Macro Roundup

Shane Frederick, “Cognitive Reflection and Decision Making,” Journal Of Economic Perspectives, Fall 2005
https://pubs.aeaweb.org/doi/pdfplus/10.1257/089533005775196732

Gender differences, “…Men scored significantly higher than women on the CRT, as shown in Table 6.The difference is not likely due to a biased sampling procedure,because there were no significant sex differences for any other cognitive measure, except SATmath scores, for which there was a modest difference corresponding to national averages. Nor can it be readily attributed to differences in the attention or effort expended on the survey, since women scored slightly higher on the Wonderlic test, which was given under identical circumstances (included as part of a 45-minute survey that recruited respondents were paid to complete)…Four facts are noteworthy. First, CRT scores are more highly correlated with time preferences for women than for men; the low and high groups differ more. Second, as suggested by most prior research (Byrnes, Miller and Schafer, 1999 present an overview), women were considerably more risk averse than men, and this remains true even after controlling for CRT score. Third, for the selected risk items, CRT is as important as sex. In other words, high-scoring women behave almost identically to low-scoring men (compare the upper left and lower right cells within each of the five items in the lower panel). Fourth, in contrast to the pattern observed for the time preference items, CRT scores are more highly correlated with risk preferences for men than for women.The curious finding that CRT scores are more tightly linked with time preferences for women than for men, but are more tightly linked with risk preferences for men than for women held for the other tests of cognitive ability, as well. Expressed loosely, being smart makes women patient and makes men take more risks.14 This result was unanticipated and suggests no obvious explanation. The only related finding of which I am aware is in a study by Shoda, Mischel and Peake (1990), who found that the patience of preschool girls was strongly related to their subsequent SAT scores, but the patience of preschool boys was not….”

The outcomes, “…The proposition that the three CRT problems generate an incorrect “intuitive” answer is supported by several facts. First, among all the possible wrong answers people could give, the posited intuitive answers (10, 100 and 24) dominate. Second, even among those responding correctly, the wrong answer was often considered first, as is apparent from introspection, verbal reports and scribbles in the margin (for example, 10 cents was often crossed out next to 5 cents, but never the other way around). Third, when asked to judge problem difficulty (by estimating the proportion of other respondents who would correctly solve them), respondents who missed the problems thought they were easier than the respondents who solved them. For example, those who answered 10 cents to the “bat and ball” problem estimated that 92 percent of people would correctly solve it, whereas those who answered “5 cents” estimated that “only” 62 percent would. (Both were considerable overestimates.) Presumably, the “5 cents” people had mentally crossed out 10 cents and knew that not everyone would do this, whereas the “10 cents” people thought the problem was too easy to miss. Fourth, respondents do much better on analogous problems that invite more computation. For example, respondents miss the “bat and ball” problem far more often than they miss the “banana and bagel” problem: “A banana and a bagel cost 37 cents. The banana costs 13 cents more than the bagel. How much does the bagel cost?”…Table 2 shows the responses of the low and high CRT groups for each of the 17 items. The reported value is either the percentage choosing the patient option or the mean response. The subscripts are the total number of respondents in the low and high CRT groups who answered that item. The rightmost column reports the level of statistical significance of group differences—the p-values from a chisquare test (for dichotomous responses) or a t-test (for continuous responses). Those who scored higher on the CRT were generally more “patient”; their decisions implied lower discount rates. For short-term choices between monetary rewards, the high CRT group was much more inclined to choose the later larger reward (see items a and b). However, for choices involving longer horizons (items c through h), temporal preferences were weakly related or unrelated to CRT scores…. It appears that greater cognitive reflection fosters the recognition or appreciation of considerations favoring the later larger reward (like the degree to which the implied interest rate exceeds the rate offered by the market). However, it remains unclear whether cognitive reflection also influences other determinants of intertemporal choices (like pure time preference). CRT scores were unrelated to preferences for the massage and tooth-pull items, which were intended as measures of pure time preference. On the other hand, those in the low CRT group (the “cognitively impulsive”) were willing to pay significantly more for the overnight shipping of a chosen book (item l), which does seem like an expression of an aspect of pure time preference (the psychological “pain” of waiting for something desired)”…”

Evidence, “The CRT was administered to 3,428 respondents in 35 separate studies over a 26-month period beginning in January 2003. Most respondents were undergraduates at various universities in the midwest and northeast who were paid $8 to complete a 45-minute questionnaire that included the CRT and measures of various decision-making characteristics, like time and risk preferences.3 On the page on which the CRT appeared, respondents were told only: “Below are several problems that vary in difficulty. Try to answer as many as you can.”Table 1 shows the mean scores at each location and the percentage answering 0, 1, 2 or 3 items correctly.Most of the analyses that follow compare the “low” group (those who scored 0 out of 3) with the “high” group (those who scored 3 out of 3). The two “intermediate” groups (those who scored a 1 or 2) typically fell between the two extreme groups on whatever dependent measure was analyzed. Thus, focusing attention on the two “extreme” groups simplifies the exposition and analysis without affecting the conclusions. Since more of the respondents were college students from selective schools, the two “extreme” groups that formed the basis for most statistical comparisons were far more similar in cognitive abilities than two extreme groups formed from the general population. Thus, the group differences reported here likely understate the differences that would have been observed if a more representative sample had been used…”

Table 4 shows the relationship btw people who took the test and other scores (when available) for context.

