Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “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
  • “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
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…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


Monday, December 15, 2025

AI Summary. The International Monetary Fund estimates Chinese public sector debt near 125% of GDP and a combined on- and off-balance-sheet fiscal deficit possibly above 12% of GDP. Since the property bubble burst, net exports have added over a percentage point to annual growth on average, with the goods surplus approaching $1.2tn, or 6% of GDP.

Brad Setser Council on Foreign Relations
Date Posted:

Official data show an export contribution to Chinese growth of 1 to 2% of GDP since 2024. Customs surplus data, approaching $1.2T or 6% of GDP, suggest a higher number. “Net exports could have been the main driver of China’s recent growth,” Setser notes.

Can exports keep driving China's growth after its property bust?

Core argument: China's customs trade surplus reached $1 trillion after only 11 months of data, with the overall goods surplus, if accurately measured, approaching $1.2 trillion, or 6% of China's GDP and well over a percentage point of the GDP of all its trading partners.

The IMF estimates that Chinese public sector debt is around 125% of GDP, and the on and off balance sheet fiscal deficit may be over 12% of GDP. With a big stock of government debt, the easiest way out of trouble, it would seem, is a weaker currency and a strong boost from exports. That is in fact how China has been growing since its property bubble burst—or was pricked—in the middle of 2021. Net exports have contributed over a percentage point to annual growth on average—and much more than that in 2024 and the first three quarters of 2025. The underlying trade data actually points to a bigger contribution from net exports than in official "contributions" data, and there is skepticism that the reported domestic contributions are as large as reported—which would imply that net exports could have been the main driver of China’s recent growth. The result is a $1 trillion customs trade surplus after only 11 months of data, and overall goods surplus that should -- if accurately measured -- approach an astonishing $1.2 trillion dollars (6% of China's GDP, well over a percentage point of the GDP of all of China's trading partners).

Takeaways by Macro Roundup® AI

  1. China's customs trade surplus reached $1 trillion after only 11 months of data, with the overall goods surplus, if accurately measured, approaching $1.2 trillion, or 6% of China's GDP and well over a percentage point of the GDP of all its trading partners.
  2. Net exports have contributed over a percentage point to China's annual growth on average since its property bubble burst in mid-2021, and much more than that in 2024 and the first three quarters of 2025.
  3. The IMF estimates Chinese public sector debt at around 125% of GDP, with an on- and off-balance-sheet fiscal deficit possibly exceeding 12% of GDP.

Related Articles:

  • China’s Trade Surplus Tops $1 Trillion After Exports Rebound — China's trade surplus reached $1.1tn in 11 months, exceeding its previous full-year record, as strong export growth to the European Union and Africa more than offset a 29% drop in shipments to the US. France's president has warned the EU may impose tariffs if Beijing does not address the imbalance.
  • Sticking with What Works: Raising GDP Forecast on China’s Manufacturing Push — Stronger Chinese growth driven by export-oriented manufacturing may not produce net positive spillovers: for every 1pp export-driven boost to China's GDP, other economies may see a 0.1–0.3pp drag, with high-tech producers such as Europe and Japan facing greater pressure. Cheaper Chinese goods continue to exert a disinflationary impulse.
  • China Is Making Trade Impossible — Interviews with Chinese economists, technologists and business leaders yielded no clear answer to what products China would want to buy from the rest of the world in future, beyond commodities, luxury goods and higher education. The author argues China sees nothing it cannot eventually make better and cheaper itself, undermining trade as a two-way exchange.

AI Summary. China's fixed asset investment fell 2.6% year-on-year for the January–November period, a steeper decline than the 2.3% drop analysts surveyed by Bloomberg expected and the 1.7% fall through October, while retail sales also weakened. Chinese authorities blame redundant investment for excessive price competition and deflation.

Joe Leahy, Thomas Hale and Haohsiang Ko Financial Times
Date Posted:

Chinese property and fixed-asset investment have fallen 15.9% and 2.6% y/y, respectively, as the property bubble deflates and Xi’s anti-“involution” campaign gains steam. Industrial production increased 4.8% y/y.

Is China's investment decline deepening as officials target redundant spending?

Core argument: China's fixed asset investment fell 2.6% year on year for January–November, a steeper decline than the 2.3% drop expected in a Bloomberg analyst survey and the 1.7% fall recorded through October, according to the National Bureau of Statistics.

