Edward Conard

Top Ten New York Times Bestselling Author

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

Macro Roundup


Tuesday, April 1, 2025

AI Summary. The author argues that US trade deficits have funded debt-financed consumption rather than domestic business investment, noting that since 2000 real interest rates have tended to fall as trade deficits widen while business investment has been uncorrelated with both. If tariffs shrink trade deficits, interest rates could rise and worsen America's fiscal balance.

Edward Conard Wall Street Journal
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For 25 yrs, trade deficits funded debt-fueled consumption, not business investment, addicting voters to government spending without higher taxes (or inflation). If tariffs reduce trade deficits, it could raise interest rates, worsening this imbalance.

Have trade deficits funded consumption rather than business investment?

Core argument: Over 25 years, U.S. trade deficits and the mistaken belief that they chiefly fund business investment fueled a debt-financed rise in American consumption that contributed to the 2008 financial crisis and unsustainable deficit spending, with little boost to domestic investment or production.

For 25 years, trade deficits and the mistaken belief that they chiefly fund business investment have fueled a debt-financed increase in American consumption. This contributed to the 2008 financial crisis and unsustainable growth of deficit spending, while doing little to boost domestic investment or production. If the demand for business investment primarily drove trade deficits, real interest rates and trade deficits would rise with the demand for domestic business investment. But since 2000, real interest rates have tended to fall as trade deficits expand, and business investment has been uncorrelated with both, at least not until fiscal deficits started to devour savings. Unproductive spending slows growth, not the means necessary to fund it—greater taxes, interest expense, inflation, and future government spending cuts. If tariffs reduce trade deficits, it could raise interest rates, sending America’s precarious fiscal balance spiraling out of control.

Takeaways by Macro Roundup® AI

  1. Over 25 years, U.S. trade deficits and the mistaken belief that they chiefly fund business investment fueled a debt-financed rise in American consumption that contributed to the 2008 financial crisis and unsustainable deficit spending, with little boost to domestic investment or production.
  2. Since 2000, real interest rates have tended to fall as U.S. trade deficits expand, and business investment has been uncorrelated with both, contrary to the view that demand for domestic business investment drives trade deficits.
  3. If tariffs reduce U.S. trade deficits, interest rates could rise and send America's precarious fiscal balance spiraling out of control, since unproductive spending slows growth rather than the taxes, interest expense, inflation, and future spending cuts needed to fund it.

Related Articles:

  • The U.S. Trade Deficit: Myths and Realities — Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
  • Pettis on Obstfeld — 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.
  • The Evolution of Global Trade in 2024 — Global trade imbalances consist of one very large surplus and one very large deficit: China's goods surplus exceeds $1tn a year, while the U.S. non-petroleum deficit drives the Asian surplus. The author argues a Chinese surplus this large can be sustained only alongside a large U.S. deficit.

AI Summary. The U.S. manufactures trade deficit of about 4% of GDP, if eliminated, is estimated to raise manufacturing value-added by roughly 2.5 percentage points of GDP — about a quarter larger than the current 10% share — because manufacturers also buy many services. That would reverse only about 2.5 of the roughly 17-point fall in manufacturing's employment share since 1970.

Paul Krugman Paul Krugman
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Paul Krugman notes that since 1970 US manufacturing employment has declined from 25% of the workforce to 8% at the end of 2024. He calculates that closing the US trade deficit would likely increase US manufacturing share by only 2.5pp.

How much would eliminating the trade deficit restore manufacturing's share?

Core argument: The U.S. manufactures trade deficit ran about 4% of GDP last year, and a rough estimate suggests eliminating it entirely would raise manufacturing value-added by roughly 2.5 percentage points from 10% of GDP, since manufacturers buy many services.

