Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, August 27, 2025

AI Summary. Using administrative tax data, the authors estimate the 400 wealthiest Americans paid a total effective tax rate of 23.8% of economic income, down from about 30% earlier in the decade and below the average rate for the full US population. The decline followed a drop in corporate taxes paid.

Akcan Balkir, Emmanuel Saez, Danny Yagan and Gabriel Zucman National Bureau of Economic Research
Date Posted:

Until the TCJA, the top 400 US individuals by wealth and the full US population both had effective tax rates of ~30%. The TCJA reduced the Top 400 individuals’ total ETRs to 23.8% in 2018 – 2020, well below those of the full population.

How much do the wealthiest Americans pay in taxes?

Core argument: The top 400 US individuals paid a total effective tax rate of 23.8% of economic income in 2018–2020, down from about 30% earlier in the decade and substantially below the average rate for the full US population.

Figure 2 shows the evolution of top 400 taxes over the 2010 - 2020 period. Panel (a) plots the raw nominal amounts of taxes paid without any adjustment whatsoever. We can see a decline of one-third in the nominal amount of corporate tax paid by the top 400 between 2014-17 and 2018-20, in line with the decline in the federal corporate tax rate from 35% to 21%. Corporate tax payments also fell between 2010-13 and 2014-17, [but] due to a decline in corporate profits accruing to the top 400. The patterns are similar when dividing taxes paid by our benchmark measure of economic income (panel b). Our results come from the numerator: absolute amounts of taxes paid fell. Panel (c) reports our main findings: the evolution of the total effective tax rate of the top 400 as a fraction of economic income. While the top 400 and the top 100 used to have a similar effective tax rate as the US population on average (around 30%), this is no longer the case after the Tax Cuts and Jobs Act. Top 400 individuals have a total effective tax rate of 23.8% in 2018 - 2020, down from about 30% earlier in the decade. This is substantially lower than the average tax rate for the full US population.

Takeaways by Macro Roundup® AI

  1. The top 400 US individuals paid a total effective tax rate of 23.8% of economic income in 2018–2020, down from about 30% earlier in the decade and substantially below the average rate for the full US population.
  2. Nominal corporate tax paid by the top 400 fell by one-third between 2014–17 and 2018–20, in line with the federal corporate tax rate cut from 35% to 21%.
  3. The top 400 and top 100 once had effective tax rates similar to the US population average of around 30%, a parity that no longer holds after the Tax Cuts and Jobs Act, with the change coming from falling absolute amounts of taxes paid.

Related Articles:

  • Comment on “How Much Tax Do Billionaires Pay?” — After adjusting existing estimates for families filing on multiple tax returns, double-counted capital income, missing taxes, and standard income definitions, the author finds the top 400 effective tax rate exceeds the overall rate by 13 percentage points, though it remains below the rate paid by the top 0.01% ranked by income.
  • Reply: Measuring Income Inequality: A Primer on the Debate — The authors defend their estimates of top income shares against a critique, arguing that the critique misrepresents how differing methods explain gaps in top 1% income shares and omits relevant context. They argue their estimates are consistent with other high-quality inequality studies and that audit studies find higher income misreporting outside the top 1%.
  • Is America Today Really No More Unequal Economic Class-Wise than It Was in 1960? — The wealthiest person on the Forbes 400 list held about 85,000x median family income in 1982 versus roughly 2,500,000x in 2023, a roughly 30x increase in that ratio. The author argues this is hard to reconcile with research finding little change in after-tax top income shares since 1980, and presumes those figures contain errors.

AI Summary. After adjusting existing estimates for families filing on multiple tax returns, double-counted capital income, missing taxes, and standard income definitions, the author finds the top 400 effective tax rate exceeds the overall rate by 13 percentage points, though it remains below the rate paid by the top 0.01% ranked by income.

David Splinter DavidSplinter.com
Date Posted:

After adjustments detailed below, Splinter finds that the Forbes 400’s effective tax rate is above that of the full population by 13pp, contrary to BSYZ.

How much tax do the wealthiest families actually pay?

