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, March 19, 2024

AI Summary. Using administrative employer-employee data on workers displaced by firm closures, the authors find that workers in larger labor markets experience shorter non-employment spells and smaller earnings losses than those in smaller markets, indicating larger markets partially insure workers against job-loss shocks. The effects are larger in industries where human capital is more specialized and less portable.

Enrico Moretti and Moises Yi National Bureau of Economic Research
Date Posted:
Is Database:
Database

Large labor markets are more liquid and improve matching. A 1% increase in market size results in an increase in the 1-year re-employment probability following a firm closure by .14 and .023 for high school and college graduates respectively. @MoisesYi3

Do larger labor markets protect workers against job loss?

Core argument: Using Longitudinal Employer-Household Dynamics administrative data, the authors find that workers displaced by firm closures in larger labor markets experience significantly shorter non-employment spells and smaller earnings losses than workers in smaller markets.

We use administrative data [Longitudinal Employer‐Household Dynamics reporting] to compare the job search outcomes of workers originally in large and small markets who lost their jobs due to a firm closure. Workers in larger markets experience significantly shorter non-employment spells and smaller earning losses following a closure than workers in smaller markets, indicating that larger markets partially insure workers against idiosyncratic employment shocks. We find that the effects are larger in industries where human capital is more specialized and less portable.

Takeaways by Macro Roundup® AI

  1. Using Longitudinal Employer-Household Dynamics administrative data, the authors find that workers displaced by firm closures in larger labor markets experience significantly shorter non-employment spells and smaller earnings losses than workers in smaller markets.
  2. The authors read the larger-market advantage as an indication that larger labor markets partially insure workers against idiosyncratic employment shocks.
  3. The estimated benefits of larger markets are greater in industries where human capital is more specialized and less portable, according to the authors.

Related Articles:

  • Changes in the U.S. Economy and Rural-Urban Employment Disparities — Long-term shifts in the US economy — technological innovation and automation, declines in some energy extraction, greater globalization, and the move to a knowledge-based economy — have coincided with disproportionately negative employment outcomes in rural communities, especially for prime working-age men and those without a high school degree.
  • The World’s Rust Belts: The Heterogeneous Effects of Deindustrialization on 1,993 Cities in Six Countries — A study of 1,993 cities in France, Germany, Italy, Japan, the UK and the US finds former manufacturing hubs lost employment on average after each country's manufacturing peak, though a large share fully recovered. After the peak, hubs with a higher initial share of college-educated workers grew significantly faster.
  • Exodus From America’s Big Cities Slowed Last Year as Pandemic Receded — The core counties of large U.S. metropolitan areas lost a net of more than 800,000 residents to other parts of the country, an improvement from a 1.2m net outflow the prior year. About 500,000 net arrivals from abroad, plus more births and fewer deaths, left those counties' combined population little changed.

AI Summary. Even as the Bank of Japan moves away from negative interest rates and yield curve control, Japanese short- and long-term interest rates are expected to remain well below those in the U.S. and Europe. On that basis, Japan is likely to remain a modest net buyer of foreign bonds.

Brad Setser and Alex Etra Council on Foreign Relations
Date Posted:

The end of yield control in Japan is expected to reduce the Bank of Japan’s purchases of foreign debt, but “the best bet is that Japan will continue to be a modest net buyer of foreign bonds, as it was in 2023.” @EtraAlex @Brad_Setser

Will Japanese investors keep buying foreign bonds as policy tightens?

Core argument: The Bank of Japan appears set to exit its negative interest rate policy, lifting its target rate to just above zero and possibly allowing 10-year Japanese government bond yields to fluctuate more freely, continuing a two-year retreat from yield curve control.

The Bank of Japan (BoJ) seems set to exit its negative interest rate policy (NIRP) this week and allow its target interest rate to rise to just above zero. It also may also take further gradual steps to allow the yield on 10-year Japanese government bonds (JGBs) to fluctuate more freely, continuing its two-year long process of backing away from yield curve control. Shifts in Japanese monetary policy – even if widely telegraphed – are of global interest. There are always fears that Japanese investors will lose interest in foreign paper. At the end of the day, the ongoing evolution in Japanese monetary policy settings isn’t likely to change all that much. Both short-term and long-term Japanese rates will remain well below rates in the U.S. and Europe. Thus, the best bet is that Japan will continue to be a modest net buyer of foreign bonds, as it was in 2023.

Takeaways by Macro Roundup® AI

  1. The Bank of Japan appears set to exit its negative interest rate policy, lifting its target rate to just above zero and possibly allowing 10-year Japanese government bond yields to fluctuate more freely, continuing a two-year retreat from yield curve control.
  2. The ongoing evolution in Japanese monetary policy is unlikely to change much, since both short-term and long-term Japanese rates will remain well below rates in the U.S. and Europe.
  3. Despite recurring fears that Japanese investors will lose interest in foreign paper, Japan is likely to continue as a modest net buyer of foreign bonds, as it was in 2023.

