Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, November 13, 2023

AI Summary. The share of US income going to labor fell roughly 5 percentage points between 1929 and 2022, with declines across most US industries and in most countries of Europe, Asia, and emerging markets. The author argues the most plausible causes are technological, including the information age and automation.

Loukas Karabarbounis National Bureau of Economic Research
Date Posted:
Is Database:
Database
Is Important:
Important

Analysis by Loukas Karabarbounis finds that labor’s share of US national income declined 5pp btw 1929-2022, and labor’s share globally has declined 6pp since 1980. He proposes capital-augmenting technology as the most likely driver of these declines.

Is technology the main cause of the falling labor share?

Core argument: The headline estimate for the United States is a labor share decline of roughly 5pp between 1929 and 2022, with a larger drop of about 7pp after World War II, and the great majority of U.S. industries showed declines in recent decades.

The headline estimate for the United States is a roughly 5pp decline of the labor share between 1929 and 2022. The decline after World War II is even larger, at around 7pp. The great majority of U.S. industries exhibited labor share declines in recent decades. The United States is not unique, as we observe labor share declines in most countries of Europe and Asia and in emerging markets. It helps to organize factors affecting the labor share in five categories: technology, product markets, labor markets, capital markets, and globalization. The factors that have contributed to the labor share decline are intertwined. My view is that the most plausible causes have technological origin. Developments such as the information age and automation, manifesting through changes in the cost of capital and the structure of product markets, caused the labor share to decline. If technological advancements continue to favor capital indefinitely, the natural outcome is a transition to a world in which capital on its own produces the entire global income.

Takeaways by Macro Roundup® AI

  1. The headline estimate for the United States is a labor share decline of roughly 5pp between 1929 and 2022, with a larger drop of about 7pp after World War II, and the great majority of U.S. industries showed declines in recent decades.
  2. Labor share declines appear in most countries of Europe and Asia and in emerging markets, so the United States is not unique.
  3. Factors affecting the labor share fall into five categories — technology, product markets, labor markets, capital markets, and globalization — and the most plausible causes are technological, with the information age and automation acting through the cost of capital and product market structure.

Related Articles:

  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — The authors estimate that post-pandemic labor market tightness compressed the US wage distribution, reducing the college wage premium and offsetting roughly one-quarter of the four-decade rise in 90-10 wage inequality. They attribute this in part to greater labor supply elasticity facing firms in low-wage markets, which reduced employer market power as young non-college workers moved to higher-paying jobs.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Cumulative growth in hourly compensation has outpaced inflation since the end of 2019, though it remains slightly below the strong trend of the latter half of the 2010s. The real wage distribution has compressed, with lower-wage workers gaining proportionally more, an effect tempered because low-income households faced greater inflation.

Joseph Politano Apricitas Economics
Date Posted:
Is Database:
Database

Real hourly compensation is above 2019 levels but below the 2015-19 trend line. @JosephPolitano

Are real wages rising, and are lower-wage workers gaining most?

Core argument: Cumulative growth in hourly compensation has outpaced inflation since the end of 2019, though it remains slightly below the trend of strong growth recorded in the latter half of the 2010s.

Cumulative growth in hourly compensation has exceeded inflation since the end of 2019, though it remains slightly below the trend of strong growth seen in the latter half of the 2010s. The real wage distribution has compressed—that is, lower-wage workers have seen proportionally larger gains than higher-wage workers, although this effect is lessened by the fact that low-income households have faced greater inflation than high-income households.

Takeaways by Macro Roundup® AI

  1. Cumulative growth in hourly compensation has outpaced inflation since the end of 2019, though it remains slightly below the trend of strong growth recorded in the latter half of the 2010s.
  2. The real wage distribution has compressed, with lower-wage workers posting proportionally larger gains than higher-wage workers.
  3. The compression in real wages is lessened by low-income households facing greater inflation than high-income households.

