Inside this Issue:
- Transitory Story? Another Month of Climbing Prices
- Rate Riddle: Inflation Fears, Bountiful Borrowing… Yet the 10-Year Bond Doesn’t Respond
- Too Much Wealth Spent on Health? The U.S. Bill is Nearly $4 Trill
- Pharma Karma: The Hopes, the Doubts and the Costs of a Newly Approved Drug
- A Dearth of Dwellings: Why is the U.S. Running Out of Homes for Sale?
- Mail Fail: The Post Office Loses Money Again
- The Vaccine Miracle: A Look Back at Operation Warp Speed
- Torpedo the Embargo? States Like Montana Want to Export to Havana
- Mission to the Moon: NASA Plans a Lunar Landing
- And This Week’s Featured Place: Hampton Roads, Virginia, Heavily Depending on Military Spending
Quote of the Week
“Our economy relies on poverty, or at least the threat of poverty, to force people to take bad jobs at low wages… We like cheap stuff, we like plentiful services, and the cheap goods and plentiful services we have in this economy (or have had at least before Covid), they’re only possible… if a lot of people work crummy jobs at low wages.”
-New York Times columnist Ezra Klein
What’s so scary about inflation? A big fear is that lenders won’t lend, meaning borrowers can’t borrow, meaning less economic activity. Think about it: You lend a suitcase full of dollars today, dollars that could have bought you a new car. A few years later, it’s time to get repaid, and that same suitcase full of dollars will only buy you a scooter. Probably best not to lend, right? Well, you might, but better charge a higher interest rate to compensate. And higher interest rates too, could mean less borrowing and less economic activity.
Fortunately for the economy, lenders are still lending. And they’re not demanding higher interest rates, never mind another discomforting inflation report from the Labor Department. They’re not demanding higher interest rates from the U.S. government anyway—yields on ten-year Treasury bonds actually fell last week. The 10-year Treasury bond, remember, greatly influences the rates lenders charge in the private sector.
Why the seemingly insatiable demand to loan Washington money, even as it borrows and borrows, more and more? Nobody has a definitive answer. But it helps to think of a Treasury bond as more than just an investment. It’s also considered a risk-free asset that’s useful to pension funds and insurance companies. Because it’s so safe, it serves as collateral in lending markets. Big U.S. banks need to hold lots of Treasuries to assure regulators that their balance sheets are safe. Foreign governments rely on Treasuries as a store of value, and sometimes to influence exchange rates. Other foreign buyers like the low rates Uncle Sam is paying, if simply because they’re better than the negative rates their own governments are paying. So no question, there’s a ton of new Treasury supply as Washington borrows. But there’s also a ton of demand.
At some point, if inflation does prove more than just transitory, heralding a devalued dollar, lenders would indeed need higher interest rates to make their lending worthwhile. But maybe, like the Federal Reserve insists, the current spell of rising prices really is just transitory. The Labor Department’s report last week, indexing consumer prices, showed an increase of 0.6% from April to May, after rising 0.8% from March to April. Those are pretty big jumps from one month to the next. Year on year, meanwhile (in other words May 2021 versus May 2020), the CPI reading was up 5%, the highest jump since the summer of 2008.
But a closer look shows much of the monthly inflation concentrated in categories associated with people returning to their pre-pandemic lives, i.e., taking vacations and heading back to offices and schools. The three products with the steepest monthly price spikes were rental cars, used cars and airfares (see chart below). If you’re not looking to buy a new home, which most Americans aren’t, sharp spikes in house prices probably won’t affect your inflation expectations. Nor will cost trends in health care and higher education—they’ve risen sharply over decades, for sure, but nothing unusual there currently. More worrying—and a greater risk to altering people’s inflation expectations—is the current upward pressure on wages and commodities. This threatens to lift prices for a wide array of goods and services.
We’ll hear the Fed’s latest thoughts after leaders meet this week. Are they finally ready to roll back those monthly bond purchases?
In the meantime, rising prices are a welcome development for some key sectors of the U.S. economy, including energy producers, agribusinesses and miners. The auto sector, amid its struggle with semicon shortages, received more evidence that Apple wants to sell cars. There are some signs of the red-hot housing market cooling off—but not because of any sort of debt problems. Amazon founder Jeff Bezos will spend part of his retirement in space. Galvanized by the China threat, the U.S. Senate approved new money for research and development. No Senate deal yet on infrastructure though.
