Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “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
  • “…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 provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…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


Friday, August 9, 2024

AI Summary. The authors estimate that mortgage rate lock-in reduced cumulative household moves across ZIP codes from about 7.3% to 6.1% over a year, preventing roughly 800,000 moves. They calculate the resulting deadweight loss at about $296 per household, or around $20bn in aggregate.

Jack Liebersohn and Jesse Rothstein National Bureau of Economic Research
Date Posted:

.@liebersohn and @rothstein_jesse estimate that since rate hikes began in mid-2021, “around 1,000,000 fewer people with a mortgage moved than would have if there had been no rate lock,” resulting in a deadweight loss of $20 billion per year.

How much does mortgage rate lock-in reduce household mobility and welfare?

Core argument: Mortgage rate lock reduced cumulative ZIP code mobility from about 7.3% to 6.1% between 2022q3 and 2023q2, preventing an estimated 800,000 moves across ZIP codes.

Figure B.1 shows the actual and counterfactual mobility hazards by quarter. In 2021q2, when the average rate gap was essentially zero, both the actual and counterfactual quarterly ZIP code mobility hazard in our sample were around 1.5%. Over the entire last year of our sample, which extends from 2022q3 to 2023q2, rate lock reduced cumulative mobility from about 7.3% to 6.1%; 800,000 moves across ZIP codes were prevented. To calculate the deadweight loss [from reduced mobility we] consider the demand for moving as a linear function of the present value of the payment gap and decreasing in wealth; by integrating under the demand curve for moving, we can calculate the welfare losses. We calculate that a 2.7 percentage point rate gap is equivalent to a difference in average mortgage balance value – the “price” of moving – of $49,400. This implies a deadweight loss of about $296 per household from 2022q3-2023q2, the last year of the sample. In aggregate, these losses amount to around $20bn in that year.

Takeaways by Macro Roundup® AI

  1. Mortgage rate lock reduced cumulative ZIP code mobility from about 7.3% to 6.1% between 2022q3 and 2023q2, preventing an estimated 800,000 moves across ZIP codes.
  2. The authors estimate a deadweight loss from reduced mobility of about $296 per household over 2022q3–2023q2, amounting to roughly $20bn in aggregate that year.
  3. A 2.7 percentage point rate gap is equivalent to a $49,400 difference in average mortgage balance value, the "price" of moving, in the authors' linear demand model for moving.

Related Articles:

  • 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.
  • The Transmission Mechanism of Monetary Policy Is Much Slower than Normal — 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.
  • 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.

AI Summary. China's National Bureau of Statistics reports that about 30% of industrial firms were loss-making, above the prior recorded peak during the 1998 Asian financial crisis, with the number of loss-making companies up 44% over six months. China's leadership has said the market must filter out weak producers and promote strong ones.

Economist Staff The Economist
Date Posted:

In June ~ 30% of China’s industrial firms were loss-making, up from 10% in 2011; In its July plenum, “China’s politburo said that the market must filter out weak producers and promote strong ones.” @TheEconomist

Are a record share of China's industrial firms losing money?

Core argument: About 30% of China's industrial firms were loss-making at the end of June, exceeding the previous recorded peak set during the 1998 Asian financial crisis, according to the National Bureau of Statistics.

About 30% of industrial firms were loss-making at the end of June, rising above the previous recorded peak during the Asian financial crisis in 1998, according to the National Bureau of Statistics. Its survey of more than 500,000 companies shows a startling deterioration in the conditions for industrial firms in the first half of the year, during which the number of loss-making companies surged by 44%. In its July meeting, China’s politburo said that the market must filter out weak producers and promote strong ones. In time, that should lead to more capital and labour being allocated to China’s most productive manufacturers, making them mightier still. But it will be painful.

Takeaways by Macro Roundup® AI

  1. About 30% of China's industrial firms were loss-making at the end of June, exceeding the previous recorded peak set during the 1998 Asian financial crisis, according to the National Bureau of Statistics.
  2. The National Bureau of Statistics survey of more than 500,000 companies shows the number of loss-making industrial firms surged by 44% in the first half of the year.
  3. China's politburo said at its July meeting that the market must filter out weak producers and promote strong ones, which should in time allocate more capital and labour to the most productive manufacturers, though painfully.

