Macro Roundup

Chris Flood, "Private equity barons grow rich on $230bn of performance fees,"Financial Times, June 15, 2020, https://www.ft.com/content/803cff77-42f7-4859-aff1-afa5c149023c

AEI analysis of Biden’s tax proposal“…Biden’s tax proposals would raise roughly $3.8 trillion between 2021 and 2030. His proposals would primarily raise taxes on high-income households and make the tax code more progressive. Biden’s proposals would raise effective tax rates on both individuals and businesses, resulting in lower output in the first decade. His plan would reduce debt-to-GDP in the second decade, leading to slightly higher GDP. However, in the long term, his plan would not raise enough to stabilize debt-toGDP and would lead to a 0.2 percent smaller economy…. Under Biden’s tax proposals, the top 1 percent would face the largest tax increase. That group’s after-tax income would fall by 17.8 percent. Overall, 72 percent of new tax revenue in 2021 would come from the top 1 percent of tax filers. This group would face an average tax increase of $118,674. This group would continue to face the largest tax increase in 2030….”

Kyle Pomerleau, Jason DeBacker and Richard Evans, “An Analysis Of Joe Biden’s Tax Proposals,” American Enterprise Institute, June 2020, https://www.aei.org/wp-content/uploads/2020/06/An-Analysis-of-Joe-Bidens-Tax-Proposals.pdf

New NBER finds significant spillover effects from Government R&D efforts during the second world war beyond just creating technology clusters (ie positive spillover from the clusters the government spending put in motion)

“….During World War II, the U.S. government launched an unprecedented effort to mobilize science for war: the newly-established Office of Scientific Research and Development (OSRD) entered thousands of R&D contracts with industrial and academic contractors, spending one to two orders of magnitude more than what the government was previously investing in science. In this paper, we study the long-run effects of the OSRD-supported research effort on U.S. invention. Using data on all OSRD contracts, we show that these investments had large effects on the direction and location of U.S. invention and high-tech industrial employment, setting in motion agglomeration forces which shaped the technology clusters of the postwar era. Our results demonstrate the effects of a large, mission-driven government R&D program on the growth of domestic technology clusters and long-run technological progress…. Rather, it appears entire local research ecosystems sprung up in the locations and technology areas where OSRD activity was concentrated – including universities, federally-funded research centers, and private invention.The long-lived effects of the OSRD may in turn be reflected in higher-order patent citation linkages, and supported by university spillovers to local invention, federally-funded research centers, Cold War defense R&D spending, or other local research activities – all of which we are exploring in ongoing research. As it stands, the evidence suggests the OSRD built up local scientific and technological capabilities that allowed local innovation to thrive after the war. Our final set of results explores how the OSRD affected not just inventive output, but entire local economies. Using U.S. County Business Patterns (CBP) data, we take our analysis to county-level manufacturing employment in industries closely tied to the wartime research effort. We show that in counties with more OSRD-supported patents in electronics technology classes, employment in the Communications and Electronics industries is substantially higher after the war – even conditional on total related patenting. Empirically, a doubling of OSRD patents in the 1940s is associated with 60-65% higher employment in these industries in the 1970s. Our interpretation is that the OSRD not only deepened local technology clusters and increased local invention over the long-run, but also created jobs in associated manufacturing industries….Given that these effects are largest in columns controlling for total employment, our interpretation of this evidence is that counties where the wartime research was performed were subsequently more likely to be loci of electronics and communications manufacturing, and in turn more specialized in these high-tech industries versus others. The upshot, however, is that the seeds planted by the wartime research effort appears to have also sprouted local industrial activity, spilling over from the inventive sector to the local economy more broadly…”

Daniel Gross, Bhaven Sampat, “Inventing the Endless Frontier: The Effects of the World War II Research Effort on Post-war Innovation,” National Bureau Of Economic Research, June 2020, https://www.nber.org/papers/w27375

William Galston, "Aftershocks of the ‘Dream Deferred’,"Wall Street Journal, June 16, 2020, https://www.wsj.com/articles/aftershocks-of-the-dream-deferred-11592327940

Aftershocks of the ‘Dream Deferred’

I do not believe that economics alone can explain the protests in cities throughout the U.S. Endless indignities against African-Americans have stoked anger and resentment. The desire to be treated with respect and enjoy equal recognition as a fellow citizen and human being goes deeper than dollars and cents.