Despite the heightened geopolitical tensions, new opportunities are opening in China for U.S. asset managers. Back home, a Miami gathering of Bitcoin enthusiasts coincided with a new wave of doubt about the cryptoeconomy, triggered by regulatory concerns. Prices for crypto assets, after skyrocketing earlier this year, are now tumbling. Stock prices, on the other hand, rose last week, undeterred by the omens of inflation. UPS, the logistics giant, presented its plan to be better, not bigger. The U.S. and its allies are close to reforming the global tax regime. There’s movement in Congress to check if not wreck the power of Big Tech. And with late June now upon us, it won’t be long before Corporate America starts reporting its second quarter financials.
The Department of Labor’s index of consumer prices showed a rise of 0.6% from April to May; that’s a pretty large increase for just one month, further fanning fears of entrenched inflation. Here’s a look at some of the categories with the steepest jumps, along with items whose prices are falling:
- Many of the categories with steep increases are associated with the resumption of leisure travel (i.e. car rentals and airline fears) and dislocations in the auto supply chain (used cars). Home related expenses including housekeeping and moving are up. So are some costs associated with returning to school and offices, like clothing and jewelry. Public transportation costs are also up as people resume their commutes. Certain food and dairy products are up too
- Wake up! The instant coffee costs less. But that’s probably because people are back out on the road buying Starbucks again. Buy yourself a ham sandwich if religious strictures allow. And don’t forget the olives and pickles. More importantly, health insurance costs are trending down, which is helpful to many households
- The Fed and Treasury haven’t changed their opinion (at least not publicly) that this spring’s steep elevation in the price index won’t last too long. It’s a “transitory” price spike, the Fed says, destined to dissipate as Covid-related supply bottlenecks and labor market shocks normalize.
- While digesting this latest consumer price gauge update, remain on the lookout for data on prices producers are facing, including those associated with labor
- What about the cost of buying a house? Yes, that’s been going up a lot. But it’s treated by the Labor Department not as consumption but as an investment. Housing is indeed a big part of the Consumer Price Index but viewed in terms of monthly rental payments, or the monthly payments owners would have to pay if they were renting
- Boston-based Biogen was in the news last week, proclaiming a “crucial inflection point in our collective battle against Alzheimer’s disease.” It was celebrating accelerated FDA approval for its new therapy drug called Aducanumab, or Aduhelm for short. CEO Michel Vounatsos said Aduhelm is the first new Alzheimer drug to be approved since 2003, with trials of at least 100 candidates discontinued since then. Japan’s Eisai was also involved in the drug’s development. Encouraging though the news surely is, not everyone’s so enthused. Skeptics downplay the new therapy’s effectiveness—it was approved absent any clinical proof of relieving any symptoms. And some worry about its costs, which could burden a federal health budget already deemed unsustainable. Keep in mind: An estimated 1m to 2m Americans could qualify to receive Aduhelm, which will cost nearly $60,000 a year per person. Biogen’s saga captures the essence of the biotech industry: Vast sums of money are invested in research, with payback hinging on regulatory approvals of new products. The company, by the way, says it’s spent more than $28b on research and development since its founding in 2003, hence the need to charge what it’s charging. The focus of its efforts more generally are therapies for people living with neurological diseases, including multiple sclerosis, neuromuscular disorders, amyotrophic lateral sclerosis (ALS) and Parkinson’s disease. Such diseases tend to be expensive for countries because they require a lot of care.
