Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, June 17, 2020

AI Summary. African-American high-school graduation rose from 32% to 88% over five decades and educational attainment is associated with higher earnings, yet whites earn more at every education level. Black wealth as a share of white wealth rose from 10% to 16% before returning to 10%, with housing market losses cited as a major factor.

William Galston Wall Street Journal
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Btw 1969 and 2019, African-American high school graduation rates surged from 32% to 88% & college degrees from 25%. Despite gains, economic disparities persist.

Have Black educational gains closed racial income and wealth gaps?

Core argument: The share of African-Americans graduating from high school rose from 32% in 1969 to 88% in 2019, yet whites earn more at every education level.

Between 1969 and 2019, the share of African-Americans graduating from high school surged from 32% to 88%, and those with a college degree increased from 25%. Despite these educational gains, economic disparities persist. African-Americans with high-school diplomas earn $7,900 more annually than dropouts, and those with college degrees earn $23,300 more than high-school graduates. However, income gaps remain, with whites earning more at every education level. From 1972 to 1999, African-American household income rose by 32%, but between 1999 and 2018, it shrank by 2%, while white income grew by 6%. Black wealth as a share of white wealth rose from 10% to 16% between 1969 and 1999 but fell back to 10% by 2020, largely due to housing market setbacks. The 2007-09 recession hit African-American homeowners hard, reducing their homeownership rate to 44% by early 2020, down nearly 6 points from its peak.

Takeaways by Macro Roundup® AI

  1. The share of African-Americans graduating from high school rose from 32% in 1969 to 88% in 2019, yet whites earn more at every education level.
  2. African-American household income rose 32% from 1972 to 1999 but fell 2% between 1999 and 2018, while white household income grew 6% over that later period.
  3. Black wealth as a share of white wealth climbed from 10% to 16% between 1969 and 1999 before falling back to 10% by 2020, largely due to housing market setbacks, with African-American homeownership at 44% by early 2020.

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….”

Ed Comment:What struck me about this statistic and the income stats in the article (that you should summarize) is whether the one-time saturation of education into the population wasn't more beneficial to whites than blacks and therefore widened the income gap. That would make statistics showing the closing of the gap, understate the true closing. For example, if we could see the changing gap for a given test score (rather than all score combined) would it show more of a closing than the gap we see with all scores combined? We know for example, the black-white income gaps for given test scores are fairly small. If more whites have higher test scores and education has a bigger impact on the income of higher scorers, did education open an income gap that other things (partially closed)?

AI Summary. Black Americans are roughly 500% more likely to be murdered and 600% more likely to commit murder than white Americans, disparities larger than gaps in poverty or education. The author argues weak law enforcement in high-crime areas fosters preemptive violence as self-protection, and that policy has trapped residents in those neighborhoods.

Holman Jenkins Wall Street Journal
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Black Americans face homicide-related disparities that are disproportionately higher than other racial disparities, with a 500% higher likelihood of being murdered and a 600% higher likelihood of becoming a murderer compared to white Americans.

Does weak law enforcement explain large racial gaps in homicide?

Core argument: Black Americans are 500% more likely to be murdered and 600% more likely to commit murder than white Americans, disparities that exceed other racial gaps and do not track poverty or education differences.

Black Americans face homicide-related disparities that are disproportionately higher than other racial disparities, with a 500% higher likelihood of being murdered and a 600% higher likelihood of becoming a murderer compared to white Americans. These disparities are not aligned with other socio-economic factors like poverty or education, suggesting a unique issue within crime statistics. The ineffectiveness of law enforcement in certain areas contributes to a culture where preemptive violence is a survival tactic. This environment hinders integration into mainstream society, as noted by Isabel Sawhill of the Brookings Institution. Public policies have often trapped residents in these high-crime areas, exacerbating the problem. Addressing these disparities requires systemic changes that allow individuals to escape environments where law enforcement fails to protect them, rather than focusing solely on racial narratives.

Takeaways by Macro Roundup® AI

  1. Black Americans are 500% more likely to be murdered and 600% more likely to commit murder than white Americans, disparities that exceed other racial gaps and do not track poverty or education differences.
  2. Ineffective law enforcement in certain areas fosters a culture in which preemptive violence serves as a survival tactic, an environment that hinders integration into mainstream society, as Isabel Sawhill of the Brookings Institution notes.
  3. Public policies have often trapped residents in high-crime areas, and addressing homicide disparities requires systemic changes that let individuals escape places where law enforcement fails to protect them rather than a focus on racial narratives.

“…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.