Results

Shane Frederick devised the cognitive reflection test to measure as a short measure of cognitive ability, "...there is no good reason for ignoring the possibility that general intelligence or various more specific cognitive abilities are important causal determinants of decision making. To provoke interest in this neglected topic, this paper introduces a three-item “Cognitive Reflection Test” (CRT) as a simple measure of one type of cognitive ability. I will show that CRT scores are predictive of the types of choices that feature prominently in tests of decision-making theories, like expected utility theory and prospect theory. Indeed, the relation is sometimes so strong that the preferences themselves effectively function as expressions of cognitive ability—an empirical fact begging for a theoretical explanation”

More evidence that minimum wage increases reduced low skilled workers net welfare. In this case via several different channels, hour reduction, lower benefits eligibility and less consistent schedules based on evidence from a retailer in California.

Overall impact on workers, "...We further show that increasing the minimum wage can diminish worker welfare due to the changes in firms’ scheduling practices, even when it does not reduce the overall employment. For an average worker in a California store in our data,we estimate the net loss of welfare due to their reduction of hours, lower eligibility for benefits, and less consistent schedules (that resulted from a $1 increase in the minimum wage) to be at least $1,590 annually or 11.6% of the worker’s total wage compensation... loss in worker welfare due to the reduction in weekly hours, eligibility of benefits, and consistency of their work schedules is estimated to be $4,710 (= $1, 872 + $467 + $2, 371) annually, while the value that workers may derive from the reduced hours may be worth up to $3,120. As a result, the net loss in worker welfare is estimated to be at least $1,590 annually or 11.6% of the worker’s total wage compensation. We note that this net loss in worker welfare is entirely due to workers’ reduced eligibility for benefits and the consistency of theirs schedules not directly due to the reduced hours, when assuming workers can use all the reduced hours in their second jobs.

Impact on benefits, "This decrease in the average number of hours worked not only reduces total wages but also impacts workers’ eligibility for benefits. We show that the percentage of workers with weekly hours larger than 20 (who may be eligible for retirement benefits according to ERISA (1974)) and those with weekly hours larger than 30 (who may be eligible for healthcare insurance according to the Affordable Care Act (ACA)) decreases by 23.0% and 14.9%, respectively. These results suggest that, as the minimum wage increases, firms may strategically adjust their scheduling practice to reduce the number of workers who are eligible for benefits.This is consistent with the results in Clemens et al. (2018) which shows using survey data from the US that minimum wage increase reduces workers’ likelihood to receive healthcare insurance especially in the low wage sectors. To demonstrate the significant financial incentive for firms to do so, we provide a rough estimate of a store’s savings associated with reducing workers’ eligibility for benefits in Section 6.2.1."..."

Impact on change in consistency of workers schedule, "...Besides the direct reduction in total wage compensation and eligibility for benefits,we also show that increasing the minimum wage leads to less consistent worker schedules both in terms of the number of hours they work from one week to another and in terms of the timing of their shifts. In particular, for each $1 increase in the minimum wage, the absolute (relative) deviation in the number of weekly hours worked by each worker increases by up to 33.0% (6.7%). In addition, we show that the absolute (relative) deviation in the number of daily hours increases by up to 9.5% (2.0%). The absolute deviation in the starting time of the work shift increases by up to 9.8%..."
Implication for firms costs, "...In this subsection, we first provide an approximation of the savings in benefit costs for an average store in California in our data through the scheduling adjustments associated with the minimum increase of $1. This will help demonstrate the strong financial motivations for the stores to adopt the schedule adjustments. We then provide a rough quantification for the resultant total welfare loss of an average worker in a California store in our data from the scheduling adjustments. This will help demonstrate the importance of the scheduling implications when analyzing the effect of the minimum wage on worker welfare.... To this end, we consider the average annual cost of retirement benefits per worker for the retail store to be $1,228. The total annual cost of healthcare insurance and retirement benefits for the store is thus estimated to be $14,638 (= 15∗ (3, 800∗ 30.3%∗ 71.2% + 1, 228∗ 56.0%∗ 22.7%)). Based on our results in Section 5.1, when increasing the minimum wage by $1, the percentage of workers with weekly hours longer than 20 and 30 decreases by 23.0% and 14.9%, respectively. Meanwhile, the number of workers for an average store in California increases from 15 to 19. With such schedule adjustments, the total annual cost of healthcare insurance and retirement benefits for this average store is thus estimated to be $9,664 (= 19∗(3, 800∗15.4%∗71.2% + 1, 228∗33.0%∗22.7%)). Therefore, the annual reduction in healthcare and retirement benefit costs is $4,974 (= $14, 638 − $9, 664). Given that the total labor hours per week is 348 for an average store in California, the total increase in the annual labor cost as a result of $1 increase in the minimum wage is $18,096 (= 1∗52∗348), and the reduction in the benefit costs represents 27.5% of the total wage cost increase..."
Qiuping Yu, Shawn Mankad and Masha Shunko, "Evidence of The Unintended Labor Scheduling Implications of The Minimum Wage," Social Science Research Network, June 2021, https://papers.ssrn.com/sol3/papers.cfm

