Macro Roundup

Ganapati concentration improves productivity

“…American industries have grown more concentrated over the last forty years. In the absence of productivity innovation, this should lead to price hikes and output reductions, decreasing consumer welfare. Using public data from 1972-2012, I use price data to disentangle revenue from output. Difference-in-difference estimates show that industry concentration increases are positively correlated to productivity and real output growth, uncorrelated with price changes and overall payroll, and negatively correlated with labor’s revenue share. I rationalize these results in a simple model of competition. Productive industries (with growing oligopolists) expand real output and hold down prices, raising consumer welfare, while maintaining or reducing their workforces, lowering labor’s share of output….”

Sharat Ganapati, “Growing Oligopolies, Prices, Output, and Productivity,” Georgetown University, January 30, 2019, https://papers.ssrn.com/sol3/papers.cfm

Richard Dobbs, et al, “The New Global Competition for Corporate Profits,” McKinsey Global Institute, September 2015, http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-new-global-competition-for-corporate-profits

“Globalisation Has Marginalized Many Regions in the Rich World,”The Economist, October 21, 2017, https://www.economist.com/news/briefing/21730406-what-can-be-done-help-them-globalisation-has-marginalised-many-regions-rich-world

Globalisation has marginalised many regions in the rich world

EVEN before the disaster, Scranton had been having a poor century. In 1902 the Lackawanna Steel Company left north-east Pennsylvania in search of better access to transport and a less assertive labour force. The area still had coal, and enough spark to start new industries: in the 1920s a local button-maker became the country’s leading presser of 78rpm records. But after the second world war demand for coal fell. Then, in 1959, miners working coal seams broke through the bed of the Susquehanna river, which flowed into the caverns below like bathwater swirling down a plughole. The mines never recovered.

The damage is in plain sight. The valley through which the Susquehanna runs is lined with shuttered factories. The city of Scranton faced near-bankruptcy in 2012. Yet despite almost a century of economic blows, more than half a million people remain in the area. It is a similar story in a host of other once-proud parts of the industrialised world. They have not found ways to thrive in a digitised, globalised economy. But they have not disappeared.

Politicians have tried to help. State and local governments have spent hundreds of millions of dollars over the past decade on infrastructure and redevelopment projects in the Scranton area, just as they have in Britain’s Teesside, and France’s Pas-de-Calais. By one estimate Pennsylvania spent over $6bn between 2007 and 2016 on corporate subsidies, more than any other state. Much of that was dished out in its depressed north-east. But throwing money around is not enough. To improve the lot of left-behind places, policymakers need more determination and greater consensus on what works.

Playing catch-up

Do better they must. The forces that drive regional disparities are built into the mechanisms of globalisation, which makes them hard to resist. It is true that globalisation could stall or go into reverse. Indeed the desire that it should do so was part of the reason that voters in north-east Pennsylvania swung heavily to Donald Trump in 2016, delivering him the state. It was in a similar spirit that areas of alienation in Britain, like Teesside, voted for Brexit and France’s economically battered north offered strong support to the Front National of Marine le Pen. But even if globalisation were to stop in its tracks, the regions it has weakened would not magically improve.

Economists once thought that, over time, inequalities between both regions and countries would naturally even out. Rich places with more money than investment opportunities would sink money into poorer ones with untapped potential; technological know-how would spread through economies. For much of the 20th century there was evidence to back this up.

Lagging industrialised countries grew much faster than the richest ones in the decades after the second world war. In 1950, for example, real output per person in Italy was 33% of that in America; by 1973 it was 62%. From 1880 to 1980, income gaps across American states closed at an average annual rate of 1.8%: real personal income per person in Florida rose from 33% of that in Connecticut to 82%. Similar convergence occurred across Japanese prefectures and European regions.

At the same time, as geographical differences dwindled within and between industrialised economies, the gap between those economies and the rest of the world widened. American incomes, adjusted for living costs, were a bit less than nine times those in the world’s poorest countries in 1870, but nearly 50 times larger by 1990.

As the 1980s gave way to the 1990s, both trends changed. Regional inequality within rich countries increased. Poorer economies began catching up with richer ones.

Between 1990 and 2010 the rate of economic convergence across American states slowed to less than half what it had been between 1880 and 1980. It has since fallen close to zero. Rich cities started pulling away from less well-off counterparts (see chart 1). According to the Brookings Institution, a think-tank, in the decade to 2015 productivity growth in American metropolitan areas was highest in the top 10% and the bottom 20% (where, by definition, the baseline was low). Struggling middle-income cities like Scranton fell further behind. A recent report by the OECD found that, in its mostly-rich members, the average productivity gap between the most productive 10% of regions and the bottom 75% widened by nearly 60% over the past 20 years.

When countries with lots of low-wage workers begin trading with richer economies, pay for similarly skilled workers converges. Those in poor economies grow richer while in rich countries workers get poorer. The effects are felt more in some places than others, and not only because the sort of people who lose out to trade tend to live in similar places. Globalisation did direct damage to many local and regional economies because of the way those regions work.

Not going global

Firms—particularly manufacturers—often do better when they are close together. A maker of industrial machinery saves on costs when it is near the firms that provide it with raw materials or components, as well as to its customers. A cluster of manufacturers attracts workers. Where there are a lot of firms and workers, new ideas are spawned and spread.

Similar dynamics apply in other industries. Financial firms do well in New York because they are close to the banks that finance them and clients that hire them, and there is a vast pool of specialised talent. Startups in Silicon Valley have access to financing, customers and new ideas they will not easily find elsewhere, not to mention competitors’ employees to filch.

The size of such clusters depends on the size of the economy. Open a national economy to a world’s worth of trade and the scale changes. Firms can sell to customers in other countries as well as in their own, and those in the most productive clusters see their existing advantages pay off. More sophisticated financial firms in London outcompete those in Frankfurt; California’s internet firms overwhelm competitors in Paris. Producers in less fortunate regions either have to up their game, specialise, move or go under.

Increasing returns of this sort do not imply that trade is a zero-sum game. A larger, more integrated market enables production at more efficient scale and increased global output. Consumers gain access to cheaper and better goods and services (including new foreign varieties). They do imply, however, that production will become more geographically concentrated. Cities with long-standing industrial traditions that could get by in a smaller economy find themselves bleeding talent and jobs.

