Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, September 1, 2020

AI Summary. Median usual weekly earnings for full-time workers rose 10.4% over four quarters, but the Federal Reserve Bank of San Francisco attributes this largely to the exclusion of laid-off low-wage workers from aggregate wage calculations. Wage growth for continuously employed workers remained flat, a pattern also seen in average hourly earnings and compensation per hour.

Mary Daly Federal Reserve Bank of San Francisco
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Data from @MaryDaly at the Federal Reserve Bank of San Francisco show wage growth for continuously employed workers remains flat despite recent uptick in wage growth.

Does the loss of low-wage jobs overstate measured wage growth?

Core argument: Median usual weekly earnings for full-time workers rose 10.4% over the four quarters through Q2 2020, 6.4 percentage points above the Q4 2019 pace, according to the San Francisco Fed.

Recent data indicate a 10.4% increase in median usual weekly earnings for full-time workers over the four quarters leading to Q2 2020, marking a 6.4 percentage point rise from Q4 2019. However, this apparent wage growth is misleading as it primarily results from the exclusion of low-wage workers laid off due to COVID-19, who are no longer included in aggregate wage calculations. This skewing effect highlights that wage growth for continuously employed workers remains flat, underscoring the need to consider employment dynamics when interpreting wage statistics. Similar patterns were observed in other wage measures like average hourly earnings and compensation per hour, emphasizing the importance of analyzing underlying employment shifts to understand true wage trends.

Takeaways by Macro Roundup® AI

  1. Median usual weekly earnings for full-time workers rose 10.4% over the four quarters through Q2 2020, 6.4 percentage points above the Q4 2019 pace, according to the San Francisco Fed.
  2. The San Francisco Fed attributes the jump to the exclusion of low-wage workers laid off during COVID-19 from aggregate wage calculations, noting that wage growth for continuously employed workers remained flat.
  3. Average hourly earnings and compensation per hour showed similar patterns, which the San Francisco Fed says makes interpreting wage statistics dependent on accounting for underlying shifts in employment.

Erin Crust, Mary Daly and Bart Hobijn, “The Illusion of Wage Growth,“ Federal Reserve Bank Of San Francisco, August 31, 2020, https://www.frbsf.org/economic-research/publications/economic-letter/2020/august/illusion-of-wage-growth/

“…Recent data show that median usual weekly earnings of full-time workers have grown 10.4% over the four quarters preceding the second quarter of 2020. This is a 6.4 percentage point acceleration compared with the fourth quarter of 2019. The median usual weekly earnings measure that we focus on here is not an exception. Other measures of wage growth—like average hourly earnings and compensation per hour—show similar spikes…. we dig deeper into the data and show that this spike in wage growth primarily reflects the departure of low-wage workers who have been laid off due to coronavirus disease 2019 (COVID-19) and are no longer counted in the aggregate wage series….

Wage statistics are being skewed by the disproportionate lay-offs of low-wage workers. good FRBSF chart looking at growth in median wages for workers continuously employed. Not that surprising, but interesting the effect wasn’t more pronounced during the Financial Crisis

Ed Comment:these things are rare but worth noting as a reminder noting I guess

AI Summary. Estimates based on Social Security and Medicare trustees' reports project that a married couple with two average earners retiring in 2020 will receive $1.167m in lifetime benefits after paying $760,000 in taxes, a net benefit of $407,000. For a comparable couple retiring in 2040, the projected net benefit is $718,000.

Eugene Steuerle Urban Institute
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A married couple with two average earners retiring in 2020 will receive $407,000 more in benefits from Medicare and Social Security than they paid in taxes, for same couple retiring in 2040 net benefit is $718,000.

How much do lifetime retirement benefits exceed taxes paid?

Core argument: A married couple with two average earners retiring in 2020 will receive $1.167m in Social Security and Medicare benefits against $760,000 in taxes paid, a net benefit of $407,000.