Thursday, June 18, 2020

AI Summary. The US pandemic response may widen economic inequality, echoing the post-financial-crisis pattern in which the affluent saw income and wealth restored quickly while many Americans faced prolonged stagnation or permanent loss. One argument holds that low productivity growth is the central challenge, with wages growing more slowly than GDP leaving businesses little incentive to invest in productivity-enhancing technology.

James Politi and James Fontanella-Khan Financial Times
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The US pandemic response may exacerbate economic inequality, mirroring post-financial crisis trends where wealth recovery favored the affluent.

Does the US pandemic response widen economic inequality?

Core argument: The US pandemic response risks widening economic inequality by mirroring the post-financial-crisis recovery, in which the wealthy saw income and wealth quickly restored while many Americans faced prolonged stagnation or permanent loss.

The US pandemic response may exacerbate economic inequality, mirroring post-financial crisis trends where wealth recovery favored the affluent. While the wealthy saw rapid income and wealth restoration, many Americans experienced prolonged stagnation or permanent loss. Economist Michael Strain emphasizes that addressing low productivity growth is crucial, as it underpins broader economic challenges. With wages growing more slowly than GDP, businesses lack incentives to invest in productivity-enhancing technology, potentially stalling economic progress and widening the divide. This dynamic risks entrenching disparities, as those with capital benefit disproportionately from economic rebounds, leaving others behind.

Takeaways by Macro Roundup® AI

  1. The US pandemic response risks widening economic inequality by mirroring the post-financial-crisis recovery, in which the wealthy saw income and wealth quickly restored while many Americans faced prolonged stagnation or permanent loss.
  2. Economist Michael Strain argues that addressing low productivity growth is crucial because it underpins broader US economic challenges.
  3. With wages growing more slowly than GDP, businesses lack incentives to invest in productivity-enhancing technology, a dynamic that risks stalling economic progress while those with capital benefit disproportionately from rebounds.

“..“We are very much at risk of having this exacerbate inequality just like the financial crisis did,” says Heather Boushey, executive director of the Washington Center for Equitable Growth, a left-leaning think-tank. “In the US after the financial crisis, it was the wealthy who saw their incomes and wealth come back fairly quickly, in the first couple of years, while the rest of America had to wait, and for many, in fact, wealth never recovered.”…Michael Strain, an economist at the American Enterprise Institute, a conservative think-tank, says that focusing on limiting inequality should not be the immediate priority, arguing that other problems such as low productivity growth are more important to tackle….”

James Politi and James Fontanella-Khan, "Why The US Pandemic Response Risks Widening The Economic Divide,"Financial Times, June 18, 2020, https://www.ft.com/content/d211f044-ecf9-4531-91aa-b6f7815a98e3

Ed Comment:Oy! High-skill productivity is growing faster than GDP because the investment opportunities (e.g., IT) exceed the supply of properly trained talent. Algebraically, if something grows faster than average, then something else must grow slower than average, namely low-skilled productivity. An unconstrained supply of low-skilled labor from low-skilled immigration, trade with low-wage economies, and automation exacerbates the problem. Growth will increase wages if the supply of labor is constrained, or employment if it’s not. US employment has grown twice as fast as Europe (and still America’s middle-class incomes are 30 to 70% higher). Were the supply of low-skilled workers constrained, high-skilled productivity growth would get transmitted to low-skilled productivity growth in the following way: Increasing demand for a limited supply of low-skilled labor would raise wages, which would prune off the least valuable work (e.g., landscaping), which would increase the marginal product of labor, which would raise wages. An unconstrained supply of low-skilled labor causes its productivity to grow slowly. Strain doesn’t see the above linkage to supply. (more below on that.) he thinks of productivity growth as an independent variable. Probably, in large part, because he sees it only linked to capital investment, like Pettis. Pettis uses a two factor model, instead of 3 factors—labor and capital, without talent. And weirdly he doesn’t start with causality. So business doesn’t invest if low-skill productivity is growing slower than GDP. And productivity doesn’t grow faster without investment. Unlike me, he never explains why productivity is growing slower than GDP. It just is. It’s empirically true. But he provides nothing more than a circular reason.I’m always surprised how much difficulty economists have following all the macro links around. In part, I think most economists lack the training, knowledge, brain power, and determination to think through all the linkages carefully. The also have a certain determination not to admit to themselves that certain truths are true—in this case, that low-skilled immigration increase the supply of labor, which reduces the marginal product of labor and wages. (in Glenn’s case, that the multiplier probably does justify his proposed investments and therefore they must be justified for humanitarian reasons.) The purpose of thinking is to stop thinking. In the case of low-skilled immigration, they are too quick to justify their wishful thinking (to support low-skilled immigration because it’s virtuously humanitarian) with “supply creates it’s own demand.” Yes, it does; but what at what marginal product of labor? Aside from the supply of labor (and capital per worker), the primary thing driving up the marginal product of low-skilled labor from “waiters waiting on waiters”, is the supply of high-skilled relative to the supply of low-skilled. Only I see that.

