The Capital Letter

The Capital Letter: Week of August 10

Traders watch President Donald Trump speak from the White House on a monitor on the floor of the New York Stock Exchange, March 13, 2020. (Lucas Jackson/Reuters)

Another week has passed with, it seems, little in the way of material progress towards the next stimulus package, and it remains unclear how much of the relief measures contained in the four executive actions signed by President Trump on August 8 will actually take effect — and when. In particular, the $400-a-week supplement to unemployment insurance (to replace the $600 in the earlier stimulus provisions) may well turn out to be $300, as the final $100 is meant to come from the states, which are not exactly flush with cash at the moment. Additionally, as CNBC noted, if a state already pays $100 a week to a recipient of unemployment benefits, it can count that aid as its “match” and won’t have to pay out any additional funds.  All in all, with the country effectively being subjected to an unprecedented and enforced social experiment— an experiment that is not going well—it is hard to see the current confusion as helpful.

Of all the economic data released during the week, the most interesting, perhaps, were the inflation numbers. The CPI rose by 0.6 percent in July, the same number that we saw in June. Not too much should be read into this, as it, in part, reflects a bounce back from the pressure on prices seen in the early months of the pandemic. The same, in all probability, applies to the increase in “core” (which excludes food and energy) inflation to (also) 0.6 percent from 0.2 percent in June, even if this was the largest month-on-month increase since 1991. There are no indications that these numbers will lead the Fed to change course, although the fact that Treasury yields at the long end are increasing is something that will be worth watching.

Whatever the inflation outlook here, we are (mercifully) a long, long way from some of the horrific inflation numbers seen elsewhere in the world, and outlined by Steve Hanke in his World Inflation Update, which will become a regular monthly feature on Capital Matters. Steve’s approach to calculating inflation in the dysfunctional economies he features revolves around purchasing power parity (PPP) and the dollar:

The most important price in an economy is the exchange rate between a country’s local currency and the world’s reserve currency, the U.S. dollar. As long as there is an active black market (read: free market) for a currency and data are available, changes in the black-market exchange rate can be reliably transformed into accurate measures of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. And, the application of PPP to measure elevated inflation rates is straightforward.

Beyond the theory of PPP, the intuition of why PPP represents the “gold standard” for measuring inflation for countries experiencing elevated inflation rates and/or hyperinflation is clear. All items in these economies are either priced in a stable foreign currency (the U.S. dollar) or a local currency. If goods are priced in terms of the local currency, those prices are determined by referring to the dollar prices of goods and then converting them to local prices after checking with the black-market spot exchange rate. Indeed, when a price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute by-minute basis, exchange-rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds, and why we can use high-frequency (daily) data to calculate inflation rates for countries with high rates of inflation, even during episodes of hyperinflation.

Venezuela headed the table with an inflation rate (as of earlier this week) of over 2,000 percent.

Elsewhere on Capital Matters, Robert Verbruggen asked whether reopening changes behavior more than locking down:

It’s been a while since I checked in on the emerging genre of “lockdown studies,” but Edward Glaeser and some coauthors have an interesting new one today.

First, the paper finds that Americans overwhelmingly changed their behavior — measured here through restaurant visits — before official lockdown measures went into effect. The policies did have a marginal impact on top of what was already happening, but most of the decline in economic activity happened simply because people got scared and stayed home. (They are not the first to find this, of course.)

But by contrast, when states reopened, many of us jumped at the chance to go out again.

One of the key questions for 2021 will be the extent to which COVID-19 and the measures taken to combat it permanently change behavior. My own guess is that this will turn out to be by less than currently imagined (I think that the death of the traditional office, for example, has been exaggerated). The exception may well be in areas such as the continuing switch to online retail and to automation, where the pandemic has accelerated trends that have been going on for a long while now, a process that is unlikely to reverse.

That was a theme of Marianne Wanamaker’s warning that the future of work has arrived too early:

It is now clear that the Future of Work is here, having arrived in the form of a pandemic. The lowest-paid and lowest-skilled Americans have been displaced from work at heightened rates. A significant number will need to be retrained as the economy realigns. And while workers are at home awaiting a vaccine or other mitigation for the public-health disaster, employers are rapidly automating their tasks with robots that have evolved faster than anyone imagined. Robots don’t need childcare, can’t catch COVID, won’t sue, and can even appear remarkably human. The order is backwards (supply shock sidelines workers and makes them costlier, then robots arrive), but the result is the same — except instead of a slow drip, the dam broke.

Ramesh Ponnuru looked at one proposal to broaden the Fed’s mandate, and didn’t like what he saw:

The more I read defenses of the Democrats’ idea for changing the Federal Reserve’s mandate to require it to seek increased racial equality (which I wrote about here), the more it seems like they’re skipping a step in thinking it through.

I am shocked, shocked that such a failure could take place.

Meanwhile David Bahnsen was not impressed by the entry of a regional Fed president into healthcare policy with the suggestion that what was needed was a “stringent” six-week national lockdown:

To come up with such a reckless policy prescription is perhaps indicative of the thinking of many central bankers — unbridled confidence in their own views and outlooks, no matter how outside their lane such views may be. Hayek might have referred to it as a fatal conceit.

