Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, December 20, 2022

AI Summary. The Bank of Japan doubled its cap on 10-year government bond yields to around 0.5% from 0.25% while leaving short- and long-term interest rates unchanged, sending the yen higher and government bonds lower. Analysts describe the move as a step toward exiting ultra-loose policy.

Toru Fujioka and Sumio Ito Bloomberg
Date Posted:

The Bank of Japan shocked analysts by letting Japanese 10-Year bonds yield rise from 0.25% to 0.5%. The yen strengthened to 132.28 per dollar, compared with 137.16 immediately before the announcement. @Bloomberg

Does doubling the bond yield cap signal a move from ultra-loose policy?

Core argument: The Bank of Japan doubled its cap on 10-year government bond yields to around 0.5% from 0.25%, while leaving both short- and long-term interest rates unchanged, according to its policy statement.

Bank of Japan Governor Haruhiko Kuroda shocked markets by doubling a cap on 10-year yields, sparking a jump in the yen and a slide in government bonds in a move that helps pave the way for possible policy normalization under a new governor. The BOJ will now allow Japan’s 10-year bond yields to rise to around 0.5%, up from the previous limit of 0.25%, while keeping both short- and long-term interest rates unchanged, according to a policy statement Tuesday. “Whatever the BOJ calls this, it is a step toward an exit,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “This opens a door for a possible rate hike in 2023 under a new governorship.”

Takeaways by Macro Roundup® AI

  1. The Bank of Japan doubled its cap on 10-year government bond yields to around 0.5% from 0.25%, while leaving both short- and long-term interest rates unchanged, according to its policy statement.
  2. The yen jumped and Japanese government bonds slid after the Bank of Japan's yield-cap decision under Governor Haruhiko Kuroda, a move that helps pave the way for possible policy normalization under a new governor.
  3. Masamichi Adachi, chief Japan economist at UBS Securities and a former Bank of Japan official, called the move "a step toward an exit" that "opens a door for a possible rate hike in 2023 under a new governorship.".

AI Summary. Higher interest rates on Japanese government bonds cast doubt on the yen's role as a cheap funding currency and could prompt Japanese money to shift out of foreign investments and into domestic ones. That reshuffling could add to concerns over who will buy US government debt.

Tracy Alloway Bloomberg
Date Posted:

.@tracyalloway notes that the uptick in Japanese rates risks the cheap funding that has enabled the yen carry trade and could further reduce demand for Treasuries.

.@tracyalloway notes that the uptick in Japanese rates risks the cheap funding that has enabled the yen carry trade and...

Will higher Japanese interest rates pull capital away from US debt?

Core argument: The Bank of Japan's move puts the yen's role as a cheap funding currency in doubt and could set in motion a mass reshuffling of global capital.

The move puts the yen’s role as a cheap funding currency in doubt and potentially sets in motion a mass reshuffling of global capital. With higher rates now on offer from Japanese government bonds, there’s a chance that money is pulled from foreign investments and plowed into domestic ones. That could potentially add to worries over who will be buying US government debt in the midst of higher inflation, new regulatory requirements for big investors, and perhaps new competition from Japanese government bonds.

Takeaways by Macro Roundup® AI

  1. The Bank of Japan's move puts the yen's role as a cheap funding currency in doubt and could set in motion a mass reshuffling of global capital.
  2. With higher rates now on offer from Japanese government bonds, money could be pulled from foreign investments and plowed into domestic ones.
  3. Such a shift could add to worries over who will buy US government debt, amid higher inflation, new regulatory requirements for big investors, and possible competition from Japanese government bonds.

AI Summary. A decline in venture capital dealmaking alongside a closed market for initial public offerings has created a funding crunch for private technology companies, pushing founders toward debt-focused structures such as bridge loans, convertible notes, structured equity and generous liquidation preferences. These deals are designed to avoid a "down round" at a far lower valuation than previously secured.

Tabby Kinder Financial Times
Date Posted:

With the total value of new venture capital funding down 42% to $286B for the first 11 months of 2022, many private technology companies are turning to debt markets to avoid writing down their equity valuations. @ft

Are startups turning to debt deals to avoid lower valuations?

Core argument: New venture capital deals fell 42% to $286bn in the first 11 months of this year versus the same period last year, according to Preqin, amid a closed IPO market and a funding crunch for private technology companies.

A sharp decline in venture capital dealmaking, alongside a closed market for initial public offerings, has resulted in a funding crunch for many private technology companies over the past year. Company founders have entered into debt-focused deals such as bridge loans, structured equity, convertible notes, participating bonds and generous liquidation preferences. These moves are designed to avoid a dreaded “down round” — accepting funding at a far lower valuation than a company had previously secured. New VC deals fell 42% in the first 11 months of this year to $286bn, compared to the same period last year, according to investment data company Preqin. Silicon Valley law firm Cooley said the total value of late-stage VC deals it advised on had slumped almost 80% this year.