Related Articles:

  • China’s Real Economic Crisis — China's emphasis on industrial output has produced overinvestment in sectors where domestic demand is already saturated and foreign governments are wary of Chinese supply chain dominance, with surplus steel capacity eventually exceeding the combined steel output of Germany, Japan, and the United States. Similar excesses have appeared in coal, aluminum, glass, cement, robotics, and electric-vehicle batteries.
  • Which Country Should Design U.S. Industrial Policy? — Manufacturing is 15% of global GDP but 11% of U.S. GDP versus 19% in Germany, 21% in South Korea, 26% in mainland China, and 34% in Taiwan, according to World Bank data. The author argues this gap stems from trade and industrial policies in surplus economies that effectively force households to subsidize manufacturing, drawing global manufacturers toward the largest subsidies.
  • China’s Record Manufacturing Surplus — China's manufacturing trade surplus has reached about 2% of world GDP, exceeding the peak surpluses of export powerhouses like Japan and Germany, and shows no signs of shrinking as policy continues to emphasize advanced manufacturing capacity. The main offsetting manufactured-goods deficit is in the United States rather than commodity exporters.

AI Summary. Japan's consumption share of GDP bottomed at 63.3% and took seventeen years to rise 10 percentage points, to 73.8%, while Japan's share of global GDP fell from 15% to 7.9%; China's consumption share was 53.4%. Countries including the Soviet Union and Japan have tried to resolve demand imbalances through technology-driven supply-side measures, which has proved harder than expected.

Michael Pettis Carnegie Endowment for International Peace
Date Posted:

.@michaelxpettis argues that supply-side measures focused on developing new technologies won’t substitute for rebalancing the Chinese economy; he notes the same approach failed in Japan in the early 1990s.

Can technology-driven supply-side measures resolve deep domestic demand imbalances?

Core argument: Japan's consumption share of GDP bottomed at 63.3% in 1991 and took seventeen years to rise 10 percentage points to 73.8% by 2008, still below the global average, while China's stood at 53.4% in 2022.

The consumption share of Japan’s GDP bottomed out at 63.3% in 1991 (compared to 53.4% for China in 2022), and it took seventeen years for the consumption share to rise by 10 percentage points. In 2008, it had reached 73.8% (still below the global average). During that time, Japan’s share of global GDP dropped from 15% to 7.9%. I am not arguing that an intense supply-side focus on developing new technology won’t make a difference for China and will fail. It is certainly possible that such a focus could help China avoid—or at least reduce—a long and difficult adjustment associated with boosting a very weak demand side of the economy. But it is foolish to suggest that such a focus must inevitably work, and even more foolish to claim that China is the first country to try this approach. Many countries have tried to resolve demand imbalances with technology-driven supply-side measures—most notoriously the Soviet Union in the 1960s and Japan in the late 1980s and early 1990s—but it has always proved far more difficult than expected.

Takeaways by Macro Roundup® AI

  1. Japan's consumption share of GDP bottomed at 63.3% in 1991 and took seventeen years to rise 10 percentage points to 73.8% by 2008, still below the global average, while China's stood at 53.4% in 2022.
  2. Japan's share of global GDP fell from 15% to 7.9% over the seventeen years its consumption share was rising.
  3. Many countries have tried to resolve demand imbalances with technology-driven supply-side measures—most notoriously the Soviet Union in the 1960s and Japan in the late 1980s and early 1990s—but it has always proved far more difficult than expected.

Related Articles:

  • How Xi Jinping Plans To Overtake America — China's leadership has pledged a "whole of nation" push for technological self-reliance, applying science and technology to production, with the central government's budget raising annual science and technology spending by 10%, the largest percentage increase of any category. Rhodium Group estimates China spent about $420bn, or 2.8% of GDP, on science and technology.
  • The Dangerous Myth of Deglobalization — China's manufacturing surplus rose by about 1 percentage point of global GDP over a four-year span and is far larger than those of Germany and Japan. China's $800bn goods trade surplus depends on the large U.S. trade deficit, which is still indirectly financed by China through the large offshore dollar stockpiles held by Chinese exporters.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.

