Macro Roundup

Good Morgan Stanley Chart (Vis Bloomberg) implicit support forAutor/Dorn/Katz/Patterson/Van Reenen’s conclusion that,".... While the prediction that rising market toughness could generate an increase in concentration and the profit share may seem counterintuitive, the ambiguous relationship between concentration, profit shares, and the stringency of competition often arises in industrial organization...".

Justina Lee and Luke Kawa, "Big Companies Have Never Dominated the S&P 500 Like They Do Now," Bloomberg, January 13, 2020, https://www.bloomberg.com/news/articles/2020-01-13/big-companies-have-never-dominated-the-s-p-500-like-they-do-now

“…As the S&P 500 Index once again tests its record high, the top five publicly-traded American companies now make up a record 18% share of the benchmark’s capitalization -- higher than the tech bubble, Morgan Stanley said on Monday. U.S. large-cap equities have jumped to near the highest in more than 10 years against small capsin the early days of this new decade. Companies that make the most money overseas are near the highest since April versus domestic peers, Goldman Sachs baskets show….”

Ernie's updated his demographically-adjusted LFPR on the new jobs numbers; both employment and participation rates rose. Prime age EPOP made a new high and his demographically adjusted LFPR remains within 20bp of its 1999-2000 average.

Ernie Tedeschi, "Demographically-adjusted LFPR," January 10 2020, https://twitter.com/ernietedeschi/status/1215642083857510401

"...Now the Trump administration has adopted a four-factor test to assess whether an indirect employer is a joint employer that would bear legal responsibility for violations of minimum-wage and overtime regulations. Take the example of McDonald’s and an independent franchise. McDonald’s would be deemed a joint employer if it hires or fires employees of the local franchise; supervises and controls employees’ work schedule or other conditions of employment to a substantial degree; determines employees’ pay; and maintains workers’ employment records...."

Michael Strain, "Who’s Your Boss? Team Trump Has a Clear New Answer,"Bloomberg, January 15, 2020, https://www.bloomberg.com/opinion/articles/2020-01-15/employment-law-confusion-eased-by-team-trump

Who’s Your Boss? Team Trump Has a Clear New Answer

If you’re a typical wage earner, then your employer is obligated to pay you at least the federal minimum wage, along with overtime if you work beyond 40 hours in a given week. But who is your employer? On Sunday, the administration of President Donald Trump brought a common-sense answer to this important and, surprisingly, unresolved question.

Determining who is liable for violations of employment law is more complicated than it may seem. Take a cashier at, say, an independent McDonald’s franchise. Certainly she works for the franchised restaurant. But does she also work for McDonald’s, the national brand? What responsibility does McDonald’s Corp. have for her?

The waters are similarly murky for an employee of a staffing agency or a contractor who is assigned to a business, like a security officer who is assigned to a law firm. If the guard is owed overtime but doesn’t receive it, who should be held accountable? The agency? The law firm? Both?

These issues have grown in importance as companies increasingly contract with outside firms for many services and functions that would once have been taken care of in-house. At large employers, it is now common for building maintenance, security, kitchen, laundry and custodial staff not to work directly for the company they report to each day. Today, it is even common for hotel rooms to be cleaned by employees of temporary staffing agencies. The same goes for the workers who load trucks at retail distribution centers. This remains true as well for activities that have long been outsourced, like payroll and accounting services.

This creates complications for the enforcement of employment law, because what workers actually do on the job — their schedules, the quality standards they are expected to meet, the procedures the need to follow — is often determined by their indirect employer, even though they are direct employees of a staffing agency or a franchise.

How much responsibility do indirect employers have for compliance with employment regulations? The uncertainty around this question has been a burden for businesses, creating compliance costs and duplicate record keeping. It has exposed national brands and businesses that hire contractors to litigation when employment regulations are violated, and in other instances.

Now the Trump administration has adopted a four-factor test to assess whether an indirect employer is a joint employer that would bear legal responsibility for violations of minimum-wage and overtime regulations. Take the example of McDonald’s and an independent franchise. McDonald’s would be deemed a joint employer if it hires or fires employees of the local franchise; supervises and controls employees’ work schedule or other conditions of employment to a substantial degree; determines employees’ pay; and maintains workers’ employment records.

Typically, a company would have to meet some or all of these criteria to be liable for wage and hours violations.

This is a narrower standard for determining joint-employer status than the practice that existed under the administration of President Barack Obama, which expanded the responsibilities of indirect employers in January 2016. The International Franchise Association (the largest organization representing franchises worldwide) argues that the broader criteria previously in place cost U.S. franchisees between $17 and $33 billion per year.

The new rules — which will affect the behavior of workers and employers, and will influence court decisions — are a victory for common sense. They more clearly define the roles and responsibilities of different parties, which will make it easier for them to work together productively and efficiently. Indirect employers will know what steps to take to avoid legal liability and compliance costs and record-keeping costs. National brands will be shielded from litigation over employment issues in local franchises they could not control. Court decisions will become more uniform, which will help businesses. By reducing compliance costs, employers in the low-wage labor market will have more resources to grow their businesses.

