Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, February 10, 2025

AI Summary. An expansionary policy agenda focused on demand while neglecting supply-side impediments such as permitting obstacles, and the author argues a surge in public spending crowds out private investment. Highway spending rose 36% over a five-year period, but construction costs rose more, leaving real infrastructure spending down 17%.

Jason Furman Foreign Affairs
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Jason Furman (Obama’s former CEA chair) claims that real infrastructure spending astonishingly fell 17% during the Biden administration despite large budget increases which failed to anticipate capacity constraints that drove prices up more than spending.

Does higher public spending deliver more infrastructure when costs rise faster?

Core argument: Highway spending rose 36% from mid-2019 to mid-2024, but construction costs for asphalt, concrete, and labor rose more, leaving real infrastructure spending down 17% over the same period.

The Biden administration failed to seriously reckon with budget constraints and to contend with the effects of “crowding out,” when a surge in public-sector spending causes the private sector to invest less. The administration’s focus on the demand side came at the expense of addressing impediments to supply, such as excessive obstacles to permitting processes related to building infrastructure. As a result, infrastructure suffered an even worse fate than real wages. More than half the funds in the Bipartisan Infrastructure Law dispersed to states through early 2024 went to highway and bridge projects, prompting a spike in highway spending, which rose 36% from mid-2019 to mid-2024. But the costs associated with construction, including asphalt, concrete, and labor, increased even more, leaving real infrastructure spending down 17% over the same period. In fact, the amount of federal investment in highways during every year of the Biden administration was lower than in any year from 2003 through 2020. Biden’s putative building boom was in reality a building bust.

Takeaways by Macro Roundup® AI

  1. Highway spending rose 36% from mid-2019 to mid-2024, but construction costs for asphalt, concrete, and labor rose more, leaving real infrastructure spending down 17% over the same period.
  2. Federal investment in highways in every year of the Biden administration was lower than in any year from 2003 through 2020, making the putative building boom a building bust.
  3. The Biden administration failed to reckon with budget constraints and with crowding out, in which a surge in public-sector spending causes the private sector to invest less, while neglecting supply impediments such as permitting obstacles.

Related Articles:

  • 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.
  • 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.
  • Bidenomics and Its Contradictions — Bidenomics rests on the claims that growth's quality matters more than its quantity, that industrial policy should replace laissez-faire, and that trade policy should favor workers over consumers. Defining market failure that broadly—covering regional, racial and gender inequities, rural internet access and child care costs—leaves no limiting principle on government intervention.

AI Summary. An analysis estimates that the increase in US federal spending has exceeded real GDP growth by $800bn, with interest costs contributing $381bn, Medicaid $137bn, social services $125bn, and Social Security and Medicare $77bn. It estimates retiree-related expenses rose 3% while non-retiree expenses rose 30%.

Elon Musk @elonmusk
Date Posted:

Elon Musk says the Federal government’s spending increase exceeded real GDP growth since 2019 by $800B, from Medicaid ($137B), social services ($125B), Social Security and Medicare ($77B), and interest ($381B). Retiree-related expense only increased 3% while non-retirees expenses ballooned 30%.

How much has federal spending outpaced real GDP growth?

Core argument: Elon Musk says federal spending growth has exceeded real GDP growth since 2019 by $800bn, with interest costs accounting for $381bn of that figure.

[Musk asks] Any corrections or comments about these numbers?

Takeaways by Macro Roundup® AI

  1. Elon Musk says federal spending growth has exceeded real GDP growth since 2019 by $800bn, with interest costs accounting for $381bn of that figure.
  2. Musk attributes the rest of the $800bn gap to Medicaid ($137bn), social services ($125bn), and Social Security and Medicare ($77bn).
  3. Musk says retiree-related expenses rose 3% while non-retiree expenses rose 30%, and he invites corrections to his figures.

