Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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 is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, September 23, 2019

AI Summary. Internal U.S. migration has declined, including moves for new jobs, and migration toward richer, more productive areas has virtually ceased while poorer regions no longer catch up economically. The authors argue high housing costs in productive areas now outweigh wage gains for lower-income workers, though not for high earners.

Daniel Shoag Brookings Institution
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Internal US migration has significantly decreased, with a notable decline in people moving for new jobs. This trend is not due to demographics but rather a breakdown in traditional migration patterns, as shown by @DanielShoag.

Do high housing costs stop lower-income workers from moving to productive places?

Core argument: Internal U.S. migration has fallen sharply, with moves for new jobs declining, a shift Ganong and Shoag (2017) attribute not to demographics but to a breakdown in traditional migration patterns.

Internal U.S. migration has significantly decreased, with a notable decline in people moving for new jobs. This trend is not due to demographics but rather a breakdown in traditional migration patterns, as shown by Ganong and Shoag (2017). Migration to richer, more productive areas has virtually ceased, and poorer regions are no longer catching up economically. In 1960, both lawyers and janitors benefited from moving to high-wage areas like New York, but today, only lawyers see net wage gains after housing costs. The high cost of living in productive areas now outweighs wage benefits for lower-income workers, highlighting the need to remove barriers to accessing these regions.

Takeaways by Macro Roundup® AI

  1. Internal U.S. migration has fallen sharply, with moves for new jobs declining, a shift Ganong and Shoag (2017) attribute not to demographics but to a breakdown in traditional migration patterns.
  2. Migration toward richer, more productive U.S. areas has virtually stopped, and poorer regions are no longer catching up economically.
  3. In 1960 both lawyers and janitors gained from moving to high-wage areas like New York, but today only lawyers see net wage gains after housing costs, as living costs in productive areas outweigh wage benefits for lower-income workers.

as requested looked at the Shoag paper you fwd for data on the migration patterns of native born middle class (note Shoag was co-author of the NEBR paper that showed income across states converge @ ~ 2% a year until 1990, this is based off of that, no new data)

"...Molloy, Smith, and Wozniak (2014), as well as Kaplan and Schulhofer-Wohl (2017), showed that internal U.S. migration has decreased significantly. They further showed that this decline cannot be explained by demographics, and that the largest component was a decline in the number of people moving for new jobs. Dao, Furceri, and Loungani (2017) demonstrated that mobility is less responsive to labor demand conditions than it was in the past. Ganong and Shoag (2017) also show that migration to the richer, more productive parts of the country has virtually ceased. Poor places are no longer catching up to rich ones, and people are no longer moving from poor places to rich ones. The traditional ways in which American society has ameliorated large gaps between places have broken down...In 1960 it made sense for both lawyers and janitors to move from the Deep South to the New York area, because both groups earned significantly higher wages even adjusting for housing costs (Ganong and Shoag 2017). Today, even though both groups earn higher wages in the New York metropolitan area, it no longer makes sense for janitors to move. Lawyers still earn more net of housing costs in the New York area, but the enormous housing costs mean that janitors’ wages net of housing costs are actually lower in the New York area than they are in the Deep South..."

However note that finding was based on PUMA's while it's granular it doesn't adjust for commuting from say the outer boroughs to Manhattan. You found it unconvincing

Daniel Shoag, "Removing Barriers to Accessing High-Productivity Places," Brookings Institution, January 31, 2019, https://www.hamiltonproject.org/papers/removing_barriers_to_accessing_high_productivity_places

AI Summary. An analysis of Earned Income Tax Credit expansions finds minimal effect on whether people work, attributing employment gains among single mothers mainly to welfare reform's work requirements and benefit time limits and a strong economy. The authors argue the credit's complexity and low awareness among potential recipients limit its power to raise labor supply.

Henrik Kleven National Bureau of Economic Research
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Analysis by @HenrikKleven reveals welfare reform, not EITC, drove significant employment gains for single mothers in the 1990s, with the EITC’s complex structure limiting its effectiveness in boosting labor supply.

Does the Earned Income Tax Credit increase whether people work?

