Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, February 13, 2025

AI Summary. Evidence including the Council of Economic Advisers' own suggests US inflation would have peaked 1–2 percentage points lower without the $1.9tn American Rescue Plan, but the author argues a smaller package would still have left an inflation spike. The excess demand is credited with a quick return to full employment and a powerful expansion.

Jared Bernstein Jared’s Substack
Date Posted:

.@econJaredB argues @jasonfurman overstates his case against Bidenomics: given the supply shock, the ARP only increased inflation by 1-2pp.

Was the inflation from excess pandemic stimulus worth the rapid recovery?

Core argument: Evidence including the Council of Economic Advisers' own suggests inflation would have peaked perhaps 1–2 percentage points lower without the American Rescue Plan, with a $650 billion package instead of $1.9 trillion possibly putting the peak near 7.5–8% rather than 9%.

All that said, good evidence, including our own at CEA, suggests that inflation would have peaked lower, perhaps by 1-2 percentage points, without the ARP. However, nobody, including Jason, is arguing there should have been no Rescue Plan. That is a totally unrealistic counterfactual. Had we done Jason’s $650 billion instead of $1.9 trillion, maybe inflation would have peaked at ~7.5-8% instead of 9%. And it matters, inflation-wise, what you’d cut. The $350 billion in state and local support may have been too large given their budget conditions, but those dollars spent out very slowly over many years. For these reasons, I’m pretty confident that a smaller ARP wouldn’t have changed the public mood very much. There's no outcome here wherein inflation would not have spiked, and the excess demand helped get us back quickly to full employment, staved off a lot of pain and scarring, and set up a uniquely powerful expansion.

Takeaways by Macro Roundup® AI

  1. Evidence including the Council of Economic Advisers' own suggests inflation would have peaked perhaps 1–2 percentage points lower without the American Rescue Plan, with a $650 billion package instead of $1.9 trillion possibly putting the peak near 7.5–8% rather than 9%.
  2. A smaller American Rescue Plan would likely not have changed the public mood much, since inflation would have spiked under any scenario and what was cut would have mattered for the inflation path.
  3. The $350 billion in state and local support may have been too large given state budget conditions, though those dollars spent out slowly over many years, while excess demand helped return the economy quickly to full employment and limited scarring.

Related Articles:

  • The Post-Neoliberal Delusion — 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.
  • 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.
  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.

AI Summary. U.S. states with more federally backed mortgage loans issued per capita are associated with larger increases in the mean number of children ever born among White women across birth cohorts, with no such association found for Nonwhite women, consistent with documented racial discrimination in these lending programs.

Lisa Dettling and Melissa Schettini Kearney National Bureau of Economic Research
Date Posted:
Is Database:
Database

.@kearney_melissa finds higher fertility in states with greater FHA/VHA loan issuance among women aged <= 20 when FHA loans began in 1935. She argues FHA/VHA led to 3mm births over 1935-1957, 10% of the baby boom’s rebound from low interwar birth rates.

Did greater access to government-backed mortgages raise completed fertility?

Core argument: States with more cumulative FHA and VA loans issued per capita from 1935–1957 saw larger increases in mean children ever born among White women, comparing women observed in the 1970–80 Census with those in the 1940–50 Census.

Women in the 1970-80 Census were 20 years old or younger in 1935 when the FHA loan was first introduced; thus, the loans we study were available to those women for nearly all of their childbearing years. Women observed in the 1940-50 Census, on the other hand, were 30 or older in 1935 so these loans were available much less of their childbearing years. Figure 5 shows the correlation between cumulative FHA and VA loan issuance by state from 1935-1957 and the state by race group changes in mean children ever born between the two cohorts of women. States with a greater number of FHA/VA loans issued per capita experienced larger increases in the mean number of children ever born for White women (panel a). We find no effects of FHA/VA lending on births for Nonwhite women, consistent with well-documented racial discrimination in these lending programs. These patterns are consistent with access to government-backed mortgages raising completed fertility and highlight the importance of access to home ownership for fertility decisions

Takeaways by Macro Roundup® AI

  1. States with more cumulative FHA and VA loans issued per capita from 1935–1957 saw larger increases in mean children ever born among White women, comparing women observed in the 1970–80 Census with those in the 1940–50 Census.
  2. FHA and VA lending shows no association with births for Nonwhite women, consistent with documented racial discrimination in those lending programs.
  3. Women observed in the 1970–80 Census were 20 or younger when FHA loans were introduced in 1935, so the loans spanned nearly all their childbearing years, while women in the 1940–50 Census were already 30 or older.

