FRIDAY, JUNE 11, 2021
BLOGS/OP-EDS
Fed’s Flow of Funds: Household Net Worth Increased $5.0 Trillion in Q1 (Bill McBride, Calculated Risk)
Bill McBride on the new Z1 numbers, “…..The third graph shows household real estate assets and mortgage debt as a percent of GDP. Note this graph was impacted by the sharp decline in Q2 GDP….Mortgage debt is still down from the peak during the housing bubble, and, as a percent of GDP is at 50.0% – down from Q4 – and down from a peak of 73.5% of GDP during the housing bubble. The value of real estate, as a percent of GDP, increased in Q1, and is above the average of the last 30 years….”
Pettis On Cochrane (Michael Pettis, Twitter @michaelxpettis)
Pettis makes the case Japan isn’t a comp to the United States, “John Cochrane asks about Japan during the past three decades: “If massive deficits, including lots of ‘infrastructure’ are going to boost the US economy, why did they not do so for Japan?” He suggests that if it didn’t work in one case it is unlikely to work in the other, but there are obvious differences between the two economies that make their responses incomparable. First, Japan entered this period massively overinvested in infrastructure, whereas most analysts agree that the US is underinvested. This means that while infrastructure spending in the US is likely to be productive, and so will boost GDP (and, with it, the economy’s real debt-servicing capacity) by at least as much as it boosts debt, in Japan much of it was likely to be non-productive after 1990. The fact that debt to GDP rose so sharply in Japan is strong evidence that this was the case. Perhaps more importantly, Japan’s GDP after 1990 was further harmed by the effective amortization of the malinvestment of the 1980s Second, Japanese household consumption, at roughly 53-55% of GDP, is extremely low compared to that of the US, which is at roughly 68-69%. This means Japan is overly-reliant on investment and trade surpluses to drive growth. I’ve long argued that Japan would never regain its previous growth rates (and from the very beginning I dismissed the possible success of Abenomics) until it had managed the difficult redistribution of income that would make consumption a bigger driver of Japanese growth. Given the huge differences in the structures of their economies and in their recent economic histories, it seems a waste of time to compare the two countries. I know that statistical comparisons are at the heart of mainstream economic analyses, but they implicitly assume that the measured entities are comparable, even when they clearly are not.”
Unhedged: we are Japan, circa 1987 (Robert Armstrong, Financial Times) ($)
Robert Armstrong on the possibility of a melt up, I’m turning Japanese, I think I’m turning Japanese, I really think so, “..In Japan in the 1980s, long-term bonds had higher yields than stocks (higher than stocks’ earnings-price ratio, that is). Here is a chart from Okina, Shirakawa and Shiratsuka showing what they call the yield spread, or earnings yield subtracted from the long-term bond rate:That spread in the US now is even lower than it was in Japan in 1987. In fact it is negative. Earnings yields are low, but higher than long Treasuries. That might suggest, to a bullish mind, that US stocks have even further to run than Japanese stocks did. We may indeed want to plan for the possibility of Japan-style asset price melt-up. It doesn’t seem like the central forecast, but it doesn’t seem impossible, either….”
On the Crisis and Inflation, Barron’s Shows How the Past Can Be Prologue (Matt Klein, Barrons) ($)
Matt Klein draws parallels btw the peacetime demobilization after the Second World War and the current state of the American economy, “…As a result, the U.S. household saving rate went from an average of a little under 6% from 1935 to 1940 to nearly 30% from 1942 to 1944. By the end of the war, Americans had saved more than $100 billion beyond what they otherwise would have, based on their peacetime behavior—a surplus worth 90% of all the consumer spending that took place in 1945. For comparison, Americans have saved about $2.5 trillion more than they otherwise would have since the pandemic began, which is worth about 15% of all consumer spending in 2019. Despite the inflation fears shared by Holden and other economy watchers, these unspent funds didn’t finance a postwar consumption boom—just as Barron’s had rightly predicted back in 1943. “Financial history teaches that the bulk of savings is, in general, quite permanent,” we wrote. “Instances where there has been a mass rush from savings into things” occur only when “runaway inflation has shaken confidence in the fundamental stability of the currency.” And that, in turn, usually happens only in societies that lose wars. In fact, the U.S. household saving rate remained well above the pre–WW II average every single year until the late 1990s. Rather than spend down their hoarded cash, Americans worked hard to preserve the financial gains they had achieved….”
Three inflations 1/2 (John Cochrane, The Grumpy Economist)
Cochrane on inflation, “…Now to the point: Where is the current surge in inflation coming from? I rebased the CPIs to 2018, and here they are. No surprise, the current surge of inflation is concentrated in durables. Durables went up 3% April to May, a 36% annualized rate, on top of 3.52% March to April! The others are rising too, interestingly, but not as spectacularly. It’s also interesting that the big decline in the pandemic was among nondurables. This is all common sense. Bar and restaurant prices went down in the pandemic, less so TVs and gym equipment, and “stuff” is now really getting hard to find and to produce. As Tyler Goodspeed points out, this inflation has wiped out the real value of recent nominal wage gains….”
The end of “the end of inflation” 2/2 (John Cochrane, The Grumpy Economist)
More John Cochrane, “This spring’s spurt of inflation clearly already means one thing: The end of “the end of inflation.” For 25 years inflation has seemed stuck on a downward trend. Those of us who worry about it seemed like end-of-the-world sign-holders that couldn’t leave the 1970s behind. It’s hard to buck the trend. A famous economist advised me to give up studying inflation — inflation is 2%, he said, that’s all you need to know. Apparently a new constant of nature. Well, apparently not. Inflation can happen, and there is an economics of inflation. Right now it’s pretty obvious — supply constraints both natural and artificial, coupled with rampant demand. Nobody is really sure where it will go….”
Bad Day At BlackRock? (Craig Pirrong, Streetwise Professor)
Craig Pirrong on institutional investors’ large scale purchases of single family homes, “…In turn, this means that inquiry into this issue should focus on whether post-Crisis, there are excessive restrictions and costs imposed on individuals looking to finance home purchases. That is, are the post-2008 laws and regulations designed to prevent a recurrence of the housing boom too restrictive? I don’t have an answer to that question, but again, posing the right question is where you have to start. My provisional conclusion now is that institutional investors are doing what they do: responding to price signals in order to maximize risk adjusted returns. They are responding to incentives. To evaluate what is going on, it is necessary to evaluate whether those incentives have been distorted by ill-conceived policies…”
What’s Scarier Than the Inflation Scare? Markets (John Authers, Bloomberg) ($)
John Authers observes markets are seemingly underreacting to inflation data,“…Headline inflation has reached 5% for only the second time in 30 years…This may well be transitory, but it’s certainly rather alarming. The market reaction is arguably even more unnerving, and certainly more extreme. If we define real long-term interest rates as the 10-year Treasury yield minus the headline inflation rate (which is the way many people would), then real yields have tanked to minus 3.7%. In the last 70 years, they have only been lower than this in 10 months, all during the worst inflationary years of 1974 and 1980. In other words, real yields are by far their lowest since the Fed under Paul Volcker convinced the market that it could control inflation in the early 1980s….This chart from Dario Perkins of TS Lombard in London illustrates the extremity of the bond market nicely. It maps 10-year yields on the vertical scale, against core inflation. Usually, and unsurprisingly, higher inflation tends to mean higher bond yields. The current yield looks like a historic outlier. Arguably, bond yields have never been this tolerant of high inflation….
