Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, May 18, 2020

AI Summary. Polling of white voters shows 41% support for Biden versus 51% for Trump, a 10-point margin, compared with Clinton's 15-point loss among the same group. Biden polls 4 points better than Clinton among white voters with college degrees and 6 points better among those without.

Economist Staff The Economist
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Biden now leads Trump by 10 points among white voters, a 15-point improvement from 2016.

Are Democrats narrowing their polling gap among white voters?

Core argument: Biden trails Trump among white voters 41% to 51%, a 10-point margin that improves on Clinton's 15-point loss with the same group in 2016.

In the 2020 election, Biden's margin with white voters showed a notable shift compared to previous elections. Currently, 41% of white voters would support Biden, while 51% favor Trump, resulting in a 10-point margin. This represents an improvement from 2016 when Clinton lost this group by 15 points. Biden has gained ground among whites with college degrees and those without, polling four and six percentage points better than Clinton, respectively. In states where working-class white voters are predominant, Biden is polling 11 points better than Clinton, although he performs six points worse in states where they are the smallest share. This data highlights Biden's strategic gains among key voter demographics, which could have significant implications for future electoral strategies and policy considerations.

Takeaways by Macro Roundup® AI

  1. Biden trails Trump among white voters 41% to 51%, a 10-point margin that improves on Clinton's 15-point loss with the same group in 2016.
  2. Biden polls four points better than Clinton among whites with college degrees and six points better among whites without degrees.
  3. In states where working-class white voters make up the largest share of the electorate, Biden polls 11 points better than Clinton, while running six points worse in states where they are the smallest share.

We spent the lockdown sorting American voters into 380,000 distinct groups: Extended Excerpt Image 1


“…. Currently our model estimates that 41% of whites who cast ballots would vote for Mr Biden if the election were held today, whereas 51% say they will cast their lot for Mr Trump—a ten-percentage-point margin. In 2016 Mrs Clinton lost this group by 15 points.Mr Biden has improved his standing both among whites who have college degrees and the ever-watched group of those who do not. He polls four and six percentage points better than Mrs Clinton did among each group, respectively. Mr Biden is currently polling 11 points better than Mrs Clinton in states where working-class white voters make up the largest share of the electorate, and he is performing roughly six points worse in those states where they are the lowest share (see chart)….”

The Economist, "We spent the lockdown sorting American voters into 380,000 distinct groups," The Economist, May 2, 2020, https://www.economist.com/united-states/2020/05/02/we-spent-the-lockdown-sorting-american-voters-into-380000-distinct-groups

AI Summary. Climate models show a wider range of uncertainties in the latest coordinated comparison round than the previous one, with the largest uncertainties stemming from external variables—such as unpredictable rates of human greenhouse gas emissions—rather than the models' internal mechanics. Adding complex elements like ice-sheet dynamics can increase divergence between models.

Economist Staff The Economist
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Uncertainty remains high in climate models due to factors beyond the models themselves, according to @TheEconomist. The cmip6 process shows a wider range of uncertainties compared to cmip5, largely due to human activities adding CO2 & methane to the atmosphere at unpredictable rates.

Do climate model uncertainties stem mainly from factors outside the models?

Core argument: The concluding CMIP6 modelling process shows a wider range of uncertainties than its CMIP5 predecessor, despite advances in climate models themselves.

Despite advancements in climate models, uncertainty remains high due to factors beyond the models themselves. The cmip6 process, which is concluding, shows a wider range of uncertainties compared to cmip5. This is largely because human activities are adding CO2, methane, and other greenhouse gases to the atmosphere at rates that models cannot accurately predict. The complexity of incorporating new elements like ice-sheet dynamics can lead to greater divergence between models, highlighting that the largest uncertainties stem from external variables rather than the models' internal mechanics. This unpredictability poses significant challenges for policymakers and economists who rely on these models for data-driven insights into climate change's economic impacts.

