Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “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
  • “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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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 far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
Upside of Inequality Oxford Unintended Consequences
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Tuesday, January 10, 2023

The Debt Ceiling Is Scarier This Time

AI Summary. The US federal debt limit of $31.3tn is expected to be reached, and three House Freedom Caucus members hold seats on the Rules Committee, which controls whether legislation reaches the House floor under regular order. The analysis argues these members are likely to demand spending cuts as a condition for raising the limit.

Robert Armstrong Financial Times
Date Posted:
January 10, 2023

.@rbrtrmstrng cites @DanCliftonStrat, who notes that fiscal hawks who won three seats on the Rules Committee as part of the McCarthy fight will likely demand spending cuts as a condition of raising the debt ceiling.

.@rbrtrmstrng cites @DanCliftonStrat, who notes that fiscal hawks who won three seats on the Rules Committee as part of the...

Does control of the Rules Committee make raising the debt ceiling harder?

Core argument: The $31.3 trillion U.S. debt ceiling is expected to be reached sometime in early autumn.

The debt ceiling of $31.3 trillion is expected to be hit sometime early in the autumn.  Daniel Clifton of Strategas notes: “McCarthy agreed to allow three House Freedom Caucus members to sit on the Rules Committee and these members are likely going to demand spending cuts, which do not have the support of a majority of House Republicans, let alone Democrats, as a condition of raising the debt ceiling. The importance of this cannot be overstated. Legislation has to go through the Rules Committee to be placed on the floor under regular order in the House. Conservatives have weakened the Speaker and have leverage.”

Takeaways by Macro Roundup® AI

  1. The $31.3 trillion U.S. debt ceiling is expected to be reached sometime in early autumn.
  2. Daniel Clifton of Strategas notes that Speaker McCarthy agreed to seat three House Freedom Caucus members on the Rules Committee, where they are likely to demand spending cuts as a condition of raising the debt ceiling.
  3. Clifton argues the spending cuts those members would demand lack majority support among House Republicans, let alone Democrats, and that conservatives have weakened the Speaker and hold leverage because legislation must pass the Rules Committee to reach the floor under regular order.
  • Fiscal Deficits
  • Fiscal Policy
  • Politics

Brad Setser On Global Balance of Payments

AI Summary. The combined current account surplus of East Asia and major oil exporters has doubled since 2020, closely matching the deficits of the US and a few other countries, with the European Union excluded. The recycling of these surpluses is occurring in complex ways rather than flowing directly into reserves or bonds.

Brad Setser @Brad_Setser
Date Posted:
January 10, 2023

.@Brad_Setser notes how closely the East Asian and oil-exporter surplus lines up with American deficits.

Have Asian and oil exporter surpluses doubled since 2020?

Core argument: Brad Setser notes that the combined surplus of East Asia and the main oil exporters has doubled since 2020, implying offsetting adjustments elsewhere in the global deficit.

The global balance of payments has to add up (at least in theory). But it is still surprising how well the surplus of East Asia and main oil exporters lines up with the deficits of the US and a few others -- (excluding the EU makes everything line up better). To make sure I don't completely bury the lede -- the surplus of the Asia + oil block has doubled since 2020 ... so there have to be some offsetting adjustments in the global deficit. The recycling is taking place in rather complex ways, as the big surplus countries aren't just adding to their reserves/ it isn't flowing directly into bonds.

Takeaways by Macro Roundup® AI

  1. Brad Setser notes that the combined surplus of East Asia and the main oil exporters has doubled since 2020, implying offsetting adjustments elsewhere in the global deficit.
  2. The surpluses of East Asia and the main oil exporters line up closely with the deficits of the US and a few other countries, with the alignment improving when the EU is excluded.
  3. Setser argues that the recycling of these surpluses occurs in complex ways, as the large surplus countries are not simply adding to reserves and the flows do not go directly into bonds.
  • Savings Glut/Trade Deficit
  • GDP

Data Update 1 for 2023: Setting the Table

AI Summary. A global dataset of publicly traded firms includes all companies with market capitalizations above zero, totaling 47,913 firms worldwide. Including very small, lightly traded companies introduces shakier data but avoids the biases in industry averages that arise from limiting the sample to larger or US-listed firms.

Aswath Damodaran Musings on Markets
Date Posted:
January 10, 2023

In January 2023 @AswathDamodaran found the market capitalization of EU and UK-based firms was 41% of American firms, and Chinese firms represented 38% of American firms.

Does including very small firms improve global industry averages?

Core argument: Damodaran's January 2023 dataset includes 47,913 publicly traded firms worldwide, comprising all companies with market capitalizations above zero and traded on any exchange.

