Issue 4: Jan. 24, 2021
Jan. 25, 2021
What’s the right answer? Another $2 trillion in federal relief spending, on top of the trillions already spent? Or ease up on the fiscal accelerator, mindful of the swelling federal debt burden? In 2020, as the Covid virus tore into large parts of the economy, Democrats and Republicans alike were quick to provide $2.2 trillion in federal relief. Reaching a second round proved politically more difficult but by December, Congress agreed to spend another $900 billion. Now, with Covid still taking its toll on businesses from restaurants to airlines, America’s new president wants $1.9 trillion more. Will he get it?
To President Biden’s backers, it would ultimately cost more not to spend the additional money. Businesses continue to fail. America’s unemployed workers are losing their skills. Critical state and local services, from policing to education to transit, are under tremendous fiscal strain. These hurricane-force headwinds say the Keynesian crusaders, will scar the economy long-term if allowed to worsen, draining its productive capacity and sapping its long-term growth potential. The additional money, they add, will buy the economy time. In only a matter of months, vaccines promise to end the terrible storm once and for all. What a shame it would be to allow so much long-lasting damage in the interim. And besides, there’s never been a safer time to borrow with interest rates so low.
But notwithstanding a growing band of modern money theorists, most economists agree that too much debt really can be a problem. The value of the dollar could collapse. Inflation could return with a vengeance. For Americans wary of too much federal power, swelling debts are a dangerous manifestation of overreach.
Another round of federal spending or not, large portions of the economy are thankfully in good shape as the first month of 2021 nears its end. It’s true of many sectors, from technology to consumer goods to agriculture to housing to finance. One way to look at it: The economy right now is like a car driving on a flat tire. Once the tire gets more air (in other words, more vaccinations) it should be running smoothly again. It’s different from the downturn a decade ago, when key parts of the economy’s engine were broken, i.e., its finance and housing sectors. The Covid crisis, meanwhile, is accelerating some major shifts in the economy—toward adoption of electric cars, for example, and Big Tech’s intent on participating in that shift. Companies in all realms are hastening their adoption of new tech tools like machine learning. The world, meanwhile, is pushing past the age of hydrocarbons. But less certain are the permanence of other big pandemic-era developments, like working from home, foregoing business travel and telehealth. Are those practices here to stay? How about the problem of worsening inequality, also turbocharged by pandemic-era forces?
For the moment, America’s hospitals continue to battle against Covid, amid worries about new strains of the virus. Health care professionals are all the while engaged in their epic campaign to vaccinate the public, racing against time. Producing, distributing and administrating hundreds of millions of vaccinations, to be sure, is no easy task. Alas, progress has thus far been slow.
Still, stock markets generally held strong last week, never mind the bubble talk, with a boost from healthy company earnings. There are certainly no signs of the Federal Reserve tightening the money supply any time soon. Will that mean interest rates stay extremely low? Or does the uptick this month herald something more noteworthy? How about last week’s bitcoin bust? Is that a trend? Will commodities—oil, minerals, grains, etc.—maintain their upward march?
We won’t discover all the answers this week. But we will get an avalanche of fourth-quarter earnings reports. It’s the busiest earnings week of the quarter, in fact, featuring iconic tech companies like Apple, Facebook and Microsoft. Johnson & Johnson will field questions not just about its earnings but more importantly, its promising one-shot Covid vaccine. Tesla will certainly command attention. Verizon and AT&T are up this week. So is McDonald's and Starbucks. Are there any signs of hope in the airline sector? American and Southwest might have some answers, as might Boeing and General Electric, the latter a big supplier of aircraft engines. But first, some highlights from last week:
Companies
Procter & Gamble, based in Cincinnati, gives a good window on consumer behavior. Its household products—Crest toothpaste, Nyquil medicine, Bounty paper towels, Pampers diapers, Covergirl makeup, Tide detergent…they’re a staple of every American’s shopping cart. Are these products selling well during the pandemic? Most indeed are, as you might expect with something like household products in a “stay-at-home” world. Like other manufacturers, P&G does face production and staffing challenges as the virus continues its lethal spread. This is all the more vexing as management tries to quickly revive output to meet growing demand. Rising commodity prices and shipping costs are another headwind. Perhaps more uncomfortably, a shift to buying more household products online inevitably means more competition with Amazon and its products (a competing line of diapers for example). P&G, however, insists that it’s channel-agnostic and that margins are no lower on the 14% of sales it now transacts online. In any case, the company’s overall results last quarter were strong—strong profits and strong sales growth, especially in the U.S. Its strongest category, and typically its largest and most profitable was cleaning supplies, including laundry detergent. On the contrary, people no longer going to the office bought fewer razors and deodorant (hold your nose). P&G said that among U.S. households, cleaning and sanitizing frequency is up 30%, dishwashing frequency is up 15%, air freshening frequency up 20% and in-home paper towel usage is up 15%. The question going forward is whether these stay-at-home habits stick after Covid passes. Make no mistake, P&G is a massive company, with about 100,000 workers. It spends $7b a year on advertising. In 2019, it spent $70m on airline tickets for U.S. employees (Business Travel News). Walmart is its biggest customer by the way, accounting for 15% of total sales. P&G certainly sells through Amazon as well. Ultimately, the company’s success depends on the classic “4 P’s” of marketing: product, place, price and promotion.
