“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“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
“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 full-throated defense of economic dynamism.” - The Wall Street Journal
“…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
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…a 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
“…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
AI Summary.Prime-age (25–54) and older (55–64) employment rates in Europe exceed those in the U.S., disproving the claim that European welfare systems suppress work. Higher-welfare northern European countries tend to have higher employment rates than lower-welfare southern ones.
Chris GilesFinancial Times
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Despite Europe’s high social spending relative to the US, Chris Giles notes that prime-age adult (25–54) labor force participation in the Eurozone has overtaken that of the US, and there has been a dramatic convergence in the LFP of older workers.
Does European welfare actually discourage work?
Core argument: Prime-age adults (25–54) and older workers (55–64) both achieve higher employment rates in Europe than in the U.S., refuting the premise that generous welfare systems suppress labor force participation.
It does not matter whether you use EU or Eurozone data, prime-age adults (between 25 and 54) in Europe are more likely to be in work than those in the US. Older people (between 55 and 64) also have higher employment rates in Europe. Younger people (between 15 and 24) are more likely to have a job in the US, but that results from Europeans educating themselves for longer. The proportion of young people not in education, employment or training is higher in the US than in Europe. So welfare is not stopping work. More than that, the higher-welfare north of Europe tends to have higher employment rates than the south, although there is convergence within the Eurozone. Spain, in particular, has enjoyed rapid improvements.
Takeaways by Macro Roundup® AI
Prime-age adults (25–54) and older workers (55–64) both achieve higher employment rates in Europe than in the U.S., refuting the premise that generous welfare systems suppress labor force participation.
The U.S. records a higher share of young people (15–24) not in education, employment, or training than Europe, indicating that lower U.S. youth employment reflects weaker human capital investment, not stronger labor markets.
Within Europe, higher-welfare northern economies consistently outperform lower-welfare southern ones on employment rates, though intra-Eurozone convergence is underway, led by rapid gains in Spain.
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Why Do Americans No Longer Work So Much More Than Non-Americans?— The gap in hours worked between Americans and non-Americans has narrowed by half since the 1990s, driven by declining U.S. work hours as expanded government health benefits reduced the need to work, while rising wages and lower barriers to employment increased hours worked in other advanced economies.
AI Summary.Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment merely replaces depreciating assets. The shift toward faster-depreciating information technology assets requires larger gross investment increases to achieve any given gain in productive capital per worker.
Timothy TaylorConversable Economist
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U.S. real net private domestic investment—which adds to the American capital stock—is now only ~25% as large as gross investment, down from ~40% in the 1970s. Taylor suggests the widening gap between gross and net investment reflects the relatively rapid depreciation of IT-related capital.
Does faster asset depreciation explain slowing productivity growth?
Core argument: Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment now merely replaces depreciating capital rather than expanding the productive stock.
The figure divides net investment by gross investment. Back in the 1970s, net investment was often around 40% of gross investment, but the share has been slumping over time. For the last decade or so, net investment has been about 25% of the gross–that is, about three-quarters of gross investment is just making up for depreciation of the pre-existing capital stock. The likely reason for the growing gap between gross and net investment is that modern investment is more likely to be related to information technology [which] depreciates more rapidly and thus needs to be replaced and updated more often. If we want the average US worker to be using a greater amount of capital on the job–which was one of the key drivers of rising labor productivity in the past–it now takes a bigger rise in gross investment to lead to a given rise in net investment.
Takeaways by Macro Roundup® AI
Net investment has fallen from ~40% of gross investment in the 1970s to ~25% today, meaning three-quarters of gross investment now merely replaces depreciating capital rather than expanding the productive stock.
The shift toward information technology — which depreciates faster than physical machinery — is the primary driver of the widening gap between gross and net investment.
Raising capital per worker, a historic engine of labor productivity growth, now requires a substantially larger increase in gross investment than it did several decades ago.
