Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, April 8, 2024

AI Summary. Government efforts to spur innovation raise the risk of expropriation through corruption, clientelism, or political favors, misallocating effort and resources. Corruption measures show a strong negative correlation with most innovation indicators, with research and development spending and researcher counts relative to output and population differing by 100% between the least and most corrupt countries.

Jose-Miguel Benavente, Claudio Bravo-Ortega, Pablo Egaña-delSol and Bronwyn Hall National Bureau of Economic Research
Date Posted:
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A cross-country statistical study provides robust evidence that expropriation risk such as corruption negatively impacts innovation by reducing productivity-enhancing activities including R&D. @NBERpubs

Does corruption reduce innovation and research spending across countries?

Core argument: R&D expenditure and the number of R&D researchers, measured relative to GDP and population, differ by 100% between the lowest and highest values of the authors' corruption index.

[Government activity to increase innovation] increases the risk of expropriation, such as corruption, clientelism or political favors, by the government, leading to a misallocation of efforts and resources. The International Country Risk Guide (ICRG) corruption index [evaluates] a country’s practices by asking if there are demands for special payments and bribes, exchange controls, tax assessments or police protection for those involved with trade and financial transactions, along with patronage, nepotism, job reservations, secret party funding, and ties between politics and business. We present the simple correlation between our corruption index and some innovative activity indicators. There is a strong negative correlation between most of the selected variables and our variable of interest. Relative to GDP and population R&D expenditure and the number of R&D researchers differ by 100% between the lowest and highest values of the corruption index.

Takeaways by Macro Roundup® AI

  1. R&D expenditure and the number of R&D researchers, measured relative to GDP and population, differ by 100% between the lowest and highest values of the authors' corruption index.
  2. The authors report a strong negative correlation between their corruption index and most selected indicators of innovative activity.
  3. The authors argue that government activity intended to increase innovation raises the risk of expropriation through corruption, clientelism, or political favors, leading to a misallocation of efforts and resources.

Related Articles:

  • Big Firms Have Different Incentives — Inventors who move to incumbent large firms and those who move to young small firms show indistinguishable patenting and earnings paths beforehand, then diverge afterward. The authors suggest large firms pay inventors more but assign them projects less likely to yield patents, including innovations less likely to threaten existing product lines.
  • Where Have All the “Creative Talents” Gone? Employment Dynamics of US Inventors — Data on over 760,000 US inventors show they are increasingly concentrated in large incumbent firms and less likely to work for young firms or become entrepreneurs; inventors hired by incumbents rather than young firms see earnings rise 12.6% while innovative output falls 6–11% over four years.
  • Mega Firms and Recent Trends in the U.S. Innovation: Empirical Evidence from the U.S. Patent Data — Analysis of US patent data finds that the largest firms are more likely to file novel patents even after controlling for size, industry, and patent counts, and that firms produce more novel patents as they become mega firms. Venture-backed startups also account for a disproportionate share of novel patents.

AI Summary. The Federal Reserve responded late in the early phase of the recent inflation cycle but is now holding the federal funds rate at a fairly high level even as inflation has declined substantially. In the early 1970s the Fed cut rates as soon as inflation fell, leaving monetary conditions too expansionary when inflation resurged later in that decade.

Jesper Rangvid Rangvid's Blog
Date Posted:

Jesper Rangvid says the Fed was slow to raise rates, but it correctly continues to keep the Fed funds rate high even after inflation has fallen, suggesting we could avoid a second 70s-style inflationary spurt.

Is the Fed handling late-cycle inflation better than in the 1970s?

Core argument: Jesper Rangvid concludes the Fed reacted very late in the first phase of this inflation cycle, suggesting it had gone dormant after years of low pre-pandemic inflation and forgotten how to respond when inflation picks up.

Inflation is now close to the target, and we can begin to assess how monetary policy reacted as inflation approached the target. The conclusion is that the Fed reacted very late in the first phase of this inflation cycle. It seems that the Fed had gone dormant and forgotten what to do when inflation picks up, probably because we had become used to inflation being so low before the pandemic. On the other hand, the Fed is doing much better now, i.e. in the late phase of this inflation cycle. The Fed is keeping the federal funds rate at a fairly high level, even though inflation has declined significantly. In the early 1970s, the Fed lowered the federal funds rate as soon as inflation fell. That was not good, because monetary conditions were then too expansionary when inflation picked up again in the late 1970s. Jesper Rangvid argues by keeping the Fed funds rate well above inflation, “we could avoid a second severe inflationary spurt like in the late 1970s.”

