Macro Roundup

Katharine Stevens and Meredith Tracy, "Still Left Behind: How America's Schools Keep Failing Our Children," American Enterprise Institute, September 2020, https://www.aei.org/research-products/report/still-left-behind/

Their most important finding in the report is“…large proportions of lower-income eighth graders in 2017 still failed to demonstrate even minimum levels of competence in reading and math, as indicated by scoring below NAEP Basic. This was the case in every state—even those that appeared to have improved the most from 2003 to 2017…Nationally, from 2003 to 2017 the average percentage of lower-income children scoring below NAEP Basic decreased by 8 percentage points in both reading (from 44 to 36 percent) and math (from 53 to 45 percent). Yet strikingly large percentages of lower-income eighth graders in 2017 still failed to demonstrate minimum levels of competence in core skills, as indicated by NAEP. This was true in all states, even those that improved the most from 2003..”

AEI finds these persistently low educational achievement outcomes of low income students have been obscured by incremental improvements in average scores which in practical terms are not meaningful, “…. Reports on NAEP trends, however, have typically focused on a limited set of metrics, leaving important outcomes insufficiently examined. First, a prevalent focus on NAEP’s average scores has obscured crucial information on children’s specific levels of performance.29 While average scores can be useful as a general indication of overall trends, they provide no information on the percentages of students performing at each of NAEP’s three discrete achievement levels.30 Further, a focus on incremental, “statistically significant” changes in average scores over time has obscured crucial aspects of long-term trends—most notably, the practical outcomes for children from years spent in school. A gain of 23 points over the 27-year period from 1990 to 2017 is “significant” in a statistical sense. But from the point of view of families, taxpayers, and policymakers, it is much less meaningful.31 For example, the gains of black eighth graders in math—from 237 in 1990 to 260 in 2017—are frequently plotted on a graph with a y-axis scaled to highlight their technical significance, as shown in Figure 1.32 Yet when those same gains are plotted on a y-axis reflecting the actual range of student scores on NAEP’s 500-point scale, their real-world significance appears much smaller (Figure 1).33 Most important, both graphs ignore that in 2017, over one-half (54 percent) of black eighth graders scored below NAEP Basic in math. Second, a tendency to focus on national averages has drawn attention away from large state-to-state variation. For example, nationally, one-quarter of eighth graders scored below NAEP Basic on the 2017 NAEP reading assessment. At the state level, however, that percentage ranged from 15 percent in Massachusetts to 45 percent in the District of Columbia. Third, a focus on the average percentages scoring at discrete achievement levels has obscured large achievement gaps among student subgroups— indeed, exactly the gaps NCLB aimed to close. While the average percentage of students who score below NAEP Basic has declined in both reading and math in most states, that percentage varies widely among subgroups. For example, 15 percent of all eighth graders in Massachusetts scored below NAEP Basic on reading in 2017, as noted above. However, that average percentage conceals a large income-based achievement gap: 31 percent of lower-income children in Massachusetts scored below NAEP Basic, compared to 9 percent of higher-income children. Similarly, in the District of Columbia, an average of 45 percent of eighth graders overall scored below NAEP Basic on reading. But disaggregating that average by income reveals that 54 percent of lower-income children scored below NAEP Basic, compared to just 18 percent of higher-income children….”

Here they expand on this in detail, “…One especially salient factor over that period is the substantial increase in the percentage of higher-income children included in the FRL-eligible group, as noted above. From 2003 to 2017, the percentage of eighth graders below the federal poverty line increased from just 15 to 16 percent nationally. However, the proportion of FRL-eligible eighth graders increased from 33 to 46 percent over that same period. In 2017, the FRL-eligible group thus clearly included a substantially larger percentage of higher-income children. At the state level, increases in the percentage of FRL-eligible students varied widely and with little relationship to changes in student poverty. In 2003, the ratio of the proportion of eighth graders who were FRL eligible to the proportion who were poor ranged from 1.5 to 4.8 across states. In 2017, that ratio had increased to a range of 2 to 5.5. Changes in the ratio from 2003 to 2017 varied from a decrease of 34 percent to an increase of 240 percent (Table 6).Over the past decade, variation within the FRL eligible group has thus grown substantially. That group now includes children from impoverished households, working- and middle-class children who fall between 100 and 185 percent of the federal poverty line, and an apparently substantial number of wealthier children attending schools that are providing free meals to their entire student population under the Community Eligibility Provision.58 Because higher-income children generally score better on NAEP assessments, it is not clear to what degree gains of the FRL-eligible group resulted from improved performance of children who were actually low income rather than changes in the group’s composition due to the addition of higher-income, higher-performing children. In many states, decreases in the percentage of the FRL-eligible group scoring below NAEP Basic may in fact largely have been driven by changes in the makeup of that group, not by improvements in poor children’s performance.Even given substantial increases in the proportion of higher-income children included in the FRL eligible group, however, 2017 outcomes for that group remained alarmingly bad across all states. Indeed, even in states often highlighted as exemplars of successful reform, large percentages of the FRL-eligible group scored below NAEP Basic in 2017. …”

