“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
AI Summary.Deep-tech investment outside AI has exceeded $150bn since early 2024, surpassing the $133bn invested across the entire prior decade. Falling valuations for traditional software companies and outsized returns from early bets on capital-intensive ventures are pushing investors toward riskier, science-driven deals.
Tim BradshawFinancial Times
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Since the start of 2024, more than $150B of venture capital has been invested into non-AI “deep tech” firms whose products are rooted in significant engineering advances, exceeding the $133B invested in such firms btw 2010 and 2019.
Are investors abandoning software for capital-intensive science bets?
Core argument: Deep-tech investment excluding AI exceeded $150bn since early 2024, surpassing the entire $133bn deployed across the prior decade (through end-2019), as falling valuations for traditional software push venture capital toward capital-intensive scientific bets.
The AI boom is fuelling a resurgence in ambitious “moonshot” bets, as early SpaceX backers’ huge returns and falling valuations for traditional software companies force tech investors to embrace riskier and more capital-intensive dealmaking. Excluding the giant sums ploughed into AI start-ups, global investment in “deep tech” — companies whose products are rooted in big scientific or engineering advances — has exceeded $150bn since the start of 2024, more than the $133bn in the entire decade to the end of 2019, according to Dealroom. This year’s deep-tech investments have not yet surpassed 2021’s peak, which was propelled by battery and electric vehicle deals for the likes of Rivian and Northvolt — many of which turned sour, highlighting the risks involved in moonshot dealmaking.
Takeaways by Macro Roundup® AI
Deep-tech investment excluding AI exceeded $150bn since early 2024, surpassing the entire $133bn deployed across the prior decade (through end-2019), as falling valuations for traditional software push venture capital toward capital-intensive scientific bets.
The 2021 deep-tech peak — driven by battery and electric vehicle deals including Rivian and Northvolt — has not yet been surpassed, and the subsequent losses from those deals underscore the capital destruction risk inherent in moonshot dealmaking.
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Capital Is Making a Comeback— Btw 1985-2021 the capital intensity of the American economy was relatively flat as a rise in intangible investment was offset by a decline in tangible…
Public to Private Equity in the United States: A Long-Term Look— Global venture capital returns are highly skewed: 62% of deals lose money, more than half lose 50–100% of invested capital, but fat-tailed outliers drive overall returns. This pattern mirrors historical whaling voyages, where payoffs were similarly variable and driven by rare outsized outcomes.
Gross and Net US Investment— Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment merely replaces depreciating assets. The shift toward faster-depreciating information technology assets requires larger gross investment increases to achieve any given gain in productive capital per worker.
AI Summary.Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment merely replaces depreciating assets. The shift toward faster-depreciating information technology assets requires larger gross investment increases to achieve any given gain in productive capital per worker.
Timothy TaylorConversable Economist
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U.S. real net private domestic investment—which adds to the American capital stock—is now only ~25% as large as gross investment, down from ~40% in the 1970s. Taylor suggests the widening gap between gross and net investment reflects the relatively rapid depreciation of IT-related capital.
Does faster asset depreciation explain slowing productivity growth?
Core argument: Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment now merely replaces depreciating capital rather than expanding the productive stock.
The figure divides net investment by gross investment. Back in the 1970s, net investment was often around 40% of gross investment, but the share has been slumping over time. For the last decade or so, net investment has been about 25% of the gross–that is, about three-quarters of gross investment is just making up for depreciation of the pre-existing capital stock. The likely reason for the growing gap between gross and net investment is that modern investment is more likely to be related to information technology [which] depreciates more rapidly and thus needs to be replaced and updated more often. If we want the average US worker to be using a greater amount of capital on the job–which was one of the key drivers of rising labor productivity in the past–it now takes a bigger rise in gross investment to lead to a given rise in net investment.
Takeaways by Macro Roundup® AI
Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment now merely replaces depreciating capital rather than expanding the productive stock.
The shift toward information technology — which depreciates faster than physical machinery — is the primary driver of the widening gap between gross and net investment.
Raising capital per worker, a historic engine of labor productivity growth, now requires a substantially larger increase in gross investment than it did several decades ago.
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Capital Is Making a Comeback— Btw 1985-2021 the capital intensity of the American economy was relatively flat as a rise in intangible investment was offset by a decline in tangible…
The Transition to a Higher Cost of Capital— Bridgewater Associates co-CIO Karen Karniol-Tambour expects 10-year Treasury yields to rise from the current ~4.5% to compensate for structurally higher fiscal…
AI Summary.Global venture capital returns are highly skewed: 62% of deals lose money, more than half lose 50–100% of invested capital, but fat-tailed outliers drive overall returns. This pattern mirrors historical whaling voyages, where payoffs were similarly variable and driven by rare outsized outcomes.
