Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “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
  • “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
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, January 21, 2025

AI Summary. The authors estimate that U.S. asset types seeing larger reductions in the user cost of capital and marginal effective tax rates after the 2017 Tax Cuts and Jobs Act had significantly larger increases in investment rates, persisting for several years. A 1pp decline in the user cost is associated with a 1.4–2.3pp higher investment rate.

Jonathan Hartley, Kevin Hassett and Joshua Rauh Social Science Research Network
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Kevin Hassett @Jon_Hartley_ @joshrauh estimate that following the 2017 Tax Cuts and Jobs Act, a 1pp drop in the cost of capital raised the investment rate in 2022 by 2.33 pp relative to 2016, 3x the CBO’s 0.7 pp estimate.

Does a lower user cost of capital raise business investment?

Core argument: The authors estimate that a 1 percentage point decline in the user cost of capital is associated with a 2.328 percentage point increase in the investment rate over 2016–2022, and with a 1.426 percentage point increase over 2016–2018, the latter significant at the 10% level.

This paper demonstrates that U.S. firms on average increased their fixed investment in response to exogenous decreases in user cost of capital and marginal effective tax rate (METR) resulting from TCJA tax reforms. Using cross-sectional data we find that the user cost of capital is associated with higher rates of investment; BEA asset types with greater reductions in user cost of capital and METR after the 2017 Tax Cuts and Jobs Act had greater statistically significant increases in their investment rates, and that this is the case for several years after the tax reform. [Between 2016 and 2018] a 1pp decline in the cost of capital (ρ) is associated with a 1.426 percentage point increase in the investment rate), albeit at the 10% level of significance. The investment rate in 2022 minus that in 2016 also varies significantly with declines in ρ; from 2016 to 2022 a 1 percentage point decline in ρ is associated with a 2.328 percentage point increase in the investment rate. These estimates are meaningfully above the CBO’s CapTax model, [which found] that a 1% decrease in the user cost of capital is associated with a 0.7% increase in investment.

Takeaways by Macro Roundup® AI

  1. The authors estimate that a 1 percentage point decline in the user cost of capital is associated with a 2.328 percentage point increase in the investment rate over 2016–2022, and with a 1.426 percentage point increase over 2016–2018, the latter significant at the 10% level.
  2. BEA asset types with larger reductions in the user cost of capital and marginal effective tax rate after the 2017 Tax Cuts and Jobs Act had statistically significant increases in investment rates persisting for several years.
  3. The paper's estimates are meaningfully above CBO's CapTax model, which found a 1% decrease in the user cost of capital is associated with a 0.7% increase in investment.

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.
  • Lessons from the Biggest Business Tax Cut in US History — The authors find the 2017 US business tax cuts reduced corporate tax revenue by 40% while raising total tangible corporate investment by about 11%, with firms facing larger tax declines investing relatively more. They estimate long-run GDP is higher by under 1% and labor income by under $1,000 per employee.
  • Making the Tax Cuts and Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax Reform — Following the 2017 US tax law, real economic output, consumption, business investment, and payrolls grew faster than pre-law forecasts and nearly matched post-law projections, and an analysis of administrative corporate tax return data estimates firms with the average tax change raised domestic investment about 20% relative to firms with no change.

AI Summary. The US share of newly announced global greenfield foreign direct investment projects rose to 14.3% from 11.6%, with the estimated value of new US projects up by more than $100bn to $227bn. Over the same period China secured just under 400 new projects, close to a record low, while Germany's fell to 470, an 18-year low.

Valentina Romei and Sam Fleming Financial Times
Date Posted:

The US’s 14.3% share of cross-border investment hit its highest level on record in 2024 with $227B of greenfield investment and the number of projects far exceeding comparable projects in China or Germany.

Is the US share of global foreign direct investment rising?

Core argument: The US share of newly announced global greenfield FDI projects rose from 11.6% in 2023 to 14.3% in the 12 months to November 2024, according to FT analysis of fDi Markets data.

The proportion of new FDI projects announced in the US rose from 11.6% in 2023, to 14.3% in the 12 months to November 2024, according to FT analysis of data collected by fDI Markets. The estimated value of new greenfield FDI projects in the US announced in the 12 months to November 2024 rose by more than $100bn to $227bn, according to fDi. The data is based on corporate announcements, press reports and fDI estimates for the lifetime of the project, rather than annual capital spending. The US attracted more than 2,100 new FDI greenfield projects in the 12 months to last November. By contrast, China secured just under 400 projects, close to a record low and a fraction of the 1,000 plus investments received each year in the decade up to the mid-2010s. New projects in Germany plunged to 470 in the 12 months to November 2024, the lowest figure in 18 years in Europe’s largest economy and a big decline from 1,100 greenfield investments a year earlier.