Related Articles:

  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
  • Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past — Pew Research Center analysis of Census Bureau data finds 21-year-olds in the US are less likely than their counterparts four decades earlier to have a full-time job, be financially independent, live on their own, be married, or have a child. Among 21-year-olds, 39% worked full time versus 64% four decades earlier, and a quarter were financially independent versus 42%.
  • The Price of Housing in the United States — Real housing price appreciation in the United States has varied widely across regions, with West Coast cities rising earlier while prices in other regions remained comparable in real terms to decades earlier. The authors find essentially no relationship between real price growth and zoning restrictiveness in the earliest period studied, and progressively steeper gradients in later periods.

AI Summary. If the Federal Reserve delivers the normalization toward its projected long-term neutral policy rate, market-cap-weighted US asset yields would offer a near-normal risk premium over cash. If instead demand stabilizes at a higher level with tight capacity and fading disinflationary forces, policy could not ease as much as markets discount, so asset yields would likely rise and prices fall.

Bob Prince and Shane Murphy Bridgewater Associates
Date Posted:

Bridgewater argues the rise in forward yields implies the US economy is stabilizing at a high level of demand with tight capacity, and reversion of disinflationary forces means further rate cuts are unlikely. “Yields likely have to rise—and prices fall.”

Do asset prices depend on rate cuts markets already expect?

Core argument: Market-cap-weighted US asset yields would in aggregate offer a near-normal risk premium relative to forward cash rates if policy normalizes toward the Fed's estimated long-term neutral policy rate.

The chart shows the current yield of assets in the US relative to cash, weighted by market cap. We then show the Fed’s estimate of the long-term neutral policy rate, i.e., the rate policy makers will manage toward if conditions allow. As you can see, if we get the normalization toward neutral rates that the Fed is projecting, then asset yields where they currently are will in aggregate offer a near-normal risk premium relative to that forward cash rate. But if we stabilize at a higher level of demand with tight capacity and disinflationary forces reverting, it’s unlikely policy will be able to ease as much as is discounted. In that world, asset yields likely have to rise—and prices fall—in order to create appropriate risk premia relative to cash. In our view, the market action over the past few months in part reflects this dynamic, as forward yields have risen in concert with expectations that a significant easing will be more difficult for policy makers to achieve.

Takeaways by Macro Roundup® AI

  1. Market-cap-weighted US asset yields would in aggregate offer a near-normal risk premium relative to forward cash rates if policy normalizes toward the Fed's estimated long-term neutral policy rate.
  2. If demand stabilizes at a higher level with tight capacity and disinflationary forces reverting, policy is unlikely to ease as much as is discounted, and asset yields would likely have to rise—and prices fall—to create appropriate risk premia relative to cash.
  3. Recent market action partly reflects this dynamic, in Bridgewater's view, as forward yields have risen in concert with expectations that significant easing will be harder for policy makers to achieve.

Related Articles:

  • Global Economies, Converging on Equilibrium, Confront a Geopolitical Regime Shift — 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.
  • 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. Only 29% of firms globally earn returns above their cost of capital, and even excluding firms with negative earnings the share is just 46.5%. Positive profits alone do not signal success, since the capital invested could have been deployed elsewhere to earn returns.

Aswath Damodaran Musings on Markets
Date Posted:

.@A_Damodaran argues “Making money is not enough for business success,” noting that only 26.3% of 6,062 US firms produce returns greater than their cost of capital. Among 1,987 US firms with positive operating income, this rises to only 64.6%.

Do most firms earn returns above their cost of capital?

Core argument: Only 29% of firms globally earn more than their cost of capital, based on excess returns for non-financial service companies examined by sub-region.

I look at excess returns earned by non-financial service companies by sub-region, again to see if companies in some parts of the world are better positioned to create value than others. As you can see, there is no part of the world that is immune, and only 29% of all firms globally earn more than their cost of capital. Even if you eliminate firms with negative earnings, the proportion of firms that earn more than their cost of capital is only 46.5%. Making money is not enough for business success: In many businesses, public or private, managers and even owners seem to think that making money (having a positive profit) represents success, not recognizing that the capital invested in these businesses could have been invested elsewhere to earn returns.

