Macro Roundup

Òscar Jordà, Martin Kornejew, Moritz Schularick and Alan Taylor, "Zombies at Large? Corporate Debt Overhang and the Macroeconomy," Federal Reserve Bank Of New York, December 2020, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr951.pdf

Core evidence, “…This is presented in Figure 2,which shows that there is no relationship between the two: that is, the depth of the recession does not depend on how much business credit grew in the preceding expansion…”

New Jordà/Schularick/Taylor looking at corporate debt supports your view that concerns about corporate leverage/Zombies are overblown, and there is no overhang on growth in the aggregate“..Our empirical analysis paints a consistent picture instead:in aggregate, there is no evidence that corporate debt booms result in deeper declines in investment or output, nor that the economy takes longer to recover than at other times. The growth of corporate credit during the expansion, the level, and their interaction provide no information about how the recession and the recovery will turn out to be…. Our results suggest that, at the aggregate level, corporate debt overhang does not play an economically or statistically significant role…. ”

Summer’ concerned about the $2000 checks, “…The data are striking. Total employee compensation is now running only about $30 billion per month behind the pre-Covid baseline….With President Donald Trump’s add-on, we are in completely uncharted territory,with household incomes more than 15% above their normal level relative to economic potential.We frankly have no confident basis for judging how much and how fast this excess, and the pre-existing backlog of saving from the Cares Act, will be spent. There is the possibility of some overheating, particularly if the economy’s potential supply remains constrained by Covid protection measures….”

Trump’s $2,000 Stimulus Checks Are a Big Mistake

The attack I made on Bloomberg Television on the idea of universal $2,000 checks as a Covid-19 response has lit up the Twittersphere, so I think it worthwhile to be clear about what I am arguing.

Certainly, I am not opposing stimulus or favoring austerity. For years I have been making the secular stagnation case for more expansionary fiscal policy, and I have often remarked over the last couple of months that “not passing fiscal stimulus is like not wearing a mask at a large indoor gathering — an insane risk.” And both in the immediate term, and on a permanent basis, I am all for strengthening the social safety net with measures such as enlarged Supplemental Nutrition Assistance Program benefits or an expanded Earned Income Tax Credit or child tax credit.

There can be no argument that the stimulus bill Congress passed should be implemented immediately, even though it is too late and too little. As I have observed, it fails to support the states and localities as they try to rehire teachers and health-care workers. It does too little to accelerate the availability of the testing necessary to put Covid-19 in the rearview mirror. And its one-month extension of the eviction moratorium and 11-week extension of unemployment insurance are clearly far too short-term.

The issue is whether spending about $600 billion on a one-time tax credit that would be worth $8,000 to a family of four and reach more than 85 percent of taxpayers makes good economic sense. Victims of Covid-19 disruption can and should receive generous targeted support, as should the poor.

The question in assessing universal tax rebates is, what about the vast majority of families who are still working, and whose incomes have not declined or whose pension or Social Security benefits have not been affected by Covid-19? For this group, the pandemic has reduced the ability to spend more than the ability to earn.

The data are striking. Total employee compensation is now running only about $30 billion per month behind the pre-Covid baseline. Measures in the congressional stimulus bill to strengthen unemployment insurance and to support business will add about $150 billion a month to household income in order to replace all this loss.

The question is whether there is a rationale for further tax rebate of more than $200 billion a month over the next quarter. This would represent additional support equal to an additional seven times the loss of household wage and salary income over the next quarter.

Some argue that while $2,000 checks may not be optimal support for the post-Covid economy, taking stimulus from $600 to $2,000 is better than nothing. They need to ask themselves whether they would favor $5,000, or $10,000 — or more. There must be a limiting principle.

One obvious candidate is not overdoing overinsurance. Bringing working families’ income up to benchmark levels is natural. Perhaps bringing them somewhat above benchmark levels makes sense. But further adding to earnings when losses are being replaced seven times over seems hard to justify — especially at a time when pent-up savings totals $1.6 trillion and is rising. If writing universal checks is a good idea, why not do it after household incomes have reverted to normal?

This point is illustrated by the figure below. It shows that because of the legislation passed in 2020, total household income (which takes no account of the stock market) has exceeded normal levels relative to the economy’s potential more or less since the pandemic began. Without new stimulus, things would have normalized in 2021.

But the existing stimulus bill is sufficient to elevate household income relative to the economy’s potential to abnormally high levels — unheard of during an economic downturn. With President Donald Trump’s add-on, we are in completely uncharted territory, with household incomes more than 15% above their normal level relative to economic potential. We frankly have no confident basis for judging how much and how fast this excess, and the pre-existing backlog of saving from the Cares Act, will be spent. There is the possibility of some overheating, particularly if the economy’s potential supply remains constrained by Covid protection measures.

There is no good economic argument for the $2,000 checks, a policy that was not even on the table until the president’s random pronouncement last week. The Democrats seizing this opportunity to pit the president and Senate Majority Leader Mitch McConnell against each other is fair and good politics — but if it leads to actual implementation, it is bad economics. Trump should instead immediately sign the bipartisan relief package that took months to negotiate and avoid a cutoff of unemployment insurance that will plunge millions of the most vulnerable Americans into poverty.