Takeaways by Macro Roundup® AI

  1. Jesper Rangvid concludes the Fed reacted very late in the first phase of this inflation cycle, suggesting it had gone dormant after years of low pre-pandemic inflation and forgotten how to respond when inflation picks up.
  2. Rangvid argues the Fed is doing much better in the late phase of this cycle, keeping the federal funds rate at a fairly high level even though inflation has declined significantly and is now close to target.
  3. Rangvid notes that in the early 1970s the Fed lowered the federal funds rate as soon as inflation fell, leaving monetary conditions too expansionary when inflation picked up again in the late 1970s, a repeat he argues can be avoided by holding the rate well above inflation.

Related Articles:

  • The Disappearance of Inflation: Were Rate Hikes Necessary? — Unlike the 1970s inflation waves, when inflation expectations rose as much as or more than inflation itself, inflation expectations stayed anchored near 3% while inflation reached 8%, which the author argues is an important reason inflation fell back. The author contends central banks still had to raise rates, since without hikes inflation would likely have been higher.
  • Global Views: Cutting Through the Noise — Slowing wage growth across all three major US wage measures is consistent with a soft landing in which inflation returns to 2% without a recession. Forward-looking measures based on wage surveys and posted wages in job ads point to further slowing toward roughly 3½%, an estimated sustainable pace.
  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.

AI Summary. Shenzhen Inovance, China's largest industrial automation company, says its role in keeping global supply chains running will insulate it from rising protectionism as it expands abroad, and it aims to rank among the world's three largest companies in the sector within five years. The International Federation of Robotics reports more than half of global industrial robot installations occurred in China.

William Langley and Gloria Li Financial Times
Date Posted:

According to the International Federation of Robotics, in 2022 more than half of all industrial robot installations in the world took place in China.

Can Chinese robot makers expand abroad despite rising protectionism?

Core argument: More than half of all industrial robot installations worldwide took place in China in 2022, according to the International Federation of Robotics.

The founder of China’s largest industrial automation company believes the key role played by the country’s robot makers in keeping global supply chains running will insulate them from rising global protectionism as they try to expand overseas. Zhu Xingming, chair and founder of Shenzhen Inovance, said it hopes to challenge incumbents — which include Western groups such as ABB and Siemens — for a place in the top three largest companies in the sector globally within five years. More than half of all industrial robot installations in the world took place in China in 2022, according to figures from the International Federation of Robotics.

Takeaways by Macro Roundup® AI

  1. More than half of all industrial robot installations worldwide took place in China in 2022, according to the International Federation of Robotics.
  2. Zhu Xingming, chair and founder of Shenzhen Inovance, China's largest industrial automation company, said it hopes to rank among the world's three largest firms in the sector within five years, challenging incumbents such as ABB and Siemens.
  3. Zhu Xingming argues that the key role of China's robot makers in keeping global supply chains running will insulate them from rising global protectionism as they expand overseas.

Related Articles:

  • What Progress Has There Been In Industrial Robots? — Industrial robot repeatability improved little between 1972 and 1984, with a typical 1-meter reach, 10kg payload arm accurate to about 1 mm in both years, but a comparable 2023 robot achieves roughly 0.01–0.02 mm, 50 to 100x more precise. Such a robot cost 2 to 3x more in the 1980s than today, before accounting for cheap Chinese robot arms.
  • The Characteristics and Geographic Distribution of Robot Hubs in U.S. Manufacturing Establishments — Establishment-level U.S. Census data on roughly 35,000 manufacturing plants show that those using robots tend to be larger, pay higher earnings per worker, employ a larger share of production workers, and spend more on capital including information technology. Robots are highly concentrated geographically even after accounting for industry mix.
  • Factory Boom Sweeps US With Construction at Record $190 Billion — US manufacturers' construction spending has more than doubled over the past year to an annual rate of nearly $190bn, according to the Census Bureau. Manufacturing now makes up about 13% of all non-government construction, the highest share in a data series going back to the early 1990s.

AI Summary. Unaccounted capital outflows from China show up not only in the balance of payments' net errors and omissions category but also in net other investment and in the gap between customs-reported and foreign-exchange-reported goods trade balances. This combined residual averaged roughly $100bn per quarter, and about twice that during periods of heavier outflow pressure.

Martin Lynge Rasmussen Money: Inside and Out
Date Posted:

A dataset of 417 cases of illegal capital flight from China shows that after 2018 the crackdown on corporate capital flight “has been extremely effective” and increasingly private individuals have been the primary driver of capital flight. @martin_lynge

How large are China's unrecorded capital outflows?

Core argument: China's balance-of-payments residual averaged roughly $100bn per quarter during 2023, and roughly twice that during the 2015–2016 and 2020–2022 episodes when capital outflow pressures picked up, according to Exante Data.