Takeaways by Macro Roundup® AI

  1. Only 29% of firms globally earn more than their cost of capital, based on excess returns for non-financial service companies examined by sub-region.
  2. Excluding firms with negative earnings, the share of companies earning more than their cost of capital rises only to 46.5%, and no part of the world is immune.
  3. Positive profit does not constitute business success, since the capital invested in a business could have been invested elsewhere to earn returns.

Related Articles:

  • Which U.S. Stocks Generated the Highest Long-Term Returns? — Of the 29,078 U.S. common stocks in a database spanning nearly a century, 51.6% had negative cumulative returns, while 17 stocks returned more than 5m% — led by Altria at 265m%. Those top performers averaged annualized returns of just 13.47%, underscoring the value of time invested.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • Data Update 6 for 2025: From Macro to Micro – The Hurdle Rate Question — 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.

AI Summary. US policy shifts can reverse quickly: an Eisenhower-era deportation surge reached 1.1m people before funding and political support collapsed, cutting deportations over 90% to 90,000 within two years. McKinley-era tariffs were followed by an inflation spike and a 100-seat Republican loss, the third largest House defeat since the Civil War.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest notes that public support for Eisenhower’s deportation surge collapsed after 1.1mm Mexicans were expelled in 1954, and that McKinley’s tariffs caused an inflation spike leading to one of the largest midterm losses on record.

How quickly have aggressive US policy pushes been reversed?

Core argument: Eisenhower's deportation surge reached 1.1 million people in 1954, but within 18 months funding and political support collapsed, and deportations fell by over 90% to 90,000 in 1956.

Whether you’re elated or despondent about the blizzard of changes emanating from Washington, let me remind you of something: two years is an eternity in US politics. Two examples: Eisenhower deportations and McKinley tariffs. Eisenhower’s deportation surge hit 1.1 million people in 1954 but within 18 months, funding and political support for the program collapsed; deportations fell by over 90% to just 90,000 in 1956. And in the 1890s, although McKinley tariffs were popular at the time (he championed them as House Ways and Means Committee Chair), they caused an almost immediate inflation spike after which the GOP lost 100 seats in the 1890 midterms. The GOP loss in 1890 is the third largest in the history of the House going back to the Civil War.

Takeaways by Macro Roundup® AI

  1. Eisenhower's deportation surge reached 1.1 million people in 1954, but within 18 months funding and political support collapsed, and deportations fell by over 90% to 90,000 in 1956.
  2. The McKinley tariffs, popular when he championed them as House Ways and Means Committee Chair, caused an almost immediate inflation spike, after which the GOP lost 100 House seats in the 1890 midterms.
  3. The GOP's 1890 House loss ranks as the third largest in the chamber's history going back to the Civil War.

Related Articles:

  • Recent Immigration Surge Has Been Largest in U.S. History — An analysis of government data finds the recent U.S. immigration surge is the largest on record, with net migration averaging 2.4m people a year from 2021 to 2023 and the foreign-born share of the population reaching 15.2% in 2023, up from 13.6% in 2020. About 60% of immigrants arriving since 2021 entered without legal authorization.
  • Economic and Fiscal Effects of the February 2025 Proposed Tariffs on China — The Budget Lab estimates that a 10% tariff on Chinese goods raises the overall US price level by just over 0.1%, equivalent to an average decline in disposable income of $223 per household. The policy is projected to raise roughly $400bn over 10 years, less after accounting for a 0.1% lower level of GDP.
  • 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.

AI Summary. A House budget resolution allows $3.3tn of net deficit increases—$4.8tn of increases offset by $1.5tn of required savings—which with interest the authors estimate would permit nearly $4tn of additional debt. The authors estimate debt would reach 126% of GDP in the budget's final year versus 117% under current law.

Marc Goldwein Committee for a Responsible Federal Budget
Date Posted:

.@MarcGoldwein argues the economic assumptions of the House’s reconciliation plan are “unrealistic” and projects $3.3T in deficit increases. Including interest, this would raise debt by almost $4T to 126% of GDP by 2034 vs.117% under current law.

How much would the House budget resolution raise federal debt?

