Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, December 13, 2024

AI Summary. OECD data show the U.S. has the most progressive income and payroll taxes of any OECD country, taxing the wealthy within international norms while taxing lower and middle earners far less than other nations. Across all federal taxes, the top-earning fifth of households paid $3.2tn, versus $655bn, $278bn, $81bn, and negative $20bn for the remaining fifths.

Brian Riedl Manhattan Institute
Date Posted:
Is Database:
Database

.@Brian_Riedl notes that “the US has the most progressive income and payroll taxes of any OECD nation.” Across all federal taxes, the top-earning quintile paid $3.2T, while the bottom 20% paid negative $20B. #incometax

How progressive is the US tax system compared with other countries?

Core argument: Across all federal taxes, the top-earning U.S. quintile paid $3.2 trillion, while the next three quintiles paid $655 billion, $278 billion and $81 billion, and the bottom quintile paid negative $20 billion.

OECD data reveal that the U.S. has the most progressive income and payroll taxes of any OECD nation—even after adjusting for income distribution across countries. America taxes the wealthy within international norms but taxes lower and middle earners far less than other nations (not to mention not imposing value-added taxes). Thus, the wealthy overwhelmingly fund the federal government. Across all federal taxes, the top-earning quintile paid $3.2 trillion, while the remaining four quintiles paid $655 billion, $278 billion, $81 billion, and negative $20 billion, respectively (see Figure 2). Put another way, the top-earning quintile funded 201 days of 2024 federal spending, the next quintile funded 41 days, and the bottom-earning 60% of families collectively funded 21 days of spending (the remaining 103 days were financed with budget deficits and borrowing). The notion that middle-earner taxes finance the federal government, while most wealthy families escape taxes, is simply preposterous.

Takeaways by Macro Roundup® AI

  1. Across all federal taxes, the top-earning U.S. quintile paid $3.2 trillion, while the next three quintiles paid $655 billion, $278 billion and $81 billion, and the bottom quintile paid negative $20 billion.
  2. OECD data show the U.S. has the most progressive income and payroll taxes of any OECD nation even after adjusting for cross-country income distribution, taxing the wealthy within international norms but lower and middle earners far less.
  3. The top-earning U.S. quintile funded 201 days of 2024 federal spending and the next quintile 41 days, while the bottom-earning 60% of families funded 21 days, with the remaining 103 days financed by deficits and borrowing.

Related Articles:

  • Tax Policy and Investment in a Global Economy — Using administrative tax data, the authors estimate that firms experiencing the mean corporate tax change under the 2017 US tax law increased investment by 20% relative to firms with no change, with long-run domestic and total capital up 7% and 13%. They find higher depreciation deductions largely offset added revenue from capital accumulation.
  • Chartbook: From Riches to Rags: Causes of Fiscal Deterioration Since 2001 — Reversing the fiscal deterioration by returning to pre-2001 tax law would mean higher rates, smaller credits and more taxpayers, while pre-2001 spending law would mean no Medicare drug benefit and deep military and domestic cuts. With more seniors and higher health costs, matching pre-2001 levels would require dramatic per-person benefit cuts and tax increases above 15%.
  • Why Is Europe More Equal Than The United States — The US redistributes a larger share of national income to the bottom 50% than any European country, with net transfers of 6% of national income versus about 4% in Western and Northern Europe. Europe taxes and redistributes more overall, 47% of national income versus 35%, relying more on indirect taxes.

AI Summary. A country's trade balance and net capital inflows sum to zero, so simultaneously attracting large foreign capital inflows and running trade surpluses is arithmetically impossible. A trade deficit is not a subsidy: the United States receives goods and sends back financial claims such as government or corporate debt.

Paul Krugman Krugman Wonks Out
Date Posted:

.@paulkrugman notes that “Trade balance + Net inflows of capital = 0,” making it arithmetically impossible to reduce the trade deficit and increase net foreign investment in the US simultaneously. #tradedeficit

Can a country attract large foreign capital inflows and run trade surpluses?

Core argument: The balance of payments always balances, with the trade balance plus net capital inflows equaling zero, making Trump's goal of simultaneously attracting large foreign capital inflows and running trade surpluses arithmetically impossible.

