Macro Roundup

new advances in understanding Maxwell’s demon"...The team, led by Manzano, wondered if there was a way toimplement something like Maxwell’s demon but without the information requirements. They imagined a two-compartment system with a door, as before. But in this case, the door would open and close on its own. Sometimes particles would randomly separate themselves into hotter and colder compartments. The demon could only watch this process and decide when to turn the system off. In theory this process could create a small temperature imbalance, and therefore a useful heat engine, if the demon was smart about when to end the experiment and lock any temperature imbalance in place, much as a smart gambler on a hot streak knows when to leave the table. “You can either play all night on the roulette table, or you can stop if you win $100,” said Édgar Roldán, a physicist at the International Center for Theoretical Physics in Italy who was a co-author on the study. “We’re saying we don’t need such a complicated device as Maxwell’s demon to extract work in the second law. We can be more relaxed.”The researchers then implemented such a gambling demon in a nanoelectronic device, to show it was possible..."

Jonathan O'Callaghan, "How Maxwell’s Demon Continues to Startle Scientists,"Quanta Magazine, April 22, 2021, https://www.quantamagazine.org/how-maxwells-demon-continues-to-startle-scientists-20210422/

How Maxwell’s Demon Continues to Startle Scientists

The universe bets on disorder. Imagine, for example, dropping a thimbleful of red dye into a swimming pool. All of those dye molecules are going to slowly spread throughout the water. Physicists quantify this tendency to spread by counting the number of possible ways the dye molecules can be arranged. There’s one possible state where the molecules are crowded into the thimble. There’s another where, say, the molecules settle in a tidy clump at the pool’s bottom. But there are uncountable billions of permutations where the molecules spread out in different ways throughout the water. If the universe chooses from all the possible states at random, you can bet that it’s going to end up with one of the vast set of disordered possibilities.

Seen in this way, the inexorable rise in entropy, or disorder, as quantified by the second law of thermodynamics, takes on an almost mathematical certainty. So of course physicists are constantly trying to break it.

One almost did. A thought experiment devised by the Scottish physicist James Clerk Maxwell in 1867 stumped scientists for 115 years. And even after a solution was found, physicists have continued to use “Maxwell’s demon” to push the laws of the universe to their limits.

In the thought experiment, Maxwell imagined splitting a room full of gas into two compartments by erecting a wall with a small door. Like all gases, this one is made of individual particles. The average speed of the particles corresponds to the temperature of the gas — faster is hotter. But at any given time, some particles will be moving more slowly than others.

What if, suggested Maxwell, a tiny imaginary creature — a demon, as it was later called — sat at the door. Every time it saw a fast-moving particle approaching from the left-hand side, it opened the door and let it into the right-hand compartment. And every time a slow-moving particle approached from the right, the demon let it into the left-hand compartment.

After a while, the left-hand compartment would be full of slow, cold particles, and the right-hand compartment would grow hot. This isolated system would seem to grow more orderly, not less, because two distinguishable compartments have more order than two identical compartments. Maxwell had created a system that appeared to defy the rise of entropy, and thus the laws of the universe.

“He tried to prove a system where the entropy would decrease,” said Laia Delgado Callico, a physicist at King’s College London. “It’s a paradox.”

Two advances would be crucial to solving Maxwell’s demon. The first was by the American mathematician Claude Shannon, regarded as the founder of information theory. In 1948, Shannon showed that the information content of a message could be quantified with what he called the information entropy. “In the 19th century, no one knew about information,” said Takahiro Sagawa, a physicist at the University of Tokyo. “The modern understanding of Maxwell’s demon was established by Shannon’s work.”

The second vital piece of the puzzle was the principle of erasure. In 1961, the German American physicist Rolf Landauer showed that any logically irreversible computation, such as the erasing of information from a memory, would result in a minimal nonzero amount of work converted into heat dumped into the environment, and a corresponding rise in entropy. Landauer’s erasure principle provided a tantalizing link between information and thermodynamics. “Information is physical,” he later proclaimed.

