Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, March 30, 2021

AI Summary. Younger men, especially those born after 1985, account for a disproportionate share of the decline in US labor force participation: they make up 22% of the 16–59 population but 43% of "missing" workers. Among women, those born after 1995 are 10% of the population but 18% of missing workers.

William Emmons Federal Reserve Bank of St. Louis
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Men born after 1985, 22% of 16-59 age group, account for 43% of “missing” workers, highlighting significant challenges in employment recovery for younger generations.

Are younger workers driving the decline in labor force participation?

Core argument: Men born after 1985 made up 22% of the U.S. population aged 16–59 in 2020 but accounted for 43% of "missing" workers.

The decline in Labor Force Participation [LFP] is notably driven by younger men, particularly those born after 1985. In 2020, the majority of "missing" workers under 60 were under 35, with 5.4m more men and 3.2m more women potentially employed if age- and gender-specific employment-to-population ratios had remained stable since 2000. Men born after 1985, comprising 22% of the 16-59 age group, accounted for a disproportionate 43% of missing workers. Among women, those born after 1995 were most affected, representing 10% of the population but 18% of missing workers. This demographic shift highlights significant challenges in employment recovery for younger generations, exacerbated by pandemic-induced labor market disruptions.

Takeaways by Macro Roundup® AI

  1. Men born after 1985 made up 22% of the U.S. population aged 16–59 in 2020 but accounted for 43% of "missing" workers.
  2. If age- and gender-specific employment-to-population ratios had held at their 2000 levels, 5.4m more men and 3.2m more women could potentially have been employed in 2020.
  3. Among women, those born after 1995 were the most affected cohort, representing 10% of the population but 18% of missing workers.

Good note from Bill at FRBSL. More evidence that labor force participation problem is being driven by younger men. The decline in LFP (relative to 2000) is being driven by male workers born after 1985.

, “…I show that the majority of the “missing” workers under 60 were, in fact, under 35 years old in 2020. Specifically, for those born after 1985, 5.4 million more men and 3.2 million more women would have been employed in 2020 if age- and gender-specific E-P ratios had not declined for those groups between 2000 and 2020. People between 35 and 59 years old in 2020, making up 55% of the 16-59 age group, represented only 33% of the missing workers. In fact, no workers were missing in the 55-59 group…. The most disproportionate effects were among men born after 1985. This group made up 22% of the population between 16 and 59 in 2020, but it accounted for 43% of the missing workers.Among women, the hardest hit by lower-than-predicted employment were those born after 1995; making up 10% of the population between 16 and 59, they accounted for 18% of these missing workers….”

William Emmons, "Americans Born after 1985 Bear the Brunt of Lower Employment," Federal Reserve Bank Of St. Louis, Of March 4, 2021, https://www.stlouisfed.org/on-the-economy/2021/march/americans-born-after-1985-bear-brunt-lower-employment

Pandemic helping force older workers out of labor force might help but have to assume hysteresis in terms of the employability of many of these workers has already set in.

AI Summary. Older millennials born in the 1980s made real median wealth gains that cut their shortfall relative to expectations from 40% to 11% below. Homeownership rates among millennials and Gen Z are comparable to earlier generations at similar ages, and home equity remains a key wealth source, suggesting scope for faster wealth accumulation.

Lowell R. Ricketts Federal Reserve Bank of St. Louis
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Millennials are catching up in terms of generational wealth. Older millennials made significant real median wealth gains prior to the pandemic (2016-2019), reducing their wealth deficit from 40% to 11% below expectations.

Are younger generations closing their wealth gap with earlier generations?

Core argument: Older millennials born in the 1980s narrowed their real median wealth deficit from 40% below expectations to 11% between 2016 and 2019, despite high entry-level home prices and student loan obligations.

From 2016 to 2019, older millennials (born in the 1980s) made significant real median wealth gains, reducing their wealth deficit from 40% to 11% below expectations. This progress is notable given the high prices for entry-level homes and financial obligations like student loans. Despite these challenges, the homeownership rate among millennials and Gen Zers is comparable to previous generations at similar ages, suggesting potential for accelerated wealth accumulation. Home equity remains a crucial wealth source, and the uptick in millennial homeownership rates indicates a promising trend for closing wealth gaps. As younger generations, including those born in the 1990s, continue to gain education and experience, they are expected to follow a steeper wealth life cycle, eventually bridging current deficits.