Trump wants America to be a winner, which means both attracting lots of foreign capital and running trade surpluses. Trump firmly believes that because we’re running trade deficits with other countries, we are subsidizing them. What Trump means is that we’re running trade deficits with both countries. But how does running a trade deficit with Mexico mean that we’re subsidizing our southern neighbor? They’re sending us useful stuff, like auto components. In return, we’re sending them IOUs of some kind, such as federal or corporate debt. Neither side is a victim. Here’s what you need to know about the balance of payments: it always balances. That is, Trade balance + Net inflows of capital = 0 (although there are a few asterisks involving investment income). He wants America to be a winner, which means both attracting lots of foreign capital and running trade surpluses. This is arithmetically impossible. If anyone got taken for a ride it was foreign investors, some of whom bought Pets.com in the 90s and subprime mortgage-backed securities in the 2000s.

Takeaways by Macro Roundup® AI

  1. The balance of payments always balances, with the trade balance plus net capital inflows equaling zero, making Trump's goal of simultaneously attracting large foreign capital inflows and running trade surpluses arithmetically impossible.
  2. Running a trade deficit with Mexico does not subsidize Mexico, since Mexico sends useful goods such as auto components while the United States sends IOUs like federal or corporate debt, leaving neither side a victim.

Related Articles:

  • Can Trump Reduce the Trade Deficit? — A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.
  • 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.
  • 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.

AI Summary. The postwar free-trade system depended on American soft power and broad respect for its rules, and as countries defected to mercantilist policies each defection pushed others to respond in kind. China's economic size and its use of currency management, public procurement, state subsidies and protectionism to build leading industries in electric vehicles, solar power and batteries broke the existing order.

Greg Jensen Wall Street Journal
Date Posted:

Greg Jensen argues that countries like China whose growth depends on rising, persistent trade surpluses “are the most at risk in a mercantilist world, as the US —the world’s largest trade-deficit economy— becomes unwilling to absorb these surpluses.”

Why is the free-trade system giving way to mercantilism?

Core argument: China's economic size and the effectiveness of its mercantilist policies broke the pre-existing free-trade order, turning a slow drip of defections into a death spiral, though other countries had pushed the boundaries before China did.

Mercantilist ideology is contagious. The postwar system of free trade relied on America’s soft power and the general respect that many nations had for the system. But as countries defected and adopted mercantilist policies, the global system lacked sufficient authority to stop them. Each time another country adopted mercantilist policies, it pushed others to react similarly. China turned a slow drip into a death spiral. While many countries had pushed the boundaries before China did, its economic size and the effectiveness of its mercantilist policies broke the pre-existing order. Through currency management, public procurement, state subsidies, protectionism and other implicit subsidies, China has developed a range of leading industries, including electric vehicles, solar power, and batteries. Countries that rely on rising, persistent trade surpluses to achieve growth are the most at risk in a mercantilist world, as the U.S.—the world’s largest trade-deficit economy—becomes unwilling to absorb these surpluses.

Takeaways by Macro Roundup® AI

  1. China's economic size and the effectiveness of its mercantilist policies broke the pre-existing free-trade order, turning a slow drip of defections into a death spiral, though other countries had pushed the boundaries before China did.
  2. Through currency management, public procurement, state subsidies, protectionism and other implicit subsidies, China has developed a range of leading industries, including electric vehicles, solar power and batteries.
  3. Countries relying on rising, persistent trade surpluses for growth are the most at risk in a mercantilist world, as the U.S., the world's largest trade-deficit economy, becomes unwilling to absorb those surpluses.

Related Articles:

  • Will China Take Over the Global Auto Industry? — The global auto market has historically been regional, with most cars sold in a region also built there. Overcapacity in China's internal combustion sector, expanding electric-vehicle capacity, ample state bank credit, and a weaker yuan could concentrate global auto production in China absent restrictions such as the US 100% tariff on Chinese electric vehicles.
  • Can Trump Reduce the Trade Deficit? — A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.
  • 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. Growth in U.S. business applications that are relatively likely to become employer businesses leads and is strongly positively correlated with total nonfarm employment growth, and leads most monthly principal federal economic indicators. Applications unlikely to become employers give early information about changes in self-employment activity.

Jose Asturias, Emin Dinlersoz, John Haltiwanger, et al. National Bureau of Economic Research
Date Posted:

The US Census Bureau’s survey of “likely employer” (HBA) business applications is a leading indicator of growth in total nonfarm employment and overall output. “Likely non-employer” (NHBA) applications predict self-employment activity. @JHaltiwanger_UM

Do business applications predict employment growth and other economic indicators?

