Inside this Issue:
- Chip Off the Old Blockchain: Crypto Assets Plummet
- Teaming for Streaming: AT&T to combine Time Warner with Discovery
- Economies of Rail: KC Southern to Wed Canadian National, Not Canadian Pacific
- Big Box Bonanza: Sales Still Spiking for Nation’s Largest In-Store Retailers
- King Copper: How the Green Transition Benefits the Red Metal
- Ford Willing: America’s Best-Selling Vehicle Now More Ecological
- Hints of a Halt: Some in the Fed Appear Geared Up to Wind Down
- Dynamic Dining: Clear Signs of a Restaurant Comeback
- Prisoner Dilemma: Are Private Jails Epic Fails?
- Strain on the Chain: John Deere, the Tractor Maker, Facing Auto Sector-like Supply Chain Pain
- Quantum of the Opera: Google Claims Progress on Next-Gen Computing
- Property Perils: A Future Squeeze from Rising Seas?
- And This Week’s Featured Place: Wichita, Building Planes on the Kansas Great Plains
Quote of the Week
“In a quarter, featuring many things to celebrate, I’m most proud of the performance of our stores. With vaccinations rolling out across the country and consumers increasingly comfortable venturing out, we’ve seen an enthusiastic return in in-store shopping.”
-Target CEO Brian Cornell
Bookkeeping without bookkeepers. That’s crypto’s superpower. A computer program, rather than a bank or some other third party, can now keep track of who owns what, in a way people can trust. A world-changing invention? Maybe. Maybe not. It’s a question for the future. In the present, the nascent cryptoeconomy looks less like a disruptive technology than a financial casino. Last week, the value of crypto assets sank like a stone, torpedoed by threats (from China’s government) and Tweets (from Elon Musk). Bitcoin, the first and still most widely owned crypto asset, fell to around $30,000 at one point during the week. Just a month earlier, it was worth more than double that.
No worries yet that the crypto wipeout heralds systemic financial damage. No comparisons yet to the dot-com bubble. Do keep in mind though: The value of these crypto assets, even after last week’s tumble, is now measured in the trillions, with much of that borrowed.
Non-crypto assets in the digital world, by the way, are having their own difficulties this spring, after spectacular gains in 2020. It’s true more generally of stocks promising future revenue growth. In the winner’s circle now: Many old-world stocks heavy on physical assets. Travel and oil stocks too, have gone from chumps to champs.
AT&T is no champ when it comes to the streaming wars. So it’s retreating, to concentrate on its cable and cellular activities. Its strategic shift, however, gives birth to a newly combined Time Warner and Discovery, hoping to challenge Netflix and Disney. Also combining are two railroads: Kansas City Southern and Canadian National, the latter besting an offer from rival Canadian Pacific. Railroads, sure enough, are one of those old-world businesses currently thriving.
So are U.S. automakers, semicon frustrations notwithstanding. Ford, for its part, is making waves with the introduction of an electric F-150 pickup truck—President Biden, visiting Ford in Michigan, took it for a spin. This marks a major milestone in the shift to a green economy—the F-150 has long been America’s best-selling vehicle. Ford will have more to say in a much-anticipated investor event this week. Separately regarding the Great Green Shift, the International Energy Agency said it’s time to end all new investments in fossil fuel projects. Now.
What are people now saying about inflation? It remains the hottest debate among economists. You know the arguments: Some fear the current spike in prices is dangerous. Others say worry not, it’s just transitory. Count the Fed in the latter group, hence no rush to start tapering its expansionary bond buying. The transcript of a late-April Fed meeting, however, did reveal a sentiment among some Fed members that perhaps, the time to taper is near. Canada’s Central Bank, for the record, already announced a reduction in the pace of its asset purchases, while bringing forward its forecast of when it might increase interest rates. Will the Fed say something more at its annual Jackson Hole symposium in August?
In the meantime, interest rates on Treasury bonds are holding still, bolstering the argument of inflation skeptics. Temporary supply shortages, they add, are what’s mostly responsible for today’s rising prices, not a dangerous jump in spending velocity. In fact, the commodity price spike showed signs of easing last week. Lumber futures plummeted. Oil fell as well. The big area to watch is labor, and whether more people are returning to the workforce in May—the Labor Department will publish those figures on June 4th. One thing to note about those disappointing April numbers: fewer than a quarter of Americans were fully vaccinated even as late as mid-April. The current figure is around 40%, implying fewer people shunning work due to health concerns. More schools have reopened since April as well. Of course, an opposing viewpoint might be right: That plump unemployment checks are the more important reason workers aren’t taking jobs.
