Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, July 12, 2024

AI Summary. Congressional Budget Office cost estimates of spending and tax legislation with large projected deficits lowered the valuation of outstanding U.S. Treasury securities by more than 20% over the period studied, with effects concentrated at longer maturities. The authors estimate 57 cents of every dollar of fiscal expansion is unbacked and passed through to Treasury valuations.

Roberto Gomez Cram, Howard Kung, and Hanno Lustig National Bureau of Economic Research
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Market reaction to CBO scoring of legislative proposals with large negative cash flow projections implies an estimated 57¢ of each dollar in major fiscal expansions is unbacked by future surpluses and passed through to Treasury valuations. @HannoLustig

How do projected deficits affect Treasury valuations and long-term yields?

Core argument: CBO cost releases with large negative cash flow projections lowered the valuation of all outstanding U.S. Treasurys by more than 20% between 1997 and 2022, with effects concentrated at longer maturities.

The CBO cost releases of U.S. spending and tax [legislative] proposals contain valuable news about future primary surpluses priced in by U.S. Treasury investors. Using daily event windows, we find that cost releases with large negative cash flow projections have lowered the valuation of all outstanding Treasurys by more than 20% between 1997 and 2022. The valuation effects are concentrated at longer maturities, with an overall increase of 4% in long-term nominal yields driven by an increase in nominal term premia and inflation expectations and a decrease in convenience yields. We account for these valuation effects in a model with Bayesian [rationally updating] bond investors who use the cost releases to learn about the long-run dynamics of U.S. deficits. Using the estimated model, we infer that 57 cents of every dollar in the fiscal expansion is unbacked and passed through to Treasury valuations. Our estimates imply that a one percentage point surprise increase in the expected supply of Treasurys, expressed as a fraction of GDP, corresponds to an increase of the 10-year nominal yield by 31 bps and a drop in the convenience yield of 7.5 bps.

Takeaways by Macro Roundup® AI

  1. CBO cost releases with large negative cash flow projections lowered the valuation of all outstanding U.S. Treasurys by more than 20% between 1997 and 2022, with effects concentrated at longer maturities.
  2. Using daily event windows around CBO cost releases, the authors find an overall 4% increase in long-term nominal yields, driven by higher nominal term premia and inflation expectations and lower convenience yields.
  3. The authors' estimated model of Bayesian bond investors implies 57 cents of every dollar of fiscal expansion is unbacked, and that a one percentage point surprise increase in expected Treasury supply relative to GDP corresponds to a 31 bps rise in the 10-year nominal yield.

Related Articles:

  • An Update to the Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects a federal budget deficit of $1.9tn in fiscal 2024, or $2tn excluding payment-timing shifts, rising to $2.8tn by 2034. On that adjusted basis, deficits equal 7% of gross domestic product in 2024, dip to 5.5% by 2027, and reach 6.9% by 2034, versus a 3.7% average over the past 50 years.
  • The Fed and the Secular Decline in Interest Rates — The authors find that the long-run decline in US Treasury yields since 1980 is fully accounted for by movements in a narrow window around Federal Reserve policy meetings, while yield changes outside that window prove transitory. They suggest the Federal Reserve conveys information to markets about the long-run level of interest rates.
  • Markets Think Inflation Will Be Too High For The Next 20 Years — Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.

AI Summary. The supply of short-term US Treasury bills has risen by $2tn over 12 months, and bills have grown as a share of total debt outstanding. Absorbing this supply requires continued demand from banks, money market funds, and households, and falling appetite could push short-term rates higher and raise the risk of funding-market strains.

Torsten Sløk Apollo
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Torsten Sløk notes the increase in T-bills’ share of outstanding Treasury debt may be a problem if September rate cuts lead to a “lower appetite for T-bills from households and money market funds.”

Does rapidly rising short-term Treasury supply threaten funding markets?

Core argument: The supply of Treasury bills has risen by $2 trillion over the past 12 months, with T-bills also rising significantly as a share of total debt outstanding.

The supply of T-bills has increased by $2 trillion over the past 12 months, and the share of T-bills outstanding as a share of total debt outstanding has trended significantly higher over the same period. Why is the rapid growth in the supply of T-bills a problem? Because a big increase in supply requires a big increase in demand. Growing the amount of T-bills outstanding while the Fed at the same time is doing QT increases the risk of an accident in funding markets, which is what we saw in repo markets in September 2019. In other words, the strong growth in the supply of T-bills will require a continued increase in demand from banks, money market funds, and households. If the Fed starts cutting rates, say, in September, we could see lower appetite for T-bills from households and money market funds, which ultimately would put upward pressure on short rates because of the big supply of T-bills not being met by similar strong demand.

Takeaways by Macro Roundup® AI

  1. The supply of Treasury bills has risen by $2 trillion over the past 12 months, with T-bills also rising significantly as a share of total debt outstanding.
  2. Rapid growth in T-bill supply alongside the Fed's quantitative tightening raises the risk of an accident in funding markets, as occurred in repo markets in September 2019.
  3. Fed rate cuts could lower T-bill appetite from households and money market funds, which would put upward pressure on short rates if large supply is not met by similarly strong demand.

Related Articles:

  • Who Buys Treasuries When the Fed Reduces its Holdings — Analysis of Federal Reserve balance sheet reduction finds that households and broker-dealers absorbed the additional supply of Treasury securities during the 2017–2019 episode, with household holdings correlated with hedge fund holdings. In the first year of the reduction begun in 2022, households purchased a large share while hedge funds did not, and insurance companies and foreign investors also increased holdings.
  • Long Live the Dollar — Foreign investors have been the dominant net buyers of longer-dated US Treasuries, purchasing a net $700bn over a 14-month period against $860bn in total net issuance. These purchases came largely from non-official entities such as hedge funds, pension funds, insurance funds, and banks, potentially motivated by high US interest rates or currency speculation.
  • Liquidity Deteriorating in Treasury Markets — A liquidity gauge for US government debt measures the average gap between quoted yields and values implied by fitted yield curves across Treasury notes and bonds with at least one year to maturity, and it indicates deteriorating liquidity. Small average yield errors signal favorable conditions, as mispricings are corrected quickly.

AI Summary. The Congressional Budget Office projects Affordable Care Act subsidies will cost $1.3tn over a decade and the law's Medicaid expansion for adults earning below 138% of the poverty line another $1.4tn, assuming enhanced subsidies expire as scheduled. Richer subsidies drew more enrollment than forecast, with 20.1m people receiving exchange subsidies, more than double the 2021 number.

The Editorial Board The Wall Street Journal
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The Wall Street Journal Editorial Board notes that the CBO’s June 2024 estimate of the cost of ObamaCare subsidies from 2022-31 has risen by $450B from the July 2021 estimate, with 20M people receiving subsidies, double the number in 2021.

Have health insurance subsidies cost far more than projected?

Core argument: The Congressional Budget Office estimated that ObamaCare subsidies would cost $450 billion more from 2022 to 2031 than its July 2021 projection, one reason being that richer subsidies drew millions more sign-ups than originally forecast.

The Congressional Budget Office estimated in its revised 10-year budget forecast [in June ‘24] that ObamaCare subsidies would cost $1.3T over the next decade. The law’s Medicaid expansion for healthy adults earning below 138% of the poverty line is projected to cost another $1.4T. And that’s assuming the ObamaCare subsidy sweeteners that Democrats enacted in their March ‘21 Covid bill and extended in the Inflation Reduction Act expire as scheduled in ‘25. The ObamaCare subsidies are expected to cost $450 billion more from 2022 to 2031 than CBO’s July 2021 projection. One reason is the richer subsidies lured millions of more people to sign up than originally forecast. As a result, 20.1 million people this year are receiving subsidies on the ObamaCare exchanges, more than double the number in 2021.

Takeaways by Macro Roundup® AI

  1. The Congressional Budget Office estimated that ObamaCare subsidies would cost $450 billion more from 2022 to 2031 than its July 2021 projection, one reason being that richer subsidies drew millions more sign-ups than originally forecast.
  2. The Congressional Budget Office's revised 10-year budget forecast estimated ObamaCare subsidies would cost $1.3 trillion over the next decade, with the law's Medicaid expansion for adults earning below 138% of the poverty line projected to cost another $1.4 trillion.
  3. Some 20.1 million people are receiving subsidies on the ObamaCare exchanges, more than double the number in 2021.

