Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “…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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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 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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, November 13, 2020

AI Summary. The share of safe assets in the US economy has remained stable at roughly 30–35% of total assets over the past 70 years, with a standard deviation of 2.3%. Their composition has shifted, with banks' role in producing safe assets diminishing and a move back toward depositories and away from shadow banking.

Sara Almadani Federal Reserve Board
Date Posted:
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The supply of safe assets in the US has been relatively stable over the past 70 years, ranging btw 30-35% of total assets.

Has the share of safe assets in the economy stayed stable?

Core argument: Safe assets have held at 30–35% of total US assets over the past 70 years, with a standard deviation of 2.3%.

Over the past 70 years, the proportion of safe assets in the US economy has remained stable, consistently ranging between 30-35% of total assets. This stability is underscored by a standard deviation of 2.3%, indicating minimal fluctuation. Despite this constancy, the composition of these assets has evolved, particularly since the Great Financial Crisis (GFC). The role of banks in producing safe assets has diminished, with a notable shift back to depositories and away from shadow banking post-GFC. Government-issued safe assets continue to play a significant role, as depicted by the red area in updated analyses through 2020. This enduring stability in the share of safe assets highlights their critical role in the financial landscape, providing a reliable foundation amidst changing economic conditions.

Takeaways by Macro Roundup® AI

  1. Safe assets have held at 30–35% of total US assets over the past 70 years, with a standard deviation of 2.3%.
  2. The composition of US safe asset production has shifted even as its share stayed constant, with banks' role diminishing and a move back toward depositories and away from shadow banking after the Great Financial Crisis.
  3. Government-issued safe assets remain a significant component of US safe asset production in analyses updated through 2020.

New Fed research finds that the percentage of safe assets in the United States been relatively stable staying btw 30-35 percent of total US assets over the past 70 years, though there have been shifts in the makeup of those safe assets (and obviously demand is not just domestic)“….One remarkable claim is the percentage of safe assets in the United States has remained very stable over time…In particular,the fraction of safe assets to total assets in the economy has remained in a range between 30-35 percent during the past 7 decades. Here, we update the data on safe assets, as defined using the Financial Accounts of the United States (Z.1), and show thatthis claim is still true. We also update the components of safe assets and show that while the overall proportion has remained the same, there has been a significant shift in the components. For many years, the role of banks in the production of safe assets has been declining. But since the Great Financial Crisis (GFC), safe asset production has shifted back to depositories and away from shadow banking. Still, the declining contribution of banks remains notable….Figure 1 below updates the analysis through 2020. The red area represents the safe assets issued by U.S. federal, state, and local governments as a share of total assets in the U.S. economy, the blue area represents safe assets issued by the financial sector, and the dotted line indicates the average proportion of safe assets over the years 1952 to 2020 (31.1 percent). The standard deviation of the safe asset share has been 2.3 percent, suggesting that thehypothesis of a relatively constant proportion of safe assets remain true….”

Sara Almadani, Michael Batty, Danielle Nemschoff, and Wayne Passmore, "The Stability of Safe Asset Production," Federal Reserve Board, November 9, 2020, https://www.federalreserve.gov/econres/notes/feds-notes/the-stability-of-safe-asset-production-20201109.htm

Thursday, November 19, 2020

AI Summary. Using French administrative data, the authors estimate that a 10% rise in labor market concentration is associated with a 0.9% decline in wages for new hires, consistent with monopsony theory, with smaller effects in more unionized industries. They also estimate that a 10% rise in product market concentration is associated with a 0.9% wage increase, suggesting rent-sharing.

Ioana Marinescu Institute of Labor Economics
Date Posted:
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Research from @IoanaMarinescu shows a 10% increase in labor market concentration in France results in a 0.9% decrease in wages for new hires, supporting Monopsony Theory.

Does higher labor market concentration lower wages for new hires?

Core argument: A 10% rise in labor market concentration is associated with a 0.9% decline in wages for new hires in France, consistent with monopsony theory, according to instrumental variable estimates using French administrative data with worker and firm fixed effects.