Core argument: Growth in U.S. Census Bureau business applications classified as "likely employers" significantly leads total nonfarm employment growth and is strongly positively correlated with it, according to the authors' analysis of Business Formation Statistics.

This paper explores the properties of three monthly business application series from the U.S. Census Bureau’sBusiness Formation Statistics as economic indicators: all business applications, business applications that are relatively likely to turn into new employer businesses (“likely employers”),and the residual series -- business applications that have a relatively low rate of becoming employers (“likely non-employers”). Growth in applications for likely employers significantly leads total nonfarm employment growth and has a strong positive correlation with it. Furthermore, growth in applications for likely employers leads growth in most of the monthly Principal Federal Economic Indicators (PFEIs). Overall, applications for likely employers are a strong leading indicator of monthly PFEIs and aggregate economic activity, whereas applications for likely non-employers provide early information about changes in increasingly prevalent self-employment activity in the U.S. economy.

Takeaways by Macro Roundup® AI

  1. Growth in U.S. Census Bureau business applications classified as "likely employers" significantly leads total nonfarm employment growth and is strongly positively correlated with it, according to the authors' analysis of Business Formation Statistics.
  2. Growth in applications for likely employers leads growth in most monthly Principal Federal Economic Indicators, which the authors characterize as a strong leading indicator of aggregate economic activity.
  3. Applications for "likely non-employers" — those with a relatively low rate of becoming employers — provide early information about changes in increasingly prevalent self-employment activity in the U.S. economy.

Related Articles:

  • Surging Business Formation in the Pandemic: A Brief Update — New business applications, including those likely to become employer firms, surged during the pandemic and were followed by a rise in establishment and firm creation, consistent with reallocation toward high-tech and pandemic-friendly industries and from city centers to suburbs and the South. Business formation remains elevated relative to pre-pandemic levels, though cooling.
  • High-Growth Firms in the United States: Key Trends and New Data Opportunities — The share of U.S. firms classified as high-growth fell from 18% in 1985 to 12% in 2015, with the decline concentrated among young and small firms while mature and large firms showed little change. All sectors declined, especially construction and manufacturing, though information industries staged a modest rebound after 2010.
  • The Long Goodbye? Incumbent Competitiveness in the 21st Century — Value creation among large American companies has become concentrated in a newer cohort of firms: businesses founded after World War II accounted for 8% of the top 50 companies' total market value in 1990 but 77% by 2024. The leading 20th-century incumbents are fading as this newer group takes over.

AI Summary. The incoming US president voiced support for the dockworkers' union opposing port automation, arguing foreign-owned shipping companies accessing US markets should hire American workers rather than lay them off. A prior three-day strike closed major East and Gulf coast container ports and ended with a 61.5% raise over a six-year contract, leaving automation unresolved.

Laura Curtis Bloomberg
Date Posted:

After a meeting with the Longshoremen Trump released a statement opposing further port automation, “The amount of money saved is nowhere near the distress, hurt, and harm it causes for American Workers.” #logistics #automation

Should foreign-owned shipping companies be blocked from automating US ports?

Core argument: The International Longshoremen's Association's three-day October strike shut every major container port from Houston to Miami to Boston before the union returned to work in exchange for a 61.5% raise over its next six-year contract.

President-elect Donald Trump met with the leaders of the International Longshoremen’s Association on Thursday and voiced support for the dockworkers union that shut East and Gulf coast ports in October and may strike again in just over a month. An ILA strike shut every major container port from Houston to Miami to Boston for three days in October, before the union agreed to return to work in exchange for a 61.5% raise over its next six-year contract. The temporary deal with the foreign-owned shipping companies and terminal operators represented by the US Maritime Alliance was brokered under intense pressure from the Biden administration and left the thornier issue of automation on the bargaining table. Automated machinery is expensive and will constantly have to be replaced, Trump said, adding he hopes the foreign-owned shipping companies “will understand how important this issue is for me.” “For the great privilege of accessing our markets, these foreign companies should hire our incredible American Workers, instead of laying them off, and sending those profits back to foreign countries,” Trump said.