Related Articles:

  • Have Workers Gotten A Raise? — Measures of typical and aggregate pay adjusted by personal consumption inflation have grown since 2019 and kept pace with or exceeded longer-term trends, while results are more mixed when deflated by the consumer price index, with average hourly earnings and total compensation below trend.
  • Is the Fed Peaking Too Soon? — Price increases have decelerated from about 6% to 3% a year while growth in the dollar value of spending and incomes has slowed much less, from about 7% to 6%, translating into faster growth in American living standards. The author argues real growth may slow, but it is less clear why nominal growth would.
  • The Economy Is Great. Why Are Americans in Such a Rotten Mood? — Consumer sentiment has been more depressed than historic correlations with the "misery index"—the sum of inflation and unemployment—would predict, even as consumer-price inflation fell from a 9.1% peak to 3.7%. The author argues much of this pessimism is "referred pain," reflecting dissatisfaction with the country as a whole rather than the economy.

AI Summary. Wage growth for workers in the bottom quarter of the wage distribution slowed from 7.2% to 5.9%, according to Federal Reserve Bank of Atlanta data based on a 12-month moving average of median hourly wage growth. Wage growth for workers overall declined by less, from 6.3% to 5.8%.

Amara Omeokwe Wall Street Journal
Date Posted:
Is Database:
Database

Wage growth for workers in the bottom quartile dropped to 5.9% in October from 7.2% in January, according to data from the Federal Reserve Bank of Atlanta.

Is wage growth for the lowest-paid workers slowing faster than overall?

Core argument: Wage growth for workers in the bottom quarter of the U.S. wage distribution slowed to 5.9% in October from 7.2% in January, according to Federal Reserve Bank of Atlanta data.

Workers in the bottom quarter of the wage distribution received a 5.9% raise in October compared with a 7.2% increase in January, according to data from the Federal Reserve Bank of Atlanta. Workers overall saw a smaller decline over the same time frame, from growth of 6.3% to 5.8%. The measure is based on the 12-month moving average of median wage growth, on an hourly basis.

Takeaways by Macro Roundup® AI

  1. Wage growth for workers in the bottom quarter of the U.S. wage distribution slowed to 5.9% in October from 7.2% in January, according to Federal Reserve Bank of Atlanta data.
  2. Overall wage growth declined less over the same period, from 6.3% to 5.8%.
  3. The Atlanta Fed measure is based on the 12-month moving average of median wage growth on an hourly basis.

Related Articles:

  • Have Workers Gotten A Raise? — Measures of typical and aggregate pay adjusted by personal consumption inflation have grown since 2019 and kept pace with or exceeded longer-term trends, while results are more mixed when deflated by the consumer price index, with average hourly earnings and total compensation below trend.
  • Is the Fed Peaking Too Soon? — Price increases have decelerated from about 6% to 3% a year while growth in the dollar value of spending and incomes has slowed much less, from about 7% to 6%, translating into faster growth in American living standards. The author argues real growth may slow, but it is less clear why nominal growth would.
  • The Economy Is Great. Why Are Americans in Such a Rotten Mood? — Consumer sentiment has been more depressed than historic correlations with the "misery index"—the sum of inflation and unemployment—would predict, even as consumer-price inflation fell from a 9.1% peak to 3.7%. The author argues much of this pessimism is "referred pain," reflecting dissatisfaction with the country as a whole rather than the economy.

AI Summary. An analysis of gross profit relative to assets for US small-cap companies, defined as $400m–$4bn in market cap, finds a broad-based decline in quality from the early 2010s, with information technology, consumer discretionary, and industrials most affected. Health care was excluded because unprofitable pharmaceutical and biotech stocks rose from 5% to 16% of small stocks.

Chris Satterthwaite Verdad
Date Posted:
Is Database:
Database

.@verdadcap uses Gross Profits/Assets as a proxy for quality, and notes that there has been a sharp deterioration in quality for US small caps. Chris Satterthwaite writes that foreign small caps have similar quality but lower price than US small caps.

Has the quality of US small-cap companies declined broadly across sectors?

Core argument: Unprofitable pharma and biotech stocks tripled as a share of US small caps, from 5% in 1995 to 16% in 2021, prompting exclusion of health care entirely from the gross profit/assets quality analysis.

