Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…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 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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


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
Date Posted:
Is Database:
Database

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

Friday, September 4, 2020

AI Summary. State angel investor tax credits are associated with roughly 18% more angel investments and 27% more individual angel investors, driven by inexperienced, young, and new investors rather than professional angels. The added capital flows mainly to low-growth-potential firms, with no observable effect on new business starts or young-firm employment.

Sabrina Howell National Bureau of Economic Research
Date Posted:
Is Database:
Database

New evidence from @SabrinaHowell shows US angel tax credits increase angel investments by 18% & individual angel investors by 27%, but don’t impact professional investors’ decisions, instead favoring low-growth firms.

Do investor tax credits increase high-growth entrepreneurship?

Core argument: State angel tax credits raise the number of angel investments by about 18% and the number of individual angel investors by about 27%, driven primarily by inexperienced, young, and new investors.

Angel tax credits increase the number of angel investments by ~18% and individual angel investors by ~27%, primarily driven by inexperienced, young, and new investors. However, these credits do not impact professional angel investors' decisions, as they prioritize startups with "home run" potential over tax incentives. The increase in investments flows mainly to low-growth potential firms, with a decline in the average ex-ante growth characteristics of funded startups. Despite the rise in risk-seeking capital, there is no observable effect on entrepreneurial activity, new business starts, or young firm employment, raising concerns about the effectiveness of these credits in fostering high-growth startups and significantly impacting the local economy.

Takeaways by Macro Roundup® AI

  1. State angel tax credits raise the number of angel investments by about 18% and the number of individual angel investors by about 27%, driven primarily by inexperienced, young, and new investors.
  2. Professional angel investors' decisions are unaffected by the credits, as they prioritize startups with "home run" potential, and the added investment flows mainly to low-growth-potential firms, lowering the average ex-ante growth characteristics of funded startups.
  3. Despite the increase in risk-seeking capital, state angel tax credits show no observable effect on entrepreneurial activity, new business starts, or young firm employment.

Matthew Denes, Sabrina Howell, Filippo Mezzanotti, Xinxin Wang, Ting Xu, "Investor Tax Credits and Entrepreneurship: Evidence from U.S. States," National Bureau Of Economic Research, August 2020, https://www.nber.org/papers/w27751

12 countries and more than 30 states across the U.S. have implemented tax credits for angel investors…First, we find that angel tax credits significantly increase state-level angel investment. This increase is connected to a decline in the ex-ante growth characteristics of the marginal startups funded by angels…. We find that angel tax credits increase the number of angel investments by approximately 18%. This effect is amplified when programs impose fewer restrictions and when the supply of alternative startup capital is more limited. Relatedly, angel tax credits increase the number of individual angel investors by about 27%..… Second, we fail to find evidence that these policies had any impact on the real effects that policymakers focus on, such as new business starts or young firm employment. Third, we show that the increase in angel investments is mostly driven by a surge in inexperienced, young, and new investors, with no change in professional angel activity…we document that these new investments primarily flow to low-growth potential firms, measured by pre-investment employment, employment growth, and founder experience. Average ex-ante growth characteristics of angel-backed firms also deteriorate after the implementation of angel tax credits. A decline in quality may be expected in response to a positive funding shock if relaxing financial constraints yields worse performing firms to be financed at the margin…and does not imply that the investments are not privately or socially valuable. However, the large declines raise concerns about the ability of angel tax credits to reach high-growth startups and have a significant impact on the local economy...”

Interesting they also find the tax credits increase investment from new investors, so they do increase the amount of risk seeking capital, but these less skilled investors/capital have no observable effect of entrepreneurial activity.

Great new paper finds that angel tax credit have no impact on professional investor’s decision to invest in a startup, as they look at the “home run” potential, indeed they generally don’t’ even access them“…We find that angel tax credits are a relatively unimportant factor for professional investors when deciding whether or not to invest in a startup. Instead, experienced investors focus on whether or not a startup has the potential to be a home run.Theseinvestors tend not to use tax credits even when they are available because of information, coordination, and administrative costs..”

