Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Sunday, March 22, 2020

AI Summary. Research-and-development spillovers appear stable from 1980 through the 2010s, with an estimated $4 of social benefit for every $1 spent, peaking between 1997 and 2001. The authors find large positive spillovers among technologically similar firms and negative effects from product market rivals through business-stealing.

Brian Lucking Fiscal Studies
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R&D spillovers remain unchanged from the 1980s through the 2010s, with $4 of social benefit for every $1 of R&D spent. @BrianLucking

Have research and development spillovers declined in recent decades?

Core argument: R&D spillovers remained stable from 1980 through the 2010s, generating about $4 of social benefit per $1 of R&D spent, contrary to concerns that spillovers have declined in the 21st century.

Despite concerns about declining R&D spillovers, data from 1980 through the 2010s indicate stability, with $4 of social benefit for every $1 of R&D spent. Notably, spillovers peaked between 1997-2001, coinciding with the dot-com boom, reflecting market enthusiasm for R&D-intensive firms. The study highlights large positive spillovers among technologically close firms and negative effects from product market rivals due to business-stealing. While R&D tax credits effectively boost firm-level R&D spending, their impact on R&D volume may be limited if the supply of researchers is inelastic. This suggests policies should focus on increasing the quantity and quality of potential inventors, such as through STEM education and broadening access for underrepresented groups.

Takeaways by Macro Roundup® AI

  1. R&D spillovers remained stable from 1980 through the 2010s, generating about $4 of social benefit per $1 of R&D spent, contrary to concerns that spillovers have declined in the 21st century.
  2. Spillovers peaked in 1997–2001, coinciding with the dot-com boom, with large positive spillovers among technologically close firms and negative effects from product market rivals due to business-stealing.
  3. R&D tax credits raise firm-level R&D spending, but their effect on total R&D volume may be limited if the supply of researchers is inelastic, suggesting policies that expand the quantity and quality of potential inventors through STEM education and broader access for underrepresented groups.

New Bloom/Van Reenen finds large positive spillover effects suggesting $4 of social benefit to every $1 of R&D spent. They find spillovers have been largely stable over the past from the 1980 through the 2010s outside of elevated spillovers btw 1995-2004 (most intensely btw 1997-2001).

"....Innovation is at the heart of growth, so policies to boost R&D, such as taxcredits, could be useful in restoring stronger productivity growth rates in advanced countries. This paper implements a framework to examine the impact of R&D on firm performance.....we show that there are large positive spillovers among technologically close firms, and negative spillovers from product market rivals due to business-stealing effects. Back-of-the-envelope welfare calculations confirm the earlier paper’s findings of a sizeable wedge between the social and private returns to R&D, suggesting $4 of social benefit to every $1 of R&D spent. The additional data also allow us to explore the changing natures of technology and product market spillovers over time. Perhaps surprisingly,we find that estimated spillovers are reasonably stable over the three decades we study. There are several exceptions, most notably elevated technology spillovers around the time of the dot-com boom of 1997-2001 which may reflect market enthusiasm for R&D-intensive firms. Finally, we show how our framework for estimating welfare implications of R&D spillovers, in which we find a roughly constant marginal social return to R&D over the past 30 years,can be reconciled within the framework of a standard semi-endogenous growth model. Although the evidence here does suggest that greater public policy support for R&D is justified, it does not tell us exactly what the precise form of policy intervention should be. One option is through the tax system and, in line with the previous literature, we do find that R&D tax credits are effective in raising firm-level R&D spending. However, tax credits or more direct R&D subsidies through industrial grants may both have a bigger influence on the price of R&D (mainly wages of R&D researchers) than on the volume of R&D if the supply of researchers is inelastic. This motivates policies that may act on the supply side of R&D through increasing the quantity and quality of potential inventors. This may be through increasing the number of students studying science, technology, engineering and maths (STEM subjects) or more radically by increasing the exposure of individuals from low-income families,minorities and women to the chance of becoming a future inventor.

Brian Lucking, Nicholas Bloom and John Van Reenen, "Have R&D Spillovers Declined in the 21st Century?"Fiscal Studies, 17 February 2020, https://onlinelibrary.wiley.com/doi/full/10.1111/1475-5890.12195

Tuesday, March 31, 2020

AI Summary. The Cares Act enables the Federal Reserve to lend up to $4.54tn, exceeding the combined total of U.S. commercial and industrial loans and newly issued corporate bonds, which the author argues crowds out private capital allocation and socializes losses while profits stay private. Only $377bn of the $2tn package targets preserving U.S. production capacity, while $510bn supports large corporations.

Luigi Zingales Wall Street Journal
Date Posted:
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The Cares Act risks crowding out private capital allocation in 2020 by enabling the Federal Reserve to potentially lend up to $4.54tn, surpassing all U.S. commercial and industrial loans and new corporate bonds issued in 2019. @LuigiZingales @WSJ.

Does emergency government lending crowd out private capital allocation?

Core argument: The Cares Act enables the Federal Reserve to lend up to $4.54tn, exceeding all U.S. commercial and industrial loans plus new corporate bonds issued in 2019, which risks crowding out private capital allocation.

