Macro Roundup

Laura Italiano, "People whose parents divorced when they were kids have lower ‘love hormone’ levels,"New York Post, September 10, 2020, https://nypost.com/2020/09/10/study-says-these-people-have-lower-love-hormone-levels/

“…The Baylor study, published in the Journal of Comparative Psychology, adds to the understanding of how early, parental stress — and the suppression of oxytocin that may result — could also be linked to adult outcomes. “What we found was that oxytocin was substantially lower in people who experienced parental divorce compared to those who did not,” Boccia said….”

James Bessen, Erich Denk, Joowon Kim and Cesare Righi, "Declining Industrial Disruption," Boston University School Of Law, February 2020, https://papers.ssrn.com/sol3/papers.cfm

“…Displacement hazards rose for several decades since 1970 but have declined sharply since 2000. Using a production function-based model to explore the role of investments, acquisitions, and lobbying, we find that investments by dominant firms in intangibles, especially software, are distinctly associated with greater persistence and reduced leapfrogging. Software investments by top firms soared around 2000, contributing substantially to the decline.Also, higher markups are associated with greater displacement hazards, linking rents positively with industry dynamism. While technology is often seen as disrupting industry leaders, it now appears to help suppress disruption…Instead, the evidence is most consistent with an explanation that emphasizes the role of proprietary software. We find that software stocks are significantly related to lower displacement rates across a variety of datasets and measures. Moreover,investments by large firms in self-developed software increased by an order of magnitude beginning in the late 1990s. This surge can account for most of the decline in leapfrogging rates and an instrumental variable analysis suggests the relationship is causal. Viewing these investments as endogenous sunk costs (Sutton 1991) provides a parsimonious explanation for the decline in Schumpeterian competition. Enabled by new technology, leading firms made large investments in managing complexity to improve the quality of their products and services, differentiating themselves from rivals and creating a “natural oligopoly.”Thus, it seems that technology has begun to play a new and different role in the economy. New technologies have been generally associated with increased disruption of industries and technology continues to disrupt industries and business models in general (newspapers, music). But now, it seems, information technology allows dominant firms to suppress their own “creative destruction,” decreasing disruption in this particular dimension…”

They find markups are actually associated with churn, “…We find, in fact, that higher markups are associated with greater industrial dynamism reflected by the displacement of industry leaders… We find that industries with higher markups actually have higher rates of displacement, implying that markups are not a reliable indicator of industry dynamism. Displacement hazards are negatively associated with industry concentration…”

Second they find the drivers of those shifts, “…explore the roles of different capital stocks in accounting for these shifts. We find that rising investments in intangibles generally and in software in particular can account for most of the drop in displacement and leapfrogging hazards since 2000. Intangible and software investments by top firms appear to impose a negative externality on second-tier firms, reducing their leapfrogging probabilities. Dominant firms increased their investment in software by an order of magnitude around 2000. Even relative to second-tier firms ranked 5-8, the top four firms more than doubled their software stocks. Moreover, using Census microdata and BEA industry data,it appears that this relationship is largely driven by own account (self-developed) software, which is substantially dominated by large firms. An instrumental variable analysis provides some support for the idea that the impact of own-account software on displacement hazards may be causal. We discuss why software might be playing this role….”

Their first finding is“…displacement and leapfrogging hazards exhibit a sharp break in trend: after rising robustly for many decades, they fell sharply starting around the year 2000… The picture that emerges is this: turnover of market leaders rose substantially from 1970 through the 1990s, but around 2000 the turnover rates began dropping. The change was sharp and substantial and across most sectors, suggesting a major shift in the nature of Schumpeterian competition…”

They measure turnover two ways, “…the annual displacement hazard that a firm ranked top four by sales in its industry falls out of the top four, and… theannual hazard that a firm ranked fifth through eighth leapfrogs into the top four….”

New Bessen looking at the turnover of dominant firms finds the inflection point was the late 1990s, when it rose substantially over previous decades but has since dropped as the internal proprietary software investment that drove churn now help to protect incumbents.