In 1982, the American physicist Charles Bennett put the pieces of the puzzle together. He realized that Maxwell’s demon was at core an information-processing machine: It needed to record and store information about individual particles in order to decide when to open and close the door. Periodically it would need to erase this information. According to Landauer’s erasure principle, the rise in entropy from the erasure would more than compensate for the decrease in entropy caused by the sorting of the particles. “You need to pay,” said Gonzalo Manzano, a physicist at the Institute for Quantum Optics and Quantum Information in Vienna. The demon’s need to make room for more information inexorably led to a net increase in disorder.

Then in the 21st century, with the thought experiment solved, the real experiments began. “The most important development is we can now realize Maxwell’s demon in laboratories,” said Sagawa.

In 2007 scientists used a light-powered gate to demonstrate the idea of Maxwell’s demon in action; in 2010, another team devised a way to use the energy produced by the demon’s information to coax a bead uphill; and in 2016 scientists applied the idea of Maxwell’s demon to two compartments containing not gas, but light.

“We switched the roles of matter and light,” said Vlatko Vedral, a physicist at the University of Oxford and one of the study’s co-authors. The researchers were ultimately able to charge a very small battery.

Others wondered if there might be less demanding ways to use information to extract useful work from a similar system. And research published in February in Physical Review Letters seems to have found a way to do so. The work makes the demon into a gambler.

The team, led by Manzano, wondered if there was a way to implement something like Maxwell’s demon but without the information requirements. They imagined a two-compartment system with a door, as before. But in this case, the door would open and close on its own. Sometimes particles would randomly separate themselves into hotter and colder compartments. The demon could only watch this process and decide when to turn the system off. In theory this process could create a small temperature imbalance, and therefore a useful heat engine, if the demon was smart about when to end the experiment and lock any temperature imbalance in place, much as a smart gambler on a hot streak knows when to leave the table. “You can either play all night on the roulette table, or you can stop if you win $100,” said Édgar Roldán, a physicist at the International Center for Theoretical Physics in Italy who was a co-author on the study. “We’re saying we don’t need such a complicated device as Maxwell’s demon to extract work in the second law. We can be more relaxed.” The researchers then implemented such a gambling demon in a nanoelectronic device, to show it was possible.

Ideas like this could prove useful in designing more efficient thermal systems, like refrigerators, or even in developing more advanced computer chips, which may be approaching a fundamental limit dictated by Landauer’s principle.

For the time being, though, our laws of the universe are safe, even when placed under the greatest scrutiny. What has changed is our understanding of information in the universe, and with it our appreciation of Maxwell’s demon, first a troublesome paradox, and now an invaluable concept — one that has helped to illuminate the remarkable link between the physical world and information.

Summer’s on how to think about secular stagnation and current fiscal policy, “…How does this square with my earlier views on secular stagnation? I looked at the global economy and, indeed, at the US economy during the pre-Covid period and what I saw was that, at near-zero real interest rates, there was a quite substantial gap between private savings and investment, driven by demography, cheap capital goods, inequality and technology. That substantial gap meant a deflationary tendency, one towards sluggishness and for savings to flow into existing assets and create asset bubbles. So, I felt that savings absorption was a central macroeconomic problem and the order of the problem was 3 or 4 per cent of GDP at very low interest rates that themselves carry substantial risks. Now, when we’re talking about fiscal stimulus totalling 14 per cent of GDP in its first round, when we’re also talking about extraordinary monetary measures, structural effects of Covid — notably a large savings overhang — it seems to me that we are way overdoing the requisite response. I always thought of economics as a quantitative field...... no one was advocating a programme of this magnitude last December. This was not anyone’s economic analysis. So, the argument might be right — but it was not an argument anyone had come to before it became politically expedient….”