Michael Pettis Comment:According to this important article, “an economist at the American Enterprise Institute, a conservative think-tank, says that focusing on limiting inequality should not be the immediate priority, arguing that other problems are more important to tackle, such as the ‘slow rate of productivity growth’”. But what if the two problems are related? As long as wages grow more slowly than GDP, why would businesses invest in productivity-enhancing technology?With wages so low there is little pressure to do so (unlike in the 19th and early 20th centuries, when US wages were the highest in the world and rising rapidly). In fact it is more profitable for companies individually to force down wages, and with wages continuing to grow slowly, businesses collectively don’t face the demand for their products that justifies large increases in productivity-enhancing investment. This is a self-reinforcing process, and it is probably not a coincidence at all that the slowdown in American productivity growth overlaps with the rise in American income inequality. This by the way is also what happened in Germany after the 2003-04 labor reforms.

AI Summary. A global savings glut has not produced a corresponding investment boom; higher net saving in surplus economies has coincided with lower domestic saving and higher consumption in deficit economies rather than more investment. Proposed explanations include weak demand, capital inflows shifting production toward less investment-intensive non-traded activities, and market concentration weakening investment incentives.

Martin Sandbu Financial Times
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Global savings glut has not led to a corresponding investment boom, raising questions about why surplus economies’ exported capital is consumed rather than invested by deficit economies.

Why has a global savings glut not produced more investment?

Core argument: The global savings glut has not produced a corresponding investment boom: increased net saving exported by surplus economies has shown up in deficit economies as lower domestic saving and higher consumption rather than higher investment.

Despite a global savings glut, there has not been a corresponding investment boom, raising questions about why surplus economies' exported capital is consumed rather than invested by deficit economies. On a global level, saving and investment must balance, yet increased net saving from surplus economies has not led to higher investment in deficit economies but rather to lower domestic saving and higher consumption. Weak demand can hold back investment when macroeconomic policy fails to shift pessimistic expectations. Additionally, net capital inflows into technologically advanced economies like the US may shift productive structures towards non-traded activities, which are less investment-intensive. Furthermore, increased market concentration, potentially encouraged by low interest rates, weakens investment incentives. These factors contribute to the disconnect between savings and investment, highlighting complex macroeconomic dynamics.

Takeaways by Macro Roundup® AI

  1. The global savings glut has not produced a corresponding investment boom: increased net saving exported by surplus economies has shown up in deficit economies as lower domestic saving and higher consumption rather than higher investment.
  2. Weak demand can hold back investment when macroeconomic policy fails to shift pessimistic expectations.
  3. Net capital inflows into technologically advanced economies such as the US may shift productive structures toward less investment-intensive non-traded activities, while greater market concentration, potentially encouraged by low interest rates, weakens investment incentives.

Martin Sandbu, "Savings Gluts And Investment Droughts,"Financial Times, June 18, 2020, https://www.ft.com/content/6360c193-2fa8-488a-b8d3-f2fec3f203a2

“..economists have picked up on one of the key puzzles thrown up by Klein and Pettis’s argument: if there is a global savings glut, how come there has not been a global investment boom to absorb the greater desire for saving?... On a global level saving and investment must balance. So it cannot be that the world as a whole invests less than it saves. To be precise, then, the question is why an increase in net saving exported as capital from surplus economies has not been matched by higher investment in deficit economies but instead by lower domestic saving and higher consumption. To simplify, why has the exported capital from “savings glut” countries been consumed rather than invested by the importers? (This way of stating the problem, by the way, suggests it is too one-sided to condemn surplus countries exclusively. When economies run up current account deficits while their rates of public and private investment drop, this must also reflect their own internal dynamics. I also disagree that capital exports from surplus economies have falling employment in deficit countries as the “inevitable consequence”, as Klein and Pettis suggest. The only advanced economy that saw consistently falling employment — outside of recessions — in the period in which global macroeconomic asymmetries grew was the US, and that had much to do with its own specific pathologies.)… a number of possible mechanisms to explain the failure of investment to respond to increased savings. One is that weak demand can hold back investment when macroeconomic policy fails to unlodge pessimistic expectations. (We need not accept that central banks are unable to do this to believe in this mechanism, just that they are unwilling to stimulate enough.)Another is a “financial resource curse” through which net capital inflows into technologically leading economies such as the US shift their productive structure towards non-traded activities that may be less investment-intensive. This would be a specific case of the broader problem that beyond a certain point, financial deepening is bad for growth because it allocates capital to less productive uses. The third possible mechanism is that investment incentives are weakened by more market concentration which, in turn, may have been encouraged by low interest rates….”

