Famous quotes

"Happiness can be defined, in part at least, as the fruit of the desire and ability to sacrifice what we want now for what we want eventually" - Stephen Covey

Sunday, August 31, 2025

5 Things Middle class should not do : Warren Buffet

 Warren Buffett, the Oracle of Omaha, has built one of the greatest fortunes in history through disciplined investing and wise financial decisions. While many focus on his stock-picking abilities, Buffett’s wisdom extends to everyday spending habits that can make or break middle-class families’ economic futures.


His philosophy centers on distinguishing between wants and needs, focusing on value rather than status, and understanding that every dollar not spent on depreciating assets can compound over time through smart investments.


Buffett’s approach to personal finance isn’t extreme frugality—it’s about making intelligent choices, prioritizing long-term wealth building over short-term gratification. His lifestyle exemplifies these principles, from his modest home to his practical vehicle choices. Buffett’s teachings offer a roadmap to financial independence for middle-class families looking to build wealth through conscious spending decisions. According to Warren Buffett, here are the five terrible things the middle class should stop buying.



1. Buying Cars for Status and to Impress the Neighbors

Warren Buffett has long advocated against purchasing vehicles for status rather than utility. He famously stated, “The car is going from point A to point B, and if it does it safely, that’s all that counts.” This philosophy reflects his broader investment principle that assets should provide real value rather than serve as expensive status symbols.


Buffett practices what he preaches, driving modest vehicles over his career and keeping them for years rather than constantly upgrading. He even bought hail-damaged cars to save on the initial depreciation. His approach highlights a crucial financial reality that many middle-class families overlook: cars are depreciating assets that lose value rapidly from the moment they leave the dealership.



New vehicles typically lose significant value in their first year, with luxury cars often experiencing steeper depreciation. The financial impact extends beyond the initial purchase price when considering insurance costs, which are substantially higher for expensive vehicles. A family choosing a reliable used car over a luxury vehicle can redirect the savings toward investments that grow in value over time.



The opportunity cost becomes staggering when calculated over decades. When invested consistently in the stock market, the difference between a luxury car payment and a modest vehicle payment can compound into substantial wealth. Buffett understands that impressing neighbors with expensive cars often comes at the expense of building absolute financial security for one’s family.


2. Gambling and Lottery Tickets

“To quite an extent, gambling is a tax on ignorance… A government shouldn’t make it easy for people to take their Social Security checks and [waste them pulling] a handle”. – Warren Buffett.


Buffett views gambling and lottery tickets as one of the worst possible uses of money for middle-class families. He has described lottery playing as fundamentally flawed thinking because the odds are mathematically designed to favor the house, creating guaranteed negative expected returns for players.


The lottery system operates on inferior odds, with major jackpots offering chances so remote they’re barely worth calculating. Despite these terrible odds, many middle-class families regularly purchase tickets, viewing them as harmless entertainment or a potential escape from financial struggles. Buffett sees this differently—money that could build wealth through compounding.


The annual amount many households spend on lottery tickets and gambling represents a significant opportunity cost. When that same money is invested consistently in low-cost index funds, the compound growth over decades can create substantial wealth. Buffett’s investment philosophy emphasizes the power of time and compounding gains, making every dollar count toward long-term financial security.


This spending pattern also reflects a mindset that conflicts with Buffett’s value investing principles. Instead of hoping for unlikely windfalls, he advocates for the mathematical certainty of compound growth through disciplined investing and wise financial choices.


3. High-Fee Investment Products

One of Buffett’s most passionate crusades involves warning investors against high-fee investment products that erode returns over time. He has consistently stated that “a very low-cost index fund is going to beat a majority of the amateur-managed money or professionally-managed money.”



Buffett’s conviction runs so deep that he famously wagered with hedge fund managers, betting that a simple S&P 500 index fund would outperform their complex strategies over a decade. He won that bet decisively, proving that expensive doesn’t mean better in the investment world.


The mathematics of fees can be devastating to long-term wealth building. Investment products with high annual fees compound against investors year after year, creating a significant drag on returns. Many middle-class investors don’t realize how minor percentage differences in fees can cost hundreds of thousands of dollars over a lifetime of investing.


Complex investment products often come with multiple fees that can be difficult to understand. Buffett advocates for transparency and simplicity, favoring low-cost index funds that track broad market performance. His approach eliminates the guesswork and high costs of trying to beat the market through expensive active management.


The solution aligns perfectly with Buffett’s overall investment philosophy: buy quality investments at reasonable prices and hold them for long periods. This strategy works for individual stocks and applies equally well to choosing investment vehicles for retirement accounts and long-term savings.


4. Luxury Items to Impress Others

Buffett’s philosophy on luxury purchases stems from his belief that “price is what you pay, value is what you get.” He consistently chooses substance over appearance, focusing on an item’s utility rather than the status it might convey to others.


His personal lifestyle exemplifies this principle. Despite his vast wealth, Buffett continues living in the same modest home he purchased decades ago. His wardrobe consists of practical clothing rather than designer labels, and his daily habits reflect someone who values function over form.


The markup on luxury goods often far exceeds their practical utility or superior quality. Many luxury items carry price premiums based primarily on brand recognition and perceived status rather than measurable improvements in performance or durability. This creates poor value propositions that conflict with Buffett’s investment principles.


For middle-class families, luxury purchases can represent significant opportunity costs. The money spent on expensive handbags, jewelry, or designer clothing could instead be invested in assets that grow in value over time. Buffett recognizes that true wealth comes from owning appreciating assets rather than consuming depreciating luxury goods.


The psychological aspect also matters in Buffett’s thinking. Purchasing items to impress others often leads to lifestyle inflation and keeping up with social pressures that can derail long-term financial planning. His approach prioritizes financial independence over social signaling.


5. Buying Things With High-Interest Consumer Debt

“Interest rates are very high on credit cards. Sometimes they are 18%. Sometimes they are 20%. If I borrowed money at 18% or 20%, I’d be broke”. – Warren Buffett


Perhaps no financial mistake bothers Buffett more than carrying high-interest consumer debt. He has stated that borrowing money at credit card interest rates would leave him “broke,” highlighting the mathematical impossibility of building wealth while paying such extreme borrowing costs.


Current credit card interest rates often exceed what successful investors earn in the stock market over time. This creates an impossible situation where debt costs compound faster than investment returns can grow. Buffett recognizes this as a wealth-destruction mechanism that can trap families in cycles of financial stress.


The minimum payment structure on credit cards particularly troubles Buffett because it extends repayment periods while maximizing interest charges. Families paying only minimum amounts can spend decades repaying relatively small balances while paying multiples of the original purchase price in interest charges.


Buffett’s solution involves paying cash for purchases and living within one’s means rather than relying on credit for lifestyle maintenance. He advocates eliminating high-interest debt before beginning any investment program because the guaranteed savings from debt elimination often exceed potential investment returns.


This principle extends beyond credit cards to other forms of high-interest consumer debt. Auto loans, personal loans, and financing for luxury purchases all represent wealth-eroding expenses that conflict with building long-term financial security.


Conclusion

Warren Buffett’s wisdom about personal spending habits offers middle-class families a clear path toward building lasting wealth. His principles aren’t about extreme deprivation—they’re about making intelligent choices that prioritize long-term financial security over short-term status and gratification.


The common thread throughout Buffett’s advice involves understanding opportunity costs and the power of compounding gains. Every dollar spent on depreciating assets or high-interest debt represents money that can’t compound and grow through smart investments.


By avoiding these five financial traps, middle-class families can redirect their resources toward building real wealth that provides genuine financial security and independence over time."

EY analysis of Indian Union Budgets of the past 10 years

 The analysis of Union Budgets from 2015 to 2025 highlights significant shifts in public expenditure priorities and the management of tax revenues, particularly concerning their impact on productivity and utilization.

