Macro Roundup: Week of October 14, 2024
Summary of Economic Articles & Papers From Ed Conard's Researchers
Week of October 14, 2024
On the Nature of Entrepreneurship?Anmol Bhandari, Tobey Kass, Thomas May, Ellen McGrattan and Evan Schulz?National Bureau of Economic Research
Using 2000-15 IRS data on 108mm self-employed Americans, Anmol Bhandari and team find the self-employed “have significantly higher average income and steeper, more persistent income growth profiles” than paid-employed peers with similar characteristics.?
We use US administrative tax data to assemble a novel longitudinal database of pass-through business owners—one that is suitable for analyzing patterns of income growth and determinants of entrepreneurial choice for a large population of self-employed individuals. Collectively, pass-through owners, including sole proprietors, partners, and S corporation owners, account for over 50% of all business net income in the United States and have been central to studies of entrepreneurship. Once we include all dollars earned in self-employment, we do not find strong evidence of inordinate risk, high startup costs, or non-pecuniary motives, and, on average, we find the self-employed have much steeper income growth profiles than paid-employed peers with the same characteristics. Overall, education and skill levels are similar for self-and paid-employed, but there are notable differences in their primary industries. We find that more than half of the self-employed population are in construction, professional services, health care, and other services, which is a considerably higher fraction than for the paid-employed.?
Related:?Stock Market Wealth and Entrepreneurship?and?Immigrant Entrepreneurship: New Estimates and a Research Agenda?and?Top Talent, Elite Colleges, and Migration: Evidence from the Indian Institutes of Technology
The American Economy Has Left Other Rich Countries In The Dust?Simon Rabinovitch and Henry Curr?The Economist
Between 1990 and today, the US share of G7 GDP increased from 40% to ~ 50%. Mean wages in Mississippi, the poorest state in the US, are higher than mean wages in the UK, Canada, and Germany. @S_Rabinovitch @currhenry?
In 1990 America accounted for about two-fifths of the overall GDP of the G7 group of advanced countries; today it is up to about half On a per-person basis, American economic output is now about 40% higher than in Western Europe and Canada, and 60% higher than in Japan—roughly twice as large as the gaps between them in 1990. Average wages in America’s poorest state, Mississippi, are higher than the averages in Britain, Canada, and Germany. America’s outperformance has accelerated recently. Since the start of 2020, just before the covid-19 pandemic, America’s real growth has been 10%, three times the average for the rest of the G7 countries. Among the G20 group, which includes large emerging markets, America is the only one whose output and employment are above pre-pandemic expectations, according to the International Monetary Fund.?
Related:?The Future of European Competitiveness – A Competitiveness Strategy for Europe?and?Europeans ‘Less Hard-Working’ Than Americans, Says Norway Oil Fund Boss?and?Draghi is Trying To Save Europe From Itself
Global Strategy Views: Diversify to Amplify?Peter Oppenheimer, Sharon Bell, Lilia Peytavin and Guillaume Jaisson?Goldman Sachs
A @goldmansachs analysis notes the largest American firms account for 18% of the value of the global equity market, and argues that “this increased concentration has reflected extraordinary profit growth rather than speculative exuberance.”?
Equity markets have become increasingly concentrated at the stock level. This is most obvious in the US, where the biggest 10 companies account for around just under 20% of the value of the global equity market, and the top 5 companies roughly 15%. Encouragingly, the valuations of large cap Technology remain much lower than we have seen in previous bubble periods. However, many of the dominant Technology companies are shifting away from their capital-light, highly scalable business models and are increasingly capital-heavy. There is rising uncertainty over whether these companies can generate the future returns on these investments that is reflected in their current valuations. History suggests that the companies that build the underlying infrastructure in technology revolutions are often not the main beneficiaries (think of the Telecom companies during the late 1990s compared with the app-based businesses that emerged later and were able to benefit from the capex that had been built and paid for by others).?
Related:?AI: To Buy, Or Not To Buy, That Is The Question?and?Which U.S. Stocks Generated the Highest Long-Term Returns??and?Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks
Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation?Michael Mauboussin and Dan Callahan?Morgan Stanley
.@mjmauboussin reviews ROIC from 1963-2023 including adjustment for intangibles, and finds that “the variance within industries is greater than the variance across industries. The industry is important but does not dictate a firm’s destiny.”?