Related Articles:

  • The Budget and Economic Outlook: 2025 to 2035 — The Congressional Budget Office projects the federal deficit will grow from $1.9tn (6.2% of GDP) to $2.7tn by 2035, well above the 3.8% of GDP average of the past 50 years. Outlays are projected to rise to 24.4% of GDP, driven by growth in Social Security and Medicare spending and rising net interest costs, while revenues reach 18.3%.
  • Interest Costs Would Explode with $5.5 Trillion Reconciliation Package — Analysts estimate that enacting $5.5tn of unoffset tax cuts and spending would raise federal interest costs by about $1.3tn over a decade, lifting annual net interest payments to $2tn, or 4.7% of GDP, by 2035 — above the prior record of 3.2% — and interest as a share of revenue to 27%.
  • 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. Brazil illustrates a feedback loop in which higher interest rates raise debt-servicing costs—now over 7% of GDP—which in turn lift risk premia and inflation expectations, making fiscal policy less sustainable still. U.S. long-term rates have not fallen despite Federal Reserve cuts, partly reflecting an $11tn debt increase and markets pricing the risk that debt is managed through higher inflation.

Stan Veuger and Mikkel Davies Foreign Policy
Date Posted:

Brazil is spending a fiscally “unsustainable” 7% of GDP on debt service. @stanveuger @mikkel_dav argue that the US may be on the same path to “fiscal dominance,” where “management of the debt will ultimately happen through bouts of elevated inflation.”

Can rising debt-servicing costs trap a country in higher interest rates?

Core argument: Brazil's debt-servicing cost exceeds 7% of GDP, and rate increases raise that cost further, feeding back into higher risk premia and inflation expectations that make fiscal policy still less sustainable.

Brazil’s fiscal anchors have come unmoored. An increase in interest rates causes the cost of servicing the debt—now at more than 7% of GDP—to rise, which makes fiscal policy even more unsustainable. This, in turn, feeds back into higher interest rates through a higher risk premium and higher inflation expectations, which makes fiscal policy even less sustainable—and so on. In the United States, long-term interest rates have not come down even as the Federal Reserve has been cutting the short-term interest rate. Higher interest rates reflect, at least in part, the effect of much higher debt levels and deficits in the United States. Since 2019, the U.S. debt level has increased by $11 trillion—an increase of roughly 20pp in the debt-to-GDP ratio. Market participants have begun to incorporate the risk that the United States might have to reduce the real value of its debt by allowing higher inflation, similar to what happened in 2021 and 2022. Washington [would thus be] accepting permanently higher interest rates, as markets anticipate that management of the debt will ultimately happen through bouts of elevated inflation.

Takeaways by Macro Roundup® AI

  1. Brazil's debt-servicing cost exceeds 7% of GDP, and rate increases raise that cost further, feeding back into higher risk premia and inflation expectations that make fiscal policy still less sustainable.
  2. U.S. debt has risen by $11 trillion since 2019, roughly 20 percentage points in the debt-to-GDP ratio, and higher long-term interest rates reflect at least in part the effect of these higher debt levels and deficits.
  3. U.S. long-term interest rates have not fallen even as the Federal Reserve has cut short-term rates, with market participants beginning to incorporate the risk that the United States reduces the real value of its debt by allowing higher inflation, as in 2021 and 2022.

Related Articles:

  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.
  • Government Debt in Mature Economies. Safe or Risky? — When governments insulate taxpayers rather than bondholders from unfunded spending shocks, government bond yields rise as debt is marked to market, shifting the risk to bondholders — a "risky debt" regime the authors argue better fits recent experience. In that regime, large-scale central bank asset purchases give government bonds temporary price support at a net loss to taxpayers.
  • 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. Valuation errors stem mainly from mistaken forecasts of growth, profitability, or reinvestment rather than from the discount rate, and no great company achieved greatness by finessing its cost of capital. The author suggests valuing a mature US company using the 8.35% median cost of capital and focusing analysis on growth and profit prospects.

Aswath Damodaran Musings on Markets
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At the start of 2025, the median cost of capital for an American firm is 8.5%. @AswathDamodaran argues that investments should be driven by “growth and profit prospects,” and that “hurdle rates are not where business/valuation battles are won or lost.”

Do discount rates or growth forecasts drive valuation errors?

Core argument: Damodaran argues that valuers of mature US companies pressed for time should use a cost of capital of 8.35%, the median for US companies at the start of 2025, and concentrate on growth and profit prospects instead.

Hurdle rates are not where business/valuation battles are won or lost: It is true that costs of capital are the D in a DCF, but they are not and should never be what makes or breaks a valuation. I have been badly mistaken many times, and the culprit almost always has been an error on forecasting growth, profitability or reinvestment (all of which lead into the cash flows), not the discount rate. In the same vein, I cannot think of a single great company that got to greatness because of its skill in finessing its cost of capital, and I know of plenty that are worth trillions of dollars, in spite of never having actively thought about how to optimize their costs of capital. If you are valuing a mature US company at the start of 2025, and you are in a hurry (and who isn't?), you would be well served using a cost of capital of 8.35% (the median for US companies at the start of 2025) and spending your time assessing its growth and profit prospects, and coming back to tweak the cost of capital at the end, if you have the time.