Takeaways by Macro Roundup® AI

  1. The concluding CMIP6 modelling process shows a wider range of uncertainties than its CMIP5 predecessor, despite advances in climate models themselves.
  2. The largest climate-model uncertainties stem from external variables rather than the models' internal mechanics, chiefly because human additions of CO2, methane and other greenhouse gases occur at rates models cannot accurately predict.
  3. Incorporating additional elements such as ice-sheet dynamics can increase divergence between climate models, posing challenges for policymakers and economists who rely on them for insight into climate change's economic impacts.

“…Unfortunately increasing complexity does not always reduce uncertainty. A model which ignores, say, the instability of ice sheets—as most did until recently—is clearly missing something important. However, because there are always different ways to incorporate something new, two models updated to capture ice-sheet dynamics may diverge more after this “improvement” than they did when, unrealistically, they simply ignored the issue. In the cmip6 process, which is currently winding up, preliminary results show a wider range of uncertainties than was seen in cmip5. The biggest source of uncertainty, though, lies not inside the models but outside them. Climate change is a problem because human activity is adding carbon dioxide, methane and other greenhouse gases to the atmosphere at a rate that is both prodigious andimpossible for the physics, chemistry and biology encoded in the models to predict….”

Economist Staff, "How modelling articulates the science of climate change,"The Economist, May 2, 2020, https://www.economist.com/schools-brief/2020/05/02/how-modelling-articulates-the-science-of-climate-change

AI Summary. Outstanding US and European investment-grade non-financial corporate debt rose from $2.5tn to $5.5tn, a 120% increase. The growth in debt financing has brought renewed scrutiny to credit-rating agencies, whose assessments help determine borrowing costs and investment decisions.

Economist Staff The Economist
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US and European corporate investment-grade non-financial debt rose from $2.5tn to $5.5tn btw 2007-2020, a 120% increase.

Has the doubling of corporate debt renewed scrutiny of credit-rating agencies?

Core argument: Outstanding US and European investment-grade non-financial corporate debt rose from $2.5tn in 2007 to $5.5tn in 2020, a 120% increase.

From 2007 to 2020, US and European corporate investment-grade non-financial debt saw a significant uptick, with outstanding amounts rising from $2.5tn to $5.5tn, reflecting a 120% increase. This surge in debt issuance coincided with a broader trend of corporate leveraging, as evidenced by the S&P Global's data showing a doubling of corporate debt levels over the same period. The increased reliance on debt financing has placed credit-rating agencies under scrutiny, as their assessments play a crucial role in determining borrowing costs and investment decisions. The implications of this trend are profound, affecting everything from corporate balance sheets to macroeconomic stability, as policymakers and investors closely monitor the potential risks associated with elevated debt levels in the context of economic uncertainty.

Takeaways by Macro Roundup® AI

  1. Outstanding US and European investment-grade non-financial corporate debt rose from $2.5tn in 2007 to $5.5tn in 2020, a 120% increase.
  2. S&P Global data show corporate debt levels doubled between 2007 and 2020, part of a broader trend of corporate leveraging.
  3. Credit-rating agencies face renewed scrutiny as corporations rely more heavily on debt financing, with rating assessments shaping borrowing costs and investment decisions.

Credit-rating agencies are back under the spotlight: Extended Excerpt Image 1


Credit-rating agencies are back under the spotlight: Extended Excerpt Image 2


Economist Staff, "Credit-rating agencies are back under the spotlight,"The Economist, May 7, 2020, https://www.economist.com/finance-and-economics/2020/05/07/credit-rating-agencies-are-back-under-the-spotlight

Ed Comment:"...there is are 2 graph in finance and economics: credit rating agencies: makers marked. One shows the increase in us and European corporate investment grade non-financial debt market size (which cis net debt issuance) since 2007. Let’s file that. The other graph shows the s&P global, outperforming the S&P 500. Our Trump trade show us outperforming the rest of the high-wage world. What’s the s&P global? What’s in it?..."