Takeaways by Macro Roundup® AI

  1. The International Longshoremen's Association's three-day October strike shut every major container port from Houston to Miami to Boston before the union returned to work in exchange for a 61.5% raise over its next six-year contract.
  2. The temporary deal with the US Maritime Alliance, brokered under intense pressure from the Biden administration, left automation on the bargaining table, and the ILA may strike again in just over a month.
  3. President-elect Donald Trump met with ILA leaders and voiced support for the dockworkers, saying automated machinery is expensive and must constantly be replaced and that foreign-owned shipping companies should hire American workers rather than lay them off.

Related Articles:

  • US Dockworkers Go Back to Work as Talks Extended to January — US dockworkers ended a three-day strike that halted trade at East and Gulf coast ports, extending their contract and reopening ports while negotiations resume on a long-term deal including a pay increase of about 62%. A supply-chain data company estimates the resulting cargo backlog will take over a month to clear.
  • Global Robot Density in Factories Doubled in Seven Years — Global factory robot density reached a record 162 robots per 10,000 manufacturing employees, more than double the level of seven years earlier. The European Union averages 219 units per 10,000 employees, North America 197, and Asia 182, with Korea, Singapore, mainland China and Japan among the ten most automated economies.
  • Labor Market Conflict and the Decline of the Rust Belt — The authors argue that persistent labor market conflict in the Rust Belt's main industries lowered investment and productivity growth, shifting employment to the rest of the country, and estimate it accounts for roughly half the decline in the region's share of US manufacturing employment. Rising foreign competition plays a more modest quantitative role.

Monday, December 16, 2024

AI Summary. Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.

Larry Cofsky, Dan Dzombak, and Kira Hobson Bridgewater Associates
Date Posted:

Bridgewater believes an increase in the deficit to 7-8% of GDP will not put undue pressure on bond yields. They argue rates reflect total credit creation, which has returned to normal as increased rates have crowded out private-sector borrowing.

Are large government deficits pushing bond yields and risk premiums higher?

Core argument: Total US borrowing is about average despite higher government deficits, as high public borrowing has contributed to the need for higher rates that have depressed private sector borrowing.

Despite higher government deficits, total borrowing is about average. High public borrowing has contributed to the need for higher rates, which have depressed private sector borrowing. This return to normal levels of credit creation has helped gradually drive inflation down toward target. And in terms of supply and demand for debt, the risk premiums on the long end look about average, with no market signs that economic or debt limits are currently being hit. This contrasts with other times when abnormally high total borrowing has driven yields and risk premiums up (via higher supply, higher inflation, or both), such as during the 1980s, the GFC, or the height of COVID.

Takeaways by Macro Roundup® AI

  1. Total US borrowing is about average despite higher government deficits, as high public borrowing has contributed to the need for higher rates that have depressed private sector borrowing.
  2. The return to normal levels of credit creation has helped gradually drive inflation down toward target.
  3. Risk premiums on the long end look about average, with no market signs that economic or debt limits are being hit, unlike the 1980s, the global financial crisis, or the height of COVID, when abnormally high total borrowing pushed yields and risk premiums up.

Related Articles:

  • Fiscal Policy Under Trump II: The Role of Scott Bessent and Basic Budget Math — US federal debt has risen from 105% to 123% of GDP, the budget deficit has doubled from 3.1% to more than 6%, and government interest expense has grown from 1.3% to about 3.1% of GDP. The author argues this makes expansive fiscal policy harder to pursue than in the past.
  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.
  • The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget — The Congressional Budget Office projects that if private investment were more sensitive to federal deficits, debt held by the public would exceed 250% of GDP and real national income per person would be 18% ($21,300) lower than its baseline, with the average interest rate on federal debt 2pp higher.

AI Summary. Public debt in the euro area is projected to rise 11 percentage points to 100% of GDP by 2034, while US public debt is projected to rise twice as much, 25 percentage points, to 122% of GDP.

Jesper Rangvid Rangvid's Blog
Date Posted:

By 2034, Euro area government debt is projected to reach 100% of GDP, up 11pp from 2024. Under the CBO baseline, which excludes Trump’s campaign proposals, US government debt is projected to reach 122% of GDP by 2034, up 25pp.

Is US public debt projected to rise twice as fast as Europe's?

Core argument: US public debt is projected to rise by 25 percentage points to 122% of GDP by 2034, twice the 11-percentage-point increase projected for the euro area.