In Washington, President Biden’s infrastructure proposals remain stuck in the Senate, with sides still far apart and a single Democratic Senator from West Virginia (Joe Manchin) holding outsized leverage. To placate critics, Biden agreed to reduce his spending plan from $2.3 trillion to $1.7 trillion. But that’s still a long way from the $568 billion offered by Senate Republicans. As for the $1.9 trillion stimulus that passed without any Republican support in March, the disbursement of money is well underway. In July, the IRS will start distributing monthly payments to some 40m households with children, a lynchpin program of the stimulus bill.
Look who’s trying again to tame the health care dragon: JP Morgan, nevermind its failure to make headway alongside Amazon and Berkshire Hathaway. The goal of a new initiative is to improve employer-sponsored health care, which nearly half of the U.S. population receives. Rival Bank of America, meanwhile, became the latest U.S. company to raise minimum wages—to $25 an hour by 2025.
Q1 earnings season is nearing its end, but not before a few big names take the stage this week. Costco, Best Buy and Dollar General will have more to say on retail trends. Nvidia might say more about its pending takeover or ARM. Salesforce might say more about its takeover of Slack.
Final thought: It’s starting to feel normal again in much of America. People are traveling again. More companies are reopening their offices. Schools are mostly reopened. The restaurants are full. The masks are coming off. The Covid crisis, of course, will be remembered mostly with grief. But a silver lining was the unexpected resilience of the economy, buttressed by heavy government support. Most of America’s most important industries did extremely well in 2020, counterintuitive though it sounds. So far, that strength continues into 2021, but with the inflation question burning. Distress, furthermore, still clouds lower-income tiers of the labor market. We’ll see soon what the May data reveals.
- AT&T: The idea seemed logical enough. AT&T owned the cables and signals that delivered the content. Why not own the content too? Comcast, after all, a competitor in the cable business, owned NBC. Verizon, a competitor in the cell phone business, had just purchased Yahoo and AOL. So AT&T, in 2018, paid $85b for Time Warner, a media giant with brands like CNN and HBO. This followed a nearly $50b deal to buy DirecTV, which delivered content via satellite. The result: AT&T became the most indebted non-financial company in America—it entered 2021 with $157b in debt. But with a catalog of great content, plus a grip on the means to distribute that content, it commanded a formidable strategic position. Or did it? Alas, AT&T decided that no, its acquisition strategy was a mistake. In February, it announced the spinoff of DirectTV into a new entity. And last week, it said it would merge Time Warner with Discovery, a New York media firm known for reality-based cable channels like HGTV, Animal Planet and the Food Network. For both AT&T and Discovery, a central problem is their un-competitiveness in the streaming war. It’s a war that Netflix is winning, with Disney running strong (now armed with full control of Hulu) and Amazon an eager player—it’s now reportedly bidding for MGM, owner of the James Bond franchise. Viacom wants in too with its new Paramount Plus (SpongeBob SquarePants, anyone?). AT&T does have HBO MAX, popular for sure but no Disney, let alone Netflix, in terms of subscribers. Discovery has its own brand new streaming service. So does Comcast for that matter, with its still-undersized Peacock service. One can see why consolidation would beckon. To be sure, media firms—and their investors—like the direct access to consumers and their data that streaming services provide. On the other hand, by most accounts, it’s not yet a profitable activity for anyone but Netflix (the latter’s operating margin last year was a robust 18%, thanks to more than 200m worldwide subscribers). The newly enlarged Discovery-Warner will strive to replicate some of that success, in the meantime stocked with revenues from traditional sources like advertising and the fees cable networks pay to carry its programs. As Americans cut the cord and dump cable though, these revenues are under threat, hence the eagerness to build viable streaming brands. As for AT&T, based in Dallas-Fort Worth, it’s getting a lot less for Time Warner than what it paid just three years ago. But the deal also absolves it of $43b in debt, a big relief after spending $23b on the spectrum it needs to compete with Verizon and T-Mobile in 5G cell service. That, along with its fiber cable business, will now be the focus of AT&T’s attention.