News
Private capital industry soars beyond $7tn (Robin Wigglesworth, Financial Times) ($)
“…The private capital industry has grown to more than $7tn thanks to demand for higher-returning but pricey and opaque strategies…Although still dwarfed by the traditional asset management industry — which primarily invests in mainstream, public equity and bond markets — explosive growth in areas such as private equity lifted the size of the overall private capital industry to $7.4tn at the end of 2020, according to Morgan Stanley. The bank expects it to hit $13tn by 2025. Private capital is now growing as quickly as cheap, index-tracking passive investing…The private capital industry has accumulated almost $2.5tn of “dry powder” — money committed to funds by investors but not yet deployed. This has underscored the ferocious competition for attractive deals, and led some analysts to warn that returns cannot remain as buoyant as they have been historically….”
The Global Logistics Logjam Shifts to Shenzhen From Suez (Stella Yifan Xie, Costas Paris, + Stephanie Yang, Wall Street Journal) ($)
“…a fresh wave of Covid-19 clusters in Asia—where vaccination campaigns remain in their early stages—is creating new bottlenecks in the global supply chain, threatening to push up prices and weigh on the post-pandemic recovery. An outbreak at one of the world’s busiest ports in southern China has led to global shipping delays, while infections at key points in the semiconductor supply chain in Taiwan and Malaysia are worsening a global chip shortage that has hindered production in the auto and technology industries….Some ships have had to wait up to two weeks to take on cargo at Yantian, with roughly 160,000 containers waiting to be loaded, according to brokers. The price of shipping a 40-foot container to the West Coast of the U.S. has jumped to $6,341, according to the Freightos Baltic Index—up 63% since the start of the year and more than three times the price a year earlier…”
Slow jobs growth may not be a bad sign for America’s recovery (Staff, The Economist) ($)
“…Last year’s rapid rebound reflected the unique nature of the pandemic recession. Employers shed a staggering 22m jobs in March and April 2020, but about 80% of the unemployed at that time were temporarily laid off, with a job to which they expected to be recalled once lockdowns eased. (During the Great Recession, by contrast, temporary lay-offs never accounted for more than 15% of all unemployment.) When firms began to reopen, the temporarily unemployed could immediately resume work; their ranks have plunged by 16m since April last year, or by about 90%, contributing to a staggering decline in the jobless rate of about nine percentage points. But there are ever fewer temporarily laid-off workers waiting to be brought back (see chart, left panel). Meanwhile, workers who have permanently lost their jobs, who made up just 9% of the unemployed early in the pandemic, now represent about a third of all those out of work….note Robert Hall of Stanford University and Marianna Kudlyak of the Federal Reserve Bank of San Francisco, the road from unemployment to a permanent job match may include more than one round of searching. Workers seeking employment often cycle through short-term jobs before finding a long-term match, which helps explain why the pace at which individual unemployed jobseekers find work is faster than that at which aggregate unemployment returns to normal….”
New Econ Research
Long shadows: The Black-White gap in multigenerational poverty (Winship, Pulliam, Shiro, Reeves, + Deambrosi, American Enterprise Institute)
“…We find a stark racial gap in the persistence of poverty across multiple generations. Fully 21.3 percent of Black adults between the ages of 30 and 39 are in the bottom fifth of the income distribution for the third generation in a row, whereas the same is true for only 1.2 percent of White adults. Among all Black and White adults who are in their third generation of poverty, 83 percent are Black….Three-generation poverty occurs among one in 100 Whites but describes the experience of one in five Black adults. Black adults in their 30s are over 16 times more likely than Whites are to have had both a parent and grandparent in poverty (defined as the bottom fifth of the income distribution)….Blacks are 41 percent more likely to be in third-generation poverty than Whites are to be poor…”
New Numbers
Financial Accounts of the United States – Z.1 (Federal Reserve Board)
“…The net worth of households and nonprofit organizations increased by $5.0 trillion to $136.9 trillion in the first quarter. The value of directly and indirectly held corporate equities increased by $3.2 trillion largely because of further gains in corporate equity prices. The value of real estate held by households increased by about $1.0 trillion. After four quarters of solid growth, household net worth is now about $19 trillion above its level at the end of 2019….”
New Science
Newly detailed nerve links between brain and other organs shape thoughts, memories, and feelings (Emily Underwood, Science)
“…people, researchers are adding surprising new details to the rough sketches Penfield and others devised. For more than 100 years, scientists have known that the vagus nerve carries signals between the organs and the brainstem. As part of the parasympathetic nervous system—active when the body is at ease or recovering from stress—the vagus regulates autonomic functions such as heart rate, breathing, and digestion. But new studies have shown signals carried by vagal fibers climb beyond the brainstem, revealing a broad interoceptive network in the brain that interprets internal changes, anticipates the body’s needs, and sends commands to fulfill them. The network includes brain regions involved in more complex cognition, which means the nerves monitoring the body’s basic workings also respond to—and influence—how we remember, process emotion, and even construct our sense of self. Challenging traditional distinctions between disorders of the brain and body, the new studies may hold clues to the nature of consciousness…”
Mysterious fast radio bursts come in two distinct flavours (Davide Castelvecchi, Nature)
“…A radio telescope in Canada has detected 535 fast radio bursts, quadrupling the known tally of these brief, highly energetic phenomena in one go. The long-awaited results show that these enigmatic events come in two distinct types — most bursts are one-off events, with a minority repeating periodically and lasting at least ten times longer on average. The findings strongly suggest that fast radio bursts could be the result of at least two distinct astrophysical phenomena. “I think this really just nails it that there is a difference,” says study co-author Kiyoshi Masui, an astrophysicist at the Massachusetts Institute of Technology in Cambridge….”
In Our Airpods
Inflation Debate With Hooper (Bloomberg Surveillance)
THURSDAY, JUNE 10, 2021
BLOGS/OP-EDS
We Ran the Treasury Department. This Is How to Fix Tax Evasion (Tim Geithner, Jacob Lew, Henry Paulson, Robert Rubin, +Larry Summers, New York Times) ($)
Larry Summers Tim Geithner, Jacob Lew, Henry Paulson and Robert Rubin on how to increase tax revenue through better compliance, “… When income can be verified by third-party reports — like wages, salaries, pension and unemployment income — misreporting rates are under 5 percent. But misreporting exceeds 50 percent for certain types of business income, like rental and proprietorship income. The current tax system thus benefits certain high earners who accrue most of their income from sources where misreporting is common. We are convinced that better information-reporting requirements can be designed that will permit significant increases in revenue collection without imposing any burden at all on taxpayers and imposing no significant increase in regulatory burdens across the economy. Relying on financial institutions to relay some basic information about account holders is a sensible way forward. With better information for the I.R.S., voluntary compliance will rise through deterrence as potential tax evaders realize there is a risk to evasion. The Treasury’s Office of Tax Analysis estimates that these initiatives will generate $700 billion over the 10-year budget window. But this proposal, if anything, is modest….”
The Inflation Red Herring (Joe Stiglitz, Project Syndicate) ($)
Stiglitz on inflation, “…Now that the normal process has been interrupted, there will be hiccups, and these will translate into price increases for one product or the other. But there is no reason to believe that these movements will fuel inflation expectations and thus generate inflationary momentum, especially given the overall excess capacity around the world. It is worth remembering just how recently some of those who are now warning about inflation from excessive demand were talking about “secular stagnation” born of insufficient aggregate demand (even at a zero interest rate)….Moreover, even if inflationary pressures were to become truly worrisome, we have tools to dampen demand (and using them would actually strengthen the economy’s long-term prospects). For starters, there is the US Federal Reserve’s interest-rate policy. The past decade-plus of near-zero interest rates has not been economically healthy. The scarcity value of capital is not zero. Low interest rates distort capital markets by triggering a search for yield that leads to excessively low risk premia. Returning to more normal interest rates would be a good thing…”
How ‘creative destruction’ drives innovation and prosperity (Martin Wolf, Financial Times) ($)
Martin Wolf reviews Philippe Aghion (with Céline Antonin and Simon Bunel) new book, “…As the authors explain, the model of growth through creative destruction has three elements. First, “innovation and diffusion of knowledge are at the heart of the growth process”. Growth is cumulative, because the innovators of today stand on the shoulders of all the scientists and technologists who went before them. Second, innovators are motivated by the possibility of lucrative monopoly. Those rents need to be protected, through property rights, including rights over intellectual property. Finally, innovation threatens incumbents, who will fight to repress it. Thus, “On the one hand, rents are necessary to reward innovation; on the other hand, yesterday’s innovators must not use their rents to impede new innovations.”..”