Industries that create value in the aggregate nonetheless have companies that have neutral and negative [return on invested capital (ROIC) vs. weighted average cost of capital (WACC)] spreads. And industries that destroy value in the aggregate still have companies that create value. Exhibit 40 shows ROIC by industry from 1963 to 2023. There are a couple of important takeaways. First, the variance within industries is greater than the variance across industries. This underscores that the industry is important but does not dictate a firm’s destiny. All industries have companies that create and destroy value. The second takeaway is that adjusting ROIC for intangibles tends to pull the very high and very low ROICs toward the middle. The median and average ROICs are similar for both the traditional and adjusted calculations, but the distribution has less variance following the modifications.?
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Related:?Valuation Multiples?and?Which U.S. Stocks Generated the Highest Long-Term Returns??and?Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks
Fiscal, Macroeconomic, and Price Estimates of Tariffs Under Both Non-Retaliation and Retaliation Scenarios?Ernie Tedeschi?Yale University
.@ernietedeschi analyzes Trump’s proposed tariffs, both with and without retaliation, and projects $1.2-$4.4T in revenue over 10 years, a 0.5-1.4% decline in real GDP, and a $1.9-7.6k decline in average real disposable income per household.?
The tariff proposals modeled raise between $1.2 to $4.4 trillion over 10 years under conventional assumptions or 0.3 to 1.2% of average GDP. When other countries retaliate against US tariffs, that lowers US tariff revenue relative to the same proposal under a no-retaliation scenario by 12-26%. Tariffs also initially raise the level of consumer prices by 1.2 to 5.1%. This represents between a tenth and a third of the price level increase experienced over 2020-2023. The loss in average disposable income from these price increases would be the equivalent of $1,900 to $7,600 per household in 2023 dollars. Most of this analysis assumes conventional assumption of fixed US aggregate economic activity, we also present some partial estimates of dynamic effects on the size of the US economy from the various tariff proposals. In the medium term, real US GDP contracts by between -0.5 to -1.4%.?
Related:?Trade Intervention for Freer Trade?and?He Helped Trump Remake Global Trade. His Work Isn’t Done?and?Only Trump Can Make America European
Immigration and the Macroeconomy After 2024?Wendy Edelberg, Cecilia Esterline, Stan Veuger and Tara Watson?Niskanen Center
.@WendyEdelberg, @stanveuger, and @CecEsterline estimate that the four-year growth in the total civilian non-institutionalized population over age 16 could range from 5mm to 15mm, depending on the impact of the election on immigration.?
In our Harris, high scenario net migration is 3.7mm in 2025, whereas in the Trump, low scenario net migration is negative 740,000. Each of these scenarios for net immigration flows has different consequences for the U.S. economy. The cumulative growth in the total civilian non-institutionalized population over age 16 (CNIP) over four years, including both U.S.-born and foreign-born people, could be as little as 5mm people or as many as 15mm people depending on the scenario. For comparison, continuation of average CNIP growth between January 2000 and January 2024 would suggest a four-year gain of 9mm people. We project a gap in 2025 GDP growth between the Trump, low, and Harris, high scenarios of roughly half a percentage point from differences in immigration policy (meaning that GDP in 2025 would be lower in the Trump immigration scenario than in the Harris scenario by around $130B).?
Related:?How Immigration Remade the U.S. Labor Force?and?U.S. Immigrant Population in 2023 Saw Largest Increase In More Than 20 Years?and?The Cost of Illegal Immigration
The Political Transformation of Corporate America, 2001-2022?Reilly Steel?Columbia Law School
Between 2001-22 both CEOs and senior corporate managers shifted left ideologically. The gap between centrist CEOs and left-leaning senior managers increased significantly. @reillysteel argues corporate America is not red or blue; “it is purple.”?
Tracking contribution-based measures of corporate director and executive ideology over time [CF Score], I find that between 2001 and 2022, the average ideology of these individuals moved meaningfully to the left, starting from a modest conservative tilt and eventually landing around the middle. Unlike measures based on voter registration or the proportion donated to each party, the CFScore measure allows for distinctions within parties—such that a donation made to a progressive Democrat like Alexandria Ocasio-Cortez would be treated differently from a donation to a conservative Democrat like Joe Manchin. This leftward shift is large relative to the ideological distribution of corporate elites, amounting to about 42% of a standard deviation. The average ideology of the people who run America’s largest companies has become considerably more liberal. Contrary to the perception that the left has taken over big business, however, conservatives still remain common in the ranks of corporate elites. Corporate America is thus neither red nor blue; it is purple.?
Related:?The Market for CEOs: Evidence from Private Equity?and?Disconnected: The Growing Class Divide in American Civic Life?and?The Road to A Political Realignment in American Politics
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