Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, September 3, 2019

AI Summary. A proposed "market access charge" would impose a variable tax on foreign capital used to buy US assets, which the authors argue the Federal Reserve could adjust until inflows match outflows, balancing the current account and eliminating the trade deficit. The authors contend this targets global savings imbalances more effectively than tariffs, which shift bilateral imbalances without addressing them.

Michael Pettis China Financial Markets
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@michaelxpettis proposes a “market access charge” to balance US capital inflows & outflows, addressing the persistent trade deficit. By taxing overseas capital, the Fed could reduce inflows until they align with outflows, eliminating the trade deficit.

Would taxing foreign capital inflows eliminate the trade deficit better than tariffs?

Core argument: For over 40 years, foreign investors have invested more in the U.S. than U.S. investors have abroad, an imbalance in capital flows that the proposal's authors tie to the persistent trade deficit.

The proposal to tax foreign direct investment (FDI) through a "market access charge" aims to balance U.S. capital inflows and outflows, addressing the persistent trade deficit. For over 40 years, foreign investors have consistently invested more in the U.S. than U.S. investors have abroad, leading to imbalanced capital flows and trade shortfalls. By imposing a variable tax on overseas capital used to purchase U.S. assets, the Federal Reserve could reduce these inflows until they align with outflows, thus balancing the current account and eliminating the trade deficit. While there is a risk of capital shortages, the Fed could adjust the tax to zero during such periods. This approach targets structural issues in global savings and is more effective than tariffs, which merely shift bilateral imbalances without solving underlying problems. The recent Senate bill reflects a promising shift towards addressing trade deficits through capital flow management.

Takeaways by Macro Roundup® AI

  1. For over 40 years, foreign investors have invested more in the U.S. than U.S. investors have abroad, an imbalance in capital flows that the proposal's authors tie to the persistent trade deficit.
  2. The proposed "market access charge" would place a variable tax on overseas capital used to buy U.S. assets, letting the Federal Reserve reduce inflows until they match outflows and balance the current account.
  3. Capital flow management is presented as more effective than tariffs, which shift bilateral imbalances without addressing structural issues in global savings, and the Federal Reserve could set the charge to zero during capital shortages.

Pettis like the Baldwin-Hawley proposal (an alternative to Buffett's "Import Certificates" ~ having the Fed tax FDI via a "market access charge")"...The heart of the bill would be a stipulation that the Federal Reserve levy a variable tax on overseas capital used to buy U.S. assets whenever foreign investors invest significantly more capital in the United States than U.S. investors send abroad, which has been the case for more than forty years. The purpose of the tax would be to reduce capital inflows until they are largely in balance with outflows. A country’s capital account and current account must always match up exactly, so a balanced U.S. capital account would mean a balanced current account, and with this the U.S. trade deficit would disappear.....The biggest risk of a tax on capital inflows is that the U.S. economy might indeed experience periods when there are capital shortages and U.S. businesses are unable to access cheap capital. At such times, of course, the Fed would simply set the tax to zero. The trade shortfalls that plague the U.S. economy are chiefly a product of imbalanced capital flows, which are driven by distortions in global savings. Selectively restricting capital inflows is the best way to address these imbalances. Tariffs are a far less effective tool: they mostly just rearrange bilateral imbalances and distort the underlying economy without addressing structural issues. Whether it passes or not, the recent Senate bill is the right approach and an encouraging sign because it is the first time lawmakers have sought to address the persistent U.S. trade deficit by way of capital imbalances...."Michael Pettis, "Washington Should Tax Capital Inflows,"China Financial Markets, August 6, 2019, https://carnegieendowment.org/chinafinancialmarkets/79641

AI Summary. A proposal would have the Federal Reserve impose a "market access charge" taxing foreign profit-seeking investors' new purchases of U.S. assets, while exempting government agencies, to adjust the dollar's value and manage the U.S. current account balance. It would also grant the Federal Reserve authority to buy foreign assets to offset unwanted inflows, a power now limited to the Treasury.

Matthew Klein Barron's
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@MattKlein suggests Fed impose a “market access charge” to manage US current account balance by taxing foreign savers on new US asset purchases, aiming to adjust the dollar’s value.

Can taxing foreign purchases of U.S. assets shrink the trade deficit?

Core argument: The proposal would have the Federal Reserve impose a "market access charge" taxing foreign savers on new purchases of U.S. assets, aiming to adjust the dollar's value and manage the U.S. current account balance.

