The PCE inflation measure rose 0.2% in October, under the forecast, while the personal savings rate fell to 2.3%, the lowest since 2005. @bloomberg
A key gauge of US consumer prices posted the second-smallest increase this year while spending accelerated, offering hope that the Federal Reserve’s interest-rate hikes are cooling inflation without sparking a recession. The personal consumption expenditures price index, excluding food and energy, which Fed Chair Jerome Powell stressed this week is a more accurate measure of where inflation is heading, rose a below-forecast 0.2% in October from a month earlier, Commerce Department data showed Thursday. The saving rate fell to 2.3% in October, the lowest since 2005, the Commerce Department report showed.
The run-up in energy prices has driven an increase in trade imbalances, with a ~ $1 Trillion surplus largely ending up in the hands of autocratic countries: China, Russia, Saudi Arabia, and the Gulf. @Brad_Setser
There was an enormous swing in the trade surplus of the energy-exporting economies, and surprisingly, China’s surplus also has continued to rise. Russia’s surplus is set to top $250 billion. Saudi Arabia’s surplus should top $200 billion. The other monarchies in the Gulf should have a surplus comparable to that of the Saudis—if anything, it will be a bit bigger. Summed up, these autocratic countries’ surpluses should total about $1 trillion in 2022. But there is an important difference between now and then: the big autocratic surplus countries are not adding to their formal foreign exchange reserves. By implication, private financial intermediaries somewhere around the world will need to absorb Treasury bonds. Just as financial intermediaries globally had to absorb U.S. “subprime” (household) risk prior to the global crisis, now they have to absorb U.S. interest rate risk.
.@PaulKrugman suggests that wage growth for lower-income families has more than offset inflation, even accounting for their higher food and energy consumption.
The labor economist Arindrajit Dube has estimated hourly wage changes — by decile rather than quartile — over a longer period since the beginning of the pandemic recession. He finds that real wages for the bottom 40 percent of workers have increased. Lower-income families spend a higher than average share of their income on food and energy, which are also the categories that have seen the most inflation recently. My rough calculations suggest that even when you take these food and energy costs into account, lower-income families have done better, not worse, than others, at least in terms of inflation’s effects. But it does lessen that difference somewhat.
An Oliver Wyman model argues that the increase in inequality has driven equity valuations @jmackin2
Oliver Wyman has constructed a model of demand for stocks that tries to assess the effect of inequality and two other long-running shifts. These are the rise in willingness of pension-fund managers to hold stocks since the 1950s and the easier access to stocks for ordinary investors, both through lower fees and the popularity of funds. This “demand-weighted income” measure is then compared with household equity wealth to come up with something akin to a slow-moving price-to-earnings ratio. A price-to-inequality ratio won’t replace a simple price-to-earnings gauge. Inequality data are slow to be produced, so this can’t be used as a real-time indicator.
While global debt declined slightly from last year, the total outstanding debt is $290 Trillion, up 1/3 from a decade ago, as borrowers face rising interest rates globally, report @mccormickliz @atanzi @endacurran
The total debt owed by households, businesses, and governments stands at $290 trillion, up by more than one-third from a decade ago, according to research by the Institute of International Finance. Although the world’s debt has declined from a pandemic-driven record early this year, the risks it poses to economies and financial markets are intensifying.
Since the start of the current tightening cycle, increases in the Investment Grade Corporate Bond Market Distress Index (CMDI) have been relatively modest. The index remains close to historical medians. @NewYorkFed
The increases in the Investment Grade Corporate Bond Market Distress Index since the start of the current tightening cycle have been relatively modest. Overall, the IG CMDI has trended sideways recently, with the 2022 peak not substantially above that observed in the 2015 tightening cycle.
The president of the German federation of industry argues “more than a fifth of German medium-sized companies they had polled were considering packing up and leaving the country,” given expected structurally higher energy costs going forward.
FAZ quotes the president of the German federation of industry as saying that more than a fifth of German medium-sized companies they had polled were considering packing up and leaving the country. Despite recent market moves, end-user energy prices will not revert to the pre-war times on a sustained level. What we expect to see in Germany is not so much large de-industrialization but a shift in production technologies. We expect to see a shift away from energy-intensive production, like bulk chemicals and steel, towards lower energy-intensive industrial segments and a shift towards low carbon technologies, in particular, a process that will be accompanied with friction and possibly lower GDP growth.
2021 saw a record 48,953 gun deaths or 15 fatalities per 100,000 people. Black men aged 20-24 suffered 142 firearm homicides per 100,000 people in 2021, a 74% increase since 2014. @wsj
A record 48,953 deaths in the US, or about 15 fatalities per 100,000 people, were caused by guns last year, said the analysis published Tuesday in the journal JAMA Network Open. Since 1990, rates of gun-related homicide have been highest among Black men aged 20 to 24, the analysis said, with 142 fatalities per 100,000 people in this group in 2021—a 74% increase since 2014. Homicide rates are as much as 23 times higher among Black men, and as much as nearly four times higher among Hispanic men than among white men, the analysis said. Gun fatality rates from suicide were highest among white men aged 80 to 84 years, at 47 fatalities per 100,000 people in this group in 2021—a 41% increase since 2007, the analysis showed.
Inflation-adjusted home prices are 3.3% under their recent peak, but affordability decreased as mortgage rates increased. @calculatedrisk
In real terms, the National index is 3.3% below the recent peak, and the Composite 20 index is 4.4% below the recent peak in 2022. In real terms, house prices are still above the bubble peak levels. There is an upward slope to real house prices, and it has been over 16 years since the previous peak, but real prices are historically high. Affordability worsened in September as mortgage rates increased, even though house prices declined.
Jack Ma has been living in central Tokyo for the last six months in the aftermath of the Chinese government’s regulatory crackdown on his businesses. @ft
Jack Ma, the Alibaba founder and once the richest business leader in China, has been living in central Tokyo for almost six months amid Beijing’s continuing crackdown on the country’s technology sector and its most powerful businessmen. Since his fallout with Chinese authorities, Ma has been spotted in various countries, including Spain and the Netherlands. People involved in Japan’s modern art scene said that Ma had become an enthusiastic collector. Friends close to the billionaire in China said he had turned to painting watercolors to pass the time after being forced to retreat from his frenetic public life, jet-setting between meetings with top officials in China and around the globe.
A good example of capital flight from the PRC: the founders of Soho China now live in New York, where their real estate assets value may exceed their Chinese assets. @bloomberg
Zhang Xin and her husband Pan Shiyi, who grew Soho China Ltd. into a behemoth that reshaped the country’s skylines, have built a discreet family office. Two of its biggest assets: stakes in the General Motors Building on Fifth Avenue and Park Avenue Plaza in Midtown. Now, after the implosion of the Chinese property sector, the combined equity value of just these two investments — about half a billion dollars — is roughly the same as the couple’s holding in the Beijing-based company responsible for their wealth. Their five-part strategy — build a successful business in China, list it on a global exchange, pay out billions of dollars in dividends, set up a family office abroad, and buy up foreign real estate — means their fortune is relatively protected while other Chinese billionaires have seen their riches crumble after running foul of President Xi Jinping’s clampdowns.
At least 500 Chinese firms have redomiciled or registered in Singapore over the past year to hedge against geopolitical risk. @ft
The exact number of Chinese companies being set up is unclear because Singapore does not disclose the origin country in its public statistics. However, one lawyer said his firm’s internal research division found more than 500 new Chinese companies had set up this year in Singapore, which experts noted was a rise from previous years. Another business advisory group in the city-state that had reviewed the data calculated the number at 400, including family offices, but also asked not to be identified due to the sensitivities involved. Analysts expect the number of family offices — many of which are from China — to be well over 1,000 by the end of this year, compared with 400 at the end of 2020.
China newsletter publisher @niubi notes that the scale of the protests is “remarkable and meaningful, but expects that the Chinese security services “will succeed in nipping [protests] in the bud.”
While there have been some breathless claims using terms like “uprising” and “revolt,” I think that is an exaggeration of the protests at this stage and that the security services will succeed in nipping them in the bud. But no mistake, the fact that so many were willing to stand up publicly in spite of the likely personal costs is remarkable and meaningful. Still, in spite of how stirring these protests have been, I would be surprised if they continue in any meaningful way, given how much work the system has put into dealing with just these kinds of contingencies and how it has repeatedly demonstrated that when it comes to ensuring political security, there is no bottom line.
The Chinese are seeking to deploy 1,500 nuclear weapons by 2035 and have doubled their intelligence, surveillance, and reconnaissance (ISR) satellite systems since 2018 to 260 satellites, according to a new Pentagon report. @ft
The Pentagon said Beijing “probably accelerated” its nuclear expansion last year and was on track to have a stockpile of 1,500 nuclear weapons by 2035. The Pentagon said China was also investing heavily in space, including everything from intelligence assets to weapons to counter an adversary, such as kinetic-kill missiles and ground-based lasers. It said China had more than 260 intelligence, surveillance, and reconnaissance (ISR) satellite systems, which marked an almost doubling since 2018. US officials say China has shown no willingness to engage in any talks about nuclear weapons.
