Macro Roundup

Research (using evidence from Denmark, largely manufacturing firms) finds that domestic production at offshoring firms didn't fall even as their produced good imports increased and the firms domestic workforce reorganized increasing the number and share of tech workers. Offshoring didn't "hollow out" firms in the Danish experience.

"...This paper exploits new information on Danish firms’ offshoring activities to construct a rich dataset on firms’ global production choices. We use these data to analyze how firms’ decisions to relocate their primary activities to low-wage countries affect not only their aggregate employment and output, but also their employment across activities. We find that over time, offshoring firms change their employment composition significantly so that they ultimately employ a much higher share of technology and research-related workers.We show that after firms relocate their main activity to a low-wage region, they increase their imports from that region, but that these new imports are primarily in products produced domestically by the firm, rather than in intermediate inputs. This finding underpins our creation of a new measure of firm offshoring by destination based on the change in the share of produced-good imports by the firm.While offshorers increase imports of the same domestically-produced goods, we find that they continue - rather than abandon - domestic production of those goods. However, the imported varieties have lower prices than their domestic counterparts and prices of the domestic varieties increase after offshoring begins. These findings suggest that offshorers have product-specific capabilities and exploit low-wage destinations to pursue a quality differentiation strategy.The rise of new low-wage production opportunities in developing countries allows offshoring firms to reorganize their domestic activities by increasing the number and share of domestic tech workers at the firm. Although offshorers decrease their total employment by shedding production workers, they do not “hollow out” the firm and transform into pure intermediaries of imported products. In addition to maintaining their output and raising the quality of domestically product varieties, they shift their workforce towards innovation related occupations.The results in this paper point to important long-term implications of offshoring. We show that firms that relocate their main activities to a foreign low-wage country maintain their domestic production by shifting to higher price varieties and are more likely to shift their domestic workers into innovative activities. Since innovation is a major determinant of future performance, this shift has important potential implications for the long-term effects of offshoring on productivity and growth…"

Record highs in Bloomberg’s startup index (private firms) have collapsed versus NASDAQ 100 (see chart) though both are still up ~ 400% from 2007. Also Bloomberg reports on layoffs in tech sector, parallel’s your views on evolution, driven not by food competition but survival from extinction:“…Layoffs have slammed tech companies both large and small since the start of the coronavirus pandemic in mid-March. The industry has cut more than 40,000 jobs so far, but this month was the cruelest yet. In a single week in early May, Uber Technologies Inc. announced it would slash 3,700 positions, Airbnb Inc. said it would cut 1,900 and Lyft Inc. fired or furloughed more than 1,000….For the first half of the last decade, theperformance of tech startups, the lifeblood of the industry, surged along with the Nasdaq 100 Index, a technology-heavy mix of large non-financial companies. Then, in 2018, startups pulled well ahead of their publicly traded counterparts, driven in part by big gains in valuations at late-stage private companies. That momentum stalled this year. The Bloomberg Startup Index, a barometer for the health of the sector using metrics like funding and valuations, is now trailing the Nasdaq 100….”

Sarah McBride and Christopher Cannon, “Covid-19 Brings a Reckoning of Layoffs to Silicon Valley,” Bloomberg, May 28, 2020, https://www.bloomberg.com/graphics/2020-coronavirus-technology-layoffs/

“…When looked at from a decade-long perspective, the 2020 census will likely show the 2010s to be a period of healthy city growth compared with the 2000s, a somewhat down decade for cities. The Census Bureau’s new estimates show that 55 of the country’s 89 largest cities have already added more people between 2010 and 2019 than was the case in the 2000 to 2010 decade (download Table D). This is the case for each of the 10 cities with populations over 1 million except New York City. Moreover, within the nation’s major metropolitan areas, the city-suburb growth disparity from 2010 to 2019 was modest compared to the sharp disparity during the 2000s….Of course, this healthy city growth was heavily front-loaded early in the decade, before the declines in recent years. What does this mean for city growth in the early 2020s, especially in the wake of the COVID-19 pandemic? There are a lot of unknowns, making this difficult to predict. But it is worth noting that big cities registered their highest growth rates during the down economy and deflated housing market in the wake of the Great Recession. Thus, there is a possibility that young adults—both millennials and Gen Z—may again gravitate to big cities as the pandemic recedes and gives way to a recovering economy….”

William Frey analysis of the Census Bureau’s new estimates finds that the population move to cities has slowed down, in the second half of the last decade suburbs grew faster in population than primary cities

Allison Schrager, "Conversations with E21: Wojciech Kopczuk on Wealth Taxes," Economics 21, May 12, 2020, https://economics21.org/html/conversations-e21-wojciech-kopczuk-wealth-taxes-3541.html

Normally I wouldn't send this to you but given the upcoming interview with CBS on inequality I though you might be interested. Note he calls the updated Smith/Zidar/Zwick numbers (attached) we looked at “the state of the art estimate” and suspects that inequality in Europe looks like the US but it’s harder to see as we have less transparency into their private firms.

