FRIDAY, AUGUST 27, 2021
BLOGS/OP-EDS
The Gentrification of Blue America (Paul Krugman, Krugman Wonks Out)
Paul Krugman implies restrictive housing construction policy might be helping drive political polarization, “…Unfortunately, most of these rising knowledge-industry hubs also severely limit housing construction; this is true even of greater New York, which is much denser than any other U.S. metropolitan area but could and should be even denser. As a result, housing prices in these metros have soared, and working-class families, instead of sharing in regional success, are being driven out. The result is that there are now, in effect, two Americas: the America of high-tech, high-income enclaves that are unaffordable for the less affluent, and the rest of the country. And this economic divergence goes along with political divergence, mainly because education has become a prime driver of political affiliation. It may seem hard to believe now, but as recently as the early 2000s college graduates leaned Republican. Since then, however, highly educated voters — who have presumably been turned off by the G.O.P.’s embrace of culture wars and its growing anti-intellectualism — have become overwhelmingly Democratic, while non-college-educated whites have gone the other way. As a result, the two Americas created by the collision of the knowledge economy and NIMBYism correspond fairly closely to the blue-red division: Democratic-voting districts have seen a big rise in incomes, while G.O.P. districts have been left behind….”
It’s time for the Fed to rethink quantitative easing (Lawrence Summers, Washington Post) ($)
Larry Summers argues that it’s time to start tapering quantitative easing, “…The Fed is running quantitative easing at current levels not because anyone has analyzed that as appropriate given current conditions. Rather, there is a felt need to maintain credibility given previous commitments and a reluctance to accept the immediate pain and dislocation associated with changing course, coupled with faith in the ability to manage the situation down the road….The Fed cannot immediately abandon quantitative easing. But its annual Jackson Hole retreat this weekend should be an occasion for planning withdrawal from a strategy that has already outlived its usefulness….”
Productive Bubbles (William Janeway, NOEMA Magazine)
William Janeway on “productive bubbles” and a possible signal in the noise around SPAC’s “…During the current wave of speculation, however, it is possible to read the signs of another nascent productive bubble: a green one. The promise is exemplified by Tesla. Bloomberg estimates that, in one form or another, Tesla has raised some $14 billion of risk capital while, over the past three years, its stock price has risen by more than a factor of 10. Pulled along in Tesla’s wake have been a variety of electric vehicle and related ventures. A number of these have secured capital through acquisition by special purpose acquisition companies (SPACs): Since March 2020, $120 billion has been invested in SPACs that pledged to merge with renewable energy, electric-vehicle and other environmentally sustainable businesses….Relatively unleveraged waves of speculation are best left to run themselves out. The longer-term productive benefit of an innovation that attracts speculative attention is by no means always evident at first glimpse. And even if there appears to be no possible productive benefit, killing the speculative impulse at birth does have the potential to create a negative externality: an absence of enthusiastic investor response when a genuine productive bubble could generate social benefits….”
NEWS
After Years of Failure, California Lawmakers Pave the Way for More Housing (Conor Dougherty, New York Times) ($)
“…On Thursday the Legislature took a big step toward rewriting that bargain, advancing a bill that would allow two-unit buildings on lots that for generations have been reserved exclusively for single-family homes. The move is one of several piecemeal housing measures — big enough to make a difference, not so sweeping that they fail to advance — that have managed to endure the legislative gantlet after years of high-profile failures….”
U.S. Household Income Jumped in July as Spending Slowed (Josh Mitchell, Wall Street Journal) ($)
“…U.S. household income rose rapidly last month as the government handed out enhanced tax breaks for parents, priming the economy for stronger growth once the Delta variant subsides. The 1.1% gain in household income, reported Friday by the Commerce Department, was the biggest jump since March and caught many analysts by surprise. It was largely due to an expanded child tax credit included in a $1.9 trillion pandemic-relief package passed by Congress this spring. The gain in income poured even more cash onto Americans’ already high savings. Meantime, growth in consumer spending slowed last month to 0.3%—less than a third June’s spending increase of 1.1%. Economists believe the Delta variant, a highly contagious strain of Covid-19, is to blame for the slower growth. Consumer fears of infection, new business restrictions and mask mandates are likely leading households to pull back in some areas, economists said. Spending on services grew last month while spending on goods declined, Friday’s report showed….”
China Plans to Ban U.S. IPOs for Data-Heavy Tech Firms (Keith Zhai, Wall Street Journal) ($)
“….China plans to propose new rules that would ban companies with large amounts of sensitive consumer data from going public in the U.S., people familiar with the matter said, a move that is likely to thwart the ambitions of the country’s tech firms to list abroad. In recent weeks, officials from China’s stock regulator have told some companies and international investors that the new rules would prohibit internet firms holding a swath of user-related data from listing abroad, the people said. The regulators said that the rules target companies seeking foreign initial public offerings via units incorporated outside the country, according to the people.
Xi Jinping’s call for wealth redistribution threatens luxury groups’ China boom (Leila Abboud + Thomas Hale, Financial Times) ($)
“….worrying investors in the world’s biggest luxury goods groups since President Xi Jinping signalled this month that China would “regulate excessively high incomes and encourage high-income groups and enterprises to return more to society”. While the Chinese Communist party had long allowed some to “get rich first”, it would now prioritise “common prosperity for all”, said a Xi-led commission, hinting that measures to regulate income and redistribute wealth could be on the cards. Those few words have been enough to shave €61.7bn, or almost 10 per cent, from the collective market value of LVMH, Hermès, Kering, Richemont and Burberry since the announcement on August 17….”
How data detectives spotted fake numbers in a widely cited paper (Staff, The Economist) ($)
“…In 2012 Mr Ariely, Max Bazerman, Francesca Gino, Nina Mazar and Lisa Shu wrote a paper arguing that people act more honestly when they state in advance that they will be truthful. It cited two studies from a lab, and one based on car-insurance data. On August 17th Leif Nelson, Joe Simmons and Uri Simonsohn, who run Data Colada, a blog, wrote that they believed the insurance data were fake. All of the paper’s authors asked for the study to be retracted. They all deny responsibility, saying that they were duped rather than dishonest. The study had car-insurance customers list how much they had driven, and sign a statement saying they were being truthful. Half signed at the top of the form, half at the bottom. The first group listed 10% more miles, possibly raising their premiums. Data Colada found three smoking guns. First, the dodgy data look different. The spreadsheet contains 6,744 values in Cambria font. Each has a twin in Calibri, identical save for small gaps in mileage. This implies that the forgers duplicated real data, added random variation and forgot to cover their tracks. Next, the distribution of miles is not bell-shaped, like most real data, but resembles a box. Similar numbers of cars drove each distance below 50,000; none exceeded that amount. And the data are too precise. The reported starting mileages are often rounded to powers of ten. Yet in the distances under study, zero is no more common than other final digits, a hallmark of machine-generated data….”
NEW ECON RESEARCH
The corporate saving glut and the current account in Germany (Thorsten Klug et al., European Central Bank)
“…Since the early 2000s, Germany’s current account has witnessed a massive rebound into positive territory, increasingly making it the focus of policy debates as it is blamed for inflicting deficits on other trading partners, such as the United States. By now it is well understood that high surpluses give rise to protectionist tendencies. In this paper, we study the business cycle drivers behind the cyclical component of the German current account surplus from a flow-of-funds perspective. We high-light the role of corporate saving in excess of corporate investment, known as the “corporate saving glut”, and analyse its cyclical component. To our knowledge, we are the first to investigate the nexus of a corporate saving glut and the current account through the lens of an open-economy VAR. We find that labor supply, world demand, and financial friction shocks can trigger a build-up in corporate saving in excess of corporate investment and thus generate capital exports outside Germany. By contrast, household saving shocks do not seem to make a difference in terms of the current account. Given that private household saving as a share of GDP declined slightly over the sample period this result is not surprising. In general, we find that, for a world demand, a financial friction and a labor supply shock, increases in the corporate-saving-to-investment ratio tend to go hand-in-hand with a decline in the labor share and weak investment dynamics. Our analysis strongly suggests that wage moderation and a domestic investment deficiency are key to understanding the issue. It also follows from the analysis that the fall in the labor share combined with booming exports are major drivers behind the German current account. A cyclical reversal of these developments, e.g. through lower world demand and a rising labor share could be expected to bring down the German current account surplus close to the 6% threshold in the Macroeconomic Imbalance Procedure…”
NEW SCIENCE
Banach-Tarski and the Paradox of Infinite Cloning (Max Levy, Quanta Magazine)
“…Banach-Tarski paradox, after the mathematicians Stefan Banach and Alfred Tarski, who devised it in 1924. It proves that according to the fundamental rules of mathematics, it’s possible to split a solid three-dimensional ball into pieces that recombine to form two identical copies of the original. Two apples out of one….Banach and Tarski realized you can turn one sphere into two by partitioning the uncountably infinite set of points it contains into — get ready for it — an uncountably infinite number of countably infinite sets….They see the Banach-Tarski paradox as a demonstration of the richness of mathematics. It offers a law-abiding example of how math can stray from physical intuition without contradicting itself….”
