Macro Roundup

Greg Ip. "The Urgency of Returning to Full Employment,"Wall Street Journal, June 24, 2020, https://www.wsj.com/articles/the-urgency-of-returning-to-full-employment-11593008207

Just an FYI Greg Ip wrote up the Minneapolis Fed study (Attached) we looked at“…We now know the business cycle’s influences aren’t purely cyclical: In the labor market, they cast a long shadow, as A study convincingly shows. The study looks at earnings of prime-aged men (those 25 to 54 years old) since the early 1970s and finds two distinct trends: a steady rise at the top relative to the median, and a saw-toothed decline at the bottom, with all of the decline occurring around recessions.…”

New FRBSL note:“…U.S. bilateral trade balance can vary significantly depending on whether one looks at value-added trade or gross trade. For example, the U.S. trade deficit with Canada and Mexico shrinks considerably and is on average 40 percent smaller when looking at the value-added trade balance as opposed to the gross trade balance. Futhermore, the U.S. trade deficit with Mexico was cut in half in 2015. These changes likely reflect the fact that many exports to the U.S. rely on content from other countries including the U.S., as we saw in the vehicle example. Also, the U.S. trade deficit with China is on average 20 percent smaller when looking at the value-added trade balance as opposed to the gross trade balance, but it is 40 percent larger with Japan and twice as large with South Korea. Again, these changes likely reflect the fact that many Chinese exports to the U.S. rely on higher value-added foreign content(e.g., from Japan and South Korea)….”B. Ravikumar and Brian Reinbold, "Value-Added Trade vs. Gross Trade," Federal Reserve Bank Of St. Louis, June 2020, https://research.stlouisfed.org/publications/economic-synopses/2020/02/14/value-added-trade-vs-gross-tradeValue-Added Trade vs. Gross Trade

2"Measuring Trade in Value Added," inInterconnected Economies: Benefiting from Global Value Chains. OECD Publishing, Paris, 2013.

1de Gortari, Alonso. "Disentangling Global Value Chains." Working Paper, November 2019.

Notes

Conventional trade statistics may have been sufficient when goods were produced entirely within a nation's borders and then exported to other countries; but with increasingly complicated supply chains and an increasingly interconnected global economy, value-added trade can provide a more accurate picture of global trade.

Also, the U.S. trade deficit with China is on average 20 percent smaller when looking at the value-added trade balance as opposed to the gross trade balance, but it is 40 percent larger with Japan and twice as large with South Korea. Again, these changes likely reflect the fact that many Chinese exports to the U.S. rely on higher value-added foreign content (e.g., from Japan and South Korea).

For example, the U.S. trade deficit with Canada and Mexico shrinks considerably and is on average 40 percent smaller when looking at the value-added trade balance as opposed to the gross trade balance. Futhermore, the U.S. trade deficit with Mexico was cut in half in 2015. These changes likely reflect the fact that many exports to the U.S. rely on content from other countries including the U.S., as we saw in the vehicle example.

The Organisation for Economic Co-operation and Development provides value-added trade statistics from 2005-15.2The figure shows the U.S. trade balance from 2005-15 with several major trading partners in terms of real gross trade and real value-added trade.

Additionally, as we saw in the vehicle example above, such measures neglect the role of other countries in the supply chain. One way to combat this issue is to look at the value added, such as labor compensation and profits, by each country at each step of the production process. This provides a better way of incorporating the intricacies of today's global supply chain into trade accounting.

Traditional trade measures record gross, or total, flows of goods and services every time they cross a border. This includes the cost of inputs plus the value added by each country. Such traditional trade measures lead to double counting because countries trade intermediate goods for further processing.

For example, when Mexico assembles a vehicle, only one-third of the vehicle's value is derived from Mexican parts and labor. The rest is due to foreign components; about 74 percent of these foreign parts is imported from the U.S.1However, when Mexico ships this vehicle to the U.S., the entire factory cost of the vehicle, which includes the cost ofall of the partsand assembly, will be added to the U.S. trade deficit with Mexico despite the fact that much of the vehicle's value comes from U.S. parts. In other words, the U.S. would run a much larger trade deficit in terms of gross trade with Mexico than in terms of value-­added trade.