The Ecology of Innovation (William Janeway, Project Syndicate) ($)
Bill Haneway compared Aghion’s new book with Dan Breznitz’s new book, “…Despite their very different approaches to the same topic, a conceptual thread linking the work of Breznitz and Aghion can be found in the Schumpeterian growth model’s failure to consider the risk that a technological innovation may fail to find a market. In the world of IT and its applications, the Schumpeterian model sits squarely in Breznitz’s stage of “second-generation product and component innovation,” where competition focuses on innovating cheaper, faster, and better ways to serve already established markets….Yet the rise of professional VC runs parallel to the digital and biotechnology revolutions that have driven the innovation economy of the last half-century. In each case, the US government served both as an upstream investor in science and as the first, collaborative customer for the outputs of new technologies that were too costly and unreliable for commercial deployment. And in each case, the highly skewed super profits reaped by a few persistently successful VCs have leveraged recurrent waves of speculative excess, as investors and market incumbents come to realize that a “new economy” might be in the making.VCs show up at the dance when there is a platform built for them by the state, from which they can attract the attention of buyers seeking to translate an uncertain future into cash today at speculative prices. But this “three-player game” is not the whole story, just as Silicon Valley is not the sole site of successful innovation, and just as the mathematics of the Schumpeterian model does not capture the full dynamics of innovation….For entrepreneurial initiatives to succeed at a regional, let alone national, scale, they need to be embedded in an ecosystem of innovation that spans markets and the state, and whose culture sanctions supportive institutions…”
The Rise of SPACs: IPO Disruptors or Blank Check Distortions? (Aswath Damodaran, Musings on Markets)
Aswath Damodaran cautions that small investors running into SPAC’s are playing a risky game, “…Put simply, no matter which measure of returns you look at, and over almost every time period, investors in SPAC-merged companies lose money. It is true that repeat sponsors do better than first-time SPAC sponsors, at least in the near term (three months), but the magic fades quickly thereafter. Finally, the median returns are much worse than the average, because of a few outsized winners, and that may explain part of the allure, is that these winner stories get told and retold to attach new investors. If there is a cautionary note in these findings, it is for investors who invest in SPAC-merged companies, after the deal is consummated, since it looks like for many of these companies, prices peak on the day of the deal, and wear down in the months after, partly because the hype fades and partly because SPAC warrant conversions continue, upping share count and the dilution drag on value per share….The bottom line is that SPACs, at least as constructed now, are games loaded in favor of the sponsors. There are some SPAC investors who are canny players at this game, usually cashing out at the time the deal is announced and using warrants to augment their returns, but those SPAC investors who stay on as shareholders in the merged company find themselves holding a loser’s hand. Finally, while there are issuing companies that may be able to go public because of SPACs and collect higher proceeds, the dilution inherent in the process acts as an anchor dragging and holding down stock prices in the aftermarket. While there are some who are pushing for the SEC to ban or constrain SPACs, the problem, as I see it, is not that there is insufficient regulation, but that investors in SPACs who are sometimes too trusting of and too generous to big name sponsors, and too lazy to do their own homework…”
CoreLogic: 1.4 Million Homes with Negative Equity in Q1 2021 (Bill McBride, Calculated Risk)
“…CoreLogic … today released the Homeowner Equity Report for the first quarter of 2021. The report shows U.S. homeowners with mortgages (which account for roughly 62% of all properties) have seen their equity increase by 19.6% year over year, representing a collective equity gain of over $1.9 trillion, and an average gain of $33,400 per borrower, since the first quarter of 2020….From the fourth quarter of 2020 to the first quarter of 2021, the total number of mortgaged homes in negative equity decreased by 7% to 1.4 million homes, or 2.6% of all mortgaged properties….”
News
Consumer Prices in U.S. Top Forecast, Stoking Inflation Concern (Reade Pickert, Bloomberg) ($)
“…The consumer price index climbed 0.6% from the prior month after a 0.8% jump in April that was the largest since 2009. Excluding the volatile food and energy components, the so-called core CPI rose by a larger-than-forecast 0.7%, according to Labor Department data Thursday….The gains were fairly broad and driven by steady growth in the costs of used vehicles, household furnishings, airfares and apparel. The increase in previously owned cars and trucks accounted for about one-third of the total monthly advance in the CPI, the Labor Department said…”
U.S. Equities Rise, Yields Steady After CPI: Markets Wrap (Kamaron Leach, Bloomberg) ($)
“…The S&P 500 was trading around its all-time high as all the main American equity indexes advanced. The tech-heavy Nasdaq 100 was headed toward its highest level since late April as megacap technology stocks rallied. The 10-year Treasury yield eased back below 1.5% following an initial surge in the wake of the inflation report….”
Banks to Companies: No More Deposits, Please (Nina Trentmann and David Benoit, Wall Street Journal) ($)
“…Bank deposits have continued to surge this year. Between late March and May 26, they rose by $411 billion to $17.09 trillion, according to the latest available data from the Federal Reserve. That is slower than the pace last spring, but still nearly four times the average of the past 20 years, according to the Fed data…”
Surprise Jump in U.S. Wages Gives Inflation Debate a New Twist (Olivia Rockeman and Reade Pickert, Bloomberg) ($)
“…But last week’s jobs report showed a larger-than-forecast pickup in average hourly wages for a second straight month. It turns out that whatever the unemployment numbers say, there’s a shortage of people ready to work at the going rate of compensation — prompting many employers to boost pay or offer bonuses in order to staff up. That raises the prospect of what’s known and dreaded in economics as a wage-price spiral…”
U.S. to Donate 500 Million Covid-19 Vaccine Doses to Lower-Income Countries (Sabrina Siddiqui, Wall Street Journal) ($)
“…President Biden’s administration plans to donate 500 million coronavirus vaccine doses produced by Pfizer Inc. to the rest of the world, according to people familiar with the plans.The administration expects 200 million of the Pfizer doses will go to other countries this year and 300 million across the first half of next year, one of the people said…”
New Econ Research
No, Monopoly Has Not Grown (Robert Atkinson + Filipe Lage de Sousa, Information Technology And Innovation Foundation)
“…In 2017, 80 percent of U.S. business output was from industries with low levels of concentration, with that share increasing from 62 percent in 2002.. the facts (data from the Economic Census) do not support assertions of monopolization. More than 80 percent of business output is in sectors with low concentration ratios, including many advanced technology industries. Moreover, from 2002 to 2017, concentration mostly stayed low and increased very little. In addition, more-concentrated industries did not on average show greater increases in prices or boosted profits than others…”
New Numbers
Consumer Price Index Summary (U.S. Bureau Of Labor Statistics, U.S. Department Of Labor)
“…The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in May on a seasonally adjusted basis after rising 0.8 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 5.0 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008….”