Evidence from France indicates that a 10% rise in labor market concentration results in a 0.9% decrease in wages for new hires, aligning with Monopsony Theory. This relationship is supported by data showing a negative correlation between labor market concentration and both wages and recruitment flows. The study uses French administrative data and instrumental variable estimates with worker and firm fixed effects to demonstrate these effects, noting that the impact is less severe in more unionized industries. Conversely, a 10% increase in product market concentration can lead to a 0.9% wage increase, suggesting rent-sharing benefits, although its effect on hiring is less consistent.

Takeaways by Macro Roundup® AI

  1. A 10% rise in labor market concentration is associated with a 0.9% decline in wages for new hires in France, consistent with monopsony theory, according to instrumental variable estimates using French administrative data with worker and firm fixed effects.
  2. Labor market concentration in France is negatively correlated with both wages and recruitment flows, with the wage effect less severe in more unionized industries.
  3. A 10% increase in product market concentration is associated with a 0.9% wage increase, which the study attributes to rent-sharing, while its effect on hiring is less consistent.

Ioana Marinescu, Ivan Ouss and Louis-Daniel Pape, "Wages, Hires, and Labor Market Concentration," Institute of Labor Economics, May 2020, https://www.iza.org/publications/dp/13244/wages-hires-and-labor-market-concentration

Core of their evidence, “…Figure 5(a) depicts the log of the average hourly wage against the log labor market HHI by commuting zone in 2015. There is a clear negative relationship between hourly wages and labor market concentration. Figure 5(b) shows a strong negative relationship between market size (in terms of recruitment flows) and labor market concentration. Both of these observations are consistent with the core predictions of the monopsony model. Of course, the negative relationship between concentration and hires is somewhat mechanical since fewer hires also typically entails fewer firms hiring. Our regression analysis will address this issue by using an instrument for labor market concentration based on the concentration in other markets….”

Impact of regional employer concentration/market power on wages based on evidence from France finds that labor market concentration lowers wages and number of new hires, product market concentration has a positive impact on wages, “…We leverage detailed French administrative data to show that labor market concentration decreases both the number of hires and the wages of new hires, as hypothesized by Monopsony Theory. Based on our instrumental variable estimates with worker and firm fixed effects, a 10% increase in labor market concentration decreases hires by about 12.4% and the wages of new hires by nearly 0.9%, with less negative effects in more unionized industries. A 10% increase in product market concentration increases wages by 0.9%, with more positive effects in more unionized industries. The impact of product market concentration on wages is consistent with rent sharing. Product market concentration also has a negative but not always significant impact on the number of new hires…”

Ed Comment:“…how on earth can someone in the us monopolize a region labor market. It would have to be a big factory (or hospital) in rural America—something rural America would be rejoicing to have. Otherwise it’s a city or the country side with a couple of gas stations….”

Implication for anti-trust work, “…We find that a horizontal merger has an impact not only on workers in the affected industry, but also on workers in other industries that share the same occupation:for a merger between the top two employers in the retail industry, about 25% of the impacts affect workers outside the retail industry. Compared to mergers in other industries, a merger between the top two employers in the retail industry would be the most damaging overall, with about 24 million annual decrease in the wages of new hires, and about an 8000 decrease in annual hires. Our comprehensive data allows us to show that employer market power has a substantial effect on labor market outcomes even in countries like France where union coverage is high and labor market institutions are protective of workers. Our findings suggest that antitrust and competition authorities should further scrutinize the effects of competition policy on workers….”

AI Summary. Ageing populations and a weakening of globalisation are expected to raise inflationary pressures, as slower labour-force growth increases the number of consumers relative to producers and may restore labour's market power. These shifts pose policy challenges for managing government deficits amid potentially higher interest rates and structurally low growth.

Martin Wolf Financial Times
Date Posted:
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The global economy is undergoing significant structural shifts, with ageing populations and a weakening of globalisation impacting economic dynamics.