Takeaways by Macro Roundup® AI

  1. The US share of newly announced global greenfield FDI projects rose from 11.6% in 2023 to 14.3% in the 12 months to November 2024, according to FT analysis of fDi Markets data.
  2. The estimated value of new greenfield FDI projects announced in the US rose by more than $100bn to $227bn in the 12 months to November 2024, spanning more than 2,100 projects, according to fDi.
  3. China secured just under 400 new greenfield FDI projects in the 12 months to November 2024, close to a record low against the 1,000-plus received annually in the decade to the mid-2010s, while Germany's fell to 470 from 1,100.

Related Articles:

  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • The Industrial Renaissance: Digital Infrastructure, Energy Transition, and Power — An industrial renaissance is underway driven by industrial policies, which fall into three types: place-based policies aimed at low-income regions that may have lost manufacturing jobs, national security policies to ensure important technology and semiconductors are produced domestically, and green policies supporting the energy transition.
  • German Companies Flock To US With Record Pledges Of Capital Investment — German companies announced a record $15.7bn of capital commitments to US projects, up from $8.2bn a year earlier and well above the $5.9bn pledged in China, according to data compiled by fDi Markets. Executives at BASF and Siemens Energy attribute the shift to pragmatic US industrial policies, a strong long-term market outlook and supply-chain concerns.

AI Summary. Applying an internal-rate-of-return approach to the S&P 500 using consensus earnings and payout estimates implies an expected stock return of 8.91% and an equity risk premium of 4.33%. Assuming the premium reverts to 4.5% yields an index value about 12% below current levels, with an estimated 80% chance stocks are overvalued.

Aswath Damodaran Musing on Markets
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.@AswathDamodaran calculates an implied expected return of 8.91% for the S&P 500 in 2025 and an implied equity risk premium of 4.33% which is “close to historic norms,” though he notes “there is an 80% chance that stocks are overvalued.“

What does the implied equity risk premium say about stock valuations?

Core argument: Damodaran backs out an implied expected return of 8.91% on the S&P 500 at the start of 2025 and an implied equity risk premium of 4.33%, netting out the Jan 1, 2025 ten-year bond rate of 4.58%.

Starting 30 years ago, I began estimating an expected return on stocks, using the S&P 500, with the level of the index standing in for the price you pay for stocks, and expected earnings and cash flows, based upon consensus estimates of earnings and cash payout ratios. I solve for an internal rate of return for stocks, based upon these expected cash flows. Using this approach at the start of 2025 to the S&P 500, I back out an implied expected return of 8.91% for the index, and an implied equity risk premium of 4.33% (obtained by netting out the ten-year bond rate on Jan 1, 2025, of 4.58%). With the assumption that the equity risk premium will climb back to 4.5%, higher than the average for the 1960-2024 period, but lower than the post-2008 average, the value that I get for the index is about 5260, about 12% lower than the index at the start of the year. With the assumption that the equity risk premium will climb back to 4.5%, higher than the average for the 1960-2024 period, but lower than the post-2008 average, the value that I get for the index is about 5260, about 12% lower than the index at the start of the year. At today's price levels, there is an 80% chance that stocks are overvalued and only a 20% chance that they are undervalued.

Takeaways by Macro Roundup® AI

  1. Damodaran backs out an implied expected return of 8.91% on the S&P 500 at the start of 2025 and an implied equity risk premium of 4.33%, netting out the Jan 1, 2025 ten-year bond rate of 4.58%.
  2. Assuming the equity risk premium rises to 4.5% — above the 1960–2024 average but below the post-2008 average — Damodaran values the S&P 500 at about 5260, roughly 12% below the index level at the start of the year.
  3. Damodaran puts the probability that stocks are overvalued at current price levels at 80% and the probability they are undervalued at 20%.

Related Articles:

  • On Bubble Watch — Data from J.P. Morgan Asset Management covering monthly observations over a 27-year period show a strong relationship between the S&P 500's starting price-to-earnings ratio and its annualized return over the following ten years, with higher starting valuations consistently followed by lower returns. Purchases at a multiple near today's 22x were followed by ten-year returns between +2% and -2%.
  • Updating Our Long-Term Return Forecast For US Equities to Incorporate the Current High Level of Market Concentration — The authors estimate the S&P 500 will deliver an annualized nominal total return of 3% over the next 10 years, roughly 1% in real terms, modeling long-term returns as a function of starting valuation, market concentration, frequency of economic contractions, corporate profitability, and interest rates. The index returned 13% annualized over the past decade, above its 11% long-term average.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.

AI Summary. Global economies are converging on a reasonable equilibrium, with developed-world central banks gradually cutting rates toward what they view as neutral, China prioritizing domestic demand after a deflationary stretch, and artificial intelligence showing potential to enhance productivity. Markets are discounting that stability, with US equity indexes pricing an even more exceptional decade than the last.

Bob Prince, Greg Jensen, and Karen Karniol-Tambour Bridgewater Associates
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Bridgewater argues the global economy is coming into equilibrium with a “mercantilist consensus” in both the US and China, but “the risk of tit-for-tat escalation in mercantilist competition (and of broader conflict) threatens the path to equilibrium.”