Core CPI annualized changes versus “Supercore” annualized changes. Supercore accounts for more than 94% of core weightings. (George Pearkas on Twitter @pearkes)
New Science
Nonreplicable publications are cited more than replicable ones (Marta Serra-Garcia + Uri Gneezy, Science Advances) ($)
“We use publicly available data to show that published papers in top psychology, economics, and general interest journals that fail to replicate are cited more than those that replicate. This difference in citation does not change after the publication of the failure to replicate. Only 12% of postreplication citations of nonreplicable findings acknowledge the replication failure. Existing evidence also shows that experts predict well which papers will be replicated. Given this prediction, why are nonreplicable papers accepted for publication in the first place? A possible answer is that the review team faces a trade-off. When the results are more “interesting,” they apply lower standards regarding their reproducibility.”
The Most Irrational Number (Jordan Ellenberg, Slate)
“…But my favorite thing about the golden ratio has nothing to do with pentagons or Pepsi. It’s that the golden ratio, among all irrational numbers, is the most irrational one. What can that mean? Either a number is the ratio of two whole numbers or it isn’t*. It turns out that there are ways to talk about how irrational an irrational number is. After all, the fact that a number like φ is irrational doesn’t mean there aren’t rational fractions very close to it. Of course there are!…Here’s a beautiful fact, a bit too hard to prove here: You won’t find any better rational approximations to φ than the ones the Fibonacci sequence provides. In fact, in a way that can be made quite precise (but not here), φ, out of all numbers, is the one that’s least well approximated by fractions; it is, in this sense, the most irrational number. That, to me, is golden…”
The Mystery at the Heart of Physics That Only Math Can Solve (Kevin Hartnett, Quanta Magazine)
“…Mathematics, which requires internal consistency and attention to every last detail, is the language that might make QFT whole. If mathematics can learn how to describe QFT with the same rigor with which it characterizes well-established mathematical objects, a more complete picture of the physical world will likely come along for the ride. “If you really understood quantum field theory in a proper mathematical way, this would give us answers to many open physics problems, perhaps even including the quantization of gravity,” said Robbert Dijkgraaf, director of the Institute for Advanced Study…”
WEDNESDAY, JUNE 9, 2021
BLOGS/OP-EDS
News from the End of Capitalism: Strong wage growth at the bottom, corporate concentration not a crisis (Jim Pethokoukis, American Enterprise Institute)
Jim Pethokoukis reports, “…The argument that capitalism is nearing its terminal stage (“late-stage capitalism”) has a big problem. The data don’t support the notion of a top-heavy socio-economic system that now only works for a few…..Check out these findings, via the Information and Technology Foundation, of Census Bureau economic data:…“Just 35 of 851 industries (4 percent) were highly concentrated, with the top-4 firms (the C4 concentration ratio) holding more than 80 percent of the market.”….“In 2017, 80 percent of U.S. business output was from industries with low levels of concentration, with that share increasing from 62 percent in 2002.”…“Fifty-five percent of industries increased concentration between 2002 and 2017; 45 percent decreased.”…Producer prices rose less from 2002 to 2017 in industries with higher levels of concentration than overall prices…”
Governments should tax cash flow, not global corporate income (Glenn Hubbard, Financial Times) ($)
My friend Glenn Hubbard on the new G7 corporate tax proposal, “…There is a better way to achieve what Yellen and her finance minister colleagues are trying to accomplish. To begin with, countries could allow full expensing of investment. That approach would move the tax system away from a corporate income tax toward a cash flow tax, long favoured by economists. In this revision, the minimum tax would not distort new investment decisions. It would also push the tax burden on to economic rents — profits in excess of the normal return to capital — better satisfying the apparent G7 goal of garnering more revenue from the most profitable large companies. And such a system would be simpler to administer, as multinationals would not need to set up different ways to track deductible investment costs over time in different countries….”
Housing and Demographics: The Next Big Shift (Bill McBride, Calculated Risk) ($)
Bill McBride points out the US housing market has a strong tailwind, “…This graph is from 1990 to 2060 (all data from BLS: current to 2060 is projected). We can see the surge in the 20 to 29 age group last decade (red). Once this group exceeded the peak in earlier periods, there was an increase in apartment construction. This age group peaked in 2018 / 2019 (until the 2030s), and the 25 to 34 age group (orange, dashed) will peak around 2023. For buying, the 30 to 39 age group (blue) is important (note: see Demographics and Behavior for some reasons for changing behavior). The population in this age group is increasing, and will increase further over this decade. The current demographics are now very favorable for home buying – and will remain positive for most of the decade….”
The Fed risks reacting too slowly if inflation keeps rising (Martin Wolf, Financial Times) ($)
Martin Wolf worries the Fed is getting out over its skis “…The rise in inflation we are now seeing might be both modest and temporary and not affect inflationary expectations, as the Fed believes. But the Fed has locked itself into responding too slowly, especially given the fiscal expansion. This is because, in the words of Richard Clarida, vice-chair, “we expect it will be appropriate to keep the federal funds rate in the current 0 to 25 basis point target range until inflation has reached 2 per cent (on an annual basis) and labour market conditions have reached levels consistent with the [Federal Open market] Committee’s assessment of maximum employment”…Given the lags between policy and outcomes, this guarantees overshooting. By the time the economy finally reaches the point when the Fed starts to tighten, it will be smoking hot (at “maximum employment”) and, inevitably, getting hotter. That is what happened in the 1970s. In that case, the necessary disinflation was postponed until Paul Volcker took over in 1979. The experience was brutal. Given the inevitable lags between tightening and bringing inflation under control, the costs are again likely to be severe. That would not matter to the US alone. Remember: the Volcker shock triggered the Latin American debt crisis. This time, there is much more debt around almost everywhere. A severe monetary tightening would create even more devastation than then….”
Why Yellen May Be Right Not to Fear Inflation (Peter Orszag, Bloomberg) ($)
Peter Orszag notes that peer economies are seeing inflationary pressure despite smaller fiscal response “…The evidence from other countries provides further perspective on whether America’s disproportionately strong fiscal response is the main driver of current inflation, which in turn could indicate whether it will become permanent. Inflation has been rising in G-7 countries and in the Euro area, and most of this increase seems unrelated to the countries’ drastically different fiscal responses. The scatterplot below shows that the U.S. is a large outlier on the size of its fiscal relief, but only a modest outlier on inflation. 3 This comparison is clearly simplistic (and the U.S. is large enough to influence inflation rates in other countries). But it is at least clear that a large part of recent inflation is not unique to the U.S….”
Farewell, Millennial Lifestyle Subsidy (Kevin Roose, New York Times) ($)
Kevin Roose reports that investors are ending the subsidized economy and implicitly offers a glimpse of what a world of relatively higher cost low skill labor looks like “…The average Uber and Lyft ride costs 40 percent more than it did a year ago, according to Rakuten Intelligence, and food delivery apps like DoorDash and Grubhub have been steadily increasing their fees over the past year. The average daily rate of an Airbnb rental increased 35 percent in the first quarter of 2021, compared with the same quarter the year before, according to the company’s financial filings….Hiring a private driver to shuttle you across Los Angeles during rush hour should cost more than $16, if everyone in that transaction is being fairly compensated. Getting someone to clean your house, do your laundry or deliver your dinner should be a luxury, if there’s no exploitation involved. The fact that some high-end services are no longer easily affordable by the merely semi-affluent may seem like a worrying development, but maybe it’s a sign of progress….”
Workers Are Quitting Hotel and Restaurant Jobs at the Highest Rate on Record (Joe Weisenthal, Bloomberg Oddlots) ($)
“…Per this morning’s JOLTS report, 5.6% of workers in the accommodation and food-services industry quit their job in April, up from 5.4% the previous month. This is record territory. Of course, the more restaurants and other service industries make a point of how aggressively they’re trying to hire, the more workers will feel comfortable leaving a job, knowing that other opportunities await them….”
