Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…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
  • “…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
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, October 21, 2020

AI Summary. Intangible assets such as intellectual property, brand value, and technological innovation held by S&P 500 companies exceeded $21tn, more than double the 2005 level, and accounted for 84% of the index's market value — the highest share recorded.

Sarah Ponczek Bloomberg
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The S&P 500 has seen a significant increase in intangible assets, reaching $21tn by 2018, more than double the amount in 2005.

Do intangible assets now drive most of the stock market's value?

Core argument: Intangible assets at S&P 500 companies exceeded $21tn by the end of 2018, more than double their 2005 level.

S&P 500 companies have seen a significant increase in intangible assets, reaching over $21tn by the end of 2018, more than double the amount in 2005. These intangibles now account for 84% of the S&P 500's market value, marking the highest proportion ever recorded. This shift underscores the growing importance of non-physical assets such as intellectual property, brand value, and technological innovation in driving corporate valuations and market performance. The reliance on intangible assets reflects a broader economic trend where traditional measures of value, likepp&E [Property, Plant, and Equipment], are increasingly supplemented by assets that are less tangible but crucial for future growth. This evolution in asset composition highlights the need for investors and policymakers to adapt their strategies and frameworks to better assess and leverage these invisible drivers of economic success.

Takeaways by Macro Roundup® AI

  1. Intangible assets at S&P 500 companies exceeded $21tn by the end of 2018, more than double their 2005 level.
  2. Intangibles account for 84% of the S&P 500's market value, the highest proportion ever recorded.
  3. Assets such as intellectual property, brand value, and technological innovation increasingly supplement traditional measures like property, plant, and equipment in driving corporate valuations, pointing to a need for investors and policymakers to adapt their assessment frameworks.

Bloomberg, “…. As a result of those gains, S&P 500 members held more than $21 trillion in intangibles at the end of 2018, more than double 2005, according to a report by research center Ponemon Institute and Aon Plc, a professional services firm that provides risk and insurance consulting. That’s 84% of the S&P 500’s market value, the most ever….”

Sarah Ponczek, "Epic S&P 500 Rally Is Powered by Assets You Can’t See or Touch," Bloomberg, October 21, 2020, https://www.bloomberg.com/news/articles/2020-10-21/epic-s-p-500-rally-is-powered-by-assets-you-can-t-see-or-touch

Bloomberg’s version

Here is their chart which Bloomberg highlights

The factoid comes from areport(attached) that is usesPP&Eas a proxy fortangible assetsand anaccounting standard for intangibles(Recognition criteria: IAS 38 requires an entity to recognize an intangible asset, whether purchased or self-created (at cost), if and only if it is probable that the future economic benefits that are attributable to the asset will flow to the entity, and the cost of the asset can be measured reliably. The likelihood of economic benefits must be based on reasonable/supportable assumptions about conditions that will exist over the life of the asset. The probability recognition criterion is considered to be satisfied for intangible assets that are acquired separately or in a business combination.)

Thursday, October 22, 2020

AI Summary. China's current account surplus is running at an annualized $400bn while the US trade deficit has returned to pre-financial-crisis levels. The author argues that China's reluctance to adopt broad-based stimulus and its managed exchange rate, aimed at keeping the currency broadly stable, risk making these imbalances persistent absent policy corrections.

Brad Setser Council on Foreign Relations
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China’s current account surplus is running at $400bn annualized, while the US trade deficit has returned to pre-financial crisis levels, highlighting a growing imbalance. @Brad_Setser

Do China's stimulus reluctance and managed exchange rate entrench global trade imbalances?

Core argument: China's current account surplus is running at an annualized $400bn while the US trade deficit has returned to pre-financial-crisis levels, indicating a growing imbalance.

China's current account surplus is running at an annualized $400bn, while the US trade deficit has returned to pre-financial crisis levels, highlighting a growing imbalance. This trend may not be a temporary COVID-related blip, as China's reluctance to implement broad-based stimulus and its managed exchange rate contribute to sustained trade imbalances. The People's Bank of China's focus on maintaining "basic stability" in the exchange rate, despite modest appreciation, further exacerbates this issue. Without policy corrections, there is a real risk that these imbalances will persist, contrasting with the post-2009 crisis period when China's stimulus and currency appreciation helped reduce trade imbalances. The IMF cannot ignore these developments, as they pose significant challenges to global economic stability.