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Capital Is Making a Comeback— Btw 1985-2021 the capital intensity of the American economy was relatively flat as a rise in intangible investment was offset by a decline in tangible…
The Transition to a Higher Cost of Capital— Bridgewater Associates co-CIO Karen Karniol-Tambour expects 10-year Treasury yields to rise from the current ~4.5% to compensate for structurally higher fiscal…
AI Summary.Higher interest rates remain low relative to nominal income and spending growth of ~7% annually, making current rate levels benign rather than restrictive. Elevated rates help reallocate spending away from consumption and housing toward productive investment, or attract foreign capital to fund that shift.
Matt KleinThe Overshoot
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Klein argues that, far from indicating a panic-driven bond sell-off, higher bond yields are a necessary concomitant of persistent 7% growth in nominal income, which in turn reflects continued high inflation and robust real spending.
Are higher bond yields actually constraining economic growth?
Core argument: U.S. nominal incomes and spending are rising ~7% annually, making current interest rates benign relative to growth and inflation expectations rather than genuinely restrictive.
Rates are still low relative to reasonable expectations of inflation and growth. Incomes and spending are currently rising about 7% a year in dollar terms. But unless there are loads of unused workers, machines, and raw materials just lying around, the only way to spend relatively more on essential machinery, equipment, and nonresidential construction is if someone spends relatively less on consumer goods, services, and housing. Higher interest rates can help to the extent that they can discourage those lower-priority activities and/or encourage people in the rest of the world to accept promises of goods and services in the future in exchange for actual goods and services today. In this context, the current level of interest rates looks downright benign.
Takeaways by Macro Roundup® AI
U.S. nominal incomes and spending are rising ~7% annually, making current interest rates benign relative to growth and inflation expectations rather than genuinely restrictive.
Reallocating spending toward machinery, equipment, and nonresidential construction requires crowding out consumer goods, services, and housing — a structural shift higher interest rates actively facilitate.
Foreign capital inflows — overseas actors exchanging current goods for future claims — provide an additional channel to fund domestic investment beyond rate-driven suppression of domestic demand.
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AI, Productivity, and Rates: Part 2— Real long-term inflation-adjusted yields reached 4.5% during the late-1990s productivity boom, compared to 2.4%–3.0% today, implying significant upward pressure on rates if AI drives a comparable acceleration in productivity growth.
Don’t Draw The Wrong Conclusion From Treasury Yields— Rising long-term bond yields reflect higher expected short-term interest rates over the next decade, not concerns about government debt sustainability, as both inflation expectations and the risk premium for holding long-term bonds have remained stable.
America’s Risky Debt: What Markets See That Policymakers Don’t— The safety premium that investors historically paid for US government bonds over equivalent alternatives has compressed toward zero and, at longer maturities, reversed — with global investors now pricing foreign government bonds as safer than US Treasurys.
AI Summary.Japan's 10-year government bond yield has reached 3% for the first time in roughly three decades, doubling within a year as the country's debt market exits its near-zero-rate era. The rapid rise is reverberating through Japan's economy and global financial markets.
John ChengBloomberg
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Japan’s 10-year government bond yield rose 6bp to hit 3% for the first time since 1996.
Is Japan's debt crisis finally forcing an end to ultra-low rates?
Core argument: Japan’s 10-year government bond yield reached 3% for the first time since 1996, doubling within a single year and marking a decisive break from the near-zero rate regime that defined Japanese monetary policy for decades.
Japan’s 10-year government bond yield touched 3% for the first time this century, an important milestone for a debt market that is returning to normality after benchmark borrowing costs languished near zero for years. The yield rose as much as six basis points to 3% on Tuesday, the highest since 1996. It was half this level around this time last year, underscoring the speed of the change, which is reverberating through Japan’s economy and global financial markets.
Takeaways by Macro Roundup® AI
Japan’s 10-year government bond yield reached 3% for the first time since 1996, doubling within a single year and marking a decisive break from the near-zero rate regime that defined Japanese monetary policy for decades.
Japan’s 10-year yield has risen approximately 150 basis points in roughly 12 months, a normalization pace rapid enough to transmit material stress across Japan’s domestic economy and global financial markets.
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The Carry Trade That Can’t Be Unwound— Japan's consolidated public sector carries liabilities worth 255% of GDP, with 75.5% of GDP in floating-rate bank reserves, while holding 56% of GDP in unhedged foreign securities and 50% of GDP in equities — assets that lose value if the yen rises or real rates climb.