Where a Labor Shortage Is Most Acute: Manufacturing, Retail, and Transportation (Matt Klein, Barrons) ($)
Are manufacturing jobs great again? Matt Klein notes there are currently more open positions in the American manufacturing sector than at any other time since the 1990s, “…There were twice as many manufacturing job openings in April as there were in the year before the pandemic, on average. In fact, there are more open positions at American manufacturing companies than at any point since at least the 1990s, by far. There’s also a record number of open positions in the “transportation, warehousing, and utilities” category, up about 30% from the prepandemic average. Together, these two categories explain about a quarter of the total increase in the number of open positions compared to the prepandemic peak of November 2018…”
Policy in a time of political madness (Paul Krugman, Krugman Wonks Out)
Krugman makes the case that while policy might not matter in short term, it’s still important to try to get it right, “…As for voters rewarding successful policy, to the extent that the economy affects elections, that effect seems to come mainly from short-term performance — how fast the economy is growing in the year or less before the election — which has very little to do with the overall quality of policy, and may not be much affected by policy at all. Add to this the real chance that what voters want may not even matter in 2024. So is there any point in even arguing for good policies? Yes, so long as you don’t have illusions about saving the world. The detective novelist Raymond Chandler published a wonderful essay about writing, “The Simple Art of Murder,” in which he argued among other things that no matter how important your theme, what mattered was what you could do with it: “Some very dull books have been written about God, and some very fine ones about how to make a living and stay fairly honest.”The point is that there are many people trying to save democracy, and rightly so. But meanwhile things like tax policy must be made, and it’s still important that we try to do it right…”
News
The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax (Jesse Eisinger, Jeff Ernsthausen + Paul Kiel, ProPublica)
“…ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits. Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year….”
U.S. Job Openings Reached Record Level This Spring (Eric Morath, Wall Street Journal) ($)
“….Available jobs in the U.S. climbed further above pre-pandemic levels last month following a record surge earlier in the spring, a sign of strong demand for workers—with leisure and hospitality sectors showing the most growth in openings. Openings continued to grow in May, according to job search site Indeed.com. That followed an increase of nearly 1 million unfilled positions in April, to 9.3 million, the highest level on records back to 2000, according to a Labor Department report released Tuesday. Open positions nearly matched the 9.8 million Americans who were unemployed, but searching for work during the month. The rate at which workers quit their jobs, a sign of confidence in the labor market, also rose to a record high in April, and the rate at which workers were laid off fell to a record low, the Labor Department said. The most quits occurred at retail jobs….”
Soaring factory prices in China add to global inflation fears (Staff, The Economist) ($)
“…On June 9th China reported that factory-gate prices rose at an annual rate of 9% in May, the highest in more than a decade. That, together with soaring shipping costs and a stronger yuan, will probably push up the prices of made-in-China goods, from phones to futons. Chinese imports in America already cost 2.1% more in April than they did a year earlier, the fastest rise since 2012 (see chart)….The bulk of the price pressures instead reflects the peculiarities of the covid-clouded world. The global demand for consumer goods—things you can buy online while confined at home—soared during the past year. Chinese exports are about 20% higher than their pre-pandemic trend, and factories have struggled to keep up with all the orders. Disruptions to global commodity supplies, such as lockdowns that limited copper mining in Chile and Peru, have also pushed up prices. Rather than transmit the shock, Chinese companies have absorbed much of it. Compared with the end of 2019, before covid-19 upended the world, factory-gate prices in China have risen by nearly 6%. But an index measuring the cost of manufactured consumer goods in China went up by just 0.6%. Companies have had to get by with thinner margins…
New York Tax Bills Show Covid’s Lasting Damage to Real Estate (Noah Buhayar, Tom Maloney, + Natalie Wong, Bloomberg) ($)
“…From the Empire State Building to the Four Seasons, property owners saw the value of their buildings drop. The lower assessments stand to provide tax relief, but also serve as a ominous reminder of the damage done to commercial buildings as Covid-19 emptied out Manhattan.All told, New York expects property tax revenue to drop by $1.6 billion, or about 5%, in the coming fiscal year. That’s the most significant decline in since the early 1990s, and a major blow to the city’s largest source of revenue…”
New Econ Research
Delay the Pension Age or Adjust the Pension Benefit? Implications for Labor Supply and Individual Welfare in China (Yuanyuan Deng, Hanming Fang, Katja Hanewald, + Shang Wu, NBER) ($)
“We develop and calibrate a life-cycle model of labor supply and consumption to quantify the implications of alternative pension reforms on labor supply, individual welfare, and government budget for China’s basic old-age insurance program. We focus on urban males and distinguish low-skilled and high-skilled individuals, who differ in their preferences, health and labor income dynamics, and medical expense processes. We use the calibrated model to evaluate three potential pension reforms: (i) increasing the pension eligibility age from 60 to 65, but keeping the current pension benefit rule unchanged; (ii) keeping the pension eligibility age at 60, but proportionally lowering pension benefits so that the pension program’s budget is the same as under Reform (i); and (iii) increasing the pension eligibility age to 65 and simultaneously increasing the pension benefits so that individuals of both skill types attain the same individual welfare levels as in the status quo. We find that relative to the baseline, both Reforms (i) and (ii) can substantially improve the budgets of the pension system, but at the cost of substantial individual welfare loss for both skill types. In contrast, we find that Reform (iii) can modestly improve the budget of the pension system while ensuring that both skill types are as well off as in the status quo. We find that Reforms (i) and (ii) slightly increases, but Reform (iii) slightly decreases, the overall labor supply.”
New Science
DNA Jumps Between Animal Species. No One Knows How Often. (Sean Landsman, Quanta Magazine)
“…A March paper in Trends in Genetics holds the unorthodox explanation: The gene became part of the smelt genome through a direct horizontal transfer from a herring. It wasn’t through hybridization, because herring and smelt can’t crossbreed, as many failed attempts have shown. The herring gene made its way into the smelt genome outside the normal sexual channels. Laurie Graham, a molecular biologist at Queen’s University in Ontario and lead author on the paper, knows she’s making a bold claim in arguing for the direct transfer of a gene from one fish to another. That kind of horizontal DNA movement once wasn’t imagined to happen in any animals, let alone vertebrates. Still, the more she and her colleagues study the smelt, the clearer the evidence becomes….“How often am I actually taking up a piece of DNA from my environment, and I don’t know it?” asked Schaack. “Maybe a lot; maybe more than I realize.” Such transfers could go unnoticed unless they happened in germ cells. The detected transfer events must therefore be only a tiny proportion of the full number of transfers that occur. The unsettling possibility is that horizontal DNA transfers could happen all the time. For instance, a 2020 PLOS Genetics paper found that TEs not only jump into mosquito genomes but can be transmitted into other species through filarial worms (nematodes) that the mosquitoes carry. “How many times have we all been bitten by mosquitoes?” Adelson asked. “My view is this happens at an astounding rate. … I bet we’re constantly being bombarded.”…”
What Makes Quantum Computing So Hard to Explain? (Scott Aaronson, Quanta Magazine)
“…The trouble is that quantum computers will not revolutionize everything. Yes, they might someday solve a few specific problems in minutes that (we think) would take longer than the age of the universe on classical computers. But there are many other important problems for which most experts think quantum computers will help only modestly, if at all. Also, while Google and others recently made credible claims that they had achieved contrived quantum speedups, this was only for specific, esoteric benchmarks (ones that I helped develop). A quantum computer that’s big and reliable enough to outperform classical computers at practical applications like breaking cryptographic codes and simulating chemistry is likely still a long way off….”