Chinese investment declined further last month while retail sales weakened sharply, as President Xi Jinping launched an unusually blunt attack on “reckless” government spending that Beijing believes is constraining growth in the world’s second-biggest economy. Fixed asset investment declined 2.6% for the January-November period on a year earlier, the National Bureau of Statistics reported on Monday, a steeper fall than the 2.3% decline forecast by a Bloomberg survey of analysts and the 1.7% fall for the year to October. Xi’s tough stance on redundant investment — which authorities blame for excessive price competition and deflation that they refer to as “involution” — came as regulators threatened last week to crack down on unfair pricing in the auto industry.

Takeaways by Macro Roundup® AI

  1. China's fixed asset investment fell 2.6% year on year for January–November, a steeper decline than the 2.3% drop expected in a Bloomberg analyst survey and the 1.7% fall recorded through October, according to the National Bureau of Statistics.
  2. Xi Jinping attacked "reckless" government spending on redundant investment, which Chinese authorities blame for excessive price competition and the deflation they call "involution.".
  3. Chinese retail sales weakened sharply alongside the deepening investment decline, and regulators threatened to crack down on unfair pricing in the auto industry.

Related Articles:

  • The True Cost of China’s Falling Prices — Prices fell for 51 of 67 consumer items tracked over a two-year period in China, while the broader GDP deflator, which includes upstream sectors, declined for 10 straight quarters, indicating deflation is more entrenched in industry. The share of "zombie" firms whose profits cannot cover debt interest rose from 19% to 34% over five years.
  • The Fracturing Of The World Economy — The US would gain relative to China from a fracturing world economy because its bloc of allies includes nearly all advanced countries, accounting for 68% of world GDP at market prices versus 26% for China's bloc. China's structural current account surplus also leaves it reliant on the US and its allies as safe places to invest those funds.
  • Peak China Housing — Real estate and related industries account for roughly 29% of China's GDP, a level of dependence the authors estimate exceeds that of Ireland and Spain before their financial crises. A 20% decline in housing activity could reduce economic output by 5-10%.

AI Summary. The authors estimate that trade has become more sensitive to geopolitical distance, with high-technology goods more sensitive than low-technology goods, suggesting fragmentation pressures are concentrated in high-tech sectors. China's continued broad commercial ties with geopolitically distant economies masked the wider shift toward trading with geopolitically closer partners.

Florencia Airaudo, François de Soyres, Ece Fisgin, Alexandre Gaillard, et al. Federal Reserve Board
Date Posted:

Geopolitical distance, as measured by divergence in General Assembly votes, reduces trade between two countries more sharply for high-tech goods than low-tech goods, likely due to national security concerns. This effect has increased steadily since 2012.

Is trade fragmentation concentrated in high-technology sectors?

Core argument: Using a gravity specification with rolling windows, the authors find that trade's sensitivity to geopolitical distance becomes stronger and statistically significant as early as the mid-2000s, when many countries were already realigning trade toward geopolitically closer partners.

The sensitivity of trade to geopolitical distance becomes stronger and statistically significant as early as the mid-2000s. [When] many countries were already realigning trade toward geopolitically closer trading partners, China maintained broad-based commercial ties even with geopolitically distant economies, thereby masking the broader trend toward geopolitical sorting. In Figure 4, examine how geopolitical distance affects trade flows separately for high- and low-technology goods. [Beginning with] a standard gravity specification [trade increases with country size and decreases with distance] and a rolling window, we find that trade in high-tech goods is more sensitive to geopolitical distance than trade in low-tech goods, with a more pronounced difference in sensitivity across the two groups in recent years. This result is robust across alternative specifications, including different sets of fixed effects and bilateral gravity variables. It suggests that fragmentation pressures have been concentrated in high-tech sectors, where trade relationships are increasingly shaped by strategic and security considerations.

Takeaways by Macro Roundup® AI

  1. Using a gravity specification with rolling windows, the authors find that trade's sensitivity to geopolitical distance becomes stronger and statistically significant as early as the mid-2000s, when many countries were already realigning trade toward geopolitically closer partners.
  2. Trade in high-technology goods is more sensitive to geopolitical distance than trade in low-technology goods, with the gap in sensitivity widening in recent years, a result robust to alternative fixed effects and bilateral gravity variables.
  3. China maintained broad-based commercial ties even with geopolitically distant economies, masking the broader trend toward geopolitical sorting in trade.

