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


Friday, July 3, 2020

AI Summary. The authors estimate that private equity buyouts are associated with a 1.7% decline in compensation per worker and an average 8% rise in labor productivity at target firms, with an overall employment effect of -1.4% that is not statistically significant. Employment effects differ by deal type: public-to-private buyouts show a 13% employment decline while private-to-private buyouts show a 13% increase.

Steven Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner and Javier Miranda Harvard Business School
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Private equity buyouts lead to a 1.7% decline in compensation per worker, but labor productivity increases by an average of 8% post-buyout.

How do private equity buyouts affect wages, productivity, and employment?

Core argument: Private equity buyouts reduce compensation per worker by 1.7%, erasing a pre-buyout wage premium at target firms.

Private equity (PE) buyouts lead to a 1.7% decline in compensation per worker, effectively erasing a pre-buyout wage premium. Despite this, labor productivity at target firms increases by an average of 8% post-buyout, a significant improvement given that these firms are often mature and in established industries. Employment trends vary by buyout type; public-to-private deals see a 13% employment reduction, while private-to-private buyouts experience a 13% increase. The overall employment impact of PE buyouts is a statistically insignificant -1.4%. These findings highlight the complex and varied economic effects of PE buyouts, influenced by factors such as buyout type and external economic conditions.

Takeaways by Macro Roundup® AI

  1. Private equity buyouts reduce compensation per worker by 1.7%, erasing a pre-buyout wage premium at target firms.
  2. Labor productivity at private equity target firms rises by an average of 8% after buyouts, a notable gain given that these firms are typically mature and operate in established industries.
  3. Employment effects vary by deal type: public-to-private buyouts cut employment by 13% while private-to-private buyouts raise it by 13%, leaving an overall statistically insignificant -1.4%.

HBS study finds overall PE improves firm productivity, employment at previously public firms shrinks 13%, but grows 13% in buyouts of privately held firms. Labor productivity rises 8% and average earnings fall 1.7%.

However where the investment falls in the credit cycle has a big impact on returns, “.. In particular, public-to-private deals proliferate in advance of credit market tightening, and their targets exhibit large post-buyout employment losses and poor productivity performance during aggregate downturns…“

“…Relative to control firms,employment at targets rises 13 percent in firms previously under private ownership (private-to-private buyouts) and 10 percent in secondary buyouts (sale from one PE entity to another).Employment falls by 13 percent in buyouts of publicly listed firms (public-to-private deals) and by 16 percent in divisional buyouts. The overall average employment impact of PE buyouts is a statistically insignificant -1.4 percent in our sample. After netting out post-buyout acquisitions and divestitures to isolate organic changes, the overall average impact is -4.4 percentage points The pace of intra-firm job reallocation at target firms rises relative to control firms post buyout. This pattern holds across all buyout types, and much of it reflects greater acquisition and divestiture activity by target firms. Labor productivity rises by an average of eight percent at target firms (again, relative to controls), a striking impact given that targets tend to be mature firms in mature industries. Productivity gains are concentrated in private-to-private and public-to-private buyouts….. Compensation per worker falls by 1.7% at target firms after buyouts, largely erasing a prebuyout wage premium relative to controls. Wage effects also differ greatly by buyout type. In short, the impact of private equity is more complex and varied than champions or detractors claim…Our results also reinforce concerns about public-to-private deals, which account for 10% of PE buyouts from 1980 to 2013 and 31% of employment in target firms. In particular, public-to-private deals proliferate in advance of credit market tightening, and their targets exhibit large post-buyout employment losses and poor productivity performance during aggregate downturns…We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking, systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly listed firms but expands 13% in buyouts of privately held firms,both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A postbuyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions…”

Steven Davis, John Haltiwanger, Kyle Handley, Ben Lipsius, Josh Lerner and Javier Miranda, “The Economic Effects Of Private Equity Buyouts,” Harvard Business School, 2019, https://www.hbs.edu/faculty/Publication%20Files/20-046_ceb00b98-e62a-45db-8d5f-9793ffd0226e.pdf

Monday, July 6, 2020

AI Summary. 35% of Black men aged 25–54 are not working—due to unemployment, being out of the labor force, or institutionalization—compared with 20% of White men, a gap the authors link to a Black-White wage gap as wide as it was in 1950.

David Leonhardt New York Times
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The Black-White wage gap remains as wide as it was in 1950, driven by higher unemployment, lower labor force participation & institutionalization among Black men.

Do differences in men's nonemployment rates explain the racial wage gap?

Core argument: 35% of Black men aged 25–54 are not working due to unemployment, labor force non-participation, or institutionalization, compared with 20% of White men in the same age group.

The share of Black men aged 25-54 not working due to unemployment, being out of the labor force, or institutionalization remains significantly higher than that of White men, contributing to the persistent Black-White wage gap. As of recent data, 35% of Black men in this age group are not working compared to 20% of White men. This disparity is driven by a combination of higher unemployment rates, lower labor force participation, and higher rates of institutionalization among Black men. The economic implications are profound, as these factors limit income potential and exacerbate the wage gap, which remains as wide as it was in 1950. Addressing these issues requires targeted policy interventions to improve employment opportunities and reduce systemic barriers for Black men, thereby narrowing the wage gap and fostering economic equity.

