FRIDAY, JULY 9, 2021
BLOGS/OP-EDS
The Importance of Competition for the American Economy (Heather Boushey + Helen Knudsen, The Council 0f Economic Advisors)
The CEA’s Heather Boushey and Helen Knudsen on concentration, “…There is evidence that in the United States, markets have become more concentrated and perhaps less competitive across a wide array of industries:…..There is evidence from an array of market-specific studies looking before and after mergers that strongly suggests that consolidation has led to less competition and greater market power. These studies show that as market conditions changed, prices rose, indicating that firms had the capacity to charge more since they had—in these cases—merged with their competitors… the conclusion is that consolidation does indicate a market power problem with the consequence that consumers are facing higher prices than they would if the market was more competitive…There is also growing evidence that market power negatively affects innovation….”
How much does climate change actually affect GDP? Part I: An illogical question. (John Cochrane, The Grumpy Economist)
John Cochrane asks a good question, “…what is the question to which current climate policy is the answer?… carbon capture, or heavy R&D to hydrogen, geothermal fracking etc. — really does not have a question. Even if the costs of climate are 5-10% of GDP in 2100, the marginal improvement of these very expensive policies will not change that much. (Coming soon). If we find that climate has no effect on GDP, or if we find that there are far better ways to improve the lot of the world’s poor and disadvantaged, that will not silence climate policy advocates. If we find that climate has no effect on species or human health, or that there are far better ways to advance these goals, that will not silence climate policy advocates….”
Pettis On “China Commits to Raising Retirement Age as Pension Shortfall Looms” (Michael Pettis on Twitter, @michaelxpettis)
Mike comments on an upcoming change in the PRC’s retirement age, “This is a becoming a classic example of how in a highly unbalanced and rigid system, a solution to a problem approached in isolation becomes much more complicated when thought about systemically. As Caixin points out, “The government has already made it clear that the retirement age will have to be raised, an unpopular decision but inevitable given the relatively low current retirement ages of 60 for men, 55 for female government workers and 50 for female blue collar workers.” Raising the retirement age might seem an obvious way of addressing China’s pension problem, but in the past 2-3 decades retired grandparents have become a very important resource for couples who want to have kids. Making men retire 5 years later and women retire 10-15 years later will put far more pressure on families with kids, especially working women, which means either fewer kids or, ironically, more women leaving the work force when they are at their most productive ages. This “contradiction” is typical of systems with deep, persistent imbalances: social, political, economic and cultural institutions develop around these imbalances, so resolving one set of imbalances requires difficult adjustment that can adversely affect other imbalances. So just as a solution to the pension problem can worsen the demographic problem, the solution to the consumption imbalance will affect the distribution of political power, and resolving moral hazard will curtail Beijing’s ability to choose GDP growth targets much above 2-3%. Unfortunately economists often recommend obvious solutions without recognizing the systemic implications that can make the solution impractical or even impossible. In a reasonably well-balanced, flexible system, this might not be a huge problem as the cost of adjustment tends to be pretty low, but when imbalances are deep and persistent, the institutions that evolve around them must usually become fairly rigid to contain them, in which case adjustment can be very costly. Consider for example that for all the recent talk in China about implementing policies to boost domestic demand, especially consumption, in practice Beijing has really only been able to boost the supply side of the economy. In this piece from three years ago I try to suggest the systemic complications associated with resolving any of China’s main economic imbalances.”
The Laser Scalpel to Target the Housing Market (Matt Klein, The Overshoot) ($)
Matt Klein on the best short term way to moderating housing demand, “… In fact, the Federal Housing Finance Agency and Ginnie Mae can raise mortgage interest rates directly by increasing the guarantee fees they impose on loan originators. That would target housing and avoid imposing collateral damage on other interest-sensitive sectors….current conditions might not justify that policy. In fact, the recent exuberance in U.S. housing may have already peaked, or at least stopped getting worse…..More Americans think that it’s a bad time to buy a house because prices are too high than ever before, according to the University of Michigan’s long-running survey of consumers….The average volume of new home sales in March-May was 15% lower than the recent peak of July-September 2020 on a seasonally-adjusted basis. The rate of new construction starts has fallen commensurately, with a slight lag. Employment among residential builders has been flat since March, while the number of specialty trade contractors has barely budged since December….Meanwhile, the monthly rate of new issuance of agency MBS has slowed sharply from $385 billion in April to just $272 billion in June—the lowest month in a year. Unsurprisingly, futures prices for lumber have tumbled by more than half since the peak in early May….”
This is Why Government Bond Sales Are an Offer That’s Too Good for the Banks To Refuse (Joe Weisenthal, Odd Lots) ($)
Joe Weisenthal on the relationship btw US government deficit spending and banks reserves “..So this is the key thing right here: When the government is engaged in deficit spending, bank reserves automatically go up. And what this means is that there’s always the cash in the system that’s ready and eager to buy the Treasuries the government issues because, as Keen points out, Treasuries have certain characteristics that are appealing to banks. They tend to pay higher interest and they are more easily traded. Hence why these auctions are always oversubscribed…”
Why Don’t Firms Pay More? (Scott Sumner, The Library of Economics and Liberty)
Scott Sumner on why firms aren’t just boosting wages to attract low wage workers and the ways society can approach increasing their wages, “…There are many ways in which society might try to raise wages for low wage workers, all of which have drawbacks: 1. Socialism. Delink wages and productivity. 2. Minimum wage laws. 3. Worker training programs to boost productivity. 4. Government wage subsidies for low wage workers. In my view, option #4 is the least inefficient method. But one thing I know for sure is that simply exhorting companies to pay higher wages won’t work. Companies will generally set wages at the profit-maximizing level….”