- Walmart: America’s largest company isn’t based in New York City. It’s not in Los Angeles. Or Chicago. Not San Francisco. Not Seattle. Not Dallas-Fort Worth. It’s in Northwest Arkansas. We’re talking, of course, about Walmart, which built its global retail empire by—among other things—mastering the arts of distribution. Today, it’s no longer quite so criticized and feared. It faces, after all, a major threat from Amazon (see Amazon vs. Walmart debate in Econ Weekly’s March 29th issue). But worry not for Walmart. After an extremely strong 2020, turbocharged by pandemic spending on food and home goods, the company slam dunked again in the early months of 2021. To be clear, mass retail is a low-margin business—Walmart’s operating margin for the quarter covering February, March and April was just 5%. But 5% of $138b is $7b, hardly chump change. More to the point, Walmart saw strong demand for most of its products, boosted in the U.S. by stimulus checks. In fact, it’s now expecting U.S. margins for the full fiscal year to be better than originally forecasted. Sales are also growing in key international markets like Mexico, Canada and China. To compete with Amazon, Walmart is adopting some of its tactics. It’s rapidly growing online sales. It’s allowing other retailers to sell on its mobile app and website and offering to deliver their orders as well. It’s also selling ads on its app and website. It’s gleaning data from its app and website. In addition, Walmart has a new loyalty plan roughly comparable to Amazon Prime, though it’s not a top priority for management right now. More pressing is a push into the health care and finance sectors. Walmart, meanwhile, is a major provider of Covid vaccines at its in-store pharmacies. It’s separately committing to purchase more U.S.-manufactured goods to ease dependence on China. That’s a topical matter as international supply chains face severe bottlenecks—Walmart says it’s having some inventory issues with products like bicycles and electronic goods; “We’re monitoring things like delays at the ports and other factors in the supply chain,” the company said in its earnings call. E-commerce sales, by the way, now account for 12% of Walmart’s global sales. And the company happens to be America’s largest importer (Target is number two).
- Macy’s: Walmart was just one of many retailers to report earnings last week, and the general sentiment was one of strong demand with few if any signs of losing steam. Macy’s, based in New York City, said—interestingly—that luggage sales are reviving. That’s a clear sign that Americans are traveling again. Executives also spoke of recovering demand for children’s clothing as schools reopen, and for clothing worn on special occasions. Luxury items at its Bloomingdales stores are also selling well. So is furniture. The company also mentioned that more people are buying items with cash rather than credit. There is one area of weakness though: The demand it used to get from foreign tourists shopping at its stores, notably its flagship store in midtown Manhattan. Macy’s, unsurprisingly, is also having issues filling open jobs, and separate issues getting inventory due to strained supply chains. As an aside, Stephanie Wissink of Jefferies sees three distinguishing characteristics of the retailers poised to thrive post-pandemic. Winners, she told Bloomberg News, 1) used the pandemic to accelerate their omnichannel initiatives, 2) upgraded their merchandise offerings to emphasize the categories where they’re strong and 3) improved their engagement with consumers, personalizing their experience and capturing their data.
- John Deere: Just 165 miles west of Chicago lies Moline, Illinois, home to John Deere, a name familiar to every farmer. It’s a nearly 200-year-old producer of tractors and other farm equipment, along with construction and forestry equipment. Like an auto manufacturer, it sells many of its products through a dealer network. It also has an in-house financing unit. Tractors too are starting to go electric and autonomous. But the similarities with automakers don’t stop there. John Deere faces supply chain strains familiar to the auto sector, with semicon shortages a “significant risk” for the remainder of this year. Materials and logistics inflation is another headache. Covid still poses a production challenge in overseas markets like India. Tight labor markets are delaying production ramp ups too. Nevertheless, with the U.S. agricultural sector prospering in 2020 thanks to greater government support—and prospering again this year as ag prices rise—John Deere’s revenues are way up. They rose 30% y/y last quarter, leading to a $1.8b net profit. And increase in demand from China is boosting farmer incomes as well. In addition, more Americans moved to the countryside and engaged in hobby farming during the pandemic, driving up demand for ride-on mowers and other such equipment.
Tweet of the Week
- Restaurants: The National Restaurant Association, citing Census data, said U.S. eating and drinking establishments registered $65b in sales during the month of April. This was up 3% from March, happily diverging from a weak April retail sales trend nationwide. In fact, the only other category to show solid growth last month was auto sales. The Association did mention the fading impact of stimulus checks as a potential drag going forward. But this should, it added, be offset by the fact that “households on the aggregate are flush with excess savings accumulated during the pandemic.” It’s encouraged by strengthening labor markets too, and firm economic fundamentals for consumers more generally. How long before restaurants and bars reach pre-pandemic levels of business? The April sales figure was only about 2% below the February 2020 sum.
