Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, October 13, 2023

AI Summary. American labor productivity rose well above its pre-pandemic estimated trend starting in 2020, but subsequently returned to that trend and, by early 2023, fell slightly below it. The estimated trend allows for a slowdown after 2004, capturing the end of the Internet-led boom.

John Fernald and Huiyu Li Federal Reserve Bank of San Francisco
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John Fernald @sffed finds that the trajectory of productivity growth post-pandemic is consistent with its pre-pandemic productivity track since 2004.

Did the pandemic productivity boom lift American productivity above its trend?

Core argument: U.S. labor productivity rose well above its statistically estimated pre-2020 trend starting in 2020, a sizeable boom that drew exuberant press discussion at the time.

The black line shows the level of American labor productivity. The blue dashed line is a statistically estimated trend, estimated through 2019 and then extended. The trend is allowed to change after 2004; the slowdown in trend captures the end of the late-90s/early 2000s Internet-led boom. Starting in 2020, you can see the sizeable productivity boom, as the black line moved well above the trend. Press discussions at the time were often quite exuberant about the possibilities. Unfortunately, since that bump, productivity has retreated right back to its pre-pandemic trend or, even, by early 2023, a little below the trend.

Takeaways by Macro Roundup® AI

  1. U.S. labor productivity rose well above its statistically estimated pre-2020 trend starting in 2020, a sizeable boom that drew exuberant press discussion at the time.
  2. By early 2023, U.S. labor productivity had retreated back to its pre-pandemic trend or slightly below it.

Related Articles:

  • The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? — Total factor productivity is the main factor accounting for differences in labor productivity growth across countries and over time, and its growth has been lackluster across large advanced economies since the mid-2000s. The authors find this slowdown appears in both manufacturing and market services, with U.S. productivity growth slowing before the Great Recession.
  • Will A.I. Transform the Economy, and if So, How? — During the 1995-2005 information technology boom, productivity ended about 12% above the trend implied by growth from 1973 to 1995, and a comparable or larger gain of around 15% from artificial intelligence is plausible. If such optimistic estimates hold, growth would exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8%, lifting revenue and easing debt concerns.
  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth

AI Summary. Artificial intelligence is projected to pass through to productivity faster than past general-purpose technologies, though peak effects remain years away. The argument rests on lower capital spending per unit of labor saved, capital spending concentrated among major software players that can distribute AI tools through platforms businesses already use, and low unemployment with high wage growth raising incentives to automate.

Karen Karniol-Tambour and Josh Moriarty Bridgewater Associates
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Bridgewater argues AI’s impact will show up sooner than previous general-purpose technologies but their base case is “inflationary secular dynamics will be more dominant in the next few years than the deflationary impacts of AI.”

Will AI boost productivity faster than past general-purpose technologies?

Core argument: AI will flow through to productivity faster than past general-purpose technologies, though the peak impacts remain far off.

AI will flow through to productivity faster than past general-purpose technologies, but the peak impacts remain far off. AI will likely proceed more quickly for a few reasons. First, the uses of AI typically require less capex, so the marginal cost per unit of labor saved is lower than for past technologies. Second, that capex is more concentrated among major software players and therefore easier to coordinate; much of the adoption will take the form of AI tools being rolled out to software-as-a-service platforms that businesses already use. Finally, secularly low unemployment and high wage growth today may also increase the incentive to automate, although temporary cyclical pressures are unlikely to have a major impact on this decades-long process. Much of the impact of AI could come from accelerating the highest-value research and development work.

Takeaways by Macro Roundup® AI

  1. AI will flow through to productivity faster than past general-purpose technologies, though the peak impacts remain far off.
  2. AI uses typically require less capex than past technologies, lowering the marginal cost per unit of labor saved, and that capex is more concentrated among major software players and therefore easier to coordinate, with much adoption coming via software-as-a-service platforms businesses already use.
  3. Secularly low unemployment and high wage growth may increase the incentive to automate, though temporary cyclical pressures are unlikely to have a major impact on this decades-long process, and much of AI's impact could come from accelerating the highest-value research and development work.