Thomas Astebro, Serguey Braguinsky, Yuheng Ding, "Declining Business Dynamism among Our Best Opportunities: The Role of the Burden of Knowledge," National Bureau Of Economic Research, September 2020, https://www.nber.org/papers/w27787

As evidence for this they point to, “…Consistent with the burden of knowledge increasing for founders,the years of work experience among founders shows a steady increase. The regression results imply thatthe average founder had about 14 percent longer post-PhD work experience in 2017 than in 1997.See Table A11. Further,Figure 2 illustrates a pronounced decline over time in the earnings of less experienced founders relative to their more experienced peers. Here, we separate less and more experienced founders by the median number of years after PhD (13 years), although other reasonable cut-offs lead to similar results. Between 1997 and 2001, founders with postPhD experience at or below the median earned more than the rest of the sample (consistent with Ouimet and Zarutskie, 2014), but by the 2010s, the situation is reversed, with less experienced founders earning on average 30-40 percent less than other founders. Prior work experience apparently is becoming much more valuable for founders over time. The earnings of less experienced founders declined not just in relative but also in absolute terms. The average inflation-adjusted earnings of founders with below the median post-PhD experience were $72,616 in 1997, whereas 20 years later their earnings were $57,517, a decline of more than 20 percent (Table A3 presents full survey data)…”

They suspect the driver of this trend is higher barriers to entry “the burden of knowledge”“…We argue and find that an increasing burden of knowledge also leads to fewer hightech high-opportunity startups. We argue and find that it also leads PhDs to amass greater work experience before becoming a founder, to shoulder more R&D tasks as founders, and not being rewarded for that extra work. Working for existing firms has, therefore, become considerably more attractive….”

They find, “….employ the nationally representative Survey of Doctorate Recipients to show a decline over the past 20 years in both the rate of startups founded and the share of employment at startups by the highest-educated science and engineering portion of the U.S. workforce….Figure 1 displays the large decline over the past two decades in the share of founders among PhDs in science and engineering. In 1997, 34 percent reported being a founder of a startup, but by 2017 this rate had declined to 21 percent, a decline of 38percent. This observation alone would not be sufficient to conclude that high-tech high-opportunity startups are on the decline because there could be fewer founding teams, but each could be getting larger. However, as also shown in Figure 1, the employment share of science and engineering PhDs at startups is also falling over time.4 The downward trend is not driven by any particular category of PhDs. For example, figures similar to Figure 1 for males versus females, whites versus non-whites, California versus the rest of the U.S., and for U.S. versus non-U.S. born PhDs differ in levels but their dynamics are almost exactly the same as those in Figure 1. See Figures A1-A6. The dramatically falling share of founders and employment at startups raises the prospect of a drying up of high-tech, high-opportunity startups.

Great new NBER paper implicitly supports Bloom'sAre Ideas Getting Harder To Find. They find that since 1997 the startup formation has declined for firms run by PhD's in science and engineering as “The Burden Of Knowledge” has increased, implies that institutional capabilities have grown even more important.

Matthew Klein, "Sure, the U.S. Can Cut Its Reliance on China. But Is It Worthwhile?,"Barrons, September 11, 2020, https://www.barrons.com/articles/sure-the-u-s-can-cut-its-reliance-on-china-but-is-it-worthwhile-51599854414

He read the same Setser post we did, “….As Brad Setser at the Council on Foreign Relations has noted, the lack of large trade imbalances elsewhere in the world right now means that America’s roughly $1 trillion trade deficit in manufactured goods is effectively funding China’s $1 trillion surplus, which in turn is supporting Chinese companies far above and beyond what they could earn from selling to their domestic market. That “could reinforce the return of pre-2008-style trade imbalances,” Setser warns, which would mean some combination of higher U.S. borrowing and lower U.S. employment. Chinese officials recognize the danger of their continuing dependence on the rest of the world’s consumers, but for various reasons, they haven’t been able to alter their own domestic political economy to change things. If the country that most desperately wants to “decouple” from the U.S. still hasn’t been able to pull it off—despite significant progress in doing so by some measures—it probably means that Americans determined to cut themselves off from China will have a tough slog ahead…..”