Related Articles:

  • An Anatomy of the Great Reallocation in US Supply Chain Trade — China's share of US direct imports fell from a peak of about 22% in 2017 to roughly 16% in 2022, 13% in 2024, and about 9% by mid-2025 — matching its share when it joined the World Trade Organization. Vietnam, Mexico, and more recently Taiwan have been the main gainers.
  • The Fracturing Of The World Economy — The US would gain relative to China from a fracturing world economy because its bloc of allies includes nearly all advanced countries, accounting for 68% of world GDP at market prices versus 26% for China's bloc. China's structural current account surplus also leaves it reliant on the US and its allies as safe places to invest those funds.
  • Mexico Is Not Just the Top Supplier to the U.S. Now It Is the Top Buyer — Mexico is now both the largest buyer of U.S. exports and the largest source of U.S. imports, with U.S. goods exports to Mexico at $226.4bn versus $225.6bn to Canada and imports from Mexico totaling $354.9bn. Mexico's growth, including its middle class, has increased demand for U.S. goods among its more than 130 million people.

AI Summary. Leading AI developers are shipping smaller, more frequent model updates, creating an impression of momentum through release frequency rather than the magnitude of change. The author argues the bet that scaling data, compute, and model size would produce artificial general intelligence has not paid off, pushing labs back toward harder problems like continual learning and new architectures.

Paul Kedrosky Applied Complexity
Date Posted:

Current AI models are “impressive but bounded.” After vastly underestimating the limits of scaling, Paul Kedrosky argues, “labs are returning to older, harder problems…a reminder that the next five years will be nothing like the last five.”

Has scaling data, compute, and model size failed to deliver general intelligence?

Core argument: Leading AI developers are shipping relatively trivial model updates at a faster pace, with Anthropic saying it is making "more incremental improvements rather than only shipping the really big upgrades" and OpenAI's GPT 5.2 drawing a mostly indifferent response.

[The] leading AI developers are pushing out relatively trivial updates to their models at a faster pace. Anthropic has said it's doing "more incremental improvements rather than only shipping the really big upgrades." OpenAI's GPT 5.2 came out this week to a mostly meh response. The pace of releases creates the impression of momentum through frequency rather than the magnitude of change. The AI industry spent years betting that scaling—more data, more compute, bigger models—would produce AGI. That bet has not paid off. The improvements are real, but increasingly incremental and slowing, while costs soar. The systems are impressive but bounded. Now the labs are returning to older, harder problems. Continual learning. New architectures. Different training methods. These are necessary research directions, but they are a reminder that the next five years will be nothing like the last five. They're the work of an industry recalibrating after hitting a wall.

Takeaways by Macro Roundup® AI

  1. Leading AI developers are shipping relatively trivial model updates at a faster pace, with Anthropic saying it is making "more incremental improvements rather than only shipping the really big upgrades" and OpenAI's GPT 5.2 drawing a mostly indifferent response.
  2. The AI industry's years-long bet that scaling data, compute, and model size would produce artificial general intelligence has not paid off, with improvements real but increasingly incremental and slowing while costs soar.
  3. AI labs are returning to older, harder problems—continual learning, new architectures, and different training methods—necessary research directions that suggest the next five years will be nothing like the last five.

Related Articles:

  • Does Gemini Show That Scaling Still Works? No. — The author argues that frontier model pre-training is becoming uneconomic, delivering only marginal capability gains for enormous spending on chips, power, and compute. Meaningful advances have shifted to post-training, inference-time compute, and tool-augmented reasoning rather than raw model size.
  • Google’s Gemini 3 Means AI’s “Resource Grab” Phase Is On — Google's Gemini 3, trained entirely on Google's own tensor processing unit chips, is the best-performing AI model across nearly all dimensions except possibly coding, leaving OpenAI without a leading model for the first time in three years. Google's vertically integrated stack from chips to data centers likely gives it the cheapest access to computing power among leading AI labs.
  • On Benchmark Games, Gemini, and Declining Returns to Scale — Composite benchmarks show Google's Gemini roughly in line with GPT-5-class models, with any gap small, and the author argues it does not lead on strict low-leakage reasoning exams. The pattern reflects growing training costs yielding modest gains concentrated in vision, video, and some coding rather than broad reasoning advances.

