Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences 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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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 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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, June 27, 2024

AI Summary. Only 20% of the variation in firms' perceived cost of capital is justified by their true cost of capital, with the rest consistent with managerial mistakes. The authors estimate that the resulting capital misallocation lowers long-run aggregate productivity by 5% in a benchmark model.

Niels Joachim Gormsen and Kilian Huber National Bureau of Economic Research
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Public company managers’ conference call comments about their cost of capital vary widely from its actual cost; 80% of the variance suggests managerial error. Those who perceive higher capital cost invest less, reducing TFP by 5%. @NielsGormsen

Do managers' misperceptions of their cost of capital reduce aggregate productivity?

Core argument: Only 20% of the variation in firms' perceived cost of capital is justified by variation in the true cost of capital determined by risk premia and interest rates, with the remaining 80% consistent with managers making mistakes.

We study hand-collected data on firms’ perceptions of their cost of capital. The perceived cost of capital is partially related to the true cost of capital, which is determined by risk premia and interest rates, but there are also large deviations between the perceived and true cost of capital. Only 20% of the variation in the perceived cost of capital is justified by variation in the true cost of capital. The remaining 80% reflects deviations that are consistent with managers making mistakes. We find that, in the long run, firms with a higher perceived cost of capital have a higher return on invested capital, lower investment rate, and lower capital-labor ratio. These results suggest that the perceived cost of capital reported on conference calls is used for long-run capital allocation in line with standard models. The deviations lead to misallocation of capital that lowers long-run aggregate productivity by 5% in a benchmark model. Forcing all firms to apply the same cost of capital would improve the allocation of capital relative to current corporate practice.

Takeaways by Macro Roundup® AI

  1. Only 20% of the variation in firms' perceived cost of capital is justified by variation in the true cost of capital determined by risk premia and interest rates, with the remaining 80% consistent with managers making mistakes.
  2. Firms reporting a higher perceived cost of capital on conference calls have, in the long run, a higher return on invested capital, a lower investment rate, and a lower capital-labor ratio, in line with standard models of capital allocation.
  3. Deviations between perceived and true cost of capital lead to capital misallocation that lowers long-run aggregate productivity by 5% in a benchmark model, and forcing all firms to apply the same cost of capital would improve allocation relative to current corporate practice.

Related Articles:

  • Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money” — The authors estimate that the weighted average cost of capital for Russell 3000 companies averaged 6.9% during the 2009-21 era of easy money versus 7.5% in the prior period, while the aggregate return on invested capital averaged 9.5% versus 9.2%. The resulting spread between returns and the cost of capital averaged 2.6 percentage points versus 1.7 points earlier.
  • Data Update 4 for 2024: Risk Enters the Equation — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.
  • Corporate Discount Rates — The authors estimate that a 1 percentage point increase in a firm's perceived cost of capital raises its discount rate by only 0.3 percentage points, with 40% of firms leaving discount rates unchanged even over a decade. Larger gaps between discount rates and the perceived cost of capital are associated with lower investment rates.

AI Summary. An analysis of the National Survey of College Graduates finds that only 41% of international students who graduated from American universities between 2012 and 2020 were still living in the country as of 2021, including 17% of bachelor's degree recipients. Scarce visas for skilled workers are cited as one reason.

Connor O’Brien Economic Innovation Group
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According to a @cojobrien analysis of foreign students graduating from US universities from 2012-20, only 17% of BA recipients remained in the US, vs. 51% of Master’s and 76% of PhD recipients.

Do most international graduates of American universities leave the country?

Core argument: Only 41% of international students who graduated from American universities between 2012 and 2020 still lived in the U.S. as of 2021, according to an analysis of the National Survey of College Graduates.

American universities graduate approximately 250,000 international students each year. Yet most of these students do not remain in the United States long-term, in part due to scarce visas available for skilled workers. Between undergraduate and graduate degree programs, only 41% of international students graduating from American universities between 2012 and 2020 still lived in the country as of 2021, according to an analysis of the National Survey of College Graduates. More than four out of every five foreign-born bachelor’s degree recipients ultimately move away after graduation. Only 17% of bachelor’s degree recipients stay. Half of master’s degree recipients and one-quarter of PhD recipients also leave.

