Issue 35: September 13, 2021

photo courtesy of Tourism Mississippi

Inside this Issue:

  • A Fall Stall? Growth Prospects Slow Amid Delta Despair
  • Cool Down from the Wind-Down? Stimulus Withdrawal Adds to Risk
  • Debt Danger Deepens: U.S. Treasury Headed for Default if Congress Doesn’t Act
  • General Dynamics: Building Subs for Uncle Sam  
  • Social Insecurity: Federal Pension Program Running out of Money
  • Health Care Prices: How Much for that Crutch? It’s Complicated.
  • Food Prices: What Price for that Rice? It’s Going Up.
  • Meeting Weed’s Needs: Financing the Cannabis Sector
  • Blow Tech: Breakthroughs in Offshore Wind Power
  • Of Bonds and Bondage: A History of Slave-Based Finance
  • And This Week’s Featured Place: Golden Triangle, Mississippi, Deep South Success

Quote of the Week

“One of the questions Amtrak is often asked is why the United States does not have faster or more high-speed trains like most European countries in corridors where that would make sense. The answer is simple: money.”

–  Amtrak CEO William J. Flynn, addressing a House Committee on Transportation and Infrastructure in May

Market QuickLook

The Latest

Autumn has all but arrived. Across the country, schools are back in session. But Covid just won’t go away.

As summer said goodbye, with it went optimism about the economy. The worldwide spread of Covid’s Delta variant, while nowhere near as impactful as earlier waves, is nevertheless causing trouble. We’ll get a better idea of just how much in a few more weeks, when Corporate America starts reporting Q3 results. But already clear is a slowdown in some leisure activities including travel, plus global supply chain disruptions that are getting worse, not better, as key Asian suppliers close factories. Still, there’s a great shortage of everything from chips to ships, with no end in sight.

That means no end in sight to the sharp price inflation that’s bedeviled policymakers throughout 2021. We’ll get the August consumer price index reading on Tuesday, offering new clues on how transitory or persistent the current situation really is. The job market, meanwhile, influenced by Covid’s resurgence, showed highly disappointing numbers for August—just 235,000 new jobs, none of them in the closely watched leisure and hospitality sector. This follows average monthly job gains of 350,000 during the six prior months. Restaurants and bars, in fact, saw 42,000 job losses during August.

Prices still up. Labor markets still tight. And growth poised to slow as the Covid crisis persists. To this add more disruptive weather, including Hurricane Ida’s impact on Gulf Coast oil facilities. What’s more, Federal stimulus support is waning, including an end this month to supplemental unemployment benefits, which follows the end of a federal ban on home evictions. There are no assurances, meanwhile, that two new spending bills—measured in the trillions of dollars—will overcome legislative challenges. Hence the newly developing worries about the economy’s resiliency. There are even murmurs of the world “stagflation,” a 1970s-era malady defined by high inflation and GDP stagnation.

That sounds at least a bit hyperbolic. GDP did grow a robust 6.5% in Q2, according to the latest estimates. That follows 6.3% growth in Q1. And jobs are certainly open to the willing and qualified—10.9m of them, according to the latest JOLTS report. This might be the biggest puzzle of all for the post-pandemic economy: Why so many jobs, yet so many jobless?

It’s a puzzle front and center in the mind of Fed chief Jay Powell, whose much-anticipated Jackson Hole speech this summer telegraphed a readiness to start tapering asset purchases before the year is done. He was speaking though, before the disappointing August jobs report. The Fed has three more policy meetings in 2021, one later this month, another in early November and the last in mid-December. To be clear, the Fed won’t be raising interest rates any time soon, just dialing back purchases of Treasury and mortgage-backed securities.

The Fed separately released its latest Beige Book, highlighting late summer developments across the country. Frequently repeated are mentions of labor, resource. materials and product inventory shortages impeding business activity. There’s mounting pressure on firms to raise prices. But demand remained strong through the summer, if somewhat weaker than in spring. The manufacturing, transportation and housing sectors, despite higher input costs, are enjoying a profit boom. The labor-heavy leisure and hospitality sector, meanwhile, saw a summer surge before Covid’s comeback cooled things off as autumn approached. The report featured anecdotes about the semicon shortage (not ending anytime soon), a wave of early retirements in the health care sector (especially nurses) and ongoing droughts affecting agriculture in parts of the country (most importantly California’s Central Valley). Examples abound of lower-income people challenged to find affordable housing and childcare, complicating efforts to heal the job market. The Boston Fed cited a firm who said pay for logistics specialists had doubled since the start of the pandemic. The Richmond Fed cited a business forced to refund several bridal parties because dresses did not arrive on time for weddings.