P&G was just one of many companies reporting their earnings last week. To briefly mention highlights from a few other calls: Bank of America now believes U.S. GDP will return to its Q4, 2019 level in early 2022. The logistics firm JB Hunt spoke of difficulties finding enough truck drivers. UnitedHealth said 11% of its Q4 costs were related to Covid-19 care. United Airlines said 2020 “was a year of going through hell” but leisure demand should revive quickly with vaccinations; business demand will take longer. Goldman Sachs, as it grows bank deposits, reaped the benefits of a hyperactive capital market. Netflix saw record signups for its streaming video service and now produces more than 70 movies a year. Halliburton, its energy sector fears eased when prices rebounded after crashing, is investing in autonomous drilling technologies. Union Pacific railroad mentioned how auto-related shipments are growing in Mexico (where many U.S. carmakers have extensive supply chains). IBM, a veteran of many technological shifts over the decades, spoke of its “hybrid cloud” strategy, its efforts to help clients digitize and investments in areas like artificial intelligence and quantum computing. Intel, another old guard tech behemoth eager to reawaken past glory, needs to stay ahead of the pack on innovation while executing on manufacturing. Will it decide to outsource some chip production to Asia?
Domino’s Pizza: Anyone hungry? For some money? Zach Fuss, of the food sector investment firm Continental Grain, explains how a fast-food pizza delivery chain can be so profitable for both the company and its independently owned franchisees. Michigan-based Domino’s was the original “ghost kitchen," said Fuss on the Invest Like the Best podcast, referring to kitchens that only prepare meals for delivery. It generally collects 5.5% of sales from franchisees, plus 6% of sales for marketing, which essentially makes it a brand manager. It also sells them pizza ingredients and cooking supplies. Franchisees, in turn, run their stores and earn profits based on how much food they sell. Sounds like any other fast-food chain. But Fuss highlights the model’s “remarkable” unit economics, not least because the three core pizza ingredients—cheese, sauce and dough—are all low-cost items (food with protein like hamburgers are more expensive). Domino’s also invests heavily in technology that makes ordering, delivering and food preparation standardized and ultra-efficient. It helps that most of its U.S.-based franchises tend to be individual or family-owned businesses rather than institutions like private equity groups—this, Fuss believes, makes it easier to get buy-in on new ideas and technology adoption. In 2019, for example, it began GPS delivery tracking and bicycle deliveries. It was also quick to adapt to the shift away from phone orders to mobile orders (currently, 65% to 70% of orders come via digital channels). It resisted working with services like Door Dash and Uber Eats. Domino’s itself is owned by the large private equity group Bain Capital (which bought control in 1998). Inexpensive ingredients, advanced technology… what else is behind the model’s success? Well, delivery-only means restaurants can be located in low-cost real estate without much foot traffic. It’s more or less a “build it once, sell it many times” business model, replicable with each new store opening. Then there’s the virtuous cycle of providing incentives for franchisees to open more stores, which reduces delivery times. For each $20 order, about $4 goes for delivery. Most franchisees, says Fuss, are former store employees or managers. They’ll typically incur roughly $300k in startup costs, earning high gross margins on more than $1m in annual revenues. That’s about the average anyway, and the average franchisee owns six to seven stores. Domino’s clearly faces competition from the growing array of other food delivery options. But pizza ordering is up big during the pandemic. Domino’s chief rivals by the way, are Pizza Hut, Papa John’s and Little Caesars. Worldwide, the company sells more than 3m pizzas a day from more than 17k stores. Its largest overseas market is India. A final data point from Fuss: Food consumed away from home is an $18 trillion business, normally accounting for 55% of all food consumed in the U.S. That number, he estimates, is probably more like 45% during the pandemic.
Sectors
Autos: Google has its autonomous car division Waymo. Amazon owns a stake in Rivian. Apple wants in on cars too. And Microsoft? It became the latest tech giant to place its bets on the giant auto sector as it transitions to electrification, autonomy and connectivity. Microsoft will invest in Cruise, the autonomous car division of General Motors. Like Ford and Chrysler (now Stellantis), GM faces a classic innovator’s dilemma: how to adopt new technology (i.e., electric cars) that by nature will kill off the technology in which it’s currently dominant (i.e., internal combustion engine cars).
