Macro Roundup

New NBER has some interesting factoids on hedge fund performance, N=6,000 funds over two decades (1995 to 2016), study finds investors earned 36 cents for each dollar of gross excess returns, with the other 64 cents paid as management and incentives fees.

Would have been interesting if they had been able to carve out RenTec or D.E Shaw.

“…During the 22-year sample period, investors paid about half of their aggregate gross profits as incentive fees—whereas the average contractual incentive fee is below 20%. Moreover, there is a considerable disconnect between returns generated and incentive fees earned across all but the worst-performing 5% of funds. After including management fees, investors collected about 36 cents for each dollar of gross excess return generated by funds on their invested capital. The other 64 cents were paid as management and incentive fees. Adding insult to injury, these results are obtained before adjusting fund returns for risk…..(over a risk-free hurdle rate and before adjusting for any risk).In the cross-section of funds, there is a substantial disconnect between lifetime performance and incentive fees earned. These poor outcomes stem from the asymmetry of the performance contract, investors' return-chasing behavior, and underwater fund closures….We study the long-run outcomes associated with hedge funds' compensation structure. Over a 22-year period, the aggregate effective Hedge funds in our sample charge a nominal incentive fee rate of 19.0% of gross profits, on average. In practice, however, investors paid 49.6% of the cumulative gross profits as incentive fees during our sample period. That is, the effective incentive fee rate is 2.62 times higher than the corresponding nominal rate. Adding management fees to the equation, managers collected the lion’s share of returns over the years. Total fees paid amount to 63.6% of the cumulative gross returns when including management fees…”

Baris Kaymak and Markus Poschke, "The Evolution Of Wealth Inequality Over Half A Century: The Role Of Taxes, Transfers And Technology,"Journal Of Monetary Economics, October 2015, https://markus-poschke.research.mcgill.ca/papers/KP_toptax.pdf

“….. Results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality…The findings emphasize the role of increasing wage dispersion, often attributed to skill biased technical change, as the main culprit of higher income and wealth inequality in the U.S. Changes in tax and transfer policies over the second half of the 20th century have played a key role, accounting for nearly half of the rise in wealth concentration. Nevertheless, their combined effect on the distribution of income and consumption were limited. The results indicate the equilibrium adjustment in prices, the redistributive nature of transfers and the offsetting effects of taxes and transfers on consumption as main reasons for this limited role. As such, the results call for caution when drawing conclusions regarding welfare, based on income and wealth distributions. An interpretation of our findings is that changes in the transfer policies have been as influential as the changes in tax policies. Yet, unlike the wide coverage of falling top income tax rates, changes in the transfer system has received little attention of late. Our focus has been on two major federal programs: the social security and medicare. Several other programs were introduced during this period, both at the federal and the state level, that could potentially have similar effects on the economy, such as the Earned Income Tax Credit program or the Welfare-to-Work programs. Given the redistributive nature of transfers in U.S., our findings highlight the need for empirical measures of wealth dispersion including claims on the public sector. The findings here suggest that such a measure would generally display a lower concentration of wealth, and a smaller increase over time….. changes in tax policy have to be analyzed in connection with the corresponding changes in transfer policy. During the same period, the share of total transfer payments in GDP increased from 4.1% to 11.9%. The rise in transfer spending was driven by two major programs: Social Security and Medicare, both of which target senior citizens. By subsidizing income and healthcare expenditures for the elderly, these programs curb incentives to save for retirement, a major source of wealth accumulation over the life-cycle. Furthermore, since both programs are redistributive by design, they have a stronger effect on the savings of low and middle income groups. By contrast, those at the top of the income distribution have little to gain from these programs. We argue that the redistributive nature of transfer payments was instrumental in curbing wealth accumulation for income groups outside the top 10% and, consequently, amplified wealth concentration in the U.S….Since the wealth distribution reacts more slowly to the economic environment than income, the full effect of the more recent changes in policy and wage dispersion has not yet fully materialized. Given today's wage structure and barring any further changes in tax and transfer policy,the model predicts two to three more decades of increasing wealth concentration, at which point the wealthiest 1% will eventually hold about half the wealth in the economy, roughly 10 percentage points more than their current share. Should future top wages increase further relative to the rest, the future increase in top wealth shares would be even larger. In contrast to their contribution to wealth inequality, top income tax cuts had no effect on the income distribution. The increase in income inequality is instead almost entirely attributable to the changes in the wage distribution. The difference comes from equilibrium adjustments in prices that work in opposing directions when income and wealth dispersions are concerned. Accumulation of additional wealth in response to tax cuts leads to a decline in the interest rate and an increase in the wage rate. The fall in the equilibrium interest rate discourages savings by lower wealth groups and exacerbates the direct effect of tax cuts on wealth inequality. As for income, the lower interest rate mitigates the rise in top incomes, while a higher wage rate benefits lower income groups as they live mainly off labor income. Therefore, changes in prices amplify the impact of tax cuts on wealth dispersion, while they mitigate their impact on income dispersion …”