AI Summary. Trading volumes in credit default swaps — insurance-like contracts against debt defaults — tied to major US technology companies including Alphabet, Amazon, Broadcom, CoreWeave, Meta, Microsoft and Oracle have risen 90%, according to clearinghouse DTCC data. The increase is most pronounced for Oracle and CoreWeave, both raising billions in debt for data centre capacity.

George Steer, Kate Duguid, Eric Platt and Oliver Roeder Financial Times
Date Posted:

DTCC data show the market for CDS’s on debt tied to the AI buildout has grown 90% since September. The cost of buying the derivatives on Oracle’s debt has risen to its highest level since 2009.

Are investors buying more default insurance on tech companies' AI debt?

Core argument: Credit default swap volumes tied to seven US tech groups — Alphabet, Amazon, Broadcom, CoreWeave, Meta, Microsoft and Oracle — have risen 90% since early September, according to data from clearinghouse DTCC.

Volumes in credit default swaps tied to a handful of US tech groups [Alphabet, Amazon, Broadcom, CoreWeave, Meta, Microsoft and Oracle] have climbed 90% since early September, according to data from clearinghouse DTCC. The uptick in CDS trading has been particularly pronounced for Oracle and cloud computing company CoreWeave, both of which are raising billions of dollars in debt to secure data centre capacity. A new market for Meta CDS sprang up after the company sold $30bn of bonds to finance AI projects in October.

Takeaways by Macro Roundup® AI

  1. Credit default swap volumes tied to seven US tech groups — Alphabet, Amazon, Broadcom, CoreWeave, Meta, Microsoft and Oracle — have risen 90% since early September, according to data from clearinghouse DTCC.
  2. The rise in CDS trading has been particularly pronounced for Oracle and cloud computing company CoreWeave, both of which are raising billions of dollars in debt to secure data centre capacity.
  3. A market for Meta credit default swaps emerged after the company sold $30bn of bonds in October to finance AI projects.

Related Articles:

  • Minsky Moments and AI CapEx — Capital-spending forecasts for the four largest cloud providers rose nearly 50% over the year, and AI data centers are increasingly funded through leveraged and off-balance-sheet structures, including $3.2bn in senior secured notes and a roughly $30bn asset-backed financing. The author argues this marks a speculative-finance phase where borrowers must roll over principal.
  • Flood of AI Bonds Adds to Pressure on Markets — Pressure on technology company bonds has been uneven: Alphabet, Amazon and Microsoft fund most AI spending from quarterly cash flow, while Meta had to offer yields well above its existing debt on a $30bn bond sale. Oracle, already burning cash as it shifts toward AI cloud computing, carries yields higher than almost any investment-grade technology peer.
  • AI Capex Risk as Predictable Engineering — The 2020 scaling-laws paper fostered a belief that mixing compute, data, and parameters yields better AI models in a deterministic way, which the author argues let unusually large capital spending plans pass without investor revolt. The author contends that curve was empirical rather than physical and is now breaking, returning AI capital spending to normal economics.

AI Summary. Registered disability rates among undergraduates have risen at elite US universities, reaching 38% at Stanford and 21% at Harvard, both up from 5% in 2009, with similar increases across 19 European countries. In the poorest US school districts, 1% of young people are on special-support plans, unchanged, while the share in the richest areas tripled from 2% to 6%.

John Burn-Murdoch Financial Times
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In 2025, 38% of Stanford and 21% of Harvard undergrads were registered as having a disability — up from 5% in 2009; 6% of youth from the richest US school districts, and 1% from the poorest, are now in special support programs.

Are rising student disability rates concentrated among the wealthiest families?

Core argument: Research by Rose Horowitch for The Atlantic found 38% of Stanford undergraduates and 21% of Harvard undergraduates are registered as having a disability, both up from 5% in 2009.

In the US, research by Rose Horowitch for the Atlantic magazine found that 38% of undergraduates at Stanford this year are registered as having a disability, as are 21% at Harvard — both up from 5% in 2009. My analysis of data from 19 European countries finds similar trends, with health impairments among students doubling on average over the past decade. In 2010, 1% of American young people from the poorest school districts were on plans that provide special support, and today that figure is unchanged. But among those in the richest areas, it has tripled from 2 to 6%.

