Inside this Issue:
- Another Slice of Price Pressure: PCE index up about 2x Fed’s target
- Building Bridges: Senate Reaches Infrastructure Deal
- But is Biden Signin’? Only if he also gets his Family Plan
- The Childcare Challenge: Who Will Watch the Kiddies in America’s Costly Cities?
- How’s Boeing Going? Demand Not Yet Growing, Finances Hardly Glowing
- Pain in the Class: Essentials of the American Middle Class Increasingly Out of Reach
- The Debt Threat: Treasury Pleads with Congress for Permission to Pay its Bills
- The Dawn of Detroit: Henry Ford and the Height of U.S. Industrialization
- And This Week’s Featured Place: Dallas-Fort Worth, Texas, A 21st Century Star
Quote of the Week
“Housing, education, and health care are each ferociously complex, but what they have in common is skyrocketing prices in a world where technology is driving down prices of most other products and services… I think we should build in the next decade new technologies, businesses, and industries that break these price curves—and in fact reverse them, and make these three primary markers of the American dream easier and easier for regular people to attain.”
–Marc Andreessen (speaking with economics blogger Noah Smith)
Since everyone’s talking about inflation, let’s talk about inflation. As you may recall, the Bureau of Labor Statistics said earlier this month that its consumer price index (CPI) rose 0.6% from April to May and 5.0% from last May to this May. Those would be uncomfortably high figures if sustained for a lengthy period. Well, the Bureau of Economic Analysis has its own consumer inflation measure (the PCE price index), and it’s signaling the same trend, if a bit less pronounced. Prices rose 0.4% from April to May, and 3.9% versus a year ago. The Fed, by the way, looks more closely at the PCE.
And so, the debate rages on. Does inflation running at 4% to 5% annually call for an immediate rollback of the Fed’s ultra-loose crisis-time policies? Those increases, after all, are way above its 2% longterm target. Or is Fed Chair Powell correct in expecting the high inflation readings to be just transitory. They do, after all, reflect in part a comparison with extremely depressed prices at the start of the pandemic last spring.
The high inflation readings, of course, also reflect a shortage in goods, services, labor and commodities (not to mention water for western farms), constraining the supply side of the economy. That’s concurrent with a demand surge triggered by Covid’s retreat and a big increase in household income thanks to government stimulus spending. The Fed’s easy money measures help stoke demand as well.
Demand, however, is shifting some from goods to in-person services like restaurant dining and air travel. The latest BEA consumer spending data makes that clear. Keep in mind: The leisure and hospitality sector isn’t huge when it comes to contributions to America’s GDP. But it punches way above its weight in providing jobs, and it’s first and foremost a big jobs deficit that’s holding back the Fed from tightening. As the sector recovers, job openings are increasingly there. But thus far, large numbers of non-employed Americans aren’t taking them. Ongoing Covid fears among the unvaccinated? Caregiving obligations? A wave of early retirements? Generous unemployment benefits? The reasons people aren’t taking open jobs aren’t completely clear. But watch for changes this fall: Schools will reopen, and unemployment bonuses will expire.
Something else to watch: A federal ban on mortgage foreclosures and landlord evictions, scheduled to expire at the end of this month, will now expire at the end of July—it’s the final extension, the government says. This will perhaps drive more low-income Americans back into the workforce later this summer. It could also, more worryingly, increase homelessness, already a big structural problem that pre-dates the pandemic. It’s tied to a major shortage of housing across the U.S. The builder KB Home, in its earnings call last week, spoke of “an acute shortage of supply stemming not only from limited resale inventory, but also from the under production of new homes over the past 15 years.”
As Marc Andreessen says (see the Looking Ahead section below), an economy that doesn’t deliver affordable housing is an economy that’s not delivering for its middle class. Same for an economy that doesn’t provide affordable education, health care and childcare. And therein lies the great contradiction of the modern American economy, one that produces high-paying jobs, world-class technologies, great universities and medical centers, a wealth of entrepreneurial opportunities… But one that simultaneously leaves a large swath of citizens in a constant state of anxiety about where they’ll live, how they’ll pay the hospital bill and how they’ll manage their student debt. All are major roadblocks, alas, in the pursuit of happiness championed by Thomas Jefferson.
