Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, March 4, 2025

AI Summary. An energy use must be electrified before green grid electricity can decarbonize it, and while US grid decarbonization continues at a steady pace, the electricity share of final US energy consumption has grown little. Transmission line growth runs well below Department of Energy targets for 2030 and 2035, and transformer delivery times have stretched from 4–6 weeks to 2–3 years.

Michael Cembalest J.P. Morgan
Date Posted:
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Over the past 10 years, $9T has been spent globally on electrification, however Michael Cembalest points out that renewables’ share of final energy consumption is still advancing at only 0.3-0.6% per year.

What is holding back electrification's share of US energy consumption?

Core argument: US transformer delivery times have stretched from 4–6 weeks in 2019 to 2–3 years, straining a grid that relies on roughly 70 million transformers requiring special steel to limit power losses.

Remember this key aspect of the energy transition: until an energy use is electrified, it’s hard to decarbonize it using green grid electrons. And while grid decarbonization is continuing at a steady pace, the US has made little progress increasing the electricity share of final energy consumption. One major obstacle: transmission line growth is stuck in a rut, way below DoE targets for 2030 and 2035. Another obstacle: shortages of transformer equipment, whose delivery times have extended from 4-6 weeks in 2019 to 2-3 years. Around 70 million transformers step voltages up and down across the US grid and require special steel to reduce power losses. Half of all US transformers are near the end of their useful lives and will need replacing, along with replacements in areas affected by hurricanes, floods and wildfires. Transformer manufacturing investment by Schneider Electric and Hitachi North America should help, eventually.

Takeaways by Macro Roundup® AI

  1. US transformer delivery times have stretched from 4–6 weeks in 2019 to 2–3 years, straining a grid that relies on roughly 70 million transformers requiring special steel to limit power losses.
  2. US transmission line growth remains far below Department of Energy targets for 2030 and 2035, and the electricity share of final energy consumption has increased little even as grid decarbonization proceeds at a steady pace.
  3. Half of all US transformers are near the end of their useful lives and will need replacing, alongside replacements in areas hit by hurricanes, floods and wildfires, with manufacturing investment by Schneider Electric and Hitachi North America helping eventually.

Related Articles:

  • Electravision — The fossil fuel share of global primary energy is falling about 0.40% per year, matching the pace of decarbonization during the 1973–1988 nuclear buildout, though total carbon dioxide emissions have not declined because energy consumption keeps rising. Renewable energy is used almost exclusively for the electricity grid, with little penetration in industry and transport.
  • Electricity 2025 — US electricity demand is projected to grow about 2% annually over 2025-2027, an upward revision from an earlier 1% forecast. A study commissioned by the US Department of Energy found data centre electricity use rose from about 60 TWh in 2014 to 176 TWh in 2023, and could reach 325-580 TWh by 2028.
  • How Tariffs Could Shock America’s Power System — US electricity prices have risen at a compound annual rate of 5.7% over five years, after being roughly flat in the prior five years. Transformers could become a chokepoint: analysts estimate only about 20% of US transformer demand can be met domestically, with prices up 70%–100% on higher electrical steel and copper costs.

AI Summary. The US imposed 25% tariffs on imports from Canada and Mexico, with Canadian oil and energy at 10%, and added a 10% tariff on Chinese imports on top of an earlier 10% levy. China responded with 10–15% tariffs on US agricultural goods plus company blacklists and export controls, while Canada announced tariffs on $107bn of US imports.

Arjun Neil Alim, Joe Leahy, Ryan McMorrow and Mari Novik Financial Times
Date Posted:

Beijing will levy a 10-15% tariff on US agricultural goods, and Canada unveiled tariffs on $107B of US imports in response to US tariffs. Mexican countermeasures will be announced over the weekend.

How are US trading partners responding to new American tariffs?

Core argument: President Donald Trump imposed a 25% tariff on imports from Canada and Mexico, with Canadian oil and energy products at 10%, and added a further 10% tariff on Chinese imports atop a 10% levy imposed the prior month.

