Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “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 full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “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 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
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, September 12, 2023

AI Summary. The Congressional Budget Office estimates the federal budget deficit reached $1.5tn over the first 11 months of the fiscal year, $0.6tn more than the same period a year earlier, with revenues 10% lower and outlays 3% higher. Net interest costs on the public debt rose $149bn, or 30%, which the agency attributes mainly to significantly higher interest rates.

Nathaniel Frentz and Justin Latus Congressional Budget Office
Date Posted:

According to @USCBO, the federal budget deficit grew by $600B for the first 11 months of fiscal 2023 vs. fiscal 2022. Revenues were down 10% and outlays were up 3%.

Is the federal deficit widening as revenues fall and interest costs climb?

Core argument: The Congressional Budget Office estimates the federal budget deficit reached $1.5 trillion in the first 11 months of fiscal year 2023, $0.6 trillion more than the shortfall recorded over the same period a year earlier.

The federal budget deficit was $1.5 trillion in the first 11 months of fiscal year 2023, the Congressional Budget Office estimates—$0.6 trillion more than the shortfall recorded during the same period last year. Revenues were 10% lower and outlays were 3% higher from October through August than they were during the same period in fiscal year 2022. Receipts collected through August 2023, net of refunds, were about $350 billion less than CBO projected, mainly because of smaller-than-anticipated collections of individual and corporate income taxes. Net outlays for interest on the public debt rose by $149 billion (or 30 percent), mainly because interest rates are significantly higher than they were in the first 11 months of fiscal year 2022.

Takeaways by Macro Roundup® AI

  1. The Congressional Budget Office estimates the federal budget deficit reached $1.5 trillion in the first 11 months of fiscal year 2023, $0.6 trillion more than the shortfall recorded over the same period a year earlier.
  2. Revenues from October through August were 10 percent lower and outlays 3 percent higher than in the same period of fiscal year 2022, and receipts net of refunds ran about $350 billion below CBO's projection.
  3. Net outlays for interest on the public debt rose by $149 billion, or 30 percent, mainly because interest rates are significantly higher than in the first 11 months of fiscal year 2022.

Related Articles:

  • The 2023 Long-Term Budget Outlook — The Congressional Budget Office projects the federal deficit falls from 5.8% of gross domestic product to 5.0% before rising every year to 10% of GDP over three decades, a level exceeded only during World War II and the pandemic. Federal debt held by the public is projected to reach 181% of GDP.
  • Interest Costs Will Grow the Fastest Over the Next 30 Years — The Congressional Budget Office projects federal spending will reach 29.1% of GDP over three decades, with net interest on the national debt rising from 1.9% of GDP to 6.7%, or $5.4tn. Under that projection, interest becomes the largest single federal budget line item, surpassing Social Security, Medicare, and Medicaid.
  • US Fiscal Alarm Bells Are Drowning Out a Deeper Problem — The Congressional Budget Office projects US federal debt held by the public at 98% of national income, within 7.6 percentage points of its 1946 wartime peak and on track to exceed it by 2028. International Monetary Fund forecasts show US debt surpassing Italy's by 2028 and Greece's by the end of the decade.

AI Summary. Most U.S. mortgages are 30-year fixed rate, while many other countries rely on variable or short-dated fixed rate mortgages, leaving U.S. mortgage debt servicing ratios near historical lows amid robust wage growth and a large stock of low-rate loans. Households in many other countries are seeing disposable income squeezed.

Joseph Wang Fed Guy Blog
Date Posted:

The prevalence of long-dated mortgages, and a reliance on capital markets financing, has made the US relatively immune to rate increases. @FedGuy12 writes that the dollar is likely to strengthen as foreign central banks cut rates before the Fed.

Do fixed rate mortgages shield US households from rising rates?

Core argument: U.S. mortgage debt servicing ratios have stayed near historical lows, supported by the dominance of 30-year fixed rate loans, a large existing stock taken out at low rates, and robust wage growth.

While the vast majority of U.S. mortgages are 30 year fixed rate, many other countries rely on either variable rate or short dated fixed rate mortgages. U.S. mortgage debt servicing ratios have thus remained around historical lows due to robust wage growth and a large existing stock of mortgages taken out at low rates. In contrast, households in many other countries are beginning to see their disposable income disappear. The dollar strengthened significantly in 2022 as the Fed moved more aggressively than other major central banks, but sold off when other countries caught up. The scenario may replay in a slightly different way as interest rate differentials widen because other central banks retreat first.

Takeaways by Macro Roundup® AI

  1. U.S. mortgage debt servicing ratios have stayed near historical lows, supported by the dominance of 30-year fixed rate loans, a large existing stock taken out at low rates, and robust wage growth.
  2. Households in many other countries, where variable rate or short-dated fixed rate mortgages prevail, are beginning to see their disposable income disappear.
  3. The dollar strengthened significantly in 2022 as the Fed moved more aggressively than other major central banks, then sold off once those banks caught up, a pattern that may replay as rate differentials widen with other central banks retreating first.