Core argument: The House budget resolution allows $3.3 trillion of net deficit increases — $4.8 trillion of increases offset by $1.5 trillion of required savings — which, with interest, the analysis estimates would permit nearly $4 trillion of additional debt.

The budget resolution includes $3.3 trillion of net allowable deficit increases – from $4.8 trillion of deficit increases somewhat offset by $1.5 trillion of required savings – that, with interest, we estimate would allow nearly $4 trillion of additional debt. Passing a reconciliation bill consistent with these instructions would increase debt in 2034 (the last year of the budget) to 126% of GDP compared to 117% under current law. The budget’s economic assumptions are overly aggressive, and the ultimate direction of the economic effects is likely ambiguous; if they resulted in modestly positive economic feedback, we estimate debt would be 123% of GDP by 2034, or if they resulted in modestly negative feedback, we estimate debt would be 129% of GDP by 2034. The window of the budget – FY 2025 through 2034 – includes one year where the TCJA doesn’t need to be extended (2025) and one less year of extension (2035) than a 2026-2035 budget would include, which could make the $4.8 trillion of tax cuts and spending increases in this budget window translate to $5.5-$6 trillion of ten-year increases. The Ways and Means Committee’s instruction in particular could be substantially smaller by either paring back extensions and cuts or increasing the savings sought from the committee’s jurisdiction.

Takeaways by Macro Roundup® AI

  1. The House budget resolution allows $3.3 trillion of net deficit increases — $4.8 trillion of increases offset by $1.5 trillion of required savings — which, with interest, the analysis estimates would permit nearly $4 trillion of additional debt.
  2. A reconciliation bill consistent with the instructions would raise debt to 126% of GDP in 2034 versus 117% under current law, with estimates of 123% under modestly positive economic feedback and 129% under modestly negative feedback.
  3. Because the FY 2025–2034 budget window includes one year requiring no TCJA extension and one fewer extension year than a 2026–2035 window, the $4.8 trillion of tax cuts and spending increases could translate to $5.5–$6 trillion over ten years.

Related Articles:

  • Long Rates Are Too High — A simple model of the relationship between long-term interest rates and Federal Reserve policy expectations shows 10-year rates sitting 40 basis points above what those expectations would predict, consistent with increases in term premium measures from the New York and San Francisco Federal Reserve Banks. Markets worry this extra premium reflects fears about fiscal sustainability.
  • Brazil’s Slow-Burning Economic Crisis Might Be the U.S. Future — 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.
  • 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.

AI Summary. US adults aged 25-35 with a bachelor's degree reported having sex 11% less often than the average adult, and those with a graduate degree 13% less often. A regression analysis of Centers for Disease Control and Prevention survey data finds a university degree is associated with 7-8% less frequent sex after controlling for age, drinking, employment, health and marital status.

Economist Staff The Economist
Date Posted:

Sexual activity among US straight adults aged 25-35 has dropped by ~ 50% over the past 20 years, with a pronounced “degree divide:” Those with a bachelor’s had sex 11% less often than the average adult, and the drop was greatest among married couples.

Does more education lead to less frequent sex?

Core argument: Between 2002 and 2023, 25- to 35-year-olds with a bachelor's degree had sex 11% less often than the average adult, and those with a graduate degree 13% less frequently.

Between 2002 and 2023, 25- to 35-year-olds with a bachelor’s degree had sex 11% less often than the average adult; those with a graduate degree had sex 13% less frequently. A regression analysis of data from the National Survey of Family Growth, a survey of nearly 10,000 Americans conducted by the Centres for Disease Control and Prevention, suggests that, even after controlling for age, drinking habits, employment, health and marriage status, a university degree is associated with 7-8% less frequent sex, on average. This effect is greatest among married couples. But even among single people, degree-holders are six percentage points less likely to say they had sex in the past year.

Takeaways by Macro Roundup® AI

  1. Between 2002 and 2023, 25- to 35-year-olds with a bachelor's degree had sex 11% less often than the average adult, and those with a graduate degree 13% less frequently.
  2. A regression analysis of Centres for Disease Control and Prevention National Survey of Family Growth data covering nearly 10,000 Americans suggests a university degree is associated with 7-8% less frequent sex, after controlling for age, drinking habits, employment, health and marriage status.
  3. The association between a degree and less frequent sex is greatest among married couples, while among single people degree-holders are six percentage points less likely to say they had sex in the past year.