NEWS
‘Financially Hobbled for Life’: The Elite Master’s Degrees That Don’t Pay Off (Melissa Korn + Andrea Fuller, Wall Street Journal) ($)
“…At least 43% of the people who recently took out loans for master’s degrees at elite private universities hadn’t paid down any of their original debt or were behind on payments roughly two years after graduation….Debt counselors recommend students not borrow more than they will earn right out of school. Yet about 38% of master’s programs at top-tier private universities in the U.S. failed that test, according to the Journal’s analysis. At for-profit schools, a common target of regulators for high student debt and poor job prospects, 30% failed to meet the debt counselors’ advice….Highly selective universities have benefited from free-flowing federal loan money, and with demand for spots far exceeding supply, the schools have been able to raise tuition largely unchecked…..”
Biden to sign sweeping order aimed at curbing power of big companies (James Politi, Financial Times) ($)
“…Joe Biden is set to sign a sweeping executive order to curb the power of big business by stamping out anti-competitive practices that harm smaller rivals. The White House on Friday unveiled 72 measures in Biden’s order, which include a ban on non-compete clauses for workers and span industries from technology and transportation to healthcare and banking… Other measures include a plan to curb the ability of manufacturers to prevent customers from seeking their own repairs on certain products, and a ban on excessive termination fees on internet bills….It is unclear, however, how much of Biden’s plan will actually be implemented in the manner the White House hopes. Many of the provisions are encouraged but not mandated, and would be more powerful if enacted into law….”
The 2020 Census of American Religion (Robert Jones et al., Public Religion Research Institute)
“….According to PRRI’s 2020 American Values Atlas, seven in ten Americans (70%) identify as Christian, including more than four in ten who identify as white Christian and more than one quarter who identify as Christian of color. Nearly one in four Americans (23%) are religiously unaffiliated, and 5% identify with non-Christian religions. The most substantial cultural and political divides are between white Christians and Christians of color. More than four in ten Americans (44%) identify as white Christian, including white evangelical Protestants (14%), white mainline (non-evangelical) Protestants (16%), and white Catholics (12%), as well as small percentages who identify as Latter-day Saint (Mormon), Jehovah’s Witness, and Orthodox Christian.2 Christians of color include Hispanic Catholics (8%), Black Protestants (7%), Hispanic Protestants (4%), other Protestants of color (4%), and other Catholics of color (2%).3 The rest of religiously affiliated Americans belong to non-Christian groups, including 1% who are Jewish, 1% Muslim, 1% Buddhist, 0.5% Hindu, and 1% who identify with other religions. Religiously unaffiliated Americans comprise those who do not claim any particular religious affiliation (17%) and those who identify as atheist (3%) or agnostic (3%). Over the last few decades, the proportion of the U.S. population that is white Christian has declined by nearly one-third. As recently as 1996, almost two-thirds of Americans (65%) identified as white and Christian. By 2006, that had declined to 54%, and by 2017 it was down to 43%.4 The proportion of white Christians hit a low point in 2018, at 42%, and rebounded slightly in 2019 and 2020, to 44%. That tick upward indicates the decline is slowing from its pace of losing roughly 11% per decade….”
Why Rising Oil Prices Are Unlikely to Kill the Economic Recovery (David Harrison, Georgi Kantchev, + Paul Hannon, Wall Street Journal) ($)
“…The recent bout of higher oil prices is unlikely to make much of a dent in the global recovery, according to economists who say strong growth and flush consumers in advanced economies will help the world absorb much of the blow from costlier crude….One indicator to watch is the oil burden, or the cost of oil as a proportion of gross domestic product, which is a bellwether for oil’s impact on growth. That indicator is expected to rise to 2.8% of global GDP for 2021, assuming an expected average oil price of $75 a barrel this year, according to Morgan Stanley. That, though, remains below the long-term average of 3.2%….”
The Places That Rich People Are Leaving (Katharina Buchholz, Statista)
“…Data shows that 16,000 Chinese and 7,000 Indian high net worth individuals moved out of their respective countries in 2019. The study by AfrAsia Bank covered only individuals with a net worth of $1 million to $9.9 million, who took up residency in a new country and spent at least half of the year there. While these millionaires for China and India constituted only a loss of 2 percent of their HNWI population, relative outflow from Russia and Turkey was higher at 6 and 8 percent, respectively….Australia topped the list of receiving countries, attracting 12,000 HNWI in 2019, which upped its HNWI count by 3 percent. The U.S. and Switzerland came in rank two and three, adding 10,800 and 4,000 HNWI….”
NEW ECON RESEARCH
Why Are Some Recoveries Short and Others Long? (Edward Leamer, National Bureau Of Economic Research) ($)
“Using the recession recovery point equal to the month when private payrolls first exceeded their previous peak level, this paper argues that it was the negative secular trend in manufacturing jobs that was the most important determinant of the length and depth of the last three recessions/recoveries. This negative secular trend changed the layoff/recall pattern of jobs in manufacturing into permanent displacements, a malady that lengthened the recovery periods and that is not the explicit target of either traditional monetary policy or traditional fiscal policy. Using the ideas gathered from an examination of the US two-digit sectoral data for the US overall, attention turns to the recession/recoveries of the 50 US states in the last three national recession periods. Regressions that explain the lengths and depths of the recessions in 50 US states reveal the importance of construction jobs, but the most important predictor was manufacturing jobs: the greater the share of manufacturing jobs prior to the recession, the worse was the recession/recovery.”
