Category: Economics
Building more will boost labor’s share
This paper argues that the decline in the labor share is not driven by the overall quantity of capital, but by its changing composition. Constructing annual macro data for 16 advanced countries over two centuries, we show that, since 1980, the relative decline in buildings capital and the associated increase in real prices of buildings have reduced the labor share because buildings and labor are complements. The decline in the labor share has been reinforced by the increase in machinery capital and the associated decline of real prices of machinery capital because machinery capital and labor are substitutes. Together, these shifts in capital composition account for a substantial portion of the observed decline in the labor share of income.
Here is the full article by Jacob Kerspien, Jakob Madsen, and Holger Strulik, via tekl.
Existential Risk and Growth
By Philip Trammell and Leopold Aschenbrenner, a new paper:
Technological development raises consumption but may pose existential risk. A growing literature studies this tradeoff in static settings where stagnation is perfectly safe. But if any risky technology already exists, technological development can also lower risk indirectly in two ways: by speeding (1) technological solutions and/or (2) a “Kuznets curve” in which wealth increases a planner’s willingness to
pay for safety. The risk-minimizing technology growth rate, in light of these dynamics, is typically positive and may easily be high. Below this rate, technological development poses no tradeoff between consumption and cumulative risk.
Self-recommending…
“What we got wrong this year”
This is from The Free Press, and the instructions were to fess up to a mistake made in a piece for The Free Press (not elsewhere). Here is mine:
On October 26 I wrote about President Trump’s $20 billion support package for Argentinian president Javier Milei. At the time I, along with many other economists, thought the bailout was a costly mistake, but so far the decision has been vindicated.
The backstory is that Milei was trying to peg the Argentinian peso artificially high. Such policies usually do not work, even with strong backing from the International Monetary Fund, or in this case the U.S. It felt like the U.S. would lose a lot of money supporting a doomed economic policy. After all, Milton Friedman taught us long ago that floating exchange rates, set by market forces, usually are best.
But Milei stuck to his guns with the peg, an unusual move for a libertarian-oriented reformer, and Trump decided to back him. What happened in the “market test of strength” is that Milei and Trump won. The peg held, and the U.S. government seems not to have suffered any losses from this policy. By December, Argentina announced that it would be softening its currency peg and moving closer to a floating-rate system, as most economists recommend.
Why were the economists—including me—wrong? Maybe we were right ex ante, and Milei and Trump got lucky ex post. An alternative view is that the political symbolism of holding the peg was more important than the economics of the decision, and Milei had insight the economists did not.
When you are not sure why you were wrong, or how wrong you were, that is all the more reason to stay humble.
There are many other answers at the link.
Conor Sen claims
Resale housing inventory has climbed toward or above pre-pandemic levels in most of the South and West. Even in the supply-constrained Northeast and Midwest, there are signs of inventory growth. By 2027 — the year in which the oldest members of Gen Z start turning 30 — the US will probably have more existing homes for sale than it’s had in a decade.
This normalization is putting gradual but persistent pressure on prices. At a metro level, price growth is either decelerating or prices are outright falling just about everywhere. A surge in delistings heading into year-end indicates that market dynamics are weaker than advertised home prices suggest. The S&P Cotality Case-Shiller US National Home Price Index rose just 1.3% in September from a year ago, well below the 3.7% growth in the average hourly earnings of American workers.
Here is more from Bloomberg. Conor has further analysis and suggests the 2030s will be quite a good house-buying time for Generation Z.
Top Posts of 2025
Here are the top MR posts of 2025 as measured by page views. Number one post goes to Tyler:
An excellent post that pairs well with another Tyler post, also in the top ten, A median voter theory of right-wing populism which has the punchline:
The right-wing populists are gaining ground in so many countries because the cultural liberals in various parliaments and congresses are extremely reluctant to meet the preferences of their median voters.
Number two was also a Tyler post. Why I think AI take-off is relatively slow, an excellent accounting of AI economic and institutional bottlenecks. This pairs well with another top-ten post in which Tyler announces that AGI is already here. Both posts are correct. An interesting conundrum.
