Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, February 10, 2022

AI Summary. Only 12% of Democrats and 5% of young adults view America as the best place on earth, and consumer sentiment remains negative despite a strong job market. The gap between personal financial satisfaction and national economic pessimism suggests a narrative-driven perception problem, reinforced by media attention to inflation rather than job growth.

Paul Krugman Krugman Wonks Out
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Only 12% of Democrats and 5% of young adults think America is the best place on earth.

Do narratives explain economic pessimism despite a strong job market?

Core argument: Only 12% of Democrats and 5% of young adults view America as the best place on earth, a sentiment linked to stagnant real wage growth and inflation outpacing wage increases.

The perception of America as the best place on earth is waning, with only 12% of Democrats and 5% of young adults holding this view. This sentiment reflects broader economic and social challenges, including stagnant real wage growth and inflation outpacing wage increases. Despite a strong job market, consumer sentiment remains negative, akin to the late 1970s when real wages were declining sharply. The disparity between personal financial satisfaction and national economic pessimism suggests a narrative-driven perception issue, exacerbated by media focus on inflation over job growth. This highlights the need for policymakers to address both economic fundamentals and public perception to restore confidence in the American economy.

Takeaways by Macro Roundup® AI

  1. Only 12% of Democrats and 5% of young adults view America as the best place on earth, a sentiment linked to stagnant real wage growth and inflation outpacing wage increases.
  2. Consumer sentiment remains negative despite a strong job market, resembling the late 1970s when real wages were declining sharply.
  3. The gap between personal financial satisfaction and national economic pessimism suggests a narrative-driven perception problem, attributed in part to media focus on inflation over job growth.

Paul Krugman, "Inflation and the Power of Narrative," Krugman Wonks Out, January 25, 2022, https://www.nytimes.com/2022/01/25/opinion/inflation-economy.html

Inflation and the Power of Narrative

President Biden had what I’d call a human moment yesterday. After a Fox News correspondent shouted out a question about whether inflation would be a political liability, Biden could be heard muttering: “No, it’s a great asset. More inflation. What a stupid son of a bitch.” Seriously, can you blame him?

But why is inflation proving to be so much of a political liability? The idea that Americans are down on the economy because price increases have outstripped wage growth has hardened into conventional wisdom. And there’s obviously something to that. But the political reaction is disproportionate to the actual decline in real wages, and I’d argue that journalists are missing a large part of the story if they fail to realize that.

Let’s talk about the long view of wages and prices.

Here’s the annual rate of change in real wages — the rate of wage increase minus the rate of inflation — for blue-collar workers since the late 1970s:

Inflation and the Power of Narrative: Extended Excerpt Image 1


Obviously there was a huge decline following the 1979 oil shock. Perhaps less familiar is the fact that real wages fell for much of the Reagan era. In particular, in October 1984 — on the eve of the presidential election — real wages were 1.4 percent lower than they were a year earlier. In October 1988, they were down 0.6 percent. Yet, Republicans won both elections by large margins by running on the economy.

What about our current situation? The most commonly used wage numbers have been screwy during the pandemic, because of compositional effects. For example, average wages shot up in 2020, not because workers were getting big raises, but because low-wage workers were laid off in disproportionate numbers. So we need to look at estimates that are supposed to correct for these compositional effects, like the Atlanta Fed’s wage tracker:

Inflation and the Power of Narrative: Extended Excerpt Image 2


This tracker shows a sharp acceleration in wages; so does the official Employment Cost Index, although this index hasn’t yet been updated to reflect the past few months.

Still, there’s no question that inflation has outstripped wages over the past year. On the other hand, inflation was low in 2020, measured both by the Consumer Price Index and by the Fed’s preferred measure, the personal consumption expenditure deflator:

Inflation and the Power of Narrative: Extended Excerpt Image 3


So real wages rose last year. On a two-year basis, they’re probably down, but not by a lot. At the same time, we’ve had stellar job growth — and as I said, the combination of modestly declining real wages with a strong job market has actually been a winner for past presidents.

This time, however, consumer sentiment is extremely negative — almost as negative as it was in the late 1970s, when real wages were really plunging and unemployment was rapidly rising:

Inflation and the Power of Narrative: Extended Excerpt Image 4


What’s going on? Surely it’s the power of narrative. As many of us have noted, Americans are very down on the national economy, but relatively upbeat about their own personal financial situation:

Inflation and the Power of Narrative: Extended Excerpt Image 5


That is, their personal experience is pretty good but they’ve heard that things are terrible for other people.

A lot of this is partisanship. Democrats and Republicans used to have similar assessments of the economy, whoever was president. Now Republicans assess the economy as worse than it was in June 1980, when inflation was 14 percent and real wages were falling 6 percent a year.