Steve Comment: TheS&P Global1200, “…The S&P Global 1200 provides efficient exposure to the global equity market. Capturing approximately 70% of global market capitalization, it is constructed as a composite of 7 headline indices, many of which are accepted leaders in their regions. These include the S&P 500® (US), S&P Europe 350, S&P TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P/ASX All Australian 50, S&P Asia 50 and S&P Latin America 40….”

AI Summary. U.S. pharmaceutical imports more than doubled from $65bn to $151bn, widening the pharmaceutical trade deficit from $32bn to $93bn, or about 0.4% of GDP, with much of the growth coming from high-wage countries such as Ireland and Switzerland. The author attributes part of this shift to tax policies encouraging profit shifting and offshoring of high-value production.

Brad Setser Council on Foreign Relations
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The US pharmaceutical trade deficit has surged, surpassing the aerospace surplus, driven by imports from high-wage countries like Ireland & Switzerland. The deficit has more than doubled since 2006, escalating from $32bn to $93bn, about 0.4% of US GDP.

Do tax policies drive the widening pharmaceutical trade deficit?

Core argument: U.S. pharmaceutical imports more than doubled from $65bn in 2006 to $151bn in 2019, widening the pharmaceutical trade deficit from $32bn to $93bn, about 0.4% of U.S. GDP, now exceeding the aerospace surplus.

The U.S. pharmaceutical trade deficit has surged, surpassing the aerospace surplus, driven by a significant increase in imports from high-wage countries like Ireland and Switzerland. Since 2006, pharmaceutical imports have more than doubled from $65bn to $151bn by 2019, escalating the trade deficit from $32bn to $93bn, which is about 0.4% of U.S. GDP. This shift is partly attributed to profit shifting encouraged by tax policies post-TCJA [Tax Cuts and Jobs Act], which incentivize offshoring high-value production. Despite high U.S. pharmaceutical prices, these imports do not enhance consumer choice as they are patent-protected goods. The primary beneficiaries are pharmaceutical company owners who enjoy lower taxes, while the U.S. Treasury loses revenue. This dynamic highlights the need for policy adjustments to address the growing trade imbalance and its implications for U.S. manufacturing and fiscal health.

Takeaways by Macro Roundup® AI

  1. U.S. pharmaceutical imports more than doubled from $65bn in 2006 to $151bn in 2019, widening the pharmaceutical trade deficit from $32bn to $93bn, about 0.4% of U.S. GDP, now exceeding the aerospace surplus.
  2. The growth in U.S. pharmaceutical imports comes largely from high-wage countries such as Ireland and Switzerland, attributed partly to profit shifting encouraged by tax policies after the Tax Cuts and Jobs Act that incentivize offshoring high-value production.
  3. Pharmaceutical imports do not expand U.S. consumer choice because the goods are patent-protected, with pharmaceutical company owners benefiting from lower taxes while the U.S. Treasury loses revenue.

New Setser, the under the radar “Irish Shock.”

U.S. pharmaceutical output peaked back in 2006, pharma imports have been climbing since then but really jumped after the TCJA (the trade deficit in pharmaceuticals is on track to double between the start of 2018 (after the tax cuts) and the end of 2020) Brad’s in favor of using the tax code to end profit shifting that encourages the offshoring of high value add like pharmaceuticals