Takeaways by Macro Roundup® AI

  1. Damodaran argues that valuers of mature US companies pressed for time should use a cost of capital of 8.35%, the median for US companies at the start of 2025, and concentrate on growth and profit prospects instead.
  2. Damodaran attributes his own valuation errors almost always to mistakes in forecasting growth, profitability, or reinvestment, which feed the cash flows, rather than to the discount rate.
  3. Damodaran says he can think of no great company that reached greatness through skill in finessing its cost of capital, and knows of many worth trillions of dollars that never actively thought about optimizing it.

Related Articles:

  • Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money” — The authors estimate that the weighted average cost of capital for Russell 3000 companies averaged 6.9% during the 2009-21 era of easy money versus 7.5% in the prior period, while the aggregate return on invested capital averaged 9.5% versus 9.2%. The resulting spread between returns and the cost of capital averaged 2.6 percentage points versus 1.7 points earlier.
  • Data Update 4 for 2024: Risk Enters the Equation — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.
  • and — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.
  • Firm Investment and the User Cost of Capital: New U.S. Corporate Tax Reform Evidence — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.

AI Summary. Underlying wage growth appears to have undergone a modest but persistent acceleration, feeding faster nominal spending growth, and because productivity growth has not matched it, inflation has been consistently faster than before the pandemic. Across a range of measures, prices are rising about 1% a year faster than in 2017-2019.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues the final stretch to 2% inflation could be the hardest: inflation has been running ~1pp above 2017-2019 levels, with wage growth at 4.5% vs. 3% pre-pandemic, outpacing productivity growth.

Is faster wage growth outpacing productivity keeping inflation above 2%?

Core argument: Across a range of measures, prices are rising about 1% a year faster than during 2017–2019, when core PCE inflation averaged 1.6%, roughly 0.4 percentage points below the 2% target.

The challenge for policymakers concerned with getting back to 2% yearly inflation is that there seems to have been a modest but persistent acceleration in the underlying pace of wage growth, which in turn has fed into faster nominal spending growth. Since the shift in the wage growth trend has not been fully matched by an acceleration in productivity growth, at least so far, inflation has been consistently faster than before the pandemic. Across a range of measures, prices are rising about 1% a year faster than in 2017-2019 [during which core PCE growth averaged 1.6%, ~.4 pp below the 2% target.]

Takeaways by Macro Roundup® AI

  1. Across a range of measures, prices are rising about 1% a year faster than during 2017–2019, when core PCE inflation averaged 1.6%, roughly 0.4 percentage points below the 2% target.
  2. A modest but persistent acceleration in the underlying pace of wage growth appears to have fed into faster nominal spending growth, keeping inflation consistently faster than before the pandemic.
  3. The shift in the wage growth trend has not been fully matched by an acceleration in productivity growth, at least so far, complicating a return to 2% yearly inflation.

Related Articles:

  • Bessent Says Trump Wants Lower 10-Year Yields, Not Fed Cuts — The US Treasury Secretary said the administration's effort to lower borrowing costs targets 10-year Treasury yields rather than the Federal Reserve's short-term benchmark rate, arguing that spending cuts, a smaller government, and lower energy prices can deliver non-inflationary growth. The Treasury maintained its guidance to keep sales of longer-term debt unchanged.
  • Data Update 4 for 2025: Interest Rates, Inflation and Central Banks! — Interest rates are ultimately driven by macroeconomic fundamentals, with an "intrinsic risk-free rate" defined as the sum of the inflation rate and real GDP growth tracking the observed 10-year Treasury bond yield closely. On this view, central banks' influence comes from preferential access to data on those fundamentals, their capacity to alter them, and their credibility.
  • Our Thoughts on Large US Deficits and Their Impact on Bond Yields — 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.

AI Summary. Using Norwegian administrative data, the authors find that businesses owned by women experience a decline in profits after the owner becomes a parent, reaching 30% below baseline ten years after childbirth, while male-owned firms show little decline. The profit decline is most pronounced among highly capable entrepreneurs, majority owners, and women with working spouses.