Is more government spending the answer? The Biden Administration thinks so. It continues to push for passage of its American Families plan, focused mostly on matters of education, health and childcare. As for infrastructure, the Senate last week produced a compromise that calls for nearly $600b in new spending (for roads, bridges, railways, energy, broadband, water, public transit, airports, etc.). But President Biden said subsequently that he’ll only sign off if he gets a bill—via the legislative process of reconciliation—that covers his other priorities as well. Besides education, health and childcare, they include housing, climate change mitigation and tax reform. “There won’t be an infrastructure bill unless we have a reconciliation bill,” said House Speaker Nancy Pelosi.
We’ll see what if anything gets passed. In the meantime, the economy’s private sector will end the first half of 2021 in an unequivocally healthy state, supply chain and labor scarcity frustrations notwithstanding. Last week, results from a Fed stress test on banks underscored the health of the financial sector. The health care sector is returning to normal. As mentioned, the leisure and hospitality sector is on the mend. So is the energy sector. Other high-impact sectors like housing, manufacturing, technology, agriculture, telecom and retail are enjoying some of their flushest times ever. Rare are the sectors still struggling—commercial real estate, perhaps, and export-dependent manufacturing, i.e., Boeing’s airplane sales.
Which brings us back to the original question: Will inflation crash the party? Corporate America will have a lot more to say during Q2 earnings season, now just weeks away. Last week, FedEx reported another quarter of record revenues and profits—it’s a big winner from the surge in e-commerce. Nike’s earnings too, were a slam dunk. Darden, owner of restaurant chains like the Olive Garden, spoke of resiliency in the full-service dining segment. Netflix struck a partnership with filmmaking legend Steven Spielberg. Shoppers took advantage of Amazon Prime Day. Microsoft unveiled a new Windows update. Walmart, the Wall Street Journal reports, is working with Comcast to develop new Smart TVs. Carnival is getting ready to sail again. And the Supreme Court issued a consequential ruling on Fannie Mae and Freddie Mac, two housing finance entities straddling both the government and private sectors. Stocks rose last week. So did oil. So did 10-year Treasury yields.
- Boeing: Even as its airline customers start to recover, America’s largest exporter remains mired in tough times. Boeing, like the airlines, needed government aid to survive the Covid crisis. But demand isn’t yet recovering like it is for most companies in the economy. Demand for Boeing’s military jets is steady but only accounts for about a fifth of company revenues during normal times. It has captured a few commercial orders this spring, including a major B737-MAX deal with one of its best customers: Southwest Airlines. But it’s barely sold any of its more expensive and generally more profitable twin-aisle planes designed for intercontinental travel. Its best-selling twin-aisle product is its B787, also called the Dreamliner. Future success, however, depends on sales to China, which were hit by trade tensions well before Covid. Also problematic well before Covid: Poor demand for Boeing’s revamped B777, a plane significantly larger than the B787. In the meantime, some countries including China haven’t yet re-certified its single-aisle B737 MAX planes following two deadly crashes in 2018 and 2019. As for supersonic flying, Boeing is a sceptic, having just withdrawn financial support for a subsequently deceased startup called Aerion. Looking ahead at its own product line, a big decision looms: Should it build a new midsized plane that’s larger than the MAX but smaller than the B787? There’s demand, for sure. But as CEO David Calhoun said at a recent Bernstein investor event, engine technology isn’t far along enough—and won’t be this decade—to produce big gains in cost efficiency. So to justify a new plane, Boeing will need to make efficiency gains in the way it designs, engineers and assembles the aircraft—bottom line is that airline customers need a plane with lower trip costs and lower costs per seat and per mile. Looking even farther ahead, can the industry devise large airplanes that don’t emit so much carbon? It’s much harder to build a practical electric plane than it is an electric car. Calhoun, meanwhile, isn’t bullish on hydrogen-powered planes. And sustainable biofuels can’t be a solution until they’re cheaper and more scalable. The best way to move forward on carbon reduction, the industry says, is fleet renewal, phasing out older planes in favor of newer and cleaner models. Newer models, of course, with their better fuel efficiency, also become more attractive as oil prices rise. But before committing to more orders, most airlines want to first see business travel rebound and borders reopen.
