Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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
  • “…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
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…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 26, 2023

AI Summary. Inflows from official investors, including central banks adding to dollar holdings, came close to supplying about half the net inflows needed to fund the US current account deficit over four quarters of data. Much of that went into equities and bank deposits rather than Treasuries, drawing less attention than Treasury flows.

Brad Setser @Brad_Setser
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Over the past four quarters, inflows from official investors covered half of the US’s current account deficit. @Brad_Setser

How much of the US current account deficit do official investors fund?

Core argument: Total foreign demand for long-term U.S. bonds, official and private including corporate bonds, exceeded the U.S. current account deficit in Q1 2023, and central banks added to their dollar holdings in Q1.

Rather quietly, inflows from official investors came close to generating about half of the net inflows needed to sustain the United States' current account deficit (over the last 4qs of data, q3 23 may be different). A lot of the inflow over the last 4qs (q3 22 to q2 23) has gone into equities and bank deposits so it doesn't get the attention of Treasury flows. But q2 23 Treasury inflows were substantial as well. Total foreign demand for LT US bonds (official and private, including private demand for corporate bonds) exceeded the US current account deficit in q1 2023. The fall in reported foreign holdings last year though got a lot more attention. The IMF's data for global reserves isn't available (yet) for q2, but central banks added to their dollar holdings in q1 (and likely q2). They are getting a lot of coupon payments on their existing stock-- and reinvesting I assume.

Takeaways by Macro Roundup® AI

  1. Total foreign demand for long-term U.S. bonds, official and private including corporate bonds, exceeded the U.S. current account deficit in Q1 2023, and central banks added to their dollar holdings in Q1.

Related Articles:

  • Setser On Chinese “De-Dollarizing” — There is no good evidence that China has reduced its dollar exposure; accounting for the higher dollar share of its hidden reserves, China's dollar holdings have likely increased. Rather than shifting out of dollars, China has moved from US-custodied Treasuries to offshore custodians and risk assets such as agency bonds and equities.
  • Saudi Arabia’s PIF and the New Petrodollar Recycling — Saudi Arabia's Public Investment Fund appears to have taken over a significant portion of the foreign asset allocation previously handled by the Saudi Central Bank, making its balance sheet a window into a new form of petrodollar recycling. Of roughly $777bn in total assets, $305bn were current and $472bn non-current, with $225bn of the latter held as investment securities.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.

AI Summary. US equity valuations have risen despite muted earnings growth, with AI-linked stocks serving as the major catalyst. Optimism about artificial intelligence's impact on growth, profits and productivity has prompted analysts to compare large language models to 20th-century milestones such as farm electrification, the interstate highway system and the internet.

Michael Cembalest J.P. Morgan
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Michael Cembalest @jpmorgan argues that AI’s impact on equity prices “should be much more durable than other recent investment themes, but the productivity shock that its most vocal adherents expect seems exaggerated.”

Are AI expectations driving equity valuations higher despite weak earnings growth?

Core argument: Equities have been sustained by the anomaly of valuations rising alongside muted earnings growth, with AI-linked stocks serving as the major US equity catalyst this year.

Equities have been sustained by the anomaly of equity valuations rising at a time of muted earnings growth, and the AI catalyst. The major US equity catalyst this year has been the rise in AI-linked stocks. They’ve come off the boil since July, but there’s still a lot of optimism regarding AI’s impact on growth, profits and productivity. All of these use cases have created a frenzy of analysts comparing large language models and other generative AI to 20th century milestones such as the electrification of farms, the interstate highway system and the internet itself.

Takeaways by Macro Roundup® AI

  1. Equities have been sustained by the anomaly of valuations rising alongside muted earnings growth, with AI-linked stocks serving as the major US equity catalyst this year.
  2. AI-linked stocks have come off the boil since July, though optimism persists regarding AI's impact on growth, profits and productivity.
  3. Analysts are comparing large language models and other generative AI to 20th century milestones including the electrification of farms, the interstate highway system and the internet.

