Macro Roundup

I think this is their key point, at some point faster wage growth is correlated with slower "real" wage growth. IE wage growth in a sense is/can be another measure of "core" inflation

Both nominal wage growth and real wage growth reflect a variety of economic forces. Our suspicion about the best way to understand the documented relationship is that in environments of stable inflation, increases in wages are primarily driven by increases in productivity growth, which justify higher real wages. But past a certain point, it is likely that most increases in wages are driven either by adverse supply shocks or by increases in nominal aggregate demand, both of which are naturally associated with decreases in real wages….Table 1 shows the historical relationship between nominal wage growth and real wage growth going back to 1965. We show the correlation coefficient using alternating wage measures and inflation measures, and include both the contemporaneous correlation and the correlation between lagged nominal wages and real wages. Across all our series, the correlation between nominal wage growth and real wage growth is very low, and usually becomes negative with a lag….It’s useful to look at nominal wages over the last 25 years to understand the challenge of taming accelerating wage growth. Since the late 1990s, nominal wage growth has reduced rapidly on two occasions — from 2001 to 2002 and 2008 to 2009 — and both times coincided with significant recessions and increases in unemployment (see Figure 3). Between 2001 and 2002, wage growth reduced by 2.4 percentage points, which required unemployment to remain above 5 percent for 4 years and 4 months. Between 2008 and 2009, wage growth reduced by 2.8 percentage points, which required unemployment to remain above 5 percent for 7 years and 10 months….Historically, wage growth and price inflation have tracked each other very closely, implying that bringing down price inflation will likely require sharp reductions in wage growth, and large increases in economic slack. Table 2 below shows the relation between nominal wage growth (measured using the Employment Cost Index) and price inflation over the last two decades, using both the PCE and CPI. Since 2001, annual nominal wage growth has been 0.7 percentage points higher, on average, then annual price inflation (using the PCE), with a standard deviation of 0.9. Wage growth has never been more than 2.5 percentage points higher than price inflation….These results imply that it is highly improbable that average price inflation will fall below 3 percent by 2023 — as predicted by the Federal Reserve — without a significant drop in wage growth from its current level of 6.5 percent. We have shown that such declines in wage growth have historically been associated with recessions and large increases in unemployment. Overall, the historical evidence presented in this note thus suggests that we have reason to be wary that higher nominal wages are always good for workers: on an economy wide basis, wage growth that runs too far ahead of productivity can contribute to underlying inflation and reverse the very gains in worker purchasing power that we are trying to achieve.

Alex Domash and Lawrence Summers, "The relation between nominal and real wage growth,"Medium, April 11, 2022, https://medium.com/@alex.domash/the-relation-between-nominal-and-real-wage-growth-2bfd2e1b27b8

The relation between nominal and real wage growth

While it is tempting to think that higher average wages categorically make workers’ richer, we believe there is reason for uncertainty. It is useful to consider the following football analogy made by Arthur Okun to differentiate between individual and aggregate outcomes: When an individual football fan stands up in the crowd, he can see the football game better. But if everyone in the crowd stands up, then nobody sees any better, and everyone is made less comfortable and worse off. Similar to this logic, we believe there is reason to question whether aggregate wage increases are always better for workers.

We first highlight that in general, the correlation between economy-wide wage increases and worker purchasing power is close to zero or negative. Table 1 shows the historical relationship between nominal wage growth and real wage growth going back to 1965. We show the correlation coefficient using alternating wage measures and inflation measures, and include both the contemporaneous correlation and the correlation between lagged nominal wages and real wages. Across all our series, the correlation between nominal wage growth and real wage growth is very low, and usually becomes negative with a lag.

