Macro Roundup

Paul Krugman argues that Medicare financing is on stable ground as health spending is leveling off: “since 2010 we’ve already done quite a lot to ‘bend the curve.’”

Description automatically generated “…Historically health spending has risen faster than GDP. Excess cost growth has slowed considerably since around 2010 the leveling off is unmistakable. Here’s national health spending as a percent of G.D.P. C.B.O. projections now show social insurance spending as a percentage of G.D.P. eventually rising by about 5 points, which is still a lot but not unimaginably large. And here’s the thing: Half of that is still the assumed rise in health care costs. Since 2010 we’ve already done quite a lot to “bend the curve.” It’s not at all hard to imagine that improving the incentives to focus on medically effective care could limit cost growth to well below what the C.B.O. is projecting, even now….”

Paul Krugman, “Why Medicare and Social Security Are Sustainable,” Krugman Wonks Out, February 21, 2023, https://www.nytimes.com/2023/02/21/opinion/medicare-social-security.html

Why Medicare and Social Security Are Sustainable

The G.O.P. response to President Biden’s truthful statement that some Republicans want to sunset Medicare and Social Security has been highly gratifying. In other words, the party has reacted with sheer panic — plus a startling lack of message discipline, with both Mike Pence and Nikki Haley saying that actually, yes, they do want to privatize or “reform” Social Security, which is code for gutting it.

Now Republicans are talking about slashing “woke” programs like Medicaid and food stamps. It’s going to be fun when the party realizes who depends on these programs and how popular Medicaid, in particular, is even among its own voters.

The press’s response to Biden’s remarks has, however, been less gratifying. I’ve seen numerous declarations from mainstream media that of course Medicare and Social Security can’t be sustained in their present form. And not just in the opinion pages: There’s been at least some reversion to the early 2010s practice of including anti-social-insurance editorializing in what are supposed to be straight news reports, with highly disputable claims about these programs’ futures presented as simple facts.

So let me try to set the record straight. Yes, our major social programs are on a trajectory that will cause them to cost more in the future than they do today. But how we deal with that trajectory is a choice, and the solution need not involve benefit cuts.

A good starting point on all these issues is the Congressional Budget Office report on the long-term budget outlook — a report issued every year, with the most recent report released in July. (The numbers were updated this month, but the basic picture hasn’t changed.) The C.B.O. does excellent work, without a policy agenda, and is an extremely useful resource.

The current report offers a very clear depiction of both the budget challenges facing our major social insurance programs and the sources of those challenges. Here’s my favorite figure, showing projected changes in spending over the next 30 years:

A lot of assumptions But the budget office is not necessarily always right — in fact, the ways in which it has proved wrong in the past are highly illuminating. To put this chart in context, there’s a widespread narrative to the effect that Medicare and Social Security are unsustainable because they won’t be able to handle the mass retirement of baby boomers. But as you can see right away, only about half the projected rise in spending is the result of population aging. The rest comes from the assumption — and that’s all it is, an assumption — that medical costs will rise faster than gross domestic product.

Before I get there, a word about demography. You might think that the projected aging is all about the baby boomers. But the baby boom is generally considered to have ended in 1964. So the last of us — yes, I’m one of them — will hit 65 in 2029, just six years from now. Most baby boomers are already there.

So why does the C.B.O. project continuing budget pressure from aging? Because it assumes that life expectancy, specifically life expectancy at age 65, will keep rising. That has certainly been true in the past, but given America’s mortality problems, I’m not sure that it’s safe to assume this trend will continue at past rates.

Still, let’s grant the aging bit. What about “additional cost growth” in health care?

Well, historically health spending has risen faster than G.D.P. — largely, we think, because doctors can now treat many more things than in the past, and this effect has outpaced cost savings from improved technology. But excess cost growth has slowed considerably since around 2010 — perhaps in part because of cost-reduction aspects of the Affordable Care Act. In any case, the leveling off is unmistakable. Here’s national health spending as a percent of G.D.P.:

Something went right around 2010 This health-cost slowdown has, as it should, affected budget projections. Back during the early 2010s, the heyday of the Very Serious People who insisted that Medicare and Social Security were unsustainable, C.B.O. projections assumed that health spending would grow at historical rates. This meant that under current policies long-run projected spending was indeed enormous, and obviously unsustainable.

But that has changed, a lot. I don’t know if people still repeating the old slogans about the need for entitlement reform realize just how much projections of future spending have come down. But here’s a comparison between projected Medicare spending as a percent of G.D.P. from the 2009 long-term budget outlook and the most recent projection:

A side note: The C.B.O. used to do 75-year projections, but apparently realized at some point that these are of little value, because nobody has any idea what the world may look like in 75 years. I used to joke that long before we got there, Skynet would have killed us all, but now we know better: Bing’s chatbot will do us in. In any case, the projections now go only 30 years ahead.

