Friday, December 12, 2014

Pledgeable Vanguard accounts

When I see houses, I see collateral.

It's good for regular people to have access to some good collateral. Without good collateral, it's very costly to respond to income shocks, emergency spending needs, or an awesome business idea. You may have to resort to credit card borrowing or even payday lenders. So this is one point in favor of owning a house: it gives you a way to accumulate collateral--so emergency borrowing isn't insanely expensive--while also providing you with housing services and a way to accumulate wealth with a little leverage.

But a house is a really weird asset! Is it really optimal to have housing be the only source of collateral for regular people? I have wondered this for a long time. If housing is the only source of good collateral, I'm going to devote a lot of saving to the accumulation of housing when it might be better if I could devote that saving to more diversified assets with higher returns. But I don't have an easy way to use my Vanguard account as collateral. I don't mean for margin trading, which is way beyond my risk tolerance. I mean I want to be able to use my portfolio to take on some uncallable debt. Unlike a house, my Vanguard account is intentionally structured in a way that minimizes exposure to idiosyncratic risk. It seems like it would make pretty good collateral, particularly over a multi-year period. We could even stick to real estate and focus only on the REIT fund if you think stocks are too risky or whatever. But, to my knowledge, there's no way for me to pledge my Vanguard portfolio. The closest thing I can think of is the rule about taking out loans against a 401k, which is very costly.

So, for regular people, financial assets are not pledgeable. Why?

Joshua Brown reports on an "exploding" trend among wealth management providers:

Wealth management clients of the wirehouse firms keep millions of dollars in their taxable brokerage accounts, predominantly invested in stocks, bonds, and mutual funds. Advisors at the firm are encouraged to convince their clients to borrow against these holdings. Clients are offered an ultra-low interest rate, typically between 2% and 5%. And they can borrow between 50% and 95% of their portfolio’s equity (cash) value, with the bond-equity mix of the account being the primary determinant of the loan’s size.

The only rule is that clients cannot use the loaned funds to purchase additional securities, like a margin loan. Instead, these borrowings are meant to allow clients to smooth out cash flow at a small business, fund the purchase of artwork and real estate, or refinance higher-rate loans like mortgages. The beauty of securities-based lending is that these are not underwritten loans nor do they require extensive due diligence because the assets are already sitting there at the firm and public securities are thought to be extremely liquid.

This is what I'm talking about! So it's a thing, but apparently it's only available to really wealthy people. Moreover, Brown describes a bunch of other problems with it. Apparently the loans are typically callable, so the lender can liquidate the collateral at will. And there are likely some systemic risks associated with the way this is being done (sort of like, you know, home equity borrowing).

So this isn't quite what I'm looking for. Housing will still carry a large liquidity service yield. If I want to accumulate a lot of collateral, it means accumulating a lot of housing inventory--maybe even more housing inventory than I need. Practically every homeowner I know holds more housing inventory than they need. That's like owning a stock but throwing away half of the dividends. But it's a pretty natural outcome when housing is seen as the best mechanism for accumulating wealth and collateral (obviously that's not the only reason people accumulate extra housing). I would rather live in a house that provides exactly the amount of housing service I need--and put my excess savings in other assets whose production I can capture in its entirety. That strategy would be less costly if my Vanguard account were pledgeable.

The aggregate consequences are less clear. Brown argues that the current trend toward collateralizing financial assets for rich people causes systemic risk. But if financial assets became pledgeable, maybe people would live in houses that are less leveraged. The net effect on systemic risk isn't clear. It might also free up resources that are currently tied up in unproductive spare bedrooms, providing more savings for productive assets. Maybe the quantitative magnitudes on that notion are pretty small. But the point is: It's not obvious to me why we have a system that so dramatically favors housing as collateral.

UPDATE: My friend Jared Larsen points me to some details about a similar service provided by Charles Schwab. The minimum credit line is $100,000, so it will still be mostly available to the well-to-do. You can borrow up to 70% of the value of the collateral. The line is subject to collateral calls, and CS can sell your collateral without your consent (or even awareness). This is available in taxable accounts. So I find this pretty interesting--the thing I'm asking for is available, more or less, but I wish it were available at smaller dollar amounts.

Wednesday, December 10, 2014

Tabarrok on business dynamism

Last week's Cato growth forum included a session on declining business dynamism, which included presentations by John Haltiwanger, Amar Bhide, and Alex Tabarrok. Alex focused on the question of whether we should care about this. See his MR post here; some key points he makes:

1. More regulated industries are not less dynamic (he shows this by plotting a measure of industry-level dynamism against a measure of regulatory burden).

2. Entrepreneurship is not necessarily good. Poor countries are full of entrepreneurs of necessity. They have no better options.

3. Old firms are very entrepreneurial. The good ones are constantly reinventing themselves. Think of Ford, Zara, or Apple.

4. Increasingly, what matters is global dynamism. Looking at national statistics is not enough.

Point 1 has made everyone's job very difficult. It is very hard to find a smoking gun in terms of policy. That said, we should not overinterpret Alex's result. In most of the work on this topic, people look within industries because regulatory burden is not the only way industries differ. My prior is that, in many industries, other differences swamp regulatory differences. I would be more persuaded by time series evidence--for example, have the industries that have seen large changes in regulatory burden also seen large changes in dynamism (of the appropriate sign)? Davis and Haltiwanger describe evidence on the effect of certain labor market regulations, like occupational licensing and various worker protections, but as they say more work is needed.

Point 2 is a good one, and in my work with John Haltiwanger, Javier Miranda, and Ron Jarmin, we mention this frequently. This was also Noah Smith's first reaction--declining mom-n-pops doesn't hurt productivity. But as we show in more recent work, it's not just low-productivity entrepreneurs that are going away. We are seeing fewer high-growth firms.

I like Point 3. I know there is work being done on this avenue, including by us. What if creative destruction is being brought inside the boundaries of older firms? In terms of Alex's exposition, what we would want is some reason to think that the reinvention he mentions is going on more now than it was 30 years ago. A related hypothesis is the notion that startups get acquired soon, so their high growth happens inside other firms. I should also note that almost all of the good data on firm growth are based on employment, because that is easy to measure (at least for privately held firms). So that matters too--what if firms are more dynamic now but it shows up somewhere other than employment? At least among public firms, though, we do see these trends (speaking of gross job flows) in sales data as well as employment.

Point 4 is good too. I know people are researching this point as well. There are a few ways to think about it, so I think it's a question with an answer.

Sunday, December 7, 2014

Feynman on living standards

I started to say that the idea of distributing everything evenly is based on a theory that there's only X amount of stuff in the world. . . . But this theory doesn't take into account the real reason for the differences between countries--that is, the development of new techniques for growing food, the development of machinery to grow food and to do other things, and the fact that all this machinery requires the concentration of capital. It isn't the stuff, but the power to make the stuff, that is important. But I realize now that these people were not in science; they didn't understand it. They didn't understand technology; they didn't understand their time.

From Surely You're Joking, Mr. Feynman, page 283 in my paperback copy. What would Feynman think of this physicist? (I don't know).