Tweet of the Week
U.S. GDP Growth by Quarter
According to the latest revised BEA estimates, real gross domestic product (GDP) increased at an annual rate of 6.4% in the first quarter of 2021. In the fourth quarter of 2020, real GDP increased 4.3%. Q1’s growth was driven by increases in personal consumption expenditures (PCE), nonresidential fixed investment, federal government spending, residential fixed investment and state and local government spending. Gains in these areas offset decreases in private inventory investment and exports. In addition, imports increased.
- Care Economy: Health care is one aspect of the care economy. Caring for seniors is another. Still another is childcare, the topic of a new podcast series called “Six Hundred Atlantic” by the Federal Reserve Bank of Boston. Like other areas of the care economy (or housing and education), childcare needs clearly aren’t well addressed by free markets alone. Ultimately what’s needed for childcare are three things: quality, availability and affordability. But market forces seem able to deliver just two of the three at best. Lowering prices would help parents but hurt providers and workers. Higher prices would help providers and workers but hurt parents. Higher pay would help workers but hurt either owners or parents. Across the U.S., the average annual cost of childcare is $9,000 per child. But it’s far more than that in more expensive regions of the country, including the Boston area. Adding to costs are the many strict regulations providers must follow, most designed to ensure child safety. Caregiving, furthermore, is a rather labor-intensive job that can’t be outsourced to robots or China. But with the economics of the industry compelling providers to keep wages low, turnover is naturally high. The Boston Fed interviewed one daycare owner who’s able to get by only because her spouse earns a good income. All of this, in turn, creates distortions in the labor market, with many mothers forced to surrender their careers to stay home with their children—childcare costs can wipe out someone’s entire earnings from a lower-wage job. Other couples choose to not have children, to have fewer children, or to delay having children. One study found that a lack of childcare options costs the U.S. economy $57b per year in lost earnings, productivity and revenue. What to do about this dilemma? The Biden administration proposes a big increase in federal funding for childcare, on top of temporary childcare tax credits families will receive for each of their children. But federal solutions are always controversial. In fact, the U.S. came close to having universal government-supported childcare once before. Here’s a passage from the New Republic: “In 1971, Congress passed the Comprehensive Child Development Act on a bipartisan vote. Co-sponsored by Minnesota Senator Walter Mondale and Indiana Representative John Brademas, the act established a network of nationally funded, locally administered, comprehensive childcare centers, which were to provide quality education, nutrition and medical services. Mondale viewed the measure as a first step toward universal childcare.” What happened? President Nixon vetoed the bill, wary of federal government involvement in the social realm. This year, by the way, is the 50th anniversary of that failed bill. It’s also a year in which childcare centers are recovering from the Covid crisis, which forced many to close. Some closed permanently.
- Air Transport: U.S. airports will receive $8b in federal grants from the last Covid relief legislation, the Federal Aviation Administration announced. Though domestic leisure traffic is rebounding sharply, business traffic and intercontinental traffic remain deeply depressed. Overall, according to the Transportation Security Administration (TSA), U.S. airport traffic is now running about 25% to 30% below 2019 levels. Airports in the U.S. are mostly controlled by local governments or port authorities, not private-sector companies (that’s more common in Europe). Chief revenue sources include landing fees that airlines pay and concession fees that shops and restaurants pay. In 2019, according to Airports Council International-North America, the five busiest U.S. airports by passenger volumes were those serving Atlanta, Los Angeles, Chicago, Dallas-Fort Worth and Denver.