A married couple with two average earners retiring in 2020 will receive $1.167m in Medicare and Social Security benefits, having paid $760,000 in taxes, resulting in a net benefit of $407,000. For a similar couple retiring in 2040, the net benefit increases to $718,000. This trend reflects the growing disparity between benefits received and taxes paid, driven by demographic shifts and policy changes. The data, derived from the 2018 Social Security and Medicare trustees' reports, highlight the increasing financial advantage for future retirees. The calculations consider sex-adjusted probabilities for post-65 mortality and a discount rate of 2% plus inflation, underscoring the long-term fiscal implications for government programs. This scenario raises critical questions about the sustainability of current funding structures for Social Security and Medicare as the population ages.

Takeaways by Macro Roundup® AI

  1. A married couple with two average earners retiring in 2020 will receive $1.167m in Social Security and Medicare benefits against $760,000 in taxes paid, a net benefit of $407,000.
  2. For a similar two-average-earner couple retiring in 2040, the net benefit rises to $718,000.
  3. The calculations, derived from the 2018 Social Security and Medicare trustees' reports, use sex-adjusted post-65 mortality probabilities and a discount rate of 2% plus inflation.

A married couple with two average earners (103,800) who retires in 2020 year will receive $1,167,00 in Medicare and Social Security benefits, in exchange they will have paid $760,000 in taxes for a net benefit of $407,000 over their lifetime.

For that same couple retiring in 2030 the net benefit is $529,000, for 2040 the net benefit is $718,000

"...The following tables show the expected present value at age 65 of benefits received in retirement and taxes paid over a career for households with different earnings and marriage histories. The underlying data come from the 2018 Social Security and Medicare trustees’ reports (Social Security Board of Trustees 2018; Medicare Boards of Trustees 2018) and supplemental data published by the Social Security Administration and Centers for Medicare & Medicaid Services (CMS). For Medicare lifetime benefits, we use an alternative cost scenario that CMS developed based on its concern that measures in current law would result in a rate of decline in reimbursement rates relative to private health insurance that were not sustainable. (See the discussion of the Medicare cost scenario on page 23. In calculating expected present values, we use sex-adjusted probabilities to account for chance of death after age 65 and a discount rate of 2 percent plus inflation...."

Social Secuirty and Medicare Lifetime Benefits and Taxes: Extended Excerpt Image 1


C Eugene Steuerle and Caleb Quakenbush, "Social Secuirty and Medicare Lifetime Benefits and Taxes," Urban Institute, October 2018, https://www.urban.org/sites/default/files/publication/99232/social_security_and_medicare_lifetime_benefits_and_taxes_2018_update.pdf

AI Summary. The authors attribute a temporary acceleration in U.S. productivity growth to information and communication technology, including 17% annual productivity growth in the U.S. computer-hardware industry, producing a slow-fast-slow pattern. Ten European countries instead saw continuous deceleration, which the authors link to lower technology investment and inefficiencies in technology-intensive industries such as agriculture and retail.

Robert Gordon National Bureau of Economic Research
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US productivity gains btw 1995-2005 were largely attributed to ICT advancements, leading to a 17% annual productivity growth in its ICT-hardware industry.

Does information technology explain diverging U.S. and European productivity growth?

Core argument: U.S. productivity growth accelerated during 1995–2005 largely on advances in information-communication technology, with the ICT-hardware industry posting 17% annual productivity growth, a temporary boost within a slow-fast-slow pattern over 1977–2015.

Between 1977-2015, the U.S. experienced a unique productivity boost from 1995-2005, largely attributed to advancements in ICT [Information-Communication Technology], which led to a 17% annual productivity growth in its ICT-hardware industry. This period marked a temporary acceleration in U.S. productivity, contrasting with the EU-10's steady decline. The EU-10's failure to capitalize on the ICT revolution was due to lower ICT investment and inefficiencies in ICT-intensive industries, resulting in a productivity growth slowdown. While the U.S. saw gains primarily in services-producing sectors, the EU-10 lagged, particularly in industries like agriculture and retail, which failed to adopt ICT-driven efficiencies. Consequently, the U.S. productivity narrative was characterized by a slow-fast-slow pattern, whereas the EU-10 experienced a continuous deceleration, highlighting the one-off nature of U.S. gains during this period.