Takeaways by Macro Roundup® AI

  1. Older millennials born in the 1980s narrowed their real median wealth deficit from 40% below expectations to 11% between 2016 and 2019, despite high entry-level home prices and student loan obligations.
  2. Homeownership rates among millennials and Gen Zers are comparable to those of previous generations at similar ages, and home equity remains a crucial source of wealth.
  3. Younger cohorts, including those born in the 1990s, are expected to follow a steeper wealth life cycle as they gain education and experience, eventually bridging current wealth deficits.

Ana Hernández Kent and Lowell R. Ricketts, "Millennials Are Catching Up in Terms of Generational Wealth," Federal Reserve Bank Of St. Louis, March 30, 2021, https://www.stlouisfed.org/on-the-economy/2021/march/millennials-catching-up-earlier-generational-wealth

Ed Comment, “Ok to add but I don’t find it very enlightening without also knowing what’s happening to income. I would be less concerned for example if the children weren’t earning as much as their parents. As families get more prosperous and growth slows down, which seems likely, I expected a fewer percent of children’s to earn more than their parents relative to the past. I know that will be trumped as propaganda. But given how prosperous we are today, I’m nonpulsed by that. I only care about the averages. If we want to be concerned about something, we should be concerned about growth slowing down. But replicating the transition from agriculture to manufacturing with its fast productivity growth seems highly unlikely to be repeated. It’s easier to earn more than your parent when your parents were relatively poor. We have witnessed a once-in-a-lifetime 35-year decline in interest rates and expansion of multiples. I double the future will compare favorable to that. Ho hum. Surely lower interest rates are a good thing, notwithstanding the fact that the Dems may waste the money reckless, drive up rates, and drive down future consumption to pay for toady’s one-time splurge. Lrt’s not blame the wrong thing though. We should blame booming real estate on land use restrictions, not low rates. There is no economic reason why real estate should be more than replacement cost. I suppose one could make an argument that we should redistribute income because of land use restrictions. Although we partially do that through property taxes. I aslo think the value of real estate is temporarily inflated because baby boomers will eventually die and leave behind a surplus of real estate. I don’t expect my real estate to be worth what it is worth today. I believe the demand is temporarily inflated by demographics. Regardless, i have no intention of selling it. There is a lot of love in the value of residential real estate beyond its financial value.”

FRBSL research the WSJ mentioned, the 1980-1989 doing gangbusters relative to 1990-1999 segment. I wonder how much of this is a story of housing (they don’t break out the drivers of the gap narrowing by sector) but they do allude to homeowner rates for the millennials upticking.

Their takeaway, …“From 2016 to 2019, families with respondents born between 1940 and 1989 all gained ground in relation to wealth expectations. (See the figure below.)While older millennials (those born in the 1980s) were still 11% below wealth expectations, this represented significant progress from a 40% deficit in 2016.4 Those born in the 1960s were also slightly below wealth expectations, while the 1990s cohort showed a significant deficit of 50% (though that group was still quite young, with an average age of 25 in 2019).…Even though families of younger millennials (born between 1990 and 1996) and older Generation Z (born between 1997 and 1999) were behind, they also have time to gain lost ground; for example, from 2016 to 2019, older millennials and Gen Xers staged a remarkable comeback. Keep in mind that the 1990s cohort is also set to become a highly educated generation. Therefore, it is possible that younger generations will simply have a steeper wealth life cycle than older generations (which make up the majority of our sample) and will eventually make up the difference. Despite high prices for entry-level homes and financial obligations such as student loans, the share of millennials and Gen Zers who have become homeowners is similar to that of previous generations when they were the same ages. Because home equity (the value of the home less the mortgage debt) is an important source of wealth for many families, comparable rates of ownership for these younger generations give hope that these families can accumulate wealth faster and make up the shortfalls we currently observe….”

AI Summary. A study using an Education Freedom Index covering vouchers, tax-credit scholarships, home-schooling, and charter schools finds that states with more school choice, such as Arizona and Indiana, post higher 8th grade math and reading scores on the National Assessment of Educational Progress. Greater education freedom is significantly associated with both higher achievement levels and score gains.

Editorial Board Wall Street Journal
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A study by the University of Arkansas’s School Choice Demonstration Project reveals a positive correlation btw educational choice and NAEP scores. States with higher education freedom, like Arizona and Indiana, achieve better NAEP outcomes.

Do states with more school choice post higher test scores?

Core argument: A University of Arkansas School Choice Demonstration Project study finds that greater education freedom is significantly associated with both higher NAEP achievement levels and gains in NAEP scores across 2003–2019.