In Our Airpods
World Bank Sees Strong Recovery (Bloomberg Surveillance)
TUESDAY, JUNE 8, 2021
BLOGS/OP-EDS
Fast & Furious Business Cycle (Ed Yardeni, Dr. Ed’s Blog)
Dr. Ed wonders if an economy can be too fast and furious, “…What the economy is experiencing may simply be a business cycle set to “fast forward” by the insanely stimulative combination of fiscal and monetary policies. We had a terrible recession last year that lasted only two months. Twelve months later, the economy had fully recovered, based on most macroeconomic indicators….Prices-paid and prices-received indexes. The prices-paid index included in May’s national survey of manufacturing purchasing managers (M-PMI) remained near April’s reading, which was the highest since July 2008 … customer inventories index fell to another record low…Booms usually occur at the tail ends of expansions. This time, one started during the tail end of the recovery and continues at the beginning of the expansion. That’s all great until it isn’t—because, as we all know, booms are followed by bananas. Economist Alfred Kahn, an economic adviser to former President Jimmy Carter, warned lawmakers in the ’70s that if they didn’t get inflation under control, the nation was heading for a recession or a depression. To avoid scaring the public during his testimony at the Capitol, instead of saying “recession” or “depression,” he simply said “banana.”…”
AEI housing market indicators, June 2021 (Edward Pinto + Tobias Peter, American Enterprise Institute)
AEI updated their housing market indicators, “…The home price boom continues, with the national rate of Home Price Appreciation (HPA) for April 2021 coming in at 13.6 percent (preliminary), up from 6.6 percent in April 2020….Starting with June 2020, months’ supply levels started to drop precipitously across all price tiers….Low mortgage rates combined with about one month’s supply mean that HPA will remain strong over the coming months, as also indicated by Optimal Blue data….”
Leisure and Hospitality Wages Are Soaring. It’s the Economy Returning to Normal (Matt Klein, Barrons) ($)
Matt reports that wages for average line worker in hospitality sector now more than $15 an hour “…Wages for the average line worker in the leisure and hospitality sector have grown at an annualized rate of 23% in the past few months—from $14.81 an hour in January to $15.87 in May—that’s the fastest growth rate on record. The good news is that the rapid uptick in pay probably isn’t a harbinger of accelerating inflation, nor is it a warning about labor shortages caused by relatively generous government unemployment benefits…”
The price of batteries has declined by 97% in the last three decades (Hannah Ritchie, Our World In Data)
Slowly, than all at once? “…The price of lithium-ion battery cells declined by 97% in the last three decades. A battery with a capacity of one kilowatt-hour that cost $7500 in 1991, was just $181 in 2018. That’s 41 times less. What’s promising is that prices are still falling steeply: the cost halved between 2014 and 2018. A halving in only four years. We see this decline in the chart, which shows the average price trend of lithium-ion cells from 1991 through to 2018.4 This is shown on a logarithmic axis, and measured in 2018 US dollars per kilowatt-hour…”
The labor supply shock (Scott Sumner, EconLib)
Scott Sumner on what’s reducing labor supply relative to pre-pandemic,“…the question is not whether a labor supply shock exists, rather the issue is what is causing labor supply to be so depressed. I’ve seen at least three theories: 1. A supplemental unemployment insurance program that pays lower wage workers more than they earned on their previous jobs. 2. Lack of childcare, partly due to school closures. 3. Fear of the health risk associated with working….I am especially struck by the fact that employment for 20-24 year olds seems to have declined more sharply than for 25-54 year olds. They experience less health risk than 25-54 year olds, and they probably have less need for childcare. On the other hand, 20-24 year olds tend to be lower wage workers, the group most likely to earn more on unemployment insurance than on their former jobs. While I suspect that all three factors are depressing labor supply, the strongest evidence seems to be for the effect of the supplemental UI program….”
News
Five Charts That Show How the U.S. Ran Out of Homes for Sale (Joe Weisenthal, Bloomberg) ($)
One Reason U.S. Treasuries Don’t Seem That Worried About Inflation (Tracy Alloway, Bloomberg) ($)
“…one of the more interesting bits of market moves in recent weeks, or lack thereof, has been in U.S. Treasuries, where yields have remained stubbornly range-bound even as concerns over inflation seem to grow alongside the issuance of new U.S. debt. There’s an argument to be made that the events of 2020 incentivized banks to snap up U.S. Treasuries for their HQLA portfolios in a way they haven’t really done before; buying $350 billion worth of the bonds over the past year or so. In other words, bank bondage could go some way towards explaining the apparently sanguine stance of the debt market towards the prospect of higher inflation and larger supply…The implication here is that a technical source of demand — banks buying U.S. Treasuries to satisfy liquidity requirements — has effectively put a lid on yields and potentially stripped them of some informational value regarding exactly what the market thinks of inflation risks. U.S. Treasury yields might be agreeing with the Federal Reserve that price pressures are transitory, but they could also just be artificially low thanks to a constellation of arcane money market rates…”
A Commodities Crunch Caused by Stingy Capital Spending Has No Quick Fix (Chuin-Wei Yap, Wall Street Journal) ($)
“…Since 2011, investments to develop the energy and mining sectors have fallen 40%, according to asset manager Schroders, leaving many producers unprepared for a recent boom in manufacturing and spending in the world’s two largest economies…Copper, a widely used metal that economists view as a proxy for macroeconomic health, illustrates the long trail of the supply crunch.From 2011 to mid-2016, there were an average of 3½ months of global copper surpluses and 8½ months of shortages annually, International Copper Study Group data show. From September 2016 onward, the deficits became more frequent, increasing to an annual average of 10 months with two months of surpluses….”
What could a new system for taxing multinationals look like? (Staff, The Economist) ($)
“…In 1985 the global average statutory corporation-tax rate was 49%; in 2018 it was 24%. Ireland boasts a statutory rate of just 12.5%; Bermuda, 0%. Second, tax competition has encouraged companies to shuffle their reported profits to low-tax places. In 2016 around $1trn of global profits were booked in so-called “investment hubs”. These include the Cayman Islands, Ireland and Singapore, which apply an average effective tax rate of 5% on the profits of non-resident companies. There is a huge mismatch between where tax is paid and where real activity takes place. Analysis by the oecd suggests that multinationals report 25% of their profits in investment hubs, although only 11% of their tangible assets and less than 5% of their workers are based there…. The problem seems to have worsened over time, perhaps because more firms make money from intangible services, from software to streaming videos. The share of American multinationals’ foreign profits booked in tax havens has risen from 30% two decades ago to about 60% today. Most investors and bosses view firms’ tax bills as a black box that only a few lawyers and tax experts truly understand….”
How housing discrimination and white flight segregated America (Staff, The Economist) ($)
“…In the Great Migration of the 1950s and 1960s, 6m African-Americans moved to cities in the north and west, and prompted record numbers of whites to leave. “White flight” was a direct response to the inward migration of black residents, regardless of changes in incomes or home prices. One study of census data by Leah Boustan, an economics professor at Princeton University, found that each arrival of an African-American led to the departure of between two and three whites. The HOLC and FHA merely provided them with a place to go….“White flight” is best demonstrated by immigration to and from Washington, DC between 1950 and 1970. In the mid-20th century, whites lived in the north-west, north-east and far south-east of the city (see map). African-Americans lived mainly in the most urban neighbourhoods directly north of the White House and the less dense eastern corridor of the area, though in mid-century those neighbourhoods were still mixed. By 1970, however, whites had left all these areas to relocate in the north-west of the city and surrounding counties in Maryland and Virginia. The north-east and south-east of Washington, DC became almost entirely black, largely because all the whites had fled….”
Biogen Alzheimer’s Drug Approved in Disease Landmark (Robert Langreth, Bloomberg) ($)
“…Biogen’s aducanumab became the first drug cleared by the U.S. Food and Drug Administration to slow the course of the mind-wasting disease that afflicts 6 million Americans….”
