Econ Weekly March 29, 2021
Inside this Issue:
Not Enough Stuff: America’s Supply Side Slide
Chips Ahoy: Intel Betting Billions
Labor? Housing? Dollar? Debt? Leading Economists Gather to Discuss
GameStop: Back to Business After Wall Street Madness
Ethereum Delirium: The Latest Blockchain Boom
Brother, Can You Spare a Dollar? Economist Dan Awrey on Eurodollar Doldrums
Mexico: Nation with Inflation?
America’s First Tycoon: The Life and Legacy of Cornelius Vanderbilt
Debate: Walmart vs. Amazon, Battle of the Retail Titans
And This Week’s Featured Place: Puerto Rico, Crisis After Crisis
Quote of the Week
“I think that is something that maybe people don’t marvel at enough: The idea that we did not even dream that we could have a vaccine this quakily, and here we are vaccinating millions of people every day… It’s just amazing.”
-New York Times science and health reporter Apoorva Mandavilli
The Latest
America has a supply problem. Not enough houses. Not enough microchips, which means not enough cars. Not enough home appliances. Not enough skilled workers. Not enough seaport capacity. Not enough raw materials like lumber. And soon, maybe not enough oil, with that humungous container ship holding up traffic in Egypt. Funny how a year ago, the big worry was oversupply, amid what looked to be a severe recession.
The recession, alas, was severe but short, followed by a voracious revival in demand, for goods anyway, if not services. One thing certainty not in short supply during the past year: fiscal and monetary support from Uncle Sam. So here we are, heading into the second quarter of 2021 with galloping demand and constrained supply. Sounds like a recipe for rising prices.
Rising prices? Yes, but not yet entrenched inflation, the economy’s great fear since the scarring experience of the 1970s. That sort of inflation is more a state of mind than anything else. People start believing prices will increase tomorrow, so they rush to make purchases today. And they insist on higher wages. That leads to even higher prices—a wage-price spiral. Suddenly, companies find planning and investing for the future a whole lot more complicated.
But here’s the difference between now and the 1970s: Workers have less leverage to score higher wages. Ten million Americans, after all, are still unemployed, never mind the much weaker positioning of unions in the age of globalization and automation. Conversely, the U.S. has more leverage, not less, in the oil markets today—the inflation of the ’70’s had a lot to do with oil shocks emanating from the Middle East. Japan, remember, the poster child for ultra-aggressive fiscal and monetary expansion in recent decades, stills fears the ghosts of deflation, not inflation. That’s when people think goods will get cheaper tomorrow, so they hold on to their money. Definitely not good for the economy either.
But we digress. Back to the supply constraints at hand, how long will they last? Many appear temporary, stemming from one-off events like the Texas freeze, the Suez snarl and a fire last week in a strategic Japanese electronics factory. Companies like Intel are now investing in new capacity. Others that underordered materials and components last spring (expecting a demand plunge) are now adjusting.
The supply of money doesn’t appear to be a problem, judging from borrowing rates that remain below year-ago levels. The Fed’s policies are helping in that regard. And while bank lending matters too, lowish loan activity seems more the consequence of tepid demand than tight lending standards. As for the critical interest rates paid on Treasury bonds… some calm in the market last week, after a period of unsettling spikes.
As you can see, there was lots to talk about as economists from around the country gathered online for an annual event hosted by the National Association of Business Economists. Multiple Fed governors and regional presidents were among the speakers. Fed chief Powell meanwhile, alongside Treasury chief Yellen, testified before Congress. So, incidentally, did executives from Big Tech.
This week, Washington turns its attention to infrastructure.
Tweet of the Week
“I got a response to my Tweet that inflation is rearing its ugly head. Sure. In everything except the labor market, which accounts for 75% of where inflation really comes from… There is no lasting inflation without a wage cycle.”
- David Rosenberg, Chief Economist & Strategist, Rosenberg Research & Associates
Companies
Intel: In strictly financial terms, 2020 was a great year for companies that build semiconductors. This year too is characterized by strong demand and tight supply—disruptively tight. Long-term demand forecasts are no less enticing with advanced microchips essential to enabling the leading technologies of the future: smart factories, artificial intelligence, cloud computing, 5G communications, autonomous vehicles and the internet of things. The world, more generally, is becoming more digital. So it must be a great time to be Intel. Well, not exactly. For sure, it earned strong profits last year. And its intellectual property remains enormously valuable. But its chips aren’t ideal for mobile computing, which of course became a giant trend. The Silicon Valley company is also confronting what appears to be the end of Moore’s Law, the historical pattern of doubling the number of transistors on a microchip every two years through consistent advances in technology. Quite simply, it’s getting harder to do that. Intel also suffered some production stumbles that dented its competitiveness. Into this challenge steps new CEO Patrick Gelsinger, a longtime Intel veteran who left to run another firm for a few years. Now that he’s back, some are hoping he’ll replicate the returning hero story of Steve Jobs at Apple. His big plan to do so is called IDM 2.0, announced with great fanfare last week. One thing the plan does not include, first of all, is outsourcing production to an outside manufacturer, or “foundry.” It won’t in other words, mimic its rival AMD, or others like Qualcomm and Nvidia, and just design chips. Intel will continue to manufacture the majority of its products internally. But it will also become a foundry itself, building chips that others design. This is the business model most famously associated with Taiwan’s super-high-tech TSMC, an industry powerhouse. Intel will invest $20b to build two new plants in Arizona for the purpose. “The world is demanding more semiconductors than ever before,” Gelsinger said in an interview with Bloomberg.