Related Articles:

  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.
  • The Case for “Higher for Longer”: Prices are Disinflating, But Not Wages (Yet) — Occupations with the fastest pay gains have seen wage growth normalize while pay growth elsewhere remains persistently faster, with only modest deceleration from the peak. The author argues the neutral policy rate has risen as an investment drought ends, making 5.5% short-term rates unremarkable and 4% 10-year Treasury yields potentially too low.

AI Summary. Nonfinancial corporate profit margins—profits as a share of gross value added—rose to about 19% before easing to 15%, compared with about 13% before the pandemic. The authors attribute much of the increase to large direct government support for small and medium-sized U.S. businesses and to lower net interest expenses under accommodative monetary policy.

Berardino Palazzo Federal Reserve Board
Date Posted:
Is Database:
Database

New @federalreserve research demonstrates elevated corporate profit margins during the pandemic period were a function of government spending and lower interest expenses.

Why did corporate profit margins rise after the pandemic?

Core argument: Nonfinancial corporate profit margins, measured as before-tax profits with capital consumption adjustment over gross value added, rose sharply to about 19% in 2021 Q2 before easing to 15% in 2022 Q4, versus about 13% in 2019 Q4.

Using a measure of nonfinancial corporate profits from the national income accounts [before tax profits with capital consumption adjustment] we find that nonfinancial corporate profit margins, or profits over gross value added, increased sharply to about 19% in 2021 Q2 and slipped back to 15% in 2022 Q4, compared to about 13% in 2019 Q4. Our analysis shows that much of the increase in aggregate profit margins following the COVID-19 pandemic can be attributed to (i) the unprecedented large and direct government intervention to support U.S. small and medium-sized businesses and (ii) a large reduction in net interest expenses due to accommodative monetary policy. Without the historically outsized government fiscal intervention and accommodative monetary policy, non-financial profit margins during 2020-2021 would have been more in line with past episodes of large economic downturns.

Takeaways by Macro Roundup® AI

  1. Nonfinancial corporate profit margins, measured as before-tax profits with capital consumption adjustment over gross value added, rose sharply to about 19% in 2021 Q2 before easing to 15% in 2022 Q4, versus about 13% in 2019 Q4.
  2. The authors attribute much of the post-pandemic rise in aggregate profit margins to large, direct government support for U.S. small and medium-sized businesses and to a large reduction in net interest expenses under accommodative monetary policy.
  3. The authors find that without the outsized fiscal intervention and accommodative monetary policy, nonfinancial profit margins during 2020–2021 would have been more in line with past episodes of large economic downturns.

Related Articles:

  • The Curious Incident of the Elevated Profit Margins — The US fiscal deficit averaged just under 3% of gross national product from 1950 to 2011 but 6.6% from 2012 to 2022, driven mainly by health and social security spending, a pattern that holds excluding pandemic years. Even assuming permanently elevated profit margins, US equity valuations imply low long-run returns.
  • “Greedflation” and the Profits Equation — The increase in nominal pretax U.S. business income since late 2019 equals about 17% of the increase in consumer spending excluding imputed rent over the same period, below the roughly 21% share of such spending that quarterly pretax business income has historically represented. On this measure, profit growth has been slightly low relative to a naive expectation.

AI Summary. China is set to overtake Japan as the world's biggest car exporter, driven in part by a mismatch between factory output and domestic demand. Analysts attribute the overcapacity to misjudged forecasts of declining internal combustion engine sales, surging electric vehicle demand, and reduced need for privately owned cars as shared mobility grows.

Edward White, Song Jung-a, Leo Lewis and Andy Lin Financial Times
Date Posted:

China is set to become the world’s largest car exporter, shipping 2.8mm vehicles through July. An industry analyst suggests that Chinese EV and legacy ICE manufacturers have excess capacity that may be as large as 25mm units/year.

Is domestic overcapacity making China the world's biggest car exporter?

Core argument: China is set to overtake Japan as the world's biggest car exporter this year, driven by structural problems in its domestic auto industry that threaten to upend car markets worldwide.

China is set to become the world’s biggest car exporter this year, overtaking Japan. Driving China’s global ascendancy are deep structural problems in the domestic auto industry, which threaten to upend car markets across the world. A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been “massive overcapacity” in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. “We have an overhang of 25mn units not being used.”

Takeaways by Macro Roundup® AI

  1. China is set to overtake Japan as the world's biggest car exporter this year, driven by structural problems in its domestic auto industry that threaten to upend car markets worldwide.
  2. Bill Russo, former head of Chrysler in China and founder of Automobility, describes "massive overcapacity" in Chinese vehicle production, with an overhang of 25mn units not being used.
  3. The mismatch between Chinese factory output and local demand stems in part from industry executives mis-forecasting the rapid decline of internal combustion engine sales, the explosion in electric vehicle popularity, and falling need for privately owned cars as shared mobility grows.

