Macro Roundup

Jason Delisle, "Are low-scoring students at elite colleges mostly wealthy?," American Enterprise Institute, April 2, 2019, https://www.aei.org/education/higher-education/are-low-scoring-students-at-elite-colleges-mostly-wealthy/

Are low-scoring students at elite colleges mostly wealthy?

The college admissions scandal has led some researchers to wonder why wealthy families felt the need to cheat to get their kids into elite colleges. They argue that selective universities already admit large numbers of students with low test scores who are “disproportionately wealthy.”

Most people have heard about so-called legacy admissions at elite colleges and how these institutions often recruit high-income students who can pay the full tuition price, so it stands to reason that admissions offices might be less picky about the test scores of these students. When we examine the claim against a representative data set of college students, it is hard to conclude, however, that these low-scoring students are disproportionately wealthy.

The researchers have defined a low test score as an SAT score “hundreds of points below the median of other students,” and wealthy as the top income quartile of US households. The median SAT score (combined math and verbal) at selective institutions is about 1220. Therefore, the low test scores referenced must mean students who scored below 1020.

The chart below shows the income distribution for three groups of students. The first group is all students at selective colleges. The second group is made up of students from the same set of selective schools, but only those with test scores below 1020 (note that this sample size is relatively small, only about 500 students). And the third shows the income distribution of students enrolled in bachelor’s degree programs at all colleges and universities regardless of selectivity who also have test scores below 1020.

The third bar, the one showing all students with low test scores, offers another comparison to test the claim. Here the data suggest that students with low test scores at selective schools are about as likely to be wealthy as students with low test scores at any college or university (due to the small sample, the difference shown in the chart is within the margin of error). Moreover, low-scoring students are also about as likely to be poor at either set of schools.

All in all, there just isn’t strong evidence to support the claim that students with low test scores at elite colleges are disproportionately wealthy. It remains a mystery how some researchers have managed to conclude otherwise.

"... The three main takeaways from a broad analysis of cross-country firm-level patterns are that (1)market power has increased moderately across advanced economies, as indicated by firms’ price markups over marginal costs rising by close to 8 percent since 2000, but not in emerging market economies; (2) the increase has been fairly widespread across advanced economies and industries, but within them, it has been concentrated among a small fraction of dynamic—more productive and innovative—firms.... As regards performance, the top 10 percent of firms in the markup distribution are, on average, about 50 percent more profitable, more than 30 percent more productive, and more than 30 percent more intensive in their use of intangible assets than the other 90 percent (Figure 2.5, panel 3).....and (3) although the overall macroeconomic implications have been modest so far, further increases in the market power of these already-powerful firms could weaken investment, deter innovation, reduce labor income shares, and make it more difficult for monetary policy to stabilize output. Even as rising corporate market power seems, so far, more reflective of “winner-takes-most” by more productive and innovative firms than of weaker pro-competition policies, its challenging macroeconomic implications call for reforms that keep future market competition strong...."

Wenjie Chen, Federico Díez, Romain Duval, Callum Jones, and Carolina Villegas-Sánche, "World Economic Outlook, The Rise of Corporate Market Power and It's Macroeconomic Effects," International Monetary Fund, April 2019, https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019

“…economic profit is distributed unequally along a power curve, with the top 10 percent of companies capturing 80 percent of positive economic profit….After adjusting for inflation, today’s superstar companies have 1.6 times more economic profit, on average, than the superstar companies of 20 years ago….. The middle 60 percent of companies record near-zero economic profit on average, showing how hard it can be to defy market forces. The bottom 10 percent destroy as much value as superstars create.We label companies in the top 10 percent as superstar companies…..As economic profits grow larger, so do economic losses at the other end of the distribution. The bottom 10 percent of companies destroy as much value as the top 10 percent create, and today’s bottom-decile companies have 1.5 times more economic loss, on average, than their counterparts of 20 years ago (Exhibit 1). That means for every company that creates economic value, there is another company that destroys economic value.Yet these value-destroying companies continue to survive, holding on to their resources for increasingly longer durations and continuing to attract capital. A growing number are turning into “zombie” companies, unable to generate enough cash flow even to sustain interest payments on their debts. The impact of these economic losses goes beyond these companies’ investors, managers, and workers: it drives down the returns for healthy companies that compete for the same resources or profits….For the vast majority of the world’s largest companies, those making up the middle 60 percent of the power curve, economic profit is hard to retain. They record near-zero economic profit, on average…..Superstar companies stand out for their size. Compared with median companies with annual revenues greater than $1 billion, superstar companies are seven times larger by revenue and capital investment (Exhibit 2). They are also productive, with 20 percent higher capital and labor productivity on average compared with median companies……Global economic data indicate that over the past 20 years, 70 percent of growth in GDP and gross surplus (an economic measure of profit) occurred in just five worldwide superstar activities: financial services, such as banking, credit, insurance, and asset management; internet-, media-, and softwareproduct development; pharmaceutical and medicalproduct development; professional services, such as R&D, management, and other high-skilled services; and real estate, rental, and leasing. Just two sectors of activity, financial services and real estate, account for about 45 percent of all the gains in gross surplus (Exhibit 3)….”

Sree Ramaswamy, Michael Birshan, James Manyika, Jacques Bughin, and Jonathan Woetzel, “What every CEO needs to know about ‘superstar’ companies,” McKinsey Global Institute, April 2019, https://www.mckinsey.com/featured-insights/innovation-and-growth/what-every-ceo-needs-to-know-about-superstar-companies

Gordon paper

"... Taking real GDP per hour worked as the broadest measure of labor productivity, its growth rate in the U.S. has declined from 2.7 percent per year during 1950-72, to 1.9 percent during 1972- 2005, to 1.1 percent during 2005-17. In the 15 Western European members of the European Union prior to its 2004 enlargement (the “EU-15”), the same growth measure declined even more sharply from 4.7 percent per year during 1950-72, to 2.0 percent during 1972-2005, to a mere 0.8 percent during 2005-17....There are two important differences in the timing and pace of the productivity growth slowdown in the U.S. and EU-10. The first, already identified above, is that the post-1972 slowdown in the EU was much sharper than in the U.S. The second is that the U.S. enjoyed a temporary productivity growth revival between 1995 and 2005 that is missing in the EU experience. Dividing up the postwar into periods delineated by 1972, 1995, and 2005, the EU experienced a continuous deceleration from 1950-72 to 1972-95 to 1995-2005 to 2005-2015, whereas the U.S. experienced a slowdown from 1950-72 to 1972-95, then a marked but temporary growth revival in the 1995-2005 interval, followed by another slowdown after 2005.....Despite these differences, this paper provides a new interpretation that points to similarities between the U.S. and EU-10 experienceboth in the aggregate and in the identity of those industries that made the largest contributions to changes in productivity growth over the intervals divided at 1972, 1995, and 2005. In ourinterpretation the EU was playing catchup to the U.S. over the entire period from 1950 to 1995. Starting in 1950 at a productivity level only 50 percent of the U.S., the EU caught up to 81 percent by 1972, growing much more rapidly than the U.S. as it rebuilt after the war and implemented the large backlog of inventions and innovations that had propelled U.S. growth in the first half of the 20th century. After 1972 it continued to catch up but at a slower pace, and we show that EU productivity growth in 1972- 95 was a mirror image of U.S. growth in the prior 1950-72 interval, not only in the sense that the growth rates of productivity were identical, but also that there is a high correlation across industries between the EU 1972-95 and the U.S. 1950-72 in the industry-by-industry productivity growth rates.By linking the U.S. experience in 1950-72 to the EU-10 growth pattern of 1972-95, we are able to point to another striking similarity. The productivity growth slowdown from these early periods to the most recent 2005-15 interval was an almost identical -1.68 percentage points for the EU-10 and -1.67 points for the U.S. Further the industry-by-industry composition of the slowdown was very similar, with a high correlation across industries in the extent of the early to- late slowdown....We show that both the pace of aggregate productivity growth during 1972-95 for the EU-10 as well as its industrial composition matched very closely the growth record of the U.S. in the previous 1950-72 time interval. A striking finding is that for the total economy the “early-to-late” productivity growth slowdown from 1972-95 to 2005-15 in the EU-10 (-1.68 percentage points) was almost identical to the U.S. slowdown from 1950-72 to 2005-15 (-1.67 percentage points). There is a very high EU-U.S. correlation in the magnitude of the early-to-late slowdown across industries. This supports our overall theme that the productivity growth slowdown from the early postwar years to the most recent decade was due to a retardation in technical change that affected the same industries by roughly the same magnitudes on both sides of the Atlantic....The set of conclusions for the EU-10 are straightforward. First, the EU-10 clearly lagged behind in ICT-investment, as demonstrated by the uniformly lower values for ICT indicators in Table 7. Second, ICT-intensity did not spur a productivity revival in EU-10 SP industries, and at best mitigated the slowdown in EU-10 CP industries. Finally, while the Electrical Machinery industry helped drive growth in the U.S. commodities industry, the same industry experienced lower growth in the EU-10 and did not respond to the ICT revolution.....Our point of departure is that, following a catch-up spurt of rapid growth in the first 25 years after World War II, when Europe was chasing the technological frontier that the U.S. had established before and during the war, in the next time interval 1972-95 the characteristics of EU-10 productivity growth were surprisingly similar both in overall pace and also in industry composition to that achieved by the U.S. in the prior 1950-72 time period. These results indicate that, if in 1972 you had known the rate of productivity growth by industry achieved in 1950-72 for the U.S., you would have been able to do a quite a good job of predicting productivity growth by industry in the EU-10 in the subsequent 1972-95 period (a relationship exhibited in Figure 9a)..... one of the most striking results of this paper is that the slowdown in EU-10 productivity growth from the 1972- 95 average growth rate to 2005-15 was exactly the same (-1.68 percentage points) as the slowdown in U.S. productivity growth from its 1950-72 average growth rate to 2005-15 (-1.67 percentage points). The start-interval and end-interval growth rates were very close, from 2.54 to 0.87 percent for the U.S. and from 2.31 to 0.63 percent for the EU-10. The slowdown over the same time intervals in the subset of industries that produce commodities was also almost identical (-2.15 percentage points for Europe vs. -2.13 points for the U.S.) Even more striking about what we call this “early-to-late change” is that there is a correlation coefficient of 0.81 across industries between the U.S. and EU-10 in the magnitude of their growth slowdowns (a pattern shown in Figure 10). The correlation coefficient rises to 0.85 for industry contributions to the total slowdown, that is, when industry productivity growth rates are weighted by the value added share of each industry.16 Thus the productivity growth slowdown is a transatlantic disease, not only in its overall magnitude but in the composition of industries making the biggest contributions. This supports our overall theme that the productivity growth slowdown from the early postwar years to the most recent decade was due to a retardation in technical change that affected the same industries by roughly the same magnitudes in the U.S. and in the EU-10...."

Robert J. Gordon and Hassan Sayed, "The Industry Anatomy of the Transatlantic Productivity Growth Slowdown," National Bureau of Economic Research, March 2019, https://www.nber.org/papers/w25703