Edward Conard

Top Ten New York Times Bestselling Author

  • “…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
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  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
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  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, July 22, 2020

AI Summary. Population aging is identified as a key driver of falling risk-free interest rates and rising equity risk premiums, with the global equity risk premium up 2.5 percentage points since 2000. Aging households save more while holding smaller equity shares, depressing safe-asset returns while reducing demand for risky assets; models project the risk-free rate falling to -278 basis points by 2050.

Joseph Kopecky Working Paper
Date Posted:
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Aging households, notably baby boomers, contribute to a savings glut that depresses real interest rates on safe assets while holding lower equity shares, leading to a higher ERP.

Does population aging lower safe returns while raising equity risk premiums?

Core argument: The global equity risk premium has risen by 2.5 percentage points since 2000, with the US premium up 2–5 percentage points from the late 1990s to 2015, which the authors attribute largely to population aging.

Demographic shifts, particularly aging populations, are key drivers behind the decline in risk-free rates and the rise in equity risk premiums (ERP). Since 2000, the global ERP has increased by 2.5 percentage points, with similar trends in the US where the ERP rose by 2-5 percentage points from the late 1990s to 2015. Aging households, notably baby boomers, contribute to a savings glut that depresses real interest rates on safe assets while holding lower equity shares. This demographic shift reduces pressure on risky assets, leading to a higher ERP. Between 1990 and 2017, models account for significant portions of ERP fluctuations and predict a continued decline in risk-free rates to -278 bps by 2050, with the ERP stabilizing at 498 bps. As demographic forces persist, the expected return on equity is projected to fall to 220 bps, underscoring the impact of aging on asset demand dynamics.

Takeaways by Macro Roundup® AI

  1. The global equity risk premium has risen by 2.5 percentage points since 2000, with the US premium up 2–5 percentage points from the late 1990s to 2015, which the authors attribute largely to population aging.
  2. Aging households, notably baby boomers, hold lower equity shares while adding to a savings glut that depresses real interest rates on safe assets, reducing pressure on risky assets and raising the equity risk premium.
  3. Models covering 1990 to 2017 project the risk-free rate falling to -278 bps by 2050, with the equity risk premium stabilizing at 498 bps and the expected return on equity declining to 220 bps.

New Alan Taylor suggests demographics are responsible for the rising ERP (he uses Damodaran’s EPR data as well):

“… global equity risk premium has risen by 2.5 percentage points since the year 2000. Similar trends can be observed in the United States, with an equity premium in 2015 that is between two and five percentage points higher than it was in the late 1990s (pre-tech bubble crisis)…..Aging households, the boomers, are responsible for a savings glut which has helped to drive down real interest rates on safe assets, but they have relatively lower shares of their portfolio in equity. As a result, the shifting population weight moving toward these households does not have the same effect on equity returns that it has been shown to have on risk free assets…Summing up, Figure 12 shows that between 1990 and 2017 our model can account for: roughly all of the fall and rise in the ERP “low” amplitude estimate (Damodaran); roughly half of the fall and rise in the ERP “mid” amplitude estimate (our estimate using the E/P ratio and 1-year yields); or roughly one third of the fall and rise in the ERP “high” amplitude estimate (Duarte and Rosa). Looking to the future, the model predicts a continued fall in the risk free rate to -278 bps by 2050 with the ERP roughly stable at 498 bps. The expected return to equity therefore continues to fall to just 220 bps as demographic shifts continue to relentlessly boost the demand for all assets, but especially safe assets….”

The Murder-Suicide of the Rentier: Population Aging and Risk Premium: Extended Excerpt Image 1


The Murder-Suicide of the Rentier: Population Aging and Risk Premium: Extended Excerpt Image 2


Joseph Kopecky and Alan Taylor, "The Murder-Suicide of the Rentier: Population Aging and Risk Premium," Working Paper June 2020, https://www.josephkopecky.com/Papers/KopeckyTaylor.pdf

More Taylor:“…Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics, but has no mechanism to speak to trends in relative returns on different assets. We calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk,and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue push the risk free rate further into negative territory, while the equity risk premium remains elevated….”