Monday, December 1, 2014

My five favorite books of 2014

image source


Here are 2013 and 2012. As usual I will limit myself to books that were published somewhat recently. My favorites, in no order:

1. Dam Nation, Stephen Grace (2012). This book is truly superb. I mentioned it here. This is a history of water in the western US, a topic I find endlessly fascinating (see posts). It is short and readable.

2. Junkyard Planet, Adam Minter (2013). I mentioned this here. This is a very readable, very interesting description of the global scrap industry. The story is told as a series of anecdotes, primarily in the US and China. This book is very engaging--it will not bore you.

3. Ninety Percent of Everything, Rose George (2013). This is an extended anecdote about the shipping industry. Basically the author rides on a container ship. I found it immensely entertaining and informative.

4. Capital, Thomas Piketty (2014). My review is here (yes, I did read the whole thing). This book's fans were often confused about which claims were empirical and which were speculative. FT/McKinsey awarded Capital for being an "epic analysis of the roots and consequences of inequality," which makes me wonder if anyone at FT or McKinsey actually read the book (very little "roots" analysis and zero "consequences" analysis). The book focused entirely on the world's richest 20 percent, and it largely ignored both the literature on the consequences of inequality and the literature on optimal taxation. But I liked the book--data firehoses provide huge benefits to economics. Between the data and the instructive nature of its omissions, Capital is a very valuable contribution to the economics and policy debate--and I found it to be quite readable.

5. Big Ideas in Macroeconomics, Kartik Athreya (2014). My review is here. Unlike Noah Smith, I found this book extremely useful and believe it should be required reading for any person who wants to engage in debates about methodological issues in macroeconomics but does not want to learn the math. It is not a casual read, but those who aren't willing to give it a shot should rethink their confidence level on macro methods topics. I also highly recommend the book to grad students who want more intuition for the models. It is also a great literature review. This book deserves far more attention than it has received.


I did not read House of Debt; I am already pretty familiar with the authors' excellent research, and I find it reasonably persuasive. Due to their blogging efforts, though, I have assumed that Mian and Sufi include a lot of the wrong complaints about the macro field that always drive me nuts, so I decided to pass on it (you spend three years writing a het agent job market paper then see how you feel when someone says macroeconomists ignore distributions). I hate that selling a book in econ apparently depends on telling readers that everyone else in the field is an idiot.

I am in the middle of Geithner's book; it is mostly fine, but I think we all have financial crisis play-by-play fatigue (though I will definitely read Bernanke). I also have a hard time with memoirs--they feel so folksy, yet I can't help but imagine the ghost writer behind the scenes. I do plan to read Fragile by Design but may not get to it for a few more months (I have been working through Caro's LBJ series and want to make some more progress soon). I am also tentatively planning to get to Martin Wolf's book. I find plenty of older books that I want to read, so I don't always keep up with new releases very well.

Wednesday, November 19, 2014

BED: 6.9 million jobs created, 6.5 million destroyed in Q1 2014

This is not a great report. From the BLS:

From December 2013 to March 2014, gross job gains from opening and expanding private sector establishments were 6.9 million, a decrease of 440,000 jobs from the previous quarter, the U.S. Bureau of Labor Statistics reported today. Over this period, gross job losses from closing and contracting private sector establishments were 6.5 million, a decrease of 94,000 jobs from the previous quarter.

This release incorporates the BED annual revisions, but I am not seeing any changes.

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroying by shrinking or closing establishments.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting business establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1

Figure 2

Reallocation at the extensive margin dropped pretty noticeably in early 2014. Most of the drop was driven by a decline in entry. This helps explain some other economic data we saw in early 2014.

Next, the intensive margin. Figure 3 reports employment flows from expanding and contracting establishments, and Figure 4 reports establishment counts for these categories (click for larger images).

Figure 3

Figure 4


At the intensive margin we see a slight decline in reallocation, but clearly the overall numbers are being driven by the entry margin. There was a collapse in new establishment formation in early 2014.

This is not a great report, but it's too early to assume that we are starting a bad trend. The jobs from entry number has fallen to levels we saw in 2012, which weren't terrible at the time. But I would say that those who think a revival in new businesses is right around the corner will have to keep waiting.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). For policymakers, it matters whether job market problems are being driven by establishment turnover or job flows in existing establishments. In my (hasty) view, these latest numbers suggest cause for minor concern about the entry margin.

More broadly, these data help dissuade us from thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms and reallocation proceeds at a high pace. In my view this complicates macro analysis somewhat, rendering simple "aggregate demand/supply" heuristics somewhat tricky.

Some previous BED posts are here.


*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.

The BLS effectively expanded the sample definition in the first quarter of 2013. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run. See BLS discussion here, on the bottom of the page ("Administrative Change Affecting...").

It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.

These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.

Tuesday, November 4, 2014

Business opinion and the representative firm

Here's Paul Krugman:

Business leaders often give remarkably bad economic advice. . . . Success in business does not seem to convey any special insight into economic policy. . . .
National economic policy, even in small countries, needs to take into account kinds of feedback that rarely matter in business life. For example, even the biggest corporations sell only a small fraction of what they make to their own workers, whereas even very small countries mostly sell goods and services to themselves.

The suggestion that business experience conveys no special economic policy insights is, frankly, totally absurd. It's way too easy for economists to say "Only we economists can truly understand the economy" when there are people who interact daily with capital and labor markets, forecasts, pricing, and policy. But Krugman has a good point about considering feedback, which is not likely to be something that business people are used to doing.

But the biggest problem, which Krugman does not mention, is that people who run businesses are inclined to think (or at least say) that the best economic policy is the one that helps their business. A recent example that comes to mind is Dow Chemical's ongoing effort to secure a ban on natural gas exports. Since it would be bad form to write an op-ed openly arguing that policy should be made to privilege your personal interests, we have Andrew Liveris (the CEO) making up some bad economics to portray the idea as being in the "national interest." The op-ed is a fantastic specimen. It has the usual misguided obsession with manufacturing and some standard sloppy counterfactuals about job creation. I really love the part where he blames 1990s energy price volatility on letting energy markets be driven by "legislation instead of market forces" in the context of his request for anti-market legislation. But this selfless champion of the public interest is spending big money to secure the policy.  Liveris probably has a better understanding of economics than his arguments would suggest, but he will always advocate policies that help his company (like any good CEO).

This problem generalizes because the data on firm dynamics tell us that there is no representative firm. Everyone knows this, but the representative firm intuition is really hard to shake--particularly in political dialogue. There is no business person or union or advocacy group whose interests are representative of "business" or "workers," let alone representative of the economy as a whole. In a given month, the net jobs number is just a residual object, the difference between jobs created by business expansions and jobs destroyed by contractions. It's a very small number compared with the gross flows, which means that there is massive heterogeneity among firms.

Firm dynamics also makes a lot of arguments quantitatively silly. Liveris cites a BCG study finding that some sort of manufacturing renaissance will create 5 million jobs (whatever that means); he also claims that high gas prices in the 1990s destroyed 300,000 jobs. But every quarter, US establishments both create and destroy 6 to 7 million jobs. Every month we have hires and separations in the vicinity of 4 million. The forces that cause daily, pedestrian reallocation absolutely dwarf anything you can accomplish with a specific policy, whether it's immigration policy or natural gas export policy. With so many jobs being destroyed by idiosyncratic shocks, it's hard to justify any policy that is designed to protect a few hundred thousand jobs in a specific industry.