- Private Prisons: About 8% of all U.S. prison inmates are held in facilities run by private-sector companies rather than governments—this according to University of Wisconsin-Madison economist Anita Mukherjee in a paper published by the American Economic Journal. Her research on the prison population of Mississippi revealed that these private prisons tend to hold inmates longer on average, raising the specter of misaligned incentives. On the other hand, there was no evidence that people released from private prisons reoffend at a higher rate. As it happens, a full quarter of Mississippi’s prisoners, far above the 8% national average, are held in private prisons. What accounts for the longer sentences? Mukherjee says inmates in private prisons receive nearly double the number of infractions, which leads to their delayed release. And this could be linked to the fact that guards in private prisons earn a lot less than their public sector counterparts, leading to more turnover and inexperience. The U.S. began contracting out prison work to the private sector in 1984, hoping to lower costs. Today, three private companies—CoreCivic, GEO Group, and Management and Training Corporation—account for about 85% of the market. GEO, for its part, mentioned some challenges in its latest earnings call, including a presidential executive order directing the Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities. Two DOJ agencies, the Federal Bureau of Prisons and the U.S. Marshals Service, currently utilize GEO’s services.
- Travel: An article by Ben Baldanza, who formerly ran Spirit Airlines, highlights a potential risk for travel companies as they emerge from the pandemic. There’s no doubting the desire to take a vacation. But inflation in the travel space could price people out of the market. Rental car prices, most importantly, are soaring. But airfares and accommodation costs are rising too. Note also that oil prices are on the rise, which usually adds further upward pressure to airfares as airlines try to recover the higher cost.
- Housing: The Wall Street Journal profiles an intriguing startup company owned by Warren Buffett’s Berkshire Hathaway. MiTek Inc., based in Missouri, is trying to introduce efficiencies to the construction sector, building entire rooms for hotels and apartment buildings in factories, before sending them to a construction site to be stacked on top of each other. The jury’s still out on the concept, however. Several other startups have tried and failed to re-conceptualize how buildings are constructed. The sector thus remains plagued with lowish productivity.
- Autos: Here’s another obstacle to the advent of autonomous vehicles: The Teamsters union and the AFL-CIO, reports Autoline Daily, are concerned that AVs could eliminate thousands of truck driver jobs. They want Congress to mandate that all commercial trucks must have a driver onboard. The report mentions another group worried about the impact of AVs on their livelihoods: Trial lawyers, which earn much of their income from traffic accidents.
- Treasuries: A recent National Review article by George Mason’s David Beckworth provides an explanation for the resilience of demand for U.S. Treasury debt. U.S. debt has gone from $5 trillion before the 2008 crisis to $21 trillion currently. Yet people mysteriously continue to lend money to Uncle Sam at extremely low rates. And inflation, which many predicted would accompany the steep rise in borrowing, never came. Beckworth asks: “Why are they not abandoning Treasuries or the dollar in general? Are investors not worried that the U.S. government may cheat on them by monetizing some of the growing national debt?” Quite simply, he argues, there’s just no substitute for Treasury securities and dollar assets more generally. Why not? Because the world needs safe and liquid assets, and the U.S. government is by far the world’s largest provider of such assets. Foreigners essentially treat the U.S. financial system like a bank. They want to hold U.S. assets, especially government insured assets like Treasuries and bank deposits. They’re also eager to hold relatively safe U.S. assets like repo, commercial paper and money market funds. As of 2020, Beckworth writes, these safe and liquid assets issued to the rest of the world totaled about $20 trillion. This doesn’t include another $12 trillion of dollar-denominated assets issued outside the U.S. by non-U.S. entities (the so-called Eurodollar market). Using the metaphor of a romance, he writes: “This means that if investors wanted to break up with the global dollar system, there would be nowhere else to go to meet all their relationship needs.” It becomes even more true during times of crisis when demand for safe assets soars. And of course, the more people that hold dollars, the more its importance becomes given network effects. “This is not to say a breakup is impossible, but it does suggest that ending investors’ affinity for the global dollar system would probably require something drastic like the United States coming apart. Since such an outcome is highly unlikely, it is equally improbable that there will be a sustained surge in inflation.” (NOTE: Box at right shows the U.S. dollar’s value falling against most major currencies in the past year).
U.S. Debt Grew by $4.2 trillion last year and is now approaching $30 trillion in total. The Good News: interest rates (borrowing costs) are extremely low.
The Blue bars show new borrowing each year
The Orange bars show how much old debt was paid off each year
The figure above the bars is the difference, which you can see grew a lot last year
- Copper: It’s a bit of a cliché: “Data is the new oil.” “Semiconductors are the new oil.” But you see the point—certain things are becoming systemically important to the proper functioning of the U.S. economy. Here’s another: “Copper is the new oil.” So says Nick Snowdon of Goldman Sachs. His point is that copper will be essential to building the green economy, given its usefulness in building wind turbines, solar installations and electric vehicles. It just happens to be a highly cost-effective metal for capturing, storing and transporting electricity. As Snowdon points out, China was a huge consumer of copper as its economy surged in the past few decades. But going forward, North America and Europe will no less important sources of demand growth. And supply? Expect constraints, due to the absence of investment. Snowdon says there have been no new copper mining projects approved in the past 18 months, owing to environmental concerns, Covid constraints and a hesitance by mining companies burned by recent price plunges.