IN OUR AIRPODS
Jackson Hole (Bloomberg Surveillance)
THURSDAY, AUGUST 26, 2021
BLOGS/OP-EDS
Biden’s Cruel Summer (Michael Boskin, Project Syndicate) ($)
Michael Boskin wonders if the retreat from Afghanistan will undermine Biden’s domestic agenda,“…Can Biden recover from this summer’s fiascos and salvage his economic agenda? Will his perceived weakness lead to additional foreign crises that sap resources and attention? History offers conflicting lessons. When President Ronald Reagan inherited record-breaking inflation from the hapless Carter, he backed Fed Chair Paul Volcker’s inflation-fighting efforts. The resulting recession doomed his party in the 1982 midterm elections. But a strong recovery thereafter positioned him for a huge re-election win and subsequent legislative victories, including the landmark 1986 tax reform….”
Afghanistan Is a Much Bigger Economic Disruption Than Markets Think (Kevin Hassett, National Review)
Kevin Hassett argues Mr. Market is underpricing Afghanistan related risk, “…There is a significant chance, however, that markets have underestimated how bad the Afghan news is about to be for the global economy…First, in the short term, one can presume that millions of refugees will head north and west. This will strain humanitarian resources, especially in this time of COVID-19. Moreover, the astonishing weakness demonstrated by President Biden is an open invitation for geopolitical rivals to flex their muscles. The rumbling is already under way, with the Chinese Communist Party’s Global Times wondering ominously in an editorial, “Is this some kind of omen of Taiwan’s future fate?” In the wake of the Western inaction during China’s “absorption” of Hong Kong, Beijing is incentivized to move quickly, especially given the threat that collapsing support for Biden will lead him to be replaced in 2024 by a tougher Republican. If China grabs a Taiwanese island or two, one wonders if President Biden will even notice. Whether he does or doesn’t, markets will. As bad as China’s behavior is likely about to be, Russia’s will be even worse. It seems highly likely that the collapse of the international order previously upheld by America and its allies will motivate Russia to be more adventurous in Ukraine and to resume at the very least the cyber-harassment of the Baltics. Putin can be expected to double down on cyberattacks here in the U.S., perhaps even taking a swing at one of our major exchanges….As these developments become more visible to markets, risky assets will be repriced and everyone will be wondering what the bottom looks like….”
U.S. Housing Normalization Continues (Matt Klein, The Overshoot) ($)
Matt Klein makes the case that the housing market rebalancing, away from the “fear of missing out” part of cycle, is well underway, “…The rebalancing is already showing up in the sharp increase in the number of new homes available for sale relative to demand. The absolute number of new single-family homes available for sale in July (368,000) was higher than at any point since 2008, and up 13% compared to before the pandemic. Meanwhile, demand has normalized, with Americans buying 59,000 new single-family houses a month in May-July on a seasonally-adjusted basis, comparable to the December 2019-February 2020 average of 62,000/month. The result is that, as of July, there were 6.24 months of supply on the market, up from the low of 3.48 months of supply last August and higher than the 5.36 months of supply in February 2020. In fact, the market for new single-family homes is better-supplied relative to demand (at least by this commonly-used measure) now than at any point since early 2019:…In practice, changes in number of homes built and bought are less important for pricing than changes in spending power available to prospective buyers. Before and during the financial crisis, changes to minimum downpayments and other credit standards had a much bigger impact on house prices than any other “fundamental” driver. Since the aftermath of the financial crisis, the level of the real interest rate on the conventional fixed 30-year mortgage has been a surprisingly good predictor of the yearly growth rate in the national S&P CoreLogic Case-Shiller Home Price Index.2 The plunge in real mortgage rates from about 2% on the eve of the pandemic to just 0.5% more recently has been perfectly consistent with the uptick in the yearly growth rate of the Case-Shiller Index from 3% to 17%. In other words, the mix between principal and interest can shift without doing much, if anything, to the typical buyer’s monthly payment. Higher prices do mean higher downpayments, which could limit affordability for some people, but that doesn’t really matter as long as renting is an option (and, speaking as a renter of a single-family home, it definitely is)….”
NEWS
Wavering US investors cut leverage for first time since start of pandemic (Eric Platt et al., Financial Times) ($)
“…Investors in the US have started to dial back their use of leverage for the first time since financial markets were rattled by the coronavirus crisis last year, removing some of the borrowed money that has since fuelled a rally in stocks. Investors had borrowed $844bn against their portfolios in July, down from a record $882bn a month earlier and the lowest level since March, according to data collected by Wall Street’s self-regulatory body, the Financial Industry Regulatory Authority. Separate data from Goldman Sachs, which runs one of the largest prime brokerages in the world, showed that the investment bank’s hedge fund clients had cut both net and gross leverage in recent weeks. Morgan Stanley has also reported long-short equity hedge funds that trade through it reducing their leverage, while bankers at other large New York-based prime brokers said a similar trend was under way….Interactive Brokers, which serves 1.5m customers, disclosed this month that margin loan balances among its clients had declined 2 per cent in July from the month before to $47.9bn. At Charles Schwab, margin balances in July rose by the smallest pace since the retail broker began disclosing the figure on a monthly basis this year, although it still hit a record of $79.9bn….”
U.S. Covid-19 Hospitalizations Nearly Doubled in August as Some States Ask for Resources (Talal Ansari, (Wall Street Journal) ($)
“…U.S. Covid-19 hospitalizations have surpassed 100,000 for the first time since January, nearly doubling since the start of August….The last time hospitalizations neared those levels was in late January, at the end of a prolonged and deadly winter surge. At the peak, on Jan. 14, Covid-19 hospitalizations stood at 142,229….Deaths, a lagging indicator, have also been edging higher in recent weeks. The number of daily deaths associated with Covid-19, based on a seven-day average, broke the 1,000 mark last Saturday, but remains well below the peak of 3,425 on Jan. 13….”
The World Economy’s Supply Chain Problem Keeps Getting Worse (Cindy Wang + Enda Curran, Bloomberg) ($)
“…A supply chain crunch that was meant to be temporary now looks like it will last well into next year as the surging delta variant upends factory production in Asia and disrupts shipping, posing more shocks to the world economy….The cost of sending a container from Asia to Europe is about 10 times higher than in May 2020, while the cost from Shanghai to Los Angeles has grown more than sixfold, according to the Drewry World Container Index. The global supply chain has become so fragile that a single, small accident “could easily have its effects compounded,” HSBC Holdings Plc. said in a note….The spread of the delta variant, especially in Southeast Asia, is making it difficult for many factories to operate at all. In Vietnam, the world’s second-largest producer of footwear and clothing, the government has ordered manufacturers to allow workers to sleep in their factories to try to keep exports moving….“Now container liners don’t sign long-term agreements, and most deals are done by spot prices,” said Jason Lo, CEO of Taiwanese gym equipment maker Johnson Health Tech Co. He said it was becoming impossible to estimate shipping costs and do financial planning, but “we have no choice.” Colin Sung, general manager of Dongguan-based World-Beater International Logistics Co., said one client had more than 70 containers of goods sitting at a warehouse in Shenzhen because his American buyer didn’t want to pay the shipping cost. Sung said 60% to 70% of his clients have cut shipments due to rising costs….”
Treasury Sales Under Scrutiny as Foreign Demand Rises to Record (Stephen Spratt, Bloomberg) ($)
“…An autopsy of this month’s blockbuster 10-year Treasury auction shows global funds bought a record amount. Traders will be scrutinizing this week’s sales for a possible repeat. A breakdown of the Aug. 11 sale released by the Treasury on Monday showed the Foreign and International category, a group that includes foreign official entities, were awarded $15.4 billion of the $41 billion of notes sold, an all-time high. Their 38% share was the biggest proportion in over a decade….This month’s 10-year sale also caught traders off guard as the notes were awarded at just 1.34%, more than three basis points below the level of prevailing yields ahead of the auction, the biggest premium since July 2012….Various theories have been bandied about as to what drove the sudden influx. One was that foreign central banks were the major bidders as they sought to reallocate their foreign-exchange reserves due to a decline in the availability of Treasury bills. Another reason that has been mooted was a step up in Chinese demand after the Asian nation’s currency reserves climbed to highest since 2015 in July. Recent tweaks to a Federal Reserve repo facility have also been cited as a possible driver. Central banks and official money may be at the forefront again as they often prefer to buy shorter maturities due to their lower volatility. On the other hand, foreign investors have recently shown a preference for refunding sales, which include longer maturities such as 10-year notes. Shorter-dated Treasuries, which are sold new each time, have not exhibited the same trend….”
