Posts Tagged ‘economy’
“What people these days call ‘Vibes’ is a smell, a taste of the soul”*…
Up? Down? Better? Worse? What’s actually going on in our economy? Noah Smith on the asymmetric warfare going on around that question…
As we gear up for election season, a big debate is whether the U.S. economy is doing well or not. Biden supporters point to extremely low unemployment, falling inflation, and real wages that have started rising again. Biden opponents — including both conservatives and socialists — contend that the inflation of 2021-22 left such a severe scar on Americans’ pocketbooks that low consumer confidence is perfectly justified. Biden supporters counter that since inflation has come down — and was never as severe as in the 1970s — the anger over the economy is just “vibes”.
Basically, the Biden supporters are right; the U.S. economy is truly excellent right now. Inflation looks beat, everyone has a job, incomes and wealth are rising, and so on. But on the other hand, I can’t command people to simply stop being mad about the inflation that reduced their purchasing power back in 2021-22. People care about what they care about.
At the same time, though, I think it’s possible for negative narratives about the economy to take hold among the general populace and distort people’s understanding of what’s actually going on. For example, John Burn-Murdoch of the Financial Times recently found [gift article] that consumer sentiment closely tracks real economic indicators in other countries, but has diverged in America since 2020:
Now this could be because Americans simply care about different things than Europeans; we might simply have started to really really hate interest rates since 2021, while Europeans didn’t. But a simpler explanation is that Americans’ negative sentiment is due to something other than economic indicators. And it’s possible that that “something” is a negative narrative — i.e., vibes…
“Vibes vs. data”
Indeed, as Burn-Murdoch observes in his analysis…
… It seems US consumer sentiment is becoming the latest victim of expressive responding, where people give incorrect answers to questions to signal wider tribal political or social affiliations. My advice: if you want to know what Americans really think of economic conditions, look at their spending patterns. Unlike cautious Europeans, US consumers are back on the pre-pandemic trendline and buying more stuff than ever…
“Should we believe Americans when they say the economy is bad?” (gift article)
But why? Jonathan Kirshner‘s review of Martin Wolf‘s important book The Crisis of Democratic Capitalism, suggest an unsettling answer…
The Crisis of Democratic Capitalism is an essential read for its articulation of the perilous crossroads at which the future of enlightened liberal civilization now stands. Wolf argues persuasively that, for all their visible flaws and imperfections, competitive market capitalism and liberal democracy are the best bad systems available for organizing human societies. And each requires the other to thrive—“[b]ut this marriage between those complementary opposites […] is always fragile.” Capitalism has been allowed to run amok, and it has elicited a backlash that threatens democracy…
Wolf’s central argument is that capitalism and democracy are inherently interdependent, yet also often in tension with one another—and managing the balance of that indispensable relationship is akin to walking a tightrope. In traditional autocracies, the economy has been captured by those that control the state, and that control is the basis of their power (which is why they are so reluctant to let go of the reins of authority). Liberal democracies today face the inverse problem: the capture of the state by those that control the economy. This is plutocracy, and aside from the injustice it visits on societies, it is also profoundly dangerous, because in democratic plutocracies (like the United States today), the simmering frustrations of mass polities will at some point lead to the voluntary election of an autocrat: “[I]nsecurity and fear are gateways to tyranny.” Decades of stagnant incomes, rising inequality, and the erosion of high-quality jobs for the middle class and the less-educated have allowed the relationship between capitalism and democracy to become dangerously unbalanced. The Crisis of Democratic Capitalism argues that the fault lies with the failure of public policy to tame the excesses of capitalism; it warns that those excesses will unleash the forces that destroy democracy.