So I think that when a prominent business person prescribes policy, we should first ask how likely it is that their prescription is based on their own narrow interests. Then, we should ask if their narrow interests have any hope of being representative of the Social Planner's problem. If they're talking about a couple million jobs over a few years, chances are that the Social Planner just wouldn't care.

Friday, October 24, 2014

Homeownership and student debt

I really like this article on student debt and homeownership because it covers a few things that I think about often.

Soft entry-level housing demand has fanned fears that rising student loan burdens may be crimping home purchases.

Fears among whom? I think I may buy a home in the next few years, so I'd love it if something "crimps" home purchases, perhaps making prices lower for me. This illustrates a broader point about housing, which is that coverage of housing markets is typically written in terms of the interests of people who like high house prices--home builders, incumbent home owners, and realtors. Recall that the housing crisis wasn't a crisis for everyone; I know people who bought houses at the bottom of the market. They didn't mind that home purchases were "crimped" at the time.*

But new data suggests that student debt may lead young adults to defer homeownership rather than skip out on it entirely. Moreover, the housing market may face a greater drag in the long run from weaker homeownership among adults that don’t attend college, especially if income prospects don’t improve for those who don’t go.

So the housing market faces "drag" if homeownership rates decline. This claim is probably true, but it's a bit misleading. People have to live somewhere--even non-homeowners. Homeownership rates only affect the amount of new housing sold to the extent that renters and owners live in different types of housing. If I don't buy housing, Blackstone will. Maybe it shifts composition toward smaller houses and apartments (though with other amenities), and probably it affects the fortunes of realtors, but as long as people are forming households we're going to need to build residential structures. And if there's a household formation issue, let's call it that instead of worrying about homeownership specifically.

More generally, like most popular dialogue the unstated assumption here is that homeownership is "good". Someone tweeted about the American Dream when linking this article. I'm already on the record suggesting that the American obsession with homeownership is a little weird.

Here's a chart from the article:



So the difference in ownership rates between college grads with debt and college grads with no debt is minuscule compared to the difference in ownership rates between college grads and non-college grads. Grads with debt take a bit longer than grads with no debt, but by age 28 the debtors look more like other college grads than non-grads.

Homeownership and student debt are similar in that they both receive a ton of political attention (and subsidies), and they both are mostly about rich people. Speaking relatively, poor people don't own houses and don't go to college. I have heard many people say that financial crisis policies should help homeowners instead of rich bankers, but I never heard anyone say that financial crisis policies should help renters instead of rich homeowners.** Similarly, populists are on a crusade to help people struggling with student debt, that is, people who are likely to have high lifetime earnings.

That's not the only way that homeownership (which is often just homeborrowership) and student debt are similar. I'm not convinced that there is a student debt crisis, but it does strike me as odd that a popular response to the "problem" of too much student debt is to make student debt cheaper. Similarly, I've read that the financial crisis was caused by too much housing debt, and the best solution for that problem is to subsidize housing debt using the old Uncle Sam Put. As crisis response tools these may be fine--unless we're in a dynamic game.


*I'm being slightly too cavalier here, since (as I've written before) pecuniary externalities matter in this market; and of course there are the demand shock arguments.
**I realize that the good arguments for helping homeowners were about demand spillovers (Mian & Sufi stuff), which is fine. I also realize that the stimulus packages included lots of help for low-income people--generally, our countercyclical policies are heavily weighted toward the poor. I'm just focusing on the rhetoric from a specific debate here, i.e., the rhetoric suggesting that we should help poorer rather than richer people.

Monday, October 20, 2014

Updated "A Model of Secular Stagnation"

Eggertsson and Mehrotra have released their secular stagnation paper at NBER, and since the last draft they have made a lot of progress. I will look at it more when I get some time, but given my whining I figured I should at least flag it. Excerpt:

The paper closes by extending the main model to consider investment and capital accumulation. While introducing capital does not change any of the results already derived in the baseline model, it allows us to illustrate a new mechanism for secular stagnation emphasized by both Keynes (1936) and Summers (2013). According to these authors, a decline in the relative price of investment may also put downward pressure on the natural rate of interest and thus serve as an additional trigger for secular stagnation - an insight that we verify in our model.

The price of capital is exogenous in the model, based on an argument by Summers that capital goods have gotten cheaper such that investment does not pull the interest rate up as much as it used to.

I would say that this is an important paper and is definitely worth a thorough read, which I will give it soon. If it answers my investment questions I will have to rethink things. The investment complaint is this: investment is positive in the data. The Mian & Sufi story is that investment is not linked to savings because of the ZLB. The odd thing about that is that, in the real world, the return on investment is not the Federal Funds rate. In the real world there is some sort of equity premium, etc. So even in partial equilibrium where we take the risk-free rate as exogenous (and very low/negative), it's hard to understand why returns on investment are necessarily negative as well. Then the next step of getting the low rates endogenously has its own problems, though I'll see what E&M have to say about it. Quantitatively it may be tricky.

Another thing to watch for is this from Pedro DM SerĂ´dio, whom you should follow on Twitter; in response to my post from last week he tweeted:

I'd add that the EM paper didn't have money either, so of course you'd pay a fee to consume part of your harvest tomorrow.
That's the most important channel for their 'negative real interest rate' result: you have to eat but can't produce tomorrow.
And also

The middle generation pays for storage in this model. If they held cash, negative rates would no longer be optimal.
[Updated: Was just reminded that Josh Hendrickson explained this here]. It is definitely tricky to motivate ZLB models without money. In the real world we say that the ZLB arises endogenously because cash guarantees a return of zero. You simply can't force people to pay for wealth storage, more or less. Imposing the ZLB exogenously is a nice modeling simplification, but it comes at a cost. So there is much to think about here.

Friday, October 17, 2014

Articulating my confusion

Here's a paragraph from a note by Neil Irwin, one of my favorite econ journalists (read his book):

The story goes like this: The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn. Because a rising share of income is going to the wealthy, spending — and hence aggregate demand — is rising more slowly than it would if there were more even distribution of income. Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.

I'm honestly not picking on Irwin; he's just relaying the standard story (and seriously, his book his awesome). I'm hoping someone can help me out here. Let's go through it piece by piece.

The wealthy tend to save a large proportion of their income, whereas middle and lower-income people spend almost all of what they earn.

Ok, so far so good.

Because a rising share of income is going to the wealthy, spending — and hence aggregate demand —

Ok. Poor people have higher MPC than rich people. Rich people are getting a larger share of "income", from the income fairies or wherever. Consumption spending is aggregate demand. So he's starting to lose me; I define aggregate demand as C+I+G+NX.

and hence aggregate demand — is rising more slowly than it would if there were more even distribution of income. 

