Macro Roundup: Weekly

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

Week of September 30, 2024

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The Great “Transfer”-mation Kenan Fikri, Sarah Eckhardt and Benjamin Glasner Economic Innovation Group

Transfer payments made up 18% of all US personal income in 2022, up from 8% in 1970. Social Security/Medicare made up 56% of the increase from 1970 to 2022, and income maintenance programs/Medicaid accounted for 35%. @kenanfikri @BenGlasner

Transfers’ share of Americans’ total personal income has more than doubled over the past 50 years, from 8.2% in 1970 to 17.6% in 2022. They are the third largest source of Americans’ personal income, after income from work and investments. The average American received $11,500 in income from government transfers in 2022, compared to $40,500 in income derived from work and $12,900 from investments. Today, most U.S. counties depend on a level of government transfer income that was once reserved only for the most distressed places. In 1970, not even 1% of counties derived a quarter or more of their total personal income from transfers. In 2000, just 10.4% did. But by 2022, 53% of counties were receiving a quarter or more of their income from transfers. Increasing participation (as populations age) and rising underlying costs (driving up the expense of health-related programs, in particular) are the most significant factors at play. Income maintenance programs only account for 11.4% of the real increase in transfers from 1970 to 2022. In stark contrast to the rising elderly share of the population, the poor share has been stable.

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Related: The Distribution of Household Income in 2021 and The Impact of Unconditional Cash Transfers on Consumption and Household Balance Sheets: Experimental Evidence from Two US States and Welfare Is What’s Eating the Budget

Americans Are More Reliant Than Ever on Government Aid Aaron Zitner, Jon Kamp, and Brian McGill Wall Street Journal

In the 2000 presidential election, of the 317 counties that received transfers equal to at least 25% of total personal income, 59% voted for the GOP candidate. In 2020, 88% of 1,986 counties voted GOP.

The country hasn’t always been this reliant on government support. In 1970, government safety-net money accounted for significant income in fewer than 1% of America's counties, new research by the bipartisan think tank Economic Innovation Group finds. As America’s population aged, more counties came to count on this government backing for a significant share of their total income. That is defined by EIG, the think tank, as those in which government safety-net and social programs account for 25% or more of personal income in the county. By 2022, 53%—more than half of all U.S counties—drew at least a quarter of their income from government aid.

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Related: The Great “Transfer”-mation and Economic Renaissance or Fleeting Recovery? Left-Behind Counties See Boom in Jobs and Businesses Amid Widening Divides and America Is Uniquely Ill-Suited To Handle a Falling Population

The Effect of Taxes and Transfers On Low-Earning Workers’ Income Scott Winship Economic Innovation Group

Between 1979 and 2022 prime-age men in the bottom quintile saw their inflation-adjusted market income rise 10%, to an all-time high of $22,800/year. Their female counterparts saw their market income rise 63% to $20,300/year. @swinshi

Figure 1 shows four trends in the disposable income of lower-earning men, from 1979 to 2022, after adjusting for inflation. In each case, the focus is on the bottom fifth of working-age men (age 25 to 54), as ranked by their pretax earnings. In all of the analyses here, “earnings” includes not just the pay of employees but self-employment income. Looking at annual earnings rather than hourly pay is useful because, in addition to earnings, the Current Population Survey’s Annual Social and Economic Supplement (CPS ASEC) includes information on a variety of taxes and transfers, measured on an annual basis. Looking at the bottom fifth’s average rather than the 20th percentile of earnings makes it easy to layer on the impact of taxes and transfers.

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Related: Understanding Trends in Worker Pay over the Past 50 Yearsand The Unexpected Compression: Competition at Work in the Low Wage Labor Market and The Great “Transfer”-mation

Surging Business Formation in the Pandemic: A Brief Update Ryan Decker and John Haltiwanger Working Paper

.@JHaltiwanger_UM @UpdatedPriors document the continued high rate of new business formation by “likely employers” since 2020, and argue that “the pandemic and its aftermath featured a surge in genuine entrepreneurial employer business creation.”

Applications for new businesses—including those with characteristics indicative of potential to transition to true employer businesses—surged starting in the summer of 2020. The surge in applications was followed in 2021 with a surge in measures of employer entry, including both establishment and firm creation, consistent with reallocation of economic activity toward pandemic-friendly and high tech industries and the geographic reallocation of activity from city centers to suburbs and from the northeast to the south and sunbelt regions. The high tech dimension has been particularly notable. Establishment births from the BLS Business Employment Dynamics (BED) through 2023:Q4. [which] include new establishments from both entirely new companies and existing firms opening new locations, started to rise late in 2020, rapidly increasing in 2021, and [remaining] elevated even while cooling recently. We provide overwhelming evidence that the pandemic and its aftermath featured a surge in genuine entrepreneurial employer business creation, and we show that measures of business formation have remained elevated relative to pre-pandemic levels even recently—though with clear signs of cooling.