Michael Mauboussin and Dan CallahanMorgan Stanley
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Btw the mid-90s and 2018, 62% of global venture capital investments lost money, and more than half of the deals lost 50–100% of invested capital. Yet US VC returned ~40% higher mean wealth btw 1984 and 2020 than a parallel investment path in the S&P 500.
Does venture capital's extreme inequality in returns justify its economic role?
Core argument: Across 31,000+ global venture capital deals from the mid-1990s to 2018, 62% lost money and more than half destroyed 50–100% of invested capital, yet fat-tailed winners generate returns sufficient to offset the majority of losses.
Exhibit 8 shows in excess of 31,000 observations of returns, measured as multiples of invested capital at the beginning of the period, for global venture capital deals. These results are from the mid-1990s to 2018. 62% lost money and more than one-half of all deals lost 50 to 100% of invested capital. The offset is that the tails are much fatter than those for buyouts or public equities. Public market equivalent (PME) is generally reflected as a ratio between private equity and public market returns. A ratio above 1 reveals relative outperformance and below 1 means underperformance. Here’s an example of how PME works. Say a fund drew $200 million from its investors in January 2021 and paid out $470 million in December 2025. An investor could have invested the $200 million in the S&P 500, which returned $392 million over the same period. The PME would be 1.2 ($470/$392). For venture funds, the average over [1984-2020] was about 1.4.
Takeaways by Macro Roundup® AI
Across 31,000+ global venture capital deals from the mid-1990s to 2018, 62% lost money and more than half destroyed 50–100% of invested capital, yet fat-tailed winners generate returns sufficient to offset the majority of losses.
Harvard Business School professor Tom Nicholas finds venture capital return distributions mirror those of historical whaling voyages, where payoffs were determined by highly variable oil and whalebone yields — confirming that extreme skewness in risk capital is a durable structural feature, not a modern anomaly.
The Deep End: 2025 Alternative Investments Review— For venture funds vintage 2018 and later both the mean and median investor have underperformed the S&P 500 as of 2025. While the top quartile has…
One Hundred Years in the U.S. Stock Markets— Btw January 1926 and December 2025, 60% of US firms had negative total returns relative to T-bills. 46 firms accounted for half of the $91T in net wealth…
AI Summary.Hyperscaler cloud revenue is growing rapidly (AWS +37%, Azure +43%, Google Cloud +82%), with combined capital spending and R&D rising from $460bn to $870bn over the last 12 months.
Michael CembalestJ.P. Morgan
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Since the start of the data-center buildout, S&P earnings breadth has “eclipsed” that which would be historically implied by the ISM manufacturing survey. Cembalest argues earnings growth “appears highly contingent” on continued hyperscaler spending.
Are hyperscalers investing faster than their revenue growth justifies?
Core argument: Hyperscaler capital spending and R&D nearly doubled from $460B in 2024 to $870B over the trailing twelve months, driving S&P 500 earnings breadth well beyond levels that ISM manufacturing surveys alone would predict—evidence of a powerful AI-led trickle-down across sectors.
The Q2 earnings season was positive for hyperscaler annual revenue growth: AWS 37%, Microsoft Azure 43% and Google Cloud 82%. Rising revenue backlogs reinforce evidence of AI monetization: Google Cloud’s backlog increased $52B to $514B, and the AWS backlog rose to $496B, up 36% q/q. Earnings growth is also more broad-based than it was in 2024-2025 when AI was the primary driver. Earnings growth appears highly contingent on continued hyperscaler capital spending and R&D which rose from $460B in 2024 to $870B over the last 12 months. The share of S&P 500 companies with positive expected earnings growth is normally well-predicted by the ISM manufacturing survey. But since the AI capital spending boom began, earnings breadth has eclipsed the improvement in manufacturing surveys; this suggests a powerful trickle-down effect from hyperscalers to other sectors.
Takeaways by Macro Roundup® AI
Hyperscaler capital spending and R&D nearly doubled from $460B in 2024 to $870B over the trailing twelve months, driving S&P 500 earnings breadth well beyond levels that ISM manufacturing surveys alone would predict—evidence of a powerful AI-led trickle-down across sectors.