GameStop? What the heck is GameStop? That’s what many were asking in January when the company became front-page news as a battleground stock between online traders and Wall Street hedge funds. The latter were actively shorting the stock, betting on a price drop. The former used internet message boards to encourage mass buying, thus boosting the price to stratospheric levels. Suddenly, a money-losing company on the wrong-side of retail trends crazily saw its stock—which opened the year at $17 a share—reach $348 in late January. The shorts got crushed, but so did many retail investors when GameStop stock fell back to earth. It then rose again. And fell again. Congressional inquiries ensued. So did debates about the role of government in protecting investors and the responsibility of commission-free trading platforms like Robinhood (which by the way is now preparing to go public). But let’s return to the original question: What the heck is GameStop? Its first earnings presentation since the Wall Street commotion provides some answers. Most importantly, it’s a video game retailer, with about half of its revenues from selling hardware (i.e., consoles like Microsoft’s Xbox) and the other half from software (the games themselves) and collectibles. That can only be a good thing, right? After all, think of the explosive growth in gaming throughout the world, both before the pandemic and especially during it? Well, GameStop is indeed seeing strong demand currently, aided by new console products which are in short supply. It made money last quarter too (November through January). But then again, a video game retailer can’t not make money during the Christmas season. More to the point, the Dallas-area company has gargantuan strategic problems, hence all the Wall Street shorting. It lost $139m last year even after adjusting for one-off accounting items. It once had $10b in annual sales. It now has $5b. It owns a network of some 5,000 brick-and-mortar stores in malls and strip malls across the U.S. and abroad, even after closing nearly 700 last year. Many of its stores were temporarily shuttered during the pandemic. It’s now exploring options for its European network of stores. Hint: it’s not making money there. So into this thorny garden steps the founder of online pet supplies retailer Chewy, buying a 10% stake last year. He was enticed by GameStop’s solid brand, large customer base and 55m loyalty plan members. But he wants it to “evolve into a technology company that delights gamers and delivers exceptional digital experiences, not remain a video game retailer that overprioritizes its brick-and-mortar footprint and stumbles around the online ecosystem.” It’s definitely making progress. Almost 30% of its sales now come online, up from low single digits. It’s developing fulfillment capabilities like same-day delivery and curbside pickup. It’s making improvements in areas like cash and inventory management. And it’s investing in technology and customer service while looking beyond just the console-based gaming market (many play games on laptops, tablets and phones too, and perhaps before long if Facebook has its way, virtual reality headsets). GameStop, however, faces an uphill battle in light of a viciously competitive retail landscape. Amazon and Walmart sell video games too.
Highlights from last week’s Economic Policy Conference, hosted by the National Association for Business Economics (NABE)
Inflation and the labor market, no surprise, were the hot topics of this year’s event. Are rising prices a major risk to the economy? Will the high jobless rate ease with an ultra-large dose of fiscal stimulus? Other much-discussed themes during the virtual gathering: international trade, infrastructure investment, digital currencies, manufacturing supply chains, housing markets, state and local finances, antitrust policy, public debt, the dollar and of course, Covid and the campaign to vaccinate against it.
Richmond Fed President Tom Barkin was among the speakers, detailing all that’s surprisingly strong about the U.S. economy as it emerges from the pandemic: disposable incomes up, household savings up, credit card debt down, bank portfolios healthy, housing markets strong (helped by low interest rates), strong consumer spending on goods (boosting manufacturers), and so on. Also supportive: The $4 trillion in federal relief last year, with nearly $2 trillion more on the way. Importantly, stimulus checks, enhanced unemployment relief and housing forbearance have disproportionately helped the poorest Americans. That’s the good news. The bad news, Barkin explains, is that 9.5m are still without jobs, many in high-turnover occupations like waiters and housekeepers. It took a decade to fully revive the job market after the 2008/09 recession, suggesting substantial labor scarring then. One manifestation of this scarring is that those who finished school during the downturn often began their careers at a depressed wage or salary, which can permeate for an entire career. Will that sort of scarring happen again? Barkin hopes not but worries in particular about low labor participation among parents (6% below pre-pandemic levels) and especially primary caregivers, usually females. Remote education, furthermore, could weaken human capital, with lifelong consequences. The pandemic accelerated automation, with the job market affected by trends like online retail and telemedicine. Cities, which are platforms for innovation and collaboration, emptied out—this might cause future scarring too. In rural areas (and sometimes inner cities as well), a major problem is broadband access. While large businesses were generally resilient during the pandemic, most small businesses were not. But all the while, many well-paid jobs are going unfilled—think nursing and commercial trucking. Barkin hopes telecommuting might improve matching between workers and jobs. But there’s a longer-term demographic problem with the labor force expected to shrink. What’s more, female worker participation in the U.S., unlike in Canada, actually declined between 2000 and 2017. On the other hand, seniors could wind up working longer.