A study by the University of Arkansas's School Choice Demonstration Project reveals a positive correlation between educational choice and NAEP [National Assessment of Educational Progress] scores. The Education Freedom Index, which evaluates school-choice environments including vouchers, tax-credit scholarships, home-schooling, and charter schools, shows that states with higher education freedom, like Arizona and Indiana, achieve better NAEP outcomes. Specifically, these states exhibit higher 8th grade math and reading scores. The data from 2003 to 2019 indicates that increased education freedom is significantly associated with both higher achievement levels and gains in NAEP scores, underscoring the potential macroeconomic benefits of school choice policies.

Takeaways by Macro Roundup® AI

  1. A University of Arkansas School Choice Demonstration Project study finds that greater education freedom is significantly associated with both higher NAEP achievement levels and gains in NAEP scores across 2003–2019.
  2. The study's Education Freedom Index scores state school-choice environments across vouchers, tax-credit scholarships, home-schooling, and charter schools, with higher-ranking states such as Arizona and Indiana showing better NAEP outcomes.
  3. States with higher education freedom show higher 8th grade math and reading NAEP scores, and the study points to potential macroeconomic benefits of school-choice policies.

Study finds school choice linked with better NAEP outcomes, “…Researchers at the University of Arkansas’s School Choice Demonstration Project developed an Education Freedom Index to measure school-choice environments in the states and Washington, D.C. The index considers offerings for private school choice like vouchers and tax-credit scholarships, home-schooling, public school choice (i.e., ability to switch schools or districts), and charter schools. Arizona, which has education savings accounts, tax-credit scholarships and expansive charter school programs, takes first place. Indiana is second, and Hawaii ranks last. The study finds the rankings strongly correlate with state NAEP scores for 8th grade math and reading.”Higher levels of education freedom,” the authors write, “are significantly associated with higher NAEP achievement levels and higher NAEP achievement gains” between 2003 and 2019 in all of their models….”

Editorial Board, "School Choice Scores for Public Schools,"Wall Street Journal, March 26, 2021, https://www.wsj.com/articles/school-choice-scores-for-public-schools-11616799171

Thursday, April 1, 2021

AI Summary. The Congressional Budget Office estimates that a permanent increase in government spending of 5-10% of GDP would reduce GDP by 3-10% relative to no increase, depending on how it is financed. A 5% increase financed by labor taxes is projected to lower GDP by 3.2%, and a 10% increase financed by progressive income taxes by 10.1%.

Nelson Congressional Budget Office
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The CBO estimates that increasing government spending by 5-10% of GDP could reduce GDP by 3-10% by 2030, depending on financing methods.

How much does financing a large permanent spending increase reduce GDP?

Core argument: The CBO estimates that a permanent increase in government spending of 5–10% of GDP could reduce GDP by 3–10% by 2030 relative to a no-increase scenario, depending on how the spending is financed.

The CBO estimates that increasing government spending by 5-10% of GDP could reduce GDP by 3-10% by 2030 compared to a no-increase scenario, depending on financing methods. A 5% increase financed by labor taxes could lower GDP by 3.2%, while a 10% increase financed by progressive income taxes might reduce GDP by 10.1%. To maintain deficit neutrality, tax rates must rise over time, impacting younger households more significantly in terms of lifetime consumption and hours worked. Higher-income households face the largest declines in consumption and work hours under progressive tax policies, which also result in the greatest output reduction but the smallest consumption decline among the bottom two-thirds of income earners.

Takeaways by Macro Roundup® AI

  1. The CBO estimates that a permanent increase in government spending of 5–10% of GDP could reduce GDP by 3–10% by 2030 relative to a no-increase scenario, depending on how the spending is financed.
  2. The CBO estimates that a 5% of GDP spending increase financed by labor taxes could lower GDP by 3.2%, while a 10% increase financed by progressive income taxes could reduce GDP by 10.1%.
  3. The CBO finds that maintaining deficit neutrality requires tax rates to rise over time, with younger households bearing larger declines in lifetime consumption and hours worked, and higher-income households facing the largest declines under progressive taxation.

CBO working paper estimates the economic impact of government expenditures rising an additional 5% to 10% of GDP. Quickly by 2030, GDP would be ~ 3-10% lower than the counterfactual (no increase in spending) depending on how the spending is financed.

See table two, CBO’slow range -3.2% impact on GDP assumes a 5% increase in spending financed by labor taxes, their high range is a10% increase in spending financed by progressive income taxes -10.1%.