Trading in Japanese government bonds is drying up. Does that matter? (Staff, The Economist) ($)
“…Nobody bought Japan’s ten-year government bond in over-the-counter trading on August 3rd. Such a lull in the world’s second-largest market for sovereign bonds would once have been remarkable. But in fact this was not even the first time activity dried up. Once-frenetic trading desks in Tokyo have fallen silent over the past half-decade….The scale of bond-buying over the past eight years in particular has been astonishing. The boj’s assets run to around 130% of gdp, nearly twice the share held by the European Central Bank and nearly four times that of America’s Federal Reserve. The boj holds almost half of Japan’s sovereign bonds (and, after years of sluggish economic growth, which have obliged the government to run budget deficits, the country has rather a lot of them). These have largely been bought from commercial banks—both domestic ones and foreign lenders based in Japan. In 2012 banks owned over 40% of the stock of government bonds; now they own less than 13%. Since they typically do a lot of bond trading, it might come as no surprise that activity has dried up like a dammed stream….Yet there also seem to have been few of the negative market consequences that critics feared. Bond dealers bleat about liquidity in surveys, but bid-ask spreads—a measure of the gap between the price at which buyers are willing to buy and sellers are willing to sell—in the trading that does occur have been contained…The lack of any direct financial consequences of throttling activity in the bond market says something interesting about qe and monetary policy in general. Policy is usually regarded as being something that causes changes in the economy. But it is as much a consequence of existing economic reality. Movements in bond markets typically convey useful information about investors’ expectations for growth and inflation. But in Japan both are so consistently low that there is little useful information to be gleaned from a livelier market. qe may have helped kill off trading activity, but ultimately the euthanasia of trading desks, like the qe programme itself, is a consequence of a stagnant economy and static prices…”
World’s Largest Chip Maker to Raise Prices, Threatening Costlier Electronics (Yang Jie et al., Wall Street Journal) ($)
“…Taiwan Semiconductor Manufacturing Co. plans to increase the prices of its most advanced chips by roughly 10%, while less advanced chips used by customers like auto makers will cost about 20% more, these people said. The higher prices will generally take effect late this year or next year, the people said….The price increases have a twofold purpose for TSMC as it addresses the shortage. In the short term, higher prices push down demand and preserve supply for customers who have no other choice. Over the longer term, the higher income will help TSMC invest aggressively in new capacity, according to analysts. The company has said it plans to spend a total of $100 billion over the next three years on new factories and equipment as well as research and development. It is expanding its production capacity in Nanjing, China, and has started construction on a $12 billion facility in Arizona….Andrew Lu, a semiconductor analyst at Sinolink Securities, said price increases would preserve TSMC’s profit margins. He said the Taiwanese company had spent too much of its huge capital budget on the most advanced chips, losing market share in less advanced chips. “TSMC is finally going to increase their prices to go with the trend, making up for misallocating their capital spending,” Mr. Lu said….The company’s market dominance gives it more pricing power than suppliers usually enjoy. TSMC accounts for more than half of the global semiconductor foundry market by revenue, according to Taiwanese research firm TrendForce, and it makes more than 90% of the world’s most advanced chips….”
Ford CEO: Up to 20% of factory workers are out on some days (Peter Valdes-Dapena, CNN)
“…Face masks are required again in major US auto factories and, according to Ford CEO Jim Farley, that has some workers deciding not to show up for work. In some factories, absentee rates can exceed 20%, he said in an interview with CNN Business. “When a fifth of your workforce isn’t coming in, in a manufacturing operation where everyone has their job and you don’t know who’s going to be missing every day, man, it’s really challenging,” Farley said….Ford has been using temporary workers to fill in on the line when regular line workers don’t come in, Ford spokeswoman Kelli Felker said later….”
NEW ECON RESEARCH
Competition and Selection in Credit Markets (Constantine Yannelis + Anthony Lee Zhang, NBER) ($)
“We present both theory and evidence that increased competition may decrease rather than increase consumer welfare in subprime credit markets. We present a model of lending markets with imperfect competition, adverse selection and costly lender screening. In more competitive markets, lenders have lower market shares, and thus lower incentives to monitor borrowers. Thus, when markets are competitive, all lenders face a riskier pool of borrowers, which can lead interest rates to be higher, and consumer welfare to be lower. We provide evidence for the model’s predictions in the auto loan market using administrative credit panel data.”
A Monetary-Fiscal Theory of Sudden Inflations and Currency Crises (David Miller, Federal Reserve)
‘Treating nominal government bonds like other bonds leads to a new theory of sudden inflations and currency crises. Holmstrom (2015) and Gorton (2017) describe bonds as having costly-to-investigate opaque backing that consumers believe is sufficient for repayment. Government bonds’ nominal return is their face value, their real return is determined by the government’s surplus. In normal times, consumers are confident of repayment but ignorant of the true surpluses that will fund that repayment. When consumers’ belief in real repayment wavers, they investigate surpluses. If consumers learn surpluses will be insufficient to repay bonds in real terms, the price level jumps. This explains why we observe inflationary crises, but never deflationary.”
NEW SCIENCE
Supersolids go two-dimensional (Bruno Laburthe-Tolra, Nature)
“…Despite their name, materials known as supersolids are not super rigid. Instead, they combine the ordered structure of a solid with the properties of a superfluid — a substance that flows without friction. To picture a supersolid, consider an ice cube immersed in liquid water, with frictionless flow of the water through the cube. In 2019, supersolids were made using ultracold magnetic atoms2–4, but the ordered structure existed in only one dimension. Now, in a paper in Nature, Norcia et al.5 report the observation of a 2D supersolid formed by ultracold dysprosium atoms. hen a liquid becomes a solid, its density becomes strongly modulated as the ordered array of particles that constitutes a crystal emerges. This regular order, which characterizes solids ranging from ice to metals, is invisible to the naked eye and breaks a type of symmetry known as translational symmetry. For a material to become a supersolid, it must similarly break translational symmetry. Moreover, it needs to exhibit superfluidity, which requires it to behave like a wave that has a well-defined oscillation throughout the material….”
IN OUR AIRPODS
Mitu Gulati and Ugo Panizza on Haiti’s Odious Post-Colonial Debt (Bloomberg Odd Lots)
WEDNESDAY, AUGUST 25, 2021
BLOGS/OP-EDS
Is the Conventional Wisdom on Educational Spending All Wrong? (Freddie deBoer, Freddie deBoer Blog) ($)
Freddie DeBoer continues grapple with the world as we find it, “…I really need to underline this point: lower educational expenditures per student can’t be the source of race and income gaps because Blacker and poorer schools receive more per-pupil funding than whiter and richer schools. Sosina and Weathers 2019: “On average, both Black and Latinx total per pupil expenditures exceed White total per pupil expenditures by $229.53 and $126.15, respectively.”…This finding flies so directly in the face of the progressive conversation that I find people just can’t hear it, but it actually makes perfect sense. Of course those schools have more funding; we’ve been throwing money at our achievement gaps for 40 years…In 1950 we spent less than 3% of GDP on education in this country. Now it’s more like 7%. It’s hard to say that we have better educational or economic outcomes commensurate with that growing price tag. I am a free-spending, let’s-use-the-printing-press kind of a guy. But even I have to ask, how much are we ultimately going to have to spend, and at what point does just cutting people checks become a more efficient option…”
When Black Americans choose where to live, they choose GOP-run Texas, Florida, and Georgia (Timothy Carney, Washington Examiner)
Timothy Carney argues revealed preference suggests black Americans prefer conservative public policy, “…People of color make up 95% of Texas’ population growth.” Texas gained the most black people, nearly 700,000, of any state in the country. Georgia and Florida were second and third place, increasing their black populations by 450,000 and 390,000, respectively. All three states were governed by Republican governors with Republican-run legislatures throughout the decade. Texas saw its black population grow by 23% while Georgia and Florida saw 15% and 13% growth respectively…Now, it’s possible that governance has nothing to do with the desirability of living in a place, but that hardly seems like a progressive position….”