Related Articles:

  • BOJ Shock Has Wall Street Gaming Out the Global Spillovers — The Bank of Japan has signaled it will allow yields to trade toward 1% from roughly 0.5%, though its intervention in the market suggests that shift is not imminent. With Japanese domestic investors holding around $2.5tn of US stocks, bonds and credit, Wall Street is weighing volatile spillovers that could reinforce higher-for-longer interest rates.
  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • Japan’s Stock Market Is Back After 34 Years But The Country Is Deeply Changed — Japan's economy grew an average of just 0.7% during the 2000s amid mild deflation, and the International Monetary Fund expects public debt to reach 256% of gross domestic product, up from 65% in 1989. Net profits at non-financial Japanese firms rose more than fourfold over that period, leaving ¥343tn in cash.

AI Summary. The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks toward yield-sensitive buyers such as US households, pensions, and insurers. If the Federal Reserve cuts rates, demand from these yield-sensitive buyers could weaken, producing a steeper yield curve.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes the buyer base for US Treasuries has shifted from yield-insensitive central banks and sovereign wealth funds to yield-sensitive households and institutions. Once the Fed starts cutting rates this could steepen the yield curve.

Has the Treasury buyer base shifted toward yield-sensitive buyers?

Core argument: The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks, including the Federal Reserve, toward yield-sensitive buyers including US households, pensions, and insurers.

The buyer base for US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance). This may become a problem once the Fed begins to cut rates because that could mean less demand from the yield-sensitive buyers, ultimately resulting in a steeper yield curve.

Takeaways by Macro Roundup® AI

  1. The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks, including the Federal Reserve, toward yield-sensitive buyers including US households, pensions, and insurers.
  2. Federal Reserve rate cuts could weaken demand from the yield-sensitive US households, pensions, and insurers now anchoring the Treasury buyer base, potentially resulting in a steeper yield curve.

Related Articles:

  • In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances — Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.
  • Manufacturing Demand — Banks' Treasury holdings have fallen as a share of assets to historically low levels, with banks preferring loans, higher-yielding securities, reserves, and agency mortgage-backed securities to meet liquidity requirements. Revising bank capital rules to revamp the leverage calculation could boost market liquidity and make banks significant Treasury buyers.
  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.

AI Summary. Private equity returns lagged public equity markets by a wide margin, and buyout exits fell 66% from 2021 and 44% from 2022, according to Bain & Co. Private equity-backed companies grew more slowly than public companies and generated significantly lower free cash flow, suggesting weakening relative fundamentals rather than valuation smoothing.

Dan Rasmussen Verdad
Date Posted:

.@verdadcap examines the 2023 performance of private equity portfolio companies with public debt and finds they had lower revenue growth and higher interest costs compared with public firms, and zero free cash flow.

Are private equity fundamentals weakening relative to public markets?

Core argument: Bain & Co. reports that buyout exits are down 66% since 2021 and 44% from 2022, which suggests that something beyond valuation smoothing is affecting private equity.

Private equity lagged public equity markets last year by a significant margin. The easiest explanation is that this is simply the result of smoothing: PE firms didn’t much mark down their portfolios when the market sold off in 2022 and then didn’t have to write them back up as much in 2023. But according to Bain & Co.'s latest report, buyout exits are down 66% since 2021 and 44% from 2022—which suggests that something more worrisome is happening underneath the hood. In 2023, PE-backed companies grew slower than the public market and generated significantly lower free cash flow. The lagging performance of buyouts relative to public markets looks like it might be more than just smoothing. It may reflect the weakening of the relative fundamentals.

Takeaways by Macro Roundup® AI

  1. Bain & Co. reports that buyout exits are down 66% since 2021 and 44% from 2022, which suggests that something beyond valuation smoothing is affecting private equity.
  2. Private equity trailed public equity markets by a significant margin in 2023, which the smoothing explanation attributes to PE firms neither marking portfolios down much in 2022 nor writing them back up in 2023.
  3. PE-backed companies grew more slowly than the public market in 2023 and generated significantly lower free cash flow, which may reflect weakening relative fundamentals for buyouts.

Related Articles:

  • Private Equity Fundamentals — An analysis of North American private equity- and venture-backed companies with public stock or debt finds they trade at 22.4x adjusted earnings, in line with small-cap growth stocks, but at 33.4x on standard accounting measures with net debt of 8.8x earnings. The authors describe the group as heavily leveraged and mostly cash-flow negative.
  • It’s Mostly a Paper Moon: Alternative Investments Review — Venture capital financing has tightened: the median time between funding rounds has lengthened, more startups have shut down through bankruptcy, and the share of "down rounds" — new financing at a lower valuation — rose from 8% to nearly 20%, with those rounds cutting post-money valuations by more than 50%.
  • The Dispersion Delusion — In simulations of 20-stock micro-cap portfolios used as a comparison for private equity median returns, the authors find value characteristics appear to have the largest effect, raising the median return from 10% in a random sample to 18% in a value-ranked sample. Ranking on profitability raises the median return to 14%.

AI Summary. Following Federal Reserve rate increases, the annual interest Americans pay on mortgages, credit cards, and other debt rose by nearly $420bn while interest income rose only about $280bn, producing a decline in household net interest income unlike prior tightening cycles. Consumer credit reprices quickly, banks were slow to raise deposit rates, and wealth has shifted from interest-paying holdings into stocks.