In the most sweeping trade measures since returning to the White House in January, the US president hit imports from Canada and Mexico with a 25% tariff. The White House also imposed an additional 10% tariff on Chinese imports on top of a 10% levy imposed last month. The moves drew an immediate response from Beijing, which said it would levy a 10 to 15% tariff on US agricultural goods, ranging from soybeans and beef to corn and wheat, from March 10. Canada also unveiled tariffs on $107bn of US imports, starting with $21bn of imports immediately. Mexican President Claudia Sheinbaum said on Tuesday that the government would wait until Sunday to unveil countermeasures, which would include both tariffs and other actions. The levies against Ottawa are set at 25% except for Canadian oil and energy products, which face a 10% tariff. Canada accounts for about 60% of US crude imports. In its response, China also targeted US companies, placing 10 companies on a national security blacklist and slapping export controls on 15 others.

Takeaways by Macro Roundup® AI

  1. President Donald Trump imposed a 25% tariff on imports from Canada and Mexico, with Canadian oil and energy products at 10%, and added a further 10% tariff on Chinese imports atop a 10% levy imposed the prior month.
  2. Beijing responded with tariffs of 10–15% on US agricultural goods including soybeans, beef, corn and wheat from March 10, placed 10 US companies on a national security blacklist, and imposed export controls on 15 others.
  3. Canada unveiled tariffs on $107bn of US imports, starting with $21bn immediately, while Mexican President Claudia Sheinbaum said countermeasures including tariffs and other actions would be announced Sunday.

Related Articles:

  • 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.
  • 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.
  • Message to President Trump: We (Europe) Take As Much From You (The US) As You Take From Us — 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.

AI Summary. The authors estimate that 25% tariffs on Canada and Mexico plus 20% tariffs on China raise the US effective tariff rate by 7 percentage points to its highest since 1943, lifting the price level 1.0–1.2% and costing households an average $1,600–2,000. They project the economy is persistently 0.3–0.4% smaller.

Ernie Tedeschi Yale University
Date Posted:

.@ernietedeschi estimates that 20% tariffs on China and 25% on Canada/Mexico will decrease real GDP growth by 0.6pp in 2025, cost the average household $1.6-2.0k/year, and raise $1.4-1.5T over 2026-35 conventionally scored, and $300-360B less if scored dynamically.

How much do new tariffs cost households and the economy?

Core argument: The modeled 25% tariffs on Canada and Mexico plus 10% tariffs on China amount to a 7 percentage point rise in the US effective tariff rate, raising it to the highest level since 1943.

[We] modeled the total effect of the planned 25% Canada & Mexico tariffs and the 10% China tariffs, as well as the 10% China tariffs already in effect. The policy is the equivalent of a 7 percentage point hike in the US effective tariff rate, raising it to the highest since 1943. The price level rises by 1.0-1.2%, the equivalent of an average per household consumer loss of $1,600–2,000 in 2024$. Real GDP growth is 0.6 lower in 2025. In the long run, the US economy is persistently 0.3-0.4% smaller, the equivalent of $80-110 billion annually in 2024$. The tariffs to date raise $1.4-1.5 trillion over 2026-35 conventionally-scored, and $300-360 billion less if dynamic revenue effects are taken into account. Tariffs are regressive taxes. Losses for households at the bottom of the income distribution would range between $900–1,100.

Takeaways by Macro Roundup® AI

  1. The modeled 25% tariffs on Canada and Mexico plus 10% tariffs on China amount to a 7 percentage point rise in the US effective tariff rate, raising it to the highest level since 1943.
  2. The tariffs are projected to raise the price level by 1.0–1.2%, equivalent to an average per-household consumer loss of $1,600–2,000 in 2024 dollars, and to lower 2025 real GDP growth by 0.6.
  3. The tariffs to date are estimated to raise $1.4–1.5 trillion over 2026–35 as conventionally scored, $300–360 billion less accounting for dynamic revenue effects, while leaving the US economy persistently 0.3–0.4% smaller, or $80–110 billion annually in 2024 dollars.

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.
  • Tariffs and Exchange Rates (and Stephen Miran) — The author argues that a universal tariff would prompt enough dollar appreciation to make US exports more expensive abroad, reducing trade flows in both directions while leaving the trade deficit roughly unchanged. Attempting to offset the export drag through deregulation would shift production away from import-competing goods, again leaving a similar trade deficit.
  • Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States — The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.

AI Summary. The U.S. goods trade deficit reached a record $1.2tn in 2024, with deficits run against more than 100 countries; a steady surplus in services left the combined goods and services gap at about $918bn. Gaps with Vietnam and India have grown as businesses shifted supply chains away from China.

