From 1992 to 2010, American adults with and without a four-year college degree saw falling mortality, but with greater improvements for the more educated; from 2010 to 2019, mortality continued to fall for those with a BA while rising for those without; during the COVID pandemic, mortality rose for both groups, but markedly more rapidly for the less educated. In consequence, the mortality gap between the two groups expanded in all three periods, leading to an 8.5-year difference in adult life expectancy by the end of 2021. One remarkable finding here is that Americans with a college degree, if they were a separate country, would be one of the best performers, just below Japan, though there was some decline in 2020 and 2021 during the pandemic.
Related: Why Are Americans Dying So Young? and Who Won the Cold War? Part II and Who Won the Cold War? Part III
Nominal bank lending growth has slowed from 10% to 2% since the start of this year on a 3-month annualized basis, for two main reasons. First, deposit outflows and higher deposit rates have led banks to reduce lending to a degree roughly in line with the usual historical relationships. Second, recession fears have likely led banks to reduce lending, and we find that banks that built up more provisions for loan losses over the last year have slowed lending by more. We expect the drag on growth from tighter bank lending standards to fade because we expect bank lending standards to remain roughly unchanged in Q3—as fading recession fears and modestly higher bank stock prices roughly offset higher interest rates—and to start to normalize gradually next year.
Related: All Clear and Outlook for Regional Banks and Real-Estate Doom Loop Threatens America’s Banks
While stimulus was an important factor in limiting credit card-financed spending earlier in the pandemic, in recent times the strength of the labor market and the associated wage gains are likely a major reason why consumers have not had to resort to hitting their credit cards harder. Exhibit 7 shows that according to Bank of America internal data, average credit card balances have risen over the last few years, after a dip in 2020. The latest reading through August 2023 suggests that for middle- and higher-income households, credit card balances are at levels equivalent to that in 2019. However, card balances for lower-income households have seen a steeper rise and have exceeded their pre-pandemic range. The good news is that lower-income households continue to see faster wage growth, as suggested by Exhibit 8, which helps offset some of the pressure that the group is facing from higher card balances.
Related: The Pandemic Has Broken a Closely Followed Survey of Sentiment and What Has Policy Tightening Accomplished So Far? and The Q4 Pothole: Student Loans, Shutdown, and Strikes
The world’s top exporter of corn, soy, and wheat for much of the past seven decades, the US is now facing a future of persistent agricultural trade deficits. The shortfall for the fiscal year ending Sept. 30 is estimated at $19 billion and is expected to balloon to almost $28 billion in fiscal 2024, according to Agriculture Department forecasts. The trend is driven in part by a shift in Americans’ eating habits—for instance, households today consume more imported produce, such as Mexican avocados and Indian mangoes—but stagnating grain and oilseed exports are also a factor. Since 1974 the only other annual deficits were in 2019 and 2020, during President Donald Trump’s trade war with China.
Related: China Expands Farmland In Bid To Cut Foreign Food Reliance and Could Economic Indicators Signal China’s Intent To Go To War?
The ballooning bilateral deficit is entirely driven by a rise in imports rather than a fall in exports; the two grew more or less in parallel at the end of the last decade. Then, after the first lockdown-related swings, EU exports to China remained more or less stable, while imports soared. The change in imports is visible across broad categories of manufacturing, although machinery and transport equipment (think of China’s electric car boom) may be contributing more than its proportionate share. [In 2023] all of these changes have recently been going into reverse. Import volumes have fallen by about 10% since the peak in August last year; import prices by about 15%. The total import bill, consequently, is down by about quarter since a year ago.
Related: The Chinese Carmakers Planning to Shake Up The European Market and China’s Auto Export Wave Echoes Japan's in the ’70s and Europe Can’t Decide How to Unplug from China
US exposure to foreign supply chains is much bigger than it appears at face value, but it is not that big on the macro level. By any measure, the US buys at least 80% of all industrial inputs from domestic sources. Thus, at an aggregate level, its foreign exposure is hardly alarming. However, while this may be reassuring, it is important to note that supply chain disruptions rarely occur at the macro level. The 80% figure was not relevant when the US auto sector shuttered factories due to a lack of semiconductors, or when buying home office electronics became problematic due to a demand surge and logistic snarls. Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers – what we call look through exposure – we see that US exposure to China is almost four times larger than it appears to be at face value.
Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and US-China Trade is Close to a Record, Defying Talk of Decoupling
The term premium is up one percentage point since late July. The ongoing rise in long rates is driven less by changing Fed expectations and more by: 1) The US sovereign downgrade 2) Japan exiting YCC 3) Fed QT 4) Fewer dollars for China to recycle in a falling exports environment 5) The US budget deficit 6) The large stock of T-bills and the Treasury’s intention to increase auction sizes. Looking ahead, the real risk to the economy, including financial stability, is if weak economic data doesn’t result in falling long-term interest rates.
Related: Maxing Out and Resilience Redux in the US Treasury Market and Living with High Public Debt
I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power. A reasonable calculation would suggest that our budget prospects are vastly worse than they were at the time of the Clinton administration's successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range. This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question. How long can or will the world's greatest debtor be able to maintain its position as the world's greatest power?
Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Rates Hit 16-Year Record and Is a U.S. Debt Crisis Looming? Is it Even Possible?
US households saved some $1.1 trillion less than previously thought over the past six years, according to revised government data released Thursday. The Bureau of Economic Analysis now calculates that Americans stashed away an average 8.3% of their disposable income annually from 2017 through 2022, down from a previously estimated 9.4%. The reduction stems from an accounting adjustment that lowered personal income from mutual funds and real estate investment trusts.
Europeans are using our high taxes to fund social transfers, not public sector investments. Innovators are therefore confronted with the worst of all worlds: a capital market not fit for purpose, high taxes, and low public sector investments. For a capital-markets driven system of innovation, you require a complete reboot of your entire socio-economic system. You would need to replace your pay-as-you go pension systems with pension funds. You would have to stop subsidising old industries and let them fall over the cliff. You would need lower rates of corporate taxes, which you can only have through cuts in social transfers. You would also need to raise public investment spending. It is safe to predict that this will not happen, not even during a long-lasting period of economic decline. We know the politics of decline.
Related: How The US Is Crushing Europe’s Domestic Exchanges and From Strength To Strength and Europe Has Fallen Behind America and the Gap is Growing
Annual births fell from 18.83 million in 2016 to 17.65 million, 15.23 million, 14.65 million, 12.02 million in 2020, 10.62 million, and 9.56 million last year. Therefore, the rate of decline each year from 2017 to 2022 was 6.27%, 13.71%, 3.81%, 17.95%, 11.65%, and 9.98%, respectively. The number of women of childbearing age is decreasing. Based on the seventh national census data, the number of women of childbearing age is expected to decline by about 4 million annually from 2020 to 2025.
Related: China’s Fertility Rate Dropped Sharply, Study Shows and China’s Collapsing Birth and Marriage Rates Reflect a People’s Deep Pessimism and China’s Defeated Youth
Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.
Related: Capital Allocation
We examined the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) for companies that did an initial public offering from 1990 to 2022. We expected to see low or negative spreads between ROIC and WACC for companies newly listed, rising spreads as they mature, and a decline in senescence. But what we found was nearly the opposite. The spread at the date of the IPO was high and narrowed before stabilizing around year five.
Related: Birth, Death, and Wealth Creation and The Economics of Inequality in High-Wage Economies and Data Update 5 for 2023: Pathways to Profitability
Using testing data from over two million students in nearly 10,000 schools in 49 states (plus the District of Columbia), we investigate the role of remote and hybrid instruction in widening gaps in achievement by race and school poverty. We find that remote instruction was a primary driver of the widening gaps. Math gaps did not widen in areas that remained in person (although reading gaps did). We estimate that high-poverty districts that went remote in 2020–2021 will need to spend nearly all of their federal aid on helping students recover from pandemic-related academic achievement losses.
Related: Parents Don’t Understand How Far Behind in School Their Kids Are and NAEP Long-Term Trend Assessment Results: Reading and Mathematics
Households are paying down their mortgage debt. As of July 2023, mortgage loans accounted for over 50% of total household debt ($6 trillion and a third of GDP). Over the past year, the amount of mortgage loans outstanding has declined for the first time ever in China as households have prioritized mortgage repayments. Note that other forms of consumer credit have also slowed sharply. The lockdown’s impact on consumer spending helped push up deposits in the 2020-21 period. New deposit growth has accelerated notably over the past year.
Related: China Is Now Growing Slower Than the U.S. and China Must Slow Down Investment If It Wants To Rebalance its Debt-Laden Economy and China’s Defeated Youth
Acceptance rates at top Chinese universities are estimated to be below 0.01% for students in some provinces and around 0.5% for those in major municipalities such as Beijing and Shanghai. For comparison, Harvard College had an acceptance rate of 3.41% this year. During China’s large-scale privatization process, older workers struggled to find new employment in the rapidly changing economy. But now, employers are reluctant to lay off older workers – both because they have valuable experience and because they are protected by labor laws. The contraction in jobs therefore is felt most acutely among young people.
Related: Why Has Youth Unemployment Risen So Much in China? and The Root of China’s Growing Youth Unemployment Crisis and China’s Defeated Youth
China is in fact hyper-capitalist. An enormous proportion of national income goes to the controllers of capital and is being saved by them. During the earlier hypergrowth period, this worked well. But now the savings are far greater than can be productively used. Income now needs to accrue to those who will spend it. The danger is not one of a huge financial crisis: China is a creditor country; its debts are overwhelmingly in its own currency; and its government owns all the important banks. A policy of financial repression would work quite well. The danger is rather one of chronically weak demand. It will be impossible, in today’s global environment, to generate either a huge export boom or consistent current account surpluses. The investment rate is already spectacularly high, while growth is slowing. Still higher non-property investment cannot be justified.
Related: An Economic Hail Mary for China and Can China’s Long-Term Growth Rate Exceed 2–3 Percent? and The Neoclassical Growth of China
Equities have been sustained by the anomaly of equity valuations rising at a time of muted earnings growth, and the AI catalyst. The major US equity catalyst this year has been the rise in AI-linked stocks. They’ve come off the boil since July, but there’s still a lot of optimism regarding AI’s impact on growth, profits and productivity. All of these use cases have created a frenzy of analysts comparing large language models and other generative AI to 20th century milestones such as the electrification of farms, the interstate highway system and the internet itself.
Related: Centaurs and Cyborgs on the Jagged Frontier and Generative AI at Work and AI, Mass Evolution, and Weickian Loops
Rather quietly, inflows from official investors came close to generating about half of the net inflows needed to sustain the United States' current account deficit (over the last 4qs of data, q3 23 may be different). A lot of the inflow over the last 4qs (q3 22 to q2 23) has gone into equities and bank deposits so it doesn't get the attention of Treasury flows. But q2 23 Treasury inflows were substantial as well. Total foreign demand for LT US bonds (official and private, including private demand for corporate bonds) exceeded the US current account deficit in q1 2023. The fall in reported foreign holdings last year though got a lot more attention. The IMF's data for global reserves isn't available (yet) for q2, but central banks added to their dollar holdings in q1 (and likely q2). They are getting a lot of coupon payments on their existing stock-- and reinvesting I assume.
Related: Setser On Chinese "De-Dollarizing" and Saudi Arabia's PIF and the New Petrodollar Recycling and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency
The US Equal Employment Opportunity Commission requires companies with 100 or more employees to report their workforce demographics every year. Bloomberg obtained 2020 and 2021 data for 88 S&P 100 companies and calculated overall US job growth at those firms. In total, they increased their US workforces by 323,094 people in 2021, the first year after the Black Lives Matter protests — and the most recent year for which this data exists. The overall job growth included 20,524 White workers. The other 302,570 jobs — or 94% of the headcount increase — went to people of color. Many people just starting out in their career are from growing Black, Hispanic, and Asian populations, who are entering the workforce just as more tenured White employees retire. That, however, can’t fully account for changes, particularly at the top of the corporate ladder.
Related: Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners and Rebound in Immigration Comes to Economy’s Aid and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995
Every five to 10 years, the World Values Survey asks people in dozens of countries where they would place themselves on a scale from the zero-sum belief that “people can only get rich at the expense of others”, to the positive-sum view that “wealth can grow so there’s enough for everyone”. The average response among those in high-income countries has become 20% more zero-sum over the last century. Moreover, two distinct rises in the prevalence of zero-sum attitudes have coincided with two slowdowns in gross domestic product growth, one in the 1970s and another in the past two decades. The same pattern holds within individual countries. Britons and Americans have become significantly more likely to believe that success is a matter of luck rather than effort precisely as income growth has slowed.
Related: Zero-Sum Thinking and the Roots of U.S. Political Divides and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics
Zero-sum thinking is associated with more preference for liberal economic policies in general and with stronger political alignment with the Democratic Party and weaker alignment with the Republican Party. We also find that zero-sum thinking is linked empirically to important political crises experienced in the United States. Specifically, we find that individuals who view the world in zero-sum terms are more likely to believe that the conspiracy theory QAnon holds some truth for U.S. politics. We also find that zero-sum thinking is linked with empathy and understanding for the January 6, 2021 attack on the U.S. Capitol Building, an act that is more justifiable and seen as being less harmful if one presumes the world is zero-sum (rather than positive/negative sum).
Related: Are We Destined For A Zero-Sum Future? and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics
US exposure to foreign supply chains is much bigger than it appears at face value, but it is not that big on the macro level. By any measure, the US buys at least 80% of all industrial inputs from domestic sources. Thus, at an aggregate level, its foreign exposure is hardly alarming. However, while this may be reassuring, it is important to note that supply chain disruptions rarely occur at the macro level. The 80% figure was not relevant when the US auto sector shuttered factories due to a lack of semiconductors, or when buying home office electronics became problematic due to a demand surge and logistic snarls. Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers – what we call look through exposure – we see that US exposure to China is almost four times larger than it appears to be at face value.
Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and US-China Trade is Close to a Record, Defying Talk of Decoupling
This paper hypothesizes that the decline of the Rust Belt was due in large part to the persistent labor market conflict that was prevalent throughout the region’s main industries. [Labor conflict] results in lower investment and productivity growth, which causes employment to move from the Rust Belt to the rest of the country. The model also features rising foreign competition as an alternative source of the Rust Belt’s decline. Quantitatively, labor conflict accounts for around half of the decline in the Rust Belt’s share of manufacturing employment. Consistent with the data, the model predicts that the Rust Belt’s employment share stabilizes by the mid 1980s, once labor conflict subsides. Rising foreign competition plays a more modest role quantitatively, and its effects are concentrated in the 1980s and 1990s, after most of the Rust Belt’s decline had already occurred.
Related: Autoworkers Have Good Reason to Demand a Big Raise and American Labor’s Real Problem: It Isn’t Productive Enough and EV Boom Remakes Rural Towns in the American South
As measured in the CES data, manufacturing average hourly wages for all employees were 3% above wages in the private sector in 2006, a difference commonly known as the manufacturing wage premium. Since then, manufacturing wages have averaged gains of 2.3% per year, while wages in the private sector have risen 2.6% per year. While manufacturing workers used to receive a premium relative to workers in other sectors, that premium has disappeared in recent years for most manufacturing jobs. Our results indicate that the decline in unionization rates is responsible for more than 70% of the drop in the manufacturing wage premium. Notably, the unionization effect remains significant even after accounting for a large set of worker and sectoral characteristics.
Related: American Labor’s Real Problem: It Isn’t Productive Enough and The World Is In The Grip Of A Manufacturing Delusion and Unpacking the Boom in U.S. Construction of Manufacturing Facilities
Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.