John Bonney, Luigi Pistaferri, and Alessandra Voena National Bureau of Economic Research
Date Posted:

Bonney et al show that in Norwegian data there is a large “child penalty” for female, but not male, entrepreneurs. “Female-owned businesses experience a substantial decline in profits, steadily decreasing to 30% below baseline ten years post-childbirth.”

Does becoming a parent reduce profits at women-owned firms?

Core argument: Female-owned businesses in Norway show profits declining steadily to 30% below baseline ten years after childbirth, according to Norwegian administrative data on entrepreneurs.

An extensive body of work has shown that motherhood is associated with large declines in women’s employment rates, working hours, and wages—a phenomenon known as the “child penalty” The literature focuses on documenting the child penalty for workers. In this paper, we use administrative data from Norway to measure the child penalty for entrepreneurs and their businesses. Using multiple administrative data sources from Norway, we examine how firm performance changes after entrepreneurs become parents. Female-owned businesses experience a substantial decline in profits, steadily decreasing to 30% below baseline ten years post-childbirth. In contrast, male-owned businesses show [little] decline, often growing in revenues and costs after childbirth. The profit decline for female-owned firms is most pronounced among highly capable entrepreneurs, women who are majority owners, and those with working spouses.

Takeaways by Macro Roundup® AI

  1. Female-owned businesses in Norway show profits declining steadily to 30% below baseline ten years after childbirth, according to Norwegian administrative data on entrepreneurs.
  2. Male-owned Norwegian businesses show little profit decline after the owner becomes a parent, often growing in both revenues and costs.
  3. The profit decline for female-owned firms is most pronounced among highly capable entrepreneurs, women who are majority owners, and those with working spouses.

Related Articles:

  • The Mommy Effect: Do Women Anticipate the Employment Effects of Motherhood? — British household panel data show a sudden, large, and persistent decline in women's labor supply after childbirth, accompanied by a shift toward more negative views of female employment that is most pronounced among more educated women. The authors argue women do not fully anticipate motherhood's effect on employment, challenging models that assume perfect foresight of its costs.
  • Why Is Prime-Age Labor Force Participation So High? — Labor force participation among 25-to-54-year-olds rose after the pandemic shock, with women's rate exceeding its pre-pandemic peak while men's returned to its pre-pandemic level but stayed below its historical high. The authors find this participation rise can ease wage and price pressures in hot labor markets, but appears to have ended.
  • Post-Pandemic Recovery for America’s Prime Age Labor Force: A Tale of Two Sexes — Prime-age women's labor force participation climbed about 5 points above its pre-pandemic level over a decade, while prime-age men's rose barely a point, only just regaining pre-pandemic levels. Despite economic expansion and labor shortages, work rates for prime-age American men are barely as high as at the trough of the severe Reagan-era recession.

AI Summary. China's Ministry of Civil Affairs reported 6.1m marriage registrations, the fewest since public records began in 1986 and less than half the 2013 peak, alongside 2.6m divorce filings. China's population shrank for a third straight year even as births rose slightly.

Bloomberg Staff Bloomberg
Date Posted:

China’s marriage registrations fell to a record low of 6.1M in 2024, down 50% from the 2013 peak. Birth rates in 2024 hit their second-lowest level since the PRC’s founding in 1949, and China’s population shrank for the third straight year.

Are marriages in China falling to record lows as its population shrinks?

Core argument: China's marriage registrations fell to 6.1 million from nearly 7.7 million in 2023, the fewest since public records began in 1986 and less than half the 2013 peak, according to the Ministry of Civil Affairs.

The number of marriage registrations fell to 6.1 million, according to statistics released by China’s Ministry of Civil Affairs on Saturday, after a post-pandemic increase to nearly 7.7 million in 2023. The tally for last year marks the fewest marriages since public records began in 1986 and is less than half the peak reached in 2013. Registrations may also have suffered last year because 2024 was an inauspicious year for marriage — known as a “Widow Year.” Some 2.6 million people also filed for divorce, up 1.1% from 2023, the data showed. China’s population shrank for the third straight year in 2024, even though births rose slightly. Some of the improvement was attributed to the belief that the Year of the Dragon in the Chinese zodiac is lucky for having children. Even so, last year saw the second-lowest number of births since the founding of the People’s Republic of China in 1949.