The Unemployed with Jobs and without Jobs (Robert Hall + Marianna Kudlyak, Working Paper)
“Potential workers are classified as unemployed if they seek work but are not working. The unemployed population contains two groups—those with jobs and those without jobs. Those with jobs are on furlough or temporary layoff. This group expanded tremendously in April 2020. They wait out periods of non-work with the understanding that their jobs still exist and that they will be recalled. We show that the resulting temporary-layoff unemployment dissipates quickly following a spike. Potential workers without jobs constitute what we call jobless unemployment. Shocks that elevate jobless unemployment have much more persistent effects. Historical major adverse shocks, such as the financial crisis in 2008, created mostly jobless unemployment and consequently caused extended periods of elevated unemployment. The pandemic of 2020 created a large volume of temporary-layoff unemployment, mostly starting in April. It was mostly dissipated by the end of 2020. It also created a bulge in jobless unemployment.”
NEW SCIENCE
Countries Using China, Astra Shots Increasingly Eye Boosters (Staff, Bloomberg) ($)
“…Growing concern that Covid-19 vaccines being deployed across much of the developing world aren’t capable of thwarting the delta variant is prompting some countries to look at offering third doses to bolster immunity against more-infectious virus strains. Though definitive evidence is yet to emerge backing the need for so-called “booster” shots, health officials from Thailand to Bahrain and the United Arab Emirates have already decided to offer the extra doses to some people already inoculated with vaccines from Chinese makers Sinovac Biotech Ltd., Sinopharm and from AstraZeneca Plc…. In Singapore — which has indicated that it’s preparing to ensure booster shots can be administered as early as year-end should they be needed — people inoculated with Sinovac aren’t being counted in the official vaccine tally, amid efficacy concerns and risk of vaccine breakthrough….”
IN OUR AIRPODS
NYC Safety with Adams (Bloomberg Surveillance)
THURSDAY, JULY 8, 2021
BLOGS/OP-EDS
Ranked-Choice Voting Is Bad for Everyone (Harvey Mansfield, Wall Street Journal) ($)
My friend Harvey Mansfield explains why New York City’s experiment in ranked choice voting is deeply flawed in that it allows people to put their personal preference above the common good “…Ranked-choice voting makes the common good inferior to each person’s private first choice. The common good of the country typically gets ranked second choice or below for each citizen….The goal should be a first choice willed as a compromise rather than a first choice abandoned for a compromise. This seemingly slender distinction makes a big difference in common trust and the way Americans think politically…”
Deprivation is not simply a material matter (Scott Winship, Education Next)
Scott Winship’s analysis is likely closer to the truth than Matthew Yglesias’ as they debate making the expanded Child Tax Credit permanent, “…cash benefits are unlikely to reduce social poverty. Deprivation is not simply a material matter. It means having less power over one’s life circumstances and options. It involves reduced opportunities to fill meaningful societal roles and make contributions. And it manifests in a dearth of supportive social connections. Making joblessness and single parenthood more common would further isolate low-income families from sources of sociaL capital, even as we paper over the problem by pointing to lower poverty rates. Beyond the risk of unintended consequences…spending picture raises again the distinction between poverty alleviation and mobility promotion. Public policy in the United States has been biased in favor of the former at the expense of the latter, since it’s easy to transfer money to families (and often thought to promote mobility). If reducing point-in-time poverty were an effective way to increase child opportunity, we would expect to see increasing upward mobility rates over the same decades that poverty has fallen. The fact that mobility has remained stagnant suggests that expanding child opportunity will require a different set of policies…”
The state of next-generation geothermal energy (Eli Dourado, elidourado.com)
Eli Dourado makes the case for geothermal energy’s potential, “…Stanford’s Global Climate and Energy Project estimates crustal thermal energy reserves at 15 million zetajoules. Coal + oil + gas + methane hydrates amount to 630 zetajoules. That means there is 23,800 times as much geothermal energy in Earth’s crust as there is chemical energy in fossil fuels everywhere on the planet. Combining the planet’s reserves of uranium, seawater uranium, lithium, thorium, and fossil fuels yields 365,030 zetajoules. There is 41 times as much crustal thermal energy than energy in all those sources combined. (Total heat content of the planet, including the mantle and the core, is about three orders of magnitude higher still.) Although today’s geothermal energy is only harvested from spots where geothermal steam has made itself available at the surface, with some creative subsurface engineering it could be produced everywhere on the planet. Like nuclear energy, geothermal runs 24/7, so it helps solve the intermittency problem posed by wind and solar. Unlike nuclear energy, it is not highly regulated, which means it could be cheap in practice as well as in theory….”