Hmm. So even over a 15-year period, output is constrained by demand (and demand=consumption). Output growth is determined entirely by consumption growth. I don't know what the mechanism is that translates consumption growth to output growth. And here is a nice counterfactual: "if there were more even distribution of income." What do you mean? Nobody is ever talking about after-tax income distribution in these discussions (well, only Scott Winship), and the higher moments of the income distribution are equilibrium outcomes, and even if you could move them exogenously I have no idea what that counterfactual looks like.

Skyrocketing debt levels papered over this disconnect in the mid-2000s, but now we could be feeling its effect.

Ok, I have no idea what this means. But I hear people say it a lot, so it must be important.

So let me see how far I can get with a model. Let income be as in Piketty world--it's exogenous, manna from Heaven, except instead of manna it's a pie, right? Because we're always talking about how "the pie" is divided. So pies fall from the sky, and they come with strict instructions about how they are to be divided. And every year, for some reason, rich people are being assigned larger shares of the pie.

And in this model there is no investment. Also there is no government spending or trade (because aggregate demand=consumption, remember?). So output growth depends on consumption growth. Wait, so output growth is not actually exogenous. Well it's still exogenous; it's an exogenously specified process. The size of the pie this year depends on how much consumption grew the previous year, and of course that was driven entirely by the pie-dividing rule and MPCs. Or maybe it's all determined simultaneously--there's no capital, so it's basically a static model. I feel like we're going in circles, but let's press on.

Rich people are saving most of their income, but it has no effect on growth because there's no investment. Don't ask me where the savings goes, I guess it's government bonds, but there's no government spending (or if there is, it's the kind where they're just dumping money in the ocean, as in some simple Ramsey models). So rich people just keep saving and saving, and the savings stock is gonna get HUGE I guess, or we're burning it, but it's not going to do anything, and rich people will just keep saving because MPC is also exogenous in this model. And consumption growth is getting slower and slower; not only do rich people have a lower MPC than poor people, but their MPC is actually something close to zero.

With me so far? This is the secular stagnation model. It's not terribly different from the Eggertson and Mehrotra model. It's also the implicit model that Mian and Sufi use. They explain the investment problem with the zero lower bound. Remember that the Fed Funds rate is near zero, so returns to investment are zero, so there's no extra investment when rich people save. Ok? Like I said, I'm just trying to articulate my confusion. In any case the ZLB wasn't binding 15 years ago. Where was the savings going back then?

Maybe someone can help me understand this, but it looks to me like the secular stagnation model is just not ready for prime time. But you wouldn't know it from the amount of attention it gets! If you repeat something enough, maybe get S&P to write a lit review on it, it becomes fact, right? It's one of those ideas that people talk about because people are talking about it. Once a few people have said it, you can cite them authoritatively as evidence. They're using it to justify a story about inequality having a significant causal impact on growth--whatever that means, since inequality is endogenous in the real world (and so is income). We're a long way from really understanding this idea or even knowing if it's plausible. And what's most interesting is that the people who talk about it the most don't seem to be doing much to seriously explain it. I think most of them have no idea what kind of assumptions are packed into their model.

Somebody, please, write down a model of this so we can understand what everyone thinks is going on. I would do it but I can't think of any clever mechanisms to deliver the result. E&M have done all the work so far, but their model doesn't have capital yet (they say they're working on it [UPDATE: here it is]). I can see that some people feel like this idea is really important. That's fair; persuade us by actually proposing some plausible mechanisms in a framework that includes things like aggregate resource constraints.

Or am I missing something obvious?

Thursday, October 16, 2014

"Few other places to turn"

Storyline is probably my favorite of the new websites this year (after Clickhole, of course; and 538 puts out awesome stuff too). Here's a great story about rent-to-own culture by Chico Harlan.

And yet low-income Americans increasingly have few other places to turn. “Congratulations, You are Pre-Approved,” Buddy’s says on its Web site, and the message plays to America’s bottom 40 percent. This is a group that makes less money than it did 20 years ago, a group increasingly likely to string together paychecks by holding multiple part-time jobs with variable hours.

And then there's the family that spent $4150 worth of monthly payments on a $1500 sofa set. They're paying $110 per week for the sofa, a smartphone, and some speakers. I think most of us know that this sort of thing is going on, yet that number is still pretty shocking. Part of the reason it's shocking is that their weekly payment exceeds the total cost of the sofa on which I'm sitting, which my wife found on Craigslist for $80 four years ago (at the time, neither of us owned a smart phone or decent speakers). And it's a pretty nice couch.

Buddy's--the rent-to-own retailer described in the article--will also sell you an "early model iPad" for $1440. This is a device that did not exist 20 years ago (or even 10). The skyrocketing price of iPads, then, isn't great support for the story about people having to get by with less in the time series. The cost of the two cell phone bills mentioned in the article isn't either.

The story reminded me of this:

Image source 
Over the last 20 years, even the lowest income group has spent less on necessities as a share of total expenditures. This is probably not the final word on the necessities/luxuries question, but it is suggestive.

So there's something that doesn't fit here. We're talking about people feeling increasingly squeezed over time (and I have no doubt that they feel that way), and we're talking about how income has fallen; yet the problems listed are that a couch has a sticker price almost 20 times as much as my couch's and costs even more when financed, and iPads are going for twice their original retail value. Meanwhile "necessities" are accounting for a smaller and smaller share of spending, or at least don't seem to be increasingly crowding other things out.

Low income is definitely a problem, but it's not the problem behind the troubling behavior in the story. I think that conclusion probably implies something about policy, though it's not immediately obvious to me what it is. Regardless, I can think of what the lessons are for me; it's all right there in Garett Jones' Piketty review.

I'm in no position to decide whether the choices being made by the people in the story are wrong for them. My point is only that something else is going on besides just stagnant incomes. 

Sunday, October 12, 2014

Charlie Munger on firm dynamics (and Piketty)

From the Daily Journal meeting:

If you take the whole history of businesses that make a fair amount of money and have a little surplus but their basic business goes to hell based on technological developments, the results are lousy. The normal result is Kodak. Imagine having a business like Kodak and having it go all the way to bankruptcy. That’s the normal occurrence: technological obsolescence. 
There are few exceptions in the history of the world. One of them is Thompson Reuters. They were a newspaper company with a few television stations added and they basically milked them as long as they could, sold them for high prices, and went into a different business – online information – and they successfully made the transition.  That is really rare. 
The other rare example, of course, is Berkshire Hathaway. Berkshire started with three failing companies: a textile business in New England that was totally doomed because textiles are congealed electricity and the power rates were way higher in New England than they were down in TVA country in Georgia. A totally doomed, certain-to-fail business.  We had one of four department stores in Baltimore [Hochschild Kohn], absolutely certain to go broke, and of course it did in due course, and a trading stamp company [Blue Chip Stamps] absolutely certain to do nothing which it eventually did. Out of those three failing businesses came Berkshire Hathaway. That’s the most successful failing business transaction in the history of the world. We didn't have one failing business – we had three. Out of that little nothing, the excess capital that we took out and put somewhere else did better than anybody’s ever done. As a matter of fact, we recently passed General Electric in terms of market capitalization, and GE was founded by Thomas Edison himself in 1892, and one of the most powerful companies in the world. 
It was a considerable stunt. But the normal result is more like Kodak. Xerox is an interesting case. They went to the brink of extinction and then came back, but they are a pale shadow of their former greatness. They actually invented most of the stuff other people made so much money out of, and they still failed. Bill Gates is a big student of this subject, and he says that the standard result is failure. Imagine General Motors who went bankrupt. Can you imagine how they towered over the economy when I was young? It was the biggest, more valuable, most admired company, and it took the shareholders to zero.