Third and fourth are two of my posts:
3. UCSD Faculty Sound Alarm on Declining Student Skills
4. One-Third of US Families Earn Over $150,000
Next is Tyler’s rundown of non-fiction books. Well worth re-reading.
5. Best non-fiction books of 2025 with one late addition.
Next I was pleased to see my post in which I explain some standard economics but in a deeper, more fundamental way than is usually done: One of my favorite posts of the year:
Why Do Domestic Prices Rise With Tariffs?
Zephyr Teachout’s op-ed wasn’t fun to read but I admit I did have some fun writing a response
Here’s another issue which makes me mad. The destruction of boarding houses, a perfectly reasonable housing form that reduces homelessness. Or to put it more simply, why is sharing a house illegal? Outrageous.
The War on Roommates: Why Is Sharing a House Illegal?
I am all for American greatness but the approach of the Trump administration is often backwards. I pointed out the big differences between the Sputnik moment and what I called the DeepSeek Moment in two posts.
The Sputnik vs. DeepSeek Moment: Why the Difference? and The Sputnik vs. Deep Seek Moment: The Answers.
I was pleased that David Brooks picked up on my framing in the NYTimes.
Finally my post The Library Burned Slowly sparked a brief spat with Chris Rufo. Rufo’s ability to turn the tools of the left on them is impressive but I haven’t changed my mind that “Bludgeoning your enemies is fun while it lasts but you can’t bludgeon your way to a civilization.”
What were your favorite posts of the year, either at MR or elsewhere?
J. M. W. Turner, financial arbitrageur
Abstract. J. M. W. Turner is famous for his achievements in graphic arts. What is not known is that he engaged in some pioneering market arbitrage, a profitable and risk-free swapping of British government securities. His activities lead to interesting insights into British markets of the 19th century. Financial innovation frequently created profitable arbitrage opportunities. However, among regular investors it seems that it was mostly mavericks like Turner who took advantage of them. Apparently there were strong cultural factors that inhibited most people from imitating him, which allowed obvious pricing anomalies to persist for extended periods.
That is from a recent paper by Andrew Odlyzko. Via Colin.
The Inflation Attention Threshold
From Oliver Pfäuti:
The recent inflation surge brought inflation back on people’s minds. I quantify when and how much attention to inflation changes and derive the macroeconomic implications of these attention changes. I estimate an attention threshold at an inflation rate of 4%, that attention doubles when inflation exceeds this threshold, and that supply shocks have stronger and more persistent effects on inflation in times of high attention. Developing a model featuring the attention threshold, I show that the observed attention changes offer a joint explanation for the recent inflation surge, its interplay with inflation expectations, and the long last mile of disinflation.
Here is the paper.
The Hainan Free Trade Port
Earlier I wrote about China’s Libertarian City, Boao Hope City (officially the Boao Lecheng International Medical Tourism Pilot Zone), China’s first special economic zone for advanced healthcare. Boao Hope City is following the peer approval model I have long argued for:
Daxue: Medical institutions within the zone can import and use pharmaceuticals and medical devices already available in other countries as clinically urgent items before obtaining approval in China. This allows domestic patients to access innovative treatments without the need to travel abroad…. The medical products to be used in the pilot zone must possess a CE mark, an FDA license, or PMDA approval, which respectively indicate that they have been approved in the European Union, the US, and Japan for their safe and effective use.
Boao Hope City is part of the larger Hainan Free Trade Zone. Hainan is a large island off China’s Southern Coast, often called the Hawaii of China. The entire island is being turned into the world’s largest free trade zone. As of Dec. 18, 2025, Hainan now boasts:
- Expanded “Zero-Tariff” Coverage…“zero-tariff” eligible goods expand from about 1,900 to approximately 6,600 tariff lines, increasing coverage from 21% to 74% of total import/export items, encompassing most production equipment and raw materials. This exemption applies to import tariffs, import VAT, and consumption tax, potentially saving enterprises about 20% in tax costs on imported equipment.