It also argues that increased transfers have reduced the need for the bottom 90% to save for retirement which has the effect of lowering their wealth accumulation which has amplified wealth concentration. Finds that btw 1980-2010 wage dispersion contributed 62.1% of the change in top 1% wealth (not income) share

Second paper David sent. This argues that wage dispersion, related to skill based technical change, has been the primary driver of higher income and wealth inequality in the US.

Dr. Ed channels Andrew Field’s “Great Leap Forward”“…Today’s doomsters could be confounded by biotechnological innovations that deliver not only a vaccine for COVID-19 but for all coronaviruses. Scientists are investigating a dizzying array of approaches to fight COVID-19. Hopefully, beyond finding a cure or a vaccine, one of beneficial outcomes of all this research will be that scientists learnmany more ways to combat illnesses in general and viruses in particular. Typically, it takes roughly a decade for a new vaccine to go through the various stages of development and testing. However, the urgency of the pandemic has mobilized global medical resources as rarely seen in human history. Billions of dollars, provided by both the public and the private sectors, are funding the global campaign to develop tests, vaccines, and cures for the virus….The awesome range of futuristic “BRAIN” technological innovations includes biotechnology, robotics and automation, artificial intelligence, and nanotechnology. There are also significant innovations underway in 5G for cellular networks, 3-D manufacturing, electric vehicles, battery storage, blockchain, and quantum and edge computing…. consider the follow stats on technology capital spending in the US: High-tech spending on IT equipment, software, and R&D rose to a record $1.32 trillion (saar) during Q2-2020 (Fig. 1). It jumped to a record 50.1% of total capital spending in nominal GDP during the quarter (Fig. 2). Equipment and software accounted for 31.1%, while R&D accounted for 19.1% of capital spending in nominal GDP (Fig. 3). The 1920s ended with a stock market meltup followed by a meltdown. The 2020s may already be seeing a meltup, begun on March 23. We live in interesting, though not unprecedented, times. The Roaring 1920s could be a precedent for the Roaring 2020s. As Mark Twain observed: “History doesn’t repeat itself, but it often rhymes.”….”

Nicole Gelinas, "Sorry, Mayor de Blasio: NYC desperately needs its billionaires,"New York Post, August 18, 2020, https://nypost.com/2020/08/18/sorry-mayor-de-blasio-nyc-desperately-needs-its-billionaires/

Sorry, Mayor de Blasio: NYC desperately needs its billionaires

Who wants to be a New York City billionaire? Contrary to what the mayor thinks, Gotham needs its superrich.

Last week, The New York Times asked: Which political leader, in this crisis, is going to champion New York as a place where businesses and wealthy people want to be? Kathy Wylde, head of the Partnership for New York City, a coalition of business interests, said we need “a plan.”

To City Hall, the request smacked of outrageous entitlement. “Kick rocks, billionaires,” said the mayor’s spokesperson. The mayor himself was more circumspect. “I am not going to beg anybody to live in the greatest city in the world,” he said.

It’s one thing to opine that the rich must pay their “fair share,” as de Blasio ineffectually nattered on about for years. It’s another thing to say that New York doesn’t need — or want — them.

OK, so what does New York without billionaires — and their envious relations, millionaires — look like?

First, taxes. In 2017 (the last year for which full data is available), 65,053 New York households — about 1.7 percent of tax filers — made above half a million dollars, according to the city’s Independent Budget Office. They paid a whopping $6.1 billion in income taxes to the city, or 53 percent of local income taxes.