The Economic Effects of Financing a Large and Permanent Increase in Government Spending: Extended Excerpt Image 1


Jaeger Nelson and Kerk Phillips, "The Economic Effects of Financing a Large and Permanent Increase in Government Spending," Congressional Budget Office, March 2021, https://www.cbo.gov/system/files/2021-03/57021-Financing.pdf

Note the paper is only looking at one side of ledger, estimates the effects of financing, not the impact of the increased spending.

Core finding, “…the paper uses one of CBO’s modeling frameworks— the life-cycle growth model—to illustrate the economic and distributional implications of raising revenues to finance a targeted amount of government spending (either 5 percent or 10 percent of GDP) through three different tax policies: a flat labor tax, a flat income tax, and a progressive income tax. To maintain deficit neutrality, tax rates for all three tax policies must rise over time to offset behavioral responses that result in smaller tax bases. After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues. In those scenarios, younger households experience greater loss in lifetime consumption and hours worked than older households. Additionally, the fall in lifetime consumption and hours worked is largest for higher-income households and smallest for lower income households when a progressive income tax is used. Aprogressive income tax generates the largest decline in total output. It also generates the smallest decline in consumption among the bottom two-thirds of the income distribution…”

AI Summary. European investors held 29% of high-risk private-label US mortgage-backed securities not guaranteed by government entities such as Fannie Mae or Freddie Mac, and UK or European banks backed 33% of newly issued private-label mortgage securities at the peak of the US securitization boom. Two-thirds of asset-backed commercial paper had European sponsors, including 57% of dollar-denominated issuance.

Philipp Schnabl National Bureau of Economic Research
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European investors held 29% of non-conforming high-risk MBS not backed by USG in 2006. 2/3 of CP issued had European sponsors, with 57% of dollar-denominated CP having European backing.

Did European banks help spread risk through US mortgage securities?

Core argument: European investors held 29% of non-conforming high-risk mortgage-backed securities not backed by US government entities such as Fannie Mae or Freddie Mac in 2006.

In 2006, European investors held 29% of non-conforming high-risk mortgage-backed securities (MBS) not backed by US government entities like Fannie Mae or Freddie Mac. During the peak of the US mortgage securitization boom, 33% of newly issued private label MBS were backed by UK or European banks. Additionally, two-thirds of commercial paper (CP) issued had European sponsors, with 57% of dollar-denominated CP having European backing. This significant involvement of European banks in US financial markets highlights the global interconnectedness and potential for imbalances, as these institutions played a crucial role in the spread of financial risks during the 2007-09 crisis.

Takeaways by Macro Roundup® AI

  1. European investors held 29% of non-conforming high-risk mortgage-backed securities not backed by US government entities such as Fannie Mae or Freddie Mac in 2006.
  2. At the peak of the US mortgage securitization boom, 33% of newly issued private label mortgage-backed securities were backed by UK or European banks.
  3. Two-thirds of commercial paper issued had European sponsors, and 57% of dollar-denominated commercial paper carried European backing.

InCrashedTooze writes (note he carves out the dollar denominated commercial paper),

"...For nonconforming high risk MBS, those not backed by Fannie Mae or Freddie Mac, the share held by European investors was in the order of 29 percent. In 2006, at the height of the US mortgage secularization boom, a third of newly issued private label MBS were backed by British or European banks.....Overall, two thirds of the commercial paper issued had European sponsors, including 57% of the dollar denominated commercial paper..."

Viral Acharya and Philipp Schnabl, "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09,"National Bureau of Economic Research, June 2010, http://www.nber.org/papers/w16079.pdf

For two thirds of of commercial paper having a European sponsor, including 57% of dollar denominated commercial paper he cites Moody's date analysed by Viral Acharya and Philipp Schnabl (See their table 4 here, paper is attached)

Bank of England, Financial Stability Report, October 22, 2007, https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2007/october-2007.pdf

For a third of newly issued private label MBS being backed by British or European banks he cites a BOE report, see their Table 2.14.

Daniel Beltran, Laurie Pounder and Charles Thomas, "Foreign Exposure to Asset-Backed Securities of U.S. Origin,"International Finance Discussion Papers, August 2008, https://www.federalreserve.gov/pubs/ifdp/2008/939/ifdp939.pdf

For 29% risky mortgages being held by European investors he cites a 2008 Fed paper (See their Table 6, paper attached)

- Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World, (New York: Viking, 2018)

AI Summary. Mortgage originations reached a record $1.2tn in a single quarter, exceeding the 2003 refinance boom, with 71% going to borrowers with credit scores above 760 and a median new-mortgage credit score of 786. Aggregate credit limits fell $10bn on credit cards and $14bn on home equity lines of credit.

