Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “…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
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, February 28, 2025

AI Summary. Trade deficits create American jobs when demand for investment exceeds domestic savings, because offshore savings fund otherwise unfunded domestic investment—but that has not been the case for decades. Instead, risk-averse offshore savings offered at near-zero interest rates funded a one-time rise in subprime consumption and a deficit-financed increase in government handouts.

Edward Conard Wall Street Journal
Date Posted:

.@EdwardConard WSJ LTE argues trade deficits predominantly increased debt-financed consumption, not US business investment, allowing chronic surplus countries to export their paradox of thrift & resulting unemployment to the US. @aeiecon @michaelxpettis

Do trade deficits create American jobs by funding domestic investment?

Core argument: Phil Gramm and Donald Boudreaux argue that when American investment demand exceeds domestic savings, trade deficits create American jobs by funding otherwise unfunded domestic investment with offshore savings.

In their op-ed “Trump’s Myth of the Trade Deficit,” Phil Gramm and Donald Boudreaux correctly note that when American demand for investment exceeds domestic savings, trade deficits create American jobs by funding otherwise unfunded domestic investment with offshore savings. But that hasn’t been the case for decades. Risk-averse offshore savings proffered at near-zero interest rates didn’t fund increased business investment. They funded a one-time increase in subprime consumption before the financial crisis and an enormous deficit-financed increase in handouts after the financial crisis. We borrowed and gave away goods made by offshore workers who would have been unemployed when their savings exceeded investment. Even if we had insisted that Americans work to pay back their borrowed income, it wouldn’t have increased employment. It would have re-employed workers who lost their jobs when we bought goods made by offshore workers who lent us their savings rather than buying our goods—an identity that’s hard to recognize when lower wages equilibrate employment.

Takeaways by Macro Roundup® AI

  1. Phil Gramm and Donald Boudreaux argue that when American investment demand exceeds domestic savings, trade deficits create American jobs by funding otherwise unfunded domestic investment with offshore savings.
  2. That mechanism has not held for decades, as risk-averse offshore savings offered at near-zero interest rates funded a one-time increase in subprime consumption before the financial crisis and deficit-financed handouts afterward, not increased business investment.
  3. Requiring Americans to work to repay borrowed income would not have raised employment but would have re-employed workers who lost jobs when the U.S. bought goods from offshore workers who lent their savings rather than buying American goods.

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.
  • 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.
  • 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.

AI Summary. The US announced an additional 10% tariff on Chinese goods, citing China's alleged role in drug supply, on top of an earlier 10% duty and alongside broader measures spanning technology and investment. China vowed to take "all necessary measures" in response.

Bloomberg Staff Bloomberg
Date Posted:

China and the US moved closer to a trade war, as Beijing vowed to respond to Trump’s threat to raise tariffs in March from 10% to 20%. Trump also said he would impose postponed 25% tariffs on Canada and Mexico, adding the EU to the equation as well.

Will China retaliate against new US tariffs on its goods?

Core argument: Trump announced an additional 10% tariff on Chinese goods effective March 4, citing China's alleged role in drug supply, on top of a prior 10% duty imposed earlier in the month.

Trump announced an additional 10% tariff would take effect March 4, citing China’s alleged role in [drug] supply. The new levies follow a previous 10% duty implemented earlier this month and represent part of Trump’s broad salvos that span technology and investment. The levies are set to take effect on Tuesday, one day before President Xi Jinping heads into the party’s biggest political meeting of this year, the National People’s Congress, where his lieutenants will unveil their economic blueprint for 2025.

Takeaways by Macro Roundup® AI

  1. Trump announced an additional 10% tariff on Chinese goods effective March 4, citing China's alleged role in drug supply, on top of a prior 10% duty imposed earlier in the month.
  2. China vowed to take "all necessary measures" against the new US tariffs, which form part of Trump's broader salvos spanning technology and investment.
  3. The tariffs take effect one day before Xi Jinping heads into the National People's Congress, where his lieutenants will unveil China's economic blueprint for 2025.

Related Articles:

  • 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.
  • Are We Still on the Path to Equilibrium? — 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.
  • 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.

AI Summary. Using integrated U.S. macroeconomic and financial accounts, the authors find that fluctuations in expected cash flows to corporate owners, rather than expected rates of return, have been the dominant driver of swings in U.S. corporate market valuations. They attribute most valuation fluctuations to changes in the share of corporate output flowing to owners as pure rent.