Ben Holland Bloomberg
Date Posted:

.@markets argues that declining net interest income has become a drag on consumer spending as the interest bill for US households has risen by $420B since the start of the hiking cycle, while interest income grew by only $280B.

Why did rate increases reduce household net interest income this time?

Core argument: U.S. household interest payments on mortgages, credit cards, and other debt have risen by nearly $420 billion since the Fed began tightening in March 2022, while household interest income rose only about $280 billion.

The annual interest bill that Americans pay on mortgages, credit cards, and other debt has climbed by almost $420 billion since the Fed started tightening policy in March 2022. The rise in interest income over the same period was only about $280 billion. Unlike every other Fed hiking cycle of the past half century, the latest one triggered a sharp decline in household net interest income. On the spending side, interest costs rose faster this time because Americans now have a larger share of their debts in consumer credit, which is quicker to reprice and saddles borrowers with bigger bills when rates go up. Mortgages, by contrast, are mostly locked-in beyond the Fed’s reach. As for interest income, one reason it’s lagged is that banks were slow to pass on higher rates to depositors. Another is that wealth has shifted out of the kind of holdings that pay interest, and into stocks.

Takeaways by Macro Roundup® AI

  1. U.S. household interest payments on mortgages, credit cards, and other debt have risen by nearly $420 billion since the Fed began tightening in March 2022, while household interest income rose only about $280 billion.
  2. Unlike every other Fed hiking cycle of the past half century, the latest one produced a sharp decline in household net interest income.
  3. Interest costs rose faster because Americans hold a larger share of debt in quick-repricing consumer credit while mortgages are mostly locked in; interest income lagged as banks were slow to pass higher rates to depositors and wealth shifted from interest-bearing holdings into stocks.

Related Articles:

  • Global Views: Cutting Through the Noise — Higher interest rates have mixed economic effects because government interest payments to private holders of public debt add to private-sector spending power, while private-sector interest payments only redistribute income among private actors. If rates stay higher for longer, these payments are projected to exceed $1tn, and the current policy stance may not return inflation to 2%.
  • How Fast Can the Fed Ease? The Private Sector Response to Easier Conditions Will Be a Key Factor — US households have reduced debt over the past 20 years, leaving room to borrow more if incentives improve, while companies that issued debt at low rates hold large liquidity and healthy balance sheets. That gives businesses capacity to raise investment, and business surveys indicate capital-spending sentiment is already improving.
  • Stock and Flow — Higher interest rates have mixed economic effects because government interest payments to private holders of public debt add to private-sector spending power, while private-sector interest payments only redistribute income among private actors. If rates stay higher for longer, these payments are projected to exceed $1tn, and the current policy stance may not return inflation to 2%.

AI Summary. TerraPower, founded by Bill Gates, plans to seek a US construction permit for its Natrium reactor, which is cooled with liquid sodium rather than water, at a first plant in Kemmerer, Wyoming. The company says the reactors could be built for about half the cost of standard water-cooled reactors.

Jamie Smyth Financial Times
Date Posted:

TerraPower, founded by @BillGates, plans to build a groundbreaking nuclear plant cooled by liquid sodium at half the cost of traditional water-cooled reactors. The plant should be operational by 2030.

TerraPower, founded by @BillGates, plans to build a groundbreaking nuclear plant cooled by liquid sodium at half the cost of...

Can sodium-cooled reactors be built for half the cost of water-cooled ones?

Core argument: TerraPower chief executive Chris Levesque told the Financial Times that the company's Natrium reactors, cooled with liquid sodium rather than water, could be built for about half the cost of standard water-cooled reactors.

TerraPower, a company founded by Bill Gates, plans to start building the first of a new generation of nuclear power plants in the US in June. Chris Levesque, TerraPower’s chief executive, told the Financial Times the company would apply for a construction permit from US regulators this month for its reactor, which is cooled with liquid sodium rather than water. He said the company’s Natrium-branded reactors could be built for about half the cost of standard water-cooled reactors. TerraPower, which has raised almost $1bn in private funding, signed an agreement with Emirates Nuclear Energy Corporation in December to explore using Natrium reactors to generate electricity and produce hydrogen in the United Arab Emirates. The company has secured pledges from the US government to provide up to $2bn to complete work at TerraPower’s first plant in Kemmerer, Wyoming.

Takeaways by Macro Roundup® AI

  1. TerraPower chief executive Chris Levesque told the Financial Times that the company's Natrium reactors, cooled with liquid sodium rather than water, could be built for about half the cost of standard water-cooled reactors.
  2. TerraPower, founded by Bill Gates, plans to begin building the first of a new generation of US nuclear plants in June and will apply this month for a construction permit from US regulators.
  3. TerraPower has raised almost $1bn in private funding and secured US government pledges of up to $2bn to complete work at its first plant in Kemmerer, Wyoming.

Related Articles:

  • Electravision — The fossil fuel share of global primary energy is falling about 0.40% per year, matching the pace of decarbonization during the 1973–1988 nuclear buildout, though total carbon dioxide emissions have not declined because energy consumption keeps rising. Renewable energy is used almost exclusively for the electricity grid, with little penetration in industry and transport.
  • First New US Nuclear Reactor In Three Decades May Be Its Last — Plant Vogtle unit 3 in Georgia, a 1,100-megawatt reactor originally slated to enter service in 2016, is the first nuclear reactor built from scratch in the US in more than three decades. The combined cost of Vogtle units 3 and 4 has grown from an original $14bn to more than $30bn.