Some of it also has to involve the way the media cover the economy. I know journalists hate hearing this, but if the way we report on events doesn’t affect public perceptions, what is the point of what we’re doing? And somehow Biden’s inflation, not Biden’s jobs boom, has come to dominate news coverage.

I’m not arguing that inflation isn’t a problem, nor am I doing a Phil Gramm and calling America a “nation of whiners.” I am saying that the remarkably negative public reaction to what by historical standards would at worst be considered mixed news is an important story in itself and deserves both some coverage and, perhaps, self-reflection on the part of those reporting on the subject.

Paul Krugman on what's happening with real wages, acceleration in compensation hasn’t yet offset inflation, on a two years basis wages are likely down, "...The most commonly used wage numbers have been screwy during the pandemic, because of compositional effects. For example, average wages shot up in 2020, not because workers were getting big raises, but because low-wage workers were laid off in disproportionate numbers. So we need to look at estimates that are supposed to correct for these compositional effects, like the Atlanta Fed’s wage tracker: This tracker shows a sharp acceleration in wages; so does the official Employment Cost Index, although this index hasn’t yet been updated to reflect the past few months. Still, there’s no question that inflation has outstripped wages over the past year. On the other hand, inflation was low in 2020, measured both by the Consumer Price Index and by the Fed’s preferred measure, the personal consumption expenditure deflator: So real wages rose last year. On a two-year basis, they’re probably down, but not by a lot...."

Ed Comment:What indices have we looked at in the past that purported to solve the compositional problem raise d by Krugman? What is that index saying now.

Steve Comment:“This is what the index looks like today Ed, so as of December the FRBA’s Wage tracker (Median wage growth, hourly data) was showing5%, CPI (I used non-core so including food and energy) printed at7.1%implying real wage growth of-2.1%I ran it back to 1997 so we could see several business cycles.”

Monday, February 14, 2022

AI Summary. The authors argue that capital inflows from developing countries have shifted U.S. economic activity from the tradable sector toward the non-tradable sector, reducing profits and innovation investment in tradables. They term this a global financial resource curse, in which cheap capital inflows slow U.S. and global productivity growth.

Martin Wolf Economia Internacional
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Capital flow paradox hits US productivity: Cheap foreign capital drives shift from tradable to non-tradable sectors, reducing innovation investment and dampening productivity growth post-2000.

Do foreign capital inflows slow U.S. productivity growth?

Core argument: U.S. investment has been weak and productivity growth has slowed since the early 2000s, contrary to the expectation that capital inflows raise productivity.

Despite expectations that capital inflows boost productivity, data shows that since the early 2000s, U.S. investment has been weak and productivity growth has slowed. Capital inflows from developing countries have shifted U.S. economic activity from the tradable sector, the engine of growth, to the non-tradable sector, leading to reduced profits and innovation investment in tradables. This reallocation results in a slowdown in U.S. productivity growth, which, as the technological leader, impacts global growth. The phenomenon, termed the global financial resource curse, highlights how cheap capital inflows can paradoxically depress productivity growth by financing a boom in the non-tradable sector, ultimately slowing global productivity growth.

Takeaways by Macro Roundup® AI

  1. U.S. investment has been weak and productivity growth has slowed since the early 2000s, contrary to the expectation that capital inflows raise productivity.
  2. Capital inflows from developing countries shift U.S. activity from the tradable sector, described as the engine of growth, to the non-tradable sector, reducing tradable-sector profits and innovation investment.
  3. The global financial resource curse describes cheap capital inflows financing a non-tradable boom that depresses U.S. productivity growth and, because the U.S. is the technological leader, slows global productivity growth.

Conventional wisdom suggests that cheap capital inflows should, at least in part, help firms to finance investment and increase their productivity. One could then expect that the global saving glut coincided with a rise in U.S. investment and productivity growth. Since the early 2000s, however, in the United States firms’ investment has been weak and productivity growth has slowed down(Figure 1b). Moreover, the international evidence shows that episodes of large capital inflows are often associated with slowdowns in productivity growth, calling into question the conventional logic.So could it be that capital flows from developing countries to the United States ended up not contributing much - or even depressing - U.S. productivity growth? If so, given the U.S. status as one of the world technological leaders, what would be the effect of the saving glut on global growth? In this paper, we tackle these questions by providing two main contributions. First, we develop a novel endogenous growth model to study the impact of international financial integration on global productivity growth. Second, we explore a channel through which a global saving glut originating from developing countries may, perhaps paradoxically, depress productivity growth in the United States, and eventually in the rest of world as well. For reasons that will become clear below, we dub this effect the global financial resource curse....The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which we dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates.

