Inside this Issue:
- It’s Now Law: Relief Bill Passes; Here Comes Another $1.9 Trillion
- Global Glee: Stronger Growth Experts See for World GDP
- Permanent Price Pressures? Nothing Yet, but Some Pockets of Pain
- Homes and Loans: Will Rising Rates Weigh Heavy on Housing?
- Cloud Combat: Oracle Trash Talks on its German Archrival
- Lease Beast: GE Merging its Jet Rental Biz
- Bust the Trusts: Congress Debates Competition Policy?
- Biz Travel’s Comeback: This is Not 2009
- The Biotech Buzz: Molecules the Next Microchips?
- Debate: Unconditional Child Tax Credits, Good or Bad?
- And This Week’s Featured Place: Nashville, a Rising Tech Superstar
Quote of the Week
“The one thing I’ve learned in my 40-year career in this business is do not underestimate the American consumer. I think we have a genetic code that says spend, whether we have the money or not.”
– Hank Smith, Head of Investment Strategy at Haverford Trust, speaking with Bond Buyer
Remember for a moment, the uncertainties present one year ago. A global pandemic was spreading. Large parts of the economy were shutting down. Was it safe to go to the supermarket? When would we return to the office? When would schools reopen? Was this the start of another Great Depression?
One year on and the plague is still with us but in retreat. Roughly a tenth of all Americans are now fully vaccinated. The economy is reopening. And oddly enough, household wealth is at an all-time high thanks to a roaring stock market, rising home values and extremely aggressive federal intervention. Last week, President Biden signed the American Rescue Plan Act of 2021, providing another $1.9 trillion in support. For context, the roughly $5.5 trillion dollars allocated since the pandemic began is nearly identical to the Watson Institute’s estimate of $5.6 trillion spent on the wars in Iraq and Afghanistan.
The possible repercussions of all that spending are hotly debated, albeit less so following years of ultra-low interest rates and inflation. Yes, rates did rise a bit again last week, triggering some unease about the rate-sensitive housing market. And yes, pockets of pricing pain are hitting certain areas of the economy including housing—housebuilders complain of spiking lumber costs for example. But persistent 1970s-style wage-price inflation seems far-fetched with so many workers still idled. The latest Labor Department report on consumer prices for February certainly didn’t set off any alarms.
Eventually, withdrawing monetary stimulus could prove a challenge, as it was in the aftermath of the last crisis. For now, however, the world seems poised for a sharp rebound. Says the OECD regarding vaccinations: With more jabs will come more jobs.
In Washington, competition policy was center stage in the Senate, while China policy was a State Department focus ahead of a summit in Alaska this week—it will be the first direct meeting between the world’s two largest economies since President Biden took office.
We’re now approaching the end of 2021’s first quarter, but not before some additional earnings announcements. Nike, FedEx, Accenture and the homebuilder Lennar are a few big headliners this week. Also this week: Another Fed policy meeting.
- Typically, executives shy away from publicly criticizing their competitors. Not Larry Ellison. The Oracle chairman spent most of the company’s latest earnings call berating and ridiculing rival SAP. The German firm, he said, “entirely missed the boat” with its latest offering of enterprise resource planning software (ERP), something companies and governments use to manage and harvest their data. Ellison gave a long list of Oracle client wins, adding the boast: “Our product is so much better than anyone else’s product in the cloud.” He stressed how quickly the firm reported earnings after the close of its quarter, faster he said, than any other company in the S&P 500. The message: that Oracle is great at managing data. It’s an older tech company to be sure, having gained its prominence in database products when software was still predominantly housed on-site at companies rather than in the cloud. Amid tough competition, revenues haven’t grown in recent years, and nor have operating profits. But thanks in part to the Covid-era technology boom, growth picked up during the quarter covering December, January and March. Management in fact proclaimed it the best fiscal Q3 results in a decade. Oracle expects demand growth to continue, boosted for example by its role in helping telecom customers transition to 5G technology. It surprised many by taking an interest in buying part of TikTok, the wildly popular Chinese video app. The deal never came through. But in any case, Oracle, which recently moved its main office from Silicon Valley to Austin, remains America’s second-largest software company after Microsoft.
