Macro Roundup

just an FYI some good data from McKinsey highlights the continued "Balkanization" of the US productivity on geographic lines

".... Our analysis of 315 cities and more than 3,000 counties shows that the United States is a mosaic of local economies with widening gaps between them. Twenty five megacities and high-growth hubs, where 96 million people live, have generated most of the nation’s job growth since the Great Recession. These are the nation’s most dynamic places, with high-growth industries, many high-wage jobs, and young, educated workers but notable inequality. By contrast, 54 trailing cities and roughly 2,000 rural counties, collectively home to 78 million people, have older and shrinking workforces, higher unemployment,and lower educational attainment. Between these extremes are thriving niche cities and a larger “mixed middle” with modest economic growth; 94 million people live in these segments..... The same 25 cities and peripheries that led the post-recession recovery could capture 60 percent of US job growth through2030. The mixed middle and trailing cities are positioned for modest job gains, but rural counties could see a decade of flat or even negative net job growth. These shifts are occurring when geographic mobility is at historic lows....Population growth has also tilted toward urban America. High-growth hubs, small powerhouses, and silver cities have grown by more than 10 percent since 2007, and most urban peripheries are also growing. Residents have been moving out of megacities, stable cities, America’s makers, and trailing cities, but immigration has more than offset the losses in megacities and stable cities. By contrast, populations in rural Americana counties grew by less than 1 percent—and distressed Americana is shrinking......

Susan Lund and Et al., "The future of work in America," McKinsey Global Institute, July 2019, https://www.mckinsey.com/featured-insights/future-of-work/the-future-of-work-in-america-people-and-places-today-and-tomorrow

next year the median age in China will be 38.4 years old, > the median age in the US of 38.3 years old. and then the gap will likely quickly widen thereafter.

, academic support for claims in op-ed are attached

"...Research has shown that the early studies purporting that desegregation did not help black children academically were flawed because they attempted to study the phenomenon too soon. If a child has spent 10 years in segregated, inferior schools and just two in a highly resourced, integrated school, one cannot expect marked achievement gains. We now know that school desegregation significantly reduced the test-score gap between black and white children — cutting it in half for some black age groups without harming white children. No other reform has reduced the gap on this scale. Rather, the opposite is true: The test-score gap between black and white students reached its narrowest point ever at the peak of desegregation and has widened as schools have resegregated. An economist and professor of public policy, Rucker C. Johnson at the University of California, Berkeley, studied the life outcomes of black children who got access to the trifecta of quality Head Start, increased school funding and desegregation. He saw the entire trajectory of their lives change. Compared with kids stuck in segregated schools, even their own siblings, they were more likely to graduate from high school and more likely to get out of poverty. As adults, they earned more, were less likely to go to jail and even lived longer. The earlier and longer these children got access to integrated schools, Dr. Rucker found, the stronger the results....."
Nikole Hannah-Jones, "It Was Never About Busing,"New York Times, July 12, 2019, https://www.nytimes.com/2019/07/12/opinion/sunday/it-was-never-about-busing.html

what the timesop-edon busing cited to support this claim ".... We now know that school desegregation significantly reduced the test-score gap between black and white children — cutting it in half for some black age groups without harming white children. No other reform has reduced the gap on this scale. Rather, the opposite is true: The test-score gap between black and white students reached its narrowest point ever at the peak of desegregation and has widened as schools have resegregated...."".... Closing achievement gaps is a goal of both national and state education policy. The results from the 2012 NAEP long-term trend assessments show some progress toward meeting that goal. The narrowing of the White - Black and White - Hispanic score gaps in reading and mathematics from the 1970s is the result of larger gains by Black and Hispanic students than White students. Only the White - Hispanic gap in mathematics at age 9 has not shown a significant change from the early 1970s. Female students scored higher in reading than male students at all three ages. The 2012 results show 9-year-old males making larger score gains than females. This has led to a narrowing of the gender gap at age 9 as compared to 1971. In mathematics, male 17-year-old students scored higher than female students. The gender gap at age 17 narrowed because female students made gains from 1971 to 2012, but 17-year-old male students did not...."