Anyway, C.B.O. projections now show social insurance spending as a percentage of G.D.P. eventually rising by about 5 points, which is still a lot but not unimaginably large. And here’s the thing: Half of that is still the assumed rise in health care costs. And there are things we can do to control costs that don’t involve cutting off Americans’ benefits. Bear in mind both that U.S. health care is far more expensive than that of any other nation — without delivering better results — and that since 2010 we’ve already done quite a lot to “bend the curve.” It’s not at all hard to imagine that improving the incentives to focus on medically effective care could limit cost growth to well below what the C.B.O. is projecting, even now.

And if we can do that, the rise in entitlement spending over the next three decades might be more like 3 percent of G.D.P. That’s not an inconceivable burden. America has the lowest taxes of any advanced nation; given the political will, of course we could come up with 3 percent more of G.D.P. in revenue.

So no, Social Security and Medicare aren’t inherently unsustainable, doomed by demography. We can keep these programs, which are so deeply embedded in American society, if we want to. Killing them would be a choice.

After plunging during the pandemic, the number of Americans working a second job is climbing with 5% of workers now working two jobs.

Description automatically generated Molly Smith, “Your Side Hustle Is Another Sign of a Tight US Job Market,” Bloomberg, February 21, 2023, https://www.bloomberg.com/news/articles/2023-02-21/working-side-jobs-is-another-sign-of-the-tight-us-labor-market?sref=U3dOGIDF

Your Side Hustle Is Another Sign of a Tight US Job Market Chart

Description automatically generated More Americans are getting a second job, and it isn’t necessarily a sign of financial hardship.

In a country where there are still almost two open positions for every person who wants one, many are taking on side hustles to make the most of flexible working arrangements, earn some extra cash or pursue their passions.

“Public perception is that people take on multiple jobs when the economy is bad because they’re not earning enough in their job,” said Julia Pollak, chief economist at jobs website ZipRecruiter Inc. The reverse is often true, she said. “People take on additional jobs when there are additional jobs to be had.”

The number of multiple jobholders spiked at the end of last year to more than 8 million, with the share reaching 5% of all employed for the first time since the start of pandemic, according to US Labor Department data.

The burden of inflation has forced many households to collect additional paychecks to make ends meet. But the increase in people working two or more jobs by itself isn’t a recessionary signal.

The number of multiple jobholders declined ahead of and during each of the last three recessions since 2001. And the prevalence of workers with several jobs is more common among those with a higher level of education, according to a 2015 study from the Bureau of Labor Statistics, suggesting it’s more a matter of opportunity than financial necessity.

With the rise of remote and flexible work making it easier to juggle several jobs, government data might be underestimating the extent of the gig economy. In their latest work-from-home survey, economists including Stanford University’s Nicholas Bloom found that nearly 10% of workers reported having a main job plus at least one other position.

The Economist reports that Asian alternatives to China (including India, Indonesia, Bangladesh, and Vietnam) have larger working age populations and exported more goods to the United States in the 12 months ending Q3 ‘22: $634B vs. China’s $614B.

Description automatically generated “…Chinese labor is no longer that cheap: between 2013 and 2022 manufacturing wages doubled, to an average of $8.27 per hour. More important, the deepening techno-decoupling between Beijing and Washington is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their reliance on China. Alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better. Its collective working-age population of 1.4bn dwarfs even China’s 980m. Altasia is home to 154m people aged between 25 and 54 with a tertiary education, compared with 145m in China—and, in contrast to ageing China, their ranks look poised to expand. In many parts of Altasia wages are considerably lower than in China: hourly manufacturing wages in India, Malaysia, the Philippines, Thailand, and Vietnam are below $3…”

Mike Bird, “Global firms are eyeing Asian alternatives to Chinese manufacturing,” The Economist, February 20, 2023, https://www.economist.com/business/2023/02/20/global-firms-are-eyeing-asian-alternatives-to-chinese-manufacturing

Global firms are eyeing Asian alternatives to Chinese manufacturing

In 1987 panasonic made an adventurous bet on China. At the time the electronics giant’s home country, Japan, was a global manufacturing powerhouse and the Chinese economy was no larger than Canada’s. So when the company entered a Chinese joint venture to make cathode-ray tubes for its televisions in Beijing, eyebrows were raised. Before long other titans of consumer electronics, from Japan and elsewhere, were also piling into China to take advantage of its abundant and cheap labour. Three-and-a-half decades on, China is the linchpin of the multitrillion-dollar consumer-electronics industry. Its exports of electronic goods and components amounted to $1trn in 2021, out of a global total of $3.3trn. These days, it takes a brave firm to avoid China.

