NEWSWIRE: 5/11/20

  • In order to contain the economic damage from COVID-19, rich nations around the world are taking on trillions of dollars in debt. The deficit is set to surge to unforeseen levels in the U.S., which could alter public spending, taxation, and the distribution of wealth for decades to come. (The Economist)
    • NH: By almost any metric, the explosion of public debt that is expected to accompany the Great Lockdown has few historical precedents.
    • The CBO now projects that the federal budget deficit in FY2020, which was already expected to run at a (red-hot) deficit of 4.9% of GDP before the pandemic hit, will clock in at 17.9% of GDP. This deficit level has been exceeded in U.S. history in only three years--1942, 1943, and 1944--that is, at the peak of America's total war against fascism. (During the Civil War, the Union may have come close to this figure.) 
    • Measured in greenbacks, the 2020 deficit will weigh in at roughly $3.7 trillion. I'm old enough to recall the astonishment of economists back in 1981 when President Reagan proposed running a deficit of just over $100 billion. This deficit is 37X larger!
    • In terms of the net federal debt held by the public, we are expected to jump from 79% of GDP at the end of FY2019 to 108% of GDP at the end of FY2021. That's 29 percentage points of GDP in just two fiscal years. The debt by FY2021 would register as the largest in U.S. history--even surpassing where we were at the end of World War II, since we had so much less federal debt going in to Pearl Harbor. Keep in mind that the CBO projection assumes no significant "second wave" of infections.
    • As was true during the GFC, the US federal government is engaging in higher levels of deficit stimulus than just about any other national government. That's the "exorbitant privilege" America enjoys by being able to borrow in the world's reserve currency. (And it may help explain why US equity markets have rebounded faster and higher.) But other major economies are certainly doing plenty on their own. According to the IMF, high-income governments will run an average deficit of 11% of GDP this year. By the end of this year, high-income public debt is projected to reach $66 trillion or 122% of GDP.
    • Will this vast and sudden increase in public debt pose a challenge to economies after the crisis is over? Back in 2009, in the aftermath of the GFC, Ken Rogoff and Carmen Reinhart wrote This Time It's Different: Eight Centuries of Financial Folly, wherein they argued that national indebtedness exceeding 100% of GDP tends to suppress economic growth and raise the probability of sovereign default. To be sure, the Rogoff-Reinhart argument has been challenged. Just think of how many governments (like Japan) have soared way past that limit with seemingly no ill effects. And now that interest rates in so many economies (including the U.S.) are falling so close to zero, do we really need to worry about debt with virtually no cost of carry?
    • The catch-22 of this rebuttal, however, is that near-zero interest rates can only persist indefinitely in a world of falling inflation expectations and a near-zero real rate of return on capital. The first is a sign of imploding aggregate demand. And the second is a sign of terminal demographics, stalled productivity growth, uncompetitive markets--or a combination of all three. So to say to a government that your vast debt will never be a problem due to zero interest rates is tantamount to saying that your economy will never grow again. There's no getting around it: Positive inflation expectations and a healthy real rate of return on capital is a prerequisite to long-term economic growth.
    • OK, so let's concede that any sane government will hope that its economy returns to a healthy positive interest rate. What then? How will it handle the growing debt-service cost?
    • There are only a limited number of options. The most effective option would be to raise taxes or cut outlays after the crisis so you can start paying the debt back. Unfortunately, this is also the least politically appealing option. Many of today's aging economies will have to cut benefit levels simply to keep total outlays constant (as a share of GDP). Significant spending reductions will be difficult. Many of them are also close to the maximum tax threshold, so that higher tax rates may not generate much more tax revenue.
    • The next option is financial repression. Here the idea is to force-feed your debt through banks at below-market rates to domestic households by giving them no other savings choices. This option was a favorite for most governments in the early postwar decades (including the US) and is still in use in China. But in today's deregulated financial environment, this would be a very tough sell to the public in most western democracies.
    • Then there's inflation. Accelerating inflation can reduce the debt load of any government that is borrowing at fixed nominal rates in its own currency. Inflation is an ancient standby for debt-heavy governments. It has its pluses. Because most of today's high-income countries have a large share of foreign creditors (39% of the US federal debt is now held by foreigners), a large share of those who suffer will not be your own citizens. There's also a populist angle. Inflation punishes all creditors--and even domestic creditors tend to be rich. And inflation rewards all debtors, who of course tend to be poor.
    • But inflation also has obvious minuses. Most importantly, it's a one-and-done strategy. Once creditors understand your intention, interest rates will rise and wipe out your advantage next time you need to rollover your debt. What's more, high and uncertain inflation rates are profoundly destructive to economies. And the credibility of low inflation expectations, once lost, is very difficult to regain. The same might be said of any other ploy to "partially default" on public credit. (See President Trump's off-hand suggestion to default on U.S. debt to China to punish them for lying about Covid-19.) The benefits are particular and short term, but the losses are global and long term.
    • So what's my guess? IMO, inflation will probably be part of the long-term burden reduction--along with outlay cuts and tax hikes. Painful as they are, we will have to face up to them.
    • But my biggest fear is not coping with rising debt-service costs. My biggest fear is that we won't have to do anything, because the whole premise of my argument--returning to a healthy positive interest rate--will never come to pass.
    • A nightmare Covid-19 recovery scenario is healthy margins and equity prices for all the biggest S&P incumbents (so gorgeously bailed out by the Fed) amid the wreckage of all their smaller potential competitors. In this scenario, the levered-up giants will face even less competition than before. It will be a world of high PEs and dividends and buybacks for them. But also a world of zero marginal return on capital for every outside investor and zero bargaining power for workers. You could call this the economic equivalent of the heat death of the universe.

