Friday, November 12, 2021

dean baker on inflation

Getting High on Inflation

The October Consumer Price Index data has gotten the inflation hawks into a frenzy. And, there is no doubt it is bad news. The overall index was up 0.9 percent in the month, while the core index, which excludes food and energy, rose by 0.6 percent. Over the last year, they are up 6.2 percent and 4.6 percent, respectively. This eats into purchasing power, leaving people able to buy less with their paychecks or Social Security benefits.

There is no argument about what the numbers show, but the key questions are what caused this rise in inflation and what can be done to bring it down. There are four important points to recognize:

1) Inflation has risen sharply in many wealthy countries, so this isn't something that can be laid entirely on the policies of the Trump and Biden administrations.

2) There are good reasons for believing that many of the factors driving this inflation are temporary and will be reversed in the not distant future.

3) Conventional remedies for inflation, like raising interest rates to increase unemployment, and put thereby put downward pressure on wages, are likely to prove counterproductive; and

4) Many people have seen increases in wages and benefits that far outweigh the impact of higher prices.

Inflation Has Risen Sharply in Many Countries, not Just the United States

On the first point, most wealthy countries have seen a substantial increase in their inflation rate in the last year, even if the current pace may not be as high as in the United States. The OECD puts Canada's inflation rate at 4.4 percent over the last year. In Norway and Germany, the inflation rate it was 4.1 percent. Some countries do have lower inflation rates. In France the inflation rate over the last year was 2.6 percent, in Italy 2.5 percent, and in Japan, the debt king of the world, just 0.2 percent. (These data only run through September, a period in which the inflation rate for the U.S. was 5.3 percent over the prior year.)

While there are differences in inflation rates across countries, the sharp increases in places like Canada, and especially European countries like Norway and Germany, can't be blamed in any plausible way on U.S. policies to get through and recover from the pandemic. There is also no clear relationship between the size of the rescue and recovery packages and current inflation. For example, the size of the packages in France and Japan were considerably larger than the packages put in place in Germany, yet both countries have considerably lower inflation.

The Case for This Inflation Being Temporary

In many of the areas seeing the sharpest price increases, the inflation is clearly due to factors associated with the pandemic and the reopening of the economy which are not likely to persist long into the future. The most obvious example here is new and used vehicles, the prices of which have risen over the last year by 9.8 percent and 26.4 percent, respectively.

These two sectors, which added more than 1.2 percentage points to overall inflation rate over the last year, have seen sharp rises in prices due to production snags associated with a worldwide shortage of semiconductors. The latter shortage in turn results from a major semiconductor producer in Japan being temporarily sidelined by a fire. This supply reduction coincided with a big upturn in worldwide demand. Because of the pandemic, consumers in the United States and other countries shifted their consumption from services, like restaurants and movies, to goods like cars, television sets, and smartphones.

This surge in demand for goods created the backlog of containers and container ships that we are now seeing at major ports. However, we will likely work through this backlog, both because supply issues will eventually be resolved, as companies arrange to higher more truck drivers and trucks, and because demand for goods will wane for the simple reason that people don't make these purchases every month. If someone bought a car in May of 2021, they are not likely to buy another one in May of 2022.

It is not hard to find an example of this sort of price reversal. Television prices rose by 10.2 percent in the five months from March to August, a 26.3 percent annual rate of increase. In the last two months, they have fallen by 2.8 percent.

We can see similar stories in other areas.  The price of a bushel of corn rose by more than 100 percent from its low in August of 2020 to its high in May of this year. It has since fallen back by almost 20 percent, to a price that is well below what we were seeing back in 2013. Lumber is an even more striking case. The price more than quadrupled from its low point in April of 2020 to its peak in May of this year. It has now fallen back by more than 50 percent to a price that is about 10 percent higher than a peak hit in June of 2018.

It's not easy to determine how quickly supply chain issues will be resolved, but when they are, we are likely to see the price of a wide range of goods, starting with cars and trucks, reverse itself and start falling. This will be true not only of consumer goods, but many intermediate goods that have been in short supply in recent months. The end of the backlogs is also likely to mean reversal in shipping costs, which have risen by 11.2 percent in the last year, adding to the price of a wide range of products.

It is also worth noting some prices that have not risen much. The cost of medical care has risen by just 1.3 percent over the last year. The cost of college tuition is up 1.8 percent. Inflation in these former problem sectors has remained well under control through the pandemic and recovery.

Finally, it is worth mentioning the situation with rent, which accounts for almost a third of the overall CPI. We are seeing a sharp divergence in rental inflation across cities. The rent proper index was up 1.5 percent year-over-year in Boston and Los Angeles, 1.7 percent in Seattle and 0.2 percent in NYC. It was down 0.3 percent in Washington, DC and 0.4 percent in San Francisco over the last year. By contrast, it is up 6.3 percent in Detroit and 7.5 percent in Atlanta. This is consistent with people moving from high-priced cities to lower priced ones.