AI Summary. The argument that a sharp stock decline reflects investors unwinding borrowing in low-interest yen to buy higher-yielding dollar assets has holes, since bonds are safer and easier collateral for harvesting the interest-rate gap. An unwind should therefore involve selling US bonds too, not rotating from US stocks into bonds.

John Cochrane The Grumpy Economist
Date Posted:

John Cochrane argues that the yen carry trade was not the cause of the August 5 stock market crash: “The most natural ‘carry trade’ is to borrow in Japan and invest in US short-term fixed income, not equities.”

Does the carry trade unwind explain a stock market decline?

Core argument: The stock market reaction is out of proportion to any of the alleged news events cited as its cause.

The stock market reaction is clearly way out of proportion to any of the alleged news events. One story being told is the unwinding of the “Japanese carry trade.” Interest rates in Japan have been very low. So, investors borrow in yen (near 0%) to invest in dollars (5%), or dollar stocks (5% plus equity premium). That strategy makes a lot of money until the yen rises. Losers then sell their US stocks to repay the loans, pushing prices down more. Nice story. Does it hang together? This “currency carry trade” has been around for decades, produces steady returns from the lower interest rate in the borrowing country than the lending country, and ends with an occasional crash when the exchange rate movers. On a market level, the story has a few holes. Bonds are easier to use as collateral, and are less risky. You can harvest the 5% difference in interest rates with a lot less risk. So when the music stops, you’d expect investors to be selling US bonds at least as well as stocks, not to rotate from US stocks to bonds.

Takeaways by Macro Roundup® AI

  1. The stock market reaction is out of proportion to any of the alleged news events cited as its cause.
  2. The yen carry trade story holds that investors borrow in yen near 0% to invest in dollar assets yielding 5%, profiting until the yen rises and losers sell US stocks to repay the loans.
  3. The carry trade explanation has holes: bonds are easier to use as collateral and less risky for harvesting the 5% interest rate difference, so an unwinding would involve selling US bonds at least as much as stocks rather than rotating from stocks into bonds.

Related Articles:

  • There’s No Place Like Home — Deutsche Bank estimates Japanese households, pension plans, banks and the Bank of Japan built a $20tn carry trade funded by low-cost yen deposits and invested in overseas and longer-duration assets. A Bank of Japan hike of 25 basis points helped trigger a 14% yen rally, among the largest in 40 years.

AI Summary. An antitrust remedy barring Google from making payments or revenue-sharing deals for search distribution would spur more innovation and competition from both Google and its rivals, benefiting consumers. This approach is the opposite of European Union regulation, which pushes toward product stasis.

Ben Thompson Stratechery
Date Posted:

.@BenThompson argues that Google “stagnates by being too nice” to potential competitors. Banning default search deals, like the one that generates profits of ~$20B/year for Apple, would promote competition and ultimately benefit consumers.

Would banning payments for search distribution spur more innovation and competition?

Core argument: The author argues the remedy should be an injunction barring Google from making any payments or revenue share for search, on the view that consumers and Google are both better off if the company has more enemies.

I would also note that the behavior I am calling for — more innovation and competition, not just from Google’s competitors, but Google itself — is the exact opposite of what the European Union is pushing for, which is product stasis. I think the E.U. is mistaken for the exact same reasons I think Judge Mehta is right. There’s also the political point: I am an American, and I share the societal sense of discomfort in dominant entities that made the Sherman Antitrust Act law in the first place; yes, it’s possible this decision doesn’t mean much in the end, but it’s pushing in a direction that is worth leaning into. This is why, ultimately, I am comfortable with the implications of my framework, and why I think the answer to the remedy question is an injunction against Google making any sort of payments or revenue share for search; It has been very profitable to be Google’s friend; I think consumers — and Google — are better off if the company has a few more enemies.