Capital flight, or capital outflows that cannot be accounted for, is usually recorded in the net errors and omissions (NEO) category in the balance of payments. At Exante Data, we believe capital flight is likely to show up in two other categories as well: net other investment (NOI) and the difference between the goods trade balance reported by the General Administration of Customs and the State Administration of Foreign Exchange (SAFE, reported on a BoP-basis). The size of China’s BoP residual, the sum of the three categories above, is massive: around $100bn per quarter on average during 2023, and twice that when capital outflows pressures picked up in 2015-2016 and 2020-2022. This is shown in the chart below.

Takeaways by Macro Roundup® AI

  1. China's balance-of-payments residual averaged roughly $100bn per quarter during 2023, and roughly twice that during the 2015–2016 and 2020–2022 episodes when capital outflow pressures picked up, according to Exante Data.
  2. Exante Data argues Chinese capital flight shows up not only in net errors and omissions but also in net other investment and in the gap between goods trade balances reported by the General Administration of Customs and by SAFE on a balance-of-payments basis.
  3. Capital flight, defined as capital outflows that cannot be accounted for, is usually recorded in the net errors and omissions category of the balance of payments.

Related Articles:

  • The Threat from China’s Capital Flight — Oddities in China's official balance of payments statistics suggest its actual current account surplus may be nearly 3x the reported figure, which would make it about as large relative to world output as it has ever been. The likeliest explanation for simultaneous downward pressure on the yuan is capital flight of roughly $500bn a year.
  • Chinese Investors Buy Gold As Property And Stock Markets Fall — Chinese investors and households have bought gold as a refuge from local property and stock market turmoil, which the World Gold Council says has helped support record prices. Chinese investment demand for gold bars and coins grew 28% to 280 tonnes, largely offsetting a steep drop in Europe, while jewelry consumption rose 10% to 630 tonnes.
  • Singapore Family Office Applicants Face 18-Month Wait Amid Tighter Scrutiny — Singapore-registered family offices rose from 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. Lawyers and advisers setting up such offices say new registrations have slowed and processing times have stretched from under six months to as long as 18 months amid an application backlog and stricter criteria.

AI Summary. Bloomberg Economics projects India's growth accelerating to 9% by the end of the decade while China slows to 3.5%, putting India on course to overtake China as the world's biggest growth driver by 2028. Manufacturing accounted for about 15.8% of India's output versus 26.4% in China.

Dan Strumpf, Anup Roy, and Abhishek Gupta Bloomberg
Date Posted:

Bloomberg forecasts that India will likely overtake China as the leading driver of global growth by 2028.

Will India overtake China as the world's biggest growth driver?

Core argument: Bloomberg Economics' base case has India's growth accelerating to 9% by the end of the decade while China slows to 3.5%, putting India on course to overtake China as the world's biggest growth driver by 2028.

In Bloomberg Economics’s base case scenario, India’s economy will accelerate to 9% by the end of the decade, while China slows to 3.5%. That puts India on course to overtake China as the world’s biggest growth driver by 2028. Even in the most pessimistic scenario — in line with the IMF’s projections for the next five years in which growth stays below 6.5% — India overtakes China’s contribution in 2037. Despite years of efforts to boost manufacturing, it still only accounted for about 15.8% of India’s GDP output in 2023 compared with 26.4% in China, according to the latest national statistics. Even if India’s manufacturing sector consistently grows by three percentage points more than the headline growth, the country wouldn’t attain Modi’s goal of 25% share in manufacturing until 2040, according to Bloomberg Economics.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics' base case has India's growth accelerating to 9% by the end of the decade while China slows to 3.5%, putting India on course to overtake China as the world's biggest growth driver by 2028.
  2. In Bloomberg Economics' most pessimistic scenario, in line with IMF projections of growth below 6.5% over the next five years, India overtakes China's growth contribution in 2037.
  3. Manufacturing accounted for about 15.8% of India's GDP in 2023 versus 26.4% in China, and Bloomberg Economics estimates India would not reach Modi's 25% target until 2040 even if manufacturing grew three percentage points faster than headline growth.

Related Articles:

  • Where Can Investors Find Geographic Diversification Today? — Japan offers investors geographic diversification, with among the lowest correlation in economic conditions to the US of any developed country, reflecting trade exposure split between the US, China, and the broader Asia region. Most sales of Japanese-listed companies are domestic, and investors remain underweight Japanese assets.
  • How China Could Swamp India’s Chip Ambitions — China is adding more chip-making capacity than the rest of the world combined, all in mature nodes, backed by government incentives worth more than $150bn, according to research consultancy Gavekal Dragonomics. Utilization rates for mature-node chip producers have fallen from nearly 100% to 65–75%, leaving India's $11bn semiconductor push facing an already well-supplied market.
  • Wall Street Snubs China for India in a Historic Markets Shift — US-listed exchange-traded funds buying Indian stocks drew record inflows while the four largest China funds saw combined outflows of nearly $800m, and India's weight in the main developing-market equity benchmark hit an all-time high of 18% as China's fell to a record low of 24.8%. Indian equities trade at more than 20x future earnings, 27% above their 2010–2020 average.

