Stabilizing the federal debt at 100% of GDP over the long term—which would far exceed the post-1960 average of 45% of GDP—would require non-interest savings beginning at 2% of GDP and ramping up to 5% of GDP over the next three decades. (The resulting interest savings from a smaller debt would provide the rest of the savings.) These figures assume the renewal of the 2017 tax cuts (as there is strong bipartisan support for extending the tax cuts for the bottom-earning 98% of earners) but do not assume any additional spending expansions, tax cuts, or economic crises—all of which would also have to be fully offset to meet this debt target. In short, the non-interest savings required to stabilize the debt will almost surely rise past 5% of GDP when accounting for additional spending and tax-cut legislation. Taxing the rich cannot close more than a small fraction of this gap.
Related: Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy and American Gothic and The Economics of Inequality in High-Wage Economies
Treasury 10-year yields rose above 4.5% for the first time since 2007 as a more hawkish Federal Reserve adds to concern the bonds face a toxic mix of large US fiscal deficits and persistent inflation. Bill Ackman of Pershing Square Capital Management says he remains short bonds because he expects long-term rates to rise further. “The long-term inflation rate plus the real rate of interest plus term premium suggests that 5.5% is an appropriate yield for 30-year Treasurys.” The yield on 30-year debt climbed as much as one basis point Friday to 4.59%, adding to the 13 basis-point jump on Thursday that took it to the highest since 2011.
Related: 31% of All US Government Debt Outstanding Matures within 12 Months and Is a U.S. Debt Crisis Looming? Is it Even Possible? and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
Even if wage growth did normalize, it is not clear why interest rates would need to fall much, if at all, in a world of 2% real growth, 2% inflation, and healthy private sector balance sheets. Real yields on 5-year Treasury inflation-protected securities (TIPS) are currently about 0.5 percentage point higher than 5-year real yields starting five years from now. But from 2003 until the pandemic, spot 5-year real rates were about 1pp lower than forward rates. (This includes the flat curve years of 2006-7 and 2018-2019, when the spread was more or less zero.) If further-forward real yields were poised to revert to this longer-term average, then that would have implications for a range of asset prices.
Related: In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and What Have We Learned About the Neutral Rate? and BIS Quarterly Review
Since the Fed started hiking rates last year, US households have bought $1.5 trillion in Treasuries, and over the past six months, US pension and insurance have also emerged as a buyer. Over the same period, the Fed has been doing QT and been a net seller of Treasuries. The bottom line is that US households and real money are finding current levels of US yields attractive.
Related: Demand for Treasuries and Trapped Liquidity and Raising Anchor
Real interest rates have risen across the yield curve after stalling out between late 2022 and the first half of 2023. Importantly, the real yield curve remains relatively flat—implying that real interest rates are slated to remain at roughly their near-term levels for the foreseeable future. For real interest rates to stay around their current levels of about 2% and inflation to remain at the target of 2% would imply a long-run natural rate of between 4 and 4.5% (after accounting for the difference between CPI and the Fed’s preferred PCE inflation adjustments). Again, that is higher than even the highest estimate put forward by a FOMC participant yesterday.
Related: What Have We Learned About the Neutral Rate? and Measuring the Natural Rate of Interest After COVID-19 and In Search of Safe Havens: The Trust Deficit and Risk-free Investments!
This year, average monthly growth in the foreign-born labor force is about 65,000 higher compared with 2022 on a seasonally adjusted basis, a Goldman Sachs analysis found. After plunging at the start of the pandemic, the size of the foreign-born labor force has rebounded, nearing 32 million people in August. Foreign-born workers’ share of the labor force—those working or looking for work—reached 18% in 2022, the highest level on record going back to 1996, according to the Labor Department. It has climbed further this year to an average of 18.5% through August, not adjusted for seasonal variation.
Related: Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Immigration Playing a Key Role in the Labor Market and Immigration and U.S. Labor Market Tightness: Is There a Link?
In Florida the average home insurance premium in 2023 is around $6,000, more than three times the national average and up 42% year-on-year. Yet rather than drooling over juicy profits, insurers are fleeing. With 1.3m policies, the state-backed insurer of last resort now has the highest market share in Florida and is insuring assets worth $608bn. The Golden State is following the Sunshine State into market failure, but for different reasons. Though California is a pricey place to live, property insurance is relatively cheap thanks to strict consumer-protection laws. Regulations prevent insurers from raising premiums high enough to cover inflation, increasing wildfire risk and rising reinsurance rates.
Related: Analyzing State Resilience to Weather and Climate Disasters and How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters and Rising Insurance Costs Start to Hit Home Sales
There is no good evidence that China has reduced its exposure to the dollar. In fact, if you account for the higher dollar share of China's hidden reserves, its USD likely has increased since 2014. I am pretty sure that over the last year China hasn't shifted its reserves out of the dollar. It has shifted from US custodied Treasuries to offshore custodians and risk assets (Agencies, equities). When China stops targeting 60% for the dollar share of its formal reserves, we will know. The interesting question is what is the dollar share of China's shadow reserves -- and I think the answer is that it is a lot higher than the dollar share of China's formal reserves.
