Edward Conard

Top Ten New York Times Bestselling Author

  • “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
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “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
  • “…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
  • “…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 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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, March 11, 2025

AI Summary. Building an identical robotic arm in the US costs about 2.2x more than in China, and US-labeled components still depend heavily on Chinese parts and materials with no scalable alternative. The author argues China is the only country positioned to capture full-scale intelligent robotic automation, which would let it outcompete the US across production.

Dylan Patel, Reyk Knuhtsen, Niko Ciminelli, Jeremie Eliahou Ontiveros, Joe Ryu and Robert Ghilduta Semianalysis
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While higher US labor costs create a greater incentive to automate, @dylan522p argues China is the only country currently positioned to achieve full-scale factory automation. Building a similar robotic arm costs ~2.2x more in the US than in China.

Is China positioned to dominate intelligent robotic automation?

Core argument: Building a robotic arm identical to the Universal Robots UR5e in the US costs roughly 2.2x more than in China.

Automation and robotics is currently undergoing a revolution that will enable full-scale automation of all manufacturing and mission-critical industries. These intelligent robotics systems will be the first ever additional industrial piece that is not supplemental but fully additive– 24/7 labor with higher throughput than any human—, allowing for massive expansion in production capacities past adding another human unit of work. The only country that is positioned to capture this level of automation is currently China, and should China achieve it without the US following suit, the production expansion will be granted only to China, posing an existential threat to the US as it is outcompeted in all capacities. Today, building an exactly identical robotic arm (modeled after the Universal Robots UR5e) in the US is ~2.2x more expensive than in China. Under the hood, the situation is even more alarming. Even if those components are labeled “Made in USA”, they rely heavily upon China-made parts and materials - with no viable scalable alternative.

Takeaways by Macro Roundup® AI

  1. Building a robotic arm identical to the Universal Robots UR5e in the US costs roughly 2.2x more than in China.
  2. US-built robotic components labeled "Made in USA" rely heavily on China-made parts and materials, with no viable scalable alternative.
  3. China is the only country positioned to capture full-scale automation of manufacturing and mission-critical industries, and if it does so without the US following suit, the resulting production expansion poses an existential threat to the US.

Related Articles:

  • Global Robot Density in Factories Doubled in Seven Years — Global factory robot density reached a record 162 robots per 10,000 manufacturing employees, more than double the level of seven years earlier. The European Union averages 219 units per 10,000 employees, North America 197, and Asia 182, with Korea, Singapore, mainland China and Japan among the ten most automated economies.
  • How AI & Robots are Smashing Economics, and Why It Matters — As artificial intelligence and robots make wages less responsive to employment conditions, the link between tight labor markets and inflation weakens, undermining central banks' inflation-targeting frameworks. The author argues central banks would then need far larger interest-rate moves to achieve the same effect, producing more volatile and less predictable outcomes.
  • What Progress Has There Been In Industrial Robots? — Industrial robot repeatability improved little between 1972 and 1984, with a typical 1-meter reach, 10kg payload arm accurate to about 1 mm in both years, but a comparable 2023 robot achieves roughly 0.01–0.02 mm, 50 to 100x more precise. Such a robot cost 2 to 3x more in the 1980s than today, before accounting for cheap Chinese robot arms.

AI Summary. After roughly 30 years of flat productivity, real labor productivity at U.S. restaurants rose over 15% during the COVID pandemic and has persisted. The authors find this gain is strongly correlated with shorter customer dwell times, and the aggregate decline in dwell time can explain almost all of the increase.

Austan Goolsbee, Chad Syverson, Rebecca Goldgof and Joe Tatarka National Bureau of Economic Research
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Labor productivity in the restaurant industry rose sharply during the pandemic and remains 10-15% higher than pre-Covid, driven by take-out and delivery. The fraction of customers spending 10 minutes or less in-house rose 10 ppt. @Austan_Goolsbee

Why did restaurant productivity jump after decades of no growth?

Core argument: Real labor productivity at U.S. restaurants surged over 15% during the COVID pandemic after remaining almost constant for nearly 30 years, and the gain has persisted even as many conditions returned to pre-pandemic levels.

We document that, after remaining almost constant for almost 30 years, real labor productivity at U.S. restaurants surged over 15% during the COVID pandemic. This surge has persisted even as many conditions have returned to pre-pandemic levels. Using mobile phone data tracking visits and spending at more than 100,000 individual limited service restaurants across the country, we explore the potential sources of the surge. It cannot be explained by economies of scale, expanding market power, or a direct result of COVID-sourced demand fluctuations. The restaurants’ productivity growth rates are strongly correlated, however, with reductions in the amount of time their customers spend in the establishments, particularly with a rising share of customers spending 10 minutes or less. The frequency of such ‘take-out’ [and “delivery service”] customers rose considerably during COVID, even at fast food restaurants, and never went back down. The magnitude of the restaurant-level relationship between productivity and customer dwell time, if applied to the aggregate decrease in dwell time, can explain almost all of the aggregate productivity increase in our sample.