Another big topic of discussion regarding the Fed concerns Powell’s future—he’s up for reapportionment early next year. Will President Biden go with someone else to assume what’s arguably the country’s most important economic job? Of course, the position of Treasury Secretary is worthy of that distinction as well. It’s currently filled by Janey Yellen, whose top concern right now is avoiding a loan default. Catastrophic though that would surely be, it could happen as early as next month if Congress doesn’t act to lift the debt ceiling. Legislators tend to do so at the eleventh hour. But one never knows.

Is Apple’s business model under threat from fraying U.S.-China relations and legal assaults on its app store? To what extent will Washington regulate up and comers in the financial sector like Robinhood and emerging crypto-players like Coinbase? Will Walmart succeed with its new Amazon-like GoLocal delivery service for merchants? What’s next for Elon’s creations Tesla and SpaceX? Is last week’s stock market retreat a harbinger of things to come? Those were a few of the hot discussion topics leading up to the weekend, one in which Americans commemorated the 9/11 attacks 20 years earlier.


  • General Dynamics: According to the Wall Street Journal, U.S. defense spending accounted for 11% of all federal spending last year, and nearly 4% of total U.S. GDP. But that’s abnormally low. At its post-9/11 peak in 2011, defense spending was 20% of federal outlays and close to 5% of GDP. At the center of this $700b-plus in annual spending are five giant defense contractors playing an important role in the American economy: Northrop Grumman (located in the Boston metro), Boeing (Chicago/Seattle), Lockheed Martin (Washington), Raytheon (Washington) and General Dynamics (Washington). The latter, like Raytheon, is headquartered more specifically in Washington’s northern Virginia suburbs, in a booming area surrounding Dulles airport. Post-9/11 defense spending, indeed, made this area one of the fastest growing regional economies of the 2010s. General Dynamics itself sold $26b worth of goods and services to the U.S. government last year, generating nearly 70% of its total revenue. Most importantly, it builds nuclear-powered submarines for the U.S. Navy, though it’s also a producer of tanks, cybersecurity technology and civilian aircraft (it owns the business-jet maker Gulfstream). The company’s CEO, Phebe Novakovic, was a recent guest on the David Rubinstein show, where she discussed some of the opportunities and challenges of running a defense contractor. The contracts are large, for sure. But the U.S. government is a monopsony buyer, giving it unique negotiating leverage. Of course, politics play a role too, with Congressional representatives always looking to secure defense contracting jobs for their home districts. Novakovic, CEO since 2013, was a former CIA spy whose father immigrated to the U.S. from Serbia. In Q2, 2021, General Dynamics earned a 10% operating margin.