Takeaways by Macro Roundup® AI

  1. New venture capital deals fell 42% to $286bn in the first 11 months of this year versus the same period last year, according to Preqin, amid a closed IPO market and a funding crunch for private technology companies.
  2. Silicon Valley law firm Cooley said the total value of late-stage venture capital deals it advised on slumped almost 80% this year.
  3. Start-up founders have turned to bridge loans, structured equity, convertible notes, participating bonds and generous liquidation preferences to avoid a "down round" at a far lower valuation than previously secured.

AI Summary. Immigrants represent 16% of US inventors but produced 23% of total innovation output as measured by patent counts, citations, and the economic value of patents. The authors estimate immigrants account for 36% of aggregate innovation, two-thirds of which comes from their spillover effects on native-born collaborators.

Joey Politano @JosephPolitano
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First generation immigrants make up 16% of American inventors, but are responsible for 23% of total innovation output. Including the spillover effects on native born collaborators, they drive 36% of aggregate innovation. @bibipousada @shaibrn @rebeccardiamond

How much of US innovation do immigrant inventors produce?

Core argument: Immigrants account for 16% of US inventors but produced 23% of total innovation output, measured by patent counts, patent citations, and the economic value of those patents, according to a linkage of patent records to more than 230mm Social Security Numbers.

We link patent records to a database containing the first five digits of more than 230mm of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We find immigrants represent 16% of all US inventors, but produced 23% of total innovation output, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. A simple decomposition illustrates that immigrants are responsible for 36% of aggregate innovation, two-thirds of which is due to their innovation externalities on their native-born collaborators.

Takeaways by Macro Roundup® AI

  1. Immigrants account for 16% of US inventors but produced 23% of total innovation output, measured by patent counts, patent citations, and the economic value of those patents, according to a linkage of patent records to more than 230mm Social Security Numbers.
  2. A decomposition attributes 36% of aggregate US innovation to immigrants, two-thirds of which is due to their innovation externalities on native-born collaborators.
  3. Immigrant inventors are more likely to rely on foreign technologies, collaborate with foreign inventors, and be cited in foreign markets, contributing to the importation and diffusion of ideas across borders.

A new BLS data series “New Tenant Repeat Rent Index” suggests that the highest housing inflation is behind us, and other indexes should see price deceleration soon.

Researchers at the BLS and Cleveland Fed released a data series today that might be the single most important new inflation indicator. The New Tenant Repeat Rent Index uses the same microdata that goes into the official Consumer Price Index to select only samples with rental turnover and to assign price shifts to when they happened, not when the units were surveyed. The New Tenant Repeat Rent Index, therefore, leads official inflation data in the CPI by 1 year. The good news is that the New Tenant Repeat Rent Index suggests that the worst of housing inflation is likely behind us, and price decelerations should pass through to official inflation data soon. Critically, New Tenant Repeat Rent index also shows lower overall price growth than private data. Joey Politano, “New Tenant Repeat Rent Index,” @JosephPolitano, December 19, 2022, https://twitter.com/JosephPolitano/status/1604971464834568192

Researchers at the BLS and Cleveland Fed released a data series today that might be the single most important new inflation indicator—and I don’t say that lightly. Introducing the New Tenant Repeat Rent Index—a new way of tracking housing inflation.

The Consumer Price Index tracks housing inflation through a large panel of housing units that are surveyed every six months. But because rental turnover is slow and CPI tracks contract rents for all units, CPI data lags current market conditions significantly.

The New Tenant Repeat Rent Index uses the same microdata that goes into the official Consumer Price Index to select only samples with rental turnover and to assign price shifts to when they happened, not when the units were surveyed.

The New Tenant Repeat Rent Index, therefore, leads official inflation data in the CPI by 1 year. The All Tenant Repeat Rent Index, which has a similar methodology to the official CPI but assigns price shifts to when they happened not when they were surveyed, leads by 1 quarter. The New Tenant Repeat Rent Index has several key differences between private data from companies like Zillow/ApartmentList. Namely, the NTRR observes contract rents directly, which private data only imputes from listing prices, and the NTRR is derived from a more robust sample.

The good news is that the New Tenant Repeat Rent Index suggests that the worst of housing inflation is likely behind us and price decelerations should pass through to official inflation data soon. Critically, NTRR also shows lower overall price growth than private data. Image The New Tenant Repeat Rent Index also tracks much closer with movements of Gross Labor Income (aggregate wages) and with much less of a lag than official CPI data. Slowing GLI growth is a key mechanism by which the Fed controls inflation, making NTRR a key indicator to watch.

One key note—since the NTRR is a repeat-rent index, it is revised as new observations are added over time. Recent measurements could change when new CPI data is collected, and data for the most-recent quarters also have the largest confidence intervals.

AI Summary. Apple plans to shift some MacBook production to Vietnam for the first time, tapping supplier Foxconn, as it diversifies manufacturing away from China. The move would give all of Apple's flagship products a production site outside China, with iPhones in India and MacBooks, Apple Watches and iPads in Vietnam.