.@ojblanchard1 revises his recommendation for the “right” inflation target from 4% to 3%, given evidence that Google search activity on “inflation” increases once it surpasses 3-4%. @ft
When inflation is low, people and companies simply do not think about it and thus do not react to it. This was certainly the case pre-Covid. When it becomes higher, however, inflation becomes salient, wage and price decisions become more sensitive to it, and inflation expectations become more easily de-anchored. The question is, what rate of inflation leads to salience? A hint is given in a recent paper, which looks at Google searches for “inflation” as a function of the actual inflation rate. It found that, for the US, if inflation was around 3-4%, people simply did not pay attention. Above 3-4%, they did. Altogether, these arguments have led me to conclude that, while a higher inflation target is desirable, the right target for advanced economies such as the US might be closer to 3% than our original 4% proposal.
Last week, the yield on the 10-year US Treasury note dropped to 0.78 percentage point below the 2-year yield, the largest negative gap since late 1981. Many investors and analysts see reasons to think that the current yield curve may presage waning inflation. @wsj
Yields on longer-term US Treasurys have fallen further below those on short-term bonds than at any time in decades, a sign that investors think the Federal Reserve is close to winning its inflation battle regardless of the cost to economic activity. Last week, the yield on the 10-year US Treasury note dropped to 0.78 percentage points below that of the two-year yield, the largest negative gap since late 1981, at the start of a recession that pushed the unemployment rate even higher than it would later reach in the 2008 financial crisis.
.@tracyalloway and @luwangnyc of @bloomberg report an unusual divergence: the price of West Texas Intermediate crude oil for immediate delivery has dropped almost 18% since July, while energy stocks have jumped more than 32% in the same time frame.
While the price of West Texas Intermediate crude oil for immediate delivery has dropped almost 18% since the middle of July, energy stocks, as encapsulated by the Energy Select Sector SPDR exchange-traded fund (XLE), have jumped more than 32% in the same time frame. Two main factors seem to be behind the divergence: 1) Energy earnings have been recovering, with the sector claiming the highest percentage of companies reporting earnings above estimates in the most recent quarter, according to Factset data, and 2) Brent crude has flipped into contango for the first time since December 2021.
There has been a sharp uptick in the number of men working as stay-at-home parents. Almost 5% of stay-at-home parents are men, compared to about 1% in the mid-1990s. @bloomberg @jordan_yadoo
[The Census Bureau defines stay-at-home males] as husbands in opposite-sex marriages with children under 15 who specifically say they’re not working so that they can care for family and whose wives are either working or looking for work. Under those terms, men accounted this year for 5% of the one-fifth of US families with a stay-at-home parent, up from about 1% in the mid-’90s and representing 239,000 fathers. According to a broader analysis by the Pew Research Center—which expands the pool to include any father of a child under 18 who hasn’t been working, regardless of reason or marital status, and also incorporates men in same-sex relationships—the number of stay-at-home dads had swelled to about 2.1M by 2021, equal to 18% of all stay-at-home parents, up from 10% in 1989.
.@scottahodge, one of the architects of the Child Tax Credit, notes the American Rescue Plan’s expanded credits left 48.3% of all filers with no income tax liability in 2021 and argues making expanded credits permanent, based on the $1.3T ten-year cost. @wsj
According to a Tax Policy Center estimate, some 74 million tax filers—or nearly half (48.3%) of all filers in 2021—had no income tax liability. Can we have a sustainable tax system if the number of nonpayers continues to grow? Expanding the child tax credit would take our redistributionist tax code to a new level. Although 2021 was a pandemic year, it gives us a picture of what that world would look like. The child tax credit is a drain not only on the federal budget but on the nation’s economy. Congress’s Joint Committee on Taxation economic models predict that the policy would reduce the labor supply by 0.2% over a decade and the amount of capital by 0.4%. As a result of the reduced supply of labor and capital investment, gross domestic product would shrink by 0.2%.
Black students continue to lag white students in the last National Assessment of Educational Progress results. In 8th grade, 38% of black students were performing at their grade level vs. 74% of white students. @aei
Whereas nationally, 86% of white 4th graders were at least on grade level in mathematics, this was true for only 55% of black students. As students progressed to the 8th grade, the share performing at grade level or better fell by 15% (86 to 74%) for white students nationally. Among black students, the decline was 30% nationally (from 55 to 38%) and among black students in the [poorest-performing cities poorest performing cities (Baltimore, Cleveland, Detroit, Milwaukee, and Philadelphia)] (28 to 20%). A Brookings Report found that in 2019, only 7% of black test-takers scored at least 600 on the math portion of the SAT exam. By contrast, 11%, 31%, and 62% of Latino, white, and Asian test-takers, respectively, did that well.
.@Bloomberg forecasts that lithium demand is set to increase more than fivefold by the end of the decade and notes that “EV sales targets for 2030 are probably unachievable because of constraints on various raw materials.”
Lithium demand is expected to jump more than fivefold by the end of the decade. EV sales targets for 2030 are probably unachievable because of constraints on various raw materials, according to Piper Sandler & Co. New lithium mines can cost as much as $1 billion and take more than six years to build, too slow for the sector’s needs, Piper analysts wrote in a November note. And BloombergNEF predicts shortages of lithium will be a problem until 2026 for companies that refine the products into chemicals used in EV batteries.
Between 2002 and 2014, regulatory costs averaged 1.34% of firms’ wage bills in the United States @xftrebbi @rainozhang @NBER
We quantify firms’ regulation compliance costs from 2002 to 2014 in terms of their labor input expenditure to comply with government rules. Detailed establishment-level occupation data, in combination with occupation-specific task information, allow us to recover the share of an establishment’s wage bill owing to employees engaged in regulatory compliance. Regulatory costs account, on average, for 1.34% of the total wage bill of a firm but vary substantially across and within industries and have increased over time. We investigate the returns to scale in regulatory compliance and find an inverted-U shape, with the percentage of regulatory spending peaking for an establishment size of around 500 employees.
October CPI showed continued disinflation month-over-month in durables and the service sector, but it will “take more time to be confident that disinflation is real.” @GeneralTheorist
Housing now dominates—accounting for more than half of service inflation pressure over 3 months. It is expected that housing will take time to reflect past rent increases still, but at the margin, the housing sector is already softening—which should hit Core CPI in about 12 months. Medical services distorted service inflation downward—something unlikely to be repeated in coming months. Overall, the October print doesn’t yet provide confidence that disinflation has spread from durables to services.
.@PaulKrugman argues that the rent surge of 2021-2022 was driven by changing preferences related to work-from-home during the pandemic, and has now largely ended.
A couple of notes about [the above] chart: I show rates of rent growth [reported by Zillow] over a three-month period, a practice many economists have converged on in recent discussions: Monthly data are too noisy, but annual growth rates lag too far behind a rapidly changing economy. I also show inflation in the average rental rate reported by the Bureau of Labor Statistics (labeled official rent above.) As you can see, the rental surge of 2021-22 was quite spectacular, with rents rising at double-digit rates for about a year and a half. But it has leveled off recently. Zillow’s index (a three-month average) fell in October; other private measures, like those published by Realtor.com and Apartmentlist.com, have been signaling rent declines for two or three months.
Bond markets forecast a 2023 recession, with long-dated Treasury yields below the Fed’s overnight benchmark range of 3.75-4%. @bloomberg
The bond market is zeroing in on a US recession next year, with traders betting that the longer-term trajectory for interest rates will be down even as the Federal Reserve is still busy raising its policy rate. Long-dated Treasury yields are already below the Fed’s overnight benchmark range -- currently 3.75% to 4% -- and there’s still an extra percentage point of central bank increases priced in for the coming months. Demand for Treasuries with longer tenors this week dragged the rate on 10-year and 30-year securities below the lower bound of the Fed’s overnight range. With front-end rates holding relatively steady, that’s seen an intensification of the most pronounced yield curve inversion in four decades -- a widely watched indicator of potential economic pain to come.
In November, 41% of American job listings required a college degree, down from 46% at the start of 2019, suggesting employers are relaxing degree requirements in tight labor markets. @wsj
US job postings requiring at least a bachelor’s degree were 41% in November, down from 46% at the start of 2019 ahead of the Covid-19 pandemic, according to an analysis by the Burning Glass Institute, a think tank that studies the future of work. Degree requirements dropped even more early in the pandemic. They have grown since then but remain below pre-pandemic levels.
Young adults in both the UK and US are spending more time alone and increasingly reporting feeling “lonely.” @ft
On average, 53% of Americans aged over 65 spend more than eight hours of waking time on their own every day, according to my analysis of data from the American Time Use Survey. The trend remains unchanged for people over 60. But compared with a decade ago, the rise in the number of young people who spend more than eight hours on their own is alarming. Time on your own is one thing; feeling lonely is quite another. And young people seem worse affected by the latter. A March 2022 ONS survey found that 40% of women aged 16 to 29 in the UK report “feeling lonely often, always or some of the time,” compared with 22% of women over 70. For men, some 22% of this age group report feeling lonely, compared with 13% of the over-70s. And, of course, the impact of Covid lockdowns cannot be ignored.