The Irish Shock to U.S. Manufacturing?: Extended Excerpt Image 1

“…Yet America’s consumption of pharmaceuticals didn’t peak in 2006. Only U.S. output. Imports have increased substantially since 2006.Imports of pharmaceuticals have increased from $65 billion in 2006 to $151 billion in 2019. As a result, the trade deficit in pharmaceuticals has increased from $32 billion at the end of 2006 to $93 billion in March of this year. That is about 0.4 percent of US GDP, or just under 10 percent of the total trade deficit in manufactures.The bulk of these imports are from countries that pay high wages. The two biggest sources of imports are Ireland and Switzerland. Many of the usual arguments around the gains to consumers from trade don't really apply here. The imports are of patent protected goods, so they don't expand consumer choice. And U.S. pharmaceutical prices are notoriously high—imports from Ireland and Switzerland haven't brought U.S. pharmaceutical prices down to European levels. The bulk of the gains from trade here almost certainly go to the owners of the pharmaceutical companies who benefit from lower taxes. And the main loser is the U.S. Treasury. Right now, the United States pays the highest prices in the world for its medicines (many of which derive from NIH research) while U.S. pharmaceutical companies are often taxed at quite low effective rates….”

Brad Setser, "The Irish Shock to U.S. Manufacturing?," Council On Foreign Relations, May 15, 2020, https://www.cfr.org/blog/irish-shock-us-manufacturing

Ed Comment:I think what we care about is how much us taxes pharma pays, how many high value-added domestic jobs they create, and the domestic multiplier on those jobs, not where they locate low-value added pill stuffers. Do we want the research jobs offshore or on? He might have a point, but not without pulling his nose off the paper and putting his point into the relevant context.

Tuesday, May 19, 2020

AI Summary. A lifetime analysis of US federal and state tax and benefit programs estimates a median marginal net tax rate of 43.2%, with one in four low-wage workers facing rates above 70% and the richest 1% facing a median near 50%. State differences could raise lifetime living standards up to 8.1% through relocation.

David Altig, Alan Auerbach, Laurence Kotlikoff, Elias Ilin, Victor Ye National Bureau of Economic Research
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One in four low-wage workers face marginal net tax rates > 70%, richest 1% face median lifetime marginal tax rate of ~ 50%.

How much of Americans' extra earnings do taxes and benefit losses take?

Core argument: Using The Fiscal Analyzer, the study finds one in four low-wage workers face marginal net tax rates above 70%, while over half face rates above 45%.

The analysis using the Fiscal Analyzer (TFA) reveals that one in four low-wage workers face marginal net tax rates exceeding 70%, effectively trapping them in poverty, while over half encounter rates above 45%. The richest 1% are not exempt, facing a median lifetime marginal tax rate of approximately 50%. The study highlights the complexity of U.S. federal and state tax and benefit programs, which create significant work disincentives. The overall median lifetime marginal net tax rate stands at 43.2%, compared to a current-year rate of 37.6%. Notably, state-specific tax provisions lead to substantial variations in marginal and average tax rates, offering households the potential to enhance their lifetime living standards by up to 8.1% through interstate relocation. This dispersion underscores the profound impact of fiscal policies on labor supply incentives across different income groups.

Takeaways by Macro Roundup® AI

  1. Using The Fiscal Analyzer, the study finds one in four low-wage workers face marginal net tax rates above 70%, while over half face rates above 45%.
  2. The median lifetime marginal net tax rate across Americans is 43.2%, compared with a current-year rate of 37.6%, and the richest 1% face a median lifetime marginal rate of roughly 50%.
  3. State-specific tax provisions produce substantial variation in marginal and average tax rates, giving households the potential to raise lifetime living standards by up to 8.1% by relocating across states.

Auerbach/Kotlikoff fire up their FTA model again to look at lifetime marginal net tax rates, findings are pretty shocking, “…One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. The richest 1 percent also face a high median lifetime marginal tax rate – roughly 50 percent…..”