Core argument: Adjusting the BSYZ estimates for Forbes 400 families spanning multiple tax returns, double-counted capital income, missing taxes, and standard income definitions raises the top 400 effective tax rate to 13 percentage points above the overall rate.

Starting with the BSYZ estimates, I adjust for Forbes 400 families being on multiple tax returns, remove double-counted capital income, add missing taxes, and apply standard income definitions. The resulting top 400 effective tax rate is above the overall rate by 13 percentage points. But even after these adjustments, the corrected top 400 effective tax rate is below the tax rate of the top 0.01% (about 32K individuals) when ranked by income. This dip in top rates at the very top of the wealth distribution is expected due to the reasons noted in BSYZ—retained earnings and accelerated depreciation of business expenses—but also because the top 400 are ranked by wealth in these estimates even though taxes are overwhelmingly based on income. Moving from ranking by income to wealth breaks the link with the tax base. Moreover, because BSYZ use one-year wealth rankings, they capture rapid wealth increases that push new members into the top 400 and push down annual tax rates. A longer-run picture would capture more taxes from these individuals as they realize capital gains or receive dividends related to those wealth increases, as well as end-of-life charitable bequests that represent a significant share of their wealth

Takeaways by Macro Roundup® AI

  1. Adjusting the BSYZ estimates for Forbes 400 families spanning multiple tax returns, double-counted capital income, missing taxes, and standard income definitions raises the top 400 effective tax rate to 13 percentage points above the overall rate.
  2. Even after these adjustments, the top 400 ranked by wealth show a lower effective tax rate than the top 0.01% ranked by income (about 32K individuals), a dip attributed to retained earnings, accelerated depreciation, and ranking by wealth rather than income.
  3. BSYZ's one-year wealth rankings capture rapid wealth increases that push new members into the top 400 and push down annual tax rates, while a longer-run picture would capture later realized capital gains, dividends, and end-of-life charitable bequests.

Related Articles:

AI Summary. U.S. construction labor productivity in 2023 was essentially unchanged from 1948, with real output per worker in 2020 more than 30% below its 1970 level, even as aggregate U.S. labor productivity tripled between 1950 and 2020. Construction accounted for about 4.5% of U.S. GDP in 2024.

Chen Yeh Federal Reserve Bank Of Richmond
Date Posted:

“Labor productivity in U.S. construction in 2023 was essentially the same as it was in 1948.” Btw 1970 and 2020, labor productivity in the American construction sector fell more than 30%.

Has U.S. construction productivity declined while overall productivity tripled?

Core argument: Real output per worker in U.S. construction was more than 30% lower in 2020 than in 1970, leaving 2023 labor productivity essentially unchanged from its 1948 level.

Labor productivity in U.S. construction in 2023 was essentially the same as it was in 1948. More importantly labor productivity in U.S. construction has actually been falling since the 1970s. Real output per worker in 2020 was more than 30% lower than in 1970, following one of the most persistent productivity declines in any major industry. This decline has significant implications not only for housing affordability but for overall economic growth. Construction represented about 4.5% of U.S. GDP in 2024. While this sector is less than half of manufacturing in terms of value added, the importance of a decline in construction productivity for its aggregate counterpart cannot be overstated. The magnitude of this decline becomes particularly striking when compared to overall economic performance. During the 1950s and 1960s, construction productivity actually grew at rates that matched or exceeded the broader economy. However, around 1970, construction productivity began a sustained downward trajectory that has continued for five decades. While aggregate U.S. labor productivity tripled between 1950 and 2020, its measure for construction remained essentially the same.

Takeaways by Macro Roundup® AI

  1. Real output per worker in U.S. construction was more than 30% lower in 2020 than in 1970, leaving 2023 labor productivity essentially unchanged from its 1948 level.
  2. Aggregate U.S. labor productivity tripled between 1950 and 2020 while construction productivity remained essentially flat, after construction matched or exceeded the broader economy's growth rates during the 1950s and 1960s.
  3. Construction accounted for about 4.5% of U.S. GDP in 2024, less than half of manufacturing in value added, with the sector's productivity decline carrying implications for housing affordability and overall economic growth.

Related Articles:

  • The Strange and Awful Path of Productivity in the U.S. Construction Sector — U.S. construction sector labor productivity and total factor productivity grew faster than the whole economy in the 1950s and 1960s, then fell, ending 2020 below their 1950 levels while economywide labor productivity and total factor productivity were 290% and 230% higher. Construction labor productivity fell about 1% a year from 1970 to 2020.
  • Building Costs and House Prices — Analysis of nearly 75 years of RSMeans construction cost data across many metro areas finds that building costs, while a large share of new home costs, are a weak predictor of variation in house prices, especially in the highest-cost metros. The authors attribute this decoupling partly to restrictions that prevent housing supply expansion in high-demand areas.
  • Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation — Homes built per construction worker boomed after World War II and fell after 1970, a decline the authors link to local land-use regulation that limits project size and keeps construction firms small and less productive. They estimate US residential builders would be roughly 60% more productive if their size distribution matched manufacturing.

AI Summary. A reported 2.2m drop in the US foreign-born population in the household survey implies implausible labor-market outcomes: either payroll employment would need downward revision by millions, or the true unemployment rate would be at a 72-year low of 2.6% with a dangerously overheating economy.

Jed Kolko Peterson Institute For International Economics
Date Posted:

If the CPS-implied drop in the US immigrant population of 2.2mm were accurate, Jed Kolko argues, “overall U.S. unemployment would be at a 72-year low of 2.6% and the economy would be dangerously overheating.”

Is the reported drop in the foreign-born population credible?

Core argument: The Current Population Survey's reported 2.2 million decline in the U.S. foreign-born population since January would, if accurate, require nonfarm payroll employment to be revised downward by millions.

The reported decline in the foreign-born population in the CPS—if true—would lead to absurd implications about the labor market. Had the foreign-born population really fallen by 2.2 million people since January, then nonfarm payroll employment would need to be revised downward by millions—or the true unemployment rate would now be at a 72-year low of 2.6% and the economy would be dangerously overheating. The numbers just don’t add up.

Takeaways by Macro Roundup® AI

  1. The Current Population Survey's reported 2.2 million decline in the U.S. foreign-born population since January would, if accurate, require nonfarm payroll employment to be revised downward by millions.
  2. Taking the CPS foreign-born decline at face value would imply a true unemployment rate of 2.6%, a 72-year low, with the economy dangerously overheating.
  3. The reported multi-million decline in the U.S. foreign-born population does not add up against labor market data, given its implications for payrolls and unemployment.

Related Articles:

  • U.S. Unauthorized Immigrant Population Reached a Record 14 Million in 2023 — Pew Research Center estimates the U.S. unauthorized immigrant population reached an all-time high of 14m in 2023, or 4.1% of the total population, after a record two-year increase of 3.5m. The overall immigrant population peaked above 53m before declining by more than 1m in the first half of 2025.
  • Illegal Population Down Since January — An analysis of the Current Population Survey finds the foreign-born population fell by 957,000 over a four-month period, with the labor force component down 601,000, one of the largest four-month declines in three decades. The decline was entirely among non-citizens, with non-citizens from Latin America arriving in 1980 or later down 1.07m.
  • How a Historic Immigration Drop Is Changing the Job Market — Estimates of a falling immigrant population rely on the Census Bureau's Current Population Survey, which the agency cautions against using to track immigrant populations over time because its roughly 60,000-household sample is scaled to possibly outdated population estimates. Noncitizen responses have dropped 18%, versus 3.7% for others.

AI Summary. China's cycle of relentless competition and price cutting stems from its long-standing growth model, with the latest phase driven by an engineered shift of investment from property into manufacturing that was not tied to expected demand growth. Administrative fixes and exports shift excess capacity between sectors rather than resolving it.

Michael Pettis China Financial Markets
Date Posted:

China will struggle to address “involution,” the disruptive process of relentless competition and price cutting, as excess capacity derives from China’s “inability to align increases in domestic production with increases in domestic demand.”

What drives China's relentless price cutting, and do administrative fixes resolve it?