Takeaways by Macro Roundup® AI

  1. Real labor productivity at U.S. restaurants surged over 15% during the COVID pandemic after remaining almost constant for nearly 30 years, and the gain has persisted even as many conditions returned to pre-pandemic levels.
  2. Using mobile phone data on visits and spending at more than 100,000 limited-service restaurants, the authors find the productivity surge cannot be explained by economies of scale, expanding market power, or a direct result of COVID-sourced demand fluctuations.
  3. Restaurant-level productivity growth is strongly correlated with reductions in customer dwell time, particularly a rising share of customers staying 10 minutes or less, a relationship that, applied to the aggregate dwell-time decline, can explain almost all of the aggregate productivity increase in the sample.

Related Articles:

  • Technological Disruption in the Labor Market — The authors measure US labor market structure since 1880 and find 1990–2017 less disruptive than any earlier period, because past changes from general-purpose technologies like steam and electricity were so profound. They identify four recent signs of accelerating change, including a 50%+ rise in science and technology employment share since 2010.
  • Does Worker Scarcity Spur Investment, Automation and Productivity? Evidence from Earnings Calls — The authors estimate that a one-unit increase in a firm's labor issues, as measured by earnings calls, raises its investment by 28 basis points, implying roughly $55bn in additional US investment attributable to tighter labor markets. The effect is concentrated in industries relying heavily on routine manual tasks, such as manufacturing assembly and warehouse packaging.
  • Labor Shock and Pay Raises Fuel a Dining Transformation — US full-service restaurants appear to have restructured toward operating with less labor, with higher minimum wages likely factoring into those decisions. Labor productivity, measured as real output per hour worked, grew at a 1.2% annualized rate over an earlier six-year stretch, then jumped 21% in a single year, retaining most of that gain after a slight pullback.

AI Summary. The National Association of Homebuilders estimates labor costs influence about 25% of a new home's final price, with labor making up 20–40% of construction costs and construction 60–70% of the sale price. Texas employs an estimated 400,000 undocumented construction workers, nearly half its construction workforce, and immigrants make up 63% of New York City's construction workforce.

Aziz Sunderji HomeEconomics
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.@AzizSunderji argues that deporting undocumented workers will make housing more expensive and reduce housing supply, noting that labor typically accounts for 20-40% of total construction costs, and that ~25% of construction laborers are undocumented.

Does the deportation of undocumented construction workers raise housing costs?

Core argument: ICE arrested nearly 600 people daily during the first three weeks of February, more than double the average pace under the Biden administration.

[Immigration] enforcement is ramping up dramatically. ICE arrested nearly 600 people daily in the first three weeks of February. That’s more than double the average during Biden's administration. Labor typically accounts for 20% to 40% of total construction costs. Construction costs represent 60% to 70% of a new home's sale price. On average, the National Association of Homebuilders estimates that labor costs directly influence around 25% of the final price of a new home. Two states in particular stand out. Texas and California (and, to a lesser extent, Florida and New York) rely heavily on undocumented labor, with Texas alone employing an estimated 400,000 undocumented construction workers—nearly half of its workforce. But the effects would be widespread. In New York City, immigrants make up 63% of the construction workforce, with approximately 40% being undocumented. While removing undocumented workers might increase wages for some American workers, these gains would be outweighed by broader negative effects: increased housing costs, reduced housing supply, construction delays, and overall economic inefficiency.

Takeaways by Macro Roundup® AI

  1. ICE arrested nearly 600 people daily during the first three weeks of February, more than double the average pace under the Biden administration.
  2. The National Association of Homebuilders estimates labor costs influence about 25% of a new home's final price, with labor at 20–40% of construction costs and construction at 60–70% of the sale price.
  3. Texas employs an estimated 400,000 undocumented construction workers, nearly half its construction workforce, while in New York City immigrants are 63% of construction workers and roughly 40% of those are undocumented.

Related Articles:

  • Construction Industry Braces for One-Two Punch: Tariffs and Deportations — Immigrants make up more than half of construction trade workers in Texas, California, New Jersey, and the District of Columbia, and undocumented workers are estimated at 13% of the construction industry, more than twice their share of the overall workforce. Roughly 130,000 newly arrived immigrants have joined the industry, bringing foreign-born construction employment to a record.
  • The “Neutral” Rate and Implications for 30-year Mortgage Rates — Economists at Bank of America argue the neutral interest rate has risen much more than previously thought, so policy may not be restrictive at all. The 30-year mortgage rate, typically 175–200 basis points above the 10-year Treasury yield, now carries a spread of about 250 basis points, which would narrow if the yield curve steepens.
  • The Price of Housing in the United States — Real housing price appreciation in the United States has varied widely across regions, with West Coast cities rising earlier while prices in other regions remained comparable in real terms to decades earlier. The authors find essentially no relationship between real price growth and zoning restrictiveness in the earliest period studied, and progressively steeper gradients in later periods.

AI Summary. Chinese startup Manus AI launched a preview of what it calls a general AI agent that can screen resumes, build trip itineraries, and analyze stocks from basic user instructions, claiming better performance than OpenAI's Deep Research on some measures. The company has not published technical papers, code, or model weights alongside the release.