We Need to Talk About the Great Mayonnaise Inflation Mystery (Tracy Alloway, Odd Lots) ($)
Tracy Alloway unpacks what’s driving mayonnaise inflation which helps to unpack how inflationary pressure diffuses, “…In many ways, higher mayonnaise prices now reflect the confluence of not one but two pandemics. African Swine Fever destroyed as much as a third of China’s pig supply. As the country’s farmers rushed to rebuild hog herds, soybean producers struggled to keep up with the sudden spike in demand for feedstock, which pressured soy prices higher. Meanwhile, the Covid pandemic and stay-at-home orders helped boost demand for sandwich spreads in the U.S., with Unilever recognizing the condiment’s outstanding contribution to its earnings in the second quarter of last year. Bad weather in South America and Canada has been pressuring soybean oil prices upwards since then For now it seems producers are absorbing some of the higher input costs that go into making the miracle that is America’s most popular sandwich spread. All of which points to a wider point about inflation. We tend to talk about it from a macro perspective, as a cohesive whole. But the measure is ultimately a collection of individual prices, each of which tell their own idiosyncratic story of supply and demand….”
NEWS
Chinese Factories Are Having Labor Pains—‘We Can Hardly Find Any Workers’ (Stella Yifan Xie + Liyan Qi, Wall Street Journal) ($)
“…Labor shortages are materializing across China as young people shun factory jobs and more migrant workers stay home, offering a possible preview of larger challenges ahead as the workforce ages and shrinks….China’s shortfall in factory labor comes as it grapples with the opposite problem in another part of its economy: too many workers for white-collar professional jobs. More than 9 million students, a record, are graduating from college this year, aggravating the structural mismatch in China’s labor market, economists say….In 2020, the number of rural Chinese people classified as migrant workers dropped for the first time in a decade, by more than 5 million to 285.6 million, according to data from China’s National Bureau of Statistics, as more workers stayed in their hometowns or looked for jobs nearby. Many did so because of fears about Covid-19 in bigger cities and still haven’t returned to them, factory owners say….In 2020, more than half of China’s migrant workers were at least 41 years old. The percentage of migrant workers aged 30 or younger steadily declined to 23% in 2020 from 46% in 2008, according to data from Wind….”
Xi Jinping’s talk of “common prosperity” spooks the prosperous (Staff, The Economist) ($)
“…Common prosperity, Mr Xi pointed out, has been an ideal of the Chinese people since ancient times. It was espoused by his predecessors as Communist Party leader. (Even Deng Xiaoping, who was famously happy to let some “get rich first”, insisted that they then help others to catch up.) The ideal appears not just in Marx but also in Confucius, Mr Xi said. He quoted a well known line from “The Analects”, which says something to the effect that a wise leader worries not about poverty but about inequality; not that his people are too few, but that they are too divided. (It is snappier in the original Chinese.) The idea, then, is not new. But it is newly important. The term has appeared 65 times in Mr Xi’s speeches or meetings this year, according to Bloomberg….“We must not allow the gap between rich and poor to get wider,” Mr Xi insisted in January. People in the top fifth of Chinese households enjoy a disposable income more than ten times as high as people in the bottom fifth, according to official figures. Disposable incomes in cities are two and a half times as high as in the countryside. And the top 1% own 30.6% of household wealth, according to Credit Suisse, a bank (compared with 31.4% in America)….The party says it will increase the role of taxation in fighting inequality. It will adjust high incomes “reasonably”. But it has yet to quantify that reasonableness by specifying future tax rates or thresholds. Besides, the government overhauled personal taxes as recently as 2018, making it unlikely to have another go soon, according to Gabriel Wildau of Teneo, a risk-advisory firm. A crackdown on tax evasion and illicit income is more likely. This week the party’s corruption watchdog said it had instructed over 24,800 party cadres in the city of Hangzhou to undertake “self-examination” and confess to any illegal borrowing from local firms or other conflicts of interest. Most egalitarian governments content themselves with tweaking taxes and transfers. But China’s reach is broader. It is also championing two other kinds of redistribution: “voluntary” donations by the rich (Tencent, an internet giant, ploughed $7.7bn into its social initiatives soon after the August 17th meeting) and what is sometimes called “pre-distribution”. This can entail altering the split of national income between wages and profits. A common prosperity “demonstration zone” in Zhejiang province, for example, includes a target to raise labour’s share of the province’s income from 47.8% (in 2017) to over 50%. The labour share is not easy to measure let alone manipulate…..China’s wage-earners might benefit from policies like the government’s new guidelines on gig workers, which seek to improve their wages and bargaining position. Certainly, investors in the gig economy fear these policies will leave a smaller slice of the cake for them. The share price of Meituan, a food-delivery giant, has fallen by 18% since the guidelines were released….”
Most Americans say the declining share of White people in the U.S. is neither good nor bad for society (Jens Manuel Krogstad et al., Pew Research Center)
“…About six-in-ten adults (61%) say the declining proportion of Americans who identify as White – a trend documented this month in new data from the Census Bureau about Americans who identify as solely White and not Hispanic – is neither good nor bad for society. About two-in-ten (22%) say it is bad, including 9% who say it is very bad. Slightly fewer (15%) say it is good for society, including 7% who say it is very good, according to the survey of 10,221 adults, conducted July 8-18, 2021….”
This Illinois County Is Losing People Faster Than Anywhere in the U.S. (John McCormick + Chad Day, Wall Street Journal) ($)
“…In a nation where more than half of all counties saw population declines during the past decade, nowhere fared worse than Alexander County in far southern Illinois. Located at the confluence of the Ohio and Mississippi rivers, the county lost 36.4% of its residents between 2010 and 2020, Census Bureau data released this month shows. No other county lost more than 30%. The exodus amounted to roughly 3,000 people and lowered the county’s population to 5,240. The declining numbers are putting added pressure on already stressed local government finances and leaving the remaining residents questioning whether there’s any future here. A yearslong plan to revive Cairo’s port may be the area’s last hope….Cairo (pronounced KAY-ro) has been the epicenter of the county’s loss. A once bustling river port, the town has suffered for decades from the decline of shipping, coal mining, government and manufacturing jobs…Roughly 80% of all inland barge traffic in the U.S. passes Cairo, according to Alexander-Cairo Port District. To the south of here, barges don’t need to pass through lock and dam structure as they do to the north, speeding transit to the Gulf of Mexico and allowing for larger and more efficient loads. “We’ve just got to figure out a way for some of this money that flows by here to stop here,” said Larry Klein, the port district’s board chairman and a lifelong resident…”
Desperate U.S. Cities Pitch Wall Street-Style Sign-On Bonuses (Katia Dmitrieva et al., Bloomberg) ($)
“…In Albuquerque, New Mexico, landing a job with the police force or fire department may get you a sign-on bonus of $15,000…Despite such incentives, about 1 in 10 local government jobs remains unfilled. Wait times on the city’s non-emergency police line are upwards of 45 minutes and several bus routes are cut each week….bout 780,000 government jobs remain missing compared with pre-pandemic levels, led by state and local positions….In Baltimore, a quarter of jobs in the public-works department, which handles trash and water, remain stubbornly open. The city didn’t lay off any workers, but more than 100 people in the department retired or left for the private sector in the past year and a half, worsening the pre-Covid shortage, according to Christopher Shorter, the city administrator. That’s led to overflowing garbage cans downtown and illegal dumping. Baltimore put off hiring for positions in other departments to boost the pay of commercial truck drivers by up to 5% to about $23 an hour, and still didn’t see enough applicants. So the city is starting a commercial-drivers academy this year to train longtime municipal workers in other departments. The thinking is that these employees will be less likely to lured away….”
NEW ECON RESEARCH
The Elusive Explanation for the Declining Labor Share (Gene Grossman + Ezra Oberfield, NBER)
“A vast literature seeks to measure and explain the apparent decline in the labor share in national income that has occurred in recent times in the United States and elsewhere. The culprits include technological change, increased globalization and the rise of China, the enhanced exercise of market power by large firms in concentrated product markets, the decline in unionization rates and the erosion in the bargaining power of workers in labor markets, and the changing composition of the workforce due to a slowdown in population growth and a rise in educational attainment. We review this literature, with special emphasis on the pitfalls associated with using cross-sectional data to assess this phenomenon and the reasons why the body of papers collectively explains the phenomenon many times over…. But the explanation for any durable realignment of factor share if indeed such a realignment has occurred remains elusive…. many economists appear to believe that further automation, robotization, globalization, market concentration, and aging of the population spell ongoing declines for the labor share. Some even fear that the labor share in national income might fall to zero. We are more sanguine. The remarkable stability of the labor share for more than a century despite the fact that labor shares in specific industries regularly undergo large changes, and despite the long list of factors that, as we have seen, have the ability to alter the functional distribution of income suggests to us the existence and operation of powerful, stabilizing forces. The exact nature of these forces has yet to be firmly established, but the literature identifies several candidates. The simplest, of course, would be a unitary elasticity of substitution between capital and labor in an aggregate production function, if such a function can be defined. Then any shift in the supply or demand for labor would generate wage movements that exactly counteract the initial shock…”
Collusion, Mergers, and Related Antitrust Issues (John Asker + Volker Nocke, NBER) ($)
“This survey examines recent developments in economic research relating to antitrust, paying specific attention to research in the areas of collusion and merger enforcement. Research relating to both collusion and mergers has made significant advances in the last twenty years. With respect to collusion, this includes important theoretical and empirical work on the sustainability, structure, and impact of collusive schemes. With respect to mergers, this includes important work on the impact of enforcement institutions, both theoretical and empirical work on unilateral effects, and theoretical work on the selection of which mergers get proposed to antitrust agencies and optimal policy in the face of that selection. A feature of recent research is the increasing complementarity between empirical work (ranging from observational studies to model-based measurement) and theoretical work in advancing our understanding of collusive and merger-related phenomena.”