Related Articles:

  • China’s Auto Export Wave Echoes Japan’s in the ’70s — The shift from petroleum-fueled internal combustion vehicles to electric vehicles moves resource leverage from Persian Gulf oil producers to critical minerals, with China holding more than half of global processing capacity for lithium, cobalt, and graphite and about a third for nickel. Chinese companies have spent $4.5bn acquiring stakes in nearly 20 lithium mines, mostly in Latin America and Africa.
  • Can Volkswagen Win Back China? — Volkswagen relies on China for at least half its annual profits, but its flagship VW brand has been displaced as China's best-selling car by BYD and holds just 2% of the electric vehicle market, ninth place, versus nearly 40% for BYD and over 10% for Tesla.
  • How China Became A Car-Exporting Juggernaut — China never mastered internal-combustion engines, but the shift to mechanically simpler battery-powered vehicles — backed by an estimated $100bn of state investment over a decade — helped it become a major car exporter, shipping more than 10,000 cars a day. Battery-powered vehicles account for a third of Chinese car exports, versus 4% in Japan and 20% in Germany.

AI Summary. When core inflation averages above 4%, stock and bond returns have moved together with few exceptions, and core inflation has averaged 4.5% over the past three years. Even within periods of positive correlation, stocks and bonds can move in opposite directions over shorter stretches, making the correlation an indicator of whether inflation or growth risk dominates.

Greg Obenshain Verdad
Date Posted:

Stock-bond correlation is positive when core inflation averages above 4%. @GregObenshain notes that, in high inflation environments, inflation shocks tend to suggest a policy response that sends stock and bond prices in the same direction.

Does high core inflation make stocks and bonds move together?

Core argument: When core inflation averages above 4%, the stock-bond correlation has been positive with few exceptions; core inflation has averaged 4.5% over the past three years and stands at 4.7%.

When the core inflation rate averages above 4%, the stock-bond correlation has been positive with few exceptions. Core inflation has averaged 4.5% for the past three years and is currently 4.7%. Even in periods of high stock-bond correlations, stocks, and bonds can be negatively correlated over shorter periods. In fact, over the first eight months of this year, stocks and bonds moved opposite one another in May, June, and July. This also helps explain how in the 1970s during a period of sustained positive stock-bond correlations, Treasurys still had positive returns in recessions. The stock-bond correlation can be seen as an indicator of what is the dominant risk—inflation or growth—and how it is changing.

Takeaways by Macro Roundup® AI

  1. When core inflation averages above 4%, the stock-bond correlation has been positive with few exceptions; core inflation has averaged 4.5% over the past three years and stands at 4.7%.
  2. Even within periods of high stock-bond correlations, stocks and bonds can be negatively correlated over shorter stretches, as they were in May, June, and July.
  3. Despite sustained positive stock-bond correlations in the 1970s, Treasurys still posted positive returns in recessions, and the stock-bond correlation can be read as an indicator of whether inflation or growth is the dominant risk and how that is changing.

Related Articles:

  • Stock-Bond Correlations — The trailing three-year correlation between stocks and bonds turned positive for the first time in decades, after roughly 30 years of negative correlation. Classifying regimes by the standard deviation of the trailing stock-bond correlation shows neutral and positive-correlation environments tend to be good for equities and oil, while Treasury bonds and gold benefit from negative-correlation environments.
  • Do Stocks Always Outperform Bonds? — Revised historical data that adds more stocks, cap-weights returns, and corrects survivorship bias in pre-1871 records puts long-run real stock returns at 5.9% rather than 6.6%, and real bond returns at 4.1% rather than 3.6%. The author argues earlier sources omitted failed banks, canals, and railroads, overstating early US stock returns.

AI Summary. Polling suggests the demographic basis of the Republican candidate's Electoral College advantage may be eroding, with relative Democratic resilience among white voters and Republican strength among nonwhite voters. Because nonwhite voters are underrepresented in the most critical battleground states, such gains would tend to boost the national vote more than the battlegrounds.

Nate Cohn New York Times
Date Posted:

Trump’s edge in the electoral college is fading as polling shows Trump’s improved margins with non-white voters may have minimal impact in battleground states. @Nate_Cohn

Are shifting voter demographics eroding the Republican Electoral College advantage?

Core argument: White voters made up 83% of the 2020 electorate in Wisconsin, Michigan, and Pennsylvania, compared with 69% of voters elsewhere in the nation.

Mr. Trump’s made huge gains among white voters without a college degree in 2016, a group that was overrepresented in the key Northern battleground states. The polls so far this cycle suggest that the demographic foundations of Mr. Trump’s advantage in the Electoral College might be eroding. Mr. Biden is relatively resilient among white voters, who are generally overrepresented in the battleground states. Mr. Trump, meanwhile, shows surprising strength among nonwhite voters, who are generally underrepresented in the most critical battleground states. As a consequence, Mr. Trump’s gains among nonwhite voters nationwide would tend to do more to improve his standing in the national vote than in the battleground states. Overall, 83% of voters in Wisconsin, Michigan, and Pennsylvania were white in the 2020 election compared with 69% of voters elsewhere in the nation.