Takeaways by Macro Roundup® AI

  1. Research by Rose Horowitch for The Atlantic found 38% of Stanford undergraduates and 21% of Harvard undergraduates are registered as having a disability, both up from 5% in 2009.
  2. An analysis of data from 19 European countries finds health impairments among students doubled on average over the past decade.
  3. Among American young people in the richest school districts, the share on plans providing special support tripled from 2% to 6% since 2010, while the share in the poorest districts remained at 1%.

Related Articles:

  • Military Officer Quality in the All-Volunteer Force — The authors find a steady decline in U.S. Marine Corps officers' General Classification Test scores, which is statistically associated with the expansion of college attendance and explains 96% of the measured change. They also find a positive association between African American officers and mean test scores, arguing affirmative action has not lowered officer quality.
  • 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.
  • Twelfth-Grade Math and Reading Scores in U.S. Hit New Low — U.S. twelfth-graders' average math and reading scores on the National Assessment of Educational Progress fell to their lowest levels on record, with math the worst since that test began in 2005 and reading below any point since 1992. The share rated proficient slid 2 percentage points to 35% in reading and 22% in math.

Tuesday, December 16, 2025

AI Summary. Federal Reserve officials have become more optimistic about growth, less concerned about unemployment, and equally concerned about inflation, yet the median official now projects a lower path for short-term interest rates under appropriate monetary policy through at least 2027. The author argues economic data cannot explain this shift, pointing instead to officials reinforcing administration pressure for faster rate cuts.

Matt Klein The Overshoot
Date Posted:

Since June, Fed officials have become more optimistic about real growth, with no change in their inflation expectations “under appropriate policy.” This should, if anything, imply a higher FFR, suggesting the Fed is reacting to political pressure.

Why do Fed officials project lower rates despite improved growth outlook?

Core argument: Federal Reserve officials are more optimistic about growth, less worried about unemployment, and equally worried about inflation compared with six months ago, yet the median official now expects lower short-term rates under "appropriate monetary policy" through at least 2027.

Federal Reserve officials are more optimistic about the growth outlook, less worried about unemployment, and just as worried about inflation as they were six months ago. Yet the median official now expects that short term interest rates “under appropriate monetary policy” will be lower than what was expected in June through at least 2027. For the most part, this shift cannot be explained by changes in the underlying economic data, to the extent that we have it. The more plausible explanation is that a small but growing cadre of Fed officials have been reinforcing the pressure from administration officials for larger and faster reductions in interest rates. [Since June], Fed officials have become far more optimistic about the real growth outlook, although they have not gotten more optimistic about inflation “under appropriate monetary policy.” Yet, bizarrely, “appropriate monetary policy” in this scenario apparently consists of a slightly lower path for short rates than had been expected back in December 2024— before the policy shock. Fed officials are willing to tolerate excessive inflation through at least the end of 2026 even though they claim that the downside risks to growth and employment have faded.

Takeaways by Macro Roundup® AI

  1. Federal Reserve officials are more optimistic about growth, less worried about unemployment, and equally worried about inflation compared with six months ago, yet the median official now expects lower short-term rates under "appropriate monetary policy" through at least 2027.
  2. The Fed's expected path for short rates under "appropriate monetary policy" is now slightly below what was projected in December 2024, before the policy shock, even as officials have not become more optimistic about inflation.
  3. The shift in the Fed's expected rate path cannot for the most part be explained by changes in the underlying economic data, and a more plausible explanation is that a small but growing cadre of Fed officials have reinforced administration pressure for larger and faster rate cuts.

Related Articles:

  • A New Era of Higher Inflation Risks — The authors argue inflation's baseline is now higher than pre-pandemic, with 2% acting more as a floor than a ceiling, noting disinflation has largely stalled and core inflation has run above target on a six-month annualized basis for five years. They expect a structurally wider range of inflation outcomes, skewed to the upside and centered higher than in the 2010s.
  • The Middle Class Is Buckling Under Almost Five Years of Persistent Inflation — US prices for goods and services are 25% above 2020 levels, and 44% of middle-income respondents in the University of Michigan consumer sentiment survey said their finances were worse than a year earlier versus 23% who said better, with most citing higher prices. Retailers report middle-income customers pulling back on discretionary spending.
  • Political Pressure on the Fed — Using data on President–Federal Reserve interactions, the author estimates that political pressure to ease monetary policy raises the price level strongly and persistently without boosting real activity, working through inflation expectations more than a typical easing. Such pressure occurred mainly in the 1970s and contributed to inflationary episodes.