The sample, "...highly granular dataset of worker schedules from a medium-sized chain of fashion retail stores in the United States. Specifically, we study worker scheduling and minimum wage data from 2015 to 2018 for5,760 workers at 45 stores in California and 17 stores in Texas. All stores share the same brand. Our data include all workers employed at the stores. They are all paid by the hour, and most of them are paid with the minimum wage. The key advantage of our dataset is that it allows the precise measurements of labor hours for a store as a whole and for all individual workers within a store, as well as the timings of the shifts for each worker..."
The results, "...Our results show that the minimum wage has no statistically significant impact on the total labor hours employed at the stores, which is consistent with the literature on the employment effect of minimum wage, especially in the non-tradable sectors (e.g., retail and service)…However, we show that the way in which the stores allocate these hours among their workers does change. Specifically, when the minimum wage increases by $1, the number of workers scheduled to work each week goes up by 27.7%, while the average hours per worker per week decrease by 20.8%. For an average store in California, for example, these changes translate into four extra workers per week and five fewer hours per worker per week. This means, for an average worker in California paid the minimum wage, her total wage compensation is reduced by 13.6% when increasing the minimum wage from $11 to $12…”

NYT reports birthrates are declining for women in all age groups, most sharply in areas with strong job markets, “…For decades, delaying parenthood was the domain of upper-middle-class Americans, especially in big, coastal cities. Highly educated women put off having a baby until their careers were on track, often until their early 30s. But over the past decade, as more women of all social classes have prioritized education and career, delaying childbearing has become a broad pattern among American women almost everywhere. The result has been the slowest growth of the American population since the 1930s, and a profound change in American motherhood. Women under 30 have become much less likely to have children. Since 2007, the birthrate for women in their 20s has fallen by 28 percent, and the biggest recent declines have been among unmarried women. The only age groups in which birthrates rose over that period were women in their 30s and 40s — but even those began to decline over the past three years. “The story here is about young women, whose births are plummeting,” said Caitlin Myers, an economist at Middlebury College who analyzed county-level birth records for The New York Times. “All of a sudden, in the last 10 years, there’s this tremendous transformation.”A geographic analysis of Professor Myers’s data offers a clue: The birthrate is falling fastest in places with the greatest job growth— where women have more incentive to wait….”

“I can not have a kid and not have to feel bad about it,” said Eboni McFadden, 28, who grew up in rural Missouri and is now two weeks from graduating as a medical technician in Phoenix. “I feel powerful that I can make that decision with my own body. I don’t have to have a kid to be successful or to be a woman.”

Child care costs, and opportunity costs

The declines in childbearing over the past decade have varied by region, according to the data from the Centers for Disease Control and Prevention and the Census Bureau. They were greater on the West Coast and in the Mountain West than in the South or Northeast. The large urban counties that have gained the most jobs and population since the recession have seen birthrates fall twice as fast as smaller, rural counties that have not recovered as strongly. The birthrate fell 38 percent in Denver County and 33 percent in Maricopa County, which includes Phoenix.

In economically stagnant places, fertility tends to be higher, and having a child is seen as a primary route to fulfillment.

She married last year, but she and her husband, a sous-chef at a casino, have been holding off on having children. She will graduate this summer as an aesthetician, doing things like facials and waxing. But she wants to have a base of clients before having a baby.

“I still don’t think I have everything I want to set myself up for success,” said Ms. Schoenherr, who is 27. “I want to have a house and a career first.”

The cost of living is adding to her hesitation. Houses in areas that she likes sell overnight with dozens of offers. Day-care rates gave her sticker shock.

In interviews with women from immigrant families, almost all of them Hispanic, the delay was less about the cost of children than about a desire to set their lives on track.