Effect of Public Expenditure on Productivity

The GoI has made a conscious effort to progressively create space for capital expenditure expansion, recognizing its crucial role in driving growth and productivity. This strategy is visible across several budgets:

  • Increased Capital Expenditure: From FY15 to FY26 (Budget Estimate), GoI's capital expenditure as a percentage of GDP increased by 1.56 percentage points, rising from 1.58% to 3.14%. As a share of total expenditure, capital outlay nearly doubled from 11.8% in FY15 to 22.1% in FY26 (BE). This augmentation was financed almost equally by revenue enhancement and expenditure restructuring, including a 0.72 percentage point fall in revenue expenditure relative to GDP.
  • Focus on Infrastructure: The increase in capital expenditure has largely favored non-defence capital expenditure, which is closely linked to infrastructure development. This category reached a peak of 2.15% of GDP in FY24. The National Infrastructure Pipeline (NIP) and GatiShakti initiative are key programs aimed at accelerating infrastructure spending, with the objective of providing a strong foundation for medium-to long-term growth.
  • Multiplier Effects: Public expenditure, especially capital expenditure, is recognized for its higher multiplier effects on output and employment compared to revenue expenditure. An RBI study estimated the central government's capital expenditure multiplier at 2.45 in the first year and 3.14 in the second year, with non-defence capital expenditure having even higher multipliers (2.10 impact, 3.84 peak).
  • Quality of Fiscal Deficit: There has been a consistent improvement in the quality of fiscal deficit since FY21. This indicates that a larger proportion of government borrowing is now being used for capital asset formation rather than revenue expenditure, which directly supports productivity and long-term growth. The share of capital expenditure in fiscal deficit increased to 57.4% in FY24.
  • Incentivizing States: The central government has also encouraged state governments to increase their capital expenditures through measures such as earmarking portions of grants for capital asset creation and providing 50-year interest-free loans. This is critical as many infrastructure projects fall under state supervision.
  • Growth Stimulus: Budgets have aimed to stimulate growth by supporting aggregate demand, focusing on job-creating sectors with high multiplier effects like infrastructure, construction, agriculture, and health. While there was a heavy reliance on fiscal stimulus during the COVID-19 crisis, particularly in FY21, the subsequent efforts focused on restructuring expenditure to prioritize capital formation.

Share of Tax Revenues and Its Utilization

The sources provide a detailed account of the trends in tax revenues and how they have been utilized to support fiscal reforms and economic objectives:

  • Combined and GoI's Tax-GDP Ratio:
    • India's combined tax-GDP ratio, which had historically hovered between 16% and 18%, shows signs of breaking this ceiling, increasing by over 2 percentage points from FY15 to FY24. It reached 18.5% in FY24 and is projected to rise to about 23.5% by FY48.
    • The GoI's Gross Tax Revenue (GTR) to GDP ratio increased from 10% in FY15 and FY20 to 11.7% in FY24.
    • However, the trend growth rate of GoI's GTR has been declining since FY08, falling to 4.8% by FY22 (BE). A sustained increase to 10% or above is needed to reduce reliance on larger fiscal deficits.
  • Composition of Tax Revenues:
    • Direct taxes are expected to contribute more significantly to the overall tax-GDP ratio going forward. Corporate Income Tax (CIT) reforms in September 2019 reduced rates, leading to an initial contraction in CIT revenues in FY20 (-16.1%). However, CIT revenues have since recovered, showing high growth and buoyancy in subsequent years.
    • Goods and Services Tax (GST), introduced in July 2017, initially resulted in lower growth and buoyancy due to the rate structure not being revenue-neutral and the initial emphasis on lower rates in the GST Council. The effective weighted average GST rate declined from 14.4% in May 2017 to 11.6% in July-September 2019.
    • Union Excise Duties on petroleum products have played a role in compensating for revenue losses from CIT reforms, with their share in GTR increasing to 15.1% in FY22 (BE) from 11.2% in FY19.
  • Share with States: The recommendations of the 14th Finance Commission led to a sharp increase in states' share of central taxes from 32% to 42%. However, the actual effective share of states was often lower (e.g., 28.9% in FY21 (RE) and 30.0% in FY22 (BE)) due to the increasing role of cesses and surcharges, which are not shared with states. This effectively reduces the divisible pool for states.
  • Non-Tax Revenues (NTR):
    • NTRs have generally languished in the 2-3% range of GDP over a long period, which is low compared to other selected countries. These revenues originate from government ownership of financial and physical assets, as well as services provided, often with less than their full potential realized.
    • Key initiatives to augment NTR include spectrum sales and the National Monetization Pipeline (NMP) for monetizing government and public sector-owned assets, including defence assets. The NMP aimed to monetize assets worth INR6 lakh crore from FY22 to FY25, with high achievement rates.
    • RBI dividends are a significant, albeit volatile, component of NTR, showing periodic jumps that can influence government revenues.
  • Utilization of Tax Revenues:
    • Tax revenues, along with non-tax revenues and non-debt capital receipts, are the primary sources for financing government expenditure.
    • A significant portion of revenue enhancement, including increased tax-GDP ratio, has been used to create fiscal space for augmenting capital expenditure and supporting the shift towards an investment-led growth strategy.
    • The need to adhere to Fiscal Responsibility and Budget Management Act (FRBMA) targets has often led to the burden of fiscal deficit reduction falling on expenditure curtailment, particularly revenue expenditure and subsidies.
    • Despite increased borrowing, especially during the COVID-19 crisis, a significant portion of additional funds was sometimes directed towards revenue expenditure, highlighting challenges in fully directing resources towards asset-forming capital expenditure. For instance, in FY20 and FY21, approximately 80% of additional borrowing financed revenue or non-asset forming expenditure.
    • Subsidy reforms, including better targeting and delivery through Direct Benefit Transfers (DBT) leveraging digital infrastructure, have led to a steady reduction in major subsidies as a percentage of GDP, falling from a peak of 3.57% in FY21 to 1.16% in FY25 (BE).
    • Interest payments constitute a significant and growing portion of government expenditure and revenue receipts (e.g., 42.7% of revenue receipts in FY23), particularly due to higher debt levels incurred during the COVID-19 period. Reducing the debt-GDP ratio is expected to lower interest payments, freeing up fiscal space for productive spending.
    • The abolition of the plan-non-plan distinction in expenditures (FY15 onwards) aimed to improve efficiency by preventing undue prioritization of new asset creation over essential maintenance.
    • Increased budgetary transparency, including bringing off-budget borrowings (like FCI's borrowing from NSSF for food subsidies) onto the government's books from FY21 onwards, has improved the accuracy of fiscal deficit reporting.

Overall, the Union Budgets from 2015 to 2025 demonstrate a strategic reorientation towards an investment-led growth model, funded by both tax revenue growth and structural expenditure reforms, while also prioritizing fiscal consolidation and transparency. However, challenges persist in consistently achieving tax buoyancy, managing the share of tax revenues with states, and fully directing all borrowed funds towards productive capital expenditures.

Comparison of Central Govt bailout of Banks

 

Feature India (2017–2021 Recap Bonds) Indonesia (1997–2004 Bank Restructuring Bonds) Ireland (2008 NAMA Bonds)
Context Twin Balance Sheet Problem: Stalled projects → NPAs in PSBs. Asian Financial Crisis: Currency crash + bank insolvencies. Global Financial Crisis: Property bubble burst, banks loaded with toxic real-estate loans.
Issuer Government of India. Government of Indonesia via IBRA (Indonesian Bank Restructuring Agency). Irish government via NAMA (National Asset Management Agency).
Subscribers / Holders Public Sector Banks (PSBs) themselves; non-tradable. Commercial banks; BRBs were tradable & could be sold for liquidity. Irish banks (who swapped bad loans for NAMA bonds); later held by ECB & markets.
Purpose Boost bank equity capital without upfront fiscal cost; improve CAR. Replace NPAs with safe sovereign securities; restore solvency. Remove toxic property loans from bank balance sheets; provide liquidity.
Mode / Type Sovereign bonds, often zero-coupon or low coupon, non-tradable, long maturity. Interest-bearing sovereign bonds, long-term (10–20 years), tradable. Government-guaranteed bonds, interest-bearing, eligible as collateral at ECB.
Amount Issued ~₹2.76 lakh crore (USD ~40 bn) via recap bonds (2017–2021). ~IDR 430 trillion (≈ USD 45–50 bn). ~€30 billion NAMA bonds (≈ USD 40 bn).
Accounting Effect – Banks Assets: Recap bonds. Equity: Govt infusion → higher CAR. Assets: BRBs replace NPAs. Equity: Solvency restored. Assets: NAMA bonds replace property loans; liquidity restored.
Accounting Effect – Govt Liabilities: Public debt ↑. Assets: Higher PSB equity stake. Liabilities: Debt ↑ (up to 50% of GDP). Assets: Claims on banks & recoveries via IBRA. Liabilities: Sovereign-guaranteed bonds. Assets: NAMA held loans (often impaired).
Uniqueness “Circular internal loop” — govt issues bonds, PSBs subscribe, govt infuses equity into same PSBs. Direct swap of NPAs for sovereign bonds (banks got tradable securities). NAMA acted as a “bad bank”, using govt bonds to buy toxic loans at discounted prices.
Outcome Stabilised PSBs; supported by IBC resolutions later. Fiscal impact spread over years. Banking system rescued but govt debt surged sharply. Banks stabilised but Ireland’s fiscal position collapsed → EU/IMF bailout (2010).