AI Summary. Taiwan Semiconductor Manufacturing Co. will produce its most advanced 2-nanometre chips at a plant in Phoenix, Arizona, and raise its total US investment from $40bn to $65bn to build a third fabrication plant. The US Commerce Department will provide $6.6bn in grants and up to $5bn in loans.

Kathrin Hille Financial Times
Date Posted:

TSMC is planning a third Arizona manufacturing facility that will build cutting-edge chips after getting $6.6B in grants and up to $5B in loans from the federal government. The new plan will bring TSMC’s total investment in the US to $65B.

TSMC is planning a third Arizona manufacturing facility that will build cutting-edge chips after getting $6.6B in grants and...

Will federal subsidies bring the most advanced chipmaking to the US?

Core argument: TSMC will raise its total US investment from $40bn to $65bn, adding a third Arizona fab using 2nm or more advanced technology that is set to be operational by 2030.

Taiwan Semiconductor Manufacturing Co., has agreed to make its most advanced products in Arizona from 2028. TSMC will make the latest cutting-edge 2-nanometre chips in a fabrication plant, or fab, it is building in Phoenix, Arizona, marking an upgrade from its previous plans. That facility will be the company’s second in the US. The first, which is also in Arizona and was announced in 2020 under the Trump administration, will begin production next year. TSMC also said on Monday that it will increase its total investment in the US from $40bn to $65bn to build a third fab, with 2nm or even more advanced technology, which will be operational by 2030. The Taiwanese company and the US Commerce Department said on Monday that Washington would provide it with support worth $6.6bn in grants and up to $5bn in loans.

Takeaways by Macro Roundup® AI

  1. TSMC will raise its total US investment from $40bn to $65bn, adding a third Arizona fab using 2nm or more advanced technology that is set to be operational by 2030.
  2. The US Commerce Department will provide TSMC with $6.6bn in grants and up to $5bn in loans, alongside the company's plan to make 2nm chips in Phoenix, Arizona from 2028.
  3. TSMC's first Arizona fab, announced in 2020 under the Trump administration, will begin production next year, while the Phoenix 2nm plant will be the company's second US facility.

Related Articles:

  • How Real is America’s Chipmaking Renaissance? — Chipmakers have announced more than $200bn of investments in America, including $40bn from TSMC in Arizona, $17bn from Samsung in Texas, and $40bn from Intel in Arizona and Ohio. Even if all planned investments materialize, American output of cutting-edge chips would meet barely a third of domestic demand.
  • One of Biden’s Favorite Chip Projects Is Facing New Delays — Taiwanese chip maker TSMC said volume production at the second of its two Arizona semiconductor plants, part of a $40bn project central to U.S. efforts to rebuild domestic chip manufacturing, is now expected in 2027 or 2028 rather than 2026, with the chip type still undetermined.
  • TSMC To Send Hundreds More Workers To Speed U.S. Plant Construction — Chipmaker TSMC and its suppliers are in talks with the U.S. government on non-immigrant visas to dispatch more than 500 experienced workers to speed construction of its U.S. chip plants, according to chip supply chain executives. Executives said too few U.S. workers have hands-on experience building semiconductor facilities, causing installation delays.

AI Summary. Baby boomers are more liberal than voters older than them, and their aging into the 65-and-older group — alongside the shrinking ranks of those older — helps explain Democratic gains among seniors. Because the relatively conservative Gen X now dominates ages 45 to 64, that group has become more conservative.

Nate Cohn New York Times
Date Posted:
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Democratic losses with younger voters are being offset by a compositional shift in older voters as Baby Boomers replace more conservative cohorts aged 65+. @Nate_Cohn

Does generational turnover explain Democratic gains among older voters?

Core argument: Baby boomers will make up more than 70% of seniors in 2024, up from 0% when Barack Obama won the presidency in 2008, and they are more liberal than the voters older than them.

Boomers will make up more than 70% of seniors in 2024, up from 0% when Mr. Obama — himself a baby boomer — won the presidency in 2008. Boomers have a reputation for being conservative, but they’re more liberal than the voters older than them. The aging of the boomers, along with the dwindling ranks of those even older than the boomers, helps explain the steady Democratic gains among seniors over the last decade. The aging of the boomers into the 65-and-older category has had the effect of making the 45-to-64 group more conservative. That’s because the relatively conservative Gen X now makes up the preponderance of those 45 to 64. Much as the boomers have long been more liberal than the Silent Generation, Gen X has long been more conservative than the boomers. In fact, the polls suggest almost every age group under age 50 has shifted to the right since 2012 (although they still lean left overall).