Saritha Rai, Julie Zhu and Edwin Chan Bloomberg
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Manus AI, a Chinese startup, announced a “truly autonomous” general AI agent that can screen resumes, create trip itineraries, and analyze stocks in response to basic user instructions. Manus did not publish detailed papers with its release.

Are Chinese startups challenging the US lead in autonomous AI agents?

Core argument: Chinese startup Manus AI launched a preview of what it calls a general AI agent that screens resumes, builds trip itineraries and analyzes stocks from basic user instructions, claiming better performance than OpenAI's Deep Research on some fronts.

For months, many leading artificial intelligence developers in the US have been racing to develop sophisticated AI agents that can carry out more complex tasks on a user’s behalf. Now, a lesser-known Chinese startup is claiming to have vaulted ahead of them. Manus AI last week launched a preview version of what it called a general AI agent capable of screening resumes, creating trip itineraries and analyzing stocks in response to basic instructions from the user. The company said its service performed better on some fronts than OpenAI’s Deep Research, another recently released agent. While some AI agents require a certain amount of hand-holding and supervision, Manus co-founder and chief scientist Yichao Ji said its product is “truly autonomous.” Unlike DeepSeek and some US companies, Manus did not publish detailed papers alongside its release to provide details about how the technology was developed. It also hasn’t publicly released any of the code or weights associated with its AI for people to use independently.

Takeaways by Macro Roundup® AI

  1. Chinese startup Manus AI launched a preview of what it calls a general AI agent that screens resumes, builds trip itineraries and analyzes stocks from basic user instructions, claiming better performance than OpenAI's Deep Research on some fronts.
  2. Manus co-founder and chief scientist Yichao Ji described the product as "truly autonomous," in contrast to AI agents that require hand-holding and supervision.
  3. Manus, unlike DeepSeek and some US companies, published no detailed papers explaining how its technology was developed and has not publicly released the code or weights behind its AI.

Related Articles:

  • DeepSeek Debates: Chinese Leadership On Cost, True Training Cost, Closed Model Margin Impacts — Estimates put algorithmic progress in artificial intelligence at roughly 4x per year, meaning the compute needed for a given capability level falls 4x annually, with some industry leaders arguing improvements run closer to 10x. The Bank of China announced a $140bn (1tn yuan) five-year subsidy for the AI industry chain aimed at making China self-reliant in science and technology.
  • DeepSeek and the Sincerest Form of Flattery — DeepSeek appears to have trained its models about 45x more efficiently than other leading-edge models, combining existing techniques—activating only 37bn of 671bn parameters at a time, a smaller memory cache, lower-precision training, and multi-token prediction—alongside self-reinforcement learning. Training cost $5.6m, and its interface charges $0.14 per million tokens versus OpenAI's $7.50.
  • DeepSeek FAQ — Consumers and businesses stand to gain most from a future of effectively free AI products, along with big consumer tech companies, since a world of free AI makes product and distribution the decisive advantages they already hold. China also benefits, and the United States faces a choice between expanding chip export restrictions and permission-based regulation or allowing itself to compete.

AI Summary. Efforts to cut U.S. trade deficits and escalate tensions with allies risk deterring foreign capital, and foreigners need only stop buying U.S. assets to hit prices, as China and Russia already have. Bridgewater estimates nonfinancial U.S. firms capture 39% of global profits though the U.S. is 15% of world output.

Greg Jensen Wall Street Journal
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Bridgewater’s Greg Jensen notes US nonfinancial firms capture 39% of global profits while the US economy is 15% of global GDP, adjusted for PPP. He’s concerned the US corporate sector’s earnings will be stressed by the trade war.

Do trade tensions threaten foreign demand for U.S. assets?

Core argument: Nonfinancial U.S. firms capture 39% of all global profits while the U.S. economy accounts for only 15% of global GDP in purchasing-power-parity terms, according to a Bridgewater Associates analysis.

The U.S. push to reduce trade deficits and escalate tensions with key allies puts at risk the ability of U.S. assets to draw in capital from the rest of the world. Foreign countries hold far more U.S. assets than the U.S. holds in foreign assets. Europe and Japan have for years stashed their surpluses in the U.S. Major institutional investors are reassessing the wisdom of having such a disproportionate amount of their assets in the increasingly unreliable U.S. Foreigners don’t need to sell those assets to create a rout; if they stopped buying them it would be devastating for U.S. asset prices. China and Russia stopped accumulating U.S. assets years ago as the risks of holding them became clear. Why wouldn’t Canada and Europe do something similar? American companies depend on global cooperation. Based on a Bridgewater Associates analysis, nonfinancial U.S. firms capture 39% of all global profits while the U.S. economy is only 15% of global gross domestic product in purchasing power parity adjusted terms. U.S. multinationals can expect retaliation from countries facing headaches from Trump administration policies.