And what does Barkin think about inflation? He more or less reiterated the Fed’s stance, downplaying concern. He’d be more concerned if he saw steady and sustained price inflation in items core to the key index economists watch—in housing rent or health care, for example. Less worrisome are the sort of temporary price spikes resulting from shortages in things like construction materials and used cars. When will the Fed raise interest rates or otherwise tighten the money supply? It’s the question Wall Street is constantly asking. But echoing Jerome Powell, Barkin said the decision will be outcome-based, not calendar-based. Yes, he thinks deficits eventually need to be brought down to more sustainable levels. And yes, Congress still has more fiscal capacity “but that’s always the case until it isn’t.” And yes, inflation expectations are firming, as rising bond yields show. But that’s not a bad thing. “As the economy gets better, you’d expect yields to rise.”
In a panel discussing the labor market, Susan Lund of the McKinsey Global Institute said she sees more future demand growth in higher-skill jobs than lower-skilled jobs, adding that manufacturing, transportation and construction companies can’t find enough workers. She also notes that today’s minimum wage would be higher than $15 an hour were it indexed to inflation over the past decades. Byron Auguste of Opportunity@Work lamented the automated “pedigree screening” many companies use when evaluating resumes, which winds up overlooking Black, Hispanic and rural workers with talent and skills but perhaps not a bachelor’s degree (which can be financially out of reach for some). He makes the point that not all low-wage jobs are low-skilled jobs, and that 71m Americans fall into a category he calls STARS: skilled through alternative routes. These people, he thinks, are key to filling those unfilled jobs Lund mentioned. Harvard’s Joseph Fuller, meanwhile, talked about the “barbell-ization” of the economy: the rich and poor growing at both ends but the middle class shrinking.
During a panel discussing international trade, the U.S.-China relationship was naturally a focus. Chad Bown of the Peterson Institute said over the course of the Trump administration’s trade war, China actually lowered its tariffs on imports from the rest of the world. The U.S. by contrast, raised tariffs not just on China but worldwide. Still the overall U.S. rates, at 3% on average, still fall below China’s 6% average.
With infrastructure, said Harvard’s Ed Glaeser, it’s easy to waste billions. So “we have to be smart about this.” Subsidizing highways, for example, is not consistent with progress on climate change. Maintenance needs to be a top priority, panelists generally agreed. Public-private partnerships can be useful. And in many cases, users of the new infrastructure should pay for it via tolls or fees. One issue is that the highway trust fund depends on gas taxes, but what happens when everyone starts driving electric cars? Glaeser urges people not to overlook busses as an affordable transportation tool, especially for lower-income people priced out of car ownership, and especially in areas with low population density, making trains impractical. “We need to stop disrespecting the bus!” Leslie Richards, who runs a network of trains and busses as head of the Philadelphia-area public transit system, stressed its importance because “transit is correlated with access, and access is correlated with opportunities.” Transit is also environmentally friendly and can even replace some air travel in the northeast region. She also mentioned Pennsylvania’s recent interest in hyperloop technology for future interstate transport. Infrastructure, of course, doesn’t just involve transportation. It also covers energy grids, broadband internet and ensuring clean water, the latter one of the biggest expenditures of states in the 19th Why, by the way, does it cost so much more to build infrastructure in the U.S. today than 50 years ago despite lower labor and materials costs? One reason, according to Glaeser, is the bias toward accommodating anti-change interests (think NIMBYism). Another is strict right-of-way restrictions governing whether trains or roads can pass through privately held land.
On the outlook for fiscal policy, Harvard’s Jason Furman listed both challenges and opportunities associated with the long-term decline in interest rates. They complicate monetary policy, create greater risk of financial bubbles and might be a symptom of chronic demand weakness (sometimes referred to as secular stagnation). On the other hand, falling rates make fiscal expansion safer and more impactful—higher debt becomes more sustainable and even optimal as interest payments as a percentage of GDP decline. He’s not a deficit maximalist though. Something as expensive as Medicaid for all, he said, would require higher taxes to fund. The Congressional Budget Office’s Phillip Swagel, meanwhile, presented fiscal forecasts drawn up before the latest stimulus. Even so, they show federal debt held by the public reaching 200% of GDP by 2050. Use a higher interest rate assumption and the percentage looks more like 260%. It’s today about 100%. For even many deficit doves, the twin worries of such heavy debt are 1) Washington’s ballooning costs for social insurance (especially health care) and 2) the output potential of the U.S. economy appears poised to decline amid a slower-growing workforce.
The housing market looks nothing like it did in 2008-09. That was a key takeaway from a panel on the topic, which more specifically focused on trends in mortgage payments. Forbearance programs that allow homeowners to delay payments have been helpful in this crisis. What’s more, many borrowers last crisis were in negative equity positions and would still owe lots of money had they sold their homes. This time, even the most distressed borrowers now typically sell their house and make money. Credit scores have surprisingly held up well, this after fears of mass defaults when the pandemic first hit last spring. Paul Willen of the Boston Fed notes how loan modifications and forbearance is this time not a zero-sum game between lenders and borrowers. Both can wind up benefitting by postponing foreclosures and waiting for the natural disaster to pass. One problem now, not present last time, however: The unusually low number of homes listed for sale, contributing to high prices.
