“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
Since 1960, older Americans have increased their consumption relative to younger Americans. @petercoy, citing arguments by @Kotlikoff, writes that this has likely lowered domestic investment.
The horizontal axis is age, from birth to 85-plus. The vertical axis compares consumption at each age with the average labor income of people ages 30 to 49 in that year. So, for example, people age 40 in 2021 had total consumption of 0.7, which is to say around 70 percent of average labor income for people ages 30 to 49. The last data point in each chart covers all ages 85 and up, not just age 85. (That’s why there’s such a jump in 2021 from age 84.) Here’s why that matters for the economy: When a larger share of resources are in the hands of the elderly — those eager to spend sooner rather than later — the economy’s saving rate, which provides funds for new investment, drops.
So far this year central banks have purchased 800 metric tons of gold, up 14% y/y. The People’s Bank of China has bought 181 metric tons taking gold to 4% of its reserves.
China has spearheaded record levels of central bank purchases of gold globally in the first nine months of the year, as countries seek to hedge against inflation and reduce their reliance on the dollar. The “voracious” rate of buying has helped bullion prices defy surging bond yields and a strong dollar to trade just shy of $2,000 a troy ounce. Overall, gold demand excluding bilateral over-the-counter flows was 6% weaker year-on-year at 1,147 tonnes.
Underpayment of workers relative to the minimum wage increases in the aftermath of minimum wage increases and disproportionately impacts workers aged 16-21. @MichaelRStrain @AEIecon
Using Current Population Survey data, we find evidence that the incidence of underpayment rises substantially for workers across all racial and ethnic groups, in particular among the young, in the wake of minimum wage increases. The overall rise in the underpayment in the wake of minimum wages is equivalent to between 10 and 20% of realized wage gains across the full sample. In addition, we find evidence of two sources of heterogeneity in the rise in underpayment experienced by members of different racial and ethnic groups. Among young workers (those ages 16 to 21), we find evidence that the burden of underpayment falls disproportionately on African American workers. Underpayment may thus blunt the impact of minimum wage increases on wage gaps between young African American workers and other groups of young workers.
The Democrats’ success in 2022 and 2023 special elections was driven by high-propensity voters. Currently, Trump is leading with lower-propensity voters who will likely vote in 2024. @Nate_Cohn
According to the Times/Siena data, the 2020 general electorate was probably more Democratic and more supportive of Mr. Biden in 2020 than the 2022 midterm electorate, since a slightly higher proportion of Democrats and Biden ’20 voters skipped the midterms than Republican or Trump ’20 voters. On that basis, one would ordinarily assume that a higher-turnout election in 2024 would help Mr. Biden and Democrats, by drawing those drop-off voters back to the polls. Yet according to the same data — the same survey respondents — a higher-turnout election would not help Mr. Biden today, even though it would draw more Biden ’20 and more Democratic voters to the polls.
US college graduates earn 40% more than their British counterparts despite comparable skill levels. @jburnmurdoch argues that this is driven by “much higher and more lucrative demand” for talent in the US economy relative to the UK.
Britons who left the education system at 18 without a degree were paid an average of £14 an hour in 2022 (about $18 after adjusting for price differences). Their US counterparts earned only marginally more, at $19 an hour. Last year [British graduates’] median hourly earnings were £21, or just over $26. US graduates pocketed almost $36 an hour. On the eve of the global financial crisis 15 years ago, British graduates made just 8% less than US grads; that gap has ballooned to 27%. Across most of Britain, more than a third of graduates are working in jobs that do not require a degree — even in London, the figure is 25%. America has mountains of highly lucrative and skilled jobs chasing the best candidates, while Britain has mountains of skilled candidates chasing a small number of world-class graduate employment opportunities.
.@FedGuy12 notes that the rising level of reserve and Treasury General Account balances will ease financial conditions over the next several months.
Declining RRP [reverse repo] balances will eventually overwhelm QT and lead to a net increase of money in the financial system. After [money market funds] lend money to the Treasury, the money moves from the RRP to the Treasury General Account [TGA] and then into the banking system through fiscal spending. In our two-tiered monetary system, this mechanically increases reserves (money for banks) and deposits (money for non-banks) in a manner similar to QE. However, the Fed’s QT program has also been pushing in the opposite direction and draining reserves at a rate of around $240b a quarter. The interaction between the two forces has resulted in a modest increase in bank reserves.
Jesper Rangvid notes that inflation has broadly tracked excess savings in the US with a one-year lag and suggests “fiscal stimulus has been an important driver of inflation, at least in the US.”
Inflation and excess savings have followed remarkably similar trends after the pandemic. Figure 6 shows excess savings (based on the 2016-2019 trend) and core CPI inflation one year later (note that inflation refers to the 2nd y-axis and the upper x-axis). The correlation is striking. Core inflation follows accumulated excess savings with a lag of one year. One year after excess savings started rising in 2020, inflation rose. Excess savings peaked in autumn 2021, as mentioned, and inflation peaked a year later. Since then, excess savings have declined and so has inflation with a one-year lag. It is tempting to conclude that excess savings caused this inflation episode. As you may recall, I agree that fiscal stimulus (which increased people’s disposable income and thus caused the accumulation of excess savings) contributed to this inflation episode, although I also believe that monetary policy and supply chain challenges played a role.
.@Brad_Setser notes that FDI into China is at a two-decade low, as “foreign companies are no longer reinvesting back in China…they are getting [their] profits out of the country as fast as they can.”
Foreign direct investment into China is falling across multiple measures, adding to pressure on Beijing and local governments as they seek to counter an economic slowdown. Financial Times calculations based on Chinese commerce ministry data compiled by Wind show that FDI fell 34% to Rmb72.8bn ($10bn) year on year in September, the biggest decline since monthly figures became available in 2014. The weakness in FDI has been part of a steady march of disappointing economic readings since China lifted pandemic restrictions at the start of the year. While FDI leapt 15% in January on the previous year, it has recorded double-digit percentage declines every month since May.
Torsten Sløk @apolloglobal argues that a steady increase in FOMC estimates of the long-run fed funds rate since early 2023 implies “the Fed is beginning to see the costs of capital as permanently higher.
The Fed has since the beginning of 2023 steadily increased its estimate of the long-run fed funds rate. The implication for investors is that the Fed is beginning to see the costs of capital as permanently higher. A permanent increase in the risk-free rate has important implications for firms, households, and asset allocation across equities and fixed income.
Analysis by the UN projects that by 2050, 35% of the world’s population aged 15-24 will live in Africa, up from 23% in 2023.
In 1950, Africans made up 8% of the world’s people. A century later, they will account for one-quarter of humanity, and at least one-third of all young people aged 15 to 24, according to United Nations forecasts. The median age on the African continent is 19. In India, the world’s most populous country, it is 28. In China and the United States, it is 38. Within the next decade, Africa will have the world’s largest work force, surpassing China and India. By the 2040s, it will account for two out of every five children born on the planet. Adjusted for population size, Africa’s economy has grown by 1 percent annually since 1990, according to the global consulting firm McKinsey & Company. Over the same period, India’s grew 5% per year and China’s grew 9%.
According to a @BudgetHawks analysis the US budget deficit will double in 2023 despite economic growth. @jasonfurman notes such deficits typically are associated with a “major crisis” like World War II or the 2008 financial meltdown.
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.
The growth in Medicare spending per beneficiary leveled off nearly a decade ago. If spending had grown at the prior rate, spending since 2011 would have been at least $3.9 trillion higher.
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.
The average hourly wage for auto workers has dropped 30% since 2003 and has converged with non-auto production workers. The UAW is attempting to arrest the trend, but the Big Three’s profits would be erased if they meet the UAW’s demands. @foxjust
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.
The typical Asian-American household in the US earns just over $100,000, 3x a typical Japanese family’s earnings.
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.
Damages from US weather events that cost >$1B have risen from $20B annually during the 1980s to $95B a year between 2010-2019, and $153B in 2021. Property insurers, who bear 48% of these costs, are beginning to reduce coverage. @FedResearch
Nationally, the real cost of [weather and climate] disasters has risen from $20B per year in the 1980s to nearly $95B per year during the period 2010–19. In 2021, damages increased to about $153B. Costs were absorbed by four entities: property insurers (48%), uninsured or underinsured homeowners, businesses, and agricultural entities (37%), the federal government (11%), and state and local governments (4%). If property insurers were to exit certain markets or decrease coverage in states with greater exposure to physical risks due to decreased profitability, a larger share of damages would not be fully insured. Two major insurers recently announced that they will no longer accept new applications for business and personal property insurance coverage in California, citing increasing wildfire risk as a key factor in that decision. In addition, several major hurricanes during 2020-22 forced numerous insurance companies into bankruptcy in Louisiana and Florida.
Capital inflows into North American markets have contributed to a 3.9x Price/Book value relative to market averages of 1.9x in Europe and 1.4x in Japan according to @verdadcap_quant. He believes this offers opportunities in both Europe and Japan.
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.
Racial polarization in voting has been declining since 2012 in the US. @Nate_Cohn finds Biden underperforming relative to 2020 in current polling with non-white voters; 5% of 2020 non-white Biden voters now say they support Trump.
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.
.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal dominance,” in which the government forces banks to hold non-interest-bearing debt.
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.
.@B_Eichengreen argues that high public debt levels are here to stay and that methods to suppress interest rates are “less feasible than in the past.” This means chronic fiscal deficits will need to be reduced even in countries that issue safe assets.
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.
Since 2007, the ratio of Treasuries outstanding to primary dealer assets has increased by a factor of four. @DuffieDarrell argues that this will drive increasing illiquidity in the Treasury market.
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.
.@JohnHCochrane takes a victory lap, arguing that the fiscal theory of the price level is the most descriptive theory of inflation.
A one-time $5 trillion fiscal blowout causes a one-time rise in the level of prices, just enough to inflate away the value of the debt by $5 trillion. Then inflation stops, even if the Federal Reserve does nothing. The Fed is still important in fiscal theory. The Fed bought about $3 trillion of the new debt and converted it to interest-paying reserves. Giving people checks backed by reserves is arguably a more powerful inducement to spend than giving people Treasury bonds. Now, by raising interest rates, the Fed lowers current inflation but at the cost of more-persistent inflation. That smoothing is beneficial. These are core propositions of fiscal theory, stated ahead of time and at odds with conventional theories. Related: Waning Inflation, Supply and Demand and The Second Great Experiment Update
As firms have stayed private longer wealth creation has shifted from public to private markets. @mjmauboussin
The median age at IPO was 7.9 years from 1976 to 2000 and rose to 9.5 years from 2001 to 2022. One implication of companies staying private longer is that wealth creation has shifted to private markets from the public markets. To illustrate the point, Amazon’s market capitalization was $749 million when it went public in 1997 and $1.3 trillion as of June 30, 2023 (in 2022 dollars). The company was three years old when it did its IPO. Essentially all of its wealth creation occurred when it was public. Hendrik Bessembinder, a professor of finance, has measured the wealth creation of more than 28,000 U.S.listed companies since 1926. A company creates wealth if it generates returns in excess of one-month Treasury bill rates. He found that from 1926 to 2022, just under 60% of them destroyed $9.1 trillion and the other 40% or so created $64.2 trillion. Just 2% of the sample created $50 trillion of the net total of $55.1 trillion, and the top 3 firms (Apple, Microsoft, and ExxonMobil) created almost $6 trillion. Related: Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOsand The Economics of Inequality in High-Wage Economies
Based on first-half new business formation, 2023 will be just shy of 2021’s record number of new firms likely to hire employees. @InnovateEconomy
Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5% increase over 2022 and a staggering 52% increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36%. Related: Startup Surge Stood Firm Against Economic Headwinds in 2022 and Like the Broader Economy, the High Tech Sector is Becoming Less Dynamic and The Economics of Inequality in High-Wage Economies
Rebecca Patterson argues US equity outperformance is likely to continue as US firms are positioned to capture a sizable share of productivity benefits from new technologies like AI, and the US is likely to experience stronger relative economic growth.
American equity exceptionalism is possible, for at least two reasons. First, the US is set to capture a sizeable share of productivity benefits from technology such as artificial intelligence. Second, a moderating global economy could work against more cyclically biased equity markets overseas, favouring those geared towards organic growth drivers. Over multi-year periods, domestic growth has been found to dominate local equity returns. A 2011 study by Clifford Asness, Roni Israelov and John Liew suggests that 39% of 15-year returns could be explained by domestic economic performance. Growth is fundamentally a function of labour and productivity. Given that most of the developed world (and China) faces at least directionally similar labour constraints, the US seems likely to be a relative growth winner thanks to prospects for greater productivity gains. Related: Market Resilience or Investors in Denial: The Market at Mid-Year 2023 and Most Global Economies Remain in Disequilibrium, Requiring Policy Action and Birth, Death, and Wealth Creation
.@charlesmurray argues that urban disorder has increased since 2013, when cities abandoned broken-windows policing.
I created a “broken-windows arrest rate” analogous to the violent and property crime rates by summing arrests in the eight categories, dividing them by the size of the city’s population, and expressing the result as the number of arrests per 100,000 population. To ensure that all these qualified as minor crimes, I included only arrests that were charged as misdemeanors, violations, or infractions, excluding arrests charged as felonies. The graph below shows the proportional change in those arrest rates using 2013 as the baseline. In New York and Los Angeles, the fall in arrests for broken-windows offenses was steep and steady from 2013 to 2020. Washington is different, with a sudden rise in broken-windows arrests in Washington in 2019. The anomaly was created entirely by a one-year spike in arrests for prostitution and solicitation, the result of a policy decision to clear the streets of prostitutes near hotels. If arrests for prostitution and solicitation are deleted from the Washington data, the trendline of broken-windows offenses shows the same unbroken decline as the trendlines for New York and Los Angeles. As of 2022, arrests for broken-windows offenses since 2013 had fallen by 74% in New York, 77% in Washington, and 81% in Los Angeles. There was no apparent “Floyd effect” in New York or Los Angeles. A case for a small effect can be made for Washington. Related: Pandemic Murder Wave Has Crested. Here’s the Postmortem
While wages are still accelerating, @jasonfurman notes cooling jobs/hours and thinks today’s job report is consistent with a soft landing.
The unemployment rate fell back to 3.5%. Has been in a 3.4% to 3.7% band for 17 straight months. The last time this happened was Nov 2007. Given the recovery in the (age-adjusted) participation rate this has brought the employment-population rate for prime age workers (25-54) above the pre-pandemic rate. The wage growth slowdown earlier this year has largely gone away. Earlier this year average hourly earnings were growing at a 3.5% annual rate, now they're up to a 5% annual rate--unchanged since early 2022. Note, these are noisy and can be revised a lot. Overall this report is mixed for the inflation outlook: Jobs/hours: Cooling Unemployment rate: Neutral Wages: Heating I tend to think the order I listed them above is roughly right for what signals matter so think this report is slightly favorable for inflation.
Michael Smolyansky @federalreserve argues the decline in interest and corporate tax rates mechanically explains 40% of real growth in corporate profits between 1989-2019 suggesting lower returns going forward.
The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak. Related: The Curious Incident of the Elevated Profit Margins and Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans
.@OppInsights finds that the “Ivy-Plus” (Ivy League, plus UChicago, Duke, MIT, Stanford) admit students from the highest income families scoring in the top 1% of SAT/ACT at far greater rates than those from lower-income families.
Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations. Related: Why Do Wages Grow Faster for Educated Workers? and Multidimensional Human Capital and the Wage Structure and The Economics of Inequality in High-Wage Economies
.@JoshZumbrun, evaluating the differences between @OppInsights recent research on elite schools and Krueger’s earlier findings, shows that elite schools don’t have that much impact outside of lottery-like tail outcomes.
Dale and Krueger had classified everyone who earned more than $200,000 into the same category, making no distinction between an affluent doctor earning $250,000 and Jeff Bezos. Chetty and his authors use a slightly different approach. They classify everyone’s income into percentiles—80th, 81st, etc. Among top students, 19% who attend the top schools make it to the richest 1% of the income distribution, versus 12% who didn’t attend. Chetty’s co-author Deming compares those upper-tail outcomes to winning the lottery: Elite schools have lots of lottery tickets lying on the ground, whereas most other colleges only have a few. For most people, the lottery ticket will be worth nothing. For a few, it is a jackpot. Related: Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges