Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, April 17, 2020

AI Summary. The authors argue that negative supply shocks can trigger larger demand shortages — "Keynesian supply shocks" — in economies with multiple sectors, incomplete markets, and liquidity-constrained consumers, with firm exits and job losses amplifying the recession. They argue standard fiscal stimulus is less potent, while monetary policy can prevent firm exits and full insurance for affected workers improves allocation.

Veronica Guerrieri Working Paper
Date Posted:
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Keynesian supply shocks reshape COVID economics: Sectoral shutdowns trigger demand collapse via price effects. 100% shock in half of sectors worse than 50% across all, amplifies through firm exits.

Can negative supply shocks cause even larger demand shortages?

Core argument: The authors argue that a 100% supply shock concentrated in half the economy differs from a 50% shock spread across all sectors, with firm exits and job destruction amplifying the resulting recession.

The COVID-19 pandemic has highlighted how supply shocks can transform into larger demand shocks, termed "Keynesian supply shocks." When certain goods become unavailable, the shadow price of affected sectors rises, discouraging overall consumption. This can lead to a deflationary shock turning inflationary as future consumption becomes more valuable. In economies with multiple sectors, incomplete markets, and liquidity-constrained consumers, these shocks are more likely. A 50% shock across all sectors differs from a 100% shock in half the economy, with firm exits and job destruction amplifying the recession. As initial businesses close, demand for others drops, potentially causing further closures and layoffs, creating a multiplier effect that could shut down much of the economy. Standard fiscal stimulus may be less effective, but monetary policy can prevent firm exits. Optimal policy involves closing contact-intensive sectors and providing full insurance to affected workers to achieve the best allocation despite fiscal policy's lower potency.

Takeaways by Macro Roundup® AI

  1. The authors argue that a 100% supply shock concentrated in half the economy differs from a 50% shock spread across all sectors, with firm exits and job destruction amplifying the resulting recession.
  2. The authors term "Keynesian supply shocks" cases where unavailable goods raise the shadow price of affected sectors, discouraging overall consumption so that a supply shock becomes a larger demand shock.
  3. The authors argue that standard fiscal stimulus may be less effective against these shocks while monetary policy can prevent firm exits, with optimal policy closing contact-intensive sectors and fully insuring affected workers.

Working paper looks at the relationship btw the drop in demand caused by a supply shock, which in many cases might be larger than the decline in supply. This shock is amplified by lack of a substitution channel btw sectors -“the fact that some goods are no longer available makes it less attractive to spend overall. An interpretation is that the shutdown increases the shadow price of the goods in the affected sectors, making total current consumption more expensive and thus discouraging it”They are calling this a“Keynesian supply shock”

TheEconomistnoted it in passing, saying that the implication is consumption will be more valuable in future given the lack of available goods and services today, they suggests that the deflationary shock could eventually turn inflationary.

“….We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession…. In this case, we identify a firm exit multiplier. As some initial set of businesses is shut down (e.g. restaurants), e.g. due to health concerns, Keynesian forces reduce demand for other businesses (e.g. car dealers) as well. This, however, might mean that some of the other businesses become unable or unwilling to remain open. When they close, however, laying off their workers, a new, endogenous, Keynesian supply shock is born, that amplifies the existing exogenous one, creating a multiplier effect that may be sufficiently strong to shut down most of the economy…. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy…demand may indeed overreact to the supply shock and lead to a demand-deficient recession.We have tried to lay out the conditions for this to be the case. Low substitutability across sectors and incomplete markets, with liquidity constrained consumers,all contribute towards the possibility of Keynesian supply shocks…..”

Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Iván Werning, "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?," Working Paper, April 2, 2020, https://cpb-us-e1.wpmucdn.com/sites.northwestern.edu/dist/6/1682/files/2020/04/covid19_supply_demand.pdf

Friday, April 24, 2020

AI Summary. The author argues that widely cited research on inequality and mobility, including studies using tax records and the Opportunity Atlas, is flawed, and that careful analysis shows smaller growth in disparities than reported. He contends families shape children's opportunities more than schools, and that public preschool helps disadvantaged children without substituting for a functional family.

Gonzalo Schwarz Medium
Date Posted:
Is Database:
Database

According to Dr. James Heckman, Family structure, not schools, drives social mobility. COVID impact: Pre-existing health gaps widen earnings inequality. Parent engagement quality during lockdowns emerges as key development factor.

Do families matter more than schools for children's opportunities?

Core argument: James Heckman criticizes inequality and mobility research as shoddy, arguing that evidence from IRS data and projects such as "The Opportunity Atlas" is flawed and that careful analysis shows less growth in disparities than reported.

Dr. James Heckman criticizes current research on inequality and mobility as shoddy, noting that it gains traction by appealing to negative societal views. He argues that evidence from IRS data and projects like "The Opportunity Atlas" is flawed, with careful analysis showing less disparity growth than reported. Heckman emphasizes the role of family structure in social mobility, stating that families, more than schools, shape children's opportunities. He highlights that public preschool benefits disadvantaged children but cannot replace the nurturing environment of a functional family. The COVID-19 crisis may exacerbate inequality in health and earnings, as those in poor health before the pandemic are most affected. Additionally, while increased parental engagement during school closures could benefit childhood development, disparities in engagement quality may lead to greater inequality.

Takeaways by Macro Roundup® AI

  1. James Heckman criticizes inequality and mobility research as shoddy, arguing that evidence from IRS data and projects such as "The Opportunity Atlas" is flawed and that careful analysis shows less growth in disparities than reported.
  2. Heckman argues that families shape children's opportunities more than schools do, and that public preschool benefits disadvantaged children but cannot substitute for the nurturing environment of a functional family.
  3. Heckman argues that the COVID-19 crisis may widen inequality in health and earnings, since those in poor health before the pandemic are most affected and parental engagement during school closures varies in quality.