Tweet of the Week
- Health: Just how massive is America’s health care sector? In 2019, before the Covid crisis, spending on health amounted to $3.8 trillion, according to the Centers for Medicare and Medicaid Services (CMS). That was 17.7% of the country’s entire economic activity that year, as measured by GDP. The amount works out to $11,582 per person, by far the most any country spends on health care per capita. The 2019 total also represented a 4.6% increase from 2018, which compares to a 2.2% increase in 2019’s GDP. The chart below provides more detail on health care spending in America, which doesn’t always produce healthier Americans. It’s a sector with many market irregularities, including missing incentives to control costs, dysfunctional price signals, fear of malpractice litigation, protected interests, heavy government involvement and a surfeit of waste and unnecessary bureaucracy. It’s also one where productivity gains are hard to achieve, though many companies including Amazon and Walmart see potential. Unusually, many of the impressive technological advances the industry produces actually increase rather than decrease costs—think new drugs and devices that improve health but cost a fortune. Demand will certainly grow in the coming decade as more Baby Boomers retire. That presents a major fiscal problem for the U.S. government if costs aren’t better controlled.
Wealth Spent on Health
A breakdown of U.S. spending on health care in 2019
- How does a country spent $3.8 trillion, almost 18% of its entire GDP? A lot gets spent in hospitals doctors offices
- Note that employers bear most of the cost for private health insurance
- Medicare is a federal government program
- Medicaid costs are shared between federal and state governments
- For individuals and households that don’t receive insurance through their employers, government subsidized plans are available on exchanges
source: Centers for Medicare and Medicaid Services (CMS)
- Housing: On an episode of Bloomberg’s Odd Lots podcast, hosts Joe Weisenthal and Tracy Alloway talk to Zonda’s chief economist Ali Wolf about why the U.S. is running out of homes for sale. Put another way, the U.S. is grossly under-housed, in part because of the ghosts of the 2008-09 housing crisis. For the past decade, buyers were reluctant to buy, and builders were reluctant to build. Shortages were thus a problem well before the Covid crisis began. In 2017, for example, there was just two-to-three months of supply on the market, compared to the four-to-six generally considered the point of market equilibrium, Wolf explains. Now, in some markets, there’s just 30 days of supply, meaning anything that goes to market sells extremely fast. Homebuilder labor shortages too, existed before the crisis. So did a reluctance to sell among landowners, including farmers, waiting for prices to further appreciate. That was the situation when suddenly, last summer, buyers “woke up,” said Wolf. Demand for larger homes jumped as people worked and schooled from home. Interest rates dropped. The stock market rose. Millennials began entering their peak home buying years. Generation X (ages 40-60) shed some of their scars from the past crisis and used their ample savings to buy larger homes. As prices rose, people had more equity in their homes. There was FOMO—the fear of missing out before prices rose even further. In some markets, demand spiked way beyond what the local area’s income level could support, due to buyers relocating from other areas. With Californians and others moving to Austin, Texas, for example, home prices there are up an astonishing 25%. Back on the supply side, the price and availability of building materials is now a constraining factor. Labor shortages have worsened, not just among building crews but also among truck drivers tasked with moving tools and supplies. Developers are now buying land at very high prices, also leading to higher home prices. The average time from a contract home sale to the start of construction is normally about 60 days, Wolf says, but is now more like 90 days—one reason is a slower permitting process because cities are inundated with applications. As Wolf explains, the U.S. finished 2020 with 1.4m housing starts, and trends that suggest they should reach 1.7m this year. But citing the National Association of Homebuilders, she says getting to 1.7m would require 400,000 new workers. Well, the housing workforce is currently up just 43,000. So what’s next? In May, there was a first sign of buyers balking at the higher prices. They might, in other words, be moving to the sidelines and waiting for prices to fall. To be clear, lending standards look nothing like they did before the last crisis. That’s comforting. But rising interest rates could hit demand quickly, Wolf thinks. She’s also critical of the Fed’s policy of buying mortgage securities—yes it holds down interest rates but it also stokes an already-overheated housing market. But she does acknowledge the risk of sending rates higher if the Fed ends its policy too abruptly.
- Housing: The Wall Street Journal looks at one specific housing trend in the U.S.: The rise of suburban rental communities. These are build-to-rent single-family housing developments, managed more like apartment buildings with hired staff to handle repairs, upkeep and maintenance. It’s different from the established practice of investors buying single-family homes and renting them out—in most cases they’re buying in communities where most residents are owners. We’re talking here about a whole community of renters. The epicenter of this new trend is Arizona, though it’s spreading beyond. As the Journal writes: “Many young professionals and families are less keen than their parents in being tied down by a 30-year mortgage… They want the flexibility of renting and the freedom that comes with being able to pick up and leave after a lease. As they age, they may want the yard, garage, good schools and roomy basement, without the headaches of mowing that yard or buying a new motor when the garage door breaks.”