Takeaways by Macro Roundup® AI

  1. Only 41% of international students who graduated from American universities between 2012 and 2020 still lived in the U.S. as of 2021, according to an analysis of the National Survey of College Graduates.
  2. Just 17% of foreign-born bachelor's degree recipients stay in the U.S. after graduation, while half of master's degree recipients and one-quarter of PhD recipients leave.
  3. American universities graduate roughly 250,000 international students annually, and most do not remain in the United States long-term, in part because visas for skilled workers are scarce.

Related Articles:

  • Top Talent, Elite Colleges, and Migration: Evidence from the Indian Institutes of Technology — Among top scorers on India's Joint Entrance Exam for the Indian Institutes of Technology, 62% of the top 100 and 36% of the top 1,000 migrated abroad within eight years, primarily to the U.S. for graduate school. The authors argue elite schools shape migration by signaling ability and providing access to networks.
  • Third-Country Effects of U.S. Immigration Policy — U.S. H-1B visa denial rates rose from about 6% to 16%, and the authors estimate a 10 percentage point rise in denials increases Canadian applications by 30%, roughly one Canadian application per four forgone visas. More exposed Canadian firms increased sales and hired about 0.5 native workers per immigrant.
  • The Global AI Talent Tracker 2.0M — The United States remains the leading destination for the world's most elite AI talent and hosts 60% of top AI institutions. China's share of top AI researchers working domestically rose from 29% in 2019 to 47% in 2022, and India retained one-fifth of its top AI researchers in 2022 versus nearly none in 2019.

AI Summary. Saudi Arabia has no surplus left to recycle and is instead borrowing heavily in sovereign debt markets and selling assets, including stakes in its national oil company, to fund its economic plans. The International Monetary Fund projects the Saudi current account surplus narrowing to 0.5% of GDP before shifting into deficit through the end of the decade.

Javier Blas Bloomberg
Date Posted:

Saudi Arabia’s current account surplus will be just 0.5% of GDP this year before shifting into deficit in 2025 and for the rest of the decade. “The country is borrowing heavily and selling assets to finance its grand economic plans.” @JavierBlas

Is Saudi Arabia now borrowing and selling assets instead of recycling surpluses?

Core argument: Saudi Arabia's current account surplus will narrow to 0.5% of GDP this year, down from a peak of 50% of GDP, according to the International Monetary Fund.

Saudi Arabia doesn’t have a surplus to recycle at all. Instead, the country is borrowing heavily in the sovereign debt market and selling assets, including chunks of its national oil company, to finance its grand economic plans. From a peak of 50% of its GDP, the Saudi current account surplus will narrow to just 0.5% this year, according to the International Monetary Fund, before shifting into deficit as soon as 2025 and until the end of the decade. If confirmed, it would be the longest current-account deficit for the kingdom since Riyadh flooded the market in 1986, triggering a price collapse.

Takeaways by Macro Roundup® AI

  1. Saudi Arabia's current account surplus will narrow to 0.5% of GDP this year, down from a peak of 50% of GDP, according to the International Monetary Fund.
  2. The International Monetary Fund projects Saudi Arabia shifting into current-account deficit as soon as 2025 and remaining there until the end of the decade, which would be the kingdom's longest such stretch since 1986.
  3. Saudi Arabia is financing its economic plans by borrowing heavily in the sovereign debt market and selling assets, including chunks of its national oil company, rather than recycling a surplus.