AI Summary. Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C, according to US National Oceanic and Atmospheric Administration and Climate Reanalyzer data. Scientists are concerned that climate change could push marine ecosystems beyond a tipping point, with seas showing no sign of returning to typical seasonal temperatures.

Jana Tauschinski and Emiliya Mychasuk Financial Times
Date Posted:

Oceans have hit record-high temperatures for the last 365+ days, reaching an all-time high of 70.2°F on March 13. This is raising alarms about impacts on marine life and weather patterns. @FT

Have global sea surface temperatures set records for a full year?

Core argument: Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C on March 13, according to data from the US National Oceanic and Atmospheric Administration and the Climate Reanalyzer research collaboration.

Oceans marked 365 straight days of record-breaking global sea surface temperatures this week, fuelling concerns among international scientists that climate change could push marine ecosystems beyond a tipping point. The consistent climb in temperatures reached a peak on [March 13] when the new all-time high was set for the past 12 months, at 21.2C. The world’s seas have yet to show any signs of dropping to typical, seasonal temperatures, with daily records consecutively broken since they first went off the charts in mid-March last year, according to data from the US National Atmospheric and Oceanic Administration and the Climate Reanalyzer research collaboration.

Takeaways by Macro Roundup® AI

  1. Global sea surface temperatures set daily records for 365 consecutive days, peaking at an all-time high of 21.2C on March 13, according to data from the US National Oceanic and Atmospheric Administration and the Climate Reanalyzer research collaboration.
  2. The world's seas have shown no signs of returning to typical seasonal temperatures since daily records began being broken in mid-March of last year.
  3. International scientists have voiced concern that climate change could push marine ecosystems beyond a tipping point.

Related Articles:

  • Long-term Surface Impact of Hunga Tonga-Hunga Ha’apai-like Stratospheric Water Vapor Injection — A volcanic eruption that injected large amounts of water vapor — a strong greenhouse gas — into the stratosphere is estimated to have raised surface temperatures by more than 1.5°C across large regions for several years, while cooling some areas by close to 1°C. The authors suggest a possible link to tropical Pacific sea surface temperatures that warrants further investigation.
  • Gulf Coast Temperatures Surge to Highest Levels Ever Observed — Sea surface temperatures in the Gulf of Mexico have warmed more than 3 degrees above the norm for the date, with temperatures near 88°F common down to depths of 165 feet. Though the Gulf as a whole has cooled slightly from record levels, it remains near all-time highs.
  • Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century — New research projects that the Atlantic Meridional Overturning Circulation, the network of ocean currents shaping North Atlantic climate, could collapse around midcentury as human-driven warming slows it. A much weaker circulation could cool much of the Northern Hemisphere, speed sea-level rise along North American and European coasts, and reduce rainfall in Africa's Sahel and Asian monsoon regions.

AI Summary. The share of children earning more than their parents fell from 91.5% for those born in 1940 to 50% for those born in 1980. A reanalysis estimates that had the later cohort seen the earlier cohort's income growth, absolute mobility would have been 81% even with unchanged inequality, pointing to slower growth rather than rising inequality.

Scott Winship American Enterprise Institute
Date Posted:
Is Database:
Database

Slower economic growth, not rising inequality, is the primary factor behind declining absolute mobility, according to Scott Winship’s analysis of Chetty’s data.

Is slower growth, not rising inequality, behind falling absolute mobility?

Core argument: Scott Winship's counterfactual analysis estimates absolute mobility for the 1980 birth cohort would have been 81% rather than 50% had it experienced the 1940 cohort's intergenerational income growth of 204% versus 5%, holding inequality unchanged.

Scott Winship's analysis of Chetty's data suggests that slower economic growth, rather than rising inequality, is the primary factor behind declining absolute mobility. Chetty's findings indicated that absolute mobility fell from 91.5% for children born in 1940 to 50% for those born in 1980, attributing this mainly to inequality. However, Winship's counterfactual analysis shows that if the 1980 cohort had experienced the same intergenerational income growth as the 1940 cohort (204% vs. 5%), absolute mobility would have been 81% instead of 50%, even with unchanged inequality. This contrasts with Chetty's estimate of 62% under higher growth conditions. Winship's results highlight that higher growth would have increased absolute mobility significantly more than lower inequality, reversing Chetty's conclusions and emphasizing the critical role of economic growth in enhancing mobility.

Takeaways by Macro Roundup® AI

  1. Scott Winship's counterfactual analysis estimates absolute mobility for the 1980 birth cohort would have been 81% rather than 50% had it experienced the 1940 cohort's intergenerational income growth of 204% versus 5%, holding inequality unchanged.
  2. Chetty's data show absolute mobility fell from 91.5% for children born in 1940 to 50% for those born in 1980, a decline Chetty attributes mainly to rising inequality.
  3. Winship's 81% figure under higher growth exceeds Chetty's 62% estimate under higher-growth conditions, supporting Winship's argument that slower economic growth, rather than rising inequality, is the primary factor behind declining absolute mobility.