On antitrust policy, Nancy Rose of MIT said officials might be reconsidering their pharmaceutical sector merger policies and coordinating with international counterparts in the process. She sees a possible new emphasis on expected labor market harm when companies collude—should anti-poach agreements and noncompete contracts be legal? Buying nascent competitors seems to be of growing interest, as with Facebook and Visa. Rose also sees excessive quantification as a problem—sometimes just because you can’t econometrically prove harm, doesn’t mean there isn’t harm. William Kovacic of George Washington University adds the problem of slashed budgets and resources for antitrust officials. On a separate note, panelists mentioned that the Google and Facebook antitrust cases likely won’t go to litigation until 2023.
Fed governor Lael Brainard, noting the one-year anniversary since the start of Covid, described a K-shaped recovery now underway, unfolding unevenly across race and income. The 22% unemployment rate for lower-income Americans is particularly alarming. No less so is the 1.7m more people (relative to pre-Covid times) who are working part-time but want to work full time. With inflation still persistently below 2%, it’s only natural that the Fed would remain accommodating. But she stressed the many uncertainties: Just how much consumption will be unleashed by the stimulus? Will the travel sector recover and when? How lasting is the trend of people working remotely? How about the trend of accelerated adoption of technology and automation?
St. Louis Fed President James Bullard focused his comments on the U.S. dollar. Is its dominance in world trade threatened by China’s currency? How about private digital currencies? He doesn’t sound too worried. Before the Civil War in the 1860s, the U.S. had many currencies issued by different banks. But people didn’t like it. Nor do they like the multi-currency international marketplace, characterized by “exchange rate chaos.” Private currencies also exist today, with blockchain technology creating a platform for many more. But “this creeping trend toward nonuniform currency is not a good one.” Stephen Yung-Li Jen of Eurizon said the dollar’s share of international transactions was holding steady but he didn’t discount the future reserve currency status of China’s yuan in the face of giant U.S. deficits. Bullard noted Britain, at the height of its empire, is said to have had a debt-to-GDP ratio of 350%! He also said U.S. Treasury debt is more than just debt—it’s also a form of liquidity and currency for countries abroad. Catherine Mann of Citigroup stressed the question: What did you use [the government spending] for? If used wisely, on climate change proposals that spur innovation, for example, the dollar will ultimately stay strong. In the short-term, she thinks the dollar will appreciate if only because other economies provided much less fiscal stimulation. Yung-Li Jen adds that policy responses vary greatly among governments today but that wasn’t the case after the last crisis. He also makes an interesting observation about geopolitical influence, evoking a distinction first postulated by Joseph Nye: China today has hard power but not soft power. Europe has soft power but not hard power. And the U.S. has both.
Sectors
Retail: An Economist survey earlier this month looked at the future of shopping, currently at the “foothills of a transformation.” It also uses the words “upheaval” and “revolution.” The survey cites the first big shopping revolution as the 16th-century development of English craftsman beginning to sell other peoples’ goods in shops rather than just trading their own goods one-to-one. The second revolution came with the industrial age when mass factory-built goods led to mass consumption, supported by advertising and big shops with economies of scale—that’s still largely the world we live in today. But the digital-age shopping revolution now underway “turns that model on its head.” Consumers, not manufacturers and stores, are the ones in charge, shaping demand, production, distribution and marketing. Direct-to-consumer businesses are thriving, empowered by big data. Legacy retailers are certainly benefitting; Nike for example, thanks to consumer behavioral data gleaned from its apps and interactive shops, noticed that traffic on its apps was showing more people doing yoga, so it swiftly produced new yoga gear. Ecommerce sales globally meanwhile, reached about $4 trillion in 2019, according to newsletter publisher Benedict Evans. It’s a bigger number today after Covid turbocharged online shopping. But not so much bigger as to replace offline shopping. Online sales in fact were less than a fifth of total sales in 2019. The Economist, sure enough, expects offline stores to remain relevant and popular, implying a world of omnichannel distribution. That’s even as the closure of retail stores has far exceeding openings in recent years, with implications for what the National Retail Federation claims are the U.S. economy’s largest private-sector employers (32m workers). Then again, the U.S. Bureau of Labor Statistics says jobs in transport and warehousing (think Amazon) grew by more than 500,000 in the seven months to December. Incumbents also face cost challenges in simultaneously operating both physical stores and online sales channels, while also paying Google and Facebook to reach customers. Then there’s the costly logistics of fulfilling online orders, plus the high ratio of online purchases that wind up getting returned. Some of the leading retail innovation is actually happening in China, where ecommerce is more widespread thanks to the ubiquity of smartphones, the shortage of attractive shopping centers beyond big cities and high urban density which cuts the cost of delivery. One hot trend is live-streaming celebrities hawking products on apps like Douyin (known in the U.S. as TikTok). Another is the concept of consumer-to-manufacture, or “C2M.” It involves tech platforms using big data and artificial intelligence to identify the latest shopping trends, so factories can make specialized products for consumers, cutting out intermediates, reducing the need for excess-inventory buffers, reducing waste and improving margins. Pinduoduo, a big Chinese ecommerce platform, is separately pioneering “community group-buy,” in which the leader of a community (often of a rural village) bids online for bulk purchases of local farm produce.
