Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 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


Monday, November 11, 2024

AI Summary. The authors argue that a burst of inflation erodes real wages when wages are sticky and job search is costly, prompting workers to switch jobs and driving up aggregate job vacancies without any additional labor market shock. This can create the appearance of a tight labor market, and four historical vacancy-to-unemployment spikes coincided with inflation persistently above 6%.

Hassan Afrouzi, Andres Blanco, Andres Drenik and Erik Hurst University of Texas at Austin Working Paper
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.@DrenikAndres et al argue that surging supply-induced inflation in 2021-22 reduced workers’ real wages and incentivized job-to-job transitions that led to a rise in aggregate vacancies, “even when labor markets are not particularly ‘hot.’”

Does inflation make the labor market look tighter than it is?

Core argument: The authors argue that a burst of inflation reduces real wages on impact and, with costly worker search effort and sticky wages, incentivizes job-to-job transitions that raise aggregate vacancies without any additional labor market shocks.

We illustrate how inflation can cause a large rise in vacancies through increased job-to-job transitions—creating the appearance of a tight labor market without any additional labor market shocks. A burst of inflation, all else equal, reduces real wages on impact. Costly worker search effort and sticky wages imply that a burst of inflation reduces workers’ real wages and incentivizes job-to-job transitions that lead to a rise in aggregate vacancies. Figure 21 shows 9 periods when the vacancy-to-unemployment rate spiked sharply relative to the average. Four of the peaks—marked with a red circle— occurred during periods when the inflation rate was persistently above 6% and the unemployment rate was either high by historical standards (in the mid and late 1970s) or was relatively constant. Notice that the four periods denoted with the red circles are also periods where it has been shown that aggregate supply shocks were important drivers of the observed inflation.

Takeaways by Macro Roundup® AI

  1. The authors argue that a burst of inflation reduces real wages on impact and, with costly worker search effort and sticky wages, incentivizes job-to-job transitions that raise aggregate vacancies without any additional labor market shocks.
  2. Of 9 periods identified in which the vacancy-to-unemployment rate spiked sharply relative to its average, four occurred when inflation was persistently above 6% and unemployment was either high by historical standards (mid and late 1970s) or relatively constant.
  3. The four vacancy-to-unemployment spikes coinciding with inflation persistently above 6% are also periods in which aggregate supply shocks have been shown to be important drivers of the observed inflation.

Related Articles:

  • Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge — The authors identify a "Beveridge threshold" level of labor market tightness—the ratio of job vacancies to unemployed workers—below which the relationship between inflation and economic activity steepens and labor market adjustment occurs mainly through vacancies rather than unemployment. They estimate that during the post-pandemic inflation surge the unemployment rate fell as much as 1.08 percentage points below this threshold.
  • Real Wage Growth: The Post-Pandemic Labor Market and Beyond — Real wage gains for non-managerial workers, roughly 80% of the private workforce, exceeded both those of all workers and projections based on pre-pandemic trends, which is attributed to labor market tightness and strong demand in low-wage sectors. This compression of wage inequality has persisted even as the labor market cooled and unemployment rose above 4%.
  • 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. Europe paid 166.3% more for its primary energy mix than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European growth. European Union primary energy consumption has fallen 17.47% from its peak, with renewables at 16.6% of the mix and renewable electricity priced at 5x conventional.

Andrew Lees Macro Strategy Partnership
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.@MacrostrategyP argues that the EU has “traded growth for ideology” with “renewable electricity price 5x that of conventional electricity.” In March 2024 German businesses’ electricity prices were 1.7x prices in the US and 2.8x in China.

How much does Europe's costly energy mix explain its weak growth?

Core argument: Europe paid 166.3% more for its primary energy mix last year than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European GDP growth.

All other things being equal, Europe paid 166.3% more for its primary energy mix last year than had it used conventional energy sources. It paid 2.23 percentage points more of GDP – (5.6% rather 3.37%) - on primary energy than had its fuel mix not included renewables, which largely explains why European GDP growth has been minimal. As renewable electricity grows as a percentage of the mix, its high cost has reduced energy consumption. Since peaking in 2006, primary energy consumption across the European Union has fallen by a massive 17.47%. Renewable energy has risen to 16.6% of the primary energy mix, but in doing so, with renewable electricity price 5 times that of conventional electricity, it has reduced by a similar amount the overall energy the economy has been able to afford. Whilst GDP has held up, the economy has reshaped dramatically, with for example French and German industrial production down around 14% from their respective highs, and Italian down 25%. Beyond the reshaping of the economy to less energy intensive industries, it is also likely that the decline in primary energy use has been offset by the consumption of the internal energy gradient, and the resultant aging and loss of capital stock.