Gianluca Benigno, Luca Fornaro and Martin Wolf, "The Global Financial Resource Curse," Centre de Recerca en Economia Internacional, December 2021, https://crei.cat/wp-content/uploads/2021/12/GFRC.pdf

Important distinction btw tradable/non-tradable sector“..Compared to standard frameworks of technology discussion, our model has two novel features. The first one is that sectors producing tradable goods are the engine of growth in our economy. That is, in both regions productivity growth is the result of investment by firms operating in the tradable sector. The non-tradable sector, instead, is characterized by stagnant productivity growth. As we explain in more detail below, this assumption captures the notion that sectors producing tradable goods, such as manufacturing, have more scope for productivity improvements compared to sectors producing non-tradables, for instance construction. The second feature is that agents in developing countries have a higher propensity to save compared to U.S. ones. Again as we discuss below, the literature has highlighted a host of factors contributing to high saving rates in developing countries, such as demography, lack of insurance or government interventions. Against this background, we consider a global economy moving from a regime of financial autarky to international financial integration. Due to the heterogeneity in propensities to save across the two regions, once financial integration occurs the United States receives capital inflows from developing countries. Capital inflows allow U.S. agents to finance an increase in consumption. Higher consumption of tradables is achieved by increasing imports of tradable goods from developing countries, and so the United States ends up running persistent trade deficits. But non-tradable consumption goods have to be produced domestically. Hence, in response to the rise in demand for non-tradable goods, factors of production migrate from the tradable sector toward the nontradable one. As the share of global demand captured by tradable rms in the U.S. declines, their profits drop, reducing their incentives to invest in innovation. The consequent drop in investment results in a slowdown in U.S. productivity growth. Therefore, in contrast with the conventional wisdom, cheap capital inflows depress investment and productivity growth, because they end up financing a boom in the non-tradable sector…”

As the pace setter of technological frontier harm to US tradable sector slows down global growth, “…To some extent, developing countries experience symmetric dynamics compared to the United States. Financial integration leads developing countries to run persistent trade surpluses. This stimulates economic activity in the tradable sector, at the expense of the non-tradable one. In turn, higher profits in the tradable sector induce firms in developing countries to increase their investment in technology adoption. The proximity of developing countries to the technological frontier thus rises. But this does not necessarily mean that financial integration benefits productivity growth in developing countries. Following financial integration, indeed, productivity growth in developing countries initially accelerates, but then it slows down below its value under financial autarky. The explanation is that the drop in innovation activities in the U.S. reduces the productivity gains that developing countries can obtain by absorbing knowledge from the frontier. Therefore, in the long run the process of financial integration - and the associated saving glut - generates a fall in global productivity growth. Perhaps paradoxically, in our framework cheap access to foreign capital by the world technological leader depresses global productivity growth in the long term. The reason is that capital inflows lead to a contraction in economic activity in tradable sectors, which are the engine of growth in our economies.In this respect, our model is connected to the idea of natural resource curse….However, our mechanism is based on financial - rather than natural - resources. Moreover, the forces that we emphasize are global in nature. In fact, lower innovation by the technological leader drives down productivity growth also in the rest of the world, including in those countries experiencing capital out flows and an expansion of their tradable sectors. For these reasons, we refer to the link between capital flows toward the world technological leader and weak global growth as the global financial resource curse. Relatedly, it has been argued that the U.S. enjoys an exorbitant privilege, because it issues the world's dominant currency and is thus able to borrow cheaply from the rest of the world…But in our model the exorbitant privilege carries an exorbitant burden, since capital inflows generate a growth slowdown in the country issuing the dominant currency. Moreover, given that the U.S. represents the world's technological leader, this exorbitant burden spreads to the rest of the world as well. To the best of our knowledge, we are the first to emphasize this connection between the central role played by the United States in the international monetary and technological system….”

Here’s the dynamics of the model, “…two main contributions. First, we develop a novel endogenous growth model to study the impact of international financial integration on global productivity growth. Second, we explore a channel through which a global saving glut originating from developing countries may, perhaps paradoxically, depress productivity growth in the United States, and eventually in the rest of world as well. For reasons that will become clear below, we dub this effect the global financial resource curse.Our model is composed of two regions: the United States and developing countries. As in
standard models of technology discussion... innovation activities by the technological leader, i.e. the United States, determine the evolution of the world technological frontier. Developing countries, in contrast, grow by absorbing knowledge originating from the United States. Therefore, investments by firms in developing countries affect their proximity to the technological frontier…”

AI Summary. The share of the U.S. population age 16+ that is retired rose 1.3 percentage points during the pandemic, versus 0.3 points annually in the prior decade, adding 3.6m retirees rather than the 1.5m implied by earlier trends. The authors attribute this mainly to fewer retirees returning to work.