Are global economies converging on equilibrium that markets already price in?

Core argument: After five years of severe imbalances, global economies are converging on a reasonable equilibrium, with developed-world central banks including the Fed gradually cutting rates toward what they view as a neutral posture.

After five years of severe imbalances, global economies are converging on a reasonable state of equilibrium, a condition that is generally good for assets. Developed world central banks, including the Fed, are responding to the stabilization of conditions within tolerable ranges by gradually cutting rates toward what they view as a neutral posture. Meanwhile, China, which has been a deflationary outlier over this period, has begun to recognize the problem and is prioritizing boosting domestic demand, even if the policies are not yet clearly defined. And AI technology has advanced to show real potential to enhance productivity over time. If these were the only developments in the world, you should expect an era of stability and strong profits. That’s what markets are discounting and what is therefore required to generate a strong positive return, particularly for US equity indexes, which are pricing an even more exceptional decade than the last.

Takeaways by Macro Roundup® AI

  1. After five years of severe imbalances, global economies are converging on a reasonable equilibrium, with developed-world central banks including the Fed gradually cutting rates toward what they view as a neutral posture.
  2. China, a deflationary outlier over this period, has begun to recognize the problem and is prioritizing boosting domestic demand, though its policies are not yet clearly defined.
  3. US equity indexes are pricing an even more exceptional decade than the last, requiring an era of stability and strong profits to generate a strong positive return.

Related Articles:

  • 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.
  • How German Industry Can Survive the Second China Shock — The European Union has 30mm manufacturing jobs, and China has grown from a $4tn economy producing under 15% of global manufacturing output to an $18tn economy producing over a third, with well over 50% of global capacity in many sectors. European tariffs on Chinese electric vehicles limit import competition but do not offset lost export markets.
  • 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 stagnant imports and robust exports have increased the global supply of manufactured goods and commodities relative to demand, helping suppress costs elsewhere. Chinese producer prices have fallen about 2-3% a year for a cumulative decline of nearly 10%, and US import prices from China are down 4% versus 1% for all imported goods excluding food and fuels.

Matt Klein The Overshoot
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US inflation is still running ~ 1pp above its pre-pandemic level despite a 4% reduction in prices of imports from China since April 2022. @M_C_Klein argues higher Chinese growth could reaccelerate inflation.

Is China's economic weakness holding down US inflation?

Core argument: Chinese producer prices have fallen about 2–3% a year since mid-2022, a cumulative decline of nearly 10%, which appears to have partly passed through to U.S. import prices.

The apparent stability in the pace of underlying price increases has coincided with a massive disinflationary impulse from across the Pacific. Chinese imports have stagnated, exports have been robust, and the trade surplus has ballooned. The net effect has been a large increase in the global supply of manufactured goods and commodities relative to global demand, which has helped suppress costs for everyone else relative to what they otherwise would be. Chinese producer prices have been falling about 2-3% a year since mid-2022, for a cumulative decline of almost 10%. That seems to have partly passed through to the prices of U.S. imports from China (before accounting for customs duties), which have dropped by 4% since the peak in April 2022. That is a notably larger decline than the 1% drop in the prices of all imported goods excluding food and fuels, and the difference is mostly attributable to price developments since the end of 2023.

Takeaways by Macro Roundup® AI

  1. Chinese producer prices have fallen about 2–3% a year since mid-2022, a cumulative decline of nearly 10%, which appears to have partly passed through to U.S. import prices.
  2. Prices of U.S. imports from China, before customs duties, have dropped 4% since their April 2022 peak, versus a 1% decline for all imported goods excluding food and fuels, with the gap mostly arising after end-2023.
  3. China's stagnant imports, robust exports, and ballooning trade surplus have raised the global supply of manufactured goods and commodities relative to demand, helping suppress costs elsewhere relative to what they otherwise would be.

Related Articles:

  • Prices Won’t Stop Falling in China, and Beijing Is Grasping for Solutions — 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.
  • 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.
  • 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.

AI Summary. Americans' resistance to paying to insure against risks from illness, old age, and natural and financial disasters is growing alongside those risks; JPMorgan estimated wildfires around Los Angeles caused $50bn in losses, of which only $20bn were insured. Socializing risk removes the price signal that encourages the insured to mitigate their own exposure.

Greg Ip Wall Street Journal
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.@greg_ip notes that since 2020, Congress funded $46B average annual disaster relief, 3X the 2009-19 rate. “Socializing risk weakens one of the main benefits of insurance: Encouraging the insured to mitigate their risk.”

Are Americans willing to pay for insurance as risks rise?

Core argument: JPMorgan estimated the fires around Los Angeles inflicted $50 billion in losses, of which only $20 billion were insured.