The past few decades have been good for the richest firms and places. They are as productive as ever; America’s slowing productivity is the result of increasingly poor performance by firms below the upper ranks. Across a wide range of industries the share of output generated by America’s top four metropolitan areas for each industry has risen, often substantially. In the financial industry their share of output rose from 18% to 29%, and in retail, wholesale and logistics from 15% to 21% between 2002 and 2014 (see chart below).

Since 2013, the share of high-salary tech jobs found in America’s eight largest technology hubs has risen, according to a Analysis by Jed Kolko, an economist at Indeed, an online jobs site. Similarly, from 1997 to 2015 London’s share of Britain’s gross value added rose from 19% to 23%.

There are several reasons why the poorer regions of rich economies did not adjust as well to the winners-take-more geography of globalisation. One is that technology seems to be moving from place to place less easily than it used to. An OECD study published in 2015 looked at the way in which productivity gains spread from “frontier” firms operating at the highest productivity levels. Since 2001 new technologies have percolated from leading firms in one country to equivalent firms in other countries more quickly. Globally competitive firms have got better at mastering complex new technologies. And fending off global rivals seems to sharpen the incentives of managers at these firms to copy other successful ones.

But it is a different story within borders. Diffusion of technology from top firms in one country to laggard firms in the same country has slowed down. The authors of the study reckon that a lack of interest in adapting technologies to local circumstances may account for part of this, suggesting that the more the best firms focus on a global (rather than domestic) market, the slower productivity-improving techniques and technologies spread locally. The rise of superstar firms means that fewer places are home to businesses operating at the productivity frontier and that domestic investment is lower than it should be. In less dynamic local markets, nonsuperstars seem neither willing nor able to adopt the best technology.

Mobile moans

The rational response to such divergent economic fortunes is to up sticks. In the most successful developing countries people move to new centres of progress with alacrity, as they did in America and Europe in the 19th and early 20th centuries. The population of Shanghai doubled from 1980 to 2010, just as Manchester’s did from 1811 to 1841.

But people in the rich world are less able and willing to move to thriving places than in the past. America, once inveterately itinerant, has settled down a lot (see chart 3). Even so, it is still more footloose than Europe. Each year just over 2% of Americans move across state lines, whereas only 1.5% of Europeans move between regions within their home country. Despite the freedom of movement created by the EU’s single market, only 0.37% move from one country to another. But mobility in America is on the decline.

At the same time, the push to leave failing places has weakened. The growth of the welfare state limits the chances that declining cities will disappear. In the 19th century, mining towns like Bodie, California—which once boasted several thousand people, a newspaper and a railway station—emptied out entirely when local mines closed. Today government benefits and pension payments spare people the horrible choice between moving or penury. Indeed, they can encourage people who would otherwise move to stay put, because meagre fixed incomes go further in places where living costs have tumbled.

Recent work by David Schleicher, of Yale University, recounts the ways that state and local benefits also impede movement. Public employees face strong incentives to stay put; according to one estimate, the pension of a teacher who spends 30 years in one school system is about twice that of a teacher who splits her career between two. Some benefits are tied to staying put, precisely because the authorities fear a brain drain. A new affordable college programme in New York, for example, requires beneficiaries to stay in the state after graduation for as many years as they received assistance.

A diminished tendency to leave places that are not doing well is not just a matter of welfare policy and the size of the state. People do not just change jobs if they move home. They also sever social ties, from churches to hunting clubs. Lighting out for new territories means leaving behind family and friends, something that today’s ageing populations may find harder than the younger populations of the past. Ageing populations have other effects. Grown-up children may need to care for ailing parents; grandparents may provide a crucial source of child care. For these and other reasons, many working-age adults are finding it harder to move far from their parents than previous generations.

Finding your place

Help—either to make it easier to set up in a successful place, or to leave a failing one—would be a boon to many, especially the young, skilled and ambitious. By making them more productive, it would probably boost GDP. But it could make life harder still for the least mobile members of society. Were New York more accessible to young Pennsylvanians, Scranton’s problems would not disappear; they would just be concentrated in a smaller, older and poorer population. Hence the attraction of policies that help people by helping the places where they find themselves.

The subsidies and tax incentives showered on north-eastern Pennsylvania are hardly unique; the rich world abounds in efforts to jump-start the economies of benighted places. Economists are generally sniffy about them, with some justification. In January, for example, American Paper Bag moved its corporate headquarters near to Scranton, thanks in part to employment tax credits, funding for workforce training and a $1.4m subsidised government loan. But the firm’s arrival is expected to create only 38 jobs.

“Enterprise zones”, which typically use tax incentives and hiring subsidies to encourage businesses into areas of concentrated poverty and joblessness, do little good. California’s 42 enterprise zones have failed to raise employment in targeted areas, according to analysis by Mr Kolko and David Neumark, of the University of California at Irvine.

Other studies find increases in employment and wages that are modest at best. In the zones franches urbaines with which France started to experiment in the 1990s, small businesses are temporarily exempted from taxes and some social-security contributions. Most of the employment these zones have created appears to be due to firms from elsewhere moving in, which may explain why surrounding neighbourhoods typically experienced employment falls roughly on a par with the zones’ gains.

Analysis of the effects of EU structural funds—money invested in poorer regions to promote convergence—finds that such spending appears to boost local output and reduce unemployment, but not necessarily in a sustainable way. A recent study of Cornwall and South Yorkshire showed that the funds improved the economic outlook of those British regions, with unemployment rates in the two declining towards the national average. In 2006, though, South Yorkshire lost access to the funds, and its gains fell away.

Some interventions do seem to produce lasting change. Just over 1,000km south-west of Scranton sits the city of Greenville. It is the largest population centre in the north-west of South Carolina, which was once a thriving centre of textile manufacturing; its fast-flowing rivers powered scores of mills, which remained long after the waterwheels were replaced by other sources of power. In the second half of the 20th century, however, foreign competition gutted the industry and employment collapsed.

In the early 1990s South Carolina’s leaders learned that BMW had plans to open an American factory. Hundreds of cities offered the Bavarians all manner of appetising inducements. South Carolina’s winning offering included more than $100m in tax incentives and a $1-per-year lease for the four square kilometres on which the plant would sit. State and local governments promised meaty investments in infrastructure. Clemson University and local community colleges were helped to develop training programmes that could be co-ordinated with the carmaker and its suppliers. A centre for automotive research in Greenville gave the offer an appetising touch of high-tech umami.