Related: Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency and Great Power Conflict Puts the Dollar’s Exorbitant Privilege Under Threat and Pettis On Pozsar
Almost 90% of surveyed Americans say people shouldn’t be judged for moving back home, according to Harris Poll in an exclusive survey for Bloomberg News. It’s seen as a pragmatic way to get ahead, the survey of 4,106 adults in August showed. Covid-19 lockdowns in 2020 drove the share of young adults living with parents or grandparents to nearly 50%, a record high. These days, about 23 million, or 45%, of all Americans ages 18 to 29 are living with family, roughly the same level as the 1940s, a time when women were more likely to remain at home until marriage and men too were lingering on family farms in the aftermath of the Great Depression.
Related: Millions of US Millennials Moved in With Their Parents This Year and Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past and Americans’ Ideal Family Size Is Larger Than the Birthrate Suggests
Democrats have been posting special-election overperformances of that magnitude all year long, in all kinds of districts. And on average, they have won by margins 11 points higher than the weighted relative partisanship of their districts. The types of people who vote in low-turnout special elections tend to be different from the types of people who vote in regularly scheduled elections: Lower turnout generally means a more college-educated electorate, and college graduates have gotten more Democratic in recent years. That could be why special-election overperformance has consistently been a couple of points more Democratic than the House popular vote over the past three cycles. However, college graduates were disproportionately Democratic in 2020 and 2022 too, and Democrats didn’t consistently do this well in special elections in those cycles. So something seems to be different this time that the education realignment doesn’t fully explain.
Related: Is a Trump-Biden Rematch Inevitable? and Trump’s Electoral College Edge Seems to Be Fading and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support
Patent concentration, which can affect diffusion, has risen over the past several decades with a concurrent surge in patent litigation cases. In the post-1980 period, a parallel trend concerning patents in the U.S. has been the dramatic increase in the number of patent cases filed, which some authors have dubbed the “patent litigation explosion.” The annual number of litigation cases filed per 100 granted patents rises from about 1.2 in the early 1990s to an average of about 1.5 between 1995 and 2010, before rising again to more than 1.8 between 2010 and 2015 and only receding marginally since then.
Related: Where Have All the "Creative Talents" Gone? Employment Dynamics of US Inventors and The Economics of Inequality in High-Wage Economies
Since 2009, manufacturing output per hour in the U.S. has grown just 0.2% a year, well below the economy as a whole and peer economies in Europe and Asia, except Japan. In motor vehicle manufacturing, the picture is especially bad: From 2012 through last year, productivity plummeted 32%, though some of this was no doubt due to pandemic disruptions. Warehouses and hospitals can pass the cost of higher wages and reduced hours to customers without being undercut by foreign competitors. Manufacturers don’t have that luxury. That’s why Detroit is recoiling at the UAW’s demands. While their output per employee is among the highest of 11 global manufacturers ranked by consultants AlixPartners, so are their costs per vehicle. The lowest cost: China’s.
Related: Autoworkers Have Good Reason to Demand a Big Raise and Auto Union Boss Wants 46% Raise, 32-Hour Work Week in ‘War’ Against Detroit Carmakers and EV Boom Remakes Rural Towns in the American South
We discuss how Large Language Models (LLM) can improve experimental design, including improving the elicitation wording, coding experiments, and producing documentation. Second, we discuss the implementation of experiments using LLM, focusing on enhancing causal inference by creating consistent experiences, improving comprehension of instructions, and monitoring participant engagement in real time. Third, we highlight how LLMs can help analyze experimental data, including pre-processing, data cleaning, and other analytical tasks while helping reviewers and replicators investigate studies. Each of these tasks improves the probability of reporting accurate findings
Related: Centaurs and Cyborgs on the Jagged Frontier and Society's Technical Debt and Software's Gutenberg Moment and Generative AI at Work
Joe Biden is likely to be the Democratic nominee. I would put his chances in the range of 80 to 85%. Donald Trump is likely to be the Republican nominee. I would put his chances in the range of 75%. The chance of an average non-Hispanic white man of Biden’s age (80) dying in the next year is about 5%. Biden’s odds are presumably lower than this, however. Even if he’s lost a step or two, I feel comfortable asserting that his physical and mental health are better than that of the typical 80-year-old. However, there are a lot of medical events other than Biden literally passing away that might end his bid for a second term. Overall, I figure there’s a 10% chance that Trump loses the nomination in “typical” fashion, such as being caught from behind in Iowa, a 5% chance that a health-related issue ends his campaign, and a 10% chance that legal jeopardy forces Trump to reconsider or compels Republicans to turn on him, even though they haven’t so far.
Related: Five Reasons Why Biden Might Lose in 2024 and For Some Key Voters, Trump Has Become Toxic and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support
Since the 1970s, trust in government has been consistently higher among members of the party that controls the White House than among the opposition party. Republicans have often been more reactive than Democrats to changes in political leadership, with Republicans expressing much lower levels of trust during Democratic presidencies; Democrats’ attitudes have tended to be somewhat more consistent, regardless of which party controls the White House. However, the GOP and Democratic shifts in attitudes from the end of Donald Trump’s presidency to the start of Joe Biden’s were roughly the same magnitude.