Last year the U.S. ran a manufactures trade deficit of around 4% of GDP. Suppose we assume that this deficit subtracted an equal amount from spending on U.S. manufactured goods. In that case what would happen if we somehow eliminated that deficit? Well, it would raise the share of manufacturing in GDP — currently 10%— by less than 4 percentage points, because manufacturing firms buy a lot of services. A rough estimate is that manufacturing value-added would rise by around 60% of the change in sales, or 2.5 percentage points, implying that the manufacturing sector would be around a quarter larger than it is. Manufacturing as a share of employment has fallen about 17 points since 1970. Complete elimination of the trade deficit would undo only around 2.5 points of that decline. So even if tariffs “worked,” which they won’t, they would fall far short of restoring manufacturing to its former glory. [Likewise, even] Germany’s huge trade surpluses haven’t been enough to avoid a big shift away from manufacturing,

Takeaways by Macro Roundup® AI

  1. The U.S. manufactures trade deficit ran about 4% of GDP last year, and a rough estimate suggests eliminating it entirely would raise manufacturing value-added by roughly 2.5 percentage points from 10% of GDP, since manufacturers buy many services.
  2. Manufacturing's share of U.S. employment has fallen about 17 percentage points since 1970, and completely eliminating the trade deficit would undo only around 2.5 points of that decline.
  3. Germany's large trade surpluses have not prevented a big shift away from manufacturing, and even tariffs that "worked" would fall far short of restoring U.S. manufacturing to its former glory.

Related Articles:

  • China is Suffering its Own ‘China Shock’ — Academic analysis of 12 labour-intensive Chinese manufacturing industries estimates average employment fell about 14%, or nearly 4mn jobs, between 2011 and 2019, with textile roles down 40%; a further analysis of the same sectors found 3.4mn more jobs lost through 2023. Researchers argue industrial upgrading and automation are cutting demand for lower-skilled workers and depressing their wages.
  • America Is Missing The New Labor Economy – Robotics Part 1 — 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.
  • The Mysterious Slowdown in U.S. Manufacturing Productivity — US manufacturing labor productivity growth slowed broadly after the Great Recession, with the four largest firms in each industry averaging –0.5% growth from 2010 to 2022 versus 3.7% from 1987 to 2007, and smaller follower firms showing an identical 4.2 percentage-point decline. The authors find the slowdown spans all industries and firm sizes.

AI Summary. Bloomberg Economics estimates a maximalist tariff approach could add up to 28 percentage points to the average US tariff rate, cutting US output by 4% (over $1tn) and raising prices by nearly 2.5% over two to three years. The estimate assumes foreign retaliation and excludes indirect costs such as deferred investment and spending.

Shawn Donnan, Enda Curran, and Maeva Cousin Bloomberg
Date Posted:

Imports of goods and services are ~14% of US GDP. “Maximalist” tariffs would cut GDP by ~4% and lift prices by ~ 2.5% over the next 2-3 years, per Bloomberg Economics. For context, the global financial crisis left US GDP ~6% below trend after 3 years.

How much would maximalist tariffs cost US output and prices?

Core argument: Bloomberg Economics estimates a maximalist tariff approach could add up to 28 percentage points to the average US tariff rate, cutting US GDP by 4% and lifting prices by close to 2.5% over two to three years.

An analysis by Bloomberg Economics found that a maximalist approach could add up to 28 percentage points to the average US tariff rate — resulting in a hit of 4% to US GDP and lifting prices by close to 2.5% over a two- to three-year period. This would be equivalent to lopping more than $1 trillion off US output, or roughly the GDP of Pennsylvania. For comparison, this would be nearly as bad as the impact of the global financial crisis — which left the economy roughly 6% smaller after 3 years than its pre-crisis trend. Trump's vocal concerns about value-added tax in Europe and non-tariff barriers in China mean they could face a major tariff shock, and potentially lose much of their exports to the US, Bloomberg Economics found. But because a limited share of GDP is exposed, the economic hit would likely be manageable. Canada and countries in Southeast Asia would likely feel a bigger disruption. The Bloomberg Economics forecast assumes retaliation by other countries in the form of tariffs on US imports. It doesn’t capture indirect economic costs of the policies, such as how uncertainty about the future might lead companies to shelve investment plans and consumers to put off purchases.