Monday, May 12, 2025

Interesting article : Mint

What would an Ambitious Australia look like - Substack

TL;DR — Australia has drifted from wealth creation. We should ask ourselves how to 10× GDP per capita. How? Become an energy superpower, including nuclear; green the outback with cheap desalinated water; poach global talent; own industrial-AI niches; slash bureaucratic sludge, reform taxes; fund audacious moonshots. Prosperity beats perpetual grievance. Let’s build a richer Australia.

In 1788 the First Fleet landed in Sydney Harbour to deposit its crooks and their jailers on barren shores. They almost starved to death, saved by timely supply shipments from Cape Town.

A century later Australia had the highest GDP per capita in the world.

From a desolate prison colony, Australians built one of the most prosperous and enduring societies in history.

We should be looking at the state of our nation today as though it were Day 1 — 1788 all over again. In 2125 we should be many, many times better off than we are now.

But you wouldn’t think so listening to our recent federal election. Surely the grimmest, low stakes campaign in my lifetime. Australians have gotten used to slim pickings for vision from its politicians.

What can we do to actually create wealth for Australians?

This question is totally absent from political discourse. The GST was Australia’s last true significant reform, a quarter of a century ago. Politics since has been dominated by grievance politics (The Voice), bottomless rorting and redistribution (NDIS), and boomer payoffs (franking credits, super concessions). (Although pleasingly, former PM Julia Gillard once asked former Treasurer Secretary Ken Henry how to turn Darwin into Singapore — they aren’t complete zombies.)

Immigration has become extremely politically salient, but no one wants to touch it. Whilst the ambitions around a big Australia are admirable and have merit, it’s not obviously necessary. Indians are not wealthier than Luxembourgers and aren’t set to be any time this century (India’s GDP per capita (~US$9k) is a rounding error next to Luxembourg’s (~US$135k).

What if we were laser-focused on one question: how to make Australians ten times richer. GDP per capita, not total GDP. Just how do we become super duper wealthier. Wealth solves many problems. Over a lifetime (say 70 years) 10x GDP per capita implies 3.3% real annual growth rate. Ambitious but possible.

You are welcome to read this as left-liberal coded if you like, in the vein of Ezra Klein and Derek Thompson’s Abundance.

Here are 5 ideas:

1. Energy superpower

Energy is upstream of basically everything. Cheaper energy lowers costs across the board and allows more things to happen.

Australia sits on one of the world’s largest mineral and energy reserves. Yet domestic energy prices have been increasing. Average effective residential price rose from 20.4 c/kWh in 2007-08 to 27c in 2020-21 and sits in the low-to-mid 30 c/kWh range in 2023-24. Wrong direction! We should allow all energy types: coal, gas, uranium, hydrogen, nuclear, solar, wind — no religious bans. Permit fast-track development. Kill litigation choke-points. No price caps. Adani’s Carmichael coal mine took >8 years to get approval despite passing environmental reviews. Endless lawsuits, bureaucratic reviews, political reversals. Onshore gas exploration is effectively banned or heavily restricted in NSW and Victoria — despite huge reserves.

Australia holds ~31% of the world’s uranium but has 0 reactors — a pure ideological choke. No need to believe in new tech. We could buy conventional plants off the shelf from South Korea. South Korea’s APR-1400 is fully operational and exported — they built the UAE's Barakah plant. From 2009 — 2024, the Koreans built 4 nuclear power plants in Barakah in about 7–8 years each. Korea Electric Power Corp (KEPCO) has a full export package: design + build + operate + train Australians.

Each reactor has a gross electrical capacity of approximately 1,345 megawatts (MW), contributing to a total plant capacity of 5,600 MW. Collectively, the four units are designed to supply up to 25% of the UAE's electricity needs, generating around 40 terawatt-hours (TWh) of clean electricity annually.

Nuclear could reduce costs meaningfully. In Australia coal is cheap but aging, renewables are cheap on production but intermittent, gas is expensive. Nuclear is reliable, with 24/7 baseload. The marginal baseload supply would disproportionately impact pricing. The 40TWh from a Barakah equivalent would add ~12% to Australian energy. Rule of thumb this should reduce prices by 15 - 30%.

The Barakah plants cost the UAE US$32 billion. This figure encompasses construction, financing, initial fuel supply, and related infrastructure. About the cost of 1 year of NDIS.

How about transmission?

Australia’s National Electricity Market (NEM) — the east coast grid (NSW, VIC, QLD, SA, TAS) — already manages about 65,000 MW of capacity. It's designed to handle peak loads of ~30,000 MW (high summer demand). So adding ~5,600 MW isn't totally crazy — it's ~12% more than today’s peak — manageable if intelligently placed. Current transmission is optimised around coal regions (like Hunter Valley, Latrobe Valley). Those lines are old but well-connected.

Wind/solar expansions (like in western NSW, western VIC) require building massive new transmission (like the "VNI West" project) because these sites are remote.

Nuclear plants, if located near existing coal hubs, can re-use existing infrastructure with only moderate upgrades. This would require massive government support — nuclear plants are natural monopolies (like transmission). A nation-building project, not a libertarian fantasy.

2. Terraform the desert

We should terraform the outback to 10x agricultural output.

We have the land and infinite sea water. With cheap energy we could desalinate to create new inland rivers (as proposed by US-based son of Australia Casey Handmer). Once we’ve done that, why not build new cities too?

The next Great Australian will build a new city.

Australia is the size of Europe, but much of it is uninhabitable and unproductive desert:

Australian habitability map shows land use patterns 70 years ago | Daily Mail Online Accordingly, most of it is minimally used:

Almost all Australians live on the coastlines. The US has great inland rivers, which allowed it to build great cities and wealth from internal trade.

What if we could create something similar for Australia?

Mongolia successfully transformed 6,000km² of Inner Mongolia's Kubuqi Desert into green landscape, quadrupling annual rainfall from <100mm to >400mm. That’s the size of about two-and-a-half Australian Capital Territories. Or the 18 million hectares restored so far in the Sahel as part of the Great Green Wall, a vision to create a 8,000km green belt across 11 countries. Other examples can be found in Israel’s Negev desert and the Toshka Project in Egypt.

I have seen this image a lot of times. Is a plan like to terraform Australia feasible? : r/geography Australia exports around $76bn in agricultural product per year. We should aim to 10x that number.

3. Aggressively target global talent

No, this does not mean flooding our universities with migrants to ‘skill them up’ in a fake university-profiteering visa mill farce.

It means attracting the world’s best and brightest. E.g.

Zero income tax for X years if you start a business that employs >10 people or generate >$5m in exports.

Fast-track citizenship for scientists, engineers, founders, capital allocators, builders.

Poach aggressively from places where elites are suffocating (e.g., Germany’s Mittelstand engineers, Hong Kong’s disgruntled financiers, San Franciscan favelas). Technology is probably the only way to increase productivity and for technological research we need more talent density. Australia is the best place in the world to live, why not attract more of the world’s best. It doesn’t mean we can recreate Silicon Valley — no one really knows how to do that — but we can make something better than we have.

4. AI?

AI is probably going to be the single greatest driver of global wealth over the next few decades. Can Australian industry get in on the boom? Australia is an AI client not a creator. Australia has no major foundational models (no OpenAI, Anthropic, DeepMind). Australia has no hyperscale tech companies (no AWS, Google, Meta scale). Australia imports almost all its AI tech (models, chips, cloud, SaaS) from USA, China, Europe.