Andrew Atkeson, Jonathan Heathcote and Fabrizio Perri National Bureau of Economic Research
Date Posted:

Stock market volatility since 1929 can be reconciled with the relative stability of macro variables if fluctuations in corporate valuations are attributed to changes in “factorless income” rather than expected returns. @Jonheathcote @fab_perri

What drives swings in U.S. corporate market valuations?

Core argument: Fluctuations in expected cash flows to firm owners, rather than fluctuations in expected rates of return, have been the dominant driver of swings in U.S. corporate market valuations since 1929.

We examine how to quantitatively reconcile the high volatility of market valuations of U.S. corporations with the relative stability of macroeconomic quantities since 1929. Macroeconomic and financial variables are measured in a consistent fashion using the Integrated Macroeconomic Accounts (IMA) of the United States, which combine NIPA data on macroeconomic flows and stocks with comprehensive data drawn from the Financial Accounts of the United States on financial flows and balance sheets with equity measured at market value. [These data] offer an internally consistent set of income statements, cash flow statements, and market value balance sheets for major sectors of the U.S. economy. We find that fluctuations in expected cash flows to firm owners have been the dominant driver of those fluctuations in value; fluctuations in expected rates of return have played a smaller role. We attribute most of the fluctuations in valuations to fluctuations in the share of corporate output flowing to owners of corporations in the form of factorless income, the share of corporate output that flows to firm owners as a pure rent.

Takeaways by Macro Roundup® AI

  1. Fluctuations in expected cash flows to firm owners, rather than fluctuations in expected rates of return, have been the dominant driver of swings in U.S. corporate market valuations since 1929.
  2. Most valuation fluctuations are attributed to changes in the share of corporate output flowing to owners as factorless income, the portion accruing to firm owners as pure rent.
  3. The analysis measures macroeconomic and financial variables consistently using the Integrated Macroeconomic Accounts of the United States, which combine NIPA flows and stocks with Financial Accounts financial flows and balance sheets where equity is measured at market value.

Related Articles:

  • The Impact of Rates Higher for Longer on the Capital Structure — Higher interest rates transmit through a higher cost of capital that reduces capital spending and hiring while redistributing value from equity holders to debt holders, since equity bears the higher debt-servicing costs. The author argues companies with earnings and cash flow outperform those without, making value more attractive than growth.
  • 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. Survey data show the share of Republican men agreeing that women should return to their traditional roles rose from 28% to 48%, and among Republican women from 23% to 37%. The authors argue the two parties are divided less by gender itself than by their attitudes about gender roles.

Michael Tesler, John Sides and Colette Marcellin New York Times
Date Posted:

Almost a majority (48%) of GOP men believe “women should return to their traditional gender roles,” up from 28% in 2022; 37% of Republican women agree, up from 23% in 2022. By comparison only 11% of Democratic women agree. @johnmsides

Are the parties divided more by attitudes about gender than by gender?

Core argument: In the Views of the Electorate Research Survey, the share of Republican men agreeing that women should return to their traditional roles rose from 28% in May 2022 to 48% in November 2024.

Surveys from 2024 show that support for traditional gender roles is increasing. Perhaps unsurprisingly, this is happening primarily among Republicans. Perhaps more surprisingly, it is happening among Republican women as well as among Republican men. The rise in gender traditionalism derives more from politics than it it does from gender. In the Views of the Electorate Research Survey, the percentage of Republican men who agree that women should return to their traditional roles increased from 28% in May 2022 to 48% in November 2024. Among Republican women, there was an increase from 23% to 37%. Although there is a lot of focus on the longstanding gender gap between men and women in voting, the two parties are actually divided less by gender than by their attitudes about gender.

Takeaways by Macro Roundup® AI

  1. In the Views of the Electorate Research Survey, the share of Republican men agreeing that women should return to their traditional roles rose from 28% in May 2022 to 48% in November 2024.
  2. Republican women also shifted toward gender traditionalism in the same survey, with agreement rising from 23% to 37%.
  3. The rise in gender traditionalism derives more from politics than from gender, with the two parties divided less by gender than by their attitudes about gender.