Like everyone, I have read a fair amount about Buffett (recommended) and Berkshire (recommended), and it is indeed a pretty amazing story. Buffett has said many times that the Berkshire purchase was a terrible decision. It threw off enough money to buy some insurance companies then it went under. He kept it open for some time as a favor to its employees and the New England economy. The insurance businesses generated enough float to buy some other businesses. Blue Chip Stamps didn't seem to do much after he bought it, but it also generated some float and was holding Sees when it came into Berkshire. He made some other mistakes; reading about his shoe investments in the late 80s/early 90s makes the reader cringe. But his insurance companies enabled him to purchase some big winners, like Washington Post, Geico, and Coke. Reinsurance has done great. He's a testament to the ability of markets, through all of their churning, to gradually move capital to the places where it can accomplish the most. There's a lot of trial and error, but the job gets done. A lot of it gets done by entrepreneurs, but not all:

In the whole history of Berkshire Hathaway, I can only think of one new business that we started by ourselves at headquarters, and that was the reinsurance department. Now, that is a huge business, and it’s made an enormous amount of money. Berkshire Hathaway, for all its glorious achievement, started one new business. Everything else we bought.

Could the secular decline in entrepreneurship reflect a growing propensity of existing businesses to innovate and reallocate resources appropriately without the need for entrepreneurial disruption? It's worth thinking about.

Munger also has this to say:

Mr. Piketty is a little daft. Put me down as hoping the Pikettys don’t marry into my family. It isn’t that some of his numbers aren’t correct, but he just doesn't interpret them correctly. Of course if a place as big as China gets really good at manufacturing it’s going to reduce some union jobs in the rest of the world in every trade. But they have a right to succeed. The rest of us can be mature enough to adjust instead of bitching about the fact that the world is occasionally a little tougher than we would have chosen. Of course there are going to be parts of the economy that do better or worse over a twenty- or forty-year period. It’s not some malevolent outcome. It’s a huge change, and in terms of world equality it’s enormously improved. To sit in a very rich country with a 36-hour week and complain about the fact that all the other people are coming up just doesn't strike me as a very mature or noble way to behave.

Probably Munger already knows this, but pointing out that growing inequality is a classic first-world problem isn't going to win him many friends.

Thursday, October 9, 2014

Does SBA lending reduce growth?

Salim Furth directs me to a new working paper on Small Business Administration loans and income growth:

Conventional wisdom suggests that small businesses are innovative engines of Schumpetarian growth. However, as small businesses, they are likely to face credit rationing in financial markets. If true then policies that promote lending to small businesses may yield substantial economy-wide returns. We examine the relationship between Small Business Administration (SBA) lending and local economic growth using a spatial econometric framework across a sample of 3,035 U.S. counties for the years 1980 to 2009. We find evidence that a county’s SBA lending per capita is associated with direct negative effects on its income growth. We also find evidence of indirect negative effects on the growth rates of neighboring counties. Overall, a 10% increase in SBA loans per capita is associated with a cumulative decrease in income growth rates of about 2%.

Of course, the "conventional wisdom" is wrong, regardless of how often politicians repeat it. Small businesses account for a tiny share of employment. They typically have no growth aspirations, so it's not surprising that, conditional on age, small businesses do not account for much job growth (also). The authors note this. So your prior should be that the Small Business Administration does not do much for job growth or economic growth generally. At the very least, a necessary condition for achieving this goal would be to focus on young businesses. But I'm not advocating any specific policies here.

The present study reviews some literature, which finds effects of SBA loans on job/income growth ranging from negative to slightly positive. The authors then report their own county-level regressions finding a negative effect on per-capita income growth.

A 10% increase in SBA loans per capita (which is about $3.43 for the average county in our sample) is associated with a cumulative decrease in income growth rates of about 2 percentage points. 

I would call this a large effect, but it's consistent with my priors. If the SBA is subsidizing credit for firms without growth prospects, it's just causing misallocation. But I think few people are going to be persuaded by the paper's identification strategy. The idea is to use spatial variation while controlling for a lot of stuff, and that's probably as good as anybody can do. It's definitely a worthwhile stylized fact. But SBA loans aren't random. What if the SBA gives special attention to counties with bad economic prospects? Since some entrepreneurs start businesses because their job prospects are bad (for whatever reason), areas that attract SBA attention could be areas that are heading downhill. I have also heard from some bankers that SBA paperwork can be cumbersome; one banker told me that their branch had to have an SBA specialist, while a banker at a different branch said they tried to avoid SBA loans entirely. So there could be selection effects along that dimension as well. I should read the other papers in this literature, but these authors don't provide a lot of detail about how the SBA makes decisions. 

From what I gather, this paper is an improvement on the literature primarily because it has better controls and richer spatial variation. It's useful evidence to be sure--I hope it gets some attention--but it would be great if we could find a smoking gun.

Friday, October 3, 2014

Bad arguments against Uber

This note by Catherine Rampell makes a pretty odd argument that Uber is bad for consumers. For example:

Medallions and other regulations capping the number of livery cars available are often derided as taxi cartel protectionism. But they can benefit the public, too. They limit the number of empty cars driving around looking for passengers, snarling intersections and polluting the air.

There's a lot wrong here--for example, if there is too much capacity then eventually drivers will go do something else with their time. But I want to focus on the congestion + pollution argument.

A good argument can be made that congestion and carbon are mispriced for the usual externality reasons. But Rampell has failed to argue that Uber and its customers uniquely deserve to bear the cost of correcting that market failure. I own a car; why should people who ride in Uber cars pay for their pollution and congestion while I drive around with impunity? This is a very silly way to make policy. Why don't we just put a cap on the number of cars Ford can produce every year? Or limit UPS to X trucks per city?

So yes, there is an externality associated with Uber cars driving around. But it's the same as the externality involved with everyone else driving around in cars. This is a car problem, not an Uber problem. Rampell hasn't explained why the Uber people should pay more for their externalities than everyone else.

She also uses this common argument:


In other words, for all their bellyaching about the bullies of Big Taxi, Uber and Lyft are becoming pretty big bullies themselves. Nothing about their behavior suggests the ultimate winner of the ride-sharing wars will wield its power beneficently when it controls the market and can raise consumer prices at will. Consumers will just be trading in one monopoly — loathed Big Taxi — for another, less regulated one.


Obviously the difference is that Big Taxi's market power is a result of rent seeking and regulatory capture, while Uber's is the result of being amazingly good at giving consumers something they want. If Uber and Lyft get so big that they have market power, there will exist strong incentives for new entrants to undercut them. The very existence of Uber and Lyft suggests that this market doesn't have special natural monopoly problems, unless we create them by regulating enduring market power into existence. Rampell certainly hasn't made an argument for why she thinks someone could take over this market without having to worry about new entrants.