Examined our favorite quality metric, gross profit/assets (GP/A), over time by sector for “small” US companies, which we define as between $400M and $4B in market cap today, or the equivalent percentile rank by market cap historically. We made the decision to exclude the health-care industry entirely given the significant proliferation of unprofitable pharma and biotech stocks, which tripled in proportion from 5% of small stocks in 1995 to 16% of stocks in 2021. We were curious whether the degradation in quality still held once we excluded this mix shift impact. The chart below shows the contribution to aggregate small-cap US GP/A by sector (e.g., IT GP/A multiplied by IT proportion of total market cap). Most notable is the broad-based decline in quality from the early 2010s to today. The most impacted sectors include IT, consumer discretionary, and industrials. We find it notable that US large caps trade at a premium to the rest of the world, while the median US small cap stock.

Takeaways by Macro Roundup® AI

  1. Unprofitable pharma and biotech stocks tripled as a share of US small caps, from 5% in 1995 to 16% in 2021, prompting exclusion of health care entirely from the gross profit/assets quality analysis.
  2. Aggregate gross profit/assets for US small caps, defined as $400M–$4B in market cap or the equivalent historical percentile rank, declined broadly across sectors from the early 2010s to today even excluding health care.
  3. IT, consumer discretionary, and industrials were the sectors most affected by the decline in small-cap gross profit/assets, measured as each sector's GP/A multiplied by its share of total market cap.

Related Articles:

  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • Market Bipolarity: Exuberance versus Exhaustion — The equity risk premium fell over the first half of the year and then held relatively steady, leaving the expected return on equities higher as risk-free rates rose. The author argues that quarterly moves in stock and corporate bond prices came largely from rising interest rates rather than a heightened fear of risk.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.

AI Summary. With Europe's current account near balance and Japan back in surplus, the question of which economy absorbs China's current account surplus remains open, and the US external deficit exceeds what G-7 countries can finance. The global economy stays relatively integrated despite frictions, even as global politics is more fractured.

Brad Setser @Brad_Setser
Date Posted:

.@Brad_Setser argues “the right measure of Sino-American decoupling is when the United States is no longer the outlet for China’s surplus.” Cumulatively, global surpluses and deficits have to match, and the US is supplying the majority of global deficits.

Is talk of decoupling overstated while the US absorbs China's surplus?

Core argument: With Europe's current account back in balance and Japan back in surplus, the question of who balances China's current account surplus begs to be answered.

Now that Europe's current account is back in balance, and Japan is back in surplus, the question of who balances China's current account surplus begs to be answered. There is a risk here, namely that the global economy -- albeit with frictions -- remains relatively integrated. Global politics is far more fractured. There isn't an easy way to solve this dilemma so long as China and others need outlets for their surpluses and equally the US external deficit far exceeds what now can be financed by G-7 countries. Politics and economics diverge, even if the mechanics of measuring bilateral trade and financial flows don't quite capture it.

Takeaways by Macro Roundup® AI

  1. With Europe's current account back in balance and Japan back in surplus, the question of who balances China's current account surplus begs to be answered.
  2. The US external deficit far exceeds what G-7 countries can now finance, while China and others still need outlets for their surpluses.
  3. The global economy remains relatively integrated despite frictions while global politics is far more fractured, a divergence the mechanics of measuring bilateral trade and financial flows do not quite capture.

Related Articles:

  • Hidden Exposure: Measuring U.S. Supply Chain Reliance — The US buys at least 80% of industrial inputs domestically, so aggregate foreign supply chain exposure is limited, but disruptions occur at the sector level rather than the macro level. Accounting for Chinese inputs embedded in goods bought from other foreign suppliers, US exposure to China is almost 4x larger than it appears at face value.
  • How America Is Failing To Break Up With China — Research finds that countries with the strongest existing trade ties to China in a given industry have gained the most as direct Chinese exports to the US are redirected, suggesting Chinese supply chains remain central to American imports even in advanced-manufacturing goods officials most want to shield from China.
  • The Global Constraints To Chinese Growth — China accounts for 18% of global GDP but 13% of global consumption and 32% of global investment, with each dollar of Chinese investment offset by only $1.3 of consumption versus $4.1 outside China. If China grew 4-5% annually for a decade while relying on investment, its share of global investment would rise to 37%.

AI Summary. A prominent Chinese economist argues that analysis of provincial micro-data, past censuses, and 1% population sample surveys shows a shrinking and ageing population has no significant negative impact on economic growth. The argument holds that China is gaining a higher-quality human capital dividend conducive to technological innovation and industrial upgrading.