In my sample, I include all publicly traded firms with market capitalizations that exceed zero, traded anywhere in the world. While there are risks in bringing in very small and lightly-traded companies, with shaky data, into the sample, I include them to avoid the biases that will be created in industry averages by looking at just larger publicly traded companies or just US-listed companies. In January 2023, I ended up with 47,913 publicly traded firms in my sample, with the pie chart above providing a geographic breakdown.

Takeaways by Macro Roundup® AI

  1. Damodaran's January 2023 dataset includes 47,913 publicly traded firms worldwide, comprising all companies with market capitalizations above zero and traded on any exchange.
  2. Damodaran includes very small and lightly traded companies with shaky data to avoid the biases in industry averages created by restricting a sample to larger firms or US-listed firms alone.
  • Financial Markets
  • GDP

Revisiting the Connection Between State Medicaid Expansions and Adult Mortality

AI Summary. Using synthetic control methods on eight state Medicaid expansions to parents and childless adults, the authors find no statistically significant effects on all-cause, healthcare-amenable, non-healthcare-amenable, or HIV-related adult mortality in any treated state or in the states combined.

Charles Courtemanche, Jordan Jones, et al National Bureau Of Economic Research
Date Posted:
January 10, 2023

New @nberpubs finds that Medicaid expansion between 1994 and 2005 had no impact on mortality rates: “we find no evidence that Medicaid expansions affect any of the outcomes in any of the treated states or all of them combined.”

New @nberpubs finds that Medicaid expansion between 1994 and 2005 had no impact on mortality rates: “we find no...

Do state Medicaid expansions reduce adult mortality?

Core argument: At a 5% significance level, the authors find no evidence that eight state Medicaid expansions to parents and childless adults from 1994 through 2005 affected all-cause, healthcare-amenable, non-healthcare-amenable, or HIV-related mortality in any treated state or all combined.

This paper examines the impact of Medicaid expansions to parents and childless adults on adult mortality. Specifically, we evaluate the long-run effects of eight state Medicaid expansions from 1994 through 2005 on all-cause, healthcare-amenable, non-healthcare-amenable, and HIV-related mortality rates using state-level data. We utilize the synthetic control method to estimate effects for each treated state separately and the generalized synthetic control method to estimate average effects across all treated states. Using a 5% significance level, we find no evidence that Medicaid expansions affect any of the outcomes in any of the treated states or all of them combined. Moreover, there is no clear pattern in the signs of the estimated treatment effects. These findings imply that evidence that pre-ACA Medicaid expansions to adults saved lives is not as clear as previously suggested.

Takeaways by Macro Roundup® AI

  1. At a 5% significance level, the authors find no evidence that eight state Medicaid expansions to parents and childless adults from 1994 through 2005 affected all-cause, healthcare-amenable, non-healthcare-amenable, or HIV-related mortality in any treated state or all combined.
  2. The authors apply the synthetic control method to estimate effects for each treated state separately and the generalized synthetic control method for average effects across treated states, using state-level data.
  3. The authors report no clear pattern in the signs of the estimated treatment effects, implying that evidence that pre-ACA Medicaid expansions to adults saved lives is not as clear as previously suggested.
  • Healthcare/Seniors

Restoration of the Ozone Layer Is Back on Track, Scientists Say

AI Summary. Scientists reporting to the United Nations project that if countries maintain bans on chlorofluorocarbons and other ozone-destroying chemicals, ozone levels between the polar regions will return to pre-1980 levels by 2040, with the Arctic ozone hole recovering by about 2045 and the Antarctic hole by about 2066.

Henry Fountain New York Times
Date Posted:
January 10, 2023

According to a @UN report the Earth’s ozone layer, which protects the Earth from the majority of the Sun’s ultraviolet radiation, is on track to reach pre-1980 levels by 2040.

According to a @UN report the Earth’s ozone layer, which protects the Earth from the majority of the Sun’s...

Will the ozone layer recover if chemical bans hold?

Core argument: Scientists reporting to the United Nations said ozone levels between the polar regions should return to pre-1980 levels by 2040 if countries maintain bans on chlorofluorocarbons and other ozone-destroying chemicals.

The weakened ozone layer, which is vital to protecting life on Earth, is on track to be restored to full strength within decades — the latest success of a global effort by nations to stop using chemicals that had been destroying the critical layer in the upper atmosphere. In a report for the United Nations, scientists said Monday that if countries continue to maintain the bans on chlorofluorocarbons and other chemicals, ozone levels between the polar regions should reach pre-1980 levels by 2040. Ozone holes, or regions of greater depletion that appear regularly near the South Pole and, less frequently, near the North Pole, should also recover, by 2045 in the Arctic and about 2066 in Antarctica.