Takeaways by Macro Roundup® AI

  1. Nonfinancial U.S. firms capture 39% of all global profits while the U.S. economy accounts for only 15% of global GDP in purchasing-power-parity terms, according to a Bridgewater Associates analysis.
  2. Foreign countries hold far more U.S. assets than the U.S. holds abroad, and foreigners merely halting new purchases, without selling, would be devastating for U.S. asset prices.
  3. China and Russia stopped accumulating U.S. assets years ago, and Canada and Europe may do something similar as major institutional investors reassess concentrating their holdings in an increasingly unreliable U.S.

Related Articles:

  • Global Economies, Converging on Equilibrium, Confront a Geopolitical Regime Shift — Global economies are converging on a reasonable equilibrium, with developed-world central banks gradually cutting rates toward what they view as neutral, China prioritizing domestic demand after a deflationary stretch, and artificial intelligence showing potential to enhance productivity. Markets are discounting that stability, with US equity indexes pricing an even more exceptional decade than the last.
  • End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns — The authors estimate that declining interest and corporate tax rates accounted for over 40% of real corporate profit growth from 1989 to 2019, while falling risk-free rates explain the entire expansion in price-to-earnings multiples. Real earnings before interest and taxes grew slightly more slowly than in 1962–1989, at 2.2% versus 2.4% per year.
  • 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. U.S. bond and equity markets are vulnerable to European investors repatriating capital, as fiscal policy shifts in Europe weaken the dollar and redirect global capital flows away from U.S. financial assets. Trade conflict is also prompting Chinese fiscal stimulus and Canadian calls for large-scale spending, raising the potential for disorderly repatriation on multiple fronts.

Joseph Wang Fed Guy Blog
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.@FedGuy12 argues that increased European defense and infrastructure spending and possible US fiscal retrenchment are “shifting global capital flows at the expense of US financial assets, heralding a period of US underperformance.”

Are U.S. markets vulnerable to foreign investors repatriating capital?

Core argument: The German DAX is up 13% year to date while the S&P 500 is 2% lower, a divergence attributed to capital flows out of the U.S. and into Europe in search of higher returns.

U.S. fixed income markets are vulnerable to repatriation from European investors. European investors are significant holders of Treasuries and U.S. corporate bonds, in part due to relatively high U.S. interest rates and also due to the need to reinvest a chronic dollar trade surplus. The Administration’s foreign policy is compelling fiscal policy changes in the E.U. that [are] successfully weakening the dollar and are likely to narrow the trade deficit. But they are also shifting global capital flows at the expense of U.S. financial assets. The wide trade war is also rousing up Chinese fiscal stimulus and Canadian calls for pandemic level fiscal spending. This raises the potential of capital repatriation on multiple fronts that could become very disorderly. The changing growth trajectories on both sides of the Atlantic isheralding a period of U.S. underperformance that will impact both U.S. equities and bonds. The German DAX is up 13% year to date while the S&P 500 is 2% lower. The recent strengthening of the Euro coincides suggests significant capital flows out of the U.S. and into Europe in search of higher returns.

Takeaways by Macro Roundup® AI

  1. The German DAX is up 13% year to date while the S&P 500 is 2% lower, a divergence attributed to capital flows out of the U.S. and into Europe in search of higher returns.
  2. European investors are significant holders of U.S. Treasuries and corporate bonds, drawn by relatively high U.S. interest rates and the need to reinvest a chronic dollar trade surplus, leaving U.S. fixed income vulnerable to repatriation.
  3. The Administration's foreign policy is compelling E.U. fiscal policy changes that are weakening the dollar, while the wide trade war is rousing Chinese fiscal stimulus and Canadian calls for pandemic-level spending, raising the potential of disorderly capital repatriation on multiple fronts.

Related Articles:

  • German Borrowing Costs Soar By Most Since 1997 on ‘Historic’ Debt Deal — 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.
  • 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.

AI Summary. The share of US fourth-grade students meeting the National Assessment of Educational Progress reading proficiency standard fell from 35% in 2019 to 33% in 2022 and 30% in 2024. More fourth-graders now score below the basic level than score proficient.

Mark Schneider American Enterprise Institute
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The 2024 NAEP results show that 40% of fourth graders are “below basic” in reading proficiency, relative to 30% who are “at or above proficient.” 39% of American 8th graders are “below basic” in math, vs. 28% who are “at or above.”

Are US fourth-grade reading proficiency rates declining?

Core argument: The share of students meeting NAEP proficiency standards fell from 35% in 2019 to 33% in 2022 and to 30% in 2024.

To fully grasp the seriousness of the 2024 results, it is important to understand what we mean when we say “proficient” and “basic.” According to the National Assessment Governing Board, which sets policy for NAEP, “Students reaching [proficiency] have demonstrated competency over challenging subject matter, including subject-matter knowledge, application of such knowledge to real world situations, and analytical skills appropriate to the subject matter.” For example, fourth-grade students who reach the proficient level in reading can describe the impact of a character’s actions or explain how characters influence one another. The share of students who meet NAEP’s proficiency standards fell from 35% in 2019 to 33% in 2022, and then to 30% in 2024. In other words, there are now more fourth-grade students below basic than there are who are proficient.

Takeaways by Macro Roundup® AI

  1. The share of students meeting NAEP proficiency standards fell from 35% in 2019 to 33% in 2022 and to 30% in 2024.
  2. More fourth-grade students now score below NAEP's basic level than reach proficiency.
  3. The National Assessment Governing Board defines proficiency as demonstrated competency over challenging subject matter, with proficient fourth-grade readers able to describe the impact of a character's actions or explain how characters influence one another.

Related Articles:

  • Do Adults Have the Skills They Need to Thrive in a Changing World? — An international assessment of adult skills describes numeracy proficiency levels ranging from counting objects and adding small whole numbers at the lowest level, to extracting information from tables and graphs and performing basic arithmetic with money and percentages at Level 1, up to analysing complex mathematical information and critically evaluating whether data support a claim at Level 5.
  • Testing Theories of Why: Four Keys to Interpreting US Student Achievement Trends — US student test scores peaked in the early 2010s; from that peak to the pandemic, scores fell for students at the 10th and 25th percentiles while rising slightly at the 75th and 90th. After the pandemic, scores fell across all percentile groups, with much larger declines among lower-performing students.
  • What the Data Says About Pandemic School Closures, Four Years Later — Among school districts with similar poverty levels, remote learning was associated with greater declines in student achievement, and a district-level analysis found community poverty rates and the length of school closures had roughly equal effects on outcomes. For each week spent remote, students in poor districts experienced steeper math losses than peers in richer districts.

Wednesday, March 12, 2025

AI Summary. Simulations of the Federal Reserve's main macroeconomic model estimate that debt-financed deficits raise core prices about 0.2 percentage points over five years absent a central-bank response. With the central bank reacting, the cost shifts to interest rates: short rates roughly 0.25% higher, mortgage rates 23 basis points higher, and real household wealth 1.2% lower.

Ernie Tedeschi Yale University
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.@ernietedeschi of Yale’s Budget Lab writes that increasing the primary deficit by 1% of GDP, the cost of extending the TCJA, would raise mortgage rates by 23 bps and lower household wealth by 1.25% by 2029, assuming the Fed holds inflation constant.

Do rising deficits raise interest costs more than inflation?

Core argument: In FRB/US without a Fed reaction function, rising federal deficits raise core PCE prices by roughly 0.2 percentage points five years out, but when the Fed tightens, the price level is only 0.05% higher after five years.

FRB/US (the Federal Reserve’s workhorse macroeconomic model) [absent a Fed reaction function], has core PCE prices at roughly 0.2 percentage points higher five years out. As the Fed tightens in reaction to inflationary pressure, the trade-off shows up more in the form of higher interest rates and less in the form of realized inflation. In FRB/US, the effect [on] inflation is now imperceptible—mere basis points—and even after five years the price level is only 0.05% higher. But debt-financing still comes with costs. Now, short-run interest rates are persistently higher, by about 0.25%. Mortgage rates are 23 basis points higher after five years, about $600 per year in interest payments to the median home in today’s market. For the average small business loan, that means an extra $1,000 in interest annually. Real household wealth falls by 1.2% over 5 years, the equivalent of a $14,000 loss on average today. And even within the five years, the capital stock begins to take damage from higher interests and crowding-out. So with a credible central bank [that staves off fiscal dominance], households still face a cost-of-living tradeoff from higher debt even in the short-run, through interest costs rather than prices.

Takeaways by Macro Roundup® AI

  1. In FRB/US without a Fed reaction function, rising federal deficits raise core PCE prices by roughly 0.2 percentage points five years out, but when the Fed tightens, the price level is only 0.05% higher after five years.
  2. With the Fed tightening in response to fiscal pressure, short-run interest rates run about 0.25% higher and mortgage rates 23 basis points higher after five years, about $600 per year for the median home and an extra $1,000 annually on the average small business loan.
  3. Real household wealth falls 1.2% over five years in FRB/US, equivalent to a $14,000 average loss today, and the capital stock begins to take damage from higher interest rates and crowding-out within that window.

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%.
  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.
  • The 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.

AI Summary. Tariffs are estimated to weigh on growth through three channels: higher consumer prices that cut real income, tighter financial conditions, and trade policy uncertainty that delays business investment. The authors estimate tariffs will subtract 0.8pp from US GDP growth over the next year, with only 0.1–0.2pp offset by tax cuts and deregulation.

Jan Hatzius Goldman Sachs
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Jan Hatzius @GoldmanSachs downgraded his 2025 US growth forecast from 2.4% to 1.7%, citing changes in US trade policy that will reduce consumer income, tighten financial conditions, and delay investment.

How much do tariffs subtract from US growth?

Core argument: Tariffs are estimated to subtract 0.8pp from US GDP growth over the next year, with only 0.1–0.2pp of that drag offset by the slower-moving boost from tax cuts and regulatory easing.

