Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard 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
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, June 13, 2024

AI Summary. China has nearly 12,000 local government financing vehicles whose aggregated assets and liabilities equal roughly 120% and 75% of national GDP, and whose earnings before interest, taxes, and depreciation do not cover their interest payments. Their average borrowing cost of about 5% far exceeds their 1% return on assets, and 80–90% of their annual spending is funded by new debt.

Jonathan Sine Cogitations
Date Posted:
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Interest-bearing debt of China’s ~12,000 local government financing vehicles (LGFVs) has grown from 13% of GDP in 2014 to 48% in 2023. @JonathonPSine finds their average borrowing cost of 5% far outpaces their 1% return on assets.

How large and indebted are China's local government financing vehicles?

Core argument: China's nearly 12,000 local government financing vehicles (LGFVs) held aggregated assets equal to 120% of GDP and liabilities equal to 75% of GDP as of 2020, according to bottom-up surveys of LGFV financials.

There are nearly 12,000 local government financing vehicles (LGFVs) in China, collectively, they are gargantuan. As of 2020, according to bottom-up surveys of LGFV financials, aggregated assets and liabilities equal 120% and 75% of China’s GDP, respectively. LGFV’s financial situation is, to put it frankly, very bad. In aggregate, earnings (before interest, taxes, and depreciation, i.e., EBITDA) do not cover even their interest payments. Including government subsidies only occasionally pushes the interest coverage ratio above one. Moreover, the average borrowing cost for LGFVs, 5% or so, far outpaces their 1% return on assets, posing obvious sustainability problems. Cash flows paint an equally troubling portrait. Every year 80 to 90% of LGFV spending is funded by new debt. On the whole, LGFVs operating inflows do not come close to covering operating expenses. New debt is routinely added simply to make up the gap and sustain current operations.

Takeaways by Macro Roundup® AI

  1. China's nearly 12,000 local government financing vehicles (LGFVs) held aggregated assets equal to 120% of GDP and liabilities equal to 75% of GDP as of 2020, according to bottom-up surveys of LGFV financials.
  2. LGFV earnings before interest, taxes, and depreciation do not cover their interest payments in aggregate, and including government subsidies only occasionally pushes the interest coverage ratio above one.
  3. LGFVs borrow at an average cost of roughly 5% against a 1% return on assets, and 80–90% of their spending each year is funded by new debt added to sustain current operations.

Related Articles:

  • China Economy Memo: Tempest in a Teapot or Crisis A-Brewing? — The authors argue China is heading into a protracted debt crisis in which about 40% of local government financing vehicles default, hitting regional banks most exposed to such lending. They estimate total losses for these creditors at roughly $5tn, or about 30% of China's GDP.
  • China Begins Nationwide Push to Reveal Hidden Government Debt — China's Ministry of Finance reported governments across the country held 37tn yuan ($5.1tn) in on-book debt, with no official tally of hidden debt or who owes it. The International Monetary Fund estimated local government financing vehicles held 66tn yuan ($9.2tn) of hidden debt at end-2022, up from 40tn yuan in 2019.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.

AI Summary. China tops the Nature Index, which counts contributions to papers in a set of prestigious peer-reviewed journals, after ranking second at the index's launch with less than a third of America's contribution. Six Chinese universities or institutions rank in the world's top ten by research output in the Leiden Ranking, and seven by the Nature Index.

Economist Staff The Economist
Date Posted:

China has surpassed the US as the leading source of scientific papers published in prestigious international journals. Next year Chinese universities are expected to produce nearly 2x as many science and technology PhDs as the US.

Has China become the world's leading producer of high-quality scientific research?

Core argument: China reached the top spot in the Nature Index by 2023, having ranked second when the index launched in 2014 with a contribution to eligible papers less than a third of America's.

[China] tops the Nature Index, created by the publisher of the same name, which counts the contributions to articles that appear in a set of prestigious journals. To be selected for publication, papers must be approved by a panel of peer reviewers who assess the study’s quality, novelty, and potential for impact. When the index was first launched, in 2014, China came second, but its contribution to eligible papers was less than a third of America’s. By 2023 China had reached the top spot. According to the Leiden Ranking of the volume of scientific research output, there are now six Chinese universities or institutions in the world's top ten, and seven according to the Nature Index.