Anthony DeBarros and Peter Santilli Wall Street Journal
Date Posted:

The US ran a record $1.2T trade deficit in goods in 2024. The US ran a $0.3T services trade surplus, leaving the overall deficit of goods and services at $918B.

Which countries account for the record US goods trade deficit?

Core argument: The U.S. goods trade deficit hit a record $1.2 trillion in 2024, with a steady services surplus leaving the combined goods and services deficit at about $918 billion.

The U.S. imported $1.2 trillion more in goods in 2024 than it exported, a record annual deficit and a major economic irritant for President Trump. The nation’s biggest trading partners—Mexico, Canada and China—contribute a sizable share of the gap. But the U.S. last year ran a trade deficit with more than 100 countries, according to Census Bureau data. Gaps with some of those nations, including Vietnam and India, have grown as businesses shifted supply chains away from China. The monthly goods deficit has been on a tear—to the downside. Preliminary census numbers for January show that, after hitting a record $123 billion in December, it rocketed to $153 billion as businesses raced to import goods ahead of tariffs. The U.S. runs a steady trade surplus in services, which in 2024 left the overall goods and services deficit at about $918 billion.

Takeaways by Macro Roundup® AI

  1. The U.S. goods trade deficit hit a record $1.2 trillion in 2024, with a steady services surplus leaving the combined goods and services deficit at about $918 billion.
  2. The U.S. ran goods trade deficits with more than 100 countries in 2024, according to Census Bureau data, with gaps widening with Vietnam and India as businesses shifted supply chains away from China.
  3. The monthly U.S. goods deficit rose from a record $123 billion in December to $153 billion in January, according to preliminary Census figures, as businesses raced to import goods ahead of tariffs.

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.
  • Message to President Trump: We (Europe) Take As Much From You (The US) As You Take From Us — 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.
  • Budget Cuts Can Solve Trump’s Trade Deficit Problem — 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.

AI Summary. The authors find that a supply-demand model of education and technology characterizes the U.S. college wage premium since the early 1960s, with skill-biased technological change and slower growth in the relative supply of college-educated labor raising the premium over time. They identify a diminished, recently negative demand-side contribution from skill-biased technological change as the main factor behind the premium's stagnation.

Leila Bengali, Robert Valletta and Cindy Zhao Federal Reserve Bank of San Francisco
Date Posted:

Bengali et al. find the stagnation in the college wage premium since 2005 “is largely due to demand-side changes: a slowdown in the pace of skill-biased technological change and rising substitutability between college and high school educated workers.”

Why has the college wage premium stopped rising?

Core argument: The authors find that the demand-side contribution of skill-biased technological change to the U.S. college wage premium was large early in their sample but diminished over time and appears to have turned negative in recent years, the main factor explaining the premium's stagnation over the past decade or so.

A supply-demand model of the race between education and technology accurately characterizes the dynamics of the U.S. college wage premium since the early 1960s. This approach emphasizes the role of skill-biased technological change and slower growth of the relative supply of college-educated labor, particularly starting in the 1980s, in increasing the college wage premium over time. We focus on assessing the contributions of demand and supply factors to the recent stagnation in the college wage premium. The demand-side contribution of skilled-biased technological change was large early in our sample frame but diminished over time and appears to have turned negative in recent years. This is the main factor explaining the stagnation in the college wage premium over the past decade or so. Through about 2005, changes in supply put downward pressure on changes in the college wage premium, with large effects evident in the early part of the sample prior to the 1980s. A slowdown in growth of the relative supply of college educated labor starting in the 1980s allowed the college wage premium to increase more rapidly

Takeaways by Macro Roundup® AI

  1. The authors find that the demand-side contribution of skill-biased technological change to the U.S. college wage premium was large early in their sample but diminished over time and appears to have turned negative in recent years, the main factor explaining the premium's stagnation over the past decade or so.
  2. A supply-demand model of the race between education and technology characterizes the dynamics of the U.S. college wage premium since the early 1960s, emphasizing skill-biased technological change and slower growth in the relative supply of college-educated labor from the 1980s.
  3. Through about 2005, changes in the relative supply of college-educated labor put downward pressure on the college wage premium, with large effects before the 1980s, after which slower supply growth allowed the premium to rise more rapidly.