The rise of globalization has led to increasingly complicated supply chains. Raw materials and intermediate goods now move strategically throughout the world before a final good reaches the consumer. Traditional measures of trade often do a poor job of capturing this complexity.

Stone/Wilcox lines up with Brooking’s “Covid Baby Bust” on Covid's impact on fertility, this was counterintuitive to me, would think that's whites (who presumably do more planning around children) given opportunity cost would be more prone to deferring births, "...Our birthrate has never been so low in America. What this means, practically, is that American families have foregone over seven million babies between 2008 (when birthrates were last at replacement rate) and 2020 and,if birthrates remain at 2020 levels for the next decade, will forego nine million more by 2030. Sixteen million fewer children born across two decades than would have been the case if birthrates remained at their 2007 levels is a shocking loss. These lost births are disproportionately felt among Hispanic, Native American, Black and working-class white women.This decline also means that a rising share of American men and women will be childless—current trends suggest that about 25 percent of women born in the 1990s will never have any children.Once again, the most vulnerable women in our society are paying the biggest price for today's family travails....."

Did you ever seeChildren Of Men? Great movie

Lyman Stone and Bradford Wilcox, "Empty Cradles Means a Bleaker Future,"Newsweek, June 24, 2020, https://www.newsweek.com/empty-cradles-means-bleaker-future-opinion-1513214

~ 80% of US residual wage inequality is driven by rising performance-pay incidence and “relatedness” note they use education as opposed to skills (on the job training for example) as a proxy for “relatedness”

“…We classify individuals into the high and low education groups according to their years of schooling. We then compute residual wage inequality for both groups during 1983-2013. The results suggestinequality within the high education group not only appears to be higher but also increases faster than the low education groupthe pattern becomes more prominent in the 1990s and the 2000s. In the high education group, even if we control for more job characteristics including industry, occupation, firm size, location, citizenship etc., about 90% of residual wage inequality still remains. This implies that wage inequality is primarily driven by within-industry/occupation inequality. To further confirm this finding, we decompose residual wage inequality into between-job and within-job components over all industry-occupation pairs. The decomposition result shows that within-job inequality accounts for more than 80% of residual wage inequality between 1983 and 2013,and its contribution to the change ranges from 70% to 110% between 1990 and 2002. To the best of our knowledge, this pattern has not been explored in the literature. In order to explain the aforementioned facts, we propose performance-pay incidence and job relatedness as the two potential causes of within-job inequality, in addition to differential job productivities. Workers in performance-pay position are paid according to how much they contribute, and such payments usually include bonus, commission, piece-rate and tips. The counter-part to this is the payment of a fixed hourly wage….we further examine the relationship between within-job wage inequality and performance-pay incidence. We find a significant positive relationship: jobs with higher performance-pay incidence usually have higher wage inequality. This hints the importance of the rising performance-pay incidence for the widening wage dispersion as observed. With regard to job relatedness, we measure it as the relatedness between the field of study of the highest degree earned and the occupation at the current job. We show that job relatedness has positive wage effect: among workers with similar schooling levels, those whose majors are more related to their jobs usually receive higher compensation than others. Moreover, we find a negative relationship between job relatedness and within-job wage inequality: jobs with more related matches are paid more equally. This implies that a reduction in job relatedness as observed in data could also serve to explain within-job wage inequality.…Over the past few decades, we find that about 80% of the widening residual wage inequality to be within jobs. We propose performance-pay incidence and job relatedness as two primary factors driving within-job inequality and embed them into a sorting equilibrium framework. We show that equilibrium sorting is positive assortative both within-job and across jobs. While performance-pay position amplifies within-job wage inequality through self-selection, the overall relationship between job relatedness and within-job wage inequality is found generally ambiguous. To quantify the role played by these factors, we calibrate the model to the US economy in 2000, where the model can account around 92% of the changes in within-job inequality among the highly educated from 1990 to 2000. Counterfactual analysis shows the contributions of performance-pay incidence and job relatedness are about 42% and 26%, respectively, both higher than that of job-specific productivity. While performance-pay incidence is particularly crucial for within-job wage dispersion in business/professional industry and professional occupation, job relatedness is the most important for mining/goods/construction industry and sales occupation….”