Takeaways by Macro Roundup® AI

  1. Europe paid 166.3% more for its primary energy mix last year than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European GDP growth.
  2. EU primary energy consumption has fallen 17.47% since peaking in 2006, as renewables rose to 16.6% of the primary energy mix at renewable electricity prices five times those of conventional electricity.
  3. French and German industrial production are down around 14% from their highs and Italian production down 25%, which the author links to a reshaping of the economy toward less energy-intensive industries.

Related Articles:

  • The Future of European Competitiveness – A Competitiveness Strategy for Europe — A European Union competitiveness report attributes the EU's labour productivity growth gap with the US largely to weaker activity in information and communications technology and large-scale digital services; excluding main ICT sectors, EU productivity was broadly at par with the US from 2000-2019. It estimates Europe's investment share must rise about 5 percentage points of GDP.
  • Draghi is Trying To Save Europe From Itself — Real disposable income per head has grown almost twice as much in the US as in the European Union since 2000, with the EU trailing the US and China in the digital revolution and only four of the world's top 50 tech companies European. If average productivity growth since 2015 persists, EU output would merely stay constant until 2050.
  • Industry is Really Worried About IRA — The president of Germany's industry federation says more than a fifth of medium-sized German companies polled were considering leaving the country. With end-user energy prices not expected to return sustainably to pre-war levels, the authors anticipate not large-scale deindustrialization but a shift away from energy-intensive production, accompanied by friction and possibly lower growth.

AI Summary. China's goods trade surplus reached a record $785bn in the first 10 months of a year, up almost 16% from the prior year, and Bloomberg calculates it would approach $1tn if it keeps widening at the same pace. Foreign direct investment liabilities fell over nine months, which would mark the first annual net outflow since 1990 if sustained.

Bloomberg Staff Bloomberg
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According to a Bloomberg analysis, China’s trade surplus is set to reach almost $1T this year, with the goods surplus rising 16% y/y. FDI may be on track for the first annual net outflow since 1990.

Is China's trade surplus approaching $1 trillion as foreign investment exits?

Core argument: China's goods trade surplus reached $785 billion in the first 10 months of the year, the highest on record for that period and up almost 16% from 2023.

The difference between Chinese exports and imports is set to reach almost $1 trillion if it continues to widen at the same pace as it has in the year to date, according to Bloomberg calculations. The goods trade surplus soared to $785 billion in the first 10 months, according to data released last week, the highest on record for that period and an increase of almost 16% from 2023. Foreign companies are also pulling money from China, with foreign direct investment liabilities dropping in the first nine months of the year, according to data released on Friday. Should the decline continue for the rest of the year, it would be the first annual net outflow in FDI since at least 1990, when comparable data begins.

Takeaways by Macro Roundup® AI

  1. China's goods trade surplus reached $785 billion in the first 10 months of the year, the highest on record for that period and up almost 16% from 2023.
  2. Bloomberg calculations indicate China's trade surplus would approach $1 trillion if the gap between exports and imports keeps widening at its year-to-date pace.
  3. China's foreign direct investment liabilities fell in the first nine months of the year, and a continued decline through year-end would mark the first annual net FDI outflow since at least 1990, when comparable data begins.

Related Articles:

  • 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.
  • EU to Impose Tariffs Up to 45% on Chinese Electric Vehicles — The European Union voted to impose tariffs of up to 45% on electric vehicles made in China, lasting five years, with China vowing to protect its companies. Chinese-made electric cars rose from around 3% to more than 20% of EU electric vehicle sales over three years, with Chinese brands accounting for about 8%.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.

AI Summary. Redistributing profits from large companies that benefited from cheaper labor abroad toward domestic workers would lower profits for many firms and equity prices, while benefiting businesses serving workers with greater purchasing power. An earlier round of US tariffs did little to re-shore production, instead lengthening supply chains as Chinese goods were re-exported through third countries.