Cheng Ting-Fang Nikkei Asia
Date Posted:

Apple will start MacBook production in Vietnam this spring as the company seeks to complete an “out of China” option for all major products. @NikkeiAsia

Apple will start MacBook production in Vietnam this spring as the company seeks to complete an “out of China”...

Is Apple moving production of all its flagship products outside China?

Core argument: Apple has tapped Taiwan's Foxconn to begin making MacBooks in Vietnam as early as around May, its first MacBook production outside China, according to sources briefed on the matter.

Apple plans to move some MacBook production to Vietnam for the first time next year as the U.S. tech group continues diversifying its production base away from China amid escalating tech tensions between Washington and Beijing. Apple has tapped its top supplier, Taiwan's Foxconn, to start making MacBooks in the Southeast Asian nation as early as around May, sources briefed on the matter said. Apple has been working to add production sites outside of China for all of its major product lines, but doing so for the final one, the MacBook has taken longer due to the complex supply chain needed for making laptop computers. "After the MacBook production shifts, all of Apple's flagship products basically will have one more production location beyond China ... iPhones in India and MacBooks, the Apple Watch and iPads in Vietnam," one person with direct knowledge of the matter told Nikkei Asia. "What Apple wants now is an 'out of China' option for at least part of production for all of its products."

Takeaways by Macro Roundup® AI

  1. Apple has tapped Taiwan's Foxconn to begin making MacBooks in Vietnam as early as around May, its first MacBook production outside China, according to sources briefed on the matter.
  2. Apple has been adding production sites outside China for all its major product lines, with the MacBook taking longer because of the complex supply chain required for laptop computers.
  3. After the MacBook shift, Apple's flagship products will each have a production location beyond China — iPhones in India and MacBooks, the Apple Watch and iPads in Vietnam — one person with direct knowledge told Nikkei Asia.

AI Summary. Linking patent records to Social Security data, the authors find immigrants are 16% of US inventors but account for 23% of innovation output measured by patent counts, citations, and economic value. They estimate immigrants are responsible for 36% of aggregate innovation, two-thirds of it through spillovers onto their native-born collaborators.

Shai Bernstein, Rebecca Diamond, et al Stanford University
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First generation immigrants make up 16% of American inventors, but are responsible for 23% of total innovation output. Including the spillover effects on native born collaborators, they drive 36% of aggregate innovation. @bibipousada @shaibrn @rebeccardiamond

How much US innovation do high-skilled immigrants account for?

Core argument: Immigrants represent 16% of US inventors but produced 23% of total innovation output, measured by patent counts, patent citations, and the economic value of those patents, based on patent records linked to the first five digits of more than 230mm Social Security Numbers.

We link patent records to a database containing the first five digits of more than 230mm of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We find immigrants represent 16% of all US inventors, but produced 23% of total innovation output, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. A simple decomposition illustrates that immigrants are responsible for 36% of aggregate innovation, two-thirds of which is due to their innovation externalities on their native-born collaborators.

Takeaways by Macro Roundup® AI

  1. Immigrants represent 16% of US inventors but produced 23% of total innovation output, measured by patent counts, patent citations, and the economic value of those patents, based on patent records linked to the first five digits of more than 230mm Social Security Numbers.
  2. A simple decomposition finds immigrants are responsible for 36% of aggregate US innovation, two-thirds of which is due to their innovation externalities on native-born collaborators.
  3. Immigrant inventors are more likely to rely on foreign technologies, collaborate with foreign inventors, and be cited in foreign markets, contributing to the importation and diffusion of ideas across borders.

First-generation immigrants make up 16% of American inventors but are responsible for 23% of total innovation output. Including the spillover effects on native-born collaborators, they drive 36% of aggregate innovation.

Description automatically generated We link patent records to a database containing the first five digits of more than 230mm of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We find immigrants represent 16% of all US inventors, but produced 23% of total innovation output, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. A simple decomposition illustrates that immigrants are responsible for 36% of aggregate innovation, two-thirds of which is due to their innovation externalities on their native-born collaborators. Shai Bernstein, Rebecca Diamond, Abhisit Jiranaphawiboon, Timothy McQuade and Beatriz Pousada, “The Contribution of High-Skilled Immigrants to Innovation in the United States,” Stanford Univeristy, December 17, 2022, https://web.stanford.edu/~diamondr/BDMP.pdf

Core of paper, “…We characterize the contribution of immigrants to US innovation, both through their direct productivity as well as through their indirect spillover effects on their native collaborators. To do so, we link patent records to a database containing the rst ve digits of more than 230 million of Social Security Numbers (SSN). By combining this part of the SSN together with year of birth, we identify whether individuals are immigrants based on the age at which their Social Security Number is assigned. We nd immigrants represent 16 percent of all US inventors, but produced 23 percent of total innovation output, as measured by number of patents, patent citations, and the economic value of these patents. Immigrant inventors are more likely to rely on foreign technologies, to collaborate with foreign inventors, and to be cited in foreign markets, thus contributing to the importation and diffusion of ideas across borders. Using an identiffcation strategy that exploits premature inventor deaths, we find that immigrant inventors create especially strong positive externalities on the innovation production of their collaborators, while natives have a much weaker impact. A simple decomposition illustrates that immigrants are responsible for 36% of aggregate innovation, two-thirds of which is due to their innovation externalities on their native-born collaborators….”