- ContextLogic, better known as Wish, is one of America’s top eCommerce platforms. In December, the San Francisco-based company raised more than $1b from an IPO. Last week, it reported y/y revenue growth of 38% for the fourth quarter. It’s not yet making money, however. On the contrary, it lost more than $200m last year even before considering depreciation, interest and taxes. But investors are enticed by its long-term prospects. Founded in 2010, Wish focusses on mobile shopping, connecting more than 500,000 merchants (the majority in China) with more than 100m monthly active users globally. Price, more than convenience, is a key focus. Total revenue last year exceeded $2.5b, a far cry from Amazon’s $386b but hardly negligible. Most of the revenue comes from fees collected for each transaction. Wish attracts shoppers to its mobile app with game-like features and user-generated content, often triggering purchases from users who don’t come to the site with a specific brand or product in mind. It naturally makes use of its large data trove to personalize the shopping experience, while providing merchants with data intelligence. The data it holds, indeed, is a key competitive advantage. Wish also provides logistics and fulfillment capabilities, now a fifth of total revenues (this is also the company’s fastest-growing revenue source). Merchants can pay to boost their prominence on the site—this ad revenue generated 8% of the company’s total last year. Looking ahead, executives think advertising can grow significantly, with sellers of financial services and travel among those likely to be enticed by Wish’s large user base. It’s working with small business brick and mortar stores to help them sell online and connect with new customers. It’s opening its logistics services to even merchants who aren’t on its platform. It also wants to sell its own products sourced directly from manufacturers, though this is controversial—the idea is to identify which of its merchants’ products sell best and then compete head-to-head with them (much like Amazon controversially does). On a separate note, Wish has had some reputational issues linked to people selling fake or counterfeit merchandise on its platform.
- Microsoft is the latest company to report a major cyber breach, in this case involving email and calendar software used by companies and governments. Tom Burt, Microsoft’s customer security chief, wrote a blog post identifying the perpetrators as a “highly-skilled and sophisticated” group backed by the Chinese government. Their past targets have included infectious disease researchers, law firms, universities, defense contractors and other organizations with valuable data to steal. The disclosure comes just several months after news of the biggest data breach ever, also involving Microsoft but more importantly a Texas-based software company called SolarWinds. Russia’s spy agency is the leading suspect in that attack, which even hit the Los Alamos nuclear lab. In today’s hyperconnected world, no secrets are safe. Hence, a dilemma of the times: With greater interconnectedness comes great benefits but also great dangers. New York Times cybersecurity reporter Nicole Perlroth has a book called “This Is How They Tell Me the World Ends,” detailing the cyberweapons arms race now underway. The U.S. has perhaps the best cyber capabilities of any country. But its lead, Perlroth said in a recent interview on the podcast Sway, appears to be diminishing. It also happens to be the most targeted country, the most connected country and the country with the most valuable targets. Cyberattacks, of course, go beyond mere data theft. All too common are hackers extorting organizations like hospitals and local governments with ransomware—pay up or lose access to all your data. One winter, Russia used a cyberattack to shut off the power in Ukraine. Just last week along with the Microsoft incident, a startup company selling surveillance cameras said the cameras were infiltrated. Most famously, state-sponsored Russian hackers were implicated in trying to influence the 2016 U.S. presidential election.
Tweet of the Week
“I asked my mom if she felt any side effects from her second vaccine shot today and she said “an acute appreciation for science.”
-Jeremy Abbate, Publisher of Scientific American
- Aircraft Leasing: In a week when Congress debated the risks of industry concentration (see government section below), the world’s two largest aircraft leasing firms said they’ll join as one. General Electric, the troubled conglomerate, will sell its GECAS unit to Europe’s AerCap. GE will stay involved though, taking a 46% ownership stake in the newly enlarged company. For AerCap, it’s not the first time taking advantage of an industry downturn to get bigger. After the global financial crisis of the late 2000s, it purchased the leasing giant ILFC from the embattled insurance firm AIG. Now, with the GE deal, it will command a fleet of more than 2,000 planes leased to some 200 airlines worldwide. Roughly 40% of the world’s airline fleet is now leased rather than owned; airlines choose leasing for a variety of reasons, including the lower capital commitments required. Should regulators be concerned? Boeing and Airbus, the largely duopolistic plane builders, can’t be thrilled with two key customers becoming one, gaining more negotiating clout. Airlines could wind up paying more. That said, the new AerCap will still have many strong competitors, including Air Lease Corp., whose founder Steve Hazy is credited with inventing the jet leasing business many decades ago (he was the one who sold ILFC to AIG in 1990). As for GE, it was once a paragon of corporate excellence. But as former CEO Jeff Immelt describes in his new book (see the Abroad section below), the conglomerate was badly damaged by the 9/11 attacks, the global financial crisis and later the energy bust of the mid-2010s. It will remain a big player in aviation, and not just via the stake it will hold in AerCap—it’s also the world’s largest manufacturer of commercial jet engines.