Takeaways by Macro Roundup® AI

  1. Scientists reporting to the United Nations said ozone levels between the polar regions should return to pre-1980 levels by 2040 if countries maintain bans on chlorofluorocarbons and other ozone-destroying chemicals.
  2. The ozone holes that appear regularly near the South Pole and less frequently near the North Pole are projected to recover by 2045 in the Arctic and about 2066 in Antarctica.
  3. The ozone layer's recovery follows a global effort by nations to stop using chemicals that had been destroying the upper-atmosphere layer protecting life on Earth.
  • Global Warming
  • Science

Wednesday, January 11, 2023

How Technology Is Redrawing the Boundaries of the Firm

AI Summary. Average "outsourcing intensity"—a firm's external purchase commitments as a share of cost of sales—nearly doubled from 11% to 22% across a sample of large listed American and European firms, with the largest increases among technology companies such as Apple and Microsoft. This is consistent with research finding that firms outsource more as they grow larger and more complex.

Economist Staff The Economist
Date Posted:
January 11, 2023
Is Database:
Database

Firms are using technology to shift work to remote employees and third-party subcontractors. Outsourcing intensity has doubled from 11% in 2005 to 22% in 2021, which may compress white-collar wages going forward. @TheEconomist

Are large firms outsourcing more as they grow bigger and more complex?

Core argument: Average "outsourcing intensity" — external purchase commitments for the coming year as a share of cost of sales — nearly doubled from 11% in 2005 to 22% in 2021 or 2022 across a sample of large listed American and European firms, by The Economist's calculation.

Pinning down just how much firms depend on outsiders is tricky—companies do not advertise this sort of thing. A measure, “outsourcing intensity,” [tracks] a firm’s external purchase commitments in the upcoming year as a share of its cost of sales.  The Economist has calculated the measure using data from financial reports for a sample of large listed firms from America and Europe. Average outsourcing intensity across our sample has nearly doubled from 11% in 2005 to 22% in the most recent year of data (either 2021 or 2022). This growth is especially pronounced among tech titans such as Apple and Microsoft; businesses that grew little over the analyzed period, such as Unilever, a British consumer-goods giant, saw only small increases. This is consistent with research which finds that as firms grow ever larger and adopt more technologies, thus becoming more complex and unwieldy, they outsource more operations—precisely as Coase would have predicted.

Takeaways by Macro Roundup® AI

  1. Average "outsourcing intensity" — external purchase commitments for the coming year as a share of cost of sales — nearly doubled from 11% in 2005 to 22% in 2021 or 2022 across a sample of large listed American and European firms, by The Economist's calculation.
  2. Growth in outsourcing intensity was especially pronounced among tech titans such as Apple and Microsoft, while firms that grew little over the period, such as Unilever, saw only small increases.
  3. The Economist's findings are consistent with research finding that as firms grow larger and adopt more technologies, becoming more complex and unwieldy, they outsource more operations, as Coase would have predicted.

Firms are using technology to shift work to remote employees and third-party subcontractors. Outsourcing intensity has doubled from 11% in 2005 to 22% in 2021, which may compress white-collar wages going forward. “…Pinning down just how much firms depend on outsiders is tricky—companies do not advertise this sort of thing. A measure, “outsourcing intensity,” [tracks] a firm’s external purchase commitments in the upcoming year as a share of its cost of sales. The Economist has calculated the measure using data from financial reports for a sample of large listed firms from America and Europe. Average outsourcing intensity across our sample has nearly doubled from 11% in 2005 to 22% in the most recent year of data (either 2021 or 2022). This growth is especially pronounced among tech titans such as Apple and Microsoft; businesses that grew little over the analyzed period, such as Unilever, a British consumer-goods giant, saw only small increases. This is consistent with research which finds that as firms grow ever larger and adopt more technologies, thus becoming more complex and unwieldy, they outsource more operations—precisely as Coase would have predicted….”

Economist Staff, “How Technology is Redrawing the Boundaries of the Firm,” The Economist, January 8, 2023, https://www.economist.com/business/2023/01/08/how-technology-is-redrawing-the-boundaries-of-the-firm

How Technology is Redrawing the Boundaries of the Firm

Technology and business are inextricably linked. Entrepreneurs harness technological advances and, with skill and luck, turn them into profitable products. Technology, in turn, changes how firms operate. Electricity enabled the creation of larger, more efficient factories, since these no longer needed to depend on a central source of steam power; email has done away with most letters. But new technologies also affect business in a subtler, more profound way. They alter not just how companies do things but also what they do—and, critically, what they don’t do.