Related Articles:

  • Centaurs and Cyborgs on the Jagged Frontier — In a pre-registered experiment at Boston Consulting Group covering 18 realistic consulting tasks, consultants using ChatGPT-4 completed 12.2% more tasks, worked 25.1% faster, and produced 40% higher quality results than those without it. The tool acted as a skill leveler: the lowest-scoring consultants improved 43%, while top performers gained less.
  • Generative AI at Work — A study of 5,179 customer support agents finds that access to a generative AI conversational assistant raised issues resolved per hour by 14% on average, with the largest gains for novice and low-skilled workers and minimal effect on experienced, highly skilled ones. The authors also find AI assistance improved customer sentiment, reduced requests for managerial intervention, and improved employee retention.
  • AI, Mass Evolution, and Weickian Loops — Early consumer artificial intelligence applications have largely been wrappers around marketing copy, image generation, and office tasks like spreadsheets and presentations. In shared spaces such as the image generator Midjourney's Discord server, users can see each other's prompts and results and iterate on them in real time, producing rapid collective experimentation and greater sophistication.

AI Summary. Data reported to the US Equal Employment Opportunity Commission by 88 S&P 100 companies show these firms added 323,094 US jobs in a single year, with 302,570 of them — 94% of the headcount increase — going to people of color and 20,524 to White workers.

Jeff Green, David Ingold, Raeedah Wahid, Cedric Sam and Daniela Sirtori-Cortina Bloomberg
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A Bloomberg analysis found that, for 88 S&P 100 companies, 94% of job growth in 2021 went to non-white workers.

Did large companies keep their promises to hire more people of color?

Core argument: Bloomberg's analysis of 88 S&P 100 companies found they added 323,094 US jobs in 2021, of which 302,570 — 94% of the headcount increase — went to people of color and 20,524 to White workers.

The US Equal Employment Opportunity Commission requires companies with 100 or more employees to report their workforce demographics every year. Bloomberg obtained 2020 and 2021 data for 88 S&P 100 companies and calculated overall US job growth at those firms. In total, they increased their US workforces by 323,094 people in 2021, the first year after the Black Lives Matter protests — and the most recent year for which this data exists. The overall job growth included 20,524 White workers. The other 302,570 jobs — or 94% of the headcount increase — went to people of color. Many people just starting out in their career are from growing Black, Hispanic, and Asian populations, who are entering the workforce just as more tenured White employees retire. That, however, can’t fully account for changes, particularly at the top of the corporate ladder.

Takeaways by Macro Roundup® AI

  1. Bloomberg's analysis of 88 S&P 100 companies found they added 323,094 US jobs in 2021, of which 302,570 — 94% of the headcount increase — went to people of color and 20,524 to White workers.
  2. The data come from the US Equal Employment Opportunity Commission, which requires companies with 100 or more employees to report workforce demographics annually; 2021 is the most recent year available.
  3. Demographic turnover — workers from growing Black, Hispanic, and Asian populations entering the workforce as more tenured White employees retire — cannot fully account for the changes, particularly at the top of the corporate ladder.

Related Articles:

  • Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners — An analysis of Labor Department data found median weekly earnings for all workers up 7.4% year-over-year, with the bottom 10th of earners—making about $570 a week—gaining nearly 10% and Black full-time workers receiving a median raise of 11.3%.
  • Rebound in Immigration Comes to Economy’s Aid — Goldman Sachs analysis found average monthly growth in the US foreign-born labor force is about 65,000 higher than in 2022, with that labor force nearing 32m people. Foreign-born workers' share of the labor force reached a record 18% in 2022 and has averaged 18.5% this year.
  • Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 — Goldman Sachs analysis found average monthly growth in the US foreign-born labor force is about 65,000 higher than in 2022, with that labor force nearing 32m people. Foreign-born workers' share of the labor force reached a record 18% in 2022 and has averaged 18.5% this year.

AI Summary. Professional economists' median one-year-ahead consumer price inflation forecast has become less sensitive to actual inflation: a regression slope of 0.71 from 1949 through 1998 fell to 0.18 from 1999 onward, implying forecasts now adjust very little in response to realized inflation.

Kevin Lansing and Federico Nucera Federal Reserve Bank of San Francisco
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Looking at postwar data, researchers at @sffed find that there was a regime shift around 1999 towards well-anchored inflation expectations that were not sensitive to incoming CPI data.

Have professional inflation forecasts become less responsive to actual inflation?

Core argument: Regressions of one-year-ahead expected CPI inflation on contemporaneous four-quarter CPI inflation yield a slope of 0.71 for 1949 through 1998, implying professional forecasters' median inflation forecast adjusted nearly one-for-one with actual inflation.