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  • Most Americans support the current restrictions on public activity, but young people are the most likely to believe that officials should be going even further. Adults under 30, for instance, are considerably more likely than older Americans to say they want a national shelter-in-place order enacted. (Yahoo! News)
    • NH: If you read last week’s issue (see “Vast Majority of Americans Support Stay-at-Home Orders”), you know two things: The vast majority of Americans are on board with shelter-in-place orders, and support for pandemic-related restrictions is generally higher among Democrats than it is among Republicans.
    • But that’s not the only interesting fact to be gleaned from these numbers. When the results are broken down by age, it’s young adults (18- to 29-year-olds) who are the most likely to back the shutdown orders and to be advocating for stronger restrictions.
    • When asked by Yahoo! News/YouGov if they would favor the issuance of a national shelter-in-place order, which would cancel school and public gatherings and require all non-essential businesses to be closed, 69% of 18- to 29-year-olds say they would. This falls to 66% among 30- to 44-year-olds, 58% among 45- to 64-year-olds, and further still to 48% among those 65+. Older generations are likely to favor state-by-state discretion. Young people are also the most likely to believe (82%) that “shelter-in-place orders are the only way to stop the spread of COVID-19” (82%). Older generations are more likely to believe that “the cure is worse than the disease.” See charts below.
    • What’s more, according to a Huffington Post/YouGov poll conducted that same weekend (Apr 17-19), young people are the most likely to say there aren't enough pandemic-related restrictions (28%). That’s almost twice the share of adults 65+ who say the same (15%). Young adults are also the least likely to believe there are too many restrictions.
    • These figures are remarkable. The age group whose lives are least at risk from the pandemic--and whose jobs and finances are most at risk (see “Bipartisanship Rising in America's Response to COVID-19”)--is the most willing to put aside its self-interest and lock everything down. Millennials and their parents have responded similarly when it comes to taking personal protective measures against the virus (see “Why Generations React Differently to COVID-19”), but support for tougher and more widespread restrictions speaks to a stronger desire for top-down action.
    • Given their dramatically different risk profile, young people’s level of support shouldn’t be on par with, let alone higher than, that of older Americans. You can bet that if COVID-19 had struck back in the late 1970s, seniors back then would have favored tough national policies and young people would have resisted. But that was a different era. And those were very different generations.