Matt Klein on US decoupling from China, it’s achievable (note these numbers are from 2015 so they don’t reflect the current deficits)“…At first glance, the costs of decoupling look modest, for the simple reason that China provides relatively little value to the U.S. economy to begin with. Using the Organization for Economic Cooperation and Development’s “trade in value added” data, less than 3% of U.S. domestic demand is ultimately satisfied by Chinese production. Most Americans’ needs are met by American companies and workers, whether it’s housing, health care, education, food, energy, or entertainment. Even in higher-value manufacturing industries where imports are far more important, such as pharmaceuticals, metals, machinery, electronics, and motor vehicles, Chinese production satisfies less than 9% of Americans’ needs.With enough time—and enough inducements to shift supply chains and offset the losses on the nearly $300 billion of investments that American companies have made in China over the past three decades—a determined push to reduce Chinese imports could therefore be successful…..”

Kurt Andersen on the failure of Friedmanism,”… That’s right — 28 years after the Friedman doctrine began the paradigm shift that made U.S. big business more powerful than ever, he was still insisting, as he had in his essay, that businesspeople with any willingness to pay a price to make society more fair were indulging “a suicidal impulse.”Which wasn’t just untrue, but by then more like the opposite of true: After the New Deal saved U.S. capitalism from its own excesses and helped enable decades of ultraprosperity and increasing equality, the full Friedmanization of our economy for the last four decades has generated such greed-driven extremes of inequality, insecurity and immobility that the system is now on a path that looks crazily self-destructive....."
Kurt Andersen, "How Liberals Opened the Door to Libertarian Economics,"New York Times, September 11, 2020, https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-free-markets.html

Sorkin on “Stakeholder Capitalism,””… The question in 2020 is: What exactly does it mean to be in favor of all stakeholders? Despite social responsibility being in vogue among C.E.O.s, and the voices of those — like myself — who have encouraged business leaders to be more empathetic,there remains an inconvenient truth for everyone seeking a more cuddly version of capitalism: If a company isn’t making profits for shareholders, it is very hard to take care of its other constituents…. Friedman’s manifesto may have fallen out of favor but, like any important doctrine, it can be denounced but not ignored.In Warren Buffett’s latest annual letter to Berkshire Hathaway’s shareholders, the legendary investor made a subtle but direct — for those who were paying attention — rebuke to the purpose-over-profit crowd. “In representing your interests,’’ he wrote, ‘‘business-savvy directors’’ will “seek managers whose goals include delighting their customers, cherishing their associates and acting as good citizens of both their communities and our country.” Reading between the lines, you can see a suggestion that the current hysteria about the profit motive and the need to create a new version of capitalism is overblown. “Those objectives are not new,” he writes. “Who would have it otherwise?”…”

Andrew Ross Sorkin, "Has Business Left Milton Friedman Behind?"New York Times, September 11, 2020, https://www.nytimes.com/2020/09/11/business/dealbook/milton-friedman-anniversary-sorkin-essay.html

Founder of Allbirds makes argument for “Stakeholder Centric Governance,” "...To reverse the Friedman paradigm,companies should embrace an affirmative duty to stakeholders and society. This requires tangible, publicly articulated goals, such as paying living wages to their workers, respecting workers’ right to join a union, promoting racial and gender inclusion and pay equity, enhancing safety protocols, and reducing carbon emissions. By committing to goals of responsible citizenship, companies allow stakeholders, institutional investors and the public to hold them accountable to their inclusive ideals. In doing so, corporate leaders will also set an example that institutional investors should be required to follow in their own investing and voting policies. But adopting a stakeholder-centric governance model is only half the battle….”

Leo E. Strine Jr. and Joey Zwillinger, "What Milton Friedman Missed About Social Inequality,"New York Times, September 10, 2020, https://www.nytimes.com/2020/09/10/business/dealbook/milton-friedman-inequality.html

Dealbook Newsletter, "Greed Is Good. Except When It’s Bad.,"New York Times, September 13, 2020, https://www.nytimes.com/2020/09/13/business/dealbook/milton-friedman-essay-anniversary.html

Urban Institute looks at school funding differences across income levels and finds education funding is largely progressive:

“…Specifically, for each state, we calculate a weighted average of each district’s per-student funding, where the weights are the number of poor kids in each district. We then calculate the same figure weighted by the number of nonpoor kids. Our progressivity measure for each state is the difference between the average funding for poor and nonpoor kids.For example, an estimate of $100 would imply that, on average, poor students attend districts that receive $100 more in per-student funding that the districts attended by nonpoor students. Of course, both poor and nonpoor students are enrolled in every district—our measure estimates whether poor students tend to be enrolled in districts with higher (or lower) funding levels than nonpoor students…”