Ed Comment:Add. I’m surprised tax credits seem to have significant effects. I’m not surprised the increase flows to marginal firms. That seems to suggest the constraint is good ideas and not risk capital. Risk capital seems to have expanded to the limit of good ideas without the credits. Nevertheless, failures adds to the knowledge base.

AI Summary. Pass-through businesses such as S corporations and partnerships accounted for 95% of U.S. businesses and $1.3tn in income, a structure favored because pass-through income is taxed at individual rates. The share of business income going to the top 1% of earners rose from 20% in 1980 to over 50%.

Eric Zwick National Bureau of Economic Research
Date Posted:
Is Database:
Database

Tax policy significantly influences business organization, with top earners increasingly deriving income from pass-through entities. In 2018, pass-through businesses accounted for 95% of all U.S. businesses, generating $1.3tn in income.

Does tax policy drive pass-through income growth at the top?

Core argument: Pass-through businesses such as S corporations and partnerships made up 95% of all U.S. businesses in 2018 and generated $1.3tn in income, with that income taxed at individual rates rather than corporate rates.

Tax policy significantly influences business organization, with data showing that top earners increasingly derive income from pass-through entities like S corporations and partnerships. In 2018, pass-through businesses accounted for 95% of all U.S. businesses, generating $1.3tn in income. This shift is partly due to tax advantages, as pass-through income is taxed at individual rates, often lower than corporate rates. The Tax Cuts and Jobs Act of 2017 further incentivized this structure by reducing the top individual tax rate to 37% and introducing a 20% deduction for qualified business income. Consequently, the share of business income among the top 1% of earners rose from 20% in 1980 to over 50% in recent years. This trend underscores the role of tax policy in shaping business structures and income distribution, highlighting the need for policymakers to consider these dynamics when designing tax legislation.

Takeaways by Macro Roundup® AI

  1. Pass-through businesses such as S corporations and partnerships made up 95% of all U.S. businesses in 2018 and generated $1.3tn in income, with that income taxed at individual rates rather than corporate rates.
  2. The share of business income accruing to the top 1% of earners rose from 20% in 1980 to over 50% in recent years, as top earners increasingly draw income from pass-through entities.
  3. The Tax Cuts and Jobs Act of 2017 cut the top individual tax rate to 37% and added a 20% deduction for qualified business income, further incentivizing the pass-through structure.

Wojciech Kopczuk and Eric Zwick, "Business Incomes at the Top," National Bureau Of Economic Research, August 2020, https://www.nber.org/papers/w27752

Ed Comment:Includes important methodology, caveats and good quotes about how one can make the numbers be whatever they want.

Zwick follows up onCapitalist In the Twenty-First Century, paper is just a discussion of how tax policy shapes how business are organized, and some research they plan on doing based off changes from TCJA:

“…First, as the complexities of the Tax Cuts and Jobs Act of 2017 unfold, a number of research opportunities should emerge. On one hand, the law reduced the marginal and effective corporate tax rates, creating—for the first time since 1987—a stronger incentive to shift business income away from a pass-through to a C-corporation structure. As an offset for capital-intensive pass-throughs that are more likely to consider C-corporation form in the first place, the 2017 legislation also introduced a new tax deduction (“Section 199A deduction”) on personal income tax returns that amounts to a 20 percent reduction in taxes on business income in this form. As an acknowledgement of the incentives to characterize entrepreneurial income in the tax-preferred form,this rate is not available to a large number of “specified service businesses,” including lawyers, doctors, consultants, and similar types of firms that rely primarily on human capital. Goodman et al. (2019) simulate the effect of the 199A deduction for pass-through owners based on 2016 data and conclude that while it benefits business owners throughout the income distribution, over 72 percent of tax savings accrues to the top 5 percent. Henry, Plesko and Utke (2018) discuss the complex interaction of tax incentives regarding the choice of the organizational form in the aftermath of the 2017 legislation….”

Doubt you will want to add this to database, Just an FYI on his future research

“…In 2014, 69 percent of the top 1 percent of income earners and 84 percent of the top 0.1 percent of income earners accrued some pass-through business income. In absolute terms, that amounts to more than 1.1 million pass-through owners with annual incomes above $390,000 and 140,000 pass-through owners with annual incomes of more than $1.6 million. In both number and aggregate income, these groups far surpass the top executives at public companies, who have been the focus of much inequality commentary. As shown in Figure 1, the 10,700 top public company executives earned a total of $33 billion in 2014 in salary and options. In contrast, the 14,900 business owners in the top 0.01 percent of the income distribution received more than $100 billion in income from S-corporations and partnerships. In 2014, approximately 270,000 wage earners in the top 1 percent and 27,000 wage earners in the top 0.1 percent worked for public companies, earning a total of $260 billion and $110 billion in wages and salaries, respectively. For every public company employee in the top 1 percent and top 0.1 percent, there are four and five pass-through owners, respectively. In short, the typical top 1 percent earner is not a public company executive or tech billionaire; instead, a top earner is typically a doctor, lawyer, or the owner-operator of a middle-sized business. These top pass-through owners are predominantly working age, in contrast to the older top earners whose income comes from other categories of capital. Looking at those with more than $1 million in annual income, Smith et al. (2019) find that 60-70 percent of the millionaires who get a majority of their income from either wages or pass-through ownership are in their 40s and 50s. However, the millionaires who get a majority of their income from C-corporation dividends or other capital tend to be older with about two-thirds falling into age brackets from their 50s to their 70s….”
Business Incomes at the Top: Comments Image 1

AI Summary. 52% of U.S. adults aged 18-29 live with their parents, up from 38% in 2000 and the highest share since the Great Depression, with the total reaching 26.6m. The increase spans racial and ethnic groups, genders, and both metropolitan and rural areas, with the sharpest growth among those aged 18-24 and White young adults.

Richard Fry Pew Research Center
Date Posted:
Is Database:
Database

52% of 18-29 year olds live with a parent, up from 38% in 2000 & +5% since February. Highest share since the Great Depression.

Are more young adults living with their parents than in recent decades?

Core argument: 52% of U.S. young adults aged 18–29 lived with their parents in July, up from 47% in February and 38% in 2000, the highest share since the Great Depression.

In July, 52% of young adults aged 18-29 lived with their parents, marking a significant increase from 38% in 2000 and a rise from 47% in February. This trend, the highest since the Great Depression, reflects broader economic challenges impacting young adults across all demographics, including racial and ethnic groups, genders, and both metropolitan and rural areas. The total number of young adults living with parents reached 26.6m, an increase of 2.6m since February. The sharpest growth was observed among the youngest adults (18-24) and White young adults. This shift underscores the economic pressures faced by this age group, potentially linked to factors such as housing affordability, labor market conditions, and educational expenses, which may have long-term implications for economic mobility and household formation trends.

Takeaways by Macro Roundup® AI

  1. 52% of U.S. young adults aged 18–29 lived with their parents in July, up from 47% in February and 38% in 2000, the highest share since the Great Depression.
  2. The number of young adults living with their parents reached 26.6m, an increase of 2.6m since February, with the sharpest growth among those aged 18–24 and White young adults.
  3. The rise in young adults living with their parents spans racial and ethnic groups, genders, and both metropolitan and rural areas.

Majority of young adults 18-29 live with parents, though this counts college students as living with parents“…In July, 52% of young adults resided with one or both of their parents, up from 47% in February, according to a new Pew Research Center analysis of monthly Census Bureau data. The number living with parents grew to 26.6 million, an increase of 2.6 million from February. The number and share of young adults living with their parents grew across the board for all major racial and ethnic groups, men and women, and metropolitan and rural residents, as well as in all four main census regions. Growth was sharpest for the youngest adults (ages 18 to 24) and for White young adults….”

Richard Fry, Jeffrey Passel and D'Vera Cohn, "A majority of young adults in the U.S. live with their parents for the first time since the Great Depression," Pew Research Center, September 4, 2020, https://www.pewresearch.org/fact-tank/2020/09/04/a-majority-of-young-adults-in-the-u-s-live-with-their-parents-for-the-first-time-since-the-great-depression/