Macro Roundup

interesting charts from St. Louis Fed updating some of Gordon's work, the ratio of safe assets to GDP has more than doubled since the 1950s. interesting pivot in 1980

"...Since 2017, financial assets have exceeded 12 times GDP. Despite this substantial growth, the fraction of safe assets relative to total financial assets has remained very stable, averaging 25 percent since 1955, as seen in the figure below.... Back in the 1950s, 90 percent of financial-sector liabilities were in the form of currency and bank deposits. This fraction dropped steadily until hitting about 30 percent right before the last recession. It has increased since, rebounding to about 43 percent in the second quarter of 2018. What took the place of traditional currency and deposits to support transactions are money-like debt (such as mutual funds and repos) and agency- and government sponsored enterprise-backed securities. Corporate and foreign bonds issued by financial entities also played a role, but not as prominently...."

Fernando Martin, "Safe Assets in the U.S. Economy," On the Economy Blog, December 10, 2018, https://www.stlouisfed.org/on-the-economy/2018/december/safe-assets-us-economy

supervision the limiting constraint?

Bloom, Brynjolfsson and Van Reenen take a look at management practices and find a 40% of this variation across plants within the same firm. they estimate this variation accounts for about a fifth of the spread of productivity, a similar fraction as that accounted for by R&D, and twice as much as explained by IT. they identity four "drivers" of management 1) product market competition, 2) business environment, 3) knowledge spillovers and 4) education

"....This paper analyzes a recent Census Bureau survey of structured management practices in over 30,000 plants across the U.S. Analyzing these data reveals large variation in management practices across plants, with strikingly about 40% of this variation being across plants within the same firm. This within-firm/across-plant variation in management cannot easily be explained by many classes of theories that focus on characteristics of the CEO, corporate governance or ownership (e.g., by family firms or multinationals) because these would tend to affect management across the firm as a whole. These management practices are tightly linked to performance, and they account for about a fifth of the cross-firm productivity spread, a fraction that is as large as or larger than technological factors such as R&D or IT.... First, there is enormous inter-plant variation in management practices. Although 18% of establishments adopt three-quarters or more of a package of basic structured management practices for performance monitoring, targets and incentives, 27% of establishments adopt less than half of such practices. Second, about 40% of the variation in management practices is across plants within the same firm. That is, in multi-plant firms, there is considerable variation in practices across units.5 The analogy for universities would be that variations in management practices across departments within universities are almost equally large as the variations across universities. Third, these variations in management practices are increasing in firm size. That is, larger firms have substantially more variation in management practices. This appears to be largely explained by the greater spread of larger firms across different geographies and industries....We find that plants using more structured management practices have greater productivity, profitability, innovation (as proxied by R&D and patent intensity) and growth. This relationship is robust to a wide range of controls including industry, education, plant and firm age, and possible survey noise. The relationship between management and performance also holds over time within plants (plants that adopted more of these practices between 2005 and 2010 saw improvements in their performance between 2005 and 2010) and across establishments within firms at a point of time (establishments within the same firm with more structured management practices achieve better performance outcomes). These management practices also have a highly significant predictive power for future growth and firm survival up to three years ahead (the current limit of our data after the MOPS survey)....The magnitude of this management-productivity relationship is large. Increasing structured management from the 10th to 90th percentile can account for about 18% of the comparable 90-10 spread in firm total factor productivity (TFP).6 Using the same dataset, we also examine the association of productivity with other common “drivers” and find that the 90-10 spread in R&D accounts for about 17% of the spread in firm TFP, employee skills about 11%, and IT expenditure per employee about 8%. Of course, all these magnitudes are dependent on a number of other factors, such as the degree of measurement error in each variable, but they do highlight that variation in management practices is likely a key factor accounting for variation in TFP. These factors are also interrelated- when we examine them jointly, we find they account for about 33% of the total variation in 90-10 productivity. Given estimates that about 50% of the variation in productivity is measurement error (Collard-Wexler, 2013 and Bloom, Floetotto, Jaimovich, Saporta and Terry, 2016), this suggests that these factors - management, innovation, IT and skills - together account for about two-thirds of the real spread in firm productivity....Examining the drivers of these management practices, we uncover four factors that are important for increasing the degree of implementation of structured management practices: product market competition, state business environment (as proxied by “Right to Work” laws), learning spillovers from the entry of Million Dollar Plants, and education. Although all of these drivers are qualitatively important, their quantitative size is not enormous, with our estimations suggesting they collectively account for about a third of the variation in management practices. This leaves ample room for new theory, data and designs to help understand one of the oldest questions in economics and business: why is there such large heterogeneity in management practices?..."