Rongsheng Tang, Yang Tang and Ping Wang, "Within-Job Wage Inequality: Performance Pay and Job Relatedness," National Bureau Of Economic Research, June 2020, https://www.nber.org/papers/w27390

The biggest mistake is to focus on gross, not net, taxes. They ignore transfer payments, like Social Security, which are disproportionately paid to the poor. In doing so, they mistake language for economics.

Messrs. Saez and Zucman’s second mistake is measuring progressivity on a one-year rather than a remaining-lifetime basis. That ignores the fiscal system’s double taxation: Income earned, taxed and saved this year will be subject to future taxation on interest, dividends and capital gains. This omission disproportionately understates taxes for the rich, who save at a higher rate. The current-year focus also understates benefits paid to the poor, since future benefits are a bigger share of their resources.

Their third mistake is failing to adjust for age. The old have paid most of their lifetime taxes, which makes them now look like tax cheats, particularly those who saved out of previously highly taxed labor income. With changing demographics, this problem will deeply confuse tax progressivity comparisons over time.

I’ll focus on 40-year-olds, but the results are similar for all age groups. Each dollar of pretax remaining lifetime resources of those in the top 1% of the resource distribution is, on average, taxed on net at a 34.5% rate. For those in the top quintile, the average net tax rate is 28.4%. For those in the bottom quintile, every dollar of pre-tax resources is matched by a 46.6% netsubsidy. (The tax rises steadily to 4.2% for the second quintile, 12.6% for the third and 18.5% for the fourth.)

The average net rates for the current year only (not including future net taxes) for this cohort understate true progressivity. They range from negative 9.8% for the bottom 20% to positive 38.2% for the top 1%.

40 to 50 year olds:

Richest 1%

Poorest 25%

40 to 49 years

Net tax rate

Share of consumption

Share of income

Share of wealth

Richest 1%

34.5%

14.5%

17.9%

34.3%

Highest 20%

28.5%

Lowest 20%

(46.6)

7.3

4.0

0.6

Laurence Kotlikoff, “Tax Myths Of Warrenomics,” Wall Street Journal, October 17, 2019, https://www.wsj.com/articles/tax-myths-of-warrenomics-11571351806

Sai Krishna Kamepalli, Raghuram Rajan and Luigi Zingales, "Kill Zone," National Bureau Of Economic Research, May 2020, https://www.nber.org/papers/w27146

“…Venture capitalists talk about a “kill zone” created by acquisitions, such as those by Facebook and Google, in the start-up space. This idea seems at odds not only with standard textbook economics, but with logic itself. Why should the prospect of being acquired at hefty multiples discourage new entry? In this paper we construct a simple model that rationalizes this result. In the presence of network externalities, early adopters generate an important externality: they facilitate the adoption by less sophisticated customers, helping the market converge to the platform with the superior technology.These early adopters, however, face significant switching costs, thus they will switch only if the benefit of switching is reasonable large. This benefit is given by the product of the technological difference and the time this difference will persist. Since a merger immediately transmits the superior technology to everybody, it reduces the payoff to early adoption. The prospect of mergers then reduces switching, makes it harder for entrants to acquire customers and offer network externalities for any given technological superiority, and thus reduces the price at which they can be acquired.This then reduces their incentive to innovate. We test this prediction using data on investment in startups. We show that VCs significantly reduce the number of deals and the amount of money they invest in markets near one where Facebook and Google have made a large acquisition, after the two giant digital platforms have made those acquisitions. … We collect data on the number of deals and dollar amounts invested by the venture capitalist in specific sectors, after major acquisitions by Facebook and Google are announced. We find that normalized VC investments in start-ups in the same space as the company acquired by Google and Facebook drop by over 40% and the number of deals falls by over 20% in the three years following an acquisition. In comparison, a similar calculation for other acquisitions in the software industry suggests that normalized VC investments in start-ups in the same space as the company acquired goes up (not down) by over 40 percent, while the number of deals goes up slightly in the three years following an acquisition. The software industry seems to follow the standard economic argument…..while the platform acquisitions seem very different. We consider alternative explanations of these results, including the possibility that most (if not all) the start-ups similar to the ones acquired by Google or Facebook were created with the only objective of being acquired by Google or Facebook. Thus, when a tech giant chooses another target, the potential alternatives lose their likely buyer and thus financing. To address this concern, we only look at startups that are in a similar space, but not too close to the space of the acquired ones (so that they cannot be considered perfect substitutes). Our results are if anything stronger. We also consider the possibility of the acquired start-up being a complement rather than a substitute to the incumbent platform….While an outright prohibition of acquisitions may reduce welfare, the model provides alternative welfare-improving forms of intervention. The most important message, though, is a simple one: it is dangerous to apply twentieth century economic intuitions to twenty first century economic problems. Our paper suggests one reason why….”