Ed, the times op-ed on busing (attached) cited the following to support this claim

"....An economist and professor of public policy, Rucker C. Johnson at the University of California, Berkeley, studied the life outcomes of black children who got access to the trifecta of quality Head Start, increased school funding and desegregation. He saw the entire trajectory of their lives change. Compared with kids stuck in segregated schools, even their own siblings, they were more likely to graduate from high school and more likely to get out of poverty. As adults, they earned more, were less likely to go to jail and even lived longer. The earlier and longer these children got access to integrated schools, Dr. Rucker found, the stronger the results....."
the op-ed cites his new book, which I can get a copy of to actually see his metrics, but here is an interview with Johnson characterizing his books findings:

"....Using nationally representative longitudinal data spanning more than four decades, I analyze the life outcomes of cohorts tracked from birth to adulthood across several generations, from the children of Brown to Brown’s grandchildren. The slow and uneven pace of desegregation, school funding reforms, and Head Start programs across the country created a natural “policy lab,” that allowed for rigorous, empirical evaluation of integration, school funding and Head Start. The research findings are clear: African Americans experienced dramatic improvements in educational attainment, earnings and health status — and this improvement that did not come at the expense of whites. Moreover, the longer students were exposed to integration and strong school funding, the better their outcomes in adulthood. This was true for children of all races. The beneficial effects were found not just for the children who attended desegregated schools, but for their children as well. School integration didn’t fail.The only failure is that we stopped pursuing it and allowed the reign of segregation to return......"

".... We use children’s differential exposure to Head Start spending (at age 4) andcourt-ordered school finance reforms (SFRs) (between the ages 5 through 17), depending on place and year of birth, to examine whether the marginal effect of Head Start spending on children’s adult outcomes are larger among individuals who were subsequently exposed to SFR-induced K12 spending increases.We present extensive tests to document that the policy-induced variation in Head Start spending and K12 public school spending we exploit is unrelated to other childhood family, community, or policy changes. For non-poor children, SFR-induced K12 spending increases led to significant improvements in educational and economic outcomes, while increases in Head Start spending had no effect.However, for poor children, both Head Start spending increases and SFR-induced K12 spending increases led to significant improvements in educational outcomes, economic outcomes, and reductions in the likelihood of incarceration. Importantly, the long-run effects of increases in Head Start spending are amplified when followed by attending schools that experienced SFRinduced increases in K12 per-pupil spending. Across all the outcomes, the marginal effect of the same increase in Head Start spending was more than twice as large for students from K12 school districts that spent at the 75th percentile of the distribution than those from K12 school districts that spent at the 25th percentile. Similarly, the benefits of K12 school-spending increases on adult outcomes were larger among poor children who were exposed to higher levels of Head Start spending during their pre-school years. For poor children, the combined benefits of growing up in districts/counties with both greater Head Start spending and K12 per-pupil spending are significantly greater than the sum of the independent effects of the two investments in isolation. There are two important caveats to our work. First, because the counterfactual childcare and pediatric care may be better today than in the late 1960s and 70s, the marginal effect of Head Start may be smaller today than in the earlier period that we study. Second, public school spending levels during the period we study were lower than current levels. If school spending exhibits diminishing marginal product, the effects presented here may be larger than one would observe with similar spending increases today. These caveats do not minimize the importance of the findings or their profound implications for policy. However, they do suggest that the contemporary magnitude of the effects may be smaller than those we present here. At the same time, the returns to education have increased, so the consequences of access to high-quality human capital investments from preK-12 are large...."
Rucker Johnson and C. Kirabo Jackson, "Reducing Inequality Through Dynamic Complementary Evidence From Head Start and Public School Spending," National Bureau of Economic Research June 2017, https://gsppi.berkeley.edu/~ruckerj/RJabstract_LRHeadStartSchoolQuality.pdf

Valerie Strauss, "Why school integration works,"Washington Post, May 16, 2019, https://www.washingtonpost.com/education/2019/05/16/why-school-integration-works/

going through his CV seem like the support for that claim of the books is likely drawn from a 2017 NEBR paper of his that found

James Pethokoukis, "Peter Thiel and the populist right’s embrace of broken capitalism theory," American Enterprise Institute, July 15, 2019, https://www.aei.org/economics/peter-thiel-and-the-populist-rights-embrace-of-broken-capitalism-theory/

Peter Thiel and the populist right’s embrace of broken capitalism theory

When, in a speech Sunday, Peter Thiel wasn’t lamenting Silicon Valley’s failure to produce a working warp engine or musing about “seemingly treasonous” actions by Google executives, he was suggesting a familiar economic argument. Well, familiar on the left ⁠— at least until the populist surge on the right. It’s an argument easily summed up by this chart from economist Robert Lawrence, one included in a recent paper by my AEI colleague Michael Strain, “The Link Between Wages and Productivity Is Strong”:

Yet a few reasonable changes to the chart presents a radically altered picture how the US economy has performed over the past half century. (Among the changes, Lawrence looks at the wages of all workers, factors in compensation rather than just wages, calculates real wages using a business price rather than consumer price deflator, and net output ⁠— which removes capital depreciation ⁠— rather than gross output.)