Joseph Wang Fed Guy Blog
Date Posted:

Noting a large portion of the trade deficit is driven by US firms’ manufacturing abroad, @FedGuy12 argues a rebalancing of global trade would reduce US corporate profits and likely lead to higher inflation.

Would shifting profits from companies to workers lower equity prices?

Core argument: The first round of Trump tariffs did little to re-shore production, instead lengthening supply chains as Chinese companies sold to third countries that re-exported to the U.S., adding costs without creating U.S. jobs.

A redistribution of profits would be difficult to achieve and imply lower profits for many companies. Large companies that benefited from cheaper labor abroad would be negatively impacted. However, higher domestic wages also imply that workers have more purchasing power so businesses that cater to them would benefit. The first round of Trump tariffs was not very effective in re-shoring and simply resulted in longer supply chains where Chinese companies sold to third countries, who then in turn re-exported to the U.S. This led to a lengthening of supply chains that added costs without creating U.S. jobs. A new Trump Administration may find ways to better implement their policies. That would ultimately imply a redistribution of profits from the few to the many, which would imply lower equity prices.

Takeaways by Macro Roundup® AI

  1. The first round of Trump tariffs did little to re-shore production, instead lengthening supply chains as Chinese companies sold to third countries that re-exported to the U.S., adding costs without creating U.S. jobs.
  2. A redistribution of profits would be difficult to achieve and would imply lower profits for many companies, particularly large firms that benefited from cheaper labor abroad.
  3. Higher domestic wages would give workers more purchasing power and benefit businesses that cater to them, while a redistribution of profits from the few to the many would imply lower equity prices.

Related Articles:

  • Protectionism Is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift Toward Trade Wars and Industrial Policy — Manufacturing's share of US employment has declined steadily since the end of the Second World War, with no obvious change in that rate after China joined the World Trade Organization or after the US adopted protectionist policies. The authors argue this suggests technology, including robotics and automation, primarily drives the trend.
  • Why Broad-Based Import Tariffs Can Hurt Exports and Manufacturing Jobs — Firms that both export and import account for 84% of US export value and 91% of import value, and employ more than 80% of all US manufacturing workers along with over half of workers in management, utilities, wholesale, transportation, information, and retail. These firms create over three-quarters of net new manufacturing jobs.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.

AI Summary. The U.S. net international investment position tends to converge with cumulative current account deficits as valuation gains and losses even out, and the interest rate on that external debt tends to track Treasury yields. The author argues the end of ultra-low rates should eliminate the U.S. income surplus and push the current account deficit above 4% of GDP.

Brad Setser and Michael Weilandt Council on Foreign Relations
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US net international investment income is “finally” heading below zero, and is already negative when income earned by US corporations in low-tax jurisdictions is removed. @Brad_Setser

Will higher rates erase the U.S. income surplus?

Core argument: The end of the low-for-long interest rate era should eliminate the U.S. income surplus and structurally pull the overall current account deficit above 4% of GDP, according to the author's argument.

The U.S. net international investment position tends to converge with the sum of U.S. current account deficits over time (as valuation gains and losses even out)—right now it is at a low because the dollar is strong, and U.S. equities are valued highly relative to foreign equities. The interest rate on that debt tends to map to the rate on Treasuries for deep structural reasons— And then it is just a matter of whether U.S. firms will continue to generate more income in offshore tax centers than the U.S. pays on its external debt. The low-for-long era coincided with an era of rampant corporate tax avoidance. The low-for-long has (mostly) ended, and even if the era of tax avoidance hasn't come to an end, the end of low-for-long should be enough to end the income surplus, and structurally pull the overall current account deficit to over 4% of GDP. With a rising trade deficit and a structural shift in the income balance underway, there is every reason to expect the U.S. current account deficit to continue to rise absent a large change in the dollar -- or a shock to U.S. demand.

Takeaways by Macro Roundup® AI

  1. The end of the low-for-long interest rate era should eliminate the U.S. income surplus and structurally pull the overall current account deficit above 4% of GDP, according to the author's argument.
  2. The U.S. net international investment position tends to converge with the cumulative sum of U.S. current account deficits as valuation gains and losses even out, and currently sits at a low because the dollar is strong and U.S. equities are highly valued relative to foreign equities.
  3. With a rising trade deficit and a structural shift in the income balance underway, the U.S. current account deficit is expected to keep rising absent a large change in the dollar or a shock to U.S. demand.

Related Articles:

  • Sucking The World Dry (The US Dependence on Foreign Inflows) — The author argues that negative net national savings means the United States is consuming capital rather than accumulating it, largely by selling capital stock to foreigners and spending the proceeds and by not replacing aging capital. With a negative net international investment position, the author contends U.S. spending depends on continued foreign inflows and that potential growth is declining.
  • The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States — The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.
  • Do Deficits Matter: Part I — Because most US corporate profits in China are turned over to the government, which for years invested them in US government and agency debt, the US could settle much of its trade deficit with debt rather than equity. Middle Eastern trading partners instead prefer equity stakes, and overpayment has served as a tactic to overcome political obstacles to such deals.

AI Summary. Berkshire Hathaway's cash holdings have reached $325bn, or 28% of its asset value — the highest share since at least 1990. The company has bought $5.8bn of equities against $133.2bn of stock sales.

Eric Platt Financial Times
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Warren Buffet’s cash hoard has risen to $325B or 28% of Berkshire’s asset value, the highest level since at least 1990. The company completed $133B in stock sales in 2024 through the end of September vs. $6B in purchases.

Are cash holdings at a major investment firm hitting record highs?

Core argument: Berkshire Hathaway's cash holdings reached $325bn, or 28% of asset value, the highest share since at least 1990.

Buffett has raised Berkshire’s cash levels to unprecedented heights. At $325bn, cash now accounts for 28% of Berkshire’s asset value — the highest level since at least 1990. Buffett has also limited his buying of other stocks this year, purchasing equities worth just $5.8bn through the end of September. That sum is dwarfed by the $133.2bn of stock sales Berkshire has executed.

Takeaways by Macro Roundup® AI

  1. Berkshire Hathaway's cash holdings reached $325bn, or 28% of asset value, the highest share since at least 1990.
  2. Berkshire sold $133.2bn of stock through the end of September while purchasing just $5.8bn of equities over the same period.
  3. Warren Buffett's Apple share sales and Berkshire's cash build-up have prompted questions about his motives.

Related Articles:

  • Updating Our Long-Term Return Forecast For US Equities to Incorporate the Current High Level of Market Concentration — The authors estimate the S&P 500 will deliver an annualized nominal total return of 3% over the next 10 years, roughly 1% in real terms, modeling long-term returns as a function of starting valuation, market concentration, frequency of economic contractions, corporate profitability, and interest rates. The index returned 13% annualized over the past decade, above its 11% long-term average.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.
  • Which U.S. Stocks Generated the Highest Long-Term Returns? — Of the 29,078 U.S. common stocks in a database spanning nearly a century, 51.6% had negative cumulative returns, while 17 stocks returned more than 5m% — led by Altria at 265m%. Those top performers averaged annualized returns of just 13.47%, underscoring the value of time invested.

AI Summary. Taiwan is considering a US arms package that people familiar with the discussions say could include up to 60 F-35 fighter jets, four Advanced Hawkeye aircraft, 10 retired warships and 400 Patriot missiles, estimated to be worth more than $15bn. Previous US administrations approved Taiwan deals worth $21bn and $7bn respectively.

Demetri Sevastopulo and Kathrin Hille Financial Times
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Taiwan is likely to make a $15B request including 400 Patriot missiles, Aegis systems, and 60 F-35s. The Biden administration has tried to force Taipei to “prioritise stockpiling munitions and other cheaper, mobile weapons,” over large weapons systems.

Is Taiwan planning a large US arms purchase to court Washington?

Core argument: Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles, a package Su estimated would be worth more than $15bn.

During Trump’s first term, the US approved 11 packages to Taiwan worth $21bn, including F-16 fighter jets and Abrams tanks. The Biden administration approved deals worth $7bn. It tried to force Taipei to allocate its limited defence budget differently and prioritise stockpiling munitions and other cheaper, mobile weapons suitable for attacking a superior invader over buying traditional big-ticket systems. People familiar with the discussions said Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles — a package that Su estimated would be worth more than $15bn.