The Industrial Revolution ended the “putting-out system”, in which companies obtained raw materials but outsourced manufacturing to self-employed craftsmen who worked at home and were paid by output. Factories strengthened the tie between workers, now employed directly and paid by the hour, and workplace. The telegraph, telephone and, in the last century, containerised shipping and better information technology (it), have allowed multinational companies to subcontract ever more tasks to ever more places. China became the world’s factory; India became its back office. Nearly three years after the pandemic began, it is clear that technology is once again profoundly redrawing the boundaries of the firm.

In the rich world, fast broadband and apps like Zoom or Microsoft Teams are allowing a third of working days to be done remotely. Jobs are trickling out from big-city corporate headquarters to smaller towns and the boondocks. And the line between collaborating with a colleague, a freelance worker or another firm is blurring.

Companies are drawing on common pools of resources, from cloud computing to human capital. By one estimate, skilled freelance workers in America earned $247bn in 2021, up from about $135bn in 2018. The biggest firms in America and Europe are outsourcing more white-collar work. Exports of commercial services from six large emerging markets have grown by 16.5% a year since the pandemic began, up from 6.5% before it (see chart 1). On January 9th Tata Consultancy Services (tcs), an Indian it-outsourcing giant, reported another bump in profits.

A useful lens for understanding these changes was offered by Ronald Coase in his paper from 1937 entitled “The nature of the firm”. Stay small and you forgo the efficiencies of scale. Grow too big and an enterprise gets unwieldy—think of Soviet-style command-and-control economies. Most commerce happens in between those extremes. Coase, whose insights earned him a Nobel prize in economics, argued that firms’ boundaries—what to do and what not to do yourself—are determined by how transaction and information costs differ within firms and between them. Some things are done most efficiently in-house. The market takes care of the rest.

For example, between the 1980s and the 2010s, globalisation and the it boom boosted economies of scale, which encouraged market concentration. But they also increased competitive pressures and cut the cost of communication and collaboration between firms. The net result was for many companies to shrink their scopes. In research published last year Lorenz Ekerdt and Kai-Jie Wu of the University of Rochester found that the average number of sectors in which American manufacturers were active fell by half between 1977 and 2017. By the 2000s many sprawling industrial conglomerates like Germany’s Degussa, which had a hand in everything from metals to medicine, or British Aerospace, which was poking at cars, had untangled themselves and picked the knitting to stick to (chemicals and aircraft, respectively).

Today Coasean forces are ushering in a new type of corporate organisation. It resembles a 21st-century putting-out system—not for artisan craftsmen but for the white-collar professionals who epitomise modern Western economies. Micha Kaufman, boss of Fiverr, an Israeli marketplace which matches freelances with business around the world, observes that firms are getting better at measuring workers’ performance based on their actual output rather than time spent producing it. This is true both of employees and subcontractors. The result is a reorganisation of businesses both internally, and in relation to other companies in the economy.

Start on the inside. Using data from America’s Quarterly Census of Employment and Wages, The Economist has examined jobs in three sectors particularly compatible with remote work: technology, finance and professional services. We find that such jobs have become far more distributed across America since the pandemic. Big metropolitan areas have lost out to smaller cities and even the countryside. Since the fourth quarter of 2019, the number of jobs in the three sectors has grown by six percentage points more in rural areas than in San Francisco and New York.

Firms are also distributing more work across borders. Oswald Yeo, who runs Glints, a recruiting startup in Singapore, says his firm hires employees in batches by country. That helps the new recruits to form in-person bonds with compatriots, while expanding Glints’s talent pool, Mr Yeo explains. There is a premium for places with a small time difference. In Glints’s case, that is countries like Indonesia.

For American firms, it is often Canada. Microsoft, which opened its first Canadian office in 1985, created a big new one in Toronto in 2022. Google is tripling its Canadian workforce to 5,000. A study last year by cbre, a property firm, of the 50 cities in America and Canada with the most tech workers found that four of the top ten were Canadian. Together, the four added 180,000 tech jobs between 2016 and 2021, an increase of 39%, while the top four American cities gained just 86,000 jobs, or 8%. Lower living costs help; the Canadian quartet were among the 16 cheapest cities in the group in terms of housing.

Barriers to immigration are another factor forcing firms to look abroad, says Prithwiraj Choudhury of Harvard Business School. Mr Choudhury has documented a growing class of firms that help employers forge stable relationships with foreign employees without hiring them directly. One example is MobSquad, a firm that enlists skilled workers unable to obtain visas to America and employs them in Canada instead. Its American clients include Betterment, an investment firm, and Guardant Health, a biotechnology company.

MobSquad’s recruits sit somewhere between outsourced temps and full-time employees. This sort of arrangement points to the bigger Coasean shift—to how firms demarcate which tasks they perform on their own account and which they subcontract.