Nicholas Bloom, Erik Brynjolfsson, Lucia Foster, Ron Jarmin, Megha Patnaik, Itay Saporta-Eksten and John Van Reenen, "What Drives Differences in Management Practices,"American Economic Review (Forthcoming)," Fall 2018, https://www.aeaweb.org/articles

Research from FRBR, while market concentration has risen nationally, concentration of smaller markets as gone down. "...We have shown...that the increase in market concentration observed at the national level over the last 25 years is being shaped by enterprises expanding into new local markets. This expansion into local markets is accompanied by a fall in local concentration as firms open establishments in new locations. These observations are suggestive of more, rather than less, competitive markets...."Counterintuitivey (figure 15) if you net out the largest firm, concentration is unchanged suggesting that either small business stay in business or when a big firm enters a market other big firms do as well.

"....Using U.S. NETS data, we present evidence that the positive trend observed in national product market concentration between 1990 and 2014 becomes a negative trend when we focus on measures of local concentration. We document diverging trends for several geographic definitions of local markets. SIC 8 industries with diverging trends are pervasive across sectors. In these industries, top firms have contributed to the amplification of both trends. When a top firm opens a plant, local concentration declines and remains lower for at least 7 years. Our findings, therefore, reconcile the increasing national role of large firms with falling local concentration, and a likely more competitive local environment....In this paper, we use the National Establishment Time Series (NETS) dataset to document four main facts regarding national and local product-market concentration in the U.S. economy between 1990 and 2014. Our first fact is that the observed positive trend in market concentration at the national level has been accompanied by a corresponding negative trend in average local market concentration.We measure concentration using the Her ndahl-Hirschman index (HHI), but our findings hold for a variety of statistics..... The second fact shows that local concentration is falling across SIC 8 industries that together account for 78% of employment and 72% of sales.Furthermore, conditioning on industries where national concentration is rising, industries where local concentration has declined account for the majority of employment overall (72% of employment and 66% of sales) across all major sectors. The presence of these diverging trends is always large but more pronounced in services, retail trade, and FIRE relative to wholesale trade and manufacturing. This ordering is natural given that transport costs are less relevant in the latter two sectors. Together, these first two facts underscore an unmistakable decline in local concentration on average that is pervasive across all sectors..... Our third fact shows that among SIC 8 industries that exhibit this pattern, top firms have accelerated these trends. That is, excluding the top firm in each industry (in terms of national sales in their SIC 8 industry in 2014), the national increase in concentration becomes naturally less pronounced.Perhaps more surprisingly, the decline in local concentration also becomes less pronounced. Put another way, large firms have materially contributed to the observed decline in local concentration.Among industries with diverging trends, large fi rms have become bigger but the associated geographic expansion of these firms, through the opening of more plants in new local markets, has lowered local concentration thus suggesting increased local competition. In the considerably smaller set of industries where we observe increases in both national and local concentration, top firms have also been responsible for both forms of concentration...... Our fourth fact establishes that among industries with falling local concentration, the opening of a plant by a top firm is associated with a decline in local concentration at the time of the opening, and that this lower level of concentration persists for at least the next 7 years.This observation provides further evidence that in those industries, large enterprises do not enter and dominate the local market but instead lower its concentration, either by competing with the previous local monopolist or by simply adding one more establishment that grabs a proportional market share from other local establishments. In any case, the notion that entry by large fi rms eliminates local producers to the point of increasing concentration is certainly not supported in the vast majority of industries where most of U.S. employment resides...."

Esteban Rossi-Hansberg, Pierre-Daniel Sarte and Nicholas Trachter, "Diverging Trends in National and Local Concentration," Federal Reserve Bank of Richmond, February 26, 2019, https://www.princeton.edu/~erossi/DTNLC.pdf

“…This paper calculates the effects of immigration on the wages of native US workers of various skill levels in two steps. In the first step we use labor demand functions to estimate the elasticity of substitution across different groups of workers. Second, we use the underlying production structure and the estimated elasticities to calculate the total wage effects of immigration in the long run. We emphasize that a production function framework is needed to combine own-group effects with cross-group effects in order to obtain the total wage effects for each native group. In order to obtain a parsimonious representation of elasticities that can be estimated with available data, we adopt alternative nested-CES models and let the data select the preferred specification. New to this paper is the estimate of the substitutability between natives and immigrants of similar education and experience levels. In the data-preferred model, there is a small but significant degree of imperfect substitutability between natives and immigrants which, when combined with the other estimated elasticities, implies that in the period from 1990 to 2006 immigration had a small effect on the wages of native workers with no high school degree (between 0.6% and +1.7%). It also had a small positive effect on average native wages (+0.6%) and a substantial negative effect (−6.7%) on wages of previous immigrants in the long run….”