Takeaways by Macro Roundup® AI

  1. White voters made up 83% of the 2020 electorate in Wisconsin, Michigan, and Pennsylvania, compared with 69% of voters elsewhere in the nation.
  2. Polling this cycle suggests the demographic foundations of Trump's Electoral College advantage might be eroding, with Biden relatively resilient among white voters, who are generally overrepresented in the battleground states.
  3. Trump's strength among nonwhite voters, who are generally underrepresented in the most critical battleground states, would tend to do more to improve his standing in the national vote than in the battlegrounds.

Related Articles:

  • Consistent Signs of Erosion in Black and Hispanic Support for Biden — Polling shows the Democratic presidential candidate's support among nonwhite voters running well below his prior election standing across racial groups, with leads of 72-11 among Black voters, 47-35 among Hispanic registrants, and 40-39 among other nonwhite voters. About 5% of his former nonwhite voters now back the Republican candidate, including 8% of Hispanic voters.
  • How to Interpret Polling Showing Biden’s Loss of Nonwhite Support — Since 1980, the gap between white and Black voter turnout has been related to the share of Black registered voters backing Democrats in pre-election polls, meaning Black voters who don't support Democrats tend not to vote. Polls showing weaker Democratic support among Black voters may therefore signal a smaller Black share of the electorate.
  • Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs? — Just over a third of the decline in the Democratic margin of victory came from the suburbs, with New York City voters—through a mix of defection and abstention—accounting for most of the rest. Precincts that are at least three-quarters Hispanic or Asian swung 58 and 52 points toward Republicans, versus 32 points in white and 8 points in black precincts.

AI Summary. Twelve homeowners insurers in Louisiana were declared insolvent within roughly a year, and average premiums rose 6.7% one year and 18.5% the next, according to state and industry data. Enrollment in the state-backed insurer of last resort climbed from 45,000 policies to 130,000 even though it charges 10% above market rates.

Leslie Kaufman Bloomberg
Date Posted:

In Louisiana the mean home insurance premium rose 6.7% in 2021 and 18.5% in 2022 as insurers reprice their risk.

Are homeowners insurers failing and premiums surging in storm-exposed states?

Core argument: Twelve insurers writing homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2022, according to the Insurance Information Institute, sending insurance prices spiraling in absolute terms and relative to local median incomes that are among the nation's lowest.

Twelve insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2022, according to the Insurance Information Institute. Those closures sent insurance prices spiraling out of control, in both absolute terms and also in prices relative to local median incomes that are among the lowest in the nation. The average premium rose 6.7% in 2021 and then 18.5% in 2022, according to the Louisiana Department of Insurance. Louisiana Citizens Property Insurance Corp., the state-backed insurer of last resort, went from 45,000 policies in 2020 to 130,000 currently. That’s despite the fact that, by law, it charges 10% above market rate and raised rates 65% at the beginning of this year.

Takeaways by Macro Roundup® AI

  1. Twelve insurers writing homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2022, according to the Insurance Information Institute, sending insurance prices spiraling in absolute terms and relative to local median incomes that are among the nation's lowest.
  2. Louisiana's average homeowners premium rose 6.7% in 2021 and 18.5% in 2022, according to the Louisiana Department of Insurance.
  3. Louisiana Citizens Property Insurance Corp., the state-backed insurer of last resort, grew from 45,000 policies in 2020 to 130,000, despite charging 10% above market rate by law and raising rates 65% at the start of the year.

Related Articles:

  • Analyzing State Resilience to Weather and Climate Disasters — The real annual cost of U.S. weather and climate disasters has risen from about $20bn per year in the 1980s to nearly $95bn per year in 2010–19, reaching roughly $153bn in one year. Property insurers absorbed 48% of these costs, uninsured or underinsured homeowners, businesses and farms 37%, the federal government 11%, and state and local governments 4%.
  • How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters — Reinsurance prices rose as much as 40% year over year, according to a report by brokerage Gallagher Re, prompting insurers to change where and what they cover. State Farm and Allstate cited reinsurance market conditions and costs in curtailing some California business, and agricultural reinsurers announced exits from Iowa.
  • Home Insurers Are Charging More and Insuring Less — Arizona, Texas, North Carolina, Oregon, Illinois and Utah approved the largest home-insurance rate increases, ranging from 20% to 30%, while some insurers have stopped selling new policies in states such as California and pulled back from disaster-prone areas. Reinsurance premiums, which insurers buy to offload risk, rose 33% to 50% at recent renewals.

AI Summary. U.S. rural population grew for a second consecutive year after decades of decline, with non-metro areas outpacing urban growth for the first time in three decades. Gains were concentrated: the 10 rural counties with the largest increases grew about 5% on average versus a 0.4% national rate, and their house prices rose more than 40% over three years.

Nazmul Ahasan and Gregory Korte Bloomberg
Date Posted:

US non-metro population grew faster than urban population for the first time in three decades in 2021. Home prices in the 10 fastest-growing rural counties are up 40% in the past three years.

Is rural population growth outpacing urban growth and lifting house prices?

Core argument: House prices in the 10 rural counties with the largest population increases rose more than 40% over the past three years, fueling resentment.