Takeaways by Macro Roundup® AI

  1. The author argues the remedy should be an injunction barring Google from making any payments or revenue share for search, on the view that consumers and Google are both better off if the company has more enemies.
  2. The author contends the goal should be more innovation and competition from Google itself as well as its competitors, the opposite of the European Union's push for product stasis, which he considers mistaken.
  3. The author supports Judge Mehta's decision, citing the discomfort with dominant entities that made the Sherman Antitrust Act law, while allowing the ruling may not mean much in the end.

Related Articles:

  • Lax Merger Enforcement Is a Myth — A study of 84,985 mergers reported to U.S. antitrust agencies, of which 1,477 were challenged in court, finds that the likelihood agencies win fully litigated cases and the likelihood challenged mergers proceed to litigation both increased following the Chicago School's influence. The authors read this as a shift toward stricter judicial enforcement standards.
  • Trends in Competition in the United States: What Does the Evidence Show? — The authors argue the ratio of price to marginal cost, not market concentration, is the meaningful measure of market power. U.S. corporate pretax profits rose from 8.6% of GDP in the 1990s to 11.9% in the 2010s, but domestic profits were far flatter, with much of the gain from foreign operations.

AI Summary. US defence technology start-up Anduril Industries raised $1.5bn at a $14bn valuation, double its valuation at its previous fundraising, amid surging investment in the sector. The company will fund new manufacturing facilities intended to mass produce tens of thousands of autonomous weapons systems for the US and its allies.

George Hammond and Tabby Kinder Financial Times
Date Posted:

Defense technology start-up Anduril has raised $1.5B to accelerate mass production of “tens of thousands of autonomous weapons systems addressing the urgent needs of the United States and our allies.”

Is investment surging in defence technology start-ups building autonomous weapons?

Core argument: Anduril Industries raised $1.5bn at a $14bn valuation, double its valuation at its previous fundraising in December 2022, as investment in defence technology surges on the back of the conflict in Ukraine.

Defence technology start-up Anduril Industries has raised $1.5B to accelerate the production of autonomous weapons for the US military and its allies, as investment in the sector surges on the back of conflict in Ukraine. This latest investment values the California-based start-up at $14B, double its valuation in December 2022, the last time the company raised money. The seven-year-old company will invest the funds into new manufacturing facilities capable of mass producing “tens of thousands of autonomous weapons systems addressing the urgent needs of the United States and our allies”. Anduril will invest “hundreds of millions” of dollars to develop the first factory, named Arsenal-1, which will be in the US — although the company declined to specify where.

Takeaways by Macro Roundup® AI

  1. Anduril Industries raised $1.5bn at a $14bn valuation, double its valuation at its previous fundraising in December 2022, as investment in defence technology surges on the back of the conflict in Ukraine.
  2. Anduril will direct the funds into new manufacturing facilities capable of mass producing what it describes as "tens of thousands of autonomous weapons systems" for the US military and its allies.
  3. The seven-year-old company will spend "hundreds of millions" of dollars on its first factory, Arsenal-1, to be located in the US at a site Anduril declined to specify.

Related Articles:

  • The West Badly Needs More Missiles—But The Wait To Buy Them Is Years Long — Each Nasams air-defense system, made by Norway's Kongsberg, takes two years to build and new buyers face a multiyear backlog, prompting the plant to run 24-hour, seven-day shifts. The defense industry faces a prolonged labor crunch, struggling to find workers with niche skills willing to undergo lengthy security checks.
  • Why is the U.S. Navy Running Out of Tomahawk Cruise Missiles? — The U.S. Navy has been firing Tomahawk land-attack cruise missiles faster than it can replace them, with opening-day strikes in Yemen expending more than 80 missiles against 30 targets. An entire year's purchase of 55 Tomahawks accounted for 68% of the precision munitions fired at the Houthis in a single day.
  • U.S. Weapons Industry Unprepared for a China Conflict, Report Says — A Center for Strategic and International Studies report argues the U.S. defense industrial base is not prepared for the current security environment and operates in a manner better suited to peacetime. The study recommends reassessing total munitions requirements and stockpile replenishment needs, creating a strategic munitions reserve, and setting a sustainable procurement plan.