Josephine Ma South China Morning Post
Date Posted:

Justin Lin Yifu argues China’s rapidly aging population won’t be a headwind for economic growth as increasing levels of human capital will increase productivity growth. @scmpnews

Justin Lin Yifu argues China’s rapidly aging population won’t be a headwind for economic growth as increasing...

Does a shrinking, ageing population hurt China's economic growth?

Core argument: Justin Lin's analysis of provincial micro-data, prior censuses, and 1 percent population sample surveys found that a shrinking and ageing population has no significant negative impact on China's economic growth.

Our analysis of micro-data of the provinces and aggregate data from previous censuses, as well as sample surveys of 1 percent of the population, showed that a shrinking and ageing population has no significant negative impact on economic growth. In 2001, China officially entered an ageing society [with 7 percent of the population over 65 years old]. Since then, many people in China have become increasingly wary that they may ‘get old before becoming affluent.’ China is ushering in a new and higher-quality human capital dividend that is conducive to technological innovation and industrial upgrading.

Takeaways by Macro Roundup® AI

  1. Justin Lin's analysis of provincial micro-data, prior censuses, and 1 percent population sample surveys found that a shrinking and ageing population has no significant negative impact on China's economic growth.
  2. China officially entered an ageing society in 2001, when 7 percent of its population was over 65 years old, and since then many Chinese have grown wary of "getting old before becoming affluent.".
  3. Justin Lin argues that China is ushering in a new and higher-quality human capital dividend conducive to technological innovation and industrial upgrading.

Related Articles:

  • An Economic Hail Mary for China — A higher ratio of people aged 59 and over to children under 15 is strongly negatively correlated with GDP growth, as are higher median age and a larger share over 59. In China's northeastern provinces, where fertility fell a decade before the rest of the country, growth has stalled.
  • The Global Constraints To Chinese Growth — China accounts for 18% of global GDP but 13% of global consumption and 32% of global investment, with each dollar of Chinese investment offset by only $1.3 of consumption versus $4.1 outside China. If China grew 4-5% annually for a decade while relying on investment, its share of global investment would rise to 37%.
  • Can China Catch Up with Greece? — Declining contributions from labor and capital are projected to hold China's income growth below 4% unless total factor productivity growth accelerates, which the authors argue is unlikely given that China's productivity growth has already averaged 1.8% since 2009. Only five of the 43 countries that previously reached China's income level sustained that pace over the following 13 years.

Tuesday, November 14, 2023

AI Summary. Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.

David Autor, Arindrajit Dube, and Annie McGrew National Bureau of Economic Research
Date Posted:
Is Database:
Database

Updated work by @davidautor documents that, since the pandemic, real hourly wage gains for the bottom 10% have reversed nearly 40% of the cumulative increase in inequality since 1980. @nberpubs

Does a tight labor market reduce wage inequality at the bottom?

Core argument: Post-pandemic labor market tightness reversed almost 40% of the rise in 90-10 log wage inequality since 1980, with disproportionate wage growth at the bottom of the distribution also reducing the college wage premium.

Labor market tightness following the height of the Covid-19 pandemic led to an unexpected compression in the US wage distribution that reflects, in part, an increase in labor market competition. Disproportionate wage growth at the bottom of the distribution reduced the college wage premium and reversed almost 40% of the rise in 90-10 log wage inequality since 1980, as measured by the 90-10 ratio. The Unexpected Compression as measured by the fall in the 90-10 log wage ratio was nearly half of the Great Compression of the 1940s. The rise in wages was particularly strong among workers under 40 years of age and without a college degree. The post-pandemic rise in labor market tightness—and the consequent wage compression— represent a profound shift in US labor market conditions, seen most clearly in the rise of the wage-separation elasticity among young non-college workers.

Takeaways by Macro Roundup® AI

  1. Post-pandemic labor market tightness reversed almost 40% of the rise in 90-10 log wage inequality since 1980, with disproportionate wage growth at the bottom of the distribution also reducing the college wage premium.
  2. The Unexpected Compression, measured by the fall in the 90-10 log wage ratio, was nearly half the size of the Great Compression of the 1940s, and reflects in part an increase in labor market competition.
  3. Wage gains were particularly strong among workers under 40 without a college degree, a shift in US labor market conditions seen most clearly in the rise of the wage-separation elasticity among young non-college workers.