Related Articles:

  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.
  • Falling College Wage Premiums by Race and Ethnicity — The college wage premium is largest for Asian workers, whose college graduates earn more than twice what high school graduates earn — about a 120% premium versus roughly 70–80% for Black, Hispanic, and White workers. The premium has edged down slightly for all groups except Hispanic workers since the pandemic recession.
  • Why Do Wages Grow Faster for Educated Workers? — College graduates sort into professional, non-routine occupations where wages rise much more with job tenure, and the author estimates this occupational sorting explains at least half of the life-cycle growth in the college wage premium. That premium is estimated at 22% at age 26, 49% at age 40, and 56% at age 60.

AI Summary. S&P Global Ratings estimates global government borrowing will reach a record $12.3tn, a 3% rise in sovereign bond issuance across 138 countries that would lift the total debt stock to a record $76.9tn, or 70.2% of global GDP. S&P attributes the increase to higher defence and other spending by major economies alongside higher interest rates.

Ian Smith Financial Times
Date Posted:

S&P forecasts global government borrowing will hit a record of $12.3T in 2025, raising the total debt stock to a record $76.9T.

Are higher defense spending and interest rates pushing government borrowing to records?

Core argument: S&P Global Ratings estimates global government borrowing will reach a record $12.3tn this year, a 3% rise in sovereign bond issuance across 138 countries, as higher defence and other spending combines with higher interest rates.

Global government borrowing is expected to reach a record $12.3tn this year, as a rise in defence and other spending by major economies and higher interest rates combine to push up debt levels. The 3% rise in sovereign bond issuance across 138 countries would take the total debt stock — which has been pushed higher by the global financial crisis, coronavirus pandemic and now the need for greater European defence spending — to a record $76.9tn, according to estimates by S&P Global Ratings. Overall, the stock of debt will reach 70.2% of global GDP, according to S&P. This has risen steadily since 2022 but is below the 73.8% hit during 2020, when governments responded to the pandemic with huge spending programmes.

Takeaways by Macro Roundup® AI

  1. S&P Global Ratings estimates global government borrowing will reach a record $12.3tn this year, a 3% rise in sovereign bond issuance across 138 countries, as higher defence and other spending combines with higher interest rates.
  2. The total stock of government debt will hit a record $76.9tn, pushed higher by the global financial crisis, the coronavirus pandemic and the need for greater European defence spending, according to S&P Global Ratings.
  3. Government debt will reach 70.2% of global GDP, up steadily since 2022 but below the 73.8% reached in 2020, when governments responded to the pandemic with huge spending programmes, according to S&P Global Ratings.

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 US Borrowing Surge: Outpacing Europe for the Foreseeable Future — Public debt in the euro area is projected to rise 11 percentage points to 100% of GDP by 2034, while US public debt is projected to rise twice as much, 25 percentage points, to 122% of GDP.
  • CBO Releases January 2025 Budget and Economic Outlook — The Congressional Budget Office projects federal debt held by the public will climb from about 98% of GDP to 118% by 2035, with deficits totaling $22tn over the decade and interest costs rising to 4.1% of GDP. Real growth is projected to average 1.8%, with inflation near 2%.

AI Summary. Years of European defence underspending have created a stock problem—depleted weapons, hardware, and technology, plus gaps in operational capacity, full-spectrum battlefield capability, and personnel—that higher spending can only fill slowly. Europe's cumulative shortfall against NATO's 2% of GDP target is about €850bn, and exceeds €2,650bn measured against US spending near 3.5% of GDP.

Chris Marsh Money: Inside and Out
Date Posted:

Since 2014 the US has spent $8.4T on defense, more than double the rest of NATO’s $3.8T. Europe’s shortfall relative to the 2% target since 2014 was €2.65T. @GeneralTheorist notes that increased flows may not address the underlying “stock” issue.

Can higher defense spending quickly close Europe's accumulated military stock gap?

Core argument: European NATO members' cumulative defence spending shortfall relative to the 2% of GDP target since 2014 totals EUR850bn, with Germany's gap largest in absolute terms at above EUR200bn and Italy's about EUR150bn.