Autos: Mark Fields, a former Ford CEO, discussed the industry’s current supply and demand conditions on an Automotive News podcast. As with many industries, the auto sector had a roller-coaster year in 2020, with demand plummeting in the spring but rebounding nicely by year’s end. Ultra-low interest rates helped, since most people borrow to buy their vehicles. Even business sales rebounded as companies got back on their feet. Still, overall vehicle sales dropped by about 15% in 2020, though this year should see a double-digit rebound. Fields thinks many people now see their personal vehicles as a safer way to travel than crowded alternatives like planes and trains. On the supply side, auto company inventory is 25% lower than usual, with Covid complicating operations. Firms face labor shortages and high absentee rates. Another problem is a shortage of semiconductors. Separately, Fields shared his opinions about Tesla, whose future profit he said will depend almost entirely on driving down the costs of its batteries. Its main challenge won’t be demand but affordability. Currently, Tesla relies on favorable regulatory incentives like tax credits. Soon, it will face much tougher competition from both new players like Apple and legacy players like GM (teaming with the likes of Microsoft) to pour billions of dollars into new battery technology. A company like Apple importantly, will likely outsource all of its production to Asia, just like it does with its phones. That could give it a big cost advantage over Tesla. Besides, Apple is already a master at supply chain management, something with which Tesla has stumbled at times. Apple already has lots of battery and tech expertise as well.
Auto Retailing: One final thought on the auto sector—one that makes legacy OEMs (original equipment makers) uneasy. GM, Ford and Chrysler sell cars through a network of independently-owned dealerships—there are roughly 17,000 of them nationwide. Well, dealerships earn lots of their profit on servicing and repairing vehicles. So they’re understandably worried about the shift to electric vehicles, which require a lot less maintenance. Tesla, as it happens, has a direct-to-consumer model rather than selling wholesale via dealers.
Semiconductors: In last week’s issue, we discussed the challenges of Intel and other chipmakers as they confront new realities about technology, competition and geopolitics. Well, there's this too: The Economist observes that semiconductor production capacity in Taiwan and Korea will likely become a chokepoint of the global economy. It compares this to the chokepoint status attributed to the Strait of Hormuz (a major thoroughfare for oil tankers) in the 20th century.
Shipping: Economist and author Marc Levinson, on Bloomberg’s Odd Lots podcast, gives a good overview of the world’s maritime shipping industry. Covid disruptions, including many cancelled sailings, have left ships and crews out of place. But at the same time, demand for goods is way up. The Financial Times says sending a 40-foot container from Asia to Europe would have cost about $2,000 in November. Now, that cost exceeds $9,000. Many U.S. bound ships from China are full but empty on the return voyage. It seems to be more of a problem for customers (i.e., big retailers like Walmart) than shippers themselves, given the pricing power shipping lines exert. It wasn’t always that way. As Levinson describes it, companies began building ever bigger and bigger ships starting in the early 2000s, hoping to drive down unit costs. But this resulted in overcapacity, especially when international trade stopped growing after the 2008/09 financial crisis—it’s still below 2008 levels today. The sheer immensity of the new ships, meanwhile, were harder for ports to handle and thus less reliable. They also tended to be slower, optimized not for speed but fuel efficiency. These pressures led to industry consolidation, including mergers and alliances. Today, three big groups control about 85% of world shipping. One involves the “2M” alliance led by Denmark’s Maersk and Switzerland’s Mediterranean Shipping. Another is the “Ocean Alliance” including France’s CMA/CGM, China’s Costco and Taiwan’s Evergreen. Lastly is the alliance—called “The Alliance”—with Germany’s Hapag-Lloyd, Taiwan’s Yang Ming and Japan’s ONE. Looking back, international trade was revolutionized by the shipping container, which made shipments cheaper and more reliable starting in the 1950s and 60s. But looking ahead, Levinson sees problems for the industry, not least the world’s aging demographics (likely to mean less demand for physical goods) and cost inflation linked to concerns about climate change. Corporate efforts to move factories out of China, in some cases bringing them back home, could also cut demand.
Health: Here are a few facts about hospitals in the U.S, courtesy of the American Hospital Association. The country currently has about 6,146 hospitals, nearly half of them run as non-profit “community” institutions. Whatever money they make supposed to be for improving the quality and cost of care rather than for owners. Another 21% are owned by investors and run for profit. About 16% are run by state or local governments. Just 3% are run by the Federal government. The remainder are mostly part of institutions, like a prison hospital. Also included in this other category are psychiatric hospitals.
Markets
Grain: Suddenly, America’s farmers are enjoying a boom. The Wall Street Journal notes a sharp rise in grain prices this year, boosted in part by tight supply and growing demand from China. Add to this last year’s big increase in federal support for farmers. It’s a welcome development for a sector that was previously mired in a multi-year recession. Corn, soybeans and wheat by the way, are all seeing price gains. Hence a boom for many in the agricultural ecosystem, from tractor companies to pesticide producers to farm mortgage lenders. Alas, not everyone is happy. Higher grain prices ultimately higher food prices.
Cobalt: One more commodity price rise story from the Wall Street Journal: Cobalt prices are already up 20% this year. Why? All you have to know is that cobalt is an essential ingredient to making batteries, and batteries are in turn the essential ingredient to making electric cars. This makes America’s car industry—and America’s government—uneasy. Much of the world’s cobalt is mined in the D.R. Congo under China’s control. After retrieved, the Journal explains, it’s shipped to South Africa, then onward to China for processing, then to battery makers around the globe. Tesla and others are working to find new technologies that reduce the need for cobalt.