Monday, August 12, 2024

AI Summary. A survey of state transportation department procurement matched to project-level cost data finds infrastructure costs are associated with agency capacity and limited competition for government construction contracts. The authors estimate that a one standard deviation increase in transportation department employment per capita correlates with 16% lower costs.

Zachary Liscow, Will Nober, and Cailin Slattery Brookings Institution
Date Posted:

A 50-state survey finds that inadequate capacity of state DoT staff has been a key driver of higher US infrastructure costs; states that are more reliant on consultants vs. DoT staff spend $70,000 higher cost per lane-mile. @ZLiscow @cailin_slattery

Do agency staffing and contractor competition lower infrastructure costs?

Core argument: States whose department of transportation employees are rated average in quality have almost 30% higher infrastructure costs per mile than states rating their DOT employees as "moderately high quality," according to the authors' survey-linked cost data.

We conduct a survey of infrastructure procurement practices across the 50 states, [interviewing] both employees at each state department of transportation (DOT) and the road builders that win contracts to build and maintain roads. We correlate the survey with a new, detailed dataset of project-level infrastructure costs. We find that two important inputs in the procurement process appear to particularly drive costs: (1) the capacity of the DOT procuring the project and (2) the lack of competition in the market for government construction contracts. A state with [average] employees has almost 30% higher costs per mile than one that rates the DOT employees as “moderately high quality.” When we measure capacity using external data we show that states with higher DOT employment per capita have lower infrastructure costs. A one standard deviation increase in DOT employment per capita is correlated with 16% lower costs.

Takeaways by Macro Roundup® AI

  1. States whose department of transportation employees are rated average in quality have almost 30% higher infrastructure costs per mile than states rating their DOT employees as "moderately high quality," according to the authors' survey-linked cost data.
  2. A one standard deviation increase in state DOT employment per capita is correlated with 16% lower infrastructure costs, measured using external employment data.
  3. The authors find that two inputs in the procurement process appear to particularly drive infrastructure costs: the procuring DOT's capacity and the lack of competition in the market for government construction contracts.

Related Articles:

  • Government Infrastructure Spending Is Expensive and Inefficient — Government Infrastructure Spending Is Expensive and Inefficient
  • The Death of NYC Congestion Pricing — New York's Metropolitan Transportation Authority has a $19bn operating budget and roughly $11bn in annual capital spending yet builds relatively little, and 4 of the 5 most expensive projects tracked by the NYU-Marron Institute Transit Costs Project are in New York City. High transit construction costs are an America-wide problem, but the author argues they are worst in the city.
  • The Nimby Tax On Britain and America — New motorway bridges in the UK cost more than 3x as much per lane mile as in France, Denmark, or Norway, and adding lanes to existing British roads costs twice as much as in Germany. In both comparisons, only the US has higher costs.

AI Summary. Recent 10-year and 30-year US Treasury auctions each cleared three basis points above the yields trading minutes beforehand, signaling demand significantly weaker than the market expected. Larger and more frequent such gaps since the Federal Reserve began raising interest rates make auction metrics an early indicator of weakening Treasury demand.

Torsten Sløk Apollo
Date Posted:

Since the start of the hiking cycle, there have been larger and more frequent yield differences between when-issued Treasuries and actual auction yields, or “tails.” Torsten Sløk argues this signals weakening demand for Treasuries.

Do government bond auction results signal weakening demand for Treasuries?

Core argument: The 10-year and 30-year Treasury auctions both tailed three basis points, meaning results came in three basis points above where the when-issued yield traded minutes before the auction closed at 1 p.m., signaling demand significantly weaker than expected.

When a US government bond auction is announced, a new when-issued bond starts trading, which allows the market to trade the new Treasury bond before the auction has completed. Such trading activity promotes price discovery and allows the market to trade the government bond before it is available for sale. When the auction is complete, the yield difference between the when-issued bond and the new bond is generally called the tail. Specifically, a one basis point tail means that the auction result was one basis point higher than where the when-issued yield was trading minutes before the auction was completed, normally at 1 p.m. This past week, there were auctions for 10-year and 30-year Treasuries, and they both tailed three basis points, which signals that demand for Treasuries was significantly weaker than the market expected. The bottom line is that the trend of larger and more frequent tails since the Fed started raising interest rates in March 2022 underscores the importance of investors closely monitoring Treasury auction metrics. These metrics can provide early indications of weakening demand for Treasuries.