- Finance: Apollo, a New York firm that manages money for clients (nearly half a trillion worth), announced a full buyback of the highly profitable insurance company Athene, which it previously divested while keeping a 35% stake. The two have always worked closely together (Athene sells annuities for retirement), and Apollo says the deal will involve deeper coordination rather than consolidation. Managing money—for retirees, for pension funds, for universities, etc.—is a growth industry, Apollo claims. Why? It points to tailwinds like aging demographics, the transfer of baby boomer assets to their offspring, the increasing popularity of passively managed assets and low interest rates (which pressures investors to seek alternative assets like the sort Apollo offers). What exactly does it offer? For one, direct loans to mid-sized U.S. companies, and credit solutions more generally. It’s also a private equity firm with ownership control of many companies—it once owned Hostess, the maker of Twinkies and Ding Dongs. It currently owns the airline Sun Country. In addition, it’s a player in the aircraft leasing market, competing against the likes of AerCap and GECAS. Apollo sees a broad shift now underway to a better market for lenders after years of “borrower-friendly conditions.” That’s as interest rates and growth prospects for the economy rise. The world, it adds, has a surplus of capital looking for places to invest, implying a shortage of productive assets. As for Athene, having full control should help make the relationship more productive. It also represents one of the first major moves for Apollo since co-founder Leon Black said he’d step down amid allegations of ties to convicted sex-trafficker Jeffrey Epstein.
- Travel: Now that the Covid threat is receding, conventional wisdom says U.S. leisure travel will boom while business travel lags. Don’t be so sure about the latter. Recovery from this crisis will look very different from past recoveries. Most importantly, U.S. companies will be flush with cash to spend. And GDP is expected to grow at its fastest pace in decades. Many of the industries that spend the most on business travel—finance, consulting, health care and technology, for example—are in terrific shape. Even the energy sector, another mega-spender on travel, is seeing a sharp recovery. Sure, video calls will replace some trips. But as United Airlines CEO Scott Kirby likes to say: “The first time someone loses a sale to a competitor who showed up in person is the last time they try to make a sales call on Zoom.” United for one, might find it surprisingly more pleasant competing for business traffic—even international business traffic given huge capacity cuts—than it will be fighting bloody leisure market battles with aggressive low-cost rivals. Internationally, of course, the status of border restrictions remains uncertain. In 2019, transatlantic flights accounted for 17% of United’s revenues, and flights to Asia another 12%.
- Music: The Morning Brew’s Business Casual podcast examines the ins and outs of the music industry with Chris Zarou, a talent manager who founded and runs Visionary Music Group. There’s been more disruption and innovation in the music business during the past decade, Zarou says, than what other industries typically experience over a century. An exaggeration perhaps. But point well taken. In the early 2010s, the business of selling recorded music was in a “death spiral” due to pirating. But new business models emerged, most importantly music streaming on platforms like Sweden’s Spotify. The latter generates revenues from advertising and premium subscriptions paid by customers who want to avoid the ads. Spotify then pays royalties to artists, record labels and other owners of copyrighted material. According to the podcast, streaming today accounts for about half of the $20b in annual revenue generated by the recorded music industry. But recorded music is just a small part of the revenue model for musicians. They can also earn money with branding deals, merchandise sales and live performances (a challenge of course during Covid). Also within the ecosystem are people like Zarou, who help discover, cultivate and commercialize talent. To become a superstar, he says, artists still need a record label. But thanks to social media, there are many more opportunities today for niche artists to build a modest career without any professional help. TikTok, Zarou says, has become an especially powerful tool for getting noticed—he himself just signed a rapper who went viral there. One way to look at Zarou’s job: As a venture capitalist, betting on a collection of promising people—in this case, musicians rather than software entrepreneurs—and hoping one or two make it big.