John Cochrane, "Summers at FT,"The Grumpy Economist, April 23, 2021, https://johnhcochrane.blogspot.com/2021/04/summers-at-ft.html

Summers at FT

Martin Wolf's FT interview with Larry Summers is a great read. It would be a great read for its articulate numeracy if Larry were a Republican, stepping down from the Trump CEA or Treasury. That he is on the the other team makes it ever more poignant.

If you look at the economy at the beginning of this year, prevailing forecasts were that Covid would reduce wages and salaries to American households by $20bn-$30bn a month, with that figure declining over the year. So, that would be a $250bn-$300bn hole in wages and salaries over the course of the year.

So, I look at this hole and then I see $900bn of stimulus in the December package, $1.9tn of stimulus in the recently passed package and $2tn in the savings overhang, which is also likely to be spent. I see the Fed with its foot on the accelerator as hard as any Fed has ever done....

So, I look at that dwindling hole. Then I look at expenditures that aren’t hard to add into the multiple trillions, and I see substantial risk that the amount of water being poured in vastly exceeds the size of the bathtub.

Wait Larry, aren't you Mr. Secular Stagnation, Hysterisis, borrow and spend?

How does this square with my earlier views on secular stagnation? I looked at the global economy and, indeed, at the US economy during the pre-Covid period and what I saw was that, at near-zero real interest rates, there was a quite substantial gap between private savings and investment, driven by demography, cheap capital goods, inequality and technology.

That substantial gap meant a deflationary tendency, one towards sluggishness and for savings to flow into existing assets and create asset bubbles. So, I felt that savings absorption was a central macroeconomic problem and the order of the problem was 3 or 4 per cent of GDP at very low interest rates that themselves carry substantial risks.

Now, when we’re talking about fiscal stimulus totalling 14 per cent of GDP in its first round, when we’re also talking about extraordinary monetary measures, structural effects of Covid — notably a large savings overhang — it seems to me that we are way overdoing the requisite response.

I always thought of economics as a quantitative field...

Not all of this makes sense to me. The stories of excess savings seem ephemeral, how savings vs. investment has anything to do with inflation -- a nominal question at the scale of decades -- and how any of that privileges "savings flow into existing assets and create asset bubbles" is a head-scratcher.

Most of all, I am dubious of the hydraulic Keynesianism to which macro policy has returned. Find your GDP gap, divide by 1.5 (actually, here, divide by 1) that equals the amount to borrow and spread around.

But I am here to praise not to quibble. At least hydraulic Keynesianism is quantitative, in a back of the envelope sense. Larry is pointing to the complete lack of quantification in macro policy otherwise.

Later,

Let me put it in a different way and it’s sort of ironic. The bet that we can do this is a bet on secular stagnation being even more true than I had supposed. For this to be right, the long-term demand gap has to be far larger than I had imagined.

I don’t think that, until recently, the principal criticism of my views on secular stagnation was that I was very much underestimating its force. So I find it not a preponderant probability

In other words, MMT has won. I do chuckle a little at Summers and others, passed on the left by MMT, saying "no, we didn't mean that much stimulus, or that much slack." But Summers is and was quantitative, he did not subscribe to the "how much? MORE" attitude of the current left.

Of course, people in the Administration can also add. So the logical conclusion is that "stimulus" therefore is just a talking point, not a serious policy. They're taking Rahm Emmanuel's advice to heart and not letting the opportunity go to waste, not for macro benefit but to hand money out to where they want to hand money out. Larry essentially says as much.

...no one was advocating a programme of this magnitude last December. This was not anyone’s economic analysis. So, the argument might be right — but it was not an argument anyone had come to before it became politically expedient.

On infrastructure (this is the last bill, not the current one, but I think Larry will probably say the same given how little actual infrastructure is in this one)

I could have been comfortable with a headline figure well in excess of $1.9tn if it had been a large-scale, multiyear programme of public investment responding to our deepest societal concerns. But that’s not what this is.