Much of the discussion about increasing defence spending in light of recent geopolitical developments fails to acknowledge that this protracted underspend has left a stock problem—a depleted stock of weapons, other hardware, and technology; but also gaps in operational capacity, full spectrum battlefield capability, and personnel. As such, while increasing defence spending today is welcome, it will only fill the “stock” gap slowly. Consider the cumulative underspend by NATO countries over the past decade relative to the 2% target and relative to US spending in % of GDP. Data provided by NATO only begins in 2014. Germany’s shortfall to 2% is largest in absolute terms and cumulates to above EUR200B, Italy about EUR150B, etc. The aggregate shortfall for Europe is EUR850B. To reach further and “catch-up” with the US spending closer to 3.5% of GDP Germany would need to spend an additional EUR550B (or EUR800B in total), Italy and France would need to spend above EUR400B in total, and so on. The aggregate shortfall for Europe since 2014 exceeds EUR2,650B.

Takeaways by Macro Roundup® AI

  1. European NATO members' cumulative defence spending shortfall relative to the 2% of GDP target since 2014 totals EUR850bn, with Germany's gap largest in absolute terms at above EUR200bn and Italy's about EUR150bn.
  2. Matching US defence spending closer to 3.5% of GDP would require Europe to have spent more than EUR2,650bn since 2014, including EUR800bn in total for Germany and above EUR400bn in total each for Italy and France.
  3. Protracted underspending has left a stock problem—depleted weapons, hardware, and technology, plus gaps in operational capacity, full spectrum battlefield capability, and personnel—that higher defence spending will fill only slowly.

Related Articles:

  • European Defence Shares Jump As Blistering Rally Gathers Pace — 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.
  • 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.

Wednesday, March 5, 2025

AI Summary. Germany's incoming governing partners agreed to exempt defense spending above 1% of GDP from the constitutional borrowing limit, create a €500bn off-budget vehicle for debt-funded infrastructure, and loosen borrowing rules for states. Goldman Sachs estimated the package could lift German growth to as much as 2%, versus its 0.8% forecast, if approved and implemented quickly.

Ian Smith, Mari Novik, Olaf Storbeck and Laura Pitel Financial Times
Date Posted:

German borrowing costs surged after parties hoping to form Germany’s next government agreed on a €500B infrastructure fund and overhaul of borrowing rules. The yield on the 10-year Bund rose 31bps to 2.79% in the largest one-day move since 1997.

How much would loosening German borrowing limits boost growth?

Core argument: German borrowing costs rose by the most since 1997 after Friedrich Merz and the Social Democrats agreed to exempt defence spending above 1% of GDP from the constitutional borrowing limit and create a €500bn off-balance sheet infrastructure vehicle.

Chancellor-in-waiting Friedrich Merz agreed with the rival Social Democrats to exempt defence spending above 1% of GDP from Germany’s strict constitutional borrowing limit, set up a €500bn off-balance sheet vehicle for debt-funded infrastructure investment and loosen debt rules for states. Deutsche Bank economists described the deal as “one of the most historic paradigm shifts in German postwar history”, adding that both the “speed at which this is happening and the magnitude of the prospective fiscal expansion is reminiscent of German reunification”. Analysts at Goldman Sachs said the package could boost German economic growth to as much as 2% next year — up from the bank’s current forecast of 0.8% — if it is approved and implemented quickly. The euro rose 0.7% against the dollar to $1.070, its highest since November, and German stocks surged. Europe’s defence sector extended a blistering rally. Shares in Rheinmetall, Germany’s largest defence company, were up 7.2% while Paris-listed Thales rose 7.6%.

Takeaways by Macro Roundup® AI

  1. German borrowing costs rose by the most since 1997 after Friedrich Merz and the Social Democrats agreed to exempt defence spending above 1% of GDP from the constitutional borrowing limit and create a €500bn off-balance sheet infrastructure vehicle.
  2. Goldman Sachs analysts said the fiscal package could lift German growth to as much as 2% next year, up from the bank's forecast of 0.8%, if approved and implemented quickly.
  3. The euro rose 0.7% against the dollar to $1.070, its highest since November, while shares in Rheinmetall gained 7.2% and Paris-listed Thales rose 7.6%.

Related Articles:

  • What Military Catch-Up? — Years of European defence underspending have created a stock problem—depleted weapons, hardware, and technology, plus gaps in operational capacity, full-spectrum battlefield capability, and personnel—that higher spending can only fill slowly. Europe's cumulative shortfall against NATO's 2% of GDP target is about €850bn, and exceeds €2,650bn measured against US spending near 3.5% of GDP.
  • European Defence Shares Jump As Blistering Rally Gathers Pace — 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.
  • 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.