- Corporate Debt: American companies were heavily indebted going into the crisis. Many borrowed lots more money during the crisis. Of course, with interest rates extremely low, most found the debt burden manageable. Interest rates are now rising, but that’s not stopping Verizon from undertaking a giant bond offering. It hopes to raise about $25b to help pay for airwaves it needs to offer 5G service to its mobile customers. American Airlines is another company that just announced a new bond offering, hoping to secure more cash before interest rates rise further.
Debate: The Biden Bill’s Child Tax Credit: Good Idea?
- Yes: “Deep inside the economic stimulus bill,” said Michael Barbaro of the New York Times Daily podcast, “is a revolutionary provision that would lay the groundwork for a European-style safety net for children in the U.S.” He’s talking about the child tax credit, providing a guaranteed income for families with children (ages 17 and below). As Times Reporter Jason DeParle explains, the federal government will provide monthly checks of up to $300 a month to families ($250 for age six and up), covering 69m children. That’s $300 per child, no matter how many children. For three children under the age of six, that’s an annual benefit of nearly $11,000. No work requirements. No restrictions on how the money can be used. And for low-income people, it’s on top of other benefits they already receive (i.e., food stamps). Monumental indeed, and America’s strongest commitment yet to cut child poverty in half. The extra money will make parents more likely to start new companies, more likely to have larger families (helpful to address aging demographic challenges) and more likely to invest in childhood education and health. It will give families more spending power to boost the economy. It will help vulnerable communities the most, including those still suffering from the legacy of discrimination including unfair housing policies (which amount to unfair schooling policies). Congress is finally doing for children what it did almost a century ago for seniors—provide a basic income floor to eradicate the deepest forms of destitution and hardship. Pre-Covid, an estimated one in six American children were living below the poverty line. The idea, if not the relief bill as a whole, has support in both political parties—Senator Mitt Romney is a notable champion. There’s one catch though: For now, the benefit is just for 2021. Congress should make it permanent.
- No: Nobody’s against trying to address child poverty. But this is not the way to do it. First of all, child tax credits already exist and have for many years. But they’re earned income credits—to qualify, you need to be working. That encourages and incentivizes people to find work. By removing the work requirement, Washington is incentivizing just the opposite: to not work. And that’s bad for an economy with already low labor participation rates. Unconditional cash transfers, furthermore, mean individuals have less of an incentive to marry or stay married. And as research by Harvard’s Raj Chetty shows, the number one predictor for upward income mobility is the percentage of single-parent families in a given neighborhood. Robert Doar, president of the American Enterprise Institute, remembers how New York City provided unconditional childcare payments for many years without alleviating child poverty. Only during the era of welfare reform in the 1990s, led by state Governor George Pataki, did the city make meaningful progress. Doar, who helped oversee some of the New York reforms, stressed the importance of work requirements and state—not just federal—involvement. He also stressed the need to have social workers involved, who can check in on the presence of fathers. As for poverty statistics, they often undercount the total benefits families currently receive. Indisputable is the dramatic drop in teen pregnancies since welfare reform. “A remarkable policy achievement,” Doer asserts. Let’s not forget: The new benefits Congress passed won’t come cheap, adding more debt for taxpayers. There’s the question of whether the IRS can even handle the administration of such a large federal scheme. There’s the separate question of fairness: $300 per child means something very different in New York City than it does in Alabama. In the words of Senator Marco Rubio: “If pulling families out of poverty were as simple as handing moms and dads a check, we would have solved poverty a long time ago.”
- Fiscal Policy: Two eminent U.S. economists presented differing views on the $1.9 trillion relief act this weekend. Appearing on Fareed Zakaria’s GPS Public Square program, Nobel laureate Paul Krugman expressed support for the bill, stressing its focus on lower-income Americans. He downplays the inflation risk, pointing to similarly big spending without inflation during the Korean War in the 1950s. Former Treasury Secretary Larry Summers, by contrast, applauded the bill’s “historic achievement” in addressing poverty but says that’s just 7% of the bill’s overall spending. The majority of funds go to one-shot transfers to middle-income Americans, neglecting long-term investments necessary to meet objectives like competing with China and managing climate change. There’s also too much money, Summers thinks, allocated to unemployment insurance. At 14% of GDP, the bill’s total spending clearly does risk inflation—”if you put too much water in the bathtub, it starts to overflow.” Interest rates this quarter, he notes, are on pace to rise more than in any Q1 during the past century, save for 1980. That’s a sign, says Summers, of markets signaling concern.