They suggest that platforms require new economics versus standard models as the economics of digital platforms differ from even other intangibles like software“The most important message, though, is a simple one: it is dangerous to apply twentieth century economic intuitions to twenty first century economic problems"

New Kamepalli/Rajan/Zingales observe that large tech firms acquiring smaller possible competitors (so in the way FB purchased Instagram) have reduced VC investment as the incumbent (likely) has a powerful moat that (implicitly) raises the hurdle rate discouraging new investment: “We find that normalized VC investments in start-ups in the same space as the company acquired by Google and Facebook drop by over 40% and the number of deals falls by over 20% in the three years following an acquisition. In comparison, a similar calculation for other acquisitions in the software industry suggests that normalized VC investments in start-ups in the same space as the company acquired goes up (not down) by over 40 percent, while the number of deals goes up slightly in the three years following an acquisition

Peter Q. Blair and Shad Ahmed, "The Disparate Racial Impact of Requiring a College Degree,"Wall Street Journal, June 28, 2020, https://www.wsj.com/articles/the-disparate-racial-impact-of-requiring-a-college-degree-11593375171

The Disparate Racial Impact of Requiring a College Degree

In response to the senseless and brutal killing of George Floyd, major brands are flooding social media with statements in support of the black community. Bank of America followed up with a $1 billion philanthropic commitment. As of June 18, Fortune 100 companies had pledged more than $2 billion to demonstrate that they are listening and responding.

But if corporate executives want to address systemic racism, they can do more. In addition to philanthropy, they should change their hiring and management practices to focus on job skills, rather than continuing to privilege college degrees. This change would increase diversity in the workforce and expand economic opportunity without sacrificing quality.

Research from Harvard Business School shows that “degree inflation” in job postings is pervasive. Example: 67% of postings for new production supervisors in 2015 included college-degree requirements, though only 16% of existing production supervisors had bachelor’s degrees.

Degree inflation is a barrier to entry for would-be employees of any race: Among workers over 25, only 40% of non-Hispanic whites and 26% of blacks have a bachelor’s or higher. Given the racial gap in college attainment, however, degree inflation has a disparate impact on black Americans. The impact is amplified today by the effects of Covid-19 on public health, the job market and access to college.

Nonessential degree requirements aren’t race-neutral. They embed into the labor market the legacy of black exclusion from the U.S. education system—namely, the antiliteracy laws that made it illegal for blacks to learn to read, the separate and unequal schools that kept them from catching up, and the limited progress since then on policies designed to remedy racial discrimination.

This spring, we and six other colleagues wrote a National Bureau of Economic Research working paper that questioned the fundamental assumption undergirding the proliferation of degree requirements: that workers without four-year degrees who earn low wages are low-skilled.

For the 71 million U.S. workers who have a high-school diploma but not a four-year degree, we used the skill profile of their current jobs as a proxy for their employability for higher-wage work. Their job experience suggests they are skilled through alternative routes, so we call them by the acronym STARs. They make up 60% of the active U.S. workforce.

Our research found that 16 million STARs have the skills for high-wage work, defined as earning more than twice the national median. Yet 11 million of them are currently employed in low-wage or middle-wage work. This suggests an extraordinary market failure: U.S. companies are systematically overlooking talent. Further, African-Americans are underrepresented among the five million STARs currently employed in high-wage work. Employers are missing out on talented workers without bachelor’s degrees, and black workers in particular.

