling one of his signature education initiatives, acknowledging that despite spending $773 million he was unable to turn around many long-struggling public schools in three years after decades of previous interventions had also failed.

Doug Holtz-Eakin and his team at AAF have created some cost estimates for the Green New Deal somewhere btw 52.6-94.4 T over ten years