Takeaways by Macro Roundup® AI

  1. Bloomberg Economics estimates a maximalist tariff approach could add up to 28 percentage points to the average US tariff rate, cutting US GDP by 4% and lifting prices by close to 2.5% over two to three years.
  2. The estimated hit of more than $1 trillion to US output, roughly the GDP of Pennsylvania, would be nearly as bad as the global financial crisis, which left the economy about 6% below its pre-crisis trend after three years.
  3. Bloomberg Economics finds Europe and China could face a major tariff shock and lose much of their exports to the US, though limited GDP exposure would likely keep the hit manageable, while Canada and Southeast Asia would likely feel bigger disruption.

Related Articles:

  • The Evolution of Global Trade in 2024 — Global trade imbalances consist of one very large surplus and one very large deficit: China's goods surplus exceeds $1tn a year, while the U.S. non-petroleum deficit drives the Asian surplus. The author argues a Chinese surplus this large can be sustained only alongside a large U.S. 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.
  • Steel Productivity has Plummeted Since Trump’s 2018 Tariffs — Output per hour in the U.S. steel industry has fallen 32% since 2017, following the imposition of 25% tariffs on steel imports, while output per hour for the economy as a whole rose 15%. U.S. steel-using firms, which employ roughly 45x as many Americans as steel producers, pay about 75% more for steel than global competitors.

AI Summary. The authors estimate that after a rise in regional labor demand, about 80% of added employment initially comes from lower state unemployment, but at a five-year horizon more than 60% comes from population growth through migration. They find no evidence that migration's responsiveness to employment changes has declined.

Andrea Foschi, Christopher House, Christian Proebsting, and Linda Tesar Brookings Papers on Economic Activity
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In response to labor demand shocks, ~80% of initial job gains come from lower unemployment. But after 5 years, >60% is driven by net migration, per Foschi et al. Migration’s share of adjustment has held steady since the 1950s.

How do workers respond to regional labor demand increases over time?

Core argument: Following an increase in regional labor demand, roughly 80% of the resulting employment gain comes from a reduction in state unemployment, with in-migration and higher labor participation accounting for the remaining 20%.

We examine the responsiveness of labor participation, unemployment and labor migration to exogenous variations in [regional] labor demand. We find that labor migration is a significant margin of adjustment for all our instruments. Following an increase in regional labor demand, roughly 80% of the increased employment is accounted for by a reduction in state unemployment. In-migration and increased labor participation account for the remaining 20 percent. As time passes, however, these shares switch. At the five-year horizon, more than 60% of the estimated increase in employment is due to increased state population, while only 20-25% comes from reduced unemployment. [While] the [overall] rate of migration between U.S. states has declined over the last 40 years, based on historical data back to the 1950s, we find no evidence of a decline in the elasticity of migration to changes in employment.

Takeaways by Macro Roundup® AI

  1. Following an increase in regional labor demand, roughly 80% of the resulting employment gain comes from a reduction in state unemployment, with in-migration and higher labor participation accounting for the remaining 20%.
  2. At the five-year horizon, more than 60% of the estimated employment increase is attributed to increased state population, while only 20–25% comes from reduced unemployment.
  3. Although the rate of migration between U.S. states has declined over the last 40 years, historical data back to the 1950s show no evidence of a decline in the elasticity of migration to changes in employment.

Related Articles:

  • Places versus People: The Ins and Outs of Labor Market Adjustment to Globalization — Analysis of U.S. register data finds that employment levels in places exposed to Chinese import competition more than fully rebound, while employment-to-population ratios stay depressed and manufacturing employment continues to shrink. The authors find the recovery comes almost entirely from young adults and foreign-born immigrants taking first jobs in lower-wage service sectors, with both in- and out-migration remaining depressed.
  • The Determinants Of Declining Internal Migration — A 10% increase in wages where people live is associated with 3.5% less migration, while a 10% increase in destination wages is associated with 7.8% more migration; a 10% rise in destination home prices is associated with 2.6% less migration. The authors find wage responses alone would have raised migration rates, but housing-related factors more than offset them.
  • Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock — U.S. local labor markets more exposed to import competition from China saw substantially larger net reductions in their foreign-born populations, with no significant reduction among native-born residents. Within exposed areas, foreign-born and native-born workers had comparably sized declines in employment-to-population ratios.