If this share of personal-income taxes has held up, they likely paid $6.7 billion in income taxes for the fiscal year that just ended — or more than 10 percent of the city’s total tax collections.

The richest of the rich? In 2017, 1,818 families earned above $10 million each — and paid $2.8 billion in local income taxes, or nearly a quarter of total income taxes.

It’s fine if New York City doesn’t want that cash — but city leaders will have to explain to middle-class people why trash isn’t being picked up as often, explain to poorer residents why it can’t keep crime down and explain to uniformed public-sector workers that they can no longer retire in their 50s.

But taxes are only one aspect. Wealthier people get to choose where they live, more so than many people can. They want to live here, for the same reasons many normal people do: restaurants, shopping, Broadway, the opera, museums, baseball games.

They just also happen to fund those things more than the rest of us. An opera-goer’s ticket doesn’t cover the cost of the show, just as a museum admission price doesn’t cover the cost of displaying its paintings.

Arts organizations depend on the people whose names are on the walls. Donors, in turn, don’t act entirely out of selflessness: They give to a cause whose product they and their peers enjoy.

You may never go to the opera, or Saks, or the museum — but wealthier people cross-subsidize these attractions with big donations or spending, attracting tourists and upper-middle-class residents to the city, further firming up the tax base.

Finally, there’s livability. The wealthy New Yorker perusing The Post from his Hamptons or Florida “second home” may read the article about a robbery spree on the Upper East Side — and decide it’s yet another reason not to return right now.

New York needs wealthier people to stay and care — partly because people in poorer neighborhoods, focused on survivability, have less time and resources to organize themselves in favor of better policing.

Nearly two decades ago, then-Mayor Michael Bloomberg clumsily called New York a “luxury city.” But he had a point: Wealthier people would pay higher taxes here because they got a good quality of life.

Now what’s the calculation? Come back to New York — and worry about getting sick from a second wave of COVID-19 (keep in mind you’re probably old), worry about being mugged on the street, be unable to attend a classical-music show at least until next year and have protesters target you at home with deafening middle-of-the night protests?

The rejoinder from the socialists is: People shouldn’t be so rich. On a practical level, wealth distribution cannot be achieved on locally, when financial assets are mobile — and especially when that locality is falling apart.

The rejoinder from the urbanists is de Blasio’s line: Disloyal people should be shamed for being disloyal. But nobody has signed a blood oath to a New York City that doesn’t want them. That leaves poorer New Yorkers who can’t leave — with fewer education and job opportunities, and a greater risk of being felled by a stray bullet.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.

Anthony Carnevale Megan Fasules Michael Quinn and Kathryn Peltier Campbell, “Born To Win, Schooled To Lose: Why Equally Talented Students Don’t Get Equal Chances To Be All They Can Be,” Georgetown University Center On Education And Workforce, 2019, https://cew.georgetown.edu/cew-reports/schooled2lose/

“….Less than one third (31%) of tenth graders in the lowest SES quartile earn the income, educational attainment, or occupational prestige to be in the top half of the SES distribution among same-age young adults 10 years later. Meanwhile, 74 percent of young adults whose families were in the highest SES quartile remain in the top SES half as young adults (Figure 16)…..Low-SES students with top-half math scores appear to be more economically mobile than those with bottom scores. However, top math scores alone are not enough to overcome the influence of family SES on economic mobility. Among tenth graders, those from the lowest SES quartile are less likely than their highest SES counterparts to be in the upper SES half after 10 years, regardless of math scores. A tenth grader from the highest SES quartile with bottom-half math scores has a 56 percent chance of remaining in the top half of SES, whereas a tenth grader from the lowest SES quartile with top-half scores has a 47 percent chance of reaching the top half of SES by age 25 (Figure 17).Simply stated, success isn’t based strictly on academic merit: a lowest-SES student with top-half scores is less likely to “make it” than a highest-SES student with bottom-half scores….”

Georgetown study you asked about that found kids from wealthy backgrounds with low test scores were more likely to be well-off by early adulthood than kids from low-income families with high math test scores by a measure of Socioeconomic Status (which is a measure of parental educational attainment, family income, and occupation).