Related Articles:

  • Bachelors Without Bachelor’s: Gender Gaps in Education and Declining Marriage Rates — Marriage rates for college-educated women have remained stable over the past fifty years even as the relative supply of college-educated men declined, with the overall decline in marriage driven almost entirely by fewer marriages between non-college women and non-college men. The education gap in women's marriage rates is larger in areas where non-college men face the highest joblessness and incarceration.
  • 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.
  • 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.

AI Summary. Federal Medicaid outlays have risen 207% since 2008 and 51% since 2019, with Medicaid climbing to 10% of federal outlays from 7% between 2007 and 2023 while the Social Security and Medicare shares held stable. The Congressional Budget Office projects Medicaid spending will increase by $2.4tn through 2035, so an $880bn reduction would still leave a $1.5tn increase.

The Editorial Board Wall Street Journal
Date Posted:

Washington should rely on state block grants and impose ‘per-capita caps’ on Medicaid spending, argues the WSJ Editorial Board, noting the 3pp growth in its share of federal outlays has outpaced Medicare, Social Security and defense since 2007.

Is Medicaid spending growing faster than Social Security and Medicare?

Core argument: Federal Medicaid outlays have risen 207% since 2008 and 51% since 2019, outpacing growth in Social Security and Medicare.

Medicaid spending is out-pacing even Social Security and Medicare. Federal Medicaid outlays have increased 207% since 2008 and 51% since 2019. Medicaid spending as a share of federal outlays rose to 10% from 7% between 2007 and 2023, while the share of Social Security and Medicare remained stable. Medicaid outlays are on track to increase by $2.4 trillion through 2035 under the Congressional Budget Office baseline projections. So shaving $880 billion from that baseline would still amount to a $1.5 trillion increase in Medicaid spending.

Takeaways by Macro Roundup® AI

  1. Federal Medicaid outlays have risen 207% since 2008 and 51% since 2019, outpacing growth in Social Security and Medicare.
  2. Medicaid's share of federal outlays climbed to 10% in 2023 from 7% in 2007, while the shares taken by Social Security and Medicare remained stable.
  3. Congressional Budget Office baseline projections have Medicaid outlays increasing by $2.4 trillion through 2035, so cutting $880 billion from that baseline would still leave a $1.5 trillion increase.

Related Articles:

  • Medicaid May Face Big Cuts and Work Requirements — Medicaid enrollment reached 87m people, boosted by pandemic legislation requiring states to keep people enrolled longer than normal and by additional states adopting the Affordable Care Act expansion, under which the federal government covers 90% of costs for expansion enrollees. The Congressional Budget Office projected states would receive nearly $60bn less in federal Medicaid funds year over year.
  • The Great “Transfer”-mation — Government transfers rose from 8.2% of Americans' total personal income in 1970 to 17.6% in 2022, making them the third largest income source after work and investments. The share of U.S. counties drawing a quarter or more of personal income from transfers rose from under 1% in 1970 to 53% in 2022.
  • The Economic Geography Of The 2024 Elections — Counties where government transfer programs such as Social Security, Medicare, Medicaid, and unemployment insurance make up at least a quarter of personal income gave Trump 63% of the vote, while counties where transfers account for less than 15% gave Harris 56%. Transfers supplied 18% of total US personal income.

Monday, March 3, 2025

AI Summary. The US trade deficit with the euro area in goods and services combined is about €57bn, under 0.2% of US GDP, and the euro area pays roughly €49bn more in investment income and wages to the US than it receives. Counting these flows, the euro area's current account with the US is effectively balanced.

Jesper Rangvid Rangvid's Blog
Date Posted:

In the year to Sept. ‘24, the Euro area ran a goods surplus with the US of €203B, the US ran a services surplus of €146B. After adjusting for other income flows, the net current account deficit with the Euro area was only €8B, “effectively balanced.”

Is the US current account with the euro area balanced?

Core argument: The euro area's combined goods and services surplus with the US is €57 billion (€203 billion in goods minus €146 billion in services), less than 0.2% of the $29 trillion US GDP recorded in 2024.