Debate
Wealth Tax Good: President Biden’s economic plans don’t for now feature a wealth tax. But they should, argue some economists. Two leading proponents are Emmanuel Saez and Gabriel Zucman, whose data show the top 0.1% of Americans now controlling 20% of the entire country’s wealth; the figure was much lower in decades past (and might be higher once the effects of the Covid crisis are assessed and analyzed). The idea is to levy a tax on just a small group of extremely wealthy people, who typically don’t get much of that wealth from income. It's why income taxes, however progressive in terms of high rates for upper brackets, don’t generate all that much revenue from the ultra-wealthy. A wealth tax, besides just raising more revenue for the government, would diminish the lobbying power of plutocrats. Saez, in a 2019 debate hosted by the Peterson Institute for International Economics, downplayed past failures among some European countries that tried wealth taxes. The ability to implement them effectively has vastly improved, he said, with advances in data science and financial transparency. It’s now much easier, in other words to accurately assess a person’s wealth for taxation purposes. Past efforts, moreover, tried to cast the net too wide, targeting the moderately wealthy in addition to the ultra-wealthy—the plan must be more targeted to work well. Regarding the transparency point, it’s simply not as easy to just hide your money in a Swiss bank account anymore. Bank transparency laws are stricter. Robert Reich, a former Labor secretary, says roughly 60% of wealth is inherited, not earned through work. And the baby boom generation is poised to bequeath something like $30 trillion to their heirs over the next three decades. This, Reich, says, puts the U.S. on a path to becoming like an old European aristocracy. It will also reinforce racial and social inequalities. Senators Elizabeth Warren and Bernie Sanders are both champions of an annual wealth tax. Others call for a one-time tax to fund Covid-era needs. Under Warren’s proposed plan, by the way, Bill Gates would have paid an extra $15b in 2019, according to a CNBC analysis.
Wealth Tax Bad: Europe’s unsuccessful track record with wealth taxes should be a warning sign, critics say. Today, just a handful of countries like Switzerland and Norway still have a wealth tax. Even France, a past champion of the idea, no longer has one. Larry Summers, a former Treasury secretary, stresses the near impossibility of accurately valuing someone’s wealth. How much is Elon Musk’s Tesla stock really worth? It changes from day to day. The wealthy, in other words, have lots of invisible and illiquid assets. Perhaps more importantly, wealth taxes would be easy to avoid. People can move money to family members or charitable institutions. They can move it abroad, even if that means renouncing their U.S. citizenship. America, meanwhile, has armies of accountants well-schooled in the dark arts of tax avoidance—they’ll inevitably find loopholes. Another criticism of wealth taxes: they discourage people from saving and investing. As for a one-time tax, Bloomberg News notes how Argentina just tried that, and more than 500 wealthy citizens took tax residency abroad. Even if you're not opposed to the concept of asking wealthy citizens to pay more, other ideas to raise money would be more effective—Summers has suggested treating inheritance money as income, for example, or closing estate tax loopholes. Would the Supreme Court even affirm the constitutionality of a wealth tax? It’s not clear. A more libertarian line of attack is that anything designed to increase federal spending power is, well, a road to serfdom.
Government
Janet Yellen, nominated to become the next Treasury chief, presented her case to the Senate finance committee last week. She insisted that the benefits of more federal spending will outweigh the costs, especially given ultra-low interest rates. By not spending big during this moment of crisis, she argued, idled workers will lose valuable skills, which would mean a less productive economy, and in turn a worsening fiscal position. Importantly, added the former Fed chief, the federal interest burden as a percentage of GDP is no higher now than it was in 2008 thanks to those lower interest rates. But yes, she does believe that deficits and debt are a long-term threat, most importantly because of medical cost inflation. Republicans, still in control of the committee at the time of the hearing—control switched later in the week with the swearing-in of Georgia’s two new Senators—expressed unease at President Biden’s new spending plan. They also dislike his plan to ultimately raise taxes on wealthier individuals and corporations. One Democrat, Colorado’s Michael Bennet, said American’s concerning debt burden is the consequence of bad choices during the last 20 years, namely spending by his count $5.6 trillion on two wars while cutting taxes by $5 trillion. He blamed health care inefficiencies as well. But Bennet says smart spending, like investing in workers and infrastructure, will have a positive fiscal impact over time. Indiana’s Rob Portman, conversely, said the 2017 tax cuts were what led to the low unemployment and solid GDP growth pre-Covid. Other topics discussed at the hearing: minimum wage laws, automatic spending triggers, reforming the unemployment system, making the tax code fairer, reinstating state and local tax (SALT) deductions, trade with China, investing in clean tech, entitlement reform, child poverty and retirement security.
A quick word about Congressional power: With Democrats in charge of both the House and Senate, they now control the legislature's committees, with jurisdiction over which proposed laws to consider. Among those taking charge is Vermont's Bernie Sanders, now head of the influential Senate budget committee. Sanders is a vocal proponent of single-payer health care, in contrast to President Biden’s more incremental approach to reform. He now has a stronger platform to advance his cause.