Sandbu on the key question arising from Pettis’ new book

Ed Comment:Oy! Sandbu (and his new book) is a particularly virulent stain of the misguided macro economists I was describing in the last email. The last Rognlie paper confirmed a large piece of the puzzle (which I have known for years). Neither savers nor investor are very sensitive to interest rates—the price that equilibrates savings. In large part, that’s because the marginal cost of capital is (constrained) equity not (unconstrained) debt. If not interest rates, then what constrains investment? Risk and expected return, especially since non-financial investors are overwhelmingly undiversified. What is needed to assess and manage risk? Properly trained talent. Good ideas can and do become money-losing ideas if you lack the talent to design, implement, and supervise them. So why don’t investors just increase the capital per worker in underdeveloped countries?Because countries are underdeveloped BECAUSE they lack the talent needed to make those investments work. Or said differently the talent is working on projects with higher returns, often project that don’t require much debt (e.g., IT).A guy like Sandbu doesn’t want to see that, so he can’t see it. And again, he only sees an out-of-date 2-factor model—labor and capital without talent.

AI Summary. Americans in metropolitan areas with populations above 1m are over 50% more productive than those in smaller cities, even after controlling for education, experience, industry, and measured cognitive ability. Adding test-score controls reduces the urban wage premium by only 1.15%, suggesting observable ability differences explain little of the gap.

Edward Glaeser and David Mare National Bureau of Economic Research
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Americans residing in metropolitan areas with populations exceeding 1m are over 50% more productive than those in smaller cities, even when accounting for education, experience, industry, and IQ.

Does measured ability explain the wage premium in large cities?

Core argument: Americans in metropolitan areas with populations above 1m are over 50% more productive than those in smaller cities, even after controlling for education, experience, industry, and IQ.

Americans residing in metropolitan areas with populations exceeding 1m are over 50% more productive than those in smaller cities, even when accounting for education, experience, industry, and IQ. This productivity advantage persists despite controlling for AFQT scores, a measure of cognitive ability, which only reduces the urban wage premium by 1.15%. The data suggests that observable ability factors have minimal impact on the urban wage premium, indicating that unobservable factors are not the primary drivers of this productivity differential. This underscores the significant economic benefits of urban living, highlighting the role of cities in enhancing productivity and economic output.

Takeaways by Macro Roundup® AI

  1. Americans in metropolitan areas with populations above 1m are over 50% more productive than those in smaller cities, even after controlling for education, experience, industry, and IQ.
  2. Controlling for AFQT scores, a measure of cognitive ability, reduces the urban wage premium by only 1.15%, indicating that observable ability factors have minimal impact on the premium.
  3. The minimal effect of observable ability controls suggests that unobservable worker characteristics are not the primary drivers of the urban productivity differential.

Glaeser inTriumph of the City"...."Americans who lives in metropolitan areas with more than a million residents are, on average, more than 50 percent more productive than Americans who lives in smaller metropolitan areas. These relationships are the same even when we take into account the education, experience, and industry of workers. They're even the same if we take individuals workers' IQ into account"..."

Edward Glaeser and David Mare, “Cities and Skills,” National Bureau Of Economic Research, May 1994, https://www.nber.org/papers/w4728

“…Regression (10) includes the AFQT variable from the NLSY. This variable is an ability test given to the members of this sample and is one possible measure of omitted ability that is not captured by the standard individual characteristics. In fact, this variable is higher in SMSAs than in the hinterland so it does make it possible that part of the urban wage premium is omitted ability bias. Controlling for AFQT scores causes only a 1.15 % fall in the urban wage premium. As we argued above, since observable ability factors make only small differences in the urban wage premium we find it difficult to believe that unobservable ability factors are driving the ability bias that remains….”

Specifically looks like the support is Table 5, Regression 3 which is showing the AFQT (so ~ an IQ test) the data we looked at trying to crack the code on this earlier this year for race.

The relationship btw relative productivity and IQ is from Glaeser’s 1994 paper “Cities and Skill”

Edward Glaeser, Triumph Of The City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier.” New York Penguin Press, 2011.