In paper they don’t attempt to measure the response to these disincentives, just seek to measure the scale of the disincentives (to work)

“….The U.S. has a plethora of federal and state tax and benefit programs, each with its own work incentives and disincentives. This paper uses the Fiscal Analyzer (TFA) to assess how these policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates household borrowing constraints and all major federal and state fiscal policies. We use TFA in conjunction with the 2016 Federal Reserve Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates…. calculate how much each household is able to consume, on an expected (average) basis over each household’s potential survival paths. Then compare this remaining expected lifetime spending with the corresponding amount the household can expect to spend were it to earn more either on a temporary (current year) or permanent (through retirement) basis. Subtracting 1 from the ratio of the difference in present value spending to the present value change in human wealth tells us the household’s remaining lifetime marginal net tax rate…. Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty. Over half face remaining lifetime marginal net tax rates above 45 percent. The richest 1 percent also face a high median lifetime marginal tax rate – roughly 50 percent. Double taxation matters. The overall median lifetime marginal net tax rate is 43.2 percent compared with an overall current-year marginal net tax rate of 37.6 percent. We also find remarkable dispersion in both lifetime and current ear marginal net tax rates, particularly among the poor, and major differences in marginal and average net taxation across states, providing typical households a large incentive to relocate to another state….state-specific tax and benefit provisions produce major differences across states in marginal and average tax rates. Indeed, a typical household can raise its lifetime living standard by as much as 8.1 percent simply by moving states…..”

David Altig, Alan Auerbach, Laurence Kotlikoff, Elias Ilin, Victor Ye, “Marginal Net Taxation of Americans’ Labor Supply,” National Bureau Of Economic Research, May 5, 2020, https://www.nber.org/papers/w27164

Ed Comment: Shocking. Add to taxes, poverty, etc. mark impartnat

AI Summary. In a survey of chief executives and their direct reports, nearly 80% said that fewer than 50% of innovation projects succeed within their organizations.

Broadridge Broadridge
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CEOs report that nearly 80% of innovation projects fail to succeed, highlighting challenges in implementing emerging technologies & fostering innovation.

Do most corporate innovation projects fail to succeed?

Core argument: Nearly 80% of CEOs and their direct reports say fewer than 50% of innovation projects succeed within their organizations, according to a survey by Broadridge Financial Solutions and the G100 Network.

A survey by Broadridge Financial Solutions and G100 Network reveals that nearly 80% of CEOs and their direct reports acknowledge that less than 50% of innovation projects succeed within their organizations. This statistic underscores the challenges businesses face in effectively implementing emerging technologies and fostering innovation. The high failure rate of these projects may reflect broader economic implications, such as inefficient resource allocation and potential impacts on GDP growth. As companies strive to enhance their competitive edge, understanding the factors contributing to these outcomes is crucial for policymakers and business leaders aiming to improve innovation success rates and drive economic progress.

Takeaways by Macro Roundup® AI

  1. Nearly 80% of CEOs and their direct reports say fewer than 50% of innovation projects succeed within their organizations, according to a survey by Broadridge Financial Solutions and the G100 Network.
  2. The Broadridge and G100 Network findings point to the difficulty businesses face in implementing emerging technologies and fostering innovation.

Figured cited in WSJ, note they don't define "succeed" or “innovation projects” seems hokey

"... Nearly 80% of CEOs and their direct reports say that less than half of all innovation projects at their organization succeed, according to a survey released today from Broadridge Financial Solutions, Inc. (NYSE:BR), a global Fintech leader, and G100 Network...."

CEOs Discuss Emerging Technology and Innovation Projects: Extended Excerpt Image 1


Broadridge, "CEOs Discuss Emerging Technology and Innovation Projects," Broadridge, May 13, 2020, https://www.broadridge.com/press-release/2020/ceos-discuss-emerging-technology-and-innovation-projects

AI Summary. World gross savings as a share of gross national income has risen persistently since 1990, a "global savings glut" the author attributes largely to policy choices and links to slowing global trade and a low natural rate of interest. High savings rates can suppress demand and hinder investment, contributing to economic stagnation.

Jon Turek Cheap Cinvexity
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The global savings glut, driven by policy choices, has led to macroeconomic imbalances & high savings rates suppressing demand & hindering investment. @JonTurek

Do policy choices explain the rising global savings glut?