The pressure is building on America’s tech giants. Washington, once highly supportive, is breathing down their neck, with hostility rising from both Republicans and Democrats. Columbia Law School professor Lina Khan, speaking on Scott Galloway’s Prof G podcast, said she believes there’s a more than 50% chance that at least one big tech company will be forced to break up. Facebook, she said, was the most likely target, followed by Google and then Apple. Khan more generally raised concern about consolidation across the U.S. economy, in industries as diverse as airlines and food. Four firms now control the nation’s chicken supply, for example, and another has control of all beef. Hospital consolidation, she adds, has resulted in a drop in the number of beds nationwide, from 1.5m in 1975 to more like 900,000 today. Half of all saline, important for medical care, is produced by one company. Her point is not just that excessive consolidation hurts consumers, but that it creates systemic risks to the entire country. Not having enough beds during the Covid crisis is a good example.
Places
Washington: Just as U.S. presidents deliver a State of the Union address each January, many state governors do something similar. This year’s State of the State addresses, as you might imagine, involve a lot of talk about fighting the Covid epidemic, including efforts to accelerate vaccine distribution. Other big topics include infrastructure and education investment, attracting new businesses, making growth more inclusive and clean energy. For Washington’s governor Jay Inslee, climate change was a central theme of his speech. Like the virus, he said, the challenge needs to be solved “through science and ingenuity.” Washington experienced one of its worst wildfire seasons in 2020, with the town Malden for one losing 80% of its buildings. A cycle of floods and droughts are another growing problem. The state’s “roaring” economy, Inslee said, has been fueled by innovation in technology, aviation, agriculture and clean energy (note: cheap energy thanks to dams and water power was central to developing western states like Washington and California). Moving forward, responsible economic development will depend on projects like the carbon neutral hockey arena soon to open for the Seattle Kraken, a new NHL team. “When you see this stunning building, you’re going to see that we can save our environment and prosper at the same time.”
Miami Mayor Francis Suarez tells Bond Buyer about the city’s influx of high-paying finance jobs. Companies with major new Miami facilities include Blackstone, Starwood Capital, JPMorgan, Goldman Sachs and Colony Capital. They might be joined by Microsoft—Suarez said the software giant would bring hundreds of jobs. Miami does of course have a big tourist sector that’s hurting right now. In addition, the ailing cruise industry is largely headquartered there. A longer-term concern is the city’s vulnerability to climate change. But housing right now, a key driver of Miami's economy, is strong. And the influx of all those new finance jobs helps.
U-Haul, the Phoenix-based moving truck company, published its 2020 U.S. migration trends gleaned from customer rental patterns. Where are Americans moving? Away from urban centers, for sure, and into less crowded places—that’s been a well-documented trend during the Covid pandemic. The San Francisco Bay Area and New York City saw the biggest outmigration in 2020, according to U-Haul. Both places, incidentally, saw growth in 2019. Bay Area residents are moving to places like Sacramento, San Diego, Stockton, Reno, Las Vegas, Portland, Phoenix and Seattle. Leading spots for outbound New Yorkers include the suburbs of Bridgeport, Poughkeepsie and New Haven, along with more distant places like Chicago and Atlanta. The top growth spots nationwide? Number one is North Port, Florida, near Sarasota, followed by Kissimmee near Orlando and Port St. Lucie north of West Palm Beach. Other notable growth stories include Auburn (Alabama), Madison (Wisconsin), Knoxville (Tennessee), Tyler (Texas), Ashville (North Carolina) and Charleston (South Carolina). As for states, Tennessee was tops for people moving in. California was tops for people moving out.