Contribution to innovation,“…We find that 16% of all US-based inventors, between 1990-2016, have been immigrants that came to the United States when they were 20 years of age or older. The contribution of these immigrants to overall US innovative output, however, has been disproportionate relative to their share of the US inventor population. Immigrant inventors have produced roughly 23% of all patents during this time period, more than a 40% increase relative to their share of the US-based inventor population. These patents, moreover, do not appear to be of lower quality. Using the number of patents weighted by the number of forward citations, which captures the quality of innovation (Hall et al., 2001), we nd that the immigrant contribution is even higher at 24%. Finally, using the Kogan et al. (2017) measure capturing stock market reaction to patent grants available for publicly traded firms and imputed for private firms, we find that the immigrants have generated 25% of the aggregate economic value, an increase of over 50% relative to their share of the inventor population….”

Why?

“…While immigrant inventors in the US may simply be selected based on their innate ability, we do observe them also making choices that complement their productivity. For example, we find immigrants are disproportionately choosing to live in highly productive counties (\innovation hubs”), relative to US born inventors. Immigrants also are disproportionately patenting in technology classes that are experiencing more innovation activity. These two forces can explain about 30% of the raw patenting gap between immigrants and natives. This suggests that immigrants are not only more productive based on ability, but that they are more willing to make choices that further improve their innovative output….”

Spillovers

“…These team interactions between foreign and US-born inventors in the production of patents are of particular interest since they may be a key mechanism through which an inventor’s knowledge spills over onto the knowledge and productivity of his collaborators. These knowledge externalities are exactly why the US may be able to allow high-skilled immigrants in the country and improve the welfare and productivity of US-born workers. We estimate the magnitudes of foreign-born and US born knowledge externalities on their collaborators using the exogenous termination of such relationships. Specifically, to construct causal estimates of these spillovers, we exploit the premature deaths of inventors, defined as deaths that occur before the age of 60.4 We then follow the patenting behavior of inventors who had co-authored a patent with the deceased inventor, at some point prior to the inventor’s death. We compare the change in patenting activity of these co-authors before versus after the inventor death to a matched control group of inventors who did not experience the premature death of a co-author. Overall, we find that premature death leads to a 10 percent decline in the innovative productivity of their co-inventors, as measured by patents and top patents, consistent with Jaravel et al. (2018). This decline takes place gradually and has a long-lasting impact. Most strikingly, we find that the disruption caused by an immigrant death causes a significantly larger decline in the productivity of the co-inventors than that of native inventors. The death of an immigrant lowers co-inventor productivity by approximately 17%, while a US-born inventor’s death lowers productivity by approximately 9%. These gaps are large and persistent, and take place across all of our measures of innovative productivity…”

The Evidence

“…We find that immigrants account for approximately 23% of all patents produced over the time period of our sample. Remarkably, this represents a 43% increase relative to their share of the US-based inventor population. One possibility, though, is that immigrants might be producing more patents of lower quality than their US native counterparts. We find that this is not the case. The fraction of raw future citations attributed to immigrants in our sample is again roughly 23%, suggesting that the higher production of patents by immigrants is not coming at the cost of the lower quality. Yet another concern is that immigrants may select into technologies that have higher citation rates, which could account for these results. Looking at adjusted citations, however, in which we scale citation rates by the average citations of all patents granted in the same year and technology class, we find that the contribution of immigrants is if anything slightly higher, accounting for 24% of the total. Similarly, when we focus on the production of top patents, those patents that are at the top 10% of citations within a technology class and year, we find a similar pattern, with immigrants generating roughly 25% of top patents in our sample period….”

Description automatically generated

“…We next explore the share of total economic value that immigrants have generated over the last four decades. We find that immigrants have generated 25% of the aggregate economic value created by patents in publicly traded and private companies between the years of 1990-2016. We finally explore whether the contribution of immigrants to innovation is concentrated in particular technology categories….” image002.png “…In Figure 2, we construct the relative contribution of immigrants across six technology categories. Immigrants account for about 25% of patents among the four main technological categories that were emerging during our sample period: Computers and Communications, Drugs and Medical, Electronics, and Chemical technologies. In contrast, the presence of immigrants seem to be lower at about 15% in more traditional technologies such as the Mechanical category that involves Metalworking, Transportation, Engines, and the Other category that includes various technologies related to Heating, Agriculture, Furniture, among others….”

AI Summary. Capital spending minus depreciation as a share of sales peaked at 6.9% and bottomed at 0.5%, averaging 1.8% over the past decade. Depreciation is an imperfect proxy for maintenance capital spending because rising prices make replacement costs exceed historical-cost depreciation, and technological obsolescence means depreciation can overstate an asset's useful life.