The proposal suggests the Fed impose a "market access charge" to manage the U.S. current account balance by taxing foreign savers on new U.S. asset purchases, aiming to adjust the dollar's value. This charge would target profit-seeking investors, like Dutch pension funds, but not government agencies such as the Swiss National Bank. The Fed would also gain authority to buy foreign assets to counteract unwanted inflows, a power currently limited to the U.S. Treasury. This approach aligns with IMF-endorsed capital flow management measures used by countries like Australia and Brazil, offering a comprehensive alternative to tariffs for addressing trade imbalances.

Takeaways by Macro Roundup® AI

  1. The proposal would have the Federal Reserve impose a "market access charge" taxing foreign savers on new purchases of U.S. assets, aiming to adjust the dollar's value and manage the U.S. current account balance.
  2. The charge would apply to profit-seeking investors such as Dutch pension funds but not to government agencies such as the Swiss National Bank.
  3. The Federal Reserve would gain authority to buy foreign assets to counteract unwanted inflows, a power currently limited to the U.S. Treasury, in an approach the proposal aligns with IMF-endorsed capital flow management measures used by Australia and Brazil.

Klein (like Pettis) likes Baldwin-Hawley

"....the proposal would require the Federal Reserve to keep America’s current account—the difference between national income and national spending—balanced around zero over five-year periods. More specifically, the central bank would have to determine the level of the U.S. dollar needed to balance income and spending, after which it would have to adjust the exchange rate accordingly......Currently, the Fed cannot simultaneously manage the value of the dollar, keep inflation under control, and stabilize the swings in the business cycle. The bill therefore provides the Fed with two additional tools to manage the exchange rate. First, and most important, is the “market access charge,” which would require foreign savers to pay a tax each time they want to invest in the U.S. The charge would be applied only to new purchases of U.S. assets, and it wouldn’t be a recurring fee on existing holdings. The Fed would have the discretion to determine the appropriate level of the charge to bring the dollar toward its appropriate level and adjust it as necessary.....The International Monetary Fund has endorsed “capital flow management measures” as legitimate policy instruments in a variety of cases, especially when the currency is overvalued. Australia, Brazil, and South Korea have all imposed taxes and quantitative restrictions on various kinds of foreign investments, including bank loans, currency derivatives, and housing. All have received the IMF’s blessing. The proposed market access charge would be a simpler and more comprehensive version. However, it would deter only profit-seeking investors, such as Dutch pension funds or Taiwanese insurers. The market access charge wouldn’t discourage government agencies such as the Swiss National Bank or the People’s Bank of China from intervening in the foreign-exchange markets. The bill therefore gives the Fed the additional authority to buy as many foreign assets as necessary to offset unwanted inflows. (Currently, the power to intervene in the currency markets resides with the U.S. Treasury and is limited.) In theory, this could be a powerful supplementary tool, although it would be limited by the openness and the size of the target markets...."

Matt Klein, "Forget Tariffs. Here’s a Better Way to Close the Trade Gap.,"Barrons, August 9, 2019, https://www.barrons.com/articles/forget-tariffs-heres-a-better-way-to-close-the-trade-gap-51565348401

Thursday, September 5, 2019

AI Summary. The authors estimate that inventor productivity rises with local high-tech cluster size, with an elasticity of patent output to cluster size of 0.0662; a 49.2% shrinkage of Rochester's cluster is associated with a 20.6% productivity drop for other local inventors. They estimate that spreading inventors uniformly across US cities would cut patent output by 11.07%.

Enrico Moretti National Bureau of Economic Research
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High-tech clusters significantly impact inventor productivity, as evidenced by the 49.2% decline in Rochester’s high-tech cluster following Kodak’s collapse, which led to a 20.6% productivity drop for non-Kodak inventors from 1996 to 2007.

Does the size of local high-tech clusters raise inventor productivity?

Core argument: Kodak's collapse shrank Rochester's high-tech cluster by 49.2%, and non-Kodak inventors there saw a 20.6% productivity decline from 1996 to 2007.

High-tech clusters significantly impact inventor productivity, as evidenced by the 49.2% decline in Rochester's high-tech cluster following Kodak's collapse, which led to a 20.6% productivity drop for non-Kodak inventors from 1996 to 2007. Conversely, Microsoft's presence in Seattle increased the productivity of non-Microsoft computer programmers by 8%. The elasticity of patent production with respect to cluster size is 0.0662, indicating that moving to a larger cluster can boost productivity by up to 12%. These findings highlight the macroeconomic benefits of clustering, as a uniform distribution of inventors across cities would reduce US patent output by 11.07%. Understanding these spillover effects can guide policy decisions on attracting high-tech firms.