- Oil: Philip Verleger, an economist specializing in energy, thinks the IEA was wrong for issuing a statement calling for an immediate end to all new fossil fuel projects. Speaking on the Macro Voices podcast, he calls the declaration a “distraction,” and one that will make western countries depend more on imports from oil producers like Russia. He’s also skeptical of the notion that big western oil giants can turn themselves into renewable energy giants. Verleger has an opinion about the hot topic of inflation too. He thinks it’s inevitable given labor and raw material shortages, compounded by environmental pressures on companies. The price of oil itself can be influenced by rather obscure regulations—he points to a U.S. mandate regarding ultra-low-sulfur fuel for diesel cars in the mid 2000s. This, he says, wound up disrupting refinery capacity and reducing the usability of heavier crude oil. It helped drive prices to nearly $140 per barrel in mid-2008. And $140 oil, in turn, helped pop the housing bubble as households had less money for their mortgage payments.
- Labor: The latest Labor Department unemployment figures by state and selected metro areas show that it’s still bad news for America’s largest cities. The unemployment rate in both New York City and Los Angeles stood at 11% during May, reflecting in part a high dependence on international trade and tourism. Chicago too, was rather high at 8%; the national unemployment rate in May was 5.8%. Which state had the highest rate? That was Hawaii at 8%—the economy there is likewise highly exposed to international tourism, especially from Japan. New Hampshire, Vermont, Nebraska, Utah and South Dakota, conversely, all had rates under 3%.
- Stocks: As the Charles Schwab WashingtonWise Investor podcast notes, just four stocks as of last week—Amazon, Apple, Facebook and Alphabet/Google—make up almost 13% of the S&P 500 by value. The figure climbs to almost 24% if you add Microsoft and Netflix.
- Fixed income: Stocks often get more attention. But the market for bonds and other securities that provide holders with fixed income payments is much, much larger. The value of all such securities amounts to some $123 trillion worldwide, according to SIFMA Research. And the U.S. alone accounts for 38% of that. In Q1, by the way, U.S. fixed income securities outstanding grew 13% y/y, boosted by a jump in U.S. government borrowing. As a reminder, a fixed income security is something that’s sold by an entity looking to borrow money. It’s bought by investors looking to lend their money to earn some interest. Another thing to keep in mind about these securities: After they’re first sold in the primary market, they’re constantly bought and sold in a big secondary market.
The Inflation Debate
- Louis Fed president James Bullard, presenting to the Clayton Chamber of Commerce in St. Louis, shared his thoughts on the topic all economists are talking about. Inflation, he said, is a new risk that “may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side.” The risk is magnified, he adds, by expectation of further positive economic news during the September-October time frame: Schools will be back in regular session and work patterns should normalize. Also, a global economic reopening will follow, “likely providing additional tailwinds for the U.S.” Bullard, though not a current voting member of the FOMC (he’ll be one next year), reminded attendees that during the FOMC’s December meeting, its summary of economic projections included a forecast for 4.2% real GDP growth in 2021, alongside core PCE inflation of 1.8%. At the just-completed June meeting, the projection changed to 7% GDP growth and 3% for core PCE. “This year,” Bullard said, “has brought a substantial upside surprise on both real GDP growth and inflation.”
- University of Georgia professor Stephen Mihm, writing for Bloomberg Opinion, explains the concept of shrinkflation. It’s not just prices for goods, services, labor and commodities that inflation hunters should watch, he warns. There’s also the practice—evident in the 1960s and 1970s—of charging the same price for a packaged product, but with fewer goods inside. On a unit basis, it means higher prices, even if harder for consumers to detect. Mihm recalls the example of Rice-A-Roni boxes, which contained 8 ounces of the product at first, but then shrank to 6.9 ounces—the packaging and price remained the same. A twist on this shrinkflation practice is the example of a 10-ounce chocolate bar sold for 75 cents. It later became a 15-ounce bar (50% larger!) that sold for $1.25 (67% more expensive).