Tariffs weigh on growth via three main channels. First, they raise consumer prices—and thereby cut real income—by an estimated 0.1% per 1pp increase in the average US tariff rate. (In theory, the drag could diminish if the tariff revenue is recycled into additional tax cuts, but this revenue will not be scored in the ongoing budget negotiations if it results from executive as opposed to congressional action.) Second, tariffs tend to tighten financial conditions, although the impact in this cycle looks smaller than in the 2018-2019 trade war when scaled by the size of the tariff hikes. Third, trade policy uncertainty leads firms to delay investment. All told, our new baseline implies that tariffs will subtract an estimated 0.8pp from GDP growth over the next year, with only 0.1-0.2pp of this drag offset by the (relatively slow-moving) boost from tax cuts and regulatory easing.

Takeaways by Macro Roundup® AI

  1. Tariffs are estimated to subtract 0.8pp from US GDP growth over the next year, with only 0.1–0.2pp of that drag offset by the slower-moving boost from tax cuts and regulatory easing.
  2. Each 1pp increase in the average US tariff rate is estimated to raise consumer prices by 0.1%, cutting real income, and tariff revenue will not be scored in budget negotiations if it results from executive rather than congressional action.
  3. Tariffs tend to tighten financial conditions—by less in this cycle than in the 2018–2019 trade war when scaled by the size of the tariff hikes—while trade policy uncertainty leads firms to delay investment.

Related Articles:

  • A Modest Stagflation Shock But Not a Recession — 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.
  • The Trade War Will Pound Stocks — Efforts to cut U.S. trade deficits and escalate tensions with allies risk deterring foreign capital, and foreigners need only stop buying U.S. assets to hit prices, as China and Russia already have. Bridgewater estimates nonfinancial U.S. firms capture 39% of global profits though the U.S. is 15% of world output.
  • Global Economies, Converging on Equilibrium, Confront a Geopolitical Regime Shift — Global economies are converging on a reasonable equilibrium, with developed-world central banks gradually cutting rates toward what they view as neutral, China prioritizing domestic demand after a deflationary stretch, and artificial intelligence showing potential to enhance productivity. Markets are discounting that stability, with US equity indexes pricing an even more exceptional decade than the last.

AI Summary. The S&P 500 fell 9% from its record high, with more than half of the decline coming from a 14% drop in the seven largest technology stocks, whose price-to-earnings ratio fell from 30x to 26x. The equal-weighted index declined 6%, leaving it 8% below its own record high.

David Kostin, Ben Snider, Ryan Hammond, Jenny Ma, et al. Goldman Sachs
Date Posted:

David Kostin and team revised their end-of-year S&P 500 target from 6500 to 6200, which would be up ~ 11% from current levels. Half of the recent drawdown is due to a 14% decline in the Mag 7 stocks which now have a P/E of 26x.

Are the largest technology stocks driving most of the index's decline?

Core argument: The S&P 500 has fallen 9% from its all-time high over three weeks, with more than half of the decline stemming from a 14% plunge in the Magnificent 7 stocks, whose P/E fell to 26x from 30x.

During the past three weeks the S&P 500 index has plummeted by 9% from its all-time high with more than half of the near-correction stemming from a 14% plunge in the share prices of the Mag 7 stocks (P/E to 26x from 30x). In contrast, last year the Mag 7 stocks accounted for more than half of the 25% total return of the overall index. Note that during the past 40 years the cap-weighted index has experienced a median calendar year drawdown of 10%, similar to the recent fall. However, the typical stock as represented by the equal-weight index (SPW) has declined by 6% during the past three weeks (P/E to 16x from 17x) and trades 8% below its all-time high reached at the end of November.

Takeaways by Macro Roundup® AI

  1. The S&P 500 has fallen 9% from its all-time high over three weeks, with more than half of the decline stemming from a 14% plunge in the Magnificent 7 stocks, whose P/E fell to 26x from 30x.
  2. The Magnificent 7 accounted for more than half of the S&P 500's 25% total return last year, and account for more than half of the index's recent 9% decline.
  3. The equal-weight S&P 500 has declined 6% over three weeks, with its P/E easing to 16x from 17x, and trades 8% below its end-of-November all-time high, against a 40-year median calendar-year drawdown of 10% for the cap-weighted index.

Related Articles:

  • Which U.S. Stocks Generated the Highest Long-Term Returns? — Of the 29,078 U.S. common stocks in a database spanning nearly a century, 51.6% had negative cumulative returns, while 17 stocks returned more than 5m% — led by Altria at 265m%. Those top performers averaged annualized returns of just 13.47%, underscoring the value of time invested.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • European vs. US Stocks: Which Market Comes Out On Top? — Since MSCI data began in 1970, US stocks have outperformed European stocks by an average of 0.8 percentage points per year, with $1 invested in 1970 growing to $268 in the US versus $141 in Europe over 55 years. Before the financial crisis the ranking was reversed, with the US gain equal to 57% of the European gain.

AI Summary. The author argues that the vast expansion of chemical production since World War 2 — billions of tons a year across 350,000 different chemicals, many of them endocrine disruptors — has made the environment toxic to human and other life. Central to the argument is a decline in men's sperm counts of nearly two-thirds since 1973.

