Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 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


Wednesday, March 11, 2020

AI Summary. Standard wealth and income measures overstate inequality in lifetime spending, because human wealth is distributed more equally than net wealth and fiscal policy is progressive. The authors estimate the top 1% hold 13.7% of human wealth versus 34.1% of net wealth, and face a 34.5% lifetime net tax rate against -46.6% for the poorest fifth.

Laurence Kotlikoff Wall Street Journal
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Current measures of wealth/income inequality overstate lifetime spending inequality due to more equal distribution of human wealth & progressive fiscal policies. @LaurenceKotlikoff @WSJ.

Do standard wealth measures overstate inequality in lifetime spending?

Core argument: The top 1% hold 13.7% of human wealth, a third of their 34.1% net wealth share, while the bottom 20% hold 4.9% of human wealth, eight times their net wealth share.

Current measures of wealth/income inequality overstate lifetime spending inequality due to more equal distribution of human wealth and progressive fiscal policies. The top 1% hold 13.7% of human wealth, a third of their net wealth share, while the bottom 20% possess 4.9% of human wealth, eight times their net wealth share. The average lifetime net tax rate for the top 1% of 40-year-olds is 34.5%, compared to -46.6% for the lowest quintile. Without fiscal policies, the richest 1% would account for 17.9% of remaining lifetime spending (RLS), below their 34.1% net wealth share. The poorest 20%, with 0.6% net wealth, have a 4% pre-fiscal resource share. Thus, human wealth distribution and fiscal policy equally enhance the RLS share of the poorest quintile, highlighting that wealth measures overstate consumption inequality.

Takeaways by Macro Roundup® AI

  1. The top 1% hold 13.7% of human wealth, a third of their 34.1% net wealth share, while the bottom 20% hold 4.9% of human wealth, eight times their net wealth share.
  2. The average lifetime net tax rate for the top 1% of 40-year-olds is 34.5%, compared with -46.6% for the lowest quintile.
  3. Absent fiscal policies, the richest 1% would account for 17.9% of remaining lifetime spending, below their 34.1% net wealth share, while the poorest 20%, holding 0.6% of net wealth, would have a 4% pre-fiscal resource share.

Laurence Kotlikoff, "Tax Myths of Warrenomics,"Wall Street Journal, October 17, 2019, https://www.wsj.com/articles/tax-myths-of-warrenomics-11571351806

To quote from paper, “…is that human wealth is more equally distributed than is net wealth. The top 1 percent of this cohort account for 13.7 percent of the cohort’s human wealth, which is roughly a third of its net wealth share. The bottom 20 percent have 4.9 percent of total-cohort human wealth - roughly eight times its net wealth share. The other reason for lower spending than wealth inequality is the fiscal system. The average remaining lifetime net tax rate of the top 1 percent of 40 year olds is 34.5 percent. It’s -46.6 percent among those in the lowest quintile. Which factor - greater equality in the distribution of human wealth or our progressive fiscal system - makes the distribution of remaining lifetime spending so much more equal than that of net wealth? The answer depends. With no fiscal system, the richest 1 percent of 40-49 year olds would account for 17.9 percent of RLS (their resource share), which is far below their 34.1 percent of net wealth and close to their 14.5 percent of RLS. For the poorest 20 percent, with just 0.6 percent of total cohort net wealth, their share of cohort pre-fiscal resources is 4.0 percent. 11 Hence, the more equal distribution of human wealth and fiscal policy play a roughly equal role in raising the RLS share of the poorest quintile...”

Steve’s note in response: So my read of the reports language is “its” here refers to the cohorts lifetime spending going forward. The way I read it was they are talking about sort of a propensity to consume relative to wealth, the older rich will “underconsume” relative to their wealth and pass wealth along to their kids, whereas the poor will “overconsume” relative to their wealth because of transfer payments. So wealth measures overstate consumption inequality.

Note Paper and initial writeup are attached.

Ed Comment:Please send me this. (you sent me the paper)…. PS. I don’t understand this line, in particular, the word “its”. Surely, the top 1% will spend a lot more than 2x the bottom 20% (ie 14.5/7.3) “Among 40-year-olds, the richest 1% own 34.1% of their cohort’s net wealth, but account for only 14.5% of its remaining lifetime spending. The poorest 20% own only 0.6% of the cohort’s wealth, but are expected to do 7.3% of its spending.”

, Kotlikoff and Auerbach push back at Saez/Zucman:"...Economists Emmanuel Saez and Gabriel Zucman……wrong, and three huge mistakes underlie their analysis. The biggest mistake is to focus on gross, not net, taxes. They ignore transfer payments, like Social Security, which are disproportionately paid to the poor...Messrs. Saez and Zucman’ssecond mistake is measuring progressivity on a one-year rather than a remaining-lifetime basis. That ignores the fiscal system’s double taxation: Income earned, taxed and saved this year will be subject to future taxation on interest, dividends and capital gains. This omission disproportionately understates taxes for the rich, who save at a higher rate. The current-year focus also understates benefits paid to the poor, since future benefits are a bigger share of their resources. Theirthird mistake is failing to adjust for age.The old have paid most of their lifetime taxes, which makes them now look like tax cheats, particularly those who saved out of previously highly taxed labor income. With changing demographics, this problem will deeply confuse tax progressivity comparisons over time... the net tax rate facing middle age Americans rises rapidly with their resources—from negative 46.4% for the bottom 20% to positive 34.5% for the top 1%...."

Thursday, March 12, 2020

AI Summary. A book surveys classical approaches in the philosophy of mathematics — logicism, formalism, intuitionism, empiricism, and structuralism — alongside specialized topics including mathematical intuition, potential infinity, the iterative conception of sets, and the search for new mathematical axioms.

Oystein Linnebo Princeton University Press
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Global growth slows amid supply disruptions + inflation; consumer spend resilient despite rate hikes. Labor mkts mixed: low unemployment but participation below pre-COVID. Business investment lags on higher borrowing costs.

What are the main philosophical approaches to understanding mathematical foundations?

Core argument: The book surveys classical approaches in the philosophy of mathematics, including logicism, formalism, intuitionism, empiricism, and structuralism.

The book provides a comprehensive overview of classical approaches in the philosophy of mathematics, including logicism, formalism, intuitionism, empiricism, and structuralism. It delves into specialized topics like mathematical intuition and potential infinity, offering insights into the iterative conception of sets and the quest for new mathematical axioms. The work of Gottlob Frege, a pivotal figure in analytic philosophy, is highlighted alongside contributions from thinkers like Kant, Mill, Hilbert, Gödel, Quine, Benacerraf, and Field. This text serves as an essential resource for students and educators in philosophy and mathematics, aiming to deepen understanding of mathematical foundations.

Takeaways by Macro Roundup® AI

  1. The book surveys classical approaches in the philosophy of mathematics, including logicism, formalism, intuitionism, empiricism, and structuralism.
  2. Specialized topics covered include mathematical intuition, potential infinity, the iterative conception of sets, and the quest for new mathematical axioms.
  3. The book highlights Gottlob Frege, a pivotal figure in analytic philosophy, alongside contributions from Kant, Mill, Hilbert, Gödel, Quine, Benacerraf, and Field, and serves as a resource for students and educators in philosophy and mathematics.

“…the book introduces all of the classical approaches to the field, including logicism, formalism, intuitionism, empiricism, and structuralism. It also contains accessible introductions to some more specialized issues, such as mathematical intuition, potential infinity, the iterative conception of sets, and the search for new mathematical axioms. The groundbreaking work of German mathematician and philosopher Gottlob Frege, one of the founders of analytic philosophy, figures prominently throughout the book. Other important thinkers whose work is introduced and discussed include Immanuel Kant, John Stuart Mill, David Hilbert, Kurt Gödel, W. V. Quine, Paul Benacerraf, and Hartry H. Field.Sophisticated but clear and approachable, this is an essential introduction for all students and teachers of philosophy, as well as mathematicians and others who want to understand the foundations of mathematics.…”

Oystein Linnebo, “Philosophy of Mathematics,” Princeton University Press, May 2017, https://www.amazon.com/Philosophy-Mathematics-Princeton-Foundations-Contemporary/dp/0691161402

AI Summary. The Dodd-Frank Act restricts the Federal Reserve's lender-of-last-resort powers by requiring Treasury approval and heightened collateral for loans to nonbanks, while barring the Federal Deposit Insurance Corporation from expanding depositor guarantees and the Treasury from guaranteeing money-market funds. The author argues these constraints hinder crisis management and that the Federal Reserve's crisis-era powers should be restored.

Hal Scott Wall Street Journal
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Hal Scott argues for restoring the Fed’s crisis-era powers to mitigate financial contagion risks, emphasizing the need for pre-emptive action & international coordination through the G20.

Do post-2008 limits on the Fed's emergency lending powers hinder crisis management?

Core argument: Bank equity capital has risen $750bn since 2007 to $2.1tn, yet Hal Scott argues a financial panic could still overwhelm banks given Dodd-Frank's limits on the Fed's lender-of-last-resort powers.

The Dodd-Frank Act, enacted post-2008 crisis, limits the Fed's lender-of-last-resort powers, posing risks amid Covid. Bank equity capital rose by $750bn to $2.1tn since 2007, yet a financial panic could still overwhelm banks. The Act restricts Fed loans to nonbanks, requiring Treasury approval and heightened collateral, deterring institutions from seeking needed funding due to stigma. It also prevents the FDIC from expanding depositor guarantees and the Treasury from guaranteeing money-market funds. These constraints hinder effective crisis management, as seen when repo rates spiked 9% in Sept 2019, prompting the Fed to inject up to $150bn. Hal Scott argues for restoring the Fed's crisis-era powers to mitigate financial contagion risks, emphasizing the need for pre-emptive action and international coordination through the G20.