Figure 1 shows that the median forecast of professional economists for one-year-ahead consumer price index (CPI) inflation has become less sensitive to actual CPI inflation. The figure shows the results of regressions measuring the strength of the relationship between one-year-ahead expected CPI inflation (vertical axis) and the contemporaneous four-quarter CPI inflation rate (horizontal axis). For the period from 1949 through the end of 1998, the blue line indicates a strong relationship with a slope of 0.71, implying that the median inflation forecast adjusts nearly one-for-one with actual inflation. The regression yields a much smaller slope of 0.18 for the period from 1999 through the second quarter of 2023 (red line), implying very little forecast adjustment in response to actual inflation.

Takeaways by Macro Roundup® AI

  1. Regressions of one-year-ahead expected CPI inflation on contemporaneous four-quarter CPI inflation yield a slope of 0.71 for 1949 through 1998, implying professional forecasters' median inflation forecast adjusted nearly one-for-one with actual inflation.
  2. For 1999 through the second quarter of 2023, the same regression slope falls to 0.18, implying very little adjustment in the median professional forecast in response to actual CPI inflation.
  3. The median professional forecast of one-year-ahead CPI inflation has become less sensitive to actual CPI inflation, as shown by the decline in the regression slope between the 1949–1998 and 1999–2023 periods.

Related Articles:

  • What We’ve Learned About Inflation — Fiscal theory holds that a one-time $5tn fiscal expansion produces a one-time rise in the price level sufficient to inflate away $5tn of debt value, after which inflation stops even if the Federal Reserve does nothing. Raising interest rates lowers current inflation at the cost of more-persistent inflation, a beneficial smoothing.

AI Summary. Commercial real-estate insurance costs have risen 7.6% a year on average since 2017, according to Moody's Analytics, with rental-apartment insurance up 14.4% annually in Dallas, 13% in Los Angeles and 12.6% in Houston. Intensifying natural disasters, costlier reinsurance, and inflation in repair and rebuilding costs are cited as drivers.

Konrad Putzier Wall Street Journal
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Since 2017, commercial real estate insurance costs have grown at 7.6% per year. Developers report that new projects are sometimes seeing no insurance bids.

Are rising insurance costs squeezing commercial real estate owners?

Core argument: Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody's Analytics, which said some owners struggle to find anyone willing to insure their buildings.

Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody’s Analytics. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston. Some owners struggle to find anyone willing to insure their buildings, Moody’s said. Intensifying natural disasters are a big reason for the increase, particularly in cities vulnerable to wildfires, floods or storms. The cost of reinsurance has also increased, trickling down to higher property insurance rates. Meanwhile, inflation has pushed up the cost of repairing or rebuilding damaged properties.

Takeaways by Macro Roundup® AI

  1. Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody's Analytics, which said some owners struggle to find anyone willing to insure their buildings.
  2. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston, according to Moody's Analytics.
  3. Intensifying natural disasters in cities vulnerable to wildfires, floods or storms, higher reinsurance costs and inflation in repair and rebuilding expenses are cited as reasons for the increases.

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%.
  • Rising Insurance Costs Start to Hit Home Sales — A survey of house builders found that 31% in Florida and 29% in Southern California said buyers' home insurance concerns were somewhat slowing sales, versus 9% nationally. Researchers estimate that pricing in flood risk would reduce U.S. residential property values by at least $121bn, including over $50bn of overvaluation in Florida flood zones.
  • 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.

AI Summary. An analysis attributes Georgia's 5.3 point Democratic shift between the 2016 and 2020 presidential elections to three factors: third-party voters switching, Black population growth alongside white population decline, and persuasion concentrated among high-income, high-education voters, with about 3.1 points from persuasion and 2.2 from electorate composition.

Patrick Ruffini The Intersection
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.@PatrickRuffini finds the 5.3pp shift in Georgia towards the Democratic presidential candidate from 2016 to 2020 was driven by vote switching from third party or Trump to Biden by 3.1pp, and demographic change worth 2.2pp.

What drove a swing state's shift toward Democrats between two presidential elections?

Core argument: Georgia's 5.3 point shift from 2016 to 2020, enough to tilt the state to Biden, came from 2016 third-party voters switching to Biden, Black population growth alongside white population decline, and persuasion concentrated among high-income, high-education voters.