It’s useful to look at nominal wages over the last 25 years to understand the challenge of taming accelerating wage growth. Since the late 1990s, nominal wage growth has reduced rapidly on two occasions — from 2001 to 2002 and 2008 to 2009 — and both times coincided with significant recessions and increases in unemployment (see Figure 3). Between 2001 and 2002, wage growth reduced by 2.4 percentage points, which required unemployment to remain above 5 percent for 4 years and 4 months. Between 2008 and 2009, wage growth reduced by 2.8 percentage points, which required unemployment to remain above 5 percent for 7 years and 10 months.

A trove of IRS data obtained by ProPublica has the definitive answers, revealing the incomes and tax rates of the 400 Americans with the highest incomes from 2013 to 2018. It took an average of $110 million per year in income to crack that list...The “income” described in this article is adjusted gross income.To calculate income taxes, we used the IRS definition of “total income tax,” which excludes self-employment tax and a few other non-income taxes that appear on Form 1040. The effective income tax rates we present are weighted averages — that is, the sum of income tax from 2013 to 2018 divided by the sum of adjusted gross income over that period… On average, the rate of income tax that people pay does climb as incomes ascend into the top 1%, but when you get to the range of $2 million to $5 million, that trend stops. The group earning in this range, composed mostly of business owners and workers with extremely high salaries, paid an average income tax rate of 29% from 2013 to 2018. After that, average tax rates actually drop the further up in income you go.

Paul Kiel, Ash Ngu, Jesse Eisinger and Jeff Ernsthausen, "America’s Highest Earners And Their Taxes Revealed,"Pro Publica, April 13, 2022, https://projects.propublica.org/americas-highest-incomes-and-taxes-revealed/

America’s Highest Earners And Their Taxes Revealed

Which people and professions rake in the most income year after year? Which are most adept at shielding that money from the taxman? And what does this tell you about America?

The top earners, of course, are often fodder for lists — but those are usually based on estimates or even speculation.

A trove of IRS data obtained by ProPublica has the definitive answers, revealing the incomes and tax rates of the 400 Americans with the highest incomes from 2013 to 2018. It took an average of $110 million per year in income to crack that list — with plenty of names you would expect and some that may surprise you.

We’ll also show how much the 400 paid in federal income taxes. (ProPublica is naming the 15 highest income earners, along with an assortment that represent income patterns that we’ve identified.)

In theory, our tax system is designed to tax the rich at higher rates than everyone else. That’s not the way it works at the loftiest incomes. The data reveals a system where the very highest earners, on average, pay far lower tax rates than the merely affluent do. And even among the top 400, some groups have it better than others: Tech billionaires pay rates well below even other business owners.

We sought comment from every person named in this story. Most did not respond or declined to comment. See their responses.

In an era of widening gaps between the rich and everyone else, ProPublica’s analysis shows that the U.S. tax system is making inequality worse.

Let’s walk you through the world of the highest-earning Americans.

So what kind of taxes do these 400 people pay?

In a progressive tax system, the more income you make, the higher your tax rate is. But in the U.S., that’s only partly true.

On average, the rate of income tax that people pay does climb as incomes ascend into the top 1%, but when you get to the range of $2 million to $5 million, that trend stops. The group earning in this range, composed mostly of business owners and workers with extremely high salaries, paid an average income tax rate of 29% from 2013 to 2018. After that, average tax rates actually drop the further up in income you go.

In the American system, there’s a huge difference between how we tax wages and how we tax investments. Income from financial assets is generally taxed at a lower rate.

Taxing long-term capital gains at lower rates than income is not new. The U.S. has done so for most of the past century. But in 2003, under President George W. Bush, that special rate was extended to most stock dividends, or money paid out to owners of a company’s stock, for the first time in U.S. history.

That change particularly benefited the wealthy. Together, the top 400 saved an average of $1.9 billion in taxes each year — due solely to the lower rate on dividends. These five benefited the most.

Those two factors — the amount of income taxed at the advantageous rate and the ability to muster large deductions — are the main drivers of lower tax rates for those with the highest incomes.

Collectively, the top 400 paid an average tax rate of 22% from 2013 to 2018.