While the US still runs a trade deficit with Europe when taking into account both goods and services, it is small, and when taking all items on the current account into account, the account balances. First, the overall US trade deficit (= the Europe trade surplus) of €57 billion (= €203 billion – €146 billion) is negligible relative to the size of the US economy. In 2024, US GDP amounted to $29 trillion, meaning the trade deficit with Europe accounts for less than 0.2% of US GDP. Moreover, when discussing international flows of funds, what truly matters is not just the trade balance in goods and services but the overall current account. This brings us to the final key component shown in Figure 1: primary income. Primary income includes wages earned by euro area residents from employment in the US, as well as income from financial investments (e.g., dividends), minus payments on those same items made to the US. For the euro area, this figure stands at a negative €49 billion, implying that Europe pays more financial income and wages to the US than it receives from the US. In total, the euro area’s current account with the US is effectively balanced (€8 = €203 billion – €146 billion – €49 billion).

Takeaways by Macro Roundup® AI

  1. The euro area's combined goods and services surplus with the US is €57 billion (€203 billion in goods minus €146 billion in services), less than 0.2% of the $29 trillion US GDP recorded in 2024.
  2. The euro area's primary income balance with the US, covering wages and investment income such as dividends, stands at negative €49 billion, as Europe pays more financial income and wages to the US than it receives.
  3. The euro area's overall current account with the US is effectively balanced at €8 billion once goods, services, and primary income flows are counted.

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.
  • Trump Widens Trade Fight to Include Global Taxes and Regulation — 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.
  • 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. An International Monetary Fund study of 33 countries found that for a large economy like the U.S., each dollar of deficit reduction shifts the current account—trade in goods, services and investment income—by 30 to 50 cents. Applying that math, cutting the U.S. federal deficit from 6.4% of GDP to 3% would trim $300bn–$500bn from the roughly $900bn goods-and-services trade deficit.

Greg Ip Wall Street Journal
Date Posted:

Noting an IMF finding that $1 in fiscal consolidation improves the current account by 30-50 cents for a low-trade dependency country like the US, @greg_ip argues reducing the deficit from 6.4% to 3% of GDP could reduce the trade deficit by $300-500B.

How much would cutting the federal deficit shrink the trade deficit?

Core argument: A 2021 IMF study of 33 countries over 1978–2019 found that for a large economy like the U.S., $1 of fiscal consolidation subtracted 30 to 50 cents from the current account balance, a broad trade measure including goods, services and investment income.

Deliberately shrinking the budget deficit, via fiscal austerity, or expanding it, via fiscal stimulus, usually spills over to trade. A 2021 study of 33 countries from 1978 to 2019 by the International Monetary Fund found that for a big country like the U.S., one dollar of fiscal consolidation subtracted 30 to 50 cents from the current account balance (a broad measure of trade that includes goods, services and investment income). Last year, the U.S. ran a federal deficit of $1.8 trillion, or 6.4% of gross domestic product. Treasury Secretary Scott Bessent has proposed reducing that to 3% by the end of Trump’s term. Run that through the IMF’s math, and you knock $300 billion to $500 billion off the trade deficit in goods and services, which was more than $900 billion last year.

Takeaways by Macro Roundup® AI

  1. A 2021 IMF study of 33 countries over 1978–2019 found that for a large economy like the U.S., $1 of fiscal consolidation subtracted 30 to 50 cents from the current account balance, a broad trade measure including goods, services and investment income.
  2. The U.S. federal deficit was $1.8 trillion last year, or 6.4% of GDP, and Treasury Secretary Scott Bessent has proposed cutting it to 3% by the end of Trump's term.
  3. Applying the IMF's estimates to Bessent's proposed deficit reduction implies a $300 billion to $500 billion cut in the U.S. goods and services trade deficit, which exceeded $900 billion last year.

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.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.
  • Can Trump Reduce the Trade Deficit? — A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.

AI Summary. Modeling of tariffs and federal spending cuts using a framework similar to the Federal Reserve's model of the US economy projects inflation 0.2% higher and GDP 0.5% lower over the coming quarters. The authors characterize this as a modest, temporary stagflation shock rather than a recession.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk models the impact of tariffs and likely DOGE savings and projects that “over the coming quarters, inflation will be 0.2% higher and GDP will be 0.5% lower.”

Do tariffs and federal spending cuts push the economy into recession?

Core argument: Modeling tariffs and DOGE in a framework similar to the Fed's FRBUS, the authors estimate inflation will be 0.2% higher and GDP 0.5% lower over the coming quarters, a modest stagflation shock but not a recession.