Still, economic opportunity matters a great deal, especially in the U.S., where the American Dream links liberty to the promise of material progress.

Many Americans believe that after landmark civil-rights laws and Supreme Court decisions in the 1950s and ’60s, the past 50 years have witnessed steady progress for African-Americans into the economic mainstream. And yes, there has been progress. But nearly all of it occurred between 1970 and 2000. During the past two decades, economic stagnation has been the main story.

Between 1969 and 1999, the poverty rate for African American families fell by 8.6 percentage points, from 32.2% to 23.6%. Since then, it has fallen by only 2.8 points, to 20.8% in 2018.

In other areas, African-Americans have fared even worse during the past 20 years. Between 1972 and 1999, median household income for white households rose by 20% adjusted for inflation, from $55,540 to $66,759. But it rose even faster—by 32%—for African-American households, from $31,963 to $42,196. Between 1999 and 2018, overall income growth slowed, and African-Americans fell behind. While white household income grew by a modest 6%, African-American household income shrank by 2%.

Median annual earnings followed a similar path. After rising by 26% for black men between 1969 and 1999, earnings fell 4% in the ensuing years. For black women, earnings rose by 50% between 1969 and 1999, but only 3% since then.

The trend in household wealth is even more dramatic. Between 1969 and 1999, black wealth rose from 10% to 16% as a share of white wealth. Since then, it has fallen all the way back to 10%.

Housing is the major reason, because African-Americans are more dependent on homeownership for wealth accumulation than whites are. After World War II, despite blatantly discriminatory mortgage lending practices by banks and the Federal Housing Administration, the African-American homeownership rate rose steadily, reaching 45.9% of households by 1999, before peaking at 49.7% in 2004.

The 2007-09 recession was a blow to all homeowners, but especially to African-Americans, who experienced a wave of foreclosures. As of the first quarter of 2020, their homeownership rate stood at just 44%, down nearly 6 points from its peak, and about 2 points lower than three decades earlier.

African-Americans have been buffeted by these trends despite taking advantage of educational opportunities. Between 1969 and 2019, the share of African-Americans graduating from high school rose from 32% to 88%. During this same period, the share of African-Americans with at least a four-year college degree quintupled, from less than 5% to more than 25%.

In absolute terms, these educational gains paid off. African-Americans with high-school diplomas outearned dropouts by $7,900 a year, and African-Americans with four-year college degrees earned $23,300 more than high-school graduates. But these gains did little to close the income gap. Whites continued to earn substantially more than African-Americans at every level of education.

Against the backdrop of economic stagnation and thwarted expectations during the past two decades, the constant irritation of aggressive policing tactics such as stop-and-frisk was even harder to bear. South Carolina Republican Tim Scott, one of three African-Americans in the Senate, revealed in a 2016 speech that he had been stopped by the police seven times that year, usually for “driving a new car in the wrong neighborhood.” He asked his Senate colleagues to “imagine the frustration, the irritation, the sense of a loss of dignity that accompanies each of those stops.” Four years later, these procedures are still widely used.

***

In January 1959, when I was a boy, my parents took me to see the premiere of Lorraine Hansberry’s “A Raisin in the Sun” at the Shubert Theater in New Haven, Conn. Nothing in my upbringing or experience had prepared me to understand the play.

As we left the theater, I recall someone asking me what I thought the title meant. I had no idea. Many years later, I learned that it was a quotation from a poem, “Harlem” by Langston Hughes. Here is that poem, in all its haunting brevity:

What happens to a dream deferred?

