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


Thursday, April 1, 2021

AI Summary. The Congressional Budget Office estimates that a permanent increase in government spending of 5-10% of GDP would reduce GDP by 3-10% relative to no increase, depending on how it is financed. A 5% increase financed by labor taxes is projected to lower GDP by 3.2%, and a 10% increase financed by progressive income taxes by 10.1%.

Nelson Congressional Budget Office
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The CBO estimates that increasing government spending by 5-10% of GDP could reduce GDP by 3-10% by 2030, depending on financing methods.

How much does financing a large permanent spending increase reduce GDP?

Core argument: The CBO estimates that a permanent increase in government spending of 5–10% of GDP could reduce GDP by 3–10% by 2030 relative to a no-increase scenario, depending on how the spending is financed.

The CBO estimates that increasing government spending by 5-10% of GDP could reduce GDP by 3-10% by 2030 compared to a no-increase scenario, depending on financing methods. A 5% increase financed by labor taxes could lower GDP by 3.2%, while a 10% increase financed by progressive income taxes might reduce GDP by 10.1%. To maintain deficit neutrality, tax rates must rise over time, impacting younger households more significantly in terms of lifetime consumption and hours worked. Higher-income households face the largest declines in consumption and work hours under progressive tax policies, which also result in the greatest output reduction but the smallest consumption decline among the bottom two-thirds of income earners.

Takeaways by Macro Roundup® AI

  1. The CBO estimates that a permanent increase in government spending of 5–10% of GDP could reduce GDP by 3–10% by 2030 relative to a no-increase scenario, depending on how the spending is financed.
  2. The CBO estimates that a 5% of GDP spending increase financed by labor taxes could lower GDP by 3.2%, while a 10% increase financed by progressive income taxes could reduce GDP by 10.1%.
  3. The CBO finds that maintaining deficit neutrality requires tax rates to rise over time, with younger households bearing larger declines in lifetime consumption and hours worked, and higher-income households facing the largest declines under progressive taxation.

CBO working paper estimates the economic impact of government expenditures rising an additional 5% to 10% of GDP. Quickly by 2030, GDP would be ~ 3-10% lower than the counterfactual (no increase in spending) depending on how the spending is financed.

See table two, CBO’slow range -3.2% impact on GDP assumes a 5% increase in spending financed by labor taxes, their high range is a10% increase in spending financed by progressive income taxes -10.1%.

The Economic Effects of Financing a Large and Permanent Increase in Government Spending: Extended Excerpt Image 1


Jaeger Nelson and Kerk Phillips, "The Economic Effects of Financing a Large and Permanent Increase in Government Spending," Congressional Budget Office, March 2021, https://www.cbo.gov/system/files/2021-03/57021-Financing.pdf

Note the paper is only looking at one side of ledger, estimates the effects of financing, not the impact of the increased spending.

Core finding, “…the paper uses one of CBO’s modeling frameworks— the life-cycle growth model—to illustrate the economic and distributional implications of raising revenues to finance a targeted amount of government spending (either 5 percent or 10 percent of GDP) through three different tax policies: a flat labor tax, a flat income tax, and a progressive income tax. To maintain deficit neutrality, tax rates for all three tax policies must rise over time to offset behavioral responses that result in smaller tax bases. After 10 years, the level of GDP by 2030 is between 3 percent and 10 percent lower than it would be without the increase in expenditures and revenues. In those scenarios, younger households experience greater loss in lifetime consumption and hours worked than older households. Additionally, the fall in lifetime consumption and hours worked is largest for higher-income households and smallest for lower income households when a progressive income tax is used. Aprogressive income tax generates the largest decline in total output. It also generates the smallest decline in consumption among the bottom two-thirds of the income distribution…”

AI Summary. European investors held 29% of high-risk private-label US mortgage-backed securities not guaranteed by government entities such as Fannie Mae or Freddie Mac, and UK or European banks backed 33% of newly issued private-label mortgage securities at the peak of the US securitization boom. Two-thirds of asset-backed commercial paper had European sponsors, including 57% of dollar-denominated issuance.

Philipp Schnabl National Bureau of Economic Research
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European investors held 29% of non-conforming high-risk MBS not backed by USG in 2006. 2/3 of CP issued had European sponsors, with 57% of dollar-denominated CP having European backing.

Did European banks help spread risk through US mortgage securities?

Core argument: European investors held 29% of non-conforming high-risk mortgage-backed securities not backed by US government entities such as Fannie Mae or Freddie Mac in 2006.

In 2006, European investors held 29% of non-conforming high-risk mortgage-backed securities (MBS) not backed by US government entities like Fannie Mae or Freddie Mac. During the peak of the US mortgage securitization boom, 33% of newly issued private label MBS were backed by UK or European banks. Additionally, two-thirds of commercial paper (CP) issued had European sponsors, with 57% of dollar-denominated CP having European backing. This significant involvement of European banks in US financial markets highlights the global interconnectedness and potential for imbalances, as these institutions played a crucial role in the spread of financial risks during the 2007-09 crisis.

