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
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “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
  • “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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


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.

Related Articles:

  • Economic Policy Before and After the 2024 Election — Market expectations for the Federal Reserve's interest-rate path have shifted, with the expected endpoint moving from about 2.8% to 3.8%. The author argues that enacting the campaign agenda—larger deficits from tax cuts, tariffs on all imports, a weaker currency, mass deportations, and pressure on central-bank independence—would produce a substantially larger inflation shock.
  • 2025 Economic Outlook: Firing on All Cylinders — The authors argue the Federal Reserve will deliver fewer rate cuts than markets expect because household spending remains strong and the economy continues to perform well. They see a risk that lower rates overheat the economy, with strong job and wage growth lifting housing demand and prices and pushing inflation back above the Federal Reserve's 2% target.
  • How Much Has the Cooling Economy Reduced Inflation? — Estimates based on labor market tightness measures — job vacancies relative to unemployment and to all job searchers — imply excess demand peaked at a contribution of 0.75 to 1.15 percentage points to inflation, and has since declined to a contribution of 0.3 to 0.4 percentage point.

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.

Related Articles:

  • United States’ Changing Net IIP — The United States' net international investment position deficit—the gap between foreign-owned US assets and US-owned foreign assets—is the largest on record and has turned negative across all major asset categories. Because much of the liability is equity, the author argues rebalancing could come through a correction in US equity values rather than a weaker dollar.
  • 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.
  • 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.

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.".

Related Articles:

  • 2023 Letter — Rising numbers of Chinese nationals are being apprehended at the US-Mexico border, with US officers encountering around 1,000 in one month early in the year and nearly 5,000 by November. Most Chinese emigrants leave through legal means, going primarily to Singapore, Japan, and Thailand.
  • As China’s Youth-Unemployment Rate Dips, Can Policy Support Keep The Ball Rolling? — China's National Bureau of Statistics reported that youth unemployment for 16-24 year-olds excluding students fell to 17.6% from 18.8%, roughly one in six, the third straight month above 17%. Authorities previously suspended publication of the rate after it reached an all-time high of 21.3%, resuming only after excluding enrolled students.
  • Mapping Chinese Capital Flight via the Sinaloa Cartel — China’s official balance-of-payments data show a large gap between its customs and foreign-exchange agencies’ estimates of the goods trade balance, and reported returns on Chinese foreign assets have broken from their historical relationship with the 5-year US Treasury yield despite central banks raising interest rates. The author argues both anomalies are consistent with unrecorded capital flight.

Tuesday, December 17, 2024

AI Summary. Only about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, yet the U.S. has created nearly 250 companies worth over $10bn ($30tn in value) against Europe's 14, and median U.S. disposable household income is 25% above Germany's. The author argues expanding high-skilled immigration is the fastest way to accelerate growth.

Edward Conard Wall Street Journal
Date Posted:
Is Database:
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My WSJ OpEd argues that mining the technological frontier motivates America’s talent to take more risk by increasing expected after-tax payoffs, producing a 70X difference in the value of newly created companies—laughably missed by tax elasticity studies.

How does the US outgrow Europe despite weaker test scores?

Core argument: OECD data show about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, while Germany's split is nearly even at 18% high and 20% low.

Economists never cite one of the most significant statistics about the U.S. economy. According to data released last week by the Organization for Economic Cooperation and Development, only about 12% of Americans score at the highest levels on internationally administered academic tests, while 34% score at the lowest levels—nearly three low scorers for every high scorer. Germany’s figures are nearly even: 18% score at the highest levels and 20% at the lowest. Put another way, Germany’s ratio of high to low scorers is almost three times America’s. Scandinavia’s is five times; Japan’s, seven.

These enormous differences have profound economic implications. With more talent and fewer needy people, is it any wonder that Northern European countries can afford more-generous welfare policies than their neighbors to the south?

Yet America excels relative to Europe despite these enormous differences. While Europe has created 14 companies worth more than $10 billion in the past 50 years, with about $400 billion of market value in total, Americans have created nearly 250 such companies, worth $30 trillion.

That success has driven up America’s middle-class incomes. The median disposable U.S. household income, according to the OECD, is now 25% greater than the median German household and 60% greater than the median household in Italy.

Europeans’ incomes would be even lower if they weren’t free-riding on American innovation, defense spending and higher drug prices, which incentivize research. America’s median incomes would be higher if we had more talent devoted to supervising and creating jobs for blue-collar workers or Northern Europe-like distribution of test scores.