Chart
Farm Power
Ranked by 2019 earnings from agricultural commodities (source: USDA)
Comment area features highlights from "State of State" speeches that some governors delivered this month
StateReceipts in $bcommentsCalifornia$50.1San Fran. office vacancy rate soars to 17% in Q4, higher than during 2008/09 recession (Cushman & Wakefield)Iowa$27.4Gov. Reynolds: state’s unemployment at 3.6%, among lowest in nationNebraska$21.4Gov. Ricketts: unemployment even lower than Iowa’s, lowest in nation actually (big farm sector helping)Texas$21.2Dallas area currently experiencing the state’s worst Covid outbreak among metro areasMinnesota$16.7Former Minn/St. Paul economic development partnership chief once called region the "Silicon Valley of food"Illinois$16.5Among state’s top companies, none (not even McDonalds) employ more than Walgreens (Zippia)Kansas$16.3Gov. Kelly criticizes former governor Brownback’s deep tax cuts; depleted funds for schools, teachers, etc.Wisconsin$11.2Gov. Evers urges legislature to help fix "broken unemployment system"North Carolina$10.6Charlotte airport, an American Airlines stronghold, one of the world’s most profitable airline hubsIndiana$10.6Gov. Holcomb pledges to build new Interstate 69 bridge crossing Ohio RiverWashington$9.4Senator Cantwell: one in four jobs in state linked to int'l trade; strong opponent of Trump tariffsMissouri$9.3Enacted minimum wage increase this month, the result of voter referendumSouth Dakota$9.0Funding to improve broadband access a major priority for states with a lot of rural residentsArkansas$8.5Gov. Hutchinson: Tax cuts moved $800m from gov’t to individuals; state payroll down by 1,700 since 2015Ohio$8.4Claims to lead country in production of plastics, rubber, fabricated metals, electrical equipment, appliancesGeorgia$8.4Gov. Kemp says frontline health workers battling Covid facing "hell on earth"Idaho$8.0Gov Little proposes $450m in tax relief; transportation investment another top priorityFlorida$7.7Pre-pandemic, Miami Dade county generated about 16% of total state GDPNorth Dakota$7.62020 was a good year for the state’s farmers but a bad year for the state’s oil sectorColorado$7.5United Airlines says its Denver hub, along with its Houston hub, outperformed all its other hubs last quarterMichigan$7.4In 2017, state produced more than 2m cars and trucks, more than any other state (Mich Auto)Pennsylvania$6.7Pittsburgh, home of Carnegie Mellon university, becoming an important center for robotics, artificial intelligenceOklahoma$6.7In August, state’s oil production was down 18% y/y (state accounts for 4% of total U.S. oil output) (KC Fed)Kentucky$5.5Gov. Beshear calls for $1k salary increase for all teachers and other school workersNew York$5.3Buffalo getting a bit of an economic boost from success of the BillsMississippi$5.3America’s poorest state per capita, according to Chamber of Commerce, just ahead of Alabama and LouisianaAlabama$5.2Produces more cars/light trucks than all but four other states (Al.com)Oregon$5.1Value of exports to foreign countries was $24b in 2019; largest trading partners were China, Canada, JapanArizona$5.0Gov. Ducey: "Americans tired of living in states with high taxes, heavy regulation, low-growth and fading opportunity"Montana$3.6Has long border with Canada, which is currently closed; has big impact on local economyTennessee$3.5One of just nine states without an income tax (with TX, WY, WA, AS, NV, FL, SD, NH)Virginia$3.4Governor Northam wants to update formula determining how state allocates health funds to local govt’sNew Mexico$3.2Netflix expanding its film production in the state; could help alleviate reliance on oil and gas sectorLouisiana$3.0Ports doing well during pandemic, same for timber and agricultural sectors; oil/gas rebounding, tourism still devastatedSouth Carolina$2.3One of the three worst states for Covid infection rates right now; others are California and ArizonaMaryland$2.2Due to get about $400m in federal emergency rental assistanceUtah$1.8Salt Lake City recently opened new airport; serves as hub for DeltaWyoming$1.5Many state officials not happy about Pres. Biden's temporary drilling ban on federal landsDelaware$1.3One challenge for small states is that workers can often choose to live in neighboring states, thereby hurting tax baseNew Jersey$1.2Gov. Murphy highlights efforts to improve troubled NJ Transit; Gateway project revived with Biden administrationVermont$0.8Timber harvesting, important to the state economy, doing well this year; strong demand, constrained supplyNevada$0.7Sen. Catherine Cortez Masto, in Yellen nomination hearing, stresses need to support travel/tourism sectorMaine$0.7Has the oldest population of any U.S. state, more deaths each year than births (News Center Maine)West Virginia$0.6Was Donald Trump’s best state in terms of margin of victory in 2020; Biden’s best state was VermontConnecticut$0.6Gov. Lamont wants sports betting, internet gaming, marijuana legalization to avoid losing out to neighboring statesHawaii$0.6Film industry contributed $400m to state economy pre-Covid, starting to grow again after pandemic hit (KHON)Massachusetts$0.4The 2nd richest state per capita after Conn., according to Chamber of Commerce; NY number threeNew Hampshire$0.2Real estate the leading industry for job creation in past year; arts/entertainment the biggest job loser (Brian Gottlob via WMUR)Rhode Island$0.1Gov. Ramondo stepping down to become Pres. Biden’s Sec’y of CommerceAlaska$0.04Best bargain ever: U.S. bought state from Alaska for $7m in 1867; nobody knew then it was rich in gold and oil
Abroad
How to manage America’s economic relationship with the European Union? It will be a high priority for President Biden, following four years of tension during the tariff-brandishing Trump administration. Important though the U.S.-China economic relationship is, it’s not as large as the U.S.-E.U. relationship. In 2019, according to the Commerce Department, America sold $468b worth of goods and services to the E.U. Imports were even higher at $598b, thus a deficit that highlights American’s role as a buyer of so much of the world’s output. Exports to China were just $163b while imports were $472b. As it happens, the E.U.-China relationship is also important to the E.U.-U.S. relationship. That’s as Europe looks to ratify a new investment deal with China, which would further amplify China’s influence in European economic affairs. This concerns the U.S., uneasy about expanding Chinese power. Germany, the E.U.’s largest economy, led the push for a China deal, eager to support its export-dependent auto and machine-making companies most importantly. Germany is also America’s largest E.U. export market, followed by the Netherlands and France. All of this of course excludes the U.K., which left the E.U. in early 2020. What do Europeans buy from the U.S.? Boeing aircraft, most significantly, notwithstanding age-old subsidy disputes between Boeing and Airbus. What does the E.U. sell to the U.S.? Pharmaceuticals more than anything else. Also cars, medical supplies and industrial machinery. As UniCredit research notes, other key U.S.-E.U. discussion priorities as Biden takes over include climate change, corporate taxation and regulation of the digital industry.