It’s too expensive and it doesn’t have the AI talent density to build it anyway. Australia could become a world leader in applied AI in heavy industries. Mining, agriculture, energy — these are Australia's strengths. Build world-best AI systems for robotic mining, agriculture optimisation, energy grid AI ops to own the "industrial AI" verticals globally. These sectors are hugely valuable and underserved by Silicon Valley, which has typically focused on digital-first solutions. Precedents and talent already exist. Just a few Australian companies I’ve admired over the years or invested in include EarthAI (AI mining exploration), Farmbot (which is laying water-monitoring infrastructure to collect the data for such applications in the future), and A1Base (building Twilio for AI agents). There are many others, including across finance and housing. We could also be a source of AI compute. If we unlock cheap energy, we have infinite land, infinite water (for cooling), and are a secure American satellite — we could host ~infinite data centres for compute. The US should be able to do this itself, but there is no reason we can’t seek to leapfrog its energy capacity and help it diversify.

5. The Boring Bits

There’s no getting around cutting all the nonsense policies and bureaucratic and tax molasses that has accrued over time to gunk up our system. I’ve placed them at 5, but they may be the most important. Each are a political quagmire. NDIS: We should at least halve the NDIS, which would still make it >twice as expensive as originally promised. As it is, it’s a massive government-funded scam soaking up jobs from the productive economy.

Tax reforms: Implement all the tax reforms we know we should — reduce the income tax, broaden the GST, introduce a land tax, remove super tax concessions, immediate expensing. Political salaries: You will hate this but we should triple political remuneration. Make politics prestigious again. Let’s at least try and attract talent to politics. Probably double public servant salaries and halve the size of the public sector. Employment law reform: Ok now that we’re really dreaming the impossible, all employment law should fit on a single piece of paper. A minimum wage, [5] weeks annual leave. You can make it as generous as you like, this isn’t about cutting conditions. It’s about simplifying a totally incomprehensible employment law landscape that no one understands and that’s built on >120 separate industry awards pre-supposing 100 years of outdated employee vs employer relations. Just stipulate the minimum conditions we are willing to accept all priced into a minimum wage, minimum safety requirements, and minimum days off (we are Australian after all). And let the market do the rest. 10% GDP boost right there.

6. Moonshot

Ok, #6 of 5. Should we have a national moonshot project? Something to rally behind, something to push our industry and nation forward. Ideas: Terraforming (#2 above) definitely counts. The first fully autonomous mine. Fully Deregulated Special Economic Zones — create one or two totally deregulated, low-tax, hyper-growth cities — e.g., in NT, WA, or Far North Queensland (think Shenzhen or Dubai — but Australian, free, democratic, and rich.) Build a Singapore in the Northern Territory (Gillard can chair the project and we can call it Gillard’s Dream if it helps!). First fleet of fully autonomous navy / nuclear submarines (spicy!) Nuclear Fuel Leasing: Not that moonshot, but it’s a no brainer — could increase South Australian state revenue by 34%.

Final word

We can be a much more prosperous nation. We need only the will. Will all the above get to 10x GDP per capita? Depends on what timeline. Probably not soon. We’ve only tripled GDP per capita in the last 60 - 70 years with favourable demographic changes (women entering the workforce). But if we are ambitious and refocus national attention towards prosperity rather than squabbling over distribution, we will be better off. Surely that’s something worth getting behind. Thanks to Cameron Murray, Dan Morgan, and Aidan Morrison for input on drafts.

Jeremy Renner Salary op-ed

Jeremy Renner has shed light on where things stand with Hawkeye season 2, and after the actor's comments, I don't want the Marvel Cinematic Universe series to return because I feel one key element would be missing. The Multiverse Saga allowed Marvel to explore Disney+ and what it could offer to the franchise. While I know that multiple MCU TV shows have faced issues, I thought Hawkeye was easily one of the best series Marvel Studios has produced.

As such, I have been waiting for Hawkeye season 2 updates since the show premiered. There have been rumors that Clint Barton's brother from the comics, Barney, could be making his MCU debut in a second season. However, Marvel has yet to announce season 2 as one of the projects on the MCU's slate. Almost 4 years after Hawkeye debuted, we now have concrete news on season 2's status, and it sadly makes me not want the show to return anymore.

Jeremy Renner Has Revealed Why He Passed On Hawkeye Season 2 The MCU Series Has Suffered A Major Setback Marvel Studios might have never revealed that Hawkeye season 2 was in development, but Clint Barton actor Jeremy Renner has now confirmed that the MCU did have plans for the Disney+ series to make a return. Renner claimed he turned down Hawkeye season 2 over a salary dispute. According to the actor, he was offered half of his season 1 salary. Check out the full quote below:

"They asked me to do Season 2, and they offered me half the money. I’m like, ‘Well, it’s going to take me twice the amount of work for half the amount of money, and eight months of my time, essentially, to do it for half the amount. I’m like, ‘I’m sorry? Why? Did you think I’m only half the Jeremy because I got ran over? Maybe that’s why you want to pay me half of what I made on the first season.'

This is not Marvel, mind you. This is like, just Disney, not even really Disney. It’s just the penny pinchers, the accountants. I told them to go fly a kite. I mean, just at the insult offer. So we didn’t see eye to eye on it. Sadly, I still love the character. I’d still love to do it, but I had to defend myself. I didn’t ask for any more money, mind you. Just pay me what I made the first season. So it’s all disheartening that that didn’t happen, but that’s fine. I’m happy to let that go, because my body’s probably thanking me, time and time again, that I’m not doing it right now. But we’ll see."

Renner suffered a major accident in 2023. The MCU actor was crushed by his snowplow while saving his nephew's life. That led to Renner breaking several bones and going on a long journey until he was fully healed. Renner mentions his accident as a possible cause why he was offered less money for Hawkeye season 2, which would have been a terrible argument.

Posts 3 While Renner turned down the offer to return for Hawkeye season 2, the actor's comments reveal that he still loves Clint Barton and would be happy to return for the show or more Hawkeye adventures in the MCU. I can understand why Renner said no, as the work would have been harder on him after the injuries, and he would have made only half of his Hawkeye season 1 salary. That said, Hawkeye season 2 could still happen even if Renner and Marvel/Disney never agree on his salary.

Hawkeye Season 2 Could Still Happen With Hailee Steinfeld As The Lead Kate Bishop's Presence In The MCU Is Set To Grow In The Future Marvel's Hawkeye series served two purposes. On the one hand, it was the studio's way of giving the original Avengers member his own solo project. Renner's Hawkeye is the only hero from the MCU's original Avengers team to not get a solo movie, but the Disney+ series made up for that, with six episodes that gave Clint Barton quite a bit of screen time. On the other hand, Hawkeye was very much a two-hander, introducing Hailee Steinfeld's Kate Bishop to the MCU.

By the end of the show, Steinfeld's Marvel hero had shown that she has what it takes to be Clint's successor as the MCU's Hawkeye. With Renner turning down Hawkeye season 2, Marvel does not necessarily need the actor to return for the show to continue. If Steinfeld signs on, Kate Bishop could become the sole star of Hawkeye season 2, perhaps even taking on her mentor's moniker for herself onscreen. Steinfeld's Kate is still making MCU appearances after all, set up to be part of Ms. Marvel's Young Avengers team.

I Don’t Want More Hawkeye If It’s Not With The Hero Duo Coming Back Together The Dynamic Between Kate And Clint Made Hawkeye Season 1 Work [Image: Clint-and-Kate-in-Hawkeye-1]

Since Renner does not mention any further talks with Marvel about returning for Hawkeye season 2, I fear that the studio might have moved on from Clint and decided to continue the show with Steinfeld's Kate Bishop as its sole lead. While I love Kate and think she has the potential to become one of the MCU's most beloved heroes, her dynamic with Renner's Hawkeye is what made me fall in love with the show.

Kate's presence allowed us to see quite a few different sides to Clint, and I loved how she was fascinated with Hawkeye. The character is often cast aside by fans when comparing the original Avengers, and I felt that Kate being a Hawkeye super fan allowed the series to show just how exciting Clint Barton can be. They became family by the end of season 1, and I would love to watch that bond deepen with more seasons. If Jeremy Renner does not return for more, as his comments suggest he will not, then I don't want Hawkeye season 2.

From screen rant article

Saturday, April 26, 2025

The Road to Campus Serfdom

April 24, 2025

The Road to Campus Serfdom

John O. McGinnis

Federal control over education has grown so powerful because progressives empowered the government for their own ideological goals.

It seems remarkable that seemingly antisemitic protests by undergraduates, such as those at my own university of Northwestern, could threaten the biomedical research funding of its medical school. But the structure of civil rights laws as applied to universities has long allowed the federal government to cut off funding to the entire university based on the wrongful actions of particular units or departments.