Jun Nie Federal Reserve Bank of Kansas City
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Retirements rose 1.3% points from Feb 2020 to June 2021, outpacing pre-pandemic trends. A sharp decline in retirees rejoining the labor force drove this uptick, likely due to pandemic-related health concerns.

Are fewer retirees returning to work driving the rise in retirements?

Core argument: The main driver of rising U.S. retirements was a decline in retirees rejoining the labor force, with the retirement-to-employment transition rate falling from 1.9% in early 2020 to 1% in April 2020 before recovering to 1.4%.

The retirement share of the U.S. population (age 16+) rose 1.3 percentage points from Feb 2020 to June 2021, significantly outpacing the 0.3 percentage point annual increase from 2010-20. This led to an increase of 3.6m retirees, compared to the expected 1.5m if pre-pandemic trends had continued. The primary driver was a sharp decline in retirees rejoining the labor force, with the transition rate from retirement to employment dropping from 1.9% in early 2020 to 1% in April 2020, before recovering to 1.4%. Pandemic-related health concerns likely contributed to this trend, as these dynamics were not observed during the 2007-09 recession. As health risks diminish, some retirees may return to work, but it could take over two years to reverse the recent uptick in retirements.

Takeaways by Macro Roundup® AI

  1. The main driver of rising U.S. retirements was a decline in retirees rejoining the labor force, with the retirement-to-employment transition rate falling from 1.9% in early 2020 to 1% in April 2020 before recovering to 1.4%.
  2. Pandemic-related health concerns likely contributed to the drop in retirees returning to work, a dynamic not observed during the 2007–09 recession, and reversing the uptick in retirements could take more than two years.

The share of the U.S. population (age 16 and above) who are retired increased rapidly at the beginning of the COVID-19 pandemic. Chart 1 shows that the retirement share rose 1.3 percentage points from February 2020 to June 2021, with the majority of the increase occurring in the first few months of the pandemic. This increase has substantially outpaced the share’s 0.3 percentage point average annual increase from 2010 to 2020. If the retirement share had risen at its 2010-20 pace, the number of retirees would have increased by 1.5 million during the pandemic. Instead, the number of retirees increased by 3.6 million....Chart 2 presents monthly transition rates between retirement, employment, and unemployment from January 2015 to June 2021 based on data from the U.S. Census Bureau’s Current Population Survey (CPS). The blue line shows that the transition rate from employment to retirement did not accelerate during the pandemic and stayed around 0.6 percent, meaning about 0.6 percent of employed people retired every month… Similarly, the green line shows that the transition rate from retirement to unemployment—covering the share of retirees who have started to look for work but are not yet employed—has remained relatively stable over the entire 2018-21 period. In contrast, the orange line shows that the transition rate from retirement to employment declined sharply at the beginning of the pandemic, falling from an average pace of 1.9 percent in the first two months of 2020 to 1 percent in April 2020 before recovering to around 1.4 percent more recently. Finally, the purple line shows that the transition rate from unemployment to retirement also dropped sharply during the pandemic. However, the number of unemployed people is much smaller than the total number of retirees, so the decline in the unemployment-to-retirement rate has less influence on the overall retirement share than the decline in the retirement-to-employment rate…Overall, these changes in transition rates highlight that the recent increase in the retirement share has been driven by a steep decline in the percentage of retirees returning to work...In sum, we findevidence that the recent increase in retirement since the beginning of the pandemic has mainly been driven by a decline in the number of people transitioning from retirement back to employment, rather than an increase in the number of people transitioning from employment to retirement.

Jun Nie and Shu-Kuei X. Yang, "What Has Driven the Recent Increase in Retirements?" Federal Reserve Bank of Kansas City, https://www.kansascityfed.org/research/economic-bulletin/what-has-driven-the-recent-increase-in-retirements/

What Has Driven the Recent Increase in Retirements?

The share of the U.S. population (age 16 and above) who are retired increased rapidly at the beginning of the COVID-19 pandemic. Chart 1 shows that the retirement share rose 1.3 percentage points from February 2020 to June 2021, with the majority of the increase occurring in the first few months of the pandemic. This increase has substantially outpaced the share’s 0.3 percentage point average annual increase from 2010 to 2020. If the retirement share had risen at its 2010-20 pace, the number of retirees would have increased by 1.5 million during the pandemic. Instead, the number of retirees increased by 3.6 million.