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The Summer I Turned Pretty— Capital spending booms historically peak when end-demand companies stagnate while equipment suppliers still thrive; today, semiconductor profits are rising even as the large cloud companies funding AI infrastructure see earnings and cash flow decline, raising doubt over who will sustain AI investment.
The Buyers of AI Are Still Waiting for the Payoff— AI capital spending is generating profit margin gains for technology sellers but not for the companies buying and deploying AI across other sectors of the economy.
AI Summary.Corporate profit margins have expanded ~250 basis points over the past year, approaching all-time highs, as 23% profit growth far outpaced 8% growth in corporate value added. Labor's share of income is hitting new lows, confirming that margin expansion—not faster economic growth—is the primary driver of record profit levels.
Abiel ReinhartJ.P. Morgan
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US corporate profit margins rose ~250bp y/y in Q2 and are approaching an all-time high. Reinhart notes that tech and communications services drove ~58% of recent S&P 500 profit growth, even as the sectors have been “steadily losing employment since late 2022.”
Are record corporate profits driven by growth or margin expansion?
Core argument: Corporate profit margins expanded nearly 250 bps over the past year and are approaching all-time highs, as domestic profit growth of 23% dwarfed the 8% rise in corporate value added, compressing labor’s share of income to record lows.
Nominal pre-tax corporate profits in the national income and product accounts (NIPA) were very robust in both 2Q (41% [annual rate]) and over the last year (23%). Excluding post-recession spikes, we haven’t seen a year this strong since the mid-2000s. Higher margins [were] the key driver [of profit growth], as 23% y/y domestic profit growth was far in excess of the 8% increase in corporate value added. Profit margins (pre-tax profits divided by value added) increased close to 250bp over the last year, and are approaching all-time highs, whereas the labor share is hitting new lows.
Takeaways by Macro Roundup® AI
Corporate profit margins expanded nearly 250 bps over the past year and are approaching all-time highs, as domestic profit growth of 23% dwarfed the 8% rise in corporate value added, compressing labor’s share of income to record lows.
Related Articles:
US Corporate Profits Surge To Record As Worker Payouts Wilt— U.S. corporate pre-tax profits reached an annualized $4.8tn, or 18% of national income—the highest share since the post-WWII era—while workers' wages and benefits fell to 60% of national income, the lowest since the 1950s.
Are US Corporate Profit Margins Too High?— In Q1 2026, US after-tax non-financial margins were estimated at 7.6%, just short of the post-1949 high of 8.2% in Q2 of 2021. Tan Kai Xian argues US corporate…
The Record Divide Between Corporate Profits and Worker Pay— Labor's share of national income has fallen to 51%—its lowest recorded level—while corporate profits have reached 12.1% of national income, their highest share since 1950. Inflation-adjusted hourly wages have risen 3% since 2019, while inflation-adjusted corporate profits have risen 50% over the same period.
AI Summary.Big Tech hyperscalers reported over $160bn in paper gains from stakes in other AI companies last quarter, inflating headline profits beyond what underlying operations generated. At Alphabet and Amazon, profit growth was driven by investment gains on holdings such as SpaceX and Anthropic rather than new revenue or cash flow.
Ramsay Hodgson and Emily HerbertFinancial Times
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In Q2, Alphabet, Amazon, Nvidia and Microsoft reported $160B in pre-tax profit from valuation gains on AI-related equity stakes alone.
Are Big Tech profits masking weakness in core business operations?
Core argument: Big Tech hyperscalers booked more than $160bn in pre-tax gains last quarter from stakes in AI companies including SpaceX and Anthropic, with Alphabet and Amazon attributing record profit growth primarily to “other income” rather than core business expansion.
Big tech giants booked a more than $160bn windfall last quarter from investments in other AI companies, flattering their earnings and raising concerns that paper gains are overstating the strength of the AI boom. In the most recent round of earnings reports, pre-tax profits reached a record at several of the Big Tech “hyperscalers”. But the main source of these increases at Alphabet and Amazon was ‘other income’ from gains on SpaceX and Anthropic, rather than new business lines or fresh cash generation. “A couple of years ago investors started to ask about the circularity of [Big Tech] revenues,” said Ben Snider, chief US equities strategist at Goldman Sachs. The profit boost from AI investments now “raises the question of whether the growth these companies are reporting is based on underlying demand or if it is misleading in some way,” he added.
Takeaways by Macro Roundup® AI
Big Tech hyperscalers booked more than $160bn in pre-tax gains last quarter from stakes in AI companies including SpaceX and Anthropic, with Alphabet and Amazon attributing record profit growth primarily to “other income” rather than core business expansion.