The outsize success of America’s talented entrepreneurs doesn’t stem from their superior intelligence. It comes from working at companies such as Google and Microsoft, which mine the technological frontier and expose employees to valuable knowledge, insights and opportunities. Apple is worth more than the 30 largest German companies combined. Apple’s employees and its alumni use their knowledge and training to create more value than their counterparts in Europe.

Unlike Europe, the enormous success of American entrepreneurs motivated an army of talented Americans to get valuable on-the-job training, work longer hours, take risks and succeed. A small amount of success bubbles up from a large pool of failure.

The belief that taxing success more heavily will scarcely slow inevitable progress ignores the importance of being first to market and founding successful companies in America rather than the rest of the world, the enormous difference in the training and expected payoffs for successful risk-taking that it creates for America’s talented workers, and the motivational effect higher expected payoffs for successful risk-taking have on our talented workers.

Studies of short-term tax elasticity laughably miss the enormous difference between the success of the U.S. and Europe. Even if Europe cut its tax rates, it would have a trivial short-term effect on the expected returns to risk-taking, because without companies such as Google, entrepreneurs wouldn’t come up with ideas worthy of investment regardless of the tax rate. It takes decades of successful risk-taking to create companies and workers who can spawn the next generation of success.

The argument that we can heavily tax the tail of the distribution of payoffs without discouraging prudent risk-taking—since entrepreneurs such as Bill Gates and Steve Jobs took risks without expecting the enormous success they achieved—fails to recognize that outsize payoffs at the tail of the distribution critically drive overall expected risk-adjusted returns above break-even. Even with these successes, the returns to venture capital over the last 20 years have been mediocre at best.

When entrepreneurs capture as little as 5% of the value they create for others, it makes little sense to encourage successful risk-takers to quit working long before they achieve outsize success. With the effect technological success has on the productivity of talented American workers, who are our constraint to growth, and the effect of their productivity on the growth of middle-class incomes relative to Europe, that’s not a “policy failure.”

The fastest way to accelerate America’s growth and increase tax revenues is to let high-skilled immigration expand our talent pool. Forty percent of America’s billion-dollar startups were founded by high-skilled immigrants—roughly the same percentage of STEM doctorates held by foreign-born American workers.

Takeaways by Macro Roundup® AI

  1. OECD data show about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, while Germany's split is nearly even at 18% high and 20% low.
  2. Europe created 14 companies worth more than $10 billion over the past 50 years, totaling about $400 billion in market value, against nearly 250 such U.S. companies worth $30 trillion, with Apple alone worth more than Germany's 30 largest companies combined.
  3. Median disposable U.S. household income is 25% above Germany's and 60% above Italy's, and expanding high-skilled immigration is argued to be the fastest way to accelerate U.S. growth, given that 40% of America's billion-dollar startups were founded by high-skilled immigrants.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.
  • 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.
  • 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.

AI Summary. The rise in geographic income inequality reflects the richest places pulling further ahead rather than the poorest falling behind, and even the lowest-income places have seen gains in inflation-adjusted income since 1980. Including government transfers or adjusting for local cost of living lowers measured geographic inequality but leaves the upward trend intact.

Jed Kolko Slow Boring
Date Posted:

Despite the post-pandemic decline in US income inequality at the national level, geographic inequality as measured by market income per capita reached a new high in 2023, as average incomes in the richest US areas have grown faster than the poorest.

Is rising geographic inequality driven by rich places pulling ahead?

Core argument: Rising geographic inequality reflects the richest places pulling farther ahead rather than the poorest places falling behind, with even the lowest-income places posting gains in inflation-adjusted income since 1980.

The increase in geographic inequality is more about the richest places pulling farther ahead than the poorest places falling farther behind, and even the lowest-income places have seen gains in inflation-adjusted income since 1980. Average incomes have been rising especially sharply for the very richest places starting around 2011. This baseline measure of geographic inequality (the heavy green line) reflects market income. Two alternative measures of income show a lower level of geographic inequality but still trending upward. The first alternative measure includes government transfers. Including transfer income makes things look somewhat more equal: geographic inequality for income including transfers is lower and rising more gently than for market income. The second alternative measure adjusts market income for differences in local cost of living. Higher-income places are more expensive to live in, mostly due to higher housing costs. Adjusting for the cost of living lowers geographic inequality, but the trend remains the same: inequality is rising and reached a new high in 2023. However, adjusting for the cost of living changes which places are richer and poorer.

Takeaways by Macro Roundup® AI

  1. Rising geographic inequality reflects the richest places pulling farther ahead rather than the poorest places falling behind, with even the lowest-income places posting gains in inflation-adjusted income since 1980.
  2. Average incomes have risen especially sharply for the very richest places starting around 2011, based on a baseline measure of market income.
  3. Including government transfers or adjusting market income for local cost of living lowers measured geographic inequality, but the upward trend holds and cost-of-living-adjusted inequality reached a new high in 2023, while changing which places rank as richer and poorer.