The latest government data released just last month points to a second year of increases in 2022 after years of declines. The trend is sparking resentment as house prices in the top 10 rural counties that have seen the biggest population increases surged more than 40% over the past three years. The number of people living in non-metro areas outgrew the urban population for the first time in three decades in 2021, and the rural population expanded again last year. But growth wasn’t evenly distributed, with the top 10 counties with the largest population gains growing by an average 5%, according to Census data. That’s more than the national average of 0.4%.

Takeaways by Macro Roundup® AI

  1. House prices in the 10 rural counties with the largest population increases rose more than 40% over the past three years, fueling resentment.
  2. The 10 counties with the largest population gains grew by an average 5%, versus a national average of 0.4%, according to Census data.
  3. Non-metro population growth outpaced urban growth in 2021 for the first time in three decades, and government data show the rural population expanded again in 2022.

Related Articles:

  • Young Families Have Not Returned to Large Cities Post-Pandemic — The under-five population in large urban U.S. counties fell 6.1% while overall population in those counties fell 0.9%, with declines exceeding 10% in the largest counties including New York, Cook County, Illinois, and Los Angeles. Losses of young families were more severe in the Mid-Atlantic and West Coast, while the under-five population grew in Southeastern urban counties.
  • Tax Data Reveals Large Flight of High Earners from Major Cities During the Pandemic — Internal Revenue Service migration data show net migration subtracted more than $68bn of taxable income from large urban counties in a single year, about 2% of their total, while adding to taxable income in all other county types. Manhattan lost over $16bn and San Francisco over $8bn, or 20%.

AI Summary. Sweden announced plans to raise defense spending by more than 25% to reach NATO's target of 2% of GDP, a level met by only 11 of the alliance's 31 members. Meeting such commitments requires a major reordering of budget and electoral priorities, as when Denmark funded higher spending by cancelling a public holiday.

John Paul Rathbone Financial Times
Date Posted:
Is Database:
Database

Western countries are facing tradeoffs to finance increased defense spending as the post-Cold War “peace dividend” fades in the face of Chinese and Russian revanchism, with 20 of 31 NATO members still below the 2% of GDP target.

Can governments meet defense spending targets without reordering budget priorities?

Core argument: Sweden, a NATO membership applicant, announced plans to raise defense spending by more than 25% to reach the alliance's target of 2% of GDP, a threshold currently met by only 11 of NATO's 31 members.

Sweden, which has applied for Nato membership, announced on Monday that it planned to raise defense spending by more than 25% to meet the military alliance’s target of 2% of GDP. Currently, only 11 of 31 members do. Persuading voters of the sacrifices required to make such commitments a reality represents a seismic reordering of the budget and electoral priorities. In Denmark, the government opted to fund its increase in public spending by cancelling a public holiday — to much chagrin from voters. "Leaders have signed up to a generational shift in defence policy. But I do wonder if they fully understand, or have told their finance ministers,” a senior Nato official said.

Takeaways by Macro Roundup® AI

  1. Sweden, a NATO membership applicant, announced plans to raise defense spending by more than 25% to reach the alliance's target of 2% of GDP, a threshold currently met by only 11 of NATO's 31 members.
  2. Denmark's government funded its increase in public spending by cancelling a public holiday, a move that drew chagrin from voters.
  3. A senior NATO official said leaders have signed up to a generational shift in defense policy but questioned whether they fully understand it or have told their finance ministers.

Related Articles:

  • The Age-Old Question: How Do Governments Pay For Wars? — Denmark abolished a centuries-old religious holiday, requiring people to work that day, partly to help pay for extra defence spending, a move 70% of Danes opposed in one poll. The Stockholm International Peace Research Institute calculates global defence spending rose 4% to a record $2.24tn and is set to keep rising even as higher interest rates raise governments' borrowing costs.
  • The Cost of the Global Arms Race — Global defence spending rose nearly 4% in real terms to over $2tn, and new commitments and forecast increases, if implemented, are estimated to add more than $200bn a year worldwide. If countries below 2% of GDP reached that level and others added half a percentage point, outlays would rise by close to $700bn annually.
  • Military Briefing: Ukraine War Exposes ‘Hard Reality’ of West’s Weapons Capacity — NATO members' defense ministries are finding that dormant weapons production lines cannot be restarted quickly, and that expanding capacity requires investment that depends on securing long-term production contracts. These countries had cut military spending, downsized defense industries, and shifted to lean "just-in-time" production with low inventories of munitions and other equipment.

Wednesday, September 13, 2023

AI Summary. Core consumer price inflation grew at a 3.4% annual rate after two months below 2%, making the latest report only qualifiedly good. A single month of data should not change the Federal Reserve's next decision, but two more similar months would warrant another rate hike.

Jason Furman @jasonfurman
Date Posted:

Core CPI grew at an annual rate 3.4% in August relative to <2% in the prior two months. @jasonfurman argues if September and October are in line with August the Fed should hike in December.

Should one month of faster core inflation change the Fed's next move?

Core argument: Core CPI grew at a 3.4% annual rate after two months below 2%, which Jason Furman calls only qualifiedly good following two consecutive unqualifiedly good reports.