Related Articles:

  • An Update to the Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects a federal budget deficit of $1.9tn in fiscal 2024, or $2tn excluding payment-timing shifts, rising to $2.8tn by 2034. On that adjusted basis, deficits equal 7% of gross domestic product in 2024, dip to 5.5% by 2027, and reach 6.9% by 2034, versus a 3.7% average over the past 50 years.
  • 84 Percent of Spending Growth Will Come from Health, Social Security, and Interest — The Congressional Budget Office projects federal deficits will grow from $1.7tn to $2.6tn and spending from $6.4tn to $10.1tn over a decade, with net interest costs more than doubling from $870bn to $1.6tn. Health care (35%), Social Security (28%), and interest (21%) account for 84% of projected spending growth.
  • Policy Steps in the Federal Budget and Health Care to Achieve Sustainable Fiscal Conditions in the U.S. — 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.

AI Summary. The United Nations projects world population will peak at about 10.29bn in 2084 before easing to 10.18bn by 2100, from roughly 8.09bn. Populations in much of Europe and in China have already peaked and are declining, while sub-Saharan Africa is projected to reach just under a third of the world total by 2100.

Danny Dougherty Wall Street Journal
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Updated UN population projections show India has surpassed China as the largest country. By the end of the century, sub-Saharan Africa is expected to make up 1/3 of the global population.

When will world population peak, and where is it already declining?

Core argument: The world's population is projected to peak at about 10.29 billion in 2084 before declining to 10.18 billion by 2100, up from 8.09 billion in July 2023.

The Earth will top out at around 10.29 billion people in 2084, before declining to 10.18 billion by 2100. That compares with the Earth’s population in July 2023 of 8.09 billion. Across much of Europe—and in longtime population leader China—population levels have already peaked and are declining. Notably, this population reversal means that India has now surpassed China as the world’s most populous country, with 1.44 billion people last year, compared with China’s 1.42 billion. India’s population won’t peak until 2061, the U.N. projects. The U.S. population, estimated at 343.5 million in 2023, is expected to keep climbing through the end of the century, but at a slowing rate. Amid those slowing growth rates, sub-Saharan Africa is expected to make up a larger slice of the world population, climbing to just under a third by 2100. This reflects not just growth in Africa, but also declining Asian populations and flattening population growth in the Americas.

Takeaways by Macro Roundup® AI

  1. The world's population is projected to peak at about 10.29 billion in 2084 before declining to 10.18 billion by 2100, up from 8.09 billion in July 2023.
  2. India has surpassed China as the world's most populous country with 1.44 billion people, compared with China's 1.42 billion, and the U.N. projects India's population will not peak until 2061.
  3. Sub-Saharan Africa is expected to account for just under a third of the world's population by 2100, reflecting African growth alongside declining Asian populations and flattening growth in the Americas.

Related Articles:

  • Exploring the Implications of Sub-Saharan Africa’s Demographic Explosion — Sub-Saharan Africa is projected to hold a quarter of the world's working-age population within a few decades and to surpass China's working-age population in roughly a decade. Even with modest productivity growth near 2%, the region's growth is estimated at 4.5–5.5%, raising its share of global output from about 3% while remaining small.
  • The World Is Becoming More African — United Nations forecasts project Africans will rise from 8% of the world's people in 1950 to one-quarter by 2100, with the continent holding the world's largest workforce within a decade. McKinsey & Company estimates Africa's per-person economic growth has averaged 1% annually since 1990, against India's 5% and China's 9%.
  • How Europe Is Paying Other Countries To Police Its Borders — Interceptions of people at sea by Tunisian authorities doubled to 81,000, and the European Union is projected to spend €278mn on migration in Tunisia, with two-thirds of one €105mn package dedicated to border management. Critics argue that outsourcing border enforcement is a short-term fix that leaves the EU open to blackmail by host governments.

AI Summary. The US became the world's largest exporter of liquefied natural gas, with exports up 12%, while the US, Australia, and Qatar together accounted for 60% of global liquefied natural gas exports. Asian countries led import growth, with China becoming the world's largest importer as its imports rose 12%.

Victoria Zaretskaya Energy Information Administration
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In 2023 the US became the largest LNG exporter, increasing exports by 12%. Import capacity expanded in Asia and Europe with Chinese LNG imports growing by 12% as the PRC became the world’s largest LNG importer.