Federal Reserve Bank of New York Federal Reserve Bank of New York
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Mortgage originations reached a record high of $1.2tn in 2020Q4, driven by a high share of refinances to borrowers with credit scores over 760. The median credit score for new mortgages was 786.

Are record mortgage originations going mostly to high-credit-score borrowers?

Core argument: Mortgage originations hit a record $1.2tn in 2020Q4, surpassing levels seen during the 2003 refinance boom, driven by a high share of refinances.

Mortgage originations reached a record high of $1.2tn in 2020Q4, surpassing the levels seen during the 2003 refinance boom. This surge was driven by a high share of refinances, with 71% of originations going to borrowers with credit scores over 760, indicating a rise in borrower quality. The median credit score for new mortgages was 786, reflecting stable and high creditworthiness among borrowers. In contrast, auto loan originations were slightly down from their peak but remained the second highest at $162bn. Meanwhile, aggregate credit limits on credit cards and HELOCs [Home Equity Line of Credit] declined by $10bn and $14bn, respectively, continuing a trend of reduced credit availability in these areas. This data suggests a shift towards higher-quality mortgage borrowers and a potential decrease in consumer spending propensity related to equity gains.

Takeaways by Macro Roundup® AI

  1. Mortgage originations hit a record $1.2tn in 2020Q4, surpassing levels seen during the 2003 refinance boom, driven by a high share of refinances.
  2. Borrowers with credit scores above 760 accounted for 71% of mortgage originations in 2020Q4, and the median credit score for new mortgages was 786.
  3. Auto loan originations were the second highest at $162bn in 2020Q4, slightly below their peak, while aggregate credit limits fell $10bn on credit cards and $14bn on HELOCs.

“Quarterly Report On Household Debt And Credit,” Federal Reserve Bank Of New York, February 2021, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2020Q4.pdf

“…Originations New extensions of credit were substantial in 2020Q4, with a record high level of newly originated mortgages and auto loans. Mortgage originations, measured as appearances of new mortgage balances on consumer credit reports and which include refinances, were at $1.2 trillion, surpassing in nominal terms the volumes seen during the historic refinance boom in 2003Q3.Auto loan originations, which includes both loans and leases, were down slightly from the record high seen in 2020Q3 but were at the second highest level for the series, at $162 billion. In contrast, both HELOC and credit cards saw declines in aggregate credit limits. Aggregate credit limits on credit cards declined by $10 billion, continuing the declines of $31 billion in the third quarter and $53 billion during the second. Aggregate credit limits on HELOC accounts declined by $14 billion. Median mortgage origination credit scores remained roughly stable at a high level, with the median credit score of newly originated mortgages at 786, reflecting a high share of refinances. The median credit score on newly originated auto loans increased, from 712 to 717…”

There has also been an uptick in second home buyers (they don’t know if those are ski houses or investment properties) So some of these people could be consuming their equity gains with more real estate?

So it’s likely the case that the “quality” of homeowners has gone up, that could make there propensity to spend less related to the value of their current equity?

One thing to think about in the context of your question“…What happens if homeowners aren’t paying downs their mortgages from a prior overhang?...”if you look at new mortgage originations the median credit score is now almost 800 (as of Q4 last year), 71 percent of originations in the fourth quarter of 2020 went to borrowers with credit scores over 760 (note this data also reflects refis)

Ed and Ben,

“Real Gross Domestic Product,” Federal Reserve Bank Of St. Louis, Accessed April 2, 2021, https://fred.stlouisfed.org/series/GDPC1

“All Sectors; One to Four Family Residential Mortgages; Asset Level,” Federal Reserve Bank Of St. Louis, Accessed April 2, 2021, https://fred.stlouisfed.org/series/ASHMA

However I thought the story would be better seen in terms of Real GDP, through that lens residential mortgages aren’t back at pre-crisis levels. Note the Z1 data is not chained like the Real GDP numbers but given inflation has been sedated the chart prob tells the story.

Ed Comment:Is it the case that mortgage lending is now above where it was prior to the financial crisis?

Steve Comment: I think the answer is no. This is “All Sectors; One to Four Family Residential Mortgages; Asset Level” from Z1 (it seemed like the ~ best series at capturing residential real estate) through Q4 of last yearso by that measure we are above pre-crisis levels.