Related Articles:

  • The Great “Transfer”-mation — Government transfers rose from 8.2% of Americans' total personal income in 1970 to 17.6% in 2022, making them the third largest income source after work and investments. The share of U.S. counties drawing a quarter or more of personal income from transfers rose from under 1% in 1970 to 53% in 2022.
  • The Economic Geography Of The 2024 Elections — Counties where government transfer programs such as Social Security, Medicare, Medicaid, and unemployment insurance make up at least a quarter of personal income gave Trump 63% of the vote, while counties where transfers account for less than 15% gave Harris 56%. Transfers supplied 18% of total US personal income.
  • “Compensate the Losers?” Economic Policy and Partisan Realignment in the US — The authors argue that partisan realignment by education reflects Democrats' declining supply of "predistribution" policies such as job guarantees, higher minimum wages, protectionism, and stronger unions, which less-educated Americans favor while more-educated Americans prefer taxes and transfers. They estimate changing views of the parties' economic policies explain roughly half the shift.

AI Summary. The decline in inflation has stalled, with Federal Reserve and market-implied inflation measures above the 2% target and short- and long-run consumer inflation expectations moving higher. The author argues this uptrend, alongside strong economic momentum, points to an inflation rebound rather than a softening that would justify rate cuts.

Torsten Sløk, Rajvi Shah, and Shruti Galwankar Apollo
Date Posted:

Torsten Sløk notes core CPI is 3.3% and headline is 2.7%. Both show signs of reacceleration, as do rising short and long-term consumer inflation expectation surveys. “The probability is rising that the Fed may have to raise interest rates in 2025.”

Is inflation rebounding rather than softening enough to justify rate cuts?

Core argument: Fed and market-implied inflation measures all sit above the Fed's 2% target and show no signs of moving toward it, while recent readings indicate the decline in inflation has stalled.

Will we see a repeat of the 1970s with the Fed easing policy too quickly, triggering a rise in inflation in 2025? Recent inflation readings show signs that the decline in inflation has stalled, and there is a risk of reacceleration, see charts below. Fed and market-implied measures of inflation are all above the Fed’s 2% target and not showing signs of moving down toward the Fed’s 2% inflation target. Short-run and [more worryingly], long-run [consumer] inflation expectations are also moving higher. The recent uptrend, combined with strong economic momentum, is pointing towards a rebound in inflation in 2025 and not a softening to justify Fed cuts. The probability is rising that the Fed may have to raise interest rates in 2025. For investors, the risk is a repeat of 2022, where the 60/40 portfolio underperformed significantly.

Takeaways by Macro Roundup® AI

  1. Fed and market-implied inflation measures all sit above the Fed's 2% target and show no signs of moving toward it, while recent readings indicate the decline in inflation has stalled.
  2. Short-run and, more worryingly, long-run consumer inflation expectations are moving higher.
  3. The uptrend in inflation, combined with strong economic momentum, points to a rebound in 2025 rather than a softening that would justify Fed cuts, raising the probability the Fed must hike rates and the risk of a repeat of 2022, when the 60/40 portfolio underperformed significantly.

Related Articles:

  • Economic Policy Before and After the 2024 Election — Market expectations for the Federal Reserve's interest-rate path have shifted, with the expected endpoint moving from about 2.8% to 3.8%. The author argues that enacting the campaign agenda—larger deficits from tax cuts, tariffs on all imports, a weaker currency, mass deportations, and pressure on central-bank independence—would produce a substantially larger inflation shock.
  • 2025 Economic Outlook: Firing on All Cylinders — The authors argue the Federal Reserve will deliver fewer rate cuts than markets expect because household spending remains strong and the economy continues to perform well. They see a risk that lower rates overheat the economy, with strong job and wage growth lifting housing demand and prices and pushing inflation back above the Federal Reserve's 2% target.
  • Inflation and the Job Market are Sending Conflicting Signals — 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.

AI Summary. Ten-year US Treasury yields are around 4.4%, and the weighted average interest rate on outstanding federal debt is about 3.3% — a 15-year high, yet still below the over-4% yields the Treasury now pays on new debt across all maturities. Bloomberg Economics projects the fiscal deficit widening to 7% of GDP.

Liz Capo McCormick and Viktoria Dendrinou Bloomberg
Date Posted:

The weighted mean interest rate on outstanding debt is currently ~ 3.3%, a 15-year high, but still well under current yields of over 4% for new issuances in all maturities.