Related Articles:

  • OPEC+ Says Goodbye to Its $100-a-Barrel Oil Quest — OPEC+, led by Saudi Arabia and Russia, agreed to extend its layered production cuts while allowing members to begin adding barrels back to the market, with larger increases to follow. The International Monetary Fund estimates Saudi Arabia needs oil above $96 a barrel to balance its budget, versus an $80 average from 2000 to 2020.
  • Megaprojects in the Desert Sap Saudi Arabia’s Cash — Saudi Arabia's spending on megaprojects has risen while oil revenues have leveled off, and the International Monetary Fund estimated oil prices near $80–$86 a barrel would be needed to balance its budget. The kingdom is expected to run a deficit of about $21bn, roughly 2% of gross domestic product.
  • Saudi Arabia’s PIF and the New Petrodollar Recycling — Saudi Arabia's Public Investment Fund appears to have taken over a significant portion of the foreign asset allocation previously handled by the Saudi Central Bank, making its balance sheet a window into a new form of petrodollar recycling. Of roughly $777bn in total assets, $305bn were current and $472bn non-current, with $225bn of the latter held as investment securities.

AI Summary. A New York Times/Siena College national poll found Trump ahead of Biden by six percentage points among registered voters and three among likely voters, well outside the average of polls, which showed Trump up by one point. The authors argue poll averages are a safer measure, though outlier results are sometimes right.

Nate Cohn New York Times
Date Posted:

In a NYT/Siena poll published June 26, Trump is leading Biden by 3pp among likely voters and 6pp among registered voters, his best result in a reputable national survey in months. An average of polls shows Trump up by 1pp.

Are poll averages more reliable than individual outlier surveys?

Core argument: A June 26 New York Times/Siena College poll found Trump ahead by six percentage points among registered voters and three points among likely voters nationally, his best result in a reputable national survey in months.

[A June 26] New York Times/Siena College poll doesn’t look much like other polls. It finds Trump ahead by six percentage points among registered voters and three points among likely voters nationally. That’s his best result in a reputable national survey in months. You have to go back to a CNN/SSRS poll in April to find something showing him ahead by six points with registered voters. (A Quinnipiac poll today found Trump up by four among registered voters.) When outlier results come around, it’s generally better to look at the average of polls. As it happens, we released our poll averages for the cycle on Monday: Mr. Trump is ahead by one point over President Biden after including the latest Times/Siena poll. That’s a safer measure of where the race stands. But that doesn’t necessarily mean the poll should be tossed out altogether. Sometimes, the outliers are right.

Takeaways by Macro Roundup® AI

  1. A June 26 New York Times/Siena College poll found Trump ahead by six percentage points among registered voters and three points among likely voters nationally, his best result in a reputable national survey in months.
  2. The New York Times poll averages for the cycle, including the latest Times/Siena poll, put Trump ahead of President Biden by one point, which the Times calls a safer measure of where the race stands.
  3. A CNN/SSRS poll in April showed Trump up six points among registered voters, and a Quinnipiac poll found him up four points among registered voters.

Related Articles:

  • The Road to A Political Realignment in American Politics — College-educated voters are now more likely to identify as Democrats while those without degrees back Republicans, with educational attainment increasingly correlated with views on abortion, LGBTQ+ rights, and religion's relationship to government. This sorting leaves most states politically uncompetitive, with eight states near the national average in education levels holding 97 electoral votes in play.
  • If Everyone Voted, Would Biden Benefit? Not Anymore — Polling indicates infrequent, less engaged voters now favor the Republican presidential candidate, a reversal that would mean higher turnout benefits Republicans rather than Democrats. In Pennsylvania, new registrants under automatic voter registration have affiliated with Republicans over Democrats by six percentage points.
  • The Shaky Foundation of Trump’s Lead: Disengaged Voters — Polling shows Trump's narrow national lead is built on gains among voters who pay little attention to politics, don't follow traditional news, and don't vote regularly, while Biden leads among those who voted in the prior presidential election. Almost all of Trump's gains have come from these less engaged voters.

AI Summary. A presidential election model's simulations show that a candidate who loses Georgia, Arizona, and Nevada must sweep Michigan, Wisconsin, and Pennsylvania, which are correlated but differ in rural share and demographics. The simulations have him winning at least one of the three 54% of the time but all three only 32%.