Takeaways by Macro Roundup® AI

  1. China reached the top spot in the Nature Index by 2023, having ranked second when the index launched in 2014 with a contribution to eligible papers less than a third of America's.
  2. Six Chinese universities or institutions rank in the world's top ten by volume of scientific research output according to the Leiden Ranking, and seven according to the Nature Index.
  3. The Nature Index, created by the publisher Nature, counts contributions to articles in a set of prestigious journals, whose papers must be approved by peer reviewers assessing quality, novelty, and potential for impact.

Related Articles:

  • Creating and Connecting US and China Science: Chinese Diaspora and Returnee Researchers — The authors estimate that China-born researchers working in the US contributed to 27% of US-addressed scientific papers, while China-born researchers with US experience who returned home contributed to 38% of China-addressed papers. Papers with these authors averaged more citations and appeared more often in high-impact journals than other papers.
  • The U.S. Is Turning Away From Its Biggest Scientific Partner at a Precarious Time — More than 40% of high-quality U.S. scientific papers involve collaboration with researchers abroad, and China and the U.S. are each other's largest research partners, with their joint work consistently among the most-cited across fields. In some strategic areas, analysis of publication data finds the U.S. depends on China more than China depends on the U.S.
  • Paper Tiger? Chinese Science and Home Bias in Citations — Researchers disproportionately cite work from their own country, and measured against a benchmark that distributes world citations by the size of citing and cited countries, every country studied shows some home bias. The authors estimate China is a clear outlier at 42.3%, followed by Iran and India at 23.2% each and the US at 15.9%.

AI Summary. One stock, NVIDIA, has accounted for 35% of the increase in the S&P 500's market capitalization so far this year. This extreme concentration of returns leaves investors more vulnerable to single headlines affecting the one stock driving index gains.

Torsten Sløk Apollo
Date Posted:

NVIDIA currently accounts for 34.5% of the S&P 500’s market cap growth this year. Torsten Sløk @apolloglobal notes “If it starts to decline, then the S&P 500 will be hit hard.”

Does one stock driving index gains leave investors more vulnerable?

Core argument: NVIDIA alone accounts for 35% of the increase in the S&P 500's market capitalization since the start of the year.

Thirty-five percent of the increase in the S&P 500’s market cap since the beginning of the year has come from one stock. Such a high concentration implies that if NVIDIA continues to rise, then things are fine. But if it starts to decline, then the S&P 500 will be hit hard. The bottom line is that the extreme concentration of returns in the S&P 500 makes investors more vulnerable to single headlines impacting the one stock-driving index returns.

Takeaways by Macro Roundup® AI

  1. NVIDIA alone accounts for 35% of the increase in the S&P 500's market capitalization since the start of the year.
  2. The concentration of S&P 500 returns in NVIDIA implies the index holds up if NVIDIA keeps rising, but would be hit hard if NVIDIA begins to decline.
  3. Extreme concentration of S&P 500 returns in a single stock leaves investors more vulnerable to individual headlines affecting that stock.

Related Articles:

  • Stock Market Concentration — Over 2014–2023 the 10 largest U.S. stocks averaged 19% of market capitalization while generating 47% of total economic profit, and by 2023 they were 27% of market capitalization and 69% of economic profit. The S&P 500 returned above its average when concentration was rising and below it when concentration was falling.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • The Concentration Conundrum; What To Do About Market Dominance — The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.

AI Summary. There are 61 nuclear power plants under construction globally, roughly 90 more in planning and over 300 proposed, alongside a push to reopen shuttered plants. Uranium prices have climbed 233% over five years, more than triple the gains in gold and copper.

Geoffrey Morgan and Jacob Lorinc Bloomberg
Date Posted:

Uranium is up 233% from 2019 as utilities pivot back to nuclear. 61 nuclear power plants are under construction globally with another 90 in the planning stage.

Is the global nuclear buildout driving uranium prices sharply higher?

Core argument: Uranium prices have risen 233% over the past five years, more than triple the gains in gold and copper even after declining somewhat in 2024.

Today, there are 61 nuclear power plants under construction globally. Another 90 or so are in the planning stage and more than 300 have been proposed. There’s even a push to re-open old plants that had been shuttered years ago. The surge in the price of uranium is a testament to the magnitude, and speed, of this pivot back to nuclear. Over the past five years, the metal has climbed 233% — more than triple the gains in gold and copper even after declining a bit in 2024.