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. The authors forecast that wage growth in developed markets will gradually decelerate before stabilizing at levels roughly consistent with 2% inflation, as labor markets rebalance in a controlled manner. They project that slower nominal wage growth combined with a sharper slowdown in headline inflation will push real wage growth into positive territory, supporting real incomes, consumer spending, and overall growth.

Joseph Briggs and Giovanni Pierdomenico Goldman Sachs
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According to @GoldmanSachs labor markets have eased in advanced economies; though they are still tighter relative to the pre-pandemic period. Wage growth is decelerating in the US to a level ~ consistent with the 2% target.

Will slowing wage growth in developed markets support real incomes and spending?

Core argument: The authors forecast wage growth in developed-market economies decelerating gradually through end-2024 before stabilizing at levels roughly consistent with 2% target inflation, as labor market rebalancing continues in a relatively controlled manner.

Given our forecast that labor market rebalancing continues to unfold in a relatively controlled manner, we expect wage growth to gradually decelerate through end-2024, before stabilizing at levels roughly consistent with 2% target inflation. This slow deceleration in nominal wage growth—combined with a sharper deceleration in headline inflation—should lead real wage growth to swing comfortably into positive territory, thereby providing a strong tailwind for real income, consumer spending, and overall GDP growth in 2024.

Takeaways by Macro Roundup® AI

  1. The authors forecast wage growth in developed-market economies decelerating gradually through end-2024 before stabilizing at levels roughly consistent with 2% target inflation, as labor market rebalancing continues in a relatively controlled manner.
  2. Slow deceleration in nominal wage growth combined with a sharper deceleration in headline inflation should push real wage growth comfortably into positive territory, according to the authors' forecast.
  3. Positive real wage growth should provide a tailwind for real income, consumer spending, and overall GDP growth in 2024, in the authors' assessment.

Related Articles:

  • U.S. Incomes Fall for Third Straight Year — 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.
  • Growth in Working-Age Population Ends. That’s Not All Bad — Immigration is the only factor keeping the US working-age population from shrinking, as about 4 million baby boomers turn 65 each year and more than 820,000 Americans aged 15–64 died last year. Forecasts project immigration will hold the US 15-to-64 population roughly constant through 2100, versus projected declines of 20% across high-income countries and 62% in China.
  • The Unexpected Compression: Competition at Work in the Low Wage Economy — Wage inequality is falling for the first time in four decades as pay rises at the bottom, with real wages increasing among young high school graduates and workers in the lowest quartile. The authors argue this reflects intensified employer competition for workers rather than simply a tight labor market, implying wages better reflect productivity and higher aggregate productivity.

AI Summary. Bank of America internal data show the share of its customers receiving income from gig platforms rose to 3% from 2.7%, an increase concentrated in ridesharing and younger workers. An increased supply of ridesharing gig workers has driven average monthly ridesharing gig pay down.

Anna Zhou Bank of America
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According to @BankofAmerica microtransaction data gig work is rising. 3% of the banks’ customers earned money from gig work in August, up from 2.7% in April and 2% prior to the pandemic.

Is a rising supply of gig workers pushing their pay down?

Core argument: The share of Bank of America customers receiving gig platform income via direct deposit or debit card rose to 3% in August 2023 from 2.7% in April, driven particularly by ridesharing jobs and younger workers.

The percentage of Bank of America customers who received income from gig platforms through direct deposits or debit cards reached 3% in August 2023, up from 2.7% in April. This increase was driven particularly by ridesharing jobs and younger people, the former of which can be largely explained by strong travel-related spending. We also found that ridesharing gig workers do not tend to also have a traditional job and an increased supply of these workers has driven average monthly ridesharing gig pay down in recent months. Millennials and Gen Z have seen the biggest increase in gig work as they tend to be more exposed to the rising cost of living. But it seems gig work may not provide enough support: younger generations' credit and debit card spending growth has consistently lagged that of Baby Boomers since mid-March, according to Bank of America internal data.