AI Summary.U.S. productivity growth has accelerated to ~2.2% annually since mid-2022, above the 2010s baseline, though pandemic-era labor market and business formation dynamics likely contributed alongside AI. Historical general-purpose technology booms sustained labor productivity growth above 2.5% for a decade or more, making the current acceleration substantial but not unprecedented.
Chad SyversonEconomic Innovation Group
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Syverson is skeptical that AI initiated the rise in productivity growth that began in 2023. The acceleration began while AI investment was small, and pandemic-era labor market churn and business dynamism match the acceleration’s start.
Is AI-driven productivity growth sustainable at historical technology boom levels?
Core argument: U.S. labor productivity has grown at roughly 2.2% annually since mid-2022, a pace exceeding the 2010s trend and, if sustained, implying GDP per capita roughly 7% higher within a decade than the prior trajectory.
Productivity from mid-2022 on has maintained a faster-than-2010s trajectory involving annual growth of about 2.2%. Could this acceleration be due to AI? Perhaps. The timing leans against AI being the sole initial cause. Additionally, there were well-documented increases in economic dynamism (labor market churn and business formation) during the pandemic emergence whose timing matches the acceleration’s start. Regardless of AI’s current effect, the longer the aggregate productivity acceleration continues, the more plausible it is that AI is an important driver. As for the magnitude, a sustained increase from 1.5 to 2.2% annual productivity growth would be substantial (after a decade, GDP per capita would be 7% higher than otherwise), but hardly unprecedented. The 1995–2004 productivity boom saw annual productivity growth of nearly 3% per year, and other past general-purpose-technology-related productivity boosts saw labor productivity growth in excess of 2.5% for a decade or longer.
Takeaways by Macro Roundup® AI
U.S. labor productivity has grown at roughly 2.2% annually since mid-2022, a pace exceeding the 2010s trend and, if sustained, implying GDP per capita roughly 7% higher within a decade than the prior trajectory.
The 1995–2004 productivity boom averaged nearly 3.0% annual growth, establishing that a durable AI-driven acceleration to 2.2% would be meaningful but well within historical precedent for general-purpose-technology cycles.
Pandemic-era surges in labor market churn and business formation align more precisely with the productivity acceleration’s start date than AI adoption does, complicating AI-as-sole-cause narratives.
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AI and Productivity— Rising US labor productivity is driven by higher capital utilization—factories, servers, and hotel rooms running harder—rather than new investment or efficiency gains at the individual task level.
AI Summary.US corporate investment in equipment and facilities is projected to grow 40% in real terms by the end of next year, versus 12% in the euro area, widening a productivity gap where output per hour worked rose $14 in the US compared with $2 in Europe since 2018.
Sam Fleming, Amy Borrett and Olaf StorbeckFinancial Times
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Oxford Economics projects US real business investment will rise 40% over 2021–2027, ~3x the euro area’s 12%. US investment growth since 2024 has been largely information processing and software, but high US growth in GDP/hour is not “merely digital.”
Is artificial intelligence investment widening the transatlantic productivity divide?
Core argument: U.S. corporate investment in equipment and facilities is projected to rise 40% in real terms between 2021 and end-2026, versus 12% in the euro area and near-zero growth in Germany, sharply widening the transatlantic capital-spending gap.
Corporate spending on new equipment and facilities in the US is projected to increase 40% in real terms between 2021 and the end of next year, according to forecasts from Oxford Economics. The US surge compared with a real-terms increase of just 12% in the euro area, while German business investment is expected to have all but stagnated over the same period. Europe also faces a large and growing productivity gap with the US. “The United States has recently pulled further ahead of Europe,” Bart van Ark, a professor at the University of Manchester, told policymakers at the ECB Forum in Sintra. GDP per hour worked increased $14 in the US between 2018 and 2025, compared with just $2 in Europe. “The gap is not only a digital sector story,” added van Ark, stressing that the US outperformance extended to other sectors, including wholesale and retail as well as professional services.