AI Summary. Germany's planned defence spending has pushed 10-year German government bond yields close to 3%, lifting borrowing costs across the eurozone because German debt serves as the bloc's benchmark. Investors warn this intensifies pressure on heavily indebted economies; one simulation projects Italy's debt-to-GDP ratio reaching 153% and France's 122% by 2030 absent spending cuts or faster growth.

Ian Smith and Olaf Storbeck Financial Times
Date Posted:

Germany’s defense buildup is pushing 10-year Bund yields toward 3%, lifting borrowing costs across the Eurozone. Point72 estimates Italy’s debt-to-GDP could rise to 153% by 2030 (from 140%), and France’s to 122% (from 115%).

Does higher German defense spending raise borrowing costs across the eurozone?

Core argument: Ten-year German Bund yields have risen to close to 3%, the first time since the 2023 global bond sell-off, amid Germany's planned defence spending spree.

A surge in Eurozone government borrowing costs as a result of Germany’s planned defence spending spree will intensify debt pressures on other countries in the bloc and could make it harder for them to mount borrowing campaigns of their own, investors have warned. Ten-year Bund yields have risen to close to 3% this month for the first time since a global bond sell-off in 2023. That has pushed other government borrowing costs higher, thanks to German debt’s role as the de facto benchmark for the bloc’s market, prompting warnings about the impact on the finances of more heavily indebted economies. A simulation by Point72, factoring in higher defence spending as well as higher yields, shows that without spending cuts elsewhere, or a boost to growth, Italy’s debt-to-GDP ratio could rise to 153% by 2030, and France’s to 122%, from about 140% and 115% respectively.

Takeaways by Macro Roundup® AI

  1. Ten-year German Bund yields have risen to close to 3%, the first time since the 2023 global bond sell-off, amid Germany's planned defence spending spree.
  2. A Point72 simulation factoring in higher defence spending and higher yields shows Italy's debt-to-GDP ratio could rise to 153% by 2030 from about 140%, and France's to 122% from about 115%, absent spending cuts elsewhere or a boost to growth.
  3. Investors warn that because German debt serves as the de facto benchmark for the Eurozone market, rising Bund yields have pushed other governments' borrowing costs higher and could make it harder for them to mount borrowing campaigns of their own.

Related Articles:

  • Global Debt Report 2025 — About 60% of fixed-rate government debt in advanced economies maturing by 2027 — roughly $9tn — was issued before the recent interest-rate tightening, with weighted average yields below 2% versus projected 10-year rates near 3.6%, implying refinancing at nearly double the original cost. France, Spain, the UK, and the US face heightened vulnerability, with maturing debt exceeding 15% of GDP.
  • Global Government Borrowing Set to Hit Record $12.3tn — 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.
  • 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.

Wednesday, April 2, 2025

AI Summary. Ample physical capacity keeps inflation low and stable and allows lower interest rates, but when demand catches up to capacity constraints, better returns in the physical economy pull capital back to fund expansion, making a commodity super-cycle a capital-expenditure cycle. In real terms, total energy investment is below its level 15 years ago.

Jeff Currie and James Gutman Carlyle Group
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Global energy capex remains below 2010 levels in real terms. Per Carlyle’s Jeff Currie, supply investment is “inadequate” relative to demand growth, which is likely to exceed the 2.5% annual pace seen over the past 60 years.

How does physical capacity shape inflation, interest rates, and capital investment?

Core argument: Real overall energy investment today is lower than fifteen years ago, with oil and gas modestly crowded out by renewables, nuclear growing from a very low base, and grid investment flat, according to the authors.

When physical capacity is plentiful, inflation is low and stable, which allows for lower interest rates. Eventually, however, demand catches up to physical capacity constraints, creating potential for better returns in the physical economy than the financial economy, motivating the redirection of capital back into the physical economy, as we saw in the 1970s (1968-1980) and the BRICs super-cycle (2002-2014). The higher cost of capital simply reflects better returns in the physical economy and the need to attract capex to expand production capacity, which is where we believe we are nearing today. As a result, a commodity super-cycle is nothing other than a capex cycle. In real terms, overall investment in energy today is actually lower than fifteen years ago, when the focus on renewables really took off. Oil and gas have been modestly crowded out by renewables, nuclear has grown from a very low base, and grid investment has been flat.

Takeaways by Macro Roundup® AI

  1. Real overall energy investment today is lower than fifteen years ago, with oil and gas modestly crowded out by renewables, nuclear growing from a very low base, and grid investment flat, according to the authors.
  2. The authors argue that plentiful physical capacity keeps inflation low and stable and permits lower interest rates, until demand catches up to capacity constraints and returns in the physical economy exceed those in the financial economy.
  3. The authors contend a commodity super-cycle is nothing other than a capex cycle, as in 1968–1980 and the BRICs super-cycle of 2002–2014, and believe conditions are nearing that point today.

Related Articles:

  • Heliocentrism — 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.
  • 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.
  • Economic Growth Now Depends on Electricity, Not Oil — Average annual electricity load growth reached 3% and is projected to continue at that rate for five years, with utilities raising expected peak demand for 2029 by 12%, or 101 gigawatts, driven by data centers, new factories, electric vehicles, heat pumps, and hydrogen production.

AI Summary. Using variation in U.S. state minimum wages, the authors estimate that each $1 increase predicts a 5% (0.3 percentage point) rise in the likelihood of union membership among people ages 16–40. Membership declines among the minimum wage's most direct beneficiaries, consistent with free-riding, while gains occur among broader groups not directly affected.

Jeffrey Clemens and Michael Strain American Enterprise Institute
Date Posted:

During the 2010s, a $1 increase in a state’s minimum wage “predicts a 5% (0.3 pp) rise in the likelihood of union membership among individuals ages 16-40,” all from “groups that are not directly affected by the minimum wage.” @MichaelRStrain

Do minimum wage increases raise union membership?

Core argument: Using variation in U.S. states' minimum wages during the 2010s, the authors estimate that each $1 increase in the minimum wage predicts a 5 percent (0.3 percentage point) rise in the likelihood of union membership among individuals ages 16–40.

Over the past decade, organized labor has played a significant role in advocating for minimum wage increases. Why might this be, given that the minimum wage may act as a substitute for the bargaining power offered by labor unions? In this paper, we study the interplay between minimum wages and union membership. Using variation in U.S. states’ minimum wages during the 2010s, we estimate that each dollar in minimum wage increase predicts a 5 percent increase (0.3 pp) in the likelihood of union membership among individuals ages 16–40. Consistent with a classic “free-riding” hypothesis, however, we find that minimum wage increases predict declines in union membership among the minimum wage’s most direct beneficiaries. Instead, increases in union membership occur among much broader groups that are not directly affected by the minimum wage. A variety of non-monetary motivations may be at work. Coalition politics, for example, can shape the strategies and tactics of unions as well as the outlooks of their members, [and] policy advocacy may bolster an interest group’s cause by enhancing its public image.

Takeaways by Macro Roundup® AI

  1. Using variation in U.S. states' minimum wages during the 2010s, the authors estimate that each $1 increase in the minimum wage predicts a 5 percent (0.3 percentage point) rise in the likelihood of union membership among individuals ages 16–40.
  2. Consistent with a "free-riding" hypothesis, the authors find that minimum wage increases predict declines in union membership among the minimum wage's most direct beneficiaries, while gains occur among broader groups not directly affected.
  3. The authors point to possible non-monetary motivations for labor's advocacy, including coalition politics shaping union strategies, tactics, and members' outlooks, and policy advocacy bolstering an interest group's cause by enhancing its public image.