Takeaways by Macro Roundup® AI

  1. Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles, a package Su estimated would be worth more than $15bn.
  2. The US approved 11 arms packages to Taiwan worth $21bn during Trump's first term, including F-16 fighter jets and Abrams tanks, compared with $7bn of deals approved under the Biden administration.
  3. The Biden administration tried to force Taipei to shift its limited defence budget toward stockpiling munitions and cheaper, mobile weapons suited to attacking a superior invader rather than traditional big-ticket systems.

Related Articles:

  • US To Provide Taiwan With Weapons From Its Stockpiles For First Time — The US will provide Taiwan with $345mn in weapons drawn directly from American military stockpiles, the first such transfer under an annual $1bn presidential drawdown authority approved by Congress. Previous US support for Taiwan came through approved arms sales rather than direct provision from US stocks.
  • Taiwan to Buy 400 US Anti-Ship Missiles Intended to Repel a China Invasion — Taiwan is purchasing as many as 400 land-launched Harpoon anti-ship missiles from Boeing, intended to repel a potential Chinese invasion, under a contract issued on Taiwan's behalf by the US Naval Air Systems Command. Taiwan had previously bought only ship-launched versions of the missile.
  • Pentagon Runs Low on Air-Defense Missiles as Demand Surges — U.S. stocks of some air-defense missiles are running low, raising questions about the Pentagon's readiness for conflicts in the Middle East, Europe, and a potential Pacific war. The U.S. has launched dozens of Standard Missile interceptors in single months, while the producer can make at most a few hundred a year, shared with at least 14 allied buyers.

Tuesday, November 12, 2024

AI Summary. Higher-than-average long-term (3–5 year) earnings growth expectations consistently predict low future stock returns, according to research, making such forecasts a contrarian indicator. The authors argue long-term forecasts reflect irrational optimism and pessimism, while short-term forecasts outside recessions convey relatively accurate information about future cash flows.

Luke Burke and Daniel Rasmussen Verdad
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.@verdadcap cites evidence from Shleifer and argues “Although the short-term forecasts, outside of recessions, are decent, the longer-term forecasts are so bad as to be a contrarian indicator.”

Do high long-term earnings growth forecasts predict low stock returns?

Core argument: Bordalo, Gennaioli, La Porta, O'Brien, and Shleifer find that higher-than-average long-term growth expectations, 3–5 years out, consistently predict low future stock returns.

Although the short-term forecasts, outside of recessions, are decent, the longer-term forecasts are so bad as to be a contrarian indicator. A paper by the powerhouse team of Bordalo, Gennaioli, La Porta, O’Brien, and Shleifer found that higher than average long-term growth expectations (3-5 years out) consistently predict low future stock returns. Long-term forecasts seem to reflect animal spirits, irrational optimism and pessimism about future events that no one can accurately predict. In contrast, short-term forecasts seem to provide real and relatively accurate information about future cash flows.

Takeaways by Macro Roundup® AI

  1. Bordalo, Gennaioli, La Porta, O'Brien, and Shleifer find that higher-than-average long-term growth expectations, 3–5 years out, consistently predict low future stock returns.
  2. Short-term forecasts, outside of recessions, appear to provide real and relatively accurate information about future cash flows, while long-term forecasts seem to reflect animal spirits and irrational optimism or pessimism about events no one can accurately predict.

Related Articles:

  • Long-Term Expectations and Aggregate Fluctuations — When stock analysts' forecasts of long-term earnings growth for S&P 500 firms are high by historical standards, their forecasts of short- and long-term profits are systematically disappointed later, according to the authors. The authors estimate that a 1 standard deviation rise in these long-term forecasts is followed by an investment boom that reverses two years later.
  • Finance Without Exotic Risk — Using analyst earnings forecast errors and revisions, the authors construct firm-level "expectations-based returns" and find that predictable movements in non-rational expectations of earnings growth, rather than exotic risk factors, account for much of the cross-sectional return spreads in value, investment, size, and momentum. Growth stocks underperform on average because optimism about them falls more often than it rises.
  • Real Credit Cycles — Managers' profit expectations overreact to current conditions, producing excessive optimism in booms and undue pessimism in downturns, which the authors link to credit and investment overexpansion followed by tighter credit and higher defaults. In their model, a 1.5% drop in productivity growth generates a large rise in credit spreads.

AI Summary. The US share of global semiconductor manufacturing capacity fell from 37% in 1990 to 12% in 2020, a shift the article attributes partly to foreign industrial policy rather than market forces alone. Industry estimates put fab operating costs 30% higher in the US than in Taiwan or South Korea, largely reflecting foreign subsidies.