The 5.3 point shift between 2016 and 2020–just enough to tilt the state to Biden—was driven by three factors: 2016 third-party voters switching to Biden in 2020, Black population growth and white population decline, and persuasion, primarily among high-income, high-education voters. The total shift in Georgia due to persuasion is about 3.1 points—and 2.2 points comes from the changes in the composition of the electorate. Georgia as a whole is not demographically favorable to Donald Trump: unlike the upper Midwest, there are fewer white working-class voters left for him to flip, and a lot of cross pressured college-educated white Republicans. If Trump’s path with suburban whites is closed off, Trump has another option: continuing to chip away at Democratic margins among African Americans, as current polls suggest he might. Trump would likely need a bigger breakthrough with Black voters than he’s gotten to date to fully counteract the effect of the state’s Black population growth.

Takeaways by Macro Roundup® AI

  1. Georgia's 5.3 point shift from 2016 to 2020, enough to tilt the state to Biden, came from 2016 third-party voters switching to Biden, Black population growth alongside white population decline, and persuasion concentrated among high-income, high-education voters.
  2. Persuasion accounts for about 3.1 points of Georgia's shift, and changes in the composition of the electorate account for about 2.2 points.
  3. Georgia offers Trump fewer white working-class voters to flip than the upper Midwest and many cross-pressured college-educated white Republicans, leaving him the option of chipping away at Democratic margins among African American voters, as current polls suggest he might.

Related Articles:

  • The Road to A Political Realignment in American Politics — College-educated voters are now more likely to identify as Democrats while those without degrees back Republicans, with educational attainment increasingly correlated with views on abortion, LGBTQ+ rights, and religion's relationship to government. This sorting leaves most states politically uncompetitive, with eight states near the national average in education levels holding 97 electoral votes in play.
  • 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.

AI Summary. The US Department of Defense aims to buy thousands of low-cost drones within as little as 18 months and up to 2,000 larger uncrewed jets, while one of its primary drone suppliers produced 38 aircraft last year. Booming commercial aerospace demand has left shortages of skilled labor, raw materials, and parts such as advanced electronics and fasteners.

Doug Cameron Wall Street Journal
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The U.S. Department of Defense wants to buy thousands of drones in the next 18 months and as many as 2,000 larger uncrewed jets, but is running into supply constraints of both material and skilled labor.

The U.S. Department of Defense wants to buy thousands of drones in the next 18 months and as many as 2,000 larger uncrewed...

Can drone makers scale to thousands amid labor and parts shortages?

Core argument: The Pentagon aims to buy thousands of cheap drones within as little as 18 months and as many as 2,000 larger uncrewed jets, while Shield AI, one of its primary drone suppliers, produced 38 aircraft last year.

The Pentagon’s goal must contend with booming demand in the commercial aerospace market that has left a shortage of skilled labor, raw materials, and parts such as advanced electronics and fasteners. The Pentagon wants to buy thousands of cheap drones in as little as 18 months, and as many as 2,000 larger uncrewed jets. By contrast, one of its primary drone suppliers, Shield AI, produced 38 of the aircraft last year. The emerging air taxi makers present another challenge. Roughly a dozen companies are vying to develop propeller-driven vehicles that can take off and land like helicopters, potentially cutting journey times in New York City, Los Angeles, and other big urban areas. Flush with cash from venture capital, stock offerings, and military contracts, the sector is moving closer to large-scale production.

Takeaways by Macro Roundup® AI

  1. The Pentagon aims to buy thousands of cheap drones within as little as 18 months and as many as 2,000 larger uncrewed jets, while Shield AI, one of its primary drone suppliers, produced 38 aircraft last year.
  2. Booming commercial aerospace demand has left shortages of skilled labor, raw materials, and parts including advanced electronics and fasteners, which the Pentagon's drone-buying goal must contend with.
  3. Roughly a dozen air taxi companies developing propeller-driven vehicles that take off and land like helicopters are moving closer to large-scale production, flush with cash from venture capital, stock offerings, and military contracts.

Related Articles:

  • Pentagon Plans Vast AI Fleet to Counter China Threat — The Pentagon plans to field thousands of air-, land- and sea-based artificial-intelligence systems, drones and autonomous platforms within two years to counter threats from China and other adversaries, spending hundreds of millions of dollars on systems intended to be "small, smart, cheap.
  • Rocket Motor Shortage Curbs Weapons for Ukraine — A shortage of rocket motors is constraining U.S. missile production at makers including Lockheed Martin and Raytheon, with Northrop Grumman brought in to supplement former sole supplier Aerojet Rocketdyne. The Pentagon's acquisition chief says rebuilding and expanding munitions stocks for a potential conflict with China over Taiwan would take five or six years.
  • 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 27, 2023

AI Summary. An analysis of companies that went public from 1990 to 2022 found that the gap between return on invested capital and the weighted average cost of capital was high at the time of listing, then narrowed before stabilizing around the fifth year — nearly the opposite of the authors' expected life-cycle pattern.