Sunday’s Department of Labor guidance is limited to regulations under the Fair Labor Standards Act, a landmark piece of New Deal legislation that determines rules about wages and hours of work and prohibits child labor. It is part of a broader conversation about joint-employer status. The National Labor Relations Board, the government agency responsible for enforcing collective-bargaining laws, is expected to issue a similar rule in the next few weeks, reversing Obama-era policy that made it easier for contractors and workers in franchised businesses to unionize.

These are welcome developments that will, on balance, accrue to the benefit of workers in the low-wage labor market. But it is important to point out that violations of labor law are all too common. A 2017 report by the Economic Policy Institute, a progressive think tank, found that low-wage workers lose billions of dollars per year due to minimum-wage violations alone. Still, the best solution is better enforcement of labor law, not muddying roles and responsibilities in economic relationships.

The Trump administration touts deregulation as one of its major accomplishments. These claims can be overblown. But this guidance is a feather in its cap.

Economistreports housing is world’s largest asset class

"...Over the past 70 years housing has undergone a remarkable transformation. Until the mid-20th century house prices across the rich world were fairly stable (see chart). From then on, however, they boomed both relative to the price of other goods and services and relative to incomes. Rents went up, too. The Joint Centre for Housing Studies of Harvard University finds that the median American rent payment rose 61% in real terms between 1960 and 2016 while the median renter’s income grew by 5%.In the18th century farmland was the world’s single-biggest asset class. In the 19th century the factories used to power the Industrial Revolution took the number-one spot. Now it is housing...."

Economist Staff, “How housing became the world’s biggest asset class,"The Economist, January 16, 2020, https://www.economist.com/special-report/2020/01/16/how-housing-became-the-worlds-biggest-asset-class

Economistreports on theory and evidence that housing price escalation isn’t just supply side (lack of housing) but also demand side, driven by looser financial conditions

"...Yet what a few years ago was an almost universally accepted view among housing economists—that housing is so costly because there is not enough construction—has come under attack, in particular from Ian Mulheirn of the Tony Blair Institute, a think-tank. Members of this vanguard argue that the obsession with supply restrictions misses a more important cause of high house prices: global financial markets. As interest rates have fallen across the rich world, people can take out bigger mortgages and keep their monthly repayments at a manageable level. Landlords are willing to pay more for a house to rent out, because yields on other assets have fallen. Some evidence seems to back up the view that economists’ obsession with housing supply is misguided. In the 2000s both Ireland and Spain experienced soaring house prices, even as construction took off. A recent blogpost from researchers at the Bank of England found that most of the rise in British house prices since 2000 was down to cheaper borrowing.In fact, both causes are important. The loosening in global financial conditions since 2000 has certainly pushed up house prices—as have low unemployment, high immigration and the rise of platforms such as Airbnb, which divert home ownership away from ordinary people. Prices have not risen because building has suddenly became vastly more difficult. At the same time, however, the long-term rise in house prices is largely down to constrained supply. And if builders struggle to erect new dwellings quickly, a given increase in demand is largely channelled into price rises. Giovanni Favara of the Federal Reserve Board and Jean Imbs of the Paris School of Economics find that, though looser finance has led to higher house prices, that was true “to a lesser extent in areas with elastic housing supply, where the housing stock increases instead”. Even the most ardent demand-siders agree that building more would reduce housing costs....."

Economist Staff, "Politicians are finally doing something about housing shortages,"The Economist, January 16, 2020, https://www.economist.com/special-report/2020/01/16/politicians-are-finally-doing-something-about-housing-shortages

Just an FYI a factoid from one of the co-authors of "Human Capitalist" that we used in chapter finds that US government debt expected returns exceeds risk free bond yields; they find this puzzling as they don't think it reflects the risks embedded in US government debt. They do not seem to incorporate the risk adverse savings glut and the related safe asset shortage as answers to their “puzzle”

".... The market value of outstanding federal government debt in the U.S. exceeds the expected present discounted value of current and future primary surpluses by a multiple of U.S. GDP. When the pricing kernel fits U.S. equity and Treasury prices and the government surpluses are consistent with U.S. post-war data, a government debt valuation puzzle emerges. Since tax revenues are pro-cyclical while government spending is counter-cyclical, the tax revenue claim has a higher short-run discount rate and a lower value than the spending claim. Since revenue and spending are co-integrated with GDP, the long-run risk discount rates of both claims are much higher than the long Treasury yield. These forces imply a negative present value of U.S. government surpluses. Convenience yields for Treasurys are much larger than previously thought and/or U.S. Treasury markets have failed to enforce the no-bubble condition....Missing government assets or market segmentation cannot resolve the puzzle either. One final “resolution” to the puzzle is to argue that there is a bubble in U.S. government debt. Indeed, our approach quantifies the bubble as the difference between the value of outstanding government debt and the value of the surplus claim. Over the post-war period, the average size of the bubble is 196% of GDP. Since 2000, the size of the bubble has tripled from 65% of GDP in 2000 to 235% of GDP in 2017. This is both because the outstanding value of government debt has doubled from about 35% to 75% of GDP and because the value of the surplus claim has fallen from-30% to-160% of GDP.The Treasury markets do not seem to enforce the transversality condition. The bond market vigilantes seem to have vanished after the 1990s...."

Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, Mindy Z. Xiaolan, "The U.S. Public Debt Valuation Puzzle," National Bureau of Economic Research, December 2019, https://www.nber.org/papers/w26583