- Treasuries: It’s one of the biggest mysteries of the global economy right now? How does the U.S. government continue to borrow more and more and more yet still pay rock-bottom interest rates? Why does everyone keep lending to Uncle Sam (in other words buying his Treasury bonds) if he’s paying so little interest? David Andolfatto of the St. Louis Fed and the Mercatus Center’s David Beckworth suggest a simple reason. Discussing the matter on Beckworth’s Macro Musings podcast, they simply say that yes, the supply of Treasuries has grown enormously. But what’s overlooked is that demand for Treasuries has perhaps grown even more. Borrowers and lenders all around the world use U.S. Treasuries as collateral. Emerging market economies use Treasuries as a safe store of value. Central banks sometimes hold them to influence exchange rates. Big banks need to hold them to comply with post-2008/09 financial regulations. Pension funds hold some to mitigate risk. More recently, producers of blockchain-based stablecoins need Treasuries to anchor their assets to the U.S. dollar. The world, Andolfatto says, is “just screaming for U.S. Treasuries.”
- Treasuries: Andolfatto and Beckworth go on to discuss the possibility that maybe persistently low interest rates on Treasuries indicate a long period in which too few of them constrained the global economy’s ability to grow. Put another way, might economies have grown faster had the U.S. government borrowed more? Think in simple terms of Treasuries being a form of U.S. dollar money. If there’s not enough dollar money in the economy, then the money supply could be too low. And if the money supply is too low you get less economic activity than you should, based on available productive capacity.
- Treasuries: There’s something you also get less of when the money supply is insufficient to meet the needs of firms, households and governments: You get less inflation. And indeed, low inflation—putting aside the current spike in prices—has been a steady reality for decades now. Here’s Andolfatto again: “My interpretation of what economists have basically missed over the past ten or 15 years in terms of their predictions of hyperinflation, is that they look at the supply side—they see the money supply exploding, they see the supply of Treasuries exploding. And in the back of their minds, perhaps based on historical observations, they have in mind this stable demand for money, stable demand for Treasuries… But of course, economic theory doesn’t say demand for this stuff is stable.” He’s saying in other words, that as much as the supply of money has grown (with heavy U.S. borrowing and Fed stimulus measures), the demand for money has seemingly grown even more.
- Treasuries: So wait, does this mean the U.S. can keep on borrowing and borrowing with no limit? A free lunch? Modern Monetary Theory basically says yes, so long as there’s no clear evidence of inflation. Others sympathetic to the premise say that’s more or less true, but you can’t just wait for the inflation to happen or rely on Congress to cut spending in response; that would be too dangerous and risk destabilizing the economy. Nobody knows the precise global capacity to absorb all the Treasuries pumped out by Washington. Andolfatto does think we’ve reached the point where inflation is probably coming. Several prominent economists agree, some now urging the Fed to start rolling back its stimulus programs before the current wave of price spikes start shaping the economic decisions of households and firms. A related sentiment often heard in recent weeks is that the Fed needs to start tapering now, because waiting too long could leave it in a position of having to sharply raise rates if prices keep on rising. A sharp rate hike could prove a big problem for critical markets like housing and autos. It would also make Washington’s heavy borrowing more costly.
- Treasuries: If you’re wondering: Why spend so much time discussing the Treasury market, it’s simply because of how foundational it is to the entire global financial system. It’s kind of like the health care of the financial world—extremely large and influential but often ignored and misunderstood. Well, here’s an update from The Fed Guy, a blogger. The largest U.S. banks, he notes, (primarily JP Morgan, Bank of America, Wells Fargo and Citi) have optimized their safe-asset portfolios (as regulations require them to hold) by buying $350b worth of Treasuries in the past year, many of them with longer-dated maturities. “This marks a big shift in bank portfolio management since the crisis,” the Fed guy writes, “where [big banks] were not very interested in Treasuries.” Other investors with a need for safe assets (i.e., foreign governments and conservative retirement funds) might also be scrapping for slightly higher yields by buying long-dated Treasuries. And perhaps it’s this demand that’s kept Treasury rates from rising in the past year. But what happens if these Big Banks and others stop buying? Would that cause rates to spike? In September 2019, the Fed Guy remembers, banks ran out of money to deploy in the overnight repo market, and rates in that market suddenly spiked.