Ironically, the left, now alarmed by the federal government’s intrusive reach, bears direct responsibility for crafting the very legal weapons wielded against the universities it dominates. Almost four decades ago, progressive legislators demanded sweeping amendments to civil rights law, expanding federal oversight over higher education. The sequence of events reveals a cautionary tale of political hubris: progressive confidence that state power would reliably serve their ends overlooked the reality that governmental authority, once unleashed, recognizes no ideological master. Today’s circumstances starkly illustrate how expansive federal control over civil society, originally celebrated by progressives, returns to haunt its architects. The left’s outrage ought to focus not on this particular administration but on its own reckless empowerment of the state.

The story begins with Grove City College, a small Christian institution in southeastern Pennsylvania. Grove City sought independence from the federal government and its proliferating regulations to preserve a distinctive faith-based education. To that end, it refused all direct government funding. Some of its students, however, received federal Basic Educational Opportunity Grants (Pell Grants) to pay tuition. The Department of Education argued that because the college benefited indirectly from those grants, it must certify compliance with Title IX’s prohibition on sex discrimination. Grove City refused, insisting that accepting students who had federal aid did not subject the entire college to federal rules. The dispute reached the Supreme Court in 1983.

The Reagan administration inherited this enforcement proceeding but tried to take a nuanced approach to protect against giving the government power over all the operations of a private university.

Solicitor General Rex Lee, for whom I had the privilege of briefly working, argued that Grove City was indeed subject to Title IX because the college received indirect federal funding through students’ financial aid. Lee, however, also focused on a limitation contained in the statute, arguing that the restrictions on discrimination only applied to the “program” that received the federal funds—in the case of Grove City, that was the financial aid office—not the entire institution. Thus, Lee’s argument reflected the Reagan administration’s broader policy concern for protecting civil society, including religious institutions, like Grove City, from federal rules that could transform their campus.

The left’s shortsightedness has delivered into the hands of their opponents the very instruments of coercion they forged.

By a 6–3 vote, the Court agreed with the Reagan administration’s position. It held that Title IX applied only to the specific program that received federal funds—in this case, the college’s financial aid office—rather than to the institution as a whole.​ In practical terms, this meant that Grove City College only had to ensure its financial aid operations did not discriminate on the basis of sex. This “program-specific” principle allowed self-determination for much of the college’s operations. It implied, for example, that Title IX would not cover a college’s athletic department unless that department itself received federal funds. It also followed that should a university refuse to end its discrimination in a program, the federal government could only withhold funds from the program that engaged in the discrimination.

As George Liebmann recently wrote for Law & Liberty, the left was enraged by the Reagan administration’s position and the Supreme Court’s decision. It pushed Congress to overturn it immediately. And after debates in Congress, in 1987, both the House and Senate passed the Civil Rights Restoration Act, which made all federal funds received by an educational institution subject to being cut off if there was discrimination by any unit. President Reagan vetoed the bill, warning that “would diminish substantially the freedom and independence” of universities. He saw it as a federal overreach—what he pungently labeled a “big government powergrab … cloaked in the mantle of civil rights.” Or, as Liebmann nicely put it in his recent essay, “Such power … allows the federal government to strangle institutions that don’t fall in line with its vision of social order.”

It is worth recognizing the intellectual roots of Reagan’s veto. Reagan was deeply influenced by Friedrich Hayek’s seminal work, The Road to Serfdom. He frequently quoted Hayek in speeches and hailed Hayek’s contributions when his successor, George H. W. Bush gave Hayek the Presidential Medal of Freedom. Hayek feared that central planning by government would crush autonomy not only of markets, but of civil institutions. Reagan’s veto was a direct application of Hayek’s liberal precepts.

But, despite Reagan’s veto, Congress nevertheless passed the bill over his veto. As a result of this change in law, all subsequent presidential administrations have enjoyed enormous leverage over universities. Any violation of Title VI or Title IX anywhere within the institution, as defined by an administration, puts a university at the risk of the loss of all federal funds in all its operations. Modern universities receive substantial federal funds. Virtually every university relies significantly on federal student aid. Research universities like my own receive substantial additional federal funding, particularly in biomedical research and in defense contracting.

And Democratic administrations made aggressive use of this leverage to change practices at college campuses in heavy-handed ways. The Obama administration’s “Dear Colleague” letter in 2011 effectively mandated that universities overhaul their procedures for sexual abuse and harassment cases or face total loss of federal funding. For instance, the letter asked that guilt be determined by a bare preponderance of the evidence standard, despite the heavy costs to a student from a guilty verdict and expulsion. It also undermined due process by discouraging cross-examination and mandating training in which investigators were encouraged to believe the accusers. The government was deploying its enormous power to dictate processes to universities and regulate their relations with their students and, by extension, students with each other.

The Obama administration did not limit itself to regulating conduct; it aggressively extended its authority to police campus speech. It argued that speech that listeners thought was of a sexual nature could lead to a finding of a hostile environment actionable under Title VI, even if that conclusion were not based on objective facts, but on subjective feelings. Such interventions encouraged speech codes and chilled debate.

In 2016, the Obama administration issued guidance interpreting Title IX to cover gender identity, advising schools that transgender students must be allowed to use facilities and participate in programs consistent with their gender identity or else be in violation of federal law.​ This requirement included access to bathrooms, locker rooms, and sports teams corresponding to their identity. Again, this interpretation represented an aggressive and expansive reinterpretation of Title IX. It seems plainly inconsistent with this language, which prevents discrimination based on sex—a concept that at the time of Title IX was passed—referred to biological sex. But colleges did not want to risk their federal funding by flouting such government ukases.

While many on the left decry the Trump’s administration’s attempt to use its power under the Civil Rights law to reform higher education to its liking, they did not lodge similar complaints against the Obama or Biden administrations’ exertion of power under the same authority.

We should return more autonomy to civil society, including private universities, by reducing the heavy hand of federal regulation.

Such expansive government authority validates Ronald Reagan’s Hayekian prophecy that empowering government inevitably undermines civil society’s autonomy. Hayek’s critique lays bare the dynamic of the current funding‑cutoff regime. A free society, he insisted, rests on rules that are general, abstract, and prospectively applied; once administrators may pursue favored social ends case by case, law dissolves into politics. Yet Congress now empowers federal agencies to “effectuate” anti‑discrimination norms by terminating—“in whole or in part”—every stream of federal aid to a university, while the Office for Civil Rights may invoke “any other means authorized by law.” Universities can thus face a remedial roulette, unsure how—or how severely—evolving notions of “hostile environment,” “pregnancy‑related conditions,” or “gender identity” will be enforced. The rule‑of‑law certainty Hayek prized yields to the horse‑trading of administrative justice.

Hayek also warned that central planners cannot marshal the dispersed knowledge lodged in local practice; uniform mandates inevitably misjudge context and breed perverse incentives. One federal definition of compliance now governs thousands of heterogeneous campuses. Because a single slip can imperil grants for physics or medicine, counsel imposes campus‑wide prophylaxis: mandatory trainings, speech codes, and quasi‑judicial procedures that outrun the statutory text. Washington’s abstractions flatten the landscape of academic life—precisely the epistemic error Hayek when centralized control becomes stronger.

Finally, Hayek identified a ratchet of increased government power: each discretionary intervention invites the next, converting temporary power into permanent dominion. As detailed above, Title VI and Title IX trace the pattern. Program‑specific oversight gave way to institution‑wide sanctions; race and sex have expanded into an ever‑widening catalogue of identities. Every “modest” extension prepares the ground for the next, tightening the lever and nudging higher education farther down the road to bureaucratic serfdom. Bureaucratic mandates by the government require more bureaucrats in the university who gain more power over university life, displacing the more varied perspectives and knowledge of the faculty.

Even under the old regime approved by the Supreme Court in Grove City, the government would have had influence over universities, because it could have cut off funds from units that violated its view of Title VI and Title IX. But its power would have been appropriately limited. Universities need not have feared the loss of all federal funds. They would have been in a better position to engage in a dialogue with the government rather than react to its dictates on any interpretation of Titles VI and IX.

