Macro Roundup

Mark Perry, "Animated chart of the day: World’s top ten manufacturing nations, 1970 to 2017," American Enterprise Institute, July 5, 2019, https://www.aei.org/carpe-diem/animated-chart-of-the-day-worlds-top-ten-manufacturing-nations-1970-to-2017/

Animated chart of the day: World’s top ten manufacturing nations, 1970 to 2017

1. The USSR was the world’s second largest manufacturing nation from 1970 until Japan surpassed the USSR in 1984 to rise to the No. 2 position.

2. After overtaking Russia in the mid 1980s, Japan quickly rose as a manufacturing powerhouse and almost overtook the USA by the mid-1990s including in 1993 when Japan produced 22.1% of world output vs. 22.9% for the USA and in 1995 when Japan produced 22.0% of the world’s manufacturing vs. USA’s 22.23% share.

3. China’s rise as a leading world manufacturer starting in the mid-1990s after a long period of producing a fairly stable share of only 3-4% of the world’s factory output from 1970 to 1995. By 1996, China was out-producing both Italy and France for the first time and outproduced Germany starting in 2001 before surpassing Japan in 2007 and the USA in 2010.

4. Despite falling to the No. 2 position behind China, the USA still produced as much manufacturing output in 2017 ($2.18 trillion) as Japan, Germany and Korea combined ($2.18 trillion) and more than Germany, Korea, India, Italy and France combined ($2.14 trillion).

"....There is compelling evidence that a country’s fiscal response to a crisis is correlated with its prior debt-to-GDP ratio. Countries that face a crisis with lower debt pursue more expansionary fiscal policy than countries that face a crisis with higher debt. Indeed,our estimates based on data for 30 OECD countries since 1980 suggest that facing a crisis with a debt ratio one standard deviation below the sample average is associated with a high employment surplus in the aftermath of a crisis that is roughly 4 percentage points smaller (that is, more expansionary) than facing a crisis with a debt ratio one standard deviation above the average. Moreover, this large difference in the policy response is associated with a large difference in the aftermath: low-debt countries experience much milder downturns following a crisis than high-debt countries.This paper seeks to understand why the prior debt-to-GDP ratio appears to matter for the fiscal response to crises. We find that including direct measures of sovereign market access, such as long-term government bond rates or sovereign credit ratings, does not eliminate, or even greatly attenuate, the estimated impact of the debt-to-GDP ratio on the high-employment surplus following crises. This strongly suggests that the debt ratio does not matter simply through its impact on current market access or because it is a proxy for market access. Rather, an important part of why it matters appears to be through its impact on policymaker choices...."

Christina Romer and David Romer, "Fiscal Space and the Aftermath of Financial Crises: How It Matters and Why," National Bureau of Economic Research, April 2019, https://www.nber.org/papers/w25768

new CBO report on a national minimum wage finds it would likely lead to significant job loses

"....If the federal minimum wage were raised to $15 an hour in 2025, as House Democrats have proposed, a significant number of Americans would likely lose their jobs, a study released Monday by the nonpartisan Congressional Budget Office found..... The study’s estimate of 1.3 million jobs lost is the median figure in a range from zero to 3.7 million eliminated jobs.....But the study also estimates that in an average week in 2025—the year after the House measure would take full effect—a $15-an-hour minimum wage would boost the pay of 17 million workers who would otherwise earn less than $15 per hour. It could also raise the pay of 10 million workers who otherwise would earn slightly more than $15 an hour. Raising the federal minimum to $15 would lift 1.3 million Americans out of poverty, the CBO said...."
Eric Morath, "$15 Minimum Wage Would Bring Mixed Fortunes for U.S. Workers,"Wall Street Journal, July 8, 2019, https://www.wsj.com/articles/15-minimum-wage-would-leave-1-3-million-american-jobless-lift-as-many-out-of-poverty-11562611503

CBO Staff, "The Distribution of Household Income, 2016," Congressional Budget Office, July 9, 2019, https://www.cbo.gov/publication/55413

though you would like this chart

"...Taken together, private-equity funds of $10 billion or more posted 14.4% five-year annualized returns net of fees as of the end of last September, barely edging past the 14.1% return for the S&P 500, according to data from investment firm Cambridge Associates. Buyout funds’ relative performance doesn’t improve much over a longer time frame. Over a span of 12.75 years—the longest period for which Cambridge has sufficient data on megafunds—returns for these large funds was 10.2%, the same as the broader index, its data show. The reasons behind the trend are simple: Bigger funds generally have to find bigger targets to invest their money, which means they have fewer options. It tends to be more difficult to broadly implement new operating strategies at larger companies than at smaller ones. Megafunds, as a result, are often buying the market. The smaller the fund is, the less its returns tend to be tied to the broader market. U.S. funds of less than $350 million had a correlation of 0.38 with the S&P 500, compared with 0.62 for funds $10 billion or more, according to Cambridge...."

Private-Equity Firms Are Raising Bigger and Bigger Funds. They Often Don’t Deliver.

Blackstone Group LP is in the final stretch of raising what would be the largest private-equity fund ever. Big funds, however, don’t necessarily translate into big returns.