[We model the likely] impact of tariffs and DOGE on GDP and inflation, using a model similar to the Fed’s model of the US economy, FRBUS. [We assume $100bn in DOGE savings resulting in 0.4% reduction in fiscal deficit, 5% appreciation of exchange rate, and 0.5% pt increase in inflation expectations shocks applied in Q1 2025.] The results show that over the coming quarters, inflation will be 0.2% higher and GDP will be 0.5% lower. In other words, DOGE and tariffs combined are a mild temporary shock to the economy that will put modest upward pressure on inflation and modest downward pressure on GDP. This is also what the incoming data is showing. This week, we saw inflation expectations move higher, a reversal of capex spending plans, and weakness in consumer confidence. Jobless claims also moved higher, likely driven by government contractors and also by federal workers who had not received forms SF-50 and SF-8 and decided to file for unemployment benefits anyway to get the process started. The bottom line for markets is that this is a modest stagflation shock to the economy but not a recession.

Takeaways by Macro Roundup® AI

  1. Modeling tariffs and DOGE in a framework similar to the Fed's FRBUS, the authors estimate inflation will be 0.2% higher and GDP 0.5% lower over the coming quarters, a modest stagflation shock but not a recession.
  2. The simulation assumes $100bn in DOGE savings cutting the fiscal deficit by 0.4%, a 5% exchange rate appreciation, and a 0.5 percentage point rise in inflation expectations, all applied as shocks in Q1 2025.
  3. Incoming data show higher inflation expectations, a reversal of capex spending plans, weaker consumer confidence, and rising jobless claims that the authors say were likely driven by government contractors and by federal workers who filed without receiving forms SF-50 and SF-8.

Related Articles:

  • 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.
  • The U.S. Economy Depends More Than Ever on Rich People — Moody's Analytics estimates the top 10% of earners account for 49.7% of all U.S. consumer spending, a record in data going back to 1989, up from about 36% three decades ago, with their spending alone equal to almost one-third of gross domestic product.
  • 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 federal spending rose to nearly $6.8tn in fiscal year 2024 from about $3.7tn in 2015, with revenue rising far more slowly. Adjusting for inflation and population growth shows spending still climbed, but by less than the raw dollar figures suggest.

Richard Rubin and Kara Dapena Wall Street Journal
Date Posted:

Adjusting for inflation and population growth, a WSJ analysis finds “Other health” including Medicaid became the second largest budget item after Social Security, increasing 36% between 2015-2025 to $2,736 per capita versus $4,385 for Social Security.

How much has federal spending grown after adjusting for inflation and population?

Core argument: Federal spending in unadjusted dollars rose to nearly $6.8 trillion in fiscal 2024 from about $3.7 trillion in 2015, while revenue rose but not nearly as fast as spending.

Measured in unadjusted dollars, spending has jumped to nearly $6.8 trillion in fiscal year 2024 from about $3.7 trillion in 2015. Revenue rose, but not nearly as fast as spending. A straight count of dollars doesn’t give an apples-to-apples comparison though. Growing population and recent inflation can skew the picture. We adjusted for inflation and population. The result, constant 2025 dollars per person, makes it easier to compare 2015 apples with 2024 apples. It still shows that spending climbed—but not by as much as it might seem. “Other health” spending includes Medicaid, the health-insurance program for low-income people, which has been expanding. That’s in part because of an Obamacare provision for individuals that has the U.S. pay a bigger share of costs in the federal-state program.

Takeaways by Macro Roundup® AI

  1. Federal spending in unadjusted dollars rose to nearly $6.8 trillion in fiscal 2024 from about $3.7 trillion in 2015, while revenue rose but not nearly as fast as spending.
  2. Adjusting federal spending for inflation and population growth into constant 2025 dollars per person still shows spending climbed from 2015 to 2024, but by less than the unadjusted totals suggest.
  3. The "other health" spending category includes Medicaid, the health-insurance program for low-income people, which has been expanding in part because of an Obamacare provision under which the U.S. pays a bigger share of costs in the federal-state program.

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%.
  • Updated Warshawsky, Mantus, and Pang Model Projections: Analyzing the US Fiscal Outlook — The authors project US deficits reaching about 14% of GDP by 2053 and 25% by 2073, a gloomier path than earlier estimates largely because of a changed assumption about how deficits affect private saving. They estimate a sustainable US debt limit of 155%–210% of GDP.
  • 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. Standard data sources disagree on whether inflation-adjusted US highway spending rose or fell, because they use different price measures. The author argues the National Highway Construction Cost Index is the better deflator since it tracks actual prices governments pay in construction bids, implying real highway investment probably did not increase.