Who leads global liquefied natural gas exports and imports?

Core argument: The US became the world's largest LNG exporter in 2023, with exports up 12% from 2022, while the US, Australia, and Qatar together accounted for 60% of all global LNG exports.

In 2023, the US became the world’s largest LNG exporter, with exports increasing by 12% compared with 2022. Exports from the three largest global LNG exporters—the US, Australia, and Qatar—accounted for 60% of all LNG exports in 2023. LNG import capacity was expanded primarily in Europe and Asia. In Asia, new capacity was added primarily in China, India, the Philippines, and Vietnam. Asian countries continued to lead the growth in LNG imports globally, with imports increasing by 3.5% (1.2 Bcf/d) in 2023. LNG imports increased by 12% (1.0 Bcf/d) in China, the most of any country in the world, making China the world’s largest LNG importer for the second year since 2021. LNG imports in India increased by 11% (0.3 Bcf/d) as new regasification terminals were placed in service and LNG prices declined.

Takeaways by Macro Roundup® AI

  1. The US became the world's largest LNG exporter in 2023, with exports up 12% from 2022, while the US, Australia, and Qatar together accounted for 60% of all global LNG exports.
  2. China's LNG imports rose 12% (1.0 Bcf/d) in 2023, the largest increase of any country, making China the world's largest LNG importer for the second year since 2021.
  3. Asian countries led global LNG import growth in 2023 with imports up 3.5% (1.2 Bcf/d), and India's imports rose 11% (0.3 Bcf/d) as new regasification terminals entered service and LNG prices declined.

Related Articles:

  • U.S. Energy Production Exceeded Consumption By Record Amount In 2023 — U.S. energy production rose 4% to nearly 103 quadrillion British thermal units while consumption fell 1% to 94, leaving production exceeding consumption by 9 quadrillion British thermal units, the widest gap in records dating to 1949. Dry natural gas, crude oil, natural gas plant liquids, and renewables all reached record output.
  • The United States Was the World’s Largest Liquefied Natural Gas Exporter in 2023 — The United States was the world's largest exporter of liquefied natural gas, shipping an average of 11.9 billion cubic feet per day, a 12% increase from the prior year.
  • US Shale: The Marginal Supplier Matures — The responsiveness of US oil supply to prices has declined and is estimated to be much smaller for publicly traded producers than private ones, with a 10% price increase raising US liquids output by roughly 1%, or 200,000 barrels a day. That implies US supply would offset only about 20-25% of a geopolitical supply shock.

Monday, July 15, 2024

AI Summary. The authors find the 2017 US business tax cuts reduced corporate tax revenue by 40% while raising total tangible corporate investment by about 11%, with firms facing larger tax declines investing relatively more. They estimate long-run GDP is higher by under 1% and labor income by under $1,000 per employee.

Gabriel Chodorow-Reich, Owen Zidar and Eric Zwick National Bureau of Economic Research
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.@gchodorowreich @omzidar and Eric Zwich conclude that the 2017 Tax Cuts and Jobs Act raised tangible corporate investment by about 11%, but long-run GDP by less than 1% while reducing corporate tax revenue by 40%.

How much did corporate tax cuts raise investment, GDP, and wages?

Core argument: Corporate tax revenue fell 40% following the 2017 Tax Cuts and Jobs Act, due to the lower rate and more generous expensing of investment.

We assess the business provisions of the 2017 Tax Cuts and Jobs Act, the biggest corporate tax cut in US history, [building] on empirical work since the passage of the 2017 legislation. We describe not only partial equilibrium results, but also aggregate effects on investment, tax revenue, and GDP, [focusing] on domestic effects. Corporate tax revenue fell by 40% due to the lower rate and more generous expensing [of investment]. In aggregate, we suggest a loose consensus from the literature [based on three different methodologies],that total tangible corporate investment increased by 11%. Firms with larger declines in their effective tax wedge increased investment relatively more. The business tax provisions increased economic growth and wages by less than advertised by the Act’s proponents, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee. Some of the expired and expiring provisions, such as accelerated depreciation, generate more investment per dollar of tax revenue than others. By contrast, the tax cuts to pass-through firms look quite unattractive: they are especially expensive in terms of how much investment they encourage.