In the chart above, productivity growth and compensation growth were coincident between 1970 and 2001. The chart depicts a divergence since 2001, especially since the Great Recession, but not a dramatic one. … The takeaway from this chart is clear: When properly measured, with variable definitions based on the most appropriate understanding of the relevant underlying economic concepts, trends in compensation and productivity have been very similar over the past several decades.

Moreover, these findings present a similar picture as those in a recent working paper ⁠— “Productivity and Pay: Is the link broken?” ⁠— by economists Anna Stansbury and Lawrence Summers:

We find substantial evidence of linkage between productivity and compensation: over 1973-2016, one percentage point higher productivity growth has been associated with 0.7 to 1 percentage points higher median and average compensation growth and with 0.4 to 0.7 percentage points higher production/nonsupervisory compensation growth. These results suggest that other factors orthogonal to productivity have been acting to suppress typical compensation even as productivity growth has been acting to raise it.

A related argument is that wages have gone nowhere for 40 years. But this is an equally suspect claim. Suspect, but politically convenient for populists for whom telling a story of total economic failure is a key attack vector on “elites.”

Mark Perry, "Chart of the day... or century?," American Enterprise Institute, July 12, 2019, https://www.aei.org/carpe-diem/chart-of-the-day-or-century-2/?mkt_tok=eyJpIjoiWkdZMll6RXpPRE13T1RRMiIsInQiOiJuZmZiV040eURcL09NYXZCY1ZrYldmXC9meHZJZ295aXNMRzBLY2UyOTFvTWVPcm5aOGFtTlloeXRtYnZcL0dkanM3Z244Y1E1enJ0QXYreHlQMmI4UUlmZDVUcEN0MWF2QTVDdlZVNmpJNmlMRCtqR09xS2NVaWxNbW5vZ0plY1R0biJ9

Chart of the day... or century?

As I wrote last summer on CD, I’ve probably created and posted more than 3,000 graphics on CD, Twitter, and Facebook including charts/graphs, tables, figures, maps and Venn diagrams over the last 12 years. Of all of those graphics, I don’t think any single one has ever gotten more attention, links, re-Tweets, re-posts, and mentions than the one above (and previous versions), which has been referred to as “the Chart of the Century.” Here are some examples of those mentions from last year for the version of the chart with price data through December 2017.

Barry Ritholz has featured various versions of the chart three times on his Big Picture Blog here, here and here.

Bloomberg published an article last July titled “Chart of Century Gives Powell Gloomy Glimpse of Trade-War World,” with this opening:

A multi-colored graphic that’s made the rounds at the Federal Reserve hints at what Chairman Jerome Powell could face if President Donald Trump succeeds in throwing globalization into reverse: Higher prices for many goods and potentially faster inflation.

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged.

That report was followed in July with a CBS MoneyWatch article “Inflation risks, trade war costs, make Fed’s job much harder.”

A chart that has been making the rounds at the Fed from economist Mark Perry shows how falling prices for trade-sensitive things like TV sets and toys have helped offset rising costs for things like medical services, housing and education.

More recently, Clemson University economist Bruce Yandle featured the chart in a March 2019 Washington Examiner op-ed titled “Rising prices, global competition, and the chart of the century“:

American Enterprise Institute economist Mark J. Perry is highly and justifiably respected for his ability to convey complicated economic relationships by way of rather simple charts and graphs. The most famous example of this, shown here, is called by some the “chart of the century.” The high praise comes about because the chart is loaded with information regarding the types of challenges faced by the Fed and other Washington policymakers. Perry’s most recent version reports price increases from 1998 through 2018 for 14 categories of goods and services along with the average wage and overall Consumer Price Index.