- Monetary Policy: Fed Chief Jerome Powell testified before a House Committee, reviewing some key policy actions taken during the crisis. Among them were emergency lending facilities available to corporations, small businesses and municipal governments. These weren’t intended to replace private credit markets, Powell explained, but to reassure private markets that Fed support was there as a backstop if needed. “Once lenders and investors understood that borrowers would have access to emergency loans, conditions improved.” State and local governments, for example, borrowed almost $380b in private markets between April and December 2020—at extremely attractive rates, no less. In fact, 2020 saw the highest annual volume of municipal debt issuance ever, helping to preserve local jobs and services. Powell separately continued to display calmness in the face of inflation threats, again describing them using his favorite word: “Transitory.” He emphasized the Fed’s new approach of no longer worrying so much about overheating the economy. In the past, if the job market became too tight, the inclination was to preemptively raise rates to forestall inflation before it could rear its head. But the coexistence of hot labor markets and low inflation in the years preceding the pandemic has convinced Powell and his colleagues to adopt a new policy framework: Don’t raise rates until you actually see hard evidence of sustained inflation. What else did he say during the hearings? Well, Congress being Congress, he had to repeatedly refrain from expressing personal views about pending legislation. He did express dismay about declining labor mobility in the U.S.—fewer people are moving to other cities for new jobs. On the still-large number of non-working Americans, he pointed out that hiring has been strong but offset in part by a large number of people quitting their jobs or retiring early.
- Fiscal Policy: On the Treasury side, Secretary Janet Yellen testified on Capitol Hill as well, urging the Senate Appropriations Committee to approve the department’s budget request. It includes among other things more money for the IRS, which Yellen said has fewer auditors today than at any time since World War II. Tax unfairness has become a hot topic with the leak of IRS information to the media group ProPublica, which published reports of billionaire tax avoidance. Yellen pledged to investigate the source of the leaks. Other Treasury priorities include implantation of a global minimum tax, financial crimes enforcement and convincing Congress to raise or suspend its borrowing limit, or debt ceiling. If it does nothing, the Treasury’s authorization to increase borrowing will expire on July 31. Once upon a time, raising the debt limit was non-controversial. But not since it became a subject of political warfare in 2011.
- Federal Contacting: The General Accounting Office says the federal government awarded $665b in contracts during fiscal year 2020. The largest chunk of that—$422b—came from military contracting (led by the Navy). Among civilian agencies, the Department of Health and Human Services spent the most. What does Uncle Sam buy from contractors? Everything from pharmaceuticals to aircraft to consulting and IT services. One of the government’s goals is to spend more of its money with small businesses. But the biggest beneficiaries are giants like Lockheed Martin (based in Maryland), Raytheon (Massachusetts), General Dynamics (Virginia), Boeing (Chicago and Seattle), Anser (Virginia), Northrup Grumman (Virginia) and Huntington Ingalls (Virginia). As discussed in Econ Weekly’s June 14th issue, economies like the Hampton Roads area of Virginia greatly depend on military contracting. Many smaller communities—from Fayetteville, North Carolina, to Killeen, Texas—depend heavily on military bases.
- Dallas-Fort Worth: In 1890, before the age of the automobile, Detroit was the 15th largest metro area in the U.S. By 1930, it ranked fourth, behind only New York, Chicago and Philadelphia. Two decades later, a Texas town best known for cowboys, railroads and cotton trading cracked the top 20 at number 15. Today, the twin cities of Dallas and Fort Worth have together matched Detroit’s industrial era achievement—the DFW Metroplex is now America’s fourth largest metro area, behind only New York, Los Angeles and Chicago. Its Texas neighbor Austin gets more attention. Houston is booming too, supported by its giant energy sector. But DFW is larger than both, and Exhibit A of a superstar post-industrial sunbelt economy. Dallas got its start as the center of the early 20th century cotton trade. Already by 1914, it was economically important enough to house one of the 12 newly created Federal Reserve banks. Fort Worth, 30 miles to the west, was a hub for longhorn cattle trading since the 1860s, and meatpacking later on. A giant step to stardom came courtesy of the Texas oil boom in the 1920s. Though DFW didn’t have any oil itself, its banks were instrumental in financing exploration and production elsewhere in the state. World War II proved economically transformative, as it was for so many cities