- Fiscal policy: The economist Noah Smith characterizes the $1.9 trillion relief act as such: “This bill is all about cash, cash, cash. Other than the spending on public health, pretty much every major item is some form of ‘mailing a check to somebody.’” Smith thinks the bill will be effective, not as an economic stimulus measure but as a disaster relief measure. The main purpose, in other words, is to “prevent a natural disaster from redistributing wealth and income in huge, arbitrary, unfair and devastating ways.” Looking ahead, he says President Biden can cement his economic legacy with stronger support for labor unions, a higher minimum wage, more vigorous government investment and stricter regulation, all of which fell out of fashion since the Reagan Revolution of the 1980s. It just might be, to quote the economist James Medlock, that “the era of big government is over is over.”
- Fiscal policy: According to the Tax Policy Center, low- and moderate-income households (those making $91,000 or less) are set to receive nearly 70% of the tax benefits provisioned in the new relief bill. The figure is closer to three-quarters if counting just low- and middle-income families with children. The analysis contrasts this with the tax cuts of 2018, which delivered nearly half of all benefits to households in the top 5% of the income distribution (who made about $308,000 or above that year). The two bills have some key differences though, with the 2018 tax cuts scheduled to run through 2025. The new bill, which includes about $467b in tax cuts this year, has lots of provisions that won’t last beyond 2021.
- Fiscal policy: One more note on the federal budget. Its deficit exceeded $1 trillion during the five months between October and February, according to the Congressional Budget Office. That’s up by $423b since the same period a year earlier. Outlays grew 25% but revenues grew only 5%.
- Competition policy: The Senate Judiciary Committee held hearings on the state of competition across the economy, at a time when Washington is turning more and more suspicious of large tech companies and their market power. But it’s not just tech companies, argued the committee’s chairwoman Amy Klobuchar of Minnesota. Yes, tech monopolies are a problem, she says. But “this isn’t just about Big Tech.” She mentioned levels of excessive consolidation in the agriculture, online travel and live entertainment industries as well. “We see it in everything from cat food to caskets.” This is hardly a new issue. The industrialization of the late 1800s created enormous corporations and trusts that President Theodore Roosevelt started reigning in after the turn of the century. Railroad trusts were broken up. So was Standard Oil. As late as the 1980s, Washington broke apart AT&T. More recently, enforcement has been less aggressive, under the doctrine that breakups are merited only when consumers are harmed by higher prices. A new generation of legal scholars, however, including Lina Khan of Columbia University, believe consumers can be harmed by companies in other ways. Google, for one, offers many of its products including Gmail for free. Yet it controls 90% of the search market, allowing it to dominate the online advertising market. Amazon, according to this school of thought, can harm the public interest by driving its most successful marketplace sellers out of business using their own data. Never mind that Amazon is always driving down prices for shoppers. President Biden by the way just nominated Khan to join the Federal Trade Commission, the same organization that late last year sued Facebook for illegal monopolization.