NEWS
U.S. Treasury Yields Extend Steep Decline (Hardika Singh + Sam Goldfarb, Wall Street Journal) ($)
“…Yields on U.S. government bonds reached fresh multimonth lows on Wednesday, reflecting investors’ anxiety about the economic outlook and new concerns about the highly contagious Delta variant of Covid-19….The yield on the benchmark 10-year U.S. Treasury note settled at 1.321%, its lowest close since Feb. 18, compared with 1.369% on Tuesday…”
Special Report: China’s gene giant harvests data from millions of women (Kirsty Needham + Clare Baldwin, Reuters)
“…A Chinese gene company selling prenatal tests around the world developed them in collaboration with the country’s military and is using them to collect genetic data from millions of women for sweeping research on the traits of populations, a Reuters review of scientific papers and company statements found. U.S. government advisors warned in March that a vast bank of genomic data that the company, BGI Group, is amassing and analysing with artificial intelligence could give China a path to economic and military advantage. As science pinpoints new links between genes and human traits, access to the biggest, most diverse set of human genomes is a strategic edge. The technology could propel China to dominate global pharmaceuticals, and also potentially lead to genetically enhanced soldiers, or engineered pathogens to target the U.S. population or food supply, the advisors said. Reuters has found that BGI’s prenatal test, one of the most popular in the world, is a source of genetic data for the company, which has worked with the Chinese military to improve “population quality” and on genetic research to combat hearing loss and altitude sickness in soldiers…”
Billion dollar ‘unicorns’ hit record numbers as valuations surge (Miles Kruppa, Financial Times) ($)
“…The number of start-ups valued above $1bn grew rapidly in the second quarter, as venture capitalists increased the size and pace of their investments following several blockbuster public listings in the US. Private investors assigned billion-dollar valuations to a record 136 start-ups between April and June, according to the data service CB Insights, more than the total for all of last year. The US produced the majority of the billion-dollar private companies, which included the social calendar app IRL and financing marketplace Pipe. Asia contributed 33 during the quarter, compared to 29 for the full year in 2020….Start-ups are on pace to double the previous annual fundraising record set just last year, when the coronavirus pandemic accelerated tech investment. Investors poured $292.4bn into minority investments in private companies globally during the first half this year, nearly equalling the total for all of last year. The totals have been driven higher by huge funding rounds for some of the largest unicorns. Rounds greater than $100m in size accounted for almost 60 per cent of the total capital raised in the first half of 2021 but only 5 per cent of the total number of deals. “When a company appears to be winning, there’s a lot of capital that is flowing to it or wants to flow to it,” said Anand Sanwal, chief executive of CB Insights. “There’s just a lot of capital out there and not enough opportunities.”…”
Borrowing Is Back as Sign-Ups for Auto Loans, Credit Cards Hit Records (Anna Maria Andriotis, Wall Street Journal) ($)
“…Consumer demand for auto loans and leases, general-purpose credit cards and personal loans was up 39% in April compared with the same period last year, according to credit-reporting firm Equifax Inc. It was also up 11% compared with April 2019, according to Equifax, which measured how often lenders checked consumers’ credit reports to make loan decisions….Some lenders are also extending more credit to people with low credit scores. Some 1.4 million general-purpose credit cards were given to subprime borrowers in March, up 28% from last year and 25% from 2019….”
NEW ECON RESEARCH
Earnings Shocks and Stabilization During COVID-19 (Jeff Larrimore, Jacob Mortenson, + David Splinter, Social Science Research Network)
“This paper documents the magnitude and distribution of U.S. earnings changes during the COVID-19 pandemic and how fiscal relief offset lost earnings. We build panels from administrative tax data to measure annual earnings changes. The frequency of earnings declines during the pandemic were similar to the Great Recession, but the distribution was very different. In 2020, workers starting in the bottom half of the distribution were more likely to experience large annual earnings declines and a similar share of male and female workers had large earnings declines. While most workers experiencing large annual earnings declines do not receive unemployment insurance, over half of beneficiaries were made whole in 2020, as unemployment insurance replaced a median of 103 percent of their annual earnings declines. After incorporating unemployment insurance, the likelihood of large earnings declines among low-earning workers was not only smaller than during the Great Recession, but also smaller than in 2019.”
Seasonal Unemployment Rate Differences by Race, Ethnicity, and Gender (Andrew McCallum + Alexis Payne, Federal Reserve)
“…This article documents three facts about the monthly seasonality of the unemployment rate for six groups of Americans: Black females, Black males, Hispanic females, Hispanic males, white females, and white males. The first fact is that the seasonal pattern of the unemployment rate is the most volatile for Hispanic males and the least volatile for white females. Second, seasonal patterns are similar between race and ethnicity within genders but different within race and ethnicity between genders. Third, white males and Hispanic males have the most positively correlated seasonal patterns, and white males and Black females have the most negatively correlated patterns….Figure 1 shows that Hispanic males’ unemployment rate seasonality has the highest standard deviation at 0.64 percentage point. In contrast, the unemployment rate of white females has the lowest standard deviation at 0.32 percentage point. Males have higher seasonal variation than do females, with 0.53 percentage point versus 0.37 percentage point, respectively. Many of these differences are statistically significant at the 10 percent level….”
The Impact of Local Residential Land Use Restrictions on Land Values Across and Within Single Family Housing Markets (Joseph Gyourko + Jacob Krimmel, NBER) ($)
“We provide estimates of the impact of restrictive residential land use environments on the price of land across major American housing markets. Using micro data on vacant land purchased to develop single family housing, we implement a new empirical strategy for estimating so-called ‘zoning taxes’ – the amount by which land prices are bid up due to supply side regulations. Our results are broadly consistent with previous findings that zoning taxes are especially burdensome in large coastal markets. However, our more recent data indicates that price impacts in the big west coast markets now are the largest in the nation. In the San Francisco, Los Angeles, and Seattle metropolitan areas, the price of land everywhere within those three markets having been bid up by amounts that at least equal typical household income. Finally, we show that our zoning tax estimates are strongly positively correlated with a new measure of local housing market supply constraint (the Wharton Residential Land Use Regulatory Index of 2018). This relationship is not mechanically driven as the regulatory index is constructed from survey data that do not incorporate land or house price data in any way.”