So as these programs expanded, they started to cover higher achieving students so there isn’t an apples to apples comparison in terms of the underlying pool of “lower income”

In answer to your question about the composition shift that AEI highlights. What has happened is a shift in how NAEP identifies as “lower income” has looped in previously higher income students - as federal eligibility for free or reduced-price lunch (“FRL eligibility”) has been used as an ~ proxy for these two income groups and eligibility expanded, “…from 2003 to 2017, the FRL-eligible group expanded to include a substantially larger proportion of higher-income children. In 2003, an estimated 15 percent of eighth-grade children were poor (that is, with family incomes below 100 percent of the federal poverty level), and 33 percent were FRL eligible.44 By 2017, the proportion of poor eighth graders had remained almost constant at around 16 percent. Yet the proportion of FRL-eligible eighth graders had increased to 46 percent—clearly including a substantial number of nonpoor children.45..”

Jason Furman and Lawrence Summers, "A Reconsideration of Fiscal Policy in the Era of Low Interest Rates," November 30, 2020, Discussion Draft, https://www.piie.com/system/files/documents/furman-summers2020-12-01paper.pdf

This is their argument in practical/policy terms, “…Specifically, by way of illustration, these estimates assume $2.5 trillion in additional fiscal support over the next there years and an investment program that starts at a net cost of 1 percent of GDP but eventually starts to result in deficit decreases over a longer period of time. Overall, this would mean about $5 trillion of deficit-financed investments over the next decade plus additional investments paid for by added revenue or other spending reductions. The result is that the debt would stabilize at less than 150 percent of GDP which would be the highest the United States has ever experienced but nominal interest payments would still be only 3.8 percent of GDP and real interest payments would be only 1.0 percent of GDP (around the 77th percentile of historical experience)…”

Note this, "...In that sense the U.S. fiscal situation is by definition sustainable—effectively it has an asset equal to at least several percent of GDP that it could choose to collect if it needs to. Higher tax countries have less room in this regard. France, for example, is closer to the top of its Laffer curve so would have less space to close a fiscal hole with more revenue. Considerations of debt sustainability need to take into account not just the amount of taxation under the law but the capacity for taxation..."

An FYI as this might be useful. Furman and Summers make the case for expanded fiscal policy given persistence low rates, seemingly the same argument works for (growth oriented) tax cuts. They note the implications of sustained lower rates going forward, "...The decline in interest rates has three important implications: (i)as monetary policy is limited in its ability to stabilize the economy and financial system, fiscal policy must play a critical role; (ii) fiscal sustainability cannot be assessed by traditional debt-to-GDP ratios but should instead be understood with measures like nominal or real interest as a share of GDP; and (iii)many public investments pay for themselves, or come close to paying for themselves, and the risk of not undertaking these investments is larger than the risk of doing too little deficit reduction.The remainder of this paper discusses these three implications in turn...."

In turn, "...The main concerns about fiscal expansion in economic downturns is that they will lead to unsustainable debt and may not be affordable in countries that currently have high debt levels. This concern is misplaced. At a minimum, countries can always come back later to raise revenues or reduce spending in order to get debt trajectories back on a desired course. More importantly, this may not even be needed as fiscal support may help fiscal sustainability by increasing output more than it raises debt, thus reducing the debt-to-GDP ratio..."

In terms of debt sustainability this struck me as an argument we will be hearing going forward, Despite debt-to-GDP going up ~ 3x since 2000 the debt relative to the present value of future GDP has been stable/falling (as interest rates fall present value goes up) at the same time real debt service has also fallen relative to GDP. "...We argue that debt-to-GDP ratios are a misleading metric of fiscal sustainability that do not reflect the fact that both the present value of GDP has risen and debt service costs have fallen as interest rates have fallen. Instead we propose that it is more appropriate to compare debt stocks to the present value of GDP or interest rate flows with GDP flows..."

Economist Staff, "Why it is misleading to blame financial imbalances on a saving glut,"The Economist, November 28, 2020, https://www.economist.com/finance-and-economics/2020/11/28/why-it-is-misleading-to-blame-financial-imbalances-on-a-saving-glut

Read it and found it underwhelming, given the massive rise in gross flows prior to the crisis correlate with large scale global reserve growth in surplus countries. BIS also didn’t seems to acknowledge anywhere in the paper that the global financial system was intimidating the savings glut which allowed/forced them to expand credit.

Just an FYI, Economistwrite up of new paper from BIS making the case for a “credit glut” (paper attached) maybe better characterized as a banking glut that in the writers view offers a better explanation than the savings glut case.