Takeaways by Macro Roundup® AI

  1. China's marriage registrations fell to 6.1 million from nearly 7.7 million in 2023, the fewest since public records began in 1986 and less than half the 2013 peak, according to the Ministry of Civil Affairs.
  2. Some 2.6 million people in China filed for divorce, up 1.1% from 2023, while marriage registrations may also have suffered because 2024 was an inauspicious "Widow Year.".
  3. China's population shrank for a third straight year in 2024 even as births rose slightly, an improvement partly attributed to the belief that the Year of the Dragon is lucky for childbearing; births were still the second-lowest since 1949.

Related Articles:

  • The Power of Demography and the Fate of East Asia — East Asia's total population has peaked and is projected to decline for at least a generation, with the pace of decline likely accelerating each decade, while US population is projected to keep growing for decades. The author argues such sustained divergence can shift the global balance of power.
  • China Steps Up Campaign For Single People to Date, Marry and Give Birth — Local officials in China are calling married women in their 20s and early 30s to ask about family plans, urge prenatal check-ups, and offer subsidies for additional children, with one resident reporting an Rmb100,000 ($14,000) offer for a second child. State-run outlets have promoted claims that childbirth benefits maternal health.
  • 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.

Tuesday, February 11, 2025

AI Summary. The author argues that Biden's post-neoliberal economic approach prioritized demand over supply and understated budget constraints, leaving inflation, unemployment, interest rates, and government debt higher than before the pandemic. Stimulus-driven demand fed inflation, construction costs erased real infrastructure gains, and industrial policy crowded out unsubsidized manufacturing without net job creation.

Jason Furman Foreign Affairs
Date Posted:
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Jason Furman wrote a “Dear John” letter to the Biden Administration’s economic policy this Valentine’s week noting the policy “failed to seriously reckon with budget constraints and ‘crowding out.'”

Did prioritizing demand over supply constraints improve economic outcomes?

Core argument: Furman argues the $1.9 trillion American Rescue Plan far exceeded need, since U.S. GDP was 3 percent below pre-pandemic forecasts in the fourth quarter of 2020 and roughly $650 billion in stimulus would have filled the hole.

Furman summarizes his position as follows:
Biden’s economic philosophy emphasized demand over supply. It considered concerns over budget constraints overstated and placed its faith in predistribution as a way to change the trajectory of the macroeconomy. Ultimately, this post-neoliberal ideology failed to seriously reckon with budget constraints and “crowding out”—when a surge in public-sector spending causes the private sector to invest less. Inflation, unemployment, interest rates, and government debt were all higher in 2024 than 2019. From 2019 to 2023, inflation-adjusted household income fell, and the poverty rate rose. Despite signing into law a $500 billion infrastructure bill, skyrocketing costs of construction have left the United States building less than it was before the law’s passage. Overall domestic industrial production remains stagnant. Compared with other developed countries, the United States saw a post-pandemic recovery that was about average in terms of real GDP growth versus pre-pandemic forecasts. Ultimately, Biden’s post-neoliberal ideology did not take tradeoffs seriously enough. Truly building back better will require not giving in to the post-neoliberal delusion.
On the American Rescue Plan, he notes:
The recovery began in mid-2020 before Biden entered the office and much, if any, of the American Rescue Plan funds had worked their way through the economy. Real GDP growth was a strong 5.6 percent in the first quarter of 2021. The unemployment rate was around six percent and falling. The $1.5 trillion of excess savings that Americans had accumulated was waiting to be unleashed perhaps obviating the macroeconomic need for yet another large stimulus bill.[Nevertheless,] the Biden administration moved aggressively, proposing a $1.9 trillion American Rescue Plan. With U.S. GDP three percent below pre-pandemic forecasts as of the fourth quarter of 2020, an additional $650 billion in stimulus—about a third as much—would have been sufficient to fill the hole in the economy. Around $900 billion was intended to support households. But by December 2020, monthly real compensation per capita was only about two percent below its pre-pandemic trend, and the gap was closing rapidly. Closing this gap would have cost less than $100 billion. Despite state and local revenue having fully recovered to pre-COVID levels by the end of 2020, state and local governments nevertheless received around $500 billion more in the stimulus package.