Tweet of the Week


  • Health: To understand the U.S. economy, be sure to give adequate attention to health care. It’s now responsible for almost one out of every $5 spent in the U.S. And in many communities across the country, it’s the leading provider of jobs. Often, it’s a rare provider of well-paid jobs—doctors, nurses, hospital administrators, etc., who need to be employed locally. The economics of U.S. health care, however, are notoriously screwy (to use the technical term). On manifestation of this screwiness is health care pricing, the subject of a recent New York Times investigation. It looked at a newly implemented Trump administration rule requiring greater price transparency. Hospitals, it concluded, have simply ignored the rule after losing lawsuits, refusing to post standard rates for care. The reasons for resisting the change seem clear enough: Data analyzed by the Times show hospitals are charging patients wildly different amounts for the same basic services, including procedures as simple as an X-ray or a pregnancy test. In the meantime, the country’s five largest private sector health insurers—Aetna, Cigna, Humana, United and the Blue Cross Blue Shield Association—are up in arms about a ruling that requires disclosure of privately negotiated rates between insurers and providers of health care products and services (hospitals, doctors, drug makers and device makers). Here, the Times discovered that in many cases, insured patients are paying prices that are higher than they would if they pretended to have no coverage at all. In addition, a single insurer can have a half-dozen different prices within the same health care facility, based on which plan was chosen at open enrollment, and whether it was bought as an individual or through work. A not-so-fun fact: Fully 16% of insured families currently have medical debt, with a median about of $2,000. “It’s not just individual patients who are in the dark,” said Martin Gaynor, a Carnegie Mellon economist who studies health pricing. “Employers are in the dark. Governments are in the dark. It’s just astonishing how deeply ignorant we are about these prices.”
  • Airlines: What’s the busiest passenger airline route in the U.S.? It used to be New York JFK-Los Angeles LAX. But that was before the pandemic. According to Visual Approach Analytics, the new champion is Newark-Orlando, reflective of the booming Florida leisure market this spring (the data is for Q1, which includes Florida’s peak tourist season). Total U.S. airport traffic for August by the way, was up 169% from last year’s depressed levels but still down about 15% from August 2019, based on TSA data. That 15% decline, importantly, includes longhaul international travelers which are still few and far between. Atlanta, the world’s busiest airport, hasn’t reported August figures as of this writing, but July volumes were down 21% from 2019, or down 17% excluding international traffic. Looking ahead, big U.S. airlines say bookings are taking a hit as the Covid’s Delta variant spreads.
  • Cannabis: The Financial Times looks at the booming industry for marijuana, which is now legal in 18 states—or more if you include authorized use for medicinal purposes. The industry, the FT estimates, is now worth some $20b. But with cannabis still illegal at the federal level, companies are finding it a challenge to get financing. Banks generally stay away from the sector, fearing legal repercussions. Some cannabis entrepreneurs are self-funded. Others are turning to startups catering to the space. Still, borrowing costs are relatively high, and lots of transactions are conducted in cash.


  • Food: Will Americans get their Christmas gifts in time? A more important question is: Will the world have enough affordable food to eat? A Bloomberg article highlights some worrisome forces currently driving up food prices. One is a shortage of workers, including farmers, meatpackers, slaughterhouse workers, chefs and waiters. At the same time, food commodity prices are rising. And so is the cost of shipping. The worker shortages are global, in some cases linked to Covid spikes in regions like southeast Asia. The article notes how Malaysia, the world’s second largest palm oil producer, has lost about 30% of potential output for oils used in products like chocolate and margarine. Shrimp production in southern Vietnam—one of the world’s top exporters—has dropped by 60% to 70% from before the pandemic. It mentions problems in southern Italy too, where a fifth of tomatoes have been lost this year. One problem is the food industry’s notoriously low levels of automation—it’s still a highly labor-intensive sector. Investments designed to change this are up, but they’ll take time to yield any significant changes. Don’t take this lightly. Rising food prices have a nasty way of producing social unrest, playing a role in many of history’s most epic upheavals, from the French Revolution to the Arab Spring.
  • Food: An article this summer in The Guardian paints an unflattering portrait of America’s food industry, which it characterizes as overconcentrated, underregulated and exploitative. A handful of powerful transnational companies, it claims, “dominate every link of the food supply chain, from seeds and fertilizers to slaughterhouses and supermarkets to cereals and beers.” It names Kraft Heinz, General Mills, Conagra, Unilever and Del Monte as major culprits, but also the four companies that control 65% of the food retail market: Walmart, Costco, Kroger and Ahold Delhaize. In meatpacking, it’s Tyson, Brazil’s JBS,Cargill and Smithfield (now owned by the Chinese multinational WH Group). Such companies, The Guardian charges, greatly influence the cost of food and what consumers eat, as well as the livelihoods and work conditions of America’s food laborers. At least half of the country’s 10 lowest-paid jobs are in the food industry, the article says, and farms and meat processing plants are among the most dangerous and exploitative workplaces in the country. “Overall, only 15 cents of every dollar we spend in the supermarket goes to farmers. The rest goes to processing and marketing our food.” Some other stats: In 2020, 82% of all food stamps were spent in supermarkets and superstores like Walmart, which means taxpayers contributed $64bn to their revenue. Currently, 93% of sodas are owned by just three companies. Same for 73% of all breakfast cereals. Farmers, meanwhile, depend on government handouts, receiving $424b in subsidies between 1995 and 2020, according to the Environmental Working Group. Roughly half of that was for growing just three crops: corn, wheat and soybeans. In addition, between 50% and 75% of the country’s 2.5m farmworkers are undocumented migrants who have few labor rights and limited access to occupational healthcare. Agriculture, furthermore, is responsible for more than a quarter of global greenhouse gas emissions. A final statistic, attributed to Amanda Starbuck of Food & Water Watch: “We have roughly one-third fewer grocery stores today than we did 25 years ago.”
  • Labor: The great labor shortage of 2021 lingers on, with no end in sight. The trucking industry for one, with a driver shortage even before the pandemic, is lobbying Congress for permission to recruit more foreigners. That could provide some relief from today’s inflation and supply-chain bottlenecks. But it’s a hard sell with so many Americans still unemployed, never mind that they don’t seem interested in driving trucks. A trucking company in Cleveland by the way, according to the latest Fed beige Book, has already given five pay raises this year.