Core argument: China's involution — relentless competition and price cutting among businesses — is rooted in its decades-old growth model, with its most recent manifestation emerging after the property bubble ended in 2021–22 and Beijing engineered a shift in investment flows from property to manufacturing.

The roots of involution [a disruptive process of relentless competition and price cutting among Chinese businesses] lie in China’s decades-old growth model, but its most recent manifestation emerged in the few years since the end of China’s property bubble in 2021-22. Beijing chose to engineer a much larger shift in investment flows from property to manufacturing. It is important to note that the acceleration in manufacturing investment was not planned around any expected acceleration in Chinese or global demand. It was determined mainly by the need to keep investment growth from dropping. Beijing has chosen to patch up the system with administrative measures, shifting excesses from one sector to another, and relying on exports to cushion the imbalance. But this is a stopgap solution that “works” only by shifting excess capacity across different sectors in the economy.

Takeaways by Macro Roundup® AI

  1. China's involution — relentless competition and price cutting among businesses — is rooted in its decades-old growth model, with its most recent manifestation emerging after the property bubble ended in 2021–22 and Beijing engineered a shift in investment flows from property to manufacturing.
  2. The acceleration in Chinese manufacturing investment was not planned around any expected acceleration in Chinese or global demand, but determined mainly by the need to keep investment growth from dropping.
  3. Beijing has patched up the system with administrative measures and reliance on exports to cushion the imbalance, a stopgap that works only by shifting excess capacity from one sector of the economy to another.

Related Articles:

  • China Struggles To Break Its Addiction To Manufacturing — China's manufacturing investment continues to rise, up 7.5% this year after a 9.5% increase the prior year, and one Chinese academic estimates the country's share of global manufacturing value-added could climb to 40% from about 27%. Chinese leadership has publicly questioned whether every province needs to develop artificial intelligence, computing power, and electric vehicles, criticizing excessive price competition.
  • Xi Overcapacity Fight Leaves Economy Vulnerable Without Stimulus — China's total debt has risen to over 300% of gross domestic product from a little over 200% a decade ago, and with the main policy rate at 1.4%, the central bank has limited room to cut. Price declines are more widespread than in past deflationary episodes, and large-scale stimulus remains off the table.
  • China Emerges From Trade Chaos With Record Exports, Surplus — China posted a record half-year trade surplus of about $586bn, with exports up 5.8% year-over-year to $325bn and imports up 1.1%. Shipments to the US fell 16.1% from a year earlier, while exports to the 10 Southeast Asian nations in the Asean group rose 17%.

AI Summary. China is preparing three new fabrication plants dedicated to producing Huawei's artificial intelligence processors, and people familiar with the effort say their combined capacity, once fully ramped up, could exceed current output from comparable lines at SMIC, China's leading chipmaker. Huawei denies having plans to launch its own fabrication plants.

Zijing Wu Financial Times
Date Posted:

China is responding to American chip export restrictions by undertaking a massive expansion of domestic chip manufacturing, attempting to triple the country’s current output by the end of 2026.

Is China building new fabrication plants to expand AI chip output?

Core argument: Three fabrication plants dedicated to Huawei's AI processors are due to begin production, one as soon as the end of this year and two next year, with combined capacity once fully ramped up potentially exceeding SMIC's current output of similar lines, according to people with knowledge of the plans.

One fabrication plant dedicated to producing Huawei’s AI processors is scheduled to start production as soon as the end of this year, while two more are due to launch next year, said two people with knowledge of the plans. While the new plants are designed to specifically support Huawei, it is not clear who exactly owns them. Huawei denied having plans to launch its own fabs and did not provide further details. Huawei’s latest products are seen as among those that would satisfy DeepSeek’s requirements. While DeepSeek has done early work on Chinese chips in small samples, to prove that it is technically viable, the group’s current model training is done on the Nvidia chip. Combined capacity from these three new plants, once fully ramped up, could exceed the current total output of similar lines at Semiconductor Manufacturing International Corporation (SMIC), China’s leading fab, according to those people with knowledge of the effort.