Takeaways by Macro Roundup® AI

  1. The share of Bank of America customers receiving gig platform income via direct deposit or debit card rose to 3% in August 2023 from 2.7% in April, driven particularly by ridesharing jobs and younger workers.
  2. Bank of America found that ridesharing gig workers do not tend to also hold a traditional job, and an increased supply of these workers has driven average monthly ridesharing gig pay down in recent months.
  3. Millennials and Gen Z showed the biggest increase in gig work, as they tend to be more exposed to the rising cost of living, yet their credit and debit card spending growth has lagged Baby Boomers' since mid-March, according to Bank of America internal data.

Related Articles:

  • Do 60 Percent Of American Workers Have Insecure Jobs? — A survey by American Compass concludes that only 40% of American workers have secure jobs, a finding critics dispute on methodological grounds. On one of the survey's own criteria, 96% of workers reported either a regular weekly schedule or satisfaction with their control over a varying one.
  • Upward Mobility Is Alive and Well in America — Comparing children's adult incomes with the inflation-adjusted income quintiles of their childhood rather than contemporaneous quintiles produces much higher measured upward mobility: only 28% of children raised in the bottom quintile remained below that childhood threshold as adults, while 26% reached the top childhood quintile, which required $111,416 (2016 dollars) for a family of four.

AI Summary. The author calculates that the average age of death among the shortest-lived 10% of Americans is 36, versus 55 in the Netherlands and 57 in Sweden, after falling by about eight years over the past decade. Wealthy Americans live equally long regardless of local opioid use and gun violence, while poor Americans in those areas live far shorter lives.

John Burn-Murdoch Financial Times
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Lower life expectancy for America’s poor is largely driven by opioids and gun deaths. Among the 10% of Americans who die youngest, the mean age of death is 36.

Why do the shortest-lived Americans die decades earlier than Europeans?

Core argument: The author calculates that the average age of death among the shortest-lived 10% of Americans is 36 years, compared with 55 in the Netherlands and 57 in Sweden.

My calculations suggest the average age of death in [the shortest-lived 10%] is just 36 years old, compared with 55 in the Netherlands and 57 in Sweden. It hasn’t always been this way. In the 1980s, the most disadvantaged Americans lived about as long as their counterparts in France. By the early 2000s, lives at the bottom had lengthened considerably, and while a deficit was opening up, it wasn’t worrisome. But in the past decade, the lives of America’s least fortunate have shortened by an astonishing eight years. Wealthy Americans who live in the parts of the country with high opioid use and gun violence live just as long as those who live where fentanyl addiction and gunshot incidents are relatively rare. But poor Americans live far shorter lives if they grow up surrounded by guns and drugs than if they don’t.

Takeaways by Macro Roundup® AI

  1. The author calculates that the average age of death among the shortest-lived 10% of Americans is 36 years, compared with 55 in the Netherlands and 57 in Sweden.
  2. America's most disadvantaged lived about as long as their French counterparts in the 1980s, and lives at the bottom lengthened considerably by the early 2000s, but over the past decade they have shortened by eight years.
  3. Wealthy Americans live equally long whether or not they reside in areas with high opioid use and gun violence, while poor Americans live far shorter lives if they grow up surrounded by guns and drugs.

Related Articles:

AI Summary. The U.S. Defense Department's schools, serving about 66,000 children of military members and civilian employees, outscored every state and large district in math and reading on the National Assessment of Educational Progress and avoided widespread pandemic losses. While overall U.S. student achievement has stagnated over the past decade, the military's schools have gained on the national test.

Sarah Mervosh New York Times
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The Defense Department manages schools for about 66,000 students and achieves proficiency outcomes far higher than national averages. DoD schools performed better than any US state in 2022, in part because they avoided pandemic declines. @nytimes

Do military-run schools outperform every state on national tests?

Core argument: The Defense Department's schools outscored every state and large district in both math and reading on the National Assessment of Educational Progress last year, and avoided widespread pandemic learning losses.

With about 66,000 students — more than the public school enrollment in Boston or Seattle — the Pentagon’s schools for children of military members and civilian employees quietly achieve results most educators can only dream of. On the National Assessment of Educational Progress, a federal exam that is considered the gold standard for comparing states and large districts, the Defense Department’s schools outscored every jurisdiction in math and reading last year and managed to avoid widespread pandemic losses. While the achievement of U.S. students overall has stagnated over the last decade, the military’s schools have made gains on the national test since 2013.