Core argument: World gross savings as a share of gross national income has risen persistently since 1990, a global savings glut the author attributes largely to policy choices.

Since 1990, the world gross savings as a % of GNI [Gross National Income] has been characterized by a persistent increase, contributing to what is termed the global savings glut. This phenomenon is linked to macroeconomic imbalances such as slowing global trade and low r* [natural rate of interest], driven largely by policy choices. As economies emerge from the pandemic, the private sector faces two potential outcomes: a liquidity crisis evolving into a solvency crisis or a surge in savings. This has led to fiscal plans involving debt forgiveness or socializing costs to alleviate private sector balance sheets. The implications are significant, as high savings rates can suppress demand, hinder investment, and exacerbate economic stagnation, necessitating strategic policy interventions to rebalance global economic dynamics.

Takeaways by Macro Roundup® AI

  1. World gross savings as a share of gross national income has risen persistently since 1990, a global savings glut the author attributes largely to policy choices.
  2. The author links the savings glut to macroeconomic imbalances including slowing global trade and a low natural rate of interest (r*), arguing high savings suppress demand, hinder investment, and worsen economic stagnation.
  3. As economies emerge from the pandemic, the private sector faces either a liquidity crisis turning into a solvency crisis or a surge in savings, prompting fiscal plans that forgive debt or socialize costs to relieve private balance sheets.

Jon Turek, "The Global Savings Glut, a Modern Policy Failure,"Cheap Cinvexity, May 18, 2020, https://jonturek.blogspot.com/2020/05/the-global-savings-glut-modern-policy.html

“…Overall: These all seem to be separate macroeconomic imbalances. Slowing global trade, high savings, low r*, EM flows. However, the umbrella in which they all seem to fit under is the world outlined above, a world that saves too much. And what is interesting from both a trading and a macroeconomic point of view, a lot of this was just a policy choice. Getting out of the pandemic, there are two outcomes for the private sector. One, a liquidity crisis turning into a solvency crisis, or they are saved and develop a massive savings impulse after this ends. This is why all these plans for fiscal involve some sort of debt forgiveness or socializing necessary costs. Policy will be pushed, whether it knows it or not, to "free" private sector balance sheets…”

Ed Comment: I love the data The narrative has some iffy aspects. “…and the US doesn't save.”Not exactly, we save enough to finance our investment. And much of what we save doesn’t show up as savings. It shows up as expenses for salaries paid to people designing a better future, most of whom are now working for home BTW. We haven’t found ways to invest the enormous influx of offshore savings.I don’t think exchange rates are a root cause. They’re an effect. The surplus saver are exporting manufacturing and buying US assets as a matter of policy. There might be a deeper correlation between manufacturing and having excess savings since the cost of capital goods is dropping faster than inflation and the future of manufacturing employment looks poor. This explains why the dollar weakens when china stimulates—the China choose to use their savings domestically rather than exporting them to the US. It's odd to say “External demand started falling, and the reaction was, we'll try adjusting the currency to rebalance. This is how Europe got to negative interest rates while running primary surpluses.” How do negative interest rate help to increase savings need to increase surplus exports? They work to mitigate savings and consequently surplus exports. A different mechanism has to be at work. For example, as demand for manufacturing employment declines (because manufacturing efficiency grows faster than the demand for manufactured output), savers may increase saving because they fear the future, which leads to a Keynesian paradox of thrift negative feedback loop. Low rates are a resulting effect, not a root cause.It’s impossible to believe“The world economy shifted”but“Asia+Europe didn't get the message.”I’m sure they go the message loud and clear. Hence they continued savings despite low rates. It’s silly/sloppy to say global trade declined before trump. This was predicted long before trump because the growth in GDP is not in manufactured good that can be exported.“So what do we have now. A balance sheet recession with both the private and public sector trying to save.”Who thinks the public sector is saving?!!! Increase growth comes with increased volatility. You can’t complain about one while ignoring the other. Or worse demand less volatility as if dampening it doesn’t come at the expense of (less capital and) slower growth. I also thinks it a mistake to call the pandemic “a liquidity crisis turning into a solvency crisis.” It’s not simply a liquidity crisis. It’s more of a solvency crisis. The path to insolvency passes through a liquidity crisis on its way to insolvency. That doesn’t make it a liquidity crisis. Insolvency can be avoided in a liquidity crisis. In a mild insolvency crisis, insolvency can be avoid if it can be pushed into the future, when better future circumstances makes it possible to avoid insolvency.