Zachary Liscow Briefing Book
Date Posted:

.@ZLiscow notes @jasonfurman’s price index “takes the actual prices for specific items in the bids and tracks them over time,” supporting Furman’s conclusion that highway construction did not rise during the Biden years, and refuting @ernietedeschi.

Does the choice of price measure determine whether real highway spending rose?

Core argument: Jason Furman argues real highway spending declined under Biden, while Ernie Tedeschi and Eric Van Nostrand note that different standard data sources yield conflicting answers on whether highway investment rose.

An important debate is raging about whether real highway spending declined under Biden. Jason Furman says yes. Ernie Tedeschi and Eric Van Nostrand point out that different standard data sources say different things. This matters because we want to know how much we are getting for our infrastructure dollars (a major long-term issue in the US). The deflator that Jason uses, the National Highway Construction Cost Index (NHCCI), takes the actual prices for specific items in the bids and tracks them over time. The other measures that Ernie and Eric use track materials and labor input prices that are used for highways, but not the actual bids. The main reason that I’m inclined to think that the NHCCI is the best measure is exactly this: It is, by design, the price that governments are paying for the things they are actually building. Using the data series produced by the major statistical agencies, as Ernie and Eric do, is a good default – those agencies have tremendous expertise, but I think that the NHCCI is fit for purpose here.

Takeaways by Macro Roundup® AI

  1. Jason Furman argues real highway spending declined under Biden, while Ernie Tedeschi and Eric Van Nostrand note that different standard data sources yield conflicting answers on whether highway investment rose.
  2. The National Highway Construction Cost Index deflates highway spending using actual prices for specific items in bids, whereas the alternative measures Tedeschi and Van Nostrand use track materials and labor input prices rather than bids.
  3. The NHCCI is the better deflator for highway spending because it captures, by design, the prices governments pay for what they are actually building, even though the major statistical agencies' standard series carry tremendous expertise.

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.
  • Has U.S. Infrastructure Investment Really Declined? — Whether real U.S. infrastructure investment rose or fell depends on the inflation index used: the Bureau of Economic Analysis's official price index implies real highway spending rose 11% since 2019, while the National Highway Construction Cost Index, an outlier showing much higher cost inflation, implies a decline. Physical measures of highway miles also show increases.
  • No Delusions: Bidenomics Wasn’t Perfect, But It Did Many Great Things — 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.

AI Summary. The authors estimate that US intergenerational human capital mobility rose between 1850 and 1950 as mass schooling replaced home education and weakened the transmission of parental human capital. Parental human capital accounted for 65% of the variation in children's human capital in cohorts born in the late 1860s, versus 35% for those born in the late 1910s.

Lukas Althoff, Harriet Brookes Gray and Hugo Reichardt Stanford University
Date Posted:

Prior to mass schooling in the US, @AlthoffLukas @ReichardtHugo find that the mother’s human capital accounted for 65% of the variance in the child’s human capital. School attendance weakened this link to 35%, boosting economic mobility.

Did mass schooling raise intergenerational human capital mobility?

Core argument: Parental human capital accounted for 65% of the variation in child human capital among Americans born in the late 1860s but only 35% among those born in the late 1910s, according to the authors' estimates.

This paper examines the evolution of intergenerational mobility in the US from 1850 to 1950, highlighting the role of maternal human capital and the expansion of mass schooling. Our findings reveal that human capital mobility rose sharply over this period, driven by a declining reliance on maternal human capital, which had been most predictive of child outcomes before widespread schooling. As schooling expanded, it replaced home education, weakening the intergenerational persistence of parental human capital and fueling gains in both human capital and income mobility. Historically, mass education played a key role in weakening the reliance on parental human capital, allowing mobility to rise. While parental human capital accounted for 65% of variation in child human capital in the earliest cohort (born in the late 1860s), it only accounted for 35% among children born in the latest cohort (born in the late 1910s). Access to quality schooling disproportionately benefits children whose parents have lower levels of human capital, which may not be easily substituted with income or wealth.

Takeaways by Macro Roundup® AI

  1. Parental human capital accounted for 65% of the variation in child human capital among Americans born in the late 1860s but only 35% among those born in the late 1910s, according to the authors' estimates.
  2. The authors attribute the rise in US human capital mobility from 1850 to 1950 to a declining reliance on maternal human capital, which had been most predictive of child outcomes before mass schooling spread.
  3. The authors find that access to quality schooling disproportionately benefits children whose parents have lower levels of human capital, an advantage they argue may not be easily substituted with income or wealth.