AI Summary. A trade war is by definition a stagflation shock, raising prices while lowering sales, and persistent policy uncertainty could lead consumers and firms to hold back spending and hiring. If tariffs on Canada and Mexico persist for months, the Federal Reserve is likely to focus on a rising unemployment rate and begin cutting rates.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk argues that policy uncertainty “could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex.”

Does a trade war create a stagflation shock that forces rate cuts?

Core argument: A trade war is by definition a stagflation shock, since tariffs raise prices while sales fall, leaving the Fed facing higher inflation alongside a rising unemployment rate.

The bigger risk to markets is sentiment. We are already seeing consumer sentiment and corporate sentiment being impacted. If policy uncertainty persists, consumers and firms may begin to hold back spending decisions. Combined with DOGE-driven layoffs, this will put upward pressure on the unemployment rate. From a Fed perspective, the biggest problem is that tariffs increase prices and hence inflation. That is why a trade war, by definition, is a stagflation shock: Higher prices and lower sales. If tariffs on Canada and Mexico continue for several months, then the Fed will focus on the rising unemployment rate and start cutting rates soon. The biggest downside risk is that policy uncertainty could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex. The key indicator to watch over the coming weeks is jobless claims.

Takeaways by Macro Roundup® AI

  1. A trade war is by definition a stagflation shock, since tariffs raise prices while sales fall, leaving the Fed facing higher inflation alongside a rising unemployment rate.
  2. Consumer and corporate sentiment are already being affected, and if policy uncertainty persists, consumers and firms may hold back spending decisions, which combined with DOGE-driven layoffs would push the unemployment rate higher.
  3. If tariffs on Canada and Mexico continue for several months, the Fed will focus on the rising unemployment rate and start cutting rates soon, with jobless claims the key indicator to watch.

Related Articles:

  • Downside Risks Intensifying — Federal workforce layoffs and contract cuts are projected by consensus to eliminate 300,000 jobs, but with studies showing two contractors for every federal employee, total job losses could approach 1mm. Economic policy uncertainty is spiking while credit spreads have not widened and incoming data remain strong.
  • Microsoft Dropped Some AI Data Center Leases, TD Cowen Says — Microsoft has voided data center leases totaling a couple of hundred megawatts of capacity and stopped converting preliminary agreements into formal leases, according to brokerage TD Cowen's checks with supply chain providers. TD Cowen also says Microsoft is redirecting some planned international spending to the US, suggesting a material slowdown in international leasing.
  • 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.

AI Summary. Tariffs do not necessarily shift the balance between national income and spending, so they are unlikely to improve the trade balance or expand manufacturing employment. Tariffs strengthen the currency, which raises imports and harms exports, while also raising the cost of critical intermediate goods used by exporters.

Maurice Obstfeld Financial Times
Date Posted:

Maurice Obstfeld argues trade policies, including tariffs, cannot close chronic American trade deficits unless the US increases net national saving, particularly reducing its unsustainable federal deficits.

Can tariffs improve the trade balance and expand manufacturing employment?

Core argument: Tariffs do not necessarily shift the balance between US income and spending in either direction, which is why they fail to improve either the trade balance or manufacturing employment.

Tariffs do not necessarily push the balance between income and spending in one direction or the other, which is why they don’t improve the trade balance or manufacturing employment. Tariffs will cause the currency to strengthen, as we have seen in the dollar’s gyrations in response to levies threatened against imports from Mexico, Canada, China and now Europe. This both raises imports and harms exports. Tariffs also hurt exports by raising the prices of critical intermediate goods. The post-tariff trade balance will be little changed and possibly even lower. And if US spending beyond its income is roughly unaffected, the need to shift resources into services and import goods from abroad remains unchanged. Manufacturing employment will not expand. Some foreign debts can be attributed to “short-sighted” consumption. Borrowing temporarily palliates the challenges of lower-income households. US household debt, at 62 per cent of GDP at the end of 2024, is a disproportionate burden on the poor and is growing. The US federal government continues to live unsustainably beyond its means.

