Macro Roundup

Kleven paper on the EITC you asked about, we had reviewed this when it came out. Also attached the WSJ editorial

Also though Scott Winship's thoughts on this paper 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
Type of Info: Theory and Quote
Characterization:
Importance: High
Point of View: Conservative
Ed's Agreement: Neutral
Timelessness: High
Trustworthiness: High An Overhyped Tax Credit The earned-income tax credit is one of those bipartisan policy idols that everybody worships but nobody examines closely for results. Now comes A study showing that its employment benefits are grossly overstated. Congress created the EITC in 1975 as temporary assistance to increase the marginal incentive to work. The idea, inspired in part by Milton Friedman’s negative income tax, was that tax benefits would increase as workers earned more and phase out after they hit a certain threshold (initially $4,000). We supported the credit as an alternative to raising the minimum wage because it doesn’t reduce incentives to hire low-skilled workers. But politicians expanded the credit and have kept raising the minimum wage. (Memo to those who want a carbon tax to replace some other tax.) One in five households now claims the credit, and government payments exceed cash welfare by six times. Complicated rules on eligibility and credit size have encouraged fraud. According to the IRS, a quarter of the $69 billion in EITC payments last year were “improper.” Yet politicians from both parties continue to pump it as a labor inducement. As Princeton economist Henrik Kleven shows, there’s scant evidence it boosts employment. The biggest EITC expansion occurred in 1993 when Congress doubled the maximum to about $2,152 for taxpayers with one child and tripled it for those with two or more. Most economists have attributed the subsequent spike in labor participation and employment among single mothers to the credit. But Mr. Kleven concludes that the real labor stimulator was welfare reform aided by a booming economy. It’s odd, he notes, that none of the other four EITC expansions in history has been linked to higher labor participation among single mothers. So what was special about the 1993 expansion? Some economists have posited that the 1993 expansion was simply larger than the others, though this doesn’t explain why employment increased most among women with more children. Following the 1993 expansion, employment increased by 10 percentage points among single mothers with one child, 15 points among those with two, 20 among those with three and 30 points among those with four or more. Mr. Kleven says this pattern is more consistent with state and federal welfare reforms in the early 1990s that reduced government cash benefits most among women with more children. Before Congress passed welfare reform in 1996, 113 state and county waivers were approved to establish work requirements and family size caps and time limits on benefits. A 2016 study found Connecticut’s welfare waiver induced many women to work. Yet Mr. Kleven finds in his study that state EITC expansions have not produced a similar effect. “Overall and contrary to consensus, the case for sizable extensive margin effects of the EITC is fragile,” Mr. Kleven concludes. His study adds to the economic research finding that the EITC phase-out causes steep infra-marginal tax rates as workers make more money. None of this may bother Republicans or Democrats who want to redistribute more income, but they shouldn’t claim these welfare tax payments are an incentive to work.

Interesting paper implicitly supports your hypothesis that major firms are constrained by properly trained talent.

Using evidence (175 recent acquisitions btw 2015-2017) from Google, Amazon, Facebook, Amazon and Microsoft the study finds that firms are largely using M/A activity for buying R&D: “…We run Probit regressions to better understand the determinants of product discontinuation….We find that younger firms and those in the core business segment of the acquirer are more likely to be discontinued. This suggests that most acquisitions are undertaken to reinforce the firms’ innovation efforts by purchasing R&D efforts and talents or to add functionalities to their core products. Again, this could be a sign that acquisitions are used to reinforce a business model rather than to develop competition….”