Related Articles:

  • Changing Opportunity: Sociological Mechanisms Underlying Growing Class Gaps and Shrinking Race Gaps in Economic Mobility — Across the 1978 to 1992 birth cohorts, adult household incomes fell for white children raised in low-income families and rose for those raised in high-income families, increasing the intergenerational persistence of income ranks among white children by 28%. Over the same cohorts, adult incomes rose for Black children at all parental income levels.
  • Intergenerational Mobility in American History: Accounting for Race and Measurement Error — Accounting for Black families, who historical studies routinely drop, and for measurement error in fathers' economic status can double estimates of intergenerational persistence in linked United States census data from 1850 to 1940. The author argues historical mobility was lower than previously estimated, implying greater equality of opportunity today than in the past.
  • The Inheritance Of Social Status: England, 1600 to 2022 — Using a genealogical database of 422,374 English people with rarer surnames, the authors find social status persists strongly even among distant relatives, with status correlations declining by a constant factor of 0.79 per step in the lineage across all status measures and eras studied. The authors argue this constancy suggests social interventions have modest effects.

AI Summary. European defence stocks and the euro rose as investors bet governments will increase military spending and take on more responsibility for the continent's security, with shares in major contractors including Rheinmetall, Leonardo, Thales, BAE Systems and Saab gaining. European government bonds sold off on expectations of higher spending.

Mari Novik, Sylvia Pfeifer and Ian Smith Financial Times
Date Posted:

European and UK defense stocks hit record highs Monday as investors bet on higher European defense spending. NATO members’ defense spending in Europe is up ⅓ in real terms since 2022.

Are investors betting on higher European military spending?

Core argument: The Stoxx Europe aerospace and defence index jumped 8.4%, on track for its biggest one-day gain since November 2020, as investors bet European governments will boost military spending.

Europe’s defence sector extended a blistering rally on Monday [3/3] and the euro surged as investors raised their bets that governments across the continent will have to boost military spending and shoulder more of the burden for their security. Shares in Rheinmetall, Germany’s largest defence company, jumped 14% while Leonardo climbed 15.4% in Milan. Paris-listed Thales surged 15%, BAE Systems gained 14.3% and Sweden’s Saab was up 11.3%. The Stoxx Europe aerospace and defence index jumped 8.4%, putting it on track for its biggest one-day gain since November 2020, while Germany’s Dax surged as much as 3.3%, on course for its largest gain in more than two years. European government bonds sold off on expectations of higher spending.

Takeaways by Macro Roundup® AI

  1. The Stoxx Europe aerospace and defence index jumped 8.4%, on track for its biggest one-day gain since November 2020, as investors bet European governments will boost military spending.
  2. Rheinmetall rose 14%, Leonardo 15.4%, Thales 15%, BAE Systems 14.3% and Saab 11.3%, while Germany's Dax surged as much as 3.3%, on course for its largest gain in more than two years.
  3. The euro surged and European government bonds sold off on expectations of higher spending, with investors anticipating that the continent will shoulder more of the burden for its own security.

Related Articles:

  • Can Europe Defend Itself Without America? — European members of NATO have increased defense spending by almost a third in real terms to $476bn, with 23 of NATO's 32 members meeting the alliance's target of spending 2% of GDP on defense, according to NATO. NATO's secretary-general argues the 2% target is insufficient, though tight budgets, high public debt, and competing priorities constrain further increases.
  • America, Jump-Started: World War II R&D and the Takeoff of the US Innovation System — From 1940 to 1945, the US Office of Scientific Research and Development engaged industrial and academic contractors in more than 2,200 research contracts worth over $9bn in 2022 dollars, despite no pre-war tradition of funding externally performed research. At the war's height, the US government funded the research behind nearly 1 in 8 US patents.
  • The Intellectual Spoils of War? Defense RD, Productivity and International Spillovers — The authors estimate that a 10% increase in government-financed R&D, largely defense, is associated with a 4.3% rise in privately funded R&D across OECD countries, indicating "crowding in" rather than "crowding out." They also find international spillovers raise private R&D abroad, though the overall effect on US productivity growth is modest.