AI Summary. Central bank policy stance explains less than half the variation in short-term interest rates, with the remainder attributed to global forces including potential output growth, demography, and other latent factors. Interest rates across major advanced economies have drifted down together in recent decades, reflecting a common decline in the natural real rate of interest.

Òscar Jordà and Alan Taylor Federal Reserve Bank of San Francisco
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Central bank policy explains less than half the variation in interest rates, with the remainder driven by productivity growth, demography, and other factors. @ÒscarJordà.

How much of short-term interest rate variation do central banks control?

Core argument: Central bank policy stance explains less than half the variation in short-term interest rates, with the remainder driven by productivity growth, demography, and other factors.

Central bank policy explains less than half the variation in interest rates, with the remainder driven by productivity growth, demography, and other factors. Interest rates in major advanced economies have drifted down in unison over recent decades, reflecting movements in the global and domestic neutral rates of interest, with only the latter controlled by central banks. From 1985, a common declining natural real rate of interest (r*) has been observed globally, influenced by potential output growth and other latent factors, each explaining about half the global variation in r*. Despite a focus on local determinants, most variation in short rates is not accounted for by policy stance, highlighting the significant role of global forces. Over the long run, there is considerable variation in the local and world paths of the natural rate, with a cross-country convergence of both gap and stance since 1970.

Takeaways by Macro Roundup® AI

  1. Central bank policy stance explains less than half the variation in short-term interest rates, with the remainder driven by productivity growth, demography, and other factors.
  2. Since 1985, a common declining natural real rate of interest has been observed globally, with potential output growth and other latent factors each explaining about half the variation in global r*.
  3. Interest rates across major advanced economies have drifted down in unison over recent decades, reflecting movements in both global and domestic neutral rates, only the latter of which central banks control.

new Jordà/Taylor suggests Central Banks are rate takers, not makers, central bank policy explains less than half the variation in interest rates the rest is a function of productivity growth and demography (and some other factors)

"....Interest rates in major advanced economies have drifted down and in greater unison over the past few decades. A country’s rate of interest can be thought of as reflecting movements in the global neutral rate of interest, the domestic neutral rate, and the stance of monetary policy. Only the latter is controlled by the central bank. Estimates from a state space New Keynesian model show that central bank policy explains less than half of the variation in interest rates. The rest of the time, the central bank is catching up to trends dictated by productivity growth, demography, and other factors outside of its control.....wider forces can permeate interest rate settings through the drift of the natural real rate of interest, or r*, at both local and global levels..... From 1985, and for the last 30 years, we find a common, declining r* in all countries; previously r* had been rising, especially in the 1970s. The finding is not new in itself, but now confirmed even in a model with term premiums. We find that all economies have a strong common global component in their r* measure. They also have a strong common global component in two subcomponents of r*. The first of these is attributable to potential output growth and the second captures other latent factors. Each explains about half the global variation in r*. The term premiums vary much less and have been relatively stable in the last 30 years or so...." We find that all economies have a strong common global component in their output gap measure gap. They also have a strong common global component in their policy measure stance. Despite the focus of much empirical and theoretical work on the local economy determinants of stance, we find that most of the variation in short rates is not accounted for by stance at all. Rather, over the long run, variation in the local and world paths of the natural rate is considerable. We find a cross-country convergence of both gap and stance, which have seen falling dispersion since 1970. But for stance this was not monotonic, as policy dispersion rose to high levels from the late 1970s to the early 1990s. This is intuitive, given the chaotic nature of monetary policy execution from the collapse for Bretton Woods to the start of inflation targeting…”

