Edward Conard

Top Ten New York Times Bestselling Author

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

Macro Roundup


Wednesday, June 10, 2020

AI Summary. Venture capital investment has surged past its 2000 peak, and 48 American venture-backed firms are valued at $1bn or more compared with ten during the dotcom bubble. Because today's large tech firms have scale and strong balance sheets, any fallout is expected to be confined to private markets and a few large firms.

Economist Staff The Economist
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VC investment has surged past its 2000 peak, with 2014 poised to be the largest year for VC investments since then. Major tech firms have collectively invested $66bn in the past year, eight times their 2009 levels and double the VC industry’s total.

Would a tech bust today cause less damage than the last one?

Core argument: Apple, Amazon, Facebook, Google, and Twitter together invested $66bn over the past year in capital spending, R&D, and acquisitions, eight times their 2009 level and double the entire VC industry's total.

VC investment has surged past its 2000 peak, with 2014 poised to be the largest year for VC investments since then. Major tech firms like Apple, Amazon, Facebook, Google, and Twitter have collectively invested $66bn in the past year, eight times their 2009 levels and double the VC industry's total. This investment includes capital spending, R&D, and acquisitions. The private market is also frothy, with 48 American VC-backed firms valued at $1bn or more, compared to ten during the dotcom bubble. Despite these signs of exuberance, today's financial excess is less likely to cause widespread economic damage. Unlike 2000, the firms involved have scale and strong balance sheets, and the potential fallout is expected to be confined to private markets and a few large firms.

Takeaways by Macro Roundup® AI

  1. Apple, Amazon, Facebook, Google, and Twitter together invested $66bn over the past year in capital spending, R&D, and acquisitions, eight times their 2009 level and double the entire VC industry's total.
  2. Venture-capital investment has surged past its 2000 peak, with 2014 set to be the largest year since then, and 48 American VC-backed firms valued at $1bn or more, against ten during the dotcom bubble.
  3. Today's financial excess is less likely than the 2000 crash to cause widespread economic damage, as the firms involved have scale and strong balance sheets and the fallout is expected to be confined to private markets and a few large firms.

“….Take the spending boom by the big, listed tech firms first. It is exemplified by Facebook, which said in October that its operating costs would rise in 2015 by 55-75%, far ahead of its expected sales growth. Forget lean outfits run by skinny entrepreneurs: Silicon Valley’s icons are now among the world’s biggest, flabbiest investors. Together, Apple, Amazon, Facebook, Google and Twitter invested $66 billion in the past 12 months. This figure includes capital spending, research and development, fixed assets acquired with leases and cash used for acquisitions (see chart 1)….That is eight times what they invested in 2009. It is double the amount invested by the VC industry. If you exclude Apple, investments ate up most of the cashflow the firms generated.Together these five tech firms now invest more than any single company in the world: more than such energy Leviathans as Gazprom, PetroChina and Exxon, which each invest about $40 billion-50 billion a year. The five firms together own $60 billion of property and equipment, almost as much as General Electric. They employ just over 300,000 people. Google says it is determined to keep “investing ahead of the curve”. The second area of technology froth is in private markets. Their exuberance was demonstrated on December 4th when Uber closed a $1.2 billion private funding round that valued the five-year old firm at $40 billion. Baidu, China’s biggest search engine, is set to buy a stake, too (see page 101). There are 48 American VC-backed firms worth $1 billion or more, compared with ten at the height of the dotcom bubble, according to VentureSource, a research outfit. In October a software firm called Slack was valued at $1.1 billion, a year after being founded. 2014 looks set to be the biggest year for VC investments since 2000 (see chart 2).

“Frothy.com.” December 20, 2014. The Economist.http://www.economist.com/news/business/21636754-new-tech-bubble-seems-be-inflating-when-it-pops-it-should-cause-less-damage

Frothy.com

IN DECEMBER 15 years ago the dotcom crash was a few weeks away. Veterans of that fiasco may notice some familiar warning signs this festive season. Bankers and lawyers are being priced out of office space in downtown San Francisco; all of the space in eight tower blocks being built has been taken by technology firms. In 2013 around a fifth of graduates from America’s leading MBA schools joined tech firms, almost double the share that struck Faustian pacts with investment banks. Janet Yellen, the head of the Federal Reserve, has warned that social-media firms are overvalued—and has been largely ignored, just as her predecessor Alan Greenspan was when he urged caution in 1999.

Good corporate governance is, once again, for wimps. Shares in Alibaba, a Chinese internet giant that listed in New York in September using a Byzantine legal structure, have risen by 58%. Executives at startups, such as Uber, a taxi-hailing service, exhibit a mighty hubris.

Yet judged by the financial yardsticks of the dotcom era there is as yet no bubble. The NASDAQ index of mainly technology stocks is valued at 23 times expected earnings versus over 100 times in 2000. That year Barron’s, an investment magazine, published an analysis showing that 51 listed technology firms would run out of cash within a year. On December 6th Barron’s repeated the exercise and found only five listed tech firms with wobbly finances.