Related Articles:

  • “Compensate the Losers?” Economic Policy and Partisan Realignment in the US — The authors argue that partisan realignment by education reflects Democrats' declining supply of "predistribution" policies such as job guarantees, higher minimum wages, protectionism, and stronger unions, which less-educated Americans favor while more-educated Americans prefer taxes and transfers. They estimate changing views of the parties' economic policies explain roughly half the shift.
  • Do Minimum Wages Reduce Job Opportunities for Blacks? — The authors find evidence that higher minimum wages reduce employment among low-skill Black workers across every group examined — teens, high school dropouts, and young workers with at most a high school education — with larger effects for Black males, while such effects are not very detectable for whites.
  • Menu Adjustment in Response to the Minimum Wage: A Return to the New Jersey-Pennsylvania Border — Comparing New Jersey restaurant menu prices with those in neighboring Pennsylvania, where the minimum wage was unchanged, the authors estimate that each $1 increase in the minimum wage raised the price of an item by 7.0 cents on average. Pass-through was larger for items requiring more employee preparation steps, adding 0.3 cents per additional step.

AI Summary. Steel tariffs added about 1,000 jobs among protected steelmakers while cutting 75,000 jobs in steel-using industries such as autos and construction, and across all tariffed industries duties raised factory employment 0.4% but reduced payrolls 2%. Tariffs on Chinese furniture and appliances raised US prices and were borne by US importers and consumers.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest notes in 2019, tariffs on Chinese furniture resulted in “almost a 1:1 increase in furniture prices, and US domestic furniture production declined.”

Do tariffs cost more jobs downstream than they protect?

Core argument: Steel tariffs added roughly 1,000 jobs among protected steelmakers while cutting employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell.

When thinking about tariffs, it’s important to look at the big picture as well as the affected industry itself. While steel tariffs created 1,000 jobs for steelmakers protected by tariffs, they reduced employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell. Similarly, in all industries affected by Trump tariffs, duties boosted factory employment by 0.4% but reduced payrolls by 2% due to rising overall costs and retaliatory tariffs. We can also take a closer look at both furniture and appliance sectors. In 2019, the US raised tariffs on Chinese furniture. There was almost a 1:1 increase in furniture prices, and US domestic furniture production declined. This is the opposite of what the Administration believed would happen. The same is true when looking at tariffs on Chinese appliances. US importers and consumers paid the price, rather than Chinese appliance manufacturers whose prices remained stable.

Takeaways by Macro Roundup® AI

  1. Steel tariffs added roughly 1,000 jobs among protected steelmakers while cutting employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell.
  2. Across industries affected by Trump tariffs, duties raised factory employment by 0.4% but reduced payrolls by 2% as overall costs rose and trading partners retaliated.
  3. The 2019 US tariffs on Chinese furniture passed through to prices nearly 1:1 while US domestic furniture production declined, and tariffs on Chinese appliances were borne by US importers and consumers as Chinese producers' prices held stable.

Related Articles:

  • 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.
  • Steel Productivity has Plummeted Since Trump’s 2018 Tariffs — Output per hour in the U.S. steel industry has fallen 32% since 2017, following the imposition of 25% tariffs on steel imports, while output per hour for the economy as a whole rose 15%. U.S. steel-using firms, which employ roughly 45x as many Americans as steel producers, pay about 75% more for steel than global competitors.
  • Trump Warned U.S. Automakers Not to Raise Prices in Response to Tariffs — The White House warned chief executives of major U.S. automakers that it would look unfavorably on raising car prices in response to tariffs, leaving some executives concerned about retaliation. Automakers depend on federal regulators for critical approvals, though it is unclear what action the administration could take.