A survey of nearly 500 American firms by the Federal Reserve Bank of Atlanta last year found that 18% were using more independent contractors than in previous years; 2% said they used fewer. On top of that, 13% relied more on leased workers, compared with 1% who reduced this reliance. mbo Partners, a workforce-management firm, estimates that the number of American workers engaged in independent work for at least 15 hours a week increased from 15m in 2019 to 22m in 2022. Figures from the Bureau of Labour Statistics are more conservative, but still show that nearly 1m more Americans are self-employed than at the start of 2020. Pandemic-era job losses forcing people into less desirable work arrangements cannot be the whole story; a similar surge in self-employment did not occur after the global financial crisis of 2007-09.

The shift is again made possible by technology, notably the spread of platforms for freelance work. Having grown slowly, from 9% of America’s labour force in 2000 to 11% in 2018, self-employment is becoming more common. Gig work is no longer just about ride-hailing or food delivery. Whereas earlier platforms, such as Taskrabbit, focused on routine tasks, emerging new ones recruit freelances for complicated work. Upwork specialises in web development; Fiverr is known for media production. Amazon turned to Tongal, another freelancing platform, when it needed a team to rapidly produce social-media content for its Prime tv shows.

Besides making it easier to tap non-employees, technology is enabling companies to collaborate more seamlessly with other businesses. In 2020 Slack, the messaging platform of choice in many a workplace, launched a feature that lets users communicate with outside firms as they would within their own organisations. More than 70% of the Fortune 100 list of America’s biggest firms by revenue use the feature. The Atlanta Fed’s survey found that 16% of responding firms had increased domestic outsourcing and 6% had offshored more. Already, combined revenues for six big it-services firms with large operations in India—Cognizant, hclt, Infosys, tcs, Tech Mahindra and Wipro—grew by 25% between the third quarter of 2019 and the same period last year.

Pinning down just how much firms depend on outsiders is tricky—companies do not advertise this sort of thing. To get an idea, Katie Moon and Gordon Phillips, two economists, look at a firm’s external purchase commitments in the upcoming year as a share of its cost of sales. As a snapshot of the economy, this measure of “outsourcing intensity” must be treated with caution; it does not capture all types of outsourcing and different firms account for external purchases in different ways. But it usefully illustrates changes over time. image001.png The Economist has calculated the measure using data from financial reports for a sample of large listed firms in America and Europe. They are indeed growing more reliant on others. Average outsourcing intensity in our sample has doubled from 11% in 2005 to 22% in the most recent year of data. This growth is especially pronounced among tech titans such as Apple and Microsoft; businesses that grew more slowly, such as Walmart, a retailing giant, saw small increases. This is consistent with research which finds that as firms grow larger and adopt more technologies, thus becoming more complex and unwieldy, they outsource more operations—precisely as Coase would have predicted.

As technology evolves further, so will the contours of the firm. Companies may gain more flexibility to seek out new workers for new tasks in new places. Portugal has created a visa for digital nomads, who will be able to work from the country for a year. Argentina wants to introduce a preferential exchange rate for freelance workers selling their services abroad: the “tech dollar” would ensure that they were not exposed to the rapidly devaluing peso.

For Western white-collar types, stiffer competition for jobs may compress pay. According to a working paper published last year, by Alberto Cavallo of Harvard Business School and colleagues, wages differ less between countries for occupations that are more prone to outsourcing. That means higher living standards for workers in poorer countries and, possibly higher profits for their employers. And for Coase, it means continued relevance.

  • Institutional Capabilities
  • Productivity
    • Workforce Reorganization
      • Urban vs Rural

Taxes, Revenues, and Net Migration In California

AI Summary. California's top income tax bracket shows the highest net out-migration rate, with departing high earners not replaced by other high earners at the same rate. Potential net outflows of taxable income reached nearly $4bn in the year federal tax reform took effect and $10.7bn around the COVID-19 pandemic.

Joshua Rauh Stanford University
Date Posted:
January 11, 2023
Is Database:
Database

.@joshrauh of the Stanford Graduate School of Business presents evidence that migration from California is being driven by high taxes rates, suggesting California has limited ability to raise taxes without losing revenue.

Are California's top earners leaving the state faster than they're replaced?

Core argument: Potential net outflows of taxable income from California spiked to nearly $4 billion in the year the Tax Cuts and Jobs Act was implemented and $10.7 billion around COVID-19.