AI Summary. US individual income tax receipts over the past 12 months are $567bn higher than just before the pandemic after adjusting for inflation, with inflation a major contributor. Changes in the Standard & Poor's 500 Index explain almost half the variation in these receipts 10 months later, so a sustained stock pullback would make further deficit reduction harder.

Justin Fox Bloomberg
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Since the start of Trump’s second term, on a trailing-12-month basis, the federal deficit has declined to ~6% of GDP from 6.4% in 2024, driven by tariff revenue and an increase in personal income receipts due to the rising stock market.

Do stock market gains help drive rising income tax receipts?

Core argument: Inflation-adjusted 12-month U.S. individual income tax revenue stands $567 billion above its level just before the pandemic, with the 2021–2022 inflation wave a big contributing factor in the rise in receipts.

The inflation wave of 2021 and 2022 was a big contributing factor [in the rise in income tax receipts], but after adjusting for inflation, 12-month individual income tax revenue is still $567 billion higher than just before the pandemic. Movements in US individual income tax receipts follow movements in the Standard & Poor’s 500 Index. The correlation is strongest with a 10-month lag. The r-squared is 0.49, meaning that the change in the S&P 500 “explains” almost half the change 10 months later in trailing-12-month individual income tax receipts — although of course the causality is probably more complicated than that. With the S&P 500 hitting a record last week, that should mean income tax receipts will keep rising for 10 more months. But after gaining 24% in 2023, 23% in 2024 and 16% so far this year, the S&P is also due for a sustained pullback one of these days — which would make it much harder to keep shrinking the deficit.

Takeaways by Macro Roundup® AI

  1. Inflation-adjusted 12-month U.S. individual income tax revenue stands $567 billion above its level just before the pandemic, with the 2021–2022 inflation wave a big contributing factor in the rise in receipts.
  2. Changes in the S&P 500 correlate most strongly with trailing-12-month individual income tax receipts at a 10-month lag, with an r-squared of 0.49, meaning the index "explains" almost half the later change in receipts, though causality is probably more complicated.
  3. The S&P 500's record high suggests income tax receipts will keep rising for 10 more months, but after gains of 24% in 2023, 23% in 2024 and 16% so far this year, a sustained pullback would make shrinking the deficit much harder.

Related Articles:

  • Interest Rates and the Trump Administration — Comparing average daily U.S. Treasury yields before and after the presidential election, the 10-year nominal yield rose from 3.92% to 4.29% and its inflation-adjusted counterpart from 1.74% to 1.96%, while the 30-year nominal yield rose from 4.21% to 4.77% and its inflation-adjusted counterpart from 2.03% to 2.5%.
  • CBO’s New Projections Show $1 Trillion Less in Tariff Savings — The Congressional Budget Office now projects tariffs enacted this year will reduce debt including interest by $3.0tn through 2035, down from $4.0tn, reflecting policy changes and revised assumptions about duty-free imports and costs absorbed by foreign exporters. If courts strike down the emergency-powers tariffs, the debt reduction would fall to roughly $0.9tn.
  • Across The Rich World, Fiscal Crises Loom — An analysis estimates most rich countries could keep debt stable as a share of their economies with only small primary surpluses—Britain's required surplus is 0.3% of GDP—even if all debt were refinanced immediately at current rates, but the tightening needed to stabilize debt ratios exceeds 2% of GDP in Britain and America and 3% in France.

AI Summary. If technology producers face competition, faster measured productivity growth in a tech-specialized country is passed to consumers in both countries through lower prices rather than higher relative living standards. Real GDP per worker over 1998-2024 diverged more between California and the rest of the US than between the US and Europe, largely reflecting industry composition.

Paul Krugman Krugman Wonks Out
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The US–EU productivity divergence over the past 25+ years was largely due to the tech sector. Notably, California’s outperformance relative to non-CA USA was even greater.

Does tech specialization raise a country's living standards relative to others?

Core argument: BEA data on real GDP per worker over 1998–2024 show a wider divergence between California and the United States excluding California than between the US and the EU, a gap the author attributes mainly to composition effects.