Chad Bown and Dan Wang Journal of Economic Perspectives
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In 2020 operating a fab in the US cost 30% more than in Taiwan and South Korea and 50% more than in China. The Semiconductor Industry Association estimated that 40–70% of that cost differential was due to relatively higher foreign government subsidies.

Did foreign subsidies drive the decline in US chipmaking capacity?

Core argument: The US share of global semiconductor manufacturing capacity fell from 37% in 1990 to 12% in 2020, with manufacturing increasingly concentrated in Asia.

The US share of global semiconductor manufacturing capacity fell dramatically—from 37% in 1990 to 12% in 2020. The increasing concentration of manufacturing in Asia was not due to only market forces: foreign industrial policy continued to play a role. The Semiconductor Industry Association, for example, argued in 2020 that it was 30% more costly to operate a fab in the United States relative to Taiwan or South Korea and up to 50% more costly than in China. The SIA also estimated that 40–70% of that cost differential was due to relatively higher foreign government subsidies.

Takeaways by Macro Roundup® AI

  1. The US share of global semiconductor manufacturing capacity fell from 37% in 1990 to 12% in 2020, with manufacturing increasingly concentrated in Asia.
  2. The Semiconductor Industry Association argued in 2020 that operating a fab in the United States was 30% more costly than in Taiwan or South Korea and up to 50% more costly than in China.
  3. The Semiconductor Industry Association estimated that 40–70% of that cost differential stemmed from relatively higher foreign government subsidies, indicating that concentration in Asia was not driven by market forces alone.

Related Articles:

  • TSMC’s Arizona Chip Production Yields Surpass Taiwan’s in Win for US Push — Taiwan Semiconductor Manufacturing Co. reports that the share of usable chips produced at its Phoenix, Arizona plant is about 4 percentage points higher than at comparable factories in Taiwan. Yield is a critical industry measure because it determines whether companies can cover the enormous costs of a chip plant.
  • With US Chips Act Money Mostly Divvied Up, the Real Test Begins — 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.
  • 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.

AI Summary. The US goods trade deficit with China equals about 1% of GDP, while the overall US goods deficit has run near 4% of GDP since after the 2008 financial crisis. Eliminating it would raise domestic goods output, likely at the expense of services, but at most would return manufacturing employment shares to levels of a decade or two earlier.

Martin Wolf Financial Times
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Martin Wolf argues eliminating the US goods trade deficit of ~4% of GDP would at most bring manufacturing “employment shares to the levels of a decade or two ago.”

Would eliminating the goods trade deficit meaningfully restore manufacturing employment?

Core argument: The US bilateral goods trade deficit with China equals only 1% of GDP, while the overall US goods deficit has run around 4% of GDP since just after the 2008 financial crisis.

The bilateral US trade deficit in goods with China is only 1% of GDP. The overall US deficit in goods has been around 4% of GDP since just after the 2008 financial crisis. If that were eliminated (probably impossible, given US competitiveness in services and the macroeconomic forces causing US trade deficits), it would indeed increase domestic output of goods (presumably at the expense of services). But the very most it is likely to do is to bring employment shares to the levels of a decade or two ago.

Takeaways by Macro Roundup® AI

  1. The US bilateral goods trade deficit with China equals only 1% of GDP, while the overall US goods deficit has run around 4% of GDP since just after the 2008 financial crisis.
  2. Eliminating the US goods deficit is probably impossible given US competitiveness in services and the macroeconomic forces that cause US trade deficits.
  3. Eliminating the US goods deficit would raise domestic goods output, presumably at the expense of services, but at most would return employment shares to levels of a decade or two ago.

Related Articles:

  • Manufacturing Jobs Have Recovered, But Not Everywhere — U.S. manufacturing employment recovered the 650,000 jobs lost in the 2020 recession, rising above 12.9m workers and exceeding the pre-pandemic level of 12.8m — the first such post-recession recovery since the late 1970s. Even so, manufacturing's share of private-sector employment fell from 31% in 1970 to 9.7%.
  • Manufacturing Jobs Boom Not Reaching Places Hit By The China Shock — U.S. manufacturing job growth since the pandemic is occurring disproportionately in counties least exposed to Chinese import competition in the 2000s, according to an analysis of federal employment and wage data. The counties hardest hit by that import competition still have fewer manufacturing jobs than before the pandemic.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.