Takeaways by Macro Roundup® AI

  1. U.S. productivity growth accelerated during 1995–2005 largely on advances in information-communication technology, with the ICT-hardware industry posting 17% annual productivity growth, a temporary boost within a slow-fast-slow pattern over 1977–2015.
  2. The EU-10 did not capitalize on the ICT revolution, with lower ICT investment and inefficiencies in ICT-intensive industries producing a continuous productivity deceleration rather than the U.S. mid-period acceleration.
  3. U.S. productivity gains came primarily in services-producing sectors, while the EU-10 lagged in industries such as agriculture and retail that failed to adopt ICT-driven efficiencies.

Robert Gordon and Hassan Sayed, "Transatlantic Technologies: The Role of ICT in the Evolution of U.S. and European Productivity Growth," National Bureau Of Economic Research, June 2020, https://www.nber.org/papers/w27425

“…. Stepping back and viewing the postwar growth experience more broadly, the EU-10 started out in 1950-72 with rapid productivity growth of 4.86 percent per year, which we have previously interpreted as reflecting a process of catching up to the benefits of innovations that had buoyed U.S. productivity growth during the interwar and wartime periods…. Then the EU-10 transitioned to a slower productivity growth path of 2.31 percent in 1972-95, mimicking the 2.54 percent growth rate that the U.S. had previously achieved during 1950-72. Skipping over the very different experiences of 1995-2005, the EU-10 wound up in 2005-2015 with a productivity growth rate of a mere 0.63 percent, little different from the U.S. rate for the same interval of 0.87 percent. The remarkable similarity of the U.S. slowdown to 2005-15 from 1950-72 with the EU-10 slowdown to the same late interval from 1972-95 is, we think, more than a coincidence. The same process of the diminishing potency of ongoing innovation was occurring on both sides of the Atlantic. In short the postwar transatlantic productivity experience can be boiled down to three issues - the causes of the overall joint early-to-late slowdown, the sources of the temporary U.S. 1995-2005 acceleration, and the factors that held Europe back from enjoying a similar 1995-2005 revival. Our diagnosis of the first is the diminished impact of innovation over the postwar period that operated on both sides of the Atlantic, of the second is the U.S. success during 1995- 2005 in achieving a one-time boost in the level of efficiency in the production and use of ICT, and of the third is the multi-faceted failure of the EU-10 to mimic the U.S. achievement in producing ICT hardware, in making a similar level of investment in ICT, and in capturing the efficiency gains of the lower level of investment that actually occurred.….”

Looking at the two growth experiences overall Gordon argues they broadly mirror each other and support his thesis of the declining impact of innovation in contrast with previous waves of innovation:

“…Why did the EU-10 fail to benefit from the ICT revolution and instead why did it experience a two-step slowdown in labor productivity and TFP growth? The diagnosis has four components. First, despite all the U.S.-led innovation that drove its ICT-hardware EM industry to register a 17 per cent annual rate of productivity growth in 1995-2005, that same industry in the EU-10 actually experienced a productivity growth slowdown during the same decade. Second, the EU-10 had substantially lower values of the contribution-based ICT-use-intensity indicator variable, indicating less rapid growth of ICT investment. Third, the regressions reveal virtually no difference in the extent of the EU growth slowdown experienced by ICT-intensive versus non-intensive industries, indicating a failure of EU-10 industries to exploit the efficiency opportunities provided by the limited ICT investment that did occur. And fourth, the EU-10 shortfall in productivity growth during 1995-2005 can be traced to particular industries in which performance fell far short of the same industries in the U.S.These outlier industries include not just ICT-producing electric machinery but also agriculture, petroleum refining, and the large wholesale and retail sector where for many reasons EU nations lagged behind the U.S in adopting the big-box retail format which exploited the opportunities provided by the ICT revolution….”