Read more

On inflation, he concludes:
Real GDP could not have gone up much more than it did given the constraints on the capacity of the economy. The excess took the form of higher prices. Beginning in 2021, the country experienced the most sustained inflation since the early 1980s—rising by about 20 percent over four years. The overheating of the economy coincided with a second round of budget deficit increases—resulting from front-loaded spending tied to the infrastructure act, the CHIPS and Science Act, and climate bills, plus executive actions by Biden, such as student loan relief. Biden’s defenders argued that the causes were external. However, by late 2022, oil prices had fallen to where they were before Russia’s invasion of Ukraine, but inflation remained elevated. Real consumer spending on durable goods in the United States rose nearly 30 percent, with no equivalent bump in countries that did not provide continued stimulus checks. Global supply chains were mostly able to accommodate the U.S. increase in spending, in part through large increases in imports. U.S. ports processed 19 percent more cargo by volume in 2021. These were not supply dislocations but a huge demand shock stemming in part from the Biden administration’s decision to provide another round of stimulus checks. Factors such as consumer tastes and supply chains determined where price increased, but they did not drive the overall average price increase. Had it not been for the large infusion of cash and the Federal Reserve’s delayed response to the emergence of inflation, higher goods prices would have led to cutbacks in services and lower price growth without much of an increase in overall inflation. Instead, inflation migrated from goods to services, where it remains elevated to this day.
On the effect of Biden’s policy on wages, Furman argues:
Biden hoped that a hot economy would benefit workers, especially those with low incomes. Unfortunately, the theory proved unsuccessful. Heating the economy did give workers more leverage to demand higher nominal wages, but it also gave businesses more leverage to raise prices, undercutting the gains of many ordinary Americans. Inflation-adjusted wages have barely increased above pre-pandemic levels, and the entire increase in real wages took place in 2020; on net, real wages have fallen since January 2021. From 2020 to 2024, average real wage growth for workers in every income group was slower than it was from 2014 to 2019. Rapid real wage growth, especially for low-income workers, began in 2014, when the unemployment rate was around six percent, but diminished dramatically when the unemployment rate fell below four percent in 2022. That makes it hard to argue that Biden’s policies contributed much to real wage growth.
On infrastructure, he reports:
Infrastructure suffered a worse fate than real wages. More than half the funds in the Bipartisan Infrastructure Law went to highway and bridge projects, prompting a spike in highway spending that rose 36 percent from mid-2019 to mid-2024. But the costs associated with construction, increased even more, leaving real infrastructure spending down 17 percent over the same period. In fact, the amount of federal investment in highways during every year of the Biden administration was lower than in any year from 2003 through 2020. Biden’s putative building boom was in reality a building bust.
On manufacturing and crowding out, Furman claims:
The manufacturing revival has also run up against the problem of crowding out. The CHIPS Act appears to be succeeding in shifting advanced chip production to the United States. But these same policies, coupled with other fiscally expansionary policies, have driven up the prices of materials and equipment, wages for construction and factory workers, interest rates for entrepreneurs hoping to borrow, and the value of the dollar, all of which have made it harder for nonsubsidized manufacturing to prosper. Policymakers should not fool themselves. Industrial policy has not led to any net job creation. Factory construction has more than doubled in the last five years. But other indicators, such as investment in industrial equipment, have not risen, suggesting that manufacturing may continue to stagnate.

Takeaways by Macro Roundup® AI

  1. Furman argues the $1.9 trillion American Rescue Plan far exceeded need, since U.S. GDP was 3 percent below pre-pandemic forecasts in the fourth quarter of 2020 and roughly $650 billion in stimulus would have filled the hole.
  2. Furman attributes the roughly 20 percent price rise over four years largely to a demand shock rather than supply dislocations, noting U.S. real consumer spending on durable goods rose nearly 30 percent and U.S. ports processed 19 percent more cargo by volume in 2021.
  3. Highway spending rose 36 percent from mid-2019 to mid-2024 under the Bipartisan Infrastructure Law, but construction costs rose more, leaving real infrastructure spending down 17 percent, according to Furman.

Related Articles:

  • 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 — 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.
  • The Budget and The Budget and Economic Outlook: 2025 to 2035 — The Congressional Budget Office projects the federal deficit will grow from $1.9tn (6.2% of GDP) to $2.7tn by 2035, well above the 3.8% of GDP average of the past 50 years. Outlays are projected to rise to 24.4% of GDP, driven by growth in Social Security and Medicare spending and rising net interest costs, while revenues reach 18.3%.