- Stocks: On his “Prof G” podcast, Scott Galloway cites Goldman Sachs data showing that since the start of 2021, U.S. companies have bought back a record $504b of their own stock. Why? One reason is that they’re sitting on so much cash. At the end of 2020, cash holdings for all S&P 500 companies reached nearly $2 trillion, up roughly 25% from the year prior. Shareholders like buybacks because the extra demand usually makes the stock more valuable. But critics worry that every dollar companies spend on buybacks is a dollar they’re not spending on longterm investment. And it’s longterm investment that makes an economy more productive and wealthier over time.
- Labor: Which states have the most semiconductor jobs? According to Oxford Economics, presenting at an online event hosted by the Semiconductor Industry Association last week, ranked California as number one with 63,000 jobs in the sector. Next on the list were Texas, Oregon, Arizona, Florida and Idaho.
- Corporate Taxes: Officials from the U.S. Treasury spent last week trying to convince other governments to adopt a global minimum tax rate for corporations. It wants the rate to be at least 15% but ideally even higher. The goal is to stop what some call a race to the bottom, where multinational companies move their money to countries with the lowest taxes. Ireland is often cited as an example of a nation that uses low taxes to lure companies.
- Municipal Debt: A Wall Street Journal report, citing Municipal Market Analytics, says investors have poured a net $39b into municipal-bond mutual funds this year. That’s the most over the same period since 2008. This is good news for state and local governments, which sell municipal bonds to pay for things like sewers and bridges. State and local government finances, indeed, are in much better shape than anyone expected a year ago, thanks to this strong muni bond market, along with federal aid and rising tax receipts from strong retail sales and soaring stock and real estate prices. “We have money raining out of the sky,” Ben Watkins tells the Journal; he’s Florida’s director of bond finance. “We’re in a much better position now than if Covid hadn’t hit at all.” Illinois by the way, with notoriously messy finances, was the only state to make use of an emergency municipal loan program offered by the Fed last year.
- Wichita, Kansas: To understand the economy of Wichita, it helps to look down. Below the surface, in the city’s outskirts, lies oil. But to really understand what makes the city tick today, look up. If you see an airplane, chances are, big parts of it were manufactured in Wichita. The area’s largest employer, in fact, is Spirit AeroSystems, once part of Boeing and still the producer of its B737 fuselages. It’s joined by other aerospace companies like Textron Aviation, which builds private planes. Canada’s Bombardier has a major Wichita presence. So does GE Aerospace and Europe’s Airbus. Manufacturing, as a result, accounts for nearly 16% of all Wichita jobs, according to Census data; that’s barely less than the percentage tied to health care and education. McConnell Air Force Base further amplifies Wichita’s aviation credentials. So does Wichita State University’s National Institute for Aviation Research (NIAR), a big recipient of federal funding. Dr. Eric Mota, an entrepreneurship professor at Wichita State’s Barton School of Business, highlights the city’s outsized share of the Defense Department’s budget, especially for aviation related maintenance, repair and overhaul. Mota, also a research fellow with the university’s Institute for the Study of Economic Growth, adds that Wichita’s aerospace prowess is now enabling a move into specialized manufacturing for other highly regulated industries, including energy and pharmaceuticals. His colleague Ted Bolema, the executive director of the Institute, names some other big employers in the city, including the energy-focused conglomerate Koch Industries, often in the news for its political activities. Cargill, a giant in the agricultural sector, has a big Wichita presence. As in so many other places across America, Amazon will soon open a new Wichita distribution center. Also like other U.S. areas, the local hospital and school districts are leading employers. Earlier this month, two Wichita-based banks—Equity Bank and American State Bank—announced a merger. Naturally, they’ll count the area’s aerospace firms among their biggest customers. But that, make no mistake, isn’t a good thing right now. “The credit that we were most worried about,” Equity Bank told investors last fall, “is aerospace.” Even as pandemic-slammed sectors like tourism and leisure start to rebound, aerospace remains depressed, posing a major challenge to Wichita’s economy. The sector was already reeling pre-pandemic after Boeing was forced to ground its best-selling B737 MAX planes in early 2019 after two fatal accidents. Wichita’s unemployment today does remain below the national average at about 5%. But that masks major job losses in aerospace. Bolema points out that the market for business and private jets is starting to show signs of recovery. The oil and gas sector has improved a lot since the early days of Covid. But several longterm challenges remain. One is keeping and attracting skilled workers. The Wichita metro area saw its population grow less than 3% for the entire 2010s, finishing the decade with just 640,000 people. That ranks it 95th among all U.S. metros, sandwiched between Toledo, Ohio, and Augusta, Georgia. With so few people, the largest city in Kansas simply doesn’t have the downtown living, the cultural amenities, the major league sports teams and so on to attract and retain large numbers of young engineers and other skilled workers. Many choose cities like Denver or Seattle instead. Another issue is the city’s limited airline connectivity. Still another is its relative isolation—the nearest major population center is Oklahoma City, about 160 miles away. Kansas City is some 200 miles away, Dallas and Denver much farther still. Of course, affordable housing is a plus. And vigorous local efforts are underway to advance what Mota calls the “tripod” of economic development: investment, tourism and talent, perhaps aided by new trends in remote working. Wichita, to be sure, has come a long way from its origins as a cowboy cattle town in the 1870s. Oil gave it the means to seed what’s become a world-class hub for aerospace. It’s a status many cities envy. But dependence on aerospace means Wichita is subject to the industry’s periodic busts, none more painful than the current one.