Ms. Portillo, who is 22, said her immigrant parents had raised her and her three siblings frugally and done fine.

“If they did it, I certainly should be able to,” she said.

Hispanic women, who once had by far the highest fertility of any major racial or ethnic group, have had the single largest drop in fertility of any group, more than a third since 2007. In Arizona, Hispanic women made up approximately 60 percent of the total decline in births in the state since 2007, according to a University of Arizona analysis.

Miguel Brusuelas, an instructor at GateWay Community College, where Ms. Portillo is a student, said that 20 years ago, most of his students in their 20s were single mothers, struggling to make ends meet. Today, far fewer have children, he said. Many have specific career goals for their education. About half of GateWay’s students are Hispanic, and nearly half are the first in their families to go to college.

“What I see now is students looking beyond, ‘OK, I have to pay this bill next week,’” Mr. Brusuelas said. “I see them looking into the future.”

Some women said they wanted to build a career as a way to avoid repeating difficult childhoods. Jakeisha Ezuma grew up on the South Side of Chicago, one of 10 children. Her older sisters, she said, had several children, and for a while in her teens, she wanted nothing more than to become pregnant, too. But she did not. Now 26 and living in Denver, she wants to wait. She is earning her dental hygienist degree, which comes with more money and a more flexible schedule than her current job as a dental assistant.

“I’m trying to go higher,” she said. “I grew up around dysfunctional things. I feel like if I succeed, my children won’t have to. I’ll be breaking the generational cycle.”

Fewer unintended pregnancies

The largest declines in births have been in unintended pregnancies and those to single mothers, Professor Myers found. The birthrate for unmarried women dropped 18 percent, compared with 11 percent for married women.

A major reason women are able to be more intentional about when to have children is better access to birth control. Long-acting reversible contraception, such as arm implants and IUDs, have given women new options, and the Affordable Care Act made many of them free.

The lower rate of unplanned pregnancy is a signal that the decline in births — despite the hand-wringing about what it portends for the nation’s work force and social safety net — could be good news for individual women.

“One of the big shifts has been fewer people having kids before they wanted to,” said Amanda Jean Stevenson, a demographer at the University of Colorado. “Maybe there are fewer babies right now, but people are able to live the lives they want to, and that’s a profound thing.”

Demanding jobs, and demanding children

Researchers cannot say for sure if education is a cause of the fertility decline, but there appears to be some connection. What is clear is that women are far more educated than they were in past generations, even since the Great Recession in 2008.

Women’s graduation rates are now rising faster than men’s. One-third of women in their 20s had a college degree in 2019, up from one-quarter in 2007.

Their place in the labor force has changed, too. Forty-four percent of female workers are in professional or management occupations, compared with 38 percent before 2008. The number of women doing jobs that do not require as much education, like office assistant, has dropped.

The emphasis on career has spread beyond women with bachelor’s degrees — as has a recognition of how children can derail it.

“The perceived price of having children has really increased since I first talked to women in the mid-1990s,” said Kathryn Edin, a sociologist at Princeton University who has spent years writing about low-income families. “Even among the poorest women, there’s a recognition that a career is part of a life course.”

At the same time, there was more of a glorification of work in American culture, and workplaces began expecting employees to be available around the clock. Yet there is little in the way of policies to help parents combine work and family.

Parenting, too, became more stressful. American parents spend more money and time on their children than any previous generation, and many feel immense pressure to be constantly teaching their children, enrolling them in enrichment classes and giving them their undivided attention. This is known as intensive parenting, and while it used to be an upper-middle-class phenomenon, it is now rising fast across all social classes.

Ms. Schoenherr is acutely aware of how much the demands of parenting have changed. She was born on a bean and corn farm in Illinois. Her parents divorced when she was 2, and her grandmother babysat while her mother was at work. She remembers long days of riding her bike and coming home when the streetlights came on.

“Back then you could let your kids do whatever and you wouldn’t be judged,” she said. “Now there’s so much mom shaming. You are looked down on if you are not fully focused on your kid.”

A number of women said they wanted to avoid the schedules of their working-class parents because they were inflexible and allowed little time for play or family activities.

Alejandra De Santiago, of Surprise, Ariz., remembers yearning for her mother to stop by school during lunch the way other mothers did, but she was always working. Her parents, a house cleaner and a truck driver, both immigrants from Mexico, divorced when she was 7, and she was raised mostly by her grandmother, while her mother worked.

“I want to know who I am first before having kids,” she said.

Ms. De Santiago, 23, said she wanted to start a spa business, which would allow her to control her schedule more than hourly work.

“I don’t want them to feel closer to their babysitter than to me,” she said.