Hayek might have recommended looking instead at the Swedish experience. It’s too early to say whether Sweden’s heterodox approach to the pandemic has been the right one, but there are increasing signs that it might just be.

From north of the border Philip Cross reported on the Canadian response to COVID-19, which he saw as indicative of broader differences between American and Canadian culture, not necessarily to Canada’s advantage:

In terms of the health crisis, Canada more successfully locked down its economy and shut in its people, containing the spread of the coronavirus better than the United States. However, the cost of Canada’s more extensive shutdown is unsustainable as firms struggle to deal with the growing backlog of bills and lagging revenues. The only viable near-term solution to the pandemic is the technological innovation of a vaccine.

Innovation is where the U.S. thrives and Canada lags. The conundrum for Canada is that the very characteristics that helped contain the spread of the pandemic are the opposite of what is needed for innovation. Quebec’s Deputy Prime Minister famously congratulated the population for its “obedience” to the lockdown and urged people to be “docile.”  Docility and obedience are admirable qualities in a dog but do not form the basis of an entrepreneurial culture. David Brown offered a devastating critique: “We’ve become a society of rule-followers and permission-seekers. Despite our can-do self-image, what we really want is to be told what to do. When the going gets tough, the tough get consent forms.”

Robert Verbruggen however wasn’t too pleased by what the current impasse over the stimulus package had to say about our own political culture:

Congress shirking its duties is not new; neither is a president pushing the limits of his authority. It is remarkable, though, that even a major recession caused by a deadly pandemic could not make American government function properly.

Returning wearily to the “socially responsible” investing beat, I noted that of the CEOs who had signed the Business Roundtable’s “Statement on the Purpose of a Corporation” (a key document in the effort to displace shareholder democracy with “stakeholder capitalism”) and who had replied to a survey on the matter, only one had received board approval.

Martin Hutchinson reviewed False Alarm, Bjorn Lomborg’s new book on climate change, and concluded:

If you buy only one book on climate change — and I don’t know why you would buy two — this should be the book. Its careful analysis and openness to the claims of climate-change proponents make its deconstruction of proposed steps to attack climate change especially devastating. If our moderately free civilization is to survive, the climate debate must be won by those offering practical solutions rather than hysterical talking points. Lomborg’s book gives you the ammunition with which you can win it.

Environmentalists would do well to follow the advice contained in Lomborg’s book, instead they have preferred to go down a different route, as highlighted by Benjamin Zycher:

Opposition to infrastructure investment for the production and transport of conventional energy is de rigueur on the environmentalist left, a stance widely justified as an important bulwark for the protection of environmental quality. This is part of the “keep-it-in-the-ground” dimension of the ideological opposition to fossil fuels, itself a deeply anti-human drive intended explicitly to hinder economic growth and increased flourishing among the world’s poorest.

Christina Martin and Angela C. Erikson sounded the alarm about the threat posed to home equity by abusive property foreclosure laws by the states:

As businesses closed and staff were laid off as a result of COVID-19, millions of Americans were faced with a personal financial crisis. As a result, some local governments have temporarily adjusted policies that might have threatened residents’ ability to stay in their homes. For example, counties in Michigan suspended all 2020 property-tax foreclosures or extended repayment deadlines. Likewise, in New York, counties extended property-tax payment deadlines or provided tax-debt relief.

But governments won’t continue these policies indefinitely, especially once they face the budgetary shortfalls that follow economic trouble. The history of the previous downturn tells us what will happen if policymakers and courts fail to protect property rights from some of the country’s worst tax-collection laws.

Take Michigan, for example. When housing values collapsed in Michigan as a result of the 2008 financial crisis and subsequent recession, property taxes remained high, imposing a heavy burden on many distressed homeowners. Unable to pay their tax debts, many owners lost their homes, along with all their home equity (a major source of family savings), to the government — helping to fill the government coffers in a time of low tax revenue. That abusive practice extended well beyond the recession and into the recovery: Between 2008 and 2015, property-tax foreclosures quadrupled in Michigan.

For retired engineer Uri Rafaeli, an $8.41 underpayment error was all it took to lose the full value of his Southfield, Mich., property.

Jonathan Ward, meanwhile, called for an economic containment strategy against China:

Many experts now predict that China is on track to become the world’s largest economy and most powerful nation. The United States, however, still has one sure path to beat Beijing’s bid for supremacy: America must win the economic competition with China.

Washington needs a new grand strategy that can counter Beijing’s quest for power by preserving American economic dominance. This requires building U.S. financial, technological, and industrial strength while orchestrating economic containment of the People’s Republic of China.

Finally, Daniel Tenreiro and I produced the Capital Note (our “daily” — well, Monday-Thursday anyway). Topics covered included rising rates of home ownership, Kodak’s slide, Robinhood, Capital Gains Tax, the dominance of the dollar, the rise of the euro, SPACing, fracking and, naturally, the (possible) kidnapping of Adam Smith.

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