- Commodities: The IMF, designed after World War II as a lender of last resort to national governments, attributes the current spike in commodity prices to four factors: 1) a manufacturing-based recovery, 2) supply-side factors like the port congestion and temporary mine closures, 3) expectations for both a faster energy transition and heavy infrastructure spending, and 4) the fact that metals are able to be stored, which makes their prices more forward looking and sensitive to interest rate movements. The IMF did note that prices are up more for metals than energy because the energy-heavy transport sector remains depressed—longhaul international air travel is still largely dormant. Global road fuels consumption, the IMF adds, is still at just 93% of pre-pandemic levels.
- Research and Development: The U.S. Senate—with rare bipartisan support—passed a bill to spend $250b on research and development. As David Sanger of the New York Times points out, the current budget request for DARPA, which does R&D for the Pentagon, is a mere $3b (for more on DARPA see the Looking Back section below). Semiconductors are the biggest focus of the new legislation, which to be clear, still needs House approval before becoming law. Other areas of focus include artificial intelligence, autonomous vehicles, robotics, synthetic biology and quantum computing. Now as always, Americans are divided on how much to trust the U.S. government in economic affairs. In recent decades, Washington’s R&D spending has dropped as percentage of GDP, suppressed by wariness of politicians trying to pick winners. What’s galvanizing everyone behind the latest push is quite simply the growing threat of China and its own heavy R&D spending. China in recent years has adopted a decidedly aggressive and assertive foreign policy, triggering a backlash from not just the U.S. but countries ranging from Australia to Canada to India to the Philippines. China’s hostilities with the European Union are also running high. As it happens, there’s a loudening chorus of scholars and analysts that are starting to question China’s economic strengths, pointing to factors like limited natural resources (including water) and heavy debts. Luke Patey of the Danish Institute for International Studies is one such skeptic. His book “How China Loses” argues more countries including the U.S. are concluding that engagement with China comes at a steep cost to their competitiveness and national security. Not everyone of course agrees, pointing to American weakness like its divided politics. And some like Singapore’s Kishore Mahbubani and Harvard’s Graham Allison warn about the disastrous consequences of U.S.-China conflict. As Mahbubani ends his book “Has China Won?”: “If the U.S. and China keep on fighting while global warming is going on, future historians will see them as two tribes of apes fighting each other while the forests around them are burning.”
- Cybersecurity: A General Accounting Office (GAO) report highlights the unsurprising growth in demand for cyber-insurance, to offer financial protection in situations like the one that just afflicted Colonial Pipeline and JBS Foods. Between 2016 and 2019, the GAO notes, the costs of cyberattacks to U.S. insurers almost doubled. And during this same time, the number of cyber policies increased by about 60%. But with ransomware and other attacks becoming more sophisticated, more common and often state-sponsored, it’s becoming more challenging for insurers to properly price a policy. Recently, the GAO says, a number of insurers reduced coverage limits or increased premiums for higher-risk organizations and industries, such as academic institutions or the health care and public sectors. Another problem: cyberattacks have the potential to quickly escalate from one business to many businesses, which can translate into unpredictable losses. For example, in 2017, Russian hackers unleashed a cyberattack against Ukraine, which spread globally.
- Post Office: A separate GAO report looks at trends in the U.S. Post Office, which entered the pandemic with 14 straight years of financial losses. Package volumes did increase in 2020 thanks to more online ordering. But letter volumes continued to decline, even with election-year mail providing a boost. In the meantime, delivery times grew longer—especially in cities like New York, Detroit and Baltimore, and especially during the Christmas holiday season. One reason was reduced employee availability due to Covid. Another was reduced access to transport capacity with many airlines suspending flights. The GAO did say the Post Office managed to increase revenues last year. But costs rose even more due to overtime pay and Covid-related protective equipment and cleaning supplies. In addition, handling packages is more labor-intensive than handling letters. The Post Office is trying to cut costs in areas like transportation and labor, but changes to retiree health benefits—a big and burdensome expense—would require Congressional legislation. The Post Office did raise stamp prices this year. And it’s considered moving from a six- to five-day-a-week delivery schedule.