Takeaways by Macro Roundup® AI

  1. China's current account surplus is running at an annualized $400bn while the US trade deficit has returned to pre-financial-crisis levels, indicating a growing imbalance.
  2. China's reluctance to adopt broad-based stimulus and the People's Bank of China's focus on "basic stability" in the exchange rate, despite modest appreciation, contribute to sustained trade imbalances rather than a temporary COVID-related blip.
  3. Without policy corrections, these imbalances risk persisting, in contrast with the post-2009 period when China's stimulus and currency appreciation helped reduce trade imbalances.

Setser has another warning about growing imbalances, US trade deficit (in $ terms) now ~ back at pre-financial crisis levels while the PRC’s current account surplus running $400B annualized

He worries this will be more than a COVID related blimp“…But it is possible that the swings will not be temporary. China has not done much to support its own household income—arguably because it has not needed to do so in a world where its exports are doing so well. And given the ongoing reluctance from Chinese policymakers toward broad-based stimulus, China’s fiscal policy response to COVID-19 may be much more tepid than the fiscal response of China’s largest trading partners. Combine that with a still-managed exchange rate that is still weak against both the dollar and the euro even with the modest appreciation in the third quarter and the PBOC’s desire for “basic stability” in the exchange rateand you have the recipe, at least in theory, for a sustained widening of trade imbalances.****….The 2009 crisis, thanks to the combination of China’s stimulus and the lagged impact of its 2007-2008 appreciation of the yuan (initially against the dollar, which translated into a broader appreciation when the dollar rallied a bit against the euro) led to a reduction in trade imbalances…. Without some policy corrections, I fear that there is a real risk that COVID-19 will lead to a sustained, rather than temporary, re-widening of imbalances…..”

Brad Setser, "China’s Surplus is Rising Rapidly. So is the U.S. Deficit. The IMF Cannot Turn a Blind Eye.," Council On Forign Relations, October 20, 2020, https://www.cfr.org/blog/chinas-surplus-rising-rapidly-so-us-deficit-imf-cannot-turn-blind-eye

AI Summary. Foreign ownership of US equity rose from 11% in 1980 to 40%, alongside a similar rise in US ownership of foreign stocks, while retirement accounts hold about 30% of US equity and taxable accounts about 25%. A substantial share of any corporate tax increase would therefore fall on foreign investors.

Steve Rosenthal New York University School Of Law
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Foreigners now own 40% of American equity, up from 11% in 1980 & 25% in 2000. @Steve_Rosenthal1

Who bears the burden of higher US corporate taxes?

Core argument: Foreign ownership of American equity rose from 11% in 1980 to 40% today, mirrored by a similar increase in US ownership of foreign stocks.

The share of American equity owned by foreigners has surged from 11% in 1980 to 40% today, reflecting a significant shift in global investment patterns. This trend is mirrored by a similar increase in US ownership of foreign stocks, highlighting the broader impact of globalization on cross-border investments. As foreign ownership of US equity has grown, the composition of equity ownership has also changed, with retirement accounts holding about 30% and taxable accounts about 25%. This evolution in equity ownership underscores the complexities of using corporate tax rates as a revenue tool, as a substantial portion of the tax burden would fall on foreign investors. The data suggests a need for policymakers to consider the implications of these shifts when designing tax strategies aimed at corporations and their shareholders.

Takeaways by Macro Roundup® AI

  1. Foreign ownership of American equity rose from 11% in 1980 to 40% today, mirrored by a similar increase in US ownership of foreign stocks.
  2. Retirement accounts hold about 30% of US equity and taxable accounts about 25%.
  3. With 40% of US equity held by foreigners, a substantial portion of the corporate tax burden would fall on foreign investors, complicating the use of corporate tax rates as a revenue tool.

New study from the Rosenthal and Burke of the Tax Policy Center finds 40% of total American equity is owned by foreigners (they use this to advocate for using the corporate tax rate as a revenue raiser as 40% of the cut went) but the evolution over time is interesting, “…Foreignersheld just 4 percent of US equity in1986(This is typo, should be 1965/1966), but their share rose steadily to 11 percent by 1980, 25 percent by 2000, and 40 percent today… foreigners now hold about 40 percent of total US equity, retirement accounts about 30 percent, and taxable accounts about 25 percent….”