Economic inequality, on the rise for 50 years, has soared to ever greater extremes in recent decades. As Wolf reports, from 1993 to 2015, the real income of the top 1 percent of the population in the United States nearly doubled; for everybody else, over those same years, aggregate real income grew by 14 percent. More pointedly, as the very rich got much, much richer from 2005 to 2014, 81 percent of US households had flat or falling real income—a weighty reminder that we continue to live in a world defined by the Global Financial Crisis and its aftermath…
… the financialization of the economy, especially after the 1990s, and the fortunes amassed from that process, were part and parcel of a larger shift towards “rigged capitalism”—the emergence of which The Crisis of Democratic Capitalism places at the heart of the matter. In a remarkable (and laudable) intellectual evolution, Wolf, who welcomed and celebrated the Thatcher revolution in Britain, and not so long ago penned the book Why Globalization Works (2004), now attributes the crisis of our time to “what Adam Smith warned us against—the tendency of the powerful to rig the economic and political systems against the rest of society.” Superseding a well-ordered market society, rigged capitalism—a toxic brew of developments and practices including financialization, winner-take-all markets, reduced competition, increased rent-seeking behavior (the use of concentrated economic power to extract monopoly profits), tax avoidance and evasion, and the erosion of ethical standards—has led to a widespread loss of confidence in the legitimacy of democracy…
These pathologies run deep, and well below the headlines. The use of political power to undermine competition—which must thrive at the heart of any capitalist society—is an endemic attribute of rigged capitalism. (And it is why we pay higher prices for most things than a “free market” would levy.) Many if not most giant corporations are now monopolies or near-monopolies, a situation that, as any card-carrying professional economist of even the most conservative stripe would agree, generates inefficiencies, rent-seeking behavior, and outright exploitation. Many markets have become shielded, protections reinforced by access to the corridors of power, with wealth extracted from consumers (and workers) in consequence: consider the atrocity of unskilled workers in fast food restaurants being forced to sign “non-compete” clauses, an act of collusive wage suppression.
Rigged capitalism—which yields massive concentrations of wealth for a sliver of largely-above-the-law plutocrats, combined with stagnation and declining opportunities for the majority—leads to a basic political problem: “How, after all, does a political party dedicated to the material interests of the top 0.1 percent of the income distribution win and hold power in a universal suffrage democracy? The answer is pluto-populism.” This is where race, identity politics, and the culture wars come into play. The century-long political hammerlock held by the Democratic Party on the Old South was based on voter suppression and other devices that guaranteed, for working-class whites, greater economic opportunity, access to the legal system, and higher social status than Blacks, in exchange for their political support. Bob Dylan, at 22 years old, saw through this in his song “Only a Pawn in Their Game” (1964)—and nearly 60 years later, that game hasn’t changed much…
rigged capitalism will nevertheless unleash forces not easily contained—and render liberal democracy unsustainable. As political scientist Rawi Abdelal has argued, “the social fact of unfairness is more important than the material fact of income and wealth distribution.” Endemic corruption, arbitrariness of justice, and fear for future prospects are poisonous to the body politic, undermining shared perceptions of the legitimacy of democratic society. In such settings, past and present, fear, despair, and frustration create the space for charismatic personalist authoritarians peddling promises of deliverance but who, once in power, consolidate their hold on the state by undermining the institutional constraints on their authority. And so, democracy dies from within.
What is bewildering about the American case is not that it has witnessed the rise of a leader who, as Wolf describes, “not only had no idea what a liberal democracy was but despised the idea,” and who was “instinctively authoritarian”—this, after all, is what pluto-populism conjures. What remains bizarre, however, is that, of all the possible choices, a hedonistic, ethically suspect, narcissistic grifter—who for decades was a signature beneficiary of rigged capitalism—would emerge as the people’s choice. Yet Donald Trump, like the gargantuan Stay-Puft Marshmallow Man from Ghostbusters, has been summoned by a collective subconscious rage to act as a malevolent score-settling agent of destruction…
“Rigged Capitalism and the Rise of Pluto-populism: On Martin Wolf’s ‘The Crisis of Democratic Capitalism’”
All three articles– and Wolf’s book– are eminently worth reading in full.
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As we ponder populism, we might recall that it was on this date in 1865 that the 27th state (Georgia) ratified the 13th Amendment to the U.S. Constitution, abolishing slavery and involuntary servitude (except as punishment for a crime). Proclaimed on December 18, it was the first of the three Reconstruction Amendments adopted following the American Civil War.