Takeaways by Macro Roundup® AI

  1. Three fabrication plants dedicated to Huawei's AI processors are due to begin production, one as soon as the end of this year and two next year, with combined capacity once fully ramped up potentially exceeding SMIC's current output of similar lines, according to people with knowledge of the plans.
  2. Ownership of the three plants built to support Huawei is unclear, and Huawei denied having plans to launch its own fabs without providing further details.
  3. DeepSeek trains its current model on Nvidia chips, having done early work on Chinese chips in small samples to prove technical viability, while Huawei's latest products are seen as among those that would satisfy DeepSeek's requirements.

Related Articles:

  • China Turns Against Nvidia’s AI Chip After ‘Insulting’ Howard Lutnick Remarks — Chinese regulators including the Cyberspace Administration of China reportedly sought ways to restrict domestic technology companies from buying Nvidia's H20 artificial-intelligence processors, after US officials said America sells China neither its best nor second-best chips and aims to get Chinese developers hooked on the American technology stack.
  • China Has Its Own Concerns About Nvidia H20 Chips — China's leaders cite security concerns, including suspicion of hidden back doors in US-designed chips, as a rationale for their drive toward chip self-sufficiency. The dilemma extends beyond chips: US intelligence reportedly found extra modems on Chinese-made port cranes, and the US has banned Chinese components from connected auto systems.
  • The Year-End Wake-Up: The ‘Chinese Sputnik’ That Demands Our Attention — Chinese AI company DeepSeek trained its Version 3 large language model for roughly $5.6m, about 100x cheaper than Meta's Llama 3, with performance comparable to Claude 3.5 Sonnet and interface access costing 12x less than Anthropic's. The author argues US chip export controls backfired by spurring leaner engineering, and that the gap between open-source and closed-source models is narrowing rapidly.

Thursday, August 28, 2025

AI Summary. Analysts estimate Nvidia will sell roughly 6m Blackwell and 5.5m GB chips over a two-year span, and that if half are installed and run at capacity in America they would add 25GW to power demand. Bernstein projects a US shortfall of 17–62GW by 2030 depending on chip efficiency; Morgan Stanley puts the gap at 45GW by 2028.

Economist Staff The Economist
Date Posted:
Is Database:
Database

If half of the Nvidia chips sold btw February 2024 and February 2026 are employed in the US, that alone will increase power demand 25 GW. The US added 27GW of energy production in 2023.

Can America's power supply keep up with AI chip demand?

Core argument: Analysts project Nvidia will sell about 6m Blackwell and 5.5m GB chips between February 2024 and February 2026, and if half land in America and run at capacity they would add 25 gigawatts of power demand.

Analysts predict that between February 2024 and February 2026 Nvidia will have sold some 6m Blackwells and 5.5m GBS. Assume that half of these end up in America, in line with its home market’s historical revenue share. If installed and operated at capacity, those chips would raise American power demand by 25 gigawatts. That is almost twice as much as all of America’s utility-scale producers added in 2022 and not far off the 27GW they managed in 2023. And that is not counting next-generation Rubin chips Nvidia plans to launch next year, or AI racks sold by rivals such as AMD, not to mention other power sinks such as electric cars. Between 2022, when ChatGPT ignited the AI boom, and the 12 months to June this year, the combined capital spending of America’s 50 biggest listed electricity providers rose by 30%, to $188bn—a compound annual increase of 7%, adjusting for inflation. According to S&P Global, a data provider, they are planning to add new plants with a collective capacity of 123GW, on top of the 565GW currently in operation. Bernstein estimates a potential power shortfall in America of 17GW by 2030 if the chips get more energy efficient, and 62GW if they don’t. Morgan Stanley puts the gap at 45GW by 2028.

Takeaways by Macro Roundup® AI

  1. Analysts project Nvidia will sell about 6m Blackwell and 5.5m GB chips between February 2024 and February 2026, and if half land in America and run at capacity they would add 25 gigawatts of power demand.
  2. The 25GW of added demand is almost twice what America's utility-scale producers added in 2022 and near the 27GW they added in 2023, excluding Nvidia's planned Rubin chips, rivals' AI racks and electric cars.
  3. Bernstein estimates an American power shortfall of 17GW by 2030 if chips grow more energy efficient and 62GW if they do not, while Morgan Stanley puts the gap at 45GW by 2028.