Based on yesterday’s BLS report for CPI price data through June, I’ve updated the chart above with price changes through June 2019. During the most recent 21.5-year period from January 1998 to June 2019, the CPI for All Items increased by exactly 57.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly earnings (wages). Seven of those goods and services have increased more than average inflation, led by hospital services (+210%), college tuition (+188%), and college textbooks (+183%). Average wages have also increased more than average inflation since January 1998, by 83%, indicating an increase in real wages over the last several decades.

The other seven price series have declined since January 1998, led by TVs (-97%), toys (-75%), software (-69%) and cell phone service (-53%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.) and clothing have remained relatively flat for the last 21.5 years while average prices have increased by 57% and wages increased 83%. Various observations that have been made about the huge divergence in price patterns over the last several decades include:

a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.

New:

d. The price series that has shown the greatest change recently is the CPI for Educational Books (mostly college textbooks). Textbook prices rose an average of nearly 6% annually between January 1998 and December 2016, nearly three times average inflation during that period of just above 2% annually. But starting in early 2017, the CPI for Educational Books has been flat, and actually fell by 2.15% over the last 12 months through June following an annual decrease of -4.0% the previous month - the two largest annual percentage declines in the history of the series going back to 1967.

We can expect future declines in the prices of college textbooks, as the traditional textbook market faces increasingly tough competition from alternative options including hundreds of “open textbooks” that have been funded, published, and licensed to be freely used, adapted, and distributed. The University of Minnesota’s Center for Open Education maintains an “Open Textbook Library” website that lists hundreds of textbooks in nearly 20 academic subjects that are available for free online or as a PDF file, or as a print copy at a low-cost ($33.50 for print copies from OpenStax). Just in the field of economics, there are more than 20 free open textbooks for Economics courses including Principles of Microeconomics, Principles of Macroeconomics, International Economics, Money and Banking, Economic Analysis and Principles of Political Economy.

Bottom Line: Based on the evidence in the chart above showing stagnating and falling textbook prices following half a century of rising prices, Hurricane Joseph appears to be hitting the college textbook market with a very large, tsunami of creative destruction called “The Open Textbook Effect.”

MP: I’ll continue to update the price chart every six months, look for the next version in January 2020 with data through December 2019.

"....In America ip now accounts for about one-third of non-residential investment, up from a fifth in the 1980s (see chart 4)...In the past year American technology firms in the s&p 500 made investments of $318bn, including research and development spending. That was roughly one-third of investment by firms in the index. Just ten of them were responsible for investments of almost $220bn; five years ago the figure was half that...."

"....A recent paper by Adrien Auclert of Stanford University sets out a framework for judging who wins and who loses from changes in monetary policy. Three channels must be considered. One concerns the impact of lower rates on the macroeconomy—the effect trumpeted by central banks. Another concerns the higher inflation that lower rates might cause. That hurts creditors and benefits debtors, who see the real value of their obligations shrink. The third channel concerns asset prices. It is wrong to claim that asset-holders generally benefit when rates fall, says Mr Auclert. What matters is the full picture of an individual’s assets and liabilities. The latter he defines to include future consumption plans (such as whether the homeowner wants to stay in his house, or whether the retired person seeks to maintain a steady standard of living). Only by looking at an individual’s balance-sheet in full can you judge whether he wins or loses from low rates—or whether, in the jargon, he has “unhedged interest-rate exposure”. The crucial question is whether someone’s assets and liabilities mature at different points in time. People with short-dated assets but long-dated liabilities—for example a saver with lots of cash in the bank to fund a purchase ten years hence—do badly when rates fall. They are the euthanised “rentiers”, who must save more to fund spending later (a rare example of lower rates depressing consumption). But those who wish to spend today and hold long-dated assets, such as long-term government bonds, do well. What does this framework imply for rich and poor? Mr Auclert presents some evidence that Americans who are older, or whose incomes are higher, tend to be on the losing end of asset-price effects when rates fall. But he says it is hard to measure the effect precisely. A recent working paper by Panagiota Tzamourani of the Bundesbank finds that within the euro area, average unhedged interest exposure varies a lot between countries, seemingly in line with the prevalence of floating-rate mortgages. But Ms Tzamourani also finds that younger households and those with low net wealth benefit from lower rates almost everywhere...."
Economist Staff, "Should egalitarians fear low interest rates?,"The Economist, July 11, 2019, https://www.economist.com/finance-and-economics/2019/07/11/should-egalitarians-fear-low-interest-rates