Do ageing populations and weaker globalisation raise inflationary pressures?

Core argument: Ageing populations and a weakening of globalisation are expected to raise inflationary pressure, as the share of young people falls, labour-force growth slows, and consumers rise relative to producers.

The global economy is undergoing significant structural shifts, with ageing populations and a weakening of globalisation impacting economic dynamics. As the proportion of young people decreases, the growth of the labour force slows, exacerbating fiscal pressures. This demographic shift, coupled with a rise in the number of consumers relative to producers, is expected to increase inflationary pressures. The shrinking labour force and weakened globalisation may lead to a resurgence in the market power of labour, further intensifying these pressures. These changes present substantial policy challenges, particularly in managing government deficits and maintaining economic stability in a world of potentially higher interest rates and structurally low growth. The implications of these shifts are profound, necessitating rigorous analysis to understand how future economic conditions may diverge from past trends.

Takeaways by Macro Roundup® AI

  1. Ageing populations and a weakening of globalisation are expected to raise inflationary pressure, as the share of young people falls, labour-force growth slows, and consumers rise relative to producers.
  2. A shrinking labour force combined with weakened globalisation may restore market power to labour, further intensifying inflationary pressures.
  3. These structural shifts pose policy challenges in managing government deficits and maintaining economic stability in a world of potentially higher interest rates and structurally low growth.

Why inflation could be on the way back

Are we about to move into a new era of unexpectedly high inflation, rather than the below-target inflation we are used to? Many dismiss this view. But the boy who cried wolf was right the last time. A book just out is crying wolf insistently. Notably, it states that, as a result of today’s fiscal and monetary largesse, “as in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even on the order of 10 per cent in 2021”. That would change everything.

The prediction comes from The Great Demographic Reversal by Charles Goodhart, a respected academic, and Manoj Pradhan, formerly at Morgan Stanley. Its prophecy of imminent inflationary doom is in fact less significant than its analytical framework. These authors argue that the world economy is about to shift regimes. The last time this happened was the 1980s. The big shifts four decades ago were not so much the desire to bring inflation under control, but globalisation and the entry of China into the world economy. That era, they argue, which was one of low inflation and high, rising indebtedness, is now ending. Its inverse will soon follow.

Why inflation could be on the way back: Extended Excerpt Image 1


In the 1980s and 1990s, the economies of China, the former Soviet empire and other developing countries opened up. The Uruguay Round was agreed, which led to the birth of the World Trade Organization, to which China acceded in 2001. International economic integration advanced apace, notably through trade, but also via direct investment from high-income countries. The global labour supply for production of tradeable goods rose enormously. The big trading economies had falling birth rates and still youthful populations, reinforced by the entry of women into their labour forces. So the workforce grew faster than population and output per head rose ahead of that per worker.

Why inflation could be on the way back: Extended Excerpt Image 2


All this together, argue Messrs Goodhart and Pradhan, caused a fall in the market power of labour in high-income countries, higher profit shares in gross domestic product, rising domestic inequality, falling global inequality, a “savings glut”, weak inflationary pressures and declining real interest rates. There was a surge in indebtedness.

Now, they argue, all this is going into reverse. Globalisation is under attack and no other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert, as the number of consumers rises relative to that of producers, inflationary pressure will increase. Moreover, as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures.

Why inflation could be on the way back: Extended Excerpt Image 3


These shifts will, they add, create huge policy dilemmas, especially given the extended balance sheets of governments and non-financial corporates. If the relationship between unemployment and inflation were to shift as adversely as the authors suggest, would central banks tighten as much as they might need to, in order to contain inflation? How would the authorities handle the waves of defaults? How would governments bring their deficits back under control in a world of structurally low growth (partly due to ageing), higher interest rates and pressures to raise spending? If they failed to do so, would the central banks keep printing money or permit national insolvency? In brief, are we confronting a rerun of the 1970s, in worse circumstances?