Related Articles:

  • Perspectives on the Labor Share — The share of US income going to labor fell roughly 5 percentage points between 1929 and 2022, with declines across most US industries and in most countries of Europe, Asia, and emerging markets. The author argues the most plausible causes are technological, including the information age and automation.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.

Jan Hatzius, Dominic Wilson, Joseph Briggs, Vickie Chang, Devesh Kodnani, and Giovanni Pierdomenico Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs argues the prospect of a recession in the US is not elevated relative to historic patterns.

Will growth tailwinds keep recession risk low as inflation falls?

Core argument: The authors reaffirm a 15% probability of a US recession, seeing only limited recession risk.

We continue to see only limited recession risk and reaffirm our 15% US recession probability. We expect several tailwinds to global growth in 2024, including strong real household income growth, a smaller drag from monetary and fiscal tightening, a recovery in manufacturing activity, and an increased willingness of central banks to deliver insurance cuts if growth slows. More disinflation is in store over the next year. Although the normalization in product and labor markets is now well advanced, its full disinflationary effect is still playing out, and core inflation should fall back to 2-2½% by end-2024. The market outlook is complicated by compressed risk premia and markets that are quite well-priced for our central case.

Takeaways by Macro Roundup® AI

  1. The authors reaffirm a 15% probability of a US recession, seeing only limited recession risk.
  2. Global growth in 2024 is expected to be supported by strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing activity, and central banks more willing to deliver insurance cuts if growth slows.
  3. Core inflation is expected to fall to 2–2½% by end-2024 as the disinflationary effect of well-advanced product and labor market normalization continues to play out, while compressed risk premia and markets well-priced for the central case complicate the market outlook.

Related Articles:

  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • U.S. Wage Growth Is Slowing, Somewhat — U.S. wage growth has slowed substantially without a large rise in joblessness, though wages are still rising faster than in the decade before the pandemic, at a pace comparable to the late 1990s and 2006-2007. The author argues much of the earlier outsized pay gains reflected one-off job market churn and sectoral shifts.

AI Summary. The US faces lower energy risk than in the 1970s: it is a net energy exporter rather than a net importer, the oil intensity of its economic growth is 65% lower, and annual global oil consumption growth has fallen from 8%-10% to 0%-2%. The Strategic Petroleum Reserve is down about 50% from its peak.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest @jpmorgan argues an energy shock is a lower risk to the American economy than it was in the past. He notes that the oil intensity of the American economy has declined, and that US crude imports are down 75% from their 2005 peak.

Is the US less vulnerable to oil shocks than in the 1970s?

Core argument: The oil intensity of US GDP growth is 65% lower than in the 1970s, and the US is now a net energy exporter rather than a net importer, leaving US energy risks generally much lower than in that decade.

Energy risks to the US are generally much lower than in the 1970’s. The US is a net energy exporter vs its net import position in the 1970s. The oil intensity of US GDP growth is 65% lower than it was in the 1970’s. Annual global oil consumption growth has declined from 8%-10% in the early 1970s to 0%-2% today. Geopolitical benefits to OPEC of an oil embargo would be less clear now: 75% of Saudi oil exports go to Asia, China gets half its oil from the Middle East and the US gets most of its imported oil from Canada, Mexico, and other non-OPEC sources. Saudi Arabia also has spare capacity to bring online if needed. The Biden Administration, in an act of geopolitical malpractice, opted not to refill the Strategic Petroleum Reserve before the conflict erupted; the SPR is down ~50% from its peak and at its lowest level since 1983.

Takeaways by Macro Roundup® AI

  1. The oil intensity of US GDP growth is 65% lower than in the 1970s, and the US is now a net energy exporter rather than a net importer, leaving US energy risks generally much lower than in that decade.
  2. Annual global oil consumption growth has fallen from 8%–10% in the early 1970s to 0%–2% today, while Saudi Arabia retains spare capacity it can bring online if needed.
  3. An OPEC embargo would carry less clear geopolitical benefit now, with 75% of Saudi oil exports going to Asia, China sourcing half its oil from the Middle East, and the US importing mostly from Canada, Mexico, and other non-OPEC suppliers.