Great quote from Heckman, "... The current research in the field is shoddy. It has gained traction because it appeals to the negative image of American society held by leading opinion makers like the New York Times and the Atlantic. In truth, the evidence based on the IRS data is deeply flawed and has been incorrectly analyzed. Take “The Opportunity Atlas” promoted by the New York Times. It claims that “zip code is destiny.” Careful statistical analysis of the data shows otherwise. The same can be said of the academics who write about the growth of the Top 1%. Careful studies show much less growth in disparity than what is picked up in the popular press and by populist politicians. A new “wisdom” has emerged: large samples more than compensate for faulty or missing data. The wisdom of this crowd is that sample size trumps careful data analysis....."
Gonzalo Schwarz, "Nobel-Prize Winning Economist Dr. James Heckman on Social Mobility, the American Dream, and how COVID-19 Could Affect Inequality, Medium, April 14, 2020, https://medium.com/@ArchbridgeInst/nobel-prize-winning-economist-dr-5550da1df5c3

Nobel-Prize Winning Economist Dr. James Heckman on Social Mobility, the American Dream, and how COVID-19 Could Affect Inequality

On April 14, 2020 Gonzalo Schwarz, President and CEO of the Archbridge Institute, conducted the following interview with Dr. James J. Heckman. Dr. Heckman is the Henry Schultz Distinguished Service Professor in Economics and the Director of the Center for the Economics of Human Development at the University of Chicago. In 2000, Heckman shared the Nobel Prize in Economics for his work on the microeconometrics of diversity and heterogeneity and for establishing a sound causal basis for public policy evaluation. For more on the work of Dr. Heckman, click here.

Gonzalo Schwarz: Many commentators have said that it is not possible to achieve the American Dream any more in the United States. Do you think the American Dream is alive and well?

Dr. James Heckman: Ask any immigrant. They are grateful for the chances that America has given them. Many came with nothing. They live in decent neighborhoods and their families have better lives than they could have before coming here. Their children go to college and integrate into American society. The progress of African Americans over the past century is staggering. Many have shaken off the legacies of poverty and discrimination. Those who deny that the American Dream is achievable ignore the myriad success stories and the mindset for personal growth that America offers.

S: When people talk about the American Dream they do so in the context of the current academic and policy discussion on income mobility and inequality. How would you characterize the current research in this field? What are some of the key issues with the literature and public discussions around these issues?

H: The current research in the field is shoddy. It has gained traction because it appeals to the negative image of American society held by leading opinion makers like the New York Times and the Atlantic. In truth, the evidence based on the IRS data is deeply flawed and has been incorrectly analyzed. Take “The Opportunity Atlas” promoted by the New York Times. It claims that “zip code is destiny.” Careful statistical analysis of the data shows otherwise. The same can be said of the academics who write about the growth of the Top 1%. Careful studies show much less growth in disparity than what is picked up in the popular press and by populist politicians. A new “wisdom” has emerged: large samples more than compensate for faulty or missing data. The wisdom of this crowd is that sample size trumps careful data analysis.

S: Without going into detail, what do you think are the main barriers to income or social mobility? (Could be micro level such as agency and family structure or on a bigger scale in terms of labor markets, entrepreneurship, etc.)

H: The main barriers to developing effective policies for income and social mobility is fear of honest engagement in the changes in the American family and the consequences it has wrought. It is politically incorrect to express the truth and go to the source of problems. Public discourse, such as it is, cannot speak honestly about matters of culture, race, and gender. Powerful censorship is at play across the entire society.

S: In your research you discuss the key importance of family structure for social mobility. Why do you feel so strongly about this issue?

H: The family is the source of life and growth. Families build values, encourage (or discourage) their children in school and out. Families — far more than schools — create or inhibit life opportunities. A huge body of evidence shows the powerful role of families in shaping the lives of their children. Dysfunctional families produce dysfunctional children. Schools can only partially compensate for the damage done to the children by dysfunctional families.

S: Your work on early childhood education is constantly cited as a justification for universal preschool education. Is that a policy you have recommended or what is your main focus and potential solution when you promote the importance of early childhood education?

H: I have never supported universal pre-school. The benefits of public preschool programs are the greatest for the most disadvantaged children. More advantaged children generally have encouraging early family lives. The “intervention” that a loving, resourceful family gives to its children has huge benefits that, unfortunately, have never been measured well. Public preschool programs can potentially compensate for the home environments of disadvantaged children. No public preschool program can provide the environments and the parental love and care of a functioning family and the lifetime benefits that ensue.

S: Do you have any thoughts overall on how this current crisis could impact social mobility and inequality?

H: Inequality in health and earnings will be exacerbated by it. Poverty and disadvantage foster disease. Inequality in access to health care fosters inequality in health and poor health inhibits the ability to contribute to society. With so many people now out of work — and out of health benefits — short-run inequality generated by poor health will increase in addition to the inequality created by the loss of jobs. We know this is true because those in poor health before COVID-19 struck are the primary victims of the new pandemic.

S: In your work a key component to childhood development and human capital is parental engagement. Because of the school closures and stay at home mandates in many states, children and their parents are staying at home which should increase the level of parental engagement. Do you think that this will be helpful for childhood development as it pertains to that specific issue or because of the heterogeneity of the quality of parental engagement and capacity of some parents to develop quality engagement, the end result could be more inequality as some kids will have a higher quality of parental engagement than others?

H: To those who have more will be given. For stressed families where the single parent is still working, the early childhood environment will likely worsen.