Takeaways by Macro Roundup® AI

  1. European investors held 29% of non-conforming high-risk mortgage-backed securities not backed by US government entities such as Fannie Mae or Freddie Mac in 2006.
  2. At the peak of the US mortgage securitization boom, 33% of newly issued private label mortgage-backed securities were backed by UK or European banks.
  3. Two-thirds of commercial paper issued had European sponsors, and 57% of dollar-denominated commercial paper carried European backing.

InCrashedTooze writes (note he carves out the dollar denominated commercial paper),

"...For nonconforming high risk MBS, those not backed by Fannie Mae or Freddie Mac, the share held by European investors was in the order of 29 percent. In 2006, at the height of the US mortgage secularization boom, a third of newly issued private label MBS were backed by British or European banks.....Overall, two thirds of the commercial paper issued had European sponsors, including 57% of the dollar denominated commercial paper..."

Viral Acharya and Philipp Schnabl, "Do Global Banks Spread Global Imbalances? The Case of Asset-Backed Commercial Paper During the Financial Crisis of 2007-09,"National Bureau of Economic Research, June 2010, http://www.nber.org/papers/w16079.pdf

For two thirds of of commercial paper having a European sponsor, including 57% of dollar denominated commercial paper he cites Moody's date analysed by Viral Acharya and Philipp Schnabl (See their table 4 here, paper is attached)

Bank of England, Financial Stability Report, October 22, 2007, https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2007/october-2007.pdf

For a third of newly issued private label MBS being backed by British or European banks he cites a BOE report, see their Table 2.14.

Daniel Beltran, Laurie Pounder and Charles Thomas, "Foreign Exposure to Asset-Backed Securities of U.S. Origin,"International Finance Discussion Papers, August 2008, https://www.federalreserve.gov/pubs/ifdp/2008/939/ifdp939.pdf

For 29% risky mortgages being held by European investors he cites a 2008 Fed paper (See their Table 6, paper attached)

- Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World, (New York: Viking, 2018)

AI Summary. Mortgage originations reached a record $1.2tn in a single quarter, exceeding the 2003 refinance boom, with 71% going to borrowers with credit scores above 760 and a median new-mortgage credit score of 786. Aggregate credit limits fell $10bn on credit cards and $14bn on home equity lines of credit.

Federal Reserve Bank of New York Federal Reserve Bank of New York
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Mortgage originations reached a record high of $1.2tn in 2020Q4, driven by a high share of refinances to borrowers with credit scores over 760. The median credit score for new mortgages was 786.

Are record mortgage originations going mostly to high-credit-score borrowers?

Core argument: Mortgage originations hit a record $1.2tn in 2020Q4, surpassing levels seen during the 2003 refinance boom, driven by a high share of refinances.

Mortgage originations reached a record high of $1.2tn in 2020Q4, surpassing the levels seen during the 2003 refinance boom. This surge was driven by a high share of refinances, with 71% of originations going to borrowers with credit scores over 760, indicating a rise in borrower quality. The median credit score for new mortgages was 786, reflecting stable and high creditworthiness among borrowers. In contrast, auto loan originations were slightly down from their peak but remained the second highest at $162bn. Meanwhile, aggregate credit limits on credit cards and HELOCs [Home Equity Line of Credit] declined by $10bn and $14bn, respectively, continuing a trend of reduced credit availability in these areas. This data suggests a shift towards higher-quality mortgage borrowers and a potential decrease in consumer spending propensity related to equity gains.

Takeaways by Macro Roundup® AI

  1. Mortgage originations hit a record $1.2tn in 2020Q4, surpassing levels seen during the 2003 refinance boom, driven by a high share of refinances.
  2. Borrowers with credit scores above 760 accounted for 71% of mortgage originations in 2020Q4, and the median credit score for new mortgages was 786.
  3. Auto loan originations were the second highest at $162bn in 2020Q4, slightly below their peak, while aggregate credit limits fell $10bn on credit cards and $14bn on HELOCs.

“Quarterly Report On Household Debt And Credit,” Federal Reserve Bank Of New York, February 2021, https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2020Q4.pdf

“…Originations New extensions of credit were substantial in 2020Q4, with a record high level of newly originated mortgages and auto loans. Mortgage originations, measured as appearances of new mortgage balances on consumer credit reports and which include refinances, were at $1.2 trillion, surpassing in nominal terms the volumes seen during the historic refinance boom in 2003Q3.Auto loan originations, which includes both loans and leases, were down slightly from the record high seen in 2020Q3 but were at the second highest level for the series, at $162 billion. In contrast, both HELOC and credit cards saw declines in aggregate credit limits. Aggregate credit limits on credit cards declined by $10 billion, continuing the declines of $31 billion in the third quarter and $53 billion during the second. Aggregate credit limits on HELOC accounts declined by $14 billion. Median mortgage origination credit scores remained roughly stable at a high level, with the median credit score of newly originated mortgages at 786, reflecting a high share of refinances. The median credit score on newly originated auto loans increased, from 712 to 717…”

There has also been an uptick in second home buyers (they don’t know if those are ski houses or investment properties) So some of these people could be consuming their equity gains with more real estate?