It transfers to state and local governments that don’t have any new budget problem, according to the latest figures. It’s paying people, who have been unemployed, more in unemployment insurance than they earned when they were working. It’s giving cheques to families in the 90th percentile of income distribution.

It doesn’t seem prudent on resource allocation grounds, as well as being problematic on macroeconomic grounds.

Larry then goes back to the back of the stimulus envelope

..there’s much discussion that suggests you can’t measure the GDP gap but, gosh, employment is 10m people lower than it might otherwise have been, so there’s got to be enormous slack.

As a rough calculation, if employment is 10m people short, that’s about 6 per cent of the labour force and, it appears, those who are not employed have wages of perhaps 60 per cent of the average worker. In terms of the shortfall in effective labour input, you’re at 60 per cent of 6 per cent, which is about 3.6 per cent.

So, in employment terms that gets you to just about the same gap that you come to in terms of more traditional estimates. You also don’t see the Fed or others substantially revising upwards their estimates of potential GDP.

There is a lot more on taxes, the possibility of closing the gap by taxing the rich, and size of government I could quibble with, but leave that alone. Kudos to Larry for speaking out so forcefully when "his team" is headed in the wrong direction.

A last golden paragraph:

...in many ways, today’s situation is a bit like the 1960s. It was then hoped that the laws of economic arithmetic could be suspended and that it would all work out. That experiment didn’t work out well for Lyndon Johnson, economically, and it didn’t work out well for the Democratic party, politically. I think there is a significant risk that something of the same kind will happen today.

I hope Larry will next look at climate policy, which is suffering a similar lack of quantification. Has anyone seen a single cost-benefit analysis?

Paul Graham on why inequality has increased, structural shift in the economy from large capital intensive firms to small ones has enable entrepreneurship, “…It’s easier now to start and grow a company than it has ever been. That means more people start them, that those who do get better terms from investors, and that the resulting companies become more valuable. Once you understand how these mechanisms work, and that startups were suppressed for most of the 20th century, you don’t have to resort to some vague right turn the country took under Reagan to explain why America’s Gini coefficient is increasing. Of course the Gini coefficient is increasing. With more people starting more valuable companies, how could it not be?…”

Paul Graham, “How People Get Rich Now,” PaulGraham.com, April 2021, http://paulgraham.com/richnow.html

His evidence, “…How are people making these new fortunes? Roughly 3/4 by starting companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders’ or early employees’ equity (52 founders, 2 early employees, and 2 wives of founders), and 17 from managing investment funds. There were no fund managers among the 100 richest Americans in 1982. Hedge funds and private equity firms existed in 1982, but none of their founders were rich enough yet to make it into the top 100. Two things changed: fund managers discovered new ways to generate high returns, and more investors were willing to trust them with their money. But the main source of new fortunes now is starting companies, and when you look at the data, you see big changes there too. People get richer from starting companies now than they did in 1982, because the companies do different things. In 1982, there were two dominant sources of new wealth: oil and real estate. Of the 40 new fortunes in 1982, at least 24 were due primarily to oil or real estate. Now only a small number are: of the 73 new fortunes in 2020, 4 were due to real estate and only 2 to oil. By 2020 the biggest source of new wealth was what are sometimes called “tech” companies. Of the 73 new fortunes, about 30 derive from such companies. These are particularly common among the richest of the rich: 8 of the top 10 fortunes in 2020 were new fortunes of this type. Arguably it’s slightly misleading to treat tech as a category. Isn’t Amazon really a retailer, and Tesla a car maker? Yes and no. Maybe in 50 years, when what we call tech is taken for granted, it won’t seem right to put these two businesses in the same category. But at the moment at least, there is definitely something they share in common that distinguishes them. What retailer starts AWS? What car maker is run by someone who also has a rocket company? The tech companies behind the top 100 fortunes also form a well-differentiated group in the sense that they’re all companies that venture capitalists would readily invest in, and the others mostly not. And there’s a reason why: these are mostly companies that win by having better technology, rather than just a CEO who’s really driven and good at making deals. To that extent, the rise of the tech companies represents a qualitative change. The oil and real estate magnates of the 1982 Forbes 400 didn’t win by making better technology. They won by being really driven and good at making deals. And indeed, that way of getting rich is so old that it predates the Industrial Revolution. The courtiers who got rich in the (nominal) service of European royal houses in the 16th and 17th centuries were also, as a rule, really driven and good at making deals….”