“…Over the period 2015-2017, the five giant technologically leading firms, Google, Amazon, Facebook, Amazon and Microsoft (GAFAM) acquired 175 companies, from small start-ups to billion dollar deals.By investigating this intense M&A, this paper ambitions a better understanding of the Big Five’s strategies. To do so, we identify 6 different user groups gravitating around these multi-sided companies along with each company’s most important market segments. We then track their mergers and acquisitions and match them with the segments. This exercise shows that these five firms use M&A activity mostly to strengthen their core market segments but rarely to expand their activities into new ones. Furthermore, most of the acquired products are shut down post acquisition, which suggests that GAFAM mainly acquire firm’s assets (functionality, technology, talent or IP) to integrate them in their ecosystem rather than the products and users themselves. For these tech giants, therefore, acquisition appears to be a substitute for in-house R&D. Finally, from our check for possible”killer acquisitions”, it appears that just a single one in our sample could potentially be qualified as such…Our classification reveals the following: most acquisitions are undertaken in segments in which the GAFAM firms were already active. According to our classifications, around 36 % of the acquisitions are in the acquiring firm’s main business segment and around 82% occur in segments in which the firms were already active. This suggests that these firms are using their M&A activity mostly to strengthen their current business models, and do not seek to increase direct competition between them by entering new markets. There are, however, two exceptions to these findings. The first one concerns the segment of products for business customers, in which Microsoft, Amazon, Google and Apple have acquired substantially. This could be a sign of increasing rivalry between them for these customers, given that Google and Amazon clearly want to compete with the current market leader, Microsoft. The second exception is Google. Compared to the other four firms, Google not only acquired the most in absolute terms, but did so in all six segments, including those in which it was not extremely active yet. Hence, Google appears to have a more aggressive M&A strategy and to intend to compete with all firms in most segments….We further analyze the acquisition strategies of the GAFAM firms by looking at the evolution of the target post-acquisition. We observe that in the vast majority of cases, the acquired brands are discontinued by the acquirer. A product is considered to be discontinued if it is no longer supplied, maintained or upgraded under its original brand name. We observe that in 60% of the acquisitions, the acquired products were discontinued. The product remains supplied under its original brand name in 27% of the acquisition cases. Product discontinuation reveals important insights into the reasons for acquisition. Firms can be acquired for their products and customers or for their assets and their R&D efforts….In the former case, the product is likely to be maintained under its original brand name while in the latter case, the product is likely to be integrated in the firm’s ecosystem. Hence, mergers motivated by asset acquisition are more likely to be discontinued. We run Probit regressions to better understand the determinants of product discontinuation….We find that younger firms and those in the core business segment of the acquirer are more likely to be discontinued. This suggests that most acquisitions are undertaken to reinforce the firms’ innovation efforts by purchasing R&D efforts and talents or to add functionalities to their core products. Again, this could be a sign that acquisitions are used to reinforce a business model rather than to develop competition. We also find that Apple and Facebook have a more systematic discontinuation policy…Our analysis leads us to conclude that most of the acquisitions made over the period considered were driven by asset acquisitions. Firms buy valuable innovations, functionalities or R&D to strengthen their main segments. By doing so, they improve their products’ ecosystem and reinforce their position in their already strong market positions. We find no evidence that this intense M&A activity leads to more global competition between the GAFAM firms. Finally, we find no evidence in our sample that killer mergers are widespread, but just one potential case that would have deserved closer investigation by competition watchdogs. …When reviewing all GAFAM acquisition cases in our sample, two eye-catching patterns come out. First, most acquisitions are undertaken in core segments or other segments in which these firms are already active. Second, the majority of acquired products is discontinued post-acquisition. This suggests, first, that many GAFAM acquisitions are driven by the desire to purchase valuable R&D inputs, such as the technology, IP rights and/or people of the target firms. Overall, more than 60% percent of the acquired products are shut following the transaction. This figure suggests that many mergers qualify as technology or talent (acqui-hire) acquisitions. Second, the focus on already known and important segments raises the question whether these acquisitions are undertaken to increase market power or to realize synergies. The answer to this question is far from obvious and would need a case by case analysis. However, given the small size of target products, not just in revenues but also in terms of employees, classical synergies, like economies of scale and scope, seem rather implausible. Except for beneficial effects on innovation, the likely motives in these cases are the desire to improve market positions and to increase market power by adding new functionalities to their already successful products. The flip-side of this focus on core segments is that entry seems to be a rare motive to undertake acquisitions. Hence, GAFAM’s main motivations in the digital economy appear to be the acquisition of innovation assets as well as the wish to increase market power.21 Synergies and market entry, on the other hand, seem to be play less prominent roles…”

Chang-Tai Hsieh and Esteban Rossi-Hansberg, "Big Business Is Driving America’s Smaller Cities,"Wall Street Journal, February 5, 2020, https://www.wsj.com/articles/big-business-is-driving-americas-smaller-cities-11580947342

“…There is a lot of debate over the risks associated with the growing power of big business. We should remember that large companies like the Cheesecake Factory and Wegmans have been engines of wage and job growth. Curbing their expansion would hurt both workers and consumers and diminish competition in cities of all sizes….”

Chart fromThe Economistslowing faster low wage growth (using AHE) over the past two years. They also suggest that the uptick in wages for low skilled workers has made the expansion more sustainable.

"...From 2014 to 2018 pay in low-wage industries grew about as quickly as that in other parts of the economy, according to a Analysis by economists at Indeed Hiring Lab, a labour-market research group. And over the past two years wage growth at the bottom has been substantially faster than that in better-paying industries (see chart).Rising pay for low earners has put more cash in the hands of those most likely to spend, supporting consumption and helping the economy weather a soft patch.At the same time household debt, which plunged immediately after the global financial crisis, has continued to fall as a share of gdp over the past few years. Lower debt levels have in turn contributed to a more durable expansion—one that is less likely to be choked off by changing credit conditions or higher borrowing costs stemming from interest-rate increases, like those imposed by the Fed from 2015 to 2018....Ernie Tedeschi, an economist at Evercore isi, a research firm, found in 2019 that the average person working at the minimum wage actually earns close to $12 per hour. This effective wage, once adjusted for inflation, has jumped by roughly a third over the past ten years...."

Economist Staff, "Wage gains for low earners have helped sustain America’s economic expansion,"The Economist, February 15, 2020, https://www.economist.com/finance-and-economics/2020/02/15/wage-gains-for-low-earners-have-helped-sustain-americas-economic-expansion

FT reports on new GS research that finds top one percent of Americans now own over half (56%) of US equities (by value) in 1990 that number was 46%

"...The wealthiest US households are strengthening their grip over corporate America. The richest 1 per cent of Americans now account for more than half the value of equities owned by US households, according to Goldman Sachs. Since 1990, the wealthiest have bought a net $1.2tn in company stakes, while the rest of the population has sold more than $1tn. Three decades ago, ownership was also lopsided, but the top percentage point of Americans by wealth only controlled 46 per cent of all US equities held by households. By the end of September 2019, that proportion had hit a record 56 per cent, amounting to $21.4tn, according to the investment bank’s calculations. That includes bothpublic stock and ownership stakes in private companies…”