"...Has wealth inequality worsened over time? Yes, it has worsened somewhat. However, there’s a range of estimates in the literature as to how much. The most aggressive ones are biased upward. The state-of-the-art estimate comes from Owen Zidar, Eric Zwick, and Matt Smith—this estimate is what I would point to as the neighborhood of where the truth might be. But the problem with measuring wealth inequality is that observing wealth is hard. Calculating it depends on lots of assumption and imputations, and for this reason any estimate should include clear error bounds or confidence intervals. But my best guess is that inequality has increased….. My suspicion is that the lower levels of observed inequality we see in Europe are due in part to the fact that there are stronger incentives to keep wealth private in Europe, which makes observing it harder. My suspicion is that there is more actual inequality there then what see in the data. Shifting in that direction may make the discourse better, but the economic substance… that’s a different story….”

Summers/Stansburyrespond to some of Tyler Cowen’s questions about their Research (including the role of equity based compensation and housing) and how to reconcile their paper with the secular stagnation hypothesis:

“…3. Has the labor share even fallen? Part 1: Labor’s share does not appear to have fallen nearly as much if you consider workers’ receipts of equity compensation, or if you consider the owners of passthrough firms (i.e. people who run and own their own businesses). It’s unclear whether to consider equity-based compensation, or the compensation of the owners of passthrough firms, to be labor income or to be capital income. Regardless, our work focuses on the decline in worker power and in labor income for the *majority* of workers.The large increases in income in the form of equity-based compensation, or accruing to owners of passthrough firms, have been at the very top of the income distribution. So while the magnitude of the decline in the aggregate labor share may not be clear, it is very clear that the share of income which is labor income for – say -the bottom 90% of workers or even 99% of workers has fallen substantially. 4. Has the labor share even fallen? Part 2: How do we take into account housing (Rognlie), depreciation (Bridgman), or the imputation of mixed income? We focus on the compensation share of income in the *corporate* sector (to be precise: the nonfinancial corporate sector in our main analysis, and the entire corporate sector in the Appendix). Focusing on the compensation share in the corporate sector excludes housing, and excludes issues of the imputation of mixed income. Furthermore, in our main analysis we focus on the labor share of value added net of depreciation. Since depreciation rates rose over the period, the decline in the gross labor share was bigger than the decline in the net labor share (See Appendix Section C6). Most of the analyses of the labor share in recent years have focused on the corporate sector for these reasons, and indeed Rognlie (2014), who raised the point about the role of housing, finds a decline in the labor share in the corporate sector since the 1980s and identifies a large role for what he calls “pure profits” (which could represent our channel of the redistribution of rents between labor and capital).5. If corporate profits are so high, how is this consistent with the persistently low demand postulated by Summers’ “secular stagnation” hypothesis? Secular stagnation as we think of it is the product of a rising gap between the desire to save and the desire to invest (which, in an IS-LM type framework, would push down the neutral real interest rate). Falling worker power redistributes income from lower and middle-income people to the rich. The rich have a higher propensity to save. Thus, falling worker power increases the desire to save relative to the desire to invest. Rising inequality has been posited by several authors as a contributor to the declining neutral real interest rate (see e.g. Smith and Rachel 2015). Under this view, secular stagnation is exemplified by low private return to capital investment – but, in a noncompetitive world, this may or may not be the same thing as an abnormally low profit rate or capital share….”

Anna Stansbury and Larry Summers, “The Declining Worker Power Hypothesis: Questions & Responses,” Harvard University, May 29, 2020, https://scholar.harvard.edu/stansbury/declining-worker-power-hypothesis-questions-responses

“…We examine the top 400 wealthiest individuals in the US economy as tabulated by Forbes magazine and analyze which of these theories are more consistent with the patterns in the data. In contrast to other studies, we look not just at the present, but also at the 1980s, 1990s, and early 2000s. These 400 people represent the very top of the distribution, the top 0.0003 percent of 132 million US households and the top 0.0001 percent of 311.5 million US individuals. We focus on three primary factors. First, we test the extent to which the individuals made money on their own as opposed to inheriting it. Second, we examine the industrial activities through which the wealth was made, and the extent to which technology played a role. Third, we consider the educational backgrounds of the top earners, and specifically the importance of having a college education. We investigate how these factors have changed over time, and we also compare the results in the United States to the changes in the composition of billionaires from other countries, also drawing on data from ForbesThe Forbes 400 in recent years did not grow up as advantaged as in decades past. Those in the Forbes 400 today are less likely to have inherited their wealth or to have grown up wealthy. They are more likely to have started their businesses having grown up with some wealth, what we consider to be the equivalent of upper middle class. The Forbes 400 of today also are those who were able to access education while young and apply their skills to the most scalable industries: technology, finance, and mass retail….”