Michael Mauboussin and Dan Callahan Morgan Stanley
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The spread between return on invested capital and the weighted average cost of capital is highest early in a firm’s life cycle and then declines until late in a firm’s life cycle. @mjmauboussin

Do newly public companies follow the expected corporate life-cycle pattern?

Core argument: For companies that completed an initial public offering from 1990 to 2022, the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) was high at the IPO date, then narrowed before stabilizing around year five.

We examined the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) for companies that did an initial public offering from 1990 to 2022. We expected to see low or negative spreads between ROIC and WACC for companies newly listed, rising spreads as they mature, and a decline in senescence. But what we found was nearly the opposite. The spread at the date of the IPO was high and narrowed before stabilizing around year five.

Takeaways by Macro Roundup® AI

  1. For companies that completed an initial public offering from 1990 to 2022, the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) was high at the IPO date, then narrowed before stabilizing around year five.
  2. The authors expected newly listed companies to show low or negative ROIC-WACC spreads that rise with maturity and decline in senescence, but found nearly the opposite pattern.

Related Articles:

  • Birth, Death, and Wealth Creation — The median age at which US companies went public rose from 7.9 years in 1976–2000 to 9.5 years in 2001–2022, implying that more wealth creation now occurs in private markets. Research on more than 28,000 US-listed companies since 1926 finds that just under 60% destroyed $9.1tn of wealth while about 2% created $50tn.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • Data Update 5 for 2023: Pathways to Profitability — The median return on capital is 7.44% for US firms and 5.19% globally, with about 10% of all firms earning above 50% and 10% below -50%. Rising risk-free rates and higher equity risk premiums and default spreads raised the US cost of capital from 5.60% to 9.63%, leaving the median US firm below its cost of capital.

AI Summary. US gross investment has run about 20-25% of GDP over time, but net investment has fallen from roughly 10% of GDP in the 1950s-1980s to about 5% recently. About three-quarters of gross investment now replaces capital that has worn out, rather than adding to the capital stock.

Timothy Taylor Conversable Economist
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US net investment has declined from its 1950-80 average of 10% of GDP to 5%. @TimothyTTaylor argues that the cause is increased investment in information technology that depreciates more quickly than plant and equipment.

Is a shrinking share of US investment adding to the capital stock?

Core argument: U.S. net investment has fallen to about 5% of GDP in the last decade or so, down from roughly 10% of GDP from the 1950s into the 1980s.

Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.

Takeaways by Macro Roundup® AI

  1. U.S. net investment has fallen to about 5% of GDP in the last decade or so, down from roughly 10% of GDP from the 1950s into the 1980s.
  2. U.S. gross investment has typically run 20–25% of GDP and has been about 20% in the last decade, a smaller decline than the fall in net investment.
  3. About three-quarters of U.S. gross investment now replaces capital that has worn out, compared with a little more than half in a typical earlier year.

Related Articles:

  • Capital Allocation — Capital spending minus depreciation as a share of sales peaked at 6.9% and bottomed at 0.5%, averaging 1.8% over the past decade. Depreciation is an imperfect proxy for maintenance capital spending because rising prices make replacement costs exceed historical-cost depreciation, and technological obsolescence means depreciation can overstate an asset's useful life.

AI Summary. Using test data from over two million students in nearly 10,000 schools across 49 states and Washington, D.C., the authors find remote instruction was a primary driver of widening achievement gaps by race and school poverty, with math gaps not widening where schools stayed in person.

Dan Goldhaber, Thomas Kane, Andrew McEachin, et al. American Economic Review
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In a study of nearly 10,000 US schools, @CEDR_US, @emily_r_morton, and @ajmceachin find that remote instruction during the pandemic was a primary driver of widening math achievement gaps in high-poverty districts. @HarvardCEPR

Did remote instruction widen achievement gaps by race and school poverty?

Core argument: Using testing data from over two million students in nearly 10,000 schools across 49 states and the District of Columbia, the authors find that remote instruction was a primary driver of widening achievement gaps by race and school poverty.

