Macro Roundup

"...Here’s a tale of Scandinavian socialism that Team Bernie never tells, via a Milken Review Institute piece from Swedish economist Andreas Bergh: In the 1970s, several well-intended political reforms backfired. The desire to increase income equality through high marginal tax rates and generous welfare benefits weakened work incentives and created strong incentives for tax avoidance. Indeed, in the 1970s and 1980s, many wealthy Swedes - notably Bjorn Borg - left the country to avoid the taxman. Meanwhile, the desire to tame the business cycle and minimize unemployment led to the subsidization of noncompetitive industries. The unions’ desire to drive wages ahead of productivity growth led to inflation, while efforts to restore Sweden’s competitiveness through repeated currency devaluations led to both a lower living standard and investment-sapping uncertainty. Perhaps most important, the mix of subsidies and devaluations sent the signal that firms in trouble could turn to the government for help, rather than be forced to innovate in order to stay competitive. When that happens, economies inevitably pay a price. After the crisis of the early 1990s, the Swedish economy recovered smartly. In many ways, Sweden learned from its mistakes and took measures to avoid large budget deficits and inflationary wage pressures. By the mid-1990s, these changes were institutionalized - and strikingly, often with support from Social Democrats as well as the right-wing parties. Prominent examples include a tax reform that lowered marginal rates substantially and a pension reform that balanced the risks between pensioners and taxpayers by automatically adjusting payments to demographic and economic conditions...."

James Pethokoukis, "Let’s stop pretending that Bernie Sanders wants to duplicate Scandinavia," American Enterprise Institute, January 15, 2020, https://www.aei.org/economics/lets-stop-pretending-that-bernie-sanders-wants-to-duplicate-scandinavia/

Let’s stop pretending that Bernie Sanders wants to duplicate Scandinavia

Bernie Sanders supporters are quick to make clear that their guy doesn’t want to turn America into Cuba or Venezuela or the old Soviet Union. By “democratic socialism,” the US senator from Vermont means Scandinavia, more or less. And what’s wrong with that? The Nordic nations are pretty nice. Even President Trump has conceded that Norway produces a quality immigrant.

But does Sanders really want to import Scandinavian “socialism”? He brags that his universal health-care plan eliminates patient cost-sharing. But Scandinavia has it. Sanders wants to raise a lot revenue though heavy taxes on business and investment. Scandinavia doesn’t. Sanders has a big problem with billionaires. Scandinavia doesn’t. Indeed, as I have written, “The egalitarian Nordic nations have as many billionaires, relatively, as the US and more concentrated wealth, at least as measured by the share of wealth controlled by the top 10 percent.”

I could do on and on, mentioning how the Nordics score highly in the conservative Heritage Foundation’s Economic Freedom Index, especially when it comes to government regulation. They’re also free traders, unlike Sanders, who opposed the North American Free Trade Agreement in the 1990s and its successor agreement today. As a JPMorgan analysis cautioned: “Copy the Nordic model if you like, but understand that it entails a lot of capitalism and pro-business policies, a lot of taxation on middle class spending and wages, minimal reliance on corporate taxation and plenty of co-pays and deductibles in its healthcare system.”

Here’s a tale of Scandinavian socialism that Team Bernie never tells, via a Milken Review Institute piece from Swedish economist Andreas Bergh:

In the 1970s, several well-intended political reforms backfired. The desire to increase income equality through high marginal tax rates and generous welfare benefits weakened work incentives and created strong incentives for tax avoidance. Indeed, in the 1970s and 1980s, many wealthy Swedes - notably Bjorn Borg - left the country to avoid the taxman. Meanwhile, the desire to tame the business cycle and minimize unemployment led to the subsidization of noncompetitive industries. The unions’ desire to drive wages ahead of productivity growth led to inflation, while efforts to restore Sweden’s competitiveness through repeated currency devaluations led to both a lower living standard and investment-sapping uncertainty.

Perhaps most important, the mix of subsidies and devaluations sent the signal that firms in trouble could turn to the government for help, rather than be forced to innovate in order to stay competitive. When that happens, economies inevitably pay a price. After the crisis of the early 1990s, the Swedish economy recovered smartly. In many ways, Sweden learned from its mistakes and took measures to avoid large budget deficits and inflationary wage pressures. By the mid-1990s, these changes were institutionalized - and strikingly, often with support from Social Democrats as well as the right-wing parties. Prominent examples include a tax reform that lowered marginal rates substantially and a pension reform that balanced the risks between pensioners and taxpayers by automatically adjusting payments to demographic and economic conditions.

Whatever Sanders wants to turn America into, it doesn’t sound much like Scandinavia as it exists in current reality. Then again, as that JPMorgan report concluded: “A real-life proof of concept for a successful democratic socialist society, like the Lost City of Atlantis, has yet to be found.”

Counterintuitive Ernie analysis suggests that the impact of state and local minimum wage hikes might be skewing our sense of how hot the labor market is. He segments minimum wage workers by those impacted by federal/state/local minimum wages and then looks at relative wage pressure using AHE and finds that absent the hikes wage growth for bottom third would be slower than overall wage growth as opposed to higher. His work suggests that wage growth for Americans in bottom 1/3 of wage earners would have been closer to 3.3% as opposed to 4.1% net the impact of minimum wages. Note he mentions this does not take into account people laid off due to the minimum wage increases.