Finance: In last week’s issue, in the Looking Back section, we discussed the financial shocks of 1907 and 2008, which both involved “runs” on non-bank lending institutions, otherwise known as shadow banks. It’s hardly just a U.S. problem though. It’s a global problem, as Dan Awrey of Cornell University discussed on the Macro Musings podcast last week. In 2017, he wrote a paper called “Brother, Can You Spare a Dollar?” which proposes ideas on how to ensure that foreign financial institutions have access to dollars during times of distress. Many indeed depend on dollars for short-term funding, which can create problems for foreign central banks during emergencies. Put another way, how can central banks ensure access to dollars for their domestic banking systems? The Federal Reserve addressed this Eurodollar problem on the fly last spring—and also during the 2008 crisis—with emergency swap lines. But Awrey thinks more permanent solutions are needed. The Macro Musings episode later turned its attention to Awrey’s ideas on “Unbundling Banking, Payments and Money.” Banks, he said, have three major roles in an economy: they lend, they manage payments and they create money (bank deposits account for about three-quarters of the U.S. money supply). The U.S. economy would be better served, he said, with more competition in these areas, from rival firms competing with giant “money center” banks. America has thousands of banks, but the money center behemoths account for much of the activity.
Markets
Labor: “Which kind looks more like the future?” ABC27’s Seth Kaplan in Harrisburg, Penn. asks the question—one with major implications for the whole economy—about four warehouses owned by the pet supplies company Chewy (yes, the same Chewy mentioned in the GameStop item above). One of the four “fulfillment centers” is unique. It’s the company’s first automated facility where robots do much of the work of packing and shipping. Will future warehouses across the U.S. look more like that one? Or will they continue to rely mostly on human workers? Chewy’s warehouse workers, incidentally, earn more than double the minimum wage. But as economist Stephen Herzenberg notes, it’s still far below what Pennsylvania workers could earn at Bethlehem Steel back in the day. If today’s wages are indeed relatively low, then perhaps the rush to automate warehouses won’t be so intense. On the other hand, automation doesn’t just cut labor costs, it also addresses labor shortages—some companies indeed are finding it hard to fill these warehouse jobs, even at double minimum wage. So maybe they do need more robots.
Debate: Walmart vs. Amazon, Who Wins?
Walmart:
It’s still the much larger company. The largest private-sector company in the world, in fact, with all the economic power that implies.
Who said a network of 12,000 brick-and-mortar stores is a liability in the age of ecommerce? On the contrary, the stores are an extremely valuable asset that Amazon doesn’t have. They serve an incredible 240m customers a week all over the globe. They’re proving invaluable as fulfillment centers, located just a short drive from almost every American’s home. Amazon, by contrast, has to build its own expensive network of fulfillment centers. Now, Walmart has a productive use for even its least profitable stores.
With all that direct contact with all those millions of customers, Walmart is beautifully positioned to enter giant markets like financial services and health care. Providing such services to its giant workforce alone provides enough economies of scale to justify entering such markets. It really can be the everything store. Sure enough, it’s getting very serious about finance, poaching executives from Wall Street and teaming with a fintech company from Silicon Valley. With so much in-person contact, moreover, it can offer mass-market services that require a physical presence, like auto care.
Make no mistake. Walmart is becoming a clear champion of ecommerce, and of omnichannel commerce more broadly. Last quarter, ecommerce sales jumped 69% y/y. A partnership with Amazon’s rival Shopify gives a boost to Walmart’s fast-growing online marketplace for third-party retailers. And it’s only getting started on monetizing online advertising, customer data optimization and Walmart+, its new loyalty plan.
In years past, Walmart was the corporate boogeyman, decimating small businesses, killing downtowns, underpaying workers and so on. Today, it’s Amazon in the crosshairs of criticism about its labor practices, its use of customer data, its tax liability and its arguably predatory practices toward retailers on its marketplace. Indeed, it might wind up getting broken up by antitrust law. Amazon, in addition, is now the one more at risk of an immediate unionization drive.
What’s the fastest-growing category of online sales? It might just be groceries. And guess what? That’s Walmart’s number one business, accounting for almost 60% of its sales. It also happens to be better positioned in key overseas markets like China and India, with investments in JD.com and Flipkart, respectively.
Amazon:
Let’s be honest: All those Walmart stores are a huge fixed cost, requiring lots of additional workers. Better to have a smaller more targeted footprint like Amazon has with Whole Foods.
Amazon has a huge advantage in its profitable AWS cloud business, which can cross-subsidize investments in the core retail business. Walmart has nothing like Amazon Prime, a loyalty plan in which members get far more than just free shipping—they even get a library of movies and music. Amazon’s digital assistant technology helps with sales too.