- Nashville: Just before the Covid crisis started, the Wall Street Journal published a list of its hottest U.S. job markets. Austin was number one. And number two? That distinction went to Nashville, the state capital of Tennessee. Why? Look at the city’s booming tech sector. In 2019, Amazon—the biggest U.S. tech employer of all—announced the creation of 5,000 new downtown jobs. The company today counts Nashville as one of its three main corporate offices along with Seattle and Arlington (Virginia). In 2015, Lyft, the ride-hailing company, put its customer service center in Nashville. Postmates and Eventbrite are two other west coast tech companies that moved part of their operations. Importantly, a number of smaller homegrown tech companies have sold themselves or gone public, creating a reserve of new capital for local reinvestment. From 2014 to 2019, according to the Greater Nashville Technology Council (GNTC), the area saw a 36% increase in tech jobs—growth for the U.S. as a whole was just 23%. Overall, the metro area population is now approaching 2m, having grown a bullish 17% in the 2010s. That makes it similar in size to Austin and Silicon Valley. Affordability is clearly a draw, with no state income tax and housing prices still about 3% below the national average. So says the GNTC, which also claims that Nashville is the third largest college town in the nation, with more than 120,000 students attending 20 different universities. Vanderbilt, the most prominent, is the area’s largest employer. That includes the university’s medical center, an anchor of the region’s giant health care sector. Also headquartered in Nashville: HCA, one of America’s largest hospital chains. It was this $90b health care sector, in fact, that helped Nashville avoid the worst of the 2008-09 recession. The Covid crisis, however, devasted what’s by most counts the city’s second-largest industry: tourism. More than 16m visitors came in 2019, many lured by Nashville’s status as the epicenter of country music—“Music City USA.” The Opryland resort and convention center calls itself the largest non-gaming hotel property in the country—2,888 rooms and more than 700,000 square feet of meeting space. As it waits for tourism to revive, Nashville has other enviable advantages, aside from tech, education, and health care. Being the state capital helps. Finance companies—AllianceBernstein is a notable example—are joining tech firms in moving all or part of their operations to Nashville. Other firms headquartered in the area include Dollar General, the Randstad staffing agency and the restaurant chains Shoney’s and Cracker Barrel. And critically, Nashville is a top beneficiary of the auto sector’s shift southward away from Detroit and the Midwest, spearheaded by foreign manufacturers. As early as 1983, Japan’s Toyota established a $7b car factory just outside of Nashville, currently employing about 7,000 workers. It now has a separate engine factory nearby as well. Bridgestone, the Japanese tire-maker, likewise has its U.S. headquarters in the area. It’s a far cry from the city’s earliest days when it was considered the far western part of the U.S., ripe for land speculation. Those were the days of President Andrew Jackson, the city’s most famous politician. Limestone was a big part of the economy then, as was shipping along the Cumberland River. As historian Carole Bucy describes, it later became the site of a DuPont plant employing 50,000 workers. Today, in addition to all the new industries moving in, so too are many retirees, attracted by the mild weather, affordable living, good health care and proximity to attractions like the Great Smoky Mountains. Some are so-called “halfbacks” who originally migrated southward from places like New York to Florida but are now moving northward to areas like Tennessee and North Carolina. Nashville does of course have its challenges, including housing costs that are sure enough starting to rise rapidly. A major flood in 2010 was extremely costly. A damaging tornado hit the city just as the pandemic was starting last spring. On Christmas Day last year, a bomb downtown caused injuries and major property damage. Nashville, meanwhile, doesn’t yet have quite the international stature as America’s Big-League cities, notes Amr El-Husseini, head of the Lodestone Advisory Group. A new nonstop British Airways flight to London helps. But that’s the only international offering aside from those to Canada and Mexico. El-Husseini, meanwhile, cautions about offering generous government incentives to companies creating mere back-office jobs that might be automated away in the coming decade. It’s important, he says, for Nashville to also invest in entrepreneurs creating growth companies. In one sense, the region’s governance model is helpful: Unlike St. Louis for example (see Econ Weekly’s Jan. 11th issue), Nashville and its surrounding county pioneered consolidated metro area governance in the 1960s. That enables decisions optimized for the metro area as a whole. We’ll close with a thought from Nashville’s former mayor Karl Dean, who says the city has the “Three T’s” essential to a successful economy in the 2020s: Talent, technology and tolerance
- San Francisco: Its largest industry is technology, right? Wrong. San Francisco’s largest industry, says sf.citi executive director Jennifer Stojkovic, is health care. And next comes tourism. Technology ranks third.
- Western Pennsylvania: Pennsylvania’s Patriot-News looks at the financial troubles of Greene County, located in the state’s far southwestern corner, south of Pittsburgh. According to the state’s website, the county was once said to have more sheep than people thanks to a flourishing wool industry. But it was coal that dominated the economy more recently. Even more recently though, coal mines have closed—there are now just four left; there were as many as nine. In the 2010s, the area got a sudden windfall in impact fees from the oil fracking boom, in which old oil fields thought to be depleted got a revival with new drilling technology. According to the Patriot-News report, however, the county failed to properly budget, squandering its fee income. Now the boom is finished, and taxes had to be raised for the first time in a decade.