Nate Silver Silver Bulletin
Date Posted:

The first run of the @NateSilver538 model gives Trump a 65.7% probability of winning the Electoral College and a 49% probability of winning the popular vote. The model gives only a 32% probability of Biden sweeping PA, MI, and WI.

How much harder is sweeping three correlated states than winning one?

Core argument: Biden wins all three of Michigan, Wisconsin, and Pennsylvania in only 32% of the model's simulations, versus 54% for winning at least one of them.

If Biden loses Georgia, Arizona, and Nevada — and he trails badly in each — he’ll need to win all three of Michigan, Wisconsin, and Pennsylvania and not just one of them. Even though these states are pretty heavily correlated, they aren’t perfectly correlated. Winning several different correlated bets is still hard. (Just ask the DraftKings how it makes so much money on same-game parlays.) And these states do have some differences with one another: Wisconsin is more rural, for instance, and Michigan has the largest Arab/Muslim/Palestinian population. In our simulations, Biden wins at least one of these states 54% of the time. But he wins all three of them in only 32% of simulations. This is the sort of precision that a model can provide that your intuition really can’t.

Takeaways by Macro Roundup® AI

  1. Biden wins all three of Michigan, Wisconsin, and Pennsylvania in only 32% of the model's simulations, versus 54% for winning at least one of them.
  2. Trailing badly in Georgia, Arizona, and Nevada, Biden would need to sweep Michigan, Wisconsin, and Pennsylvania rather than win just one of them.
  3. Michigan, Wisconsin, and Pennsylvania are heavily but imperfectly correlated, with Wisconsin more rural and Michigan home to the largest Arab/Muslim/Palestinian population.

Related Articles:

  • The 2024 Election Won’t Be Up To the Same Voters Who Chose Biden — States gained more than 31m newly eligible voters — people who moved from another state, turned 18, or became naturalized US citizens — with migration between states the largest factor, according to a Bloomberg News analysis of government and private data. In all seven swing states, newly registered voters outnumber the prior presidential margin of victory.
  • If Everyone Voted, Would Biden Benefit? Not Anymore — Polling indicates infrequent, less engaged voters now favor the Republican presidential candidate, a reversal that would mean higher turnout benefits Republicans rather than Democrats. In Pennsylvania, new registrants under automatic voter registration have affiliated with Republicans over Democrats by six percentage points.
  • The Shaky Foundation of Trump’s Lead: Disengaged Voters — Polling shows Trump's narrow national lead is built on gains among voters who pay little attention to politics, don't follow traditional news, and don't vote regularly, while Biden leads among those who voted in the prior presidential election. Almost all of Trump's gains have come from these less engaged voters.

Friday, June 28, 2024

AI Summary. The authors project that the US fiscal trajectory is unsustainable, with deficits and debt exceeding both historical norms and official projections, arguing that official forecasts understate how labor shortages raise health care prices in inefficient sectors. They argue that reducing health care spending, increasing capital, and fiscal retrenchment could restore sustainable fiscal conditions.

Mark Warshawsky, John Mantus, and Gaobo Pang Journal of Policy Modeling
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Analysis led by Mark Warshawsky @AEIecon finds that CBO projections significantly underestimate rising healthcare costs, and proposes changing incentives to curb rising demand, and more rapid adoption of new technologies to improve productivity.

Can lower health care spending and fiscal retrenchment restore fiscal sustainability?

Core argument: The authors project the U.S. fiscal trajectory is unsustainable, with future deficits and debt well beyond both historical norms and official projections, and identify health care spending growth as a major cause of rising federal deficits.