He argues the post war period was an outlier in American economic history, note he seemingly falls for Lind’s uncompelling argument that the post war economy wasn’t competitive which was a deterrent to entrepreneurship, “…So it’s not 2020 that’s the anomaly here, but 1982. The real question is why so few people had gotten rich from starting companies in 1982. And the answer is that even as the Herald Tribune’s list was being compiled, a wave of consolidation was sweeping through the American economy. In the late 19th and early 20th centuries, financiers like J. P. Morgan combined thousands of smaller companies into a few hundred giant ones with commanding economies of scale. By the end of World War II, as Michael Lind writes, “the major sectors of the economy were either organized as government-backed cartels or dominated by a few oligopolistic corporations.” In 1960, most of the people who start startups today would have gone to work for one of them. You could get rich from starting your own company in 1890 and in 2020, but in 1960 it was not really a viable option. You couldn’t break through the oligopolies to get at the markets. So the prestigious route in 1960 was not to start your own company, but to work your way up the corporate ladder at an existing one. Making everyone a corporate employee decreased economic inequality (and every other kind of variation), but if your model of normal is the mid 20th century, you have a very misleading model in that respect…. But though the breakup of J. P. Morgan’s economy created a new world in the technological sense, it was a reversion to the norm in the social sense. If you only look back as far as the mid 20th century, it seems like people getting rich by starting their own companies is a recent phenomenon. But if you look back further, you realize it’s actually the default. So what we should expect in the future is more of the same. Indeed, we should expect both the number and wealth of founders to grow, because every decade it gets easier to start a startup. Part of the reason it’s getting easier to start a startup is social. Society is (re)assimilating the concept. If you start one now, your parents won’t freak out the way they would have a generation ago, and knowledge about how to do it is much more widespread. But the main reason it’s easier to start a startup now is that it’s cheaper. Technology has driven down the cost of both building products and acquiring customers. The decreasing cost of starting a startup has in turn changed the balance of power between founders and investors. Back when starting a startup meant building a factory, you needed investors’ permission to do it at all. But now investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up valuations.

Survey results suggest there is little support for "woke" ideas in general population, "..., when respondents were asked how people should be treated —specifically, do you believe that all people should be treated equally based on merit — there is essentially parity. 84% of all respondents agree with this statement and just 8% do not. 86% of whites, 82% of Blacks, and 81% of Hispanics agree here too. Americans clearly believe in equal treatment for all....”
When specifically asked about favoring a progressive world view, "...There are racial differences present in the data, but it is important to note that no racial group wanted to prioritize social justice concerns over a real diversity of views. 69% of white respondents opted to expose students to a variety of perspectives over a narrow progressive worldview. The number in support of a multiplicity of views dropped to 44% among Black respondents but this 44% is the plurality among Blacks for just 29% of Black respondents want the progressive idea and another 27% were unsure. Similarly, 51% of Hispanic or Latino identifiers selected viewpoint diversity with a third (33%) wanting a narrower view and 15% unsure.Collectively, the data reveal that there are understandable differences in racial outlook, but the overtly woke attitudes and approaches being taken by K-12 schools are completely out of step with reality for pluralities of all racial groups and the nation as a whole rejects this social justice approach...."

Samuel Abrams, "Americans do not want the woke racism our schools are peddling,"American Enterprise Institute, April 23, 2021, https://www.aei.org/op-eds/americans-do-not-want-the-woke-racism-our-schools-are-peddling/

Americans do not want the woke racism our schools are peddling

In the past few weeks, it has become apparent that the extreme progressive impulses infecting higher education in the United States have moved from campus quads and dormitories into our nation’s middle and high schools and even into our kindergartens. In New York City alone, the uptown Dalton School has seen an uprising and departure of numerous high-level staff over questions of curriculum and social justice. Downtown, a Grace Church School teacher published anopen letterexplaining that the school’s new “anti-racist” ideology induces shame in white students for being oppressors; he has witnessed the harmful impact that these ideas have had on children including silencing inquiry such that “children are afraid to challenge the repressive ideology that rules our school.”

Most recently, a Brearley School parent penned anopen letterto the entire community of parents explaining he was pulling his daughter from the school because of its “obsession with race” and the fact that the school abandoned its principle of teaching how to think for teaching what to think. In response, Brearley doubled-down on its position and argued that this letter was both offensive and harmful; it was nothing of the sort.

While theselettershave undoubtedly impacted their writers, these public statements show that the wave of progressive, woke, critical-race theory influenced “anti-racist” dogma that has penetrated our K-12 schools is finally being called out for what is it: racist, reductionist, anti-intellectual, and dangerous. And, I wanted to add some more fuel to those leading this important pushback: despite the impression that an illiberal, totalitarian movement has seized the world of education, new data shows that majorities of citizens want viewpoint diversity in our K-12 world, they want our schools to give their students an education based on skills, facts, and history and they do not approve of these divisive and racist ideas which masquerade as progressive and inclusive values.

Thanks to Data from the American Council of Trustees and Alumni (ACTA), it becomes immediately apparent that the woke ideas in the K-12 universe do not have the wide support of the public. ACTA surveyed a large number of Illinois residents — a microcosm of the American experience possessing not only a diverse citizenry, but large and small cities along with rural areas — about their attitudes toward these anti-racist ideas and support for woke and equitable thinking is not widely accepted at all.

Consider the following: Respondents were asked if K-12 teachers should work to expose students to a variety of perspectives about the country’s founding and history, and to equip them to think critically about its successes and failures OR if K-12 teachers should embrace progressive viewpoints and perspectives when teaching U.S. history, to encourage students to advocate for social justice causes. Almost two-thirds (62%) believed that it was more important to expose students to a variety of perspectives, compared to just 23% who preferred that teachers embrace progressive viewpoints and perspectives; 15% were not sure where they stood.

There are racial differences present in the data, but it is important to note that no racial group wanted to prioritize social justice concerns over a real diversity of views. 69% of white respondents opted to expose students to a variety of perspectives over a narrow progressive worldview. The number in support of a multiplicity of views dropped to 44% among Black respondents but this 44% is the plurality among Blacks for just 29% of Black respondents want the progressive idea and another 27% were unsure. Similarly, 51% of Hispanic or Latino identifiers selected viewpoint diversity with a third (33%) wanting a narrower view and 15% unsure. Collectively, the data reveal that there are understandable differences in racial outlook, but the overtly woke attitudes and approaches being taken by K-12 schools are completely out of step with reality for pluralities of all racial groups and the nation as a whole rejects this social justice approach.

The survey also asked about teacher preparation programs for the classroom and whether schools should prioritize teaching progressive viewpoints and social justice advocacy to help teachers overcome their own biases and build more inclusive classrooms OR if these programs should focus on making teachers better equipped to help students develop core skills and competencies, not on social justice or progressive politics. 58% of respondents preferred skills, while just a third (34%) wanted progressive politics.

When white respondents are considered, 63% advocated for core skills compared to 28% who thought about social justice considerations. This looks notably different from Black respondents who were fairly evenly divided: 44% sided with the progressive viewpoint position while 42% preferred skills. This is remarkable because this is a fairly even split and not a landslide in support for anti-racist thinking despite the rhetoric being churned out at K-12 schools. For those with Hispanic backgrounds, we see the same pattern with 51% falling on the progressive side and 44% landing on the skills side. This is a slight skew and shows, again, that there are not significant majorities which support the woke, anti-racist messages and teachings happening in our schools. The silence despite the data is most likely due to the fear that many have when they speak up and challenge these impulses.

Finally, when respondents were asked how people should be treated — specifically, do you believe that all people should be treated equally based on merit — there is essentially parity. 84% of all respondents agree with this statement and just 8% do not. 86% of whites, 82% of Blacks, and 81% of Hispanics agree here too. Americans clearly believe in equal treatment for all and not the divisive, anti-racist narratives coming from many of our K-12 schools today.

In short, many schools are fixated on race and difference and this is dangerous. Viewing people as members of narrow and simplistic racial groupings foolishly suggests that one should be defined by race and little more. This is an absurd way to understand people, dividing us rather than unifying us and finding common ground based on shared humanity and history. This is the antithesis of what our schools should be teaching, which include the values of real diversity in all forms and social inclusion. These recent examples of pushback are hopefully the start of a much larger effect to dismantle the progressive, ant-racist ideas which are infecting all levels of our education system. Our educational institutions anchor our nation and help teach and propagate our values and these institutions cannot be ceded to the seemingly growing woke and progressive waves corrupting the free exchange of ideas and our core ideas about learning. The data show that Americans reject anti-racism and the pushback against these ideas must continue as our nation’s core values and social fabric depend on it.

NBER argues that shocks that drive changes in equity risk premia also explains most business-cycle comovements in aggregates, "... We identify a shock that explains the bulk of fluctuations in equity risk premia, and show that the shock also explains a large fraction of the business-cycle comovements of output, consumption, employment, and investment. Recessions induced by the shock are associated with reallocation away from full-time permanent positions, towards part-time and flexible contract workers. A real model with labor market frictions and fluctuations in risk appetite can explain all of these facts, both qualitatively and quantitatively. The size of risk-driven fluctuations depends on the relationship between the riskiness and productivity of different stores of value: if safe savings vehicles have relatively low marginal products, then a flight to safety will drive a larger aggregate contraction...."

Core of paper, "....The identified shock explains the vast majority (around 90%) of unconditional equity risk-premium fluctuations and drives persistent changes in expected excess returns with a half-life of roughly four years. Having isolated the major source of risk premium fluctuations in the data, we next examine the effects of this shock on several important macroeconomic quantities and prices. We find that an increase in the equity premium, driven by our shock, is also associated with substantial falls in output, consumption, investment, employment, and stock returns, and only a small change in real interest rates.2 Thus,our shock generates the type of comovement across macro quantities (and a “smooth” risk-free rate) that is consistent with the main stylized facts about business cycles.The identified shock also explains a substantial proportion of the overall fluctuations in macro aggregates - including over half of the unconditional fluctuations in output, consumption, investment, employment, and stock returns. Furthermore, the shock we identify explains an even greater portion of the covariance in the key variables of interest. For example, we find that the covariance of output and stock returns driven by our shock is even larger than the unconditional covariance between these two variables, implying that all other shocks in the data jointly drive these variables in opposite directions. In addition to the main business cycle variables described above, we explore the effects of our shock on a set of additional variables that are not commonly included in businesscycle studies. In particular, we show that the identified shock, while causing a fall in aggregate hours and in total employment, leads part-time employment to rise significantly, both in absolute terms and as a share of total employment. This fact poses a particular challenge for many standard macroeconomic models which, whether driven by aggregate demand or aggregate supply shocks, generally imply that different types of labor should move in the same direction...."

Susanto Basu, Giacomo Candian, Ryan Chahrour & Rosen Valchev, "Risky Business Cycles," National Bureau Of Economic Research, April 2021, https://www.nber.org/papers/w28693