NEW SCIENCE
The Brain Doesn’t Think the Way You Think It Does (Jordana Cepelewicz, Quanta Magazine)
“….But they also found unsettling evidence that those categories and the neural networks that support them don’t work as expected. It’s not just that the architecture of the brain disrespects the boundaries between the established mental categories. It’s that there’s so much overlap that a single brain network “has more aliases than Sherlock Holmes,” Barrett said. Recent work has found, for instance, that two-thirds of the brain is involved in simple eye movements; meanwhile, half of the brain gets activated during respiration. In 2019, several teams of scientists found that most of the neural activity in “perception” areas such as the visual cortex was encoding information about the animals’ movements rather than sensory inputs. This identity crisis isn’t limited to neural centers of perception or other cognitive functions. The cerebellum, a structure in the brains of all vertebrates, was thought to be dedicated almost exclusively to motor control, but scientists have found that it’s also instrumental in attention processes, the regulation of emotions, language processing and decision-making. The basal ganglia, another ancient part of the brain usually associated with motor control, has been similarly implicated in several high-level cognitive processes….”
The world needs a proper investigation into how covid-19 started (Staff, The Economist) ($)
“…An online open-source-intelligence group which calls itself drastic has been scouring sequencing data to get insight into activities at the Wuhan Institute of Virology (wiv). When researchers publish sequences they typically post the raw data from which those sequences are assembled to public databases such as the sequence-read archive at America’s National Centre for Biotechnology Information. Contamination events in the laboratory, or within sequencing machines themselves, mean these data sometimes contain sequences not meant to be there. In theory such evidence could reveal nefarious goings-on. Such work, while promising, takes a lot of resources. If you have the sort of supercomputers available to America’s national labs it gets easier. Gilles Demaneuf, a data scientist who works with drastic, says he has a hunch the American intelligence community’s 90-day study is working the same angle. It is conceivable that the intelligence services might have been able to filch raw sequence reads directly from Chinese sequencing machines, thus picking up even more data. Sequencing data only offers a way forward if the virus did indeed leak out of a lab, something which remains a possibility but which is far from proven. The study of early cases should be useful whatever route it took; the closer you get to understanding the when and where of the crossing-over from animal to human, the easier it should be to learn something of the how. On the basis of information provided by China the joint study concluded it was unlikely for there to have been any substantial transmission in Wuhan before December 2019. That is unlikely to be true. For one thing the South China Morning Post, a newspaper based in Hong Kong, obtained government documents in 2020 which showed one to five new cases a day in Wuhan from November 17th 2019 onwards. Further evidence has strengthened the possibility that the virus could have been in circulation much earlier than the official story allows….”
IN OUR AIRPODS
“Now it seems like their strategy is no longer tenable”—the Delta variant crushes Australia’s plan (Economist Radio)
TUESDAY, AUGUST 24, 2021
BLOGS/OP-EDS
Poverty in America, before and after COVID-19 (Robert Doar, American Enterprise Institute)
Cleareyed Robert Doar remarks on the state of poverty in America, “…So, when it comes to poverty in America, most politicians and policy experts have an unhappy story to tell….Thankfully, all these depictions are wrong…. Since the 1990s, our country has made remarkable, yet often overlooked strides to improve the lives of millions of low-income Americans….Bruce Meyer of the University of Chicago and AEI and James Sullivan at Notre Dame have found that, properly measured, poverty in America was just under 3 percent, as of 2019,7 as shown in the chart I am displaying, which compares Meyer and Sullivan’s findings to the official poverty rate for all Americans. Factoring in all the assistance families are provided, correcting for inaccuracies in reporting, and looking at what low-income families consume, the child poverty rate has fallen from 16.1 percent to 3.7 percent, or by more than 7.6 million children, in the past 30 years….I’d like to show another chart that further illustrates the point I’m making about the economic situation of the lowest income Americans. This is from a Congressional Budget Office report…As you can see, over the last forty years, according to the CBO, Americans in the bottom 20% of earners have experienced over 91% cumulative growth in their incomes….A combination of a focus on employment and generous government support for low-income Americans led to dramatic declines in poverty among all Americans and their children. The pandemic disrupted this approach and required an extraordinary response. A dramatic increase in emergency benefits worked to distribute support and reduce the economic harm that would have resulted from the economic disaster that COVID-19 caused. But looking forward, our success in responding to the COVID-19 crisis may lead us to forget the lessons we learned before it and undermine our focus on work—leading, I am afraid, in the long term to less employment and, as a result, more family dysfunction and higher poverty rates. Government transfers and benefits, without earnings from work or attention to underlying issues, will not help people escape poverty….”
Math education — or not (John Cochrane, The Grumpy Economist)
John Cochrane on the state of American math education, “….Algebra and calculus should be considered basic math, not advanced math! It’s still amazing to me, who uses both in every working day, that the US puts off teaching these central skills until late in high school. If, now, at all….Everyone likes to talk up their own book, and advocate “be like me.” I like applied math, and I hate pure math. I was no good at it. I need to see things, not prove theorems. I learn things from simple example to more general example, and finally to theorem that encompasses a full set of examples. I loved physics, and hated the math olympiad questions. I hate number theory. The skills of a research mathematician are not the skills that 99% of stem users need! We need to demystify applied math, the race to proving theorems in elegant generality. That’s a great skill for those who have it, but neither necessary nor sufficient (!) for producing a generation of stem users. Indeed, I think math education goes haywire far too soon by trying to teach people to be “research mathematicians” and weed out that talent, rather than teach people to be competent math users (like me)….”
Honey, Who Shrunk the World? (Paul Krugman, Krugman Wonks Out)
Krugman argues the period of hyperglobalization was idea driven, and those ideas have come and gone, “…Basically, nations can choose to be inward-looking, trying to develop by producing for the domestic market, or outward-looking, trying to develop by selling to the rest of the world. What happened in much of the developing world during the era of hyperglobalization was a drastic turn toward outward-looking policies. What caused that trade policy revolution and hence helped cause hyperglobalization itself? The immediate answer, which may surprise you, is that it was basically driven by ideas…..So orthodoxy shifted to a much more free-trade set of ideas, the famous Washington Consensus. (Catherine Rampell suggests that should be the new name for D.C.’s football team. Nerds of the world, unite!) The new orthodoxy also delivered its share of disappointments, but that’s a story for another time. The important point, for now, is that the change in economic ideology led to a radical change in policy, which played an important role in surging world trade: We wouldn’t be importing all those goods from low-wage countries if those countries were still, like India and Mexico in the 1970s, inward-looking economies living behind high tariff walls. There are, I think, two morals from this story. First, ideas matter. Maybe not as much as John Maynard Keynes suggested when he asserted that “it is ideas, not vested interests, which are dangerous for good or evil,” but they can have huge effects. Second, it’s a corrective against American hubris. We still tend, far too often, to imagine that we can shape the world as we like. But those days are long gone, if they ever existed. Hyperglobalization was made in Beijing, New Delhi and Mexico City, not in D.C..” Also note this factoid, “…Only a tiny fraction of the tonnage that crosses borders goes by air, but air-shipped goods are, of course, much higher value per pound than those sent by water, so airplanes carry around 30 percent of the value of world trade…”
President Biden’s Infrastructure and Build Back Better Plans: An Antidote for Inflationary Pressure (Jared Bernstein + Ernie Tedeschi, Council of Economic Advisors)
Jared Bernstein and Ernie Tedeschi argue that Biden’s infrastructure and Build Back Better plans are supply side boosts that will expand capacity and in turn dampen price pressure, “….The President’s investment plans expand the capacity of the U.S. economy through a number of these different channels. For example, the transportation, rail, public transit, and port investments will reduce efficiency-killing frictions that keep people and goods from getting to markets as quickly as they should. The child and elder care investments will boost the labor supply of caretakers. The educational investments in pre-K and community college will eventually show up as higher-productivity as a result of a better-educated workforce. Larger capacity and faster growth pay dividends to people over the long run in different ways. Key benefits include higher incomes on average and greater economic security. Another is lower inflationary pressure: as economic capacity builds, cost pressures are less binding on firms making new goods and services, and price pressures gradually ease. In the late 1990s, for example, productivity in the U.S. accelerated due in large part to the rise of the Internet and the adaption of other information technology, meaning the capacity of the U.S. economy was growing faster than economists had previously expected. At the time, the Federal Reserve led by its Chair, Alan Greenspan, recognized that this unexpected expansion in the supply-side meant that inflationary pressure would be lower than anticipated; in turn, the Federal Reserve adjusted its outlooks accordingly….”