Takeaways by Macro Roundup® AI

  1. The 10-year and 30-year Treasury auctions both tailed three basis points, meaning results came in three basis points above where the when-issued yield traded minutes before the auction closed at 1 p.m., signaling demand significantly weaker than expected.
  2. Auction tails, the yield difference between the when-issued bond and the new bond, have grown larger and more frequent since the Federal Reserve began raising interest rates in March 2022.
  3. Treasury auction metrics such as tails can provide early indications of weakening demand for US government bonds, making close monitoring of auction results important for investors.

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.
  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances — Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.

AI Summary. Changes in US and global neutral real interest rates have driven most movements in emerging and developed market neutral rates over 25 years, passing through almost one-for-one. The authors find cross-country differences are accounted for by income per person, inflation, and current account balances, with no independent role for growth or government debt.

Kevin Daly Goldman Sachs
Date Posted:
Is Database:
Database

Kevin Daly notes that r* tracks US/Global r*, while cross-country variation is driven by GDP per capita, inflation, and current account and government balances.

What explains differences in neutral real interest rates across countries?

Core argument: Changes in US/global r* have driven most developments in emerging- and developed-market neutral real rates over the past 25 years, passing through almost one-for-one, while country-specific spreads have stayed largely stable in aggregate, falling in some economies and rising in others.

Developments in EM and DM neutral real rates over the past 25 years have mostly been driven by changes in US/global r*, which have an almost one-for-one impact on other economies. Country-specific spreads have remained largely stable in aggregate, falling in some economies but rising in others.In the latest five-year period (2020-24), the neutral real rate spread vs. the US has ranged from negative in some DM economies (notably Japan, the Euro area and Switzerland) to more than 10pp in some high-yield EM economies that have experienced major currency weakness (Turkey and Egypt).We find that most of the cross-country variation in neutral real rates is accounted for by three factors: GDP per capita levels, inflation, and current account balances (the latter are a more important factor for EMs than DMs). A 10pp convergence in GDP per capita lowers neutral real rates (r*) by 12bp (all else equal), 1pp higher average inflation raises r* by 33bp, and a 1pp improvement in the current account balance lowers r* by 7bp (and by 20bp in EM economies). We find no independent role for a range of other factors, including GDP growth, government balances, and government debt levels.

Takeaways by Macro Roundup® AI

  1. Changes in US/global r* have driven most developments in emerging- and developed-market neutral real rates over the past 25 years, passing through almost one-for-one, while country-specific spreads have stayed largely stable in aggregate, falling in some economies and rising in others.
  2. Three factors account for most cross-country variation in neutral real rates: a 10pp convergence in GDP per capita lowers r* by 12bp, 1pp higher average inflation raises it by 33bp, and a 1pp improvement in the current account balance lowers it by 7bp, or 20bp in emerging markets.
  3. Over 2020–24, neutral real rate spreads versus the US ranged from negative in developed economies such as Japan, the Euro area and Switzerland to more than 10pp in high-yield emerging markets that experienced major currency weakness, including Turkey and Egypt.

Related Articles:

  • The Future Of r* — Long-run equilibrium interest rates are argued to stay low relative to recent decades' historical average but above pre-pandemic lows, implying rates only slightly below current levels, with a nominal neutral rate near 3.5% offered as illustration. Rising government debt, particularly in the US, is identified as the main risk to that view.
  • Quo Vadis, r*? The Natural Rate Of Interest After The Pandemic — Estimates of the natural rate of interest across core advanced economies suggest it may have increased, though the estimates are widely dispersed and statistically uncertain. Low expected potential growth and rising longevity may weigh on the natural rate, while large fiscal deficits, age-related spending, and public investment needs for infrastructure, defense, and the green transition may push it up.
  • Recent Movements in R*: The Most Important Interest Rate That You Have Never Heard Of — The natural rate of interest — the inflation-adjusted rate prevailing when the economy grows at trend with inflation at target — is unobservable and uncertain, but most estimates have risen and sit above pre-pandemic levels. The data lean toward a long-run natural rate higher than pre-pandemic and possibly above Federal Reserve projections.