Health care spending has grown significantly in the US, and is a major cause of rising federal deficits. Official projections find that low economic growth and aging of the population will lead to a modest continuation of this situation, but they miss that labor shortages have a particular impact on inefficient sectors, raising the cost of healthcare. We find that the current fiscal trajectory of the US is unsustainable, with future deficits and debt well beyond both historical norms and official projections. Table 1 gives a summary of the official projections for select future years, and compares it with our projections in key areas. We are fairly close to the official projections in the near term, but we see a worse situation in the medium and long term. In particular, our projection is that health care prices are higher and grow faster than the Trustees and CBO who see a cooling off. Policy steps, focusing on reducing health care spending, increasing capital, and fiscal retrenchment, can lead to sustainable fiscal conditions and raise living standards that will otherwise fall.

Takeaways by Macro Roundup® AI

  1. The authors project the U.S. fiscal trajectory is unsustainable, with future deficits and debt well beyond both historical norms and official projections, and identify health care spending growth as a major cause of rising federal deficits.
  2. Unlike the Trustees and CBO, who see health care prices cooling off, the authors project health care prices will be higher and grow faster, arguing that labor shortages weigh particularly on inefficient sectors and raise health care costs.
  3. The authors argue that policy steps reducing health care spending, increasing capital, and pursuing fiscal retrenchment can achieve sustainable fiscal conditions and raise living standards that would otherwise fall.

Related Articles:

  • CBO Releases June tt Baseline Update — The Congressional Budget Office projects federal spending of $84.9tn (24.1% of GDP) over the next decade against revenue of $62.8tn (17.8% of GDP), compared with 50-year averages of 21% and 17.3%. Interest costs are projected to reach $892bn, more than defense or Medicare, and grow to $1.7tn (4.1% of GDP).
  • The Long-Term Budget Outlook Undertt Alternative Scenarios8u for the Economy and the Budget — The Congressional Budget Office projects that if private investment were more sensitive to federal deficits, debt held by the public would exceed 250% of GDP and real national income per person would be 18% ($21,300) lower than its baseline, with the average interest rate on federal debt 2pp higher.
  • Analysis of the 2024 Medicare Trustees’ Report — Medicare's Hospital Insurance trust fund is projected to exhaust its reserves in 2036, with a 75-year shortfall of 0.35% of payroll, and total gross Medicare costs are projected to rise from 3.90% of GDP to 6.20% by 2098. An alternative scenario from the program's Chief Actuary projects 8.38% of GDP instead.

AI Summary. Real wage growth has turned slightly positive, but wage levels remain below where they stood before the inflation surge: consumer prices rose nearly 18% while the Employment Cost Index, a broad wage measure, rose a little under 15%, leaving cumulative real wage growth about 3pp below zero.

Jose Maria Barrero, Nick Bloom, Steven Davis, Kevin Foster, Brent Meyer and Emil Mihaylov Federal Reserve Bank of Atlanta
Date Posted:
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Adjusted for CPI inflation, the Q1 2024 Employment Cost Index of wages and benefits per hour is 3pp under its Q1 2021 level. @Jose_MariaRD @I_Am_NickBloom @Davis_StevenJ

Have real wages caught up to the inflation surge?

Core argument: Cumulative real wage growth stands roughly 3 percentage points below zero since the start of 2021, with CPI up nearly 18% through the first quarter of 2024 while the Employment Cost Index rose a little less than 15%.

While real wage growth has turned slightly positive in recent months, the level of real wages is still below where they were at the onset of the inflation surge that we began to see in the first quarter of 2021. Simply put, real wages haven't fully caught up to the sudden burst in inflation. For example, the cumulative growth in the CPI since the beginning of 2021 is nearly 18% (through the first quarter of 2024). The Employment Cost Index (ECI)—one of the broadest measures of wage growth and which at least partially accounts for compositional shifts in the labor force—is up a little less than 15% over that period, leaving cumulative real wage growth roughly 3pp below zero. This decline in real wages is unusual compared to what the ECI typically depicts. During the prior expansion, real growth in the ECI averaged around 0.5pp per year. Projecting that over the period from the first quarter of 2021 to the first quarter of 2024 would have led to a cumulative increase in the real ECI of 1.5 percentage points.