Steven Kaplan and Joshua Rauh. “Family, Education, and Sources of Wealth Among the Richest Americans, 1982-2012,” American Economic Review, May 2013, https://www.jstor.org/stable/23469721

“…We should tackle these problems. But we should remember thatthe key drivers of growth are science, education and innovation, not low taxes, lax regulations or greater exploitation of natural resources….”

The Path to Prosperity Is Blue

HOW can America’s leaders foster broad prosperity? For most Republicans — including Donald J. Trump — the main answer is to “cut and extract”: Cut taxes and business regulations, including pesky restrictions on the extraction of natural resources, and the economy will boom.

Mr. Trump and House Speaker Paul Ryan are united by the conviction that cutting taxes — especially on corporations and the wealthy — is what drives growth.

A look at the states, however, suggests that they’re wrong. Red states dominated by Republicans embrace cut and extract. Blue states dominated by Democrats do much more to maintain their investments in education, infrastructure, urban quality of life and human services — investments typically financed through more progressive state and local taxes. And despite what you may have heard, blue states are generally doing better.

How can conservative commentators claim that red states dominate? A tactic favored by Mr. Trump’s economic adviser Stephen Moore is to rely on measures goosed by population expansion, like job growth or a state economy’s size.

That’s like portraying India as a beacon of prosperity because it has one of the biggest economies in the world and creates millions of jobs annually. Economic performance is measured in the lives of individuals, not aggregates.

Another favorite approach is to cherry-pick a handful of red states with decent records and contrast them with the most troubled blue states. With Texas now stumbling as oil prices fall, the new conservative favorite is Utah.

Utah’s low poverty rate and long life expectancy are impressive, but spotlighting a single state ignores the more numerous red states that dominate the lowest ranks of state performance — whether for life expectancy, obesity, rates of violent crime and incarceration, or labor force participation of prime-age workers.

Many of these differences are longstanding. Our reddest region, the South, has long been the poorest part, too. The gap between today’s red and blue states was enormous for much of the 20th century. It then narrowed substantially, thanks in part to huge federal transfers to the poorest states to raise them toward the national level.

Yet income differences between red and blue states stopped closing around 1980 and, in some revealing cases, widened. For example, Texas and Massachusetts — often considered exemplars of the red and blue models — had almost converged by 1980. Since then, Texas’ per capita income has fallen significantly relative to Massachusetts’. The same is true of Utah.

Yes, the cost of living is higher in Massachusetts than it is in Texas — by about 11 percent in the last few years, according to recent government calculations by the Bureau of Economic Analysis. But even this significant difference (surely longstanding) can’t close the widened gap.

Why are red states no longer consistently gaining ground? An important reason is that modern knowledge economies increase the rewards for education, research and development and urban hubs that promote the exchange of ideas and development of talent. This has made local conditions more important even in this age of globalization. And the places where these effects have been most successfully promoted are overwhelmingly blue.

Yes, there are fast-growing red state economies. But many, like North Dakota, look more like Saudi Arabia than Silicon Valley. Not all states are sitting on huge fossil fuel reserves, and tapping these reserves isn’t costless. It creates pollution and other problems — negative externalities — that go beyond states’ borders, notably the costs associated with carbon emissions.

By contrast, the innovation-driven growth in blue states creates broad positive externalities. People educated in blue states can move to red states; technologies developed in blue states can be emulated in red states. In other words, blue state investments “leak out.” Yet these states are still producing high levels of prosperity.

Not all blue states are economically successful, of course, and not all red states are struggling. Some red state innovation hubs like Austin, Tex., are thriving (even if these “blue islands” are at odds with state governments over wage rules and public investments). Yet few of the cities that do the most research or advanced manufacturing or that produce the most patents are in red states.

On the other side, blue states have found it difficult to maintain their historic investments in education and infrastructure. In some cases, state policies are to blame. Connecticut, Illinois and Rhode Island are now having to deal with badly underfinanced pension funds.

But blue states have also been affected by cutbacks in federal funding for research, infrastructure and higher education — a reminder that federal policy still matters enormously.

And blue states have higher average inequality than red states do (in part because of their success in promoting high-paying jobs), and their dense urban economies continue to harbor troublingly deep pockets of disadvantage.

Local restrictions that stymie construction of new affordable housing play a big role. These policies not only hurt less affluent residents; they also make these states poorer because the most innovative cities are less dense and hence less productive than they could be.

We should tackle these problems. But we should remember that the key drivers of growth are science, education and innovation, not low taxes, lax regulations or greater exploitation of natural resources.

And we should be worried, whatever our partisan tilt, that leading conservatives promote an economic model so disconnected from the true sources of prosperity.

Jacob Hacker and Paul Pierson, “The Path to Prosperity Is Blue,”New York Times, July 30, 2017, https://www.nytimes.com/2016/07/31/opinion/campaign-stops/the-path-to-prosperity-is-blue.html