- Optimized “Tariff Exemption for Value-added Processing” Policy: One of the most transformative measures, this policy sees significantly relaxed restrictions (e.g., on core business income ratios) and now allows cumulative value-added calculation across upstream and downstream enterprises. This makes it easier for businesses to meet the “over 30% value-added” threshold for tariff exemption when selling finished products into the mainland market. Companies can ship primary products or components to Hainan for substantial processing; if the value-added meets the standard, the final products can enter the mainland market tariff-free.
- “Dual 15%” Tax Incentives as a Long-term Advantage: Encouraged industries registered and substantively operating in the Hainan FTP enjoy a reduced 15% corporate income tax rate. Eligible high-end and in-demand talents benefit from an individual income tax exemption for the portion exceeding 15%, providing long-term, stable fiscal predictability.
- Enhanced Trade and Investment Liberalization/Facilitation: Measures include implementing a negative list for cross-border trade in services, relaxing foreign investment access, adopting a “commitment-based registration system” for business setup, and streamlining procedures. A visa-free policy for nationals of 59 countries is in effect, with further eased entry-exit restrictions for business personnel.
The Macroeconomic Effects of Tariffs: Evidence From U.S. Historical Data
We study the macroeconomic effects of tariff policy using U.S. historical data from 1840–2024. We construct a narrative series of plausibly exogenous tariff changes based on major legislative actions, multilateral negotiations, and temporary surcharges– and use it as an instrument to identify a structural tariff shock. Tariff increases are consistently contractionary: imports fall sharply, exports decline with a lag, and output and manufacturing activity drop persistently. The shock transmits through both supply and demand channels. Prices rise in the full sample but fall post-WWII, a pattern consistent with changes in the monetary policy response and with stronger international retaliation and reciprocity in the modern trade regime.
That is from a new paper by Tamar den Besten and Diego R. Känzig. These effects of course do take some while to appear.
Cayman (U.S.) fact of the day
Over the past four years, hedge funds have doubled their footprint in the U.S. debt market, making the Cayman Islands — where many hedge funds are officially based — the place where the most U.S. debt outside the United States is held, according to the Fed. Typically, people flock to Treasuries for safety in times of crisis. Yet, driven in large part by hedge fund activity, the Treasury market went through unusual turbulence during recent shocks, including the onset of the Covid-19 pandemic in March 2020 and President Trump’s “Liberation Day” tariff announcement in April 2025.
And this:
By the early 2010s, these foreign governments made up over 40 percent of Treasury holdings, excluding those the Federal Reserve held. That was up from just over 10 percent in the mid-1990s…Foreign governments now make up less than 15 percent of the overall Treasury market.
Will AI Improve Undergraduate Economics Education?
For decades, undergraduate economics educators have followed a well-worn playbook featuring textbooks, lectures and problem sets. Students have passively listened, taken notes and studied for exams. AI disrupts this educational process. Some students are using this tool as a substitute for their own precious time. What is our best response? This paper provides a prospective analysis of how to restructure every phase of the undergraduate economics experience to improve the major and better prepare students for their uncertain future. Departments face a principal/agent issue in implementing major curricular reforms. I discuss the incentive problems that arise both within economics departments and across departments. If we win this competition to reimagine the undergraduate experience, will the Deans reward us?
TC again: No.
Marginal Returns to Public Universities
From Jack Mountjoy, forthcoming in the QJE:
This paper studies the returns to enrolling in American public universities by comparing the long-term outcomes of barely admitted versus barely rejected applicants. I use administrative admission records spanning all 35 public universities in Texas, which collectively enroll 10 percent of all American public university students, to systematically identify and employ decentralized cutoffs in SAT/ACT scores that generate discontinuities in admission and enrollment. The typical marginally admitted student gains an additional year of education in the four-year sector, becomes 12 percentage points more likely to ever earn a bachelor’s degree, and eventually earns 8 percent more than their marginally rejected but otherwise identical counterpart. Marginally admitted students pay no additional tuition costs thanks to offsetting grant aid; cost-benefit calculations show internal rates of return of 26 percent for the marginal students themselves, 16 percent for society (which must pay for the additional education), and 7 percent for the government budget. Earnings gains are similar across admitting institutions of varying selectivity, but smaller for students from low-income families, who spend more time enrolled but complete fewer degrees and major in less lucrative fields. Finally, I develop a method to separately identify effects for students on the extensive margin of attending any university versus those on the margin of attending a more selective one, revealing larger effects on the extensive margin.
