Big Data Could Boost Big Company FinancesBy
Funding might be cheaper for information-rich companies
This may help explain why large firms are dominating business
In business, it could also disadvantage the little guy.
That splash of cold water is the lead item in this week’s economic research roundup, which also takes a look at the demographics of U.S. junk food consumption, the culprits behind slower innovation in America, and the pros and cons of a higher inflation target in Canada. Check this column each week for a roundup of new and revealing economic research from around the world.
Big Data and Big Companies
Big Data in Finance and the Growth of Large Firms
Published April 2018
Available on the NBER website
Large firms are thriving while smaller ones struggle, leaving macro-economists asking why. Big data, and how that helps drive down the cost of capital for bigger companies, could hold part of the answer, according to this National Bureau of Economic Research working paper.
Large corporations have more economic activity and, often, longer firm history. That means equity investors with new data analysis capabilities can get a strong handle on the outlook for such companies -- reducing investment risk and slashing the firm’s cost of capital. Because smaller companies offer up fewer data points, they’re less of a sure bet, and they have to finance themselves at higher rates. The channel is “one way in which the growth of big data might affect the real economy,” the authors say. And their model is “a modest first step.”
“Our results only show that big data is a force with some potential,” the authors write. “There is a logical way in which the growth of big data and the growth of large firms is connected.”
Weekly (Demo)graphic: You Are What You Eat
The Economic Research Service over at the U.S. Department of Agriculture has confirmed what anyone who’s ever downed syrupy pancakes or a greasy cheeseburger can tell you: even people who understand nutrition break the rules at restaurants. That also holds true for higher-income consumers. They generally eat healthier than other groups, but that drops off a lot when they skip the grocery run.
You may be wondering: Why does an organization called the Economic Research Service care about this? Diet-related disease is a major public health problem, and it comes with a hefty economic burden.
Everything in Moderation
Why Has Economic Growth Slowed When Innovation Appears to Be Accelerating?
Published April 2018
Available on the National Bureau of Economic Research website
Northwestern University economist Robert Gordon -- author of “The Rise and Fall of American Growth” -- is at it again. His new paper looks at how fertility, mortality, life expectancy and immigration have contributed to the slowdown in U.S. gross domestic product growth, which decelerated to 1.4 percent annually in the decade through 2016 from 3.2 percent per year between 1970 and 2006.
Gordon says a slowdown in educational attainment kicked off the deceleration in productivity, and owed to both the flattening of the college wage premium and the rising cost of education. Why was the return to a degree declining? For that, Gordon points to the maturity of America’s information technology revolution, which also directly contributed to the slowdown as patent filings increased but innovations yielded a more “evolutionary” than “revolutionary” impact.
Still, don’t pin the productivity blame on companies. Capital spending has dropped off, but that’s come as profitable investment opportunities dry up, victim to declining population growth, lower labor force participation and the “dampened impact” of innovation. “Low net investment is both a cause and a result of the overall slowdown in GDP growth,” Gordon writes.
All About Alternatives
Could a Higher Inflation Target Enhance Macroeconomic Stability?
Published April 2018
Available on the Bank of Canada website
As U.S. central bankers discuss whether symmetrically targeting 2 percent inflation is still the best plan for monetary policy, their neighbors to the north are also digging into the topic. In this Bank of Canada staff working paper, economists look at whether a 3 percent or 4 percent target could improve macroeconomic stability in the Canadian economy. The answer, they find, hinges on whether they can turn to effective unconventional policy tools and where the neutral interest rate sits (that’s the one that neither stokes nor slows growth).
If alternative tools like central bank asset purchases are available and effective, then raising the inflation target only helps a little. If neutral rates are “deeply negative,” though, a higher inflation rate -- which pushes real rates back into positive territory -- improves macroeconomic stability.
In a way, this study underlines why it’s so hard to pin down whether a higher inflation target is prudent. Neutral is an amorphous concept whose symptoms are best seen in the rear-view mirror, but it’s pivotal to where the inflation target ought to be set. “Alternative estimates of the neutral rate lead to starkly different conclusions about the implications of a higher inflation target,” they write.