Related Articles:

  • Romantic Recession: How Politics, Pessimism, and Anxiety Shape American Courtship — 52% of single American women say they would be less likely to date a supporter of Donald Trump, compared with 36% of single men, with 47% of men saying it would make no difference. The gap widens with education: 73% of college-educated single women report such hesitancy, versus under half of those without a degree.
  • America’s ‘Marriage Material’ Shortage — Marriage and coupling rates are declining across many countries, with the marriage rate for people under 30 in England and Wales down by more than 50% and annual marriages in Iran falling 40% over a decade. The author argues rising expectations among women and falling fortunes for lower-income men are subverting marriage's traditional role as economic insurance.
  • 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.

Friday, February 14, 2025

AI Summary. The US has directed economic officials to calculate new country-by-country "reciprocal" tariffs based on the total tariff, tax, regulatory, currency and other barriers facing US exports, treating value-added taxes as a trade barrier. If value-added tax rates are added to existing tariff rates, India would face the highest rate at 29%, followed by Brazil and the European Union.

Shawn Donnan Bloomberg
Date Posted:
Is Database:
Database

The US is preparing reciprocal tariffs that treat value-added taxes as barriers to US exports. @Brad_Setser notes that this “basically forecloses negotiation, as the EU and others aren’t in a fiscal position to negotiate away its tax base.”

Does counting value-added taxes as trade barriers raise reciprocal tariff rates?

Core argument: Trump ordered US economic officials to calculate country-by-country "reciprocal" tariffs based on the total tariffs plus tax, regulatory, currency and other barriers facing US exports, with reports due by April 1 examining first the economies where the US has the largest trade deficits.

Trump on Thursday ordered top economic officials to calculate new US tariffs based on the total tariffs and tax, regulatory, currency and any other barriers that US exports face. The new “reciprocal” duties would be calculated country by country. They will be laid out in a series of reports due by April 1 that officials said would first examine the economies with which the US has the largest trade deficits. Trump and his advisers argue [that] the ability to claim a VAT rebate when products are exported gives European companies an unfair advantage as imports from the US are charged VAT of 15-20% or higher depending on the member country. “Defining a VAT to be a trade barrier isn’t just questionable economics, it also basically forecloses negotiation, as the EU and others aren’t in a fiscal position to negotiate away its tax base,” argues Brad Setser, a senior fellow at the Council on Foreign Relations. If the US imposes reciprocal tariffs that add VAT rates and MFN tariff rates together, the countries most hit would be India with a rate of 29%, Brazil and the EU.

Takeaways by Macro Roundup® AI

  1. Trump ordered US economic officials to calculate country-by-country "reciprocal" tariffs based on the total tariffs plus tax, regulatory, currency and other barriers facing US exports, with reports due by April 1 examining first the economies where the US has the largest trade deficits.
  2. Trump and his advisers argue that the ability to claim a VAT rebate on exports gives European companies an unfair advantage, since imports from the US are charged VAT of 15-20% or higher depending on the member country.
  3. If the US imposes reciprocal tariffs adding VAT rates and most-favored-nation tariff rates together, the countries most affected would be India at 29%, Brazil and the EU.

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.
  • 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.
  • What Trump’s Trade War Would Mean, in Nine Charts — Imports and exports make up about a quarter of U.S. gross domestic product, less than in Germany, Japan, and the United Kingdom, and U.S. imports come from a fairly broad set of countries. Trade accounts for roughly 70% of Canadian and Mexican output, giving the U.S. significant leverage in negotiations with both.

AI Summary. Inflation, inflation expectations, and the gap between nominal and inflation-indexed bond yields are all moving higher. The author argues that cutting interest rates too early raises the likelihood of repeating the 1970s, leaving the Federal Reserve no option but to hold rates higher for longer.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes CPI is directionally tracking the 1974-1982 episode, though at a lower magnitude. “If the Fed cuts interest rates too early, it increases the likelihood that we will see a repeat of the 1970s.”

Does cutting rates too early risk repeating 1970s inflation?

Core argument: Inflation, inflation expectations, and breakevens between nominal and inflation-indexed bonds are all moving higher.

Inflation is moving higher, inflation expectations are moving higher, and breakevens [between nominal and index bonds] are moving higher. If the Fed cuts interest rates too early, it increases the likelihood that we will see a repeat of the 1970s. The Fed has no other options than to keep interest rates higher for longer.