Rare, widespread political protest spread across major Chinese cities over the weekend, seemingly driven by frustrations with zero-Covid. @ft
At least 10 cities, including Shanghai, Beijing, Wuhan, and Chengdu, were shaken by rare political protests over the weekend, triggering clashes with police and security officers that led to a spate of detentions. The sudden outbreak of civil disobedience was sparked by outrage after a deadly apartment fire in Urumqi, Xinjiang, was partly blamed on coronavirus restrictions. While most of the protests appeared to have been stamped out by Monday, they followed months of frustration, especially among China’s young people, with relentless lockdowns, quarantines, mass testing, and electronic surveillance under Xi’s zero-Covid policies.
China’s trade surplus has continued to grow since the pandemic, with manufacturing exports ~ 14% of GDP. The trade surplus is poised to grow, as China’s bill for imported commodities falls. @Brad_Setser
The popular deglobalization narrative simply isn't in China's trade data -- manufacturing exports are up massively, and that has pushed the surplus up even as China's commodity import bill reached record levels (the commodity bill is poised to fall now, by the way.) China's currency is (still) managed (in my judgment, even if the PBOC's reported reserves don't change,) so movements reflect the interaction of market pressure and political decisions. But at some level, a weaker CNY, even with a massive trade surplus, reflects a judgment by China's policymakers that they need to sustain the rise in exports (relative to China's GDP) even as global demand for manufactures drops (to offset China's domestic weakness.)
The FCC has banned China-based Huawei and ZTE from telecommunications sales into the American market, citing national security concerns. The move may further fuel tensions with Beijing. @ft
Washington’s top telecommunications regulator has barred China-based Huawei and ZTE from selling equipment in the US, citing national security concerns in a move that could further fuel tensions with Beijing. The Federal Communications Commission announced the step on Friday, saying it was the latest effort by US authorities to “build a more secure and resilient supply chain” in the telecommunications industry. “The action we take today covers base station equipment that goes into our networks. It covers phones, cameras, and WiFi routers that go into our homes. And it covers rebranded or ‘white label’ equipment that is developed for the marketplace. In other words, this approach is comprehensive,” said Jessica Rosenworcel, chair of the FCC.
The backlog of US weapons delivery has grown to $18.7B from more than $14B last December, as competing demands from Ukraine and Taiwan stress the military supply chain. @wsj
The flow of weapons to Ukraine is now running up against the longer-term demands of a US strategy to arm Taiwan to help it defend itself against a possible invasion by China, according to congressional and government officials familiar with the matter. The backlog of deliveries, which was more than $14 billion last December, has grown to $18.7 billion. Included in the backlog is an order made in December 2015 for 208 Javelin antitank weapons and a separate one at the same time for 215 surface-to-air Stinger missiles. None of them have arrived on the island, according to congressional sources and people familiar with the matter. Executives at Lockheed Martin Corp., Boeing Co., and other defense companies say pandemic-driven supply-chain problems have set back production for many systems and that they have struggled to keep up with orders even before Russia’s invasion of Ukraine boosted demand.
German defense spending is set to decline by €300M in 2023 as the country continues to fall short of its NATO-set obligation of spending the equivalent of 2% of GDP on defense. @ft
Nine months ago, in the wake of Russia’s full-scale invasion of Ukraine, Olaf Scholz declared a Zeitenwende — a turning point — for Germany’s military and its place in the world. But since then, barely any of the €100bn in extra funding the German chancellor pledged has made its way to the armed forces. The parliamentary body set up in the spring to allocate money to modernization and reform programs has met once. The defense ministry had no procurement proposals to submit to it. Its next sitting will not be until February. Far from rising, the 2023 defense budget, opposition leader Friedrich Merz noted, was set to shrink by €300mn based on current government plans. The lack of German action was “[giving] rise to considerable distrust” at NATO and in allied capitals, he claimed.
Companies with market capitalization of over $200B currently represent 30-35% of total capitalization, up from the 10-15% share that was normal until 2016. @policytensor
The polarization in favor of the biggest firms peaked at the end of last year. The megacap-to-midcap ratio of market cap has been cut from four to three in the course of 2022. But three is far from a collapse of the megacap boom. The 10-15% that was normal until 2016 has since given way to 30-35% of total capital controlled by the megacaps. I have used biweekly rolling averages for the graph. Note that this is a bottom-up census rather than an estimate. I am just adding up reliable third-party data at the granular level; every single ticker for which there is price and market cap data. This is the broadest possible universe of US equities for which I can find kosher data.
Temperatures anomalies that were once-in-1,000-yearly events in North America in the 1970s are now expected to be 5-yearly events, according to new research in @Nature
We find that slow- and fast-moving components of the atmospheric circulation interacted, along with regional soil moisture deficiency, to trigger a 5-sigma heat event. Its severity was amplified by ~40% by nonlinear interactions between its drivers, probably driven in part by land-atmosphere feedback catalyzed by long-term regional warming and soil drying. Since the 1950s, global warming has transformed the peak daily regional temperature anomaly of the event from virtually impossible to a presently estimated ~200-yearly occurrence. Its likelihood is projected to increase rapidly with further global warming, possibly becoming a 10-yearly occurrence in a climate 2 °C warmer than the pre-industrial period, which may be reached by 2050.
.@M_C_Klein cites the end of a spike in compensation for low-skilled workers and longer-term forward real interest rates well within their post-financial crisis range and argues against a deliberate economic downturn to curb inflation.
In the US, the earlier spike in lower-end wages relative to other workers' pay has completely stopped, while the split between labor income and profits has, if anything, moved in favor of investors. For better or worse, the popular and elite reactions to the inflation outbreak suggest that policymakers are not going to respond to future downturns the way they did to the pandemic. Soft budget constraints do not appear to be on the menu. And while there have been some constructive increases in public investment (and military spending) in the major economies, they do not seem large enough to move the needle. Financial markets may be wrong, but it is noteworthy that longer-term forward real interest rates are well within their post-financial crisis range, even if they have jumped over the past 12 months.
China reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, Guangzhou, and Chongqing. Lockdowns are more extensive than during the Shanghai outbreak that slowed annual economic growth to 0.4% in Q2. @ft
Covid-19 cases in China are spiraling towards record highs, forcing officials to lock down again large swaths of the country. The world's second-biggest economy reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, the southern manufacturing hub of Guangzhou, and the southwestern metropolis of Chongqing continuing to grow. Covid restrictions have hit areas responsible for one-fifth of China's gross domestic product. Officials in Beijing shut most non-essential businesses in the city's largest district, Chaoyang, which has a population of 3.4mn, and have closed restaurants and other entertainment venues in much of the city while telling residents to work from home.
Researchers at @NewYorkFed evaluate the pass-through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles, and discuss factors that affect deposit rates.
We can observe that the gap [between the deposit rate and the Fed funds rate] is negative when rates are near zero (and deposit levels are high) and positive when rates rise. As a consequence, post-GFC and before the 1994 tightening, deposits were more attractive to depositors, and deposit supply was high relative to loans. However, as rates rise, the gap increases, depositors move elsewhere, banks raise their rates, and cumulative deposit betas rise. Since the 1990s, the response of deposits to monetary policy has been attenuated. This can be explained by the growth in deposits over the post-crisis period relative to investment opportunities.
.@WSJ notes that the Fed has been raising rates at the fastest pace in four decades (+375 basis points in 9 months.) Key variables such as housing starts have declined much more rapidly than in previous cycles.
The Nobel Prize-winning economist Milton Friedman famously argued that "monetary actions affect economic conditions only after a lag that is both long and variable." Historically, housing starts begin to decline within two years of a Fed hike. New home construction fell by 24% from the Fed increase in March to July. Declines in home construction that follow Fed rate increases can take years before they bottom out.
@bloomberg reports that the dollar value of global debt as a share of the global economy is 20 percentage points under its pandemic peak, as a result of inflation and a sharply appreciated dollar.
Total debt declined $6.4 trillion in the three months through September, to about $290 trillion, the IIF said in its quarterly Global Debt Monitor published Tuesday in Washington. That drop is amplified by the surging dollar, which makes loans denominated in other currencies look smaller when they’re measured in greenbacks. As a share of the world economy, debt has dropped to 343% -- about 20 percentage points below its pandemic peak last year. Soaring inflation in many economies has helped erode debt burdens measured against the size of economic output because the nominal value of gross domestic product has risen rapidly.
.@paulkrugman argues that once the demand shock from pandemic aid fades, “we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows.”
Once [the economic boost from pandemic aid fades away,] we’ll probably be back where we were before the pandemic, with weak private investment demand holding interest rates down. Last time I wrote about this I stressed demography — the drastic slowdown in growth of the working-age population — plus what looks like disappointing rates of technological progress. Let me now put it a different way. [The macroeconomic accelerator effect] tells us that investment spending will only remain high if we expect rapid economic growth. And what we know now doesn’t support that expectation. What all this suggests to me is that the era of cheap money is not, in fact, over. A few years from now, we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows
Excess savings associated with the pandemic, which are somewhere in the $1.2-$1.8T range, should provide support for the economy through the end of next year according to a range of estimates. @WSJ
Headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings”—the amount above what they would have saved had there been no pandemic. Economists’ estimates for how much consumers have left vary. JPMorgan Chase & Co. put the hoard at about $1.2 to $1.8 trillion in the third quarter and said it could be entirely spent by the second half of next year. Goldman Sachs economists estimate households have drawn down about 25% of excess savings and will have spent about 60% by the end of 2023. Ian Shepherdson, chief economist of Pantheon Macroeconomics, puts it at $1.3 trillion and estimates that at the current rate of rundown, that could last another year or so.