Over the next decade, the debt-to-GDP ratio in the euro area is projected to rise by 11 percentage points, reaching 100% of GDP by 2034. While this represents a significant level of debt, the situation in the US is even more concerning. Public debt in the US is expected to increase by twice as much—by 25 percentage points—over the same period, reaching 122% of GDP by 2034. While borrowing and spending can stimulate economic activity in the short term, the money must eventually be repaid. The US economy enjoys significant structural advantages over Europe, including less burdensome regulation, a more favourable demographic outlook, greater innovation, and more. However, if the US fails to address its mounting debt, it risks severe long-term consequences.

Takeaways by Macro Roundup® AI

  1. US public debt is projected to rise by 25 percentage points to 122% of GDP by 2034, twice the 11-percentage-point increase projected for the euro area.
  2. The euro area's debt-to-GDP ratio is projected to reach 100% of GDP by 2034.
  3. The US holds structural advantages over Europe, including less burdensome regulation, a more favourable demographic outlook and greater innovation, but risks severe long-term consequences if it fails to address its mounting debt.

Related Articles:

  • Euro Bashing Abounds, But Remember That US Growth is Debt-Fuelled — US government debt as a share of GDP has risen by 60 percentage points since 2007, versus 21 percentage points in the euro area. Assuming each dollar of government spending adds $0.30 of economic activity, the author calculates the US growth advantage over the euro area would be 5 percentage points rather than the observed 23.
  • A Visualization of Europe’s Non-Bubbly Economy — The Draghi report notes that no European Union company with a market capitalization above €100bn was founded from scratch in the past fifty years, while all six US companies valued above €1tn were. The 13 EU companies founded in that period and worth at least $10bn total about $400bn, versus nearly $30tn for their US counterparts.
  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.

AI Summary. After five years of stagnation, Germany's economy is 5% smaller than if its pre-pandemic growth trend had continued, and Bloomberg Economics estimates most of that shortfall will be hard to recover given the loss of cheap Russian energy and German automakers struggling against Chinese rivals.

Jana Randow Bloomberg
Date Posted:

Bloomberg estimates that Germany’s economy is now 5% below its pre-pandemic growth trend. They argue this is driven by “structural blows such as the loss of cheap Russian energy” and rising competition from Chinese autos.

Is Germany's economic shortfall from stagnation hard to recover?

Core argument: Germany's economy is 5% smaller than it would have been had the pre-pandemic growth trend continued, following five years of stagnation.

Germany is reaching a point of no return. Business leaders know it, the people in the country feel it, but politicians haven’t come up with answers. That has set Europe’s largest economy on a path of decline that threatens to become irreversible. Following five years of stagnation, Germany’s economy is now 5% smaller than it would have been if the pre-pandemic growth trend had been maintained. Bloomberg Economics estimates that the bulk of the shortfall will be tough to recover, due to structural blows such as the loss of cheap Russian energy and both Volkswagen and Mercedes-Benz Group struggling to keep pace with China’s auto firms. The decline in national competitiveness means every household is worse off by about €2,500 ($2,600) a year.

Takeaways by Macro Roundup® AI

  1. Germany's economy is 5% smaller than it would have been had the pre-pandemic growth trend continued, following five years of stagnation.
  2. Bloomberg Economics estimates the bulk of Germany's output shortfall will be tough to recover, citing structural blows including the loss of cheap Russian energy and Volkswagen and Mercedes-Benz struggling to keep pace with China's auto firms.
  3. Germany's decline in national competitiveness leaves every household worse off by about €2,500 ($2,600) a year, and German politicians have yet to produce answers.

Related Articles:

  • Europe is Pricing Itself Out of Existence — 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.
  • Once Dominant, Germany is Now Desperate — Manufacturing still accounts for 20% of German gross value added, nearly twice France's share, but industrial production peaked in 2018 and has since fallen faster than elsewhere in the European Union, especially in energy-intensive sectors such as steelmaking. The Bundesbank estimates US tariffs could reduce German GDP by a percentage point.
  • 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.

AI Summary. Using stock-price moves on U.S.-China tariff-announcement days, the authors estimate the U.S. stock market fell 11.5%, a $4.1tn loss in firm equity value. After adjusting for discount-rate changes, they attribute about 40% of that decline (4.7 percentage points) to lower expected firm dividends rather than higher equity risk premia.