The Emancipation Proclamation (made in September 1862; effective January 1, 1863) had freed all current slaves in the U.S. (though as a practical matter freedom took years longer). The Thirteenth Amendment assured that it would never be reinstated.
“Not all private equity people are evil. Only some.”*…
But as Rogé Karma explains, that could be enough to cause big trouble, as a large and growing portion of our economy is disappearing behind a veil…
The publicly-traded company is disappearing. In 1996, about 8,000 firms were listed in the U.S. stock market. Since then, the national economy has grown by nearly $20 trillion. The population has increased by 70 million people. And yet, today, the number of American public companies stands at fewer than 4,000. How can that be?
One answer is that the private-equity industry is devouring them. When a private-equity fund buys a publicly traded company, it takes the company private—hence the name. (If the company has not yet gone public, the acquisition keeps that from happening.) This gives the fund total control, which in theory allows it to find ways to boost profits so that it can sell the company for a big payday a few years later. In practice, going private can have more troubling consequences. The thing about public companies is that they’re, well, public. By law, they have to disclose information about their finances, operations, business risks, and legal liabilities. Taking a company private exempts it from those requirements.
That may not have been such a big deal when private equity was a niche industry. Today, however, it’s anything but. In 2000, private-equity firms managed about 4 percent of total U.S. corporate equity. By 2021, that number was closer to 20 percent. In other words, private equity has been growing nearly five times faster than the U.S. economy as a whole.
Elisabeth de Fontenay, a law professor at Duke University who studies corporate finance, told me that if current trends continue, “we could end up with a completely opaque economy.”
This should alarm you even if you’ve never bought a stock in your life. One-fifth of the market has been made effectively invisible to investors, the media, and regulators. Information as basic as who actually owns a company, how it makes its money, or whether it is profitable is “disappearing indefinitely into private equity darkness,” as the Harvard Law professor John Coates writes in his book The Problem of Twelve. This is not a recipe for corporate responsibility or economic stability. A private economy is one in which companies can more easily get away with wrongdoing and an economic crisis can take everyone by surprise. And to a startling degree, a private economy is what we already have.
America learned the hard way what happens when corporations operate in the dark. Before the Great Depression, the whole U.S. economy functioned sort of like the crypto market in 2021. Companies could raise however much money they wanted from whomever they wanted. They could claim almost anything about their finances or business model. Investors often had no good way of knowing whether they were being defrauded, let alone whether to expect a good return.
Then came the worst economic crisis in U.S. history…
Read on for a bracing account of: “The Secretive Industry Devouring the U.S. Economy,” (gift article) in @TheAtlantic.
* Paul Krugman
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As we clean our glasses, we might spare a thought for Ivy Lee; he died on this date in 1934. A publicity expert and a founder of modern public relations, he was among the first to persuade business clients– foremost among them, the Rockefeller family– to woo public opinion. Ultimately he advised rail, steel, automobile, tobacco, meat packing, and rubber interests, as well as public utilities, banks, and even foreign governments.
Lee pioneered the use of internal magazines to maintain employee morale, as well as management newsletters, stockholder reports, and news releases to the media. And he did a great deal of pro bono work, which he knew was important to his own public image; during World War I, he became the publicity director for the American Red Cross.
“It’s very easy for trusted companies to mislead naive customers, and life insurance companies are trusted”*…
Systemic risk in the financial system– the kind that can create devastation like the Crash of 2008— has been the province of regulators for many decades, primarily the SEC and the Federal Reserve. But as our financial system has become more complex and intertwined, that risk may have moved from the stock market and banks to other sectors, sectors less well regulated. As John Ellis explains in his terrific newsletter, News Items, we might do well to turn our attention to the seemingly staid insurance industry…
The Fed exists to oversee banking, but lately it’s been keeping an eye on life insurance, too. Its recent Financial Stability Report flagged some life-insurance practices that might make the system vulnerable. Some insurers invest in assets that “can suffer sudden increases in default risk,” the report said. And some use “nontraditional” funding sources that could dry up “on short notice.”
That sounds ominous. But not long after that, Jon Gray, the president of private-equity giant Blackstone, turned up in a Financial Times article, saying life insurers had the wherewithal to bolster America’s weakened regional banks.