Takeaways by Macro Roundup® AI

  1. Inflation, inflation expectations, and breakevens between nominal and inflation-indexed bonds are all moving higher.
  2. Cutting interest rates too early increases the likelihood of a repeat of the 1970s, the author argues.
  3. The Federal Reserve has no option other than keeping interest rates higher for longer, the author concludes.

Related Articles:

  • US Inflation Tops Forecasts, Bolstering Case for Fed to Hold — The US consumer price index rose 0.5% in a month, with shelter accounting for nearly 30% of the advance, according to the Bureau of Labor Statistics. Grocery prices led the increase, and two-thirds of that gain came from higher egg prices following a deadly bird flu outbreak.
  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
  • 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.

AI Summary. Government debt of about 100% of GDP, versus 25% in 1980, makes it harder for monetary policy to contain inflation, since each percentage-point rise in interest rates raises debt interest payments by roughly one percentage point of GDP. Supply shocks force a choice between accommodating inflation and softening the economy.

John Cochrane The Grumpy Economist
Date Posted:

.@JohnHCochrane notes that in the 1970s, tight monetary policy partially offset the inflationary effects of supply shocks. With debt/GDP now 100% rather than 20%, he argues, it will be harder for the Fed to contain inflation via higher rates.

Does high government debt make it harder to contain inflation?

Core argument: U.S. debt at 100% of GDP, versus 25% in 1980, makes it harder for monetary policy to contain inflation, since each percentage-point rise in interest rates raises interest payments on the debt by one percentage point of GDP.

The situation is also different. We have much more debt and an intractable deficit. Debt to GDP in 1980 was 25%, not 100%. That makes it harder for monetary policy to contain inflation, as each point of interest rate rise raises interest payments on the debt by one percentage point of GDP. The resurgence of inflation in 1979 is usually attributed not to the Fed directly stoking the fire, but to “supply shocks.” Supply shocks do not directly cause inflation, but they lead the Fed to a difficult choice: accommodate inflation or soften the economy. Stagflation of the 1970s was its choice to take a little bit of both pain. We may be in for adverse supply shocks from trade. Or we may be in for hugely beneficial supply shocks from energy, AI, and deregulation. Buckle up.

Takeaways by Macro Roundup® AI

  1. U.S. debt at 100% of GDP, versus 25% in 1980, makes it harder for monetary policy to contain inflation, since each percentage-point rise in interest rates raises interest payments on the debt by one percentage point of GDP.
  2. The 1979 resurgence of inflation is usually attributed to supply shocks rather than to the Fed directly stoking it; supply shocks do not themselves cause inflation but confront the Fed with a choice between accommodating inflation and softening the economy.
  3. The stagflation of the 1970s reflected the Fed's choice to accept some of both pains, and the economy may face either adverse supply shocks from trade or beneficial ones from energy, AI, and deregulation.

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  • Brazil’s Slow-Burning Economic Crisis Might Be the U.S. Future — 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.
  • Expectations and the Neutrality of Interest Rates, Final Version — Under the combined new-Keynesian and fiscal theory of the price level view, inflation is stable, determinate, and long-run neutral with respect to an interest rate target, much like a money growth target. The author argues this implies that a perpetually higher interest rate peg eventually produces correspondingly higher inflation, even if the short run moves the other way.

AI Summary. Lower earnings inequality in the Nordic countries relative to the U.S. and U.K. is mostly explained by a compressed distribution of hourly wages, which accounts for over 70% of the earnings gap versus the U.S. The authors attribute nearly all of that wage compression to a smaller skill premium rather than workforce composition, consistent with centralized bargaining and wage coordination.

Magne Mogstad, Kjell Salvanes, and Gaute Torsvik National Bureau of Economic Research
Date Posted:
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Mogstad et al find that over 70% of the difference in earnings variability between the Nordic countries and the US/UK is due to a lower skill premium rather than skill variability, likely the result of wage compression due to collective bargaining.

Why is earnings inequality lower in the Nordic countries?

Core argument: Over 70% of the difference in the variance of log earnings between the Nordic countries and the U.S. is explained by the relatively low variance of log hourly wages in the Nordics.