Former Fed bond trader Joseph Wang notes that higher interest rates subsidize consumption by increasing private sector interest income from public sector liabilities. He argues, “the current policy stance may not be effective in moving inflation back to 2%.” @FedGuy12
The economic impact of higher rates is mixed because it also subsidizes consumption by increasing private sector interest income from public sector liabilities. While private sector interest expenditures merely redistribute income among private actors, public sector interest rate expenditures increase the overall spending power of the private sector. If rates are higher for longer, the interest payments will easily exceed $1t next year. The aggressive rate hikes have thus far appeared to have a limited effect on dampening inflation. With the policy rate much closer to the terminal rate than 0% and financial markets stabilizing, the stock effect of monetary policy appears to be waning. If the flow effects are mixed, then the current policy stance may not be effective in moving inflation back to 2%
.@foxjust at @bloomberg argues that the lag between the new leases rent measure and the CPI’s shelter component may mean the Fed “was behind the curve when it started raising interest rates in March and could end up late again in pivoting to easier monetary policy.”
The most important of those implications would seem to be that the Federal Reserve’s policy-making committee was behind the curve when it started raising interest rates in March — a year after rents on new leases started exploding — and could end up late again in pivoting to easier monetary policy long after rents have started to fall. I ran the idea of switching to a new-leases rent measure by Princeton economist and former Fed Vice Chairman Alan Blinder, who wrote an influential paper in 1980 urging the switch to owner’s equivalent rent. He emailed, “For most purposes, making that change would be a terrible idea. It would reflect the prices paid by a small, and not representative, minority. That said, if the BLS (or anyone) wants to create a leading indicator of inflation, using rents on new leases would be quite sensible.”
A 2019 RAND study found 60% of American men in the 26-35 cohort who failed to graduate from high school had been arrested by age 26, and their arrest rate has been going up over time, reports @adam_tooze
60% of young men in America with less than high-school education have been arrested at least once by age 26. Strikingly, the report’s author James P. Smith found that the arrest rate has increased dramatically over time. Black men were significantly more likely to have been arrested. Of black men aged 26-35 in the study, 33% had been arrested by age 26 versus 23% for white men. Education plays an outsized role in explaining racial arrest differences, especially for men in the 26–35 age group. The overall higher rate of arrests by 26 among black adults in the 26–35 age group correlates with lower education levels. The study also found that having a more educated father was associated with lower rates of arrests and convictions by 26.
The MSCI India Index has outperformed the MSCI China Index through April 2022, according to @Wellington_Mgmt research, as noted by @tylercowen
Figure 1 shows the cumulative total returns posted by the S&P 500 Index, the MSCI China Index, and the MSCI India Index from December 31, 1992, through April 20, 2022. Our clients have been uniformly surprised that China’s long-term performance has been so much lower than that of the US and India, especially given all the investor focus on China in recent years. And they’ve been even more surprised that India – a market many clients have more or less ignored – has fared so well over the long run.
New research cast doubts on the impact of Made In China 2025, at least through 2018 “we see little statistical evidence of productivity improvement or increases in R&D expenditure, patenting and profitability”
Using a Difference-in-Differences approach, we find evidence that participation [in Made In China 2025] enables firms to receive more innovation subsidies, which appears to induce increases in R&D intensity. However, there is no evidence that participation increases domestic and foreign patenting, labor productivity, TFP, or profitability of participating firms, suggesting the most important goals of the policy are still unrealized. There is no statistically significant evidence (at a 5% significance level) of positive effects of the “Made in China 2025” initiative on total subsidies, Chinese invention patents, US utility patents, log labor productivity, TFP, and profit margin.
Two Aegis-equipped Japanese destroyers successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month. Japan added two more vessels to its Aegis-equipped fleet and now has a total of 8 operational.
Japan added two more vessels to its fleet of Aegis-equipped destroyers, raising to eight the number of ships capable of intercepting ballistic missiles. Two Maya-class Aegis destroyers, the Maya and the Haguro, successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month, the Defense Ministry said Monday. In addition, the Maya fired the Standard Missile-3 Block 2A, the interceptor missile developed by the US and Japan. This marks the first time a Japan Maritime Self-Defense Force vessel launched an interceptor from the state-of-the-art Block 2A system.
New official Chinese numbers show over 40% of 31 provincial-level jurisdictions reported more deaths than births last year. Total population grew by 480,000 to 1.4B in 2021, the smallest increase since 1962, with births down 11.5% from 2021. @SCMPNews
Among China’s 31 provincial-level jurisdictions, 13 reported more deaths than births last year. Those 13 comprised the wealthy regions of Shanghai, Jiangsu, and Tianjin; the central provinces of Sichuan, Chongqing, Hunan, and Hubei; Hebei, Shanxi, and the Inner Mongolia autonomous region in the north and northwest; and the northeastern rust-belt provinces of Liaoning, Jilin, and Heilongjiang. China has shined a bit more light on its demographic crisis, with newly released figures showing that more than a third of its provinces saw their populations shrink last year. Chinese mothers gave birth to just 10.62 million babies in 2021 – an 11.5% decline from 2020.
Large scale decoupling isn’t showing up in the Chinese trade data. Chinese exports to the US rose to 2.5% of GDP in Q3 ‘22, up from about 2.25% on average from 2010 to 2018. @Brad_Setser
I don't think there has been much of a shift in global supply chains out of China. If you trust the Chinese data -- the Chinese data here may be better, as the US data is influenced by tariff avoidance -- US imports from China are slightly higher (as a share of GDP) than before the trade war. China's overall data tells a story of the reglobalization of China's economy after the pandemic. Exports to GDP had been trending down from 2010 to 2018 -- but have moved up strongly in the past year. And there is no sign that the G-7 has already decoupled from China as a source of supply! (imports from China have boomed in the last 3 years) So decoupling, in my view, is a forecast -- not a current reality. The pandemic increased the world's reliance on China as a source of manufactured supply and increased China's reliance on exports for demand!
The Oswald Misery Index (2 x unemployment + inflation ) was 15% in October, on par with the 20% peaks in the aftermath of the financial crisis. @WSJ
Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath and for a couple of months in 2020 during the early lockdowns. Importantly, though, the two factors didn't necessarily carry the same weight, as the Misery Index implies. [Andrew Oswald, a professor at the University of Warwick, found that] a 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. [If Oswald] were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate. His index was 20% in 2010 and 15.1% now. By putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.
Masayoshi Son, chief executive and founder of SoftBank, owes the company close to $5B from loans that enabled his investments in the company’s tech funds. @ft
Masayoshi Son personally owes SoftBank close to $5bn because of growing losses on the Japanese conglomerate's technology bets, which have also rendered the value of his stake in the group's second Vision Fund worthless. The billionaire's ballooning personal liabilities, discovered through a Financial Times analysis of SoftBank's recent filings, comes as the world's biggest tech investor was hammered by plunging tech stocks and valuations in private companies over the past year.
The S&P is rallying outside of large-cap tech stocks. @rbrtrmstrng @ft
One way to think about the relationship between the great Big Tech stocks and the broader market is by comparing the equal-weight S&P index — where the performance of every stock counts the same — to the plain vanilla S&P, which is [weighted by market capitalization.] The performance of the equal-weight index is the light blue line in the chart above, [with a dark blue line for the market cap weighted index.] What that chart shows, in short, is the performance of a few [large cap] stocks, mostly the Big Techs, dragging the index around. But in the most recent rally, things have changed meaningfully, as seen from the extreme right part of the chart. Since the beginning of October, the equal-weight index has outperformed, and the index has risen. The market has rallied without Big Tech.
Economics newsletter publisher @JosephPolitano notes worsening financial conditions, increasing interest rate volatility and rising long-term interest rates as the Federal Reserve began Quantitative Tightening earlier this year.
Throughout most of the 2010s, the dominant state for the US banking system was low-interest rates, large amounts of Quantitative Easing, weak credit creation, and low inflation. Now, however, commercial banks face a different challenge. Since the start of Quantitative Tightening, we have seen financial conditions worsening, increasing interest rate volatility, and rising long-term interest rates—so the program is likely having some of its intended effects (although it's hard to disaggregate the effects of short-term rate hikes and signaling against the actions of QT).
James Capretta notes the federal government’s unfunded liabilities in 2021 were $93.1 trillion, nearly 400% of annual GDP. In 2001, they stood at 105% of GDP. @AEI
Most of the nation's political leaders show little concern or even awareness that the federal government's net financial position has eroded rapidly in this century. They know about mounting public debt because regular budget reports highlight it, as do media outlets. Less well-known or understood is the growth of the government's unfunded liabilities, which, if anything, should be more alarming. With Social Security and Medicare included in the assessment, the federal government's unfunded liabilities in 2021 are $93.1 trillion, or nearly 400 percent of annual GDP. That compares with $11.1 trillion as calculated in the 2001 Treasury report, which was 105 percent of GDP.
.@JohnAuthers argues that the Cleveland Fed “trimmed mean” and the Atlanta Fed “sticky” inflation measure suggest inflation has peaked.