Related: Capital Allocation
The Treasury market may be entering a period of volatility as leveraged investors have stalled in their purchases and the next marginal buyer has not yet arrived. When the Fed and commercial banks stepped away from the Treasury market, hedge funds stepped in and bought cash Treasuries in size as part of a cash futures basis trade. The financing for that trade is sourced through dealer repo, which grew rapidly and then stalled. While dealers themselves have access to virtually unlimited financing from the Fed, the size of their activity is constrained by balance sheet costs. If the leveraged buyers are reaching financing limits, then a new marginal Treasury buyer must emerge to absorb the sizable upcoming issuance.
Related: Resilience Redux in the US Treasury Market and Who Has Been Buying U.S. Treasury Debt? and Raising Anchor
Rather quietly, inflows from official investors came close to generating about half of the net inflows needed to sustain the United States' current account deficit (over the last 4qs of data, q3 23 may be different). A lot of the inflow over the last 4qs (q3 22 to q2 23) has gone into equities and bank deposits so it doesn't get the attention of Treasury flows. But q2 23 Treasury inflows were substantial as well. Total foreign demand for LT US bonds (official and private, including private demand for corporate bonds) exceeded the US current account deficit in q1 2023. The fall in reported foreign holdings last year though got a lot more attention. The IMF's data for global reserves isn't available (yet) for q2, but central banks added to their dollar holdings in q1 (and likely q2). They are getting a lot of coupon payments on their existing stock-- and reinvesting I assume.
Related: Setser On Chinese "De-Dollarizing" and Saudi Arabia's PIF and the New Petrodollar Recycling and Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency
I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power. A reasonable calculation would suggest that our budget prospects are vastly worse than they were at the time of the Clinton administration's successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range. This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question. How long can or will the world's greatest debtor be able to maintain its position as the world's greatest power?
Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Rates Hit 16-Year Record and Is a U.S. Debt Crisis Looming? Is it Even Possible?
US equities account for nearly 70% of the MSCI World index; the next five largest — in Japan, UK, France, Canada, and Germany — total less than 20%. The top 10 constituent equities of the MSCI World index, which are all US companies including Apple at number one and ExxonMobil at number 10, aggregate to more than 20%. To put it bluntly, the 10 most valuable US equities are larger than the market capitalisations of Japan, UK, France, Canada, and Germany combined. In effect, the US has scaled up the largest companies in the world in its own public markets, creating a colossal pool of recyclable equity capital residing in domestic and non-US investor portfolios. This has created a virtuous cycle of new listings from US and overseas issuers attracted by the depth and liquidity of that equity pool.
Related: Europe Has Fallen Behind America and the Gap is Growing and Why Europe’s Stock Markets Are Failing to Challenge the US and From Strength To Strength
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
Every five to 10 years, the World Values Survey asks people in dozens of countries where they would place themselves on a scale from the zero-sum belief that “people can only get rich at the expense of others”, to the positive-sum view that “wealth can grow so there’s enough for everyone”. The average response among those in high-income countries has become 20% more zero-sum over the last century. Moreover, two distinct rises in the prevalence of zero-sum attitudes have coincided with two slowdowns in gross domestic product growth, one in the 1970s and another in the past two decades. The same pattern holds within individual countries. Britons and Americans have become significantly more likely to believe that success is a matter of luck rather than effort precisely as income growth has slowed.
Related: Zero-Sum Thinking and the Roots of U.S. Political Divides and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics
Zero-sum thinking is associated with more preference for liberal economic policies in general and with stronger political alignment with the Democratic Party and weaker alignment with the Republican Party. We also find that zero-sum thinking is linked empirically to important political crises experienced in the United States. Specifically, we find that individuals who view the world in zero-sum terms are more likely to believe that the conspiracy theory QAnon holds some truth for U.S. politics. We also find that zero-sum thinking is linked with empathy and understanding for the January 6, 2021 attack on the U.S. Capitol Building, an act that is more justifiable and seen as being less harmful if one presumes the world is zero-sum (rather than positive/negative sum).
Related: Are We Destined For A Zero-Sum Future? and Is the Surge to the Left Among Young Voters a Trump Blip or the Real Deal? and Millennials are Shattering the Oldest Rule in Politics
US exposure to foreign supply chains is much bigger than it appears at face value, but it is not that big on the macro level. By any measure, the US buys at least 80% of all industrial inputs from domestic sources. Thus, at an aggregate level, its foreign exposure is hardly alarming. However, while this may be reassuring, it is important to note that supply chain disruptions rarely occur at the macro level. The 80% figure was not relevant when the US auto sector shuttered factories due to a lack of semiconductors, or when buying home office electronics became problematic due to a demand surge and logistic snarls. Taking account of the Chinese inputs into all the inputs that American manufacturers buy from other foreign suppliers – what we call look through exposure – we see that US exposure to China is almost four times larger than it appears to be at face value.
Related: Setser On Rumors Of Decoupling and How America Is Failing To Break Up With China and US-China Trade is Close to a Record, Defying Talk of Decoupling
This paper hypothesizes that the decline of the Rust Belt was due in large part to the persistent labor market conflict that was prevalent throughout the region’s main industries. [Labor conflict] results in lower investment and productivity growth, which causes employment to move from the Rust Belt to the rest of the country. The model also features rising foreign competition as an alternative source of the Rust Belt’s decline. Quantitatively, labor conflict accounts for around half of the decline in the Rust Belt’s share of manufacturing employment. Consistent with the data, the model predicts that the Rust Belt’s employment share stabilizes by the mid 1980s, once labor conflict subsides. Rising foreign competition plays a more modest role quantitatively, and its effects are concentrated in the 1980s and 1990s, after most of the Rust Belt’s decline had already occurred.
Related: Autoworkers Have Good Reason to Demand a Big Raise and American Labor’s Real Problem: It Isn’t Productive Enough and EV Boom Remakes Rural Towns in the American South
As measured in the CES data, manufacturing average hourly wages for all employees were 3% above wages in the private sector in 2006, a difference commonly known as the manufacturing wage premium. Since then, manufacturing wages have averaged gains of 2.3% per year, while wages in the private sector have risen 2.6% per year. While manufacturing workers used to receive a premium relative to workers in other sectors, that premium has disappeared in recent years for most manufacturing jobs. Our results indicate that the decline in unionization rates is responsible for more than 70% of the drop in the manufacturing wage premium. Notably, the unionization effect remains significant even after accounting for a large set of worker and sectoral characteristics.
Related: American Labor’s Real Problem: It Isn’t Productive Enough and The World Is In The Grip Of A Manufacturing Delusion and Unpacking the Boom in U.S. Construction of Manufacturing Facilities
Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.
Related: Capital Allocation
I would suggest that substantial and accumulating deficits and debts are a substantial threat to national security and national power. A reasonable calculation would suggest that our budget prospects are vastly worse than they were at the time of the Clinton administration's successful budget actions and substantially worse than they were at the time of the Simpson-Bowles efforts. The budget deficits a decade out comfortably in double digits as a share of GDP now seem a reasonable projection with primary deficits quite likely in the 5% of GDP range. This is without the assumption of the need for vast mobilization for meeting contingencies, military or non-military. And I think it is reasonable to ask the question. How long can or will the world's greatest debtor be able to maintain its position as the world's greatest power?
Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Rates Hit 16-Year Record and Is a U.S. Debt Crisis Looming? Is it Even Possible?
US equities account for nearly 70% of the MSCI World index; the next five largest — in Japan, UK, France, Canada, and Germany — total less than 20%. The top 10 constituent equities of the MSCI World index, which are all US companies including Apple at number one and ExxonMobil at number 10, aggregate to more than 20%. To put it bluntly, the 10 most valuable US equities are larger than the market capitalisations of Japan, UK, France, Canada, and Germany combined. In effect, the US has scaled up the largest companies in the world in its own public markets, creating a colossal pool of recyclable equity capital residing in domestic and non-US investor portfolios. This has created a virtuous cycle of new listings from US and overseas issuers attracted by the depth and liquidity of that equity pool.