Core of their credit glut hypothesis, “…Furthermore, while the global saving glut hypothesis argues that foreign saving financed the US current account deficit, our results clearly highlight the entirely distinct behavior of foreign saving and foreign financing…The credit glut view instead appeals to domestic credit and creation of purchasing power as the driving force of the divergence, and the impulse response in Figure 9 is at least qualitatively consistent with the divergence - output and inflation increase and lead to an increase in the real policy rate, while the lending spread decreases very significantly. In fact the lending spread shown in Figure 9 is the net effect of an increase in the regulatory spread of around 60 basis points (due to higher bank leverage) and a decrease in the retail lending spread of around 120 basis points (due to lower perceived household credit risk).…”

“… This analytical framework allows us to shed new light on four important policy debates that are associated with international capital flows. The first debate concerns the pervasive use of current accounts as indicators of financial vulnerability. The issue with this practice is that in a financial crisis lenders, who can be domestic as well as foreign, do not stop financing current accounts, they stop financing debt. Even with a zero current account and net foreign liabilities position, an economy can exhibit very large gross debt positions that are vulnerable to reversals. Furthermore, there are many different categories of debt. Some of these categories could be far more vulnerable to reversals than others pre-crisis, and post-crisis the effects of reversals on vulnerability depend on their differential effects on different categories of debt. Interpreting the current account as the principal indicator of financial vulnerability therefore misses almost all relevant information. The second debate is the global saving glut hypothesis. Here the issue is similar, in that US non-banks do not finance imports and current account deficits using physical saving provided by foreign non-banks. Instead, current account deficits are financed using digital purchasing power, provided by banks that are more likely to be domestic than foreign. In the latter case, a US credit glut becomes a plausible alternative explanation for the saving glut to traditional foreign saving or technology shocks. To help distinguish between these alternatives,we show that foreign saving shocks imply changes in financial sector balance sheets that are about as large as the simultaneous changes in GDP, while credit supply shocks imply far larger changes to financial than to real variables. As has been amply documented in the literature, the latter did characterize the saving glut episode. The fact that the financing bank can be located in the domestic as well as the foreign economy emphasizes that the current account or foreign physical saving contain no information about the source and direction of the financing flows that allow domestic residents to finance current account deficits. This matters for policy recommendations, because the global saving glut hypothesis puts the onus of adjustment on surplus countries, while the US credit glut hypothesis does the opposite. The third debate is Triffin’s current account dilemma. The issue here is that the creation of dollars as an international medium of exchange requires financing, or credit creation, denominated in dollars, by US or foreign banks. It does not require the setting aside, or saving, of foreign physical resources by foreign non-banks. In other words, the creation of a sufficient quantity of US dollars is completely independent of US current account deficits. There is therefore no dilemma. The fourth debate concerns interpretations of the high correlation of gross capital inflows and outflows. The issue here is that all financial flows necessarily consist of a pair of gross inflows and gross outflows that are inseparable as a matter of accounting, and that are therefore necessarily perfectly correlated. Correlated flows therefore do not represent, as in many interpretations, the result of synchronized economic decision-making by domestic and foreign investors. The only two ways in which the correlation between inflows and outflows could be lower than one is “errors and omissions”, whereby some gross financial flows are not captured in the balance of payments statistics, and a significant role for net payment flows, where only one of the flows is financial while the other is physical…”.

They don’t have additional specific language on this point.

Re: “….3) their view that banks inflate demand-side pull?...”

“..A closely related notion to Triffin’s current account dilemmais the idea that current account surpluses “fund” the accumulation of foreign exchange reserves(Bernanke (2005), Bernanke et al. (2011), Gros (2009)). This view is based on the accounting identity whereby the current account equals official reserve accumulation plus other gross outflows minus gross inflows. But the accumulation of foreign exchange reserves (a gross financial outflow) is a purely financial transaction, and must therefore automatically generate an offsetting reduction in private sector gross outflows or an increase in private sector gross inflows, without requiring any changes to the current account. For example, consider the increase in reserve assets associated with a central bank foreign exchange purchase financed by the sale of domestic government securities off its balance sheet. This gross outflow is offset either by a reduction in private-sector gross outflows if the counterparty of the central bank is a domestic seller of foreign exchange, or an increase in gross inflows if the counterparty is a nonresident seller of foreign exchange…”

Re: “…2) growing demand for saving that pull it in…”

Here is the core language, “Such shocks, along with technology shocks, have been frequently used in net flow models to study the global saving glut. But in our framework they cannot reproduce a key feature of the saving glut episode:gross domestic and cross-border balance sheet positions increased by far more than GDP, and were much more volatile, than implied by such shocks. Furthermore, we show that for these shocks the current account contains no information about the direction of foreign financing flows, which in fact decline. Meanwhile a domestic credit supply shock, an increase in US credit to US households that stimulates US demand, provides a very plausible alternative explanation of the saving glut phenomenon. This shock gives rise to a US current account deficit, but in this case accompanied by a US credit glut, with changes in balance sheet positions that are an order of magnitude larger than changes in GDP, congruent with the data. This shock emphasizes financing, the access to existing or newly created purchasing power, rather than foreign saving, as the factor that allows domestic households to pay for additional imports. But that financing can be obtained domestically as well as abroad. This shock suggests very different remedies to the saving glut phenomenon, because it identifiesUS credit rather than non-US physical savingas its trigger….”