Pro-Growth Isn’t Anti-Environment (Matt Klein, The Overshoot) ($)
Matt Klein on our best future is “green” in that’s the color of money, “…After all, we have already made tremendous progress in reducing emissions and increasing carbon efficiency without even trying. Carbon emissions in the major rich countries were 15% lower in 2019 than at the peak 2005 even as total production of goods and services rose about 30%.5 Put another way, a resident of an advanced economy produced about 50% more GDP in 2019 with the same amount of carbon emissions than she did in 2005. Moreover, that’s part of a longer-term trend going back decades. Humanity as a whole has done even better, with the global economy producing 5.5 times as much goods and services per ton of CO2 in 2019 than in 1980. Put another way, we’ve managed to improve our carbon efficiency about 4% each year for decades.6 That’s obviously not enough, but it suggests there is a lot of potential for much faster progress if we actually agree it’s important….The climate transition will require massive amounts of spending and production. Some areas of economic activity may have to shrink, but many will have to grow, and at least in the short term, the need for more production of desired goods and services will vastly outweigh the need to reduce undesirable forms of economic activity. Growth, not de-growth, is going to be the answer. uppose humanity pulls it off and we get to a world of zero (or negative) net greenhouse gas emissions in the next few decades. At that point, energy would predominantly come from resources that are both clean and, for all practical purposes, inexhaustible. Our diets and building materials might have changed a bit, but once we figure out how to make it work, the one-time adjustments should last for generations. At that point, why would there be any environmental limits to growth?…”
NEWS
Chinese Academics Call for Wealth Tax to Redistribute Income (Staff, Bloomberg) ($)
“…Chinese academics in a province that’s piloting measures to reduce income inequality said the government should impose wealth taxes, including on property and inheritance. In a front-page article published Thursday by the official Economic Daily newspaper, two researchers at Zhejiang University argued that the taxes would help adjust the earnings of high-income groups and narrow the income gap. Li Shi, a professor, and Yang Yixin, a researcher, said the taxes should be imposed at an appropriate time to promote “common prosperity.”…”
Spain counts cost of agribusiness in rising desertification (Daniel Dombey, Financial Times) ($)
“…An often irreversible process, desertification is a growing problem in Europe — especially in Spain where about a fifth of the country is already affected…Desertification can conjure up romantic images of sand dunes. In fact, the process is more banal. It refers to the degradation of land in dry areas that makes it unproductive and infertile. The main cause is often human action, such as overfarming and excessive irrigation, which erodes soil and drains aquifers. The problem exists on a daunting scale in Spain, where agriculture has steadily industrialised and three-quarters of the landmass is already generally dry or semi-arid..In Spain, about 20 per cent of land is already desertified, largely for historic reasons such as the destructive mining and overfarming that followed the change of use of land expropriated from the Catholic church in the 18th and 19th centuries. In such areas, productive land has become incapable of yielding substantial crops for human or animal life, although some vegetation may hang on. Satellite imagery shows that a further 1 per cent of Spanish territory is actively degrading because of intensive agricultural practices, although a greater area is indirectly affected, too. “It is like a black hole,” said Gabriel del Barrio, a researcher at the state-run Arid Zone Experimental Station in Almería, one of the most affected areas. “This 1 per cent endangers the countryside for kilometres around it . . . using up water and causing other damage.”…”
Ships Resume Docking at Ningbo Port After Two-Week Shutdown (Ann Koh, Bloomberg) ($)
“…Ships have resumed berthing operations at a halted container terminal in Ningbo, China, adding to optimism that full activity at one of the world’s busiest ports will be restored shortly after a two-week shutdown to quarantine dockworkers….The partial closure of the world’s third-busiest container port worsened congestion at other major Chinese gateways such as Shanghai, Xiamen and Hong Hong, as ships diverted away amid uncertainty over how long virus control measures in the city will last….”
NEW ECON RESEARCH
Regulatory Costs of Being Public: Evidence from Bunching Estimation (Michael Ewens et al., National Bureau of Economic Research) ($)
“The increased burden of disclosure and governance regulations is often cited as a key reason for the significant decline in the number of publicly-listed companies in the U.S. We explore the connection between regulatory costs and the number of listed firms by exploiting a regulatory quirk: many rules trigger when a firm’s public float exceeds a threshold. Consistent with firms seeking to avoid costly regulation, we document significant bunching around multiple regulatory thresholds introduced from 1992 to 2012. We present a revealed preference estimation strategy that uses this behavior to quantify regulatory costs. Our estimates show that various disclosure and internal governance rules lead to a total compliance cost of 4.1% of the market capitalization for a median U.S. public firm. Regulatory costs have a greater impact on private firms’ IPO decisions than on public firms’ going private decisions. However, heightened regulatory costs only explain a small fraction of the decline in the number of public firms.”
The Economics of Walking About and Predicting Unemployment (David Blanchflower + Alex Bryson, National Bureau of Economic Research) ($)
“Unemployment is notoriously difficult to predict. In previous studies, once country fixed effects are added to panel estimates, few variables predict changes in unemployment rates. Using panel data for 29 European countries over 439 months between 1985 and 2021 in an unbalanced country*month panel of just over 10000 observations, we predict changes in the unemployment rate 12 months in advance based on individuals’ fears of unemployment, their perceptions of the economic situation and their own household financial situation. Fear of unemployment predicts subsequent changes in unemployment 12 months later in the presence of country fixed effects and lagged unemployment. Individuals’ perceptions of the economic situation in the country and their own household finances also predict unemployment 12 months later. Business sentiment (industry fear of unemployment) is also predictive of unemployment 12 months later. The findings underscore the importance of the “economics of walking about”. The implication is that these social survey data are informative in predicting economic downturns and should be used more extensively in forecasting. We also generate a 29 country-level annual panel on life satisfaction from 1985-2020 from the World Database of Happiness and show that the consumer level fear of unemployment variable lowers well-being over and above the negative impact of the unemployment rate itself. Qualitative survey metrics were able to predict the Great Recession and the economic slowdown in Europe just prior to the COVID19 pandemic.”