Takeaways by Macro Roundup® AI

  1. Cumulative real wage growth stands roughly 3 percentage points below zero since the start of 2021, with CPI up nearly 18% through the first quarter of 2024 while the Employment Cost Index rose a little less than 15%.
  2. Real wage growth has turned slightly positive in recent months, but the level of real wages remains below where it stood at the onset of the inflation surge that began in the first quarter of 2021.
  3. Real growth in the Employment Cost Index averaged around 0.5 percentage points per year during the prior expansion, a pace that, projected from the first quarter of 2021 to the first quarter of 2024, would have yielded a cumulative real ECI increase of 1.5 percentage points.

Related Articles:

  • Has Pay Kept Up With Inflation? — All four measures of typical and aggregate pay have grown since 2019 when adjusted using the personal consumption expenditures price index, but show smaller increases in three measures and a decline in one when adjusted using the consumer price index. This pattern of smaller gains under consumer price index adjustment holds across time periods.
  • Are You Better Off Than You Were Four Years Ago? — Inflation-adjusted wages rose over the past four years, including when measured from just before the pandemic, at roughly the same pace as in the preceding years: about 3% cumulative growth adjusted by the consumer price index versus about 4% in 2015-2019, and about 5% growth adjusted by personal consumption prices.
  • Credit Bidenomics for Rising US Wages — Inflation-adjusted wages for US workers in the middle pay range, between the 40th and 60th percentiles, were 6.6% higher than before the pandemic, slightly above what 2015-19 trends would predict. The US is the only G7 country with substantial real wage gains, ranging elsewhere from a 0.2% rise in Canada to a 9% decline in Italy.

AI Summary. Credit markets show wide dispersion by quality: investment grade and BB-rated debt trade near decade-tight spreads while CCC-rated spreads sit near their 10-year average. The authors expect this divergence to persist, with demand for high-quality credit holding index spreads near record tights as weaker borrowers face high interest rates.

John Cortese, Robert Bittencourt, Shobhit Gupta, et al. Apollo
Date Posted:

.@Apolloglobal doesn’t expect a further deterioration in credit quality; demand for high-quality credit will keep option-adjusted spreads (OAS) tight while some lower-quality corporates remain under pressure.

Will credit quality divergence persist between strong and weak borrowers?

Core argument: About 60% of the US high yield index trades inside 250 basis points while 7% trades above 750 basis points, a more extreme distribution than in prior periods when high yield spreads were at similar levels.

This divergence across credit markets has resulted in significant dispersion in performance across the quality spectrum. Investment grade and BB-rated debt are trading near their tights of the past decade, while CCC-rated spreads are near their 10-year average. In fact, the CCC/BB spread ratio is hovering near its post-Covid peak. The dispersion is evident in the makeup of the US high yield benchmark, where about 60% of the index trades inside 250 basis points and 7% trades above 750 basis points—a more extreme distribution than in prior periods when HY spreads were at similar levels. We expect this theme of divergence to persist through 2024 as demand for high-quality credit keeps index spreads near record tights while a subset of lower-quality corporates remain under pressure with generationally high interest rates.

Takeaways by Macro Roundup® AI

  1. About 60% of the US high yield index trades inside 250 basis points while 7% trades above 750 basis points, a more extreme distribution than in prior periods when high yield spreads were at similar levels.
  2. Investment grade and BB-rated debt trade near their tights of the past decade while CCC-rated spreads sit near their 10-year average, leaving the CCC/BB spread ratio near its post-Covid peak.
  3. Credit market divergence is expected to persist through 2024, with demand for high-quality credit holding index spreads near record tights while a subset of lower-quality corporates remain under pressure from generationally high interest rates.

Related Articles:

  • Corporate Debt, Boom-Bust Cycles, and Financial Crises — Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
  • The Calm Before the Storm — Private credit and direct lending have not rewritten the rules of credit risk, and much financial innovation amounts to repackaging risk in higher-fee wrappers. High-yield bonds followed a comparable path: after the 1980s boom, below-investment-grade default rates reached roughly 10.4% and 9.1% before the market matured.
  • The Corporate Debt Maturity Wall: Implications for Capex and Employment — The authors estimate the average interest rate on outstanding corporate debt will rise from 4.20% to 4.50%, lifting private sector interest expense as a share of gross output by 0.25 percentage points. They project this would reduce capital spending growth by up to 0.25 percentage points and labor cost growth by up to 0.15.