If these are the best anti-Uber arguments out there, it's no wonder these economists can't find anything wrong with it.

Friday, September 19, 2014

"Disruption" disrupted

At The Atlantic, Justin Fox compares the popular obsession with "disruption" to findings from research on declining dynamism, including papers I've been on.

Nowadays every corporate executive wants to disrupt; the word has become a mark of forward-thinking decisiveness—though it is sometimes attached to strategies that are more about cost-cutting than game-changing. And in Silicon Valley, belief in disruption has taken on a near religious tinge. All that disrupts is good; all that stands in disruption’s way (such as, say, San Francisco taxi companies or metropolitan daily newspapers) deserves to perish. . . . 
What may be even more extraordinary, however, is the growing disjuncture between all this talk of disruption and its actual practice—at least so far as we can measure it. Thanks to data that the Census Bureau began releasing a decade ago, economists can now track what they call “business dynamism” in ways they couldn’t before. As researchers have dug into these numbers, they’ve found that most metrics of dynamism and upheaval in American business have actually been declining for decades, with the downturn steepening after 2000. Fewer new businesses are being launched in the United States, the average age of businesses is increasing, job creation and job destruction are on the wane, industries are being consolidated, and fast-growth businesses are rarer.

The article also describes results from, but does not cite or link to, unpublished work by coauthors and me on the post-2000 decline of high-growth firms.

Sunday, September 14, 2014

Millennials and finances

From Deseret News:
Millennials may have their elders beat on the computer, but they have a few things to learn about finances.

Some data on those elders:
In the 2013 Retirement Confidence Survey conducted by the Employee Benefit Research Institute (EBRI), workers aged 55 and older said the following about their retirement savings:
  • 60% have less than $100,000 in retirement savings
  • 43% have saved less than $25,000
  • 36% have saved less than $10,000


Saturday, September 13, 2014

Rognlie on productivity and employment

Matt Rognlie is one of those people who really knows how to reason from a model, and he can do so quantitatively by using compelling rules of thumb and back-of-the-envelope reasoning. Google around for some good examples.

In the comments to this post, Matt writes:

Let's ignore non-labor sources of income for a moment. Then, in a very simple static model of labor supply, unless substitution effects are much stronger than income effects (which would imply a counterfactual secular rise in labor hours), a fall in the level of real wages does not imply a decline in labor hours. If we adopt cancellation between substitution and income effects as a baseline, then hours should be constant regardless of the real wage. Not clear why a fall in productivity, say, should translate into a decline in hours. 
Dynamically, there is a similar invariance of labor hours to shifts in the long-run level of productivity, but there may be some intertemporal substitution of labor depending on the (1) real interest rate vs. the (2) rate of expected real wage growth. Specifically, labor supply today is increasing in (1) - (2), though the actual amount of intertemporal substitution is determined by the Frisch elasticity, which does not seem to be that high in practice. The recent recession involved declines in both (1) and (2), maybe with an overall decrease in (1) - (2), but (I don't think) quantitatively enough to get a large decline in labor supply. Intertemporal substitution is pretty problematic as a mechanism in general, since the people whose employment fell the most tended to be the ones who don't have much ability to smooth wages over time and thus can't engage in much intertemporal substitution. . . . 
Anyway, I could go on and on about the ways in which a classical labor supply model is not a good description of reality, and we'd probably agree there. My point is to emphasize that since it's hard to justify the decline in employment in a frictionless model, there are probably some substantial labor market imperfections at work here. And a lot of the most plausible imperfections suggest that we should pursue policies to boost aggregate demand, if only as an application of the theory of the second best.

To be clear, when I hint at the idea that trends in firm dynamics could be affecting the business cycle, I'm not really thinking about a productivity channel. I'm thinking in very rough partial equilibrium terms about the simple fact that high firm growth rates are increasingly rare, so I'm left wondering where we'll get the labor demand "needed" to accommodate growth in the labor force (and also, as a side issue, wondering whether we need the high rates of excess reallocation that we used to see). That's all pretty non-rigorous, basically lump-of-labor reasoning, so it's a long way from being ready for prime time. I don't know how to build a model of this yet, because we still are mostly ignorant about what's driving the trends. But my view is this: either these trends in firm dynamics matter for the cycle or they don't. If they don't, I'm very curious about why they don't. If they do, they may complicate the AD/AS story.

Friday, August 22, 2014

The Great Unskewing

One way to think about the dynamics of jobs and firms is to examine the distribution of firm growth rates. The high pace of job reallocation we observe implies that firms vary considerably in employment growth rates; some firms are shrinking (or closing their doors), some are operating year after year without changing the size of their workforce, and some are rapidly expanding. We basically know about the first moment of this distribution (the mean or median), which must be slightly positive to accommodate growth of the workforce over time. The second and third moments--the width of the distribution and the degree to which it is skewed up by high-growth firms--are measures of dynamism.

Suppose we sliced the distribution of firms by firm age. The figure below is from our recent JEP paper (click for larger image):

Figure from Decker, Haltiwanger, Jarmin, and Miranda (2014a)


Here you can see the Geico "everybody knows that" fact about young firms "accounting for" aggregate job growth. As a cohort of firms ages, its growth rate distribution converges on zero--so old firms as a group do not create jobs in aggregate (more on cohort dynamics here and here). The second moment can be seen here too: young firms vary widely, but firm cohorts see their growth rate distribution narrow as they age (but note that the distribution never becomes degenerate--there is still lots of churning among old firms). In this sense, old firms are less dynamic than young ones. Finally, observe that young firms are skewed toward high growth. The gap between the median firm and the firm at the 90th percentile is larger than the gap between the median firm and the firm at the 10th percentile.

As part of the general aging of firms (though not entirely because of it), the aggregate firm distribution increasingly looks like the distribution of old firms. The next figure (from a current working paper) plots the gap between the 90th percentile and the 10th percentile firm, for all firms and for only continuing firms (i.e., no entry or exit):

Click for larger image
Figure from Decker, Haltiwanger, Jarmin, and Miranda (2014b)

Observe that this measure of the second moment--the dispersion of firm outcomes--has been falling, so the firm distribution has been tightening up. This might seem like a good thing, particularly if the tightening is happening because fewer firms are shrinking. This is basically the reason that some people are skeptical about the need to be concerned about declining dynamism. Who cares if dispersion is falling? A lot of that churning is unnecessary anyway. The next three figures examine the third moment--skew--by comparing the gap between the 90th and 50th percentiles to the gap between the 50th and 10th percentiles.


Figures from Decker, Haltiwanger, Jarmin, and Miranda (2014b)


While it is true that the bottom of the firm distribution is pulling up, the top is falling down more quickly. The US economy is unskewing, beginning to look more and more like the old timers. When we look at all firms in aggregate or just at the high-tech sector, it looks like the distribution could be totally symmetric soon. Among young firms, there is still a high degree of skew but it is falling (keep in mind that age-0 firms necessarily have positive growth rates, which gives the young firm distribution a boost).