There’s no beating Amazon when it comes to mastering the fine arts of big data. It’s a leader in artificial intelligence. Its online advertising business is much larger than Walmart’s. It’s a leader in robotics too, having acquired a leading company in the space.
Just as importantly, Amazon offers a much larger selection of merchandise thanks to a much larger ecosystem of third-party sellers. Walmart is just getting started with its online marketplace platform.
Yes, Walmart gets 60% of its sales from groceries. Low-margin groceries. And low-margin everything else. For all the customers it serves, few are upper-income customers with heavy-duty spending power. The Amazon brand resonates much more powerfully with wealthier customers, especially in high-consumption urban areas. Whole Foods is an example. Not to be too blunt but let’s face it: Walmart is a brand associated with low-income America. It’s the opposite of cool and trendy.
Simply put, ecommerce is growing much faster than in-store commerce, and Amazon is the undisputed leader in ecommerce. Besides, Walmart’s heavy reliance on groceries could be a liability post-pandemic as more Americans return to eating outside of the home.
Government
Infrastructure: Now that President Biden and his allies in Congress have their relief and stimulus act passed, attention turns to improving the nation’s infrastructure. Almost everyone agrees that it needs improvement, all the more so after what just happened with the power grid in Texas (albeit that one a state rather than federal affair). Aging roads, bridges and ports are another focus. So is ensuring that all communities have access to broadband internet. High-speed rail is a more controversial project. Also thorny is balancing true need against the realities of Congressional politics (i.e., New York desperately needs new rail tunnels, but Iowa doesn’t want to pay for it). The President will present details of his plan this week. It’s likely to cost another several trillion. Money well spent? That depends. Bridges to nowhere? Or projects that lead to additional commerce and lower transportation costs? Of course, much of what America’s infrastructure needs now is mere maintenance and upkeep, whose impact is less about increasing economic value than simply preventing it from declining—or in some cases merely protecting public safety. We’ll see what the President proposes.
Inflation Watch
Unadjusted y/y % change in price index for selected items, Feb. 2021
source: Bureau of Labor Statistics
Not all categories carry the same weight when compiling the consumer price index monitored by the Federal Reserve and others
The weightiest category by far is housing, led by "owners' equivalent rent of residences." This is roughly what a homeowner pays monthly in mortgage payments, taxes, etc. Even a steep rise in housing prices won't affect this number much in the short run
Item
Feb y/y
Used cars and trucks
9%
Tobacco and smoking products
7%
Utility (piped) gas service
7%
Meats, poultry, fish, and eggs
5%
Physicians' services
5%
Nonalcoholic beverages
4%
Fruits and vegetables
3%
Motor vehicle maintenance
3%
Cereals and bakery products
3%
Dairy and related products
3%
Hospital services
3%
Electricity
2%
Alcoholic beverages
2%
Owners' equivalent rent of residences
2%
Rent of primary residence
2%
Motor fuel
1%
New vehicles
1%
Medical care commodities
-3%
Motor vehicle insurance
-3%
Apparel
-4%
Airline fares
-26%
Places
Puerto Rico: Spoiler alert: It’s not a happy story. But before going any further, let’s be clear about Puerto Rico’s political status. It’s not a state, but rather one of five U.S. “territories” that elect their own governors and legislatures but don’t cast votes for president (the other four permanently inhabited territories are Guam, the U.S. Virgin Islands, American Samoa and the Northern Mariana Islands). Puerto Rico’s 3.2m people—there were 3.8m as recently as 2014—are U.S. citizens, meaning they can live and work anywhere in the country without any special documentation. They can and often do serve in the U.S. military. But they lack full voting representation not just in presidential elections but also in Congress. They typically don’t pay federal taxes on income earned on the island but don’t have the same eligibility for some federal programs. That’s been the story more or less since 1900, when Congress established a civilian government for Puerto Rico, after taking possession in a war with Spain. Early on, its big industry was sugar. It became a place of geopolitical significance during the Cold War when its rather strong economic growth was held up as a Caribbean counterexample to communist Cuba. As the economist Jose Villamil recounted in a 2014 lecture, Puerto Rico in the 1960s and ’70s began to lose some foreign investment in low-wage sectors (i.e., shoe manufacturing) to new competitors including Spain. But it also became a center of petrochemicals, pharmaceuticals and medical devices. Not until the mid-1970s did Puerto Rico experience its first recession. Uncomfortably, much of its investment from the U.S. mainland was thanks to generous tax incentives, for research and development, for example, and the right to return profits back to the mainland tax free. Congress, alas, ended Section 936 of the tax code in 1996, thus phasing out these lucrative benefits over a ten-year period. That brings the story to 2006 when the housing bubble was inflating across the U.S., Puerto Rico included. The pop, when it came, hit hard. While the rest of the U.S. recovered, however, Puerto Rico never did. The 2010s would be a lost decade economically, scarred by fiscal ruin and brutal natural disasters. In 2016, Congress enacted a board to oversee Puerto Rico’s finances and conduct a bankruptcy-like restructuring of its huge debts; Washington did not however provide any taxpayer bailouts. Hurricane Maria obliterated much of the island’s economy in 2017. Earthquakes followed in 2019. Then Covid last year, which shrank GDP by about 8%. According to a