It is uncertain whether young women will end up having the children that — at least so far — they are putting off. In surveys, they say they still want them, though the number of children they intend to have has fallen. It is possible that the drop over the past decade is a new normal for fertility in America, one that looks more like what has happened in Europe and some Asian nations.

Kristal Wynn, 36, grew up in rural Florida. Her best friend from high school had three children by the time she was 19, and Ms. Wynn knew she did not want that. She eventually became a nurse. Now living in Denver, she is going back to school to earn her bachelor’s degree, a longtime dream and something no one in her family has done.

“It was something no one ever expected me to do, I never expected myself to do,” she said.

As for children, she said she still wants them but that “it won’t be the end of the world if it doesn’t happen.” She loves learning, traveling and living in Denver. “I’m at the point in my life where I could be fulfilled by other things.”

Sabrina Tavernise, Claire Cain Miller, Quoctrung Bui and Robert Gebeloff, "Why American Women Everywhere Are Delaying Motherhood,"New York Times, June 16, 2021, https://www.nytimes.com/2021/06/16/us/declining-birthrate-motherhood.html

PHOENIX — Luz Portillo, the oldest daughter of Mexican immigrants, has many plans. She is studying to be a skin care expert. She has also applied to nursing school. She works full time, too — as a nurse’s aide and doing eyelash extensions, a business she would like to grow.

But one thing she has no plans for anytime soon is a baby.

Ms. Portillo’s mother had her when she was 16. Her father has worked as a landscaper for as long as she can remember. She wants a career and more control over her life.

“I can’t get pregnant, I can’t get pregnant,” she said she tells herself. “I have to have a career and a job. If I don’t, it’s like everything my parents did goes in vain.”

For decades, delaying parenthood was the domain of upper-middle-class Americans, especially in big, coastal cities. Highly educated women put off having a baby until their careers were on track, often until their early 30s. But over the past decade, as more women of all social classes have prioritized education and career, delaying childbearing has become a broad pattern among American women almost everywhere.

The result has been the slowest growth of the American population since the 1930s, and a profound change in American motherhood. Women under 30 have become much less likely to have children. Since 2007, the birthrate for women in their 20s has fallen by 28 percent, and the biggest recent declines have been among unmarried women. The only age groups in which birthrates rose over that period were women in their 30s and 40s — but even those began to decline over the past three years.

“The story here is about young women, whose births are plummeting,” said Caitlin Myers, an economist at Middlebury College who analyzed county-level birth records for The New York Times. “All of a sudden, in the last 10 years, there’s this tremendous transformation.”

A geographic analysis of Professor Myers’s data offers a clue: The birthrate is falling fastest in places with the greatest job growth — where women have more incentive to wait.

Casey Mulligan and E.J. Antoni look at the gross benefits available to unemployed workers, "...A family with two unemployed parents can double up on unemployment benefits, meaning $600 in weekly bonus payments, on top of normal benefits that average about $375 a week for each parent. Add in virtually free health insurance from ObamaCare expansions and free premiums for those who stay on their former employer’s plan, food stamps and $3,000-a-child payments. On top of all that, recipients of government benefits don’t have to pay payroll taxes. People with jobs do. Here are the results from our new study for the Committee to Unleash Prosperity: In 21 states and the District of Columbia, households can receive the wage equivalent of $25 an hour in benefits with no one working. In 19 states, benefits are the equivalent of $100,000 a year in salary for a family of four with two unemployed parents.In all but two of the blue states, the $300 supplemental unemployment insurance benefit plus other welfare can pay more than the wage equivalent of a $15 minimum wage. In the blue states that haven’t suspended the $300 bonus, the average annual unemployment insurance benefit for a family of four with two parents out of work is more than $72,000. Median household income in the U.S. is about $68,000..."

E.J. Antoni and Casey B. Mulligan, "The Pay Is Generous, the Work Nonexistent,"The Wall Street Journal, June 14, 2021, https://www.wsj.com/articles/the-pay-is-generous-the-work-nonexistent-11623709614

The Pay Is Generous, the Work Nonexistent

The latest Labor Department statistics show an all-time record 9.3 million unfilled jobs, even though more than nine million Americans remain unemployed. Alarm bells should be ringing in Washington.

Twenty-five Republican governors have wisely suspended the $300-a-week supplemental unemployment benefits starting this month. But 25 mostly blue-state governors will let the bonus run into September, even with jobs plentiful in nearly every state. Why?

The Biden team and Democrats in Congress were warned repeatedly that the March “stimulus” bill would shrink employment by five million to six million because of the rewards for not working. Three months later the evidence is clear: The stimulus bill stimulated unemployment, not employment.

More than a million jobs are waiting to be filled in the construction and manufacturing sectors, but these industries have gained almost no new employees over the past two months. These are high-paying blue-collar jobs.