Increasingly, however, under a weighty combination of commercial and political pressure, foreign companies are beginning to pluck up the courage if not to leave China entirely, then at least to look beyond it for growth. Chinese labour is no longer that cheap: between 2013 and 2022 manufacturing wages doubled, to an average of $8.27 per hour. More important, the deepening techno-decoupling between Beijing and Washington is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their reliance on China.

Between 2020 and 2022 the number of Japanese companies operating in China fell from around 13,600 to 12,700, according to Teikoku Databank, a research firm. On January 29th it was reported that Sony plans to move production of cameras sold in Japan and the West from China to Thailand. Samsung, a South Korean firm, has slashed its Chinese workforce by more than two-thirds since a peak in 2013. Dell, an American computer-maker, is reportedly aiming to stop using Chinese-made chips by 2024.

The question for Dell, Samsung, Sony and their peers is: where to make stuff instead? No single country offers China’s vast manufacturing base. Yet taken together, a patchwork of economies across Asia presents a formidable alternative. It stretches in a crescent from Hokkaido, in northern Japan, through South Korea, Taiwan, the Philippines, Indonesia, Singapore, Malaysia, Thailand, Vietnam, Cambodia and Bangladesh, all the way to Gujarat, in north-western India. Its members have distinct strengths, from Japan’s high skills and deep pockets to India’s low wages. On paper, this is an opportunity for a useful division of labour, with some countries making sophisticated components and others assembling them into finished gadgets. Whether it can work in practice is a big test of the nascent geopolitical order.

This alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better (see chart). Its collective working-age population of 1.4bn dwarfs even China’s 980m. Altasia is home to 154m people aged between 25 and 54 with a tertiary education, compared with 145m in China—and, in contrast to ageing China, their ranks look poised to expand. In many parts of Altasia wages are considerably lower than in China: hourly manufacturing wages in India, Malaysia, the Philippines, Thailand and Vietnam are below $3, around one-third of what Chinese workers now demand. And the region is already an exporting power: its members sold $634bn-worth of merchandise to America in the 12 months to September 2022, edging out China’s $614bn.

Altasia has also become more economically integrated. All of it bar India, Bangladesh and Taiwan has, helpfully, signed on to the Regional Comprehensive Economic Partnership (rcep, which also includes China). By harmonising the rules of origin across the region’s sundry existing trade deals, the pact has created a single market in intermediate products. That in turn has eased regulatory barriers to complex supply chains that run through multiple countries. Most Altasian countries are members of the Indo-Pacific Economic Framework, a newish American initiative. Brunei, Japan, Malaysia, Singapore and Vietnam belong to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (cptpp), which also includes Canada, Chile, Mexico and Peru.

A model for the Altasian economy already exists, courtesy of Japanese companies, which have been building supply chains in South-East Asia for decades. More recently Japan’s rich Altasian neighbour, South Korea, has followed its example. In 2020 South Korean firms’ total stock of direct investments in Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam—which together with unstable Myanmar make up the Association of South-East-Asian Nations (asean)—and Bangladesh reached $96bn, narrowly outstripping Korean investments in China. As recently as a decade ago the stock of Korean companies’ investments in China was nearly twice as large as in Altasia. Samsung is the biggest foreign investor in Vietnam. Last year Hyundai, a South Korean carmaker, opened its first asean factory, making electric vehicles in Indonesia.

Now more non-Altasian firms are eyeing the region, often via their Taiwanese contract manufacturers. Taiwan’s Foxconn, Pegatron and Wistron, which assemble gadgets for Apple, among others, are investing heavily in Indian factories. The share of iPhones made in India is expected to rise from around one in 20 last year to perhaps one in four by 2025. Two Taiwanese universities have teamed up with Tata, an Indian conglomerate with ambitious plans in high-tech manufacturing, to offer courses in electronics to Indian workers. Google is shifting the outsourced production of its newest Pixel smartphones from China to Vietnam.

More sophisticated manufacturing, especially of geopolitically fraught semiconductors, is also moving to Altasia. Malaysia already exports around 10% of the world’s chips by value, more than America. asean countries account for more than a quarter of global exports of integrated circuits, easily surpassing China’s 18%. And that gap is growing. Qualcomm, an American “fabless” chipmaker, which sells microprocessor designs for others to manufacture, opened its first research-and-development centre in Vietnam in 2020. Qualcomm’s revenues from Vietnamese chip factories, many of which belong to global giants like Samsung, tripled between 2020 and 2022. Earlier this month the local government of Ho Chi Minh City announced that it was courting a $3.3bn investment from Intel (though it later struck the American chip giant’s name from the statement online).