Figure 2 shows the net departure rates from the state by income tax bracket between 2003 and 2018. Since 2003, only middle-income earners in the 9.3 percent income tax bracket have entered California at higher rates than left during any year over the time period. The top bracket, and the highest earners within the top bracket in particular, display the highest net out-migration rate over the whole period. Higher-income earners who leave the state are not being replaced by other high earners at the same rate. California's top earners are particularly mobile, showing the highest rates of departure around tax policy changes such as Proposition 30 in 2012 and the Tax Cut and Jobs Act (TCJA) of 2017 as well as the COVID-19 pandemic in 2020. Consequently, potential net outflows of taxable income spiked to nearly $4 billion in the year TCJA was implemented and $10.7 billion around COVID-19. High-earning movers have been consistently more likely to leave California for zero-income tax states since 2012, and those who experienced larger tax increases under TCJA were more likely to depart.

Takeaways by Macro Roundup® AI

  1. Potential net outflows of taxable income from California spiked to nearly $4 billion in the year the Tax Cuts and Jobs Act was implemented and $10.7 billion around COVID-19.
  2. Between 2003 and 2018, California's top income tax bracket, and the highest earners within it, showed the highest net out-migration rates, with departing higher-income earners not replaced by other high earners at the same rate.
  3. Only middle-income earners in California's 9.3 percent income tax bracket entered the state at higher rates than they left in any year from 2003 to 2018, while high-earning movers have been more likely to leave for zero-income-tax states since 2012.

Brandon Adams Comment: One of the best papers we’ve ever had in the summary. We should get in touch with Rauh. He’s doing great work on an important topic. It’s interesting that the hit to the CA tax base from out migration is not nearly as big as I would have thought.

“…Figure 2 shows the net departure rates from the state by income tax bracket between 2003 and 2018. Since 2003, only middle-income earners in the 9.3 percent income tax bracket have entered California at higher rates than left during any year over the time period. The top bracket, and the highest earners within the top bracket in particular, display the highest net out-migration rate over the whole period. Higher-income earners who leave the state are not being replaced by other high earners at the same rate. California’s top earners are particularly mobile, showing the highest rates of departure around tax policy changes such as Proposition 30 in 2012 and the Tax Cut and Jobs Act (TCJA) of 2017 as well as the COVID-19 pandemic in 2020. Consequently, potential net outflows of taxable income spiked to nearly $4 billion in the year TCJA was implemented and $10.7 billion around COVID-19. High-earning movers have been consistently more likely to leave California for zero-income tax states since 2012, and those who experienced larger tax increases under TCJA were more likely to depart….”

Paper: “…Using microdata from the California Franchise Tax Board (FTB) on the universe of California tax filings from 2000 to 2020, we observe the resident status, county or state of residence, taxable income, and taxes paid for all California filers around two major policy changes, California Proposition 30 and the US Tax Cut and Jobs Act (TCJA) of 2017, as well as the onset of the COVID-19 pandemic. This paper, therefore, makes three main contributions….”

“…First, this paper extends the findings of Rauh and Shyu (2022) on Proposition 30 to also consider taxable income and revenue impacts of out-migration. In 2012, California voters passed ballot initiative Proposition 30 to increase the marginal income tax rates for high-income earners by one to three percentage points, up from 9.3 percent (California Legislative Analyst’s Office, 2012).2 According to Rauh and Shyu (2022), the Proposition 30 tax increases resulted in significantly higher departure rates among California’s high income earners. I find that the calculation of total taxable income of out-movers exceeded that of in-movers around the year of Proposition 30 by $1.2 billion, which translates into a net loss of about $135 million in tax liability, an arguably permanent annual loss. Were it not for the net in-migration of a high number of earners in the bottom tax bracket, these figures would be approximately 2.2 times as large…”

“…Second, this paper studies the consequences of TCJA for California’s taxable income and tax revenue. TCJA instituted a $10,000 cap on the state and local tax (SALT) deduction.3 For many California taxpayers, this cap more than offset the impact of TCJA’s lower federal tax rates, leading to a net federal tax increase.4 Even for taxpayers who saw a net federal tax cut under TCJA, TCJA dramatically increased the spread in total tax paid by most California taxpayers and what they would pay if they were in a much lower-tax state. We investigate departures from the state, changes in taxable income, and potential revenue effects in the years surrounding the implementation of TCJA and the SALT deduction cap. Total taxable income of out-movers between 2017 and 2018 exceeded that of in-movers by nearly $4 billion, jumping up from roughly zero in the previous year. This translated into a net loss of about $368 million in tax liability, again an arguably permanent annual loss. These effects largely repeated themselves between 2018 and 2019, with $3.44 billion n taxable income and $314 million in annual tax revenue lost on net. Net in-migration of mlower-income earners was considerably less helpful during this episode, exerting an effect half as large as it was in 2012….”