Scott Winship revisits Chetty data and argues that slower economic growth has been much more important than the rise in inequality in terms of explaining the reduction of absolute mobility. Recall Chetty"found that while the vast majority of American kids born in 1940 ended up better off at age 30 than their parents fared at the same age, that was only true of half of kids born in 1980. Moreover, the paper found that rising income inequality was much more to blame for this falling “absolute mobility” than slower economic growth."
Chetty's claim, "...Chetty et al. report that absolute mobility fell from 91.5 percent for children born in 1940 to 50 percent for those born in 1980. In their counterfactual simulations, they found that if the economic growth rates prevailing for the 1940 cohort had been experienced by the 1980 cohort, with inequality nonetheless rising as much as it actually did, the absolute mobility rate for the 1980 cohort would have been 62 percent rather than 50 percent. However, if the adulthood inequality experienced by the 1980 cohort had been what the 1940 cohort saw, with economic growth increasing as slowly as it actually did, 80 percent of the most recent cohort would have experienced absolute mobility...."
This is a relative technical debate but Winship noted a methodological flaw in Chetty’s work, "...The central point at issue here is that incorporating GDP per working-age person into the counterfactual analyses introduces potentially problematic assumptions into the Chetty analyses. Dividing average income for each percentile of the distribution of 30-year-olds by GDP per working-age person is different than dividing average income for each percentile by total income measured the same way as in the numerator. In the latter case, the ratios would sum to 100 across percentiles. The ratios Chetty et al. compute only sum to 44.3. What that means is that most GDP per working-age individual is not allocated to the incomes of 30-year olds. That is appropriate in that the Chetty team later compares the counterfactual incomes of these adults to parental income, with average parental income also smaller than GDP per working-age person in 1980. If all of GDP per working-age individual were allocated to 30-year-olds, these amounts would automatically tend to be larger than parental incomes, artificially inflating absolute mobility..."

“…Section III.B. of their paper acknowledges that “a significant portion of the increase in absolute mobility in our counterfactual is driven by the fact that 30 year olds today earn a smaller fraction of GDP than in the past.” That means their counterfactual analyses must assume not only that the 1980 cohort of 30-year-olds have the within-30-year-old distribution of the 1940 cohort but that they have the 30-year-old-to-everyone-else distribution of the 1940 cohort too. In his correspondence with me, Chetty confirmed that the team prefers making this assumption and incorporating GDP per working-age person into the analyses to the alternative of simply using parental and 30-year-old incomes in their data. As they note in Section III.B., the income in their data misses an increasing share of national income, so using it alone to simulate a counterfactual of lower inequality seems unwarranted….”

His alternativeapproach "...There is a simpler alternative approach to modeling counterfactual absolute mobility rates for the 1980 cohort if growth had been stronger. We can look at the intergenerational increase in income (as measured in the Chetty data) for the 1940 birth cohort (comparing average 30-year-old income in 1970 to average parental income). Then we can apply that growth to the 1980 birth cohort’s parental income and assume that 30-year-old incomes would still have been distributed as unequally as they really were. The income growth calculations need only use the parental and 30-year-old income estimates from the Chetty data (not GDP per working-age person), and the income distribution of the 30-year-olds likewise need only use the 30-year-old income estimates.."
Winship's results, "...implemented this strategy. The result? If the 1980 birth cohort had experienced the same intergenerational income growth as the 1940 cohort did (an increase of 204 percent rather than 5 percent), while the fruits of that income growth had been distributed as unequally in 2010 as really occurred, the absolute mobility rate would have been 81 percent instead of 50 percent. Again, Chetty et al. report an estimate of just 62 percent for their “higher growth” simulation...."
Winship bottom line is that slower economic growth is much more important than inequality is understanding absolute mobility, "... my results indicate the opposite: higher growth would have raised absolute mobility from 50 percent to 81 percent, while lower inequality would have increased it to just 57 percent.This is almost the mirror image of the Chetty findings. Chetty also reported trends looking at absolute mobility for the 1970 cohort as of age 40 rather than for the 1980 cohort at age 30 (Figure S12 in their paper). These analyses showed that in the “high growth” counterfactual, instead of 56 percent of the 1970 birth cohort experiencing absolute mobility, 67.5 percent would have. Meanwhile, in the “low inequality” counterfactual, the rate was 74 percent. However, using my approach, the “high growth” scenario produced an absolute mobility rate of 78.5 percent, while the “low inequality” scenario featured a rate of 63 percent. Again, the Chetty conclusion about the importance of growth versus inequality reverses..."
What’s Robert Lucus line? "Once one starts to think about it is hard to think about anything else

Scott Winship, "Was Rising Inequality behind Falling Absolute Mobility?"American Enterprise Institute, December 1, 2022, https://www.aei.org/wp-content/uploads/2022/12/Was-Rising-Inequality-Behind-Falling-Absolute-Mobility.pdf

Wednesday, March 20, 2024

AI Summary. The Congressional Budget Office projects the federal budget deficit will reach 8.5% of gross domestic product over a 30-year horizon, with outlays rising to 27.3% of GDP and revenues to 18.8%. The projected growth is attributed to rising interest costs, large sustained deficits excluding interest, and spending on federal health care programs, particularly Medicare.