Michael Mauboussin and Dan Callahan Morgan Stanley
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.@mjmauboussin shows capital expenditures net of depreciation as a percentage of sales peaked in 1988 at 6.9%. Over the past decade it has averaged 1.8% and fell to 0.5% in 2020 during the pandemic.

Has net capital investment as a share of sales declined?

Core argument: Capital expenditures minus depreciation as a share of sales peaked at 6.9% in 1988 and bottomed at 0.5% in 2020 for the studied population, averaging 1.8% over the past decade.

Exhibit 25 shows capital expenditures minus depreciation for the population we studied. Using this measure, investment as a percentage of sales peaked in 1988 at 6.9% and bottomed in 2020 at 0.5 percent of sales. The average of the past decade was 1.8%. The two substantial limitations to using depreciation as a proxy for maintenance capital expenditures include inflation and the risk of technological obsolescence. In periods of rising prices (such as 2022), the capital expenditures required to replace new equipment will exceed depreciation because new expenditures reflect inflation whereas depreciation is based on historical costs. Technological obsolescence introduces the likelihood that depreciation overestimates an asset’s useful life.

Takeaways by Macro Roundup® AI

  1. Capital expenditures minus depreciation as a share of sales peaked at 6.9% in 1988 and bottomed at 0.5% in 2020 for the studied population, averaging 1.8% over the past decade.
  2. Using depreciation as a proxy for maintenance capital expenditures faces two substantial limitations: inflation and the risk of technological obsolescence.
  3. In periods of rising prices such as 2022, capital expenditures needed to replace equipment exceed depreciation because new spending reflects inflation while depreciation is based on historical costs.

Michael Mauboussin and Dan Callahan shows capital expenditures net of depreciation as a percentage of sales peaked in 1988 at 6.9%. Over the past decade it has averaged 1.8% and fell to 0.5% in 2020 during the pandemic. (200)

Exhibit 25 shows capital expenditures minus depreciation for the population we studied. Using this measure, investment as a percentage of sales peaked in 1988 at 6.9% and bottomed in 2020 at 0.5 percent of sales. The average of the past decade was 1.8%. The two substantial limitations to using depreciation as a proxy for maintenance capital expenditures include inflation and the risk of technological obsolescence. In periods of rising prices (such as 2022), the capital expenditures required to replace new equipment will exceed depreciation because new expenditures reflect inflation whereas depreciation is based on historical costs. Technological obsolescence introduces the likelihood that depreciation overestimates an asset’s useful life. Michael Mauboussin and Dan Callahan, "Capital Allocation: Results, Analysis and Assessment," Morgan Stanley, December 15, 2022, https://www.morganstanley.com/im/publication/insights/articles/article_capitalallocation.pdf

Tuesday, January 3, 2023

AI Summary. Wage inequality is falling for the first time in four decades as pay rises at the bottom, with real wages increasing among young high school graduates and workers in the lowest quartile. The authors argue this reflects intensified employer competition for workers rather than simply a tight labor market, implying wages better reflect productivity and higher aggregate productivity.

David Autor Massachusetts Institute of Technology
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.@davidautor shows high school workers’ wage growth overtaking college wage growth in the aftermath of the pandemic and argues that higher wages better reflect rising productivity as companies compete more intensively for workers.

Is rising employer competition, not just tight labor markets, compressing wages?

Core argument: Wage inequality is falling for the first time in four decades, driven by rising wages at the lower tail of the distribution.

For first time in four decades, wage inequality falling, due to rising lower tail. Despite inflation, real wages rising among young HS grads, 1st quartile workers. It’s tempting to attribute this change to ‘tight’ labor markets—but what does this mean in practice? The simplest explanation is that labor markets are operating on a higher point on the labor demand curve. Evidence indicates this explanation too simple: Competition has intensified. Distinction is critical: Rising competition means higher wages that better reflect productivity and higher aggregate productivity — a double dividend.

Takeaways by Macro Roundup® AI

  1. Wage inequality is falling for the first time in four decades, driven by rising wages at the lower tail of the distribution.
  2. Real wages are rising among young high school graduates and first-quartile workers despite inflation.
  3. Evidence indicates that intensified competition, rather than labor markets simply operating at a higher point on the labor demand curve, explains the compression, yielding wages that better reflect productivity and higher aggregate productivity.

AI Summary. Wages of lower-paid, less-skilled hourly workers had steadily lost ground to those of skilled workers, college graduates, managers, and professionals for decades, but that trend has reversed. The labor force with a college education is 5% larger than before the pandemic, while the high-school-educated and dropout labor force is 4% smaller.

Greg Ip Wall Street Journal
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The American college workforce is 5% larger than in Feb 2022, whereas the high school workforce is 4% smaller. This has likely contributed to the decrease in earnings inequality in the post-pandemic period. @Greg_Ip

Is the decades-long rise in wage inequality reversing?

Core argument: The college-educated labor force was 5% larger than in February 2020, while the high school-educated and high school dropout labor force was 4% smaller, though data between the two periods is not strictly comparable.