“….Third, most recently in 2020, the COVID-19 pandemic spread across the United States with the first case diagnosed in California in January 2020. While the pandemic did not impact tax policy in the same way as Prop 30 or TCJA, Californians saw a marked decline in public services during COVID-19, particularly in the early months of its spread. A statewide emergency was declared by Governor Gavin Newsom on March 4, 2020 followed promptly by a statewide shelter-in-place order taking effect on March 19, 2020. This resulted in the closure or major scale back of services at public schools, courthouses, DMV offices, and almost all businesses.5 In fact, schools throughout the state were required to be closed for in-person instruction in California for 290 days in 2020, amongst the longest closure in the nation (Hale et al., 2021). COVID-19 restrictions and shutdowns were not unique to California during this period, but taxpayers in the state continued to pay a premium for services that were largely unavailable while many employers likely no longer required workers to be stationed in California. For families with dependents, the share of California taxpayers who left and moved to a given state was higher in 2020 by an average of half a percentage point for every 10 percent fewer days of school closures in the destination state. Total taxable income of people who moved out-of-state in 2020 surpassed that of those who moved into California in the same year by $10.7 billion. This is reflected in a potentially permanent annual net loss of about $1.17 billion in tax liability….”

“…Based on our analysis, we find that the departure rates of high-income taxpayers appear highly responsive to tax policy changes like Proposition 30 and the TCJA as well as more large-scale changes like those prompted by the COVID-19 pandemic, while outmigration for low- and middle-income earners has been gradually increasing over time with in-migration not keeping pace for most income tax brackets. Similarly, the amount of income tax liability of high-income out-movers prior to their move has consistently not been replaced in full by that of in-movers at the same level, meaning the state loses revenue due to out-migration from the top bracket. We also see that a large share of emigrants relo- cate to zero- and low-income tax states during our time period. Finally, our analysis shows that Southern California saw a larger share of out-of-state departures during the Proposition 30 episode, while Northern California saw high levels of these departures around TCJA and COVID-19. As California’s tax revenues have become increasingly dependent on high-income earners in the top bracket, the loss of taxpayers from net out-migration, no matter the cause, poses long-term challenges the state’s fiscal stability…”

“…While much of the literature suggests that migration effects do not have substantial impacts on government revenues (Agrawal and Foremny, 2019; Martinez, 2021), none of the aforementioned studies explore the impact migration may have on economic prosperity generally. As noted by Rauh and Kearney (2021), a more holistic approach to studying ncome taxation would consider the rate at which the productive output of a society is maximized, not simply the rate at which the government can collect the most revenue….”

FACTOIDS

“…Lavelle and Kepner (2022) use data from United Van Lines to compare trends in migration before the pandemic in 2018 and 2019 and after the pandemic started in 2020 and 2021. They find that even prior to the pandemic, California accounted for the second largest outbound share of total interstate moves in the country, with over 56 percent of movers in the US originating in California in 2018 and 2019. This trend continued after the pandemic began with California’s share of outbound movers increasing to nearly 60 percent of movers nationwide…”

“…Figure 7 displays the total amount of income tax revenue generated within the state over time, broken down by tax bracket. From 2003 to 2019, income tax revenues about tripled, increasing from $32.1 billion to $94.7 billion in 2015 dollars. At the same time, income tax revenues as a share of total revenues grew from 31 percent in 2003 to 57 percent in 2019 according to the US Census Bureau. Over the same period, the state has become increasingly reliant on the top income tax bracket for these revenues, and particularly on the highest earners within that bracket (those earning more than $5 million a year), as is displayed in Figure 8. In 2003, the top 1 percent of income earners (those earning more than $681,342 annually in 2015 dollars) generated more than 42 percent of all of California’s income tax revenues. In 2012, this share jumped to 50 percent of total income tax liability. As of 2020, those making over $5 million contributed more than 25 percent of total income tax revenue. This means that only 25,000 households – 0.1 percent of the income tax-paying population – paid over a quarter the state’s total income tax revenues in that year. Meanwhile the 9.3 percent tax bracket’s share of total tax liabilities decreased from 49.3 percent in 2003 to 36.8 percent in 2020….”