CBO Staff Congressional Budget Office
Date Posted:

.@USCBO new budget outlook forecasts that federal outlays will reach 27.3% of GDP by 2054 vs.revenues of 18.8%. From 1974 to 2023 mean outlays were 21% of GDP.

How large will the federal deficit grow over 30 years?

Core argument: CBO projects the total federal budget deficit will reach 8.5% of GDP in 2054, a level exceeded since the Great Depression only during and shortly after World War II, the 2007–2009 financial crisis, and the coronavirus pandemic.

In CBO’s projections, the total federal budget deficit increases significantly in relation to gross domestic product over the next 30 years, reaching 8.5% of GDP in 2054. Since the Great Depression, that level has been exceeded only during and shortly after World War II and during the 2007–2009 financial crisis and the coronavirus pandemic. That growth results from rising interest costs and large and sustained primary deficits, which exclude net outlays for interest. Those deficits average 2.2% of GDP over the 30-year period; over the past 50 years, they averaged 1.6% of GDP. Projected primary deficits are especially large given the forecast of low unemployment rates. Measured as a percentage of GDP, federal outlays are large by historical standards and, beginning in 2028, increase in each year, reaching 27.3% of GDP in 2054. Growth in net interest costs and in spending for federal health care programs, particularly Medicare, drives those increases. Revenues, also measured as a percentage of GDP, fluctuate over the next decade and increase thereafter, reaching 18.8% of GDP in 2054.

Takeaways by Macro Roundup® AI

  1. CBO projects the total federal budget deficit will reach 8.5% of GDP in 2054, a level exceeded since the Great Depression only during and shortly after World War II, the 2007–2009 financial crisis, and the coronavirus pandemic.
  2. CBO projects primary deficits, which exclude net outlays for interest, will average 2.2% of GDP over the 30-year period, above the 1.6% average of the past 50 years, and are especially large given the forecast of low unemployment rates.
  3. CBO projects federal outlays will increase in each year beginning in 2028, reaching 27.3% of GDP in 2054, driven by growth in net interest costs and federal health care spending, particularly Medicare, while revenues reach 18.8% of GDP.

Related Articles:

  • Monthly Budget Review: August 2023 — 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.
  • 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.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.

AI Summary. The authors project US federal debt at 135% of GDP in 2032 and 268% in 2052, above the Congressional Budget Office's 112% and 177%, and argue the deficit is unsustainable. Their model, which determines interest rates through supply and demand rather than historical trends, has rising real rates ratcheting up interest payments, deficits, and debt.

Mark Warshawsky, John Mantus and Gaobo Pang American Enterprise Institute
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A paper from @AEIecon Mark Warshawsky, John Mantus and Gaobo Pang uses an economic model rather than extrapolating historical trends and projects that debt-to-GDP will be 132% in 2032, compared to CBO’s 2023 projection of 115%.

Do supply-and-demand-driven interest rates imply much higher future federal debt?

Core argument: The authors project US debt-to-GDP at 135 percent in 2032 and 268 percent in 2052, compared with CBO's 112 percent and 177 percent respectively.

Within the next ten years, the federal government budget deficit will grow significantly beyond historical experience and should be regarded as unsustainable. This conclusion comes from our economic model that determines key variables simultaneously based on an analysis of supply and demand, in contrast to the official models which tend to assume a continuation of historical trends. We project that debt-to-GDP will be 135 percent in 2032 and 268 percent in 2052, compared to CBO’s 112 percent and 177 percent, respectively. Real interest rates rise in the long run, ratcheting interest payments, deficits, and debt, and vice versa. Our projection of national health expenditures relative to GDP in 2072 is 31.4 percent, compared to 28.4 percent by the Centers for Medicare & Medicaid Services (CMS). A link to their computational dashboard can be found here.

Takeaways by Macro Roundup® AI

  1. The authors project US debt-to-GDP at 135 percent in 2032 and 268 percent in 2052, compared with CBO's 112 percent and 177 percent respectively.
  2. The authors conclude the federal budget deficit will grow significantly beyond historical experience within ten years and should be regarded as unsustainable, with rising long-run real interest rates ratcheting up interest payments, deficits, and debt.
  3. The authors project national health expenditures at 31.4 percent of GDP in 2072, compared with 28.4 percent from the Centers for Medicare & Medicaid Services, using a model that determines key variables simultaneously from supply and demand rather than extrapolating historical trends.

Related Articles:

  • The Long Term Budget Outlook: 2024 to 2054 — The Congressional Budget Office projects the federal budget deficit will reach 8.5% of gross domestic product over a 30-year horizon, with outlays rising to 27.3% of GDP and revenues to 18.8%. The projected growth is attributed to rising interest costs, large sustained deficits excluding interest, and spending on federal health care programs, particularly Medicare.
  • Olivier Blanchard on Debt Explosions — The author argues that rising long-term US Treasury yields reflect a term premium driven by heavy bond supply and weaker demand, including the Federal Reserve shrinking its holdings, rather than a risk premium, since inflation-indexed yields have also risen. Risks include a failed auction or debt monetization producing high inflation.
  • From Riches to Rags: Causes of Fiscal Deterioration Since 2001 — Federal debt held by the public rose from 32% to 98% of GDP over roughly two decades, despite earlier Congressional Budget Office projections that the debt would be paid off. The authors attribute 37 percentage points to major tax cuts, 33 to discretionary spending and Medicare expansions, and 28 to recession and pandemic responses.