Clumsy governmental dictates on contentious matters such as transgender rights do not merely settle disputes; they inflame societal divisions by transforming moral disagreements into winner-takes-all political battles. Civil society, by contrast, thrives precisely because it embraces diversity and facilitates compromise, allowing pluralistic communities to coexist peacefully without being conscripted into ideological warfare. The left, fixated upon uniform outcomes, consistently undervalues the power of voluntary cooperation and cultural persuasion. Their shortsightedness has delivered into the hands of their opponents the very instruments of coercion they forged, vividly confirming an enduring truth: the power you grant government today will inevitably be wielded tomorrow by your adversaries.

In the long term, the wisest course would be to return more autonomy to civil society, including private universities, by reducing the heavy hand of federal regulation. The Trump administration has demonstrated to progressives that governmental power over education is indeed a double-edged sword. Perhaps, having felt the blade’s sting, the left might now join friends of liberty in sheathing it.

John O. McGinnis

Federal control over education has grown so powerful because progressives empowered the government for their own ideological goals

Sunday, April 13, 2025

What if the World stopped lending to US

Since the early 1990s, the United States has borrowed heavily from its trading partners. This paper presents an analysis of the impact of an end to this borrowing, an end that could occur suddenly or gradually.

Modeling U.S. borrowing as the result of what Bernanke (2005) calls a global saving glut—where foreigners sell goods and services to the United States but prefer purchasing U.S. assets to purchasing U.S. goods and services—we capture four key features of the United States and its position in the world economy over 1992–2012. In the model, as in the data: (1) the U.S. trade deficit first increases, then decreases; (2) the U.S. real exchange rate first appreciates, then depreciates; (3) the U.S. trade deficit is driven by a deficit in goods trade, with a steady U.S. surplus in service trade; and (4) the fraction of U.S labor dedicated to producing goods—agriculture, mining and manufacturing—falls throughout the period.

Using this model, we analyze two possible ends to the saving glut: an orderly, gradual rebalancing and a disorderly, sudden stop in foreign lending as occurred in Mexico in 1995–96. We find that a sudden stop would be very disruptive for the U.S. economy in the short term, particularly for the construction industry.

In the long term, however, a sudden stop would have a surprisingly small impact. As the U.S. trade deficit becomes a surplus, gradually or suddenly, employment in goods production will not return to its level in the early 1990s because much of this surplus will be trade in services and because much of the decline in employment in goods production has been, and will be, due to faster productivity growth in goods than in services.

The global saving glut

From 1992 to 2012, households and the government in the United States borrowed heavily from the rest of the world. As U.S. borrowing—measured as the current account deficit—grew, the U.S. net international investment position deteriorated by $4 trillion, and, by 2012, the United States owed the rest of the world $4.4 trillion. In this paper, we use a model developed by the authors (Kehoe, Ruhl and Steinberg 2013) that captures this increase in borrowing to study the different ways in which the United States can reverse its current account deficit and begin to pay down its accumulated debt. Our hypothesis for the driving force behind the United States’ borrowing is the global-saving-glut theory proposed by Ben Bernanke. In a March 2005 address, Bernanke (2005) asked,

“Why is the United States, with the world’s largest economy, borrowing heavily on international capital markets—rather than lending, as would seem more natural? … [O]ver the past decade a combination of diverse forces has created a significant increase in the global supply of saving—a global saving glut—which helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”

The essence of the global-saving-glut theory is that increased saving in the rest of the world, primarily in China, resulted in foreigners purchasing U.S. assets rather than U.S. exports. As foreigners sold goods and services to the United States to finance these asset purchases, the price of these goods and services compared to those in the United States fell.

The balance-of-payments identity says that payments by U.S. residents to rest of the world (ROW) must equal payments by the rest of the world to U.S. residents:

ROW purchases of U.S. exports + ROW factor payments and transfers to U.S. + ROW purchases of U.S. assets = U.S. purchases of ROW exports + U.S. factor payments and transfers to ROW + U.S. purchases of ROW assets.

This equation is an identity because accounting conventions make it hold at all times: An excess of payments made by the rest of the world over payments made by U.S. residents, for example, is counted as purchases of assets in the rest of the world by U.S. residents, that is, U.S. residents borrowing from foreigners. We can rearrange this identity as

(ROW purchases of U.S. exports − U.S. purchases of ROW exports) + (ROW factor payments and transfers to U.S. − U.S. factor payments and transfers to ROW) = (U.S. purchases of ROW assets − ROW purchases of U.S. assets),

which says that the U.S. trade balance plus net factor payments and transfers from the rest of the world are equal to net U.S. asset accumulation in the rest of the world. The sum of the trade balance plus net factor payments and transfers from the rest of the world is referred to as the current account balance, which is also equal to net U.S. accumulation of foreign assets. The data in Figure 1 show that the U.S. current account balance is approximately equal to the U.S. trade balance because net factor payments and transfers from the rest of the world are small. Consequently, the balance-of-payments identity says that the trade deficit is approximately equal to foreign accumulation of U.S. assets.

Figure 1 also presents data on prices in the United States relative to those in the rest of the world, the real exchange rate between the U.S. dollar and a weighted geometric average of the currencies of its 20 most important trading partners. The real exchange rate between the U.S. dollar and the Chinese renminbi, whose principal unit is the yuan, for example, is

U.S.-China real exchange rate = U.S.-China nominal exchange rate x (Chinese CPI ÷ U.S. CPI),

where we measure the price level in each country using its consumer price index (CPI). To understand this real exchange rate, consider the units in which it is measured:

(dollars÷yuan) x ((yuan÷Chinese consumption basket) ÷ (dollars÷U.S. consumption basket)) = U.S. consumption basket ÷ Chinese consumption basket.

As the real exchange rate falls, fewer U.S. consumption baskets trade for one Chinese consumption basket, and the dollar appreciates.

Between 1992 and 2002, the real exchange rate between the U.S. dollar and the weighted sum of the currencies of its trading partners fell from 100 to 78.2. This means that prices of U.S. goods and services compared with those of its trading partners increased by 27.9 percent (1.279 = 100/78.2), or, equivalently, that prices in the rest of the world compared with those in the United States fell by 21.8. After 2002, the real exchange rate increased and the dollar depreciated. Between 2002 and 2012, the real exchange rate increased from 78.2 to 100.3, a depreciation of 22.1 percent. Notice that during this depreciation, the trade deficit—and the current account deficit—fell, although the timing is off in that the reversal in the movement of the trade balance occurred after 2006, while the depreciation of the dollar occurred after 2002.

The Kehoe-Ruhl-Steinberg model

We use a dynamic, multisector, general equilibrium framework with two countries: the United States and the rest of the world. U.S. households work, consume and save to maximize their utility subject to the constraint that spending and saving equal income each year. Households can save or borrow by buying or selling bonds—claims on the next year’s U.S. CPI basket of goods and services—and claims on next year’s U.S. capital stock. U.S. firms that produce goods, services and construction purchase intermediate inputs from these same three sectors as well as inputs of capital and labor to maximize profits. Investment producers use only intermediate inputs. Investment output, combined with the U.S. capital stock that remains after depreciation, becomes the next year’s capital stock. The U.S. government earns income by taxing U.S. households and selling bonds.1 The government spends its income paying off maturing bonds and purchasing goods and services according to a spending rule.

We calibrate most of the parameters of the U.S. portion of the model using an approach similar to that taken by researchers who use static, multisector applied general equilibrium models to analyze the impact of trade liberalization. (See, for example, Kehoe and Kehoe 1994.) We require that the model’s households, firms and government carry out the same transactions in the base year of 1992—the last year in which the U.S. current account was close to balanced—as do their counterparts in the data. Most of these transactions are summarized in the input-output matrix in Table 1, which we have constructed using data from the U.S. Bureau of Economic Analysis (BEA). In this matrix, each entry specifies the expenditures on intermediate inputs or factors of production (rows) made by the model’s three industries and final uses (columns). For example, the entry of 848 in the labor row of the goods column indicates that the goods sector paid U.S. $848 billion in labor compensation to households in 1992, and the entry of 3,346 in the services row of the consumption column indicates that households consumed U.S. $3,346 billion in services. U.S. gross domestic product (GDP) in 1992 was U.S. $6,342 billion, which is equal to the sum of consumption, government spending, investment and exports minus imports, which also equals the sum of labor income and capital income.

Our disaggregation of production into three industries—goods, services and construction—is not the typical one in international macroeconomics. Services and construction are usually aggregated into an industry called nontradable goods, while goods are called tradable goods. The table clearly shows that services are in fact traded, although they are not traded as much as goods. The table also shows that the United States had a large surplus in services trade in 1992, while it had a large deficit in goods trade. The time series data in Figure 2 show that this pattern persists over time. Our model closely matches this pattern between 1992 and 2012.