What Has Driven the Recent Increase in Retirements?: Extended Excerpt Image 1


Retirement is often thought of as a permanent shift in an individual's employment status, and an increase in the retirement share typically indicates an increase in the number of employed people transitioning to retirement. However, we find that the current increase has mainly been driven by a decline in the number of retirees rejoining the labor force. Chart 2 presents monthly transition rates between retirement, employment, and unemployment from January 2015 to June 2021 based on data from the U.S. Census Bureau’s Current Population Survey (CPS). The blue line shows that the transition rate from employment to retirement did not accelerate during the pandemic and stayed around 0.6 percent, meaning about 0.6 percent of employed people retired every month. Similarly, the green line shows that the transition rate from retirement to unemployment—covering the share of retirees who have started to look for work but are not yet employed—has remained relatively stable over the entire 2018-21 period. In contrast, the orange line shows that the transition rate from retirement to employment declined sharply at the beginning of the pandemic, falling from an average pace of 1.9 percent in the first two months of 2020 to 1 percent in April 2020 before recovering to around 1.4 percent more recently. Finally, the purple line shows that the transition rate from unemployment to retirement also dropped sharply during the pandemic. However, the number of unemployed people is much smaller than the total number of retirees, so the decline in the unemployment-to-retirement rate has less influence on the overall retirement share than the decline in the retirement-to-employment rate. Overall, these changes in transition rates highlight that the recent increase in the retirement share has been driven by a steep decline in the percentage of retirees returning to work.

What Has Driven the Recent Increase in Retirements?: Extended Excerpt Image 2


The decline in the percentage of retirees rejoining the labor force could be temporary for two reasons. First, the retirement-to-employment transition rate did not plummet during the 2007-09 recession, suggesting the current decline is unique to the pandemic (and thus likely to recover when the pandemic ends). Indeed, Chart 3 shows that all four transition rates remained relatively stable during the 2007-09 recession. One natural explanation for the recent decline in the retirement-to-employment transition rate is pandemic-related health concerns. Given the risk of being infected at work, some retirees who might have otherwise rejoined the workforce may have postponed these plans. As vaccinations continue to increase and health risks fade, more retirees will likely transition to employment.

What Has Driven the Recent Increase in Retirements?: Extended Excerpt Image 3


Second, the recent increase in the retirement share includes people across a wide range of ages, suggesting many of those who postponed their plans to rejoin the labor force still have time to do so when the pandemic ends. Chart 4 shows that the increase in the number of retirees since February 2020 includes 0.7 million people younger than 60, 0.5 million people age 60 to 67, and 1.6 million people age 68 to 75. Many of these people are still young enough to reenter the labor market if the pandemic abates in the near term.

What Has Driven the Recent Increase in Retirements?: Extended Excerpt Image 4


In sum, we find evidence that the recent increase in retirement since the beginning of the pandemic has mainly been driven by a decline in the number of people transitioning from retirement back to employment, rather than an increase in the number of people transitioning from employment to retirement. Pandemic-related health concerns may help explain this decline, as these dynamics were not observed during the 2007-09 recession. As such, some of these retirees may consider rejoining the labor force if the health risks of the pandemic decline in the near future. Nonetheless, the retirement share may not return to its previous trend or some time. Even if monthly transitions from retirement to employment return to their average pace in 2018-19, it will take more than two years to fully unwind the recent increase in the retirement share.

Endnotes

1 To calculate the transition rates, we match individuals in the CPS in two consecutive months following the procedure in Nekarda (2009) and Shimer (2012). These transition rates describe the ratio of the number of people transitioning retirement states between two months to total matched observations for the original state in the two months. For example, the retirement-to-employment transition rate from March to April is calculated as the ratio of the number of people transitioning from retirement to employment to the total number of retired people in March that can be matched in April. Note that the rotation structure of the CPS design suggests that 25 percent of observations will be lost in this matching process, which is why we only include total matched observations in calculating the transition rates.

2 The number of unemployed people was about 13 percent of the number of retired people in February 2020. This ratio rose to a level above 40 percent in April before quickly declining to a level of around 20 percent. The steep increase in the unemployment level from February to April 2020 largely explains the concurrent decline in the unemployment-to-retirement transition rate shown in Chart 2, as the unemployment rate rose from 3.5 percent in February 2020 to 14.8 percent in April 2020.

3 This calculation assumes monthly retirement-to-employment transitions increase from the average level seen from February 2020 to June 2021 to the average level seen from January 2018 to February 2020, while all other transitions are held unchanged. Under this assumption, it will take about 28 months to reduce the retirement level by 2.1 million, which is the extra increase (relative to its normal trend) since the beginning of the pandemic.