Does it dry up

like a raisin in the sun?

Or fester like a sore—

And then run?

Does it stink like rotten meat?

Or crust and sugar over—

like a syrupy sweet?

Maybe it just sags

like a heavy load.

Or does it explode?

“…Between 1969 and 2019, the share of African-Americans graduating from high school rose from 32% to 88%. During this same period, the share of African-Americans with at least a four-year college degree quintupled, from less than 5% to more than 25%.In absolute terms, these educational gains paid off. African-Americans with high-school diplomas outearned dropouts by $7,900 a year, and African-Americans with four-year college degrees earned $23,300 more than high-school graduates. But these gains did little to close the income gap. Whites continued to earn substantially more than African-Americans at every level of education…. Between 1972 and 1999, median household income for white households rose by 20% adjusted for inflation, from $55,540 to $66,759. But it rose even faster—by 32%—for African-American households, from $31,963 to $42,196. Between 1999 and 2018, overall income growth slowed, and African-Americans fell behind. While white household income grew by a modest 6%, African-American household income shrank by 2%...The trend in household wealth is even more dramatic. Between 1969 and 1999, black wealth rose from 10% to 16% as a share of white wealth. Since then, it has fallen all the way back to 10%.Housing is the major reason… The 2007-09 recession was a blow to all homeowners, but especially to African-Americans, who experienced a wave of foreclosures. As of the first quarter of 2020, their homeownership rate stood at just 44%, down nearly 6 points from its peak, and about 2 points lower than three decades earlier….”

“…In the catalog of racial disparities, a black American is 50% more likely to suffer hypertension, 16% more likely to die of cancer—and nearly 500% more likely to be murdered and 600% more likely to become a murderer. These homicide-related disparities not only are “historic and pervasive,” write Columbia University’s Brendan O’Flaherty and Rajiv Sethi in a 2010 paper, but weirdly disproportionate to every other black-white disparity associated with crime, including being poor, being a high school dropout, living in an urban neighborhood, being from a single-parent household, and even being a victim of a lesser assault. The authors convincingly suggest: “Any satisfactory explanation must take into account the fact that murder can have a preemptive motive: people sometimes kill simply to avoid being killed” in places where law enforcement is utterly ineffective at deterring and solving murders….Isabel Sawhill of the Brookings Institution observed that “everyone living in such an environment is exposed to lifestyles that are not conducive to joining mainstream American society.” That is, good behavioral norms may not be of much use in such places. A widely praised 2015 book by Los Angeles crime reporter Jill Leovy cited the embattled community of Watts and argued that “where the criminal justice system fails to respond vigorously to violent injury and death, homicide becomes endemic.” In the Economist, a reviewer likened the result to a “parallel culture of rough justice that operates independently of the legal system, like other ‘vengeance cultures’ from Northern Ireland to South Africa.” Starting in the 1980s, researchers identified 880 census tracts (out of 56,000) where social disorder made a law-abiding life difficult. About two million people, including many who are not black, lived in such places in 2005. So, except in the media and popular culture, and perhaps in the minds of police officers, these neighborhoods hardly represent the experience of 41 million African-Americans….Among the unhelpful gestures: elite opposition to charter schools, high marginal tax rates on people moving from welfare to work, and housing subsidies tied to downtrodden and jobless neighborhoods. Now a noisy sliver has taken up the chant “defund the police,” as if doing so wouldn’t leave these neighborhoods even less protected while suburban communities and private enclaves double down on security spending….“white liberals have moved so far to the left on questions of race and racism that they are now, on these issues, to the left of even the typical black voter.”…Zach Goldberg of Georgia State University, who developed much of the data, coined the ironic label “America’s white saviors” for these activists….”

Holman Jenkins, Jr., "Race Problem or Crime Problem?,"Wall Street Journal, June 16, 2020, https://www.wsj.com/articles/race-problem-or-crime-problem-11592348133

Race Problem or Crime Problem?