The authors are correct in arguing that the world economy is undergoing big structural shifts. Ageing and a weakening of globalisation in the production of goods are well under way. Moreover, this process includes China. That combination will transform our economies.

Yet it is also vital to remember how little we know about how such shifts might play out in the real world. What if we had known in 1980 that China was going to open up its economy to the world and launch the biggest investment boom in world history, culminating in an investment rate of 50 per cent of GDP? How many would have predicted that the macroeconomic situation a few decades later would be one of excess savings, low real interest rates, ultra-loose monetary policies and debt overhangs? Most would surely have assumed that booming China was about to import savings massively and so raise real interest rates and export net demand, instead.

Similarly, Messrs Goodhart and Pradhan may be right that, in their brave new world, the desire to save will tend to fall faster than that to invest, the savings glut will turn into a shortage, and real interest rates will soar. But the difference between desired savings and investment is a narrow one. It is quite possible, instead, that, with slow economic growth and continuing declines in the relative price of capital goods, corporate retained profits will continue to exceed investment in high-income economies. The Chinese corporate sector might also follow suit. If so, demand might stay weak and real interest rates low for a long time, reinforced by the huge private-sector debt overhangs in all these economies.

It is not even clear that globalisation was the main historic driver of changes in labour markets. It was just one element in a set of transformations — new technologies, the shareholder-value-maximisation model of corporate governance, the rising role of finance and growing monopoly power.

Doubts about these theses are warranted. But it is also dangerous to extrapolate the present into the future. In 1965, few imagined that postwar Keynesianism would shortly die. The world of “lower for longer” may similarly vanish. Big changes are in process. We need to think rigorously about how our future may differ from our past.

Wolf’s description of Goodhart/Pradhan’s argument"...Globalisation is under attack andno other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert,as the number of consumers rises relative to that of producers, inflationary pressure will increase. Moreover,as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures....."

Ordered a copy of the book as it seems interesting even though I'm not likely to be persuaded but though you might like these charts

Ed Comment:“…The inflation argument is plausible but look at the demographic shift in japan than didn’t produce any inflation. …”

Martin Wolf "Why inflation could be on the way back,"Financial Times, November 18, 2020, https://www.ft.com/content/dea66630-d054-401a-ad1c-65ebd0d10b38

AI Summary. Average federal tax rates for the top quintile fell by about 1 percentage point while middle and bottom quintile rates fell roughly 5 and 8 percentage points, indicating increased tax progressivity. Federal taxes remain progressive, with negligible rates for the bottom quintile, 11–16% for the middle, and about 33% for the top 1%.

David Splinter Working Paper
Date Posted:
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US federal tax rates remain progressive, with negligible rates for the bottom quintile, 11-16% for the middle quintile, and about 33% for the top 1%.

Has the US federal tax system become more progressive over time?

Core argument: Between 1979 and 2016, average federal tax rates fell by roughly 1 percentage point for the top quintile, about 5 points for the middle quintile, and about 8 points for the bottom quintile, indicating increased tax progressivity.

Between 1979 and 2016, average federal tax rates for the top quintile decreased by about 1 percentage point, while middle and bottom quintile rates fell by approximately 5 and 8 percentage points, respectively, indicating increased tax progressivity. Recent estimates show that federal taxes remain progressive, with negligible rates for the bottom quintile, 11-16% for the middle quintile, and about 33% for the top 1%. Despite little change in top average tax rates since the 1960s, the bottom 50% have seen substantial reductions. The stability of top tax burdens over time is due to falling statutory rates being offset by an increasing share of top incomes becoming taxable. These trends highlight the evolving nature of tax policy and its implications for income distribution across different economic strata.

Takeaways by Macro Roundup® AI

  1. Between 1979 and 2016, average federal tax rates fell by roughly 1 percentage point for the top quintile, about 5 points for the middle quintile, and about 8 points for the bottom quintile, indicating increased tax progressivity.
  2. Recent estimates show federal taxes remain progressive, with negligible average rates for the bottom quintile, 11–16% for the middle quintile, and about 33% for the top 1%.
  3. Top average tax rates have changed little since the 1960s because falling statutory rates were offset by a rising share of top incomes becoming taxable, while the bottom 50% saw substantial reductions.