China’s huge advantage has historically been its vast single market, knit together with decent infrastructure, where value could be added without suppliers, workers and capital crossing national borders. For Altasia to truly rival China, therefore, its supply chain will need to become far more integrated and efficient. Although rcep has greased the wheels of intra-Altasian commerce somewhat, the flow of goods faces more obstacles than it does within China. Its member countries will need to play to their comparative advantage.

For now the infrastructure that connects them is shabby, at best. Finicky regulations and national ambitions can easily gum up the alternative supply chain. Altasia’s poorer countries are also not necessarily keen on the logical division of labour, which would see them with a bigger role in the more menial parts of the electronics supply chain. And forgoing all Chinese-made parts is next to impossible. Thamlev, an American electric-bike startup, moved production from China to Malaysia in 2022 in order to avoid a 25% American tariff, but still needed to import Chinese components. As a result, it took a month longer for its e-bikes to reach American riders.

Prospects for deeper integration are hazy, both within Altasia and with big consumer markets in the rich world. India, on whose 1.4bn people Altasia’s future may depend, seems in no rush to become part of rcep. Although the country has, with other Altasian neighbours, signed up to America’s Indo-Pacific framework, it has opted out of the initiative’s trade provisions. And these anyway lack bite: America is in a protectionist mood and has offered no tariff cuts or better access to its vast market. One asean policymaker likens it to a doughnut, lacking substance in the middle.

Altasia will certainly not replace China soon, let alone overnight. In January, for example, Panasonic announced a big expansion of its Chinese operations. But in time China is likely to become less attractive to foreign manufacturers. Chinese labour is not getting any cheaper and its graduates are not getting much more numerous. America may yet realise that reducing its reliance on China in practice requires closer ties with friendly countries, including membership of the cptpp, the precursor of which collapsed after America pulled out in 2017. And as a budding alternative to China, Altasia has no equal.

An Economist analysis suggests that if rates follow their current trajectory, total interest costs globally will rise from 12% of GDP in 2021 to 17% by 2027. Their analysis covered 58 countries representing 90% of global GDP, “….The Economist has estimated the interest bill for companies, households and governments across 58 countries. Together these economies account for more than 90% of global GDP. In 2021 their interest bill stood at $10.4T, or 12% of combined GDP. By 2022 it had reached a whopping $13T, or 14.5% of GDP. Our analysis suggests that, if rates follow the path priced into government-bond markets, the interest tab will hit around 17% of GDP by 2027.Interest costs in America exceeded 20% of GDP during the global financial crisis of 2007-09, the economic boom of the late 1990s and the last proper burst of inflation in the 1980s. Yet an average bill of this size would mask big differences between industries and countries….”

Description automatically generated Economist Staff, “The world’s interest bill is $13trn—and rising,” The Economist, February 19, 2023, https://www.economist.com/finance-and-economics/2023/02/19/the-worlds-13trn-interest-bill

The world’s interest bill is $13trn—and rising

After a relaxing 2010s, in which interest rates hardly budged, rising prices are putting central-bank officials to work. Indeed, policymakers have rarely been busier. In the first quarter of 2021, policy rates in a sample of 58 rich and emerging economies languished at an average of 2.6%. By the final quarter of 2022, this figure had jumped to 7.1%. Meanwhile, total debt in these countries stands at $298trn, or 342% of their combined gdp, up from $255trn, or 320% of gdp, before the covid-19 pandemic.

The more indebted the world becomes, the more sensitive it is to interest-rate rises. To assess the effect of borrowing and higher rates, The Economist has estimated the interest bill for companies, households and governments across 58 countries. Together these economies account for more than 90% of global gdp. In 2021 their interest bill stood at a $10.4trn, or 12% of combined gdp. By 2022 it had reached a whopping $13trn, or 14.5% of gdp.

Our calculations make a series of assumptions. In the real world, higher interest rates do not push up debt-servicing costs immediately, except for those of floating-rate debt, such as many overnight bank loans. The maturity of government debt tends to be in the range of five to ten years; companies and households tend to borrow on a shorter-term basis. Therefore we assume that interest-rate rises feed through over the course of five years for public debt, and over a two-year period for households and companies.

To project what might happen over the next few years, we make a few more assumptions. Real-life borrowers respond to higher rates by reducing debt to ensure that interest payments do not get out of hand. Nonetheless, research by the Bank for International Settlements, a club of central banks, shows that higher rates do raise interest payments on debt relative to income—ie, that deleveraging does not entirely negate higher costs. Thus we assume that nominal incomes rise according to imf forecasts and debt-to-gdp ratios stay flat. This implies annual budget deficits of 5% of gdp, lower than before covid.

Our analysis suggests that, if rates follow the path priced into government-bond markets, the interest tab will hit around 17% of gdp by 2027. What if markets are underestimating how much tightening central banks have in store? We find that another percentage point, on top of that which markets have priced in, would bring the bill to a mighty 20% of gdp.

Such a bill would be big, but not without precedent. Interest costs in America exceeded 20% of gdp during the global financial crisis of 2007-09, the economic boom of the late 1990s and the last proper burst of inflation in the 1980s. Yet an average bill of this size would mask big differences between industries and countries. Ghana’s government, for instance, would face a debt-to-revenue ratio of over six and government-bond yields of 75%—which would almost certainly mean eye-watering cuts to state spending.

Inflation may ease the burden somewhat by pushing up nominal tax revenues, household incomes and corporate profits. And global debt as a share of gdp has fallen from its peak of 355% in 2021. But this relief has so far been more than offset by the considerable rise in interest rates. In America, for instance, real rates as measured by the yield on the five-year Treasury inflation-protected security sit at 1.5%, against an average of 0.35% in 2019.

So who is bearing the burden? We rank households, companies and governments across our 58 countries according to two variables: debt-to-income ratios and the increase in rates over the past three years. When it comes to households, rich democracies, including the Netherlands, New Zealand and Sweden, look more sensitive to rising interest rates. All three have debt levels nearly twice their disposable incomes and have seen short-term government-bond yields rise by more than three percentage points since the end of 2019.

Yet countries that have less time to prepare for rate rises may, in fact, face greater difficulties than their more indebted peers. Mortgages in the Netherlands, for instance, often have longer-term fixed rates, meaning the country’s households are probably better protected from higher rates than our rankings suggest. In other countries, by contrast, households typically either have shorter-term fixed-rate loans or borrow on flexible terms. In Sweden floating-rate mortgages account for nearly two-thirds of the stock, which means problems may emerge more quickly. In emerging economies the data are patchier. Although debt-to-income ratios are lower, this partly reflects the fact that formal credit is hard to obtain.

In the business world, surging consumer demand has lifted profits. In 33 of the 39 countries for which we have data, the ratio of debt to gross operating profit has fallen in the past year. Indeed, parts of the world look surprisingly strong. Despite the woes of Adani Group, a conglomerate under fire from a short-seller, India scores well, thanks to a relatively low debt-to-income ratio of 2.4, and a smaller rise in rates.

Big debt burdens and tighter financial conditions may still prove too much for some companies. s&p Global, a research firm, notes that default rates on European speculative-grade corporate debt rose from under 1% at the start of 2022 to more than 2% by the end of the year. French firms are especially indebted, with a ratio of debt to gross operating profit of nearly nine, higher than any country bar Luxembourg. Russia, cut off from foreign markets, has seen short-term yields spike. Hungary, where the central bank has rapidly raised rates to protect its currency, could face a big interest bill relative to the size of its economy.

Last and most consequential is government debt. Daleep Singh of pgim, an asset manager, says a variable to watch is the risk premium on debt (the extra return markets demand to hold a country’s bonds over and above the yield on an American Treasury). Rich-world governments are mostly doing fine on this measure. But Italy, which has seen one of the biggest increases in bond yields among euro-zone countries in our sample, remains a risk. As the European Central Bank tightens policy, it has stopped buying sovereign bonds, and will begin to shrink its balance-sheet in March. The danger is that this prompts a crunch.

Emerging economies increasingly borrow in their own currencies, but those struggling with external debts may require help. Argentina recently reached a bail-out agreement, which will require uncomfortable belt-tightening, with the imf. It sits near the top of this category, and already defaulted on its external debt in 2020. Egypt, which has medium-term government-bond yields around four to five percentage points above pre-pandemic levels, is trying not to follow suit. Ghana, which recently joined Argentina in the severely distressed camp, is now embarking on fiscal and monetary tightening in an attempt to secure support from the imf.

The fate of some governments, as well as the households and firms that eventually need state support, may depend on the goodwill of China. Despite high debt levels, China itself sits near the bottom of our rankings because of its placid interest rates. Yet its importance to global debt stress is only growing. China is now the largest lender to the world’s poor economies and gobbles up two-thirds of their inflating external debt-service payments, complicating debt-relief efforts. Western governments must hope they can shoot down this balloon, too.