Mary Amiti, Matthieu Gomez, Sang Hoon Kong, and David Weinstein Federal Reserve Bank of New York
Date Posted:

Amiti et al. find that on days when US tariffs on China or Chinese retaliatory tariffs were announced in 2018-19, US stock returns were consistently negative, summing to -11.5% over 11 dates, due 40% to lower expected dividends and 60% to uncertainty.

How much did tariff announcements reduce U.S. stock market value?

Core argument: The U.S. stock market fell 11.5% on days when U.S.-China trade-war tariffs were announced, a $4.1 trillion loss in firm equity value, with particularly large drops after the March 2018 and May 2019 announcements.

We use movements in asset prices on days in which tariffs are announced to obtain estimates of market expectations of the PDV of firm cash flows, which then can be used to assess the welfare impact of tariffs. Stock-market returns are consistently big and negative, with particularly large drops following the March 2018 and May 2019 tariff announcements. Overall, the U.S. stock market fell 11.5% on days when tariffs were announced, which amounts to a $4.1 trillion loss in firm equity value. After adjusting the decline in equity prices for changes in discount rates, we estimate that approximately 40% (4.7 percentage points) of the decline in equity prices on tariff-announcement days can be attributed to changes in expected firm dividends (as opposed to changes in equity premia).

Takeaways by Macro Roundup® AI

  1. The U.S. stock market fell 11.5% on days when U.S.-China trade-war tariffs were announced, a $4.1 trillion loss in firm equity value, with particularly large drops after the March 2018 and May 2019 announcements.
  2. After adjusting for changes in discount rates, the authors estimate roughly 40% (4.7 percentage points) of the equity-price decline on tariff-announcement days is attributable to changes in expected firm dividends rather than changes in equity premia.
  3. The authors use asset-price movements on tariff-announcement days to estimate market expectations of the present discounted value of firm cash flows, which they then use to assess the welfare impact of tariffs.

Related Articles:

  • Can Trump Reduce the Trade Deficit? — A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.
  • Fiscal, Macroeconomic, and Price Estimates of Tariffs Under Both Non-Retaliation and Retaliation Scenarios — The authors estimate the modeled tariff proposals would raise $1.2tn–$4.4tn over 10 years, or 0.3–1.2% of average GDP, with foreign retaliation cutting that revenue by 12–26%. They project consumer prices initially rise 1.2–5.1%, equal to $1,900–$7,600 of lost disposable income per household, with real GDP contracting 0.5–1.4% in the medium term.
  • 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.

AI Summary. U.S. wages and prices are still rising about 1–1.5 percentage points faster per year than before the pandemic, while the share of Americans aged 25–54 with a job has been declining. Federal Reserve officials may expect a modestly weakening job market to curb pay growth, slowing consumer spending and eventually price increases.

Matt Klein The Overshoot
Date Posted:

With inflation and wages both rising at an annual rate of 1-1.5pp above their pre-pandemic pace, @M_C_Klein notes that the Fed may view recent labor market weakness as a positive development.

Will a weakening job market slow wage and price growth?

Core argument: U.S. wages and prices are still rising at yearly rates roughly 1–1.5 percentage points faster than before the pandemic, with some measures slowing and others barely budging over the past 18 months.

The U.S. economy is still growing briskly, but policymakers may soon have to manage a tradeoff between stubborn inflation and a weakening job market. Wages and prices are still rising at yearly rates about 1-1.5 percentage points faster than before the pandemic. There has been some slowing by some measures, but others have barely budged over the past 18 months. And while employment remains high, the share of Americans aged 25-54 with a job has been dropping. Moreover, the share of workers who are unemployed because they lost a job and do not expect to be re-hired is now at its highest since November 2021. Federal Reserve officials may not view this as a tradeoff. Instead, they may hope that the ongoing—but, so far, modest—weakening of the job market will eventually reduce workers’ ability to secure higher pay. Since most people spend whatever extra income they earn on additional goods and services, smaller raises should eventually flow through to slower increases in the dollar value of consumer spending. If businesses keep increasing their real output of goods and services at similar rates as before, the slower growth in nominal spending should then lead to slower price increases.