Just an FYI, David Splinter updated his work in response to a critique from PSZ and contrasts it with other high quality estimates (CBO) and finds that AS estimate of the pre-tax income of top one percent increasingly 3.6pp btw 1988-2015 is consistent with CBO 3.4pp.

He also confirms that the tax code has grown more progressive,”…. In AS, we found that top average tax rates have changed little since the early 1960s while bottom 50 percent average tax rates have fallen substantially... Between 1979 and 2016, top quintile rates decreased by about 1 percentage point, middle quintile rates decreased by about 5 percentage points, and bottom quintile rates decreased by about 8 percentage points. The larger decrease at the bottom of the distribution means tax progressivity increased….”

See his Figure 1, “…Mainstream estimates show that federal taxes are progressive in recent years. Figure 1 displays estimates of average tax rates by income from Piketty and Saez (2007), the Congressional Budget Office (CBO, 2019), the Joint Committee on Taxation (JCT), Treasury’s Office of Tax Analysis (OTA), and the Urban-Brookings Tax Policy Center (TPC). These estimates, as well as those from AS (which have lower levels due to the inclusion of additional untaxed income sources), are broadly consistent with one another: negative or negligible tax rates for the bottom income quintile, 11 to 16 percent for the middle quintile, and about 33 percent for the top one percent…..”

Reply: Trends in US Income and Wealth Inequality: Revising After the Revisionists: Extended Excerpt Image 1


On the increase in 1% share of pre-tax income, "......Bricker et al. (2016) used Survey of Consumer Finance data. Between 1988 and 2012, they found a top one percent share increase of 3 percentage points (pp). The AS pre-tax increase of 3.6pp resembles thisand the PSZ pre-tax increase of 6pp exceeds it. The Congressional Budget Office (2019) used tax return and survey data. Between 1988 and 2015, CBO found that the top one percent share of pre-tax income increased 3.4pp. The AS pre-tax increase of 2.5pp is a bit lower and the PSZ pre-tax increase of 5pp exceeds it.16 Burkhauser et al. (2012) used internal Census data to overcome top-coding issues. Between 1967 and 2004, they found a top one percent share increase of 2pp. The AS pre-tax increase of 2pp is similar and the PSZ pre-tax increase of 5pp exceeds it..."
He also reiterates that the tax code has become more progressive, "….Recent estimates also show increasing tax progressivity. In AS, we found that top average tax rates have changed little since the early 1960s while bottom 50 percent average tax rates have fallen substantially... Between 1979 and 2016, top quintile rates decreased by about 1 percentage point, middle quintile rates decreased by about 5 percentage points, and bottom quintile rates decreased by about 8 percentage points. The larger decrease at the bottom of the distribution means tax progressivity increased. SZ contrasted this finding with the much higher marginal tax rates for individual income taxes in the 1960s. But very few people paid those top rates. For example, fewer than 500 tax returns paid the top marginal rate in 1962.15 The reason top average tax rates (total taxes of an income group divided by their income) are lower than expected in the 1960s is that a significant share of top one percent income was not reported on individual tax returns, largely due to corporate retained earnings. This explains why measures using national accounts by Pechman (1985), AS, and PSZ, found that the 1966 average federal income tax rate for the top one percent was between 14 and 16 percent. The stability of top tax burdens over time is because falling statutory rates were offset by an increasing share of top incomes being taxable...."

Reply: Trends in US Income and Wealth Inequality: Revising After the Revisionists: Extended Excerpt Image 2


David Splinter, "Reply: Trends in US Income and Wealth Inequality: Revising After the Revisionists," Working Paper, November 17, 2020, http://www.davidsplinter.com/Splinter2020-SaezZucmanReply.pdf