“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“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
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…a 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
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“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
“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

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Pettis On Krugman

Michael Pettis @michaelxpettis

Date Posted:: January 28, 2025

Responding to @paulkrugman @michaelxpettis notes that “foreign capital pours into the US not just when times are good, but also when times are bad. US deficits are almost permanent and they don’t reflect US economic conditions.”

We disagree on what drives capital inflows. Krugman argues that rising US productivity in the late 1990s and early 2000s attracted foreign investment, and this is how economics should work: the US economy does well, imports capital, and runs deficits. However, I disagree. Capital flows into the US not just in good times, but also in bad, and US deficits are almost permanent, not reflecting US economic conditions. Another issue is the role of Asia. While China’s economy grew faster than the US’s, it had no capital inflows and instead exported large amounts of capital, which contradicts economic theory. This was due to policy interventions in China, like capital controls, an undervalued currency, and government-managed credit allocation. These conditions forced China to export capital, mostly to the US, even as the US economy weakened by 2005-06. Thus, foreign capital inflows to the US were more about conditions abroad than US performance, including the post-Asian Crisis reserve accumulation by developing countries. The US economy still had to adjust to this imbalance.

The Global Economy Is Threatened Again by Trade Imbalances

Greg Ip The Wall Street Journal

Date Posted:: June 12, 2026
Is Database:: Database

Greg Ip warns that while global imbalances are “narrower” than they were pre-crisis, “they are more persistent and more entrenched in national behavior,” pointing to China’s trade surplus and chronic US fiscal deficits.

The IMF calculates that deficits plus surpluses reached 3.7% of global gross domestic product last year after falling steadily from around the global financial crisis. Until the early 2000s, they fluctuated between 1% and 3%. This is worrisome. Current-account deficits played a part in the crises that swept Latin America in the early 1980s, East and Southeast Asia in the late 1990s, the U.S. in 2007-09, and the eurozone from 2009 on. Today’s imbalances look different. While annual deficits are narrower than 15 years ago, they are more persistent and more entrenched in national behaviour. Take the U.S., whose current-account deficit of $1.1 trillion is by far the largest single imbalance. Last year, tariffs did reduce some imports, but because the AI boom sucked in foreign-made tech equipment, the current-account deficit narrowed only slightly. The bigger contributor to the U.S. current-account deficit is its budget deficit, which sustains excessive U.S. spending and inadequate saving. The IMF estimates a budget deficit of 2% of GDP increases the current-account deficit by 0.5% of GDP.

Takeaways by Macro Roundup^® AI

Global trade imbalances reached 3.7% of GDP last year, up from a post-2008 low, driving renewed financial stability risks across.
Current-account deficits have narrowed vs. 15 years ago but grown more persistent, leading to entrenched structural imbalances that amplify systemic.
Trade imbalances fluctuated 1–3% of GDP through the early 2000s before spiking post-crisis, indicating a structural shift in savings behavior.

Japan, South Korea and Taiwan Are Suffering Industrial Rot

Economist Staff The Economist

Date Posted:: May 28, 2026
Is Database:: Database

The industrial production of Japan, South Korea and Taiwan has risen 15% since 2019 – entirely driven by AI-related demand. Apart from chip-making, IP has shown no trend since 2011. The fall in non-chip output is likely due to Chinese competition.

North-east Asian manufacturing is getting narrower. Chips and other gear related to AI make up over 40% of South Korean exports, more than double their share just two years ago. In Taiwan it is 80% of exports, compared with about half before the pandemic. After accounting for firms not neatly captured as AI-linked in official statistics, like Japan’s Advantest (which makes chip-testing gear) and Taiwan’s Foxconn (which produces data-centre servers, among other electronics), The Economist finds that all 15% of the region’s rise in industrial output since 2019 is thanks to AI. In Japan, South Korea and Taiwan output at factories unrelated to AI has shrunk in recent years.

Takeaways by Macro Roundup^® AI

Japan, South Korea and Taiwan Are Suffering Industrial Rot.
North-east Asian manufacturing is getting narrower.
In Taiwan it is 80% of exports, compared with about half before the pandemic.

State of U.S. Tariffs: February 21, 2026

John Iselin Yale University

Date Posted:: February 23, 2026
Is Database:: Database

The new 15% tariffs under Section 122 bring the mean effective tariff rate to 13.7%, down from 16.9% prior to the SCOTUS ruling that the IEEPA tariffs were illegal. Section 122 tariffs will expire in 150 days unless extended by Congress.

The Budget Lab (TBL) estimates the effects of all US tariffs and foreign retaliation implemented through February 20, 2026, including the new 15% Section 122 tariffs and the elimination of IEEPA-based tariffs. Under our baseline case, the Section 122 tariffs expire after 150 days. Before the IEEPA tariffs were struck down, consumers faced an overall average effective tariff rate of 16%, the highest since 1936. Immediately following the IEEPA ruling, the rate fell to 9.1%. After the Section 122 tariffs were imposed, the rate rose to its current level of 13.7%. If those tariffs expire in 150 days, the rate will fall again to 9.1%. Assuming Section 122 tariffs expire in 150 days, the administration’s tariffs will raise about $1.3 trillion over 2026-35, though slower economic growth reduces revenues and brings the net dynamic revenue to $1.1 trillion. (If they are instead made permanent, these figures would be $2.2 trillion and $1.9 trillion.)

Trump’s Options After the Supreme Court Said His Tariffs Are Illegal

Isabel Gottlieb Bloomberg

Date Posted:: February 20, 2026
Is Database:: Database

Trump has at least five tools he can use to offset the IEEPA tariffs; however, none of them offer the latitude that Trump’s interpretation of IEEPA allowed. Section 338 of Smoot-Hawley, which has never been used, likely has the broadest scope.