- Point Roberts, Washington: American places don’t come any more interesting than this. CBS Sunday Morning looks at the pandemic era troubles of an oddly positioned city where residents have to drive across the Canadian border twice to reach the U.S. mainland (take a look on the map). That’s a big problem right now, with the U.S.-Canada border closed to all non-essential travelers. Point Roberts, unfortunately, depends on Canadians crossing the border for tourism and shopping. Sadly, many businesses are closing and residents fleeing. Ironically, the town has just one confirmed case of Covid-19. But the virus has badly infected the economy.
Gross Domestic Pounding
Covid caused world GDP to contract an estimated 3.4% in 2020
Here are figures for some individual countries
source: OECD, note: India’s figures for fiscal year that began in April
|country||Change in GDP 2020 vs. 2019|
- A global economic recovery is in sight. That’s the assessment of OECD, an organization of advanced economies. It sees worldwide GDP growing nearly 6% this year, which is a point higher than it forecast just three months ago. Vaccine momentum and the U.S. fiscal boost are two reasons for the greater optimism. The U.S., in fact, should see GDP expand 6.5% following its 3.5% contraction in 2020; OECD then sees 4% U.S. growth in 2022. India will lead the way this year with 13% GDP expansion, followed by 8% for China. Globally, economic output should reach pre-pandemic levels by the middle of this year. Separately, OECD recommends that governments invest in clean energy and digital technologies, accelerate implementation of Covid relief spending plans, help businesses adapt to a digital future, protect incomes of the hardest-hit people and help lower-skilled and young people get training and education. Its forecast acknowledges some uncertainty to be sure, in part tied to “the race between vaccines and emerging variants of the virus.”
- Former General Electric CEO Jeff Immelt, talking about his new book on Bloomberg’s Masters in Business podcast, warns the U.S. to move carefully with respect to its China policy. While recognizing the problem of intellectual property theft, long a major problem for GE, Immelt thinks the U.S. must accept the reality that China’s economic power and influence are here to stay. It will soon have an economy as big as America’s (some say it already does). Key U.S. allies trade as much with China now as they do with the U.S. China’s “market is vast for most things U.S. companies do,” he says. GE, for its part, has a $4b health care business in China that was more profitable than its U.S. health care business. It commands three-quarters of all jet engine sales in the country, which buys more planes than any other. “I’m not saying to be naïve and I’m not saying to not be careful… but my hope is we don’t disengage.”
- China is a rare country whose economy actually grew last year. But it’s not alone. Turkey says it too grew in 2020, with output (measured by GDP) rising about 2%. According to Reuters, the major reason for this was a near doubling of lending by state-owned banks. That stimulated activity in the second half of 2020. But it also came at a cost—the country’s currency plummeted in value while inflation rose to 15%. Reuters also said the Turkish job market didn’t see much of the benefit. In normal times, construction and tourism are two vital sectors. In fact, Turkey is one of the most visited countries in the world, by Europeans and Russians in particular. Tourist arrivals last year declined more than 70% from record highs in 2019.
- McKinsey & Company: The world’s most famous consulting firm has a new chief: Bob Sternfels. He becomes just the 13th leader of the firm since its founding in 1926 by James McKinsey, a University of Chicago accounting professor. Author Duff McDonald recounts the company’s history in his 2014 book “The Firm: The Story of McKinsey and Its Secret Influence on American Business.” During the late 1800s and early 1900s, U.S. corporate giants attained great size and national scope through consolidation. Managing them become more challenging, and in stepped McKinsey which preached using budgeting and accounting as a management tool, identifying for example, which parts of a firm exceeded or fell short of plans. McKinsey would quickly become a major player in the efficiency drive of the late 1920s. But that was just the beginning of its role, McDonald writes, in helping “invent what we think of as American capitalism” and later spreading it to every corner of the world. It was instrumental in the rationalization of governments and rise of marketing in the 1950s; the age of corporate influence in the 1960s; the restructuring of America and the rise of strategy in the 1970s; the massive growth of information technology in the 1980s; globalization in the 1990s; and the boom, bust and cleanup of the 2000s. While it’s credited with crafting many successful corporate strategies over the years, it’s also been involved with some disasters, most infamously the Enron collapse. Later came an insider trading scandal that sent its managing partner to jail. Sometimes, companies hire McKinsey to let employees know that it’s serious about cost-cutting—a corporate mercenary of sorts. Some perhaps hire it to glean secrets from competitors—McKinsey after all works for so many of the world’s top firms. Hiring the firm can lend credibility to tough decisions. It often wins businesses from the many companies run by former employees (one notable alumnus is Facebook’s Sheryl Sandberg). McKinsey is also a top recruiter of MBA graduates. As Sternfels prepares to take charge, repairing the firm’s reputation will rank high on the agenda. McKinsey recently paid more than half a billion dollars to settle a lawsuit by U.S. states accusing the firm of helping pharmaceutical firms sell addictive opioids. It was also tied to a major corruption scandal in South Africa. Still, McKinsey remains a powerful voice in corporate boardrooms, greatly influencing the direction of the global economy.