We had 2 consecutive unqualifiedly good CPI reports. I was hoping for a 3rd but this one is only qualifiedly good. Not a huge concern but some. I'm focused on core CPI which grew at a 3.4% annual rate after 2 months <2%. Here is swapping new rents instead of all rents for core. The most reassuring of the bunch because new rents are actually falling. Is a useful gut check but I would not actually assume that we're going to see substantial falls in all rents anytime soon. Overall I still feel better than I did a few months ago about the possibility of a soft landing. But I feel a bit worse than I did yesterday. And if you over-updated based on the noisy June and July data you should probably be over-updating back again based on the August data. One month of data will not and should not change what the Fed does next week. But if we get two more months like this then I would hope they hike again at the December meeting.

Takeaways by Macro Roundup® AI

  1. Core CPI grew at a 3.4% annual rate after two months below 2%, which Jason Furman calls only qualifiedly good following two consecutive unqualifiedly good reports.
  2. Furman calls substituting new rents for all rents in core CPI the most reassuring measure because new rents are falling, though he would not assume substantial falls in all rents soon.
  3. Furman argues one month of data will not and should not change the Fed's decision next week, but hopes for another hike at the December meeting if two more months look like this one.

Related Articles:

  • The Unresolved Tension Between Prices and Incomes — Persistent per-worker income growth of about 5% a year is difficult to reconcile with forecasts of 2% inflation, since inflation reflects the gap between nominal spending growth and real production, and wages are the largest source of financing for consumer spending. Interest rates may therefore fall more slowly than market prices imply.
  • Has the Fed Tightened Enough? Guideposts to Consider — Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.

AI Summary. A debt accounting exercise finds that sustained reductions in government debt are typically driven by strong primary budget balances and above-average growth, with inflation playing little role, while current fiscal projections and market interest rates do not point to falling debt-to-GDP ratios across developed economies. The authors estimate market-implied real interest rates now exceed growth rates in many countries.

George Cole and Sara Grut Goldman Sachs
Date Posted:

A @GoldmanSachs analysis argues that high interest rates are likely to continue given current high inflation and wider deficits, and notes that “the US and UK are the most obvious candidates for a duration risk premium repricing.”

What drives sustained reductions in government debt-to-GDP ratios?

Core argument: A debt accounting exercise finds that sustained debt reductions in developed markets are typically driven by strong primary balances and above-average growth, with inflation playing little role after 1980.

Using a debt accounting exercise, we show that periods of sustained debt reduction are typically driven by strong primary balances and above-average growth. Following 1980, inflation has played little role in debt reductions. Current fiscal projections and current market interest rates on average do not point to declines in debt-to-GDP ratios across developed markets. We estimate that market implied r - g, the difference between real interest rates and growth rates, is now positive for many countries. Japan provides an example of high debt peaceably coexisting with low interest rates. However, given current high inflation, wider deficits, and rising interest costs, we think it unlikely that we return to the era of structurally low interest rates in the US, UK, or Europe. As a result, we see the risks to term premia skewed higher as fiscal risks simmer.

Takeaways by Macro Roundup® AI

  1. A debt accounting exercise finds that sustained debt reductions in developed markets are typically driven by strong primary balances and above-average growth, with inflation playing little role after 1980.
  2. Fiscal projections and market interest rates on average do not point to declines in debt-to-GDP ratios across developed markets, with market-implied r – g, the gap between real interest rates and growth, now estimated to be positive for many countries.
  3. Given high inflation, wider deficits, and rising interest costs, a return to structurally low interest rates in the US, UK, or Europe appears unlikely and risks to term premia look skewed higher, though Japan shows high debt coexisting with low interest rates.

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  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.
  • American Gothic — US tax increases since 1950 of 2% of GDP or more occurred when overall tax receipts were a much smaller share of GDP than today. Restoring the ratio of entitlement to non-defense discretionary spending to its earlier level of 2.2x would require tax increases larger than those historical precedents.
  • Is a U.S. Debt Crisis Looming? Is it Even Possible? — A debt spiral requires the interest rate on government debt to exceed the economy's growth rate; with inflation-protected 10-year U.S. bond yields near 1.83%, close to most estimates of sustainable growth, any spiral would be slow-moving. Stabilizing debt at 100% of GDP would require a 2% primary surplus.

AI Summary. The decline in marriage and the rise in children raised in one-parent homes have occurred predominantly outside the college-educated class, whose members continue to marry, often to each other, while earnings for adults without a college degree have stagnated or risen only slightly. These divergent family-structure trends mean household inequality has widened by more than earnings inequality alone would imply.

David Price and Melissa Kearney Federal Reserve Bank of Richmond
Date Posted:
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.@kearney_melissa argues that the rise of single-parent households is leading to lower social mobility for children raised in those households relative to two-parent households.

Does diverging family structure widen household inequality beyond earnings gaps?

Core argument: Melissa Kearney notes that the decline in marriage and the rise in the share of children raised in one-parent homes has occurred predominantly outside the college-educated class.