Takeaways by Macro Roundup® AI

  1. Kodak's collapse shrank Rochester's high-tech cluster by 49.2%, and non-Kodak inventors there saw a 20.6% productivity decline from 1996 to 2007.
  2. Microsoft's presence in Seattle raised the productivity of non-Microsoft computer programmers by 8%, and the estimated elasticity of patent production with respect to cluster size is 0.0662, implying productivity gains of up to 12% from moving to a larger cluster.
  3. A uniform distribution of inventors across US cities would reduce US patent output by an estimated 11.07%.

new Moretti, really interesting on high tech clusters. for example impact of the demise of Kodak on the broader Rochester high-tech cluster reduce the cluster by 49.2% (data runs through 2007) and the virtuous circle that high impact firms create (Microsoft raised the productivity of non-Microsoft computer programmers in Seattle by 8%)

“… The high-tech sector is increasingly concentrated in a small number of expensive cities, with the top ten cities in “Computer Science”, “Semiconductors” and “Biology and Chemistry”, accounting for 70%, 79% and 59% of inventors, respectively…..These shares were significantly larger in 2007 than in 1971, pointing to increasing geographical agglomeration of inventors….. I use longitudinal data on top inventors based on the universe of US patents 1971 – 2007 to quantify the productivity advantages of Silicon-Valley style clusters and their implications for the overall production of patents in the US. I relate the number of patents produced by an inventor in a year to the size of the local cluster, defined as a city × research field × year. I first study the experience of Rochester NY, whose high-tech cluster declined due to the demise of its main employer, Kodak. Due to the growth of digital photography, Kodak employment collapsed after 1996, resulting in a 49.2% decline in the size of the Rochester high-tech cluster. I test whether the change in cluster size affected the productivity of inventors outside Kodak and the photography sector. I find that between 1996 and 2007 the productivity of non-Kodak inventors in Rochester declined by 20.6% relative to inventors in other cities, conditional on inventor fixed effects.In the second part of the paper, I turn to estimates based on all the data in the sample. I find that when an inventor moves to a larger cluster she experiences significant increases in the number of patents produced and the number ofcitations received. Conditional on inventor, firm, and city × year effects, the elasticity of number of patents produced with respect to cluster size is 0.0662 (0.0138).The productivity increase follows the move and there is no evidence of pre-trends. IV estimates based on the geographical structure of firms with laboratories in multiple cities are statistically similar to OLS estimates….The elasticity of number of patents in a year with respect to cluster size is 0.0662 (0.0138). The estimated elasticity implies that a computer scientist moving from the median cluster in computer science (Gainesville, FL) to the cluster at the 75th percentile of size (Richmond, VA) would experience a 12.0% increase in productivity, holding constant the inventor and the firm. In biology and chemistry, a move from the median cluster—Boise, ID—to the 75th percentile cluster—State College, PA—is associated with a productivity gain of 8.4%, holding constant the inventor and the firm…..Estimates of the elasticity of productivity with respect to cluster size can be used to quantify the spillover effects that a firm generates within a cluster. These estimates indicate that the size of the spillover varies enormously across firms. The spillover effect generated by the average firm in the average city is 0.3% and 0.24% in computer science and biology and chemistry, respectively. But it is much larger for firms that account for a large number of inventors in the local cluster. For example, the productivity of non-Microsoft computer scientist in Seattle is estimated to be 8.06% higher because of the presence of Microsoft in the local computer science cluster. This large effect reflects Microsoft remarkable size in this field in Seattle. Having estimates of the productivity spillover that a specific firm generates in a specific cluster may prove useful to local and state governments that offer subsidies to attract high-tech firms to their jurisdiction…..In the final part of the paper, I use the estimated elasticity of productivity with respect to cluster size to quantify the aggregate effects of geographical agglomeration on the overall production of patents in the US. I find macroeconomic benefits of clustering for the US as a whole. In a counterfactual scenario where the quality of U.S. inventors is held constant but their geographical location is changed so that all cities have the same number of inventors in each field, inventor productivity would increase in small clusters and decline in large clusters. On net, the overall number of patents produced in the US in a year would be 11.07% smaller….”

Enrico Moretti, “The Effect of High-Tech Clusters on the Productivity of Top Inventors,” National Bureau of Economic Research, August 2019, https://eml.berkeley.edu//~moretti/clusters.pdf

AI Summary. Analysis from the Federal Reserve Bank of St. Louis attributes a jump in venture capital investment to the Tax Cuts and Jobs Act, with average annual growth of 11.2% between 2007 and 2017 rising to 51.2% between 2017 and 2018. Gains were largest in internet, healthcare, and software, and also appeared in less venture-intensive sectors such as automotive and transportation.

Juan M. Sánchez Federal Reserve Bank of St. Louis
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Analysis from @FRBSL indicates that the TCJA significantly boosted VC investment and innovation, with a 51.2% surge in VC investment btw 2017 and 2018, a 40 percentage point increase post-TCJA.

Do tax cuts boost venture capital investment and innovation?

Core argument: Venture capital investment grew 51.2% between 2017 and 2018 after averaging 11.2% annual growth over 2007–2017, a 40 percentage point increase following the Tax Cuts and Jobs Act, according to the Federal Reserve Bank of St. Louis.

Analysis from FRBSL [Federal Reserve Bank of St. Louis] indicates that the TCJA [Tax Cuts and Jobs Act] significantly boosted VC [Venture Capital] investment and innovation. Between 2007 and 2017, the average yearly growth rate of VC investment was 11.2%, but it surged by 51.2% between 2017 and 2018, marking a 40 percentage point increase post-TCJA. This growth was most pronounced in sectors like internet, healthcare, and software, but also notable in less VC-intensive sectors such as automotive and transportation. The increased levels of innovation and VC investment in 2018 and early 2019 are expected to support higher growth rates in subsequent years, underscoring the TCJA's positive impact on long-term economic expansion.

Takeaways by Macro Roundup® AI

  1. Venture capital investment grew 51.2% between 2017 and 2018 after averaging 11.2% annual growth over 2007–2017, a 40 percentage point increase following the Tax Cuts and Jobs Act, according to the Federal Reserve Bank of St. Louis.
  2. The rise in venture capital investment after the Tax Cuts and Jobs Act was most pronounced in internet, healthcare, and software, and also notable in less VC-intensive sectors such as automotive and transportation.
  3. The Federal Reserve Bank of St. Louis expects the higher levels of innovation and venture capital investment in 2018 and early 2019 to support higher growth rates in subsequent years.

analysis from FRBSL suggests that the TCJA increased both VC investment and innovation

"...Another way to analyze the effect of the act on long-term growth is to look at data on VC investment. The PwC/CB Insights MoneyTree™ Report provides data on VC investment. Between 2007 and 2017, the average yearly growth rate of VC investment was 11.2 percent,but it grew by 51.2 percent between 2017 and 2018. That is, VC investment growth was 40 percentage points larger in 2018 than what it was previously. Figure 2 shows the levels of VC investment by sector for the years 2014-15, 2016-17, and 2018-19.5 The key is to compare the changes in VC investment after the tax cuts (2018-19 vs. 2016-17) taking into account the previous trend (2016-17 vs. 2014-15). VC investment grew faster after the act. The difference in the dollar amounts is largest for sectors that receive VC investment: internet, healthcare, and software. But there are also significant differences for other sectors that do not receive much VC investment, such as automotive and transportation. In sum, the evidence suggests that both innovation and VC investment increased significantly after the Tax Cuts and Jobs Act. The level of innovation and VC investment in 2018 and the first half of 2019 should support increased growth rates in the next years...."
Juan M. Sánchez, "Tax Cuts, Venture Capital, and Long-Term Growth," Federal Reserve Bank of St. Louis," August 30, 2019, https://research.stlouisfed.org/publications/economic-synopses/2019/08/30/tax-cuts-venture-capital-and-long-term-growth

AI Summary. The rise in "deaths of despair" is primarily driven by the opioid epidemic, with drug-related deaths increasing substantially since 2000, while suicides and alcohol-related deaths remain near mid-1970s levels. The authors argue that a more prevalent and lethal supply of addictive opioids can raise mortality without any increase in despair itself.

Scott Winship United States Congress Joint Economic Committee
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@SWinshi: “Deaths of Despair” are largely just opioid use. Drug-related deaths increased significantly since 2000, while suicides & alcohol-related deaths remain at levels similar to the mid-1970s.

Are rising deaths of despair driven by drug supply rather than despair?

Core argument: The rise in "deaths of despair" is driven primarily by the opioid epidemic, with drug-related deaths increasing significantly since 2000, while suicides and alcohol-related deaths, though also rising, remain near mid-1970s levels.

The rise in "deaths of despair" is primarily driven by the opioid epidemic, with drug-related deaths increasing significantly since 2000. While suicides and alcohol-related deaths have also risen, they remain at levels similar to the mid-1970s. The proliferation of highly addictive opioids has led to a more prevalent and lethal supply of despair relief, contributing to higher mortality rates even without a corresponding increase in despair. Economic and social indicators do not align well with trends in deaths of despair or unhappiness, suggesting that policymakers should prioritize addressing the overdose epidemic over focusing solely on despair.

Takeaways by Macro Roundup® AI

  1. The rise in "deaths of despair" is driven primarily by the opioid epidemic, with drug-related deaths increasing significantly since 2000, while suicides and alcohol-related deaths, though also rising, remain near mid-1970s levels.
  2. The proliferation of highly addictive opioids has made the supply of despair relief more prevalent and more lethal, contributing to higher mortality even without a corresponding increase in despair.
  3. Economic and social indicators do not align well with trends in deaths of despair or unhappiness, suggesting policymakers should prioritize addressing the overdose epidemic rather than focusing solely on despair.

Winship convincing argues that “deaths of despair” are actually just an opioid epidemic, see Figure 1. Full report is attached.

“…Self-reported unhappiness probably has been on the rise since around 1990 (though not all sources agree). That predates the increase in deaths of “despair” by a decade. Moreover,unhappiness likely fell over the 25 years preceding 1990, while deaths of despair rose and then plateaued. And one data source suggests stable levels of unhappiness over the long run. Rising unhappiness may have increased the demand for ways to numb or end despair, such that the cumulative effects show up years later in the form of higher death rates. But the proliferation of a uniquely addictive and deadly class of drugs has meant that the supply of despair relief has become more prevalent and more lethal, which would have increased mortality even absent an increase in despair. Given the lack of correspondence between trends in economic and social indicators, unhappiness, loneliness, and deaths of “despair,” it may be more productive for policymakers to focus on the overdose epidemic than on despair per se…”

(202) 228-6984

G-01 Senate Dirksen Office Building

Director | Social Capital Project

Executive Director | Joint Economic Committee

Scott Winship, Ph.D.

I hope you find this report—and our research generally—useful. Best, Scott

This was the last report from Phase 1 of the Social Capital Project, which was purely descriptive. Later this month we will begin releasing policy papers with the goal of expanding opportunity by shoring up the health of families, communities, and civil society. If you’ll forgive me for sending another impersonal email, I will follow up with a summary of the flagship Phase 2 paper, “The Wealth of Relations,” which we released in the spring.

We didn’t have time to do a really deep dive on this, but so as to hopefully spur more research, we have posted a spreadsheet with detailed long-term trends by age, sex, and race:https://www.jec.senate.gov/public/index.cfm.

That trend doesn’t correspond neatly with deaths of “despair” trends (nor do trends in loneliness). We close by noting that few economic or social capital trends line up well either with the trend in deaths of despair or in unhappiness, and we suggest that focusing on the opioid epidemic itself should be a greater priority than focusing on despair per se.

Among other things, we show that suicides and alcohol-related deaths were as high or higher early in the 20th century as they are today and that drug-related deaths have been rising steadily for decades (but especially after 2000). Suicides and alcohol-related deaths have been rising since 2000 but are sitting at about the same levels as in the mid-1970s. We note major national and international events that clearly affect the trends (wars, epidemics, depressions). We question whether rising “despair” is the right way to think about the increase in these deaths. In another new contribution, we present 50-year trends in unhappiness, extending a series by Betsey Stevenson and Justin Wolfers:

I am writing because I thought you might be interested in the latest release from Senator Mike Lee’s Social Capital Project, within the Joint Economic Committee: Long-Term Trends in Deaths of Despair (https://www.jec.senate.gov/public/index.cfm/republicans/analysis). Anne Case and Angus Deaton, famously, demonstrated that deaths from suicides and alcohol and drug abuse have skyrocketed since the late 1990s among middle-age non-Hispanic whites. (They have spiked for other groups, too, but among this specific demographic, the rise was enough to increase overall mortality rates.) It was a ton of work, but we took their series (a version of it) back to 1900 for the overall population (and back to 1959 for middle-age whites):

Hello,

Scott Winship, “Long-Term Trends In Deaths of Despair,” United States Congress Joint Economic Committee, September 5, 2019, https://www.jec.senate.gov/public/index.cfm/republicans/analysis