  • Social Security recipients, attention: You’re poised to get a big increase in payouts next year due to inflation. Indeed, the federal program has a cost-of-living adjustment that ties payouts to current price levels. And prices are currently rising faster than they have in many years. According to the program’s trustees (led by the Treasury secretary), beneficiaries could see a roughly 6% boost next year due to this year’s elevated consumer price index. Is that good or bad? In theory, the adjustments are designed to leave recipient spending power neutral. But for a retiree that’s not buying a new house, renting a used car, buying a washing machine or staying in a hotel, it could be a windfall. The point is, prices are up sharply for some things, but hardly all things, which was more the case during the 1970s. This year by the way, beneficiaries are getting a cost-of-living adjustment of just 1.3%, based on 2020’s low rate of inflation.
  • Social Security: For background, the Social Security program, created during the Great Depression of the 1930s, is today the federal government’s singe largest program, covering roughly 178m workers (which is almost the entire U.S. workforce). Last year, it paid pension benefits to some 50m people. Where does the money come from? From today’s employers and employees, each charged a payroll tax of 6.2% (participation is mandatory). The money goes to what’s called the Social Security trust fund, which also receives money from federal income taxes on the benefits some Americans receive. Unfortunately, it’s not enough money. Or it won’t be next decade. The trustees, in their latest report on the program’s finances, said the fund won’t have enough money to cover all its benefit obligations after 2033. That’s assuming Congress makes no changes, which it might. Already since 2010, the program’s annual costs have exceeded its annual income (excluding interest), forcing it to make payouts by dipping into its reserves. When Social Security was originally designed in the 1930s, average lifespans were considerably lower, with people typically collecting pensions for only a few years after retiring. Now Americans live much longer, often collecting benefits for decades. These same demographic trends, incidentally, are also challenging the finances of Medicare, the 1960s-era program covering health care costs for retirees. Longer term, i.e., post 2040, the situation should stabilize as the large Baby Boomer generation passes and the workforce grows thanks to a large cohort of Americans born between 1990 and 2008. (It’s the current ratio of working people to retired people that matters). Much lower birth rates post-2008, and a more recent aversion to immigration, portend a return to more challenging conditions after 2055.
  • Social Security: What exactly do Social Security recipients get? In some cases, as much as 78% of their average wages earned over their careers. For higher earners, the percentage is less—about 42% for middle income workers and as low as 28% for high earners. But it also depends on when you decide to start collecting benefits—the earlier you start the less per year you’ll get (the earliest you can start collecting is age 62). The program provides benefits to spouses and children of beneficiaries too, including after they pass. The general rule is that people need about 70% of their pre-retirement income to live comfortably after they stop working. Which means Social Security benefits alone won’t cover all of what most people need. There’s also, by the way, a separate Social Security fund for disabled workers.