We use the empirical literature to set the model’s remaining parameters, the elasticities that govern substitutability: how substitutable goods consumption is for services consumption in the household’s utility function, for example, or how substitutable inputs of labor are for inputs of capital in production. Two other parameters—one for goods and one for services—govern substitutability between imports and domestic output for final uses. We choose these elasticities to be consistent with the higher volatility in the goods trade balance seen in Figure 2; that is, we assume that foreign goods are more substitutable for U.S. goods than foreign services are for U.S. services. Nonetheless, foreign goods are still imperfectly substitutable for U.S. goods in our model. That condition is how we are able to model the saving glut as driving down the relative price of foreign goods and forcing the U.S. real exchange rate to appreciate.

Our model of the rest of the world is simpler than our model of the United States. Firms in the rest of the world produce goods and services using linear technologies with labor as the only input; we abstract from capital formation, domestic input-output linkages and construction. Households in the rest of the world work, consume and save to maximize utility, and have similar preferences to their U.S. counterparts: They enjoy leisure and regard imports of U.S. goods and services as substitutes for domestic ones, with the same elasticity of substitution as in the United States. Households in the rest of the world can save or borrow only by buying or selling U.S. bonds.

The rest of the world’s intertemporal decision-making generates the saving glut. For 1992–2012, we calibrate the weights that the rest of the world puts on utility for consumption and leisure in different years so that it chooses to lend exactly enough to the United States to generate the trade balance dynamics observed in the data. During this period, the rest of the world discounts the future less than U.S. households, which induces it to postpone current consumption to be able to consume more later. It does so by buying U.S. bonds. After 2012, the rest of the world’s discount factor gradually converges to that of U.S. households so that the world economy converges to a balanced growth path in which the interest rate is 3 percent per year.

We model the sudden stop in 2015–16 in the same manner as Kehoe and Ruhl (2009), who model the Mexican sudden stop of 1995–96 as a surprise. Agents in the model have perfect foresight before the sudden stop occurs and afterward, but if and when the sudden stop occurs, it is completely unexpected. During the sudden stop, the rest of the world buys no more bonds, but households and the government in the United States make interest payments on existing bonds at the 2014 interest rate. The U.S. interest rate during the sudden stop is determined within the United States since there is no foreign lending.

We model the sudden stop as a surprise because U.S. interest rates currently indicate that financial markets do not assign a significantly positive probability to a U.S. debt crisis—just as they did not assign significantly positive probabilities to a crisis in Mexico in 1995 to or to the currently ongoing debt crises in the eurozone. (See, for example, Arellano, Conesa and Kehoe 2012.) We think of the possibility of a debt crisis striking the United States as the possibility of the sort of self-fulfilling crisis modeled by Cole and Kehoe (2000) and Conesa and Kehoe (2012).

The model incorporates additional data that are important in generating the equilibrium’s dynamics. We use projections from the UN World Population Prospects to model population growth in the United States and the rest of the world. To allow the equilibrium to converge to a balanced growth path, we assume that the population in the United States and the rest of the world converge to constant levels after 2050. We model U.S. government spending and borrowing to evolve over time using projections from the Congressional Budget Office (CBO). We use data from 1992–2011 on value added by sector to calculate annual productivity growth rates of 4.6 percent in goods, 1.4 percent in services and −1.3 percent in construction. We impose these growth rates over 1992–2030 and let productivity growth in each sector converge to 2 percent in all sectors thereafter.

Dynamics of the U.S. trade balance

Our model of the saving glut is designed to capture the impact of government policies in the rest of the world that may have been responsible for the saving glut, such as Chinese policies that discouraged consumption and promoted saving, or policies that kept the Chinese real exchange rate from appreciating against the U.S. dollar. It can also be seen as capturing factors that make saving in the United States more attractive for foreigners than saving in their own countries. (See, for example, Mendoza, Quadrini and Ríos-Rull 2007.)

Notice, however, that, besides modeling U.S. government spending and borrowing during 1992–2012, we do not model U.S. government policies such as monetary policies or policies to promote mortgage borrowing that may have been responsible for the massive U.S. borrowing during this period. See Obstfeld and Rogoff (2009) and Bernanke et al. (2011) for discussions of these policies and their interaction with the saving glut. We later argue, however, that it is unlikely that global imbalances over the period 1992–2012 were driven by lack of saving in the United States. That would imply that U.S. investment was low when, in the data, investment was high throughout this period.

Our view is that the saving glut is a temporary, albeit lengthy, phenomenon and that discounting of the future in the rest of the world will eventually revert to a value consistent with balanced growth. Bernanke (2005) takes a similar perspective:

“[T]he underlying sources of the U.S. current account deficit appear to be medium-term or even long-term in nature, suggesting that the situation will eventually begin to improve, although a return to approximate balance may take some time. Fundamentally, I see no reason why the whole process should not proceed smoothly. However, the risk of a disorderly adjustment in financial markets always exists.”

In other words, the current account imbalances associated with the saving glut will end eventually. The only question is whether the rebalancing process will be gradual or sudden. Figure 3 reports the results of two experiments, one with gradual rebalancing and the other with a sudden stop in new foreign loans to the United States in 2015–16. As explained, the model has been calibrated so that it exactly matches the U.S. trade balance in 1992–2012. The model matches the actual behavior of the U.S. real exchange rate during 1992–2002. In the model, the depreciation of the U.S. real exchange rate starts after 2006, while in the data it starts after 2002.

The model also captures much of the sectoral reallocation of labor during the saving glut, at least until the 2008–09 recession: In the data, workers in the goods industry received 19.7 percent of total U.S. labor compensation in 1992. By 2007, this number had fallen to 13.3 percent. In the model, the labor compensation that goes to workers in the goods industry goes from 19.7 percent in 1992 to 14.7 percent in 2007, capturing 78 percent of the decline observed in the data.

In construction, workers received 4.4 percent of total labor compensation in 1992 data, rising to 5.6 percent in 2007, the peak of the construction boom. In the model, reallocation toward construction is actually larger, going from 4.4 percent of total labor compensation in 1992 to 6.8 percent in 2007. The model does relatively poorly in capturing the collapse of the construction boom during 2008–12.

The intuition for the model’s performance is simple: During the saving glut, foreigners buy more U.S. bonds and less U.S. goods and services. To finance these bond purchases, the rest of the world sells its goods to the United States, lowering the relative price of these goods. The lower relative price of foreign goods shows up in appreciation of the U.S. real exchange rate. Since foreign goods are more substitutable for U.S. goods than they are for U.S. services and construction, as U.S. households and the U.S. government buy more foreign goods, they buy less U.S. goods and more U.S. services and construction.

In an experiment with the model in which the saving glut does not occur, labor compensation in goods falls from 19.7 percent of total compensation in 1992 to 16.2 percent in 2007, indicating that 70 percent of the drop in labor compensation in the model—and 55 percent of the drop in the data—is due to faster growth in productivity in manufacturing rather than to imports of foreign goods.

Notice in Figure 3 that, if a sudden stop occurs, it would have a very disruptive impact on the U.S. economy, causing the exchange rate to depreciate rapidly and the trade balance to move rapidly into a substantial surplus. Figure 2 shows that much of the improvement in the U.S. trade balance would come from goods trade because U.S. services are not very substitutable for services in the rest of the world. In Figure 4, we see that the U.S. construction industry would crash and its labor would be reallocated to goods and services production. In the baseline model that we are discussing, this reallocation is modeled as costless. In alternative specifications of the model with adjustment costs, the sudden stop is far more costly, echoing concerns expressed by Bernanke (2005):

“To repay foreign creditors, as it must someday, the United States will need large and healthy export industries. The relative shrinkage in those industries in the presence of current account deficits—a shrinkage that may well have to be reversed in the future—imposes real costs of adjustment on firms and workers in those industries.”

What do we learn from the model, and what do we still need to study? As we can see in Figures 2, 3 and 4, our model captures four key features of the United States and its position in the world economy over 1992–2012: In the model, as in the data, the U.S. trade deficit first increases, then decreases; the U.S. real exchange rate first appreciates, then depreciates; the U.S. trade deficit is driven by a deficit in goods trade, with a steady U.S. surplus in service trade; and the fraction of U.S labor dedicated to producing goods falls throughout the period, with most of the drop due to higher productivity in goods than in services.