Takeaways by Macro Roundup® AI

  1. Baby boomers will make up more than 70% of seniors in 2024, up from 0% when Barack Obama won the presidency in 2008, and they are more liberal than the voters older than them.
  2. The aging of boomers into the 65-and-older category, along with the dwindling ranks of those older than the boomers, helps explain steady Democratic gains among seniors over the last decade.
  3. Gen X, long more conservative than the boomers, now makes up the preponderance of those 45 to 64, making that group more conservative, and polls suggest almost every age group under 50 has shifted right since 2012 while still leaning left overall.

Related Articles:

Tuesday, April 9, 2024

AI Summary. An analysis finds recent swings in inflation have been concentrated in the categories most sensitive to monetary policy, with inflation for that responsive group now close to its pre-2020 rate. The authors estimate that interest rate increases likely began putting downward pressure on prices about a year later and will continue to do so near term.

Leila Bengali and Zoë Arnaut Federal Reserve Bank of San Francisco
Date Posted:

Above-target inflation is currently being driven by categories that are historically less reactive to interest rate changes, largely services, electricity, and housing. This implies more disinflation is coming.

How quickly do prices respond to interest rate changes?

Core argument: The authors find that recent swings in inflation have concentrated in the categories most sensitive to monetary policy, and inflation for that most responsive group is now close to its pre-2020 rate.

Our analysis indicates that recent ups and downs of inflation have been focused in categories that are most sensitive to monetary policy. The inflation rate for this most responsive group of goods and services categories is now close to its pre-2020 rate. Our findings suggest that the Fed’s rate hikes that began in March 2022 are exerting downward pressure on prices and will continue to do so in the near term. Rate cuts from 2019 to early 2020 could have contributed upward price pressures starting in mid- to late 2020 and thus could explain some of the rise in inflation over this period. The tightening cycle that began in March 2022 likely started putting downward pressure on prices in mid-2023 and will continue to do so in the near term. This is consistent with the view that the full effects of monetary policy tightening have yet to be felt. Finally, though inflation for the most responsive categories has been falling since mid-2022, the early part of this decline was likely to have been driven more by changes in prevailing economic conditions than by policy tightening, given estimated policy lags.

Takeaways by Macro Roundup® AI

  1. The authors find that recent swings in inflation have concentrated in the categories most sensitive to monetary policy, and inflation for that most responsive group is now close to its pre-2020 rate.
  2. The authors estimate that the Fed's tightening cycle begun in March 2022 likely started putting downward pressure on prices in mid-2023 and will continue to do so in the near term, consistent with the view that the full effects of tightening have yet to be felt.
  3. Rate cuts from 2019 to early 2020 could have contributed upward price pressures starting in mid- to late 2020, and the early part of the decline in responsive-category inflation since mid-2022 was likely driven more by prevailing economic conditions than by policy tightening.

Related Articles:

  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.
  • 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.
  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.

AI Summary. US nonfinancial corporations' net issuance of bonds and loans has fallen to zero, yet real nonresidential capital spending has kept growing faster than before the pandemic, funded by profits that rose 8% pretax in a year. Business investment is largely self-financing in the aggregate, so rising investment and rising profits tend to move together.

Matt Klein The Overshoot
Date Posted:

Higher interest rates have led to deleveraging by US nonfinancial corporations, but with profits up 8% in 2023, corporations have continued to invest. @M_C_Klein

Why does business investment keep growing as corporate borrowing falls to zero?

Core argument: Pretax domestic nonfinancial corporate profits rose 8% in 2023, and real nonresidential capital spending has continued to grow faster than before the pandemic even as net bond and loan issuance by US nonfinancial corporations fell to zero.

Capital spending [by US nonfinancial corporations] is usually financed by debt. Even as net issuance of bonds and loans by nonfinancial corporations has dropped to zero, real nonresidential capital spending has continued to grow faster than it did before the pandemic. In the aggregate, of course, business investment is self-financing, because buyers book the cost as an asset that can depreciate over time while sellers book revenues immediately. This is why rising investment and rising profits tend to go together. And profits have been booming recently, with pretax domestic nonfinancial corporate profits up by 8% in 2023. This virtuous circle could break if recent investments are not validated via higher sales to consumers—but unless (or until) that happens, corporate America can continue to grow even if higher borrowing costs end up making debt less attractive.

Takeaways by Macro Roundup® AI

  1. Pretax domestic nonfinancial corporate profits rose 8% in 2023, and real nonresidential capital spending has continued to grow faster than before the pandemic even as net bond and loan issuance by US nonfinancial corporations fell to zero.
  2. Business investment is self-financing in the aggregate because buyers book the cost as a depreciating asset while sellers book revenues immediately, which is why rising investment and rising profits tend to move together.
  3. The investment-profits circle could break if recent investments are not validated by higher sales to consumers, but until that happens corporate America can keep growing even if higher borrowing costs make debt less attractive.