  • Golden Triangle, Mississippi: Making steel. Building helicopters. Manufacturing engines. These are not things typically associated with Mississippi, by many measures the poorest U.S. state. But they’re all indeed a feature of the economic landscape in a region dubbed the “Golden Triangle.” It’s not in the storied Mississippi Delta, one of the highest-poverty regions in America. Nor is it on the state’s ecologically fragile Gulf Coast. The Golden Triangle lies in the east, close to the Alabama border. The triangle includes Starkville, home to Mississippi State University and its more than 4,000 employees. There’s West Point at the top of the triangle. There’s Columbus, home to a U.S. Air Force base. And within the triangle: A surprising number of manufacturing facilities serving national and even global markets. It wasn’t always this way. As late as 2007, the region was in the throes of a de-industrialization wave symbolized by the closure of an old meat processing plant that employed roughly a thousand people. But Joe Max Higgins was already hard at work. He’s today one of the country’s most celebrated economic development leaders, featured in media programs like “60 Minutes” and even a Harvard Business School case study. An early triumph was securing the Tennessee Valley Authority’s “megasite” certification for major industrial development. That ensured a steady supply of cheap electricity and a streamlined path for manufacturers looking to establish a presence. Put another way, it removed important elements of risk for companies A Russian steel manufacturer responded, opening a plant since sold to Indiana-based Steel Dynamics. Airbus, the European aerospace giant, owns a helicopter factory close to the steel plant. Not far away is a tire plant opened in 2015 run by Japan’s Yokahama Tires. One selling point for the Golden Triangle is its proximity to the many auto manufacturing plants throughout the South. Sure enough, car companies are some of the largest buyers of Mississippi-built steel and tires. Paccar, which makes engines, is another area manufacturer catering to the auto sector. In total, Higgins and his team claim to have netted some 6,000 manufacturing jobs since the early 2000s, along with $5.5b in capital investment. No wonder why others see the area as a model for development. The biggest challenge is finding enough skilled workers to staff all the new manufacturing jobs. For all its success and job creation, the area hasn’t seen much population growth and struggles to attract millennials and immigrants. Mississippi State certainly helps, as does East Mississippi Community College, which works closely with manufacturers to help train people in specific skills as needed. Mississippi, incidentally, has the highest percentage of African Americans of any state, a legacy of the pre-Civil War era when much of its land was used for slave-based cotton farming. Nearly half of all residents in Lowndes County, home to many of the factories, are African American, making the area’s success with job creation a potential template for improving racial equity. The Airbus factory, furthermore, employs many U.S. military veterans. Speaking earlier this year on the “Supertalk Mississippi” program, Higgins outlined his goal to attract more companies catering to outdoor sports like hunting and boating, both popular in the Golden Triangle. Another avenue of growth: Solar power farms; several are now in development. Even with all the corporate newcomers, the Golden Triangle offers just one nonstop airline route. But it happens to be to Atlanta, the busiest airport in the world. And that means easy one-stop access to most major business centers worldwide, including auto centers like Detroit, Frankfurt and Tokyo. The area is well connected, meanwhile, by highways, railways and even a canal to the Gulf coast port of Mobile that opened in 1985. An ample supply of land, lowish housing costs, mild winters and a nonunion labor force are other attractions for employers. Importantly, the state recently allocated heavy spending for upgrading broadband access. The Golden Triangle never did win a giant foreign auto manufacturing plant like Greenville-Spartanburg, profiled in the July 19th issue of Econ Weekly. (Nissan has one near Mississippi’s capital Jackson, and Toyota has one south of Memphis near Tupelo). But it’s certainly benefited from the South’s expanding auto industry exposure, and from modern manufacturing more generally.


  • China: With respect to its relations with China, the U.S. begins the 2020s just as it ended the 2010s: With heightened levels of tension and suspicion. The presidents of both countries spoke last week, searching for ways to lower the temperature. But there’s no escaping the reality that the world’s two largest economies feel increasingly threatened by one another. At the same time, their economies remain intricately tied to one another—neither is as wealthy without the other. From the U.S. perspective, China is a major source of demand (it’s a critical export market for aerospace and agriculture, for example). And it’s a major source of supply (many of the goods Americans buy on Amazon or in Walmart and Target come from Chinese factories). Some economists even suggest that if the two economies continue to drift toward decoupling from one another, U.S. consumer prices will spike. A far more dire scenario, meanwhile, is a military confrontation, most likely over China’s claims to control Taiwan. Both the U.S. and China have their current challenges dealing with Covid. Both also have high levels of debt. China’s non-financial corporate sector, according to The Economist, owed the equivalent of 222% of GDP at the end of 2020. The U.S. figure is 164%.
  • Here’s an unrelated set of stats from The Economist, emphasizing America’s exposure to economies beyond its border. There are 9m Americans living abroad, it writes. Some 39m American jobs are supported by international trade. And Americans hold $33 trillion in foreign assets.
  • Germany: On the always-interesting Macro Musings podcast hosted by David Beckworth, economist Philippa Sigl-Glöckner cites three key challenges for the German economy: One is de-industrialization, most importantly as it pertains to the country’s large auto manufacturing sector facing the transition to electric vehicles (which require fewer workers to build). The second threat is export dependency, with so much of Germany’s GDP tied to selling things like cars, airplanes and advance machinery abroad, with China a critical market. And third, Germany faces worrisome demographic trends amid low birthrates and a growing population of retirees. This was one reason why outgoing Chancellor Angele Merkel opened Germany’s borders to many Syrian refuges. But the decision, to say the least, was controversial.
  • El Salvador: It doesn’t typically get much attention on the global economic stage. But El Salvador’s Bitcoin experiment is in the spotlight. It last week became the first country to make the digital money an official currency. That means businesses there must accept it as payment. It’s risky for sure, with Bitcoin’s value fluctuating widely—its price tanked last week. El Salvador, by the way, also uses the U.S. dollar as an official currency. A central feature of its economy: exporting t-shirts and other clothing to the U.S.