Among the top 400, rates between different groups ranged widely, depending on the interplay of those two factors. Tech billionaires paid rates well below that average. By contrast, we found nine owners of privately held manufacturing companies who paid relatively higher tax rates, because the income from their businesses is largely taxed at the ordinary rate.

While the income tax rates paid by the richest Americans can be surprisingly low, they are still generally much higher than the income tax rates paid by average working people.

But income taxes are only part of the story. A majority of workers actually pay more in taxes for Social Security and Medicare than income taxes. These payroll taxes are automatically deducted from paychecks every month.

The rich, meanwhile, tend to pay proportionally little of these types of taxes because wages are a small portion of their total income.

Because payroll taxes hit low- and middle-income workers disproportionately, they can wipe out the progressivity of income taxes. It’s common for wage earners to pay a higher rate of personal federal taxes than even the highest-earning Americans.

As we showed last year, the richest avoid income when they can. Then they pay very little in tax when it’s measured against their growing wealth. The top 25 wealthiest Americans got $401 billion richer from 2014 to 2018, but paid just $13.6 billion in federal income taxes, a “true tax rate,” as we called it, of 3.4%.

Even the conventional income tax rate for this top 25 is remarkably low: 16%.

Over time, the gap between those at the top and ordinary Americans has gotten wider. This is evident when looking at both wealth and income.

Economists are mainly focusing on the surge of new firms in America. But the trends are wider. Using data for a range of rich countries we estimate that in the fourth quarter of 2021 the number of “enterprise entries”—ie, newly formed companies—was 15% higher than the average before the pandemic (see chart). An extra 1m or so firms have sprung to life across the oecd group of mostly rich countries since the first lockdowns, compared with the pace of business creation before 2020...In America during the 2010s the share of people who worked for large companies (ie, those with more than 1,000 employees) was rising. In 2021 it fell, with the proportion of people working for small firms moving up.Britain is experiencing similar trends. In Germany new business creation is slightly higher than it was in 2019. And in France the number of startups is about 70% higher than was usual before the pandemic....Three explanations for the startup boom stand out. The first relates to family finances...The second factor relates to economic reallocation...The third explanation is hard to measure, but could have the longest-lasting effects. The pandemic, by reminding people that life is short, may have encouraged them to take more risks. It would not be the first time. In America from 1918, after the first world war had ended and the Spanish flu epidemic had faded, an even bigger startup boom began, as more people plucked up the courage to set out alone.

Economist Staff, "All over the rich world, new businesses are springing to life,"The Economist, April 23, 2022, https://www.economist.com/finance-and-economics/2022/04/23/all-over-the-rich-world-new-businesses-are-springing-to-life

All over the rich world, new businesses are springing to life

The lasting effects of the covid-19 pandemic on the economy are starting to become clear. Surveys suggest that Americans who can work from home are likely to do so for two or three days a week in the post-covid world, compared with hardly at all in 2019. Companies have regained their appetite for capital spending. And the pandemic appears to be provoking a shift towards higher levels of entrepreneurship around the rich world.

Economists are mainly focusing on the surge of new firms in America. But the trends are wider. Using data for a range of rich countries we estimate that in the fourth quarter of 2021 the number of “enterprise entries”—ie, newly formed companies—was 15% higher than the average before the pandemic (see chart). An extra 1m or so firms have sprung to life across the oecd group of mostly rich countries since the first lockdowns, compared with the pace of business creation before 2020.

Some of these new firms are in glamorous industries. Caroline Girvan incorporated her fitness business in Northern Ireland in October 2020. (Her at-home videos, which your correspondent has discovered are impossibly difficult to keep up with, have racked up more than 250m views.) With global venture capital booming, startups from Triple Whale (e-commerce) in Columbus, Ohio, to Payrails (fintech) in Berlin are receiving lots of investment. Yet most of the companies set up during the pandemic have nothing to do with Silicon Valley or its pretenders. They are construction firms, consultancies and the like.