Though it was worth reading hand and hand with Rognlie work on aging and global imbalances:

Thursday, July 23, 2020

AI Summary. An "economic singularity" is defined as the point at which economic growth exceeds 20% per year, driven by superintelligent computers that make human input economically superfluous. On the demand side, growth could accelerate as consumer spending shifts toward high-productivity-growth industries; on the supply side, as production relies increasingly on rapidly improving information capital.

William Nordhaus Yale University
Date Posted:
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The concept of an economic singularity is defined as the point where the economic growth rate surpasses 20% per year, driven by superintelligent computers that render human input economically superfluous.

Can information technology push economic growth above 20% per year?

Core argument: An economic singularity is defined as the point where economic growth exceeds 20% per year, driven by superintelligent computers that render human input economically superfluous.

The concept of an economic singularity is defined as the point where the economic growth rate surpasses 20% per year, driven by the advent of superintelligent computers that render human input economically superfluous. This scenario is akin to an "intelligence explosion," where ultraintelligent machines design even more advanced machines, leading to unprecedented technological change. On the demand side, rapid growth could result from consumer spending shifting towards high-productivity-growth industries, a phenomenon known as Baumol's cost euphoria. On the supply side, growth accelerates as production increasingly relies on rapidly improving information capital. This shift in economic dynamics suggests a future where traditional human roles in economic performance diminish significantly.

Takeaways by Macro Roundup® AI

  1. An economic singularity is defined as the point where economic growth exceeds 20% per year, driven by superintelligent computers that render human input economically superfluous.
  2. The singularity scenario parallels an "intelligence explosion," in which ultraintelligent machines design still more advanced machines, producing unprecedented technological change.
  3. On the demand side, growth could accelerate as consumer spending shifts toward high-productivity-growth industries, termed Baumol's cost euphoria, while on the supply side production relies increasingly on rapidly improving information capital.

Nordhaus on the singularity:

Paper is a model/though experiment that attempts to gage how close we are to the Singularity, broadly defined as a point where human’s having no impact on economic performance, specifically defined as when the economic growth rate crosses 20% a year:“…intelligence moving toward superintelligence, which denotes “intellect that is much smarter than the best human brains in practically every field, including scientific creativity, general wisdom and social skills.”…. At the point where computers have achieved superintelligence, we have reached the “Singularity” where humans become economically superfluous in the sense that they make no difference to economic performance. Superintelligent computers are the last invention humans would make, as described by the mathematician Irving Good (1965) as follows: Let an ultraintelligent machine be defined as a machine that can far surpass all the intellectual activities of any man however clever. Since the design of machines is one of these intellectual activities, an ultraintelligent machine could design even better machines; there would then unquestionably be an “intelligence explosion,” and the intelligence of man would be left far behind. Thus the first ultraintelligent machine is the last invention that man need ever make. This point at which the rate and breadth of technological change will be so great is sometimes call the “Singularity” in a sense analogous to passing over the event horizon into a black hole - here the event horizon is where the forces of computer intelligence leave no room for human interventions…I define Singularity as a time when the economic growth rate crosses 20% per year…”

He then goes on to talk about the economic of the singularity, “…Put more precisely, and as will be developed below, we might think that Singularity can arise from either the demand or the supply side. Rapid growth in both cases results from substitution toward high-growth inputs or outputs and away from stagnant inputs or outputs. On the demand side, rapid growth would occur if preferences are such that consumer spending moves increasingly toward high-productivity-growth industries as relative prices change. This is Baumol’s cost euphoria. On the supply side, Singularity would occur if production has sufficient substitutability that the input bundle moves toward rapidly improving information capital as growth proceeds. I begin with the demand side and then move to the supply side…”

William Nordhaus, “Are We Approaching An Economic Singularity? Information Technology and the Future Of Economic Growth,” Yale University, January 2, 2017, https://www.nber.org/papers/w21547.pdf