The private-equity giant has capped its latest fund at around $25 billion amid strong demand, according to people familiar with the matter. Collecting that would take the fund past the $24.6 billion record set by Apollo Global Management LLC in 2017. Others also are raising big funds: Advent International said earlier this month it had raised a $17.5 billion fund, and software-focused Vista Equity Partners is raising a $16 billion vehicle.

The rise of megafunds reflects the growing demand for private equity from large investors such as sovereign-wealth funds with hundreds of millions of dollars to put to work. With interest rates still persistently low, the industry’s historical reputation for 20%-plus returns, is appealing—even if it means paying higher fees and having money locked up for long periods.

The problem is that the largest funds haven’t always lived up to the hype. Taken together, private-equity funds of $10 billion or more posted 14.4% five-year annualized returns net of fees as of the end of last September, barely edging past the 14.1% return for the S&P 500, according to data from investment firm Cambridge Associates.

Buyout funds’ relative performance doesn’t improve much over a longer time frame. Over a span of 12.75 years—the longest period for which Cambridge has sufficient data on megafunds—returns for these large funds was 10.2%, the same as the broader index, its data show.

The reasons behind the trend are simple: Bigger funds generally have to find bigger targets to invest their money, which means they have fewer options. It tends to be more difficult to broadly implement new operating strategies at larger companies than at smaller ones. Megafunds, as a result, are often buying the market.

The smaller the fund is, the less its returns tend to be tied to the broader market. U.S. funds of less than $350 million had a correlation of 0.38 with the S&P 500, compared with 0.62 for funds $10 billion or more, according to Cambridge.

Megafund managers say their main periods of outperformance tend to come when the market is down—not in a decadelong bull market like the current one. Megafunds also provide one of the few places for large pension and sovereign-wealth funds to invest massive amounts of cash all at once. That offers them a way for them to get exposure to the growing slice of the market that isn’t traded on major exchanges.

“They are definitely serving a role in your portfolio, but it may not be the role you think they are serving,” said Andrea Auerbach, head of the global private-investments group at Cambridge, in an interview. “Size is the frenemy of performance.”

Investors piling into Blackstone’s latest fund can look at its past performance for an indication of where returns may be heading. Its 2011 fund, a $15 billion pool, posted annualized returns of 15.2% net of fees as of last September, public pension data show. That is less than 2 percentage points above the annualized total return for the S&P 500 with dividends reinvested over the same period.

Blackstone’s $18 billion fund raised in 2016 returned a net 22.9% through last September versus about 16% for the S&P 500 over the same period. Some pension funds still consider that fund too young for those results to be meaningful.

California Public Employees’ Retirement System, the largest U.S. public pension fund, which aims to commit between $10 billion and $13 billion a year to private equity, is exploring a new model for investing in it. Under the current plan, the pension fund would become the sole backer of at least two limited-liability companies. These companies would be overseen by outside managers, who would invest directly in companies on Calpers’s behalf. The fund would also continue its regular investments in private-equity funds.

Other institutions whose size allows them to be more nimble have opted to invest mostly with smaller managers. Alaska Permanent Fund Corp., which has about $60 billion under management and commits around $1.6 billion a year to private equity, targets funds in the range of $500 million to $1 billion. It aims to be one of the larger investors in these funds by writing checks of $50 million to $100 million, a position that also gives it access to more co-investment opportunities.

Steve Moseley, Alaska Permanent Fund’s head of alternative investments, said the strategy requires more legwork because he has to oversee more investments and more relationships with general partners. But the state fund’s private-equity investments have posted five-year annualized returns of 22.6% as of the end of last year.

“We discovered that by having more robust relationships with mid-sized and smaller we could deliver better returns,” Mr. Moseley said. “I don’t envy the folks who are managing the giant public pension funds.”

“…According to the IRS from a previous report on the dynamics of the Top 400 earners (updated here with 2014 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,584 different taxpayers represented in total for the 23-year period between 1992 and 2014. Of these, fewer than 17% appear more than once and only 3% were represented in 10 or more years. Nearly three out of four taxpayers (71.2%) were in the Top 400 in only a single year.”…”

Mark Perry, "Q: How much turnover is there among the richest Americans? A: A lot according to IRS data," American Enterprise Institute, July 9, 2019, https://www.aei.org/carpe-diem/q-how-much-turnover-is-there-among-the-richest-americans/

Q: How much turnover is there among the richest Americans? A: A lot according to IRS data

Of the 9,200 total tax returns filed in the 23 years from 1992 to 2014 for the 400 highest earners in each year, there were 4,584 unique, individual taxpayers in the Top 400 over those 23 years, since some taxpayers were in the Top 400 group in more than one year. The new IRS data show that:

1. Of the group of 4,584 unique top earners from 1992-2014, there were 3,262 individual taxpayers who made it into the “Fortunate 400” only one time during the 23-year period. Those 3,262 one-timers represent 71.2% of the total 4,584 taxpayers (see chart above), and therefore only 1,322 taxpayers that make up the rest of that elite group (28.8% of the 4,584 total, or about one in four) were able to make it into the Top 400 in more than one year between 1992 and 2014.