Matthew Chingos and Kristin Blagg, “Do Poor Kids Get Their Fair Share Of School Funding?” Urban Institute, May 2017, https://www.urban.org/sites/default/files/publication/90586/school_funding_brief_1.pdf

Data from (attached):

Matthew Chingos and Kristin Blagg, “School Funding: Do Poor Kids Get Their Fair Share,” Urban Institute, May 2017, https://apps.urban.org/features/school-funding-do-poor-kids-get-fair-share/

Chart via

Results:

“…. We find that poor students in most states attend school districts that are about as well funded as the districts nonpoor students attend in their state. This is good news for those concerned about regressive funding, but troubling news for those who advocate for additional funding for schools serving low-income students. With a few notable exceptions, such as New Jersey and Ohio, districts serving poor students do not receive significantly more resources than districts that serve nonpoor students. Many states have adopted funding systems aimed at providing more resources to schools serving disadvantaged students. Our analysis indicates that funding progressivity has not changed much since 1995, perhaps because local funding has responded in ways that tend to preserve the relative funding of more versus less economically advantaged districts. The ways in which state and local funding interact is an important subject for future research. Regardless of their overall effect on progressivity in the medium to long run, the funding reforms of the 1990s and 2000s appear to have benefited disadvantaged students…But policy design clearly matters, as shown by the continued general lack of progressivity in many states documented here and by previous research on state funding policies….For example, a 1994 Michigan funding reform disproportionately benefited more advantaged students, likely because districts directed new dollars to schools serving lesspoor student populations….”

Tax Policy Center analysis finds differences in spending per pupil btw white and non-white students is small.

"...To examine spending patterns across different populations of students, we compared average per pupil spending across districts weighted by the number of students in each racial or ethnic group. In general, differences in spending per pupil in districts serving nonwhite and white students are very small. In 1972, the ratio of nonwhite to white spending was.98; this trend had reversed by 1982, as spending per pupil for nonwhite students was slightly higher than for white students in most states and in the United States as a whole and has been for the past 20 years (figure 2). Table 2 presents spending per pupil figures for 2002 weighted by the number of students in each subgroup...."

They also finds that differences in spending per pupil have diminished over past 40 years:

".... Differences in spending per pupil have diminished over the past 38 years in the aftermath of court cases, but significant variation still exists. Further, there is little evidence that these efforts have directly affected student achievement. There has been some closing of test score gaps between black and Hispanic students and white students and greater availability of AP courses. States are moving beyond equalization to ensure that each student receives an adequate education...."

Washington Post, September 13, 2020, https://www.washingtonpost.com/opinions/2020/09/13/robert-samuelson-goodbye-column/

Dear Readers,

It’s time to quit. Since coming to Washington in 1969 as a young reporter, I have written, by my crude calculation, about 2 million words, most of them columns for The Post, Newsweek and the National Journal. Some years ago, I promised myself that I wouldn’t overstay my welcome: I would not continue my column simply because I could. I’m almost 75. If I haven’t yet said what’s on my mind, I never will.

Here are a few parting observations. As regular readers know, I write on the economy and its connection with society and politics. Over the years, I’ve explored dozens of subjects: recessions, inflation, executive pay, budget deficits, climate change, poverty, the welfare state, trade, taxes, aging, cybersecurity, China, the stock market — and many others.

So far as I can tell, nothing that I have written has ever had the slightest effect on what actually happened. I’ve routinely suggested shutting down Amtrak, not because I dislike trains (I don’t) but because Amtrak is an excellent example of how the federal government has acquired so many nonessential functions. Amtrak continues chugging along, costing billions of dollars for small public benefits. But I’m resigned to this. No one elected me to anything. In our system, the people rule, not the pundits; and that’s how it should be.

The truly big economic story of the past half-century has been the rise and fall of “macroeconomics.” This is economists’ fancy term for using interest rates, taxes and government spending to regulate the economy’s growth and stability. This once seemed doable. Now, less so.

What happened?