NEW SCIENCE
Mathematicians Prove Symmetry of Phase Transitions (Allison Whitten, Quanta Magazine)
“….in a proof posted in December, a team of five mathematicians has come closer than ever before to proving that conformal invariance is a necessary feature of these physical systems as they transition between phases. The work establishes that rotational invariance — one of the three symmetries contained within conformal invariance — is present at the boundary between states in a wide range of physical systems…Conformal invariance consists of three types of symmetries rolled into one more extensive symmetry. You can shift objects that exhibit it (translational symmetry), rotate them by any number of degrees (rotational symmetry or invariance), or change their size (scale symmetry), all without changing any of their angles. “[Conformal invariance] is what sometimes I call ‘the symmetry to rule them all’ because it’s an overall symmetry, which is stronger than the three others,” said Duminil-Copin….”
IN OUR AIRPODS
Steve Keen Says Economists Get Everything Wrong (Especially About Climate Change) (Bloomberg Odd Lots)
WEDNESDAY, JULY 7, 2021
BLOGS/OP-EDS
Big Tech and Big Finance Breed Hubris (Bret Swanson, Wall Street Journal)
My AEI colleague Bret Swanson on the dangers of Hayek’s “pretense of knowledge,” “..Index funds exist because security prices are nearly impossible to predict. So if expert computer modelers can’t yet predict temperatures in a single complex realm—climate—how can we take seriously BlackRock’s triple extrapolations of the climate, the economy and finance? Big Tech and BlackRock’s presumptuous monopolies on truth create new fragilities. When information is debated and decision-making is dispersed, we get little mistakes and quick error-correction. But when today’s hyper-giants impose single answers that turn out to be wrong the mistakes can be catastrophic. They both suffer what Hayek called “scientism”—the hubristic assertion of perfect knowledge in messy, complex arenas as if they were controlled physics experiments….”
Based on differences in median salaries, there’s a 20% gender pay gap at the Biden-Harris White House (Mark Perry, American Enterprise Institute)
Mark Perry makes a point about the gender wage gap by pointing out that the median income of women in the Biden White House is 20% less than men, even though the women earn more on average than the men,“…But there might a good reason the White House departed from standard methodology and reported average and not median salaries because the median salary of its 304 female staffers is $80,000 (half make more than $80,000 and half make less) compared to the median male salary of $100,000 (half make more and half make less). Therefore, the typical female staffer in the Biden-Harris White House currently earns only 80 cents for every $1 a male staffer earns, and there is a 20% gender pay gap at the Biden White House. That pay gap is more than two times greater than the average gender pay gap for the Washington, DC labor market of 9.3% according to the most recent data available from the Department of Labor (see Table 3) for 2019. If the White House had been consistent and used the same standard pay gap methodology that it and everybody normally use including government agencies like the BLS and Census, it would have to report that “Women working full-time at the Biden-Harris White House are typically paid just 80 cents for every dollar paid to men.” Stated in dollars, the typical female staffer working in the Biden White House earns $20,000 less on average per year than the typical male staffer. Because of that significant gender pay gap, women working for Biden and Harris will have to continue to work until early April in 2022 before they earn what the typical male staffer will earn working just this year. That is, Equal Pay Day for the female White House staffers won’t take place until next April 6, 2022!…”
The Fed, MBS, and housing (Matt Klein, The Overshoot) ($)
Matt Klein argues the impact of the Fed’s MBS on housing prices has been overstated, “…Agency MBS are riskier than Treasury bonds—which is why they have higher interest rates—but that spread is a function of the prepayment option, not default risk….When the Fed buys agency MBS, it’s absorbing this prepayment risk onto its own balance sheet. Crucially—unlike every other investor in American mortgages—the Fed doesn’t care about the duration of its portfolio, only the face value….Fed buys agency MBS —> less prepayment risk held by the private sector —> less convexity hedging —> less interest rate volatility —> lower risk premiums embedded into longer-term interest rates —> lower borrowing costs across the economy…. The net effect is that, outside of crisis periods, the spread between the average mortgage rate as tracked by Freddie Mac and the yield on the 10-year U.S. Treasury note tends to be remarkably stable. Right now it’s only slightly below the long-term average since 1987—and higher than in much of the 1990s. From this perspective, it’s hard to argue that mortgage rates are unusually low relative to everything else going on in the world, which means it’s unlikely that the Fed’s purchases of agency MBS are disproportionately affecting the mortgage market….Curtailing MBS purchases would likely raise longer-term interest rates across the economy, and while that would have an impact on housing, it probably wouldn’t address the concerns people have about affordability and leverage—at least, not without also having an impact on other interest-sensitive sectors such as motor vehicles and small business investment. There are better tools to target perceived excesses in the housing market, which I’ll discuss in a subsequent piece. The focus on MBS is misplaced…. ”
When Will China Rule the World? Maybe Never (Eric Zhu + Tom Orlik, Bloomberg) ($)
Interesting forecast from the team at Bloomberg Economics from Eric Zhu and Tom Orlik “…When will China overtake the U.S. to become the world’s biggest economy?…Drawing all these strands together, Bloomberg Economics has constructed scenarios for the outcome of the U.S.–China economic race. If everything goes right for China—from domestic reforms to international relations – then it could start the next decade neck-and-neck with the U.S.—and then accelerate into the distance….”