Takeaways by Macro Roundup® AI

  1. U.S. wages and prices are still rising at yearly rates roughly 1–1.5 percentage points faster than before the pandemic, with some measures slowing and others barely budging over the past 18 months.
  2. The share of Americans aged 25–54 with a job has been dropping, and the share of workers unemployed because they lost a job and do not expect re-hiring is at its highest since November 2021.
  3. Federal Reserve officials may hope that a modest weakening of the job market reduces workers' ability to win higher pay, slowing growth in nominal consumer spending and, if real output growth holds, price increases.

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AI Summary. A weaker dollar would impose losses on foreign holders of U.S. equities in their own currencies, which the author argues would prompt some to sell and rebalance out of historically stretched U.S. positions. Foreign holdings of U.S. equities have surged since the pandemic, partly reflecting the U.S.-centric artificial intelligence boom.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 expects more than the two 2025 rate cuts predicted by the market, putting downward pressure on the dollar and also US equities, as foreign investors “sell and rebalance out of their historically stretched US equity positions.”

Would a weaker dollar prompt foreign investors to sell U.S. equities?

Core argument: A weaker dollar would impose losses on foreign holders of U.S. equities in their own currency terms, prompting some to sell and rebalance out of historically stretched U.S. positions.

A weaker dollar would precipitate a decline in U.S. equities as it would prompt foreigners to exit their overweight U.S. equity holdings. Foreign holdings of U.S. equities have surged since the pandemic, in part due to the U.S. centric AI boom. In foreign currency terms, foreign investors have doubly benefited due to both the appreciation in U.S. equity prices and also appreciation of the dollar. A trend shift towards a weaker dollar would directly impose losses on foreign investors in foreign currency terms. This would likely lead some foreign investors to sell and rebalance out of their historically stretched U.S. equity positions. In the context of elevated share prices, a change in foreign investor behavior could precipitate a deeper sell-off.

Takeaways by Macro Roundup® AI

  1. A weaker dollar would impose losses on foreign holders of U.S. equities in their own currency terms, prompting some to sell and rebalance out of historically stretched U.S. positions.
  2. Foreign holdings of U.S. equities have surged since the pandemic, in part due to the U.S.-centric AI boom, with foreign investors benefiting from both rising U.S. share prices and dollar appreciation.
  3. With U.S. share prices elevated, a shift in foreign investor behavior toward selling could precipitate a deeper equity sell-off.

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AI Summary. China's leaders are expanding security measures and suppressing dissenting views on the country's economic health amid public protests over economic grievances and a series of deadly attacks. The Communist Party's security chief ordered nationwide efforts to resolve conflicts at the grassroots level, and the top prosecutor urged officials to better protect low-income workers, job-seeking graduates, and the elderly.

Chun Han Wong and Brian Spegele Wall Street Journal
Date Posted:

The CCP implicitly acknowledged that the slowdown in China’s economy is linked to a series of high-profile security incidents, issuing orders to members to “protect people’s livelihoods” with the goal of “ensuring the overall stability of society.” @WSJ

How is China responding to unrest over economic grievances?

Core argument: China's leaders are expanding security measures and suppressing discordant views on the economy as public protests over economic grievances increase and deadly mass stabbings and car-ramming attacks unnerve officials and ordinary citizens.

Faced with rising social frustrations and public unrest, China’s leaders are ramping up security measures and squelching discordant views on the country’s economic health. A spate of deadly attacks in China in recent weeks—including mass stabbings and car-ramming incidents—has unnerved officials and ordinary people alike, raising concerns that stagnating growth has played a role in fueling unrest and even outbursts of violence, amid an increase in public protests over economic grievances. In response, the Communist Party’s security czar last month ordered nationwide efforts to “resolve conflicts at the grassroots and nip them in the bud.” China’s top prosecutor urged officials to better protect the rights of low-income workers, job-seeking graduates, and vulnerable groups such as the elderly as a way to “strictly prevent extreme cases from happening.”

Takeaways by Macro Roundup® AI

  1. China's leaders are expanding security measures and suppressing discordant views on the economy as public protests over economic grievances increase and deadly mass stabbings and car-ramming attacks unnerve officials and ordinary citizens.
  2. The Communist Party's security czar ordered nationwide efforts to "resolve conflicts at the grassroots and nip them in the bud," after a spate of deadly attacks raised concerns that stagnating growth has played a role in fueling unrest.
  3. China's top prosecutor urged officials to better protect the rights of low-income workers, job-seeking graduates, and vulnerable groups such as the elderly as a way to "strictly prevent extreme cases from happening.".

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