AI Summary. Running the US economy at high pressure appears to support the "reverse hysteresis" hypothesis that sustained strong demand draws people into the labour force and boosts business investment, research and development, and dynamism. As inflation cools toward central bank targets, the economy and labour market have shown marked resilience, though US budget deficits are projected at 6% of GDP.

Julia Coronado Financial Times
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Julia Coronado argues the US economy’s outperformance relative to other advanced economies suggests “reverse hysteresis” where tight labor markets due to fiscal stimulus are driving increased investment and productivity.

Does running the economy at high pressure boost labor supply and investment?

Core argument: Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.

Janet Yellen pondered in 2016 whether a “high-pressure economy” could prompt more labour force engagement, business investment, research and development, and generally greater dynamism — a sort of reverse hysteresis. The combination of the pandemic and the policy failures in the aftermath of the financial crisis effectively led the US to run the experiment of running a high-pressure economy. The results are increasingly supportive of Yellen’s reverse hysteresis hypothesis. Pandemic frictions and generous policy support initially contributed to spiking global inflation and a hard turn towards restrictive monetary policy. But as inflation cools towards central bank targets, we have seen a stunning degree of economic and labour market resilience. Bond markets have been understandably nervous with budget deficits in the US projected at 6% of GDP for the foreseeable future.

Takeaways by Macro Roundup® AI

  1. Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.
  2. The pandemic combined with post-financial-crisis policy failures effectively led the US to run the high-pressure economy experiment, with pandemic frictions and generous policy support initially contributing to spiking global inflation and a hard turn to restrictive monetary policy.
  3. US budget deficits are projected at 6% of GDP for the foreseeable future, leaving bond markets nervous even as inflation cools towards central bank targets alongside economic and labour market resilience.

Related Articles:

  • Why is the U.S. GDP Recovering Faster Than Other Advanced Economies? — The U.S. output advantage over other advanced economies is attributed mainly to faster labor productivity growth and secondarily to hours worked per employee. Rigid foreign labor markets and job-retention policies kept workers attached to firms producing below capacity, while the U.S. saw about 3x more sectoral worker reallocation and a surge in new firm formation.
  • Does Worker Scarcity Spur Investment, Automation, and Productivity? Evidence from Earnings Calls — The authors estimate that a one-unit increase in a firm's labor issues, as measured by earnings calls, raises its investment by 28 basis points, implying roughly $55bn in additional US investment attributable to tighter labor markets. The effect is concentrated in industries relying heavily on routine manual tasks, such as manufacturing assembly and warehouse packaging.
  • U.S. Business Investment in the Post-COVID Expansion — Business fixed investment has held at roughly the same share of U.S. GDP as before COVID, a better outcome than after every other recession since 1980, when investment typically fell as a share of GDP and contributed less well into the recovery. American businesses invested $430bn more than if investment had followed its usual historical pattern.

AI Summary. China’s official balance-of-payments data show a large gap between its customs and foreign-exchange agencies’ estimates of the goods trade balance, and reported returns on Chinese foreign assets have broken from their historical relationship with the 5-year US Treasury yield despite central banks raising interest rates. The author argues both anomalies are consistent with unrecorded capital flight.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues that adjusting for understated exports and missing investment income, China’s Q1 2024 current account surplus is probably about 3.5x the official numbers, implying capital flight of around $500B per year.

Do anomalies in China's balance-of-payments data indicate unrecorded capital flight?

Core argument: The historically close relationship between China's foreign investment returns and the 5-year U.S. Treasury yield has broken down, with implied yields now lower than ever, even as most major central banks raised rates sharply since the end of 2021.