Core argument: EITC reforms had minimal impact on labor supply at the extensive margin, with employment increases among single mothers driven primarily by welfare reform and a strong economy, according to the analysis.

Analysis of EITC [Earned Income Tax Credit] reforms reveals minimal impact on labor supply at the extensive margin, with significant employment increases for single mothers primarily driven by welfare reform and a robust economy. The 1993 EITC expansion coincided with welfare reform, which imposed work requirements and time limits on benefits, leading to increased employment among single mothers. Despite the EITC's role in poverty reduction, its complex structure and lack of awareness among potential recipients limit its effectiveness in boosting labor supply. Welfare reform's straightforward and widely publicized changes contrast with the EITC's intricate tax incentives, underscoring welfare reform's pivotal role in employment gains. The EITC remains a non-distortionary transfer to the working poor, but its employment effects are overstated, highlighting the need for policies that prioritize clear incentives and information dissemination.

Takeaways by Macro Roundup® AI

  1. EITC reforms had minimal impact on labor supply at the extensive margin, with employment increases among single mothers driven primarily by welfare reform and a strong economy, according to the analysis.
  2. The 1993 EITC expansion coincided with welfare reform's work requirements and time limits on benefits, changes the analysis credits with raising employment among single mothers.
  3. The EITC's complex structure and limited awareness among potential recipients constrain its effect on labor supply, though it remains a non-distortionary transfer to the working poor that reduces poverty.

Kleven paper on EITC. Though Scott Winship's thoughts on it were worth noting, "... I’ve come around on EITC employment effects being relatively small. I STILL think it plays a big role in poverty reduction, since it compensates for expenses single moms incur when they choose work instead of welfare. But yeah, needed welfare reform first & foremost..."

"....In this paper I have analyzed every EITC reform at the state and federal level within one modern empirical framework. From this comprehensive and long-run perspective, the EITC has not had any clear effects on labor supply at the extensive margin. Apart from the expansion enacted in 1993, EITC reforms are not associated with increases in the employment of single mothers relative to single women without children. The 1993 reform, on the other hand, is associated with very large employment increases, but these increases align closely with the confounding effects of welfare reform and a booming macroeconomy. Exploiting variation in these confounders across household type, space and time, I have shown that the effects are driven exactly by those affected most strongly by welfare reform and the business cycle. A stacked event study of all EITC reforms, controlling for welfare reform and the business cycle, produces a precisely estimated zero. There are two interpretations of this null result. One is that the extensive margin elasticity with respect to taxes is small, and perhaps especially the elasticity with respect to a highly nonlinear tax refund like the EITC. The other is that, even if the elasticity is not zero in general, the informational and psychological frictions specific to the EITC have reduced its impact. These frictions may be related to the complex nonlinear schedule or to the procedures for filing taxes and claiming the credit. As reviewed above, a number of studies have documented that most potential recipients are either unaware of the EITC or have a limited understanding of the schedule and eligibility requirements. Given these frictions, the EITC is not an a priori likely candidate for finding large labor supply impacts. While these frictions are widely acknowledged in the literature, they have been used mainly to explain the absence of intensive margin responses. The reasoning seems to be that extensive margin responses can be based solely on knowing about the existence of a tax refund without understanding the specifics of the schedule and eligibility rules. Even ignoring the fact that many potential recipients are unaware of the EITC, this argument is surprising. Economic theory predicts that intensive and extensive margin decisions are interdependent, and this interdependence is particularly strong for nonlinear incentives....The EITC is an incentive to enter the labor market around the refund-maximizing earnings range, which is relatively narrow and vary by family size. Without precise information about the location of the refund-maximizing earnings range and the size of the credit in that range, the extensive margin response is not very credible. By contrast, welfare reform is not subject to these concerns about salience and information. The debate about welfare reform and welfare culture was extremely prominent in the nineties, as exemplified by Bill Clinton’s famous campaign pledge to “end welfare as we know it.” State waivers and national TANF reform imposed drastic changes on existing program participants, so information was essentially automatic. What is more, the changes to welfare were mechanical and brute-force. They included lifetime limits on welfare receipt (down to two years in a number of states), work requirements, community service and training. Those who did not satisfy these requirements were kicked off the welfare rolls. These initiatives stand in sharp contrast to the complex tax refund incentives introduced by the relatively unknown EITC program. These findings do not necessarily imply that the EITC is a bad policy. Absent labor supply responses at either the extensive or intensive margins, the EITC is a non-distortionary transfer to the working poor.The optimality of such a transfer depends on the social welfare function and on who pays for it. For example, if the EITC is financed by a lump-sum tax on all individuals and if the government puts a larger weight on the working poor than on the average individual, then the policy is socially optimal. This is the reasoning underlying the results in Saez (2002).Conversely, if transfers to the working poor are financed by reducing welfare benefits to the poor, then the equity effect is negative under standard social preferences. In this case, the desirability of the EITC requires social preferences that put more weight on the working poor than on the non-working poor, even if the latter are worse off. Leaving aside these optimal tax considerations, the political argument for the EITC has relied heavily on its supposed employment effects. The empirical findings presented here do not lend support to this argument..."