President Donald Trump can lean on alternative legislation to try to rebuild his tariff wall, after the US Supreme Court ruled that he can’t use a 1977 emergency law to impose import taxes. [Notably], Section 338 of the Smoot-Hawley Tariff Act of 1930. The Depression-era provision empowers the president to introduce tariffs on imports from nations “whenever he shall find as a fact” that these countries impose unreasonable charges or limitations, or engage in discriminatory behavior against US commerce. There’s no prerequisite for a federal agency to conduct an investigation before the president can apply tariffs. Section 338 has never been used before to impose tariffs. If Trump were to lean on this provision, such an unprecedented move may invite legal challenges. The possibility that Trump could tap Section 338 has alarmed some Democrats in the House of Representatives — five lawmakers introduced a resolution in March 2025 to repeal this section of the 1930 law.

State of U.S. Tariffs: February 20, 2026

John Iselin Yale University

Date Posted:: February 20, 2026
Is Database:: Database

Without the IEEPA tariffs, the mean effective tariff rate is 9.1%, down from 16.9%. The previous tariff regime was projected to raise ~$2.7T over 2026–35 ($2.3T dynamically). The SCOTUS decision will cut revenue by about 50% to ~$1-1.2T with or without refunds.

The Budget Lab estimates the effects of all US tariffs and foreign retaliation implemented in 2025 after the decision by the Supreme Court of the United States that President Trump exceeded his authority to invoke the 1977 International Emergency Economic Powers Act (IEEPA) to impose reciprocal tariffs. Without IEEPA tariffs, consumers will face an overall average effective tariff rate of 9.1%, which remains the highest since 1946 excluding 2025. (If IEEPA tariffs had been allowed to stay in effect, this figure would have been 16.9%.) All tariffs to date as of February 2026 are projected to raise about $1.2 trillion over 2026-35, though slower economic growth reduces revenues and brings the net dynamic revenue to $1 trillion. (With IEEPA, these figures would be more than twice as large.) The economic implications of the SCOTUS decision are complicated by two major factors. First, in the short-term, firms will be aggressively seeking refunds on tariffs paid in 2025, which has large revenue effects and uncertain distributional effects. Second, the current Administration has stated its intent to replace IEEPA tariffs with tariffs using other authorities, but there remain timing and other questions regarding these steps.

Industrial Policies, Global Imbalances and Technological Hegemony

Ambrogio Cesa-Bianchi, Andrea Ferrero, Luca Fornar, and Martin Wolf Bank of England

Date Posted:: February 12, 2026
Is Database:: Database

Cesa-Bianchi et al show that countries (primarily in East Asia) that make more intensive use of industrial policies have had more rapid growth in manufacturing employment, total factor productivity, and exports, but not larger trade surpluses.

Figure 5 [see image gallery] reports scatter plots together with correlation coefficients (ρ) and associated t-statistics. The data reveal strong and interesting correlations. The left panel shows that countries with higher use of industrial policies experienced larger rises (or smaller drops) in manufacturing employment shares. The correlation is 0.52 and highly statistically significant. The right panel shows that an analogous result applies to TFP growth, with a similar correlation (0.48) and high statistical significance. As one would expect, East-Asian countries play an important role in driving these correlations. This conforms with the popular view that East-Asian countries have adopted a strategy of outward-oriented growth, characterized by policies that promote tradable sectors. Figure 6 shows the relationship between industrial policies and export growth (left panel) and the current account to GDP ratio (right panel), both averaged over the 2002- 2019 period. The results show a positive relation between industrial policies and exports, though with a smaller coefficient (0.30) and lower statistical significance than for TFP or manufacturing employment shares. Industrial policy does not appear to be related to current account to GDP ratio in the raw cross-country data.

Responding to @paulkrugman @michaelxpettis notes that “foreign capital pours into the US not just when times are good, but also when times are bad. US deficits are almost permanent and they don’t reflect US economic conditions.”

Related Articles:

Greg Ip warns that while global imbalances are “narrower” than they were pre-crisis, “they are more persistent and more entrenched in national behavior,” pointing to China’s trade surplus and chronic US fiscal deficits.

Are persistent trade imbalances becoming a structural threat to global stability?

Takeaways by Macro Roundup® AI

Related Articles:

The industrial production of Japan, South Korea and Taiwan has risen 15% since 2019 – entirely driven by AI-related demand. Apart from chip-making, IP has shown no trend since 2011. The fall in non-chip output is likely due to Chinese competition.

Is North-East Asia's economy becoming dangerously dependent on AI manufacturing?

Takeaways by Macro Roundup® AI

Related Articles:

The new 15% tariffs under Section 122 bring the mean effective tariff rate to 13.7%, down from 16.9% prior to the SCOTUS ruling that the IEEPA tariffs were illegal. Section 122 tariffs will expire in 150 days unless extended by Congress.

Related Articles:

Trump has at least five tools he can use to offset the IEEPA tariffs; however, none of them offer the latitude that Trump’s interpretation of IEEPA allowed. Section 338 of Smoot-Hawley, which has never been used, likely has the broadest scope.

Related Articles:

Without the IEEPA tariffs, the mean effective tariff rate is 9.1%, down from 16.9%. The previous tariff regime was projected to raise ~$2.7T over 2026–35 ($2.3T dynamically). The SCOTUS decision will cut revenue by about 50% to ~$1-1.2T with or without refunds.

Related Articles:

Cesa-Bianchi et al show that countries (primarily in East Asia) that make more intensive use of industrial policies have had more rapid growth in manufacturing employment, total factor productivity, and exports, but not larger trade surpluses.

Related Articles:

Takeaways by Macro Roundup^® AI

Takeaways by Macro Roundup^® AI