Historical Parallels to Today’s Inflationary Episode (Cecilia Rouse, Jeffery Zhang, + Ernie Tedeschi, Council Of Economic Advisors)
The CEA looks at previous periods that saw an uptick in inflation and argues that market based and survey based measures at this point indicate that the current uptick is likely transitory, “…Today, we have metrics measuring longer-run inflation expectations in the form of surveys and market-based measures. If transitory inflation pressures were spilling over into longer-run expectations, we would anticipate seeing these measures rise to historically high levels. However, as Figure 4 below shows, both market-based measures like the five-year, five-year inflation break-evens, and survey-based measures like the ten-year expectations in the Survey of Professional Forecasters, have broadly recovered from pandemic-lows to levels more consistent with pre-pandemic expectations. The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off. The CEA will continue to carefully gauge the trajectory of inflation….”
First impressions (Scott Sumner, Library of Economics and Liberty)
Zenmaster Scott Sumner knows the importance of the phrase “We’ll see,” “…People are far too quick to make judgments. Pundits that focus on the economy often proclaim this or that policy to be a success or failure, long before we have enough information to make an informed evaluation…In 2002, it was almost universally agreed that there had been a massive NASDAQ stock price bubble in 2000. Today, the NASDAQ market of 1999-2000 no longer looks overpriced. Instead, 2002 looks absurdly underpriced….In 2010, it was almost universally agreed that housing prices in 2006 were a “bubble”. Today that claim is far from obvious….In 2013, some Keynesians claimed that fiscal austerity was slowing the economy. By 2014 that claim looked implausible….In early 2014, there were claims that terminating the extended unemployment insurance program was slowing growth. By 2015, it had become clear that employment growth sped up in 2014….I find that evaluations based on time-tested propositions tend to hold up better than other claims. These include the idea that free market economies are best, that monetary policy drives nominal variables, and that money is neutral in the long run. The idea that price controls don’t work. The idea that asset prices tend to be efficient because it’s hard to get rich by consistently beating the market. The idea that paying people not to work tends to discourage them from working. If you believe in these time-tested principles, don’t let yourself be bullied by pundits suggesting that you are out of date and need to get with the times. Very likely, you’ll be the one proved right in the long run….”
NEWS
Soaring U.S. Rents Are the Sticky Inflation With Staying Power (Alexandre Tanzi, Bloomberg) ($)
“…The median national rent climbed 9.2% in the first half of 2021, according to Apartment List. While part of the increase reflects a bounce-back in prices that dropped earlier in the pandemic, the real-estate firm says rents are now higher than if they had stayed on their pre-Covid track…Higher rents are the kind of price increase that’s hard to reverse -– unlike many of the ones that have accompanied the economy’s reopening, from lumber to used cars….”
The state of American friendship: Change, challenges, and loss (Daniel Cox, Survey Center on American Life)
“… Many Americans do not have a large number of close friends. Close to half (49 percent) of Americans report having three or fewer…The number of close friendships Americans have appears to have declined considerably over the past several decades (Figure 3). In 1990, less than onethird (27 percent) said they had three or fewer close friends, while about as many (33 percent) reported having 10 or more close friends.7 Only 3 percent said they did not have any close friends. Many Americans are not overly satisfied about the size of their friendship group. About half of Americans (51 percent) report they are very satisfied or completely satisfied with the number of friends they have. Thirty percent say they are only somewhat satisfied, and 17 percent say they are not too or not at all satisfied with the number of friends they have. Women are slightly more likely than men are to report being satisfied with their number of friends. A majority (54 percent) of women say they are completely or very satisfied, compared to less than half of men (48 percent)….”
Americans’ Life Ratings Reach Record High (Dan Witters + Sangeeta Agrawal, Gallup)
“…The percentage of Americans who evaluate their lives well enough to be considered “thriving” on Gallup’s Live Evaluation Index reached 59.2% in June, the highest in over 13 years of ongoing measurement and exceeding the previous high of 57.3% from September 2017. During the initial COVID-19 outbreak and economic shutdown, the thriving percentage plunged nearly 10 percentage points to 46.4% by late April 2020, tying the record low last measured during the Great Recession….”
For China’s Business Elites, Staying Out of Politics Is No Longer an Option (Li Yuan, New York Times) ($)
“…By going after Didi and a few other U.S.-listed internet companies for data security concerns, Beijing has effectively laid the last brick of the digital Berlin Wall that increasingly separates the Chinese internet from the rest of the world. Beijing has made it clear that it is serious about keeping important data within its borders while pressuring its tech elites, who are among the biggest beneficiaries of globalization, to show their loyalty and obedience, they said….Ma Changbo, an online media start-up founder, wrote on his WeChat social media account. “This is the second half of the U.S.-China decoupling,” he wrote. “In the capital market, the model of playing both sides of the fence is coming to an end.”…”
Down $831 Billion, China Tech Firm Selloff May Be Far From Over (Jeanny Yu + Abhishek Vishnoi, Bloomberg) ($)
“…China’s technology giants have seen a combined $823 billion wiped from their market value since a February peak, with Beijing’s expanding crackdown on the sector fueling investor concern that the selloff is far from over….The Hang Seng Tech Index is down 31% from its February high. Investors in mainland China, who accounted for about a third of turnover in Tencent shares this year, turned net sellers of the stock in June…”
New Econ Research
President Biden’s FY2022 Budget Proposal: Budgetary And Economic Effects (Alexander Arnon et al., University of Pennsylvania)
“…PWBM estimates that President Biden’s FY2022 budget proposal would increase spending by $6.1 trillion and increase revenue by $3.9 trillion over the 2022-2031 budget window. By 2050, we project that the President’s budget proposals would decrease public debt by 5.1 percent and decrease GDP by 1.5 percent relative to current law….PWBM estimates that, over the 2022-2031 budget window, President Biden’s FY2022 budget proposals would require $6.1 trillion in new spending and would raise $3.9 trillion in new revenues on a conventional basis (without accounting for macroeconomic feedback)….Including macroeconomic feedback effects, we project a 1.1 percent increase in public debt in 2031 but a 5.1 percent decrease in public debt in 2050, relative to current law…..Despite the long-run decrease in debt and increased productivity from new public investments, we project that the capital stock would fall by 4.2 percent in 2050 and GDP would fall by 1.5 percent in 2050, relative to current law….”