Takeaways by Macro Roundup® AI
U.S. corporate investment in equipment and facilities is projected to rise 40% in real terms between 2021 and end-2026, versus 12% in the euro area and near-zero growth in Germany, sharply widening the transatlantic capital-spending gap.
U.S. labor productivity rose $14 per hour worked between 2018 and 2025, versus $2 in Europe, with outperformance spanning wholesale, retail, and professional services—not solely the digital sector.
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AI Summary.Real long-term inflation-adjusted yields reached 4.5% during the late-1990s productivity boom, compared to 2.4%–3.0% today, implying significant upward pressure on rates if AI drives a comparable acceleration in productivity growth.
Matt KleinThe Overshoot
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Klein compares measures of real rates from the 1990s productivity boom to today’s real rates, using TIPS, as well as “synthetic TIPS” derived by subtracting inflation expectations from nominal rates. Current real rates are very low by comparison.
Does artificial intelligence productivity require substantially higher interest rates?
Real yields on actual TIPS were ~3.5% when they first arrived at the beginning of 1997, and then rose gradually to ~4.5% by the peak of the bubble in 2000. Yields on “synthetic” TIPS derived by removing estimates of inflation expectations from nominal yields were also around 3.5% in early 1997 and 4.5% in the first half of 2000, though they were more volatile in between. The yield on the benchmark 10y TIPS is currently 2.4% while the yield on the 30y TIPS is around 3%. Knowing what actually happened in the 1990s is helpful for calibrating expectations about what could happen in the next decade, if new software technologies lead to a comparable acceleration in productivity growth.
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AI, Productivity, and Rates: Part I— Resource utilization growth from late 2024 through early 2026 ranks among the fastest 5-quarter stretches since 1947, driven by a rise in average weekly hours worked rather than improvements in unemployment or manufacturing capacity.
AI and Productivity— Rising US labor productivity is driven by higher capital utilization—factories, servers, and hotel rooms running harder—rather than new investment or efficiency gains at the individual task level.
Have We Entered an Era of High Productivity Growth?— Labor productivity data show a 57% probability the U.S. economy has entered a high-growth regime, but efficiency-based measures show only 21%, mirroring the mixed signals seen in the mid-1990s technology boom before sustained productivity gains became clear.
AI Summary.Tariff refunds are contributing an estimated 0.2 percentage points to US quarterly GDP growth, adding to existing economic tailwinds from AI investment, industrial expansion, and fiscal policy, keeping interest rates elevated for longer.
Torsten SløkApollo
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Net tariff receipts turned negative in May as refunds outpaced custom duties. The Atlanta Fed projects GDP growth of 4.3% at an annual rate in Q3, of which Sløk estimates ~.2pp will be driven by tariff refunds.
Are tariff refunds masking underlying economic weakness?
The tailwinds behind the US economy are not just AI spending, the industrial renaissance and the One Big Beautiful Bill. Tariff refunds have now joined the list. Not only are tariff refunds boosting corporate earnings, they are also boosting GDP growth. The Atlanta Fed's GDPNow currently points to 4.3% growth this quarter, of which we estimate roughly 0.2 percentage points come from tariff refunds. The bottom line is that the US economy continues to be supported by a growing set of tailwinds. Rates will stay higher for longer.
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The State of U.S. Tariffs July 24, 2026— The average U.S. tariff rate stands at 11.1% and is set to rise to 11.8% by year-end, with current tariff policy estimated to raise consumer prices by 0.7% and generate $1.9tn in revenue over ten years, net of drag on economic output.
The AI Capex Boom Is Building Twice as Fast as the Housing Boom— Data-center investment is expanding at nearly twice the speed of the housing boom at its peak, rising from 1.4% to 3.1% of GDP in two years (~0.85 percentage points per year) versus housing's fastest pace of 0.5 percentage points per year.
The AI Investment Race— AI infrastructure investment is expanding faster than any previous technology boom, including the railway mania and dotcom bubble, within just three years. Debt-fueled buildout and circular financing arrangements are creating financial interconnectedness that makes the current cycle more fragile and prone to sharp correction.