More entrepreneurship is likely to be good for the economy. New businesses try out fresh ideas and ways of doing things, while drawing capital and people away from firms that are stuck in their ways. Many economists draw links between the low rate of entrepreneurship after the financial crisis of 2007-09 and the weak productivity growth of the 2010s. In addition, a recovery with lots of startups tends to create more jobs, since young firms typically seek to expand and thus hire new staff.

Three explanations for the startup boom stand out. The first relates to family finances. From about 2017 onwards labour markets in the rich world noticeably strengthened, putting money in workers’ pockets. With a financial cushion in place, people may have felt comfortable trying something new—which might explain why business creation picked up shortly before the pandemic. Then governments plumped the cushion considerably, as they handed out vast amounts of cash via stimulus cheques or furlough schemes in 2020 and 2021. At the same time, people cut back on spending. The result was a huge rise in saving, and an acceleration in startups.

The second factor relates to economic reallocation. The pandemic has prompted profound changes in consumption habits, meaning that demand has shifted across both geographies and industries. City centres are less busy than suburbs, while industries favoured by social distancing—online retail, for instance—remain more popular than activities that require in-person attendance. Entrepreneurs are responding. In France the number of hospitality startups is 22% below its pre-pandemic level, but those in the information and communication sector are up by 26%.

The third explanation is hard to measure, but could have the longest-lasting effects. The pandemic, by reminding people that life is short, may have encouraged them to take more risks. It would not be the first time. In America from 1918, after the first world war had ended and the Spanish flu epidemic had faded, an even bigger startup boom began, as more people plucked up the courage to set out alone.

The empirical evidence presented in this article suggests that VC financing is positively associated with firm innovation and growth in the United States... Figure 6 displays the shares of patents and patents adjusted by the quality (proxied by citations) of VC-backed companies. It confirms the increasing importance of VC-backed companies for innovation...Regression analysis is now conducted to evaluate the performance of VC-backed and non-VCbacked firms along four dimensions for the years following an initial public offering (IPO) of stock: the R&D-to-sales ratio, growth rate of employment, growth rate of sales, and firm market value (in natural logarithm). The results are presented in Table 1. The regressions are based on U.S. public companies between 1970 and 2014. To compare VC-backed companies with their non-VC-backed counterparts, a VC dummy is entered as an independent variable that takes the value of 1 if the company is funded by VC before its IPO. In all regressions, industry dummies, year dummies, and a year dummy for the IPO are included. In addition, a cross term is added between the VC dummy and the number of years since the firm’s IPO. As shown in the first row of Table 1, VC-backed companies are more R&D intensive and grow faster than their non-VC-backed counterparts. On average the R&D-to-sales ratio of a public VCbacked company is higher than its non-VC-backed counterpart by 5.2 percentage points, and it grows faster—by 4.9 percentage points in terms of employment and 7.0 percentage points in terms of sales. These superior performances translate into higher market values: VC-backed companies are valued 37.3 percent higher than their non-VC-backed counterparts. The difference in performance, however, gradually dwindles over time, as shown by the negative estimates of the regression coefficients in the second row. As a consequence, the performances of VC- and non-VC-backed public companies tend to converge in the long run, though the speed of convergence is fairly low, as revealed by the magnitudes of the estimates in the second row....As demonstrated in Table 3, increasing VC funding in an industry in a given year is associated with a higher growth rate of employment and sales in the subsequent three years. According to IV regressions (2) and (4), a one-standard-deviation increase in logged industry-level VC funding is associated with increases of 1.3 percentage points and 1.9 percentage points in annual employment and sales growth, respectively, following funding.

Jeremy Greenwood, Pengfei Han, and Juan Sánchez, "Venture Capital: A Catalyst for Innovation and Growth,"Federal Reserve Bank Of St. Louis, April 2022, https://files.stlouisfed.org/files/htdocs/publications/review/2022/04/06/venture-capital-a-catalyst-for-innovation-and-growth.pdf