Technological progress is much faster in tech than in non‑tech. [Suppose] for historical reasons, the US has a comparative advantage that leads it to produce all the world’s tech. [U.S.] measured productivity growth [will exceed] Europe’s. But will this translate into a rising standard of living for Americans [vs]. Europeans? If there is competition among tech companies, no: rising productivity will be passed on to consumers in both countries [via] lower prices. If you find it implausible to suggest that high US productivity growth in tech doesn’t translate into significantly higher US living standards, consider productivity divergences among U.S. states. Much of the U.S. tech sector is located in California, [leading] to high measured productivity growth in California. compared with the rest of America. The graph constructed with data from the BEA, shows the percentage change in real GDP per worker over 1998-2024 for three “countries”: California, Texas, and “not-California,” i.e., the United States ex CA. This is a huge divergence — bigger than the EU/US divergence that has Europeans so worried. Yet we don’t see Texans obsessing over why they can’t be like California. [If] people think about this divergence at all, they realize that it’s mainly about composition effects.

Takeaways by Macro Roundup® AI

  1. BEA data on real GDP per worker over 1998–2024 show a wider divergence between California and the United States excluding California than between the US and the EU, a gap the author attributes mainly to composition effects.
  2. The author argues that if one country specialized in tech and posted faster measured productivity growth, competition among tech firms would pass those gains to consumers in both countries through lower prices rather than raising relative living standards.
  3. The author notes that Texans do not obsess over matching California's productivity growth despite that larger divergence, offering the comparison as reason to doubt that Europe's tech lag means lower European living standards.

Related Articles:

  • Concentrated Growth: The Role Of The IT Sector — Since 1988, total factor productivity in the information technology sector has risen about 178%, versus about 12% across all non-IT sectors combined, while aggregate productivity rose about 40%. The IT sector accounts for roughly 45% of cumulative aggregate productivity growth, once sectoral linkages to downstream industries are weighted in.
  • From IT to AI: What Explains US Productivity Outperformance? — Larger information-technology quality adjustments and hours-worked measurement distortions explain about 30% of the average annual US-Euro area total factor productivity growth gap since 1995, leaving an adjusted gap near 0.25pp. The authors estimate greater US intangible investment spillovers contribute about 0.1pp, more efficient resource allocation about 0.1pp, and better management and larger firms about 0.05pp.
  • 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.

AI Summary. Manufacturing competitiveness is argued to stem largely from lower labor costs relative to productivity, so policies that raise the household share of income weaken competitiveness while countries that suppress wages gain at trade partners' expense. The author argues Europe must therefore intervene in its external accounts to offset foreign trade intervention rather than cut wages and welfare.

Michael Pettis Financial Times
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Pettis argues that unless the EU is “willing to dismantle its welfare system and force down wages relative to productivity to restore competitiveness,” it must either accept deindustrialisation, tariffs, or depreciation of the Euro.

Should countries intervene in trade to offset wage suppression abroad?

Core argument: Manufacturing competitiveness is a product not so much of greater efficiency as of lower labour costs relative to productivity, so policies that raise the household income share of total production undermine manufacturing competitiveness.

We live in a world in which manufacturing competitiveness is a product not so much of greater efficiency but of lower labour costs (relative to productivity). So policies that boost demand by increasing the household income share of total production also undermine manufacturing competitiveness. The result is an example of what the Polish economist Michał Kalecki described decades ago: a paradox in which a player becomes more competitive and grows faster by suppressing wages even as the overall system suffers from such a strategy. It “wins” by retaining the benefits while exporting the costs to its trade partners. That is why unless Europe is willing to dismantle its welfare system and force down wages relative to productivity — which would be bad for global growth — it has no choice but to intervene in its external accounts. The purpose of such intervention is not protectionism, but rather to reverse the consequences of trade intervention abroad.

Takeaways by Macro Roundup® AI

  1. Manufacturing competitiveness is a product not so much of greater efficiency as of lower labour costs relative to productivity, so policies that raise the household income share of total production undermine manufacturing competitiveness.
  2. Michał Kalecki described a paradox in which a player becomes more competitive and grows faster by suppressing wages even as the overall system suffers, retaining the benefits while exporting the costs to its trade partners.
  3. Unless Europe dismantles its welfare system and forces wages down relative to productivity, which would be bad for global growth, it has no choice but to intervene in its external accounts to reverse the consequences of trade intervention abroad.

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AI Summary. German exports to China have fallen by a quarter since 2019 while imports rose, and German government figures put the country's goods and services trade deficit with China on track for a record €88bn (about $102bn). German manufacturing output is down 14% from its 2017 peak, with industrial employment down almost 5% since 2019 and auto jobs down about 13%.