NEW SCIENCE
New SARS-CoV-2 variants have changed the pandemic. What will the virus do next? (Kai Kupferschmidt, Science)
“…Derek Smith, an evolutionary biologist at the University of Cambridge, has worked for decades on visualizing immune evasion in the influenza virus in so-called antigenic maps. The farther apart two variants are on Smith’s maps, the less well antibodies against one virus protect against the other. In a recently published preprint, Smith’s group, together with David Montefiori’s group at Duke University, has applied the approach to mapping the most important variants of SARS-CoV-2 (see graphic, right). The new maps place the Alpha variant very close to the original Wuhan virus, which means antibodies against one still neutralize the other. The Delta variant, however, has drifted farther away, even though it doesn’t completely evade immunity. “It’s not an immune escape in the way people think of an escape in slightly cartoonish terms,” Katzourakis says. But Delta is slightly more likely to infect fully vaccinated people than previous variants. “It shows the possible beginning of a trajectory and that’s what worries me,” Katzourakis says. Other variants have evolved more antigenic distance from the original virus than Delta. Beta, which first appeared in South Africa, has traveled the farthest on the map, although natural or vaccine-induced immunity still largely protects against it. And Beta’s attempts to get away may come at a price, as Delta has outstripped it worldwide. “It’s probably the case that when a virus changes to escape immunity, it loses other aspects of its fitness,” Smith says. The map shows that for now, the virus is not moving in any particular direction. If the original Wuhan virus is like a town on Smith’s map, the virus has been taking local trains to explore the surrounding area, but it has not traveled to the next city—not yet….Some clues about SARS-CoV-2’s future path may come from coronaviruses with a much longer history in humans: those that cause common colds. Some are known to reinfect people, but until recently it was unclear whether that’s because immunity in recovered people wanes, or because the virus changes its surface to evade immunity. In a study published in April in PLOS Pathogens, Bloom and other researchers compared the ability of human sera taken at different times in the past decades to block virus isolated at the same time or later. They showed that the samples could neutralize strains of a coronavirus named 229E isolated around the same time, but weren’t always effective against virus from 10 years or more later. The virus had evidently evolved to evade human immunity, but it had taken 10 years or more. “Immune escape conjures this catastrophic failure of immunity when it is really immune erosion,” Bloom says. “Right now it seems like SARS-CoV-2, at least in terms of antibody escape, is actually behaving a lot like coronavirus 229E.”…”
Decades-old SARS virus infection triggers potent response to COVID vaccines (Smriti Mallapaty, Nature)
“…People who were infected almost two decades ago with the virus that causes severe acute respiratory syndrome (SARS) generate a powerful antibody response after being vaccinated against COVID-19. Their immune systems can fight off multiple SARS-CoV-2 variants, as well as related coronaviruses found in bats and pangolins.The Singapore-based authors of a small study published today in The New England Journal of Medicine1 say the results offer hope that vaccines can be developed to protect against all new SARS-CoV-2 variants, as well as other coronaviruses that have the potential to cause future pandemics….Last year, Linfa Wang, a virologist at Duke–NUS Medical School in Singapore who led the latest study, went looking for people who had survived SARS to see whether they offered any clues about how to develop vaccines and drugs for COVID-19. He detected ‘neutralizing’ antibodies in their blood that blocked the original SARS virus from entering cells, but did not affect SARS-CoV-2 — which he found surprising, because the viruses are closely related. But when Singapore rolled out the Pfizer–BioNTech COVID-19 vaccine this year, Wang decided to interrogate how the SARS infection affected responses to the vaccine. What he discovered was striking. Eight vaccinated study participants, who had recovered from SARS almost two decades ago, produced very high levels of neutralizing antibodies against both viruses, even after just one dose of the vaccine….They also produced a broad spectrum of neutralizing antibodies against three SARS-CoV-2 variants of concern in the current pandemic — Alpha, Beta and Delta — and five bat and pangolin sarbecoviruses. No such potent and wide-ranging antibody response was observed in blood samples taken from fully vaccinated individuals, even those who had also had COVID-19. The researchers suggest that such broad protection could arise because the vaccine jogs the immune system’s ‘memory’ of regions of the SARS virus that are also present in SARS-CoV-2, and possibly many other sarbecoviruses….”
IN OUR AIRPODS
Dudley Supports 2nd Powell Term (Bloomberg Surveillance)
MONDAY, AUGUST 23, 2021
BLOGS/OP-EDS
Why the Bezzle Matters to the Economy (Michael Pettis, China Financial Markets) ($)
Michael Pettis on when market prices diverge substantially from assets’ fundamental value for long periods of time, what Galbraith called “bezzle,” “…Galbraith recognized, in other words, that there could be a temporary difference between the actual economic value of a portfolio of assets and its reported market value, especially during periods of irrational exuberance. When that happens, Galbraith pointed out, “there is a net increase in psychic wealth.” Why? Because the embezzler feels (and is) wealthier, while the original owners of the portfolio do not realize that they are less wealthy….Munger went on to illustrate how rising asset prices, when they rise faster than rises in the underlying long-term economic value, can contribute to what he now renamed the febezzle—a clumsy word that has never stuck. Munger’s insight was that rising stock or real estate prices can generate income and wealth effects whether or not these rising prices reflect real increases in the earning capacity of these assets, that is to say in their real fundamental values. When they do reflect real increases in wealth, the increase in the investor’s wealth is matched by an increase in the real productive capacity of the economy. There is no false or distorted sense of wealth. But when asset prices increase for reasons other than real increases in their productive capacity, something very different happens. The overall economy is no better off because there will be no corresponding increase in the productive capacity of that economy. The owner of such assets, however, feels richer—although only temporarily—because over the long term, asset prices eventually converge to a value that represents their real contribution to the production of goods and services. When the perceived value of assets outpaces their actual economic utility, the psychic wealth of the economy once again rises, and because this rise is not associated with any corresponding rise in real wealth, it is only temporary (though, as Munger noted, this temporary phase can go on for a very long time). The point is that financial markets can create temporary impressions of false wealth very similar to those of Ponzi schemes without any need for an embezzler—a notion, by the way, that economist Hyman Minsky would have quickly recognized as a restatement of the third, Ponzi, stage of his Financial Instability Hypothesis….The bezzle cannot be quantified, and it cannot even be proven to exist until after the fact. But while that makes it useless as a concept for a form of economics that values precision over accuracy, this doesn’t mean that its impact should be ignored. The balance sheet matters, and when there is a significant (albeit temporary) divergence between the perceived value of assets in an economy and their future contribution to the production of real goods and services—whether this divergence is created by fraud, irrational exuberance, or malinvestment and other forms of nonproductive investment—this divergence will change economic behavior and activity in ways that are not sustainable….”
Treasury yields, inflation, and real interest rates: Analyzing the historical record (Paul Kupiec, American Enterprise Institute)
Paul Kupiec looks at past trends in Treasuries but notes that quantitative easing means that past performance is likely not a guide going forward “…Chart 1 plots historical Treasury yields and annual CPI inflation rates over the last 60 years. The data are sourced from the Federal Reserve Bank of St Louis FRED database. Negative ex ante real rates, a phenomenon that allegedly foreshadows subsequent Treasury note losses, occurred between September 1973, and August 1975, and again between October 1978 and October 1980. A careful look at the data from this period shows that investors who held their notes to maturity, rather than being “crushed,” for the most part not only earned positive real returns, but in some instances some of the highest real Treasury note yields available over the last sixty years. I calculate the actual ex-post real yields on Treasury notes for the period 1960 to 2011, the final year for which ten-year ahead inflation data is available. I assume that a new Treasury note is issued each month at par and project the note’s semi-annual cash flows for the following ten years. I use the actual change in the CPI over each note’s lifetime to calculate the inflation-adjusted (real) cash flows associated with each note at the date of note issuance. I calculate the ex-post real yield as the yield that equates the discounted value of each note’s inflation-adjusted cash flows to the par value of the note. Chart 2 plots historical ex ante real and ex-post real Treasury note yields. Chart 2 clearly shows that the vast majority of months with negative ex ante real yields actually returned positive real yields for investors who held their notes to maturity. The early 1980s was a period of exceptionally large negative ex ante real Treasury note yields and yet investors who held these notes to maturity earned some of the highest real returns available over this 50-year period. The ex-post real rate data suggest that the investors that got “crushed” were investors that purchased notes between late-1963 and early-1973, a period over which nominal note yields were higher than the lagging 12-month CPI inflation rate but realized ex post real yields were mostly below zero….The ex ante real-yield can be misleading for two reasons: (1) the lagging 12-month CPI inflation rate is not an accurate forecast of inflation over the notes’ 10-year life; and (2) when Treasury notes are held to maturity, mark-to-market losses on outstanding notes caused by yield increases are attenuated as the note approaches maturity and returns its par value….his brief analysis of the historical record, while informative, does not in my opinion provide any guidance on how current Treasury notes may perform going forward. Current nominal Treasury note yields are exceptionally low in part because of massive Federal Reserve QE purchases that were absent in historical episodes….”
A quality theory of Treasuries (Brendan Greeley, Financial Times) ($)
Brendan Greeley notes theory doesn’t explain bond markets and offers two hypotheses on Treasury Yields, “…The Treasury continues to sell more bonds every year, and the interest it pays on them has continued to fall. Low yields are a victory of practice over theory…..Hanno Lustig, an economist at the Stanford Graduate School of Business, sat down with several other researchers to figure out ways to price the entire portfolio of US Treasuries. They found two ways to explain low yields. The first is that investors keep thinking the US is about to raise taxes in a huge fiscal correction; an expectation Lustig describes as “implausible”. The second is a rational bubble — Treasuries are just special. Investors aren’t pricing them the way they would any other debt security….”