Related Articles:

  • Has the U.S. Economy Transitioned to a Higher Long-Run Real Interest Rate Regime? — Labor productivity growth in the U.S. nonfarm business sector has exceeded its longer-run average in three of the past five years, suggesting a possible shift to a faster productivity growth regime. Such a shift is one possible explanation for a long-run neutral real interest rate above 2%.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.
  • The U.S. Economy is Roaring. Why Should Rates Come Down? — Traders and Federal Reserve officials expect short-term interest rates to fall sharply on the assumption the economy resembles its pre-pandemic state, but the data suggest a period of structurally faster growth more like the late 1990s, with inflation-adjusted U.S. output up more than 3% in 2023 versus 0.7% the prior year.

AI Summary. The Federal Reserve now indicates that a surge in migration will expand labor supply and moderate wage growth without requiring higher unemployment, making strong job gains compatible with potential rate cuts. Overall jobs data show native-born employment little changed since 2020 while foreign-born employment rose by 3m.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 notes Powell’s recent comments that immigration moderates wage growth and argues that the current job growth rate is consistent with the start of an easing cycle.

Does rising migration allow strong job growth alongside rate cuts?

Core argument: Foreign-born employment in the U.S. has risen by 3 million since 2020 while native-born employment levels are little changed, according to the overall jobs data.

Chair Powell had previously sought to lower inflation by dampening wage growth, which was to be done by raising unemployment. In that framework, strong job gains would suggest the need for tighter policy. But Powell now indicates that the tremendous surge in migration will increase labor supply and moderate wage growth without the need for higher unemployment. This suggests that blockbuster jobs growth is now compatible with potential rate cuts. The recent wave of migrants may be helping to fill the gap [caused by pandemic-related early retirements in] labor-intensive industries. This would also be consistent with the overall jobs data indicating native-born employment levels to be little changed since 2020, while foreign-born employment levels rising by 3 million.

Takeaways by Macro Roundup® AI

  1. Foreign-born employment in the U.S. has risen by 3 million since 2020 while native-born employment levels are little changed, according to the overall jobs data.
  2. Chair Powell indicates that the surge in migration will increase labor supply and moderate wage growth without requiring higher unemployment, departing from his earlier framework of lowering inflation by dampening wage growth through rising unemployment.
  3. Under Powell's revised framework, strong jobs growth is compatible with potential rate cuts, whereas strong job gains previously suggested the need for tighter policy.

Related Articles:

  • To Retire or Keep Working after a Pandemic? — Workers age 55 and older have not reversed the decline in labor force participation that began with the COVID-19 pandemic, unlike other age groups, amounting to roughly 2m workers by some estimates. The shortfall is concentrated among those without a college degree, while college-educated older workers' participation returned to its pre-pandemic trend.
  • Immigration and the U.S. Economy Since the Pandemic: An Accounting Exercise — The US native-born labor force fell by about 1.2m over four years, a decline driven overwhelmingly by population aging, while foreign-born labor supply grew by about 3m, leaving the overall labor force up roughly 2m. Without immigration, the total US labor force would have shrunk.
  • 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.

AI Summary. Commercial banks located near a post office that accepted federally insured deposits were more likely to close during the Great Depression, and this effect weakened sharply after deposit insurance was extended to commercial banks. The authors interpret this as a competitive liquidity effect arising from incomplete insurance coverage.

Matthew Jaremski and Steven Sprick Schuster National Bureau of Economic Research
Date Posted:
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Jaremski and Schuster document that before the establishment of the FDIC, deposits fled to the safety of local insured postal banks, illustrating that lack of universal deposit coverage amplifies run risk. @ssprickschuster

Does incomplete deposit insurance coverage make uninsured banks more likely to fail?

Core argument: Matching balance sheets from over 16,000 commercial banks before the Great Depression with post offices that accepted deposits, the authors find banks operating near a deposit-accepting post office were more likely to close between 1929 and 1935.

Before the Federal Deposit Insurance Corporation (FDIC) became active in 1934, the only federally insured deposit accounts available to American households were through the U.S. Postal Savings System. To examine the role that postal savings played on bank closure, we collect the balance sheets of over 16,000 commercial banks just before the start of the Great Depression and match them with information on which post offices accepted deposits. We find banks that operated nearby a post office that accepted deposits were more likely to close between 1929 and 1935. The effect of postal savings is severely weakened after deposit insurance was installed across commercial banks in 1934. This lends evidence to the theory that we are capturing a competitive liquidity effect due to the lack of universal coverage.