- CRISPR: Walter Isaacson, biographer of innovators from Leonardo da Vinci to Steve Jobs, is busy promoting his latest book “Code Breaker.” Its subject this time is Jennifer Doudna, who shares a Nobel Prize with Emmanuelle Charpentier for pioneering CRISPR, a technique to edit genes. Appearing on WBGH’s Innovation Hub podcast, Isaacson spoke of a biotech revolution “that’s going to be ten or 20 times more important and exciting than the digital revolution that dominated the past 50 years.” He adds: “molecules have become the new microchip.” The potential is mind-blowing. But the ethical questions are daunting. Imagine editing out the genes that cause Alzheimer’s disease. But would it be acceptable to edit genes to enhance memory? What if only wealthier people had access to the technology? It starts to sound like Huxley’s Brave New World. The fact is, CRISPR is already being used to treat diseases like Sickle Cell Anemia. Isaacson sees bioscience at the center of a new innovation era, following the era of computer science innovation, and before that an era of physics-driven discovery.
- 3-D Printed Houses: The cost of housing varies by market. But broadly speaking, it’s not been a sector characterized by lots of cost-saving technology. Well, CNBC looks at the early success of 3-D printed houses, highlighting pioneering firms like SQ4D in New York, ICON in Texas and Mighty Buildings in California. Demand, they say, is extremely strong. Don’t picture the paper printer sitting on your desk next to the computer. Instead, these firms use on-site machines that “print” materials like concrete or synthetic stone directly at the construction site, rather than having to be trucked in. The concept holds hope of cutting costs, reducing the need for labor, producing less waste and accelerating projects. Will it live up to those promises?
- Robots: In Kevin Roose’s new book “Futureproof,” the New York Times journalist considers the implications of a world in which machines can handle ever-more complicated jobs. Robots, he explained on the podcast Pivot, are already writing financial articles that journalists once wrote. How long before they become doctors and teachers? His advice to young people: Pursue careers that can’t be replaced by machines. The most prized skills, he adds, will be surprising, social and scarce. As Silicon Valley executives are finding, it’s harder to find a good salesperson with social skills than a software engineer. Ultimately, Roose sees tasks done by a machine becoming very cheap and tasks that can only be done by humans more valuable.
- Digital Money: What’s the future of digital currencies? David Birch, author of a book called the “Digital Currency Revolution,” tells the BBCs he thinks nation-states probably won’t dominate currency issuance forever. Within a few decades, cities and companies might have their own currencies too. So might other communities of people. Just as airlines are no longer synonymous with countries—British Airways still exists but so does easyJet—nor will currencies. One day, Birch says, we might be paying attention to the Apple-Microsoft exchange rate rather than the Dollar-Pound rate. He also says digital currencies will combine with the internet of things to facilitate a world in which payments are less between people than between machines. An example only half-jokingly mentioned during the BBC conversation: your refrigerator negotiating with the electricity company on your behalf.
- Smart Mattresses: You made it all the way through this week’s issue. If you’re ready for a nap, Matteo Franceschetti has just the product. Speaking on the Invest Like the Best podcast, the entrepreneur behind Eight Sleep talked about his smart mattresses, embedded with sensors and temperature controls to improve sleep. It’s a high-end product, marketed to athletes or executives looking to sleep less while still sleeping well. Franceschetti is nothing if not ambitious, hoping his mattresses can one day have enough artificial intelligence and collect enough data during your sleep to enable early detection of disease and other health benefits. He does acknowledge the greater difficulty of running a hardware business than a software business. But like Apple, which also makes hardware, Eight Sleep envisions an iPhone-like business model where the product’s software is constantly updated. Like so many companies nowadays, it’s also hoping to pursue subscription revenue streams.