- Taiwan: The current semiconductor shortage shines a spotlight on the importance of Taiwan to the U.S. economy. But it’s not just semiconductors. Taiwan’s Hon Hai, better known as Foxconn, is a critical manufacturing supplier for America’s most valuable company Apple—the two firms rose and prospered together in the 2000s. Foxconn, using low-cost labor at factories in mainland China, builds electronics for other U.S. customers too, and its big move now is into the auto sector. It wants to build electric vehicles for global car companies just like it builds iPhones and iPads for Apple. Last week, Stellantis, the Amsterdam-based company that now owns Detroit’s Chrysler, announced a deal to create a new joint venture with Foxconn. The new company called Mobile Drive will develop in-car connectivity solutions for Stellantis and rival automakers as well. The industry’s biggest megatrend, of course, is the shift from ICE to electric. But not far behind is the emphasis on connectivity, using software to turn cars into computers on wheels. This will in theory create opportunities for new revenue streams and more driver amenities. Note also, by the way, that China’s Huawei, the telecom company at the center of U.S.-China tensions, is likewise entering the auto space, providing services for local car manufacturers.
Who Sells and Buys What From Where?
A look at the top exports and imports for selected countries (source: OEC)
- Brazil: Reuters profiles the Brazilian misfortunes of the U.S. automaker Ford. The company, it reports, lost nearly $12b there during the past decade, prompting a January announcement to stop producing cars in the country. That’s bad news for some 5,000 workers and 300 dealerships. But Ford simply couldn’t stomach any more red ink, having lost about $2,000 on every Brazilian-built car it sold. Part of its difficulties stemmed from the country’s high taxes, costly labor and complicated logistics. Other car companies, Reuters writes, have also suffered big losses in Brazil, including GM, Toyota and Volkswagen. In the first decade of the 2000s, and well into the early 2010s, Brazil’s economy showed great promise. But its performance was closely linked to a commodity boom that crashed in late 2014. That triggered a deep recession, followed last year by the Covid pandemic, which killed almost half a million Brazilians (only the U.S. had a higher death count). The country, to be sure, remains a global powerhouse when it comes to commodities. Soybeans are its largest export, but also important are oil, iron ore, sugar and meats. On the other hand, Brazil is disadvantaged by its geography—its coastal population centers are just really far from even its South American neighbors, let alone major world markets like the U.S., Europe and East Asia.