The unskewing of the firm distribution means that we are seeing fewer high-growth firms (or, equivalently, the bar for what constitutes "high growth" has fallen). In partial equilibrium, at least, it's very hard to interpret that result as good news. It is likely to affect how the economy responds to the business cycle, and over time it could have consequences for productivity. For now these are speculative claims, but this is a growing literature. A new paper by Davis and Haltiwanger finds evidence that lower dynamism causes lower employment, not to mention slower wage growth. In my view this evidence greatly complicates the recession stories that dominate the econ blogosphere. It may not be a simple Econ 101 aggregate demand story.

Friday, August 8, 2014

Comment on Cowen

My comment on this post by Tyler Cowen (it never made it through moderation):

- I have been amazed at how many econ journalists and economist bloggers were not already aware of these trends. The Hathaway and Litan briefs have not revealed new facts; just pushed on them in some very helpful ways. Academics have known the basic facts (declining entrepreneurship, aging firms) for some time. The general decline in entrepreneurship was documented in a working paper that started circulating almost 3 years ago (here) and in various Kauffman briefs. Over a year ago I blogged about the aging of the firm distribution. That post had very little traffic even by this blog's standards, but I see now that it wasn't because the topic doesn't interest people.
- The Yglesias argument is just speculation. We've had a hard time finding evidence for it. The aggregate times series should make anyone skeptical. If he wants to push this story, he should use regional variation (for a start). 
- This isn't just about subsistence entrepreneurship, the "orange sellers" and mom-n-pop shops. At least starting around 2000, high-growth entrepreneurs took a hit too. 
- While it's true that the datasets on which these findings are based currently end in 2011, the establishment birth data we see in the BED (which extends through 2013q4) are suggestive (though not conclusive, since establishments aren't firms). Don't expect a massive rebound in new firm formation on the heels of the Great Recession.

The last two points are responses to other comments on the post. This is a good example of an issue on which the blogosphere (or, at least, the blogs with readers) and journalists are way behind academia, though there are a handful of journalists who have been on the case for several years.

Sunday, August 3, 2014

Entrepreneurial decline: Mom-n-pop or high-growth?

A lot of people respond to data on declining rates of entrepreneurship by suggesting that this is about the decline of mom-n-pop shops associated with retail sector consolidation. From a recent paper:

Most business startups exit within their first ten years, and most surviving young businesses do not grow but remain small. However, a small fraction of young firms exhibit very high growth and contribute substantially to job creation. 

If we're just seeing fewer slow growers and likely failures, and if that "small fraction" of young firms that accounts for so much job creation has been unaffected, then less entrepreneurship isn't alarming. Big firms pay better than small firms, and the rise of big box retail has probably made the economy more productive. So Noah Smith and others have pushed back against the growing chorus of declining dynamism alarmism.

In a preliminary, incomplete working paper, coauthors and I attempt to determine whether the decline of entrepreneurship has involved high-growth firms. One way to do this is to study the distribution of growth rates of young firms (i.e., firms age 5 or less). Figure 10 from that paper is below (click for larger image):


Figure from Decker, Haltiwanger, Jarmin, & Miranda (2014)
"The secular decline in business dynamism in the U.S."

The lines indicate the employment-weighted 90th percentile of employment growth rates. That is, only 10 percent of young firm employment is at firms with growth rates that exceed the red line (the series are actually HP filtered). For young firms, the growth rate required to be in the 90th percentile was somewhat constant during the 80s and 90s, suggesting that the decline in entrepreneurship we see in those decades may not have been affecting high-growth firms. But starting around 2000, the top of the growth rate distribution falls. We take this as suggestive evidence that high-growth entrepreneurship began declining around 2000. You can also see that mature firms had a fairly constant distribution before 2000, so that the overall trend was largely a composition effect.

So at least by blog standards I think it's fair to assume that the pre-2000 decline of entrepreneurship may have been largely about the death of the mom-n-pop, but since then even high-growth entrepreneurship has taken a hit. It turns out that the year 2000 is significant for other measures of dynamism, too. The high-tech sector, the information sector, finance, and publicly traded firms all had turning points around that time (see Figure 6 from the working paper), with flat or rising rates of job reallocation and within-firm volatility prior to ~2000 and declining dynamism after ~2000 (and dynamism trends aren't the only thing that changed around 2000; an example). So the story of declining dynamism in the US is partly a story of convergence, with roughly the year 2000 marking a point at which classes of firms that were previously unaffected by the aggregate patterns finally joined the trend.

Friday, August 1, 2014

"Economic dynamism and productivity growth"

Dietz Vollrath has a nice response to our work on dynamism. Basically his argument is that the decline in dynamism doesn't seem to be affecting aggregate productivity. Yesterday I posted a comment at his blog, but comment moderation over there seems to be on hiatus, so I'm reposting my comment here:

In the paper, we are pretty careful not to draw conclusions about whether this is a good thing or a bad thing, since (as you suggest) it’s unclear what is optimal in terms of young firm activity and job flows. A lot of journalists have looked at our work and related work and run with stories about doom and gloom, but we’re not ready to draw any kind of conclusions. 
Likewise, I think it’s a little premature to draw the conclusions you draw about productivity. First, just looking at the aggregate data without a plausible counterfactual is, as you know, pretty tricky. I know you’re aware of the evidence on productivity and reallocation (which we review in the paper); I think our prior, at least, should be that this matters. 
Second, the Fernald chart you include is not inconsistent with a connection between productivity and dynamism. Note the trend break in the early 2000s. This is consistent with the dynamism data in Figure 3 from our paper–observe that the dynamism trend is pretty flat during the 1990s. Moreover, as we show in some newer work, dynamism measures for, eg, the high tech sector and public firms actually increase until the early 2000s, at which point they head downward (see http://updatedpriors.blogspot.com/2014/06/trend-reversal-new-fact-about-public.html and the paper linked therein). It’s not unreasonable to assume that strong dynamism in key sectors helped boost productivity in the 1990s, and once those sectors experienced reversal in the early 2000s the aggregate trend moderated somewhat. 
As a side note, you mention retail. As we discuss in the paper, there is lots of evidence that consolidation in retail has been productivity enhancing. So, certainly, there are countervailing trends at work.

Wednesday, July 30, 2014

The role of entrepreneurship in US job creation and economic dynamism

That is the title of my first quarter-of-a-publication, in the Journal of Economic Perspectives. The issue includes symposia on entrepreneurship, development, and academic production, as well as some other content. JEP articles are always ungated, courtesy of the AEA. I suspect that the excellent Timothy Taylor will do a full write-up of the issue soon. This particular journal is meant for generalists, and as such the papers tend to be largely nontechnical and digestible (and interesting!).

Our article has been in circulation as a working paper in various versions for maybe 2 or 3 years, and during that time the general topic of declining entrepreneurship and dynamism generally has become pretty widely known outside of academia. I have blogged on this stuff too many times to link. We're also already working on a follow-up study that looks at things like high-growth entrepreneurship, differences between public and private firms, some specific sectors, and trends in the nature of "shocks" hitting firms. I've blogged a bit about that newer paper, here and here; it is still in early stages.