across the U.S. Fort Worth in particular, became a major production site for military automobiles and aircraft. Well into the 1970s and 1980s, Fort Worth would be heavily dependent on the aerospace sector that emerged from those federal military investments—only after post-Cold War defense cuts did the city feel pressured to diversify into other areas. Dallas, meanwhile, received unwanted international attention as the site of President Kennedy’s assassination in 1963. It would later enter the national consciousness for more sanguine city symbols, including the Cowboys football team and the 1980s television show Dallas. The 1980s wasn’t a great decade for DFW’s economy, however. The drop in oil prices hurt. And so did the savings and loan crisis. But the one thing DFW always had: Its perfect location in the center of the country, just like Chicago. But with population moving south and west, and with California emerging as the largest U.S. state, DFW was in some ways even more strategically located. It sure enough followed Chicago’s lead in becoming one of the nation’s most important transportation and logistics hubs. The railroads understood the geographic advantage in the 19th century, contributing to DFW’s rise. And rail transport remains big business today—BNSF, the country’s largest railroad (owned by Warren Buffet’s Berkshire Hathaway), is headquartered in Fort Worth. No less importantly though, is DFW’s nexus of interstate highways that make it critical to trucking and warehousing. Fort Worth, furthermore, is home to American Airlines, by some measures the world’s largest airline. And Dallas is home to Southwest Airlines, famous for its low costs and nearly 50 straight years of profits before the pandemic. DFW airport was the world’s tenth busiest in 2019, and the fourth busiest in pandemic-hit 2020. With so much rail, road and air transport, it’s no wonder DFW—unlike most cities throughout history—could thrive without any navigable links to the sea. Being so central also makes it a magnet for corporate headquarters, including many over the years that have relocated from New York and California. American and ExxonMobil, for example, were once New York City-based companies. Toyota North America and engineering giant Jacobs both moved from California. So, more recently, did Charles Schwab and McKesson. AT&T moved from San Antonio. Seattle’s Boeing nearly moved its head office to DFW before settling on Chicago. Aerospace nevertheless remains a big jobs provider, with Lockheed Martin alone employing more than 10,000 DFW residents. The military, health care and education are large and stable employers. Finance remains critical too, with most major national banks having a big DFW presence. The area’s “Silicon Prairie” is home to many tech companies, building on the legacy of Texas Instruments, an early IT superstar. With ExxonMobil, AT&T and McKesson, by the way, DFW is the only U.S. city to host three of the country’s 15 largest companies. With so many job opportunities, and housing that’s affordable relative to big coastal cities, DFW is understandably attracting people. Lots of them. During the 2010s, the Metroplex population grew 18%, second fastest among America’s 20 largest metros (only Houston grew faster, slightly). In 2020, despite the pandemic, it saw the largest net increase of any area—120,000 more people from July 2019 to July 2020, according to newly released Census data. Since 2010, DFW has added 1.3m new people. And it wasn’t because Texans are having a lot of babies. Last year, 48% of the increase came from domestic migration, and another 14% from international migration. Many of those from abroad come from Mexico and Central America, and Hispanics account for almost 30% of the DFW population today. A diverse population. A diverse economy. Both help make Dallas-Forth Worth the superstar economy it’s become.
- Oregon: Josh Lehner, an economist with Oregon’s Office of Economic Analysis, discussed his latest quarterly state forecast in a virtual presentation hosted by the Rotary Club of Salem. One major theme is that state and local government revenues are far healthier than expected, thanks to soaring tax proceeds from business profits, capital gains, rising asset prices, booming real estate markets and record lottery sales. Oregon’s taxable marijuana sales too, are up. In addition, the state stands to get $2.6b in federal aid, with cities and localities getting about $2b. “Public budgets,” Lehner said, “haven’t been this flush in a while.” He adds that incomes in Oregon are 20% higher now than they were pre-pandemic, boosted by federal fiscal stimulus worth 25% of national GDP—this to cover just a 10% hole in the economy. He calls it the largest non-wartime increase in federal spending since the New Deal in the 1930s. As with all states, one of Oregon’s chief economic challenges currently is ensuring that the supply side can grow fast enough to meet the surge on the demand side. Lehner separately mentioned how he’d be glad if corporate tax revenue actually declined, if it did so because companies were investing more of their dollars.