The concentration of Big Tech earnings gains in unrealized investment income rather than operating cash flow signals that headline AI-era profitability overstates the sector’s underlying commercial monetization.
Related Articles:
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Opportunities and Expectations: The Present Value of Growth Opportunities in Valuation— A stock index's price can be split into steady-state earnings value and the value of future growth opportunities; historically, the growth opportunity component has averaged 35% of total price, and periods when this share is below average have preceded stronger 10-year returns.
Are US Corporate Profit Margins Too High?— In Q1 2026, US after-tax non-financial margins were estimated at 7.6%, just short of the post-1949 high of 8.2% in Q2 of 2021. Tan Kai Xian argues US corporate…
AI Summary.U.S. corporate pre-tax profits reached an annualized $4.8tn, or 18% of national income—the highest share since the post-WWII era—while workers' wages and benefits fell to 60% of national income, the lowest since the 1950s.
Myles McCormickFinancial Times
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Corporate profits have risen to 18% of national income, their highest share since 1947, while labor’s share has fallen to 60%, a low not seen since the 1950s. The decline in labor’s share has accelerated over the past year.
Are record corporate profits coming at workers' expense?
Pre-tax earnings hit an annualised $4.8tn in the second quarter, or 18% of national income, according to Bureau of Economic Analysis data, the highest share since the aftermath of the second world war. Employees’ share from wages and benefits fell to 60%, the lowest level since the 1950s. “Regardless of what measure you look at, workers, in terms of employee compensation, have been receiving an increasingly small share of national income over time,” said Abiel Reinhart, an economist at JPMorgan. The decline in labour’s share of income has gained pace in the past five years and especially over the past 12 months.
Related Articles:
The Post‑COVID Decline in the Labor Share— The labor share of income has fallen 1.6 percentage points below its pre-pandemic level, reaching an all-time post-war low, driven by within-industry dynamics rather than shifts in activity across sectors.
Are US Corporate Profit Margins Too High?— In Q1 2026, US after-tax non-financial margins were estimated at 7.6%, just short of the post-1949 high of 8.2% in Q2 of 2021. Tan Kai Xian argues US corporate…
Why the Labor Share Keeps Falling: Taxes!— Tax code changes account for roughly one-third of the decline in the worker share of U.S. business income since 1978, as firms shift from corporate to pass-through structures to reclassify wages as profits and reduce tax burdens.
AI Summary.Rising long-term bond yields reflect higher expected short-term interest rates over the next decade, not concerns about government debt sustainability, as both inflation expectations and the risk premium for holding long-term bonds have remained stable.
Stephen MiranFinancial Times
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Citing a stable term premium, Miran argues the rise in the 10-year Treasury yield most likely reflects investors “marking up their expectations for long-run economic growth, not becoming concerned over central bank or fiscal credibility.”
Are rising bond yields signaling higher future rates or debt concerns?
Core argument: The rise in ten-year real Treasury yields is driven almost entirely by higher expected long-run overnight rates, not by fiscal credibility concerns or debt sustainability fears.
Ten-year real yields are equal to the average expected overnight yield over the next ten years, plus a risk premium that investors demand for locking up their money for ten years. This term premium reflects the fact that realised overnight rates might deviate from expected overnight rates. If the market saw fiscal credibility or debt sustainability problems, this would show up in an increased term premium. But the term premium has also been stable and is only a hair lower since the end of last year. With term premium and inflation expectations contained, the recent increase in bond yields is therefore almost entirely due to higher expected overnight rates over the long term.
Takeaways by Macro Roundup® AI
The rise in ten-year real Treasury yields is driven almost entirely by higher expected long-run overnight rates, not by fiscal credibility concerns or debt sustainability fears.
The term premium on ten-year Treasuries remains stable and only marginally lower since year-end, ruling out market pricing of sovereign fiscal stress as a driver of yield moves.
Contained inflation expectations and a flat term premium together confirm that bond market signals reflect monetary policy rate expectations, not structural deficit risk.
Related Articles:
Let the Bond Market Speak— Treasury intervention in a functioning bond market suppresses the price signal that transmits collective market information to decision makers, removing the mechanism by which orderly volatility performs its intended economic function.
America’s Risky Debt: What Markets See That Policymakers Don’t— The safety premium that investors historically paid for US government bonds over equivalent alternatives has compressed toward zero and, at longer maturities, reversed — with global investors now pricing foreign government bonds as safer than US Treasurys.