Underlying metrics confirmed that this time might really be the peak, in a way they conspicuously failed to do earlier this year when core CPI last seemed to have started a descent. The chart shows the “trimmed mean” inflation produced by the Cleveland Fed that excludes the biggest outliers in either direction from the index’s components and takes the average of the rest; and the “sticky” inflation measure produced by the Atlanta Fed, which looks only at the goods and services whose prices are hardest to change. In practice, when these measures rise, it’s taken as a sign that inflationary pressure is gaining strength; it’s good to see that while both remain very elevated, the trimmed mean has dipped slightly, while sticky price inflation is unchanged.
.@johnHCochrane argues that inflation potentially peaking with the Federal Funds rate < CPI is evidence that the fiscal theory of the price level is the right way to understand inflation
The news of the moment is that inflation might--might--be peaking. I just present the CPI to make the point, but there seems to be a lot of news suggesting that inflation is easing off. Newer theory, which primarily uses rational (better, forward-looking or model-consistent) rather than adaptive expectations, says that inflation is stable under an interest rate target. It follows that inflation can go away all on its own, even with interest rates substantially below inflation. With fiscal theory + rational expectations, we are having a burst of inflation to devalue government debt, as a response to the 2020-2021 fiscal blowout. But once the price level has risen enough to bring the real value of debt back, it’s over. Until the next shock hits. If inflation fades away despite interest rates below the inflation rate, we have a rather striking confirmation of this rational expectations view, with stable inflation, relative to the traditional spiral-away view. So, are we headed there? It’s too soon for this cautious commenter to declare victory, but I am willing to provide context and say I’m watching anxiously!
.@Davidshor notes that Republicans likely turned out at higher rates than democrats in 2022 and suspects the reason Democrats won independents was anger at the Dobbs decision.
Republicans literally outnumbered Democrats, according to the AP’s VoteCast. And yet Democrats still won. What’s really unique about this midterm cycle is that Republicans created a radical policy change — and one that was quite unpopular — without controlling the presidency or the legislature. And that allowed Democrats to plausibly run as the party that was going to make less change than the opposition, which is a super-unusual situation. In our ad testing, messaging about reproductive rights tested very well. Dobbs had an immediate impact on election outcomes. If you look at special elections before and after the decision, Democrats did much better in the latter. And the percentage of primary voters who were Democrats increased by about 2.7 percent after Dobbs. So I think Dobbs was really the major factor.
Citing a slowdown in the Employment Cost Wage index, @paulkrugman argues there is a “strong case to be made there’s considerable disinflation in the pipeline” and admits, “Over the past year, optimists like me were wrong, while pessimists were right.”
Wages are still rising too fast to be consistent with the Fed’s inflation target, but if the economy is really set to weaken, wage growth will probably weaken too. Furthermore, you can argue that past wage growth, like surging rents, partly reflected a one-time adjustment to pandemic-related shocks, which will go away over time. I’d argue, a strong case to be made that there’s considerable future disinflation already in the pipeline. Over the past year, optimists like me were wrong, while pessimists were right. But past results are no guarantee of future performance.
@LHSummers argues that the current inflationary environment should spur regulatory reforms “that will both reduce prices and make the economy work better.”
The crisis of inflation should not be wasted. A bright spot in the dismal inflation period of the 1970s was the collaboration of Stephen G. Breyer (then counsel to the Senate Judiciary Committee), Sen. Edward M. Kennedy (D-Mass.) and the Carter administration on airline deregulation. In this era, high inflation should be a spur to regulatory changes — from addressing Jones Act increases in shipping costs, to strategic tariffs, to rules that force oil and gas to be transported via truck rather than pipeline, to punitive zoning restrictions — that will both reduce prices and make the economy work better. Regaining price stability at as low a cost as possible is far from sufficient to maximize American economic performance, but it is necessary.
American households still have $1.7 trillion in excess savings, $350 billion of which are in the hands of the lower half of the income distribution. @NickTimiraos @WSJ￼
Household, nonfinancial corporate and small-business sectors ran a surplus of total income over total spending equal to 1.1% of gross domestic product in the quarter of April to June, according to economists at Goldman Sachs Group Inc. Using a three-year average, the measure is healthier than on the eve of any U.S. recession since the 1950s. U.S. households still have around $1.7 trillion in savings they accumulated through mid-2021 above and beyond what they would have saved if income and spending had grown in line with the prepandemic economy, according to estimates by Fed economists. Around $350 billion in excess savings as of June were held by the lower half of the income distribution, or around $5,500 per household on average.
.@WSJ reports, “Treasury securities with similar characteristics are trading at larger-than-normal price differences” as large buyers like big banks and asset managers reduce purchases.￼
Treasury securities with similar characteristics are trading at larger-than-normal price differences. Major players, including the big banks and asset managers that have long been significant buyers, are in retreat. One problem is a growing difference between yields on the newest Treasurys in the market and older vintages that are still traded among investors. Theoretically, a five-year note sold this year should trade at the same yield as a five-year-old 10-year note, because both come due in 2027. But fresh Treasurys are trading at a growing premium to older notes, a sign the older securities have become harder to find buyers for.
“There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” an American manufacturer in China reports @WSJ ￼
It took Jacob Rothman two decades to build a Chinese manufacturing business with his friends and family. Now the 49-year-old American executive says customers want him to make some of his grilling tools and kitchen products elsewhere. He knows it isn’t going to be easy. “There’s not a customer that we have that isn’t pressuring us, suggesting, hoping that we will build factories outside of China,” says the co-chief executive of Velong Enterprises Co., which has six factories in mainland China and serves big retailers and consumer brands such as Walmart Inc. and grill maker Weber Inc. Yet “there’s nothing like China,” he added. “We’ve built this supply chain for 30 years to work like a Swiss clock. There’s just nothing like it.”
.@michaelxpettis notes that decoupling from China will be hard because, with subsidies in “energy, transportation, logistical and communications infrastructure, they can effectively produce more cheaply in China than elsewhere.”￼
Decoupling won't be easy because there is a reason China-based manufacturers are so "competitive" internationally. Chinese subsidies to manufacturers – not just direct but, especially, indirect – are far greater than those of any other country. The extent of these subsidies explains China's huge domestic imbalances and the persistent weakness in its domestic demand. Manufacturers are in China because as long as China subsidies them directly and indirectly, with constant (and expensive) upgrades to energy, transportation, logistical and communications infrastructure, they can effectively produce more cheaply in China than elsewhere. Even rising Chinese wages won't matter because as long as the total income of Chinese workers – and households more generally – doesn't exceed, or even lags, the growth in total production, China will always be a relatively "low wage" economy.
The average hourly wage for auto workers has dropped 30% since 2003 and has converged with non-auto production workers. The UAW is attempting to arrest the trend, but the Big Three’s profits would be erased if they meet the UAW’s demands. @foxjust
During the past 20 years, the inflation-adjusted average hourly wage of non-management US workers, also known as production and nonsupervisory employees, has risen 13%. That’s not exactly a rip-roaring pace — 0.6% a year. Then again, real hourly wages for production and nonsupervisory employees fell in the 1970s and 1980s and rose at only a 0.3% annual pace in the 1990s. The average hourly wage for autoworkers on the production line has dropped 30% since 2003. GM, Ford and Stellantis are all profitable, with a combined net income of $42B for the 12 months ended in June and the amount coming from their US operations probably adding up to somewhat less than $30B. Bloomberg reported last month that Ford and GM’s internal estimates of the costs of the UAW’s demands peg them at $80B per company over the next four years, which would wipe out all those profits and then some.
The typical Asian-American household in the US earns just over $100,000, 3x a typical Japanese family’s earnings.
Even after a planned rise in October, the minimum wage in Tokyo will be the equivalent of just $7.65, compared with $15 in New York City. Median household income in Japan in 2021, the most recent year for which data are available, was equivalent to about $29,000 at the current exchange rate, compared with $70,784 in the U.S. that year, according to government statistics in the two countries. The typical Asian-American household brought in just over $100,000—more than triple what the typical Japanese family made.
Damages from US weather events that cost >$1B have risen from $20B annually during the 1980s to $95B a year between 2010-2019, and $153B in 2021. Property insurers, who bear 48% of these costs, are beginning to reduce coverage. @FedResearch
Nationally, the real cost of [weather and climate] disasters has risen from $20B per year in the 1980s to nearly $95B per year during the period 2010–19. In 2021, damages increased to about $153B. Costs were absorbed by four entities: property insurers (48%), uninsured or underinsured homeowners, businesses, and agricultural entities (37%), the federal government (11%), and state and local governments (4%). If property insurers were to exit certain markets or decrease coverage in states with greater exposure to physical risks due to decreased profitability, a larger share of damages would not be fully insured. Two major insurers recently announced that they will no longer accept new applications for business and personal property insurance coverage in California, citing increasing wildfire risk as a key factor in that decision. In addition, several major hurricanes during 2020-22 forced numerous insurance companies into bankruptcy in Louisiana and Florida.
Capital inflows into North American markets have contributed to a 3.9x Price/Book value relative to market averages of 1.9x in Europe and 1.4x in Japan according to @verdadcap_quant. He believes this offers opportunities in both Europe and Japan.