Using testing data from over two million students in nearly 10,000 schools in 49 states (plus the District of Columbia), we investigate the role of remote and hybrid instruction in widening gaps in achievement by race and school poverty. We find that remote instruction was a primary driver of the widening gaps. Math gaps did not widen in areas that remained in person (although reading gaps did). We estimate that high-poverty districts that went remote in 2020–2021 will need to spend nearly all of their federal aid on helping students recover from pandemic-related academic achievement losses.

Takeaways by Macro Roundup® AI

  1. Using testing data from over two million students in nearly 10,000 schools across 49 states and the District of Columbia, the authors find that remote instruction was a primary driver of widening achievement gaps by race and school poverty.
  2. Math achievement gaps did not widen in areas that remained in person, though reading gaps did widen in those areas.
  3. The authors estimate that high-poverty districts that went remote in 2020–2021 will need to spend nearly all of their federal aid to help students recover from pandemic-related academic achievement losses.

Related Articles:

  • Parents Don’t Understand How Far Behind in School Their Kids Are — The authors calculate that the average student fell half a year behind in math and a third of a year behind in reading. Students in the poorest 10% of districts lost three-quarters of a year in math, more than double the decline in the richest districts, with reading declines half as large.
  • NAEP Long-Term Trend Assessment Results: Reading and Mathematics — U.S. national assessment scores for 13-year-olds declined 4 points in reading and 9 points in mathematics from the prior assessment, and 7 and 14 points respectively compared with a decade earlier. Mathematics declines were larger for lower-performing students (12–14 points) than for middle- and higher-performing students (6–8 points).

AI Summary. Chinese mortgage loans account for over 50% of total household debt, at $6tn and a third of GDP, and the stock of outstanding mortgage loans has declined for the first time as households prioritize repayment. Other forms of consumer credit have slowed sharply while new deposit growth has accelerated.

Jeff Dawson Federal Reserve Bank of New York
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A Keynesian paradox of thrift may be taking hold in China as the household savings rate rises in response to fears about the direction of the Chinese economy. @NewYorkFed

Are Chinese households paying down mortgage debt instead of spending?

Core argument: As of July 2023, mortgage loans made up over 50% of Chinese household debt, at $6 trillion and a third of GDP, and outstanding mortgage loans declined over the past year for the first time ever in China as households prioritized repayments.

Households are paying down their mortgage debt. As of July 2023, mortgage loans accounted for over 50% of total household debt ($6 trillion and a third of GDP). Over the past year, the amount of mortgage loans outstanding has declined for the first time ever in China as households have prioritized mortgage repayments. Note that other forms of consumer credit have also slowed sharply. The lockdown’s impact on consumer spending helped push up deposits in the 2020-21 period. New deposit growth has accelerated notably over the past year.

Takeaways by Macro Roundup® AI

  1. As of July 2023, mortgage loans made up over 50% of Chinese household debt, at $6 trillion and a third of GDP, and outstanding mortgage loans declined over the past year for the first time ever in China as households prioritized repayments.
  2. Other forms of Chinese consumer credit have also slowed sharply, alongside the decline in outstanding mortgage debt.
  3. Chinese deposits rose in 2020–21 as the lockdown's impact curbed consumer spending, and new deposit growth has accelerated notably over the past year.

Related Articles:

  • China Is Now Growing Slower Than the U.S. — China's central bank and other banks sold more foreign currency and foreign-exchange forwards in a single month than in any month since January 2017. Because Chinese entities have been large buyers of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae, a shift toward selling or buying less could affect those spreads and interest rate volatility.
  • China Must Slow Down Investment If It Wants To Rebalance its Debt-Laden Economy — 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.
  • China’s Defeated Youth — Urban Chinese unemployment among those aged 16 to 24 has run above 20%, about double the pre-pandemic level for that age group, with over 70% of unemployed youth in one year calculated to be graduates. Sentiment analysis of social media indicates the mood of young Chinese is growing darker.

AI Summary. Chinese employers are reluctant to lay off older workers, both because of their experience and because labor laws protect them, so contraction in jobs is felt most acutely by young people. Acceptance rates at top Chinese universities are estimated below 0.01% in some provinces and around 0.5% in Beijing and Shanghai, compared with 3.41% at Harvard College.

Nancy Qian Project Syndicate
Date Posted:

Nancy Qian argues China’s youth “will be wealthier than any other generation in China’s history,” but the mismatch between young people’s expectations and reality risks political unrest.