Gray said private equity firms like Blackstone could get “very low-cost capital” from life insurers and extend it to regional banks, to fund their lending operations. That would be a boon, because the banks’ usual source of funding, customer deposits, has grown more expensive and flighty in the wake of this year’s bank failures. So the life insurers could help ease a credit squeeze.
And once the banks make the loans, Gray said, the insurers might like to acquire some of them as investments. Blackstone manages billions of dollars of insurance investments, and Gray said the firm was already talking with large, unnamed regional banks about such deals.
So, what’s up with life insurance? Is the industry so flush it can send money to shore up America’s weakened banks? If so, then what’s the Fed worried about?
As it happens, a group of Fed economists has some answers. They got under the hood of the life insurance industry and combed through the voluminous regulatory filings of more than a thousand life insurers in the years since the crash of 2008. The U.S. financial system was going through major changes then, and they wanted to understand how the insurers had navigated the changing landscape.
One trend they observed: First, America’s bailed-out banks, seen as having gambled with their depositors’ money, were brought under the broad financial-reform legislation known as Dodd-Frank. It steered them away from making any more loans to big, low-rated borrowers. Then, once the banks had departed that space, life insurers moved in.
As a result, “These insurers have become exponentially more vulnerable to an aggregate corporate sector shock,” wrote the three economists, Nathan Foley-Fisher, Nathan Heinrich, and Stéphane Verani, in a paper first published in February 2020 and updated in April of this year.
Their findings cast the life insurance industry in a very different light from the traditional image of dull, stable companies plodding along under the weight of big, safe, bond-laden investment portfolios.
“Within ten years, the U.S. life insurance industry has grown into one of the largest private debt investors in the world,” the three wrote.
At the end of 2020, life insurers managed one-fourth of all outstanding CLOs, or collateralized loan obligations – bond-like securities backed by pools of loans to large, low-rated borrowers. Because the underlying borrowers have low ratings, CLOs pay a higher yield than the high-grade corporate bonds a conventional life portfolio would hold.
The insurers were also using unusual sources of capital to fuel their growth (funding-agreement-backed repos, anyone?). Not all life insurers, but a certain cohort was doing the kind of business the big banks did before the financial crisis, “but without the corresponding regulation and supervision.”
The economists called it “a new shadow-banking business model that resembles investment banking in the run-up to the 2007-09 financial crisis.”
Their reports describe the trends in detail, but in measured tones. No flashing red lights or alarm bells. But they do tell how things could go south: “A widespread default of risky corporate loans could force life insurers to assume balance sheet losses” from their CLO holdings.
Institutional investors watch life insurers carefully and know where the shadow-banking activity is concentrated; they would presumably see the losses coming and withdraw from the affected insurers in time. That’s what we’ve been seeing in the regional banking sector this spring, where savvy investors have identified potential problem banks and sold or shorted their stocks. The trouble is, such trading can turn a potential problem into a real one.
Upshot: “U.S. life insurers may require government support to prevent shocks from being amplified and transmitted to the household sector,” the three warn…
[Ellis explains how this happened; TLDR: life insurers chased yield; private equity firms obliged.]
The Fed researchers said the private-equity firms appear to be giving their affiliated insurers “some of the riskiest portions” of the CLOs that they package. Since risk and reward go hand in hand, presumably the insurers are getting better returns than they would from safe bonds.
But still, should America’s insurance regulators be allowing this? Remember, America’s banks were told to stop.
The National Association of Insurance Commissioners has, in fact, proposed a change in the post-crisis rule that’s been letting insurers count risky CLOs as if they were safe bonds.
But the NAIC isn’t a regulator; it’s a non-governmental organization that represents America’s 56 insurance regulators (one for each state, five for the territories, and one for the District of Columbia). The regulators often have different priorities and viewpoints, and when the NAIC makes a proposal, it can take years to get the necessary buy-in.