Earnings inequality is relatively low in the Nordics because of compression of the hourly wage distribution, a lower dispersion in hours of work, and a smaller covariance between hours of work and hourly wages. Compression of hourly wages matters the most, explaining a large majority of the difference in earnings inequality between Nordic countries and the U.S.and U.K. Over 70% of the difference in the variance in log earnings between the Nordics and the U.S. is explained by the relatively low variance of log hourly wages in Nordic Countries. A decomposition shows that almost all of the differences in the inequality of hourly wages between the Nordic countries and the U.S. can be accounted for by differences in the skill premium rather than differences in the composition of the workforce by skills and other characteristics. To understand why, it is useful to return to how wages are set in the Nordic countries. Both cross-sectional and panel data suggest that centralized bargaining and wage coordination in the Nordic countries strongly compress the distribution of wages compared to the distribution of labor productivity.

Takeaways by Macro Roundup® AI

  1. Over 70% of the difference in the variance of log earnings between the Nordic countries and the U.S. is explained by the relatively low variance of log hourly wages in the Nordics.
  2. A decomposition attributes almost all of the gap in hourly wage inequality between the Nordic countries and the U.S. to differences in the skill premium rather than workforce composition by skills and other characteristics.
  3. Lower Nordic earnings inequality reflects compressed hourly wages, less dispersion in hours worked, and a smaller covariance between hours and wages, with cross-sectional and panel data suggesting centralized bargaining and wage coordination compress wages relative to labor productivity.

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AI Summary. New evidence indicates that in complex tasks such as research and management, high performers are best positioned to work with AI, since evaluating model output requires expertise and judgment. AI is likely to widen workforce divides rather than narrow them, commoditising skills and automating the repetitive tasks of lower-skilled roles such as customer service.

Economist Staff The Economist
Date Posted:

Studies suggest “AI is likely to widen workforce divides, much like past technological revolutions” that benefited more talented workers. “Low-skilled workers may face a future akin to cashiers. Their repetitive tasks are susceptible to automation.”

Does AI widen rather than narrow workforce skill divides?

Core argument: Amit Zavery of ServiceNow estimates that more than 85% of customer-service cases for some clients no longer require human involvement, a figure likely to rise as AI advances, leaving fewer agents handling only the most complex cases.

In complex tasks such as research and management, new evidence indicates that high performers are best positioned to work with AI. Evaluating the output of models requires expertise and good judgment. Rather than narrowing disparities, AI is likely to widen workforce divides, much like past technological revolutions. The case for AI as an equaliser was supported by research showing that the tech enhances output most for less experienced workers. The problem is that this is swamped by another effect. A job can be considered as a bundle of tasks, which tech may either commoditise or assist with. Customer-service agents and other low-skilled workers may face a future akin to cashiers. Their repetitive tasks are susceptible to automation. Amit Zavery of ServiceNow, a business-software company, estimates that more than 85% of customer-service cases for some clients no longer require human involvement. As AI advances, this figure will probably rise, leaving fewer agents to handle only the most complex cases. Although AI may at first boost productivity, its long-term impact will be to commoditise skills and automate tasks.

Takeaways by Macro Roundup® AI

  1. Amit Zavery of ServiceNow estimates that more than 85% of customer-service cases for some clients no longer require human involvement, a figure likely to rise as AI advances, leaving fewer agents handling only the most complex cases.
  2. In complex tasks such as research and management, new evidence indicates that high performers are best positioned to work with AI, since evaluating model output requires expertise and good judgment.
  3. Research showing that AI enhances output most for less experienced workers is swamped by the commoditisation of repetitive tasks, so AI is likely to widen workforce divides rather than narrow them, much like past technological revolutions.

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AI Summary. Researchers report that China began building 94.5GW of coal-fired power capacity in a year, the most since 2015, alongside a record 356GW of new wind and solar capacity. The report argues clean energy is being layered on top of continued reliance on coal rather than replacing it.

Joe Leahy, Wenjie Ding, and Attracta Mooney Financial Times
Date Posted:
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In 2024, China added a record 356GW of wind and solar capacity, but also started building 94.5GW of coal power capacity – the most since 2015. Last year, 93% of new global coal power construction was in China.

Is China adding clean energy on top of coal, not replacing it?