Carmakers try to spark US love affair with electric pick-up trucks (Claire Bushey, Financial Times) ($)
“…When Ford unveiled the F-150 Lightning last month, it became the latest US carmaker to unveil a product to compete in a segment that comprised about 20 per cent of the US auto market’s 14.4m sales in 2020. The field is becoming crowded with Rivian scheduled to deliver the first R1Ts in July, General Motor’s GMC Hummer coming this autumn and Tesla’s space age-looking Cybertruck likely to go on sale next year. Electric vehicles comprised about 3.2 per cent of the US auto market in April, according to research firm JD Power and Associates. That share could grow if Americans embrace the new electrified entrants: a January survey from Cox Automotive found that two out of five consumers shopping for a pick-up in the next two years was considering an electric model….”
New Econ Research
Alienation Is Not ‘Bullshit’: An Empirical Critique of Graeber’s Theory of BS Jobs (Magdalena Soffia, Alex Wood, + Brendan Burchell, Work, Employment and Society)
“David Graeber’s ‘bullshit jobs theory’ has generated a great deal of academic and public interest. This theory holds that a large and rapidly increasing number of workers are undertaking jobs that they themselves recognise as being useless and of no social value. Despite generating clear testable hypotheses, this theory is not based on robust empirical research. We, therefore, use representative data from the EU to test five of its core hypotheses. Although we find that the perception of doing useless work is strongly associated with poor wellbeing, our findings contradict the main propositions of Graeber’s theory. The proportion of employees describing their jobs as useless is low and declining and bears little relationship to Graeber’s predictions. Marx’s concept of alienation and a ‘Work Relations’ approach provide inspiration for an alternative account that highlights poor management and toxic workplace environments in explaining why workers perceive paid work as useless.”
New Numbers
U.S. International Trade in Goods and Services, April 2021 (Bureau of Economic Analysis, U.S. Department of Commerce)
“…The U.S. Census Bureau and the U.S. Bureau of Economic Analysis announced today that the goods and services deficit was $68.9 billion in April, down $6.1 billion from $75.0 billion in March, revised….”
New Science
A new material made from carbon nanotubes can generate electricity by scavenging energy from its environment (MIT via Phys.org)
“…MIT engineers have discovered a new way of generating electricity using tiny carbon particles that can create a current simply by interacting with liquid surrounding them. The liquid, an organic solvent, draws electrons out of the particles, generating a current that could be used to drive chemical reactions or to power micro- or nanoscale robots, the researchers say…The new discovery grew out of Strano’s research on carbon nanotubes—hollow tubes made of a lattice of carbon atoms, which have unique electrical properties. In 2010, Strano demonstrated, for the first time, that carbon nanotubes can generate “thermopower waves.” When a carbon nanotube is coated with layer of fuel, moving pulses of heat, or thermopower waves, travel along the tube, creating an electrical current. That work led Strano and his students to uncover a related feature of carbon nanotubes. They found that when part of a nanotube is coated with a Teflon-like polymer, it creates an asymmetry that makes it possible for electrons to flow from the coated to the uncoated part of the tube, generating an electrical current. Those electrons can be drawn out by submerging the particles in a solvent that is hungry for electrons….”
Astronomers Find Secret Planet-Making Ingredient: Magnetic Fields (Robin George Andrews, Quanta Magazine)
“…A new study, however, published in Nature Astronomy in February, demonstrates that by taking magnetism into account, astronomers may be able to explain the striking diversity of planets orbiting alien stars….Magnetism seems to have three key effects. First, magnetic fields shield certain clumps of gas — those that may grow up to be smaller planets — from the destructive influence of stellar radiation. In addition, those magnetic cocoons also slow down the growth of what would have become supermassive planets. The magnetic pressure pushing out into space “stops the infalling of new matter,” said Mayer, “maybe not completely, but it reduces it a lot.”…The third apparent effect is both destructive and creative. Magnetic fields can stir gas up. In some cases, this influence disintegrates protoplanetary clumps. In others, it pushes gas closer together, which encourages clumping….Altogether, these simulations hint that magnetism may be partly responsible for the abundance of intermediate-mass exoplanets out there, whether they are smaller Neptunes or larger Earths….”
In Our Airpods
Global Tax With OECD’s Cormann (Bloomberg Surveillance)
MONDAY, JUNE 7, 2021
BLOGS/OP-EDS
The new proposal on corporate tax synchronization (Tyler Cowen, Marginal Revolution)
Tyler on the G7 tax synchronization agreement, “…One perennial question is whether the 15% rate is defined over gross or net income. You don’t want to tax gross income, especially if the business under consideration actually is making a loss. In any case, you basically end up taxing business income acquisition per se. If it is net income you are taxing at minimum 15%, you haven’t done as much to limit tax arbitrage as you thought at first. Especially if the multinational and its subsidiaries engage at arm’s length transactions with shadow pricing, etc. Net income is a major object of the actual manipulations, and would become all the more so under this new plan, assuming it is applied to net income. Won’t countries wanting to play the tax haven game end up with very lax definitions of “net income”? (Or for that matter gross income?) Or does that get regulated as well?…”
CEOs Are the Problem (Daron Acemoglu, Project Syndicate) ($)
Acemoglu not a fan of CSR, “… I would caution against any solution that gives even more discretion to management. The problem with shareholder primacy wasn’t only that it created an obsession with stock prices and pitted workers against shareholders; it was that it handed a massive amount of power to top managers….When inordinately empowered CEOs receive a vague mandate to pursue stakeholder interests as they see fit, abuses are sure to follow. Some companies might funnel millions of dollars to their CEOs’ pet project (be it the Metropolitan Museum of Art or a preferred charter school program), or to “philanthropic” causes that are really just veiled forms of influence-peddling….ExxonMobil, Philip Morris, and Facebook are virtue signaling because they are under increasing pressure from civil society, not because their CEOs suddenly have become more public-spirited. That kind of pressure is needed now to block any reforms that would give executives even more discretion. But civic activism works better when laws specify what counts as unacceptable corporate behavior, be it tax evasion, excessive automation, pollution, or accounting tricks to enrich shareholders and greedy managers….”
Real Borrowing Costs for the US Treasury: May 2021 (Menzie Chinn, Econbrowser)
Real yields are still negative, “…It’s noteworthy that — despite the runup in real and particularly nominal rates — May 2021 real rates are still below anything experienced in the the recovery from the Great Recession, and only slightly higher than the all time lows recorded in August 2020 and January 2021 (monthly averages of daily data)….”
What about Japan? (John Cochrane, The Grumpy Economist)
Cochrane “I think I’m turning Japanese I really think so”, “…Since 2006, the US has been behaving a lot like Japan, or more so. We only have less debt because the US ran surpluses through the 1990s. Japan has had perpetually low GDP growth, low inflation and zero interest rates since the 1990s. I view it as low “supply” growth, but it ought to be the poster child for “secular stagnation” fans. So I turn the question around: If massive deficits, including lots of “infrastructure” are going to boost the US economy, why did they not do so for Japan?… Japan different from the US… Japan does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more. Sustainability is about debt vs. ability to repay; about future deficits; not debt alone….”