We’ve found reasons to think more highly of Europe and Japan. Notably, we find that value stocks in Europe and Japan are more profitable, with Europe being particularly impressive. Among firms that trade at a discount to book value, Europe has a Gross Profit/Assets ratio of 18.5%, which is 1.5x the profitability of North American value firms. The differences are even more stark in terms of EBITDA/Assets, with Europe’s value firms delivering a 6.4% return on assets, almost 3x higher than North America’s profitability among value firms. We believe that the combination of historically wide valuation spreads in Europe and higher levels of profitability among Europe’s value stocks bolster the case for upward mean reversion going forward. Historically, mean reversion in multiples has supported significant outperformance of value relative to growth.
Racial polarization in voting has been declining since 2012 in the US. @Nate_Cohn finds Biden underperforming relative to 2020 in current polling with non-white voters; 5% of 2020 non-white Biden voters now say they support Trump.
Mr. Biden’s weakness among nonwhite voters is broad, spanning virtually every demographic category and racial group, including a 72-11 lead among Black voters and a 47-35 lead among Hispanic registrants. The sample of Asian voters is not large enough to report, though nonwhite voters who aren’t Black or Hispanic — whether Asian, Native American, multiracial or something else — back Mr. Biden by just 40-39. In all three cases, Mr. Biden’s tallies are well beneath his standing in the last election. The survey finds evidence that a modest but important 5% of nonwhite Biden voters now support Mr. Trump, including 8% of Hispanic voters who say they backed Mr. Biden in 2020.
.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal dominance,” in which the government forces banks to hold non-interest-bearing debt.
The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. Inflation taxation has two components: expected and unexpected inflation taxation. Both are limited in their ability to fund real government expenditures. The expected component of inflation taxation (per period) is the product of the nominal interest rate and the inflation tax base, which consists of all non-interest bearing government debt. Unexpected inflation taxation occurs when the nominal value of outstanding government debt falls unexpectedly (thereby taxing government debtholders), and this component is also limited by the ability of government to surprise markets by creating unanticipated inflation. It is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.
.@B_Eichengreen argues that high public debt levels are here to stay and that methods to suppress interest rates are “less feasible than in the past.” This means chronic fiscal deficits will need to be reduced even in countries that issue safe assets.
Large, persistent primary budget surpluses are not in the political cards. It is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer. Inflation is not a sustainable route to reducing high public debts. Statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.
Since 2007, the ratio of Treasuries outstanding to primary dealer assets has increased by a factor of four. @DuffieDarrell argues that this will drive increasing illiquidity in the Treasury market.
The total amount of Treasuries outstanding will continue to grow rapidly relative to the intermediation capacity of the market because of large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, unless there are significant improvements in market structure. Broad central clearing and all-to-all trade have the potential to add importantly to market capacity and resilience. Additional improvements in intermediation capacity can likely be achieved with real-time post-trade transaction reporting and improvements in the form of capital regulation, especially the Supplementary Leverage Ratio. Backstopping the liquidity of this market with transparent official-sector purchase programs will further buttress market resilience.
.@PaulKrugman notes that after a long period of general agreement that r* was very low, there is now active disagreement about the level of r*, with some, including the Richmond Fed, believing that r* has increased substantially.
Many of us thought we had a pretty good understanding of the forces behind low r* before Covid struck. Investment demand is largely driven by expectations about future economic growth, and prospects for U.S. growth seemed low in part because of demography — growth in the working-age population has stalled — and in part because, despite all the hype about technology, productivity has grown slowly since the mid-2000s. The demographic story hasn’t changed. There are a couple of other forces that might have increased r*. Budget deficits have gotten bigger, which could be providing a fiscal boost. The Biden administration’s industrial policies seem to be catalyzing a boom in manufacturing investment. But manufacturing investment isn’t that big a part of overall investment spending, so it’s not clear how much this matters for interest rates. One possible reason to think that r* may have risen is the surprising resilience of the economy in the face of Fed rate hikes.
Noting high nominal wage growth, Bridgewater argues that inflation is likely leveling out at its current rate which implies downside risk to asset prices.
Today, about 2.5% wage growth would be consistent with 2% inflation, as recent-trend productivity growth has been low and other sources of income (from assets and government-deficit-financed transfers) are more neutral. With wage growth currently running at around 4.5%, we’re far away from this level. We’re more likely to see inflation level out at its current rate rather than continue to decline like it has over the past year. This would push the Fed to continue tightening and, with a short pause and return toward easing being priced in, could come through the form of either rate rises or holding rates at high levels. This makes assets especially vulnerable to another round of tighter policy.
Alan Auerbach @Kotlikoff argue that the global savings glut was a “myth.” The market return on capital, which would show a decline if there were a capital glut, increased in the 2000s and 2010s.
There has been no major increase in the US capital-output ratio, nor has there been a major decline in the US marginal product of capital – the economy’s real return to capital. The US capital-output ratio remains close to its postwar average and capital’s real return has remained roughly constant -- around 6%. During the 2000s the marginal product of U.S. capital (MPK) was a healthy 5.84%. In the 2010s it was even higher at 6.42%. The market return to capital would show a decline if there were a capital glut and investors expected lower rates of return, It shows no such decline. The market return to capital’s real return averaged 5.52% between 1950 and 1989. Btw 1990 and 2019 it averaged 6.95. Hence, the broadest market-based real return data shows a rise, not a fall in returns in the recent decades during which capital has allegedly been in vast oversupply. The real return to US wealth between 2010 and 2019 averaged 8.25% – the highest average return of any postwar decade.
Jesper Rangvid notes that, so far this year, seven stocks generated 70% of the S&P 500 return; they now constitute 27.5% of the S&P 500.
In this analysis, I look at the performance of stocks referred to by some as the “Magnificent Seven” (Mag7). These are: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. The combined market value of all 500 stocks in the S&P 500 has increased by $5 trillion or 15.3% in 2023, as mentioned. Leaving Mag7 out of the equation, the value of the remaining 493 shares has risen from $26 trillion to $27 trillion today, a return of only 4.5%. Consequently, Mag7 stocks have provided a 10.8% increase in the S&P 500. This means that only 7 out of 500 stocks generated 10.8%/15.3% = 71% of the return of the S&P 500 in 2023. The remaining 493 stocks delivered the remaining 29%. One can only speculate whether these shares are bubbles. The spectacular performance of Nvidia, for example, is reminiscent of the performance of hyped stocks during the dot.com bubble at the turn of the millennium.
Ideologically driven donors of $200 or less are driving political polarization in the US, as small donors hold far more extreme views than those of the mean voter. @Edsall
A 2022 paper, “Small Campaign Donors,” documents the striking increase in low-dollar ($200 or less) campaign contributions in recent years. The total number of individual donors grew from 5.2mm in 2006 to 195mm in 2020. The appeal of extreme candidates can be seen in the OpenSecrets listing of the top members of the House and Senate ranked by the percentage of contributions they have received from small donors in the 2021-22 election cycle: Bernie Sanders raised $38.3mm, of which 70%, came from small donors; Marjorie Taylor Greene raised $12.5mm, of which 68% came from small donors; and Alexandria Ocasio-Cortez raised $12.3mm, of which 68%, came from small donors. House Republicans who backed Trump and voted to reject the Electoral College count on Jan. 6 received an average of $140,000 in small contributions, while House Republicans who opposed Trump and voted to accept Biden’s victory received far less in small donations, an average of $40,000.
Half the world’s oceans are experiencing a marine heatwave. As the Gulf of Maine warms, the lobster catch has fallen by 26% since 2016 and is now “162 miles northward and nearly 70 feet deeper.”
This summer, nearly half the world’s oceans are experiencing a marine heatwave, defined as warmer than 90% of previous temperature observations on the same date. There are other possible explanations in addition to climate change and the El Niño/La Niña cycle. New pollution rules have cut airborne sulfur aerosol particles released by commercial ships over parts of the ocean, clearing the air and allowing more sunlight to reach the ocean surface. That in turn might be heating the water along some shipping routes, although the amount is in dispute. In January 2022, an underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere. Some researchers believe that vapor might be acting as a planet-warming greenhouse gas and nudging up ocean temperatures. Both theories are still under investigation, and their overall impact is up for debate.
Depletion of groundwater reserves is causing significant reductions in crop yields and puts at risk one-third of America’s total volume of drinking water that comes from groundwater.
A wealth of underground water helped create America, its vast cities and bountiful farmland. Now, Americans are squandering that inheritance. The Times analyzed water levels reported at tens of thousands of sites, revealing a crisis that threatens American prosperity - 84,544 monitoring wells examined for trends since 1920. Nearly half the sites have declined significantly over the past 40 years as more water has been pumped out than nature can replenish. In the past decade, four of every 10 sites hit all-time lows. And last year was the worst yet.
Treasury yields are 75bps above the CBO’s baseline projection. If rates remain at this level interest costs will exceed defense spending in 2024.
The ten-year Treasury Note interest rate closed at 4.30% on Thursday, the highest since 2007. Meanwhile, the three-month Treasury Bill rate closed at 5.56% and the 30-year Treasury Bond at 4.41%. All three are at or near their highest level in 16 years. CBO's most recent baseline projections are based on a ten-year rate of 3.9% and a three-month rate of 4.6% this quarter. Based on this, we estimate that interest rates across the yield curve average about 75bps above baseline projections. If rates remain 75bps above CBO’s projections, it could add $2.3T (6% of GDP) to the debt over the next ten years and $350B (0.9% of debt-to-GDP) to the deficit in 2033. Under that scenario, interest costs would exceed combined spending on Medicaid, SSI, and SNAP as well as spending on defense by next year. By 2026, the cost of interest would reach a record high 3.3% of the economy.