In the 1960s, the American disciples of British economist John Maynard Keynes (1883-1946) argued that they could tame the business cycle. One well-known economist put it this way: “Recessions are now generally considered to be fundamentally preventable, like airplane crashes and unlike hurricanes.”

It didn’t work. Instead of reaching “full employment” (generally defined as an unemployment rate of 4 percent to 5 percent), we got easy money and inflation (peak: 13 percent in 1980). Paradoxically, we also got four recessions from 1970 to 1982 as the Federal Reserve tried to contain the inflation it had unleashed. “Stagflation,” it was called. Only a deep recession in the early 1980s, engineered by then-Fed Chair Paul A. Volcker, reduced inflation to single digits.

A similar saga occurred in the late 1990s and early 2000s. A long period of solid economic growth — labeled the Great Moderation by economists — fueled easy credit, shaky loans, defaults and insolvent lenders. Presidents George W. Bush and Barack Obama responded decisively. Fed Chair Ben Bernanke and Treasury secretaries Henry Paulson Jr. and Timothy Geithner did yeoman work in avoiding a second Great Depression. But that doesn’t excuse their failure to anticipate the housing boom and to preempt the bust.

I didn’t see it coming, either. But I’m not an economist, as I periodically reminded readers. I’m just a reporter who covers economics. One of the pleasures of journalism is that you get to learn lots of new “stuff.” I have learned much from economists. With some exceptions, most are intelligent, informed, engaged and decent. In my experience, this truth spans the political spectrum. But it’s not the only truth.

Another is this: Economists consistently overstate how much they know about the economy and how easily they can influence it. They maintain their political and corporate relevance by postulating pleasant policies. Presidents claim the good and repudiate the bad. There are practical limits to how much economic growth and living standards can be accelerated and sustained.

Recessions remain a threat. Any doubts about that were settled by the 2007-2009 Great Recession and global financial crisis, which at the time was the worst economic collapse since the 1930s’ Great Depression. The business cycle hasn’t been conquered yet and possibly never will be. That’s my main conclusion from a half-century of economy-watching. For at least three reasons, I see this cycle of overpromise continuing.

First, the quest for economic status and power pushes economists and their political sponsors toward exaggerated promises that lead to widespread public disappointment. To be sure, there are long periods of prosperity, but they tend to end badly. That’s been the case since the 1960s.

Second, people have a hard time changing their minds. Once their minds are made up, they are relatively impervious to argument, evidence and persuasion. Life is infinitely complex. To simplify, people make assumptions. If they routinely changed all their assumptions, they’d go crazy, as would the people around them. People do change, but the catalyst is usually some traumatic event.

Third, modern democracies have a hard time making sacrifices in the present for gains in the future. We’re already grappling with this problem. From 2010 to 2030, the elderly’s share of the population (65 and over) is projected to rise from 13 percent to 20 percent. Spending on Social Security and Medicare will skyrocket, and already is. Yet we have done little to prevent spending on the elderly from squeezing the rest of the federal budget. Global warming poses a similar issue: As yet, there is no consensus to spend today in the vague hope that we can curb climate change several decades from now.

I hope I am wrong about the future. That’s one excuse for my throwing in the towel now, in the midst of one of the great news stories of our time. I am a man of the 20th century, but we are now facing the problems of the 21st century, which demand new policies and norms. Goodbye and good luck — you’ll need as much help as you can get.

***

My special thanks over the years to Bill and Sue Jones, who made a young reporter feel at home in a strange city; to Richard Frank, the late editor of the National Journal, who first assigned me a column; to Peter Silberman, who moved the column to The Post; to Marge and Mel Elfin, who moved the column also to Newsweek; to Rich Thomas, the former chief economic correspondent for Newsweek, who has been a constant source of intellectual stimulation and moral support; to Alan Shearer, who syndicated the column through The Washington Post Writers Group; to Joel Havemann, a superb editor and better friend; and to Fred Hiatt, The Post’s editorial page editor who has kept me on the op-ed page for many years.

Samuelson, “…Second, people have a hard time changing their minds. Once their minds are made up, they are relatively impervious to argument, evidence and persuasion. Life is infinitely complex. To simplify, people make assumptions. If they routinely changed all their assumptions, they’d go crazy, as would the people around them. People do change, but the catalyst is usually some traumatic event….”