The decline in marriage and the rise in the share of children being raised in a one-parent home has happened predominantly outside the college-educated class. Over the past 40 years, while college-educated men and women have experienced rising earnings, they continue to get married, often to one another, and to raise their children in a home with married parents. Meanwhile at the same time, the earnings among adults without a college degree have stagnated or risen only a bit. And these groups have become much less likely to marry and more likely to set up households by themselves.So just mechanically, these divergent trends in marriage and family structure mean that household inequality has widened by more than it would have just from the rise in earnings inequality.

Takeaways by Macro Roundup® AI

  1. Melissa Kearney notes that the decline in marriage and the rise in the share of children raised in one-parent homes has occurred predominantly outside the college-educated class.
  2. Over the past 40 years, college-educated men and women have seen rising earnings and continue to marry, often to one another, and to raise children in homes with married parents, while earnings for adults without a college degree have stagnated or risen only slightly.
  3. Kearney argues that divergent trends in marriage and family structure mean household inequality has widened by more than the rise in earnings inequality alone would produce.

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AI Summary. The Census Bureau reported that US inflation-adjusted median household income fell 2.3% to $74,580, a 4.7% decline from its peak. Wage growth for the typical worker subsequently outstripped inflation, with inflation-adjusted wages rising about 3%, according to Atlanta Federal Reserve and Labor Department data.

Gwynn Guilford and Paul Overberg Wall Street Journal
Date Posted:
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US median household income fell in real terms by 2.1% in 2022 for the third straight year, as inflation outpaced wage gains. Since its pre-pandemic peak, real household income has fallen by almost 5%.

Have real household incomes fallen even as real wages have risen?

Core argument: U.S. inflation-adjusted median household income fell 2.3% to $74,580 in 2022 from $76,330 in 2021, the Census Bureau said, a third straight annual decline.

Americans’ inflation-adjusted median household income fell to $74,580 in 2022, declining 2.3% from the 2021 estimate of $76,330, the Census Bureau said Tuesday. The amount has dropped 4.7% since its peak in 2019. Wage growth for the typical worker outstripped inflation starting in December 2022, with inflation-adjusted wages rising about 3% in July, according to data from the Atlanta Fed Wage Tracker and the Labor Department.

Takeaways by Macro Roundup® AI

  1. U.S. inflation-adjusted median household income fell 2.3% to $74,580 in 2022 from $76,330 in 2021, the Census Bureau said, a third straight annual decline.
  2. U.S. median household income has fallen 4.7% since its 2019 peak, according to the Census Bureau.
  3. Wage growth for the typical worker outstripped inflation starting in December 2022, with inflation-adjusted wages rising about 3% in July, according to the Atlanta Fed Wage Tracker and Labor Department data.

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  • Jason Furman On Employment Cost Index — The Employment Cost Index shows private wages and compensation rising at annual rates of roughly 4.7%–5.1%, higher than any point in the previous cycle, supporting the argument that wage growth is not slowing and that the measured slowdown in average hourly earnings reflected shifts in workforce composition. Real wages and salaries remain 5% below their pre-pandemic trend.
  • Real Wage Growth at the Individual Level in 2022 — Both the mean and median worker saw wages fail to keep pace with prices in their consumption baskets, a decline in real wages affecting 54% of workers. Workers under 25 saw real wage growth of 4.3%, while older age groups saw declines that grew larger with age.
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AI Summary. The European Union is opening an anti-subsidy investigation into Chinese electric vehicles it says are distorting the EU market, one of its largest trade cases. Manufacturers found in breach of trade rules could face punitive tariffs, as the EU seeks to avoid a repeat of the insolvencies in its solar panel industry caused by cheap Chinese imports.

Alice Hancock, Henry Foy, Hudson Lockett and Peter Campbell Financial Times
Date Posted:

The EU is launching an anti-subsidy investigation into Chinese electric vehicles; the investigation will likely result in significant tariffs on Chinese manufacturers.

The EU is launching an anti-subsidy investigation into Chinese electric vehicles; the investigation will likely result in...

Will Europe impose tariffs on subsidized Chinese electric vehicles?

Core argument: Brussels will open an anti-subsidy investigation into Chinese electric vehicles that it says are "distorting" the EU market, in what could be one of the largest trade cases the EU has launched.

Brussels will launch an anti-subsidy investigation into Chinese electric vehicles that are “distorting” the EU market. The probe could constitute one of the largest trade cases launched as the EU tries to prevent a replay of what happened to its solar industry in the early 2010s when photovoltaic manufacturers undercut by cheap Chinese imports went into insolvency. If found to be in breach of trade rules, manufacturers could be hit with punitive tariffs.

Takeaways by Macro Roundup® AI

  1. Brussels will open an anti-subsidy investigation into Chinese electric vehicles that it says are "distorting" the EU market, in what could be one of the largest trade cases the EU has launched.
  2. Chinese electric vehicle manufacturers found in breach of trade rules could face punitive tariffs in the EU.
  3. The EU casts the probe as an effort to avoid a replay of its solar industry's experience in the early 2010s, when photovoltaic manufacturers undercut by cheap Chinese imports went into insolvency.