In the JEP paper, we describe some data on the dynamics of young firms, how the growth rate distribution of firm cohorts evolves as they age, the role of young firms in productivity growth (see also here), and some long-term trends that are pretty widely known now. We do some simple accounting exercises to determine the degree to which composition effects are driving long-term trends in gross job flows. Some basic insights and findings:

- New firms experience a strong "up or out" dynamic--a few grow very quickly and survive, while the rest shrink and fail (see Figure 1 in the paper, below, click for larger version). As such, many of the jobs created by startups are destroyed in short order. This is pretty well known in this literature.

I do not own this image


- The growth rate distribution of young firms is highly skewed, with some firms growing very quickly and pulling up the mean. Among older firms, the growth rate distribution is symmetric with a mean and median of zero (see Figure 2 in the paper).

- Startups, and reallocation more generally, play a huge role in productivity growth. We discuss this in some detail, and I covered it a bit here; we really just review existing research.

- In shift-share analysis, the aging of the firm distribution "accounts" for about one third of the decline in gross job flows. Changing industry composition (away from manufacturing and toward retail and services) works the "wrong way", since we have moved toward more activity in more volatile industries. When we absorb age, size, and industry composition effects, we "explain" about 15 percent of the decline (note, though, that this is not causal analysis). This means that the decline is happening within cells, and a good explanation for it has yet to be found. As such, policy implications of what we know right now are unclear.

- The decline in dynamism is relentless, indefatigable, indisputable, and undeniable (Yorke 2006), and it is ubiquitous across industry and geography. This suggests that simple policy explanations may not get us very far.

- We conceptualize the question in terms of standard models of firm dynamics, which would suggest that a decline of this kind means either (a) a decline in the volatility of shocks that drive firm outcomes, or (b) a decline in the responsiveness of firms to these shocks (which could be driven by, e.g., technology or policy changes). Our newer working paper sheds some light on this problem.

We write,

We do not yet fully understand the causes of the decline in indicators of business dynamism and entrepreneurship, nor in turn, their consequences. Improving our understanding of the causes and consequences should be a high priority. . . .  
The declining pace of startups, job creation, and job destruction is mirrored in other measures of the dynamism of American society. . . . Taken together, there appears to be less scope for the US economy to adjust to changing economic conditions through the migration of workers, the reallocation of jobs across producers, and through the switching of workers across a given allocation of jobs.

The paper is reasonably short, nontechnical, and (I think) focused enough to be worth looking through. A lot of this literature consists of papers where you drink through a fire hose of data, but here we've tried hard to be concise (thanks in large part to excellent editors). We started with dozens of figures and tables and whittled down to just a few. When I first encountered the firm dynamics literature, I was blown away by the richness and diversity of market economies that shows up in the administrative micro data. Hopefully this paper will get others thinking about the topic.

I'm very excited about this paper. It builds a lot on work that has been done by people other than me, primarily including my coauthors John Haltiwanger, Ron Jarmin, and Javier Miranda, but also Stephen Davis, Lucia Foster, Chad Syverson, and others whom are listed at the end of the text. These people, along with others like Erik Hurst, have done and are doing a lot of really interesting work in empirical firm dynamics. In my view this is the best stuff happening in macro these days, as it utilizes large amounts of micro data on firms and establishments to explore big macroeconomic questions. For my involvement in this project I thank my generous coauthors and a series of consecutive luck shocks.

BED: 7.3 million jobs created, 6.5 million destroyed in Q4 2013

From the BLS:

From September 2013 to December 2013, gross job gains from opening and expanding private sector establishments were 7.3 million, an increase of 290,000 jobs from the previous quarter. . . . Gross job losses from closing and contracting private sector establishments were 6.5 million, a decrease of 34,000 jobs from the previous quarter.

I like this data series, with some caveats.* If you're not familiar with this series, note that gross flows are large relative to net flows. Roughly speaking, think of the Great Recession as involving about 8.5 million net job losses. Entering and expanding business establishments create at least half that many jobs even in terrible quarters, but a recession is characterized by even larger numbers of jobs being destroying by shrinking or closing establishments.

I like to slice the data by extensive margin (opening or closing business establishments) and intensive margin (expanding or contracting business establishments). Figure 1 reports the flows of employment associated with opening and closing establishments, and Figure 2 reports actual numbers of establishments that opened or closed (click for larger images).

Figure 1


Figure 2
New establishments continue to boost net employment, keeping positive job flows ahead of closures for several quarters in a row. The latest quarter shows a slight uptick in gross flows of establishments, which many might consider to be a positive sign. But in general, total reallocation on the establishment extensive margin has been pretty constant since the end of the recession.

Next, the intensive margin. Figure 3 reports employment flows from expanding and contracting establishments, and Figure 4 reports establishment counts for these categories (click for larger images).

Figure 3

Figure 4

I would say that these numbers look promising. Establishment growth is helping drive employment recovery, and shrinking establishments are providing less "drag" over time. Total reallocation seems to be trending upward as well, so in my view these data look reasonably good.

Overall, this is a pretty good report.

Now some usual thoughts: gross flows give us an idea of where jobs are being created and destroyed, which fleshes out the net job numbers that are more popular (and timely). For policymakers, it matters whether job market problems are being driven by establishment turnover or job flows in existing establishments. In my (hasty) view, these latest numbers suggest that both margins are firing reasonably well, which was less the case a few quarters ago. Further, my prior is that the slight upward trend in total reallocation among continuing establishments is a good sign and may boost productivity somewhat.

More broadly, these data help dissuade us from thinking in representative agent terms, which is what the net numbers incline people to do. It's tempting to think that net numbers tell us about the experience of most businesses, but in reality there is a lot of heterogeneity among firms and reallocation proceeds at a high pace. In my view this complicates macro analysis somewhat, rendering simple "aggregate demand/supply" heuristics somewhat tricky.

Some previous BED posts are here.


*The BED are quarterly data provided from the BLS based on state UI data. They are released with a lag of about 8 months. Like the BDS (the dataset I usually use here), the BED basically covers the universe of private nonfarm employers; unlike the BDS, the BED is available at higher frequency and is released more quickly. BED has other drawbacks compared to the BDS, such as a more limited ability to track firms.

The BLS effectively expanded the sample definition in the first quarter of 2013, and it does not appear that they have done anything to fix the time series. This is very unfortunate as it limits the usefulness of looking at time series in ways that are difficult to fully grasp. The 2013q1 observation was the most obviously affected, as it reported all establishments that were added to the sample as establishment openings. For openings data, I have replaced the 2013q1 observation with the average of 2012q4 and 2013q2. I haven't dug into the data enough to know whether users can manually correct for this over the longer run. See BLS discussion here, on the bottom of the page ("Administrative Change Affecting..."). Please, BLS, do something about these time series.

It is also important to note that these numbers are seasonally adjusted, and any guess at net numbers based on the difference between two seasonally adjusted series is very, very rough. Non-SA numbers are available on the BLS website.

These numbers track business establishments, which are different from firms. Costco is a firm; your local Costco store is an establishment. Most firms consist of only one establishment. The BED is not ideal for tracking firms, as it has limited ability to correctly link establishments to the firm level.