In the decades before the pandemic, the wages of lower-paid, less skilled hourly employees steadily lost ground to those of skilled workers, college graduates, managers, and professionals. In the two years since, those trends have sharply reversed. We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy. Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)

Takeaways by Macro Roundup® AI

  1. The college-educated labor force was 5% larger than in February 2020, while the high school-educated and high school dropout labor force was 4% smaller, though data between the two periods is not strictly comparable.
  2. Wages of lower-paid, less skilled hourly workers lost ground to skilled workers, college graduates, managers, and professionals for decades before the pandemic, and those trends have sharply reversed in the two years since.
  3. Whether the narrowing in wage inequality lasts is unknown, as it may stem from labor shortages that fade as the pandemic recedes or from a tight labor market that the Federal Reserve is seeking to cool.

AI Summary. Mexico is positioned to gain from shifting U.S.-China trade, with lower wages than China, an established manufacturing base anchored by autos, and proximity to the U.S. market. Bank of America analysts note U.S. imports of Mexican manufactured goods are roughly 60% above pre-pandemic levels, with Mexico gaining U.S. import share in plastics and textiles as China loses share.

Stephen Wilmot Wall Street Journal
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Bank of America notes evidence of reshoring to Mexico at the expense of China with imports of Mexican low-tech goods such as plastics and textiles up ~60% relative to pre-pandemic levels.

Is Mexico gaining U.S. import share as China loses it?

Core argument: U.S. imports of Mexican manufactured goods were roughly 60% higher as of October than before the pandemic, according to Bank of America analysts who see some evidence Mexico is gaining from the U.S.-China trade war.

Another big winner in the U.S.-China trade war could be Mexico. It has lower wages than China, an established manufacturing sector anchored by the automotive industry, and the perfect geographic position for serving the U.S. market—particularly since the rise of videoconferencing, which has increased the importance of being in the same time zone. Analysts at Bank of America already see some evidence that this is happening, with U.S. imports of Mexican manufactured goods roughly 60% higher than before the pandemic as of October. Interestingly, Mexico has gained share of U.S. imports in some low-tech industrial sectors such as plastics and textiles, while China has lost share.

Takeaways by Macro Roundup® AI

  1. U.S. imports of Mexican manufactured goods were roughly 60% higher as of October than before the pandemic, according to Bank of America analysts who see some evidence Mexico is gaining from the U.S.-China trade war.
  2. Mexico has gained share of U.S. imports in some low-tech industrial sectors such as plastics and textiles, while China has lost share.
  3. Mexico's advantages include lower wages than China, an established manufacturing sector anchored by the automotive industry, and a geographic position for serving the U.S. market, which matters more since the rise of videoconferencing raised the importance of sharing a time zone.

AI Summary. Shifting US production to countries with balanced or deficit trade, such as Mexico, is likely to raise US exports to those countries because wages and household income make up a higher share of their output. Relocating to large-surplus countries instead converts part of export revenues into savings, since workers there receive a smaller share of what they produce.

Michael Pettis @michaelxpettis
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.@michaelxpettis argues that moving production away from chronic surplus countries like China to countries like Mexico will increase global demand as Mexican export revenues are converted to imports.

.@michaelxpettis argues that moving production away from chronic surplus countries like China to countries like Mexico will...

Does shifting production to balanced-trade countries raise US exports?

Core argument: Pettis argues Washington has a stronger economic case for shifting production to countries with balanced trade or trade deficits, such as Mexico, than to countries running large, persistent trade surpluses.

There is a stronger economic reason for Washington to encourage switching production from countries with large-persistent trade surpluses to countries, like Mexico, with balanced trade, or even trade deficits. Because wages and household income comprise a higher share of Mexican output, when an American business shifts production to Mexico, this will likely increase US imports from Mexico. This is not what happens when a US business relocates to a trade surplus country. In that case, because their workers receive a much lower share of what they produce, and their businesses a higher share, part of the country's export revenues are converted into savings.

Takeaways by Macro Roundup® AI

  1. Pettis argues Washington has a stronger economic case for shifting production to countries with balanced trade or trade deficits, such as Mexico, than to countries running large, persistent trade surpluses.
  2. Because wages and household income make up a higher share of Mexican output, Pettis argues that an American business moving production to Mexico will likely raise US imports from Mexico.
  3. In trade-surplus countries, where workers receive a much lower share of what they produce and businesses a higher share, Pettis argues part of export revenues is converted into savings.

AI Summary. British "silent generation" and baby boomers grew more conservative with age, and Gen X is following the same path, but millennials, born 1981-1996, diverged from that trajectory. The most likely explanation is a cohort effect, with US survey data showing millennials favoring greater redistribution from rich to poor than earlier generations.

John Burn-Murdoch Financial Times
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An analysis by @jburnmurdoch suggests millennials in the US and UK are breaking a historical pattern of becoming more conservative in their voting behavior as they age.

Are millennials failing to grow more conservative with age?

Core argument: Britain's "silent generation", born 1928–1945, was five percentage points less conservative than the national average at age 35 but roughly five points more conservative by age 70, according to the author's calculations.