AI Summary. Broad 25% tariffs are projected to cut Canadian and Mexican GDP by about 5% and 7% respectively, and US GDP by over 2%, as intermediate goods like steel grow more expensive and export industries suffer. Measured by total goods trade with the US as a share of GDP, the US is 3-4x more exposed than most of its trading partners.

Ben Inker and John Pease GMO
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Total goods trade as a % of GDP shows the US is 3-4x more exposed than its trading partners, noting tariff risks, on top of high valuations, make the “American stock market a hard pitch”, suggests global asset manager GMO.

Do broad tariffs hurt the U.S. economy more than assumed?

Core argument: Under broad 25% tariffs, the authors expect GDP shocks of roughly 5% for Canada and 7% for Mexico, alongside a hit of over 2% of GDP for the United States.

U.S. exceptionalism often has us assuming that an American-made trade war would be worse for the world than it would be for America. It begs reminding that U.S. trade is of much larger relevance for the U.S. economy than it is for the economy of most other countries in the world. Under broad 25% tariffs, we should expect extreme shocks to the GDP of Canada and Mexico (5% and 7%, respectively). We should also expect a very unpleasant jolt to the U.S. economy (of over 2% of GDP), where intermediate goods (like steel) will become more expensive, and export-driven industries take it on the chin. Exhibit 2 – which looks at total goods trade with the U.S. as a percentage of GDP – shows that the U.S. is 3-4 times more exposed than most of its trading partners. As we see it, U.S. companies have at least as much at risk as non-U.S. ones from U.S. tariffs, so we don’t see a reason to retreat from our non-U.S. versus U.S. bet on those grounds.

Takeaways by Macro Roundup® AI

  1. Under broad 25% tariffs, the authors expect GDP shocks of roughly 5% for Canada and 7% for Mexico, alongside a hit of over 2% of GDP for the United States.
  2. The authors argue U.S. trade matters more to the U.S. economy than to most other countries, citing total goods trade with the U.S. as a share of GDP, which leaves the U.S. 3-4 times more exposed than most trading partners.
  3. The authors see U.S. companies as having at least as much at risk from U.S. tariffs as non-U.S. ones, with intermediate goods like steel becoming more expensive and export-driven industries taking the hit, and maintain their non-U.S. versus U.S. bet.

Related Articles:

  • 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.
  • 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.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.

AI Summary. Underlying inflation is running about 1–1.5 percentage points faster than normal, driven by both services and goods, with goods inflation accelerating while services inflation slows, partly an illusion tied to healthcare measurement. Income growth is slowing but remains persistently faster than pre-pandemic, consistent with modestly above-target inflation.

Matt Klein The Overshoot
Date Posted:

Wages are growing at a 4.2% annual rate, well above the pre-pandemic level of 2.9%, consistent with inflation running “about 1-1.5 percentage points faster than normal.” @M_C_Klein

Is underlying inflation still running faster than normal?

Core argument: Underlying U.S. inflation is running roughly 1–1.5 percentage points faster than normal, reflecting excessive inflation in both supercore services and goods.

Underlying inflation is still running about 1-1.5 percentage points faster than normal, thanks both to excessive inflation in supercore services and goods. Goods inflation had been accelerating, while services inflation had been slowing, although that is partly an illusion thanks to issues with healthcare inflation. Income growth is slowing somewhat, but is still persistently faster than pre-pandemic, consistent with the modestly faster-than-target inflation. Job churn has stabilized below where it was before the pandemic, consistent with the collapse in relative wage gains for job-switchers over job-seekers, but there is still a large gap between actual labor churn and what would be expected based on the pace of wage growth.

Takeaways by Macro Roundup® AI

  1. Underlying U.S. inflation is running roughly 1–1.5 percentage points faster than normal, reflecting excessive inflation in both supercore services and goods.
  2. Goods inflation had been accelerating while services inflation had been slowing, though the services slowdown is partly an illusion stemming from issues with healthcare inflation.
  3. Job churn has stabilized below its pre-pandemic level, consistent with the collapse in relative wage gains for job-switchers over job-seekers, yet a large gap remains between actual churn and what the pace of wage growth would imply.