So it’s likely the case that the “quality” of homeowners has gone up, that could make there propensity to spend less related to the value of their current equity?

One thing to think about in the context of your question“…What happens if homeowners aren’t paying downs their mortgages from a prior overhang?...”if you look at new mortgage originations the median credit score is now almost 800 (as of Q4 last year), 71 percent of originations in the fourth quarter of 2020 went to borrowers with credit scores over 760 (note this data also reflects refis)

Ed and Ben,

“Real Gross Domestic Product,” Federal Reserve Bank Of St. Louis, Accessed April 2, 2021, https://fred.stlouisfed.org/series/GDPC1

“All Sectors; One to Four Family Residential Mortgages; Asset Level,” Federal Reserve Bank Of St. Louis, Accessed April 2, 2021, https://fred.stlouisfed.org/series/ASHMA

However I thought the story would be better seen in terms of Real GDP, through that lens residential mortgages aren’t back at pre-crisis levels. Note the Z1 data is not chained like the Real GDP numbers but given inflation has been sedated the chart prob tells the story.

Ed Comment:Is it the case that mortgage lending is now above where it was prior to the financial crisis?

Steve Comment: I think the answer is no. This is “All Sectors; One to Four Family Residential Mortgages; Asset Level” from Z1 (it seemed like the ~ best series at capturing residential real estate) through Q4 of last yearso by that measure we are above pre-crisis levels.

Saturday, April 3, 2021

AI Summary. A study of US county-level data finds that economic decline explains less than 10% of the rise in drug-related deaths, with the weak association largely accounted for by confounding factors. The authors argue the epidemic is better explained by the drug environment, including availability and cost, than by economic despair.

Christopher Ruhm National Bureau of Economic Research
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A recent study challenges the notion that opioid addiction is primarily driven by economic despair, suggesting instead that the epidemic is more closely linked to changes in the drug environment.

Does economic decline explain the rise in drug deaths?

Core argument: Economic conditions account for less than 10% of the rise in drug-related deaths in county-level data from 1999–2015, according to the study, which finds that even minor unobserved variables can negate the link entirely.

A recent study challenges the notion that opioid addiction is primarily driven by economic despair, suggesting instead that the epidemic is more closely linked to changes in the drug environment. Analysis of county-level data from 1999-2015 reveals that while areas with economic decline did see higher drug mortality growth, this relationship is weak and largely explained by confounding factors. Economic conditions account for less than 10% of the rise in drug-related deaths, and even minor unobserved variables can negate this link entirely. The study indicates that the public health environment, including drug availability and cost, plays a more significant role in the epidemic. Therefore, improving economic conditions in distressed areas may not substantially reduce drug mortality, as the crisis is more reflective of drug problems than "deaths of despair."

Takeaways by Macro Roundup® AI

  1. Economic conditions account for less than 10% of the rise in drug-related deaths in county-level data from 1999–2015, according to the study, which finds that even minor unobserved variables can negate the link entirely.
  2. The study finds that counties with economic decline saw higher drug mortality growth, but that this relationship is weak and largely explained by confounding factors.
  3. The study argues that the public health environment, including drug availability and cost, plays a more significant role in the epidemic, so improving economic conditions in distressed areas may not substantially reduce drug mortality.

NEBR paper suggest that Deaton's "deaths of despair" are more of a supply side then a demand side issue. Note Ed blogged about thishttps://www.staging4.edwardconard.com/2018/01/30/nebr-paper-disputes-opioid-addiction-link-economic-despair/

Christopher Ruhm, “Deaths of Despair or Drug Problems?" National Bureau of Economic Research, January 2018, http://www.nber.org/papers/w24188

"...The United States is in the midst of a fatal drug epidemic. This study uses data from the Multiple Cause of Death Files to examine the extent to which increases in county-level drug mortality rates from 1999-2015 are due to “deaths of despair”, measured here by deterioration in medium-run economic conditions, or if they instead are more likely to reflect changes in the “drug environment” in ways that present differential risks to population subgroups.A primary finding is that counties experiencing relative economic decline did experience higher growth in drug mortality than those with more robust growth, but the relationship is weak and mostly explained by confounding factors. In the preferred estimates, changes in economic conditions account for less than one-tenth of the rise in drug and opioid-involved mortality rates. The contribution of economic factors is even less when accounting for plausible selection on unobservables, with even a small amount of remaining confounding factors being sufficient to entirely eliminate the relationship. These results suggest that the “deaths of despair” framing, while provocative, is unlikely to explain the main sources of the fatal drug epidemicand that efforts to improve economic conditions in distressed locations, while desirable for other reasons, are not likely to yield significant reductions in drug mortality.Conversely, the risk of drug deaths varies systematically over time across population subgroups in ways that are consistent with an important role for the public health environment related to the availability and cost of drugs. Put succinctly, the fatal overdose epidemic is likely to primarily reflect drug problems rather than deaths of despair..."

let's by all means legalize drugs.