Improvement in the US debt-GDP ratio from 1946-1974 was driven primarily by primary government surpluses and distortions of real interest rates from surprise inflation and from pegged nominal rates, not overall economic growth. @AcalinJulien
We decompose the movements of debt/GDP into the effects of primary surpluses and deficits; distortions of real interest rates from surprise inflation and from pegged nominal rates; and the difference between the undistorted real interest rate and the growth rate of output (r⋆ − g). For the period up to 1974, we find that the fall in the debt-GDP ratio is explained mostly by primary surpluse and interest-rate distortions. Absent those factors, with the path of the ratio determined entirely by r⋆ − g, the ratio of 106% in 1946 would have fallen only to 74% in 1974 rather than the actual trough of 23%. As of the end of fiscal year 2022, the actual debt/GDP ratio stands at 102%, close to its peak of 106% in 1946. Over the last 76 years, however, g > r⋆ has contributed only modestly to debt reduction. History should not make us optimistic that the U.S. will grow out of its debt.
Torsten Sløk @apolloglobal notes higher interest payments aren’t flowing back into the American economy as foreigners and the Fed own 50% of Treasuries.
When interest rates increase, holders of fixed income get a higher cash flow. The problem is that the Fed and foreigners own 50% of Treasuries outstanding, and foreigners own 28% of [investment grade and high-yield corporate] credit outstanding, so a lot of the additional cash flow created by higher US yields is not boosting US GDP growth. The bottom line is that higher interest rates are a net negative for the US economy.
The Fortune 500 is less dynamic than many think: only 52 of the firms that make up the Fortune 500 were born after 1990. However, this likely reflects the dynamism of the component firms.
We found that only 52 of the [Fortune] 500 were born after 1990, our yardstick for the internet era. That includes Alphabet, Amazon and Meta, but misses Apple and Microsoft. Merely seven of the 500 were created after Apple unveiled the first iPhone in 2007, while 280 predate America’s entry into the second world war. In 1990 just 66 firms in the Fortune 500 were 30 years old or younger and since then the average age has crept up from 75 to 90. One explanation is that the digital revolution has not been all that revolutionary in some parts of the economy. Another is that inertia has slowed the pace of competitive upheaval in many industries, buying time for incumbents to adapt to digital technologies. A third explanation is that [incumbents’] scale creates a momentum of its own around innovation.
.@TheEconomist notes that American firms collect 41% of “excess profits” globally as measured by firms’ return on invested capital above a hurdle rate of 10%.
Out of some 900 sectors in America the number where the four biggest firms have a market share above two-thirds grew from 65 in 1997 to 97 by 2017. The Economist has come up with a crude estimate of “excess” profits for the world’s 3,000 largest listed companies by market value (excluding financial firms). Using reported figures from Bloomberg we calculate a firm’s return on invested capital above a hurdle rate of 10% (excluding goodwill and treating research and development, R&D, as an asset with a ten-year lifespan). This is the rate of return one might expect in a competitive market. In the past year excess profits reached $4trn, or nearly 4% of global GDP. American firms collect 41% of the total, with European ones taking 21%. The energy, technology and, in America, health-care industries stand out as excess-profit pools relative to their size.
The German economic model is under increasing stress due to higher energy costs, China’s import substitution strategy, and competition from American and Chinese electric car makers.
Germany will be the world’s only major economy to contract in 2023, with even sanctioned Russia experiencing growth, according to the International Monetary Fund. China was for years a major driver of Germany’s export boom. A rapidly industrializing China bought up all the capital goods that Germany could make. But China’s investment-heavy growth model has been approaching its limits for years. Growth and demand for imports have faltered. Energy prices in Europe have declined from last year’s peak as EU countries scrambled to replace Russian gas, but German industry still faces higher costs than competitors in the U.S. and Asia.
The labor force participation rate for prime-age women (ages 25-54) is at an all-time high 77.8%, driven by mothers whose youngest child is under 5 years old. @laurenlbauer
Since February 2023, the labor force participation rate for prime-age women––those between the ages of 25 and 54––has exceeded its all-time high. As of the most recent jobs report, prime-age women had a labor force participation rate of 77.8%. We find that those who have contributed most to the rebound in overall labor force participation in April and May of 2023, three years after the nadir of pandemic-era participation, are in fact prime-age women. Moreover, among prime-age women and indeed among all groups, women whose youngest child is under the age of five are powering the pack’s upward trajectory.
Since 2018, auto manufacturers have announced at least $110 billion of EV-related domestic investment, about half in Southern states, driven by lower labor and energy costs. Unionizing southern auto workers is a priority for the UAW.
Auto companies have announced more than $110 billion in EV-related investments in the U.S. since 2018, with about half that sum destined for Southern states, according to the Center for Automotive Research. The rest is mostly planned for states in the Great Lakes region, including Michigan, Ohio and Indiana. Auto employment in the Great Lakes region, while still nearly double that of southern states, has slid 34% in the last two decades to 382,000 workers as of 2021, according to the Economic Policy Institute. Full-time unionized jobs in the industry currently range between $18 to $32 an hour. There is no guarantee the [southern] Ford plants will be unionized, and the company has said this decision is up to its workers. The United Auto Workers union is currently in talks with the Detroit automakers and is prioritizing organizing these joint-venture battery plants.
.@GoldmanSachs finds that 20-25% of US workers are working from home at least part of the week, well above the pre-pandemic average of 2.6%. This exerts upward pressure on office vacancy rates, partially offset by a decline in new office construction.
Work from home has reduced office utilization rates but has not yet led to substantial declines in office occupancy rates because most firms are locked in long-duration leases. Going forward, 17% of all office leases are scheduled to expire by the end of 2024, 47% between 2024-2029, and the rest after 2030. Our baseline estimates suggest that remote work will likely exert 0.8pp of upward pressure on the office vacancy rate by 2024, an additional 2.3pp over 2025-2029, and another 1.8pp in 2030 and beyond, though this is likely to be partially offset by a decline in new construction. The share of employees working remotely remains remarkably elevated in industries like information that require less face-to-face interaction, while it is much lower in contact-heavy sectors like retail and hospitality.
Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.
We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.
The decline in the college wage premium has been driven by faster wage growth for high school workers rather than slower wage growth for college graduates. @sffed
The college wage premium is especially large for Asian workers, with college graduates earning more than twice what high school graduates earn. This reflects about a 120% premium, compared with about a 70–80% premium for the other three racial/ethnic groups. The college wage gap is also somewhat larger for Black workers than for Hispanic and White workers, although the premiums for those groups have largely converged in recent years. All four groups saw gains through at least the early part of the recovery from the 2007–09 recession. While the premium continued to rise for Asian workers, the premium flattened for White workers in the latter half of the recovery and fell for Hispanic and Black workers. Moreover, since the 2020 pandemic recession, the college wage premium edged down slightly for all groups except Hispanic workers.
Xi Jinping is opposed to domestic consumption growth, according to well-sourced reporters @Lingling_Wei and @yifanxie. This implies that persistent imbalances with the West are a goal of the central government.
Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world at a time of simmering tensions between Beijing and the West. Chinese officials told their counterparts at multinational institutions that the many hardships Xi survived during the Cultural Revolution—when he lived in a cave and dug ditches—helped shape his view that austerity breeds prosperity, the people said. “The message from the Chinese is that Western-style social support would only encourage laziness,” one person familiar with the meetings said.
.@fuxianyi expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data, less than half the number in 2016 when China scrapped its one-child policy.
China’s total fertility rate—a snapshot of the average number of babies a woman would have over her lifetime—fell to 1.09 last year, from 1.30 in 2020, according to a study by a unit of the National Health Commission cited this week by National Business Daily, a media outlet managed by the municipal government of Chengdu, the capital of Sichuan province. At 1.09, China’s rate would be below the 1.26 of Japan. Yi Fuxian, a scientist at the University of Wisconsin who has studied China’s demographics expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data. That would be less than half the number in 2016, when China scrapped its one-child policy and recorded around 18 million births. By last year, the figure had fallen below 10 million.
Labor force participation is down 1pp since the start of the pandemic. A @sffed analysis finds that two-thirds of the decline was driven by changes in population, largely aging, and forecasts a further 1pp decline between 2022 and 2032.
.@paulkrugman argues that at the current interest rate of inflation-protected 10-year U.S. bonds of 1.83%, economic growth makes a runaway debt spiral unlikely.
You can get a debt spiral if r is significantly larger than g; in that case rising debt leads to faster accumulation of debt, and we’re off to the races. Even after the rate surge of the past few days, the interest rate on inflation-protected 10-year U.S. bonds was 1.83%, which is close to most estimates of the economy’s sustainable growth rate. If you take the low end of such estimates, we could possibly face a debt spiral, but it would be a very slow-motion spiral. Put it this way: If r is 1.8, while g is only 1.6, stabilizing the debt ratio with debt at 100% of G.D.P. would require a primary surplus of 2% of G.D.P.; increase debt to 150%, and that required surplus would increase only to 3%. Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Costs Will Grow the Fastest Over the Next 30 Years and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
.@JohnHCochrane takes a victory lap, arguing that the fiscal theory of the price level is the most descriptive theory of inflation.