"...To get a sense of this impact, I have used data in the Current Population Survey to look at minimum wage workers as a group and calculate the pressure their wage gains have put on aggregate wage growth over time, controlling for compositional changes in the share of minimum wage work. Note that this approach doesn’t settle whether minimum-wage increases are a net benefit to Americans, since among other things wage data will by definition capture only those who stayed employed after an increase. If people were laid off because of a minimum-wage increase, their loss of wages wouldn’t factor into the average.This analysis shows that growth in average wages has been running about 3.9 percent per year in the Current Population Survey over the past two years, a bit firmer than the pace right before the Great Recession but below the near 5 percent reached in 2000. But increases to minimum wages at the state and local level have put 0.4 percentage points of upward pressure on this recent growth. Absent that pressure, wage growth in the Current Population Survey over the last two years would have been 3.5 percent.That’s still a fine result, but it’s a bit cooler than the unadjusted data suggest. Wage pressure from minimum wage workers is magnified when you look at only the lowest wages. That’s because while minimum wage work makes up about 6 percent of all usual hours worked, it’s around 13 percent of hours worked by Americans in the bottom third of wages. As the analysis has shown us, wage growth at the bottom is doing well. It has been around 4.1 percent over the last two years — above the 3.6 percent at the top end, and above the overall average of 3.9 percent. But absent the pressure from minimum wage workers, growth at the bottom would have been closer to 3.3 percent...."
Basically overall Ernie finds that AHE growth it’s running 4.1% per year on average in the CPS, and changes in wages for minimum wage workers boosted that by 0.8 percentage points. So ex-hikes, growth at the bottom third looks closer to 3.3%. And when you look at everyone, minimum wage hikes are still registering, though obviously far less, adding 0.4 percentage points to wage growth. He noted in an email, “….A few conclusions from this: first, among workers who stay employed, minimum wages are clearly helping, though as I said earlier this approach can’t weight this benefit against possible costs. In fact, for workers at the bottom, minimum wage hikes have meant the difference between exceeding or falling short of the overall average growth and the growth at the top. Second, minimum wage wages aren’t the biggest reason wages have grown, even at the bottom. The tightening labor market is very likely responsible for the lion’s share of growth. In the bottom third, minimum wage hikes can explain around 1/5 of the wage growth over the last 2 yrs….”

Great FRBSL chart on the college wealth gap, basically showing the “wealth” gap has outpaced the “income gap.” This is a largely a function of capital gains as college households have greater exposure to financial assets.

They also rule out assertive mating as a driver of the trend (Figure 8).

".... Our analysis corroborates the strong increase in the difference between college and noncollege income since the early 1980s. The average income of college households has increased by about 50 percent in real terms (Panel A of Figure 1). However, the increase of the college income premium is dwarfed by that of the college wealth premium (Panel B of Figure 1). The wealth of college households tripled between 1971 and 2016, while the wealth of noncollege households barely grew at all.We document that a substantial part of this widening wealth gap is driven by strong wealth gains within the top 10 percent of the wealth distribution. Looking at who makes it to the top 10 percent of the wealth distribution, we find that the share of noncollege households in the group has declined over time (Figure 2). By contrast, the share of college households making it to this group has remained remarkably stable over time. Our results therefore suggest that obtaining a college degree does not increase the probability of making it to the top 10 percent. A college degree seems to help households to keep pace, but not to reach the top. We additionally document that households with two college-educated spouses have enjoyed particularly large gains in wealth. Yet this trend is not driven by assortative matching but by the overall growth in college education..... assortative mating has even decreased among college graduates over time. An important question raised by our findings is why the ratio of college to noncollege wealth has grown so much more than the income gap. The workhorse economic models of wealth accumulation imply a tight comovement of income and wealth differences, as savings out of income is the sole determinant of wealth. We demonstrate that college and noncollege households exhibit systematic differences not only in the sizes of their asset holdings but also in the compositions of their portfolios. College households own a higher share of stocks and mutual funds (Figure 3). Consequently, college and noncollege households are differentially exposed to asset price changes. College households reap disproportionately high capital gains during stock market booms. Importantly, such capital gains are unrelated to income, as total household income in the SCF+ excludes capital gains. This finding is consistent with the decoupling of the evolution of the college income and wealth premiums since the 1980s...Using explorative regression analysis, we also find some indication that business ownership matters for the increase of the college wealth premium, especially since the late 1990s. The fact that the college wealth advantage is associated with equity holdings and business ownership may be related to higher levels of financial literacy and entrepreneurial skills among college households. These features can affect wealth via portfolio composition and differential returns..."

Employers are increasing demanding college degrees. Perhaps an alternative read is in an era of diminished college degrees (expanded accesses) failure to get across the finish line is an increasingly powerful signal to employers

"...Our main finding is that skill demand has increased substantially in the decade following the Great Recession. The share of online job vacancies requiring a bachelor’s degree increased from 23 percent in 2007 to 37 percent in 2019, an increase of more than 60 percent. Most of this increase occurred between 2007 and 2010, consistent with the finding that the Great Recession provided an opportunity for firms to upgrade skill requirements in response to new technologies...We present several pieces of evidence suggesting that the increase in skill demand is structural, rather than cyclical...when we extend the sample forward and adjust for differences in the composition of online vacancies, we find that this cyclical “upskilling” fades within a few years. In its place, we find long run structural increases in skill demand across all labor markets. In fact, we show that the increase in skill demand post-2010 is larger in higher-wage cities. We also find much larger increases in the demand for education in professional, high-wage occupations such as management, business, science and engineering...Our results suggest that increasing demand for educated workers is likely a persistent feature of the U.S. economy post-recession...We find rapid expansion in the demand for skills, suggesting that education and technology are “racing” together to hold the college wage premium steady....The share of job vacancies requiring a bachelor’s degree increased by more than 60 percent between 2007 and 2019, with faster growth in professional occupations and high-wage cities. Since the labor market was becoming tighter over this period, cyclical “upskilling” is unlikely to explain our findings…”

Peter Blair and David Deming, "Structural Increases in Skill Demand after the Great Recession," National Bureau of Economic Research, January 2020, https://www.nber.org/papers/w26680