Tom Fairless and Bertrand Benoit Wall Street Journal
Date Posted:
Is Database:
Database

German imports from China have risen to ~3.7% of GDP, up from ~3% in Q4 2019. Over that same period, exports to China fell from ~2.7% of GDP to ~1.9%. German manufacturing output is down 14% from its 2017 peak.

Is Germany's trade relationship with China shrinking its manufacturing sector?

Core argument: Germany's trade deficit in goods and services with China is on track to reach a record 88 billion euros (around $102 billion), according to German government figures, as total German exports to China have fallen by a quarter since 2019 while imports rocketed.

Total German exports to China have fallen by a quarter since 2019 while imports rocketed. Germany’s trade deficit in goods and services with China is on track to reach a record 88 billion euros this year, equivalent to around $102 billion, according to German government figures. This has left deep scars. Germany’s manufacturing output has fallen 14% since peaking in 2017. The industrial sector has shed almost 5% of its jobs since 2019, according to consulting firm Ernst & Young. The auto sector has lost about 13% of positions over the same period.

Takeaways by Macro Roundup® AI

  1. Germany's trade deficit in goods and services with China is on track to reach a record 88 billion euros (around $102 billion), according to German government figures, as total German exports to China have fallen by a quarter since 2019 while imports rocketed.
  2. German manufacturing output has fallen 14% since peaking in 2017.
  3. Germany's industrial sector has shed almost 5% of its jobs since 2019, with the auto sector losing about 13% of positions over the same period, according to consulting firm Ernst & Young.

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  • Europe’s Green Energy Rush Slashed Emissions—and Crippled the Economy — Europe has cut carbon emissions 30% from 2005 levels versus 17% in the US, while the shift to renewables has helped push electricity prices higher across much of the continent. Average electricity prices for heavy industry in the European Union are roughly 2x those in the US and 50% above China.
  • Sticking with What Works: Raising GDP Forecast on China’s Manufacturing Push — Stronger Chinese growth driven by export-oriented manufacturing may not produce net positive spillovers: for every 1pp export-driven boost to China's GDP, other economies may see a 0.1–0.3pp drag, with high-tech producers such as Europe and Japan facing greater pressure. Cheaper Chinese goods continue to exert a disinflationary impulse.

AI Summary. Ukraine's Security Service says it used underwater drones alongside the Ukrainian Navy to strike a Russian Kilo-class submarine, vessels valued at about $400mn, and estimates sanctions and limited access to high-tech components could push replacement costs to $500mn.

Christopher Miller and Anastasia Stognei Financial Times
Date Posted:

Ukraine hit a Russian Kilo-class submarine with an undersea drone in port in Novorossiysk. Ukrainian intelligence claimed the submarine was “put out of action” as a result of the attack, a claim backed by non-official Russian sources.

Can underwater drones destroy submarines that cost hundreds of millions to replace?

Core argument: An SBU official told the Financial Times that the Security Service of Ukraine, with the Ukrainian Navy, used underwater drones to strike a Russian Kilo-class submarine, the 636.3 Varshavyanka; such submarines are valued at about $400mn.

A Security Service of Ukraine (SBU) official told the Financial Times that the agency had deployed underwater drones together with the Ukrainian Navy to hit the Russian Kilo-class submarine known as the 636.3 Varshavyanka. Kilo-class submarines are valued at about $400mn. Due to international sanctions and restricted access to high-tech components, the SBU estimated the cost of building a replacement could now reach $500mn. The port of Novorossiysk has taken on greater strategic importance for Russia’s Black Sea Fleet after a series of Ukrainian attacks with naval drones and missiles, including on Sevastopol in Russian-occupied Crimea, forced several vessels to relocate to Russian ports. Russian authorities did not immediately comment on the attack.

Takeaways by Macro Roundup® AI

  1. An SBU official told the Financial Times that the Security Service of Ukraine, with the Ukrainian Navy, used underwater drones to strike a Russian Kilo-class submarine, the 636.3 Varshavyanka; such submarines are valued at about $400mn.
  2. The SBU estimated that international sanctions and restricted access to high-tech components could push the cost of building a replacement submarine to $500mn.
  3. Novorossiysk has gained strategic importance for Russia's Black Sea Fleet after Ukrainian naval drone and missile attacks, including on Sevastopol in Russian-occupied Crimea, forced several vessels to relocate to Russian ports.

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