Impressive Arrays (Gregor Macdonald, Impressive Arrays)
Gregor Macdonald reports on California gasoline consumption, “…California gasoline consumption is recovering, but may struggle to reach previous highs. The Golden State remains our best proxy, in the US at least, for the approaching confluence of EV adoption, oil consumption disincentives, and the electrification of transport. California has mostly halted gasoline demand growth for over a decade, for example. But the state is also a lens through which to absorb how challenging it will be to force gasoline consumption into decline. That car dependency is so thoroughly embedded in California is useful also, in this regard, as it provides a hard case for the extreme political difficulty of dislodging personal vehicles from our cities. However, as discussed in Last Dance for Oil, it may be the pandemic that does some of the work our policy complex has failed to do. Through the first four months of this year, California gasoline consumption remains down about 13% compared to 2019 (the pandemic year 2020 is of course not useful for comparison, in this regard). It would be reasonable to expect further recovery, but it looks like consumption may still wind up down around 10% compared to the last “normal” year. Why might that be? The conversion of temporary work-from-home changes in commuting to a more permanent state of workplace flexibility. Return dates have been postponed once again, and California is probably the leading edge of coming changes in how we use, or don’t use, office space….”
NEWS
Japan’s Love of Debt Offers a View of U.S. Future (Peter Landers, Wall Street Journal) ($)
“…Tokyo’s central government is already on the hook to pay out nearly $10 trillion to its creditors. It sounds like an impossibly large sum to rustle up for a government that collects less than $600 billion in taxes each year….First, it is entirely denominated in Japan’s own currency, the yen. Second, about half of it is owned by the central bank, part of the same government issuing the debt in the first place. By borrowing only in yen, Japan is akin to the U.S., which borrows in its own currency, and different from Greece, which borrows in euros, a currency not under its control. Before repo men could seize Emperor Naruhito’s Toyota Century sedan, as an American hedge fund once tried to do with Argentina’s presidential plane, the Bank of Japan’s printing press could be turned on to satisfy the creditors….Someone has to buy the bonds financing this spending, yet the interest rate on the benchmark 10-year bond remains at almost exactly zero. There is always a big buyer waiting in the wings: the Bank of Japan. Through an asset-purchase stimulus program known as quantitative easing, the BOJ already owns about half of the government’s bonds, a higher proportion than the Fed, which owns about one-fifth of U.S. government debt….”
Cutoff of Jobless Benefits Is Found to Get Few Back to Work (Ben Casselman, New York Times) ($)
“…Data released Friday by the Labor Department provided the latest evidence. It showed that the states that cut benefits have experienced job growth similar to — and perhaps slightly slower than — growth in states that retained the benefits. That was true even in the leisure and hospitality sector, where businesses have been particularly vocal in their complaints about the benefits….In the most detailed study to date, also released Friday, Mr. Dube and several colleagues used data from Earnin, a financial services company, to review anonymized banking records from more than 18,000 low-income workers who were receiving unemployment benefits in late April. They found that ending the benefits did have an effect on employment: In states that cut off benefits, about 26 percent of people in the study were working in early August, compared with about 22 percent of people in states that continued the benefits. But far more people did not find jobs. The researchers had data for 19 states that ended the programs; in those places, they found that about 1.1 million people lost benefits because of the cutoff, and that only about 145,000 of them found jobs. (The researchers argue that the true number is probably even lower, because the workers they were studying were the people most likely to be severely affected by the loss of income, and therefore may not have been representative of everyone receiving benefits.)…”
China Hits Zero Covid Cases With a Month of Draconian Curbs (Staff, Bloomberg) ($)
“…It’s been just over a month, and China has once again squelched Covid-19, bringing its local cases down to zero It was more difficult this time, even though the leaders of the world’s most populous nation used the same playbook they followed to quell more than 30 previous flare-ups. The arrival of the more infectious delta variant has raised the stakes, as the pathogen refines its ability to escape curbs and flout vaccination. It’s unclear how long the victory will last….The containment-at-all-costs approach is weighing on the world’s second largest economy. Consumption and manufacturing slowed in July, with further weakness expected for August when infections peaked and measures to control them intensified. Investment banks from Goldman Sachs Group Inc. to Nomura Holdings Inc. cut their growth projections….Still, China has proven its ability to keep the pathogen at bay, and it has vowed to continue, regardless of the effort or expense. Health minister Ma Xiaowei told the state news agency Xinhua on August 16 that authorities planned even stricter measures intended to spot incursions of the virus from abroad more quickly….It’s clear China can stamp out the virus. The question remains how long it can hold out against the rest of the world….”
U.S. Home Sales Rose 2% in July Amid Higher Inventory (Nicole Friedman, Wall Street Journal) ($)
“…Sales of previously owned homes rose in July for the second straight month as high prices prompted more homeowners to put their houses on the market. Existing-home sales rose 2% in July from the prior month to a seasonally adjusted annual rate of 5.99 million, the National Association of Realtors said Monday. July sales rose 1.5% from a year earlier. The frenzied housing market of earlier this year is showing signs it is winding down, but the market remains competitive for buyers. The inventory of homes on the market has risen in recent months, but the supply remains well below demand, according to market participants….”
NEW ECON RESEARCH
Early Withdrawal of Pandemic Unemployment Insurance: Effects on Earnings, Employment and Consumption (Kyle Coombs et al., Working Paper)
“In June 2021, 22 states ended all supplemental pandemic unemployment insurance (UI) benefits, eliminating benefits entirely for over 2 million workers and reducing benefits by $300 per week for over 1 million workers. Using anonymous bank transaction data and a difference-indifferences research design, we measure the effect of withdrawing pandemic UI on the financial and employment trajectories of unemployed workers in states that withdrew benefits, compared to workers with the same unemployment duration in states that retained these benefits. In our data through August 6, we find that ending pandemic UI increased employment by 4.4 percentage points while reducing UI recipiency by 35 percentage points among workers who were unemployed and receiving UI at the end of April 2021. Through the first week of August, average UI benefits for these workers fell by $278 per week and earnings rose by $14 per week, offsetting only 5% of the loss in income. Spending fell by $145 per week, as the loss of benefits led to a large immediate decline in consumption.”
Does Money Still Matter? Attainment and Earnings Effects of Post-1990 School Finance Reforms (Jesse Rothstein + Diane Whitmore Schanzenbach, NBER) ($)
“Card and Krueger (1992a,b) used labor market outcomes to study the productivity of school spending. Following their lead, we examine effects of post-1990 school finance reforms on students’ educational attainment and labor market outcomes. Lafortune et al. (2018) show that these reforms increased school spending and narrowed spending and achievement gaps between high- and low-income districts. Using a state-by-cohort panel design, we find that reforms increased high school completion and college-going, concentrated among Black students and women, and raised annual earnings. They also increased the return to education, particularly for Black students and men and driven by the return to high school.”
NEW SCIENCE
The mutation that helps Delta spread like wildfire (Ewen Callaway, Nature)
“…As the world grapples with the hyper-infectious Delta coronavirus variant, scientists are racing to understand the biological basis for its behaviour. A slew of studies has highlighted an amino-acid change present in Delta that might contribute to its swift spread. Delta is at least 40% more transmissible than is the Alpha variant identified in the United Kingdom in late 2020, epidemiological studies suggest. “The key hallmark of Delta is that transmissibility seems to be ramping up to the next notch,” says Pei-Yong Shi, a virologist at the University of Texas Medical Branch in Galveston. “We thought Alpha was pretty bad, very good at spreading. This one seems to be even more.” Shi’s team and other groups have zeroed in on a mutation that alters a single amino acid in the SARS-CoV-2 spike protein — the viral molecule responsible for recognizing and invading cells. The change, which is called P681R and transforms a proline residue into an arginine, falls within an intensely studied region of the spike protein called the furin cleavage site. The presence of this short string of amino acids set off alarm bells when SARS-CoV-2 was first identified in China, because it is associated with heightened infectivity in other viruses such as influenza, but had not previously been found in other sarbecoviruses, the family of coronaviruses to which SARS-CoV-2 belongs. “This little insert sticks out and hits you in the face,” says Gary Whittaker, a virologist at Cornell University in Ithaca, New York….Delta wasn’t the first SARS-CoV-2 variant to gain a mutation that alters the furin cleavage site. The Alpha variant has a different amino-acid change at the same location as Delta. But the available evidence suggests that the mutation’s effect has been especially profound in Delta. In a study reported as a preprint on 13 August1, Shi’s team found that the spike protein is cut much more efficiently in Delta-variant particles than in Alpha particles, echoing results reported in May by virologist Wendy Barclay at Imperial College London and her team, who compared Delta with an earlier strain2. Follow-up experiments by both groups showed that the P681R change was largely responsible for spike being clipped so much more efficiently. “This really nailed it, in terms of the mechanism,” says Shi. Researchers are also beginning to join the dots between P681R and Delta’s ferocious infectivity. Shi’s team found that, in cultured human-airway epithelial cells infected with equal numbers of Delta and Alpha viral particles, Delta rapidly outcompeted the Alpha variant, mimicking epidemiological patterns that have played out globally. But Delta’s advantage disappeared when the researchers eliminated the P681R change….”
IN OUR AIRPODS