The plant BMW has built there is now the firm’s largest in the world. But the state’s dowry bought more than a dashing groom. The network of firms that supplies BMW has attracted other companies to the region, as have improved transport links to cities in North Carolina and Georgia. Recently Volvo, a Swedish carmaker owned by Geely, a Chinese firm, announced plans to build a factory close to Charleston, a city on South Carolina’s coast. Volvo will buy many parts for its vehicles from suppliers which first came to the state to serve BMW.

South Carolina has not become an all-purpose manufacturing powerhouse. In fact, manufacturing employment is lower in the region than it was when BMW set up shop. But real incomes are growing and the population is booming. Greenville is 70% bigger than it was in 1990.

Its success shows the value of co-ordination. There is a chicken-and-egg problem in establishing a cluster. Firms would like to be where there are workers, suppliers and infrastructure; workers want places where firms are already offering good new jobs. Neither will go where the other isn’t. But action on a number of fronts can, under the right circumstances, attract both at once, creating a kernel round which a cluster can grow large enough to become self-sustaining. After that, it may well invigorate other areas of the local economy.

Strategies which build clusters through such two-way seduction are hard to assess. Work by Michael Greenstone and Richard Hornbeck of the University of Chicago and Enrico Moretti of the University of California, Berkeley compares places that lose out in competitions for big plants to those that win. They find that the arrival of a new plant raises productivity in existing factories—those that were there before the arrival of the big fish. This suggests that within clusters spillovers of technological and organisational know-how are genuine; attracting successful firms is a way to channel knowledge into lagging regions.

Although a new plant can promote the diffusion of technical knowledge and provide jobs that pay well in other companies nearby, not every place can nurture a manufacturing cluster. The success of South Carolina has come about because BMW chose to put its plant there rather than somewhere else.

So rather than attempting to seed clusters, governments could instead focus on spreading know-how in order to increase the attractiveness of laggard regions to productive firms. Improving the investment climate in struggling areas could help. In 2015 the Economic Innovation Group, an American think-tank, published a report by two economists—Jared Bernstein, a Democrat, and Kevin Hassett, a Republican, who now heads Mr Trump’s Council of Economic Advisers—which proposed a way of doing just this.

The idea was to use tax incentives to create new financial vehicles, not unlike venture-capital firms, with a place-specific investment mission. The intention would be to provide access for investors to regional-investment opportunities, turning struggling parts of rich countries into domestic versions of emerging markets. Because a “Cleveland Fund”, say, would be run by a single manager or management team, its investments could be co-ordinated. Investment aimed at enticing businesses and attracting workers could be designed with each other in mind. Legislation based on the idea has been introduced in Congress, with bipartisan support.

The public sector might also play a more direct role. In the late-19th century, America’s federal government set up what are now known as land-grant universities. The legislation gave federal land to states, which were meant to sell it to raise money to create agricultural and mechanical colleges. Those colleges were initially intended to provide a solid technical education for young farmers and engineers across the great American expanse.

They were fairly soon given additional missions: first, to carry out agricultural and engineering research, and second, what was termed “extension”—connecting with working farmers and mechanics in order to spread knowledge of new techniques and best practices. Today, many of those institutions have become fully-fledged research universities, which often co-operate with local firms to commercialise research findings, develop curriculums and place students in new occupations.

Germany has its own, more recent version of this model, called the Fraunhofer Gesellschaft. Started in 1949, the system now consists of a network of 69 applied research institutions, which receive 30% of their funding from national and local government, with a mission to develop and improve technologies in partnership with German firms.

Governments could invest in an effort to expand the reach and remit of such institutions (or to create new ones). These could be given resources to expand training for working adults. And they could prioritise extension once again by helping local firms to master new technologies such as machine learning, augmented reality, additive manufacturing and so on. The better understood a new technology is, the less important it is for those wishing to use it to be near the people and firms where it originates. Post-secondary education could expand its focus from equipping individuals with skills to speeding the flow of knowledge from those who generate it to everyone else, companies included.

If there is a particular reason to favour dispersion of technological know-how and economic activity, it is that the concentration of such things also corresponds to a concentration of power. Since the late 1990s, as you would expect given the logic of globalisation, American industry has become more concentrated and more profitable. Superstar firms can draw on their financial and political capital to quash or take over would-be rivals, leaving fewer high-growth companies with the potential to anchor local economies. Not all these superstar perks are necessarily invidious, but looked at in the context of regional economies they can have striking effects. The announcement in June that Amazon would purchase Whole Foods, a grocer, led to a sharp drop in the share prices of companies like Walmart (headquartered in Bentonville, Arkansas), Target (Minneapolis, Minnesota) and Kroger (Cincinnati, Ohio). Amazon has since asked America’s cities what they would be willing to offer to get its planned second headquarters, equal in status to the original in Seattle. Scores of cities responded with detailed investment plans and juicy incentives: a testament to the power wielded by America’s corporate superstars. But Amazon’s demands—which include a large, skilled workforce, lots of big-city amenities and extensive transport links—suggest that the prize will go to somewhere already thriving, rather than a place in need of the lift a firm like Amazon could provide.

Concentrated politics

It is much harder for a new communications technology to take root in an unpromising place than it was when Scranton rose to dominate the creation of newfangled shellac records. Efforts to accelerate technological diffusion—which might include the more rigorous application of antitrust rules—could raise competitive pressures in the national economy in a way that favoured regional competitors.

But the segregation of cities into a small set of haves and a much larger set of have-lesses tends to mean that elites (in business and politics) rub elbows only with each other. That makes them ever less sensitive to the costs of regional inequality. The growing concentration of corporate offices in the vicinity of Washington, DC is a particularly obvious example of this.

Votes for Brexit and for Mr Trump were often cast as an expression of anger at a system that seems rigged. Unless policymakers grapple seriously with the problem of regional inequality, the fury of those voters will only increase.

Stdu finds US incomes are more widely dispersed among 25-year-olds than they were in the past and that median 25-year-old incomes have drifted downward. The study also finds lifetime incomes grow similarly across the income spectrum as they have historically and concludes that the wider dispersion of 25-year-old incomes is the chief driver of lifetime income inequality

“…Using panel data on individual labor income histories from 1957 to 2013, we document two empirical facts about the distribution of lifetime income in the United States. First, from the cohort that entered the labor market in 1967 to the cohort that entered in 1983, median lifetime income of men declined by 10%-19%. We find little-to-no rise in the lower three-quarters of the percentiles of the male lifetime income distribution during this period. Accounting for rising employer-provided health and pension benefits partly mitigates these findings but does not alter the substantive conclusions. For women, median lifetime income increased by 22%-33% from the 1957 to the 1983 cohort, but these gains were relative to very low lifetime income for the earliest cohort. Much of the difference between newer and older cohorts is attributed to differences in income during the early years in the labor market. Partial life-cycle profiles of income observed for cohorts that are currently in the labor market indicate that the stagnation of lifetime incomes is unlikely to reverse. Second, we find that inequality in lifetime incomes has increased significantly within each gender group. However, the closing lifetime gender gap has kept overall lifetime inequality virtually flat. The increase within gender groups is largely attributed to an increase in inequality at young ages, and partial life-cycle income data for younger cohorts indicate that the increase in inequality is likely to continue. Overall, our findings point to the substantial changes in labor market outcomes for younger workers as a critical driver of trends in both the level and inequality of lifetime income over the past 50 years….”

Fatih Guvenen,Greg Kaplan, Jae Song, and Justin Weidner, “Lifetime Incomes in the United States over Six Decades,” NBER, April 2017, http://www.nber.org/papers/w23371

"...The past thirty years have seen a dramatic decline in the rate of income convergence across states and in population flows to high-income places. These changes coincide with a disproportionate increase in housing prices in high-income places, a divergence in the skill-specific returns to moving to high-income places, and a redirection of low-skill migration away from high-income places. We develop a model in which rising housing prices in high-income areas deter low-skill migration and slow income convergence. Using a new panel measure of housing supply regulations, we demonstrate the importance of this channel in the data...."

Peter Ganong and Daniel Shoag, “Why Has Regional Income Convergence in the US Declined?”Journal of Urban Economics, November 2017, https://www.sciencedirect.com/science/article/abs/pii/S0094119017300591

Drew Desilver, "Immigrants don’t make up a majority of workers in any U.S. industry,"Pew Research Center, March 16, 2017, https://www.pewresearch.org/fact-tank/2017/03/16/immigrants-dont-make-up-a-majority-of-workers-in-any-u-s-industry/

Immigrants don’t make up a majority of workers in any U.S. industry

Immigrants are more likely than U.S.-born workers to be employed in a number of specific jobs, including sewing machine operators, plasterers, stucco masons and manicurists. But there are no major U.S. industries in which immigrants outnumber the U.S. born, according to a Pew Research Center analysis of government data.

There are two main ways to look at the kinds of work people do: by industry (that is, the business their employer is engaged in) and by occupation (the kind of work they do on the job). To get a sense of the work immigrants to the U.S. do most frequently, we relied on 2014 workforce estimates by Pew Research Center. The estimates, based on augmented data from the Census Bureau’s 2014 American Community Survey, cover all workers ages 16 and older who reported being in a civilian industry or occupation, including both lawful and unauthorized immigrants.

Private households were the most immigrant-intensive “industry” in 2014. Of the 947,000 people working for private households, 45% were immigrants, with lawful immigrants slightly outnumbering unauthorized immigrants. The industries with the next-biggest shares of immigrant workers were textile, apparel and leather manufacturers (36%) and the farm sector: A third (33%) of the nearly 2 million agriculture workers in 2014 were born outside the U.S.

While these industries had the biggest share of immigrant workers, they weren’t the biggest overall employers of immigrants, since industries with a smaller share of immigrants may have more of them in absolute numbers.

The overall U.S. workforce - U.S.-born and immigrant (both lawful and unauthorized) - is concentrated in a relatively small number of industries. But while the 10 biggest-employing industries are the same for U.S.-born and lawful immigrant workers (and in almost the same order), the employment pattern among unauthorized immigrants is markedly different.

Retail, for instance, was the single biggest employer of lawful immigrants (10% of all lawful immigrant workers), followed by educational services (8%) and non-hospital health care services (7%). By contrast, the top industry for unauthorized immigrant workers was construction, which included 16% of all unauthorized immigrant workers. Construction was followed by eating and drinking places, which had 14% of unauthorized immigrant workers, and administrative and support services (9%). Those three industries each included between 5% and 7% of lawful immigrants.

Any given industry employs workers in many different occupations, and people may do much the same job in any number of different industries. The occupational group with the highest share of immigrants in 2014 was farming, fishing and forestry: Nearly half (46%) of the 1.2 million people in those occupations were foreign born. More than a third (35%) of the 6.7 million people in building and grounds cleaning and maintenance occupations were immigrants, as were 27% of the 8.3 million people in construction and extraction occupations.

And as with industries, the distribution of occupations differs significantly between lawful and unauthorized immigrants. More than half of all unauthorized immigrant workers in 2014 were in just four occupational groups: construction and extraction; building and grounds cleaning and maintenance; food preparation and serving; and production. In contrast, those four groups accounted for only about a quarter of lawful immigrants’ jobs. The biggest occupational sectors for lawful immigrant workers were office and administrative support, sales, and management (each with 9% to 10% of the total).

The immigrant share of the U.S. workforce has grown over time. Back in 1995, according to Pew Research Center estimates, immigrants (lawful and unauthorized) made up about 12% of the total civilian workforce. The lawful-immigrant share has risen gradually, from an estimated 9% in 1995 to 12% in 2014; the unauthorized-immigrant share rose from about 3% in 1995 to 5% in 2005, but has been roughly stable ever since. Immigrants, and their U.S.-born children, are projected to drive growth in the nation’s working-age population for at least the next two decades.

Views on immigration’s impact on U.S.-born workers have shifted significantly over the past decade, according to a Pew Research Center survey released last year. Americans then were almost evenly divided, with 42% saying the growing number of immigrants working in the U.S. helps American workers and 45% saying it hurts workers who were born in the U.S. In 2006, 55% said having more immigrants hurt U.S. workers, with just 28% saying it helped them.

Note full report attached (pulled a few tables from full report and embedded them here)

Note according to Pew Btw 1991-2010 (In 2011 prices andppP) the median disposable income for a middle three person household for the US +9.2%

France +30% (but there baseline was < 40,000)

Germany +1.5% (note this is the former west Germany only)

UK +34.7%

“..While the U.S. middle class may be smaller than those in Western Europe, its standard of living - as measured by its median income - is higher. That raises a question: What shares of adults in Western European countries have the same standard of living as the American middle class? In other words, what would the middle-class share in Western European countries be if the middle class were defined as adults living in households with the same incomes as middle-class households in the U.S.? In 2010, middle-class households in the U.S. had incomes ranging from $35,294 to $105,881 - that is, two-thirds to double the overall median income of $52,941. This U.S. standard can be applied to any country in Western Europe after incomes are adjusted for cost-of-living differences across countries. (Incomes in this analysis are adjusted to reflect a household of three and are expressed in 2011 prices. They are also converted to purchasing power parity dollars, which adjusts for cost-of-living differences across countries. For more, seefull methodology.)When the Western European countries the Center analyzed are viewed through the lens of middle-class incomes in the U.S., the share of adults who are middle class decreases in most of them. The greatest decline is in Italy, where the middle-class share in 2010 falls from 67% under that country’s national income standard to 44% under the U.S. income standard. In other words, 44% of Italians had the same standard of living as 59% of Americans who were in the middle class in 2010…”

Rakesh Kochhar, “Through An American Lens, Western Europe’s Middle Classes Appear Smaller,” Pew Research Center, June 5, 2017, https://www.pewresearch.org/fact-tank/2017/06/05/through-an-american-lens-western-europes-middle-classes-appear-smaller/Western Europe’s middle classes, by U.S. income standards

Recent research byCharles I. Jones and Peter J. Klenowfinds that economic well-being in their sample of Western European countries is similar to that of the U.S. when welfare estimates are broadened to include measures of leisure, mortality and inequality. For example, they estimate that while per capita income in France is only 67% of the level in the U.S., the broader measure of welfare for France is 92% of the level of welfare in the U.S.

Overall, regardless of how middle class fortunes are analyzed, the material standard of living in the U.S. is estimated to be better than in most Western European countries examined. But to the extent that governments in Western Europe are more likely to provide services to households that may not be captured in household income, such as the National Health Service in the UK, it is possible that differences in the quality of life between the U.S. and Western Europe are narrower.

An expansion of the lower-income share in Western European countries when the U.S. standard is applied is typically accompanied by a decrease in the upper-income share - that is, the share of adults living in households with incomes greater than the incomes of the American middle class. In France, for example, the upper-income share falls from 9% to 4% and the lower-income share increases from 17% to 33% when the U.S. income standard is applied. Luxembourg, where incomes are higher than in the U.S., is an exception to these trends. Under the U.S. income standard, the upper-income share in Luxembourg increases from 8% to 18% and the lower-income share decreases from 17% to 8%.

Applying U.S. incomes as the middle-class standard also boosts the estimated shares of adults who are in thelower-incometier in most Western European countries (i.e., living in households with incomes less than the minimum needed to be in the American middle class). For example, in Denmark, the share of adults living in lower-income households increases from 14% to 28% under the U.S. standard. And a slight majority of adults in Italy and Spain (an estimated 53% each) are in lower-income households by U.S. standards, up from 22% and 24% respectively based on those countries’ incomes.

In most Western European countries studied, applying the U.S. standard shrinks the middle-class share by about 10 percentage points - from 80% to 70% in Denmark, for example. But the middle-class shares of Luxembourg and Norway are unchanged; their overall median incomes equal or exceed that of the U.S.

When the Western European countries the Center analyzed are viewed through the lens of middle-class incomes in the U.S., the share of adults who are middle class decreases in most of them. The greatest decline is in Italy, where the middle-class share in 2010 falls from 67% under that country’s national income standard to 44% under the U.S. income standard. In other words, 44% of Italians had the same standard of living as 59% of Americans who were in the middle class in 2010.

In 2010, middle-class households in the U.S. had incomes ranging from $35,294 to $105,881 - that is, two-thirds to double the overall median income of $52,941. This U.S. standard can be applied to any country in Western Europe after incomes are adjusted for cost-of-living differences across countries. (Incomes in this analysis are adjusted to reflect a household of three and are expressed in 2011 prices. They are also converted to purchasing power parity dollars, which adjusts for cost-of-living differences across countries. For more, seefull methodology.)

While the U.S. middle class may be smaller than those in Western Europe, its standard of living - as measured by its median income - is higher. That raises a question: What shares of adults in Western European countries have the same standard of living as the American middle class? In other words, what would the middle-class share in Western European countries be if the middle class were defined as adults living in households with the same incomes as middle-class households in the U.S.?

The share of the adult population living in middle-class households in 2010 also varies by country. Among the countries examined, the middle-class share in Western Europe ranged from 64% in Spain to 80% in Denmark and Norway. By comparison, the U.S. lagged behind, with a middle-class share of 59% in 2010.

In the Center’s analysis, the middle class in a country consists of adults living in households with disposable incomes ranging from two-thirds to double the country’sownmedian disposable household income (adjusted for household size). This definition allows middle-class incomes to vary across countries, because national incomes vary across countries.

The median disposable (after-tax) income of middle-class households in the U.S. was $60,884 in 2010. With the exception of Luxembourg - a virtual city-state where the median income was $71,799 - the disposable incomes of middle-class households in the other 10 Western European countries in the study trailed well behind the American middle class.

The American middle class is smaller than middle classes across Western Europe, but its income is higher, according to a recentPew Research Center analysisof the U.S. and 11 European nations.

Through an American lens, Western Europe’s middle classes appear smaller

Charles Jones and Peter Klenow, “Beyond GDP? Welfare Across Countries And Time,” American Economic Review, 2016, http://klenow.com/Jones_Klenow.pdf

“…..As an example, suppose we wish to compare living standards in France and the United States. GDP per person is markedly lower in France: France had a per capita GDP in 2005 equal to just 67 percent of the US value. Consumption per person in France was even lower—only 60 percent of the United States, even adding government consumption to private consumption. However, other indicators looked better in France. Life expectancy at birth was around 80 years in France versus 77 years in the United States. Leisure was higher in France: Americans worked 877 hours (per person, not per worker) versus only 535 hours for the French. Inequality was substantially lower in France: the standard deviation of log consumption was around 0.54 in the United States but only 0.42 in France. Our welfare metric combines each of these factors with the level of consumption using an expected utility framework.We do this in two ways. First, we use detailed micro data from household surveys for 13 countries to provide a measure of welfare with as few assumptions as possible. Then, we use publicly available multi-country datasets to construct cruder welfare measures for 152 countries. Cross-checking these “macro” results with the detailed “micro” results suggests that there is valuable information even using the coarse multi-country datasets. Our consumption-equivalent measure aims to answer questions such as: what proportion of consumption in the United States, given the US values of leisure, mortality, and inequality, would deliver the same expected utility as the values in France?In our results, lower mortality, lower inequality, and higher leisure each add roughly 10 percentage points to French welfare in terms of equivalent consumption. Rather than looking like 60 percent of the US value, as it does based solely on consumption, France ends up with consumption-equivalent welfare equal to 92 percent of that in the United States…Average Western European living standards appear much closer to those in the United States(around 85 percent for welfare versus 67 percent for income)when we take into account Europe’s longer life expectancy, additional leisure time, and lower inequality…”

Charles Jones effort to make cross country comparisons of living standards mentioned by Pew. Includes strong assumptions about value of leisure time and doesn’t control for compositional effects driving down life expectancy in US (ie black population) but if you look at his welfare measure US still looks okay, average Western European living standards 67% by income measure, 85% by his welfare measure.

Aswath Damodaran, “A Viral Market Update IX: A Do It Yourself S&P 500 Valuation,” Musing On Markets, June 4, 2020, http://pages.stern.nyu.edu/~adamodar/

ERP soared early in Covid event, peaking at more than 7% in mid-March, and have steadily dropping since to btw 5.3-5.5% on June 1 remaining above pre-crisis levels.

Highly imperfect blog post, but a good turn of phrase, "...Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’..."

"... The US suffers massive negative economic consequences from its position as issuer of the dominant reserve currency—the effects of which are unevenly distributed. Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’; a situation in which the reliance on exporting a single commodity raises the exchange rate and thus squeezes out the production of tradeable, value-added goods in favor of services and financial rents....For the United States,this single commodity just happens to be the dollar. The mechanism behind this process is not hard to understand. From the point of view of simple accounting, every asset must be matched by a liability. That means that a surplus on the capital account—or the desire of the world to purchase safe, US dollar-denominated, assets—is offset by a deficit on the current account. Thus, the United States budget deficit and its trade deficit are both endogenous to the dollar system. When US budget deficits fall either as the result of an increased trade surplus, or the cutting of the budget, financial risk increases as markets substitute safe US government debt for risky collateral, such as the infamous mortgage backed securities of the 2008 crisis. The most visible cost of the disease is the steady appreciation of the dollar since the 1980s, despite a falling US share of global gross domestic product. The main domestic symptom has been the rising costs of non-tradable goods—such as medicine, real estate rents, and education—over tradable goods. This disconnect is at least in part responsible for the country’s low rate of inflation, falling wage share, and increased economic insecurity despite access to a wider range of consumer goods...It is hard to see how the US is economically benefiting from this system. In the early post-war years, it might have been true—in a narrow, arithmetic sense—that this arrangement was, economically, a net benefit for the United States. The cost of having a reserve currency was smaller after the war, simply because the non-US share of global GDP was considerably smaller than it is now. In the present, however, now that the American share of a larger pie is relatively smaller, the costs of the global demand for dollars are higher. Most other governments would, in fact, actively discourage substantial and sustained purchases of their currency...."

Yakov Feygin and Dominik Leusder, "The Class Politics of the Dollar System,"Phenomenal World, May 1, 2020, https://phenomenalworld.org/analysis/the-class-politics-of-the-dollar-system

The Class Politics of the Dollar System

The global dollar system has few national winners. The typical frame for understanding the US dollar is that of “exorbitant privilege.” But the role of the dollar in structuring the international financial system and defining the relationship between a hegemonic US and the rest of the world is ambiguous—as is the question of who exactly benefits from the current arrangement. Dollar primacy feeds a growing American trade deficit that shifts the country’s economy toward the accumulation of rents rather than the growth of productivity. This has contributed to a falling labor and capital share of income, and to the ballooning cost of services such as education, medical care, and rental housing. With sicknesses like these, can we say for certain that the reserve currency confers substantial benefits to the country that provides liquidity and benchmark assets denominated in that currency?

For the rest of the world, the ills are clear enough. In developing countries, the need to insure their economies against currency crises and debt deflation has meant the accumulation of dollars at the expense of necessary domestic investment. These policies are usually accompanied by a suppression of consumption and incomes to establish a permanent trade surplus vis-à-vis the dollar system. And in many countries, the dollar system allows corrupt elites to safely transport their ill-gotten earnings to global banking centers located in jurisdictions with opaque ownership laws.

A closer look at the underlying dynamics that sustain this arrangement reveals why seemingly no one wants to ‘buck the dollar’ but why all countries, including the US, have an interest in doing so.

Rather than viewing the dollar system as primarily a national tool of the United States government, we should understand it as a consequence of a globalized economy that privileges the preferences of financial elites for the free, international movement of capital. The system rests not on uniformly active support for the dollar as a global currency, but on the absence of robust international monetary governance and accommodations to international money markets. The dollar’s present centrality does not come from the priorities of United States national security or interests. Rather, it is rooted in the preferences of private actors in the global money market that mediates between financial institutions, political and business elites, and states. Traditional views of Westphalian sovereignty are not sufficient to explain the cleavages caused by the dollar in the ‘matrix’ of interlocking balance sheets that make up the global financialized economy. While the dollar system has undoubtedly had a disproportionately negative effect on developing countries, the main fault lines that emerge from the dollar system are along class, rather than national lines.

In this context, it might be tempting to retreat to national boundaries and to advocate for de-globalization of various kinds. However, the fact that the dollar system is primarily based on social, rather than geopolitical conflict means that the best solutions suggest at a reform of the system in a manner that empowers people at the bottom of the global social hierarchy.

The Contours of the Dollar System

The global accumulation of wealth and payments for trade and other transactions are largely denominated in dollars, making it the dominant currency for credit and invoicing. Because most of the entities operating in this system do not fall within the purview of the Federal Reserve, most dollars are supplied via offshore interbank credit, funded by dollar deposits at non-US banks, or ‘eurodollars’. These offshore transactions require safe, dollar-denominated collateral to manage their liquidity—preferably United States Treasury debt. Zoltan Pozsar has long highlighted this feature of the offshore financial plumbing, warning of a ‘black hole’ in the dollar funding market. Offshore dollar pools depend on the liquidity of treasuries and near substitutes as collateral to raise cash in the event of a margin call.

The reason for these dollar pools is twofold. First is the need to fund trade. The Eurodollar system facilitates trading relationships between countries with different currencies by giving them access to a common stable currency in which to denominate trade—the dollar. Dollar credit allows the execution of contracts without actual, US-issued currency being exchanged. Instead, the system functions as an exchange of IOUs to deliver receipts at various periods of time. Banks in major money centers clear this system of credit using a combination of time accounts and, if necessary, repurchase agreements to obtain dollars via short-term loans typically collateralized by US treasury debt.

Because 80% of trade in emerging market economies is denominated in dollars, firms with receipts in a domestic currency acquire unsustainable debt in dollars if the domestic currency falls. For this reason, central banks attempt to stockpile dollar assets, most commonly US debt. To acquire them, they usually run a persistent trade surplus by repressing the real wages of their workers. This might be sustainable in the short run, but in the long run it leads to periods of economic stagnation, or international trade and currency wars.

The second driver of these offshore dollar pools is wealth inequality and outsized corporate returns. Large corporations, pension funds, and extremely wealthy individuals cannot bank their money in the retail banking system. Instead, they hold them in pools of dollar liquid denominated assets that can be converted into dollars quickly. While this ‘shadow banking’ system has legitimate uses, it also facilitates tax evasion and kleptocratic corruption. The repression of real wages only compounds this trend. Ubiquitous global trade imbalances drive more returns to owners of capital, increasing inequality.

The dollar system thus facilitates and fuels the power of elites who have an interest in maintaining the status quo. A globalized system with a dominant key currency aids the accumulation of rents at the expense of higher consumption from workers in exporter countries and the hoarding of those rents in the legal black hole of offshore finance.

A financial Dutch disease

The fracture between elite beneficiaries and working losers under the dollar system exists within the United States as well. The US suffers massive negative economic consequences from its position as issuer of the dominant reserve currency—the effects of which are unevenly distributed. Demand for high quality dollar-denominated assets saddles the United States with a financial ‘Dutch Disease’; a situation in which the reliance on exporting a single commodity raises the exchange rate and thus squeezes out the production of tradeable, value-added goods in favor of services and financial rents. Classic examples of countries where ‘Dutch disease’ has taken place have usually been commodity exporters such as Holland in the 1970s (after the discovery of North Sea Oil) as well as Nigeria and Russia. Dutch diseased economies often result in a shrinking, narrow elite whose power rests on income from sales of the single commodity, or the services and management that bloom around the cash flows generated by this commodity.

For the United States, this single commodity just happens to be the dollar. The mechanism behind this process is not hard to understand. From the point of view of simple accounting, every asset must be matched by a liability. That means that a surplus on the capital account—or the desire of the world to purchase safe, US dollar-denominated, assets—is offset by a deficit on the current account. Thus, the United States budget deficit and its trade deficit are both endogenous to the dollar system. When US budget deficits fall either as the result of an increased trade surplus, or the cutting of the budget, financial risk increases as markets substitute safe US government debt for risky collateral, such as the infamous mortgage backed securities of the 2008 crisis.

The most visible cost of the disease is the steady appreciation of the dollar since the 1980s, despite a falling US share of global gross domestic product. The main domestic symptom has been the rising costs of non-tradable goods—such as medicine, real estate rents, and education—over tradable goods. This disconnect is at least in part responsible for the country’s low rate of inflation, falling wage share, and increased economic insecurity despite access to a wider range of consumer goods. While the American consumer can now purchase an ever expanding set of appliances, electronics, and small luxuries, services that are necessary for economic mobility and household sustainability are increasingly out of reach.

It is hard to see how the US is economically benefiting from this system. In the early post-war years, it might have been true—in a narrow, arithmetic sense—that this arrangement was, economically, a net benefit for the United States. The cost of having a reserve currency was smaller after the war, simply because the non-US share of global GDP was considerably smaller than it is now. In the present, however, now that the American share of a larger pie is relatively smaller, the costs of the global demand for dollars are higher. Most other governments would, in fact, actively discourage substantial and sustained purchases of their currency.

If this system is so sub-optimal, why is it still in place? The answer is that it is the locus of a new kind of transnational class politics.

The class politics of dollarization

Frameworks for understanding the persistence of the dollar system tend to vary from from reductionist to outdated, often examining international politics with discrete nation states as the main unit of analysis. In this view, the dollar is a product of hegemonic US interests, wielded as a tool of statecraft. But global financialization has upended this framework: elite interests are not aggregated domestically but internationally, and are transmitted via the balance-of-payments mechanism and the financial system. US leaders and technocrats do not directly compel developing countries to invest their balance-of-payments inflows into Treasuries; nor is it really the active decision making of, say, the People’s Bank of China that’s led to the accumulation of Chinese dollar reserves.

Let us assume that Chinese authorities wanted the People’s Bank of China to reduce its dollar holdings. In order to resolve their external imbalance with the US, they would need to resolve their domestic imbalances. That is because basic accounting identities hold that everything not consumed domestically is saved; those savings are then ‘exported’, largely to the United States, in the form of capital flows. As Michael Pettis has consistently argued, the low household share of income in China (high levels of income inequality caused by rapid growth) have led to a high domestic savings rate and underconsumption. Too great a share of the national income is in the hands of high-saving entities with dollar liquidity preferences, such as high net worth individuals and large corporations. To reverse this imbalance, income would have to be transferred from these powerful interests to China’s workers—a dynamic described by Albert Hirschman as early as 1958. Barring a drastic redistribution of income, perhaps the People’s Bank could simply seek out another reserve currency and an equivalent safe asset. But neither of these would be forthcoming, since no country other than the US has deep, liquid markets in a benchmark asset.