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Gianmarco Ottaviano and Giovanni Peri, "Rethinking The Effect Of Immigration On Wages," National Bureau Of Economic Research, May 2008, https://www.nber.org/papers/w12497

Alex Brill and Scott Ganz, "Rising tax burdens for those earning the most," American Enterprise Institute, October 15, 2019, https://www.aei.org/economics/rising-tax-burdens-for-those-earning-the-most/

Is the tax code sufficiently progressive? The answer depends not only on the values of the person answering the question, but it also is a surprisingly tricky empirical exercise. What counts as income and who pays the corporate tax? How should one measure households?

These details are at the core of an ongoing debate about economic inequality and the tax system. One camp relies on research by economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman, which indicates that the share of national income attributable to households at the top has surged, and that tax policy changes have magnified these gains. Careful research by economists Gerald Auten and David Splinter tells a very different story. Using largely the same data sources but with seemingly minor adjustments, Auten and Splinter’s results show that the long-term trend in the share of national income going to very high earners is actually remarkably flat.

Some of the adjustments are common sense, like adjusting the data for children who file tax returns, changes in marriage rates among different income populations, and variations in household size. For example, Auten and Splinter recognize that a college student with a part-time job who is claimed as a dependent by her parents is not a poor household by herself, but a part of her parents’ household. Other adjustments concern how unreported income is distributed across the income distribution, how health insurance and retirement savings and distributions are measured, and what fraction of taxes paid by corporations is actually borne by workers rather than by capital owners. Other adjustments are more technical, such as replacing realized capital gains data with corporate retained earnings as a better way of distributing corporate profits among households.

Thomas Piketty poses in his book-lined office at the French School for Advanced Studies in the Social Sciences. His book “Capital in the Twenty-First Century” has attracted praise and invective alike. REUTERS/Charles Platiau

Taken together, these adjustments to the measurement of national income matter a great deal. The Picketty-Saez-Zucman distribution of national income makes it seem that average tax rates on high-income earners are falling. We find the opposite result when we analyze the Auten-Splinter data.

Each frame in Figure 1 below illustrates taxes — federal, state, and local — as a share of income for the highest-earning households from 1960 to 2015. Auten and Splinter’s more comprehensive measure of income and careful measure of the tax burden illustrate that effective tax rates on the top 10 percent, top 1 percent, and even top 0.01 percent of households slowly increased from 1960 to 2015. (The data do not show the tax burdens of the top 400 households, which is the focus of recent research by Saez and Zucman, but the top 0.01 percent of households in the last frame below represents roughly 12 thousand such units).

We think that the best available data show that the tax code has not become less progressive. To the contrary, it has become somewhat more progressive, at least through 2015, the last year for which complete data is available.

Did the Republican tax cuts in 2017 undo this result? Hardly. Recent research by Splinter applies a forecast of the impact of the Tax Cuts and Jobs Act to historical income data and concludes that the effects of the tax cut on the progressivity of the tax code are quite modest. Tax rates do decline for those at and near the top, but the long-run trend is still toward an increasingly progressive tax system.

Rejecting the conclusions of Picketty, Saez, and Zucman does not imply that inequality is not a problem, or that the tax code is sufficiently progressive. That’s a separate matter and one that deserves careful analysis. Policymakers should know, however, that significantly increasing taxes on high-income Americans — Senator Warren’s wealth tax, for example — in order to alter the degree of inequality is a radical departure from policy norms, and not a return to the progressivity of a tax system a half-century ago. And such steps will likely come at a high economic cost as such policies would yield high effective marginal tax rates that distort and discourage growth.

The radical changes to the tax code being proposed by progressive politicians are supported by the misconception that the tax code has grown significantly less progressive. On a topic as important as this, we think that politicians, journalists, and public intellectuals would do well to moderate their rhetoric and take a hard look at the data.