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  • Vietnam is launching a campaign to increase the fertility rate in certain areas and get young people to be married by 30. The campaign will combine a mix of “baby bonus” incentives with the creation of new services like local matchmaking clubs. (Bloomberg)
    • NH: Vietnam is in a much different situation from our often-discussed list of low fertility countries like South Korea, Japan, and Hungary. Those countries all have fertility rates of 1.5 or lower. Vietnam, on the other hand, has a fertility rate of 2.04. See "Nations Labor to Raise Their Birthrates."
    • The main goal of Vietnam's program is to raise the fertility rate to 2.2 children per woman, just above the replacement rate. By offering matchmaking services, they hope earlier marriages will encourage more births. In those regions where fertility is low, the government will also give parents with two or more children tax breaks and housing reimbursements. And in those regions where fertility is high, they want to bring fertility down--but it's unclear how this will be achieved.
    • IMO, I think Vietnam will be successful with their program. Like Singapore and South Korea, Vietnamese culture is based on a strict and conservative Confucianism. But unlike Singapore, Vietnam is not a wealthy urban island. And unlike South Korea, Vietnam is not (yet) experiencing a marriage strike led by young women with careers.
  • Millions of Boomers are reaching the end of their working lives with little or no savings, a trend that’s set to worsen in the coming years. This piece, which interviews six Americans ages 57 to 74, offers a glimpse at the hard choices they’re facing and what they’re doing to get by. (The Washington Post)
    • NH: This is a great article, brimming with poignant anecdotes and fortified by citations to research. It is also a profoundly depressing commentary on the deteriorating standard of living Boomers can look forward to in their retirement. I've written often on the reasons why this is happening. See "The Old and the Bankrupt," "Why Are Seniors Flipping Burgers," and "Boomers Stuck in 'Low-Quality' Jobs."
    • Overall, Boomers will not do as well as the last generation (the Silent) in retirement. See the first chart below, which shows that, in 2014, Americans born in the late 1930s (at age 73 to 83) actually had a higher average and median net worth than Americans born in the late-1950s (at age 55 to 59). In fact, the financially best-off Americans in retirement were born in the early to mid-1940s--which means they are either late-wave Silent or early wave Boomers depending on where you want to draw your generational boundary. Later-born Boomers have generally been worse off at every age, which is why--now that these late-wavers are approaching age 65--hardship in retirement is attracting more media attention. (See also "The Graying of Wealth.")
    • One of the biggest challenges for today's new Boomer retirees is the rapid decline in the prevalence of defined-benefit pensions. As for defined-contribution pensions like 401(k)s, barely 40% are eligible to participate. And even those who do participate borrow against them, fail to roll them over, or are forced to take early withdrawals (in the face of events like the pandemic lockdown).
    • For some truly alarming statistics, look at the table (below) tabulated from a 2019 survey by GOBankingRates. Even at age 55 to 64, 55% of Americans had accumulated less than $10K in retirement savings. Less than a third has more than $50K.
    • "We’ve probably peaked in terms of retirement security--and it’s not great," said Monique Morrissey, of the Economic Policy Institute. "And now it’s all downhill. Unless something changes, we’re going to start seeing much more hardship." Yes, with senior employment bound to fall in a Covid-19 world, I think that describes the situation pretty well.

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  • According to the latest Harvard Youth Poll, a mere 8% of adults under 30 like our existing government the way it is. The survey also reflects high levels of economic insecurity, with many young adults worried about housing costs, student debt, and their ability to access health care. (Harvard Institute of Politics)
    • NH: Every fall and spring, Harvard's Institute of Politics releases a national survey of the country's 18-29-year-olds. The 2020 spring poll was conducted between March 11-23, just as shelter-at-home orders were going into effect. See charts below.
    • The most striking number: 90% of Americans 18-29 want to either "reform" or "replace" American institutions. "Replace with new institutions" was the choice of 39%. Millennials, as I've often suggested, see sweeping civic changes in their future. Just look at their support of Bernie Sanders over Joe Biden during the primaries. See "Millennials Still Love Bernie Sanders."
    • As for the coming election, the survey found that young adults are not fans of the current president. In the general election, 60% said they would vote for Biden, while only 30% said they would vote for Trump. Some 66% disapprove of Trump's job performance, and 39% said he has made their lives noticeably worse.
    • When it came to national issues, their number one concern was the coronavirus (19%). Healthcare came in at 17%, the economy at 14%, climate change at 8%, and immigration at 3%.
    • One issue they all agree on is overhauling the college debt program. 85% said they believe in some form of policy change. 35% believe the government should help with "repayment options." And 33% believe the program should be completely canceled. It’s no surprise that Millennials supported candidates like Sanders and Warren who promised to cancel college debt. See "Six-Figure Tuitions Are Coming to Colleges."

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  • Renowned economists Anne Case and Angus Deaton have released Deaths of Despair and the Future of Capitalism, which tracks the decline of the white working class. The book argues that rising suicide rates and declining life expectancy have not been driven primarily by material deprivation, but by the loss of community. (The New York Times)
    • NH: The phrase “deaths of despair” was made famous by Case and Deaton, who became household names for their work examining rising suicide rates, drug overdoses, and alcohol abuse among middle-aged white Americans. (See “All the Lonely People,” “A Nation Hooked,” and “Boomers Have a Drinking Problem.”) Now they have a new book, Deaths of Despair and the Future of Capitalism, which expands on their research and offers more theories for why the fortunes of working-class Americans have declined so steeply. I don’t agree with all of them, but we’re on the same page about what the data show.
    • The main “lesson” that readers are likely to take away from this book is the growing correlation between income and health. Income and education have always been linked to health outcomes: The richer and better-educated you are, the lower your mortality rate. But in recent years, this gap--measures for example in life expectancy--has hugely risen. (See "Adults Under Age 65 Driving Decline in US Life Expectancy."
    • Case and Deaton argue that the mortality gap between whites with and without a bachelor’s degree is almost entirely due to the rise in “deaths of despair” among the latter. By 2017, men without bachelor’s degrees were three times more likely to die from alcohol, drugs, or suicide than those with them. Likewise, college-noncollege gap in the share who report that they’re in poor health has grown. As has the gap in the share who say they have disabilities ("trouble with the activities of daily life").
    • What’s changed? Up until now, Case and Deaton’s public arguments have been largely economic. Job prospects for the less educated have declined; wages have stagnated; attachment to the labor market is declining. In the book, they spend more time discussing other forces--namely, the marked decline in community cohesion (e.g. marriage, churchgoing, union membership), and the expensive, wasteful, profit-driven particulars of the health care system, which ties benefits to employment and which pushed doctors to prescribe the Mt. Everest of pills that helped fuel the opioid epidemic.
    • In a recent interview, Deaton once again stressed that the reasons aren’t just economic. He described the situation as a “long-term drip of losing opportunities and losing meaning and structure in life.” Their book came out in mid-March--just as the devastating impact of COVID-19 was beginning to come into focus. While no one knows what the long-term effects of the pandemic will be, it’s a safe bet that it will further widen the gap over higher- and lower-paid Americans.
    • In 2017, an estimated 158,000 Americans died of “deaths of despair,” compared to 69,000 annually in the mid-‘90s. This is a public health crisis, too, and it deserves serious attention. It’s one that has come on much more slowly, and one that will continue after the worst of the pandemic is over.
    • The title of Emerson College student Monica Petrucci’s op-ed says it all: “I’ve been sheltering in place my whole life and I’m over it.” Her childhood, she says, has been defined by crisis after crisis: school shootings, terrorist attacks, and now a pandemic. (The Boston Globe)
      • NH: Petrucci is a late-wave Millennial (she’s 22), but most of the experiences she describes illustrate why my readers, back in 2005, believed that the best name for the generation following hers would be the Homeland Generation. She was 3 when 9/11 happened and has never known a world without constant surveillance, airport security screenings, and school-shooting drills. Her cohort, she says, has been raised under an ever-present cloud of uncertainty and anxiety. They were used to sheltering in place long before the pandemic hit.
      • She’s hopeful that it won’t be this way forever: “I believe soon we’ll be using the skills we learned in our lifelong panic mode to bring around substantial change. We’ll come out of this on the other side ready to fight: for sustainability, for freedom, and for a reality where we aren’t afraid.” What they’ll be fighting for, in other words, is a world where they don’t have to fight, they can live more peacefully, and the rules make sense. They want what the Silent Generation had.

    DID YOU KNOW?

    Let’s Go to the Drive-In. Want to see a movie? Time to get in the car. Thanks to the pandemic, drive-in theaters are having a moment. According to The Washington Post, there are only about 300 drive-in theaters remaining in the United States—and pre-COVID-19, most were struggling to keep up with their flashier, better-funded indoor competitors. But thanks to their distancing-friendly format, several drive-in theaters are already back open in states that have begun lifting restrictions on nonessential businesses. In many places, this is the only option for public entertainment available. With studios postponing new releases until at least mid-July, the theaters are showing films from February and March as well as older classics like Raiders of the Lost Ark. For the Silent and Boomers taking their kids and grandkids, the experience is surely inspiring some nostalgia, but it isn’t an exact replica of their childhoods: Many theater owners have opted to double the space between cars and serve concessions via curbside pickup.