AI Summary. The 10-year US Treasury yield has fallen from a peak of 5% to 4.3% as inflows into US bond funds reached their highest level since 2021, despite heavy government borrowing. Goldman Sachs projects the stock of outstanding Treasuries will rise by $1.7tn this year, weighted more toward longer-dated bonds that are riskier for investors.

Kate Duguid Financial Times
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Despite the 10 year Treasury yield retreating from its 5% peak in October, long-dated yields might rise due increased new issuance and ongoing Fed QT.

Are Treasury yields falling despite heavy government borrowing?

Core argument: The 10-year Treasury yield has fallen from an October peak of 5% to 4.3%, with inflows into US bond funds in the first week of March hitting their highest level since 2021, according to EPFR data.

The yield on the 10-year Treasury has fallen from a peak of 5% in October to 4.3%, reflecting higher bond prices. Inflows into US bond funds in the first week of March reached the highest level since 2021, according to EPFR data. In the wake of the coronavirus pandemic, large Fed purchases thwarted the vigilantes, despite the US’s record borrowing needs. But as the Fed turned from buyer to seller, the quantity of US Treasury sales remained high, suggesting that conditions might finally be turning in the vigilantes’ favour. The quantity of Treasuries outstanding is set to rise by $1.7tn this year, according to Goldman Sachs. While this is lower than last year’s increase, it will be more weighted to longer-dated bonds, which are riskier for investors and harder for markets to digest.

Takeaways by Macro Roundup® AI

  1. The 10-year Treasury yield has fallen from an October peak of 5% to 4.3%, with inflows into US bond funds in the first week of March hitting their highest level since 2021, according to EPFR data.
  2. Goldman Sachs estimates the quantity of Treasuries outstanding will rise by $1.7tn this year, less than last year's increase but weighted more toward longer-dated bonds that are riskier for investors and harder for markets to digest.
  3. Large Fed purchases thwarted bond vigilantes after the coronavirus pandemic despite record US borrowing needs, and the Fed's shift from buyer to seller alongside continued high Treasury sales suggests conditions might be turning in the vigilantes' favour.

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  • In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances — Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.
  • Who Is Buying US Treasuries? — The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks toward yield-sensitive buyers such as US households, pensions, and insurers. If the Federal Reserve cuts rates, demand from these yield-sensitive buyers could weaken, producing a steeper yield curve.
  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.

AI Summary. The authors estimate that each percentage point by which market mortgage rates exceed a homeowner's original rate lowers the probability of sale by 18.1%, an effect they calculate prevented 1.33m US home sales. They estimate this supply reduction raised home prices by 5.7%, outweighing a 3.3% price decline from higher rates.

Ross Batzer, Jonah Coste, William Doerner and Michael Seiler Federal Housing Finance Agency
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For every 1pp mortgage rate increase above an American homeowner’s current rate, the probability of a sale decreases 18%. This “lock-in” effect drove a 5.7% increase in home prices between Q2 ‘22 and Q4 ‘24.

How much do rising mortgage rates reduce home sales and raise prices?

Core argument: Each percentage point by which market mortgage rates exceed a loan's origination rate reduces the probability of sale by 18.1%, according to the paper's estimates of U.S. mortgage rate lock-in.

In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell. This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%. These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability.

Takeaways by Macro Roundup® AI

  1. Each percentage point by which market mortgage rates exceed a loan's origination rate reduces the probability of sale by 18.1%, according to the paper's estimates of U.S. mortgage rate lock-in.
  2. Mortgage rate lock-in cut home sales with fixed-rate mortgages by 57% in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4, the paper finds.
  3. The paper estimates that the lock-in-driven supply reduction raised home prices by 5.7%, outweighing the direct effect of elevated rates, which lowered prices by 3.3%; nearly all 50 million active U.S. mortgages carry fixed rates.

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  • 1.54 million Total Housing Completions in 2023 including Manufactured Homes; Most Since 2007 — Total US housing completions and placements, including manufactured homes, reached 1.543m, the most since 2007, even as total housing starts fell 9.0% year over year. Excluding manufactured homes, completions were 1.453m, up 4.5%, with construction delays leaving a near-record number of units still under construction.
  • The Distribution of Mortgage Interest Rates Outstanding — 23% of outstanding US mortgages carry an interest rate below 3%, 38% are between 3% and 4%, and only 9% were originated above 6%. With mortgage rates at 7.25%, homeowners lack incentive to move and take on a new mortgage, a key reason housing supply remains low.
  • Higher For Longer and The 2024 Housing Outlook — Sustained higher mortgage rates are expected to weigh most on housing turnover, since nearly all borrowers hold rates below market levels, discouraging moves; the authors project existing home sales of 3.8mn, the fewest annual sales since the early 1990s. Housing starts are projected to fall 4% to 1.34mn.

AI Summary. Official US border encounter statistics exclude people who evade Border Patrol agents, who in past decades made up the majority of illegal crossers. The Department of Homeland Security estimated apprehension rates of 33%–43% in the 2000s versus 81% more recently, a shift attributed mainly to most crossers intending to turn themselves in and apply for asylum.