Jeremy Grantham GMO
Date Posted:

Jeremy Grantham notes a two-thirds decline in men’s sperm concentration from 1973 to 2018, and argues endocrine-disrupting chemicals “have begun in the last 20 years to profoundly impact our ability to have children.”

Is rising chemical production making the environment toxic to human fertility?

Core argument: Men's sperm counts have fallen by almost two-thirds since 1973, which the author identifies as the most powerful result of rising chemical output for fertility.

The incredible increase in chemical output since World War 2 has resulted in a world that is simply toxic to life in most forms, including ours. These billions of tons a year of 350,000 different chemicals, many of which are endocrine disruptors, have begun in the last 20 years to profoundly impact our ability to have children. The most powerful result of all this, directly affecting our fertility, is that the quantity of men’s sperm has been reduced by almost two-thirds from 1973. But 1973 was already a very toxic era – sperm counts must already have been down from hunter-gatherer days. There are no good records, so we can only make intelligent guesses. (Mine would be that we must, by inference, be down by at least 75% from original levels.) The good news was that our species was hugely overdesigned in the case of sperm count, I like to say like a good Victorian bridge, and the first 40 or 45% reduction appeared to have absolutely no effect.

Takeaways by Macro Roundup® AI

  1. Men's sperm counts have fallen by almost two-thirds since 1973, which the author identifies as the most powerful result of rising chemical output for fertility.
  2. Billions of tons a year of 350,000 different chemicals, many of them endocrine disruptors, have over the past two decades profoundly affected human ability to have children, according to the author.
  3. The author infers that sperm counts are down at least 75% from original levels, notes no good records exist, and argues the first 40–45% reduction had no apparent effect because the species was hugely overdesigned.

Related Articles:

  • Global Sperm Counts Are Falling. This Scientist Believes She Knows Why — A researcher argues that "endocrine disrupting" chemicals — including pesticides, bisphenols that harden plastic, and phthalates that soften it — interfere with the body's natural hormones and may be lowering sperm counts and affecting the reproductive development of unborn children. Traces of these chemicals have been found in breast milk, placental tissue, urine, blood, and seminal fluid.
  • Sustainability or Bust: The Sheer Impossibility of Eternal Compound Growth — The author argues that compound growth in energy use cannot continue indefinitely, noting that sustaining the past 250 years' 2.3% annual growth for another 450 years would generate enough waste heat alone to boil the oceans. Greenhouse gases account for 95% of the heating effect of human energy use and waste heat diffusion under 5%.

AI Summary. Data from seven surveys of mental health and well-being, along with reported suicide rates, show teens and young adults in the US improving on every measure in recent years. The share of young adults reporting weekly depression fell from 16.5% to 13.3%, though it remains well above pre-pandemic levels.

Economist Staff The Economist
Date Posted:

Analysis by @TheEconomist suggests that mental health among US 12-18 year olds is improving: the percent reporting persistent feelings of sadness fell from 42% in 2022 to 40% in 2023.

Is the mental health of young Americans improving?

Core argument: In the CDC's National Health Interview Survey, the share of young adults reporting depression at least once a week fell from 16.5% in 2022 to 13.3% in 2023, though it remains well above pre-pandemic levels.

We examined data from seven different surveys of mental health and well-being, as well as reported suicide rates. On every measure teens and young adults seem to be doing better in the past few years. In the National Health Interview Survey carried out by the Centres for Disease Control and Prevention, the share of young adults who report feeling depressed at least once a week fell from 16.5% in 2022 to 13.3% in the most recent data from 2023 (although it is still well above pre-pandemic levels). In 2023 the share of 15- and 16-year-olds who said they don’t enjoy life was 24.7%, down from 28.8% in 2021. The suicide rate of 18-25-year-olds has also fallen to 16.1 for every 100,000, slightly below the rates from 2017 to 2019.

Takeaways by Macro Roundup® AI

  1. In the CDC's National Health Interview Survey, the share of young adults reporting depression at least once a week fell from 16.5% in 2022 to 13.3% in 2023, though it remains well above pre-pandemic levels.
  2. The share of 15- and 16-year-olds saying they don't enjoy life fell to 24.7% in 2023 from 28.8% in 2021.
  3. The suicide rate for 18-to-25-year-olds has fallen to 16.1 per 100,000, slightly below the rates from 2017 to 2019, and seven surveys of mental health and well-being suggest teens and young adults are doing better.

Related Articles:

AI Summary. A Japanese government survey found adults eating the smallest daily volume of vegetables since 2001, attributed to inflation, with prices of Chinese cabbage, leek and carrots running 227%, 167% and 140% above their long-term averages. Food as a share of household spending stands at a 43-year high.

Leo Lewis Financial Times
Date Posted:

The BoJ’s efforts to end Japan’s long deflationary slump face growing consumer retrenchment: wage hikes haven’t kept pace with inflation, and “higher prices are making [consumers] more thrifty, not making them spend more.”

Is inflation changing how households eat in Japan?

Core argument: Japan's most recent government survey of national eating habits found adults eating the smallest daily volume of vegetables since 2001, which the government attributes to inflation.