Nancy Qian argues China’s youth “will be wealthier than any other generation in China’s history,” but the mismatch...

Why do young workers bear the brunt of China's job contraction?

Core argument: Acceptance rates at top Chinese universities are estimated below 0.01% for students in some provinces and around 0.5% in major municipalities such as Beijing and Shanghai, compared with Harvard College's 3.41% this year.

Acceptance rates at top Chinese universities are estimated to be below 0.01% for students in some provinces and around 0.5% for those in major municipalities such as Beijing and Shanghai. For comparison, Harvard College had an acceptance rate of 3.41% this year. During China’s large-scale privatization process, older workers struggled to find new employment in the rapidly changing economy. But now, employers are reluctant to lay off older workers – both because they have valuable experience and because they are protected by labor laws. The contraction in jobs therefore is felt most acutely among young people.

Takeaways by Macro Roundup® AI

  1. Acceptance rates at top Chinese universities are estimated below 0.01% for students in some provinces and around 0.5% in major municipalities such as Beijing and Shanghai, compared with Harvard College's 3.41% this year.
  2. Chinese employers are reluctant to lay off older workers because they hold valuable experience and are protected by labor laws, so the contraction in jobs is felt most acutely among young people.
  3. During China's large-scale privatization, older workers struggled to find new employment in the rapidly changing economy.

Related Articles:

  • Why Has Youth Unemployment Risen So Much in China? — Young workers aged 15-24 are particularly vulnerable when economic growth slows, and China's youth unemployment rate does not appear to be an outlier relative to its income level among global peers. Mismatches between the skills graduates acquire in higher education and those employers demand may add to labor market frictions.
  • The Root of China’s Growing Youth Unemployment Crisis — China's government has long encouraged university enrollment, raising higher-education student numbers from 22m to 383m and expanding graduate-school capacity, with master's candidates up 25% in one year. The author argues that boosting graduate numbers while restricting the services sector and subsidizing construction is bad economics and worse social policy.
  • China’s Defeated Youth — Urban Chinese unemployment among those aged 16 to 24 has run above 20%, about double the pre-pandemic level for that age group, with over 70% of unemployed youth in one year calculated to be graduates. Sentiment analysis of social media indicates the mood of young Chinese is growing darker.

AI Summary. China's high savings, concentrated among controllers of capital, now exceed what can be productively invested, so income needs to shift toward those who will spend it. The risk is chronically weak demand rather than a financial crisis, since China is a creditor country whose debts are in its own currency.

Martin Wolf Financial Times
Date Posted:

Martin Wolf argues that while the risk of a true financial crisis in China is low, China will not be able to generate growth through an export boom or consistent current account surpluses. The choice is rebalancing or slow growth.

How can China shift income toward spenders to sustain demand?

Core argument: China's savings, concentrated among the controllers of capital who receive an enormous share of national income, now exceed what can be productively used, so income needs to accrue to those who will spend it.

China is in fact hyper-capitalist. An enormous proportion of national income goes to the controllers of capital and is being saved by them. During the earlier hypergrowth period, this worked well. But now the savings are far greater than can be productively used. Income now needs to accrue to those who will spend it. The danger is not one of a huge financial crisis: China is a creditor country; its debts are overwhelmingly in its own currency; and its government owns all the important banks. A policy of financial repression would work quite well. The danger is rather one of chronically weak demand. It will be impossible, in today’s global environment, to generate either a huge export boom or consistent current account surpluses. The investment rate is already spectacularly high, while growth is slowing. Still higher non-property investment cannot be justified.

Takeaways by Macro Roundup® AI

  1. China's savings, concentrated among the controllers of capital who receive an enormous share of national income, now exceed what can be productively used, so income needs to accrue to those who will spend it.
  2. China's main danger is chronically weak demand rather than a financial crisis, since it is a creditor country whose debts are overwhelmingly in its own currency and whose government owns all the important banks.
  3. China's investment rate is already spectacularly high while growth slows, and today's global environment makes a huge export boom or consistent current account surpluses impossible, leaving still higher non-property investment unjustifiable.

Related Articles:

  • An Economic Hail Mary for China — A higher ratio of people aged 59 and over to children under 15 is strongly negatively correlated with GDP growth, as are higher median age and a larger share over 59. In China's northeastern provinces, where fertility fell a decade before the rest of the country, growth has stalled.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.