Are rising federal borrowing costs pushing the deficit higher?

Core argument: The weighted average interest rate on outstanding U.S. federal debt stands near 3.3%, a 15-year high, yet remains below the over-4% yields the Treasury must now pay across all maturities to sell new debt.

Investors appear largely to be giving the incoming Trump team the benefit of the doubt. Ten-year yields are around 4.4%, down from their peak in the immediate aftermath of the Nov. 5 election. Analysts surveyed by Bloomberg last month saw them dropping below 4% by late 2026, while derivatives contracts indicate traders are betting they’ll hold roughly around current levels over that period. The weighted average interest rate on outstanding debt is now around 3.3%. That’s a 15-year high, but still well below the rates the Treasury now has to pay to sell its debt, with all maturities yielding over 4%. And while the Fed is expected to lower interest rates further after beginning its easing cycle in September, few economists anticipate any return to the ultra-low borrowing costs enjoyed before Covid. The baseline forecast at Bloomberg Economics has the fiscal deficit widening to 7% of GDP by 2028.

Takeaways by Macro Roundup® AI

  1. The weighted average interest rate on outstanding U.S. federal debt stands near 3.3%, a 15-year high, yet remains below the over-4% yields the Treasury must now pay across all maturities to sell new debt.
  2. Bloomberg Economics' baseline forecast has the U.S. fiscal deficit widening to 7% of GDP by 2028.
  3. Ten-year Treasury yields are around 4.4%, down from their peak just after the Nov. 5 election, with analysts surveyed by Bloomberg seeing them below 4% by late 2026 while derivatives contracts indicate traders bet they hold near current levels.

Related Articles:

AI Summary. Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, and China's gross domestic product deflator, a broad gauge of economy-wide prices, has been negative for six straight quarters, the longest stretch since the late 1990s. As falling prices sap profitability, companies could delay investment or cut jobs, and buyers could postpone purchases expecting further declines.

Hannah Miao Wall Street Journal
Date Posted:

Prices for Chinese manufactured goods have fallen y/y for 26 consecutive months. As of November, they were down 2.5% y/y, raising the prospect of deflation taking hold with postponement of investment and durables purchases.

Are falling prices becoming entrenched in China's economy?

Core argument: China's factory-gate prices fell 2.5% year-over-year in November, the 26th consecutive month of decline, with little sign of turning up again soon.

Prices for goods leaving Chinese factories have fallen year-over-year for 26 consecutive months, dropping 2.5% in November from a year earlier, and there is little sign of them turning up again soon. China’s gross domestic product deflator, a broader gauge of price levels across the economy, has been in negative territory for six consecutive quarters, the longest stretch since the late 1990s. The fear is that deflation is becoming ingrained in China. As falling prices sap profitability, companies could postpone investments or shed workers, leading more people to cut back on spending. Others might put off purchases because they think prices will drop even more.

Takeaways by Macro Roundup® AI

  1. China's factory-gate prices fell 2.5% year-over-year in November, the 26th consecutive month of decline, with little sign of turning up again soon.
  2. China's GDP deflator, a broader gauge of economy-wide price levels, has been negative for six consecutive quarters, the longest such stretch since the late 1990s.
  3. The concern is that deflation becomes ingrained in China as falling prices sap profitability, prompting companies to postpone investment or shed workers and consumers to delay purchases in anticipation of lower prices.

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  • Chinese Bond Market Grapples With ‘Japanification’ — Yields on 30-year Chinese government bonds have fallen from 4% in late 2020 to 2.21% as China cuts interest rates and investors move into safe assets, while Japan's long-term yields have risen above China's to 2.27%. Chinese core inflation, excluding fuel and food, was 0.2% annually versus 2.3% in Japan.
  • 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.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

AI Summary. China's share of global GDP has fallen from a peak of just above 18% in 2021 to around 16%, while it accounts for roughly 28% of world investment and 35% of gross manufacturing output but only about 12% of global consumption. The author argues this imbalance leaves Beijing increasingly reliant on exporting excess industrial output.

Daniel Rosen, Reva Goujon, and Logan Wright Foreign Affairs
Date Posted:

Chinese mercantilism offers the US an opportunity, as trade partners may be more likely to “align their own policies, including tariffs and technology-related controls, with Washington’s as part of a broader ‘de-risking’ strategy.”

Does a shrinking share of global output increase China's reliance on exports?

Core argument: China's share of global GDP peaked just above 18% in 2021 and stands at around 16% today, even as it accounts for roughly 28% of world investment and 35% of gross manufacturing output.