Takeaways by Macro Roundup® AI

  1. Uranium prices have risen 233% over the past five years, more than triple the gains in gold and copper even after declining somewhat in 2024.
  2. Globally, 61 nuclear power plants are under construction, about 90 more are in the planning stage, and more than 300 have been proposed.
  3. The pivot back to nuclear power includes a push to re-open plants that had been shuttered years ago.

Related Articles:

  • Plant Vogtle Unit 4 Begins Commercial Operation — The 1,114-megawatt Unit 4 reactor at Georgia's Plant Vogtle entered commercial operation, completing an 11-year expansion that brings the plant's capacity to nearly 5 gigawatts and makes it the largest US nuclear plant. No nuclear reactors are currently under construction in the United States, where nuclear supplies about 19% of electricity.
  • Nuclear Power Is Hard. A Climate-Minded Billionaire Wants to Make It Easier — Start-up TerraPower has begun building a sodium-cooled nuclear reactor designed to be smaller and cheaper than conventional water-cooled plants, with completion expected no earlier than 2030 and the design not yet approved by the Nuclear Regulatory Commission. The company says the reactors should ultimately generate electricity at half the cost of traditional nuclear plants.
  • Electricity 2024 — More than 8,000 data centers operate globally, with about 33% in the United States, 16% in Europe, and close to 10% in China. US data center electricity use is projected to rise from roughly 200 TWh in 2022, about 4% of US electricity demand, to almost 260 TWh, or 6% of total demand.

Friday, June 14, 2024

AI Summary. The authors argue firms inefficiently automate jobs where wages exceed workers' opportunity cost, so new automation technologies that deliver small cost savings can reduce productivity, average real wages, and aggregate consumption. They estimate workers earned an average wage premium of 35% in jobs automated between 1980 and 2016.

Daron Acemoglu and Pascual Restrepo National Bureau of Economic Research
Date Posted:
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Between 1980-2016, automation targeted tasks where workers earned an average wage that was 35% higher than their next best job opportunity. Automation accounted for 52% of the increase in between-group US inequality over the period. @DAcemogluMIT

Can automating high-wage jobs lower productivity and average wages?

Core argument: Workers earned an average rent of 35% — wages above opportunity cost — in jobs automated between 1980 and 2016, according to the authors' estimates.

Rents - wages above opportunity cost [in some sectors] distort employment decisions - the VMPL [Value Marginal Product of Labor] in tasks with high rents exceeds the VMPL in lower-rent tasks. Firms inefficiently automate tasks because the wage they face exceeds the opportunity cost of workers [due to] the difference in rents that firms would have paid workers in automated tasks and the rents earned by workers elsewhere in the economy. New automation technologies can have a net negative effect on productivity, average real wages, and aggregate consumption when [they] are adopted in tasks where workers earn high rents despite the fact that these technologies generate small cost savings. Estimates imply that workers used to earn an average rent of 35% in jobs automated between 1980 and 2016. The impact of automation on group-level wages is amplified because it targets higher-rent tasks and thus reduces worker rents. Automation worsens allocative efficiency because it tends to target higher-rent jobs, which are the ones that were undersupplied before automation ([as] these are the tasks where the value marginal product of labor is typically greater). As labor is eliminated from higher-rent tasks, productivity suffers. Consequently, automation may reduce TFP. Figure 8 plots the change in average wages for 500 demographic groups. The vertical axis is for the change in wages during 1980–2016 due to new automation technologies. The horizontal axes in all panels sort groups according to their average hourly wages in 1980. The panels of Figure 8 show the (cumulative) implications of different economic forces.

Takeaways by Macro Roundup® AI

  1. Workers earned an average rent of 35% — wages above opportunity cost — in jobs automated between 1980 and 2016, according to the authors' estimates.
  2. The authors argue that firms inefficiently automate tasks because the wage they face exceeds workers' opportunity cost, so new automation technologies can reduce productivity, average real wages, and aggregate consumption when cost savings are small.
  3. Because automation targets higher-rent tasks, which have higher value marginal product of labor and were undersupplied beforehand, the authors argue it worsens allocative efficiency and may reduce total factor productivity.