Our research suggests there are changes companies can make to address this problem:

• Hire for skills and work experience, not degrees. Rather than using the degree requirement as a default, employers should examine the skills that their jobs require and then use skill requirements for job postings, screenings and assessments. IBM adopted this type of skills-based approach with its New Collar initiative, launched in 2017.

• Look for talent where STARs work and learn. Many STARs learn critical-thinking and complex problem-solving skills from work in overlooked sectors such as retail sales and child care. Companies should expand recruiting pipelines from these sources, reassess referral processes to close what LinkedIn calls the “network gap,” and develop programs to bring STARs on board. Workday’s Opportunity Onramps and Salesforce’s Pathfinder programs are early examples of this approach.

• Invest in STARs to support their career advancement. Such efforts improve efficiency, boost retention and enhance skills. Walmart, for example, offers educational benefits for its employees through its Live Better U program. Even if STARs change employers, their training benefits the local labor market and improves their earning potential.

These recommendations are only a start. Last August, 181 CEOs of the Business Roundtable agreed that the purpose of the corporation is to “promote an economy that serves all Americans.” If the goal of the recent surge in corporate engagement is to dismantle systemic racism and fashion a more inclusive economy, companies should heed the words of STARs like LaShana Lewis, a self-taught coder and CEO of her own company. Ms. Lewis calls on businesses to “look past the pedigree and look more at the skill base.”

This call to action doesn’t diminish the role of college degrees or public investment in improving the skills of the U.S. workforce. It suggests that businesses can take the lead.

Black workers face extraordinary barriers to economic mobility. By valuing skills over degrees, companies can improve the way the labor market functions for black STARs—a necessary step to ensure that the economy works for all.

“…For the 71 million U.S. workers who have a high-school diploma but not a four-year degree, we used the skill profile of their current jobs as a proxy for their employability for higher-wage work. Their job experience suggests they are skilled through alternative routes, so we call them by the acronym STARs. They make up 60% of the active U.S. workforce.Our research found that 16 million STARs have the skills for high-wage work, defined as earning more than twice the national median. Yet 11 million of them are currently employed in low-wage or middle-wage work. This suggests an extraordinary market failure: U.S. companies are systematically overlooking talent. Further, African-Americans are underrepresented among the five million STARs currently employed in high-wage work. Employers are missing out on talented workers without bachelor’s degrees, and black workers in particular….”

Read this over the weekend on how DARPA works, some neat factoids and a great quote from former director on being constrained by ideas. For a risk seeking organization surprising high success rate btw 5-10%, and only 10% of program are killed early.

"...DARPA is relatively tiny and flat. As of April 2020,DARPA has 124 staff and three layers of management. That number is right around Dunbar’s Number - just small enough for one person to know everyone in the organization. The small organization means that there are no “group projects” so every PM is directly responsible for the program they’re working on and you can’t have slackers. Small size also helps keep PM quality high by removing pressure to hire a lot of people.... DARPA Program managers have a tenure of four to five years. This transience is important for many reasons. Transience can inculcate PMs against the temptation to play it safe or play power games because there’s only one clear objective - make the program work. You’re out regardless of success or failure..... Only 5-10 out of every 100 programs successfully produce transformative research, while only 10% of projects are terminated early. Shifting the risk from the performers to the program managers enables DARPA to tackle systemic problems where other models cannot.... DARPA is ~0.5% of the Department of Defense Budget and ~12% of that is basic research…. at its height, Bell Labs’ budget was only 5% of AT&T’s revenue…A lot of DARPA’s budget is spent on actually assembling weapons and vehicle systems. So the math works out that only ~$400m is actually being spent on ‘basic research.’ … in the years 2018-2020among DARPA programs not focused on assembly and production the minimum budget was $2m, the maximum budget was $31.4m, and the average budget was $12m. …These raw numbers raise the question - is there a ‘minimum effective budget’ to generate outlier results? If so, what is it? DARPA is more ideas limited than money limited. This excerpt is gold: “I never really felt constrained by money,” (former DARPA director) Tether says. “I was more constrained by ideas.”…”

Ben Reinhardt, "Why does DARPA work?," Benjaminreinhardt.com, June 2020, https://benjaminreinhardt.com/wddw