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.
  • AI Demand Drives Record Electricity Supply Costs In Largest US Market — PJM, the largest US power market, procured capacity at a record $329.17 per megawatt-day, up 22% from the prior year, and will pay producers $16.1bn to meet demand over a one-year delivery period, a 10% increase. The grid operator expects customer energy bills to rise 1–5%, depending on how utilities and states pass on costs.
  • Power Check: Watt’s Going On With The Grid? — Bank of America Global Research estimates US electricity demand will grow at a 2.5% compound annual rate through 2035, up from 0.5% annually over the prior decade, driven by building electrification, data centers, industrial demand, and electric vehicles. Meeting it requires greater utility investment in grid capacity.

AI Summary. The gap between French and German 10-year government bond yields is near the highs reached during France's political crises, and French stocks have resumed sharp underperformance versus the rest of Europe. France's finance minister warned the country might need assistance from the International Monetary Fund.

John Authers Bloomberg
Date Posted:
Is Database:
Database

The 10-year French OATS spread over German bunds yields is nearing the highs sparked by last year’s political crises. France’s finance minister warned that the country may need an IMF bailout like that of the UK in 1976.

Are French bond spreads and stocks signaling renewed political risk?

Core argument: The spread of 10-year French OATs over German bunds has returned to nearly the highs reached during last year's French political crises, ending a nine-month respite from concerns about French politics.

After a nine-month respite, we need to start worrying about French politics again. The key chart, with trigger warnings for all those who lived through the euro zone sovereign debt crisis, is this one: The spread of 10-year French OATS over German bund yields is almost back to its highs during last year’s political crises. French stocks have resumed sharp underperformance of the rest of Europe. [Prime Minister] Francois Bayrou, is calling a confidence vote Sept. 8 that he is likely to lose. Worse still, his finance minister warned in as many words that France might need help from the International Monetary Fund, awaking extremely unpleasant memories in the UK, which accepted a bailout in 1976.

Takeaways by Macro Roundup® AI

  1. The spread of 10-year French OATs over German bunds has returned to nearly the highs reached during last year's French political crises, ending a nine-month respite from concerns about French politics.
  2. French Prime Minister Francois Bayrou has called a confidence vote for September 8 that he is likely to lose, while French stocks have resumed sharp underperformance versus the rest of Europe.
  3. France's finance minister warned that the country might need assistance from the International Monetary Fund, recalling the UK's acceptance of a bailout in 1976.

Related Articles:

  • Bayrou Stakes French Premiership On Wooing Socialists On Budget — France's government proposed a €44bn fiscal package for 2026 that freezes spending across government except defence, freezes pensions and welfare benefits, tightens unemployment benefit eligibility, and scraps two national holidays to raise an estimated €4.2bn. The plan aims to narrow a deficit of 5.85% of GDP to 4.6%, a target analysts doubt will be met.
  • 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.

AI Summary. In the euro zone, high-debt countries run larger budget deficits than low-debt ones. The author argues that European Central Bank backstops eliminate the risk of a debt crisis and therefore any political incentive to pursue unpopular spending cuts or tax increases, with France's fiscal standoff a symptom.

Robin Brooks Robin Brooks Substack
Date Posted:

Brooks blames the fact that “high debt countries run bigger budget deficits than low debt ones” on moral hazard created by the ECB. “If there’s no risk of a debt crisis, why bother with arduous reforms that will get you booted out of office?”

Do central bank backstops remove incentives for fiscal consolidation?

Core argument: Euro zone high-debt countries run bigger budget deficits than low-debt ones, a pattern the author attributes to the ECB removing the left tail of the distribution and with it any incentive for fiscal consolidation.