The gap between the GACC and SAFE estimates of China’s trade balance in goods is large and unusual, but it is not the only questionable feature of China’s balance of payments in recent years. Most of the major central banks have raised interest rates sharply since the end of 2021, which should have boosted the income that Chinese residents earn on their foreign investments. China’s foreign assets are mostly either reserves or bank loans, which means that their yields should more or less float in line with market rates. SAFE provides no details on Chinese foreign investment income, which makes it impossible to determine the effective yields on specific types of assets, but historically, there was a close relationship between Chinese foreign investment returns and the yield on the 5-year U.S. Treasury note. That relationship has broken down, with implied yields now lower than ever. That has depressed foreign investment income and the current account balance in ways that I (and others) find implausible. Combine this missing investment income with the missing trade surplus in goods, and the estimates of capital flight start to make a lot more sense.

Takeaways by Macro Roundup® AI

  1. The historically close relationship between China's foreign investment returns and the 5-year U.S. Treasury yield has broken down, with implied yields now lower than ever, even as most major central banks raised rates sharply since the end of 2021.
  2. China's foreign assets consist mostly of reserves or bank loans whose yields should float roughly in line with market rates, which makes the depressed reported foreign investment income and current account balance implausible.
  3. The large and unusual gap between the GACC and SAFE estimates of China's goods trade balance, combined with the missing foreign investment income, makes estimates of Chinese capital flight more plausible.

Related Articles:

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AI Summary. Analysts estimate private capital flight from China has run at an annualized rate of roughly $516bn, peaking near $738bn, compared with about $94bn before the pandemic. Chinese officials and analysts attribute the outflows to wealthy entrepreneurs losing confidence in China's future and seeking ways to move money abroad through informal or illicit channels.

Joe Miller and James Kynge Financial Times
Date Posted:

.@Brad_Setser argues that as of Q1 2024 private capital flight from China was running at $516B per year, equivalent to Norway’s entire GDP leaving the country. Prior to the pandemic, the rate was $94B.

Has capital flight from China surged above pre-pandemic levels?

Core argument: Brad Setser of the Council on Foreign Relations estimates private capital flight from China was running at an annualised rate of about $516bn as of the first quarter of this year, compared with $94bn in the last quarter of 2019.

“The levels of capital flight in the past three years have been quite alarming,” says one senior Chinese official, who declined to be identified and who says that a lot of billionaires and multimillionaires are trying to leave China and take their money with them. “Some wealthy private entrepreneurs are losing confidence in China’s future. They feel unsafe so they are finding ways to get their money out. Calculating the extent of capital flight from China is not straightforward. It requires forensic analysis of China’s balance of payments data to work out how much money is leaving the country through informal or illicit channels. Brad Setser, a former US Treasury official and an expert on global capital flows at the Council on Foreign Relations, a US think-tank, estimates that as of the first quarter of this year, private capital flight from China was running at an annualised rate of about $516bn. It was even higher in the third quarter of 2022 when it hit nearly $738bn. These levels are well above outflows in the last quarter of 2019 — before the pandemic struck early in 2020 — which were taking place at an annualised rate of $94bn.

Takeaways by Macro Roundup® AI

  1. Brad Setser of the Council on Foreign Relations estimates private capital flight from China was running at an annualised rate of about $516bn as of the first quarter of this year, compared with $94bn in the last quarter of 2019.
  2. Setser estimates Chinese private capital flight reached an annualised rate of nearly $738bn in the third quarter of 2022.
  3. A senior Chinese official, speaking anonymously, says many billionaires and multimillionaires are seeking to leave China with their money because some wealthy private entrepreneurs are losing confidence in China's future and feel unsafe.

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  • China to See Biggest Millionaire Exodus in 2024 as Many Head to U.S. — China is projected to see a record 15,200 high-net-worth individuals — those with at least $1m in assets — leave the country, the world's largest such outflow, according to a Henley & Partners report. The prior year's 13,800 departures went mostly to the US, Canada, and Singapore.
  • 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.