China’s share of the world economy is shrinking—it peaked at just above 18% of global GDP in 2021 and stands at around 16% today. China remains an investment-led economy: it is the world’s largest source of investment (around 28%) and gross manufacturing output (35%), but it represents only around 12% of global consumption. To create growth, therefore, Beijing has come to rely even more on exports of excess industrial output that cannot be absorbed in the domestic market. But China can only make further relative gains if other countries reduce their manufacturing investment or if Beijing expands its share of global exports. Washington can leverage the influence of U.S. consumer and capital markets, offering its allies and partners a better alternative to being crowded out by Chinese exports.

Takeaways by Macro Roundup® AI

  1. China's share of global GDP peaked just above 18% in 2021 and stands at around 16% today, even as it accounts for roughly 28% of world investment and 35% of gross manufacturing output.
  2. China represents only around 12% of global consumption, and Beijing has come to rely more heavily on exporting excess industrial output that the domestic market cannot absorb.
  3. China can make further relative gains only if other countries cut manufacturing investment or Beijing expands its share of global exports, and Washington can leverage U.S. consumer and capital markets to offer allies an alternative to being crowded out by Chinese exports.

Related Articles:

  • China Economy Memo: Tempest in a Teapot or Crisis A-Brewing? — The authors argue China is heading into a protracted debt crisis in which about 40% of local government financing vehicles default, hitting regional banks most exposed to such lending. They estimate total losses for these creditors at roughly $5tn, or about 30% of China's GDP.
  • We Are All Mercantilists Now — 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.
  • 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. New underwater drones can dive thousands of feet and operate for days with little human intervention, which advocates say suits them to intelligence gathering, protecting undersea infrastructure, and countering threats in the Pacific. Boeing is delivering five 85-foot Orca vehicles to the US Navy, and Australia is developing Ghost Shark with Anduril.

Alistair MacDonald Wall Street Journal
Date Posted:

Boeing is set to deliver five of its Orca drones to the U.S. Navy by the end of next year. Up to 85 feet long, the Orca can travel almost 7,500 miles with little human intervention.

Are underwater drones becoming a new frontier of naval warfare?

Core argument: Boeing is set to deliver five Orca extra-large uncrewed undersea vehicles to the U.S. Navy by the end of next year, with the up-to-85-foot craft able to travel almost 7,500 miles with little human intervention.

The new underwater drones can typically dive thousands of feet below the surface and operate largely without human interaction for days on end. That ability makes them ideally suited to gather intelligence, protect undersea infrastructure and counter potential threats in the Pacific, advocates say. Boeing is set to deliver five of its Orca extra-large uncrewed undersea vehicles to the U.S. Navy by the end of next year. Up to 85 feet long, the Orca can travel the equivalent of almost 7,500 miles with little human intervention. Australia is working with defense startup Anduril on an underwater drone called Ghost Shark. The project is part of a $4.65 billion investment the country is making in subsea warfare capabilities and new autonomous and uncrewed maritime vehicles.

Takeaways by Macro Roundup® AI

  1. Boeing is set to deliver five Orca extra-large uncrewed undersea vehicles to the U.S. Navy by the end of next year, with the up-to-85-foot craft able to travel almost 7,500 miles with little human intervention.
  2. Australia is investing $4.65 billion in subsea warfare capabilities and new autonomous and uncrewed maritime vehicles, including the Ghost Shark underwater drone developed with defense startup Anduril.
  3. Advocates argue that underwater drones capable of diving thousands of feet and operating for days without human interaction are suited to gathering intelligence, protecting undersea infrastructure and countering potential threats in the Pacific.

Related Articles:

  • Pentagon Plans Vast AI Fleet to Counter China Threat — The Pentagon plans to field thousands of air-, land- and sea-based artificial-intelligence systems, drones and autonomous platforms within two years to counter threats from China and other adversaries, spending hundreds of millions of dollars on systems intended to be "small, smart, cheap.
  • China Is Rapidly Building Warships. Satellite Images Reveal The Scale — China's shipbuilding capacity now exceeds the United States' by such a margin that it can build more ships in a month than American yards build in a year, with a workforce estimated at nearly 5x the US level. Chinese yards handled more than 1,700 orders in a year, compared with fewer than five for American shipyards.
  • China’s Shipyards Are Ready for a Protracted War. America’s Aren’t — China produced more than half of the world's commercial shipbuilding output, while Europe accounts for about 5% and the US next to nothing, with most of the remainder built in South Korea and Japan. Analysts argue that in a protracted conflict China's wartime-scale yards could quickly accelerate production, replace lost ships, and repair damaged ones.