- Corporate Regulation: NYU’s Scott Galloway, on his “Prof G” podcast, points out that the U.S. Federal Trade Commission (FTC) employed about 1,100 people in 2019, down 37% from 1979. He sees it as a dangerous neglect of government oversight, especially at a time when tech giants are growing more profitable and powerful.
- Hampton Roads, Virginia: English settlers started coming more than 400 years ago. Today, nearly 2m people live in the Hampton Roads region of Virginia, making it the 38th largest metro in America. When it comes to U.S. national defense, however, and projecting U.S. military might abroad, few if any places nationwide have a greater importance than Hampton Roads. The number of active-duty military personnel currently stationed there is currently about 88,000. Naval Station Norfolk—the largest naval base in the world—alone has more than 47,000 active-duty personnel. Roughly 15% of the area’s residents are military veterans—that’s the twice the national average. Virginia Beach, specifically, is popular among military retirees. The broader metro including Norfolk and Newport News (and portions that dip into North Carolina) host no fewer than 15 military installations representing all five branches of the military. There’s Fort Story. There’s the Naval Air Station Oceana. There’s Langley Air Force Base. And there’s the area’s massive shipbuilding facilities, including the Norfolk Naval Shipyard and the Newport News Shipyard. The latter is operated by a private-sector company called Huntington Ingalls, the largest U.S. shipbuilder and one of the country’s largest recipients of federal contracts. It’s also the world’s only manufacturer of nuclear-powered aircraft carriers, not exactly a low-tech endeavor. There’s also the high-tech nuclear physics lab, plus a major NASA research facility. Yet Hampton Roads hasn’t evolved into a high-tech hub for private sector startups, like Silicon Valley famously did with help from funds flowing in from defense contracts. One reason is that the number of active military personnel is down by more than 20% from its peak in the early 2000s. In fact, during the 2010s, the metro area’s population grew a mere 3%. Hampton Roads also lacks an elite university, though Old Dominion makes important contributions. It probably doesn’t help economically that the Hampton Roads population is split across several cities, with Virginia’s capital Richmond also not far. Only 7% of the population is foreign born, compared 13% statewide and higher still in the D.C. suburbs. The bottom line: Military spending—and government more broadly—forms the nucleus of the economy. Government in fact accounts for a fifth of all jobs, similarly to the ratio in Washington D.C.—Atlanta’s figure, for example, is just 12%. The Port of Virginia, the third busiest on the east coast, is also government controlled (and currently booming). As for important private sector employers not associated with government contracting, Amazon sure enough announced several expansion projects in Hampton Roads last year. One will be a $200m robot-heavy fulfillment center slated to become the largest industrial building in Virginia. The retailer Dollar Tree is headquartered in Chesapeake. So are several food and beverage companies, including Smithfield Meats, one of the region’s largest employers. But Hampton Roads is also vulnerable to rising sea levels linked to climate change. According to the Rand Corporation, sea levels around Hampton Roads are one to two feet higher than they were a century ago, with floods now common in some coastal neighborhoods. Climate models, meanwhile, suggest the seas could rise by another 1.6 to 7.5 feet by the end of the century. In 2019, retired Rear Admiral Ann C. Phillips told Congress that “Virginia’s high military concentration is tied to the water by the very nature of its mission, and at risk from the threat of sea level rise and climate change impacts.” She also cited a 2008 OECD study that, ranked the Hampton Roads metropolitan area as the 10th most vulnerable in the world based on the value of assets at risk from rising sea levels. (The top nine were Miami, Greater New York, New Orleans, Osaka-Kobe, Tokyo, Amsterdam, Rotterdam, Nagoya and Tampa-St Petersburg). On a more uplifting note, Hampton Roads stands to win plenty of new military contracts as the Navy, for its part, looks to modernize its vessels. The Port will expand in 2024. And offshore wind power is a growth sector. Ultimately though, the real power of the area’s economy is America’s military power.