They also examine why the EU10 failed to benefit from the diffusion of ICT:

We find that additionalproductivity growth in ICT intensive industries drove almost all of the post-1995 revival in U.S. productivity growth. However,this change in growth occurred almost entirely in services-producing industries rather than commodities-producing industries except for the electric machinery industry that produces computer hardware. This makes sense because the most intensive users of ICT were industries in the services sector. The EU-10 story is quite different. Productivity growth in producing computer hardware in the EU-10 actually slowed after 1995 in contrast to its explosive growth in the U.S. Further in the EU-10 there was little difference between the productivity growth slowdown after 1995 and after 2005 in industries that were intensive in ICT use versus the non-ICT industries. Europe not only invested less in ICT hardware but failed to reap its benefits even in industries that were heavy ICT users….”

He then looks the drivers of the decline in terms of sectors:

“…A retardation in the growth of labor productivity and of total factor productivity (TFP) has characterized both the United States and western Europe, in the sense that on both sides of the Atlantic growth has been slower since 2005 than it was before 1995. The notable difference in performance occurred in the middle interval of 1995-2005, when a sharp acceleration of growth in the U.S. contrasted to a growth slowdown in western Europe. As a result, the story of U.S. productivity growth since the mid-1970s has been one of slow-fast-slow over the three intervals divided at 1995 and 2005, in contrast to a two-step deceleration in Europe.…”

His research finds the decline in productivity growth was a three step process in the US (with an uptick btw 1995-2005) versus a steady decline in the EU10:

New Gordon argues that the ICT Revolution (Information-Communication Technology) is best understood as a temporary technological shock due to the lag in productivity growth after 1995. The uptick in productivity growth btw 1995-2005 was driven by the electronics manufacturing industry and ICT using service sector. Europe is a disaster, the E10 was unable to reap benefits (in terms of productivity growth) from ICT due to lack of response to ICT investment, as opposed to sheer absence of ICT investment.

Ed Comment 1/3:The thing he misses is what I identify in my chapter. High-skilled productivity seems to have grown faster than low-skilled and the US has a lot more low-skilled relative to Europe (more than the north, same as the south) so 1) our high-skilled seems to have grown faster and 2) our low-skilled productivity grew at least as fast but with substantially less supervision. What at the dual columns in table 5?

Transatlantic Technologies: The Role of ICT in the Evolution of U.S. and European Productivity Growth: Comments Image 1

Steve Comment: Re: The dual columns“….Table 5….with results for the U.S. on the left and for the EU-10 on the right. We repeat the results for labor productivity growth in the total economy from Table 4 for ease of comparison with our new results explaining TFP growth. Thus, in Table 5, columns (A) and (B) repeat the U.S. results shown in Table 4 for the total economy, columns (A) and (D). Likewise columns (E) and (F) repeat the EU-10 results shown in Table 5, columns (E) and (H);these differ only in the choice of the ICT indicator….”

Ed Comment2/3 Ps I wonder how this effect the Gordon’s calculations on contributors productivity. This says intangible investment is mismeasured. Add this note to the Gordon entry with a link to this paper.

“…The first of these is the ICT “share indicator,” which is formulated as in Stiroh (2002). We compute the average ICT share of investment, which is the annual nominal expenditure on computing equipment, communications equipment and computer software and databases, all divided by the annual nominal expenditure on total capital investment.Initially we examine the actual values of this ratio for individual industries and subsequently in the regressions we convert the share indicator into a share dummy variable equal to unity for industries which are ranked above the median value in the 1991-95 period and zero otherwise. The other KLEMS ICT variable is the “contribution indicator,” equal to the contribution of ICT capital to real value-added growth. This is available at the industry level only beginning in 1999….”