Takeaways by Macro Roundup® AI

  1. Corporate tax revenue fell 40% following the 2017 Tax Cuts and Jobs Act, due to the lower rate and more generous expensing of investment.
  2. A loose consensus from the literature, based on three different methodologies, suggests total tangible corporate investment increased by 11%, with firms seeing larger declines in their effective tax wedge increasing investment relatively more.
  3. The 2017 law's business provisions increased growth and wages by less than its proponents advertised, with long-run GDP higher by less than 1% and labor income by less than $1,000 per employee.

Related Articles:

  • Tax Policy and Investment in a Global Economy — Using administrative tax data, the authors estimate that firms experiencing the mean corporate tax change under the 2017 US tax law increased investment by 20% relative to firms with no change, with long-run domestic and total capital up 7% and 13%. They find higher depreciation deductions largely offset added revenue from capital accumulation.
  • Making the Tax Cuts and Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax Reform — Following the 2017 US tax law, real economic output, consumption, business investment, and payrolls grew faster than pre-law forecasts and nearly matched post-law projections, and an analysis of administrative corporate tax return data estimates firms with the average tax change raised domestic investment about 20% relative to firms with no change.
  • End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns — The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.

AI Summary. A Low-Wage Index holding constant the labor force mix of sex, age, industry, occupation, and education finds bottom-quartile real weekly wages flat near $450 (in 2023 dollars) from 1979 to 1997, then grew 20% over 1997–2007 and 25% over the last decade. The 75th-to-25th percentile wage ratio fell from 2.9x to 2.5x.

Ernie Tedeschi Briefing Book
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.@ernietedeschi creates a Low Wage Index, holding the labor force mix of sex, age, industry, occupation, and education constant from 1979, and finds that workers at the bottom 25th percentile saw earnings rise 20% from 1997-2007 and 25% from 2014-23.

Have low-wage workers' real wages stagnated over the past five decades?

Core argument: The Low Wage Index, which holds the 1979 mix of sex, age, industry, occupation, and education constant, has grown 25% over the last 10 years, exceeding its 20% growth over 1997–2007.

Real wage pressure at the bottom has not stagnated over the last 50 years. But neither has it been steady and consistent. [Constructing] a Low Wage Index [LWI], holding the labor force mix of sex, age, industry, occupation, and education constant from 1979, [I find that] a worker at the bottom quartile with a 2023 profile would have made roughly the same in 1997 each week as 1979, about $450 a week in 2023 dollars. But then in the hot economy of the dot-com boom, real wages at the bottom finally grew. The Low Wage Index goes from barely budging for twenty years to growing 20% over the 1997-2007 period. The Great Recession hit, and for a time, low-wage workers saw wage pressure cool. In 2014, it began a second acceleration that, interestingly, continued throughout the pandemic. The low-wage index has grown by 25% over the last 10 years, an even stronger growth record than in the wake of the dot-com boom. The LWI suggests recent wage compression since 2014 has been extraordinary. The ratio of the 75th-to-25th percentile wage has steadily fallen since 2014, from 2.9x to 2.5x, the lowest level since data began in the late 1970s.

Takeaways by Macro Roundup® AI

  1. The Low Wage Index, which holds the 1979 mix of sex, age, industry, occupation, and education constant, has grown 25% over the last 10 years, exceeding its 20% growth over 1997–2007.
  2. A bottom-quartile worker with a 2023 profile would have earned roughly the same weekly pay in 1997 as in 1979, about $450 a week in 2023 dollars, before real wages at the bottom grew in the dot-com boom.
  3. The ratio of the 75th-to-25th percentile wage has fallen steadily since 2014, from 2.9x to 2.5x, the lowest level since the data begin in the late 1970s.

Related Articles:

  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.
  • Perspectives on the Labor Share — The share of US income going to labor reached its lowest level since the Great Depression, falling roughly 5 percentage points between 1929 and 2022 across most industries, alongside a worldwide decline of about 6 percentage points since 1980. The author argues the most plausible causes are technological, including capital-augmenting technology.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.

AI Summary. Wage changes for union and nonunion workers tend to move similarly over time, with union workers' nominal wage changes less volatile, and since 2002 both groups' wages increased at the same rate. When consumer prices grew faster than wages, real wage growth turned negative despite a strong labor market, then turned positive as inflation fell.

Maximiliano Dvorkin Federal Reserve Bank of St. Louis
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Real wages for union members declined by more than non-union members in 2021-22; however, union member real wages are now outpacing those of non-union members. @stlouisfed

Do union and nonunion workers see similar wage growth over time?

Core argument: Since 2002, wages for union-affiliated and nonunion workers increased at the same average rate, with nominal and real wage changes moving similarly over time, though union workers' nominal wage changes appear less volatile.

In nominal and real terms, the wage changes of union-affiliated workers and those with no union affiliation tend to move over time in a similar way, although union workers’ nominal wage changes seem less volatile. On average, since 2002, wages for these two groups of workers increased at the same rate. Non-wage benefits and total compensation show similar trends. From mid-2021 to mid-2023, following the initial phases of the COVID-19 pandemic, consumer prices grew rapidly, outpacing the average annual growth rate in wages. This implies that, in real terms, wage growth was negative. In this case, high inflation rates pulled real wage growth down into negative values despite a strong labor market. After mid-2023 [given] lower levels of inflation [there was] positive real wage growth. In addition, the nominal wage growth of union workers increased more rapidly, leading to higher real wage growth and compensating for the lost ground of the previous few years.

Takeaways by Macro Roundup® AI

  1. Since 2002, wages for union-affiliated and nonunion workers increased at the same average rate, with nominal and real wage changes moving similarly over time, though union workers' nominal wage changes appear less volatile.
  2. From mid-2021 to mid-2023, consumer price growth outpaced average annual wage growth, implying negative real wage growth despite a strong labor market.
  3. After mid-2023, lower inflation coincided with positive real wage growth, and union workers' nominal wage growth rose more rapidly, yielding higher real wage growth that compensated for ground lost in the prior few years.

Related Articles:

  • Unions, Wages and Hours — After adjusting for worker characteristics, the gap between union and non-union members' hourly earnings has been declining since the Great Recession, while the union differential in weekly wages has been more stable at roughly 15 log points. That weekly gap reflects both a higher hourly wage (about 10 log points) and longer working hours (about 5 log points).
  • Labor Market Conflict and the Decline of the Rust Belt — The authors argue that persistent labor market conflict in the Rust Belt's main industries lowered investment and productivity growth, shifting employment to the rest of the country, and estimate it accounts for roughly half the decline in the region's share of US manufacturing employment. Rising foreign competition plays a more modest quantitative role.
  • Pettis On American Labor Unions — Strong labor unions are incompatible with a global trading system in which countries that subsidize domestic production externalize those costs through large, persistent trade surpluses, according to this argument. The US must either reform that system or unilaterally limit its economy's role in absorbing global savings and production imbalances.

AI Summary. Recent cooler inflation readings may be payback for surprisingly hot readings earlier in the year, reflecting new-year price resets rather than a change in underlying trend. Depending on the measure, inflation has been stable for anywhere from one to two years following the earlier spike, suggesting little has changed year over year.

Matt Klein The Overshoot
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.@M_C_Klein looks at inflation over the past 18 months and suggests the underlying rate hasn’t changed since 2023, and “the most recent prints are a form of payback from the surprisingly hot readings in the first few months of the year.”

Do cooler inflation readings signal a real change in the underlying trend?

Core argument: The author suspects the cooler inflation prints are payback for the surprisingly hot readings in the first months of the year, which many analysts attributed to new year's price resets rather than underlying trends.

While it is possible that trend inflation has decelerated sharply, my suspicion is that the most recent prints are a form of payback from the surprisingly hot readings in the first few months of the year. If those earlier prints were reflecting new year’s price resets rather than underlying trends, as many analysts argued, it would make sense for subsequent inflation numbers to come in somewhat cooler even if the overall rate of inflation in 2024 were on track to be unchanged from 2023. There is a clear pattern of deceleration from the inflation spike of 2021H2-2022H1. But after that, things are much less clear. Depending on your preferred measure, inflation has been stable for as long as two years (headline CPI), 18 months (“sticky” prices ex shelter and all items ex food, shelter, energy, and used vehicles), or since last summer (the 16% trimmed mean). Either way, this perspective implies that little about inflation has changed in 2024 relative to 2023.

Takeaways by Macro Roundup® AI

  1. The author suspects the cooler inflation prints are payback for the surprisingly hot readings in the first months of the year, which many analysts attributed to new year's price resets rather than underlying trends.
  2. Depending on the measure, inflation has been stable for as long as two years for headline CPI, 18 months for sticky prices excluding shelter and for all items excluding food, shelter, energy, and used vehicles, or since last summer for the 16% trimmed mean.
  3. A clear pattern of deceleration followed the inflation spike of 2021H2–2022H1, but the author argues little about inflation has changed in 2024 relative to 2023.

Related Articles:

  • Markets Think Inflation Will Be Too High For The Next 20 Years — Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.
  • The Defining Economic Issue of the US Election — Although inflation has largely receded from the 2021-23 shock, the price level remains elevated: the US consumer price index is about 20% above its level at the start of the Biden administration. A back-of-the-envelope estimate puts the aggregate price level roughly 15 percentage points higher than if inflation had continued on its 1.5% pre-COVID path.
  • 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.

AI Summary. US net investment per capita was 110% higher than three decades earlier, led by intellectual property at 460% higher, while net investment in structures was 22% lower. Net residential investment per person has added less each year since 2007, failing to keep pace with depreciation and population growth.

Zachary Bartsch Economist Writing Every Day
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Important

Real net private investment per capita in 2022 was up 110% from 1993, led by a 460% increase in intellectual property, while residential investment failed to keep up with population growth. @zachary_bartsch

How has US net investment per person shifted across asset types?

Core argument: U.S. net investment per capita in intellectual property was 460% higher in 2022 than in 1993, leading all categories, while total net investment per capita rose 110% over the same period.

The graph illustrates the historical net investment per capita as a proportion of the 1993 values. Over the past 30 years, we’ve had massive increases in the annual contributions to our capital stock. Overall, we contributed 110% more in 2022 than in 1993. Intellectual property leads the way with the US adding 460% more capital per person than we did 30 years ago. Clearly, there are big structural changes happening in our economy. Speaking of structures, our net structures investment per capita is down 22% compared to 1993. A more concerning figure is net residential investment. Though the average house might be bigger, in every year since 2007 we’re getting less additional house per person. Our inflation-adjusted residential investment isn’t keeping up with the depreciation and population growth.

Takeaways by Macro Roundup® AI

  1. U.S. net investment per capita in intellectual property was 460% higher in 2022 than in 1993, leading all categories, while total net investment per capita rose 110% over the same period.
  2. U.S. net structures investment per capita in 2022 stood 22% below its 1993 level, even as overall net capital contributions per person rose 110%.
  3. In every year since 2007, the United States has added less housing per person, as inflation-adjusted net residential investment has not kept up with depreciation and population growth.

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  • 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.
  • Capital Is Making a Comeback — Tangible investment in property, factories and equipment fell from 12.5% to 8.5% of private gross domestic product, while intangible investment in intellectual property, software and process knowledge rose from about 11.5% to 16.75%. The author argues demand for tangible capital investment will now have to rise.

AI Summary. Chinese cities borrowed off-budget through state-owned local government financing vehicles to fund infrastructure and bypass borrowing limits, with economists estimating $7–11tn in hidden debt, about 2x central government debt, and as much as $800bn at high risk of default. Bailouts could encourage unsound borrowing; defaults could expose banks to losses.

Brian Spegele and Rebecca Feng Wall Street Journal
Date Posted:

Economists estimate that Chinese local government financing vehicles (LGFVs) have debt of “somewhere between $7-11T, about twice the size of China’s central government debt” and that $800B is at high risk of default. @WSJ

Does off-budget local borrowing threaten China's growth and banks?

Core argument: Economists estimate Chinese local government financing vehicles hold $7–11 trillion of off-the-books debt, roughly twice the size of China's central government debt, incurred to fund sewers, streets and similar projects while sidestepping borrowing limits.

Chinese cities discovered decades ago that they could take on debt through state-owned entities known as local government financing vehicles (LGFVs), to fund sewers, streets and the like. Because the debts don’t appear on government ledgers—only on the LGFV books—cities were able to sidestep borrowing limits. Economists estimate the size off-the-books debt is somewhere between $7-11T, about twice the size of China’s central government debt. The total amount isn’t known—likely not even to Beijing, say bankers and economists—because of the opaqueness surrounding the financial arrangements that allowed the debt to balloon. As much as $800 billion of that debt is at a high risk of default, economists say. If the financing vehicles can’t meet their obligations, Beijing could either pay for bailouts, which might create a bigger problem by encouraging unsound borrowing. Or it could allow insolvent funding vehicles to go belly up, exposing Chinese banks to serious losses and potentially spurring a credit crunch that would further erode economic growth. Rhodium Group found that only a fifth of nearly 2,900 LGFVs it reviewed last year had enough cash to cover their short term debt obligations and interest payments.