Takeaways by Macro Roundup® AI

  1. Matching balance sheets from over 16,000 commercial banks before the Great Depression with post offices that accepted deposits, the authors find banks operating near a deposit-accepting post office were more likely to close between 1929 and 1935.
  2. Before the FDIC became active in 1934, the U.S. Postal Savings System offered the only federally insured deposit accounts available to American households.
  3. The effect of nearby postal savings on bank closure weakened substantially after deposit insurance was extended to commercial banks in 1934, which the authors read as evidence of a competitive liquidity effect stemming from the lack of universal coverage.

Related Articles:

  • The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications — An examination of 25 years of US banking trends finds deposits—especially uninsured deposits—have grown rapidly while banks have shifted from information-intensive lending toward longer-term securities such as mortgage-backed securities and long-term Treasuries. The authors argue these trends favor strengthening liquidity regulation over expanding deposit insurance to reduce bank-run risk.
  • Ameridollars — Dollar deposits in U.S. banks are de facto fully protected by the U.S. government, but that protection does not extend to the trillions of dollar deposits held at foreign banks, which are supervised by home-country regulators that typically cannot insure dollar deposits. Even U.S. branches of foreign banks tend to lack federal deposit insurance.
  • In Today’s Banking Crisis, Echoes of the ’80s — Unrealized securities losses at recently failed banks reflect the risk of borrowing short and lending long, echoing thrifts that became insolvent as the Federal Reserve raised rates; between 1980 and 1994, 1,617 banks and 1,295 thrifts closed or received government assistance. Uninsured depositors fled fast enough to limit losses, illustrating market discipline.

AI Summary. JPMorgan Chase argues the economy is being fueled by government spending and deficits that are larger than past ones and occurring during boom times rather than a recession, supported by central bank bond buying. The bank also calls proposed international banking capital rules flawed and poorly calibrated, and warns that proxy advisory firms have become too influential.

Andrew Ross Sorkin, Ravi Mattu, Bernhard Warner, Sarah Kessler, Michael J. de la Merced, Lauren Hirsch and Ephrat Livni New York Times
Date Posted:

Jamie Dimon is worried about the trajectory of US fiscal policy, “Deficits today are even larger and occurring in boom times, and they have been supported by quantitative easing, which was never done before the great financial crisis.”

Jamie Dimon is worried about the trajectory of US fiscal policy, “Deficits today are even larger and occurring in boom...

Is the economy being fueled by government spending and deficits?

Core argument: Jamie Dimon warns that the economy is being fueled by government spending and rising deficits, noting that deficits are larger today and occurring in boom times rather than resulting from a recession.

Dimon warns that the economy is being fueled by government spending and rising deficits. “The deficits today are even larger and occurring in boom times — not as the result of a recession — and they have been supported by quantitative easing, which was never done before the great financial crisis." Dimon reiterated his concerns that many of the proposed banking rules [Basel 3] are “flawed and poorly calibrated.” He also argues that proxy advisory firms like ISS have become too influential and thinks the universal proxy “makes it easier to put poorly qualified directors on a board.”

Takeaways by Macro Roundup® AI

  1. Jamie Dimon warns that the economy is being fueled by government spending and rising deficits, noting that deficits are larger today and occurring in boom times rather than resulting from a recession.
  2. Dimon argues that today's deficits have been supported by quantitative easing, a policy never used before the great financial crisis.
  3. Dimon calls many proposed Basel 3 banking rules "flawed and poorly calibrated," and contends that proxy advisory firms such as ISS have become too influential while the universal proxy makes it easier to place poorly qualified directors on boards.

Related Articles:

  • You Are Right to Worry About the Economy — The Federal Reserve describes the US as on an unsustainable fiscal path, with federal debt up from 70% of GDP after the financial crisis to nearly 100% and spending at 23% of GDP versus 19% before. Heavy tax increases on top earners are estimated to yield under 2% of GDP.
  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • The Bond Market’s Message — The federal government is 43% larger than four years earlier, and more than a third of the surge in investment spending traces to government subsidies, credits, and handouts. The author argues the supply of Treasury securities needed to fund deficits will be substantially larger than official estimates, pushing buyers to demand higher yields.

AI Summary. World defense spending reached a record $2.2tn, and security officials say military budgets may need to reach Cold War levels of as high as 4% of economic output to deliver on NATO's plans. Bloomberg Economics calculates that US and Group of Seven allies hitting that level would mean over $10tn in additional commitments over a decade.

Enda Curran, Natalia Drozdiak, and Bhargavi Sakthivel Bloomberg
Date Posted:

Bloomberg estimates that returning US and G7 defense spending to Cold War-era levels would require more than $10T of additional spending over the next decade.

How much would rearming to Cold War defense levels cost?

Core argument: Bloomberg Economics calculates that if the US and its G7 allies raised defense spending to 4% of GDP, that would equate to more than $10 trillion of additional commitments over the next decade.