As risks from illness and old age to natural and financial disaster grow, so does Americans’ resistance to paying to insure against them. The latest example is California. Earlier this month, JPMorgan estimated the fires around Los Angeles had inflicted $50 billion in losses, of which only $20 billion were insured. Socializing risk weakens one of the main benefits of insurance: Encouraging the insured to mitigate their risk so as to reduce premiums. Without that price signal, it usually takes direct intervention to modify behavior. After being bailed out in 2008-09, banks have had to submit to far more stringent safety and soundness rules. The same may be true of natural disasters. If the risk is to be socialized, society has a right to demand the insured mitigate their risk, such as making homes more flood, wind and fire proof or staying out of disaster-prone areas entirely.

Takeaways by Macro Roundup® AI

  1. JPMorgan estimated the fires around Los Angeles inflicted $50 billion in losses, of which only $20 billion were insured.
  2. Socializing risk weakens a main benefit of insurance — encouraging the insured to mitigate risk in order to reduce premiums — and without that price signal, modifying behavior usually requires direct intervention.
  3. Banks had to submit to far more stringent safety and soundness rules after being bailed out in 2008-09, and the same may be true of natural disasters, with society entitled to demand that the insured make homes more flood, wind and fire proof or stay out of disaster-prone areas.

Related Articles:

  • Reinsurers Little Exposed to LA Fires After Retreat From Disaster Risks — Citi analysts estimate reinsurers could absorb less than 3% of insured losses from the Los Angeles wildfires. Reinsurers' share of modelled catastrophe risk has fallen from about 46% over the past 25 years to 33%, following years of wildfire losses that led major reinsurers to reduce their appetite for such risks.
  • Growing Costs of Natural Disasters are Stressing Property Insurance Markets — U.S. home insurers posted $15.2bn in net underwriting losses, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage. State "last-resort" public insurance plans, backed by a state's policyholders or taxpayers, reached a record of just over $1.3tn in exposure, signaling growing unavailability of private coverage.
  • Los Angeles Fires Become Existential Test for California’s Stopgap Insurer — California's largest property insurer declined to renew 72,000 home and apartment policies statewide, including 69% of policies in one Pacific Palisades ZIP code, pushing homeowners toward the state's FAIR Plan insurer of last resort, which listed $458bn in exposure against about $2.5bn in reinsurance and $200m in surplus cash.

AI Summary. People in their teens and twenties now socialize about as much as people 10 years older did in the past, with less partying accompanied by less sex and drinking. Trends in time spent alone closely parallel rising mental distress among the young but not the middle-aged or older.

John Burn-Murdoch Financial Times
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.@jburnmurdoch notes in the US and UK young people are spending about 2 hours more time alone per day in 2023 than in 2010. “Time spent alone is strongly associated with lower life satisfaction and even elevated mortality.”

Is less time socializing linked to worsening mental health among young people?

Core argument: People in their teens and twenties now hang out about as much as someone 10 years older did in the past, less a case of 30 being the new 20 than 20 being the new 30.

People in their teens and twenties now hang out about as much as someone 10 years older thanthey did in the past. Not so much a case of 30 being the new 20, as 20 being the new 30. Less hanging out and less partying means less sex and less drinking. Both are developments that have been welcomed by the public health community, but they mask a darker side. Trends in time spent alone are an almost exact parallel of trends in mental health, where rates of mental distress are mounting among the young, but not the middle-aged or older. A wealth of public health research suggests the two are not merely coincidental but causally linked. Time spent alone is strongly associated with lower life satisfaction and even elevated mortality.

Takeaways by Macro Roundup® AI

  1. People in their teens and twenties now hang out about as much as someone 10 years older did in the past, less a case of 30 being the new 20 than 20 being the new 30.
  2. Less hanging out and partying among the young means less sex and less drinking, developments welcomed by the public health community that mask a darker side.
  3. Trends in time spent alone almost exactly parallel trends in mental health, with rates of mental distress mounting among the young but not the middle-aged or older, and public health research suggests the two are causally linked.

Related Articles:

  • The Anti-Social Century — Americans spend less time with other people than in any period with reliable data back to 1965, with in-person socializing down more than 20% from 2003 to 2023 according to the Bureau of Labor Statistics' American Time Use Survey. Among unmarried men and people under 25, the decline exceeded 35%.
  • The Data is Clear: People Are Having Less Sex — Survey data show every age group now reports less frequent sexual activity than counterparts in earlier decades, with roughly an 8 percentage point decline across age groups. Among people around age 25, the share reporting sex at least monthly fell from over 80% to 72%, while the peak years remain ages 30 to 40.
  • Disconnected: The Growing Class Divide in American Civic Life — 17% of Americans report having no close friends, and survey data show a wide educational gap: 24% of those with a high school education or less have no close friends versus 10% of college graduates. Three decades ago, Americans with less formal education reported social circles at least as large.

Wednesday, January 22, 2025

AI Summary. Annual change in the US debt-to-GDP ratio can be decomposed into the primary deficit, interest payments, and the growth dividend, with the latter two summing to "excess interest," which remains slightly negative in Congressional Budget Office baseline projections. That implies primary deficits drive the projected unsustainable debt path.