The public overwhelmingly supports peaceful protests against police violence, but other kinds of crowds are relevant too. Take the crowds that turn out routinely when charter-school places are up for grabs. Or the crowd so large that police were needed when a Chicago housing project invited residents to participate in a lottery that would relocate a random few to suburban communities with functional schools and job markets.

Why does this matter? What many Americans consider the intractable problem of race relations may actually have more to do with places than it does with people.

You’ve heard that a black American is 2.5 times as likely as a white American to be killed by police, but maybe not that a white homicide victim is 2.5 times as likely as a black homicide victim to have been killed by police. A black person is so much more likely to be a homicide victim generally that police killings are actually a smaller proportion of total black killings.

In the catalog of racial disparities, a black American is 50% more likely to suffer hypertension, 16% more likely to die of cancer—and nearly 500% more likely to be murdered and 600% more likely to become a murderer.

These homicide-related disparities not only are “historic and pervasive,” write Columbia University’s Brendan O’Flaherty and Rajiv Sethi in a 2010 paper, but weirdly disproportionate to every other black-white disparity associated with crime, including being poor, being a high school dropout, living in an urban neighborhood, being from a single-parent household, and even being a victim of a lesser assault.

The authors convincingly suggest: “Any satisfactory explanation must take into account the fact that murder can have a preemptive motive: people sometimes kill simply to avoid being killed” in places where law enforcement is utterly ineffective at deterring and solving murders.

This is not a completely new insight. Baltimore’s Abell Foundation long ago called for policies to “allow poor families to leave violent neighborhoods in the short run, instead of being trapped in the low-performing schools and poor quality housing that exist while their communities await larger redevelopment investments.”

Isabel Sawhill of the Brookings Institution observed that “everyone living in such an environment is exposed to lifestyles that are not conducive to joining mainstream American society.” That is, good behavioral norms may not be of much use in such places.

A widely praised 2015 book by Los Angeles crime reporter Jill Leovy cited the embattled community of Watts and argued that “where the criminal justice system fails to respond vigorously to violent injury and death, homicide becomes endemic.” In the Economist, a reviewer likened the result to a “parallel culture of rough justice that operates independently of the legal system, like other ‘vengeance cultures’ from Northern Ireland to South Africa.”

Starting in the 1980s, researchers identified 880 census tracts (out of 56,000) where social disorder made a law-abiding life difficult. About two million people, including many who are not black, lived in such places in 2005. So, except in the media and popular culture, and perhaps in the minds of police officers, these neighborhoods hardly represent the experience of 41 million African-Americans.

Their residents also overwhelmingly want out. Unfortunately, the thrust of public policy in recent decades has been to keep them in place, partly because doing so maintains some of the safest seats in American politics. Among the unhelpful gestures: elite opposition to charter schools, high marginal tax rates on people moving from welfare to work, and housing subsidies tied to downtrodden and jobless neighborhoods. Now a noisy sliver has taken up the chant “defund the police,” as if doing so wouldn’t leave these neighborhoods even less protected while suburban communities and private enclaves double down on security spending.

Which highlights a new problem: A year ago I quoted a parade of progressive commentators worrying that, in the words of Vox’s Matthew Yglesias, “white liberals have moved so far to the left on questions of race and racism that they are now, on these issues, to the left of even the typical black voter.”

Zach Goldberg of Georgia State University, who developed much of the data, coined the ironic label “America’s white saviors” for these activists. New York magazine’s Andrew Sullivan described how political correctness in their hands had become a club that progressive elites mainly use on each other.

The charge of “systemic racism” is their obsession. Using the word rightly, however, “systemic” in America has been our attempt to protect individual rights against the amoral chaos of nature, including human nature, from which all kinds of racial and other irrational hatreds emerge. This may be a losing battle in the long run—nature will prevail, civilization won’t. But in the meantime we could help more people escape bad neighborhoods in favor of places where the law actually protects and supports their quest for a better life.