Takeaways by Macro Roundup® AI

  1. Economists estimate Chinese local government financing vehicles hold $7–11 trillion of off-the-books debt, roughly twice the size of China's central government debt, incurred to fund sewers, streets and similar projects while sidestepping borrowing limits.
  2. Economists say as much as $800 billion of Chinese LGFV debt is at high risk of default, leaving Beijing to choose between bailouts that might encourage unsound borrowing or failures that expose banks to serious losses and a potential credit crunch.
  3. Rhodium Group found that only a fifth of the nearly 2,900 local government financing vehicles it reviewed had enough cash to cover short-term debt obligations and interest payments.

Related Articles:

  • The Rise and Fall of LGFVs — 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.
  • 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’s Debt Isn’t The Problem — China's roughly $47.5tn debt pile is a symptom rather than the core problem, which is the unrecognized losses from a decade of misallocated investment into excess property, infrastructure, and manufacturing. Resolving it requires distributing asset-side losses quickly in ways that minimize financial distress costs, not just restructuring liabilities to protect the financial system.

AI Summary. Chinese survey respondents once cited lack of ability, lack of effort, and low education as the main explanations for poverty, with unequal opportunity ranking 5th and an unfair economic structure 9th. In a later survey, unequal opportunity ranked first and an unfair economic structure third, with education remaining second.

Ilaria Mazzocco and Scott Kennedy Center for Strategic and International Studies
Date Posted:
Is Database:
Database

In 2014 well over 60% of Chinese believed lack of ability and effort explained poverty; in 2023 these factors fell to 31-33%, topped by unequal opportunity at 38% and an unfair economic system at 36%. @mazzocco_ilaria @KennedyCSIS

Do Chinese citizens now blame the system rather than themselves for poverty?

Core argument: In China's 2023 survey, unequal opportunity ranked as the number one explanation for why people are poor, and an unfair economic structure rose to third, up from 5th and 9th respectively in surveys spanning 2004–2014.

Between 2004 and 2014 respondents identified lack of ability, lack of effort, and low education as the main factors that explained poverty in China. Structural issues, such as unequal opportunities, ranked 5th, while an unfair economic structure ranked 9th. The originally low assignment of responsibility to systems changed dramatically in the 2023 survey. Instead, respondents in China now believe that structural factors are most important in explaining why people are poor. Unequal opportunity surged to being the number one reason why respondents believe people are poor, and an unfair economic structure jumped to number three. Education remained the second most important factor, but uneven access to education in China is in itself a source and a symptom of widespread and persistent inequality.

Takeaways by Macro Roundup® AI

  1. In China's 2023 survey, unequal opportunity ranked as the number one explanation for why people are poor, and an unfair economic structure rose to third, up from 5th and 9th respectively in surveys spanning 2004–2014.
  2. Between 2004 and 2014, Chinese respondents named lack of ability, lack of effort, and low education as the main causes of poverty, assigning little responsibility to the economic system.
  3. Education remained the second most important explanation for poverty in China, and uneven access to education is itself both a source and a symptom of widespread and persistent inequality.

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  • Why So Many Middle-Class Chinese Migrants Take Risky, Illegal Route To U.S. — U.S. Customs and Border Protection reported more than 37,000 Chinese nationals detained at the border with Mexico in a single year, roughly 10x pre-pandemic levels, with families among the fastest-growing group. United Nations data show China's annual net emigration rose above 300,000, compared with about 190,000 a year over the prior decade.
  • Living Outside China Has Become More Like Living Inside China — About 10.5m people living outside China are or once were Chinese citizens, a diaspora exceeded only by India's, Russia's, and Mexico's. Chinese citizens received more than 70% of 81,000 American investor visas issued to dollar-millionaires over a decade, and 18% of China's nearly 900 dollar-billionaires now live abroad, up from 6%.