- Mississippi: REMI, a company that sells economic modeling software, has a series of online webinars about different states. A recent one profiled Mississippi, whose economy was once dominated by cotton. Today, however, as REMI points out, cotton is no more important to the state than catfish, livestock, sweet potatoes, soybeans and broiler chickens. Mississippi is also a major producer of lumber and wood, as well as manufactured furniture, car parts and processed seafood. It has some oil and gas drilling too. A few other general facts about the state: It has the highest percentage of African American residents of any state (nearly 40%). More than 60% of its land is covered in forest. Areas along the Gulf of Mexico have lots of fishing, shipbuilding, oil activity, military bases and a casino-based tourist sector. Toyota has a big manufacturing plant just north of the capital Jackson. Mississippi and Mississippi State universities are both big employers. And the northwestern part of the state is linked with the Memphis, Tennessee, metro area.
- Taiwan: Richard Bush once served as head of the American Institute in Taiwan, which serves as America’s unofficial embassy on the island—the two stopped having official diplomatic relations after the U.S. switched to recognizing Beijing in 1979. Today, as Bush discussed in a talk with the National Committee on United States-China Relations (NCUSCR), Taiwan’s leaders face choices that are getting more and more difficult. Economic growth is much slower than it was in past decades. Like many industrialized societies, the population is aging, with a rising ratio of retirees to workers. Its firms face tougher competition from state-supported mainland rivals. Taiwan’s government revenue, he adds, suffers from taxes that are too low relative to public needs. Taiwan’s biggest economic strength is its extremely sophisticated semiconductor industry, led by the firm TSMC. But the semicon sector faces some uncomfortable realities too, like droughts impacting the water supply.
- Europe: Goldman Sachs expects the euro area economy to grow about 5% this year, and the U.K. economy to grow more than 8%. Jari Stehn, chief European economist of Goldman’s research division, points to rising Covid vaccination rates, a resilient manufacturing sector and strong fiscal support from both European governments and the European Union—Italy and Spain will be two of the biggest beneficiaries of E.U. loans and grants. He also believes governments will be much less aggressive in repaying Covid-era fiscal debts, having learned lessons from overzealous fiscal austerity in the early 2010s. One wildcard is Europe’s large summer-centric tourism sector. Most countries haven’t yet fully reopened their borders to tourists.
- Ford: Jonathan Levy’s new book describing the “Ages of American Capitalism” has a chapter entitled “Fordism,” referring of course to Henry Ford and his mass production of automobiles. This was, Levy writes, “the greatest achievement in the annals of the industrial revolution.” The Ford Motor Company was incorporated just outside of Detroit in 1903. Before long, it was building cars in massive factories powered by coal-fired electricity, using mostly immigrant workers doing repetitive tasks along an assembly line. Ford’s River Rouge mega-factory was an international sensation, making use of breakthrough architectural techniques and built with the goal of near self-sufficiency. By the late 1920s, it featured 93 buildings, including steel, cement and glass plants. The Rouge had a textile mill, a leather plant, a hospital, an airport and a coal fired electric power plant capable of powering a city of more than 1m people. Some 100,000 workers toiled on 15m square feet of floor space. Raw materials entered by canal or by train, with Ford owning its own ships and its own railroad. It would also buy its own forests, mines and even an ill-fated rubber plantation in Brazil (a carmaker needs rubber for the tires). As for the workers, by 1914 less than 30% were born in the U.S. They were largely European peasant farmers, arriving from places like Poland, Russia, Italy, Romania and Hungary. When immigration was curbed during World War I, Ford turned to Black workers escaping the oppressive South. Fordism, Levy asserts, was different than the first wave of American industrialization, which involved the manufacture of intermediate goods like steel, useful for things like railroad tracks. Ford’s cars were consumer goods, thus greatly expanding not just supply in the economy but also demand. After the 1920s, General Motors would surpass Ford in profitability, pioneering more effective management practices. But River Rouge survives, albeit in much smaller form. It’s the site of what Ford now calls its Dearborn plant, which builds the company’s popular F150 trucks.