Related Articles:

  • The Economic Consequences of the Israel-Hamas War — The World Bank estimates that conflict-driven disruptions to Middle East oil supply of 2mn barrels a day would push oil to $93-$102, 3-5mn barrels a day to $109-$121, and 6-8mn barrels a day to $141-$157, with the largest scenario approaching historic real price peaks. Closure of the Strait of Hormuz would be far worse.
  • US Shale: The Marginal Supplier Matures — The responsiveness of US oil supply to prices has declined and is estimated to be much smaller for publicly traded producers than private ones, with a 10% price increase raising US liquids output by roughly 1%, or 200,000 barrels a day. That implies US supply would offset only about 20-25% of a geopolitical supply shock.
  • U.S. Oil Boom Blunts OPEC’s Pricing Power — U.S. shale drilling and fracking costs have fallen 36% since 2014 even as recovered oil volumes have risen, according to J.P. Morgan. One major producer can now earn as much from $42-a-barrel oil as it once did at $86, while Saudi Arabia's budget is estimated to require $81 a barrel.

AI Summary. The pandemic-era increase in the federal deficit was largely driven by discretionary policy, including major spending bills such as the $2tn Coronavirus Aid, Relief, and Economic Security Act that funded small business support, unemployment benefits, household transfers, aid to state and local governments, and health care. That deficit increase likely acted as a strong tailwind stimulating growth during the recovery.

Brigid Meisenbacher and Daniel Wilson Federal Reserve Bank of San Francisco
Date Posted:

A @sffed analysis argues the fiscal tailwind is fading and going forward fiscal policy will be effectively neutral.

Did discretionary spending drive the deficit increase and boost growth?

Core argument: The pandemic-era deficit increase stemmed largely from discretionary policy, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act and other major spending bills enacted over 2020, with the spending increase especially large in 2021.

What accounts for the large increase in the deficit during the pandemic recession? As Figure 2 implies, [the pandemic] spending increase, especially in 2021, was largely the result of discretionary policy. In particular, several major spending bills, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act, were enacted over the course of 2020. These pieces of legislation included spending on small business support, unemployment benefits, and other household transfers, aid to state and local governments, and health care. To be clear, this spending surge and the resulting “excess” cyclical response of the deficit do not say anything about whether this was good or bad policy. Nonetheless, the large increase in the deficit was likely a strong tailwind to stimulate economic growth during the pandemic recovery.

Takeaways by Macro Roundup® AI

  1. The pandemic-era deficit increase stemmed largely from discretionary policy, including the $2 trillion Coronavirus Aid, Relief, and Economic Security Act and other major spending bills enacted over 2020, with the spending increase especially large in 2021.
  2. Pandemic legislation funded small business support, unemployment benefits, other household transfers, aid to state and local governments, and health care.
  3. The large increase in the deficit was likely a strong tailwind stimulating economic growth during the pandemic recovery, though the spending surge says nothing about whether the policy was good or bad.

Related Articles:

  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

AI Summary. Using US firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in spillovers from publicly funded research and development causes a 0.17% decline in firm productivity growth, with public R&D spillovers about 3x as impactful as private ones and smaller firms gaining most.

Arnaud Dyevre London School of Economics
Date Posted:
Is Database:
Database

New research from @ArnaudDyevre finds a 1% decline in public R&D spillovers caused a 0.17% decline in productivity growth in the United States. Notably, the decline in public R&D can explain a third of the deceleration in TFP since 1995.

How much does declining public R&D spillovers reduce firm productivity growth?

Core argument: Using firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in public R&D spillovers causes a 0.17% decline in firm productivity growth.

Using a unique firm-level dataset with patent and balance-sheet information covering 70 years (1950-2020), I estimate the impact of the decline in public R&D in the US on long-run productivity growth. I first document three new facts about publicly-funded innovations: they are (i) more reliant on science, (ii) more likely to open new technological fields, and (iii) more likely to generate knowledge spillovers, especially toward smaller firms. I then use two instrumental variable strategies–a historical shift-share IV and a patent examiner leniency instrument–to estimate the impact of the decline in public R&D on the productivity of firms through spillovers. I find that a 1% decline in public R&D spillovers causes a 0.17% decline in productivity growth. Public R&D spillovers are three times as impactful as private R&D spillovers for firm productivity and their impact persists at the sector level. Moreover, smaller firms experience larger productivity gains from public R&D spillovers.