AI Summary. Incoming data—above-trend growth, strong retail sales and durable goods, low jobless claims, rising average hourly earnings, falling default rates, and record corporate profits—are inconsistent with the view that the US labor market is cooling. The author argues tailwinds including record stock prices, tight credit spreads, and the artificial intelligence build-out could drive a sharp rebound in job growth.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk argues that the economic expansion is robust and that anticipated lower taxes for domestic manufacturers and deregulation might drive “a dramatic increase in job growth in November.”

Does incoming data contradict the view that the labor market is cooling?

Core argument: Incoming data on above-trend GDP growth, strong retail sales and durable goods, low jobless claims, and rising average hourly earnings are inconsistent with the narrative that the US labor market is cooling.

The narrative that the labor market is cooling is inconsistent with the continued strength seen in the incoming data for above-trend GDP growth, strong retail sales, strong durable goods, low jobless claims, and rising average hourly earnings. In addition, default rates continue to decline, corporate profits are at all-time highs, weekly forward profit margins are at record highs, and US household balance sheets are in excellent shape. In short, the US economy remains incredibly strong. Combined with tailwinds to growth from record-high stock prices, tight credit spreads, M&A/issuance markets rebounding, the AI/data center boom, the Chips Act, the IRA, the Infrastructure Act, and lower taxes for domestic manufacturers and deregulation likely coming, the bottom line is that we could see a dramatic increase in job growth in November, including a reversal of the weather and strike effects that were pushing down nonfarm payrolls in October.

Takeaways by Macro Roundup® AI

  1. Incoming data on above-trend GDP growth, strong retail sales and durable goods, low jobless claims, and rising average hourly earnings are inconsistent with the narrative that the US labor market is cooling.
  2. Declining default rates, corporate profits at all-time highs, record weekly forward profit margins, and healthy US household balance sheets point to a US economy that remains strong.
  3. Record-high stock prices, tight credit spreads, rebounding M&A and issuance markets, the AI and data center boom, the Chips Act, the IRA, and the Infrastructure Act could drive a sharp increase in November job growth, reversing October's weather and strike effects.

Related Articles:

  • Why is the U.S. GDP Recovering Faster Than Other Advanced Economies? — The U.S. output advantage over other advanced economies is attributed mainly to faster labor productivity growth and secondarily to hours worked per employee. Rigid foreign labor markets and job-retention policies kept workers attached to firms producing below capacity, while the U.S. saw about 3x more sectoral worker reallocation and a surge in new firm formation.
  • 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.
  • Will Trump’s Win (Eventually) Lead to *Lower* Long-Term Interest Rates? — The author argues the inflation of 2021–2022 could have been avoided only at the cost of a global depression, and that historical elections show voters do not reward incumbents who preside over disinflationary downturns. Many in the U.S. may nonetheless come to treat the episode as a cautionary tale about responding too aggressively to economic downturns.

AI Summary. The US has set out a road map to triple nuclear power capacity by 2050, adding 200 gigawatts through new reactors, plant restarts and upgrades to existing facilities, with 35 gigawatts of new capacity targeted within about a decade. Demand is climbing for nuclear as a round-the-clock source of carbon-free power.

Jennifer Dlouhy Bloomberg
Date Posted:

The Biden administration is rolling out a plan to bring 200 gigawatts of nuclear energy online by 2050 via construction of new reactors, plant restarts and upgrades to existing facilities.

Can the US triple its nuclear power capacity by 2050?

Core argument: The Biden administration's road map calls for tripling US nuclear power capacity by 2050, adding 200 gigawatts through new reactor construction, plant restarts, and upgrades to existing facilities.

President Joe Biden’s administration is setting out plans for the US to triple nuclear power capacity by 2050, with demand climbing for the technology as a round-the-clock source of carbon-free power. Under a road map being unveiled Tuesday, the US would deploy an additional 200 gigawatts of nuclear energy capacity by mid-century through the construction of new reactors, plant restarts and upgrades to existing facilities. In the short term, the White House aims to have 35 gigawatts of new capacity operating in just over a decade.