Related Articles:

  • From Above to Below — 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.
  • Consumer Sentiment Deteriorating Rapidly — University of Michigan survey data show consumer sentiment declining for households earning both above and below $100,000, with job-loss worries at levels typically seen in recessions and a record-high share of consumers saying business conditions are worsening. Income expectations are falling while inflation expectations are rising rapidly.
  • The Richest Americans Kept the Economy Booming. What Happens When They Stop Spending? — The authors of an Institute for New Economic Thinking paper estimate that wealth gains among the top 10% of US households were large enough to explain the rise in total consumer spending above its longer-term trend, sustaining their spending even as their inflation-adjusted incomes shrank.

AI Summary. China's economic problem is too few good jobs rather than too few workers, a demand shortfall rather than a supply constraint, and surplus rural labor means that will remain true for a long time. Further manufacturing investment would produce more excess capacity and invite protection against Chinese export surges, including from Europe.

Martin Wolf Financial Times
Date Posted:

Martin Wolf predicts that Europe will mirror Trump’s tariffs to counter “inevitable surges of Chinese exports.” He argues that Chinese policy needs to shift “income towards households, developing the social safety net and increasing public consumption.”

Is China's problem too few good jobs, not workers?

Core argument: China's core economic constraint is a shortage of good jobs rather than of workers, a demand problem rather than one of potential supply, and surplus rural workers will keep it that way for a long time.

Many think that China’s demographic challenges are bound to destroy the economy. But the problem right now is too few good jobs, not too few workers. It is a demand problem, not one of potential supply. That will remain the case for a long time, because of surplus rural workers. During the early part of this century, the demand hole was partly filled by a huge current account surplus. Then, when this became impossible, after the financial crisis, the still bigger hole that then emerged was filled by a huge surge in investment in real estate and infrastructure. The former is already falling. But investing even more in manufacturing just guarantees ever more excess capacity and thus protection aimed against the inevitable surges of Chinese exports. Thus, the Europeans will follow Trump’s example. Indeed they will do so because of the diversion of China’s exports to their markets that will follow from his example.

Takeaways by Macro Roundup® AI

  1. China's core economic constraint is a shortage of good jobs rather than of workers, a demand problem rather than one of potential supply, and surplus rural workers will keep it that way for a long time.
  2. China's demand shortfall was filled early this century by a large current account surplus and, after the financial crisis, by a surge in real estate and infrastructure investment, with real estate investment already falling.
  3. Further Chinese investment in manufacturing guarantees more excess capacity and protection aimed against surges of Chinese exports, and Europeans will follow Trump's example as those exports are diverted to their markets.

Related Articles:

  • Economist Michael Pettis on China’s Consumption Paradox and the Pitfalls of a Trade War — China's low household consumption share of GDP is not an oversight but is integral to its manufacturing competitiveness, so raising one requires lowering the other. Japan's experience shows consumption share fell for five years after it pledged to raise it, then took 17 years to rise 10 percentage points as manufacturing's share shrank.
  • China is Suffering its Own ‘China Shock’ — Academic analysis of 12 labour-intensive Chinese manufacturing industries estimates average employment fell about 14%, or nearly 4mn jobs, between 2011 and 2019, with textile roles down 40%; a further analysis of the same sectors found 3.4mn more jobs lost through 2023. Researchers argue industrial upgrading and automation are cutting demand for lower-skilled workers and depressing their wages.
  • China Needs a Very High Consumption Share of GDP Growth — If consumption growth accounted for 70% of China's future GDP growth with nominal GDP growing 6% a year, the author estimates it would take 16 years for consumption to rise from 53.4% of GDP to 63–64%. Even with consumption driving 90% of growth, the shift would take 6 years.