Japan’s central bank maintained its long-held policy of expanding the money supply, eager to avoid deflation. For decades now, Japan’s economy—the world’s third largest after America’s and China’s—has experienced low growth, high public debt, ultra-low interest rates and ultra-low inflation. If all that sounds familiar, it’s because America and Europe are exhibiting similar trends. Japan’s short-term interest rates are actually negative now, while longterm rates (paid on ten-year government treasury bonds) are zero. The Bank of Japan (BOJ) is acting to keep both short and long rates low, in a policy known as yield curve control. Expanding the money supply will continue until y/y consumer price inflation consistently exceeds 2% (the U.S. Fed just adopted a similar stance). Right now, deflation is more likely than inflation, at least in the very short-term with prices for oil and leisure travel way down. The BOJ is however getting somewhat more optimistic about future GDP growth, with private consumption picking up. Public investment is up. Financial conditions are benign with help from government credit support. And importantly, exports and industrial production strengthened in late 2020 on overseas demand for goods including autos. That said, the Covid crisis remains a major drag on face-to-face service businesses like restaurants and hotels. The crisis has weakened the labor market as well. Japan, keep in mind, has a rapidly aging and shrinking population, which might be a major factor behind its decades-long stagnation. Just prior to the pandemic, surging inbound tourism was providing a welcome boost. But that’s gone for now. Tokyo is hoping the 2021 Olympics, originally scheduled for last summer, can safely begin this summer (the scheduled start is July 23). Besides ultra-loose monetary policy and tourism, other efforts to jumpstart Japan’s economy include policies to encourage more females to join the workforce, new international trade agreements and modest rises in very low immigration rates.
Looking back
The Great Depression: The 1920s economic boom followed the lethal influenza pandemic of 1918. Will the 2020 Covid pandemic precede another round of the “Roaring Twenties?” The 1920s, unfortunately, ended in tears as the October 1929 stock market crash marked the start of a decade-plus period of extremely tough times. What caused this Great Depression? How did America eventually get out of it? To this day, the topic polarizes economists, often along a central fault line in American history: that between proponents of a larger role for Washington (from Alexander Hamilton to Joseph Biden) to those favoring a more limited role (from Thomas Jefferson to Ronald Reagan). As historian David Kennedy once put it, some assign blame for the Great Depression to the “unbridled abuses of the private sector” and others to “the meddling, encroachments, interference and irresponsibility of the public sector.” You’ll find many economists from both sides subscribing to the conclusion championed by Milton Friedman and Anna Schwartz in their “Monetary History of the United States.” To them, the Great Depression was a self-inflicted wound. The Federal Reserve, more specifically, repeatedly tightened the money supply when they should have expanded it. And it failed to execute its role as the lender of last resort to the banking system. The U.S. money supply thus fell by almost a third from late 1930 to late 1933. And thousands of banks were left to fail. Former Fed chief Ben Bernanke, by the way, a scholar of the Great Depression, agrees with this assessment. The Depression might have partly stemmed from some overlooked problems of the 1920s: excessive speculation and debt, a big Florida property bubble, income inequality, struggles in the agricultural sector, etc. Some blame the Smoot-Hawley tariffs of 1930, which dramatically shrank farm, auto and steel exports. Central Michigan University professor Jason Taylor, in a 2016 episode of the Macro Musings podcast, mentioned President Hoover’s efforts to artificially raise nominal wages. Whatever the true causes, U.S. GDP shrank from $104b in 1929 to just $56b in 1933. As late as 1940, the figure still hadn’t climbed back to its 1929 level. Unemployment, meanwhile, jumped from 3% to 25%. Also from 1929 to 1933, industrial production fell by half. Deflation increased debt burdens, distorted economic decision-making and reduced consumption. Suffering was widespread, more so because most families at the time had only one earner. And there were fewer social safety net programs. Into this national emergency stepped President Roosevelt (FDR) in 1933. He set about with a flurry of new programs, laws and actions that greatly increased federal involvement in the economy. Many of the initiatives, as Robert Caro’s classic book "The Power Broker" makes clear, were inspired by Governor Al Smith’s actions in New York state. FDR, with the support of a Democratically controlled Congress, created federal jobs programs, labor protections, infrastructure projects, retirement pensions (Social Security), insurance for bank deposits, Wall Street oversight, food stamps, credit support for housing, programs to lift farm prices and so on. Importantly and very controversially, he broke America’s ties to the international gold standard, effectively allowing the money supply to expand. Did the measures work? That’s where the heated arguments come in. The economy did grow for a few years after the early New Deal programs. But another sharp downturn came in 1937. Only with World War II did indicators like unemployment return to healthy levels. Some say the New Deal efforts went too far and didn’t address some of the people most in need (African Americans, for example, which influential southern Congressmen went out of their way to exclude from relief programs). Others say FDR didn’t go far enough, at times actually cutting federal spending (he was much more of a budget hawk than many believe). Besides, the war increased federal involvement in the economy much more than the New Deal ever did.