By my calculations, members of Britain’s “silent generation”, born between 1928 and 1945, were five percentage points less conservative than the national average at age 35, but around five points more conservative by age 70. The “baby boomer” generation traced the same path, and “Gen X”, born between 1965 and 1980, are now following suit. Millennials — born between 1981 and 1996 — started out on the same trajectory, but then something changed. The most likely explanation is a cohort effect — that millennials have developed different values to previous generations.  This is borne out by US survey data showing that, having reached political maturity in the aftermath of the global financial crisis, millennials are tacking much further to the left on economics than previous generations did, favoring greater redistribution from rich to poor.

Takeaways by Macro Roundup® AI

  1. Britain's "silent generation", born 1928–1945, was five percentage points less conservative than the national average at age 35 but roughly five points more conservative by age 70, according to the author's calculations.
  2. Baby boomers traced the same rightward path with age as the silent generation, and Gen X, born 1965–1980, are now following it, while millennials, born 1981–1996, began on that trajectory before diverging.
  3. The author attributes the millennial divergence most likely to a cohort effect, citing US survey data showing millennials, who reached political maturity after the global financial crisis, tacking further left on economics and favoring greater redistribution from rich to poor.

AI Summary. Millennials hold roughly the same wealth per capita as Baby Boomers and Gen X did at the same age, while Gen X is about $100,000 or 18% wealthier per capita than Boomers were at that age. A broad decline in wealth has had little effect on Millennials, whose largest asset category is real estate rather than stocks.

Jeremy Horpedahl Economist Writing Every Day
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cording to @jmhorp Millennials are keeping pace with Baby Boomers and Gen X in terms of generational wealth per capita.

Are younger generations as wealthy as earlier ones at the same age?

Core argument: Gen X holds roughly $100,000 more wealth per capita than Baby Boomers did at the same age, about 18% greater.

Millennials are roughly equal in wealth per capita to Baby Boomers and Gen X at the same age. Gen X is currently much wealthier than Boomers were at the same age: about $100,000 per capita or 18% greater. Wealth has declined significantly in 2022, but the hasn’t affected Millennials very much since they have very little wealth in the stock market (real estate is by far their largest wealth category.)

Takeaways by Macro Roundup® AI

  1. Gen X holds roughly $100,000 more wealth per capita than Baby Boomers did at the same age, about 18% greater.
  2. Millennials are roughly equal in wealth per capita to Baby Boomers and Gen X at the same age.
  3. Wealth declined significantly in 2022, but Millennials were affected little because they hold very little wealth in the stock market, with real estate their largest wealth category by far.

AI Summary. Alcohol-induced deaths in the US rose from 39,043 in 2019 to 54,258 in 2021, according to the Centers for Disease Control and Prevention, with the population-adjusted death rate more than double its level in the 2000s. Even so, US alcohol consumption likely remains below that of many affluent countries, particularly in Europe.

Justin Fox Bloomberg
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Americans are drinking at elevated levels in the aftermath of the pandemic with inflation-adjusted spending up 15% in 2022 vs. just before the pandemic. @foxjust

Have alcohol-induced deaths in the US continued rising?

Core argument: US deaths from alcohol-induced causes rose from 39,043 in 2019 to 54,258 in 2021, according to the Centers for Disease Control and Prevention, with the population-adjusted death rate now more than double its level in the 2000s.

There is clear evidence that more people are drinking too much. Deaths from alcohol-induced causes rose from 39,043 in 2019 to 54,258 in 2021, according to the Centers for Disease Control and Prevention, and the population-adjusted death rate is now more than double what it was in the 2000s. Provisional data also show an encouraging decline in alcohol-induced deaths in the first half of 2022, although that trend could change as final numbers become available. Even after the big increases of the past couple of years, US alcohol consumption likely still lags that of many affluent countries, especially in Europe. And yes, Americans drank lots more back in the 1970s — not to mention the 1830s, when estimated per-capita consumption was nearly three times what it was in 2020.

Takeaways by Macro Roundup® AI

  1. US deaths from alcohol-induced causes rose from 39,043 in 2019 to 54,258 in 2021, according to the Centers for Disease Control and Prevention, with the population-adjusted death rate now more than double its level in the 2000s.
  2. Provisional data show alcohol-induced deaths declining in the first half of 2022, a trend that could change as final numbers become available.
  3. US alcohol consumption likely still lags that of many affluent countries, especially in Europe, and Americans drank more in the 1970s and in the 1830s, when estimated per-capita consumption was nearly three times the 2020 level.

AI Summary. Legislation and executive actions enacted by the Biden Administration are projected to add more than $4.8tn to budget deficits over 2021–2031. That net figure reflects roughly $4.6tn of new spending, about $500bn of tax cuts and breaks, and $700bn of added interest costs, partly offset by $400bn of spending cuts and $600bn of revenue increases.

CRFB Staff Center For A Responsible Federal Budget
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During Biden’s first two years in office, he has approved at least $4.8T of new borrowing according to @BudgetHawks.