Henrik Kleven, "The EITC and the Extensive Margin: A Reappraisal," National Bureau of Economic Research, September 2019, https://www.henrikkleven.com/uploads/3/7/3/1/37310663/kleven_eitc_sep2019.pdf

AI Summary. Global trade imbalances are driven by large surpluses in Europe and East Asia, with the U.S. absorbing them through a trade deficit roughly equal to those regions' combined current account surpluses. Global trade balance requires a sizable U.S. deficit as long as China, the euro area, and Japan run surpluses.

Brad Setser Council on Foreign Relations
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Global trade imbalances are driven by significant surpluses in Europe & East Asia, with the U.S. absorbing much of these surpluses. A large U.S. deficit is necessary for global trade to balance. @Brad_Setser

Does the US trade deficit reflect surpluses in Europe and East Asia?

Core argument: The U.S. trade deficit in manufactures is roughly equal to the combined current account surpluses of Europe and East Asia, which the U.S. absorbs through its deficit.

Global trade imbalances are primarily driven by significant surpluses in Europe and East Asia, with the U.S. absorbing much of these surpluses through its trade deficit. The U.S. trade deficit in manufactures is roughly equal to the combined current account surpluses of Europe and East Asia. While the U.S. runs a modest surplus on intellectual property trade and offshore investments, its total current account deficit remains below the combined surplus of these regions. For global trade to balance, a significant U.S. deficit is necessary, as China, the euro area, and Japan maintain substantial surpluses. This imbalance suggests that global trade imbalances could worsen before improving, as the structural need for a large U.S. deficit persists in the current economic landscape.

Takeaways by Macro Roundup® AI

  1. The U.S. trade deficit in manufactures is roughly equal to the combined current account surpluses of Europe and East Asia, which the U.S. absorbs through its deficit.
  2. The U.S. runs a modest surplus on intellectual property trade and offshore investments, leaving its total current account deficit below the combined surplus of Europe and East Asia.
  3. Global trade imbalances could worsen before improving, since balancing global trade requires a significant U.S. deficit while China, the euro area, and Japan maintain substantial surpluses.

Good chart, according to Brad East Asia's regional savings rate is 40%, in a low interest rate world.

Why Global Trade Imbalances Could Get Worse Before They Get Better: Extended Excerpt Image 1

"...As a result, trade imbalances run mostly along an east-west axis these days. Across the Atlantic, where the United States, Canada, and Mexico absorb a portion of Europe’s surplus. And across the Pacific, where the United States, Canada, and Mexico absorb East Asia’s surplus. It is of course too simple to reduce everything to a single number—but in very rough terms, the U.S. trade deficit in manufactures right now just happens to be about equal to the combined current account surpluses of Europe and East Asia....More importantly, looking only at manufacturing leaves out the surplus that the U.S. runs on intellectual property trade (which is fairly modest because of tax considerations) and the surplus the United States runs on its offshore investments (the entire surplus on foreign direct investment income comes from the seven main low tax jurisdictions these days, see Martin Wolf). The United States' total current account deficit is now below the combined surplus of Europe and East Asia—but it's still clearly the case that global trade cannot balance today without a sizable U.S. deficit. If China, the euro area and Japan all have significant surpluses, someone big needs to have a significant deficit for global trade to add up.