“…We find that high-income earners appear to be very responsive to tax policy changes, with spikes in departure rates of these taxpayers in 2012 and 2017 following the enactment of Proposition 30 and the TCJA’s $10,000 cap on the state and local tax deduction. Further, we find that particularly for the highest-income earners, the rate of out-migration outweighs the average rate of in-migration by over 0.5 percentage point from 2001 to 2018, and spikes to over 1.5 percentage points for the very highest earners around the tax events we study. These spikes, however, paled in comparison to those related to the COVID-19 pandemic. Departure rates for filers making over $5 million rose to 3.75 percent, swamping the in-migration rate of 0.42 percent for filers at the same income level. This departure rate was more than 2 percentage points higher than the income-weighted baseline of 1.6 percent from 2001 to 2018. The economic implications of these increases in out-migration are significant for the state. With high-earning individuals moving out, so too does a large portion of their income. This represents a loss of economic activity and tax revenues. We estimate that in 2019 alone, nearly $30 billion in taxable income was earned by taxpayers who moved out of California in the next year while just $19 billion was earned by those moving in, resulting in a net outflow of nearly $11 billion that could have been taxed by the state. This loss is compounded over time as the income growth of movers occurs in an emigrant’s destination state, rather than in California….” Joshua Rauh, “Taxes, Revenues, and Net Migration in California,” Stanford University, December 2022, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4037764

  • Taxation
  • Fiscal Policy
  • Politics

Credit Boom

AI Summary. Banks' total assets were little changed even as they shifted composition from cash and securities into lending, with roughly $1.2T in loans made over the year — about 3x the level of recent years — and credit unions showing similar growth. The author likens this credit expansion to fiscal stimulus, except that borrowers must eventually repay.

Joseph Wang Fed Guy Blog
Date Posted:
January 11, 2023

In 2022 banks and credit unions made $1.5T in loans, an annual rate that’s three times higher than the 2018 to 2021 period. High net interest margins have increased the desire of banks to lend. @fedguy12

Is a surge in bank lending acting like fiscal stimulus?

Core argument: Banks made around $1.2tn in loans in 2022, roughly three times the level of recent years, while the total size of the banking sector was little changed as banks replaced cash and securities holdings with loans to the real economy.

The total size of the banking sector was little changed over 2022, but the static surface obscures a boom in lending of epic proportions. Banks changed the composition of their assets by replacing their cash and security holdings with loans to the real economy. Around $1.2T in loans were made in 2022, a level around three times higher than that of recent years. The same explosive growth is also seen in credit unions, which are functionally similar to small banks. Credit union loans outstanding grew $0.23T from 2021Q3 to 2022Q3 (Q4 data not available), a level also there times higher than in recent years. Loan growth was strong across categories and appeared to persist despite rising rates. The huge credit growth in 2022 can be likened to the prior fiscal stimulus, with the exception that the money must one day be repaid. Borrowers have $1.5T more in purchasing power that they did not have before. The need to repay the money may affect their spending decisions and willingness to take on additional debt, but credit cycles can last for years.

Takeaways by Macro Roundup® AI

  1. Banks made around $1.2tn in loans in 2022, roughly three times the level of recent years, while the total size of the banking sector was little changed as banks replaced cash and securities holdings with loans to the real economy.
  2. Credit union loans outstanding grew $0.23tn from 2021Q3 to 2022Q3, also about three times the pace of recent years, with loan growth strong across categories and persisting despite rising rates.
  3. The 2022 credit growth left borrowers with $1.5tn more in purchasing power, comparable to prior fiscal stimulus except that the money must one day be repaid, which may affect spending decisions and willingness to take on more debt.
  • Business Cycle
  • GDP

China’s Population Likely Fell in 2022 as Births Hit New Low

AI Summary. An independent demographer estimates China's annual births fell to a record low of about 10m, down from 10.6m the prior year — itself the sixth straight decline and the lowest since 1949. Deaths likely exceeded the prior year's 10.1m, partly due to the spread of Covid infections.

Bloomberg Staff Bloomberg
Date Posted:
January 11, 2023

Deaths likely outpaced births in China in 2022 with births falling to 10M, down from 10.6M in 2021. The UN expects China to lose 110 million people by 2050 and fall to about half its current size by the end of the century. @Bloomberg

Has China's population begun to shrink as births hit record lows?

Core argument: Independent demographer He Yafu expects China's official 2022 data to show a record-low 10 million births, down from 10.6 million in 2021.

The government’s official data for the total number of births in 2022 — expected to be released next week — will probably show a record low of 10 million, according to independent demographer He Yafu. That would be less than the 10.6 million babies born in 2021, which was already the sixth straight year of decline and the lowest since the founding of the People’s Republic of China in 1949. He added that the country likely recorded more deaths last year than the 10.1 million people who died in 2021, in part because of the spread of Covid infections.

Takeaways by Macro Roundup® AI

  1. Independent demographer He Yafu expects China's official 2022 data to show a record-low 10 million births, down from 10.6 million in 2021.
  2. China's 10.6 million births in 2021 marked the sixth straight year of decline and the lowest total since the founding of the People's Republic of China in 1949.
  3. He Yafu says China likely recorded more deaths in 2022 than the 10.1 million in 2021, partly because of the spread of Covid infections, pointing to a likely population decline.
  • Demographics
  • China
  • Workforce


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