- Multiparty Computation (MPC): Analyzing data, as the world is finding out, can solve more and more big problems. But some of the most useful data is often private data that people don’t want to share. Enter multiparty computation, a method that allows data scientists to view a collection of data without any ability to see the individual inputs. In other words, nobody’s individual data is revealed, only the aggregate data of multiple individuals. MPC uses cryptography, a mathematical way to secure information. A common example is the case of three individuals who don’t want to reveal their salaries. But a researcher, perhaps at the Labor Department, wants to know the average of the three. Instead of having to trust the researcher with their data, the individuals can have their salary info split up into random multiple parts, i.e., a person making $50k might split the amount into $2k, $22k and $28k (which adds up to $50k). Each person does the same, and the researcher can only see a bunch of random numbers that mean nothing by themselves, but which add up to the correct total. From that, an average is obtainable. The technique has lots of real-world applications, not least in the field of medicine. There, companies like Microsoft and Google want to analyze patient data for better health care outcomes but need to do so without revealing anyone’s private data.
- Housing, education and health care: Marc Andreessen, once a famed web browser pioneer, now a prominent venture capitalist, shared his thoughts on various topics with economics blogger Noah Smith. Andreessen reiterated his criticism of overregulation and underbuilding, contributing to affordability problems in three markets essential to the prosperity and happiness of American families. Good quality 1) housing, 2) education and 3) health care are becoming out of reach for more and more Americans. And these, he says, are the “three primary markers of the American dream.” What all three have in common (see quote of the week above) is skyrocketing prices in a world where technology is driving down prices of most other products and services. “I think we should build in the next decade new technologies, businesses and industries that break these price curves—and in fact reverse them, and make these three primary markers of the American dream easier and easier for regular people to attain.”
- Distributed Consensus: In that same interview, Andreessen provides some bullish sentiment for the cryptoeconomy, at a time when cryptoassets are plummeting in value. Blockchain technology, he explains, has given the internet a unique architecture: The ability “for many untrusted participants in a network to establish consistency and trust.” The concept is known as distributed consensus, and it could lead to what Andreessen calls “a civilizational shift in how people work and get paid.” But he cautions: “I think it will take 30 years to work through all of the things we can do as a result.” Its best-known application today is internet money (i.e., Bitcoin). But he says, “We can now, in theory, build internet native contracts, loans, insurance, title to real-world assets, unique digital goods (known as non-fungible tokens or NFTs), online corporate structures (such as digital autonomous organizations or DAOs), and on and on.”
- Artificial Intelligence: Andreessen, finally, mentions an observation by fellow Silicon Valley titan Peter Theil. Artificial Intelligence, Thiel has said, is in some sense a left-wing idea: Centralized machines making top-down decisions. But crypto is a right-wing idea: Many distributed agents, humans and bots, making bottom-up decisions. Thought provoking.
Earn Baby Earn
Percentage change in personal net earnings ranked by state, at annual rate, Q4 ’20 to Q1 ’21
Net earnings refer mostly to wage and salary income, not income from government transfer payments which are up sharply this year. Also excluded are earnings from sources like dividends, rents and interest)
source: Bureau of Economic Analysis
- If you do include all income sources including those big transfer payments, personal income jumped by an annualized rate of almost 60% from Q4 to Q1. The largest gains were in the poorest states, led by Mississippi. It’s a sign that stimulus measures were helping the places that needed it most. Total income gains were up least in Washington DC and Connecticut
- But again, that’s total income. The chart below is just wages and salaries. Here, Texas led the nation in gains thanks to the recovery of its big oil and gas sector. It also saw big increases in categories like finance and professional services
- A decrease in government aid to farmers in Q1 hurt states like the Dakotas
- Manufacturing-heavy states like Michigan fared well in terms of personal earnings growth. But that was much less true in Washington state, where Boeing’s woes held back the manufacturing sector