When one of us warned on these pages in December of the negative effects of the $300 bonus, critics said the piece exaggerated the financial incentives for not working. Bank of America Global Research issued a highly quoted study finding that unemployment insurance cash benefits typically pay only about $32,000 a year. The California Employment Development estimated benefits of about $31,200 and argued that unemployed workers weren’t staying on the couch.

These analysts are making the same mistake they made after the last recession, except now on a larger scale. Looking only at unemployment-insurance cash, they understate the work vs. welfare trade-off. Washington provides unemployed workers with an array of other subsidies.

A family with two unemployed parents can double up on unemployment benefits, meaning $600 in weekly bonus payments, on top of normal benefits that average about $375 a week for each parent. Add in virtually free health insurance from ObamaCare expansions and free premiums for those who stay on their former employer’s plan, food stamps and $3,000-a-child payments. On top of all that, recipients of government benefits don’t have to pay payroll taxes. People with jobs do.

Here are the results from our new study for the Committee to Unleash Prosperity:

• In 21 states and the District of Columbia, households can receive the wage equivalent of $25 an hour in benefits with no one working.

• In 19 states, benefits are the equivalent of $100,000 a year in salary for a family of four with two unemployed parents.

• In all but two of the blue states, the $300 supplemental unemployment insurance benefit plus other welfare can pay more than the wage equivalent of a $15 minimum wage.

• In the blue states that haven’t suspended the $300 bonus, the average annual unemployment insurance benefit for a family of four with two parents out of work is more than $72,000. Median household income in the U.S. is about $68,000.

To get Americans back to work Congress and President Biden should immediately rescind the $300-a-week supplemental benefit. With the economy getting back to normal, work requirements for all other aid programs should be reinstated. This would restore fairness in the unemployment-insurance system and significantly contribute to the long-term economic health of people who have now been absent from the workforce for as long as 15 months.

"...After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the U.S. economy...."

Before the pandemic, U.S. companies were borrowing heavily at low interest rates. When Covid-19 lockdowns triggered a recession, they didn’t pull back. They borrowed even more and soon paid even less.

After a brief spike, interest rates on corporate debt plummeted to their lowest level on record, bringing a surge in new bonds. Nonfinancial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high, according to Dealogic. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the U.S. economy.

That torrent of inexpensive money has benefited all types of businesses. It helped cruise operators, airlines and movie theaters weather the pandemic by replacing some lost revenue with cash raised from bond sales. It allowed thriving businesses to stock up on cash and to save money by refinancing older debt. And it permitted companies that were struggling before the pandemic to ease the threat of bankruptcy by issuing new long-term debt.

“It’s been surprising that the cost of debt has come down as much as it has,” said Dan Schlanger, chief financial officer of Crown Castle International Corp., a cell tower owner that has been issuing bonds with progressively lower interest rates to fund capital projects and pay off debt. “We’ve enjoyed the period of time we’re in.”

The question now is whether companies have merely delayed a reckoning. Debt-laden companies withstood last year’s recession far better than many had feared. But it was in many ways a unique shock to the economy, more akin to a natural disaster than a typical recession. For all their current enthusiasm, many CFOs and investors acknowledge that businesses could still be punished in a normal downturn that raises borrowing costs for a longer period and does more serious damage to household finances.

In a May report, the Federal Reserve noted that, by one measure, investors had rarely been compensated any less for the risk of holding corporate bonds, even as stock valuations were in line with historical averages. The report concluded that “vulnerabilities arising from business debt remain elevated.”

Some of the biggest borrowers during the pandemic, according to figures from financial-data provider FactSet, have been those hurt most by it. Carnival Corp, the world’s largest cruise operator, had around $33 billion of total debt as of Feb. 28, almost triple what it had near the end of 2019. Boeing Co's total debt more than doubled during the pandemic, to $64 billion, while Delta Air Lines Inc.’s doubled to around $35 billion.

With cruises canceled around the world, raising money early last year wasn’t easy for Carnival. Chief Financial Officer David Bernstein said he spent two weeks in March 2020 to try to put together a bond sale, only for debt investors to balk because the company wasn’t also planning to issue more stock.

It took him another 10 days working nearly around the clock to put together a deal that included a stock offering. In early April last year, Carnival issued $4 billion of secured bonds with an 11.5% interest rate—a level typically associated with businesses with rock-bottom credit ratings—along with $500 million of stock and about $2 billion of convertible bonds.

“Somehow I managed to raise $6.5 billion,” Mr. Bernstein said. “I was amazed.”

From then on, though, as investor demand for corporate debt rebounded, borrowing money got easier. Carnival sold bonds or obtained loans from investors five more times over the next 10 months, finally issuing $3.5 billion of unsecured bonds in February at a 5.75% rate. In April, Mr. Bernstein said Carnival had raised enough money to last until it resumes full operations.

