Capital Gains Can Be Labor Income
Zwick and Zidar argue that a substantial share of the decline in labor share can be accounted for by changing forms of pay, including pass-throughs and equtiy compensation. In particular, if an employee is paid in stock and that stock increases in value then the tax rules tend to count some of that as capital income (depending on when the capital gains occur) rather than as labor income. Zwick and Zidar point us to Human Capitalists for the details:
Human capitalists are corporate employees who receive significant equity-based compensation such as equity grants and stock options. These employees are partial owners of US firms, and in return for their human capital input, human capitalists accrue a share of firm profits through firm dividends and capital gains in addition to earning wages. We document the stylized facts describing the evolution of human capitalists’ income over time and across industries within the US manufacturing sector.1 Human capitalists have become an increasingly important class of corporate income earners. Due to measurement challenges, prior work has underestimated the importance of equity pay below the C-suite. Correctly measuring the total income of human capitalists substantially alters conclusions about changes in factor shares and technological complementarity.
Equity-based compensation represents 36% of compensation to human capitalists from 2010 to 2019 and constitutes a 7% share of value added in the manufacturing sector in 2019. Correctly accounting for the total income earned by high-skilled workers has a substantial effect on measured changes in labor shares over the modern era. The addition of equity pay to cash wages reduces the decline implied by the wage-only income share of value added in manufacturing since the 1980s by 32%. Without including equity pay, high-skilled labor’s share decreased from 17% in the 1980s to 11% in the most recent decade. The inclusion of equity-based compensation almost eliminates this decline. The high-skilled share of total labor income increases from one-third at the beginning of the 1960s to two-thirds in the 2010s when equity-based compensation is included.
See also my previous post The Labor Share Fell. So What?
The Troubled History of Government Equity in Technology
Even though Germany privatized Deutsche Telekom in 1996, the federal government retained a substantial ownership stake. This partial state ownership status, which remains to this day, presents a textbook example of how this type of arrangement distorts incentives and delays the competitive dynamism necessary for technological progress.
Through the late 1990s and into the 2000s, Deutsche Telekom was buttressed by its privileged position and implicit government backing and leveraged this support to resist infrastructure competition. Rather than aggressively deploying broadband in order to compete with rivals, the company lobbied for regulatory arrangements that protected its legacy copper network. As a result, Germany—one of the world’s largest economies and a hub of engineering excellence—consistently trailed other European competitors in broadband deployment. To see German broadband stagnate while the competitive markets in Scandinavia and other European countries surged ahead was particularly jarring, as Germany had directly linked its economy to workplace digitization.
Germany’s broadband woes did not result from a lack of capital or engineering talent at Deutsche Telekom. Instead, government ownership produced a fundamental alteration of the company’s incentive structure. With state backing, Deutsche Telekom had fewer reasons to take risks, cannibalize its own infrastructure, or accept short-term losses in favor of long-term technological leadership and more reasons to cultivate political relationships that protected their existing revenue streams. This dynamic is reliably produced by partial government ownership of private companies.
The history of heat deaths in Europe (from my email)
I will not double indent, all of what follows is from economic historian Daniel Gallardo Albarrán of the Netherlands:
“…you posted a link to an article on how Europe became the world champion of heat deaths.
Something that the article did not cover, which I find particularly outrageous is that Europe used to be at the forefront of reducing deaths due to extreme temperatures in the early 20th century, but then AC came in and the US took the lead. To flesh this out a bit, let’s consider some recent research on this field, including my own, that is comparable to the article by Barreca et al. referenced in the post, the following points are important:
- Summers became increasingly deadly during the 19th century as a result of urbanization and overcrowding. They were incredibly deadly, mostly, for infants who died in disproportionate amounts due to gastrointestinal diseases. Children and adults died as well from heatstrokes and the like, but their relative importance in the death statistics was rather small
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The turning point in Europe happened in the 1900s and 1910s.