Danny Yagan National Bureau of Economic Research
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.@dannyyagan notes that in CBO’s baseline, nominal GDP growth exceeds the nominal interest rate through 2040, but the historically high debt/GDP ratio implies greater vulnerability to the risk that interest rates will exceed GDP growth before 2040.

What drives the projected rise in the debt-to-GDP ratio?

Core argument: America's growth dividend — the amount by which annual GDP growth shrinks the debt-GDP ratio — has more than doubled since the Great Recession because the debt ratio has more than doubled, leaving headline deficits far exceeding changes in the debt ratio.

America's growth dividend - the amount by which annual GDP growth shrinks the debt-GDP ratio - has more than doubled since the Great Recession because the debt ratio has more than doubled, leading to headline deficits that far exceed changes in the debt ratio. Each year's change in the debt ratio can be decomposed into three components: the primary deficit (non-interest spending minus tax revenue), interest payments, and the growth dividend. The sum of the latter two is excess interest: the impact of past debt on the debt ratio, roughly equal to last year's debt ratio times the excess interest rate (r-g)/(1+g) where r is the average nominal interest rate on federal debt and g is the nominal GDP growth rate. Excess interest remains slightly negative in CBO's baseline ten-year projection. Hence, current debt is sustainable in the CBO baseline despite high interest payments, and primary deficits entirely drive the unsustainable projected debt ratio path and provide a good guide for how the debt ratio is projected to change. However, America's higher debt ratio implies higher vulnerability to the risk that the excess interest rate turns persistently positive.

Takeaways by Macro Roundup® AI

  1. America's growth dividend — the amount by which annual GDP growth shrinks the debt-GDP ratio — has more than doubled since the Great Recession because the debt ratio has more than doubled, leaving headline deficits far exceeding changes in the debt ratio.
  2. The annual change in the debt-GDP ratio decomposes into the primary deficit, interest payments, and the growth dividend, with the latter two summing to excess interest, roughly last year's debt ratio times (r-g)/(1+g).
  3. Excess interest remains slightly negative in CBO's baseline ten-year projection, so debt is sustainable in that baseline despite high interest payments, with primary deficits driving the unsustainable projected debt path and the higher debt ratio implying greater vulnerability if the excess interest rate turns persistently positive.

Related Articles:

  • The Growth Dividend and Excess Interest — The annual change in the debt-to-GDP ratio equals the deficit plus a "growth dividend," the amount by which nominal GDP growth shrinks the ratio. Under Congressional Budget Office baseline projections, interest payments stay below the growth dividend, so projected primary deficits—not existing debt—drive the unsustainable debt path.
  • Robust Fiscal Stabilization — The authors find that Congress reduced deficits in response to rising projected deficits during 1984–2003 but that this year-to-year response was absent on average during 2004–2024. They estimate that holding the debt ratio below 250% with 95% probability requires gradual deficit reduction averaging 0.5%–1.2% of GDP over the next decade.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

AI Summary. Executive orders can streamline permitting for pipeline and transmission projects, but without explicit federal eminent domain legislation such projects remain open to legal challenge, and US oil pipeline, gas pipeline and transmission line construction has nearly halted. Ending leasing to wind farms would be marginal since only 2% of US wind power is on public lands.

Michael Cembalest J. P. Morgan
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Michael Cembalest notes streamlining permits for energy infrastructure will likely have only a limited impact on speeding construction without Federal eminent domain powers. Still a 7% increase in oil and gas output by 2029 is “a very achievable goal.”

Can executive orders restart stalled pipeline and transmission construction?

Core argument: Bessent's 3-3-3 target amounts to a 7% increase in US oil, gas and NGL production, most of which will continue to rely on hydraulic fracturing, a goal the authors call very achievable, though its effect on US energy prices is less clear.

You can try to streamline permits for pipelines and transmission projects with executive orders, but without explicit Federal eminent domain legislation, projects can still be challenged for a number of reasons. Oil pipeline, gas pipeline and transmission line projects in the US have practically ground to a halt. It would be quite a feat from a political perspective to jumpstart the pace. The Trump agenda also calls for an “end to leasing to wind farms”, but only 2% of US wind power takes place on public lands as opposed to private lands, so that’s a marginal issue at best. Trump might have more luck achieving Bessent’s target for higher domestic energy production. Based on our energy math, Bessent’s 3-3-3 target amounts to a 7% increase in oil, gas and NGL production (most of which will continue to rely on hydraulic fracturing) and is a very achievable goal. Whether this brings down US energy prices is less clear.

Takeaways by Macro Roundup® AI

  1. Bessent's 3-3-3 target amounts to a 7% increase in US oil, gas and NGL production, most of which will continue to rely on hydraulic fracturing, a goal the authors call very achievable, though its effect on US energy prices is less clear.
  2. Without explicit federal eminent domain legislation, executive orders streamlining permits still leave oil pipeline, gas pipeline and transmission line projects, which have practically ground to a halt in the US, open to challenge on a number of grounds.
  3. Trump's call for an end to leasing to wind farms is a marginal issue at best, since only 2% of US wind power takes place on public lands rather than private lands.

Related Articles:

  • Oil Was Written Off. Now It’s the Most Productive US Industry — US oil and gas extraction productivity nearly tripled in a decade, and crude output reached a record 13.3m barrels a day — 48% above Saudi Arabia — with under a third of the rigs. BloombergNEF projects production growth of 600,000 barrels a day on higher well productivity.
  • U.S. Crude Oil Production Established A New Record In August 2024 — U.S. crude oil production averaged a record 13.4m barrels per day in August, topping the prior monthly record of 13.3m barrels per day. The U.S. Energy Information Administration forecasts annual production averaging 13.2m barrels per day, above the 12.9m annual record, and 13.5m barrels per day the following year.
  • AI is Changing Oil Country—and Pumping Up Profits — The U.S. produces 60% more oil per day with 40% fewer workers than a decade ago, with annual productivity gains roughly 7x those of the average U.S. business. In the Permian, the break-even oil price has fallen to $40 a barrel from over $90, and AI tools that predict the most productive drilling locations should push it lower.

AI Summary. The U.S.-Mexico-Canada trade agreement governs roughly $2tn of trade and was approved with the broadest congressional support of any U.S. trade deal, with more than 200 Democrats backing it over added labor and environmental standards. Mexico and Canada have since supplanted China as the leading U.S. trading partners.

Brian Schwartz, Gavin Bade and Vipal Monga Wall Street Journal
Date Posted:

Trump is seeking an early renegotiation of the USMCA, the successor to NAFTA, and in advance of the negotiations is threatening Canada and Mexico with 25% tariffs as of February 1.

Have North American neighbors displaced China as top US trading partners?

Core argument: The USMCA governs roughly $2 trillion of trade among the U.S., Mexico, and Canada, and Trump is pushing to renegotiate it ahead of schedule.

The USMCA governs roughly $2 trillion of trade between the U.S. and its continental neighbors. It was approved by Congress with the broadest support of any trade deal in U.S. history. More than 200 Democrats in the House and Senate joined Republicans in backing the agreement because of the stricter labor and environmental standards that Trump’s team added to broaden its appeal. Since its signing, Mexico and Canada have supplanted China as the leading U.S. trading partners, according to Census Bureau data. Trump is particularly focused on using the threat of tariffs to change automotive rules under the continental trade pact, forcing car plants to move from Canada and Mexico back to the U.S., according to people familiar with his thinking.

Takeaways by Macro Roundup® AI

  1. The USMCA governs roughly $2 trillion of trade among the U.S., Mexico, and Canada, and Trump is pushing to renegotiate it ahead of schedule.
  2. More than 200 Democrats in the House and Senate joined Republicans in approving the USMCA, the broadest congressional support for any trade deal in U.S. history, because of stricter labor and environmental standards added by Trump's team.
  3. Mexico and Canada have supplanted China as the leading U.S. trading partners since the USMCA was signed, according to Census Bureau data, and Trump is focused on using tariff threats to change the pact's automotive rules and move car plants back to the U.S., people familiar with his thinking said.

Related Articles:

  • A User’s Guide to Restructuring the Global Trading System — During the 2018–2019 U.S.–China trade war, the effective tariff rate on Chinese imports rose 17.9 percentage points while the renminbi depreciated 13.7% against the dollar, leaving after-tariff import prices in dollars up just 4.1%. The author argues this currency offset of more than three-fourths of the tariff explains why inflation pressure was negligible.
  • China’s Very Bad, No Good Trillion-Dollar Trade Surplus — China's high investment rates face diminishing returns and the government is unwilling to promote higher consumer spending, so it compensates for weak domestic demand with large trade surpluses supported by a weaker currency. The author argues this attempt to export its policy failure will provoke a protectionist backlash from Europe, the UK, and others.
  • 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.

AI Summary. Tariffs would need to be high and broad to reshape the global economy and raise tax revenue, and financial markets would react far faster than the real economy. A market decline that tightens financial conditions could push the Federal Reserve toward rate cuts, cushioning the economy and allowing the trade war to continue.

Joseph Wang Fed Guy Blog
Date Posted:

Focusing on trade wars as threats to financial stability, @FedGuy12 notes “the sharp market decline in late 2018 tightened financial conditions and forced the Fed to pivot towards cuts” and suggests “the stage is set for a re-run of the same show.”

Do rate cuts triggered by falling markets enable an aggressive trade war?

Core argument: The author argues Trump's trade war can be unusually aggressive because a Federal Reserve with ample room to cut rates will underwrite it.

Trump’s trade war can be surprisingly aggressive because it will be underwritten by a Fed with plenty of room to cut. The market seems to perceive tariffs as largely a negotiating tool, but there is increasing indication that they will be deployed regardless of the outcome of negotiations. Tariffs will need to be high and broad in order to fundamentally reshape the global economy and raise tax revenue. Similar to the first trade war, the financial markets would react far quicker to tariffs than the real economy. The sharp market decline in late 2018 tightened financial conditions and forced the Fed to pivot towards cuts, even though they viewed the economy to be on sound footing. Their actions saved the market and unwittingly allowed the trade war to continue. The stage is set for a re-run of the same show.

Takeaways by Macro Roundup® AI

  1. The author argues Trump's trade war can be unusually aggressive because a Federal Reserve with ample room to cut rates will underwrite it.
  2. Tariffs will need to be high and broad to fundamentally reshape the global economy and raise tax revenue, and indications are increasing that they will be deployed regardless of negotiation outcomes.
  3. The sharp market decline in late 2018 tightened financial conditions and forced the Fed to pivot toward cuts despite its view that the economy was on sound footing, which the author says unwittingly allowed the trade war to continue.

Related Articles:

  • A User’s Guide to Restructuring the Global Trading System — During the 2018–2019 U.S.–China trade war, the effective tariff rate on Chinese imports rose 17.9 percentage points while the renminbi depreciated 13.7% against the dollar, leaving after-tariff import prices in dollars up just 4.1%. The author argues this currency offset of more than three-fourths of the tariff explains why inflation pressure was negligible.
  • China’s Very Bad, No Good Trillion-Dollar Trade Surplus — China's high investment rates face diminishing returns and the government is unwilling to promote higher consumer spending, so it compensates for weak domestic demand with large trade surpluses supported by a weaker currency. The author argues this attempt to export its policy failure will provoke a protectionist backlash from Europe, the UK, and others.
  • China’s Stunning 2024 Export Growth — Chinese export volumes are up 13% year-over-year while import volumes are up only 2%, a gap that with exports at about 20% of GDP implies a net exports contribution to Chinese growth of close to 2% of GDP. Falling Chinese export prices mean export volumes are growing much faster than the dollar value of exports.

AI Summary. Tariffs are argued to cause a one-time jump in price levels rather than persistently faster inflation, while mass deportations would be more disruptive but with less clear long-run inflation effects. The article argues inflation could be lower in the long term because politicians, fearing voter backlash, may be more reluctant to fight future downturns.

Matthew Klein Financial Times
Date Posted:

.@M_C_Klein argues the 2024 election may ultimately reduce inflation. Tariffs cause a one-time jump in prices, not persistent inflation, and politicians “will be cognisant of the political risks of inflation.”

Could tariffs raise price levels once without causing lasting inflation?

Core argument: Tariffs may produce a one-time jump in price levels rather than a persistent acceleration in inflation, while mass deportations would be far more disruptive than any tariff, with a less clear longer-term inflation impact.

The longer-term ramifications [of the 2024 election] could well lead to less inflation in the decades ahead. [Tariffs may cause] a one-time jump in price levels, but no persistent acceleration in inflation. Mass deportations would be far more disruptive than any tariff, [but] the longer-term impact on inflation is less clear: at least some Federal Reserve officials have indicated that this kind of persistent supply shock, unlike one-time tariff increases, should not be accommodated with higher prices. Even if the Trump agenda makes inflation worse over the next few years, there is still one very good reason to think that it could be lower in the long term as a result of his victory: politicians may be more reluctant to fight future downturns out of fear of voter backlash. Democrats may overcorrect to restore their credibility in the eyes of voters when they are next in power, prioritising pushing inflation down rather than going for growth. Savvy Republicans will be cognisant of the political risks of inflation and wary of facing their own equivalent of 2024. And Trump himself promised to defeat inflation in his inauguration speech.

Takeaways by Macro Roundup® AI

  1. Tariffs may produce a one-time jump in price levels rather than a persistent acceleration in inflation, while mass deportations would be far more disruptive than any tariff, with a less clear longer-term inflation impact.
  2. At least some Federal Reserve officials have indicated that a persistent supply shock such as mass deportations, unlike one-time tariff increases, should not be accommodated with higher prices.
  3. The 2024 election outcome could lead to less inflation in the decades ahead if politicians grow more reluctant to fight downturns for fear of voter backlash, with Democrats prioritising pushing inflation down over growth when next in power.

Related Articles:

  • Will Trump’s Win (Eventually) Lead to *Lower* Long-Term Interest Rates? — The author argues the inflation of 2021–2022 could have been avoided only at the cost of a global depression, and that historical elections show voters do not reward incumbents who preside over disinflationary downturns. Many in the U.S. may nonetheless come to treat the episode as a cautionary tale about responding too aggressively to economic downturns.

AI Summary. OpenAI and SoftBank plan a US artificial intelligence infrastructure joint venture called Stargate, intending to spend $100bn initially and as much as $500bn over four years. SoftBank holds financial responsibility and OpenAI operational responsibility, with Abu Dhabi state fund MGX and Oracle also funding and Arm, Microsoft and Nvidia as technology partners.

George Hammond, Myles McCormick and David Keohane Financial Times
Date Posted:

OpenAI and SoftBank are launching an AI buildout, “Stargate” that will spend between $100-$500B over the next four years on artificial intelligence infrastructure in the United States.

How large is the new US AI infrastructure joint venture?

Core argument: OpenAI and SoftBank's joint venture Stargate plans to spend $100bn on US AI infrastructure, rising to as much as $500bn over four years.

OpenAI and SoftBank plan to launch a massive new US artificial intelligence infrastructure project. The joint venture, dubbed Stargate, is looking to spend $100B in Big Tech infrastructure projects, rising to as much as $500B over the next four years. It was not immediately clear how Stargate would obtain funding but one person involved in the project said they intended to bring on additional investors. SoftBank has ultimate financial responsibility for the new company, with OpenAI taking operational responsibility. Tokyo-based SoftBank’s chair Masayoshi Son will chair the joint venture. Abu Dhabi state AI fund MGX and Oracle are also providing funding for the project, while SoftBank-owned Arm, Microsoft and Nvidia are technology partners.

Takeaways by Macro Roundup® AI

  1. OpenAI and SoftBank's joint venture Stargate plans to spend $100bn on US AI infrastructure, rising to as much as $500bn over four years.
  2. SoftBank holds ultimate financial responsibility for Stargate while OpenAI takes operational responsibility, with SoftBank chair Masayoshi Son chairing the joint venture.
  3. Abu Dhabi state AI fund MGX and Oracle are providing funding for Stargate, with SoftBank-owned Arm, Microsoft and Nvidia as technology partners, and one person involved said additional investors would be brought on.

Related Articles:

  • The AI Boom’s Economic Impact Is Starting to Show Up — Spending on software, technology hardware, industrial equipment and data center structures tied to the artificial intelligence boom amounts to nearly 6% of US GDP and is likely to rise further. At close to 7% of the economy, such spending would exceed the peak share reached by the late-1990s tech, industrial and telecom boom and rival housing investment's peak share.
  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • A Severe Case of COVIDIA: Prognosis For An AI-Driven US Equity Market — Computing cycles move from infrastructure to platforms to applications, and NVIDIA data center revenues as a share of market-wide capital spending are projected to reach levels last seen at the 1969 mainframe peak and the dot-com boom. Large cloud providers spend more than twice as much training foundational models as running them for customers.

AI Summary. The share of heterosexual men reporting no female sexual partners in the past year rose, driven mainly by fewer men reporting exactly one partner, with no change among men reporting large numbers of partners. The decline is concentrated in approximately monogamous sex, reflecting later or forgone marriage.

Lyman Stone Institute for Family Studies
Date Posted:

In 2022-23, 24% of US males and 13% of females aged 22-34 had no sexual partner in the last year, up from 9% and 8%, respectively, in 2013-15. @lymanstoneky argues “One of the biggest drivers of declining sexual activity is the decline in marriage.”

Is declining marriage behind less sex among young adults?

Core argument: The rising share of heterosexual men reporting no female sexual partners in the past year is driven mostly by a decline in men with one partner, and secondarily by a decline in men with two.

There was a rise in the share of heterosexual males with no female sexual partners in the last year—but it was driven mostly by a decline in the number of males with one female partner, and secondarily by a decline in the number of men with two. There was no change at all in the prevalence of heterosexual men with large numbers of female sexual partners. Thus, what we can actually observe is not that a small number of men are having sex with more and more women, but simply that men and women are failing to couple off together: the major decline is in sex between people who only had sex with one person in the prior year, i.e. approximately monogamous sex. This is because one of the biggest drivers of declining sexual activity is the decline in marriage. Married people have more sex, and for most young adults, marriage is occurring later or not at all. As a result, sex is declining.

Takeaways by Macro Roundup® AI

  1. The rising share of heterosexual men reporting no female sexual partners in the past year is driven mostly by a decline in men with one partner, and secondarily by a decline in men with two.
  2. The prevalence of heterosexual men with large numbers of female sexual partners did not change, indicating that men and women are failing to couple off rather than that a small number of men are having sex with more women.
  3. The decline in marriage is one of the biggest drivers of falling sexual activity, since married people have more sex while for most young adults marriage occurs later or not at all.

Related Articles:

  • The Anti-Social Century — Americans spend less time with other people than in any period with reliable data back to 1965, with in-person socializing down more than 20% from 2003 to 2023 according to the Bureau of Labor Statistics' American Time Use Survey. Among unmarried men and people under 25, the decline exceeded 35%.
  • The Data is Clear: People Are Having Less Sex — Survey data show every age group now reports less frequent sexual activity than counterparts in earlier decades, with roughly an 8 percentage point decline across age groups. Among people around age 25, the share reporting sex at least monthly fell from over 80% to 72%, while the peak years remain ages 30 to 40.
  • Young People Are Hanging Out Less — It May Be Harming Their Mental Health — People in their teens and twenties now socialize about as much as people 10 years older did in the past, with less partying accompanied by less sex and drinking. Trends in time spent alone closely parallel rising mental distress among the young but not the middle-aged or older.