Looking back

  • Slavery is one of many subjects found in “Americana” a multi-century U.S. economic history by Bhu Srinivasan. The book moves through the country’s many breakthroughs in industry and technology, from canals to cotton to textiles to railroads to oil, to steel, to automobiles, all the way to Silicon Valley. Among the interesting discussions is one regarding the value of slaves in the U.S. South pre-Civil War. They became, Srinivasan explains, in effect the true monetary base of the southern economy, widely used as collateral for loans. Slaves worked better than land in this regard because land isn’t mobile and varies in value by location, crop yield, access to water and so on. Southern farmers financed their operations in part by borrowing against future cotton production but also against the value of their slaves, similar in economic terms to how today’s homeowners borrow against the value of their homes. Slaves, like houses, had clear and transferable legal titles. And like the mortgages of today, packaged and traded around the world, slave-backed bonds were widely bought and sold in secondary markets worldwide. The book tells the story of two Louisiana banks—eventually merged into what’s today JP Morgan Chase—that together had collateralized more than 13,000 slaves. New York City finance companies, meanwhile, including Lehman Brothers, were central middlemen in the global trade involving slaves, cotton and clothing. Srinivasan pins the collective value of all U.S. slaves shortly before the Civil War at about $3b, more than double the value of all the railroads in America at the time. Slaves were thus the most valuable asset in the U.S. economy. And maybe the world economy—cotton was the lifeblood of Britain’s vital textile industry. The Confederacy hoped this fact would convince Britain to supply it with the goods and weapons it needed to win the Civil War—a cotton for iron trade. But a northern blockade of southern ports proved effective. And Britain would find alternative sources of cotton in two of its colonies: India and Egypt.
  • Prohibition: Another chapter of “Americana” talks about the economics and politics of banning alcohol sales in the 1920s. Interestingly, before World War I, about a third of the U.S. federal budget came from taxes levied on alcohol sales. So a ban would have been fiscally reckless. But with the advent of income taxes to help finance the war, revenue from alcohol taxes was rendered largely irrelevant. Some of the biggest proponents of prohibition were anti-immigrant groups unhappy that so many beer manufacturers were owned by German Americans. In didn’t help that many Irish immigrants, resented for their Catholicism, were stereotyped as big drinkers. Rural Americans saw drinking as an urban vice that needed to be checked. Southern states, despite a traditional hostility to federal control over industries, were among the first to ratify the Constitutional amendment banning the sale of alcohol.

Looking ahead

  • Clean Energy: The Economist profiles a plan by Royal Dutch Shell and Iberdrola’s Scottish Power to build the world’s first large-scale floating wind farm off the coast of Scotland. Currently offshore wind power is restricted to waters shallow enough to build the base of a windmill on the seabed. But 80% of the world’s offshore wind blows over places deeper than that, the article explains. Hence the idea for a floating windmill. Unique engineering problems make that difficult. But several companies including Shell and Iberdrola think the technology is ready to deploy at scale. The article concludes: “The upshot of all this is that it may soon be possible to extract a lot more electrical power from the wind, to do so without covering hillsides with turbines, and to make a profit while doing it.”


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