That is one simple way of seeing why I do not think of higher education as largely signaling, noting that signaling theories might give you a higher wage up front but not over extended periods of time, as worker quality becomes known.
Economic growth
Depending on how you look at it growth in Q3 was very very strong or very strong or just possibly merely strong.
Annual rates: GDP: 4.3% Real final sales to domestic purchasers: 2.9% Average of GDP & GDI: 3.4%
GDI: 2.4%
That is from Jason Furman.
What should I ask Kim Bowes?
Yes, I will be doing a Conversation with her. Here is Wikipedia:
Kimberly D. Bowes (born 1970) is an American archaeologist who is a professor of Classical Studies at the University of Pennsylvania. She specializes in archeology, material culture and economics of the Roman and the later Roman world. She was the Director of the American Academy in Rome from 2014–2017.[2] She is the author of three monographs…
While she is continuously focused on the archaeology and material culture of the Roman and later Roman worlds, her research interests have shifted from late antiquity and the archeologies of religion and elite space to historical economies with a distinct focus on poverty and the lived experience of the poor. Her forthcoming study on Roman peasants in Italy reflects a greater attention to non-elites in the studies of Roman archaeology and economic history and a shift in her methodology, integrating archaeological and scientific data, anthropological theory and historical economics become.
I am a big fan of her new book Surviving Rome: The Economic Lives of the Ninety Percent. So what should I ask her?
Three that Made a Revolution
Another excellent post from Samir Varma, this time on the 1991 reforms in India that launched India’s second freedom movement:
Three men you’ve probably never heard of—P.V. Narasimha Rao, Manmohan Singh, Montek Singh Ahluwalia—may be the three most important people of the late 20th century.
Bold claim. Audacious, even. Let me defend it.
Here are the numbers. In 1991, over 45% of Indians lived below the poverty line—roughly 400 million people. By 2024, extreme poverty in India had fallen to under 3%.
That’s 400 to 500 million people lifted out of poverty.
The largest democratic poverty alleviation in human history.
….So there they stood.
The precipice was visible. A Hindu politician from a dusty village in Telangana who spoke 17 languages and wrote novels nobody wanted to read. A Sikh economist from a village that no longer existed, who took cold showers at Cambridge and kept dried fruits in his pockets. Another Sikh economist who’d been the youngest division chief in World Bank history and wrote a memo that would change a country.
Three men. All products of a civilization that absorbs contradictions—that somehow fits Hindus and Sikhs and Muslims and Christians and Jains and Buddhists and Parsis into one impossibly diverse democracy. A civilization where, as I’ve written before, any statement you make is true, AS IS its opposite.
India was bankrupt. The gold was gone. The Soviet model they’d followed for forty years was collapsing in real time. Every assumption that had guided Indian economic policy since independence was being revealed as catastrophically wrong.
The intelligentsia still believed in socialism. The party cadres still worshipped Nehru’s memory. The opposition would scream about selling out to foreign powers. The bureaucracy would resist losing its control. The protected industries would fight to keep their monopolies.
But the three men had something their opponents didn’t: a plan. The M Document—the years of thinking—the technocratic expertise accumulated across decades. They had political cover—Rao’s tactical genius, his willingness to let Singh take the heat while he worked the back channels. They had credibility—Singh’s Cambridge pedigree, Ahluwalia’s World Bank experience, Rao’s decades of political survival.
And they had something else: the crisis itself. The one thing that could break through forty years of socialist inertia. The emergency that made the previously impossible suddenly necessary.
Varma tells the story well. For the full history consult the indispensable The 1991 Project, full of documents, oral histories and interviews.
Hat tip: Naveen Nvn.