Core argument: China began construction of 94.5GW of coal-fired power capacity in 2024, the most since 2015, alongside the resumption of suspended projects with another 3.3GW, according to a report by CREA and Global Energy Monitor.

China’s coal plant construction surged last year to the highest level in almost a decade, conflicting with President Xi Jinping’s promise that carbon emissions would peak before 2030, researchers have said. In a report released on Thursday, the think-tank Centre for Research on Energy and Clean Air (CREA) and Global Energy Monitor (GEM) said that while China added a record 356GW of wind and solar electricity-generating capacity in 2024, it also began building coal power plants with 94.5GW of capacity, the most since 2015. The new construction, as well as the resumption of suspended projects with another 3.3GW capacity, boosted coal’s role in the power system of the world’s second-largest economy despite its push into renewables, the report said. “Instead of replacing coal, clean energy is being layered on top of an entrenched reliance on fossil fuels,” said the report, [whose lead authors are] Qi Qin, China analyst at Helsinki-based Crea, and Christine Shearer of California-based GEM. “The parallel expansion of coal and renewables risks undermining China’s clean energy transition.”

Takeaways by Macro Roundup® AI

  1. China began construction of 94.5GW of coal-fired power capacity in 2024, the most since 2015, alongside the resumption of suspended projects with another 3.3GW, according to a report by CREA and Global Energy Monitor.
  2. China added a record 356GW of wind and solar generating capacity in 2024, yet the report's authors say clean energy is being layered on top of an entrenched reliance on fossil fuels rather than replacing coal.
  3. The CREA and GEM researchers say the coal build-out conflicts with Xi Jinping's pledge that China's carbon emissions would peak before 2030, and that parallel expansion of coal and renewables risks undermining the country's clean energy transition.

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  • We’re Burning More Coal Than Ever Thanks to China — The International Energy Agency estimates global coal demand reached an all-time high of 8,771m metric tons, up 1% from the prior year, as electricity demand rose faster than expected. China consumes nearly 30% more coal than the rest of the world combined, and its coal demand is projected to set records annually through at least 2027.
  • The Energy Transition Is Powered By — Wait for It — Coal — The International Energy Agency now estimates coal consumption in 2030 will be 6% higher than it projected a year earlier — an increase equal to Japan's entire coal use — and above 2010 levels. Fossil fuels met two-thirds of the recent global increase in energy demand.

AI Summary. The top US military commander in the Indo-Pacific says China's military activity around Taiwan has grown so extensive that it is becoming difficult to distinguish large-scale exercises from actual preparations for an attack. He characterizes the maneuvers as rehearsals for forced unification of Taiwan with the mainland rather than exercises.

Demetri Sevastopulo Financial Times
Date Posted:

Samuel Paparo, head of the US Indo-Pacific Command, characterized recent PLA operations around Taiwan not as exercises, but as “rehearsals for the forced unification of Taiwan to the mainland.”

Are military exercises near Taiwan becoming indistinguishable from attack preparations?

Core argument: US Navy Admiral Samuel Paparo, the top US commander in the Indo-Pacific, said China's military exercises around Taiwan have grown extensive enough that they could soon serve as a "fig leaf" concealing an attack on the island.

China’s military exercises around Taiwan have become so extensive that they could soon be used as a “fig leaf” to conceal an attack on the island, according to the top US military commander in the Indo-Pacific. The People’s Liberation Army had significantly increased activity around Taiwan in recent years, leaving it more difficult to distinguish between large-scale exercises and actual preparations for an attack, US Navy Admiral Samuel Paparo said. “We’re very close to that [point] where on a daily basis the fig leaf of an exercise could very well hide operational warning,” he said. “Their aggressive manoeuvres around Taiwan right now are not exercises as they call them, they are rehearsals. They are rehearsals for the forced unification of Taiwan to the mainland.”

Takeaways by Macro Roundup® AI

  1. US Navy Admiral Samuel Paparo, the top US commander in the Indo-Pacific, said China's military exercises around Taiwan have grown extensive enough that they could soon serve as a "fig leaf" concealing an attack on the island.
  2. Paparo said the People's Liberation Army's significantly increased activity around Taiwan in recent years has made it more difficult to distinguish large-scale exercises from actual preparations for an attack.
  3. Paparo characterized China's maneuvers around Taiwan as rehearsals rather than exercises, calling them rehearsals for the forced unification of Taiwan with the mainland.

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