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For instance, in Germany summers began being less deadly after ca. 1905, as a result of investments in water provision, healthcare and infant care. (See my own paper on this in the EHES Working Paper Series, no. 290)
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In England the turning point is somewhere around WWI (see Hanlon et al., 2021, JEH), possibly due to improvements in the disease environment.
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In the United States, before the arrival of AC, summer diarrheal disease that largely affected infants would only go down much later during the 1920s and 1930s (see Anderson et al., 2022, EEH). A few decades after European cities had progressed substantially in this regard…
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This reversal does not get much attention in accounts of current differences in the deadliness of extreme temperatures. This is unfortunate because from an early-20th century perspective, it was far from obvious at the time that this would happen. But the lack of willingness to adopt the arrival of a very useful technology (AC) was something that we (Europeans) have brought onto ourselves over many decades, and this is largely independent from recent phenomena such as rising global temperatures, inequality trends, etc. This is simply inefficient governance and lack of attention to a problem that takes the lives of many.”
*What Makes a Great Composer?: A Data-Driven Exploration of Music History*
A very good book, forthcoming, by Karol J. Borowiecki and Marc Lawx, here is the Amazon link, here is the Princeton University Press page.
Sunday assorted links
1. The family keeping watch over a 52-year-old pot of soup (WSJ). I guessed the country wrong.
2. The rise of grocery tourism.
3. PEPFAR interview. Much of this is substantive, and interesting. But some of Mike’s claims are absurd, for instance: “Elon Musk, on his own, if he paid his taxes, could end world hunger.” Can he really believe that?
4. David Brooks on who benefits from AI (Atlantic).
5. Michael Polanyi’s book The Contempt of Freedom is now reissued. Amazon link here.
6. Falling fertility on the political left is the key driver of U.S. birth rate decline. Do note that political views are somewhat heritable. That said, other demographics are moving America to the left economically.
What should I ask Michael Moritz?
Yes I will be doing a Conversation with him, based around his new book Ausländer: One Family’s Story of Escape and Exile. Mike of course was a pioneering venture capitalist through Sequoia, and before that had a distinguished career as a journalist, which included books on Chrysler, Apple (the first such book I believe?), and soccer coach Alex Ferguson of Manchester United. Here is his Wikipedia page.
So what should I ask him?
Tyler, Nabeel, and Jackson on French thinkers
Nabeel: (57:47) …For example, there’s a French thinker called Jacques Derrida. I probably should go and read him at some point, but I’m not entirely convinced there is a there there, and I don’t know anyone who swears by it. If Tyler told me, “Nabeel, you are missing a big piece of your life by not reading him,” I would go read him tomorrow. But I don’t have any of those people.
Tyler: (58:44) Lacan is my marginal case of “no there there.” So Derrida, I put in a fair amount of effort and did conclude, rightly or wrongly, that there’s no there there. So you can, in my opinion, write him off. Lacan, I keep on wondering. Smart people still will say, “This is amazing.” I’ve tried a bunch of times, but I haven’t given up. There’s a new Lacan book coming out later this summer and I’ll try it again. We’ll see. That’s my marginal “is there a there there” figure.
Nabeel: (59:13) Yeah. I think modern French thinkers put too much of a premium on sounding cool, or postmodern philosophy generally. I think it repays some effort to kind of grasp the core ideas, but it doesn’t repay making it your life’s reading or something.
Tyler: (59:26) Baudrillard is quite good and Foucault is extremely interesting. So I’m not against “the French” in this period, but if they keep on not making sense, I feel I’m educated well enough.
Jackson: (59:37) You have a lot of context.
Tyler: (59:38) That at some point I can strike the ledger.
Nabeel: (59:41) I do—Nowadays, I just put Foucault through GPT and I just have GPT explain it to me, and that’s going to be good enough for now.
Tyler: (59:50) The problem with Foucault, I think, is so much of the history is wrong in a quite mundane way, so there’s something very problematic about it. But the stuff—I think it’s in a way quite simple, almost too simple. And the fact that the current right has so latched on to Foucault is a sign that it’s simple. I don’t mean necessarily bad, but there are these structures and they’re trying to tell you what to do. And there’s something anonymous about that as well. It’s not just the individuals who form the conspiracy. It’s how a lot of the world thinks today.
Here is the longer discussion, already linked to.
Why we love this country
A Free Press feature for the 250th, here is my entry:
Tyler Cowen can’t decide, so he picks about 20 things instead.
My favorite thing about America is that I do not have a single favorite thing. We have the NBA (with a Toronto team too), the world’s best AI models, Alexander Calder sculptures, a few wonderful R.E.M. albums, southern Utah, the world’s best Constitution, lots of air-conditioning, sausage in southwest Louisiana, the infield fly rule in baseball, Winslow Homer, Sioux Plains drawings and Navajo blankets, the music of Chuck Berry and Brian Wilson, cheeseburgers, deep capital markets, the world’s best universities, the Museum of Modern Art, Chattanooga, Tennessee, lots of big airports, the north rim of the Grand Canyon, red cardinals and blue jays, about two dozen cities and towns named Paris, self-driving vehicles, not just one but two Dakotas, three branches of government (I hope not four), and the best set of immigrants in the world. And that is just scratching the surface.
The other contributors are notable as expected.
Saturday assorted links
1. The pending evolution of Chile’s school age population.
2. Markets in everything those new service sector jobs.
3. Survey on the economics of caste.
4. J.D. Vance on Milton Friedman. And Mamdani on Hayek.
5. “Firms that adopt AI heavily grow headcount 10% over two years following adoption.”
6. Browse all Criterion films.
7. Does a damage accumulation model explain different aging rates across the species?
America the Beautiful, 250 years!
A scientific benefit (and cost) of AI innovation
What changed was that the cost of preliminary exploration collapsed. I could sketch an argument, identify the first serious objections, test whether they were fatal, and reach a provisional verdict in an afternoon rather than a fortnight. This sounds like a simple acceleration, and the more profound effect was on what I was willing to abandon. Dropping a question after an afternoon’s work feels nothing like dropping one after three weeks. When the exploration costs are low, the sunk cost attachment disappears, and you find yourself dropping bad questions earlier and more often, which means the questions you keep are better. I explored far more ideas, and my working portfolio became both larger and better curated. I arrived at this outcome not through any deliberate plan but simply through sustained engagement with a tool that changed what exploration cost.
The skill that improved most, and the one I would never have thought to look for, was something I can only describe as question-identification – the ability to find problems that are both tractable and important. This is the thing an academic career is substantially built on and which nobody, so far as I know, has ever tried to teach directly.
I want to be honest about the costs. My ability to hold together a complex position verbally, under pressure, in a seminar or a conversation, has probably not improved and may have declined somewhat. When preliminary exploration is cheap, you spend less time grinding through arguments from first principles, a grinding that builds fluency that shows up in live exchange. Friends have pressed me on this, and they are right to worry.
That is from Carlo Cordasco, and there is more, via Conor Friedersdorf.
The most profitable crypto investors and firms
Here is the source. Here is from the editors at The Free Press. Here is more from Mene Ukueberuwa.
Do falling birth rates boost per capita income?
The secular decline in birth rates across the globe over the past seven decades has slowed population growth, raised average ages, and reshaped labor markets and the macroeconomy. Contrary to the widespread expectation that these trends hamper economic growth, we find lower birth rates are associated with higher growth in GDP per working-age adult across countries and higher wage growth across US commuting zones, with no negative impact on aggregate GDP or earnings. These patterns are not explained by educational upgrading, rising female labor force participation, the declining importance of agriculture, or neoclassical-Solow mechanisms. We argue that they reflect the endogenous, labor-saving response of technology to the scarcity of younger workers. Consistent with this interpretation, countries and regions with lower birth rates exhibit more labor-saving patents and growing high-tech activity. There is also higher TFP growth across countries and industries. Exploiting cross-country variation in WWII military and civilian deaths, we find that declines in younger population, rather than population size per se, drive our results.
Here is the full paper by Acemoglu, Autor, Beirne, and Scott. Via Philip Heimburger.
Friday assorted links
1. Rohit is solving for the AI equilibrium.
2. Robin Hanson explains his political evolution.
3. Restoring the Book of Kells.
4. More Scott Sumner movie reviews.
5. Peter Howitt YouTube talk on golf? (I have not heard)
6. “Academics need to change, not the AI.”
7. I answer questions about AI for Berkman Klein Center.
8. On late Dylan.
How Britain Became as Poor as Mississippi
How Britain Became as Poor as Mississippi is a good piece in the Atlantic by Idrees Kahloon filled with colorful anecdotes of a nation in decline:
The health service now has to spend more money settling maternity-malpractice claims than it does on actually providing maternity care. Many Brits can neither obtain an appointment with a publicly funded dentist nor afford a private one; in a 2023 survey, one in 10 reported doing DIY dental work, in extreme cases extracting their own teeth or gluing broken crowns back together.
Incomes can be shockingly low: Junior doctors recently went on strike for the 15th time in three years over their salaries, which start at just £38,800; the median salary for British civil servants is £35,680. In April, amid the Iran conflict, the Daily Mail pounced on Prime Minister Keir Starmer for vacationing in Valencia, Spain, at what the tabloid described as a luxury hotel, costing £200 a night.
Americans are likely to come away a bit smug, especially as Independence Day approaches and Europeans are enjoying our giant stadiums and central air conditioning. Look deeper, however, and Britain’s story becomes more uncomfortable. Does this sound familiar?
Recent plans to transform the country have rested in no small part on High Speed 2, a superfast rail line intended to connect London with Birmingham, Leeds, and Manchester. But since HS2 was proposed, in 2009, its costs have tripled, to more than £100 billion. It is the most expensive rail line in the world. (A special structure to protect a rare bat species near the rail line in Buckinghamshire required 8,000 permits and was built at a cost of £216 million.) The most important sections of the proposed route have been lopped off. The rump line—going from Birmingham, Britain’s second-largest city, to not-quite-central London—may be finished by 2040…. HS2 has been delayed for so long that two swiftly built towers near the terminus now themselves look derelict and in need of demolition.
…Building infrastructure, or much of anything else, has become all but impossible in the United Kingdom. In addition to having the world’s most expensive (not yet built) train line, Britain also hosts the world’s most expensive (not yet built) nuclear-power plant, Hinkley Point C. Its environmental-impact assessment ran 31,401 pages; the plant will feature a £700 million “fish disco,” which will pulse sounds underwater to deter animals from its intake pipes.
Upon closer inspection, the United States looks a lot less like a shining city on a hill and a lot more like a declining Great Britain, appendaged with one or two dynamic sectors, most notably AI. The similarities are especially obvious in the retrograde solutions Britain has lumbered into, namely attacking immigrants and trade—Brexit being the equivalent of a high tariff regime. Nations in decline, like people, tend to lash out at others rather than deal with their real problems. Needless to say, neither immigrants nor trade explain Britain’s—or California’s—inability to build high-speed rail or other infrastructure.
It is discomforting to watch the birthplace of the Industrial Revolution, individual rights, and free speech—the nation that once built the railways, the steam engines, the factories that remade the world—lose the capacity to build much of anything, or even to tolerate people speaking their minds. In parallel, instead of dealing with our real problems—almost all of our creation—the right gets literally hysterical over symbolic culture-war questions like birthright citizenship, while the left nominates candidates with Marxist-Leninist sympathies. The abundance and progress movements are some of the few shining lights. It’s not too late. But Great Britain is a warning.