Re: “…1) a glut of excess saving offshore that push their way into the US…”

I don’t buy it.

They totally disagree with my view of what the decline in interest rates is saying, “…A key aspect of the saving glut was the “Greenspan bond conundrum” (Greenspan (2005)), the observation that US long-term bond yields declined during the height of the saving glut episode in 2004-2005 despite continuous policy interest rate increases. The saving glut hypothesis appeals to foreign physical saving as an explanation for such a divergence. However, at least in our impulse response in Figure 8 the opposite occurs following a physical saving shock - a drop in output and inflation leads to a drop in the real policy rate, while the lending spread does not change by much, and in fact increases by around 10 basis points. The latter is consistent with the fact that foreign financing, unlike foreign saving, decreases. The credit glut view instead appeals to domestic credit and creation of purchasing power as the driving force of the divergence, and the impulse response in Figure 9 is at least qualitatively consistent with the divergence - output and inflation increase and lead to an increase in the real policy rate, while the lending spread decreases very significantly. In fact the lending spread shown in Figure 9 is the net effect of an increase in the regulatory spread of around 60 basis points (due to higher bank leverage) and a decrease in the retail lending spread of around 120 basis points (due to lower perceived household credit risk)….”

They focus on purchasing power created by banks, they don’t seem to address, in our view that purchasing power was driven by the banks role intermediating the savings glut, indeed they argue the credit glut is presumably sucking in those savings“…we note that foreign saving cannot play a direct role in financing domestic imports. Foreign saving is a goods market concept and a national accounts residual, it is the current account deficit by definition (ignoring investment for simplicity). What is required to pay for a current account deficit is not physical resources set aside by foreigners. Instead it is purchasing power created by banks…”

“…possibility that theonus of adjustment should be on deficit countries, if their “excessive credit” is the main culprit behind their large current account deficits. Under this changed perspective, foreigners are no longer seen as investors of physical resources into the domestic economy, but as recipients of payments from that economy…”

Charles Rossotti, Natasha Sarin, and Lawrence Summers, "Shrinking the Tax Gap: A Comprehensive Approach,"Tax Notes, November 25, https://www.taxnotes.com/featured-analysis/shrinking-tax-gap-comprehensive-approach/2020/11/25/2d7ht

Potential return from better enforcement (this would require more money in addition to their proposed executive actions in terms of investment in IT)“…Combining the insights of our past work, we reach the conclusion thatinvesting less than $100 billion in the IRS over a decade will generate $1.2 trillion to $1.4 trillion in additional tax revenue, primarily from high-income individuals, who are disproportionately responsible for underpayment of owed tax liabilities….”

Specifically they propose, “…first, in early meetings between the incoming Treasury secretary and the IRS commissioner, the secretary can gauge existing leadership’s willingness to oversee a strong attack on the tax gap and ask them to identify their top-priority staffing and funding needs; Treasury can also direct the reallocation of enforcement resources toward high-income taxpayers and corporations with substantial book income but low tax liabilities;Treasury can promulgate regulations to disallow opinions from highly paid tax advisers to constitute reasonable cause defenses against IRS action;an IRS notice can add gift and estate tax avoidance strategies to the set of transactions that must be reported on by tax advisers;30 the IRS can commit to pursuing extensions of the statute of limitations when cases are brought against high-income noncompliers;31 the IRS and Treasury can work together to develop a rule requiring that all gig economy workers receive information reports;32 the IRS can announce plans to seek the highest penalties and sanctions for high-income noncompliers and for tax experts who advise and facilitate their malfeasance;the IRS and the Justice Department can pledge to prioritize the prosecution of criminal tax fraud and economic substance cases against those engaging in tax-motivated transactions; and the IRS, with cooperation from the Justice Department, can be directed to reallocate the focus of its criminal investigators primarily to tax evasion of legal income by high-income filers and nonfilers…”

Sarin/Summer’s suggestions for IRS reforms using executive orders, largely ramp up penalties for evaders and their advisors, more criminal cases and hire more IRS workers.

Daniel Kroening, "Software Ate the World, and Soon It Will Write Itself,"Wall Street Journal, December 3, 2020, https://www.wsj.com/articles/software-ate-the-world-and-soon-it-will-write-itself-11607037000