Takeaways by Macro Roundup® AI

  1. 35% of Black men aged 25–54 are not working due to unemployment, labor force non-participation, or institutionalization, compared with 20% of White men in the same age group.
  2. The Black-White wage gap remains as wide as it was in 1950, with the higher share of non-working Black men aged 25–54 contributing to its persistence.
  3. Higher unemployment, lower labor force participation, and higher rates of institutionalization among Black men limit income potential and contribute to the Black-White wage gap.

David Leonhardt, "The Black-White Wage Gap Is as Big as It Was in 1950,"New York Times, June 25, 2020, https://www.nytimes.com/2020/06/25/opinion/sunday/race-wage-gap.html

Ed Comment:Plz add to database, esp chart who is not working. How audacious do you have to be to say the black/white gap wasn't changed because twice the share of black men aren't working despite an enormous increase in Hispanic employment? Perhaps we ought to ask how they can afford not to work?

AI Summary. Capital inflows to the US predominantly flow to the non-tradable sector, and the authors argue this shrinks the tradable sector relative to it, where innovation that pushes the global technological frontier is concentrated. Their model implies that diverting capital away from tradables slows US innovation and, because other countries absorb US advances, global productivity growth.

Martin Wolf Working Paper
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US capital inflows target non-tradable sectors, depressing tradable sectors & slowing US innovation, according to @MartinWolf Working Paper. This dynamic creates a feedback loop where reduced innovation in the US leads to slower global growth.

Do capital inflows shrink the tradable sector and slow global innovation?

Core argument: Capital inflows to the US predominantly target the non-tradable sector, producing a relative decline in the tradable sector that the authors identify as crucial for innovation and for pushing the global technological frontier.

Capital inflows to the US predominantly target the non-tradable sector, leading to a relative decline in the tradable sector, which is crucial for innovation. This shift is significant as the tradable sector is responsible for pushing the global technological frontier. The model suggests that when capital is diverted from tradable to non-tradable sectors, it results in a slowdown of US innovation, which in turn affects global productivity growth. The US, being a primary source of technological advancement, sees its role diminished as other countries rely on absorbing US innovations. This dynamic creates a feedback loop where reduced innovation in the US leads to slower global growth, highlighting the unintended consequences of capital allocation preferences driven by global financial flows.

Takeaways by Macro Roundup® AI

  1. Capital inflows to the US predominantly target the non-tradable sector, producing a relative decline in the tradable sector that the authors identify as crucial for innovation and for pushing the global technological frontier.
  2. The model implies that diverting capital from tradable to non-tradable sectors slows US innovation, which in turn slows global productivity growth because other countries rely on absorbing US innovations.
  3. The authors describe a feedback loop in which reduced US innovation leads to slower global growth, an unintended consequence of capital allocation preferences driven by global financial flows.

Gianluca Benigno, Luca Fornaro and Martin Wolf, "The Global Financial Resource Curse," Working Paper, June 2020, https://www.dropbox.com/s/6wch3u3pjdrz927/globfincurse_june2020.pdf

New paper (model based ) that attempts to connect the global saving glut and productivity growth. Worth noting in the model innovation by US firms pushes the world technological frontier. Other countries grow by absorbing knowledge from the US. Those are the only two agents.

Ed Comment:Add to data base. Interesting idea but it seems a bit outdated. The savings glut definitely shifts the US economy from manufacturing to the non-tradable domestic service sectors where productivity growth has been slower, albeit where US productivity is higher than the rest of the world’s. $3 an hour offshore wages put enormous pressure on domestic manufacturing, which was forced to selectively prune off low-productivity production, and which has accelerated productivity growth in the remaining manufacturing sectors beyond growth in the demand for manufactured goods, which hollows out manufacturing employment and drives talent into other sectors with more promising career opportunities, especially when big legacy pensions that can no longer by paid with declining domestic demand, employment, and profit margins “bankrupts” large collective enterprises needed for manufacturing. America never abandoned the technological frontier. Unlike Europe and Japan, America, out of necessity, abandoned the manufacturing technological frontier and shifted its talent to IT, which fortunately proved to be more valuable than the old manufacturing frontier, especially given the interlocking developments described above, although it was probably more valuable regardless of these developments but without them, we might have been slow to make the shift, like Europe and Japan. Not only has the future of IT proven to be more promising relative to manufacturing, it reduces the importance of capital relative to talent/ideas, and makes it easier to make and measure individual contributions by talent (which are power law distributed)—good dynamics for talent, especially when there is a shortage of talent. (My chapter made these points, but Diana insisted on taking them out because she misguidedly insisted on defending the success of domestic manufacturing and, oddly, couldn’t accept these points because of her agenda.) Sorry for the run on sentences.

The key feature is that sectors producing tradable goods are the engine of growth. Capital flows from the chronic surplus countries to the US boost demand for our non-tradable sectors/goods (construction), and depress economic activity in the US tradable sectors (manufacturing). The result is lower investment in innovation by US firms. Since US innovation determines the world technological frontier, global growth slows down. Effect similar to natural resource curse, but financial and global in nature. Hence, we dub it the global financial resource curse.

"...Since the late 1990s, the United States has received large capital flows from developing countries - a phenomenon known as the global saving glut - and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one.In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which we dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates..."
The Global Financial Resource Curse: Comments Image 1