Justin Fox Bloomberg
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Illegal immigration may not be at a record high. @foxjust argues statistics are being skewed by a change in behavior as illegals seek out government authorities to take advantage of the asylum system.

Do border encounter statistics overstate how much illegal crossings have risen?

Core argument: DHS estimates the Southwest border apprehension rate reached 81% in fiscal 2021, versus a range of 33% in 2003 to 43% in 2000 and 2009 during the 2000s.

The problem with the statistics on what US Customs and Border Protection now calls Southwest land border encounters is that they leave out people who successfully evade the agency’s agents. In past decades, these were the majority of illegal border crossers. The Department of Homeland Security estimates of the Southwest border apprehension rate in the 2000s range from 33% (in 2003) to 43% (in 2000 and 2009). In recent years, the apprehension rate has been much higher than that. According to the most recent estimate by DHS, it was 81% in the 2021 fiscal year. Going by monthly CBP “got away” estimates compiled by the Cato Institute’s David J. Bier, the apprehension rate was 79% in both the 2022 and 2023 fiscal years, and 92% in the first four months of the 2024 fiscal year. That rate has risen partly because the US-Mexico border is more tightly controlled than it used to be, but mainly it’s just that most of the people crossing the border illegally intend to turn themselves in and apply for asylum.

Takeaways by Macro Roundup® AI

  1. DHS estimates the Southwest border apprehension rate reached 81% in fiscal 2021, versus a range of 33% in 2003 to 43% in 2000 and 2009 during the 2000s.
  2. CBP "got away" estimates compiled by the Cato Institute's David J. Bier put the apprehension rate at 79% in both fiscal 2022 and 2023 and 92% in the first four months of fiscal 2024.
  3. CBP's Southwest land border encounter statistics exclude those who evade agents, who in past decades were the majority of illegal border crossers, and the apprehension rate has risen mainly because most crossers intend to turn themselves in and apply for asylum.

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  • New Immigration Estimates Help Make Sense Of The Pace Of Employment — The Congressional Budget Office estimates net immigration was 3.3m in 2023, versus the 1m it had projected, implying faster population and labor force growth than currently reported. The authors estimate this raised real economic growth by about 0.1 percentage point and, by lifting both production and demand, added little price or wage pressure.
  • The Demographic Outlook: 2024 to 2054 — The Congressional Budget Office projects the US population will grow from 342mm in 2024 to 383mm in 2054, an average 0.4% a year — less than half the 0.9% pace of the prior five decades. Immigration accounts for about 70% of growth over the next decade and for all population growth beginning in 2040.
  • Illegal Immigration Is a Bigger Problem Than Ever. These Five Charts Explain Why — Government data show border agents made 2.05m arrests in a single federal fiscal year, the second consecutive year above 2m, after figures never previously exceeded 1.7m or stayed elevated for as long. A growing share of migrants are families with children, who are difficult to deport to their home countries, rather than single adults from Mexico seeking work.

AI Summary. Demographic groups whose work has been more displaced by automation have seen slower real wage growth, and automation is estimated to account for about 70% of between-group wage inequality in the US since 1980. Establishments adopting artificial intelligence have slowed hiring of non-AI workers by more than they have added AI specialists.

Erik Brynjolfsson, Adam Thierer, and Daron Acemoglu American Enterprise Institute
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There is early evidence that AI’s impact on labor markets is following the path of other forms of automation. @erikbryn @AdamThierer @DAcemogluMIT

Does automation explain most of the growth in wage inequality?

Core argument: Automation explains about 70% of between-group wage inequality in the US since 1980, with demographic groups whose work was more displaced by automation seeing weaker real wage growth.

The more a demographic group’s work has been displaced by automation, the less its real wages have grown since 1980. In fact, automation explains about 70% of the between-group inequality in the US since 1980. As shown in Figure 9, establishments have slowed their hiring of non-AI workers (and much more so than they increase the number of AI specialists they hire). So overall, the early rollout of AI seems to have taken the same automation path other digital technologies of the 1980s, 1990s, and 2000s followed. This overall decline in hiring therefore confirms AI is replacing human workers in some occupations, even after accounting for AI-skilled job creation.

Takeaways by Macro Roundup® AI

  1. Automation explains about 70% of between-group wage inequality in the US since 1980, with demographic groups whose work was more displaced by automation seeing weaker real wage growth.
  2. Establishments have slowed their hiring of non-AI workers by more than they have increased their hiring of AI specialists.
  3. The early rollout of AI appears to have followed the same automation path as the digital technologies of the 1980s, 1990s, and 2000s.

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  • The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market — Freelancers in occupations most exposed to generative AI saw employment and earnings decline, with the authors estimating a 2% drop in jobs and a 5.2% drop in monthly earnings on an online labor platform. Offering high-quality service did not mitigate the effect, and top-rated freelancers appear disproportionately hurt.
  • Here’s What We Know About Generative AI’s Impact On White-Collar Work — In a randomized study, Boston Consulting Group consultants given access to GPT-4 completed tasks 25% faster, finished 12% more tasks, and produced work rated 40% higher in quality than colleagues without the tool. Gains appeared across the skill distribution but were largest among less highly skilled employees.