AI Summary. The US Chips Act is a bet that Intel, Micron, Taiwan Semiconductor Manufacturing, and Samsung can return advanced chip production to the US, with an explicit goal of making a fifth of the world's most advanced processors by 2030, up from roughly zero. Nearly 100 companies have pledged about $400bn in US facilities.

Mackenzie Hawkins Bloomberg
Date Posted:
Is Database:
Database

Citing BCG data, Bloomberg estimates that Chips Act grants will increase the global share of US fabs to 14% in 2032 from 10% today. In the absence of the Chips Act, BCG estimates the US share would have declined to 8%.

Can subsidies bring advanced chip manufacturing back to the US?

Core argument: An explicit goal of the Chips Act is for the US to make a fifth of the world's most advanced processors by 2030, up from roughly zero today.

The Chips Act, enacted two years ago Friday, is the nation’s most audacious foray into industrial policy since World War II. It’s essentially a bet that four companies — Intel Corp., Micron Technology Inc., Taiwan Semiconductor Manufacturing Co. and Samsung Electronics Co. — can bring sophisticated chip production back to the US. In a sign of the ambition, one explicit goal is making a fifth of the world’s most advanced processors by 2030, up from roughly zero today. On all fronts, there’s progress. In the past several years, nearly a hundred companies have pledged to spend roughly $400 billion on US facilities. Over half of that comes from a trio of top chipmakers — TSMC, Intel, and Samsung — that are planning a slew of new chip fabrication centers, or fabs, to manufacture their most cutting-edge technology.

Takeaways by Macro Roundup® AI

  1. An explicit goal of the Chips Act is for the US to make a fifth of the world's most advanced processors by 2030, up from roughly zero today.
  2. Nearly 100 companies have pledged roughly $400 billion on US facilities, with over half coming from TSMC, Intel and Samsung, which plan new fabrication centers for their most cutting-edge technology.
  3. The Chips Act is the most audacious US foray into industrial policy since World War II, betting that Intel, Micron, TSMC and Samsung can bring sophisticated chip production back to the US.

Related Articles:

  • The Chips Act Has Been Surprisingly Successful So Far — The US government has spent over half of its $39bn in Chips Act semiconductor incentives, and chip companies and supply chain partners have announced $327bn of investments over the next 10 years, according to Semiconductor Industry Association calculations. US data show a 15-fold increase in construction of computing and electronics manufacturing facilities.
  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • A Mid-Year Temperature Check on Growth — The authors project business investment growth to slow to roughly 3% in the second half of the year as the factory-building boom catalyzed by CHIPS Act and Inflation Reduction Act subsidies has peaked. They expect downstream investment in factory equipment and artificial-intelligence-related computer hardware and software to eventually take its place, though the timing is uncertain.

AI Summary. A Financial Times investigation found that about 40% of the largest US manufacturing investments announced in the first year of the Inflation Reduction Act and Chips and Science Act have been delayed or paused. Of projects worth over $100m, $84bn have been delayed from two months to several years, or paused indefinitely.

Amanda Chu, Alexandra White, and Rhea Basarkar Bloomberg
Date Posted:
Is Database:
Database

The FT finds that 40% of the major manufacturing investments receiving tax credits, loans, and grants via the Inflation Reduction Act and Chips and Science Act “have been delayed for between two months and several years, or paused indefinitely.”

Are large manufacturing projects from new industrial subsidies being delayed?

Core argument: A Financial Times investigation found that 40% of the largest US manufacturing investments announced in the first year of the Inflation Reduction Act and Chips and Science Act have been delayed or paused.

Some 40% of the biggest US manufacturing investments announced in the first year of Joe Biden’s flagship industrial and climate policies have been delayed or paused, according to a Financial Times investigation. The US president’s Inflation Reduction Act and Chips and Science Act offered more than $400bn in tax credits, loans, and grants to spark development of a US cleantech and semiconductor supply chain. However, of the projects worth more than $100mn, a total of $84bn have been delayed for between two months and several years, or paused indefinitely, the FT found.

Takeaways by Macro Roundup® AI

  1. A Financial Times investigation found that 40% of the largest US manufacturing investments announced in the first year of the Inflation Reduction Act and Chips and Science Act have been delayed or paused.
  2. Among projects worth more than $100mn, $84bn have been delayed for between two months and several years or paused indefinitely, according to the Financial Times.
  3. The Inflation Reduction Act and Chips and Science Act offered more than $400bn in tax credits, loans, and grants to spark development of a US cleantech and semiconductor supply chain.

Related Articles:

  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • The Mysterious Slowdown in U.S. Manufacturing Productivity — US manufacturing labor productivity growth slowed broadly after the Great Recession, with the four largest firms in each industry averaging –0.5% growth from 2010 to 2022 versus 3.7% from 1987 to 2007, and smaller follower firms showing an identical 4.2 percentage-point decline. The authors find the slowdown spans all industries and firm sizes.
  • ‘Transformational Change’: Biden’s Industrial Policy Begins to Bear Fruit — Financial Times research identified more than 75 large-scale US manufacturing announcements following the passage of American semiconductor and clean-energy subsidy laws, with companies committing roughly $204bn to boost semiconductor and clean-tech production and promising at least 82,000 jobs. That is almost double the capital spending commitments made in those sectors two years earlier.

AI Summary. Real U.S. gasoline prices are lower than they have been 63% of the time this century, with the average production and nonsupervisory worker needing 8.65 hours of work to fill a 16-gallon tank. Greater domestic crude production is a key driver, with U.S. output exceeding any country's in history.

Ryan Cummings Briefing Book
Date Posted:

At $3.46/gal US gas prices are lower than they have been for 63% of the 21st century; the key driver of low real prices is record US domestic crude oil production. @weakinstrument

Is record domestic oil production making gasoline more affordable for workers?

Core argument: The U.S. national average gas price fell to $3.46/gal on Friday, August 9, and real gas prices are lower than they have been 63% of the time this century.

Gas prices are falling, with the national average down to $3.46/gal last Friday, August 9—not that you’ll be hearing about it on TV. (As we showed in May TV rarely covers gas prices when they drop below $3.50/gal.) Indeed, real gas prices are lower than they have been 63% of the time this century. Put differently, today the average worker (production and nonsupervisory) needs to work 8.65 hours to fill up a typical car’s 16-gallon tank, fewer hours than at most times since the turn of the century (59% of the time, to be exact). A key driver of the recent decline in gas prices is greater domestic crude production. The U.S. is now not only producing more than at any time in our history but more than any country has ever produced, ever.

Takeaways by Macro Roundup® AI

  1. The U.S. national average gas price fell to $3.46/gal on Friday, August 9, and real gas prices are lower than they have been 63% of the time this century.
  2. The average production and nonsupervisory worker must work 8.65 hours to fill a typical 16-gallon tank, fewer hours than at 59% of the time since the turn of the century.
  3. Greater domestic crude production is a key driver of the decline in gas prices, with the U.S. now producing more than at any time in its history and more than any country has ever produced.

Related Articles:

  • The World Is Transitioning to American Oil From Saudi Crude — Saudi Aramco scrapped plans to raise production capacity to 13mm barrels a day from 12mm, a cancellation expected to save $20–40bn in capital spending over five years and signaling insufficient demand for additional Saudi oil. Saudi Arabia, pumping about 9mm barrels a day under OPEC+ cuts, appears set on lower output to support higher prices.
  • 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.
  • Bad News Bias in Gasoline Price Coverage — An analysis of over one million television transcripts finds that coverage of gasoline prices shows a negative news bias, ramping up sharply once the nominal price reaches $3.50 a gallon, most steeply at Fox News. Because that threshold is fixed in nominal terms, the inflation-adjusted trigger has fallen by one-third.