In the Euro zone, the perverse pattern that’s emerged is that high debt countries run bigger budget deficits than low debt ones, as the chart above shows. By removing the left tail of the distribution, the ECB in effect removes any incentive for policy makers to pursue fiscal consolidation. After all, spending cuts and tax hikes are never popular. If there’s no risk of a debt crisis, why bother with arduous reforms that will get you booted out of office. The current stand-off in France over fiscal consolidation is a direct reflection of this dysfunction. Without the risk of a serious debt crisis, why should the opposition back government efforts to bring the budget under control? ECB actions are skewing incentives and France is a symptom of that.

Takeaways by Macro Roundup® AI

  1. Euro zone high-debt countries run bigger budget deficits than low-debt ones, a pattern the author attributes to the ECB removing the left tail of the distribution and with it any incentive for fiscal consolidation.
  2. The author argues that without the risk of a debt crisis, policy makers have no reason to pursue unpopular spending cuts and tax hikes that would cost them office.
  3. France's stand-off over fiscal consolidation reflects this dysfunction, in the author's view, since the opposition has no reason to back budget control absent the threat of a serious debt crisis.

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.
  • The Future of European Competitiveness – A Competitiveness Strategy for Europe — A European Union competitiveness report attributes the EU's labour productivity growth gap with the US largely to weaker activity in information and communications technology and large-scale digital services; excluding main ICT sectors, EU productivity was broadly at par with the US from 2000-2019. It estimates Europe's investment share must rise about 5 percentage points of GDP.
  • Why Denmark is Raising its Retirement Age to 70, Europe’s Highest — Denmark's state pension age is tied to life expectancy under a parliamentary agreement that sets adjustments every five years with 15 years' notice and caps increases at one year at a time. Under this system the pension age is set to rise from 67 to 70, keeping public finances healthy long term.

AI Summary. The authors document frequent, sustained departures from the Taylor rule—under which policy rates move more than one-for-one with inflation—and argue optimal monetary policy does not always require such a response, since central banks can look through inflation not expected to persist. They attribute that flexibility to credibility built on track record and central bank independence.

Emi Nakamura, Venance Riblier and Jon Steinsson Federal Reserve Bank of Kansas City
Date Posted:

Credible central banks shouldn’t follow Taylor rules that prescribe a >1-for-1 response of the policy rate to inflation, but “should look through…inflation that is not expected to persist,” as the Fed did in its post-covid “immaculate disinflation.”

Must central banks always raise rates more than one-for-one with inflation?

Core argument: The authors document frequent deviations from the Taylor rule, particularly over the past 20 years, with interest rates varying less than one-for-one with inflation for sustained periods.

We show that deviations from the Taylor rule [and related formulae that, roughly speaking, prescribe > 1-for-1 responses of the policy rate to inflation] have occurred frequently, particularly over the past 20 years. In many cases, interest rates vary less than one-for-one with inflation for sustained periods. We argue that optimal monetary policy does not always dictate a more than one-for-one response of interest rates to inflation. One way to interpret these results is that central banks should look through the part of inflation that is not expected to persist. The Fed’s policy deviated strongly from the Taylor rule during this period and ultimately managed to bring about an “immaculate disinflation.” Figure 14 plots core PCE inflation and 1-year inflation expectations for the GDP deflator from the Survey of Professional Forecasters. During the post-Covid inflation episode, the market was confident that the Fed would act aggressively if inflation persisted or de-anchoring of expectations started to occur. This high degree of credibility is partly due to the Fed’s strong track record, but also partly due to institutions such as central bank independence, valuable assets that can be destroyed much faster than they were built up.”

Takeaways by Macro Roundup® AI

  1. The authors document frequent deviations from the Taylor rule, particularly over the past 20 years, with interest rates varying less than one-for-one with inflation for sustained periods.
  2. The authors argue that optimal monetary policy does not always dictate a more than one-for-one response of interest rates to inflation, and that one interpretation is that central banks should look through the part of inflation not expected to persist.
  3. The Fed's policy deviated strongly from the Taylor rule during the post-Covid inflation episode and ultimately brought about an "immaculate disinflation," with credibility attributed partly to its track record and partly to institutions such as central bank independence.

Related Articles: