Macro Roundup

“…To give the ftc its due, delineating digital markets is devilishly tricky. Like Facebook, most social-media firms do not charge users, so the typical approach of looking at an industry’s consumer-derived sales is no use. Facebook does have paying customers, firms that buy ads on its platforms, but the extent of that market, too, is hazy. If all American online advertising counts, its share is 25%, according to an estimate by The Economist (see chart). Looking just at social-media advertising it does rise to 60% in America (though globally Facebook’s share is declining).But what qualifies as social media is amorphous, as features and rivals pop up and fizzle….”

Economist Staff, “Is Facebook a monopolist?”The Economist, July 3, 2021, https://www.economist.com/business/2021/07/03/is-facebook-a-monopolist

Is Facebook a monopolist?

At last, it’s happening. Or so big tech’s critics thought. President Joe Biden has named one of their own, Lina Khan, to head the Federal Trade Commission (ftc). A Congressional committee has approved six bills to rein in Alphabet, Amazon, Apple and Facebook. Then, on June 28th, a federal judge provided a heavy dose of realism by summarily dismissing two antitrust cases against Facebook.

The unexpected ruling, which sent Facebook’s market value past $1trn, was a reminder that, in America, the swelling “techlash” may yield meagre results (see chart 1). Judge James Boasberg—appointed by Mr Biden’s former boss, Barack Obama—threw out one of the cases, brought by 46 states, on a technicality. The complaint, which accused Facebook of acquiring nascent rivals, such as Instagram in 2012 and WhatsApp in 2014, to cement its social-networking dominance, was deemed too tardy. More profoundly, the judge found the second case, lodged by the ftc, “legally insufficient”. “It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist,” he wrote.

That indeed seems to be what the ftc expected. It asserted that Facebook has a “dominant share of the market (in excess of 60%)” without explaining what that market is. And it defined “personal social networking” to exclude things like professional networks (LinkedIn) or video-sharing sites (YouTube).

To give the ftc its due, delineating digital markets is devilishly tricky. Like Facebook, most social-media firms do not charge users, so the typical approach of looking at an industry’s consumer-derived sales is no use. Facebook does have paying customers, firms that buy ads on its platforms, but the extent of that market, too, is hazy. If all American online advertising counts, its share is 25%, according to an estimate by The Economist (see chart 2). Looking just at social-media advertising it does rise to 60% in America (though globally Facebook’s share is declining). But what qualifies as social media is amorphous, as features and rivals pop up and fizzle.

The judge conceded that Facebook has market power (“no one who hears the title of the 2010 film ‘The Social Network’ wonders which company it is about”) and he has given the ftc 30 days to show this more precisely. However, he also threw out one of the agency’s core claims. The ftc accused Facebook of stifling competition by blocking rivals from its platform. According to Supreme Court precedents, the judge pointed out, such conduct is legal: monopolists have no “duty to deal”.

That may make sense in the analogue world. Critics like Ms Khan argue that in the digital one, where dominant platforms look a lot like pipe-owning utilities, it amounts to a licence to kill competition. If more cases against big tech stumble—as may happen to those involving Apple and Google—that would lend weight to demands to reform antitrust laws. Even this may not be enough to get any of the six bills, or anything like them, passed by the gridlocked Senate. Despite a bipartisan consensus in Washington that big tech is too powerful, Democrats and Republicans are unlikely to agree on the details of what to do about it.

The Economiston Europe's anemic economic performance relative to the United States, "...In recent decades companies such as Nokia, Nestlé or bp have been among the world’s ten biggest firms by market capitalisation. Now only on occasion does Europe have a firm in the top 20 globally. In 2000 nearly a third of the combined value of the world’s 1,000 biggest listed firms was in Europe, and a quarter of their profits. In just 20 years those figures have fallen by almost half.... At the start of the 21st century 41 of the world’s 100 most valuable companies were based in Europe (including Britain and Switzerland but excluding Russia and Turkey). Today only 15 are...American firms have reinforced their position at the vanguard of global business. European ones, alongside those from Japan, have not. In 2000 Europe had a share of corporate wealth commensurate with its roughly one-third of the world economy. That is no longer true...In 2000 the 100 biggest firms in Europe were worth $4.6trn, rising to $8.9trn now. America’s equivalent companies started at $7.4trn but are now worth $26trn. (China’s top 100 firms are worth $8.8trn....In the past 20 years, in absolute terms Europe has added as much additional economic output as America—roughly $10trn each. (China added $14trn by growing at a faster rate but from a smaller base.)That is partly because of Europe’s larger population. European gdp per head is about two-thirds that of America...."

In 1984 a besuited 20-something American executive on a visit to France offered Europeans a few tips for corporate success. Entrepreneurs needed to be given a second chance if they failed and government bureaucrats made for lousy investors, he told a television interviewer. His advice was sage. But European companies ruled the global corporate roost alongside those of America and, occasionally, Japan. Why should they take advice from this uppity Californian newcomer?

Nearly four decades later the company founded by that young upstart, Steve Jobs, is worth more than the 30 firms in the German blue-chip dax index combined. Its value is not far off that of all 40 companies in France’s cac index. Apple’s success has been notable, but it is the decline of corporate Europe that is truly striking. At the start of the 21st century 41 of the world’s 100 most valuable companies were based in Europe (including Britain and Switzerland but excluding Russia and Turkey). Today only 15 are (see chart 1).

Some of Europe's lost stature is down to the rise of China. But American firms have reinforced their position at the vanguard of global business. European ones, alongside those from Japan, have not. In 2000 Europe had a share of corporate wealth commensurate with its roughly one-third of the world economy. That is no longer true (see chart 2).

Plenty of European companies still make consumers swoon. lvmh of France flogs Louis Vuitton handbags from Beijing to Buenos Aires; German cars and Swiss pharmaceuticals are sought-after around the world; and homes are stocked with products made by Unilever, an Anglo-Dutch giant, and ikea, a Swedish forest-feller. But look at who dominates the global corporate economy, and Europe’s geopolitical rivals now prevail.

When it comes to big business, America, the spiritual home of free-market capitalism, has been on top for decades. It is the ascent of Asia that has rejigged the global corporate landscape. China’s rapid economic growth has spawned corporate titans to match. Over 160 of the world’s 1,000 most valuable firms are now Chinese, a fourfold rise in two decades.

Ne me quitte pas

Assuming that Chinese firms would have gate-crashed the Fortune Global 500, which ranks the world’s biggest companies by revenue, in relative terms it was inevitable that some Western firms would be nudged out of the global elite. That left European firms vying with American ones to stay dominant. It is in this tussle that Europe has fallen by the wayside. In 2000 the 100 biggest firms in Europe were worth $4.6trn, rising to $8.9trn now. America’s equivalent companies started at $7.4trn but are now worth $26trn. (China’s top 100 firms are worth $8.8trn.)

How did European companies fall behind their American competitors? The first reason is that its firms seem to have been outmanaged. Look at firms competing in the same sector over the past 20 years, and incumbent American companies more often than not went on to churn out bigger profits and are better positioned for future success than their European counterparts.

There are many exceptions to this rule: Siemens of Germany has outshone its industrial rival General Electric, for example, and Airbus, based in France, has had fewer problems of late putting jets together than Boeing, its American foe. But by and large it has been better to bet on Nike of America over Adidas of Germany; JPMorgan Chase in New York over Credit Suisse in Zurich, or America’s Walmart over France’s Carrefour. Their advantage in terms of profits and sales growth is often small, but compounds over time.

A second reason Europe fell behind in recent decades is that its biggest firms are in the wrong industries. The sectors European firms dominated 20 years ago, such as insurance or telecoms, have grown at a glacial pace. Even if European firms did well, as many did, they mattered less as the world moved on. America, by contrast, had already made significant inroads into software and e-commerce, industries that would soon redefine the global economy and generate trillion-dollar valuations.

The third, and most striking, reason Europe has fallen behind is the lack of newly created firms in its blue-chip indices. Many of the biggest companies in America, such as Amazon, Netflix, Tesla or Facebook, are young enough to be run by their founders. In Europe old names prevail.

Of the world’s 142 listed firms worth over $100bn, 43 were set up from scratch in the past half-century, 27 in America and ten in China. Only one was in Europe: sap, a German software group founded in 1972. Half of Europe’s richest ten billionaires inherited fortunes spawned long ago; in America nine of the top ten are wealthy solely because of companies they founded.

Many—but by no means all—of the American newcomers are in tech. That has led policymakers and business leaders in Europe to make light of the problem. The failure by France or Germany to build big new firms is regrettable, they concede, but America has merely stolen a march in the consumer-internet realm. Silicon Valley was the right place to be at the right time to build this new generation of firms: a felicitous nexus of universities and research institutes, venture capital and America’s consumer-first reflexes. When that bubble bursts, new business models will emerge that Europe will be ready to seize.

It’s more fun to compute

In fact, the absence of European tech giants is symptomatic of an entrepreneurial deficiency that transcends the world of apps and clicks. America’s nous at creating new companies—and Europe’s failure to match it—extends beyond Silicon Valley, argues Thomas Philippon of New York University.

A global chain of cafés might have been expected to hail from Italy, home of the espresso and barista. Instead Starbucks has overrun the world, despite America’s reputation for insipid coffee. A green car giant should have emerged from Europe, which has a proud engineering tradition and is at the forefront of environmental regulation. Yet it is an American newcomer, Tesla, that is now worth roughly as much as every other American and European carmaker combined. Why could Britain’s or Switzerland’s storied financiers not have created an asset-management giant to dominate the markets? Today it is BlackRock, set up in 1988, which manages $9trn of global investments from New York.

Each of these has found success in its own way. But a combination of factors helped propel them to global corporate superstardom. The ability to raise ample capital, from private investors to large pension funds, is a recurring theme in America that is all too often missing in Europe. So too is the belief that a company that develops a better product will, eventually, displace incumbents, however powerful.

The balance is unlikely to shift in Europe’s favour any time soon. The pipeline to become the world’s next trillion-dollar company is stuffed with firms from America and China, not Britain or Spain. According to PitchBook, a data provider, in the past decade venture capitalists have backed 661 companies that went on to be worth over $1bn. Only 78 of these “unicorns” are in Europe, worth 8% of the 661 firms’ over-$2.5trn total.

Disentangling the cause of Europe’s corporate malaise from its consequences is tricky. One reason frequently cited is the economy: how could European companies be expected to do well when the European economy fared so poorly since 2000? And indeed its share of global gdp has trended down (see chart 3) as emerging markets have grown faster. But that offers only a partial explanation.

Looking at European gdp as a whole assumes firms there have access to the entire economic zone. Too often they do not. In theory the eu offers its firms and citizens a “single market” stretching across much of the continent (though no longer to Britain, one of the biggest economies). In practice it is a part-built edifice. It is still fiddly for a bank in Portugal to offer services in Finland—much harder than for a Californian bank to expand to Texas.

Beyond linguistic and cultural differences, legal complexities often get in the way. “When companies think of their home market, they usually think of their home country, not of Europe,” says Carl-Henric Svanberg, chairman of Volvo, a Swedish lorry maker, and of the European Round Table for Industry, which represents large companies.

These internal barriers mean Europe has many smaller firms operating at national, not continental, scale. Each country tends to have its own banks, utilities, airlines and supermarkets. (Europe has over 100 mobile operators, compared with a handful in America or China.) These lack the economies of scale and opportunities to grow quickly enjoyed by firms plying the American or Chinese markets.

In the absence of easy opportunities at home, European firms have expanded overseas more zealously than their American counterparts. Firms in richer countries in Europe, the source of most of its multinationals, now generate over half their income elsewhere, up from just over a quarter in 1997, according to Morgan Stanley, a bank. That includes around a third from poor countries; large German firms now sell more to emerging markets than they do domestically. American groups generate over 70% of their income locally. That can make managing European companies a case of constantly putting out fires in far-flung subsidiaries.

At home, European companies complain that they face a less favourable business environment. Europe’s brand of capitalism is often softened by a stronger role for unions. That has its allure, as workers toil shorter hours and enjoy greater job security. It also means higher labour costs. The political protection afforded businesses—from hostile takeovers, say, which are rare in mainland Europe—is one reason their financial results are underwhelming.

Europe’s smaller firms now find themselves competing against global behemoths with inbuilt advantages. Large firms can afford to buy and try new technology, borrow at cheaper rates and absorb fixed costs more efficiently. They tend to spend relatively more on research and development. The dearth of big companies helps explain why European spending on research, at 2.1% of gdp, is below the average of the oecd, a group of mostly rich nations.

Que reste-t-il de nos amours?

Even as Europe has fallen out of business league tables, it has continued to play a role as a global regulator. Sometimes that has seemed its main contribution to the global business landscape: look at rules on privacy or combating climate change. Because standards set by the European Commission are often the most stringent in the world, and businesses want to build a single set of products for all markets globally, they often end up applying across the world. But eu rulemaking that applies in effect only to foreign firms—as does much of the tech regulation devised in Brussels—has increasingly been attacked as covert protectionism. Currently a rulemaker, Europe may risk losing that position.

European policymakers are well aware of Europe’s relative decline. They point to mitigating factors. Some corporate giants in America profit from areas which in Europe are the responsibility of the state—running hospitals or railways. Others such as airlines and mobile carriers are monopolies that bilk customers. And can profits or market capitalisation truly reflect the value of a company to society?

There has also been a return to European dirigiste reflexes. If the private sector has proved unable to grow firms that are a match for global titans, perhaps politicians can help? More overt intervention by the public sector in the economy—both helping European firms and stymieing their competitors—was increasing before covid-19. The pandemic has turbocharged it.

Under the banner of promoting Europe’s “strategic autonomy”, rules preventing takeovers of some European firms by foreign rivals have been bolstered. Proposals are being developed to hamper foreign companies backed by non-eu governments who wish to do business in Europe—a measure plainly aimed at China. Talk has grown of a “carbon border tax” to ensure European firms are not at a disadvantage when competing against challengers from places with less ambitious climate-protection policies.

France and Germany are among those who have demanded the eu stop blocking favoured mergers of big European firms into pan-continental champions, despite the scepticism of antitrust regulators. Politicians are willing to shovel public money into industry in the hope of guiding its priorities—the idea of “picking winners”, popular in the 1970s, has made a comeback. Myriad state-backed investments are happening in green technologies. France has revived the position of “high commissioner for planning”. Across the continent public funds are being invested in everything from startups to large listed firms.

Hast du etwas Zeit für mich?

Europe’s boosters see plenty of corporate life left there. From utilities to power majors, firms in Europe have gone further than others in greening themselves. Those in other parts of the world will have to follow suit at some point. European universities remain world-class. But Europe also has unique challenges. One is demography: the old continent is living up to its name. There are more over-65s than under-15s nowadays and populists across the eu make it hard to boost immigration.

That leaves few levers to pull to help Europe’s firms compete globally. The most obvious, deepening the single market, has fallen off the political agenda. Helping law firms and software designers sell across the continent seamlessly lacks the pizzazz of picking industrial winners. But stiffening competition in Europe is key to creating firms fit for corporate glory. The path to global business begins at home.

Gregor Macdonald, “…The US has a much higher share of low-paying jobs than the rest of the OECD, potentially complicating the country’s efforts to pursue greater public investment. The observation comes from economist Jens Nordvig, of Exante Data. According to the OECD, nearly 24% of total jobs in the US are low paying, against an OECD average of 15.3%.That means long-timeline infrastructure projects may be challenged to find enough skilled labor, given that the US is carrying such a large load of unskilled jobs—mostly in food services. Looked at another way, however, this is precisely why the US should pursue broad, long term public investment programs. These are far more typical in the rest of the OECD, and undoubtedly account for part of the wage differentials. To put this bluntly, the US is overinvested in fast food production, and the strip mall economy more generally. Wage growth can never emanate from that segment of the economy, because it produces few useful increases in productivity. By contrast, cleaning out the pipes, so to speak, in the US water, transit, educational, and grid systems would justifiably throw off better wages as these efforts would lead to far better productivity and efficiency. America is discovering right now that workers are not keen to return to line-cook jobs at national burger chains. Maybe, just maybe, there’s a real signal there, worthy of our attention.To see a dynamic version of the chart below, just click on it….”

Work Matters

Oil prices remain quite firm, even as the international agencies gently dial back their demand forecasts. The price strength makes sense however, especially as we turn to the second half of the year. Travel is likely to accelerate, industrial applications will also strengthen, and commuting will be resurrected this autumn. The crude oil futures market cannot afford to misprice Q4, which is historically quite strong.

All this said, global demand is not on course (this year, at least) to match the 2019 highs around 100 mbpd. Thus, we are once again facing an oil market that’s challenging to describe. It requires some flexibility to understand that global re-openings means a fast demand recovery, while at the same time absorbing the likelihood that demand has finally peaked. More challenging still: envisioning a demand landscape that carries onward for years, oscillating around a flatline.

As far as the EIA is concerned, US petrol demand has indeed peaked. They said so once again in their recent STEO report. Next year’s demand will still not reach the 2019 highs. Indeed, US road fuel demand peaked years ago. But note the echo: while it will never sustainably rise again, it’s only fallen a little.

Two factors bear watching for 2022. First, the global economy is likely to be quite strong next year as it gathers momentum. This will of course put additional upward pressure on oil demand. Indeed, the IEA—which has held its 2021 demand recovery forecast to a bounce of 5.4 mbpd—now sees 2022 total demand matching the 2019 high near/at 100 mbpd. But strength in the economy will also mean the EV adoption curve will accelerate, avoiding (for the first time perhaps on a global basis) a significant percentage of ICE vehicles that would otherwise have hit the road.

The second factor will come through workplace and commuting changes, which are now likely to be sustained. Here, we should probably “fade” the idea that everyone will be offered new home or office flexibility. The percentage of workers and employers that go the distance on new workplace schedules is likely to be small. But it’s not zero.

A just published paper from the University of Chicago, for example, showed that hours expended by workers during last year’s work-from-home phase actually increased, while productivity decreased. At first glance, this would appear to spell doom for WFH prospects—until you look into the details. Productivity losses were weighted heavily towards those workers with children, while single workers fared better. One conclusion is obvious: children will be back at school fully in the years ahead, so any understandable productivity loss from having children at home will ameliorate. Work from home is a concept that’s now out in the open, and will not be put back so easily.

When Facebook announced last week it would be extending workplace flexibility to all employees, that was probably the loudest signal yet that WFH options are here to stay. As we learned during the pandemic, many global workers today wake at home, travel a long distance to work, only to sit down again in front of a computer terminal. Moreover, we have decades of data showing that commuting itself is a deadening experience that often interweaves itself into overall job dissatisfaction. WFH, even on a marginal basis, promises to change these dynamics for the better. But more important still, future WFH represents another sizable hit to global oil demand, helping to kill off another pathway to growth, and the risk that global demand exceeds the 2019 peak for any length of time.

The drought in the western United States has probably been going on for twenty years, and may actually be a mega-drought, comparable to one last seen over 500 years ago. That’s the conclusion of a study released last year, which used 1200 years of tree-ring data. More sobering: droughts build strength over time, making them harder to break out of, or terminate. One immediate concern is how much the west depends on hydropower. As other analysts have noted, rising temperatures, dry conditions, and falling water levels tend to drive responses that include greater use of air conditioning, and greater demand for power—which often leads to rising natural gas consumption. The past several years have also seen fire and smoke events that have blanketed large areas, not just in California, but Oregon and Washington. And not just for a day or two, but for weeks. The New York Times also covered the story this week. Here’s a graphic from their piece.

To see a dynamic version of the chart below, just click on it.

The real news however is the market share growth of NEV, now coming into clearer view. As we have observed, the 5% level tends to be a take-off point in the adoption of myriad technologies and in 2020 NEV finally notched a 5.4% share, after stalling around 4.6% the two years prior. Now, with the total Chinese vehicle market on pace to sell about 26 million units in 2021, NEV are on course to hit an 8.8% share of the market. Thus, NEV have now reached their overt tipping point, just as they’ve done in the California market, and the European market.

In the chart below, note the figures for ICE sales: down over 4 million units since the highs of 2017.

Lordstown Motors burned through a lot of cash, and has now warned it may not endure as a going concern. Investors should have been savvy enough to pick through last year’s oeur d'oeuvres tray of SPACs, choosing only those names that had earnings or sufficient capital. Chargepoint (CHPT) and STEM (STEM) are two examples of post-SPAC companies moving forward now with solid growth. Nikola (NKLA) and Lordstown (RIDE) offer the opposing case. It is frankly amazing that NKLA still trades above pennies per share. Lordstown, meanwhile, is discovering how difficult it can be to undertake a hardware start-up. Most embarrassing is that within a 60 day period, Lordstown provided radically different updates to investors on its cash position. Current status: “we don’t have enough capital to start producing.”

Bloomberg NEF released its global EV outlook, and raised its EV adoption guidance by the largest amount in five years. BNEF now sees global EV passenger cars rising from their 4% market share in 2020 (3.1 million units), to a 16% market share by 2025 (14 million units). Well, that’s a quadrupling of market share and a nearly 5X advance of units sold. Not bad. BNEF notes that divergences will be large, of course, between regions and picks China and Europe as market leaders—at least until 2025.

For a fleet perspective, which aggregates on-road EV, BNEF helpfully lays out that over 50 million passenger cars, and nearly 6 million EV buses and commercial vehicles, will be on-road by 2025. On an absolute basis, however, what’s quite astounding are the millions of two and three wheeled EV due to accumulate in the years ahead. The world will have added nearly another 75 million of these vehicle types by 2025. That represents a very large hit to oil growth, indeed. | Electric Vehicle Outlook 2021.

After falling 11% in 2020 energy related emissions will recover by about 6% this year, according to the EIA’s latest forecast. As for next year, EIA estimates emissions will advance by another 2%. This won’t take emissions back to the 2019 highs, but the recovery is fairly strong. The last few years have seen reasonably good progress but rapid closures of coal fired power plants and the plateau in US road fuel demand have mostly accounted for the emissions decline. The challenge now, however, is to put together fresh new blocks of decarbonization. As The Gregor Letter has pointed out, the US is simply not going to open up fresh decarb gains unless it does something more forceful about the existing auto fleet. | The chart below is complete through 2020.

Ruth Igielnik, Scott Keeter and Hannah Hartig, "Behind Biden’s 2020 Victory," Pew Research Center, June 30, 2021, https://www.pewresearch.org/politics/2021/06/30/behind-bidens-2020-victory/

I work for the county out on ninety five, All day I hold a red flag and watch the traffic pass me by, "...One of the few things that Democrats and Republicans agree on is that spending billions of dollars on America’s roads would boost productivity and the U.S. economy’s growth prospects. Economists aren’t so sure. A wide body of research focused on the effects of highway spending suggests that major new investment in U.S. roads would generate little, if any, long-term economic gain....the U.S. already has an extensive system of roads, so building more wouldn’t add much to productivity…That’s not to say that billions of dollars in new government road spending wouldn’t boost growth in the short term. But the gains would come about as the result of the construction, and would dissipate once all the projects are completed. In a 2012 paper, San Francisco Fed economists Sylvain Leduc and Daniel Wilson found that new spending on roads can boost an area’s economy at two specific times: immediately after the new spending has been announced, and six to eight years later, when construction is under way. Beyond 10 years, there were no economic benefits to infrastructure spending, they found. Moreover, the immediate effect applies only during recessions, they wrote. It’s unclear whether the U.S. would see that short-term boost now that the economy is expanding rapidly...."

David Harrison, "Why More Highway Spending Won’t Rev Up the Economy,"Wall Street Journal, July 4, 2021, https://www.wsj.com/articles/why-more-highway-spending-wont-rev-up-the-economy-11625403600

Why More Highway Spending Won’t Rev Up the Economy

One of the few things that Democrats and Republicans agree on is that spending billions of dollars on America’s roads would boost productivity and the U.S. economy’s growth prospects.

Economists aren’t so sure. A wide body of research focused on the effects of highway spending suggests that major new investment in U.S. roads would generate little, if any, long-term economic gain.

While the projects would spur hiring and spending temporarily, both when they are announced and under way, they aren’t likely to raise the economy’s productivity and, in turn, its overall growth potential in a lasting way, many researchers find.

That is because the U.S. already has an extensive system of roads, so building more wouldn’t add much to productivity, economists say.

New spending for roads accounts for the largest single share—roughly 19%—of the $579 billion in new spending that the White House and a group of lawmakers have agreed to. Both Democrats and Republicans say that money would raise the economy’s productivity, defined as the level of output per hour worked.

President Biden last week touted the agreement as delivering “higher productivity and higher growth for our economy over the long run.”

Sen. Rob Portman, an Ohio Republican who helped craft the deal, said last month that the plan would “increase our productivity as a country.”

Development of the U.S. interstate highway system between the 1950s and 1970s—currently 47,000 miles of multilane highways stretching coast to coast—did make the economy much more productive, John Fernald, an economist at the Federal Reserve Bank of San Francisco, wrote in a 1999 paper.

The system meant a cross-country trip that used to take months could be accomplished in days. Businesses gained access to new suppliers and new customers. Cities were able to specialize in certain industries. International trade opened up. By one estimate, the U.S. economy would be 3.9% smaller today without the interstate highway system.

But those gains all came about when the highways were built. By now, the gains have been reaped.

“Building the interstate highway system was enormously productive,” Mr. Fernald said. “That does not imply that building a second one would be equally productive.”

Other research has reached similar conclusions.

A group of economists in Spain studying that country’s infrastructure spending between 1964 and 1991 concluded that the investment earlier in the period produced greater economic gains than investments later, when much of the infrastructure was already in place.

Researchers have also found that in developed countries, whatever local benefits come from highway improvements come at the expense of other locations. In other words, road spending reallocates the pie but doesn’t make it bigger.

Mr. Duranton and two co-authors, Geetika Nagpal and Matthew Turner, both of Brown University, suggested in a paper last year that new investments “lead to a displacement of economic activity while net growth effects are limited.”

That’s not to say that billions of dollars in new government road spending wouldn’t boost growth in the short term. But the gains would come about as the result of the construction, and would dissipate once all the projects are completed.

In a 2012 paper, San Francisco Fed economists Sylvain Leduc and Daniel Wilson found that new spending on roads can boost an area’s economy at two specific times: immediately after the new spending has been announced, and six to eight years later, when construction is under way. Beyond 10 years, there were no economic benefits to infrastructure spending, they found.

Moreover, the immediate effect applies only during recessions, they wrote. It’s unclear whether the U.S. would see that short-term boost now that the economy is expanding rapidly.

Some of the spending lawmakers are considering could ease congestion. But those improvements would also be temporary. Adding more highway lanes to ease congestion tends to encourage more people to use those lanes, making them congested once more, a phenomenon known as “induced demand.”

A 2011 paper by Mr. Duranton and Mr. Turner found that areas that added road miles saw a proportional increase in driving, resulting in the same overall traffic levels.

Even if long-term benefits are limited, there is still a case to be made for spending money on roads, economists say. Filling potholes could provide a more comfortable driving experience, for instance.

“The more comfortable ride is getting you the improved quality of life but it’s not necessarily adding tons of private sector productivity,” Mr. Fernald said.

New note from Michael Mauboussin highlight the impact of intangible assets, intangible intensive firms grow faster than their tangible counterparts but also face a greater risk of being overtaken by their competitors. Implying a higher standard deviation in the distribution of growth rates for intangible-based versus tangible-based industries.

Implication for base rates is the past distributions are not prologue given the impact of intangibles.

"...suggests two hypotheses that we can test. The first is that intangible-based businesses can grow faster than what the base rate data show...the right tail of the distribution of growth rates is extending outward from the average. Amazon’s results provide anecdotal evidence for this. The second is that we should observe greater variance in the distribution of growth rates for intangible-based businesses. That means that the left tail of the distribution of growth rates is also spreading further from the average. BlackBerry’s 26.7 percent average annual revenue decline in the past decade through February 2021 is a case in point....Companies grow by generating a return on investment. The nature of investment has changed markedly in recent decades, from one dominated by tangible assets to one mostly in the form of intangible assets. Intangible assets have some characteristics that distinguish them from tangible assets, including greater potential economies of scale and higher risk of obsolescence. The good news is that intangible-intensive companies can grow faster than their tangible counterparts. The bad news is they can also become irrelevant and shrink fast. As a consequence, we should see two effects in the data: higher growth and more dispersion in the outcomes. Our analysis of the results from companies in the Russell 3000 from 1984-2020 reveals both of these. The base rate of sales growth is getting stretched from the average in both the positive and negative direction. There are two main lessons for investors. First, it is important to be mindful of the potential shift in the base rate as the result of the rise of intangibles. Second, skillful investors may be able to identify the companies that will grow faster than expected, hence providing the potential for attractive returns...."

Evidence: “.. We calculated the median sales growth rate for companies in each of those categories using the constituents of the Russell 3000 from 1984-2020. We also examined the standard deviation, a measure of the dispersion, of the distributions. Exhibit 1 showsthe results for the full sample.

Michael Mauboussin and Dan Callahan, "The Impact of Intangibles on Base Rates," Morgan Stanley, June 23, 2021,
https://www.morganstanley.com/im/publication/insights/articles/article_theimpactofintangiblesonbaserates.pdf

The sales growth rates, measured either as the median or average, consistently go from highest for companies that are most intangible-asset intentive to lowest for those that are least intensive. While the short-term numbers are noisy, the relationship holds true over 1-, 3-, 5-, and 10-year periods. Consider the median compound annual sales growth rates over five-year periods. Growth was 10.4 percent for healthcare, 7.9 percent for technology, 6.0 percent for consumer, and 5.0 percent for manufacturing. The median across all companies was 6.5 percent. This supports the first hypothesis. The standard deviation of the growth rates follows the same pattern. Where intangible asset intensity is high, the standard deviation is also high. Assuming these distributions are normally distributed, an imperfect but illustrative assumption, about two-thirds of healthcare companies had 5-year sales growth rates between -18.0 and 43.2 percent. The comparable figures for manufacturing companies were -7.0 and 19.2 percent. This is consistent with the second thesis....One silver lining was the ability of digital companies, built largely on intangible assets, to thrive in the chaos. We examined the sales growth rates of the companies in the Russell 1000, the largest one thousand companies in the U.S., to see which companies fared well. Healthcare and technology, the industries with the highest intangible asset intensity, represented over 60 percent of the top 20, 50, and 100 growers despite being only 29 percent of the universe (see exhibit 2)...."

John Cogan and Daniel Heil report on their Research on the impact of Biden's planned expansion of the welfare state, "...the American Families Plan would add 21 million Americans to the list of federal entitlement beneficiaries. With these additional recipients,57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls. The share of households receiving assistance would be higher in some areas of the U.S. than in others. This is primarily because federal eligibility for many of the American Families Plan’s programs, particularly its refundable tax credits, don’t account for geographical differences in incomes and living costs. We estimate that most of the Biden plan’s entitlement benefits would go to middle- and upper-income households. Households in the upper half of the nonelderly income distribution would receive 40% of the new entitlement benefits...."

John F. Cogan and Daniel L. Heil,"Biden’s Plan for an Entitlement Society,"Wall Street Journal, June 28, 2021, https://www.wsj.com/articles/bidens-plan-for-an-entitlement-society-11624918494

Biden’s Plan for an Entitlement Society

The federal government’s system of entitlements is the largest money-shuffling machine in human history, and President Biden intends to make it a lot bigger. His American Families Plan—which he recently attempted to tie to a bipartisan infrastructure deal—proposes to extend the reach of federal entitlements to 21 million additional Americans, the largest expansion since Lyndon B. Johnson’s Great Society.

For the first time in U.S. history—except possibly for the pandemic years 2020 and 2021, for which we don’t yet have data—more than half of working-age households would be on the entitlement rolls if the plan were enacted in its current form. Contrary to Mr. Biden’s assertion that his plan “doesn’t add a single penny to our deficits,” his plan would add more than $1 trillion to the national debt over the next decade.

The American Families Plan proposes several new entitlement programs. One promises students the government will pick up the entire cost of community-college tuition; another promises families earning 1.5 times their state’s median income that Washington will cover all daycare expenses above 7% of family income for children under 5; still another promises workers up to 12 weeks of federally financed wage subsidies to take time off to care for newborns or sick family members.

The American Families Plan would follow longstanding government practice and make temporary emergency programs permanent. In March, Congress enacted the American Rescue Plan, which expanded Affordable Care Act subsidies and refundable tax credits for child care and low-wage workers. The expansions were sold as temporary measures to combat the effects of pandemic lockdowns. A month later, Mr. Biden asked Congress to make them permanent.

These programs extend eligibility for benefits high up the income ladder. Two-parent households with two preschool-age children and incomes up to $130,000 would qualify for federal cash assistance for daycare. Single parents with two preschoolers and incomes up to $113,000 would qualify. And some families with incomes over $200,000 would be eligible for health-insurance subsidies. Other parts of the plan, such as paid leave and free community college, have no income limits at all.

Our analysis shows that the American Families Plan would add 21 million Americans to the list of federal entitlement beneficiaries. With these additional recipients, 57% of all married-couple children would receive federal entitlement benefits, and more than 80% of single-parent households would be on the entitlement rolls.

The share of households receiving assistance would be higher in some areas of the U.S. than in others. This is primarily because federal eligibility for many of the American Families Plan’s programs, particularly its refundable tax credits, don’t account for geographical differences in incomes and living costs.

We estimate that most of the Biden plan’s entitlement benefits would go to middle- and upper-income households. Households in the upper half of the nonelderly income distribution would receive 40% of the new entitlement benefits.

Our estimates are for a full-employment economy, not one in recession. So the percentage of U.S. households receiving benefits from at least one federal entitlement program would only increase if the U.S. economy were to falter.

Where will the money come from to finance this largess? Mr. Biden claims that taxes on the rich will entirely finance his American Families Plan. But his proposed revenue heist falls woefully short of the plan’s true cost. Presidential budgets for years have been littered with gimmicks to hide their true expense. The American Families Plan is no exception.

The plan proposes that the $100 billion annual expansion of the child tax credit will suddenly expire at the end of 2025, reducing the tax credit from a high of $3,600 to $1,000. All other programs in the plan are assumed to be permanent. Why only phase out the child tax credit? The obvious answer: Its expiration reduces the 10-year estimated cost by $465 billion.

The gimmicks don’t stop there. The Biden administration proposes to use more than $200 billion in new business taxes to finance the American Families Plan. Amazingly, it also proposes to use that same money to finance future Medicare spending.

Properly accounting for these gimmicks, and the plan’s overly optimistic revenue assumptions from its Internal Revenue Service compliance initiatives, pushes the American Families Plan deficit to more than $1 trillion during the next 10 years. The president claims that his plan is part of a budget that is “putting the nation on a fiscally responsible path.” Hardly. If passed, it would accelerate the pace of entitlement expansions that began in the late 1960s. Improving the safety net is one thing, but spending more than $1 trillion on mainly middle-class entitlements and financing this expenditure with debt robs future generations while enriching today’s.

John Cogan analysis of the American Families Plan, "...Overall, the President’s plan would add 6.2 million households, containing 21.3 million persons, to the federal entitlement benefit rolls. The increase would lift the percentage of all non-elderly U.S. households that receive benefits from at least one federal entitlement to over 50 percent. This would be the first time in U.S. history that a majority of working age households are federal entitlement recipients, except perhaps for the pandemic years 2020 and 2021 for which we are yet to have data. Over 40 percent of the plan’s new entitlement benefits would go to households in the top half of the income distribution...."