This is mirrored by American ownership of foreign equity (See Figure 3)“…Over the same period,US ownership of foreign stock rose at a similar clip. This growth, by spurts, in cross-border investment is just one manifestation of globalization…”

Whos Left to Tax? US Taxation of Corporations and Their Shareholders: Extended Excerpt Image 1


Steve Rosenthal and Theo Burke, "Who’s Left to Tax? US Taxation of Corporations and Their Shareholders," New York University School Of Law, October 27, 2020, https://www.law.nyu.edu/sites/default/files/Who%E2%80%99s%20Left%20to%20Tax%3F%20US%20Taxation%20of%20Corporations%20and%20Their%20Shareholders-%20Rosenthal%20and%20Burke.pdf

AI Summary. Concerns about "zombie firms" — loss-making companies kept alive by cheap credit — are overstated because with interest rates near zero the cost of funding them is minimal and little capital is crowded out. Shutting them down can cut national output by more than their own production, as lost worker income reduces spending economy-wide.

Joseph Gagnon Peterson Institute for International Economics
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Concerns about zombie firms are overstated due to the limited opportunity cost of funding them, especially when the economy operates below potential.

Are worries about loss-making firms kept alive by cheap credit overstated?

Core argument: Eliminating zombie firms can cause an immediate GDP drop exceeding 100% of their production, as lost worker income reduces spending across the economy through the Keynesian multiplier.

Concerns about zombie firms are overstated due to the limited opportunity cost of funding them, especially when the economy operates below potential. With interest rates near zero, the cost to creditors of keeping loss-making firms afloat is minimal, allowing for potential recovery without significant crowding out of capital. Eliminating zombie firms can lead to an immediate GDP drop exceeding 100% of their production, as the loss in worker income reduces spending across the economy. This Keynesian multiplier effect underscores the potential harm of prematurely shutting down such firms. Moreover, the capital invested in these firms is often irretrievable, and the management teams are unlikely to transition to new industries, suggesting that maintaining these firms may be less detrimental than perceived.

Takeaways by Macro Roundup® AI

  1. Eliminating zombie firms can cause an immediate GDP drop exceeding 100% of their production, as lost worker income reduces spending across the economy through the Keynesian multiplier.
  2. With interest rates near zero and the economy operating below potential, the cost to creditors of keeping loss-making firms afloat is minimal, allowing recovery without significant crowding out of capital.
  3. Capital invested in zombie firms is often irretrievable and their management teams are unlikely to transition to new industries, suggesting that maintaining such firms may be less detrimental than perceived.

Joseph Gagnon, "Who's afraid of zombie firms?," Peterson Institute For International Economics, October 22, 2020, https://www.piie.com/blogs/realtime-economic-issues-watch/whos-afraid-zombie-firms

Gagnon on why concerns about "Zombie Firms" are overrated in this current environment (economy operating below potential)"...When the economy is operating below potential and the forces returning it toward potential are absent or weak, the costs of killing zombie firms are huge. Killing a zombie immediately wipes out the income its workers have to spend on goods and services throughout the economy. This decline in spending drags GDP down by potentially more than 100 percent of what the zombie firm used to produce via a Keynesian multiplier effect..."

Ed Comment, “…You can add this for my comments but I’m not so persuaded by the zombie arguments. First, I think, far more often than not, things exist for good reasons. It’s the criticism that’s misguided. Second, why not stay alive if interest rates are near zero? Third, and interest rates are near zero because we don’t have good uses for additional capital so I don’t see much crowding out. Fourth, I don’t see much crowing out regardless because the capital is already in the ground so there is no way to retrieve it and use it elsewhere. Fifth, if there is an opportunity cost it’s with the management team keeping the zombie alive. But they are probably 55 years olds who aren’t going to transition to a new industry/company/job. What I see a lots of previously employed but now underutilized 50 year olds, not a shortage. I don’t think young talent is coming behind them to take their places. Is it so bad that we kept the pickup truck business alive in America with tariffs as long as our upcoming talent is going to places like apple and not GM? It was probably a good thing….”

"..Thus, killing a zombie firm when the economy is operating well below potential causes an immediate drop in GDP on the order of 100 percent (or more) of the zombie’s production, which is only gradually offset by eventual improvements in productivity amounting to a small fraction of the lost GDP. When the economy is operating below potential, many firms operate at a loss. In such an environment, central banks set interest rates close to zero,and it costs creditors little to keep loss-making firms in operation in hopes of renewed profitability when the economy recovers. There is nothing wrong with this outcome...."