The performance of the model over 1992–2012 gives us some confidence in the predictions of the model for the future. The model predicts than the U.S. real exchange rate will depreciate as U.S households and government begin to repay the rest of the world. Much of the U.S. trade surplus will be in services trade and, if productivity in goods continues to grow faster than that in services, as it did over 1992–2012, employment in goods, particularly in manufacturing, is unlikely to ever return to its level in 1992.

These changes will occur whether the stop in foreign lending is sudden or gradual. A sudden stop in foreign lending, however, would be very disruptive to the U.S. economy. Construction, unlike goods and services, is completely nontradable, so it would absorb much of the shock of a sudden real exchange rate depreciation. During a sudden stop, the U.S. real interest rate would jump from 2.9 percent in 2014 to 5.5 percent in 2015. A sudden stop would cause a sharp contraction in output and employment in construction, more severe than the collapse of the U.S. housing boom in 2008–12.

A sudden stop would also change the welfare analysis of the global imbalances over the period 1992–2012. Twenty years of inexpensive foreign goods, as well as the credit with which to purchase these goods, has made U.S. households better off. We can calculate the increase in real income of U.S. households generated by the saving glut as being 1992 U.S. $689 billion, 10.9 percent of 1992 U.S. GDP.

If the saving glut were to end in a disorderly sudden stop, where productivity falls as it did in Mexico in 1994–95, however, these welfare gains would be lost and, in fact, U.S. households would suffer a real income loss of 1992 U.S. $330 billion, 5.2 percent of 1992 U.S. GDP, compared with a scenario in which the saving glut had never occurred. These calculations come from a model in which the costs of the sudden stop come from its surprise nature and from the drop in productivity; with adjustment frictions, the losses in real income would be larger.

Our results leave a couple of puzzles that suggest directions for future research. In our model, the saving glut has only a small effect on U.S. interest rates, as seen in Figure 5, in contrast to Bernanke’s (2005) judgment. The largest fall the U.S. real interest rate in the model with the saving glut over 1992–2012 compared with the model with no saving glut is 46 basis points (3.70 percent per year compared with 3.24 percent) in 2009. This is in line with Greenspan’s (2005) judgment that foreign lending accounted for less than 50 basis points of the drop in interest rates. Warnock and Warnock (2009) have estimated that foreign lending drove down U.S. real interest rates by a somewhat larger amount, about 80 basis points, throughout the period.

In our model, the impact of the saving glut on interest rates depends on how substitutable foreign goods are for U.S. goods. With the elasticity of substitution parameter that we have chosen, we see that the saving glut generates the right magnitude of appreciation of the U.S. real exchange rate in Figure 3, but not the right magnitude in the drop in the U.S. real interest rate in Figure 5. If we make foreign goods more substitutable for U.S. goods, we can generate more of a drop in the U.S. real interest rate in the period 2006–12—although still nowhere near as large a drop as observed in the data—but the model would then predict a much smaller appreciation in the U.S. real exchange rate.

It is worth noting that our model predicts that the U.S. interest rate is driven up by appreciation of the dollar and is driven down by depreciation. The falling prices of foreign goods during the period 1993–2006 induce U.S. households to increase consumption faster than they do in the model without a saving glut, generating the observed trade deficit. U.S. households are willing to do this only if interest rates are higher. As the dollar depreciates during the period 2006–12, consumption grows more slowly than in the model with no saving glut and interest rates are lower.

Since our model does not provide a convincing explanation for the very low U.S. interest rates seen in the data, we need to look elsewhere, possibly at the sorts of U.S. policies discussed by Obstfeld and Rogoff (2009) and Bernanke et al. (2011).

Modeling the source of the global imbalances over the period 1992–2012 as being generated by saving behavior in the United States, however, does not work well. We have followed Bernanke (2005) in modeling a saving glut driven by forces in the rest of the world. Alternatively, we could have modeled a saving drought in the United States in which U.S. households discount the future more than foreign households. Such a U.S. saving drought would generate the sort of increase in the trade deficit, real exchange rate appreciation and movement of labor out of U.S. goods production as the foreign saving-glut model.

This alternative model would generate very different results for U.S. investment during the period of global imbalances, however, as seen in Figure 6. In the data, the correlation between changes in the U.S. trade deficit and changes in U.S. investment is −0.79. In other words, U.S. investment increased as U.S. borrowing from the rest of the world increased. The foreign saving-glut model—where households in the rest of the world increase their saving—captures this relationship, and the correlation between changes in the trade deficit and changes in investment is −0.81.

The U.S. saving-drought model—where U.S. households decrease their savings—gets this relationship wrong, and the correlation between changes in the trade deficit and changes in investment is 0.82. The data indicate that the period of global imbalances was a period of increased investment worldwide—or consistent with the foreign saving-glut model, and not with the U.S. saving-drought model.

Although the model with a U.S. saving drought is successful in generating lower U.S. interest rates during the period 1992–2006, as the dollar appreciates, it generates higher U.S. interest rates during the period 2006–12, as the dollar depreciates. The low interest rates during the entire period thus pose a puzzle for both the foreign saving-glut and U.S. saving-drought models.

As we have mentioned, the timing of the depreciation of the U.S. real exchange rate is off in our model. It may be that the same factors that are missing from the model in capturing the low U.S. interest rates would also explain the U.S. continuing to borrow even as the real exchange rate depreciated. Disaggregating the U.S. real exchange rate suggests a simpler explanation, however: Figure 7 graphs the U.S.-China real exchange rate and the average U.S. real exchange rate against its other major trading partners. Notice that, starting in about 2001, as China became more important in trade with the United States, the real exchange rate in the model looks more like the U.S.-China real exchange rate. This suggests that we should explore models that consider countries like China, Korea and Japan—which are the principle lenders to the United States—separately from other U.S. trading partners.

We have performed extensive sensitivity analysis on the model. Our main results are robust to allowing agents to be uncertain about how long the saving glut would last. They are also robust to eliminating government borrowing and making government spending a constant portion of U.S. GDP.

Our result that the long-term impact of the saving glut on the U.S. economy does not depend on how the saving glut ends does not say that the saving glut itself has not had a long-term impact. Figure 8 shows how large the long-term impact has been. The United States will have to run a substantial trade surplus in the future to repay its debt to foreign lenders. The purchasing power of the U.S. dollar—as measured by the reciprocal of the real exchange rate—will be lower. Output and employment in goods will be higher.

What should policymakers do? Our results indicate that U.S. households have benefited from two decades of low prices of foreign goods, but that these welfare gains could be erased by a disorderly sudden stop in foreign lending. Policymakers should be vigilant to ensure that a sudden stop does not take the U.S. financial sector by surprise, as it was by the collapse of the U.S. housing market during the 2008–09 recession.

The need for prudential regulation in the U.S. financial system to prevent a sudden stop in foreign lending from becoming disorderly might seem to imply the need for capital controls. Recently, the debt crises in the eurozone have generated a renewal of interest in capital controls, especially in taxes on purchases and/or sales of assets by foreigners. See, for example, Farhi and Werning (2012) and Benigno et al. (2013).

The United States is in a unique position as the provider of the world’s reserve currency, however, and any attempt to impose capital controls on purchases or sales of U.S. assets—especially of U.S. government bonds—would push foreign governments to another currency, or currencies, for reserves. Indeed, much of the holdings of U.S. assets by the Chinese, Japanese and Koreans are in the form of U.S. government bonds. Since the United States enjoys substantial economic benefits from providing the world’s reserve currency, it is very unlikely, and probably undesirable, for U.S. policymakers to consider capital controls as one of the prudential regulations to guard against a disorderly sudden stop.

Note * The authors thank David Backus, Kei-Mu Yi and Frank Warnock for helpful discussions. Participants at seminars and conferences made useful comments and suggestions. The authors are grateful to Jack Rossbach for extraordinary research assistance. The data presented in the figures are available here. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.

Endnote 1 We model households as paying taxes on capital income to be able to calibrate the model. Otherwise, we combine all the taxes and government transfers in the data into a simple tax that subtracts from household income in that year and does not depend on household decisions, a lump-sum tax. It would be useful to extend our analysis to capture the richness of the U.S. fiscal system, with distortionary taxes on labor, consumption, production and imports.

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