World defense spending reached a record $2.2 trillion last year. Political leaders have been congratulating themselves on the progress toward NATO’s targets for members of the alliance to set aside 2% of their gross domestic product on defense. But officials focused on security say that military budgets may need to emulate Cold War spending of as high as 4% in order to deliver on the alliance’s plans. If the US and its Group of Seven allies were to reach such levels, that would equate to more than $10 trillion of additional commitments over the next decade, according to calculations by Bloomberg Economics.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics calculates that if the US and its G7 allies raised defense spending to 4% of GDP, that would equate to more than $10 trillion of additional commitments over the next decade.
  2. World defense spending reached a record $2.2 trillion, with political leaders citing progress toward NATO's target of members devoting 2% of GDP to defense.
  3. Officials focused on security say military budgets may need to emulate Cold War levels as high as 4% of GDP to deliver on NATO's plans.

Related Articles:

  • Higher Interest Rates Are Here to Stay — Interest rates will likely stay higher over the next decade than in the decade after the 2008 financial crisis, reflecting factors including high debt levels, deglobalization, higher defense spending, the green transition, populist demands for income redistribution, and persistent inflation. Aging populations may also push developed countries to increase spending.
  • If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode — Stabilizing public debt ratios would require cutting primary deficits to zero, which the author argues no government can do quickly without risking recession and boosting support for populist parties. With a US primary deficit around 4% and a dysfunctional budget process, the debt ratio is likely to keep rising for some time.
  • The Age-Old Question: How Do Governments Pay For Wars? — Denmark abolished a centuries-old religious holiday, requiring people to work that day, partly to help pay for extra defence spending, a move 70% of Danes opposed in one poll. The Stockholm International Peace Research Institute calculates global defence spending rose 4% to a record $2.24tn and is set to keep rising even as higher interest rates raise governments' borrowing costs.

AI Summary. The H5N1 bird flu virus has been detected in cows from 16 herds across six US states, the first widespread outbreak in cattle after only sporadic prior infections with closely related flu viruses. One infected dairy worker is recovering, and the worker's viral variant carries a mutation linked to more efficient spread in mammals.

Max Kozlov and Smriti Mallapaty Nature
Date Posted:

H5N1 has jumped from birds to cows at farms in at least six US states in the first widespread outbreak of the virus in cows. @Nature

H5N1 has jumped from birds to cows at farms in at least six US states in the first widespread outbreak of the virus in cows....

Does bird flu spreading in dairy cattle raise risks for humans?

Core argument: Health officials detected H5N1 bird flu in cows from 16 herds across six US states over a two-week span, a count likely to rise as US surveillance is stepped up.

In the past two weeks, health officials have detected H5N1 in cows from 16 herds across six states — a number that is likely to increase as US surveillance is stepped up. Researchers have previously documented sporadic infections of cows with flu viruses closely related to H5N1, but no widespread outbreaks had been detected until now. One dairy worker in Texas has been infected, but the US Centers for Disease Control and Prevention reports that the person is recovering. The virus infecting the worker is closely related to the strains found in dairy cattle in Texas, with one notable distinction: the worker’s variant has a mutation that is linked to more efficient spread in mammals.

Takeaways by Macro Roundup® AI

  1. Health officials detected H5N1 bird flu in cows from 16 herds across six US states over a two-week span, a count likely to rise as US surveillance is stepped up.
  2. Researchers had previously documented only sporadic infections of cows with flu viruses closely related to H5N1, with no widespread outbreaks detected until this one.
  3. One infected Texas dairy worker is recovering, according to the US Centers for Disease Control and Prevention, and the worker's virus is closely related to strains found in Texas dairy cattle but carries a mutation linked to more efficient spread in mammals.

Related Articles:

  • How the Current Bird Flu Strain Evolved to be So Deadly — A Nature study tracking bird flu genome changes and reported outbreaks found the virus spread three times faster among wild birds than farmed poultry, attributed to mutations letting it adapt to diverse species. Outbreaks, once seasonal with Northern Hemisphere bird migration, have become persistent, killing millions of birds across five continents.
  • Bird Flu’s Surge Has Scientists Seeking Clues to Prevent the Next Pandemic — A bird flu infection in a Cambodian village took a week to reach the attention of the government health system, as villagers attributed dead chickens to hot weather and hospital doctors initially assumed a schoolgirl had seasonal flu. Health officials deemed the eventual response a success.
  • Bird Flu Sample from Chilean Man Showed Some Signs of Adaptation to Mammals — The U.S. Centers for Disease Control and Prevention reported that an H5N1 bird flu sample from a hospitalized Chilean man carried two mutations shown in animal studies to help the virus replicate in mammalian cells. Officials said public risk remains low and the sample lacked other changes needed for efficient human-to-human spread.