How much have recent policies added to projected budget deficits?

Core argument: Policies enacted by the Biden Administration through legislation and executive actions since January 2021 will add more than $4.8 trillion to budget deficits between 2021 and 2031.

Since January 2021, the Biden Administration has enacted policies through legislation and executive actions that will add more than $4.8 trillion to budget deficits between 2021 and 2031. The $4.8 trillion is the net result of roughly $4.6 trillion of new spending, about $500 billion of tax cuts and tax breaks, and $700 billion of additional interest costs that are partially offset by $400 billion of spending cuts and $600 billion of revenue increases.

Takeaways by Macro Roundup® AI

  1. Policies enacted by the Biden Administration through legislation and executive actions since January 2021 will add more than $4.8 trillion to budget deficits between 2021 and 2031.
  2. The $4.8 trillion total combines roughly $4.6 trillion of new spending, about $500 billion of tax cuts and tax breaks, and $700 billion of additional interest costs.
  3. Partially offsetting the Biden Administration's deficit increases are $400 billion of spending cuts and $600 billion of revenue increases.

AI Summary. Transfer benefits phase out so quickly that the effective marginal tax rate in the lowest three income quintiles approaches 100%, meaning an extra dollar earned can cost roughly a dollar of benefits. Hours worked in the lower quintiles have plummeted, though the authors stop short of asserting a causal link.

John Cochrane The Grumpy Economist
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.@JohnHCochrane reviews Phil Gramm, Robert Ekelund and John Early book and highlights their big finding, “The effective marginal tax rate in the lowest three quintiles is effectively 100%. Earn a dollar and lose a dollar of benefits. Why work?”

Do benefit phase-outs impose near-100% marginal tax rates on low earners?

Core argument: Gramm, Ekelund, and Early's tables show an effective marginal tax rate near 100% across the lowest three quintiles, where a dollar earned is offset by a dollar of lost benefits.

Why has work collapsed in the bottom decile? Here we might have a big debate. $11.76 per hour (2017) isn't a lot. But the previous graphs certainly contain a suggestion worth pursuing: The effective marginal tax rate in the lowest three quintiles is effectively 100%. Earn a dollar and lose a dollar of benefits. Why work? Gramm Ekelund and Early are careful, and don't make any causal assertions here. They don't really even stress the fact popping from the table as much as I have. But the fact is a fact, a nearly 100% tax rate + an income effect isn't a positive for labor supply, and the amount of work in lower quintiles has plummeted.  This is a book about facing facts and this one is undeniable.

Takeaways by Macro Roundup® AI

  1. Gramm, Ekelund, and Early's tables show an effective marginal tax rate near 100% across the lowest three quintiles, where a dollar earned is offset by a dollar of lost benefits.
  2. Work has collapsed in the bottom decile, and the amount of work in the lower quintiles has plummeted.
  3. Gramm, Ekelund, and Early make no causal assertions linking the near-100% effective marginal tax rate to falling labor supply, though such a rate combined with an income effect is not a positive for labor supply.

AI Summary. World Health Organization estimates put remaining life expectancy for 15-year-old Russian males in 2019 at 53.7 years, the same as in Haiti and worse than in 23 of the 46 countries the United Nations classifies as least developed. Projecting from those survival patterns, more than one in four 20-year-old Russian males would die before age 60, twice the European risk.

Nicholas Eberstadt American Enterprise Institute
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Nicholas Eberstadt @AEI notes that prior to the Russo-Ukrainian War life expectancy for a 15-year-old Russian male “was essentially indistinguishable from 15-year-old males in Haiti.”

Do Russian men face survival odds like the least developed countries?

Core argument: WHO estimates put remaining life expectancy for 15-year-old Russian males in 2019 at 53.7 years, identical to the estimate for 15-year-old males in Haiti.

According to World Health Organization estimates, life expectancy in 2019 for 15-year-old Russian males was essentially indistinguishable from 15-year-old males in Haiti. This is not a typo. The estimate for both Haiti and Russia was 53.7 years. That teenage Russian male stood worse survival chances in Russia than in 23 of the 46 countries the United Nations categorizes as “least developed” — among them Mali, Yemen, and even war-decimated Afghanistan. Projecting from 2019 survival trajectories, over one in four 20-year-old males will die before their 60th birthday. The corresponding risk in Europe is only half that high — and those European aggregates, remember, are distorted by including Russia in them.

Takeaways by Macro Roundup® AI

  1. WHO estimates put remaining life expectancy for 15-year-old Russian males in 2019 at 53.7 years, identical to the estimate for 15-year-old males in Haiti.
  2. A 15-year-old Russian male in 2019 faced worse survival odds than counterparts in 23 of the 46 countries the UN classifies as "least developed," including Mali, Yemen, and Afghanistan.
  3. Projecting from 2019 survival trajectories, over one in four 20-year-old Russian males will die before their 60th birthday, twice the corresponding risk in Europe, whose aggregates include Russia.