Those are the “share indicator” and the “contribution indicator” defined earlier:

Ed Comment 3/3IT might be having a greater impact on productivity than Gordon acknowledges. It’s possible, for example, that as manufacturing productivity growth eliminates jobs, the only jobs left are low productivity jobs afflicted by Baumol’s cost disease. If low-skilled productive is declining (as high-skilled productivity is rising due to IT) IT’s contribution would be understated. It might also be the case that the capability of IT is growing but also growing more complex. With a shortage of properly trained talent, it may be the case that only the largest and most successful companies have the wherewithal to capitalize on the increased capability. That would explain why those companies are investing more in IT, growing their productivity faster, gaining share, and increasing their profitability. So it might be the case that productivity isn’t growing faster, not because IT isn’t delivering results, but for other reasons, namely constraints on the economy’s capacity to capitalize on it and therefore an increase need for economies of scale maximize the value of the constrained resources. Arguably, that can all be lumped in with “IT.” But lumping it might understating our ability to produce valuable innovation. Perhaps we’re still capable of producing it, but we are bumping into other constraints because of it

Wednesday, September 2, 2020

AI Summary. The implied equity risk premium on the S&P 500 — the extra return investors require to hold stocks over bonds — has fallen to 4.62% from 5.01%, returning to pre-pandemic levels.

Board Of Governors Of The Federal Reserve System Federal Reserve Bank of St. Louis
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The Implied Equity Risk Premium (ERP) for the S&P 500 has decreased to 4.62% from 5.01% as of August 1, 2020, indicating a return to pre-COVID levels.

Has the equity risk premium returned to pre-pandemic levels?

Core argument: The implied equity risk premium for the S&P 500 fell to 4.62% from 5.01% as of August 1, 2020, returning to pre-COVID levels.

The Implied Equity Risk Premium (ERP) for the S&P 500 has decreased to 4.62% from 5.01% as of August 1, 2020, indicating a return to pre-COVID levels. This decline in ERP suggests a shift in investor sentiment towards lower perceived risk in equity markets relative to bonds. The "Real" Risk-Free Rate, calculated as the 30-Year Treasury Constant Maturity Rate minus the 30-Year Breakeven Inflation Rate, provides context for this change. The adjustment in ERP reflects broader economic conditions and expectations, as investors reassess risk premiums in light of evolving macroeconomic indicators. This trend is crucial for business professionals, economists, and policymakers as it impacts investment strategies and economic forecasts.

Takeaways by Macro Roundup® AI

  1. The implied equity risk premium for the S&P 500 fell to 4.62% from 5.01% as of August 1, 2020, returning to pre-COVID levels.
  2. The decline in the S&P 500 implied equity risk premium suggests a shift in investor sentiment toward lower perceived risk in equities relative to bonds.
  3. The "real" risk-free rate used to contextualize the equity risk premium is calculated as the 30-Year Treasury Constant Maturity Rate minus the 30-Year Breakeven Inflation Rate.

The “Real” Risk Free Rate here is the 30 Year Treasury Constant Maturity Rate - 30 Year Breakeven Inflation Rate from FRED*

ERP/T.Bond Rate is Aawaths. Included S&P on secondary axis for context. *(Both are Monthly, Seasonally Adjusted)

Data

Board Of Governors Of The Federal Reserve System, “30-Year Treasury Constant Maturity Rate,” Federal Reserve Bank of St. Louis, Accessed September 4, 2020, https://fred.stlouisfed.org/series/DGS30

30-Year Treasury Constant Maturity Rate: Extended Excerpt Image 1

Aswath Damodaran, “Implied Equity Risk Premium Update,”Musings On Markets, September 1, 2020, http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm

Aawath’s updated ERP numbers, it’s falling back to pre-Covid levels, down to 4.62% from 5.01% on August 1

Aswath Damodaran, “Implied Equity Risk Premium Update: Series ERP (T12m), S&P 500, T. Bond Rate,)”Musings On Markets, September 1, 2020, http://people.stern.nyu.edu/adamodar/New_Home_Page/home.htm

Federal Reserve Bank Of St. Louis, “30-Year Breakeven Inflation Rate,” Federal Reserve Bank of St. Louis, Accessed September 4, 2020, https://fred.stlouisfed.org/series/T30YIEM