So here we are. Countless policyholders and annuitants are diligently paying their premiums to keep their contracts in force, unaware of these trends. The Fed’s economists see undisclosed risk, but the Fed has no legal authority to regulate insurers. The insurance regulators don’t seem in any rush to rein in the risk-takers. Keep in mind: Life-and-annuity is a $9 trillion industry that doesn’t have anything like the FDIC…
Eminently worth reading in full (along with the report and the paper linked above): “Risky Business,” from @EllisItems.
(Image above: source)
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As we whack the mole, we might recall that it was on this date in 1931 that the New York Stock Exchange began regularly reporting short selling data for the first time. The Crash of 1929 had rocked the stock market; the Dow dropped 32.6% in 1930 as the American economy took a nosedive (unemployment doubled to 16.3% by 1931, as the Great Depression set in). But short sellers in the stock market made a killing. Consequently, those short sellers took a lot of heat for the stock market crash of 1929, which led to the enactment of the uptick rule (requiring that short selling orders be filled only during upticks in share prices and meant to mitigate the negative impact of short sales) shortly thereafter. The reporting of short orders/sales was another step toward reining in the phenomenon.
The uptick rule was abolished in 2007, just prior to the market crash of 2008.
“I think inequality is fine, as long as it is in the common interest. The problem is when it gets so extreme, when it becomes excessive.”*…
Alvin Chang, with a beautifully-told (and beautifully-illustrated) primer on a startling unpacking of the fundamental logic of our market economy…
Why do super rich people exist in a society?
Many of us assume it’s because some people make better financial decisions. But what if this isn’t true? What if the economy – our economy – is designed to create a few super rich people?
That’s what mathematicians argue in something called the Yard-sale model…
Read it and reap: “Why the super rich are inevitable,” by @alv9n in @puddingviz.
* Thomas Piketty, A Brief History of Equality
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As we ponder propriety, we might recall that it was on this date that Jane Austen‘s [and here] Pride and Prejudice was published. A novel of manners– much concerned with the dictates of wealth (and the lack thereof), it was credited to an anonymous authors “the author of Sense and Sensibility,” as all of her novels were.
Title page of the first edition (source)
“The advance of machine-technique must lead ultimately to some form of collectivism, but that form need not necessarily be equalitarian”*…
Whither our relationship with the technology that’s become so engrained a part of our lives? And what of the companies that provide it? Tim Carmody muses…
The end of the heroic age of the tech giants does not imply that tech giants are in decline, but confusing the two is natural. Observers and analysts usually talk that way about companies, especially tech companies and the platforms they enable: they grow, mature, then decline (in relevance if not in revenue).
In general, what characterizes this phase of the tech giants’ development is a shift from unlocking user creativity and customer value to doubling down on surveillance, usually augmented by AI. Mass surveillance was always an important emergent part of the tech giants’ strategy, but was arguably secondary to delighting users and giving them greater capabilities. Now surveillance and nonhuman solutions are dominant, and the creative possibilities are now almost all residual.
(Yes, this “emergent/dominant/residual” schema is a Raymond Williams reference.)…
… Both of these declines — the decline of the consumer experience and the decline of the market forecasts — are driving tech companies’ retreat from what I’m calling their heroic phase. But neither are identical to it.
We can imagine — in fact, I predict — that these companies’ stock prices will rebound along with the rest of the market. Their profits will soar — the newfound emphasis on profits rather than reinvestment demands that they soar. Their technical innovations will continue, especially in AI, automation, and cloud computing. And yes, customers from you and me to the DoD will continue to shop for, use, and stream their products.
The main difference is that it’s now clearer than ever before that these companies’ interests are not the same as their customers’, or their workers’. There’s nothing universal about the technology revolution, no rising tide that lifts all boats. We have to give up that fiction in order to see things as they really are…
Eminently worth reading in full: “Two ways to think about decline,” from @tcarmody via @sentiers.
* George Orwell, The Road to Wigan Pier
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As we (re-)think tech, we might recall that it was on this date in 1871 that Andrew Smith Hallidie received a patent for an “endless wire rope way” which he then put into practice as the Clay Street Hill Railroad– the start of the San Francisco cable car system.
A view of the railroad in 1876 (source)
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