Takeaways by Macro Roundup® AI

  1. Using firm-level patent and balance-sheet data spanning 1950–2020, the author estimates that a 1% decline in public R&D spillovers causes a 0.17% decline in firm productivity growth.
  2. Public R&D spillovers are estimated to be three times as impactful as private R&D spillovers for firm productivity, with effects persisting at the sector level and larger productivity gains accruing to smaller firms.
  3. Publicly funded innovations are documented as more reliant on science, more likely to open new technological fields, and more likely to generate knowledge spillovers, especially toward smaller firms.

Related Articles:

  • Moonshot: Public R&D and Growth — Federal R&D investment for the mission to send a crewed mission to the Moon peaked at over 0.7% of GDP for NASA. The authors estimate that NASA research-and-development contractor spending had a local economic impact similar to that of typical government expenditures, and note there is no credible empirical estimate of the space program's contribution to economic growth.
  • Bottlenecks: Sectoral Imbalances and the US Productivity Slowdown — The authors estimate that greater dispersion in productivity growth among an industry's input and idea suppliers has a strong negative effect on that industry's own productivity growth, using data on 462 US manufacturing industries and 42 non-manufacturing industries. Their evidence implies most of the US productivity slowdown can be explained by rising cross-industry variance in productivity growth.
  • The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? — Total factor productivity is the main factor accounting for differences in labor productivity growth across countries and over time, and its growth has been lackluster across large advanced economies since the mid-2000s. The authors find this slowdown appears in both manufacturing and market services, with U.S. productivity growth slowing before the Great Recession.

AI Summary. US consumer price inflation was 0% in a recent month as gasoline prices fell 5%, while core inflation excluding food and energy ran at a 2.8% annualized rate, below expectations. Core inflation still exceeds 3% over three-, six-, and twelve-month horizons, indicating no reacceleration but continued elevated inflation.

Jason Furman @jasonfurman
Date Posted:

Overall CPI inflation was flat in October but remains above 3% Y/Y; the economy slowing might bring inflation back to target without further tightening. @jasonfurman

Is inflation reaccelerating or just staying elevated?

Core argument: Headline CPI was 0% in October as gasoline prices fell 5%, while core CPI excluding food and energy ran at a 2.8% annualized rate, lower than expected, according to Jason Furman.

The CPI data was a pleasant surprise. Headline was 0 inflation in October, which happened because volatile gasoline fell 5%. More important, core CPI (excluding food and energy) was 2.8% annualized in October, lower than expected. Not out of woods: still 3%+ over 3/6/12 months. Looking at core but with new rents instead of all rents you get annual rates of: 1 month: 1.8% 3 months: 1.3% 6 months: 0.8% 12 months: 1.6% (Would caution that I don't expect all rent ever to slow to this extent since marginal rent still above all rent.) Here is overall inflation. Annual rate: 1 month: 0.5% 3 months: 4.4% 6 months: 3.1% 12 months: 3.2%. Overall this is reassuring about no reacceleration of inflation. But it remains true that we've only had two unambiguously good inflation prints in 2-1/2 years (June & July). And IF inflation is running at 3%+ that would mean more work to do. A slowing economy may do that work.

Takeaways by Macro Roundup® AI

  1. Headline CPI was 0% in October as gasoline prices fell 5%, while core CPI excluding food and energy ran at a 2.8% annualized rate, lower than expected, according to Jason Furman.
  2. Core CPI measured with new rents instead of all rents shows annualized rates of 1.8% over 1 month, 1.3% over 3 months, 0.8% over 6 months, and 1.6% over 12 months, with marginal rent still above all rent.
  3. Furman puts overall inflation at annualized rates of 0.5% over 1 month, 4.4% over 3 months, 3.1% over 6 months, and 3.2% over 12 months, counting only two unambiguously good prints in 2-1/2 years, June and July.

Related Articles:

  • Inching Toward Equilibrium — With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.
  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.