Related: Collapsing Social Trust is Driving American Gun Violence
The pandemic led to a surge in new business formations. What is striking to us is that this elevated level has continued post-Covid. According to data from the Census Bureau, in July, high-propensity business applications, which include all those that are more likely to become businesses with a payroll, were 40% higher than the average level in 2019. While not all of these businesses survive (the number of business deaths also rose in 2022 according to the Bureau of Labor Statistics), the net impact still points to strong growth in business formation. Business applications each year seem to be driven by a different sector. At the start of the pandemic, retail trade saw the biggest surge, driven largely by the growing demand for e-commerce, according to commentaries from the Census Bureau.
Related: Surging Business Formation in the Pandemic: Causes and Consequences and The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record and Creative Destruction After the Pandemic
To get rates back up to the 12% pre-pandemic level would require adding 2.7 million new housing units—more than the entire housing stock of the state of Maryland or more than 1.5 years of construction at 2022 rates—and leaving them all empty. Assume half occupancy and America needs 6.2 million new units—more than currently exist in Pennsylvania. If you assume that 75% of units will get filled on net then America needs more than 18 million additional housing units—roughly as many as exist in California and Washington state combined. Actual construction stood at only 1.4 million in the first half of 2023, failing to keep up with demand and leading to further declines in unoccupied housing rates—in other words, the structural shortage of housing is keeping prices high and vacancies down.
Related: Repeat After Me: Building Any New Homes Reduces Housing Costs For All and On the Move: Which Cities Have The Biggest Housing Shortage? and Have Rising Mortgage Rates Frozen the Housing Market?
All these areas clearly do have much higher WFH shares than the nation as a whole. What else do they have in common? One striking characteristic, which I highlighted in the top-50 table, is that most are located in central cities of metropolitan areas, which are designated as such based on population and how many people commute to jobs there. What’s more, two non-central cities on the list — Cupertino, California, and Redmond, Washington — happen to be home to the headquarters of the two most valuable companies in the world, Apple and Microsoft, and several others are also home to large corporate headquarters. Working at home seems to be most popular in places close to lots of offices and other places of employment.
'Related: Remote Work, Three Years Later and Work From Home and the Office Real Estate Apocalypse and Real-Estate Doom Loop Threatens America’s Banks
Using UN votes to condemn Russia’s invasion of Ukraine as a filter, Bloomberg Economics found that the global share of greenfield foreign direct investment going to countries that didn't condemn the invasion averaged only 15% in the last two years, down from 30% in the decade to 2019. China's share, including Hong Kong, fell to less than 2% in 2022 from nearly 11% on average over 2010-19. The data point to US and other Western companies investing more in like-minded countries. Between the second quarter of 2020 and the first quarter of this year, US companies’ greenfield investments in China plunged 57.9% and those by European firms dropped 36.7% versus the five years leading up to the pandemic, an updated IMF analysis shared with Bloomberg found. Investments from the rest of Asia into China were down by more than two-thirds.
Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and Global Firms Are Eyeing Asian Alternatives to Chinese Manufacturing
Xin Meng of the Australian National University appears to refute the “demographic dividend” as an explanation for China’s economic success. Her analysis showed that between 1982 and 2015 China’s working-age population, defined as those aged between 16 and 65, grew from 600m to 1bn. During this same period, however, labour-force participation dropped from 85% to just over 70%. Much of the decline came from those with an urban hukou. Unlike holders of rural hukou, urbanites were subjected to mandatory retirement at the age of 55 for women and 65 for men. Compulsory education and greater university enrolment kept under-25s out of the workforce.
Related: Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? and The Chinese Century Is Already Over and The Neoclassical Growth of China
While Treasuries remain the most liquid security in the world, they are structurally becoming less liquid. The average daily cash transactions in Treasuries has not come close to scaling with the overall growth in issuance. Although average daily cash volumes have increased slightly in recent years to $700b, that increase is in part due to the activity of principal trading firms whose strategy is to profit from small intraday fluctuations in price. These firms account for 20% of cash market volumes, but they disappear when volatility picks up so their provision of liquidity is illusory. Excluding their participation, cash market activity would be progressively thinning relative to the steady growth in issuance.
Related: Living with High Public Debt and Raising Anchor and Resilience Redux in the US Treasury Market
Even if wage growth did normalize, it is not clear why interest rates would need to fall much, if at all, in a world of 2% real growth, 2% inflation, and healthy private sector balance sheets. Real yields on 5-year Treasury inflation-protected securities (TIPS) are currently about 0.5 percentage point higher than 5-year real yields starting five years from now. But from 2003 until the pandemic, spot 5-year real rates were about 1pp lower than forward rates. (This includes the flat curve years of 2006-7 and 2018-2019, when the spread was more or less zero.) If further-forward real yields were poised to revert to this longer-term average, then that would have implications for a range of asset prices.
Related: In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and What Have We Learned About the Neutral Rate? and BIS Quarterly Review
Since the Fed started hiking rates last year, US households have bought $1.5 trillion in Treasuries, and over the past six months, US pension and insurance have also emerged as a buyer. Over the same period, the Fed has been doing QT and been a net seller of Treasuries. The bottom line is that US households and real money are finding current levels of US yields attractive.
Related: Demand for Treasuries and Trapped Liquidity and Raising Anchor
The pandemic led to a surge in new business formations. What is striking to us is that this elevated level has continued post-Covid. According to data from the Census Bureau, in July, high-propensity business applications, which include all those that are more likely to become businesses with a payroll, were 40% higher than the average level in 2019. While not all of these businesses survive (the number of business deaths also rose in 2022 according to the Bureau of Labor Statistics), the net impact still points to strong growth in business formation. Business applications each year seem to be driven by a different sector. At the start of the pandemic, retail trade saw the biggest surge, driven largely by the growing demand for e-commerce, according to commentaries from the Census Bureau.
Related: Surging Business Formation in the Pandemic: Causes and Consequences and The Startup Surge Continues: Business Applications on Track for Second-Largest Annual Total on Record and Creative Destruction After the Pandemic
Patent concentration, which can affect diffusion, has risen over the past several decades with a concurrent surge in patent litigation cases. In the post-1980 period, a parallel trend concerning patents in the U.S. has been the dramatic increase in the number of patent cases filed, which some authors have dubbed the “patent litigation explosion.” The annual number of litigation cases filed per 100 granted patents rises from about 1.2 in the early 1990s to an average of about 1.5 between 1995 and 2010, before rising again to more than 1.8 between 2010 and 2015 and only receding marginally since then.
Related: Where Have All the "Creative Talents" Gone? Employment Dynamics of US Inventors and The Economics of Inequality in High-Wage Economies
Stabilizing the federal debt at 100% of GDP over the long term—which would far exceed the post-1960 average of 45% of GDP—would require non-interest savings beginning at 2% of GDP and ramping up to 5% of GDP over the next three decades. (The resulting interest savings from a smaller debt would provide the rest of the savings.) These figures assume the renewal of the 2017 tax cuts (as there is strong bipartisan support for extending the tax cuts for the bottom-earning 98% of earners) but do not assume any additional spending expansions, tax cuts, or economic crises—all of which would also have to be fully offset to meet this debt target. In short, the non-interest savings required to stabilize the debt will almost surely rise past 5% of GDP when accounting for additional spending and tax-cut legislation. Taxing the rich cannot close more than a small fraction of this gap.
Related: Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy and American Gothic and The Economics of Inequality in High-Wage Economies
There is no good evidence that China has reduced its exposure to the dollar. In fact, if you account for the higher dollar share of China's hidden reserves, its USD likely has increased since 2014. I am pretty sure that over the last year China hasn't shifted its reserves out of the dollar. It has shifted from US custodied Treasuries to offshore custodians and risk assets (Agencies, equities). When China stops targeting 60% for the dollar share of its formal reserves, we will know. The interesting question is what is the dollar share of China's shadow reserves -- and I think the answer is that it is a lot higher than the dollar share of China's formal reserves.
Related: Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency and Great Power Conflict Puts the Dollar’s Exorbitant Privilege Under Threat and Pettis On Pozsar
Since the 1970s, trust in government has been consistently higher among members of the party that controls the White House than among the opposition party. Republicans have often been more reactive than Democrats to changes in political leadership, with Republicans expressing much lower levels of trust during Democratic presidencies; Democrats’ attitudes have tended to be somewhat more consistent, regardless of which party controls the White House. However, the GOP and Democratic shifts in attitudes from the end of Donald Trump’s presidency to the start of Joe Biden’s were roughly the same magnitude.
Related: Collapsing Social Trust is Driving American Gun Violence
For decades now, the Chinese government has encouraged university enrollment, pushing the number of students in higher education from 22 million in 1990 to 383 million in 2021. During the pandemic, it pressed even harder, expanding graduate-school capacity. Master’s-degree candidates rose by 25 percent in 2021. China’s Ministry of Education estimated that 10.76 million college students would graduate in 2022, 1.67 million more than in 2021—and it expects a further large rise in 2023. The message for China’s policymakers is clear: boosting graduate numbers while throttling services and subsidizing buildings is bad economics and worse social policy.
Related: Why Has Youth Unemployment Risen So Much in China? and China Cannot Allow Jobless Young To ‘Lie Flat’ and China’s Defeated Youth
Xin Meng of the Australian National University appears to refute the “demographic dividend” as an explanation for China’s economic success. Her analysis showed that between 1982 and 2015 China’s working-age population, defined as those aged between 16 and 65, grew from 600m to 1bn. During this same period, however, labour-force participation dropped from 85% to just over 70%. Much of the decline came from those with an urban hukou. Unlike holders of rural hukou, urbanites were subjected to mandatory retirement at the age of 55 for women and 65 for men. Compulsory education and greater university enrolment kept under-25s out of the workforce.
Related: Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? and The Chinese Century Is Already Over and The Neoclassical Growth of China
The hype around the “Magnificent 7” stocks [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla] that have driven the stock market this year is reminiscent of the dot.com era, which ended with a spectacular crash. However, there are two reasons why today’s developments seem less worrying: The rise of hyped stocks was more extreme in the Dot.com era, as was the rise of the rest of the market. While today’s situation is exceptional, with seven stocks accounting for nearly 30% of the total value of the S&P 500, the rule in the past has been that only a few stocks generated most of the value creation of the stock market in the US and internationally.
Related: 7 or 493 Stocks: What Matters for the S&P 500? and Birth, Death, and Wealth Creation and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs
We calculate net global stock market wealth creation of $US 75.7 trillion btw 1990 and 2020. Wealth creation is highly concentrated. Five firms (0.008% of the total) with the largest wealth creation during the January 1990 to December 2020 period (Apple, Microsoft, Amazon, Alphabet, and Tencent) accounted for 10.3% of global net wealth creation. The best-performing 159 firms (0.25% of total) accounted for half of global net wealth creation. The best-performing 1,526 firms (2.39% of the total) can account for all net global wealth creation. Skewness in compound returns is even stronger outside the U.S. The present sample includes 46,723 non-U.S. stocks. Of these, 42.6% generated buy-and-hold returns measured in U.S. dollars that exceed one-month U.S. Treasury bill returns over matched horizons. By comparison, 44.8% of the 17,776 U.S. stocks in the present sample outperformed Treasury bills.
Related: Birth, Death, and Wealth Creation and More Bang for Your Buck and The Economics of Inequality in High-Wage Economies
Using a debt accounting exercise, we show that periods of sustained debt reduction are typically driven by strong primary balances and above-average growth. Following 1980, inflation has played little role in debt reductions. Current fiscal projections and current market interest rates on average do not point to declines in debt-to-GDP ratios across developed markets. We estimate that market implied r - g, the difference between real interest rates and growth rates, is now positive for many countries. Japan provides an example of high debt peaceably coexisting with low interest rates. However, given current high inflation, wider deficits, and rising interest costs, we think it unlikely that we return to the era of structurally low interest rates in the US, UK, or Europe. As a result, we see the risks to term premia skewed higher as fiscal risks simmer.
Related: Living with High Public Debt and American Gothic and Is a U.S. Debt Crisis Looming? Is it Even Possible?
Using a measure of nonfinancial corporate profits from the national income accounts [before tax profits with capital consumption adjustment] we find that nonfinancial corporate profit margins, or profits over gross value added, increased sharply to about 19% in 2021 Q2 and slipped back to 15% in 2022 Q4, compared to about 13% in 2019 Q4. Our analysis shows that much of the increase in aggregate profit margins following the COVID-19 pandemic can be attributed to (i) the unprecedented large and direct government intervention to support U.S. small and medium-sized businesses and (ii) a large reduction in net interest expenses due to accommodative monetary policy. Without the historically outsized government fiscal intervention and accommodative monetary policy, non-financial profit margins during 2020-2021 would have been more in line with past episodes of large economic downturns.
Related: The Curious Incident of the Elevated Profit Margins and "Greedflation" and the Profits Equation
The federal deficit for the first 3/4 of the fiscal year 2023 was almost 3x as high as a year before. Very little of it was the result of new spending programs (although money is starting to flow out the door under the Biden administration’s industrial policies). It was mainly about two things: a sharp fall in tax receipts and rising interest payments. What’s happening on taxes is that the federal government in effect got a windfall from stock prices and inflation, which is now going away. We’re not looking at any fundamental deterioration. The U.S. government really shouldn’t be running budget deficits this big at full employment. Yet we don’t want to reduce deficits by cutting essential spending. America collects a lower share of its income in taxes than other major economies, so more revenue — partly from the rich, but also from the middle class — would be a reasonable policy.
Related: Is a U.S. Debt Crisis Looming? Is it Even Possible? and American Gothic and Living with High Public Debt
Americans’ inflation-adjusted median household income fell to $74,580 in 2022, declining 2.3% from the 2021 estimate of $76,330, the Census Bureau said Tuesday. The amount has dropped 4.7% since its peak in 2019. Wage growth for the typical worker outstripped inflation starting in December 2022, with inflation-adjusted wages rising about 3% in July, according to data from the Atlanta Fed Wage Tracker and the Labor Department.
Related: Jason Furman On Employment Cost Index and Real Wage Growth at the Individual Level in 2022 and The Unexpected Compression: Competition at Work in the Low Wage Economy
China is set to become the world’s biggest car exporter this year, overtaking Japan. Driving China’s global ascendancy are deep structural problems in the domestic auto industry, which threaten to upend car markets across the world. A stark mismatch between production at Chinese factories and local demand has been caused, in part, by industry executives mis-forecasting three key trends: the rapid decline of internal combustion engine car sales, the explosion in popularity of electric vehicles and the declining need for privately owned vehicles as shared mobility booms among an increasingly urbanised Chinese population. The result has been “massive overcapacity” in the number of vehicles produced in factories across the country, said Bill Russo, former head of Chrysler in China and founder of advisory firm Automobility. “We have an overhang of 25mn units not being used.”
Related: China’s Auto Export Wave Echoes Japan's in the ’70s and Can Volkswagen Win Back China? and How China Became A Car-Exporting Juggernaut
Brussels will launch an anti-subsidy investigation into Chinese electric vehicles that are “distorting” the EU market. The probe could constitute one of the largest trade cases launched as the EU tries to prevent a replay of what happened to its solar industry in the early 2010s when photovoltaic manufacturers undercut by cheap Chinese imports went into insolvency. If found to be in breach of trade rules, manufacturers could be hit with punitive tariffs.
Related: China Set to Overtake Japan as World’s Biggest Car Exporter and China’s Auto Export Wave Echoes Japan's in the ’70s
The decline in marriage and the rise in the share of children being raised in a one-parent home has happened predominantly outside the college-educated class. Over the past 40 years, while college-educated men and women have experienced rising earnings, they continue to get married, often to one another, and to raise their children in a home with married parents. Meanwhile at the same time, the earnings among adults without a college degree have stagnated or risen only a bit. And these groups have become much less likely to marry and more likely to set up households by themselves.So just mechanically, these divergent trends in marriage and family structure mean that household inequality has widened by more than it would have just from the rise in earnings inequality.
Related: US Births Are Down Again, After the COVID Baby Bust and Rebound and Wage Inequality and the Rise in Labor Force Exit: The Case of US Prime-Age Men and Bringing Home the Bacon: Have Trends in Men’s Pay Weakened the Traditional Family?
When the core inflation rate averages above 4%, the stock-bond correlation has been positive with few exceptions. Core inflation has averaged 4.5% for the past three years and is currently 4.7%. Even in periods of high stock-bond correlations, stocks, and bonds can be negatively correlated over shorter periods. In fact, over the first eight months of this year, stocks and bonds moved opposite one another in May, June, and July. This also helps explain how in the 1970s during a period of sustained positive stock-bond correlations, Treasurys still had positive returns in recessions. The stock-bond correlation can be seen as an indicator of what is the dominant risk—inflation or growth—and how it is changing.
Related: Stock-Bond Correlations and Do Stocks Always Outperform Bonds?
Stabilizing the federal debt at 100% of GDP over the long term—which would far exceed the post-1960 average of 45% of GDP—would require non-interest savings beginning at 2% of GDP and ramping up to 5% of GDP over the next three decades. (The resulting interest savings from a smaller debt would provide the rest of the savings.) These figures assume the renewal of the 2017 tax cuts (as there is strong bipartisan support for extending the tax cuts for the bottom-earning 98% of earners) but do not assume any additional spending expansions, tax cuts, or economic crises—all of which would also have to be fully offset to meet this debt target. In short, the non-interest savings required to stabilize the debt will almost surely rise past 5% of GDP when accounting for additional spending and tax-cut legislation. Taxing the rich cannot close more than a small fraction of this gap.
Related: Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy and American Gothic and The Economics of Inequality in High-Wage Economies
The hype around the “Magnificent 7” stocks [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla] that have driven the stock market this year is reminiscent of the dot.com era, which ended with a spectacular crash. However, there are two reasons why today’s developments seem less worrying: The rise of hyped stocks was more extreme in the Dot.com era, as was the rise of the rest of the market. While today’s situation is exceptional, with seven stocks accounting for nearly 30% of the total value of the S&P 500, the rule in the past has been that only a few stocks generated most of the value creation of the stock market in the US and internationally.
Related: 7 or 493 Stocks: What Matters for the S&P 500? and Birth, Death, and Wealth Creation and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs
We calculate net global stock market wealth creation of $US 75.7 trillion btw 1990 and 2020. Wealth creation is highly concentrated. Five firms (0.008% of the total) with the largest wealth creation during the January 1990 to December 2020 period (Apple, Microsoft, Amazon, Alphabet, and Tencent) accounted for 10.3% of global net wealth creation. The best-performing 159 firms (0.25% of total) accounted for half of global net wealth creation. The best-performing 1,526 firms (2.39% of the total) can account for all net global wealth creation. Skewness in compound returns is even stronger outside the U.S. The present sample includes 46,723 non-U.S. stocks. Of these, 42.6% generated buy-and-hold returns measured in U.S. dollars that exceed one-month U.S. Treasury bill returns over matched horizons. By comparison, 44.8% of the 17,776 U.S. stocks in the present sample outperformed Treasury bills.
Related: Birth, Death, and Wealth Creation and More Bang for Your Buck and The Economics of Inequality in High-Wage Economies
Using a measure of nonfinancial corporate profits from the national income accounts [before tax profits with capital consumption adjustment] we find that nonfinancial corporate profit margins, or profits over gross value added, increased sharply to about 19% in 2021 Q2 and slipped back to 15% in 2022 Q4, compared to about 13% in 2019 Q4. Our analysis shows that much of the increase in aggregate profit margins following the COVID-19 pandemic can be attributed to (i) the unprecedented large and direct government intervention to support U.S. small and medium-sized businesses and (ii) a large reduction in net interest expenses due to accommodative monetary policy. Without the historically outsized government fiscal intervention and accommodative monetary policy, non-financial profit margins during 2020-2021 would have been more in line with past episodes of large economic downturns.
Related: The Curious Incident of the Elevated Profit Margins and "Greedflation" and the Profits Equation
The decline in marriage and the rise in the share of children being raised in a one-parent home has happened predominantly outside the college-educated class. Over the past 40 years, while college-educated men and women have experienced rising earnings, they continue to get married, often to one another, and to raise their children in a home with married parents. Meanwhile at the same time, the earnings among adults without a college degree have stagnated or risen only a bit. And these groups have become much less likely to marry and more likely to set up households by themselves.So just mechanically, these divergent trends in marriage and family structure mean that household inequality has widened by more than it would have just from the rise in earnings inequality.
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The chart shows the % of Black families that are in three income groups, using total money income data. The data is adjusted for inflation. The progress is dramatic. In 1967, the first year available, half of Black families had incomes under $35,000. By 2022 that number had been cut in half to just one quarter of families (the 2022 number is the lowest on record, even beating 2019). Twenty-five percent is still very high, especially when compared to White, Non-Hispanics (it’s about 12 percent), but it’s still massive progress. It’s even a 10-percentage point drop from just 10 years ago. And Black families haven’t just moved up a little bit: the “middle class” group (between $35,000 and $100,000) has been pretty stable in the mid-40 percentages, while the number of rich (over $100,000) Black families has grown dramatically, from just 5% to over 30%.
Related: U.S. Incomes Fall for Third Straight Year and Who Won the Cold War? Part I
Recent studies from the US, Sweden, and Finland all demonstrate that although most people who move directly into new unsubsidised housing may come from the top half of earners, the chain of moves triggered by their purchase frees up housing in the same cities for people on lower incomes. The US study found that building 100 new market-rate dwellings ultimately leads to up to 70 people moving out of below-median income neighbourhoods, and up to 40 moving out of the poorest fifth. Those numbers don’t budge even if the new housing is priced towards the top end of the market. It’s a similar story in the American Midwest, where Minneapolis has been building more housing than any other large city in the region for years, and has abolished zones that limited construction to single-family housing. Adjusted for local earnings, average rents in the city are down more than 20% since 2017, while rising in the five other similarly large and growing cities.
Related: On the Move: Which Cities Have The Biggest Housing Shortage? and A $100 Billion Wealth Migration Tilts US Economy’s Center of Gravity South and Young Families Have Not Returned to Large Cities Post-Pandemic
Sweden, which has applied for Nato membership, announced on Monday that it planned to raise defense spending by more than 25% to meet the military alliance’s target of 2% of GDP. Currently, only 11 of 31 members do. Persuading voters of the sacrifices required to make such commitments a reality represents a seismic reordering of the budget and electoral priorities. In Denmark, the government opted to fund its increase in public spending by cancelling a public holiday — to much chagrin from voters. "Leaders have signed up to a generational shift in defence policy. But I do wonder if they fully understand, or have told their finance ministers,” a senior Nato official said.
Related: The Age-Old Question: How Do Governments Pay For Wars? and The Cost of the Global Arms Race and Military Briefing: Ukraine War Exposes ‘Hard Reality’ of West’s Weapons Capacity
Unexpected changes in monetary policy can slow the pace of economic activity much more persistently than is commonly believed. In response to a 1% increase in interest rates, output would be about 5% lower after 12 years than it would otherwise be. To provide some context for these numbers, consider some data for the United States. In response to a similar 1% increase in interest rates, after 12 years TFP would be about 3% lower and capital would be about 4% lower. When we separate our interest rate experiments into those that resulted in rate hikes versus those that resulted in lower interest rates, we see that there is no free lunch. The blue line shows that lower interest rates have mostly temporary effects that vanish after a few years, as traditional theories predict.
Related: Loose Monetary Policy and Financial Instability and Monetary Policy and Innovation
According to the Committee for a Responsible Federal Budget the federal deficit is projected to roughly double this year, as bigger interest payments and lower tax receipts widen the nation’s spending imbalance despite robust overall economic growth. After the government’s record spending in 2020 and 2021 to combat the impact of covid-19, the deficit dropped by the greatest amount ever in 2022, falling from close to $3 trillion to roughly $1 trillion. But rather than continue to fall to its pre-pandemic levels, the deficit then shot upward. Budget experts now project that it will probably rise to about $2 trillion for the fiscal year that ends Sept. 30. Jason Furman said the current jump in the deficit is only surpassed by “major crises,” such as World War II, the 2008 financial meltdown or the coronavirus pandemic.
Related: Living with High Public Debt and There Is No "Stealth Fiscal Stimulus" and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
Spending per Medicare beneficiary has nearly leveled off over more than a decade. The trend can be a little hard to see because, as baby boomers have aged, the number of people using Medicare has grown. The reason for the per-person slowdown is a bit of a mystery. Some of the reductions are easy to explain. The Affordable Care Act in 2010 reduced Medicare’s payments to hospitals and to health insurers that offered private Medicare Advantage plans. Congress also cut Medicare payments as part of a budget deal in 2011. But most of the savings can’t be attributed to any obvious policy shift. Economists at the Congressional Budget Office described the huge reductions in its Medicare forecasts between 2010 and 2020. Most of those reductions came from a category the budget office calls “technical adjustments,” which it uses to describe changes to public health and the practice of medicine itself.
Related: America’s Entitlement Programmes Are Rapidly Approaching Insolvency and Why Medicare and Social Security Are Sustainable and Interest Costs Will Grow the Fastest Over the Next 30 Years
During the past 20 years, the inflation-adjusted average hourly wage of non-management US workers, also known as production and nonsupervisory employees, has risen 13%. That’s not exactly a rip-roaring pace — 0.6% a year. Then again, real hourly wages for production and nonsupervisory employees fell in the 1970s and 1980s and rose at only a 0.3% annual pace in the 1990s. The average hourly wage for autoworkers on the production line has dropped 30% since 2003. GM, Ford and Stellantis are all profitable, with a combined net income of $42B for the 12 months ended in June and the amount coming from their US operations probably adding up to somewhat less than $30B. Bloomberg reported last month that Ford and GM’s internal estimates of the costs of the UAW’s demands peg them at $80B per company over the next four years, which would wipe out all those profits and then some.
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Even after a planned rise in October, the minimum wage in Tokyo will be the equivalent of just $7.65, compared with $15 in New York City. Median household income in Japan in 2021, the most recent year for which data are available, was equivalent to about $29,000 at the current exchange rate, compared with $70,784 in the U.S. that year, according to government statistics in the two countries. The typical Asian-American household brought in just over $100,000—more than triple what the typical Japanese family made.
Related: The Economics of Inequality in High-Wage Economies and Japan Demographic Woes Deepen as Birthrate Hits Record Low and From Strength To Strength
We’ve found reasons to think more highly of Europe and Japan. Notably, we find that value stocks in Europe and Japan are more profitable, with Europe being particularly impressive. Among firms that trade at a discount to book value, Europe has a Gross Profit/Assets ratio of 18.5%, which is 1.5x the profitability of North American value firms. The differences are even more stark in terms of EBITDA/Assets, with Europe’s value firms delivering a 6.4% return on assets, almost 3x higher than North America’s profitability among value firms. We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability among Europe’s value stocks bolster the case for upward mean reversion going forward. Historically, mean reversion in multiples has supported significant outperformance of value relative to growth.
Related: Europeans Are Becoming Poorer. ‘Yes, We’re All Worse Off.’ and From Strength To Strength and The Economics of Inequality in High-Wage Economies
Mr. Biden’s weakness among nonwhite voters is broad, spanning virtually every demographic category and racial group, including a 72-11 lead among Black voters and a 47-35 lead among Hispanic registrants. The sample of Asian voters is not large enough to report, though nonwhite voters who aren’t Black or Hispanic — whether Asian, Native American, multiracial or something else — back Mr. Biden by just 40-39. In all three cases, Mr. Biden’s tallies are well beneath his standing in the last election. The survey finds evidence that a modest but important 5% of nonwhite Biden voters now support Mr. Trump, including 8% of Hispanic voters who say they backed Mr. Biden in 2020.
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Looking back over the last few decades, there’s a clear relationship between the racial turnout gap — the difference between white and Black turnout — and the proportion of Black registered voters who back Democrats in pre-election polls since 1980. Or put differently: When Black voters don’t support Democrats, they tend not to vote. It’s possible that the Black voters who back Mr. Trump in the polls today will ultimately show up for him next November. But for now, when I see Mr. Biden’s share among Black voters slip into the 60s and 70s in the polls, I mostly see yet another decline in the Black share of the electorate, at least “if the election were held today.” If there’s any good news for Mr. Biden here, it’s that the election is still 14 months away.
Related: Consistent Signs of Erosion in Black and Hispanic Support for Biden
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. Inflation taxation has two components: expected and unexpected inflation taxation. Both are limited in their ability to fund real government expenditures. The expected component of inflation taxation (per period) is the product of the nominal interest rate and the inflation tax base, which consists of all non-interest bearing government debt. Unexpected inflation taxation occurs when the nominal value of outstanding government debt falls unexpectedly (thereby taxing government debtholders), and this component is also limited by the ability of government to surprise markets by creating unanticipated inflation. It is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.
Related: The Return of Quantitative Easing and Is a U.S. Debt Crisis Looming? Is it Even Possible? and The 2023 Long-Term Budget Outlook
Large, persistent primary budget surpluses are not in the political cards. It is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer. Inflation is not a sustainable route to reducing high public debts. Statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.
Related: American Gothic and Did the U.S. Really Grow Out of Its World War II Debt?
The total amount of Treasuries outstanding will continue to grow rapidly relative to the intermediation capacity of the market because of large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, unless there are significant improvements in market structure. Broad central clearing and all-to-all trade have the potential to add importantly to market capacity and resilience. Additional improvements in intermediation capacity can likely be achieved with real-time post-trade transaction reporting and improvements in the form of capital regulation, especially the Supplementary Leverage Ratio. Backstopping the liquidity of this market with transparent official-sector purchase programs will further buttress market resilience.
Related: JPMorgan Says Treasuries Coping Amid Worst Liquidity Since 2020 and Raising Anchor
There has been no major increase in the US capital-output ratio, nor has there been a major decline in the US marginal product of capital – the economy’s real return to capital. The US capital-output ratio remains close to its postwar average and capital’s real return has remained roughly constant -- around 6%. During the 2000s the marginal product of U.S. capital (MPK) was a healthy 5.84%. In the 2010s it was even higher at 6.42%. The market return to capital would show a decline if there were a capital glut and investors expected lower rates of return, It shows no such decline. The market return to capital’s real return averaged 5.52% between 1950 and 1989. Btw 1990 and 2019 it averaged 6.95. Hence, the broadest market-based real return data shows a rise, not a fall in returns in the recent decades during which capital has allegedly been in vast oversupply. The real return to US wealth between 2010 and 2019 averaged 8.25% – the highest average return of any postwar decade.
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