One important thing to keep in mind about America in the 1930s was just how underdeveloped the South was. The region, agrarian from the earliest days, was devasted by the Civil War in the 1860s. Still by 1938, when Washington issued a report on the economic conditions in the South, the average annual income stood at $314, compared to $604 for the country as a whole. More than half of the region’s people had no land of their own. Workers on cotton plantations were earning as low as ten cents a day. One in ten Southerners were illiterate. Ira Katznelson takes a deeper look in his book “Fear Itself.” He describes a South that was overwhelmingly poor and rural, with depleted land and a quasi-feudal agriculture system. Bankruptcies and foreclosures were common. Roads were poor, as were schools for both whites and blacks. The region lacked local investment capital. It had few industrial research facilities, limited mineral resources, high freight rates, low tax collection, polluted water, outbreaks of malaria and a severe shortage of hospitals, clinics and doctors. The only major unionized parts of the economy were Alabama’s steel factories and the port of New Orleans. Most houses lacked toilets and running water. Northeastern capitalists controlled most of the South’s major finance, mining, transport, communications and manufacturing companies. The one thing the South did have, however, was power in the U.S. Senate. During the 1930s, southern legislators were a critical part of the Democratic Party and happened to hold many of the most powerful committee chairmanships (Robert Caro’s “Master of the Senate” made this abundantly clear). Southern legislators were big New Deal supporters, bringing lots of federal dollars to their home states. Perhaps most famously, the Tennessee Valley Authority (TVA) delivered low-cost power that helped industrialize the region. World War II would transform the South in many ways. In the decades following the war, leading up to the present, many areas of the South (Atlanta for example) have become a magnet for people and businesses. That said, states like Mississippi, Alabama and Louisana remain the nation's poorest.
Looking ahead
It’s a big topic of discussion among economists: Why did U.S. productivity growth slow starting in the 1970s? And more importantly, is it poised to now accelerate? Caleb Watney of the Progressive Policy Institute has an opinion, which he shared on the Macro Musings podcast. He’s generally on optimist, pointing to potentially transformative new technologies like mRNA vaccines, artificial intelligence, driverless cars, new energy advances (including geothermal and nuclear), faster and higher-capacity wireless communications, advances in semiconductors (like Apple’s new M1 chips) and transport technologies like the hyperloop. Some of these are just now taking big leaps toward significantly impacting the economy—vaccine technology for sure, but also driverless cars (Google’s Waymo is already offering a driverless ride-hailing service in Phoenix). Just as importantly, Watney argues, are technologies to slow climate change, a big threat to productivity. That means clean tech, yes, but also things like artificial meat. He cautions, however, that overaggressive environmentalism can sometimes get in the way of progress. Same for NIMBYism (the “not in my backyard” sentiment in which people fight against anything built in their own neighborhoods). What else could threaten future productivity growth? Watney worries some about Covid’s ongoing impact on workers congregating and sharing ideas in person. Nor are immigration curbs helpful—he cites three waves of past arrivals that were greatly influential in boosting the economy's productivity: 1) the arrival of Jewish scientists from Germany and Austria (among them Albert Einstein) before World War II, 2) German scientists after the war and 3) Russian scientists and mathematicians after the fall of the Soviet Union. Finally, Watney stresses the past role of government in fostering innovation, highlighting the human genome project which laid the foundations for the mRNA miracle. Washington’s research and development funding, though, has waned in recent years. There are of course many skeptics about future productivity, including Robert Gordon, who wrote an influential book called “The Rise and Fall of American Growth” (more on that in future issues of Econ Weekly). A lot of his argument revolved around differences in the impact of technology then and now (electricity more impactful than cell phones, for example). Some point to the rise of the service sector, where it’s harder to become more productive (think of the giant health sector—do you really want doctors to become more “productive” by seeing ever more patients per hour?). Others even question whether we’re measuring productivity right. Maybe productivity growth really has been strong all along, neglecting to record the immense utility of free services like Wikipedia or Gmail. As a reminder, productivity is how much you can make relative to how much labor, capital and whatever else you need to make it. Simply put, if an economy produces more for less, it gets wealthier.
Wondering what career to pursue? Here’s the latest U.S. News and World Report list of “Best Jobs in America in 2021.” It selects them based on things like average salaries, expected growth and even levels of stress. The top ten: physician’s assistant, software developer, nurse practitioner, health services manager, physician, statistician, speech pathologist, data scientist, dentist and veterinarian. If you haven’t noticed, health care and information technology loom large on the list. LinkedIn, the professional networking site owned by Microsoft, shared its own list of hot jobs, including anything to do with e-commerce fulfillment, mortgage lending, health care, sales, workplace diversity management, digital marketing, nursing, education, digital content creation and professional/personal coaching.