NEW SCIENCE
Neurons Unexpectedly Encode Information in the Timing of Their Firing (Elena Renken, Quanta Magazine)
“…For the first time, Jacobs and two coauthors spied neurons in the human brain encoding spatial information through the timing, rather than rate, of their firing. This temporal firing phenomenon is well documented in certain brain areas of rats, but the new study and others suggest it might be far more widespread in mammalian brains. “The more we look for it, the more we see it,” Jacobs said. The phenomenon is called phase precession. It’s a relationship between the continuous rhythm of a brain wave — the overall ebb and flow of electrical signaling in an area of the brain — and the specific moments that neurons in that brain area activate. A theta brain wave, for instance, rises and falls in a consistent pattern over time, but neurons fire inconsistently, at different points on the wave’s trajectory. In this way, brain waves act like a clock, said one of the study’s coauthors, Salman Qasim, also of Columbia. They let neurons time their firings precisely so that they’ll land in range of other neurons’ firing — thereby forging connections between neurons….Monitoring individual neurons is too invasive to do on the average human study participant, but the Columbia team took advantage of data collected years ago from 13 epilepsy patients who had already had electrodes implanted to map the electrical signals of their seizures. The electrodes recorded the firings of individual neurons while patients steered their way through a virtual-reality simulation using a joystick. As the patients maneuvered themselves around, the researchers identified phase precession in 12% of the neurons they were monitoring….These studies suggest that phase precession allows the brain to link sequences of times, images and events in the same way as it does spatial positions. “Finding that first evidence really opens the door for it to be some sort of universal coding mechanism in the brain — across mammalian species, possibly,” Qasim said. “You might be missing a whole lot of information coding if you’re not tracking the relative timing of neural activity.”…”
IN OUR AIRPODS
Larry Summers on China (China Talk, Lawfare)
TUESDAY, JULY 6, 2021
BLOGS/OP-EDS
Repressing Labor, Empowering China (Ho-fung Hung, Phenomenal World)
Ho-fung Hung makes the case that monetary expansion won’t cause inflation if workers don’t have bargaining power and argues that the lack of a wage price spiral in China, due to workers’ lack of bargaining power, has driven the integration of the two economies, “…allows us to resolve the so-called mystery of chronic low inflation despite great fiscal and monetary expansion from 2001–2019. It also provides an insight into the fateful interdependence of American and Chinese economic processes. With workers’ bargaining power curbed, monetary expansion could no longer contribute to any wage-price spiral, even with low unemployment. While cheap money does not bring wage growth today, it does flow into financial markets, where it inflates asset bubbles and boosts debt-fueled consumption. The assault on US labor was simultaneous with the global expansion of productive capacity in low-wage countries, notably China. At the same time, consumption in the US has been maintained through the expansion of personal debt and cheap imports. When China joined the World Trade Organization in 2001, it became in large measure the workshop of the world. With an army of disciplined and low-cost, rural-originated labor not protected by independent unions, Chinese factories pumped out a whole range of consumer goods at a fraction of the US cost. For American workers, the price of this import bonanza was the loss of 2–3.7 million manufacturing jobs between 2001 and 2018….”
Some thoughts on the latest U.S. jobs numbers (Matt Klein, The Overshoot) ($)
Matt Klein on Friday’s job numbers, “…there are probably around 9 million missing jobs, the current pace of progress is probably too slow to get back to full employment before the end of next year at the earliest….There are two pandemic-specific factors that seem to playing a big role right now: the past misclassification of furloughed workers and the seasonality of employment at public and private schools….Here’s what happens if you compare the monthly changes in the payroll survey to the monthly changes in the household survey, along with the various modifications I mentioned above…”
Alexander Hamilton and post-Covid America (Paul Krugman, Krugman Wonks Out) ($)
Paul Krugman speculates that the LFP rate of older American has permanently changed in response to the pandemic, “…forced unemployment gave a significant number of Americans a chance to discover both that they really disliked their jobs and that they can manage financially without them, even without special government aid. Such workers won’t be going back. This is probably especially true among older workers, who have seen a much sharper drop in labor force participation than prime-age adults: Many of these older workers were planning to retire fairly soon anyway; now they’ve learned that retirement is a better experience, and the extra money they can earn by working longer is worth less in life satisfaction than they realized. So the pandemic didn’t just provide infant-industry protection to remote work; it also provided infant-industry protection to nonwork among certain groups….So the post-Covid-19 economy will look different from what we had before: There will probably be a glut of office space, and total employment will probably be a bit lower — Goldman Sachs estimates by around one million — than it would have been otherwise, because of early retirement….”