Riders on the Storm: Extended Excerpt Image 1


Òscar Jordà and Alan Taylor, "Riders on the Storm," Federal Reserve Bank of San Francisco, September 2019, https://www.frbsf.org/economic-research/publications/working-papers/2019/20/

AI Summary. Broad US money-supply measures have shown large jumps in growth, and monetarist views hold that such rapid monetary expansion alongside constrained output points to a possible rise in inflation. Slower circulation of money as people hold rather than spend it could offset this, leaving the probability of inflation higher but still modest.

Martin Wolf Financial Times
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US M2 and M4 have shown large jumps in growth, suggesting a potential rise in inflation according to monetarist views.

Does rapid money-supply growth alongside constrained output raise inflation risk?

Core argument: US M2, covering demand, savings, and time deposits, and the broader transaction-weighted Divisia M4 index have both jumped in growth, which under monetarist views points to rising inflation when output is constrained.

In recent months, US M2, which includes demand, savings, and time deposits, and Divisia M4, a broader index that weights components by their transaction role, have both shown large jumps in growth. This rapid monetary expansion, coupled with constrained output, suggests a potential rise in inflation according to monetarist views. However, the pandemic may have reduced the velocity of money circulation as people hold rather than spend it, which could mitigate inflationary pressures. Despite this, the risk of inflation remains, reminiscent of the unexpected surge in the 1970s. While the probability of inflation has increased, it remains modest.

Takeaways by Macro Roundup® AI

  1. US M2, covering demand, savings, and time deposits, and the broader transaction-weighted Divisia M4 index have both jumped in growth, which under monetarist views points to rising inflation when output is constrained.
  2. The pandemic may have lowered the velocity of money as people hold rather than spend it, an offset that would mitigate the inflationary pressure from rapid monetary expansion.
  3. The probability of inflation has increased but remains modest, with the unexpected surge of the 1970s offering a precedent.

Martin Wolf, "Why inflation might follow the pandemic,"Financial Times, May 19, 2020, https://www.ft.com/content/cdae43be-9901-11ea-adb1-529f96d8a00b

“…But this time it really is different. In the past two months, US M2, a measure that includes demand, savings and deposits for fixed amounts of time, and Divisia M4, a broader index that weights components by their role in transactions, both show large jumps in growth.If one is a monetarist, like Tim Congdon, the combination of constrained output with rapid monetary growth forecasts a jump in inflation. But it is possible that the pandemic has lowered the velocity of circulation: people may hold this money, not spend it.But one cannot be certain. I will not forget the almost universally unexpected surge in inflation in the 1970s. This could happen again… The chances of inflation may have risen. But they are still modest….”

Wolf mentions Goodhart's analysis we’ve looked at (he disagrees)

Ed Comment:I think the attached tells a much clearer story—no real increase in the money supply. The monetary base has to turn into credit and not excess reserves to increase the money supply and, in turn, create (the possibility of) inflation (or growth). Otherwise, the Fed is just borrowing short term (and lending it to the government if the Fed buys Treasuries) by paying the interest rate it pays on excess reserves, rather than the government borrowing the money directly. Ho hum. The (interest rate paid on the) excess reserves gives the Fed an extra policy lever, albeit a small one since it’s a rate-taker, and a prefunded bank bailout in the case of a run on the banks, which is not so bad. The risk is dumb policymakers stupidly and mistakenly griping that the interest paid to banks by the Fed is a bank subsidy and the UIs, who don’t know right from wrong, and just believing what they are told to believe. That’s a big risk. Shrewd politicians are eager to create, find, and exploit that.