Takeaways by Macro Roundup® AI

  1. Tariffs do not necessarily shift the balance between US income and spending in either direction, which is why they fail to improve either the trade balance or manufacturing employment.
  2. Tariffs strengthen the dollar, as seen in its gyrations in response to levies threatened on imports from Mexico, Canada, China and Europe, which raises imports and harms exports, while tariffs also raise prices of critical intermediate goods.
  3. US household debt stood at 62 per cent of GDP at the end of 2024 and is growing, falling disproportionately on the poor, while the federal government continues to live unsustainably beyond its means.

Related Articles:

  • Budget Cuts Can Solve Trump’s Trade Deficit Problem — 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.
  • 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.
  • How Tariffs Can Help America — Tariffs raise the price of imported goods, transferring income from net importers to net exporters and taxing consumers to subsidize domestic producers. The author argues that tariffs on final goods would redirect U.S. demand toward domestic production, raising GDP, employment, and wages while lowering debt.

AI Summary. Pettis argues that saving rates in China, Japan, South Korea, Germany, Russia and Saudi Arabia are driven by their own domestic policies and conditions, and in turn drive the US saving rate. He notes the US has an open capital account, deep financial markets, and limited intervention in credit allocation.

Mike Pettis @michaelxpettis
Date Posted:

Responding to Maurice Obstfeld, @michaelxpettis argues that the chronic US current account deficit reflects deep and open US capital markets, which encourage chronic surplus countries to export their excess savings to the United States.

Do foreign saving policies determine the US saving rate?

Core argument: Pettis argues that Obstfeld assumes high saving rates in China, Japan, South Korea, Germany, Russia and Saudi Arabia are forced up by Americans' "refusal" to save, rather than by those countries' own domestic policies and conditions.

As a good American, Obstfeld cannot imagine that foreigners could determine US saving rates. He must instead assume that Chinese saving rates are forced up by the "refusal" of Americans to save, and not just Chinese saving rates, but also Japanese, South Korean, German, Russian and Saudi Arabian saving rates. He cannot consider the idea that domestic saving rates in these countries can be driven by domestic policies and conditions, and can in turn drive the savings rates of the US, even though it is an economy with a totally open capital account, a very flexible and deep financial sector, a rules-based system of governance, and very limited intervention in credit allocation and in the domestic economy – and one that has wanted to reduce its trade deficit for decades but has been unable to do so.

Takeaways by Macro Roundup® AI

  1. Pettis argues that Obstfeld assumes high saving rates in China, Japan, South Korea, Germany, Russia and Saudi Arabia are forced up by Americans' "refusal" to save, rather than by those countries' own domestic policies and conditions.
  2. Pettis contends that domestic saving rates abroad can drive the US saving rate, despite the US having a totally open capital account, a deep and flexible financial sector, rules-based governance, and very limited intervention in credit allocation.

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.
  • Pettis On Krugman — The author argues that capital inflows to the US are driven more by conditions abroad than by US economic performance, since the US attracts capital and runs deficits in both good times and bad. China grew faster than the US yet exported capital, a result of capital controls, an undervalued currency, and government-managed credit.
  • The Dangers of a US Capital Inflow Tax — A tax on foreign capital inflows large enough to balance US trade would raise real interest rates for all US borrowers, domestic and foreign-funded alike, since some foreign funding is needed whenever a trade deficit exists. The argument holds the deficit would shrink mainly through lower investment, reducing demand, growth, and innovation.

AI Summary. Using Texas administrative records, researchers estimate that program rank matters for business and law degrees: a 20-place ranking improvement is associated with returns higher by 0.026 for an MBA (average return 0.125) and 0.07 for a law degree (average return 0.453). Returns to nursing, social work, and pharmacy degrees show no such ranking dependence.

Joseph Altonji and Zhengren Zhu National Bureau of Economic Research
Date Posted:
Is Database:
Database

Controlling for student quality, Altonji et al. estimate school rank has a moderate, statistically significant effect on returns to Texas MBA and JD degrees, but little impact on earnings from graduate nursing, social work, and pharmacy degrees.

Does program ranking affect the financial return to graduate degrees?

Core argument: Using Texas administrative records, the authors estimate that a 20-place improvement in MBA program ranking raises the return to the degree by 0.026 (s.e. 0.014), against an average MBA return of 0.125.