A one-time $5 trillion fiscal blowout causes a one-time rise in the level of prices, just enough to inflate away the value of the debt by $5 trillion. Then inflation stops, even if the Federal Reserve does nothing. The Fed is still important in fiscal theory. The Fed bought about $3 trillion of the new debt and converted it to interest-paying reserves. Giving people checks backed by reserves is arguably a more powerful inducement to spend than giving people Treasury bonds. Now, by raising interest rates, the Fed lowers current inflation but at the cost of more-persistent inflation. That smoothing is beneficial. These are core propositions of fiscal theory, stated ahead of time and at odds with conventional theories. Related: Waning Inflation, Supply and Demand and The Second Great Experiment Update
As firms have stayed private longer wealth creation has shifted from public to private markets. @mjmauboussin
The median age at IPO was 7.9 years from 1976 to 2000 and rose to 9.5 years from 2001 to 2022. One implication of companies staying private longer is that wealth creation has shifted to private markets from the public markets. To illustrate the point, Amazon’s market capitalization was $749 million when it went public in 1997 and $1.3 trillion as of June 30, 2023 (in 2022 dollars). The company was three years old when it did its IPO. Essentially all of its wealth creation occurred when it was public. Hendrik Bessembinder, a professor of finance, has measured the wealth creation of more than 28,000 U.S.listed companies since 1926. A company creates wealth if it generates returns in excess of one-month Treasury bill rates. He found that from 1926 to 2022, just under 60% of them destroyed $9.1 trillion and the other 40% or so created $64.2 trillion. Just 2% of the sample created $50 trillion of the net total of $55.1 trillion, and the top 3 firms (Apple, Microsoft, and ExxonMobil) created almost $6 trillion. Related: Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOsand The Economics of Inequality in High-Wage Economies
Based on first-half new business formation, 2023 will be just shy of 2021’s record number of new firms likely to hire employees. @InnovateEconomy
Early-stage business activity across the United States remains robust through the first half of 2023, as the pace of new business formation strengthened over last year. Individuals filed nearly 2.7 million applications to start a business between January and June of this year, a 5% increase over 2022 and a staggering 52% increase over the same period in 2019. One-third of those filings were for new businesses likely to hire employees—a key subset of applications from the Census Bureau’s Business Formation Statistics demonstrating a “high propensity” to hire staff, if and when the business becomes operational. The volume of likely employer applications also remained well above prepandemic levels, surpassing the total from the first six months of 2019 by 36%. Related: Startup Surge Stood Firm Against Economic Headwinds in 2022 and Like the Broader Economy, the High Tech Sector is Becoming Less Dynamic and The Economics of Inequality in High-Wage Economies
Rebecca Patterson argues US equity outperformance is likely to continue as US firms are positioned to capture a sizable share of productivity benefits from new technologies like AI, and the US is likely to experience stronger relative economic growth.
American equity exceptionalism is possible, for at least two reasons. First, the US is set to capture a sizeable share of productivity benefits from technology such as artificial intelligence. Second, a moderating global economy could work against more cyclically biased equity markets overseas, favouring those geared towards organic growth drivers. Over multi-year periods, domestic growth has been found to dominate local equity returns. A 2011 study by Clifford Asness, Roni Israelov and John Liew suggests that 39% of 15-year returns could be explained by domestic economic performance. Growth is fundamentally a function of labour and productivity. Given that most of the developed world (and China) faces at least directionally similar labour constraints, the US seems likely to be a relative growth winner thanks to prospects for greater productivity gains. Related: Market Resilience or Investors in Denial: The Market at Mid-Year 2023 and Most Global Economies Remain in Disequilibrium, Requiring Policy Action and Birth, Death, and Wealth Creation
.@charlesmurray argues that urban disorder has increased since 2013, when cities abandoned broken-windows policing.
I created a “broken-windows arrest rate” analogous to the violent and property crime rates by summing arrests in the eight categories, dividing them by the size of the city’s population, and expressing the result as the number of arrests per 100,000 population. To ensure that all these qualified as minor crimes, I included only arrests that were charged as misdemeanors, violations, or infractions, excluding arrests charged as felonies. The graph below shows the proportional change in those arrest rates using 2013 as the baseline. In New York and Los Angeles, the fall in arrests for broken-windows offenses was steep and steady from 2013 to 2020. Washington is different, with a sudden rise in broken-windows arrests in Washington in 2019. The anomaly was created entirely by a one-year spike in arrests for prostitution and solicitation, the result of a policy decision to clear the streets of prostitutes near hotels. If arrests for prostitution and solicitation are deleted from the Washington data, the trendline of broken-windows offenses shows the same unbroken decline as the trendlines for New York and Los Angeles. As of 2022, arrests for broken-windows offenses since 2013 had fallen by 74% in New York, 77% in Washington, and 81% in Los Angeles. There was no apparent “Floyd effect” in New York or Los Angeles. A case for a small effect can be made for Washington. Related: Pandemic Murder Wave Has Crested. Here’s the Postmortem
While wages are still accelerating, @jasonfurman notes cooling jobs/hours and thinks today’s job report is consistent with a soft landing.
The unemployment rate fell back to 3.5%. Has been in a 3.4% to 3.7% band for 17 straight months. The last time this happened was Nov 2007. Given the recovery in the (age-adjusted) participation rate this has brought the employment-population rate for prime age workers (25-54) above the pre-pandemic rate. The wage growth slowdown earlier this year has largely gone away. Earlier this year average hourly earnings were growing at a 3.5% annual rate, now they're up to a 5% annual rate--unchanged since early 2022. Note, these are noisy and can be revised a lot. Overall this report is mixed for the inflation outlook: Jobs/hours: Cooling Unemployment rate: Neutral Wages: Heating I tend to think the order I listed them above is roughly right for what signals matter so think this report is slightly favorable for inflation.
Michael Smolyansky @federalreserve argues the decline in interest and corporate tax rates mechanically explains 40% of real growth in corporate profits between 1989-2019 suggesting lower returns going forward.
The reduction in interest and corporate tax rates was responsible for over 40% of the growth in real corporate profits from 1989 to 2019. Moreover, the decline in risk-free rates over this period explains the entirety of the expansion in price-to-earnings (P/E) multiples. These two factors therefore account for the majority of this period’s exceptional stock market performance. From 1989 to 2019, real corporate profits grew at the robust rate of 3.8% per year. This was almost double the pace seen from 1962 to 1989. The difference in profit growth between these two periods is entirely due to the decline in interest and corporate tax rates from 1989 to 2019. One way to see this is to compare the growth of earnings before subtracting interest and tax expenses (EBIT). In fact, real EBIT growth was slightly lower from 1989 to 2019 compared to 1962 to 1989: 2.2% versus 2.4% per year. The outlook for stock price growth is bleak. Related: The Curious Incident of the Elevated Profit Margins and Charlie Munger: US Banks Are ‘Full of’ Bad Commercial Property Loans
.@OppInsights finds that the “Ivy-Plus” (Ivy League, plus UChicago, Duke, MIT, Stanford) admit students from the highest income families scoring in the top 1% of SAT/ACT at far greater rates than those from lower-income families.
Children from families in the top 1% are more than twice as likely to attend an Ivy-Plus college (Ivy League, Stanford, MIT, Duke, and Chicago) as those from middle-class families with comparable SAT/ACT scores. Two-thirds of this gap is due to higher admissions rates for students with comparable test scores from high-income families; the remaining third is due to differences in rates of application and matriculation. The high-income admissions advantage at private colleges is driven by three factors: (1) preferences for children of alumni, (2) weight placed on non-academic credentials, which tend to be stronger for students applying from private high schools that have affluent student bodies, and (3) recruitment of athletes, who tend to come from higher-income families. Highly selective public colleges that follow more standardized processes to evaluate applications exhibit smaller disparities in admissions rates by parental income than private colleges that use more holistic evaluations. Related: Why Do Wages Grow Faster for Educated Workers? and Multidimensional Human Capital and the Wage Structure and The Economics of Inequality in High-Wage Economies
.@JoshZumbrun, evaluating the differences between @OppInsights recent research on elite schools and Krueger’s earlier findings, shows that elite schools don’t have that much impact outside of lottery-like tail outcomes.
Dale and Krueger had classified everyone who earned more than $200,000 into the same category, making no distinction between an affluent doctor earning $250,000 and Jeff Bezos. Chetty and his authors use a slightly different approach. They classify everyone’s income into percentiles—80th, 81st, etc. Among top students, 19% who attend the top schools make it to the richest 1% of the income distribution, versus 12% who didn’t attend. Chetty’s co-author Deming compares those upper-tail outcomes to winning the lottery: Elite schools have lots of lottery tickets lying on the ground, whereas most other colleges only have a few. For most people, the lottery ticket will be worth nothing. For a few, it is a jackpot. Related: Diversifying Society’s Leaders? The Determinants and Causal Effects of Admission to Highly Selective Private Colleges