Related: Europe Has Fallen Behind America and the Gap is Growing and Why Europe’s Stock Markets Are Failing to Challenge the US and From Strength To Strength
The US Equal Employment Opportunity Commission requires companies with 100 or more employees to report their workforce demographics every year. Bloomberg obtained 2020 and 2021 data for 88 S&P 100 companies and calculated overall US job growth at those firms. In total, they increased their US workforces by 323,094 people in 2021, the first year after the Black Lives Matter protests — and the most recent year for which this data exists. The overall job growth included 20,524 White workers. The other 302,570 jobs — or 94% of the headcount increase — went to people of color. Many people just starting out in their career are from growing Black, Hispanic, and Asian populations, who are entering the workforce just as more tenured White employees retire. That, however, can’t fully account for changes, particularly at the top of the corporate ladder.
Related: Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners and Rebound in Immigration Comes to Economy’s Aid and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995
Using testing data from over two million students in nearly 10,000 schools in 49 states (plus the District of Columbia), we investigate the role of remote and hybrid instruction in widening gaps in achievement by race and school poverty. We find that remote instruction was a primary driver of the widening gaps. Math gaps did not widen in areas that remained in person (although reading gaps did). We estimate that high-poverty districts that went remote in 2020–2021 will need to spend nearly all of their federal aid on helping students recover from pandemic-related academic achievement losses.
Related: Parents Don’t Understand How Far Behind in School Their Kids Are and NAEP Long-Term Trend Assessment Results: Reading and Mathematics
Figure 1 shows that the median forecast of professional economists for one-year-ahead consumer price index (CPI) inflation has become less sensitive to actual CPI inflation. The figure shows the results of regressions measuring the strength of the relationship between one-year-ahead expected CPI inflation (vertical axis) and the contemporaneous four-quarter CPI inflation rate (horizontal axis). For the period from 1949 through the end of 1998, the blue line indicates a strong relationship with a slope of 0.71, implying that the median inflation forecast adjusts nearly one-for-one with actual inflation. The regression yields a much smaller slope of 0.18 for the period from 1999 through the second quarter of 2023 (red line), implying very little forecast adjustment in response to actual inflation.
Related: What We’ve Learned About Inflation
US households saved some $1.1 trillion less than previously thought over the past six years, according to revised government data released Thursday. The Bureau of Economic Analysis now calculates that Americans stashed away an average 8.3% of their disposable income annually from 2017 through 2022, down from a previously estimated 9.4%. The reduction stems from an accounting adjustment that lowered personal income from mutual funds and real estate investment trusts.
Commercial real-estate insurance costs have risen 7.6% annually on average since 2017, according to Moody’s Analytics. Costs to insure rental-apartment buildings rose 14.4% annually on average in Dallas, 13% in Los Angeles and 12.6% in Houston. Some owners struggle to find anyone willing to insure their buildings, Moody’s said. Intensifying natural disasters are a big reason for the increase, particularly in cities vulnerable to wildfires, floods or storms. The cost of reinsurance has also increased, trickling down to higher property insurance rates. Meanwhile, inflation has pushed up the cost of repairing or rebuilding damaged properties.
Related: Analyzing State Resilience to Weather and Climate Disasters and Rising Insurance Costs Start to Hit Home Sales and How a Small Group of Firms Changed the Math for Insuring Against Natural Disasters
The 5.3 point shift between 2016 and 2020–just enough to tilt the state to Biden—was driven by three factors: 2016 third-party voters switching to Biden in 2020, Black population growth and white population decline, and persuasion, primarily among high-income, high-education voters. The total shift in Georgia due to persuasion is about 3.1 points—and 2.2 points comes from the changes in the composition of the electorate. Georgia as a whole is not demographically favorable to Donald Trump: unlike the upper Midwest, there are fewer white working-class voters left for him to flip, and a lot of cross pressured college-educated white Republicans. If Trump’s path with suburban whites is closed off, Trump has another option: continuing to chip away at Democratic margins among African Americans, as current polls suggest he might. Trump would likely need a bigger breakthrough with Black voters than he’s gotten to date to fully counteract the effect of the state’s Black population growth.
Related: The Road to A Political Realignment in American Politics and Consistent Signs of Erosion in Black and Hispanic Support for Biden and How to Interpret Polling Showing Biden’s Loss of Nonwhite Support
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
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
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?
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