Takeaways by Macro Roundup® AI

  1. Bank equity capital has risen $750bn since 2007 to $2.1tn, yet Hal Scott argues a financial panic could still overwhelm banks given Dodd-Frank's limits on the Fed's lender-of-last-resort powers.
  2. Dodd-Frank restricts Fed lending to nonbanks by requiring Treasury approval and heightened collateral, bars the FDIC from expanding depositor guarantees, and prevents the Treasury from guaranteeing money-market funds.

, "...Here’s what should be done immediately:First, the Fed should reactivate all the facilities it created in the crisis and any additional ones it believes necessary, so it is ready to be the strongest possible lender of last resort—to do whatever it takes, consistent with its present legal authority. This includes making U.S. dollars available to other major central banks through currency swaps. And the Treasury secretary should announce his approval of these efforts, consistent with the requirements of Section 13(3). Second, financial regulators should modify their rules and supervision to stimulate liquidity in the interbank and repo markets. Third, Congress should restore all the powers it took away from the Fed, FDIC and Treasury during the crisis. Fourth, international coordination through the Group of 20 must be accelerated.This is a global problem...."

Hal Scott, "Dodd-Frank Worsens Covid’s Risk,"Wall Street Journal, March 11, 2020, https://www.wsj.com/articles/dodd-frank-worsens-covids-risk-11583961933

Dodd-Frank Worsens Covid’s Risk

Coronavirus is contagious. So is financial panic.

The spread of the novel coronavirus could cause a run on the financial system leading to a deep recession. Severe stock-market drops and increased demand for liquidity are warning signals. Bank equity capital has increased by $750 billion to $2.1 trillion since 2007, but a panic could still overwhelm well-capitalized banks. We need to restore the weapons to fight contagion that Congress took away during the last financial crisis. Strong pre-emptive action would greatly diminish the risk of a panic.

The previous systemic threat to the financial system was spurred by the failure of Lehman Brothers in 2008. That threat came from within the banking system in the form of bad housing loans. This time is different. Wall Street risk-taking isn’t to blame for the coronavirus.

In 2008 the Fed supplied needed liquidity to the banking and nonbanking financial sector, the latter through its authority under Section 13(3) of the Federal Reserve Act. Meanwhile, the Federal Deposit Insurance Corp. expanded the limits of deposit insurance, among other things providing unlimited protection for transaction accounts. The Treasury Department offered guarantees to money-market funds.

Once the crisis abated, however, there was growing public concern about “moral hazard”—that government backstops and guarantees created incentives for risky behavior. In response, the Dodd-Frank Act of 2010 limited the Fed’s lender-of-last-resort powers for nonbanks, an increasingly important part of the financial system. Fed loans to nonbanks can now be made only with the approval of the Treasury secretary. They must be done through a broad program, unlike the one-off rescue of AIG, and must meet heightened collateral requirements. Loans to nonbanks must be disclosed to congressional leaders within seven days and to the public within one year. Loans to banks must be disclosed within two years. While disclosure is usually desirable, in this situation it creates the specter of future stigma that deters financial institutions from seeking even badly needed Fed funding. Even before the current crisis, banks’ use of the discount window had dropped to record lows.

Dodd-Frank also prevents the FDIC from expanding guarantees to bank depositors without congressional approval, as it did in the credit crisis. And the Treasury is now prohibited from guaranteeing money-market funds. These legislative changes make it difficult for the Fed and other regulators to deal effectively with a financial panic.

Government agencies have compounded the problem of their own weakness with regulations that make it harder for financial firms to lend to each other. The liquidity coverage ratio, the Fed liquidity stress tests, and the “living wills” process require the largest banks to meet stiff liquidity requirements that can result in liquidity hoarding.

Even before the coronavirus sent markets tumbling, the scarcity of liquidity was a big problem. The 9% spike of overnight repurchase agreement, or repo, rates last September caused the Fed to supply as much as $75 billion a day to the repo market. Although the demand for such support had fallen to about $26 billion by the end of February, it rose to $100 billion on March 4. The Fed responded Monday by raising the minimum support offered to $150 from $100 billion. While this change is welcome, it falls short.

Here’s what should be done immediately: First, the Fed should reactivate all the facilities it created in the crisis and any additional ones it believes necessary, so it is ready to be the strongest possible lender of last resort—to do whatever it takes, consistent with its present legal authority. This includes making U.S. dollars available to other major central banks through currency swaps. And the Treasury secretary should announce his approval of these efforts, consistent with the requirements of Section 13(3). Second, financial regulators should modify their rules and supervision to stimulate liquidity in the interbank and repo markets. Third, Congress should restore all the powers it took away from the Fed, FDIC and Treasury during the crisis. Fourth, international coordination through the Group of 20 must be accelerated. This is a global problem.

China, Europe and Japan already have many of these powers. Policy makers in the U.S. need them too. Bold action can prevent a panic before it starts. The public knows the situation is serious and wants the government to act.