The Cares Act risks crowding out private capital allocation in 2020 by enabling the Federal Reserve to potentially lend up to $4.54tn, surpassing all U.S. commercial and industrial loans and new corporate bonds issued in 2019. This unprecedented move towards a centrally planned economy socializes losses while keeping profits private. With only $377bn of the $2tn package targeted at preserving U.S. production capacity, the Act's design favors large corporations, allocating $510bn for their support. This allocation, under intense lobbying pressure, lacks transparency and accountability, threatening the essence of American capitalism. The urgency of the crisis has facilitated a significant corporate subsidy, necessitating stricter conditions and oversight to ensure fiscal prudence and safeguard the capital market's role in economic recovery.

Takeaways by Macro Roundup® AI

  1. The Cares Act enables the Federal Reserve to lend up to $4.54tn, exceeding all U.S. commercial and industrial loans plus new corporate bonds issued in 2019, which risks crowding out private capital allocation.
  2. Only $377bn of the $2tn Cares Act package targets preserving U.S. production capacity, while $510bn is allocated to supporting large corporations.
  3. The Cares Act socializes losses while keeping profits private, and its corporate support, shaped by lobbying pressure, lacks transparency and accountability and requires stricter conditions and oversight.

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"...Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private....."

Amit Seru and Luigi Zingales, "Save Capitalism From the Cares Act,"Wall Street Journal, March 30, 2020, https://www.wsj.com/articles/save-capitalism-from-the-cares-act-11585608917

Save Capitalism From the Cares Act

A surreal bipartisanship prevails in Washington. Everyone wants to spend, spend, spend. Senate Majority Leader Mitch McConnell, who aggressively fought President Obama’s 2009 stimulus package, was delighted the other day to announce a fiscal stimulus more than twice as large. Democrats are pushing for more.

Are we all Keynesians now? Or have we all embraced the so-called Modern Monetary Theory, which suggests that when an economy is below its full potential, we can print money to finance any deficit without provoking inflation? No. The answer is much simpler. We are all experiencing the effects of combining a real crisis with powerful lobbying.

With 20% of Americans locked in their homes, nearly all air travel canceled, and the global supply chain disrupted, you don’t need to be a Keynesian to think the government should intervene. But that doesn’t mean the Cares Act—an acronym for Coronavirus Aid, Relief, and Economic Security—is wise. The last thing we need at this moment is a Keynesian stimulus. Since the lockdowns constrain supply, stimulating demand would lead only to a rise in prices.

Besides helping the medical effort, government intervention should offer financial help to people who can’t work, and it should preserve the production capacity of the U.S. economy. The greatest resource most companies have is their teams of employees. If they dismantle those teams because of the pause in the economy, production capacity will be lower at the end of the pandemic.

Only $377 billion of the $2 trillion package is directly targeted to this goal. These are loans to small firms (fewer than 500 employees), which are forgivable if the funds are spent on payroll, rent, mortgage interest and utilities. By using 2017 census data (the most recent available), we calculated the total expenditures in payroll, interest expenses and rents of U.S. small firms amounts to $258 billion a month. Unless the Trump administration introduces criteria for selective targeting, the money allocated in Cares will run out in a month and a half. Designing the conditions for such targeting isn’t easy, since every requirement will slow the money’s deployment and speed is of essence. Thus, we fear that the administration will soon come back to Congress with a new request for money.

The need to help individuals and small firms has provided cover to the largest corporate subsidy program in U.S. history. Under intense pressure from lobbyists, the Cares Act allocates $510 billion to support loans for large businesses. A small chunk of this money ($56 billion) will be used directly by the Treasury to grant loans to airlines and other “strategic” firms (read: Boeing). The Treasury will then confer the rest ($454 billion) to the Federal Reserve to absorb losses the Fed might incur in lending to firms in the private sector.

The expectation is that the central bank will leverage this money 10 to 1, enabling it to lend up to $4.54 trillion to companies. That sum is more than all U.S. commercial and industrial loans outstanding at the end of 2019 ($2.35 trillion) plus all the new corporate bonds issued during 2019 ($1.41 trillion). Thus, if this capital is all deployed by the Fed, and at rates that will surely crowd out private capital, all capital allocation in the U.S. in 2020 will be done by the Federal Reserve System, not by the capital market. This is the largest step toward a centrally planned economy the U.S. has ever taken. And it socializes only losses. Profits, when they come, remain private.

There needs to be far more transparency, governance and accountability around the Fed’s deployment of trillions of dollars in the real economy. Policy makers also should make the $510 billion program for large companies similar to that for small firms, but with tougher conditions. Again using 2017 census data, we calculated the total expenditures in payroll, interest expenses and rents of all U.S. large companies to be $392 billion a month.

Yet not all large companies are idle. Amazon is doing great, and so are Google and Facebook. Overall, large businesses are likely to be hit less hard than the U.S. economy overall. Goldman Sachs forecasts a 24% drop in this coming quarter. Even if the large companies were hit in proportion to the overall downturn, the cost of replacing their wages, rents and interest would be only $94 billion a month. So the $510 billon would last almost half a year.

The urgency of the moment facilitated a giveaway to vested interests. Now that the Cares Act is law, policy makers need to find ways to impose restrictions on how the money is deployed. It isn’t only a question of fiscal prudence; the nature of American capitalism is at stake.