Lawrence Summers, "Trump’s $2,000 Stimulus Checks Are a Big Mistake,"Bloomberg, December 27, 2020, https://www.bloomberg.com/opinion/articles/2020-12-27/larry-summers-trump-pelosi-2-000-stimulus-checks-are-a-mistake

Potential useful quote, “…I am all for a far more expansive approach to fiscal policy. But that does not mean indiscriminate support for universal giveaways at a time when household income losses are being fully replaced and checking account balances (at least as of October) were above pre-Covid levels. There is no good economic argument for the $2,000 checks, a policy that was not even on the table until the president’s random pronouncement last week.The Democrats seizing this opportunity to pit the president and Senate Majority Leader Mitch McConnell against each other is fair and good politics — but if it leads to actual implementation, it is bad economics….”

Prasanna Tambe, Lorin Hitt, Daniel Rock and Erik Brynjolfsson, "Digital Capital and Superstar Firms," National Bureau Of Economic Research, December 2020, https://www.nber.org/papers/w28285

Hardware only accounts for 10% of "Digital Capital" "....Our findings suggest that the higher values the financial markets have assigned to firms with large digital investments in recent years reflect greater digital capital quantities, rather than simply higher prices for existing assets. In other words, they reflect genuine improvements to firms’ productive capacity. In fact, we find that digital capital, if included as a separate factor in firm-level production functions, predicts differences in output and productivity among firms. Our estimates of the output elasticity of digital capital suggest that it is several times greater than the output elasticity of IT capital. Our estimates are broadly consistent with earlier evidence (Saunders and Brynjolfsson, 2016)that indicates that IT hardware accounts for only about 10% of total digital investment, with investments in complementary intangibles-that is, digital capital- accounting for the rest...."
What digital capital looks like on a firm level, digital capital accumulation predicts firm-level productivity about three years in the future. "....there is substantial heterogeneity among firms in terms of quantities of digital capital they own. The majority of the increase in quantities concentrated in a subset of superstar firms, which we define as those within the top decile of our sample in terms of market value. This concentration can be observed not only in terms of aggregate digital capital accumulation, but also for the development of digital capital on a per-employee basis, and it contrasts with patterns of accumulation of other assets such as those classified as property, plant, and equipment. Furthermore, heterogeneity has been increasing during the course of our panel, as the top firms have pulled increasingly further away from the rest. Fourth, by creating firm-level measures of digital capital quantities, we can estimate how the accumulation of this form of capital contributes to productivity and growth. In productivity regressions, we estimate the contributions of our digital capital quantity measures along side IT capital stock measures. We find that the contribution of digital capital to growth during this period was approximately double that of IT capital stock. Moreover, current year levels of digital capital are most predictive of productivity levels about three years in the future, suggesting that while its value is reflected in firm’s stock prices immediately, it takes several years to fully install into the firm and become productive. Consistent with this finding, the contribution of digital capital to productivity in long-differences grows larger over longer difference lengths... The coefficient estimate on IT capital indicates that a dollar of IT capital is associated with about 12 dollars of market value, although standard errors are large so we cannot reject the the hypothesis that the contribution of this type of capital to value is zero.However, it is notable that the point estimate is very close to the BHY estimates, which found that each dollar of computer investment was correlated with 11 dollars of market value,,,Figure XI which uses the unbalanced panel that includes the newer firms that we might expect to be the most digital capital-intensive. Relative to the result from the balanced panel, average digital capital quantities fall because the unbalanced sample includes firms that enter midway during the panel and are smaller. The key observation, however, is that for the unbalanced panel, differences between the top decile and other deciles are even more pronounced than those shown in Figure Xb. This is consistent with what we would observe if relatively more digital capital-intensive firms were entering the panel. For this sample of firms, an even greater fraction of the total digital capital is concentrated in the highest decile firms in terms of market value…”

New Brynjolfsson looks at IT-related intangibles, including management processes (what he calls "Digital Capital") and attempts to measure that series on a firm level overtime"...For digitally focused firms, investments in the intangible assets needed to realize value from new technologies - like cumulative investment in skills training, new decision-making structures within the firm, management practices, and software customization - often account for significantly greater total costs than the technologies themselves. These assets comprise digital intangible capital (hereafter, interchangeably referred to in this paper as “digital capital”)...Our findings suggest that the higher values the financial markets have assigned to firms with large digital investments in recent years reflect greater digital capital quantities, rather than simply higher prices for existing assets. In other words, they reflect genuine improvements to firms’ productive capacity. In fact, we find that digital capital, if included as a separate factor in firm-level production functions, predicts differences in output and productivity among firms…. One interpretation of our findings is that translating organizational innovations into productive capital requires significant investment in organizational re-engineering and skill development. Therefore, even if firms have the appropriate absorptive capacity, knowledge of how to construct digital assets will not automatically generate productive digital capital any more than access to the blueprints of a competitor’s plant will directly lead to productive capacity…”

Role of digital capital overtime, ".... First, the market value of digital capital rose sharply during the late 1990’s but then fell in the early 2000’s, reflecting changes in the price of digital capital during the dot-com boom and subsequent bust. Second, the value of digital capital began to rise again from 2010 onward, with the timing coinciding with a wave of innovations based on mobile technologies, cloud computing, big data, data science, and most recently, artificial intelligence (AI). With the important exception of the period corresponding with the dot-com boom and subsequent bust, the long run increases in value can largely be attributed to changes in digital capital quantities, rather than prices. Quantities of digital capital rise fairly steadily and substantially over the course of our nearly thirty-year panel. By the end of the panel, digital capital quantities account for 20-25% of the levels of physical capital for firms in our sample..."