2. Moreover, since 3,262 earners made it into the Top 400 only once (71.2%) and another 558 taxpayers (12.2%) made it into the top group twice between 1992 and 2014 (see table above), that means that 83.3% of the top earners made it into the “Fortunate 400” only once or twice (3,820 out of 4,584), and only 16.7% (764 taxpayers out of 4,584) were able to make it into the top group in more than 2 years out of 23 years.

3. There were only 138 taxpayers out of the 4,584 total taxpayers in the top earner group (3%) who were in the Top 400 in 10 or more years out of 23 (see table).

4. Why is there such a high turnover among the Top 400 and why are most taxpayers in that group for only a single year? Data in Table 1 of the IRS report provide an answer. The combined salaries and wages of the Top 400 in 2014 were about $5.6 billion, which represented only 4.4% of those taxpayers’ combined Adjusted Gross Income (AGI) of about $127 billion. But those top taxpayers as a group had about $76.8 billion in income from sales of capital assets in 2014, which was more than 60% of their combined AGI of $127 billion. So while the Top 400 are certainly high earners (average salary of about $14 million in 2014), what puts them into the Top 400 in a given year isn’t their high salaries, but rather their large gains from the sale of capital assets (average capital gain for the Top 400 taxpayers in 2014 was $192 million) - which are often one-time sales of appreciated stock, or one-time gains from selling a business, partnership, farm, or real estate.

5. Data from Table 1 also reveal that the Top 400 are a pretty generous group based on their reported charitable contributions. In 2014, the Top 400 combined gave nearly $14.5 billion to charity, at an average of more than $37 million per taxpayer. Even though that Top 400 group represented only about three one-thousandths of 1% of all 148.6 million taxpayers in 2014 (0.000269%), those 400 taxpayers accounted for nearly 7% of the $210 billion in total charitable contribution deductions in 2014.

According to the IRS from a previous report on the dynamics of the Top 400 earners (updated here with 2014 data), “The data reveal a mostly changing group of taxpayers over time. In fact, there were 4,584 different taxpayers represented in total for the 23-year period between 1992 and 2014. Of these, fewer than 17% appear more than once and only 3% were represented in 10 or more years. Nearly three out of four taxpayers (71.2%) were in the Top 400 in only a single year.”

MP: Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. That is, once you find yourself in a top or bottom quintile, or a certain income percentile, or the Top 400, you’ll likely stay there for decades or even for life. But economic reality is very different - people move up and down the income quintiles and percentile groups throughout their careers and lives. The top or bottom 1/5/10% by income, just like the top or bottom income quintiles, are never the same people from year to year, because there is constant, dynamic turnover as we move up and down the income categories.

It’s very likely that most of the members of the IRS’s Top 400 started in one of the lower-income quintiles early in their lives and careers, and advanced into the higher income quintile and eventually into the Top 400 as they become successful, and they may drop into a lower-income quintile later in life. As the new IRS data show, almost three out of every four members of the ever-changing “Fortunate 400” over the last 23 years were only “members” of that group for a single year, which reflects the dynamic nature of the US economy and the significant income mobility that exists for Americans — at all levels of income.

Note: The IRS discontinued the top 400 taxpayer data series after tax year 2014 and replaced it with data on taxpayers at the.001 percentile level, which in 2014 represented the top 1,396 returns. According to the IRS: “This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution. As the number of returns increases with the growth of the economy, the number of returns in the.001 percentile will increase proportionally as well thus allowing for a consistent high-income data series.”

This post (and title) was inspired by a report yesterday by Robert Bellafiore and Aida Vazquez-Soto at the Tax Foundation titled “How Much Turnover Is There Among the Richest Americans?” based on the same IRS data above for the Top 400 Taxpayers from 1992 to 2014. Here’s a big slice of that report:

Income inequality has been a prominent topic on the presidential campaign trail, leading to proposals for wealth taxes, higher marginal income tax rates, and other policies. As scholars and everyday taxpayers continue to debate this issue and the question of increasing taxes on the richest Americans, one observation to keep in mind is the high degree of turnover among the highest-income Americans.

Data from the Internal Revenue Service shows the frequency of those filing who make the top 400 individual income tax returns with the highest adjusted gross income from 1992 to 2014. Of the 4,584 people who made it into the top 400 at some point over that period, 3,262 qualified for only one year. In other words, 71.2% of those who were in the top 400 made it once and not again. Of that same overall group, 138 people did qualify for at least a decade.

These data illustrates another important point about how tax rates, or the share of the tax burden on an income group, have changed over time: We should not conclude without evidence that it is the same people in that income group the entire time. For example, it can be easy to look at data on the top 1 percent’s tax rates over time and assume that the same people belong to that group in every year. However, such data on its own often doesn’t tell us whether a given income group represents the same people year after year, experiences a complete turnover annually, or something in between.

When the data do provide information on the people in a given group, as is the case here, the results can be surprising. At least among the top 400 such filers, there is more turnover than many might think. Policymakers and taxpayers should keep this in mind and be careful not to jump to unjustified conclusions as they consider the many changes to our tax code being debated today.