Macro Roundup: Week of December 2, 2024

Macro Roundup: Week of December 2, 2024

Summary of Economic Articles & Papers From Ed Conard’s Researchers

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A Visualization of Europe's Non-Bubbly Economy Andrew McAfee The Geek Way

There are only 13 EU-based firms less than 50 years old with a market cap of > $10B, with a combined market cap of $400B. The comparable US cohort is worth $30T, 70x that of its EU equivalent. @amcafee

Of all the [hard-hitting statistics] in the Draghi report, though, the ones that most startled me were in this sentence: “there is no EU company with a market capitalisation over EUR 100 billion that has been set up from scratch in the last fifty years, while all six US companies with a valuation above EUR 1 trillion have been created in this period.” How many arriviste European companies are worth at least $10B (I’m switching from euros to dollars here)? We found 13 EU arrivistes worth at least $10B. The total market cap of this continental treize is about $400B. The US has a large and variegated population of valuable young from-scratch companies. The EU simply doesn’t. The American population of arrivistes worth at least $10B is collectively worth almost $30 trillion dollars — more than 70 times as much as its EU equivalent.SHARE

Related: The Future of European Competitiveness – A Competitiveness Strategy for Europe and Draghi is Trying To Save Europe From Itself and The Economics of Inequality in High-Wage Economies

Why America’s Economy Is Soaring Ahead Of Its Rivals Valentina Romei, William Crofton, and Colby Smith Financial Times

Draghi noted that excluding the tech sector, “EU productivity growth over the past 20 years would be broadly at par with the US.” The US dominates global R&D, and per data from Preqin accounts for 83% of VC funding in G7 economies over the past decade.

US labour productivity has grown by 30% since the 2008-09 financial crisis, more than three times the pace in the Eurozone and the UK. That productivity gap, visible for a decade, is reshaping the hierarchy of the global economy. Economic growth in the Eurozone has been a third of the US’s since the pandemic, and output is set to expand by just 0.8% this year, according to the IMF. Similarly, the economies of Japan and the UK have grown only by 3% over the past five years. In fact, in productivity growth, the US is rapidly outstripping almost all advanced economies. According to data by Preqin, the US accounts for 83% of the amount of VC funding in G7 economies over the past decade. The country also attracted 14.6% of the world’s overall greenfield foreign direct investment in the first 10 months of 2024, according to fDi Markets data — a record high. Germany, by contrast, registered its lowest share of global FDI in 18 years.SHARE

Related: The Future of European Competitiveness – A Competitiveness Strategy for Europe and A Visualization of Europe’s Non-Bubbly Economy and The Economics of Inequality in High-Wage Economies

Cost of Failure and Competitiveness In Disruptive Innovation Yann Coatanlem and Oliver Coste Universita Bocconi

.@YannCoatanlem and @olivercoste find that restructuring costs in the EU are 10x that of the US and argue that “the cost of failure is a first-order factor of Europe’s lag in tech, with major consequences for its competitiveness and standard of living.”

We find that the profitability of high-risk tech companies, associated with high rates of failure, is very dependent on the cost of restructuring, which itself is driven by employment protection legislation. Leveraging a combination of financial analysis, empirical observations, and limited existing literature, we estimate that restructuring costs (that include much more than severance packages) are approximately 10 times higher in countries with high labor protection, such as in Western Europe, than in countries with low labor protection such as in the United States. We show that this cost differential translates into lower returns on capital in tech industries and confirm that impact empirically. We explain that the cost of failure is a first order factor of Europe’s lag in tech, with major consequences for its competitiveness, its standard of living and its security. A key insight is that restructuring costs matter even if they apply only to larger enterprises because the high return from the few winners materializes only once they become larger.SHARE

Related: A Visualization of Europe’s Non-Bubbly Economy and The Future of European Competitiveness – A Competitiveness Strategy for Europe and The Economics of Inequality in High-Wage Economies

Can Trump Reduce the Trade Deficit? Paul Krugman Stone Center on Socio-Economic Inequality

.@paulkrugman offers a novel mechanism by which Trump’s tariffs may reduce US trade deficits. “A tariff-ridden world would also be a world with greatly reduced capital flows,” and “net capital flows are the counterpart of imbalances in physical trade”.

My main new argument here is that a tariff-ridden world would also be a world with greatly reduced capital flows; since the U.S. trade deficit is the counterpart of large capital inflows, a global reduction in capital mobility would also squeeze our trade deficit, although it would largely do so by reducing overall investment in the U.S. economy. The amount by which the exchange rate must appreciate to accommodate a given inflow of capital depends on how many goods are tradable. If only a small part of production can be exported and a small part of consumption imported, you’d need a very, very strong dollar to produce the kind of trade deficits America currently has. And because what goes up must eventually come down, a U.S. economy with limited trade would be unable to attract foreign investment at current rates. To the extent that [trade deficit reduction due to tariffs] succeeds, it will be for bad, economically destructive reasons: damaging the world trading system will also greatly damage international capital markets.SHARE

Related: The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States and Fiscal, Macroeconomic, and Price Estimates of Tariffs Under Both Non-Retaliation and Retaliation Scenarios and A User’s Guide to Restructuring the Global Trading System

Is The Great Stagnation Actually Just a 'So-So' Stagnation? Maxwell Tabarrok Maximum Progress

.@MTabarrok argues that “zero improvement in the population average score” in math and reading since the 1970s implies that growth accounting has overestimated growth in human capital, understating 2023 TFP relative to its post-1973 trend by up to ?.