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Related: High Tech Business Entry In The Pandemic Era and Surging Business Formation in the Pandemic: Causes and Consequences?and The Economics of Inequality in High-Wage Economies

US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat Atul Narayan and Alex Greene Bridgewater Associates

Over the last decade, US equities have delivered a 529% total compounded return in dollar terms, vs. 125% for the rest of the developed world. Given current elevated P/E ratios, US companies need about 7% EPS growth to earn a 4% risk premium over bonds.

While the US continues to have significantly better companies, that’s also a lot more priced-in today versus a decade ago. We show the EPS hurdle rate by sector needed to generate a normal level of risk premium for equity investors above the risk-free rate [estimated at 4%.] You can see that US companies need about a 7% EPS growth to clear this hurdle, while other developed equity markets need less than half as much (3%) to achieve the same risk premium. This priced-in hurdle is broad-based across sectors, and with both a higher weight and more aggressive expectations, the burden for outperformance in tech and the Mag 7 specifically is higher than ever. In contrast, even with no earnings growth, Chinese companies should be able to generate a 4% risk premium over Chinese bonds—in other words, a very high-risk premium is priced into Chinese stocks today.

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Related: Which U.S. Stocks Generated the Highest Long-Term Returns? and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns

U.S. Immigrant Population in 2023 Saw Largest Increase In More Than 20 Years John Gramlich and Jeffrey Passel Pew Research Center

A @pewresearch analysis finds the immigrant population of the US increased by 1.6mm in 2023 to a record 47.8mm. Their 14.3% share of the population is approaching the 14.8% peak of 1890.

The number of immigrants living in the United States increased by roughly 1.6 million people in 2023. That marks the largest single-year increase in the nation’s immigrant population since 2000, according to a Pew Research Center analysis of recently published data from the U.S. Census Bureau. Overall, a record 47.8 million immigrants lived in the U.S. in 2023, up from 46.2 million in 2022. The nation’s immigrant population includes naturalized U.S. citizens, lawful permanent residents, and lawful temporary residents, as well as unauthorized immigrants. While the number of immigrants in the U.S. reached a new record high last year, their share of the population remained below the all-time peak. Immigrants accounted for 14.3% of the total U.S. population in 2023 – up roughly threefold from 4.7% in 1970, but still below the record high of 14.8% in 1890.

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Related: Without Immigrants, US Working-Age Population Would Shrink and The Cost of Illegal Immigration and The Demographic Outlook: 2024 to 2054

Trade Intervention for Freer Trade Michael Pettis and Erica Hogan Carnegie Endowment For International Peace

China comprises 17% of global GDP but 29% of manufacturing and 13% of consumption while the US is 26% of GDP, 16% of manufacturing, and 26% of consumption. @michaelxpettis favors capital controls over tariffs to correct these imbalances.

The best response would be for the United States to intervene to reverse the beggar-thy-neighbor policies of surplus nations. This could be achieved either through restrictions on the ability of surplus countries to dump goods into the U.S. economy, for instance via the imposition of tariffs, or through restrictions on their ability to dump excess savings into the U.S. financial system, notably by taxing capital inflows. Neither approach is a perfect antidote. A system of uniform tariffs, for instance, risks imposing the same costs on countries that are more and less aggressively mercantilist. A more direct and focused alternative to tariffs is to reintroduce capital controls. Capital inflows could be controlled through a number of mechanisms, including taxes, volume restrictions, bank reserve requirements, government approvals for transactions, and limitations on investor eligibility. An effective capital inflow regulation regime would need to be flexible, allowing for benign, temporary trade imbalances that balance an increase in productive investment while penalizing short-term and speculative inflows.

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Related: The Dangerous Myth of Deglobalization and Brazil, India, and Mexico Are Taking on China’s Exports and China’s Excess Savings Are A Danger

Also Noted

Data centers used 26% of Virginia’s total power consumption in 2023; nationwide data centers could use 9% of US electricity by 2030 according to the Electric Power Research Institute.

Michael Cembalest @JPMorgan notes that the residential electricity price in CA is >3.5x that of China/India; TX is 2x. US electrical prices have risen vs China and India as renewables’ share of final energy consumption has grown to 8% from 4% in 2010.

In August, the labor force participation rate for women aged 25-34 hit a record 78.5%. The male rate for that cohort was 89.1%, which implies 700,000 fewer male workers than would their 2004 participation rate.

55% of US women aged 18-29 identify as a “feminist” relative to 41% aged 30-49, 38% aged 50-64, and 35% aged 65+. 31% of US men aged 18-29 identify as a “feminist,” for a 24pp gender gap. @dcoxpolls

The CDC reported that the cluster of possible bird flu infections in Missouri has expanded to 8 people in what may be the first known person-to-person transmission of the virus in the US.