Several factors account for the decline. Low inflation is one. Also, economic growth has trended lower over the decades, limiting how high the Fed can raise rates without tipping the economy into a recession.

During the 2008-09 financial crisis, the Fed cut its benchmark federal-funds rate to near zero for the first time and started buying large quantities of U.S. Treasurys and mortgage-backed securities in an effort to boost the economy.

Investors seeking higher yields subsequently piled into riskier assets, ushering in an era of supersize debt sales.

The pandemic pushed the prevailing trends to extremes. The Fed again cut the federal-funds rate to zero and resumed purchasing Treasurys. It also broke new ground by buying corporate bonds, bolstering investor confidence.

After setting a record last year, overall corporate bond issuance remains robust this year, and higher-risk, speculative-grade bonds are now on pace to set their own record.

For many companies that weren’t thrown into crisis by the pandemic, the booming bond market has provided an opportunity to slash interest expenses.

At the start of 2020, the average investment-grade corporate bond yielded 2.84%, a rough indication of the interest rate companies with solid credit ratings would have to pay on new bonds. At the peak of pandemic fears, it rose to about 4.6%, but by the end of last year it had fallen to an all-time low of 1.74%. Companies rushed to try to lock in those low borrowing costs.

AT&T Inc which as of March 31 had more outstanding debt than any other nonfinancial company, is one such company. In recent months, it announced deals to shed media and pay-TV assets that it said would reduce net debt by more than $50 billion.

It spent much of last year trying to take advantage of the bond boom to reduce interest expenses and push out debt maturities. In one deal, it issued $11 billion of bonds with maturities ranging from 7.5 years to 40.5 years to pay back bonds maturing over the next five years. In April, it said it had reduced its first-quarter interest expense by $150 million from the year-earlier period.

In June of 2020, Crown Castle, the cell tower operator, issued $2.5 billion of new bonds with maturities as long as 30 years, which enabled it to pay down bonds due in this year and next. And this year, it issued more bonds at its lowest ever interest rates.

Mr. Schlanger, the CFO, said the company can use interest savings to increase its profit margin, or it can pass them on to customers, which include the major U.S. wireless carriers. “Anytime we can take advantage of a market like this to either make more money or lower the cost to our customers, we’re more than happy to do so,” he said.

By the end of last year, investors had worked up such an appetite for corporate bonds that they were willing to lend large sums to companies with near rock-bottom triple-C credit ratings. This year, triple-C bond issuance is running 35% above the previous record, according to LCD, a unit of S&P Global Market Intelligence.

Community Health Systems Inc, one of the country’s largest for-profit hospital operators, has been struggling with the challenges of serving patients outside major cities, and with the fallout from a problematic acquisition. At the end of last year, it was poised to burn through more than $600 million of cash in 2021, according to Moody’s Investors Service.

Undeterred, investors have snapped up a series of secured bond offerings from the hospital chain since December, enabling it to both reduce its interest expense and extend its debt maturities.

Chief Financial Officer Kevin Hammons said overall market conditions were a big help, enabling the company to take “a more aggressive approach in doing things quicker than we otherwise may have done.” He also attributed the successful offerings to improved earnings in the second half of last year and progress executing new strategies, which have involved selling underperforming hospitals.

Last month, Moody’s upgraded Community Health’s credit rating to just above its equivalent of a triple-C rating, citing the impact of its recent refinancing deals and improved operating performance.

Not everyone thinks it is good for the economy over the long term for struggling companies to have such an easy time refinancing debt. Torsten Slok, the former chief economist for Deutsche Bank Securities who is now chief economist at the asset-management firm Apollo Global Management, wrote last year that one consequence of persistent low interest rates is that it “keeps more unproductive firms alive, which ultimately lowers the long-run growth rate of the economy.”

Some analysts say investors are willing to accept such low interest rates on corporate bonds not only because of the brightening economic outlook but because of the Fed’s aggressive response to the pandemic, which they think could to be repeated in future recessions.

Others are doubtful that even if the Fed announced that it would buy corporate bonds again, it would provide the same jolt to the market it did last year. They say that the normal risks of debt still apply, and that corporate bond investors could face significant losses in the next economic downturn.

Scott Kimball, a portfolio manager and co-head of U.S. fixed income at BMO Global Asset Management, said he doesn’t expect debt to be a problem in the near term, but that it could start causing headaches for businesses and investors in a few years when companies have to start thinking about refinancing some of the bonds they recently issued. Then, he said, “in the next recession, it’s going to be a major issue.”