Instead, today’s financial excess is hidden partly out of sight in two areas: inside big tech firms such as Amazon and Google, which are spending epic sums on warehouses, offices, people, machinery and buying other firms; and on the booming private markets where venture capital (VC) outfits and others trade stakes in young technology firms.

A new tech bubble seems to be inflating. But when it pops, it should cause less damage than the dotcom crash of 2000: Extended Excerpt Image 1


Take the spending boom by the big, listed tech firms first. It is exemplified by Facebook, which said in October that its operating costs would rise in 2015 by 55-75%, far ahead of its expected sales growth. Forget lean outfits run by skinny entrepreneurs: Silicon Valley’s icons are now among the world’s biggest, flabbiest investors. Together, Apple, Amazon, Facebook, Google and Twitter invested $66 billion in the past 12 months. This figure includes capital spending, research and development, fixed assets acquired with leases and cash used for acquisitions (see chart 1).

That is eight times what they invested in 2009. It is double the amount invested by the VC industry. If you exclude Apple, investments ate up most of the cashflow the firms generated. Together these five tech firms now invest more than any single company in the world: more than such energy Leviathans as Gazprom, PetroChina and Exxon, which each invest about $40 billion-50 billion a year. The five firms together own $60 billion of property and equipment, almost as much as General Electric. They employ just over 300,000 people. Google says it is determined to keep “investing ahead of the curve”.

Big firms are also making speculative bets, to add new products and insure themselves against technological change. Amazon is investing in content and recently acquired Twitch, a video-streaming firm. Google is throwing cash at driverless cars, robots and home thermostats. Facebook has acquired Oculus VR, a maker of virtual-reality headsets. Mark Zuckerberg, Facebook’s boss, has said that it will not have an immediate payback: “It’s going to take a bunch of years to get there.”

What are the odds of all this money being spent sensibly? Apple is still tremendously profitable. The other firms have patchier records. Google’s return on capital has halved to about 20%, after accounting for stock-option costs. Amazon has never generated much cash. The longer-term omens are not good. Few firms learn how to create a framework for spending tens of billions of dollars almost overnight.

When previous champions, such as Nokia, Yahoo and Microsoft, made big acquisitions in adjacent areas they often fared badly. There are few obvious sources of restraint at those firms still dominated by powerful leaders who control their companies: Google, Facebook and Amazon. All five of today’s stars have lots of excess cash. Much of this is parked offshore and cannot be brought home without incurring tax, giving an extra incentive to spend it.

A new tech bubble seems to be inflating. But when it pops, it should cause less damage than the dotcom crash of 2000: Extended Excerpt Image 2


The second area of technology froth is in private markets. Their exuberance was demonstrated on December 4th when Uber closed a $1.2 billion private funding round that valued the five-year old firm at $40 billion. Baidu, China’s biggest search engine, is set to buy a stake, too (see page 101). There are 48 American VC-backed firms worth $1 billion or more, compared with ten at the height of the dotcom bubble, according to VentureSource, a research outfit. In October a software firm called Slack was valued at $1.1 billion, a year after being founded. 2014 looks set to be the biggest year for VC investments since 2000 (see chart 2).

Part of what is happening is a shift away from stockmarkets. Entrepreneurs are keen to avoid the bureaucracy involved in initial public offerings. They now have alternative ways to raise cash and to award tradable shares to staff. More institutional investors are buying into private technology firms, alongside VC funds. Unlike in 2000 the firms they invest in already have scale. Uber’s gross sales, of which it keeps about 20%, are expected to hit a run rate of $10 billion by late 2015.

But with many investors chasing a few firms, VC gurus are worried about frothy valuations. The best-known of these, Marc Andreessen, has said valuations are getting “a little warm”, and called for discipline. A banker warns that successful funds’ recent run of profitable exits is encouraging them to take “lottery ticket” bets. Among the most recent tech firms to debut on stockmarkets with huge share-price “pops” are Lending Club, a peer-to-peer lending platform, and New Relic and Hortonworks, two “big data” software firms.

The sins of big, listed tech firms and younger, private ones will be forgiven if their growth continues at a blistering pace for several years: so far there is no clear sign of deceleration. But if these firms do slow down before then, the present investment boom will look like a horrible mistake for the firms and investors that financed it.

For society, though, there is little to fret about. As in 1999-2000, startups and tech giants are creating jobs and investing in new technologies and infrastructure that boost long-term economic growth. But this time round a slump would be unlikely to lead to a broader contagion, since it would be confined to private markets and a few large firms with strong balance-sheets. Silicon Valley still does vanity, bubbles, genius and excess. But when it comes to causing crashes, it has learned to be less evil.

Thursday, June 11, 2020

AI Summary. Wage gaps between poorer and richer U.S. cities narrowed at about 1.4% a year between 1940 and 1980, but this regional convergence then stopped. Using a dynamic spatial equilibrium model that matches observed wage, skill-ratio, and migration patterns, the authors attribute much of the change in cross-city wage differences to skill-biased technical change and agglomeration economies.

Elisa Giannone University of Chicago
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Prior to 1980, US wage gaps btw poorer & richer cities were shrinking at 1.4% annual rate. Post-1980, regional convergence ceased due to skill-biased technical change & agglomeration economies.