In its most recent survey of national eating habits, Japan’s government discovered something unsettling. Adults in this wealthy, healthy country were now eating the smallest daily volume of vegetables since 2001. The reason? Inflation. At the beginning of March, prices of the three key ingredients of Japanese hotpot, a traditional winter dish — Chinese cabbage, leek and carrots — were respectively 227, 167 and 140% above their long-term average. The Engel coefficient, which measures food as a proportion of household spending, is at a 43-year high. The collective decision to cut back on greens has come as the country undergoes what some see as its biggest economic inflection in over 30 years: the much-heralded “normalisation” of Japan’s relationship with money after a long period of stagnant prices and moribund growth.

Takeaways by Macro Roundup® AI

  1. Japan's most recent government survey of national eating habits found adults eating the smallest daily volume of vegetables since 2001, which the government attributes to inflation.
  2. At the start of March, prices of Chinese cabbage, leek and carrots — the three key ingredients of Japanese hotpot — stood 227%, 167% and 140% above their long-term averages.
  3. Japan's Engel coefficient, which measures food as a proportion of household spending, is at a 43-year high as the country undergoes what some see as the "normalisation" of its relationship with money after a long period of stagnant prices and moribund growth.

Related Articles:

  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • Japan Births Fall to Lowest in 125 Years — Japan recorded 720,988 births, a 5% drop from the prior year and the lowest since records began 125 years ago, with births declining for nine straight years despite government financial incentives for couples to have more children. Combined with a record 1.6mn deaths, Japan's population shrank by almost 900,000 people net of immigration.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

AI Summary. Shipyards tied to China's defense industrial base account for 15% of the country's active shipyards but 40% of commercial output by tonnage, with over 75% of their production built for firms outside China and Hong Kong. The authors argue these commercial revenues offset fixed costs and effectively subsidize China's naval expansion.

Matthew Funaiole, Brian Hart and Aidan Powers-Riggs Center for Strategic and International Studies
Date Posted:

In 2024, China State Shipbuilding Corporation built more commercial vessels by tonnage than the entire US shipbuilding industry had built since the end of World War II. @CSIS notes “commercial revenues effectively subsidize China’s naval expansion.”

Do foreign commercial ship orders help fund China's naval expansion?

Core argument: China's Tier-1 and Tier-2 shipyards, closely intertwined with the country's defense industrial base, account for just 15% of active shipyards but 40% of total commercial output by tonnage, while more numerous private yards produce 36%.

A disproportionate share of China’s commercial shipbuilding occurs at shipyards that are closely intertwined with the country’s sprawling defense industrial base. Tier-1 and Tier-2 yards represent just 15% of active shipyards in China but produce a striking 40% of its total commercial output by tonnage. Private shipyards, although far more numerous, combine for just 36% of the country’s commercial production. Foreign buyers are responsible for the vast majority of shipbuilding production across China’s industry, but especially at Tier-1 and Tier-2 yards. Over 75% of the production at these shipyards was destined for firms based outside of China or Hong Kong. By purchasing vessels from these yards, foreign firms have funneled billions of dollars of revenue into entities that are central to China’s naval modernization. Given the substantial overlap in material inputs, production techniques, personnel, and infrastructure required for both commercial and military shipbuilding, commercial revenues effectively subsidize China’s naval expansion. By offsetting fixed costs, these earnings enable Chinese shipyards to scale military production more efficiently and at lower marginal expense.

Takeaways by Macro Roundup® AI

  1. China's Tier-1 and Tier-2 shipyards, closely intertwined with the country's defense industrial base, account for just 15% of active shipyards but 40% of total commercial output by tonnage, while more numerous private yards produce 36%.
  2. Over 75% of production at China's Tier-1 and Tier-2 shipyards was destined for firms based outside China or Hong Kong, funneling billions of dollars in revenue into entities central to China's naval modernization.
  3. Because commercial and military shipbuilding share material inputs, production techniques, personnel, and infrastructure, commercial revenues offset fixed costs and effectively subsidize China's naval expansion, letting shipyards scale military production at lower marginal expense.

Related Articles:

  • The Hidden Threat to National Security Is Not Enough Workers — At Newport News Shipbuilding, half of welders now have less than four years' experience, down from an average of 20 years three decades ago, and inexperience reduces productivity and adds delays. Shipbuilding wages starting at $17 an hour no longer carry a premium over local retail and warehouse jobs paying up to $24.
  • China Is Rapidly Building Warships. Satellite Images Reveal The Scale — China's shipbuilding capacity now exceeds the United States' by such a margin that it can build more ships in a month than American yards build in a year, with a workforce estimated at nearly 5x the US level. Chinese yards handled more than 1,700 orders in a year, compared with fewer than five for American shipyards.
  • China’s Shipyards Are Ready for a Protracted War. America’s Aren’t — China produced more than half of the world's commercial shipbuilding output, while Europe accounts for about 5% and the US next to nothing, with most of the remainder built in South Korea and Japan. Analysts argue that in a protracted conflict China's wartime-scale yards could quickly accelerate production, replace lost ships, and repair damaged ones.