Zoltan Pozsar Sees a $1 Trillion Problem for Money Markets Ahead (Tracy Alloway, Odd Lots) ($)
Tracy Alloway on CS’s Zoltan Pozsar’s new forecast for turbulence in money markets, “…Pozsar argues that money market funds are incentivized to rotate out of Treasury bills and into the newly-lucrative RRP, potentially leaving billions of dollars worth of bills that the market will need to absorb, thereby draining reserves from the banking system. So far that hasn’t been too much of a problem, with shorter-term investors keen to snap up bills ahead of an expected crunch in supply. A reinstatement of the debt ceiling, which was suspended during the depths of the pandemic, is expected to hit supply as the Treasury will have to slash its balance at the Fed to $400 billion before July 31. But ongoing QE from the Fed ($250 billion in the next two months) will leave some $400 billion that still needs to be drained, according to Pozsar’s estimates. That could lead to market weirdness as banks retool their balance sheets: “…But if these deposits go, the J.P. Morgan portfolio will lend fewer reserves in the FX swap market, and Bank of America will have less excess reserves to fund its recent, “programmatic” purchases of duration. The liquidity posture of the lender of next-to-last-resort and the buyer-of-last resort will thus change. None of this is an issue for the banks in discussion, but it could lead to events in the markets – FX swaps, long-dated Treasuries, and MBS – that they backstop…”
NEWS
The Tech Cold War’s ‘Most Complicated Machine’ That’s Out of China’s Reach (Don Clark, New York Times) ($)
“…a massive machine sold by a Dutch company has emerged as a key lever for policymakers — and illustrates how any country’s hopes of building a completely self-sufficient supply chain in semiconductor technology are unrealistic. The machine is made by ASML Holding, based in Veldhoven. Its system uses a different kind of light to define ultrasmall circuitry on chips, packing more performance into the small slices of silicon. The tool, which took decades to develop and was introduced for high-volume manufacturing in 2017, costs more than $150 million. Shipping it to customers requires 40 shipping containers, 20 trucks and three Boeing 747s….Manufacturers can’t produce leading-edge chips without the system, and “it is only made by the Dutch firm ASML,” said Will Hunt, a research analyst at Georgetown University’s Center for Security and Emerging Technology, which has concluded that it would take China at least a decade to build its own similar equipment. “From China’s perspective, that is a frustrating thing.”…The situation underscores the crucial role played by ASML, a once obscure company whose market value now exceeds $285 billion. It is “the most important company you never heard of,” said C.J. Muse, an analyst at Evercore ISI…Dutch restrictions on exporting such machines to China, which have been enforced since 2019, haven’t had much financial impact on ASML since it has a backlog of orders from other countries. But about 15 percent of the company’s sales come from selling older systems in China. In a final report to Congress and Mr. Biden in March, the National Security Commission on Artificial Intelligence proposed extending export controls to some other advanced ASML machines as well. The group, funded by Congress, seeks to limit artificial intelligence advances with military applications…”
Lower-Wage Workers See Biggest Gains From Easing of Covid-19 Pandemic (Eric Morath, Wall Street Journal) ($)
“…A fading pandemic and heating U.S. economy appear to be paying off for lower-wage workers. New jobs at restaurants, hotels, stores, salons and similar in-person roles accounted for about half of all payroll gains in June, according to the Labor Department. And workers in those industries are seeing larger raises than other employees….Average hourly wages for retail workers were up 8.6% in June from February 2020, before the pandemic took hold in the U.S. Wages for restaurants and other hospitality workers were up 7.9%. Both gains are above both overall wage growth, at 6.6% in that period, and inflation. The average hourly wage in the hospitality sector was $18.23 an hour in June, and $21.92 in the retail sector, versus $30.40 for private-sector workers overall, according to Labor Department data….”
Pandemic Wave of Automation May Be Bad News for Workers (Ben Casselman, New York Times) ($)
“…Daron Acemoglu of the Massachusetts Institute of Technology said that many of the technological investments had just replaced human labor without adding much to overall productivity….[Acemoglu ] concluded that “a significant portion of the rise in U.S. wage inequality over the last four decades has been driven by automation” — and he said that trend had almost certainly accelerated in the pandemic.”If we automated less, we would not actually have generated that much less output but we would have had a very different trajectory for inequality,” Professor Acemoglu said…..Ms. Gonzales, the Checkers franchisee, isn’t looking to cut jobs. She said she would hire 30 people if she could find them. And she has raised hourly pay to about $10 for entry-level workers, from about $9 before the pandemic. Technology, she said, is easing pressure on workers and speeding up service when restaurants are chronically understaffed. “Our approach is, this is an assistant for you,” she said. “This allows our employee to really focus” on customers. Ms. Gonzales acknowledged she could fully staff her restaurants if she offered $14 to $15 an hour to attract workers. But doing so, she said, would force her to raise prices so much that she would lose sales — and automation allows her to take another course…..”
For Some Millennials, a Starter Home Is Hard to Find (Julia Carpenter, Wall Street Journal) ($)
“..Supply of “entry-level housing”—which Freddie Mac defines as homes under 1,400 square feet—is at a five-decade low….“There just aren’t enough of these homes to fulfill the demand,” said Ed Pinto, director of the AEI Housing Center at the American Enterprise Institute. “It’s creating this ‘Great American Land Rush,’ as I call it. People are moving around and there’s tremendous demand, but the inventory is down.”…Delaying homeownership has far-reaching consequences for buyers’ financial lives. Those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s, according to an analysis from the Urban Institute. Those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.“This is a big deal,” said Sam Khater, chief economist and head of Freddie Mac’s Economic and Housing Research division. “We need to think about how we talk about affordable housing, because for most people, when they hear affordable housing, there’s an instant negative reaction. They think ‘low-income,’ right? The issue now is these fissures have not just invaded the middle class. It’s now going up into the upper-middle-income strata.”…”