The implicit assumption here, however, is that the financial sector and corporate elites actually want an alternative. There is no reason to believe that this is the case. The system, as it is constituted, does not have many disadvantages for current entrants, and any alternative would require a distributional shift. China’s vast dollar reserves illustrate how emerging market economies with domestic imbalances caused by years of lopsided growth can use dollar-denominated assets as a politically convenient method of maintaining growth without having to resort to intersectoral transfers—from, say, profits to wages. Developed world exporters like Japan and Germany also maintain a growth model based on cost competitiveness and wage suppression. An increased role for the Euro or the Yen would undercut these models. For resource exporters, it facilitates corruption and tax evasion through simple capital flows. In the United States, it benefits financial industry elites, who can reap the rewards from intermediating capital inflows into US markets, while the cost of non-tradable services like tuition, healthcare and real estate rises for everyone else. Across all countries, elites win.

The preference of global elites, and therefore global markets, for the dollar system demonstrates the futility of applying a Westphalian framework to the global financial system. Herman Mark Schwartz, one of the foremost experts on the dollar and American hegemony, offers a better way to think about the dollar—namely, as the state money of a quasi-imperial global system, in which the different economic regions are tied together by a shared reserve currency. This ‘imperial currency’ is more of a by-product, and less of an enabler of (or even an enabling constraint on) American expansionism and military adventurism, both of which preceded the reserve currency status of the dollar.

Two clear geopolitical advantages accrue to the US because of its reserve currency status: dollar liquidity swap lines, and the dreadful power of American sanctions. But the ability of the US to wield that power has been built ad hoc, over several decades, and in periods of great contingency. Recent research shows the international dollar system was not purposely designed, but rather assembled by elites who believed that international money markets must not be actively structured toward a notion of the common good, but backstopped. The system of swap networks that we associate with the 2008 financial crisis had its origins in efforts to backstop the eurodollar as early as the 1960s, and a decision by leaders that it would be better to facilitate it than to fight or restructure it. As long as domestic inequalities are not resolved at the expense of these elites, the dollar will remain hegemonic.

The source of the Federal Reserve’s power over the eurodollar system—and the vulnerability of emerging markets within it—is the global reliance on central bank backstopping. In the 2008-9 crisis, the Fed deployed so-called central bank liquidity swap lines to backstop the global system. These took the form of reciprocal currency arrangements between central banks: The Fed replenished the dollar reserves of other central banks in exchange for local currency. The real power of the swap lines is not who gets them but rather who doesn’t. In a recent piece for the Nation, Andres Arauz and David Adler highlight how these swap lines can be used for a form of monetary triage, in which the United States decides which countries have better prospects for weathering economic storms. However, the Covid-19 crisis has thrown even this into doubt. Not only has the Fed extended its swap support to a wider range of countries than in 2008 and 2009, but on March 31, 2020, it opened a repo facility with foreign international monetary authorities (FIMA). The FIMA Repo Facility allows other central banks and other monetary authorities to directly exchange their Treasury securities for dollars, thereby avoiding having to sell their Treasuries outright into an illiquid market. In doing so, the Fed created an additional source of dollar liquidity for any central bank.

Reforming the dollar system

Dedollarization seems like a distant prospect. There is no equivalent euro-denominated safe asset, for instance, and capital markets in the eurozone are not as developed as those of the US. Attempts to deepen capital markets and introduce a common debt instrument have been dealt repeated blows by EU countries belligerently opposed to financial risk sharing. The recent scuttling of the ‘coronabond’ proposal provides ample testimony on this dynamic. As long as countries like Germany and the Netherlands remain firm in their opposition to necessary financial integration in the eurozone, the currency composition of international reserves will remain heavily skewed towards the dollar. The political prospects for creating Bancor, a synthetic currency first proposed by John Maynard Keynes, are equally bleak.

Instead, we should opt for managing the current system to mitigate its harms, a process in which the United States must take a leading role. We have some proposals.

First, the United States should offer its trade counterparties direct access to the Federal Reserve balance sheet via institutionalized swap lines that are part of trade agreements. The United States should give its partners access to high quality dollar liquidity in exchange for maintaining a balanced trade policy. This tradeoff would decrease the American trade deficit, while placing upward pressure on the real wage in trade counterparties.

Secondly, as Nathan Tankus recently suggested, the Federal Reserve can extend its swap line to the International Monetary Fund (IMF). This would allow the IMF to act like a global fiscal policy maker by issuing so-called special drawing rights (SDRs). In their current form, SDRs are largely illiquid and cannot be converted into dollars or even other currencies in which emerging market debt is denominated. Providing swap line backstops to SDRs is a politically expedient way of using the institutions we already have to ensure that SDRs are actually redeemable in dollars. Tankus’ proposal has been advocated in a letter to the G20 signed by many world leaders under the leadership of former UK Prime Minister Gordon Brown.

Thirdly, the United States should begin to view its deficit not as a problem but as a public resource, and to manage it like energy exporters use sovereign wealth funds to avoid Dutch Disease. To administer this public good, the US should establish a series of public banks to fund specific economic investment initiatives. The Federal Reserve would guarantee the debt of these institutions by discounting it at a penalty rate for reserves or United States Treasury debt or dollar reserves. These securities could thus trade at a slightly higher yield than treasuries and provide investors with an alternative product to general purpose treasuries. The liabilities of these investment vehicles would provide global collateral and promote financial stability while also offsetting the effects of dollar hegemony on domestic industry via permanent, active investment.

But the right set of tools are not enough. To go beyond managing the status quo, we need to first recognize that the dollar system evolved not as a tool of imperial statecraft, but as the project of a transnational elite that has effectively usurped control of an international public good. As long as active confrontation with elite interests remains wanting, the dollar system will persist as a zero-sum game—a state of affairs that, in the long run, is unsustainable for the global political economy. And, following Herbert Stein’s quip: that which is unsustainable will not be sustained.

“..Evidence of progress in France and Germany is not so clear-cut. Employment gaps for men in Germany and the UK seem quite similar for first and second-generation immigrants but France has a number of groups in which the second-generation immigrants seem to be doing worse than the first. For women, patterns are similar but there is clearer general evidence of a reduction in employment gaps for the second generation….”

Yann Algan, Christian Dustmann, Albrecht Glitz and Alan Manning, “The Economic Situation Of First And Second Generation Immigrants In France, Germany And The United Kingdom,” The Economic Journal, 2010, http://www.christiandustmann.com/content/4-research/41-the-economic-situation-of-first-and-second-generation-immigrants-in-france-germany-and-the-united-kingdom/algan_etal_2010_ej.pdf