Why did wage convergence between poorer and richer U.S. cities stop?

Core argument: The wage gap between poorer and richer U.S. cities narrowed at roughly 1.4% a year between 1940 and 1980, but regional convergence ceased after 1980, attributed largely to skill-biased technical change and agglomeration economies.

Between 1940 and 1980, the wage gap between poorer and richer U.S. cities was shrinking at an annual rate of ~1.4%. However, post-1980, regional convergence ceased, largely due to skill-biased technical change (SBTC) and agglomeration economies. A dynamic spatial equilibrium model was developed to analyze these shifts, successfully matching the quantitative features of U.S. regional wage convergence and reproducing changes in skill ratios and migration patterns across cities. The model's counterfactual analysis indicates that SBTC significantly contributed to the change in cross-city wage differentials, highlighting its role in halting the convergence trend.

Takeaways by Macro Roundup® AI

  1. The wage gap between poorer and richer U.S. cities narrowed at roughly 1.4% a year between 1940 and 1980, but regional convergence ceased after 1980, attributed largely to skill-biased technical change and agglomeration economies.
  2. A dynamic spatial equilibrium model matches the quantitative features of U.S. regional wage convergence and reproduces observed changes in skill ratios and migration patterns across cities.
  3. Counterfactual analysis of the spatial equilibrium model indicates that skill-biased technical change contributed substantially to the change in cross-city wage differentials and to the halt in regional convergence.

“…. Between 1940 and 1980 the wage gap between poorer U.S. cities and richer ones was shrinking at an annual rate of roughly 1.4%. After 1980, however, there was no further regional convergence overall. This paper quantifies the contributions of skill-biased technical change (SBTC) and agglomeration economies to the end of cross-city wage convergence within the U.S. between 1980 and 2010. I develop and estimate a dynamic spatial equilibrium model that looks at the causes of regional convergence and divergence. The model choice is motivated by novel empirical regularities regarding the evolution of the skill premium and migration patterns over time and across space. The model successfully matches the quantitative features of the U.S. regional wage convergence. Moreover, the model also reproduces changes in the skill ratio across U.S. cities, as well as, migration patterns after 1980. Finally, the counterfactual analysis suggests that SBTC explains much of change in cross-city wage differentials….”

Giannone, Elisa. January 4, 2017. “Skilled-Biased Technical Change and Regional Convergence.” University of Chicago.https://home.uchicago.edu/~elisagiannone/files/JMP_ElisaG.pdf

AI Summary. The US has seen a decline in business startups and employment dynamism, with the share of employment at young firms falling by nearly 30% over 30 years. The authors argue this indicates weakened incentives to start new firms and supports policies that encourage entrepreneurship.

Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda Journal of Economic Perspectives
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US business startups and employment dynamism have declined, with the share of employment by young firms decreasing by nearly 30% over the last 30 years

Has US startup activity and employment at young firms declined?

Core argument: The share of US employment at young firms has fallen by nearly 30% over the past 30 years, indicating a reduced role for dynamic young businesses in the economy.

The US has experienced a notable decline in business startups and employment dynamism, with the trend accelerating post-2000. Over the last 30 years, the share of employment by young firms has decreased by nearly 30%, indicating a reduced role for dynamic young businesses in the economy. This decline suggests that incentives for entrepreneurs to start new firms have diminished, impacting economic growth and productivity. While the optimal pace of business dynamics is complex to define, the evidence points to a need for policies that encourage entrepreneurship to revitalize job creation and economic dynamism.

Takeaways by Macro Roundup® AI

  1. The share of US employment at young firms has fallen by nearly 30% over the past 30 years, indicating a reduced role for dynamic young businesses in the economy.
  2. US business startups and employment dynamism have declined, with the trend accelerating after 2000, suggesting that incentives for entrepreneurs to found new firms have diminished.
  3. Although the optimal pace of business dynamics is difficult to define, the evidence points to a need for policies encouraging entrepreneurship to revitalize job creation and economic dynamism.

“…An optimal pace of business dynamics—encompassing the processes of entry, exit, expansion, and contraction—would balance the benefits of productivity and economic growth against the costs to firms and workers associated with reallocation of productive resources. It is difficult to prescribe what the optimal pace should be, but evidence accumulating from multiple datasets and methodologies suggests that the rate of business startups and the pace of employment dynamism in the US economy has fallen over recent decades and that this downward trend accelerated after 2000. A critical factor in accounting for the decline in business dynamics is a lower rate of business startups and the related decreasing role of dynamic young businesses in the economy. For example, the share of US employment accounted for by young firms has declined by almost 30 percent over the last 30 years.These trends suggest that incentives for entrepreneurs to start new firms in the United States have diminished over time. We do not identify all the factors underlying these trends in this paper but offer some clues based on the empirical patterns for specific sectors and geographic regions….”

Decker, Ryan, John Haltiwanger, Ron Jarmin, and Javier Miranda. Summer 2014. “The Role of Entrepreneurship in US Job Creation and Economic Dynamism.”Journal of Economic Perspectives.https://www.aeaweb.org/articles