Congressional analysis, the island suffers from low labor participation rates, high rates of outmigration (notably to the Orlando area of Florida), intensified global competition and a declining birth rate. The San Juan metro area alone saw its population shrink by 14% in the 2010s. Census data show 92% of Puerto Rico’s households earn less than $75,000 annually (the percentage is just 66% in Florida). A full 45% of residents live below the poverty line (15% in Florida). Per capita income, says former Congressman Luis Gutierrez, is half what it is in the poorest U.S. state Mississippi. Crime, including drug trafficking given its strategic location, is a concern. Villamil, when he spoke in the early 2010s, estimated that federal transfers accounted for more than a fifth of average incomes. After a decade-long recession, what’s the path forward? Tourism, for sure, as the sector recovers from the Covid shock (San Juan is a major cruise port, with an airport owned and run by a Mexican operator). The island still has an active biopharma industry—Amgen for one employs about 3,000 people there. Jorge Martel of T-Mobile explains how Puerto Rico, after much of its telecom infrastructure was damaged by the hurricanes, is building back with leading-edge 5G cellular technology, making it a leader in 5G rollouts. The island’s bondholders have agreed to cut their claims from $19b to just over $7b, according to the financial oversight board’s executive director Natalie A. Jaresko (fast fact: she was once Ukraine’s finance minister). She hopes Puerto Rico can exit bankruptcy before the year’s end. Some islanders want statehood, though that’s a tall task politically given the national implications for Senate power and Presidential votes (it would help Democrats over Republicans). Helpfully, the $1.9 trillion American Rescue Plan makes households in Puerto Rico fully eligible for child tax credits for the first time. But there’s a long way to go, including in power infrastructure and poverty alleviation. The oversight board recently revised its GNP forecasts upward thanks largely to the $14b-plus in aid to be received from the three big federal stimulus packages. But it still sees the economy shrinking 4% in the year to June, barely growing at all next year, and then shrinking again during the two subsequent years. It’s a far cry from the 4% to 8% pop economists are expecting for the U.S. economy as a whole.
Wondering which states have the highest unemployment? The latest Labor Department figures for February, released last week, show Hawaii and New York holding that dubious distinction—unemployment in these two states is about 9%. Both have lots of leisure and tourism jobs. And which states have the lowest employment? South Dakota and Utah, both around 3%. The national jobless rate is 6%.
Abroad
Mexico: In the U.S., inflation is a still theoretical concern—something that might afflict the economy in the months or years ahead. In Mexico, the threat is already perceptible, with the latest reading of consumer prices jumping to about 4%. Still, the country’s central bank last week decided not to raise interest rates in response. Doing so would have made borrowing more expensive at a time of deep economic pain. Mexico is heavily dependent on the U.S. economy, whose expected burst of growth should be helpful. The country is a base of manufacturing for U.S. producers, including automakers. It sells a lot of oil to the U.S. (more than any other country except Canada, in fact). It welcomes a lot of U.S. tourists to beach resorts like Cancun. Unseen in official statistics is income from the illicit cross-border drug trade from which many Mexicans earn a living. Finally, Mexico’s economy depends on remittances from migrant workers in the U.S. As Bloomberg notes, the rate of Mexican migration to the U.S. declined during the past two decades. But as current news headlines make clear, northward migration is now increasing.
Looking back
Cornelius Vanderbilt: “A child of the 18th century, master of the 19th.” So writes T.J. Stiles about “the first great tycoon in American history.” Cornelius Vanderbilt was much more than a businessman though. His long career would both coincide with and greatly influence multiple transformations of the American economy. At the time of his birth on New York’s Staten Island in 1794, agriculture was dominant, in a “world powered by human hands.” Vanderbilt’s own ancestors arrived in America from the Netherlands as either farmers or tavern keepers. But young Cornelius began his career as a ferry captain transporting people and goods between Staten Island and Manhattan. Before long, New York became the country’s top commercial center thanks to the Erie Canal and the invention of steamships. After the War of 1812 especially, New York was a thriving port for trade both across the Atlantic and with the U.S. interior. Ship captains were thus in high demand, and Vanderbilt became both captain and business associate to Thomas Gibbons, a steam ferry operator who lent his name to a landmark Supreme Court case. Gibbons v. Ogden (1824) established that Congress, not individual states, had the right to regulate commerce between states, in this case ferries running between New York and New Jersey. With anyone now free to compete with state-sanctioned monopolies, Vanderbilt sprang out on his own and rapidly built a steamship empire, extending his reach across the country, eventually with routes to California via Central America, and across the Atlantic to Europe. But already before the Civil War in the 1860s, he simultaneously moved into railroads, controlling important links between New York and New England, both benefiting from the cotton and textile trade that ushered in America’s industrial revolution. Vanderbilt was thus a leader in expanding and improving the nation’s transportation infrastructure, which in turn facilitated an increase in the percentage of Americans living in towns and cities (to 18% in 1850, from just 7% in 1820.) He was also bringing revolutionary change to how businesses were run, in what Stiles describes as a desire to “organize, amalgamate, develop and bring order to the chaos of the marketplace.” This didn’t sit well with many in Jacksonian America, who mistrusted big business and prized an “individualistic competitive impulse.” The U.S. national bank would succumb to this antagonism. But not Vanderbilt and his growing empire, which got a big boost from the California gold rush in the 1840s—most people went there not by covered wagon as the stories depict, but by steamship via Panama or Nicaragua. After the Civil War, Vanderbilt turned his full attention to railroads, taking on “the role of railway king as railroads became central to American life.” Transportation in fact, was now America’s largest industry and railroads its largest corporations. No longer were they semi-public bodies but pure businesses, too large and capitally intensive to be run by one individual. Their huge appetite for capital fostered new financial services to meet their needs. They created a unified national mega-market for farmers, merchants, workers and industrialists. They facilitated western mining, fostered new cities like Chicago, contributed to further urbanization, reinforced east-west political ties, gave rise to tourism and ushered in a world of stockholders, salaried managers and wage workers, alongside the nation’s growing mills, factories and banks. As Stiles writes, they “helped lay the foundation for the modern economy.” In an age without modern antitrust laws, Vanderbilt would establish his empire through financial manipulation, competitor collusion and industry consolidation, culminating in the New York Central and Hudson River Railroad. He became, to put it succinctly, “the biggest man in the biggest thing in America.” In the meantime, the discomfort with rising corporate power first seen during the Jacksonian era only grew stronger in the Gilded Age. Corporations were now overshadowing farmers, artisans and merchants in their influence and power. “What was the place of a railroad king in a democracy of equals?” A host of legendary American business magnates were just beginning their careers when Vanderbilt was at his peak: Rockefeller (oil), Carnegie (steel) and Morgan (banking). A young Rockefeller, in fact, mimicked Vanderbilt’s consolidation tactics in building his great Standard Oil empire. Vanderbilt passed away in 1877, age 82. But not before the Panic of 1873 pushed more than half of America’s railroads into bankruptcy. His empire would survive the crisis, but in the 20th century, the railways eventually ceded their importance to highways and airways. And the corporate power that Vanderbilt helped establish led to a rise of countervailing labor and government power. Still, the Vanderbilt legacy lives on, through institutions like Vanderbilt University in Tennessee, infrastructure like Grand Central Station in New York and decedents like the late fashion designer Gloria Vanderbilt and her son, the CNN journalist Anderson Cooper.
Looking ahead
Cryptoeconomy: Bitcoin, the digital currency, was the first blockchain. And it remains the largest blockchain today. What’s the second largest? The answer is Ethereum, which is much more than a digital currency. It doesn’t want to be just peer-to-peer money. It wants to be “peer-to-peer everything.” That’s the theme of Camila Russo’s 2020 book “Infinite Machine: How an Army of Crypto-hackers Is Building the Next Internet with Ethereum.” Unlike Bitcoin, whose founder is unknown, Ethereum was created (in 2014) by Vitalik Buterin, just 19 years old at the time. He’s now what Russo calls a “crypto rock star,” idolized by the growing number of young computer programmers and software entrepreneurs fascinated by the technology’s potential—potential not just to transform entire industries like finance but also wrest power away from governments and corporations. Some call it the “Web3” vision, in which the internet is decentralized. No gatekeepers like Google or Facebook. No middlemen between users that want to message with each other, bank with each other, transact with each other... Ethereum issues tokens called Ether, a digital currency for use on the blockchain’s applications, created by a growing ecosystem of third-party developers. It’s no different than third-party developers building apps for Facebook or the Apple app store. Except that Ethereum is a non-profit organization. As the book describes, the first big “killer app” on Ethereum involved fundraising. This was the “initial coin offering” craze (ICO) of 2017, in which startups essentially sold newly created digital currencies, or tokens, to investors who hoped they’d rise in value like Bitcoin. In some cases, the tokens could be used on an app, much like frequent flier miles are issued for use with an individual airline (another analogy is an arcade selling tokens for use on its machines). Russo, a former Bloomberg reporter, covers the subsequent crash of the ICO bubble, concerns by regulators, attacks by hackers, efforts to make Ethereum-based transactions faster and more scalable and an ongoing project to make the process of verifying transactions (called mining) less energy intensive. The latest killer app? Ethereum-based online collectibles using tokens to represent unique (non-fungible) ownership rights to a digital file. That craze began with CryptoKitties, which are digital images of cartoon cats created by the developer Dapper Labs. Now, big businesses like the NBA are issuing NFTs, in its case video clips of players in action. Artists are using NFTs too. Giants like Microsoft, Amazon and JP Morgan, meanwhile, are themselves building some applications on Ethereum. But so are startups with grand ambitions to disrupt these companies, especially in the area of finance.
Clarification: In last week’s issue, in the discussion about Alaska’s capital Juneau, we stated the drive times to Seattle and Anchorage. We should note that the city is not connected to either city by road.