The Inflation Debate
- Is America in for a future of rising prices? Like many economists, Roger Bootle has an opinion. Speaking with Bloomberg, the founder of Capital Economics said globalization, the collapse of trade unions and the intensification of competition acted as something akin to “a reverse oil shock,” putting downward pressure on prices from the 1980s through the 2010s. But now, he sees the economy at a turning point. “If I had to put my money on a single factor that was going to push up costs in the years to come, I would say it was the environmental emphasis and in particular the drive towards net-zero. This is going to lead to a whole series of costs and price increases across the economy.” He sees pent-up demand following the Covid crisis as an inflationary force as well. But Bootle expects prices to rise more modestly like they did in the 1950s and 1960s, not the 1970s. “The 1970s were special,” he says, pointing to two oil price shocks, extremely loose fiscal and monetary policy, powerful trade unions, powerful corporations and a high rate of government ownership. In addition, the U.S. entered the 1970s with what was already a quite high base rate of inflation.
- He wasn’t weighing in on the current inflation debate per se. But Jonathan Levy, in his new book “Ages of American Capitalism,” infers something unique about the 1970s, a decade almost synonymous with high inflation. By that time, he writes, “many past longterm investments were beginning to rust,” referring to America’s many factories and infrastructure projects built in the industrial age. No longer were many of these assets adding to economic productivity, and thus no longer exerting downward pressure on prices.
- Cuba: Should the U.S. end its economic embargo against Cuba? That’s a question debated since the embargo was first imposed in the 1960s, when the island formed an alliance with the Soviet Union. After the Soviet regime collapsed in the early 1990s, Cuba experienced extreme economic deprivation. Tourism from Canada, Europe and elsewhere helped improve the situation in the 2000s. Venezuela would partly replace the Soviet Union as a key benefactor, providing Cuba with discounted oil. In 2014, the U.S. eased some aspects of the embargo. But it was retightened in 2017. In 2020, Covid badly hit the vibrant tourist sector. Will President Biden flip the policy back in favor of more engagement? It’s not a top administration priority. And Florida politics always comes into play. But there are some in Congress who want the embargo to end. Last month, three Senators introduced legislation that would eliminate the legal barriers to Americans doing business in Cuba, while keeping portions of the embargo that address human rights or property claims against the Cuban government. Not by coincidence, two of these three Senators are from big farm states, namely Amy Klobuchar of Minnesota and Jerry Moran of Kansas (the other was Patrick Leahy of Vermont). Before 1960, Cuba was the ninth-largest export market for U.S. agricultural products, according to the GAO. Last year, it was worth just $157m, almost all of that poultry shipments.
- Covid Vaccines: The American Affairs Journal looks back at Operation Warp Speed (OWS), America’s triumphant effort to create vaccines to stop Covid-19. The plan launched on May 15, 2020, aiming to “accelerate the testing, supply, development and distribution of safe and effective vaccines, therapeutics and diagnostics to counter Covid-19.” It was led by government agencies including the Department of Health and Human Services (HHS) and the Department of Defense (DOD), working with the private sector. The whole story, however, begins with DARPA, the DOD’s research and development arm created during the Cold War. DARPA would have its hand in the invention of drones, engine rockets, GPS, voice-recognition software, flat-panel displays, self-driving cars, stealth technology, personal computing and most famously, the internet. Now add one more to the list: mRNA vaccines. The organization helped fund preliminary research in the early 2010s, following breakthrough discoveries in 2005 by the scientists Katalin Karikó and Drew Weissman at the University of Pennsylvania (Kariko is the subject of a New York Times Daily podcast aired last week). Big pharma companies weren’t all that interested, given the unappealing economics of producing and selling vaccines. But in 2013, DARPA gave a $25m grant to a Boston-based biotech startup called Moderna Therapeutics—it’s not a coincidence that “Moderna” ends in the letters RNA. When Covid ambushed the U.S. in early 2020, the newly created OWS team, led by Moncief Slaoui, a veteran pharma executive, and General Gustave Perna, with experience overseeing the army’s complex supply chains. They selected three vaccine technologies to support, including the mRNA platform advanced by Moderna and Pfizer, the latter working with Europe’s BioNTech. The other two platforms were called replication-defective live-vector (supported by AstraZeneca and Johnson & Johnson) and recombinant-subunit-adjuvanted protein (Novavax and Sanofi/GSK). OWS would also help—financially and otherwise—with clinical trials, manufacturing capacity, mapping supply chains, sharing technology, implementing the Defense Production Act, project management, logistics and guaranteeing demand as governments pre-purchased vaccines for their citizens. Moderna, for its part, stunningly designed its vaccine in just two days, and produced an actual vaccine that could be tested on humans in just sixty-three days. The process typically takes years. Blake Smith, who authored the Journal article, sees the OWS model as a template for funding other technologies. He argues that capital-intensive ideas don’t scale well in the U.S., in part because of overreliance on the market—“OWS didn’t have to focus on share price or short-term financial objectives; its funding came from the Covid-related CARES Act.” The only technologies that tend to scale well in the U.S., he adds, involve software. Manufacturing tech, by contrast, tends to blossom outside the U.S. Writes Smith: “OWS is a case study of how to tie together America’s fragmented innovation system and scale up technological breakthroughs that would otherwise languish, as mRNA vaccine technologies were before the pandemic. It shows how the United States can bring to market disruptive, radical technologies that leapfrog existing manufacturing processes. OWS takes away R&D and regulatory risk, and adds in financing, government assistance in tech transfer for manufacturing, support for a robust domestic supply chain and guaranteed demand.”
- Gilded Age Banking Crises: The St. Louis Fed’s history website looks at the period between the passage of the National Banking Acts in 1863-64 and the formation of the Federal Reserve in 1913. “In this period,” it writes, “the U.S. monetary and banking system expanded swiftly and seemed set on solid foundations but was repeatedly beset by banking crises.” Some of these crises affected specific regions, most importantly around New York City, then and now the nation’s financial center. But three big ones were national in scope, namely the Panics of 1873, 1893 and 1907. The first of these (1873) happened because of railroad overinvestment. The trigger was a stock market crash in Austria, which prompted European investors to dump their U.S. railroad bonds. In a depressed bond market, railroads found it difficult to pay for operations, pay for capital projects and pay off debts. Things really got panicky when the esteemed Jay Cooke bank—heavily invested in railroads—collapsed. Other bank failures followed. On September 20, for the first time in its history, the New York Stock Exchange closed. From 1873 all the way to 1879, the U.S. experienced what was known then as the Great Depression. Next came an even more severe depression triggered by the Panic of 1893. This one started when the Treasury’s gold reserves dropped, shrinking the supply of dollars (whose value was then tied to gold). At the same time, a slowing economy caused many companies to default on their loans, weakening the banking system and eliciting public concerns about the safety of their bank deposits. People hoarded gold and withdrew their money from banks. For more on the Panic of 1907, which led Congress to create the Federal Reserve System, see Econ Weekly’s March 22nd
- Space Exploration: There’s a lot of excitement in the space economy. Jeff Bezos said he’ll travel to space with his company Blue Origin. Elon Musk is busy leading advancements at Space X, including a plan to offer satellite internet. But don’t forget about NASA, the U.S. government’s space agency based in Houston. It’s planning another moon landing for 2024, which would be its first since 1972. The timetable is perhaps ambitious. But in any case, NASA wants to create a continuous human presence on the moon to facilitate exploration of Mars. Elon Musk, remember, wants to colonize Mars so that humans have a place to go if earth proves uninhabitable.
- Batteries: With electric vehicles taking center stage, batteries will become a big part of America’s economic future, much like gas-powered cars made oil vital to the country’s present. But what kind of batteries? The dominant technology today is the lithium-ion battery. But there’s hope they’ll be replaced by solid state batteries, which have the potential to be safer, lighter, cleaner, longer lasting, quicker to charge and higher in energy density. “The technology is there,” said Michael Kultgen of Analog Devices, speaking on a webinar hosted by the Semiconductor Industry of America last week. The challenge, he explains, is learning how to produce such batteries at scale to be cost productive. That could start as early as 2023, Kultgen said. Toyota and Samsung are two automakers whose researchers have made advances in solid state batteries. Several independent companies, including Volkswagen-backed QantumScape, have made advancements as well.