Related Articles:

  • Learning From Ricardo and Thompson: Machinery and Labor in the Early Industrial Revolution, and in the Age of AI — Mechanization of cotton spinning greatly increased labor productivity, but the authors find factory workers' real weekly wages barely rose and employment gains were modest, with productivity gains not shared with workers in textiles or offset elsewhere. They argue digital technologies, robotics, and office automation have similarly reduced affected workers' real earnings and employment.
  • Perspectives on the Labor Share — The share of US income going to labor fell roughly 5 percentage points between 1929 and 2022, with declines across most US industries and in most countries of Europe, Asia, and emerging markets. The author argues the most plausible causes are technological, including the information age and automation.
  • Navigating the Future of Work — 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.

AI Summary. A tax on foreign capital inflows large enough to balance US trade would raise real interest rates for all US borrowers, domestic and foreign-funded alike, since some foreign funding is needed whenever a trade deficit exists. The argument holds the deficit would shrink mainly through lower investment, reducing demand, growth, and innovation.

Maurice Obstfeld Project Syndicate
Date Posted:
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Maurice Obstfeld argues that attempting to address America’s chronic trade deficits via a levy on foreign purchases of US assets would lead to higher interest rates and risk undermining the liquidity of US financial markets.

Would a tax on capital inflows raise rates for all borrowers?

Core argument: A US capital inflow tax large enough to balance trade would raise US real interest rates, lifting borrowing costs for every US borrower on every loan, not just those funded from abroad, the author argues.

A capital inflow tax big enough to balance US trade would inflict economic damage at home and abroad in several ways, but the most notable effect would be a steep rise in US real interest rates. The capital inflow tax would, of course, raise the cost of foreign borrowing by the amount of the tax. But perhaps less obviously, it would also raise the interest rate paid by every US borrower on every loan, whether the funding source was domestic or foreign. After all, some foreign funding is necessary in the face of a trade deficit, however small; but nobody would be willing to borrow from abroad unless domestically sourced and foreign funding were equally costly. This rise in interest rates points to the key mechanism through which a capital inflow tax reduces the trade deficit. A country’s borrowing from foreigners must also equal the amount of its investment in excess of what it can cover out of national savings. Thus, the trade deficit (or, more precisely, the current-account deficit) equals investment minus saving. The rise in interest rates may compress the trade deficit through some increase in saving, but its main effect would most likely be a fall in investment, leading to reduced demand, lower growth, and less innovation. Worse, all these repercussions would be magnified if, as seems likely, the inflow tax undermined global confidence in the safety of the US dollar and the liquidity of US financial markets. The implications for monetary and fiscal policy are also worrying. On monetary policy, the capital inflow tax would raise the neutral real interest rate and introduce the risk of runaway inflation if the Fed did not raise its policy rate commensurately. And on fiscal policy, it would raise borrowing costs for the Treasury. The sustainability of US public-sector debt is already a problem, and while the tax would generate revenue, its net effect could be to make the fiscal situation even worse.

Takeaways by Macro Roundup® AI

  1. A US capital inflow tax large enough to balance trade would raise US real interest rates, lifting borrowing costs for every US borrower on every loan, not just those funded from abroad, the author argues.
  2. Because the current-account deficit equals investment minus saving, the author argues the tax would compress the trade deficit mainly by reducing investment, leading to weaker demand, lower growth, and less innovation.
  3. The author warns the inflow tax would raise the neutral real interest rate, risking runaway inflation if the Fed did not raise its policy rate commensurately, and would raise Treasury borrowing costs, potentially worsening the fiscal situation despite the revenue raised.

Related Articles:

  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • He Helped Trump Remake Global Trade. His Work Isn’t Done — A former U.S. trade representative argues that countries running chronic trade surpluses for decades are by definition protectionist, and backs a universal 10% tariff plus a higher tariff on China to push toward globally balanced trade over time. Alternatives include import certificates tied to exports and a charge on foreign investment in U.S. assets.
  • A Second Dose of Trump On Trade Would Differ From The First — A second Trump administration would pair a 10 percentage point tariff increase on all US trading partners with a tariff of at least 60% on Chinese imports, with advisers arguing a broad import tax addresses America's persistent pattern of trade deficits rather than bilateral imbalances. Researchers estimate China's manufacturing goods surplus reached a record of almost 2% of world GDP.

AI Summary. U.S. inflation data show broad-based disinflation, with notable price declines in airfares, video and video game subscriptions and rentals, computer software, and gasoline, each falling by almost 4%. Few categories rose by much if at all, and narrower measures that strip out volatile or idiosyncratic components tell a similar story.