We estimate school-specific returns to a JD, an MBA, and degrees in nursing, pharmacy, and social work, the graduate degrees for which there are significant numbers of Texas programs that have been ranked by US News and World Report. We address selection into specific institutions by controlling for the programs to which a student applied and was admitted. We treat JDs from different schools as different degrees and in addition add controls for selection into different law schools based on students’ application and admission records. We then regress the school specific returns on a measure of program rank from US News & World Reports. We find that the institution has a substantial effect on the return to an MBA. An increase of 20 places in rankings increases the return by 0.026 (0.014) [st errors in parentheses] which is economically significant relative to the average return of 0.125. The average of the returns to a set of unranked MBA programs is close to zero (0.034). The return to a JD increases by 0.07 (0.014) for a 20-spot increase in program ranking. In comparison the average return to JD is 0.453, significant at the 1% level. We do not find that the returns to nursing, social work, and PharmD programs depend on the ranking.

Takeaways by Macro Roundup® AI

  1. Using Texas administrative records, the authors estimate that a 20-place improvement in MBA program ranking raises the return to the degree by 0.026 (s.e. 0.014), against an average MBA return of 0.125.
  2. The authors estimate the return to a JD rises by 0.07 (s.e. 0.014) per 20-spot gain in program ranking, compared with an average JD return of 0.453, significant at the 1% level.
  3. The authors find no evidence that returns to nursing, social work, and PharmD programs depend on US News & World Report rankings, while the average return across a set of unranked MBA programs is close to zero (0.034).

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  • Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges — Children from top-1% families are more than 2x as likely as middle-class students with comparable SAT/ACT scores to attend an Ivy-Plus college, with two-thirds of the gap attributable to higher admissions rates. The authors attribute this advantage to legacy preferences, weight on non-academic credentials, and athlete recruitment.
  • Marginal Returns to Public Universities — Using admission-score cutoffs across all 35 Texas public universities, the author estimates that marginally admitted students complete an additional year of four-year education, are 12 percentage points more likely to earn a bachelor's degree, and earn 5–10% more than marginally rejected peers, with gains driven by students who otherwise would not attend a four-year school.

AI Summary. Estimates of immigrants' fiscal impact depend heavily on the assumptions used: the lifetime fiscal impact of a 22-year-old high school dropout shifts from negative $315,000 under one set of assumptions to a small negative number under another. The author argues the accounting approach common in this literature understates immigrants' contribution to fiscal sustainability.

Stan Veuger American Enterprise Institute
Date Posted:
Is Database:
Database

Adjudicating the debate between @DanielDiMartino and @David_J_Bier, @stanveuger argues the likely fiscal impact of a 22-year-old high school dropout immigrant is “a small negative number.”

Do assumptions drive estimates of immigrants' fiscal impact?

Core argument: Substituting Bier's assumptions for Di Martino's shifts the estimated fiscal impact of a 22-year-old high school dropout from negative $315,000 to a small negative number.

My sense is that the “accounting” approach commonly adopted in this literature consistently underrates the contribution immigrants make to fiscal sustainability. Were one to adopt Bier’s assumptions instead of Di Martino’s, the fiscal impact of a 22-year-old high school dropout changes from a negative $315,000 to a small negative number. My own preferred set of assumptions would assign both more public-good spending and more business tax revenue to immigrants than Bier does but would generate a significantly more positive estimate in this case than Di Martino’s set of assumptions.

Takeaways by Macro Roundup® AI

  1. Substituting Bier's assumptions for Di Martino's shifts the estimated fiscal impact of a 22-year-old high school dropout from negative $315,000 to a small negative number.
  2. The "accounting" approach commonly adopted in the fiscal-impact-of-immigration literature arguably underrates the contribution immigrants make to fiscal sustainability.
  3. A set of assumptions assigning immigrants both more public-good spending and more business tax revenue than Bier does would still generate a significantly more positive estimate in this case than Di Martino's assumptions.

Related Articles:

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  • Manhattan Institute’s “Lifetime Fiscal Impact of Immigrants” Report Shows Upside to Immigration — A review of the Manhattan Institute's model estimating that the average immigrant adds $10,000 in lifetime present value to the federal budget while less-educated immigrants are fiscally negative finds the result hinges on assumptions such as large immediate defense spending increases and no added corporate tax payments.
  • 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.