Takeaways by Macro Roundup® AI

  1. The Defense Department's schools outscored every state and large district in both math and reading on the National Assessment of Educational Progress last year, and avoided widespread pandemic learning losses.
  2. The Pentagon's schools enroll about 66,000 children of military members and civilian employees, more than the public school enrollment of either Boston or Seattle.
  3. While U.S. student achievement overall has stagnated over the last decade, the military's schools have made gains on the National Assessment of Educational Progress since 2013.

Related Articles:

Monday, October 16, 2023

AI Summary. At age 25, workers in the top lifetime-earnings bracket average about $39,000 versus roughly $12,000 for the bottom bracket, a gap of about 3.25x. Top earners' pay rises 435% between ages 25 and 35 and over 150% between 35 and 45, exceeding $500,000 annually by age 45, while bottom earners gain about 15-16% per decade.

Serdar Ozkan Federal Reserve Bank of St. Louis
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The top 2% of male earners in the United States see their annual earnings pull away from the median male workers starting at age 25; these workers see strong earnings growth until age 55. @serdarozkanEN

How does pay growth after age 35 differ across earnings brackets?

Core argument: Top lifetime-earnings workers saw earnings rise 435% between ages 25 and 35, versus over 65% for median earners and 16% for those at the bottom.

At age 25, individuals in the lowest lifetime earnings (LE) bracket earned an average of approximately $12,000, while those in the median and top brackets earned $28,000 and $39,000, respectively. As a result, the earnings gap between the highest and lowest earners—measured as the ratio of their average earnings—already stands at around 3.25 at the beginning of their working lives. Those at the top of the LE distribution witness a remarkable 435% surge in their incomes between ages 25 and 35. In contrast, median earners undergo a comparatively modest increase of over 65%, while those at the bottom experience minimal earnings growth, a mere 16% uptick. Interestingly, during the subsequent 10-year period (ages 35-45), the median LE group witnesses a significant deceleration in their earnings growth, plummeting from the previous decade’s 65% increase to approximately 15%. Meanwhile, the bottom LE group continues to undergo a gradual but consistent earnings growth of around 15%. The top LE group deviates substantially from the rest of the workforce. They once again experience surge in earnings, exceeding 150%, and by the time they reach age 45, they earned more than half a million dollars annually. Consequently, the earnings gap between the highest and lowest earners widens further, expanding from 15.3 to 33.1.

Takeaways by Macro Roundup® AI

  1. Top lifetime-earnings workers saw earnings rise 435% between ages 25 and 35, versus over 65% for median earners and 16% for those at the bottom.
  2. Between ages 35 and 45, top lifetime earners gained more than 150%, exceeding $500,000 annually by age 45, while median earners' growth slowed from over 65% to about 15% and bottom earners grew about 15%.
  3. The earnings ratio between the highest and lowest lifetime earners stands near 3.25 at age 25, when average earnings are about $39,000 versus $12,000, and widens from 15.3 to 33.1 by age 45.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • The Inheritance Of Social Status: England, 1600 to 2022 — Using a genealogical database of 422,374 English people with rarer surnames, the authors find social status persists strongly even among distant relatives, with status correlations declining by a constant factor of 0.79 per step in the lineage across all status measures and eras studied. The authors argue this constancy suggests social interventions have modest effects.

AI Summary. Analysts estimate higher interest rates will raise small businesses' interest burden from roughly 5.8% of revenues to about 7%, and eventually to just under 8% as term loans mature—above the pre-pandemic 6.8% but similar to the mid-1990s. Because small businesses are about 15% of private-sector gross output, they project a drag on economywide GDP growth of about 0.1pp.

Manuel Abecasis and Spencer Hill Goldman Sachs
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.@GoldmanSachs estimates interest expenses for small businesses will be up 1pp by 2024 from 5.8% of revenues in 2021 to around 7% in 2024. Despite that, the overall private sector is forecast to run a financial surplus of 4% of GDP.

How much do higher rates on small businesses slow GDP growth?

Core argument: Higher rates are estimated to raise small businesses' interest burden by just over 1pp by 2024, from roughly 5.8% of revenues in 2021 to around 7%.

We estimate that higher rates will increase the interest burden for small businesses by just over 1pp by 2024, from roughly 5.8% of revenues in 2021 to around 7% in 2024. Under our current rates forecasts, we forecast this share would increase further to just under 8% as term loans gradually mature—above the pre-pandemic share of 6.8% but similar to that of the mid-1990s. In 2023, we expect small business interest payments as a share of output to increase by a little under 1pp. Since this sector accounts for around 15% of private-sector gross output and the ratio between private-sector gross output and US GDP is a little under 1.6, this implies a drag on economywide GDP growth of around 0.1pp.

Takeaways by Macro Roundup® AI

  1. Higher rates are estimated to raise small businesses' interest burden by just over 1pp by 2024, from roughly 5.8% of revenues in 2021 to around 7%.
  2. Under current rates forecasts, the small business interest burden is projected to rise to just under 8% as term loans gradually mature, above the pre-pandemic share of 6.8% but similar to that of the mid-1990s.
  3. With small businesses accounting for around 15% of private-sector gross output and a private-output-to-GDP ratio a little under 1.6, the projected rise in interest payments implies a drag on economywide GDP growth of around 0.1pp.

Related Articles:

  • Higher Cost of Capital Continues — Higher costs of capital following Federal Reserve rate increases have pushed more companies into bankruptcy, as some firms cannot obtain new loans or refinance existing debt. The author argues this rise in bankruptcies will continue as long as interest rates stay high, which is the intended mechanism for slowing the economy to return inflation to 2%.
  • Credit Normalization — Excluding Treasury securities, more than $30tn of debt securities are outstanding, and credit spreads, while wider than their 2021 lows, remain within historical ranges. The recent slight deterioration in credit-quality metrics and the rise in bankruptcy filings from historically low levels most likely reflect normalization rather than emerging financial distress.
  • 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.

AI Summary. One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.

Greg Obenshain Verdad
Date Posted:

Despite an uptick in Chapter 11 filings associated with the hiking cycle high-yield spreads have barely moved. @GregObenshain speculates lower quality borrowers have migrated to the private credit market.

Have the riskiest borrowers shifted from high-yield bonds to private credit?

Core argument: Moody's reports that 62% of its rated universe of loans and bonds carries a B2 rating or below, with the count of B3-rated issuers falling as those borrowers migrate to private credit.

One reason we believe high-yield spreads haven’t spiked yet is the migration of lower-quality borrowers—those most likely to default—out of high yield and into the private credit market. According to Moody’s, the number of issuers with B3 debt has fallen as these issuers have departed for private credit. According to Moody’s, 62% of its rated universe, which includes both loans and bonds, is rated B2 (also known as B) or below, and, “In general, the high-yield bond market favors better-quality Ba [Moody’s term for BB] issuers, while the leveraged loan market is concentrated in LBOs that have had liquidity constraints on the heels of the Federal Reserve’s aggressive tightening.”

Takeaways by Macro Roundup® AI

  1. Moody's reports that 62% of its rated universe of loans and bonds carries a B2 rating or below, with the count of B3-rated issuers falling as those borrowers migrate to private credit.
  2. The migration of lower-quality borrowers most likely to default out of high yield and into private credit is offered as one reason high-yield spreads have not spiked.
  3. Moody's states that the high-yield bond market favors better-quality Ba issuers while the leveraged loan market is concentrated in LBOs facing liquidity constraints following the Federal Reserve's aggressive tightening.

Related Articles:

  • Higher Cost of Capital Continues — Higher costs of capital following Federal Reserve rate increases have pushed more companies into bankruptcy, as some firms cannot obtain new loans or refinance existing debt. The author argues this rise in bankruptcies will continue as long as interest rates stay high, which is the intended mechanism for slowing the economy to return inflation to 2%.
  • Credit Normalization — Excluding Treasury securities, more than $30tn of debt securities are outstanding, and credit spreads, while wider than their 2021 lows, remain within historical ranges. The recent slight deterioration in credit-quality metrics and the rise in bankruptcy filings from historically low levels most likely reflect normalization rather than emerging financial distress.

AI Summary. Estimates for 10 advanced economies show natural interest rates have declined over the long run, though not steadily: as recently as the 1990s they ranged from 100 to 600 basis points, while by the end of the sample 4 of 10 countries had a negative natural rate and most others fell between 0 and 50 basis points.

Josh Davis, Cristian Fuenzalida, Leon Huetsch, Benjamin Mills, and Alan Taylor National Bureau of Economic Research
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A new @nberpubs analysis documents that the natural interest rate moves in a very wide range of 400-500 basis points across advanced economies. There is a strong global factor in r*, such that natural rates tend to move together across countries.

Have natural interest rates declined across advanced economies over the long run?

Core argument: Natural rates of interest have fallen in all 10 advanced economies studied, from a range of 100–600 bps in the 1990s to negative levels in 4 of the 10 countries by the end of the sample, with most others between 0 and 50 bps.

The top panel in Figure 7 shows the r∗ estimates. Natural rates have fallen over time in all countries, but not monotonically, consistent with previous works documenting the decline of real rates over the long run. As recently as the 1990s, natural rates in these countries were between 100 and 600 bps. By the end of the sample 4 out of 10 countries have a negative r∗, and most others are between 0 and 50 bps. There is cross-country correlation, and natural rates have a positive correlation with the “global” component, and a considerable local component at high frequency. These comovements may reflect forces of market integration to some degree, as well as the effects of common factors.

Takeaways by Macro Roundup® AI

  1. Natural rates of interest have fallen in all 10 advanced economies studied, from a range of 100–600 bps in the 1990s to negative levels in 4 of the 10 countries by the end of the sample, with most others between 0 and 50 bps.
  2. The estimated natural rates decline over time but not monotonically, consistent with prior work documenting the long-run decline of real rates.
  3. Natural rates across the 10 economies are correlated with one another and positively correlated with a "global" component, alongside a considerable local component at high frequency, comovements that may reflect market integration and common factors.

Related Articles:

  • Measuring the Natural Rate of Interest After COVID-19 — Model estimates for the United States, Canada, and the Euro Area place the natural rate of interest within a few tenths of a percentage point of pre-pandemic estimates, with the main longer-term consequence of the pandemic a reduction in the natural rate of output. The authors find no evidence that the era of historically low natural rates has ended.
  • In Search of Safe Havens: The Trust Deficit and Risk-free Investments! — Plotting US Treasury bond rates against a crude fundamental risk-free rate—actual inflation plus real GDP growth—undercuts the argument that central banks set interest rates. Central banks can nudge rates at the margin but cannot override the fundamentals of inflation and real growth.
  • Hitch Your Wagon to R-Star — The neutral interest rate is argued to be low because investment demand tracks expected growth, and U.S. growth prospects are held down by stalled working-age population growth and slow productivity gains. Larger budget deficits and an industrial-policy-driven manufacturing investment boom could have raised it, though manufacturing is a small share of overall investment.

AI Summary. A return of bond yields to their 2010s lows is unlikely, though the author expects some mean reversion, guessing roughly 0.5 percentage points. Demand for US Treasuries from wealthy emerging-market investors, sovereign wealth funds, and exchange reserves continues to scale with global wealth, so the author argues the safe-asset shortage holding down Treasury rates is not over.

Brad DeLong Brad DeLong's Grasping Reality
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.@delong writes the increase in US Treasury rates is likely overdone. He sees a supply-demand shift, with higher rates here to stay, but he thinks that the role of US Treasuries as a global safe asset is unlikely to be over.

Will bond yields return to their previous lows?

Core argument: DeLong guesses bond rates will mean-revert by about 0.5 percentage points, plus whatever portion of the recent interest-rate rise is an overreaction to shifts in the fundamental flow-of-funds supply-demand balance.

What are the odds that bond rates are going to return to the 2010s normal? Low. But some mean-reversion is highly likely. How much? My guess is 0.5%-points, plus whatever in the recent interest-rate rise is an overreaction to shifts in the fundamental flow-of-funds supply-demand balance—but I run out of space here before I can even start analyzing that. Emerging market-rich, sovereign wealth fund, and exchange-reserve demand for US Treasuries continues to scale with the wealth of the world, or rather with the wealth of the world’s rich and the wealth and power of the world’s governments. I simply do not see the safe-asset shortage component of secular-stagnation low U.S. Treasury rates as being over.

Takeaways by Macro Roundup® AI

  1. DeLong guesses bond rates will mean-revert by about 0.5 percentage points, plus whatever portion of the recent interest-rate rise is an overreaction to shifts in the fundamental flow-of-funds supply-demand balance.
  2. DeLong puts low odds on bond rates returning to their 2010s norm, while judging some mean-reversion highly likely.
  3. Demand for US Treasuries from rich emerging markets, sovereign wealth funds, and exchange reserves continues to scale with the wealth of the world's rich and the wealth and power of governments, and DeLong does not see the safe-asset shortage as over.

Related Articles:

  • Why We Should, but Won’t, Reduce the Budget Deficit — High interest rates will likely crowd out private investment and weaken long-term growth prospects. Because Social Security, health care, other safety-net programs, defense, and interest payments make up most federal spending, leaving only a small and already squeezed slice of nondefense discretionary spending, deficit reduction requires either cutting popular benefits or raising taxes.
  • 23% Increase in Treasury Auction Sizes in 2024 — US Treasury auction sizes are projected to rise an average of 23% across maturities under the Treasury Borrowing Advisory Committee's neutral issuance scenario, including 37% for 3-year notes and 28% for 5-year notes. The analysis argues this growth in government debt supply pulls investor dollars away from other fixed-income assets such as investment grade credit.
  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.

AI Summary. New York City retains advantages in sheer size, business diversification, and global financial dominance, with its labor force, airport use, and seated diners back to pre-pandemic levels and low residential and industrial vacancy rates. But mass transit use is 73% of prior levels, office vacancy is 18%, and about 35% of workdays are done from home.

Michael Cembalest J.P. Morgan
Date Posted:
Is Database:
Database

Michael Cembalest @jpmorgan notes NYC is above median on many measures of urban recovery since 2019, but nonetheless ranks only above Chicago/Detroit/San Francisco because of structural problems related to business conditions and fiscal health.

Has New York City fully recovered from the pandemic?

Core argument: New York City's office vacancy rate of 18% is the highest since the early 1990s, with substantial leased-but-underutilized space and roughly 35% of work days still done from home.

NYC has unique advantages regarding its outright size (output, labor force, purchasing power), business sector diversification, and global financial sector dominance. Many measures have now reached pre-pandemic levels, including the labor force, airport utilization, and seated diners. NYC residential and industrial vacancy rates are low, and NYC crime stats also compare favorably to other cities which sometimes comes as a surprise. But mass transit use is still 73% of 2019 levels, which is unsustainable given required capital and operating costs. NYC office vacancy rates of 18% are the highest since the early 1990s, leased-but-underutilized space is high and ~35% of work days are still done from home; office to residential conversions are unlikely to materially reduce the stock of underutilized office space given cost and complexity.

Takeaways by Macro Roundup® AI

  1. New York City's office vacancy rate of 18% is the highest since the early 1990s, with substantial leased-but-underutilized space and roughly 35% of work days still done from home.
  2. New York City mass transit use remains at 73% of 2019 levels, a level the author argues is unsustainable given required capital and operating costs.
  3. New York City's labor force, airport utilization, and seated diners have returned to pre-pandemic levels, while residential and industrial vacancy rates are low and crime statistics compare favorably with other cities.

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  • Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy — The authors estimate that US billionaires move to states without estate taxes as they age, with $80.7bn of Forbes 400 wealth escaping estate taxation as a result. They find that for the average state the added estate tax revenue exceeds forgone income tax revenue by 31%, with California a notable exception.
  • 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%.