US labor market heated up in May as jobs grew and wages soared (Jason Furman + Wilson Powell, Peterson Institute For International Economics)
Furman and Powell on the US labor market, we are seeing fastest wage growth since the early 1980s “…Although employment remained well short of normal, numerous other signs were more characteristic of a very tight labor market. Job openings are at record levels and in March the quits rate was at a historic high. There were 1.0 job seekers for every vacancy, still somewhat less tight than the pre-pandemic labor market. In addition, wages for production and nonsupervisory workers rose 0.5 percent in May, an increase that likely understated the true increase in wages because of the addition of lower-wage workers in sectors like leisure and hospitality. Holding the industry composition constant, wages grew by 0.6 percent, or 7.2 percent at an annual rate, making composition-adjusted wage growth in April and May faster than in any pre-pandemic two-month period since the early 1980s….Over the last two months wage growth has picked up to an annual rate of 8.1 percent for production and non-supervisory workers. This almost certainly understates true wage growth in the economy because many of the workers rehired have been in lower-wage industries and as they re-enter the jobs numbers they drag down the average. It is impossible to do a full adjustment for this effect without the underlying micro data, but a crude adjustment holds the industry sector shares of total hours worked constant, effectively averaging the growth in wages within each industry sector. This shows that wage grew 1.5 percent in April and May for production and non-supervisory workers, or 9.1 percent at an annual rate, faster than in any pre-pandemic two-month period since the early 1980s. (The two-month wage growth for all private workers was the fastest pre-pandemic growth on record, with data going back to 2006.)…”
Workers Aren’t Coming Back (Michael Strain, National Review)
Strain workers aren’t coming back (to this point) “…One of the two most significant statistics from this morning’s jobs report: Workers aren’t coming back. Data released by the Labor Department this morning show that last month, 61.6 percent of the working-age population were active in the labor force, either working in jobs or looking for them. That is essentially unchanged from the summer of 2020. The second most significant statistic is that wages are soaring. In May, average wages grew at a 6.1 percent annual rate. In April, they grew at an 8.7 percent annual rate. Combined, these two statistics tell much of the story of the economy this spring: Employers are boosting wage offers in order to attract and retain workers, who are increasingly difficult to attract and retain. This is a situation you’d expect with employers’ demand for workers growing much faster than workers are returning to the labor market. Labor demand is booming, and labor supply is not keeping up…”
Do Hiring Headaches Imply a Labor Shortage? (Paul Krugman, Krugman Wonks Out)
Krugman hypothesis people are overthinking labor market, restarting from sudden stop is disruptive, “…The truth is that two things are clear about the U.S. economy right now. It’s growing very fast, and adding jobs at a rapid clip; but the pace of job creation is being crimped, at least a bit, because employers are having a hard time finding as many workers as they want to hire….But are we just overthinking this? How much of the issue is simply that it takes some time to get the economy back up to speed from a standing start?…But I still suspect that it’s mainly a transitory issue of getting a stalled economy up to speed in record time. And in a few months all of these short-term problems will probably have been forgotten….”
Wage Pressures in the Labor Market: What Do They Say? (Julie Hotchkiss, Federal Reserve Bank Of Atlanta)
FRBA, “..There is evidence of significant wage pressures among low-wage service occupations….A combination of surging demand and reluctant supply appears to be driving current wage pressures…..It’s too soon to know if wage pressures will expand to other occupations….To obtain more definitive evidence of wage pressures, the Current Population Survey (CPS) allows comparison of reported hourly wages of workers during January through March 2021 to wages that would be predicted for the same workers using data from January through March 2020. In other words, holding everything else about workers constant, are they earning higher wages now than they would have prepandemic? Figure 3 shows this comparison…The first thing to notice in figure 3 is that, within an occupational group, continually employed workers earn higher wages than newly employed workers. Secondly, and more to the point, reported wages in low-wage service occupations are 7.7 percent higher in the first quarter of 2021 than predicted —the largest difference among all occupational groups depicted…”
The Employment Situation in May (Cecilia Rouse, Council Of Economic Advisers)
Cecilia Rouse, “…Indicators of labor availability for employers in the report were mixed, and it is too soon to conclude that labor supply issues are holding back the long-term path of the recovery. On the one hand, while labor force participation failed to rise, indicating some people remain on the sidelines, wage growth rose 0.5 percent month-over-month. This may in part reflect wage pressure as employers seek to entice workers back into the labor force. On the other hand, the number of part-timers who would prefer full-time work was largely unchanged and average weekly hours did not increase. Typically, in a period of constrained labor supply, employers and workers might adjust along this so-called “intensive margin” by adding more hours of work when new workers are scarce, but this did not happen on average in May….”
News
G7 tax deal is ‘starting point’ on road to global reform (Chris Giles + Delphine Strauss, Financial Times) ($)
“…G7 ministers backed a global minimum rate of at least 15 per cent, and agreed that countries should have the right to tax a certain proportion of the largest, most profitable multinationals’ profit in the locations where it is generated…..While the OECD estimates the proposals could generate an additional $50bn-$80bn a year in tax revenues, the actual sum raised will vary wildly depending on the technical details of the eventual global agreement. Two factors will have a particular impact: the rate at which any minimum is set and whether countries that implement the minimum can levy it on revenue generated in countries that do not. The scale of the overall impact is particularly sensitive to this latter point, known as “jurisdictional blending” or “country by country top-ups”….”
Self-Driving Cars Could Be Decades Away, No Matter What Elon Musk Said (Christopher Mims, Wall Street Journal) ($)
“…despite investments already topping $80 billion, we may never get the self-driving cars we were promised. At least not without major breakthroughs in AI, which almost no one is predicting will arrive anytime soon—or a complete redesign of our cities…A recently published paper called “Why AI is Harder Than We Think” sums up the situation nicely. In it, Melanie Mitchell, a computer scientist and professor of complexity at the Santa Fe Institute, notes that as deadlines for the arrival of autonomous vehicles have slipped, people within the industry are redefining the term. Since these vehicles require a geographically constrained test area and ideal weather conditions—not to mention safety drivers or at least remote monitors—makers and supporters of these vehicles have incorporated all of those caveats into their definition of autonomy. Even with all those asterisks, Dr. Mitchell writes, “none of these predictions has come true.”…”
Chip shortage to last until at least mid-2022, warns manufacturer (Harry Dempsey, Financial Times) ($)
“…The forecast from Flex, the world’s third-biggest such manufacturer, is one of the gloomiest yet for a crisis that is forcing car and consumer electronics groups to re-examine their global supply chains….Lynn Torrel, Flex’s chief procurement and supply chain officer, said that the manufacturers it relies on for semiconductors have pushed back their forecasts for when the shortage will end. “With such strong demand, the expectation is mid to late-2022 depending on the commodity. Some are expecting [shortages to continue] into 2023,” she said….”
Summer Job Market for Teens Is Sweet (Patrick Thomas, Wall Street Journal) ($)
“…Teens are answering the call to work. In May, the share of 16- to 19-year-olds who work rose to 33.2%, the highest rate since 2008, according to figures released by the Bureau of Labor Statistics on Friday. That teenage-employment rate is still far off the near-50% levels of the 1970s, when summer and part-time jobs were more common rites of passage into adulthood. But it marks a sharp rebound from the record-low 20% employment rate among teens in April 2020, shortly after the pandemic set in and dried up millions of lower-wage job opportunities…”
New Econ Research
Why is Productivity slowing down? (Ian Goldin, Pantelis Koutroumpis, François Lafond, + Julian Winkler, Oxford University)
“We review recent research on the slowdown of labor productivity and examine the contribution of different explanations to this decline. Comparing the post-2005 period with the preceding decade for 5 advanced economies, we seek to explain a slowdown of 0.8 to 1.8pp. We trace most of this to lower contributions of TFP and capital deepening, with manufacturing accounting for the biggest sectoral share of the slowdown. No single explanation accounts for the slowdown, but we have identified a combination of factors which taken together account for much of what has been observed. In the countries we have studied, these are mismeasurement, a decline in the contribution of capital per worker, lower spillovers from the growth of intangible capital, the slowdown in trade, and a lower growth of allocative efficiency. Sectoral reallocation and a lower contribution of human capital may also have played a role in some countries. In addition to our quantitative assessment of explanations for the slowdown, we qualitatively assess other explanations, including whether productivity growth may be declining due to innovation slowing down.”