Math and reading scores on tests that have been surveyed over longer periods also show essentially zero improvement in the population average scores. The average score on the reading test in 1971 was 255 out of 500, in 2023 it was 256 and math scores went from 266 to 271. Educational attainment has risen by 3+ years since 1970s but population level reading and math scores have barely changed, and scores within educational attainment groups have fallen. As more people are pushed through lowered standards to a high school diploma, the wage premium to this degree has fallen, suggesting that much of its value was in the differentiating signal rather than skill gains. If this story is true, and more education hasn’t been raising productivity, then all the GDP growth we thought was due to more skilled workers is actually coming from somewhere else. That means we’ve been undercounting TFP, and technological progress for decades. If we take the SF Fed TFP data and remove the adjustments they make for gains in human capital (based mostly on rising educational attainment), we get something that looks like this. The Great Stagnation is shrunk by about a third!SHARE

Related: Productivity During and Since the Pandemic and Marginal Returns to Public Universities and Toward An Understanding Of The Returns To Cognitive Skills Across Cohorts

Foreign Economic Policy Uncertainty and U.S. Equity Returns Mohammad Jahan-Parvar, Yuriy Kitsul, Jamil Rahman et al. Federal Reserve Board

Federal Reserve research finds that an increase in foreign economic policy uncertainty is associated with excess US stock returns over the following 6-12 months. These excess returns are attributable to news about cash flows rather than discount rates.

The policy uncertainty index combines news article counts in 21 countries that reflect uncertainty about a broad range of policies, including those by fiscal and monetary authorities, but also the potential economic effects of policies that are not traditionally viewed as economic, such as military actions. We document that foreign economic policy uncertainty [EPU] has significant incremental predictive power for excess U.S. stock returns both in aggregate and for returns of portfolios constructed on firm characteristics, for 6 to 12-months-ahead horizons. We find that [unlike US domestic EPU shocks] foreign EPU shocks operate through a cash-flow news channel; they do not affect discount rates or equity premia. Aggregate credit demand and investment outlays respond significantly to an adverse foreign EPU shock. Corporate investment outlays, payouts, and aggregate credit demand decline in response to such a shock.SHARE

Related: United States’ Changing Net IIP and The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks

Eight Questions—and Some Answers—on the US Fiscal Situation Jason Furman Aspen Economic Strategy Group

.@jasonfurman argues that stabilizing the debt by 2034 will require $2-11T of fiscal consolidation over the next ten years, or 0.7-4.6% of GDP.

To understand this table, start with the CBO forecast and current law. Under these parameters, a combination of tax increases and spending cuts would need to total 2.5% of GDP annually to stabilize the debt. If this measure went into effect in 2034, then the debt would stabilize at 122% of GDP. The exact dollar figure of these required figures over the ten-year budget window used in Washington policy debates depends on the time path; the table shows the ten-year total—assuming that savings are linearly phased in from the first year to the full $1T in 2034—of $6T. Assuming higher productivity growth reduces these fiscal gaps, but some adjustment is still needed. This requirement is consistent with the observation that debt is still rising as a share of GDP even with productivity growth 0.5pp higher. If interest rates are higher, then an even larger fiscal adjustment is necessary. Under current policy, the tax cuts will be extended, adding about 1.6% of GDP to the needed adjustment. Overall, the needed fiscal adjustment ranges from 0.7% of GDP to 4.6% of GDP—which, if phased in, would amount to $2 to $11T over the ten-year budget window.SHARE

Related: Long-Term Interest Rates, Fiscal Policy, And The Term Premium and As the Fed Cuts Rates, Treasury Yields Are Rising and Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle

Also Noted

An experiment in which a non-profit gave low-income Americans a tax-free $1k/month for 3 years showed little effect on political engagement, conservatism, or trust in democratic governance, but some increased belief in the value of work. @AlexBartik

The breakeven price per barrel in the Permian Basin has fallen from $90 in 2012 to $40. AI tools could generate a further drop, helping the industry reach its “holy grail” a recovery rate of over 10%.

Since 2021 Danish GDP has grown 3.6%, but excluding Novo Nordisk’s GLP-1 drugs Ozempic and Wegovy growth would have been flat. Danish corporate income tax receipts are up 50% from pre-Covid levels. @JosephPolitano

Biden’s Inflation Reduction Act passed without a single GOP vote, but the lion’s share of the act’s spending is in Republican congressional districts, complicating repeal. Critics may target scaling back federal clean energy tax credits.

From 1930-90, the market capitalization of the top 50 US companies was dominated by firms founded in the 19th century. Since 1990, the market cap from companies founded after WWII has risen from 8% to 77% in 2024. @amcafee