Matt Klein The Overshoot
Date Posted:

The last CPI print indicates a broad-based disinflation but @M_C_Klein expects the Fed to be “wary of adjusting their interest rate forecasts too much in response.”

Is disinflation broad-based across price categories?

Core argument: Airfares, subscription and rental of video and video games, computer software, and gasoline each fell by almost 4% in the latest inflation data.

The disinflation is broad-based. While a few categories experienced notable price declines, including airfares, “subscription and rental of video and video games”, computer software, and gasoline, each of which fell by almost 4%, the really notable feature of the latest data is that there were so few categories that rose by very much, if at all. Narrower cuts of the numbers, which attempt to strip out unusually volatile or idiosyncratic components, tell a similar story.

Takeaways by Macro Roundup® AI

  1. Airfares, subscription and rental of video and video games, computer software, and gasoline each fell by almost 4% in the latest inflation data.
  2. The disinflation is broad-based, with the notable feature of the data being how few categories rose by very much, if at all.
  3. Narrower cuts of the inflation data, which strip out unusually volatile or idiosyncratic components, tell a similar story of broad-based disinflation.

Related Articles:

  • Furman On CPI Report — Core consumer price inflation came in at 0.16% for the month, a 2.0% annual rate, with headline inflation at 0.01%. Core goods prices remained negative and core services inflation has been receding even as shelter inflation has not slowed, which the author argues supports hope for further inflation reduction and puts a second inflation-based interest rate cut in play.
  • An Analysis of Pandemic-Era Inflation In 11 Economies — A cross-country analysis of 11 economies finds wide agreement that global energy and food price increases and supply disruptions in key sectors drove pandemic-era inflation, and that their recession accounts for most of the global cooling of inflation. The authors find tight labor markets had smaller but more persistent inflationary effects, leaving wage inflation as the larger remaining factor.
  • An Update About How Inflation Has Affected Households at Different Income Levels Since 2019 — The Congressional Budget Office estimates that income after transfers and taxes grew faster than consumption prices for all income groups, lowering the share of income needed to buy the same goods by 2% for the lowest-income fifth and 6.3% for the highest-income fifth.

AI Summary. The share of outstanding US mortgages with interest rates below 4% has risen from 38% before the pandemic to 63%, leaving millions of households insulated from Federal Reserve rate increases. The author argues this slows the transmission of monetary policy and will require the Federal Reserve to hold rates higher for longer to contain inflation.

Torsten Sløk Apollo
Date Posted:

Prior to the pandemic, 38% of mortgages had interest rates below 4%, vs. 63% today. Torsten Sløk argues that lock-in slows the impact of rate hikes so that “the Fed will need to keep interest rates higher for longer to get inflation under control.”

Do locked-in low mortgage rates slow monetary policy transmission?

Core argument: The share of outstanding U.S. mortgages carrying interest rates below 4% has risen to 63% from 38% before the pandemic, leaving housing to adjust very slowly to Fed rate hikes.

Before the pandemic, the share of outstanding mortgages with interest rates below 4% was 38%. Today it is 63%. In other words, housing is adjusting very slowly to Fed hikes. Millions of households still benefit from having locked-in low mortgage rates during the pandemic. Put differently, the transmission mechanism of monetary policy is much slower than normal, and the Fed will need to keep interest rates higher for longer to get inflation under control.

Takeaways by Macro Roundup® AI

  1. The share of outstanding U.S. mortgages carrying interest rates below 4% has risen to 63% from 38% before the pandemic, leaving housing to adjust very slowly to Fed rate hikes.
  2. Millions of U.S. households still benefit from low mortgage rates locked in during the pandemic, slowing the transmission mechanism of monetary policy relative to normal.
  3. With monetary policy transmission slowed by locked-in low mortgage rates, the Fed will need to keep interest rates higher for longer to bring inflation under control.

Related Articles:

  • The Lock-In Effect of Rising Mortgage Rates — 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.
  • A Huge Number of Homeowners Have Mortgage Rates Too Good to Give Up — About 70% of US mortgage holders hold rates more than three percentage points below what a new loan would cost, compared with a 1998–2020 period in which no more than 40% had rates even one point below market. Economists at the Federal Housing Finance Agency estimate this lock-in effect accounts for roughly 1.3m fewer home sales.
  • How Quickly Do Prices Respond to Monetary Policy? — 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.