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AI Summary. Denmark's weight-loss drug exports illustrate a positive-sum export boom in which new products create both supply and demand, while Chinese car exports reflect firms with persistent overcapacity fighting for market share. The US preempted Chinese electric vehicles through legislation that boosts demand while reserving a share for local producers; Europe remains more exposed.

Matt Klein The Overshoot
Date Posted:

Contrasting Demark’s Novo Nordisk and China’s car exporters, @M_C_Klein distinguishes “positive-sum” trade which is driven by something new and valuable from “negative-sum” trade which is driven by overcapacity.

How do new-product export booms differ from overcapacity-driven ones?

Core argument: Novo Nordisk's weight-loss drugs illustrate a positive-sum export boom in which scientists invented something new and valuable that created supply and demand simultaneously, rather than shifting sales from Danes to Americans.

The positive-sum vision of global economic integration is that rising production in one place does not need to displace existing production elsewhere because demand and living standards will rise commensurately. Novo Nordisk’s scientists invented something new and valuable, simultaneously creating both supply and demand. They did not pivot from selling to Danes to selling to Americans. The negative-sum vision is the one of businesses burdened by persistent “overcapacity” (really, underconsumption) are forced to fight for market share in a world without growth. The U.S. effectively preempted the influx of Chinese-made electric vehicles with the Inflation Reduction Act, which boosts total demand while reserving a share for local producers. Europe is far more exposed and has yet to formulate a response. The common belief in certain circles that Europeans are more “open to trade” than Americans may not survive this experience.

Takeaways by Macro Roundup® AI

  1. Novo Nordisk's weight-loss drugs illustrate a positive-sum export boom in which scientists invented something new and valuable that created supply and demand simultaneously, rather than shifting sales from Danes to Americans.
  2. The negative-sum vision of trade is one in which businesses burdened by persistent overcapacity, really underconsumption, fight for market share in a world without growth.
  3. The Inflation Reduction Act effectively preempted an influx of Chinese-made electric vehicles by boosting total demand while reserving a share for local producers, while Europe remains far more exposed and has yet to formulate a response.

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AI Summary. The author estimates that transferring roughly 1.5% of GDP a year to Chinese households could lift household income and consumption growth to around 7% annually, supporting GDP growth of 4-5% even with sharply slower investment growth. The argument is that China cannot sustain its current investment share of GDP while growing faster than the rest of the world.

Michael Pettis South China Morning Post
Date Posted:

China is facing a choice between low GDP growth or encouraging more domestic consumption. @michaelxpettis calculates that transferring 1.5% of GDP to the household sector annually might enable a 4-5% growth rate.

Can China grow 4-5% by shifting income to households?

Core argument: The author calculates that transferring roughly 1.5% of GDP annually to Chinese households, directly or indirectly, could lift household income and consumption growth to about 7% a year.

By my calculations, if the government could directly or indirectly transfer roughly 1.5% of GDP every year to households, it could drive growth in household income – and with it, household consumption – to around 7% annually. This, in turn, could generate GDP growth of 4-5% even as investment growth dropped sharply. The arithmetic of rebalancing is unassailable. Given its status as the world’s second-largest economy, and by far the world’s largest investor, China simply cannot maintain its current investment share of GDP while continuing to grow relative to the rest of the world.

Takeaways by Macro Roundup® AI

  1. The author calculates that transferring roughly 1.5% of GDP annually to Chinese households, directly or indirectly, could lift household income and consumption growth to about 7% a year.
  2. Such transfers could generate Chinese GDP growth of 4-5% even as investment growth dropped sharply, according to the author's rebalancing arithmetic.
  3. The author argues that China, the world's second-largest economy and by far its largest investor, cannot maintain its current investment share of GDP while continuing to grow relative to the rest of the world.

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AI Summary. Apple plans to make India-assembled iPhones available in India and some other regions on the first day of global sales, the first time an India-built device of the latest generation is offered at launch. The vast majority of the new iPhones will still come from China.

Sankalp Phartiyal Bloomberg
Date Posted:

For the first time, Apple is selling a new generation iPhone manufactured in India on launch day. Apple is trying to move at least 25% of its iPhone production out of China by next year.

For the first time, Apple is selling a new generation iPhone manufactured in India on launch day. Apple is trying to move...

Is India becoming a launch-day manufacturing base for new smartphones?

Core argument: Apple plans to offer India-assembled iPhone 15 units in India and some other regions on the global launch day, the first time an India-built device of the latest generation is available on the first day of sale, according to people familiar with the matter.

For the first time, the new iPhone model you buy on the launch day could be made in India. Apple plans to make the India-built iPhone 15 available in the South Asian country and some other regions on the global sales debut day, people familiar with the matter said. While the vast majority of iPhone 15s will come from China, that would be the first time the latest generation, India-assembled device is available on the first day of sale, they said, asking not to be identified as the matter is private.

Takeaways by Macro Roundup® AI

  1. Apple plans to offer India-assembled iPhone 15 units in India and some other regions on the global launch day, the first time an India-built device of the latest generation is available on the first day of sale, according to people familiar with the matter.
  2. The vast majority of iPhone 15s will come from China, people familiar with the matter said, even as Apple adds India-built units to launch-day availability.

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