Brad Setser, "Why Global Trade Imbalances Could Get Worse Before They Get Better…," Council on Foreign Relations, September 20, 2019, https://www.cfr.org/blog/why-global-trade-imbalances-could-get-worse-they-get-better

AI Summary. Science, technology, engineering, and math graduates aged 23–25 earned an average of $61,744, 37% more than liberal arts peers at $45,032, but the gap narrows with age. By age 40, male social science and history majors averaged $131,154, above the $111,870 average for all male college graduates, aided by management, business, and law roles.

David Deming New York Times
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By age 40, male STEM graduates see salaries double to $124,458, yet liberal arts majors catch up, with social science & history majors surpassing $131,154, aided by roles in management, business & law.

Does the STEM earnings advantage over liberal arts narrow with age?

Core argument: Computer science and engineering majors aged 23–25 earned an average of $61,744 in 2017, 37% more than liberal arts peers at $45,032.

While STEM graduates initially earn more, with computer science and engineering majors aged 23-25 earning an avg of $61,744 in 2017 (37% higher than liberal arts peers at $45,032), the earnings gap narrows over time. By age 40, male STEM graduates see their salaries double to $124,458, yet liberal arts majors, benefiting from skills like problem-solving and adaptability, often catch up. The avg salary for all male college graduates at age 40 is $111,870, with social science and history majors surpassing this at $131,154, aided by roles in management, business, and law. This trend highlights the long-term value of a liberal arts education in diverse career paths, suggesting that initial salary advantages in STEM may diminish as liberal arts graduates leverage their broad skill sets for higher-paying opportunities later in their careers.

Takeaways by Macro Roundup® AI

  1. Computer science and engineering majors aged 23–25 earned an average of $61,744 in 2017, 37% more than liberal arts peers at $45,032.
  2. By age 40, male STEM graduates' salaries doubled to $124,458, while social science and history majors averaged $131,154, above the $111,870 average for all male college graduates at that age.
  3. Liberal arts majors often close the earnings gap over time, aided by roles in management, business, and law and by skills such as problem-solving and adaptability.

"...although liberal arts majors start slow, they gradually catch up to their peers in STEM fields. This is by design. A liberal arts education fosters valuable “soft skills” like problem-solving, critical thinking and adaptability. Such skills are hard to quantify, and they don’t create clean pathways to high-paying first jobs. But they have long-run value in a wide variety of careers. Computer science and engineering majors between the ages of 23 and 25 who were working full time earned an average of $61,744 in 2017, according to the Census Bureau’s American Community Survey. This was 37 percent higher than the average starting salary of $45,032 earned by people who majored in history or the social sciences (which include economics, political science and sociology). Large differences in starting salary by major held for both men and women. Men majoring in computer science or engineering roughly doubled their starting salaries by age 40, to an average of $124,458. Yet earnings growth is even faster in other majors, and some catch up completely. By age 40, the average salary of all male college graduates was $111,870, and social science and history majors earned $131,154 — an average that is lifted, in part, by high-paying jobs in management, business and law...."
David Deming, "In the Salary Race, Engineers Sprint but English Majors Endure,"New York Times, September 20, 2019, https://www.nytimes.com/2019/09/20/business/liberal-arts-stem-salaries.html

Thursday, September 26, 2019

AI Summary. Proposed US wealth taxes range from a 10% annual levy on fortunes above $10bn to a 2% levy on assets above $50m. Critics argue such taxes would weaken the financial rewards for extreme business success and high-impact entrepreneurship, and suggest addressing housing inequality would be more effective.

James Pethokoukis American Enterprise Institute
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Wealth taxes may reduce financial incentives for extreme business success without significantly affecting socially valuable innovation, according to @JamesPethokoukis.

Do wealth taxes weaken the incentives for high-impact entrepreneurship?

Core argument: Bernie Sanders' proposed wealth tax would levy 10% on fortunes above $10bn, compared with Elizabeth Warren's proposed 2% tax on assets above $50m, potentially affecting America's richest.