One encouraging fact for investors is that many companies didn’t add debt over the past year to buy back stock, increase dividends or otherwise juice returns for shareholders. They borrowed money on an emergency basis, and could be in position to pay down debt once that emergency is over.

Mr. Bernstein, Carnival’s CFO, said the company will reduce its debt in coming years by paying off bonds and loans as they come due, using cash generated from operations. The goal, he said, is to reclaim the same investment-grade ratings that the company had before the pandemic.

Boeing has said it will make debt reduction a priority once its cash flow becomes more normal.

Some companies that borrowed money in the pandemic have already started to pay it back.

Delta has said it expects to return to its investment-grade profile within two years. It paid down a $1.5 billion loan in March and said in April that it would repay $850 million of additional debt by the end of this quarter.

The retailer Target Corp. issued $2.5 billion of bonds in March 2020 when state and local governments were issuing lockdown orders. Its earnings, though, actually improved during the pandemic, and in October, the company paid down roughly $1.8 billion of its bonds before their maturity dates.

Similarly, food distributor Sysco Corp. issued $4 billion of bonds in March of last year to bolster its cash holdings. Since last September, it has reduced its debt by roughly $3 billion, including the early repayment of roughly $700 million of its bonds.

“What we’re seeing is corporations make an active attempt to improve their balance sheets,” said Matt Brill, senior portfolio manager and head of North American investment grade at the asset manager Invesco Ltd. “And as long as we’re seeing that, we’re not going to be concerned.”

Still, he added, “there is certainly an elevated level of debt that needs to be repaid.”

Matt Klein, "The Fed Is Optimistic About the Recovery—and Unsure What That Means for Rates,"Barrons, June 16, 2021, https://www.barrons.com/articles/the-fed-is-optimistic-about-the-recoveryand-unsure-what-that-means-for-rates-51623878339

The Fed Is Optimistic About the Recovery—and Unsure What That Means for Rates

Fed officials are universally bullish about the growth of the U.S. economy over the next few years. They also agree that while inflation will run a bit fast this year, the pace of price increases should quickly slow to the target rate of 2% once pandemic-related distortions fade. That’s an incredibly benign outcome, suggesting substantial scope for recent innovations to boost living standards compared to what had been expected as recently as December 2019.

The easiest way to see this is to focus on the details of the Fed’s summary of economic projections, which are published each quarter and let the world study how each policy maker expects events to unfold under “appropriate monetary policy.” These aren’t forecasts in the normal sense of the word, but instead are signals of what officials want to see happen within bounds determined by their private estimates of their constraints and capabilities.

The key thing to note this time around is that the latest projections are almost unchanged from the ones made in March. Yes, inflation and growth in 2021 are both expected to be a bit faster than before, but everything else is essentially unchanged from three months ago. At the same time, Fed officials, on average, now think that a higher level of interest rates will be necessary to generate those economic outcomes.

One possibility, flagged by Luke Kawa of UBS Asset Management, is that some officials were concerned about downside risks to the economic outlook and public health situation back in March, even if they were generally optimistic about the shape of the postpandemic recovery. Those officials might have supported zero interest rates through 2023 as a hedge, but would want unwind that hedge once the data made it clear that the original baseline forecast was coming to pass.

From this perspective, the level of interest rates under “appropriate monetary policy” hasn’t changed, only the level of uncertainty around the outlook. The apparent consensus earlier in the year would have been a mirage.

It’s also possible that officials are starting to disagree about what’s happening with inflation. In his postmeeting press conference, Chairman Jerome Powell focused on the odds that the recent inflation uptick was due to one-off factors caused by temporary supply disruptions in specific industries as well as an expected normalization of prices that had been depressed during the pandemic. Once those forces dissipate—which may already be happening in some sectors—inflation should quickly return to normal without any need for the Fed or Congress to act.

But others at the Fed may disagree with his analysis. They may instead believe that the U.S. economy has more underlying inflationary momentum—perhaps due to the tightening job market—that needs to be checked by tighter monetary policy. They may be concerned that, without interest rate increases, consumer spending and business investment would grow too quickly and lead to persistently higher price pressures. From this perspective, the level of interest rates necessary for the Fed to achieve its goals would have changed even if the goal itself and officials’ confidence hadn’t budged.

The Fed is ultimately run by a committee. Powell may be the public face and the man who heads meetings—and he has powerful intellectual allies in the form of Vice Chairman Richard Clarida and governor Lael Brainard —but he can’t compel his colleagues to hew to any specific set of policy views. Analysts outside the Fed are vigorously debating what’s going on in the U.S. economy and the appropriate response because the current environment is unusual and because there is a wide range of plausible outcomes. We shouldn’t be surprised that the members of the Federal Open Market Committee are finding themselves in a similar situation even if they all agree on what they want to have happen.