Takeaways by Macro Roundup® AI

  1. The Biden administration's road map calls for tripling US nuclear power capacity by 2050, adding 200 gigawatts through new reactor construction, plant restarts, and upgrades to existing facilities.
  2. The White House aims to have 35 gigawatts of new US nuclear capacity operating in just over a decade.
  3. Demand for nuclear power is climbing as a round-the-clock source of carbon-free electricity.

Related Articles:

  • Three Mile Island’s Nuclear Plant to Reopen, Help Power Microsoft’s AI Centers — Constellation Energy will spend about $1.6bn to restart the undamaged reactor at Pennsylvania's Three Mile Island nuclear plant, which closed in 2019, and has signed a 20-year agreement to sell the power to Microsoft. The deal reflects the scale of round-the-clock carbon-free electricity sought for artificial intelligence data centers.
  • Nuclear Power Is Hard. A Climate-Minded Billionaire Wants to Make It Easier — Start-up TerraPower has begun building a sodium-cooled nuclear reactor designed to be smaller and cheaper than conventional water-cooled plants, with completion expected no earlier than 2030 and the design not yet approved by the Nuclear Regulatory Commission. The company says the reactors should ultimately generate electricity at half the cost of traditional nuclear plants.
  • Electravision — The fossil fuel share of global primary energy is falling about 0.40% per year, matching the pace of decarbonization during the 1973–1988 nuclear buildout, though total carbon dioxide emissions have not declined because energy consumption keeps rising. Renewable energy is used almost exclusively for the electricity grid, with little penetration in industry and transport.

AI Summary. The European Union plans to give member states more flexibility to redirect cohesion funds — about €392bn aimed at reducing economic inequality between member countries — toward defence industries and military mobility projects such as reinforcing roads and bridges for tanks. The change would permit funding for weapons and ammunition production.

Paola Tamma Financial Times
Date Posted:

The EU will allow €392B, originally aimed at reducing economic inequality between EU countries, to be used by member countries “to support their defense industries and military mobility projects” @FT

Can regional development funds be redirected to defence spending?

Core argument: Brussels is loosening rules on roughly €392bn of EU cohesion funds for 2021–2027 — about a third of the bloc's common budget, aimed at reducing economic inequality between member states — potentially redirecting tens of billions of euros to defence and security.

Brussels is changing its spending policies to potentially redirect tens of billions of euros to defence and security. The policy shift would apply to about a third of the bloc’s common budget, or some €392bn from 2021 to 2027, money that is aimed at reducing economic inequality between EU countries. Only about 5% of these so-called cohesion funds have been spent to date, with the biggest beneficiaries, including Poland, Italy, and Spain, spending even less. Under existing rules, these funds cannot be used to purchase defence equipment or directly fund the military, but investment in so-called dual-use products such as drones is allowed. Capitals of member states will be told in coming weeks that they will now have more flexibility under the rules to allocate cohesion funds to support their defence industries and military mobility projects such as reinforcing roads and bridges to allow the safe passage of tanks. This will include permitting funding for boosting the production of weapons and ammunition.

Takeaways by Macro Roundup® AI

  1. Brussels is loosening rules on roughly €392bn of EU cohesion funds for 2021–2027 — about a third of the bloc's common budget, aimed at reducing economic inequality between member states — potentially redirecting tens of billions of euros to defence and security.
  2. Only about 5% of the EU's cohesion funds have been spent to date, with the biggest beneficiaries, including Poland, Italy and Spain, spending even less.
  3. Member states will be told they have more flexibility to use cohesion funds for defence industries, weapons and ammunition production, and military mobility projects such as reinforcing roads and bridges for the safe passage of tanks.

Related Articles:

  • The US and Its Allies Face a $10 Trillion Reckoning in the Race to Rearm — World defense spending reached a record $2.2tn, and security officials say military budgets may need to reach Cold War levels of as high as 4% of economic output to deliver on NATO's plans. Bloomberg Economics calculates that US and Group of Seven allies hitting that level would mean over $10tn in additional commitments over a decade.
  • The ‘Eye-Watering’ Cost of Ending the Peace Dividend — Sweden announced plans to raise defense spending by more than 25% to reach NATO's target of 2% of GDP, a level met by only 11 of the alliance's 31 members. Meeting such commitments requires a major reordering of budget and electoral priorities, as when Denmark funded higher spending by cancelling a public holiday.
  • 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.