The proposed wealth tax by Sanders, with a 10% levy on fortunes over $10bn, contrasts with Warren's 2% tax on assets over $50m, potentially impacting America's richest. Economist Gabriel Zucman suggests that such taxes would have altered the career trajectories of founders like those of Microsoft and Amazon. Critics argue that a wealth tax could reduce the financial incentives for extreme business success without significantly affecting socially valuable innovation. The debate centers on whether such taxation discourages high-impact entrepreneurship and innovation, with some suggesting that addressing housing inequality might be more effective. The societal impact of wealth taxes is questioned, as they may conflict with a culture that admires business success and innovation, as noted by economist Deirdre McCloskey, who highlights the importance of trade-tested progress and the admiration for entrepreneurs who create valued products and services.

Takeaways by Macro Roundup® AI

  1. Bernie Sanders' proposed wealth tax would levy 10% on fortunes above $10bn, compared with Elizabeth Warren's proposed 2% tax on assets above $50m, potentially affecting America's richest.
  2. Economist Gabriel Zucman suggests that such wealth taxes would have altered the career trajectories of founders including those of Microsoft and Amazon.
  3. Critics contend that a wealth tax would reduce the financial incentives for extreme business success without significantly affecting socially valuable innovation, with some suggesting that addressing housing inequality would be more effective.

James Pethokoukis, "Punishing ‘extreme business success’: Who does that help?," American Enterprise Institute, September 25, 2019, https://www.aei.org/economics/punishing-extreme-business-success-who-does-that-help/

Punishing ‘extreme business success’: Who does that help?

The most compelling feature of Bernie Sanders’ wealth tax proposal is that it makes Elizabeth Warren’s seem a bit less unreasonable. The Sanders tax is a graduated levy that reaches 10 percent for fortunes over $10 billion vs. the Warren plan’s 2 percent tax on assets $50 million and an added percentage point for wealth over $1 billion. Assuming each tax has been in place since the 1980s, here’s how they would have impacted America’s richest people, according to economist Gabriel Zucman:

Now that’s what I call static analysis. All else equal — even when implementing a massive new tax on wealth creation, including entrepreneurial fortunes? Really? Would nothing else be meaningfully different about the career arcs of the founders of Microsoft, Amazon, Facebook, and Google if they operated under such a taxation scheme?

In a paper on the Warren wealth tax, Zucman and fellow economist Emmanuel Saez are dismissive on any unintended consequences for American high-impact entrepreneurship. They explain that a wealth tax “would reduce the financial payoff to extreme cases of business success” but dispute there would be any loss of “socially valuable innovation.” A wealth tax would really only hurt wealthy owners who have already built businesses and are worried merely about “protect their dominant positions by fighting new competition.” The assumptions here are plentiful and tightly packed, including the idea that America’s tech titans are no longer innovating and merely trying to preserve market share by squashing rivals.

Moreoever, what is the policy failure, exactly, when the story of wealth inequality is largely one of housing inequality? As I wrote earlier this year, “Is the solution legally suspect and administratively challenging wealth taxes or tackling land-use regulations that deter housebuilding and generate fat returns for homeowners? Granted, that the latter provides much less cathartic punch for those in need of such emotional release.”

Why take the risk to growth when it’s not clear what problem the wealth tax solves? Do we not want more cases of “extreme business success” as Saez and Zucman put it? Why would we want to do anything to discourage such a phenomenon from occurring? And is there not good reason to think taxes do matter for innovation and high-impact entrepreneurship?

Punishing extreme business success: Who does that help?: Extended Excerpt Image 1


And as I also wrote earlier this year, “A wealth tax also seems out of step with a business-admiring nation, especially wealth generated by building a company that successfully delivers goods and products that people greatly value.” This isn’t plutocratic rhetoc. This sort of societal signaling matters. Economist and historian Deirdre McCloskey writes thusly: “The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher level than in earlier times of toleration for trade-tested progress — letting people make mutually advantageous deals, and even admiring them for doing so, and especially admiring them when, Steve Jobs-like, they imagine betterments.” And get wildly rich in the process.

For more on wealth inequality, please check out this recent AEIdeas online symposium on the subject.

Ed Comment:50% warren, 80% Sanders