- The Gilded Age: Professor Edward T. O’Donnell covers a large sweep of U.S. history in his Great Courses lecture on “America in the Gilded Age and Progressive Era.” The first part covers the years from roughly 1865 (right after the Civil War) to 1900. It was a period characterized by a major industrial boom in northern states, severe economic deprivation in southern states and a west radically transformed by four industries: farming, mining, ranching and railroads. Also luring people west: The federal Homestead Act granting free land to settlers. Soldiers went west as well, to fight in the Indian Wars. The era saw development of America’s first truly big businesses, most importantly the railroads. They introduced the first modern forms of management and financing. They were big buyers of all the steel, wood and coal that U.S. firms were producing. They were vital to moving goods, including agricultural goods. And railroad junctions turned into big cities like Chicago and Atlanta. The second half of the 1800s also gave birth to the oil and steel industries, dominated by Rockefeller and Carnegie, respectively. The first department stores and mail order firms began appearing. There were more consumer goods to sell. U.S. companies began exporting manufactured goods like sewing machines, further contributing to the shift away from a farm-dominated economy. Abroad, some countries like Japan were rapidly industrializing but with few natural resources. Others like Russia were rich in natural resources but slow to industrialize. The U.S., by contrast, was resource rich and The federal government, meanwhile, largely served corporate interests during the Gilded Age. It protected firms with import tariffs, It allowed mass immigration to ensure cheap labor. It readily deployed the army to suppress labor strikes. It granted free land and tax breaks to railroads. Sure enough, government power was so subservient to corporate power that today, it’s the era’s corporate leaders we remember (Vanderbilt, Rockefeller, Carnegie, JP Morgan), not the era’s presidents (Hayes, Garfield, Arthur, Cleveland, Harrison, McKinley). The best-known president of the era? Civil War hero U.S. Grant, who presided over multiple corruption scandals involving—sure enough—corporations appropriating government power to steal money. The Pennsylvania railroad’s chief lobbyist, O’Donnell recounts, was known as the state’s 51st senator. In New York state, the Vanderbilt and Gould railroad empires competed for influence in the legislature. Such corruption on a grand scale angered many Americans. So did the rise of ultra-wealthy “robber barons” who seemed to care little for their workers, many of whom were just children. Labor tensions escalated. There were few government controls on companies selling fake medicines. In growing cities, crime, poverty and disease were rife. Railroads gouged western farmers. Mining companies despoiled the environment. And with no effective government constraints on collusion, companies formed pools—and later legally-sanctioned trusts—to limit competition and fix prices. They also consolidated: In 1870, there were 808 U.S. steel producers. By 1900, there was just 70. Overall in 1900, just 1% of the nation’s corporations controlled 30% of its manufacturing. The figure would rise to 44% ten years later. To be clear, the Gilded Age was a time of immense economic growth and innovation. But Americans eventually grew impatient with the ugly side effects. The author Henry George would ask: “How do we preserve the dynamism and creativity and wealth creation associated with modern capitalism while at the same time avoiding its tendency to produce inequality and exploitation that threaten the health and the future of the American republic?”
- The Progressive Era: George’s question frames the second portion of O’Donnell’s lecture, covering the first two decades of the twentieth century. Its early years were dominated by a highly memorable president, Theodore Roosevelt, who reinvigorated federal power as a check on corporate power. At this point, public opinion was galvanized by decades of abuses, along with journalistic efforts like Ida Tarbell’s scathing critique of Rockefeller’s oil trust. Also driving change: Growing female empowerment, labor union efforts, farmer frustrations, immigrant activism and early advances in the Black civil rights movement. From 1880 to 1900, O’Donnell says, the U.S. saw no fewer than 37,000 labor strikes. The most prominent was the Pullman railroad strike of 1894, which President Cleveland suppressed with the military. Just eight years later, during a major coal strike, Roosevelt refrained from using the military, instead negotiating a compromise at the White House. His administration would also undertake the first successful federal prosecution of a large interstate corporation, namely the Northern Securities railroad trust. Roosevelt and his successor William H. Taft would also go after Rockefeller’s Standard Oil trust, along with trusts in meatpacking, steel and tobacco. And then there was banking. JP Morgan at the time—just by himself—controlled some 40% of the nation’s financial and industrial capital, leading to a “Money Trust” Congressional investigation in 1912. This in turn led to the Federal Reserve System, designed to end a pattern of repeated economic and financial panics (1837 1857, 1873 1893 and 1907). With President Woodrow Wilson came a shift away from import tariffs as the primary means of funding the federal government—income taxes would now take precedence. Economic policies then changed dramatically in Wilson’s second term, when the U.S. entered World War I. To support the war effort, Washington would take control of many key sectors while rationing use of key products like steel. The government also became a huge buyer of U.S. goods, and as such was able to mandate progressive policies that companies needed to follow if they wanted the business. These included union-friendly rules and bans on child labor.
- Future productivity: It’s the “key metric of how a civilization is doing.” A bold thing to say about the economic principle of productivity. But Eli Dourado of Utah State University has a point. Productivity gains, after all, are what makes a society richer over time. Dourado, speaking on the podcast “Invest Like the Best,” was referring specifically to total factor productivity (TFP), often a synonym for technology; it also covers some difficult to measure concepts like the strength of governing institutions. Combine TFP with labor and capital, and companies have the potential to produce more with less. And that’s what they did—to a remarkable degree—for much of the twentieth century. From 1920 to the early 1970s, TFP grew about 2% a year. But as Dourado explains, the rate slipped to less than 1% a year through much of the 1970s and 1980s. The pace picked back up from about 1995 to 2005. And then it “fell off a cliff.” More recently, TPF growth has been a mere 0.3%. Advances in information technology have surely helped. But TFP in other crucial sectors has lagged—think housing, health care and education, all huge parts of the economy. The economist Robert Gordon, for one, thinks the new technologies of the past few decades were simply less revolutionary than the incredibly transformative developments of earlier years—airplanes, electricity, the internal combustion engine, indoor plumbing, etc. Tyler Cowen points to a diminished emphasis on growth in favor of preserving and protecting things like neighborhoods and the environment. Dourado mentions the 1960 NEPA law, which was a federal regulation subjecting new building projects to an environmental impact study which typically takes about five years. An often-used metaphor for the slowdown in TFP: today’s commercial airplanes, who are flying at speeds achieved in the 1950s, never mind the advent of supersonic planes in the 1960s. So what’s next? Will TFP in the 2020s revive its mid-twentieth century vigor? Dourado is hopeful. For starters, mRNA technology, plus artificial intelligence, could bring productivity to the health care sector, perhaps shrinking its percentage of total GDP (currently approaching 20%). Energy is another area he’s watching, because any improvements in energy productivity tends to ripple through the whole economy. Solar and wind power have made huge strides in the past decade. Batteries will play an important role, albeit restrained by likely supply bottlenecks. He’s especially bullish on geothermal energy. Dourado also has his eyes on new materials and industrial processes, vertical farming, water desalinization, custom-designed semiconductors, the cryptoeconomy, the space economy and yes, even a revival of supersonic flying. The old Concord, he says, never made money because intercontinental demand was insufficient at the time. Markets today (or before the Covid crisis anyway) are much larger. And carbon fiber technology can produce much more efficient engines.
- Quantum Computing: Here’s another technology that could boost the economy’s TFP: Quantum computing. Google, which is investing heavily, said at a developer event last week that it hopes to have a “useful” quantum computer available before the end of this decade. Google can already run quantum computers that can perform calculations beyond the reach of classical computers. But more work is needed before the technology can be harnessed to address real-world challenges. Some see it as a future weapon in understanding nature, which implies progress in areas like improving health and arresting climate change.
- Bitcoin: As Elon Musk’s swaying affections go, so goes the price of Bitcoin. But the world’s first cryptocurrency, built on the world’s first blockchain, retains its legions of supporters. Bobby Lee, a former software engineer at Yahoo and Walmart, is one of them. His new book, “The Promise of Bitcoin: The Future of Money and How It Can Work for You,” argues that eventually, anyone who spends lots of time online (which is most people these days) will eventually adopt digital currencies. Discussing his book on the New Books Network podcast Lee reviews Bitcoin’s origins and features. It was first proposed in 2008, by an unknown person or persons known by the pseudonym Satoshi Nakamoto—Lee says with confidence that Nakamoto is really three people: Craig Wright, David Kleiman and Phil Wilson. For many years prior, cyberpunks have tried to create a digital, decentralized version of money that didn’t require a need for banks or any other third parties. Finally, the Bitcoin approach solved the riddle, in part by employing the concept of “mining” to audit and verify transactions. Lee describes mining as people around the world using computers to compete in a race to solve complex numerical problems. Their participation qualifies them for what’s essentially a lottery ticket. Roughly every ten minutes, there’s a prize (some Bitcoin) that’s doled out. The more computer power you expend, the more lottery tickets you’ll have, and the greater chance you’ll have of winning more money. Entire companies now exist—Riot Blockchain, for example—whose chief activity is mining Bitcoin.
- Housing: Dee Gill of UCLA’s Anderson Review asks the question: “Is the $1 Trillion Coastal Housing Market a Future Financial Crisis?” The worry is that some 40% of Americans live along the continental coasts, where climate change poses risk of severe flooding as sea levels rise. By 2100, she writes, nearly 490 communities nationwide will experience chronic inundation, defined as tidal flooding covering at least 10% of a community 26 times a year or more. New York, Miami and Houston are three examples of mega-cities especially vulnerable to rising sea levels. Of course, wildfires and droughts are other increasingly prevalent risks attributed to climate change and threatening places like California. Demand for coastal properties nevertheless remains high, as does the willingness to lend for purchases of such properties. But Gill says investment banks, financial regulators and municipalities have increasingly joined climate scientists and environmental activists in worrying about the problem.
Return to the Skies
Leaders and Laggards, among the 50 busiest U.S. airports
Based on scheduled airline seats, June 2021 vs. June 2019
*Fort Myers on Florida’s Gulf Coast is a much busier airline market now than it was pre-crisis
*Global centers of commerce, like San Francisco, New York, Boston and Washington, hit the hardest