The low rental inflation, or falling rents, in the high-priced metro areas is obviously good news for renters there, however the rising rents in previously low-priced areas is bad news for prior residents who may be looking at large rent increases. However, even with 6.3 percent rental inflation, rents will still look cheap in Detroit for someone moving from Boston or New York.

It's also important to remember that almost two-third of households are homeowners (only 44 percent for Blacks and 48 percent for Hispanics). For people who own their home, higher implicit rents are not a problem, and if the sale price goes up, as it has been doing, this is good news.

Anyhow, we may see some further increase in rental inflation in the months ahead. We have seen a large rise in home sales prices since the pandemic, which has far exceeded the rise in rents. The vacancy rate has also fallen somewhat, although the pace of new construction did pick up sharply, which should help to lower rents over time.

Will Slamming on the Brakes Cure Inflation?

The standard remedy for inflation is to deliberately slow the economy with higher interest rates from the Fed and possibly cuts in government spending and/or tax increases. The idea is that by slowing the economy, and throwing people out of work, we can put downward pressure on wages, which will then mean lower prices.

There is no doubt that if we force workers to take large enough pay cuts, it will alleviate inflationary pressures, but this is a rather perverse way to accomplish the goal. With low interest rates and high demand, companies have large incentives to innovate to get around bottlenecks. It's much better to allow the economy to work its way through a stretch of high inflation in ways that could lead to lasting productivity gains than to squeeze workers so as to alleviate cost pressures.

It's also worth noting that many of the proposals being put forward by the Biden administration will help to alleviate inflationary pressures in both the long-term and the short-term. In the latter category, universal pre-K and increased access to child care will make it easier for many parents, primarily women, to enter the labor force or to work more hours.

In the longer-term category, increased access to broadband and improving our transportation infra-structure will increase our capacity in many areas. Also, money spent to protect against the effects of climate change will reduce the disruptions caused by extreme weather events in the future.

This is a much more promising path for dealing with inflation than forcing workers to take pay cuts.

Keeping Score on Inflation

There have been several pieces in major news outlets in the last week telling people how inflation has been devastating for low- and moderate- income families. While it is undoubtedly hard for many families to pay more for food and other necessities, it is important to keep an eye on the income side of the equation.

In the case of families who have children, the vast majority are receiving the expanded child tax credit. Before the American Recovery Act (ARA), the credit was $2,000, but only partially refundable. This meant that many low-and moderate-income families only received $1,400 per child. Under the ARA, these families are receiving $3,000 per child and $3,600 for every child under the age of six. This is a big gain in income for a family with an income of $20,000 or $30,000. (There are families that don't get the credit. This includes undocumented workers who are not eligible and others who are excluded because of bureaucratic obstacles. These are important issues, but unrelated to the problem of inflation.)

There also have been sharp increases in wages for workers at the bottom end of the pay ladder. Restaurant workers have seen their pay rise by $1.84 an hour over the last year. This would come to an increase of $3,680 for a full year, full-time worker.

These increases in income would dwarf the rise in food costs that have featured prominently in news accounts on inflation. The Bureau of Labor Statistics puts the weight of food in a household's budget at 7.4 percent. Suppose we double this for moderate income families and make it 15 percent. For a family that spends $30,000 a year, that comes to $4,500 a year. If we apply the estimated 4.5 percent rate of food inflation over the last year, the higher prices will take a bit more than $200 out of this family's pockets.

That is less than 10 percent of the pay increases that we expect low-paid workers to be receiving or the gains from the child tax credit for families with kids. If we're going to talk about the well-being of these families it is incredibly irresponsible to only talk about the spending side of the ledger and ignore the income side.

Conclusion: Team Transitory Is Not Throwing in the Towel

While the stretch of high inflation has gone on much longer than many of us anticipated, however, there are still good reasons for thinking that inflation will slow sharply in the months ahead. We have seen the prices of many items, like television sets and lumber, reverse and fall sharply after prior run-ups. It is likely that many other items, like cars and meat, will be in this category in the near future.

For what it's worth, it seems that financial markets also agree with this assessment. The interest rate on 10-year Treasury bonds is only 1.56 percent, well below the pre-pandemic level. That is not consistent with a story where markets expect 4 or 5 percent inflation in coming years.

Also, contrary to gloom and doom predictions, the dollar has been rising in value against the euro and other currencies. That is also not consistent with a belief that the U.S. is facing a wage-price spiral.

Financial markets can be wrong, as those of us who predicted the collapse of the stock and housing bubbles know well. But for now at least, they seem to be in agreement with the analysis from Team Transitory.


Sunday, October 10, 2021

Dean Baker Deep dive on the Jobs Report and Supply chain issues

Building Back Better and the September Jobs Report

If President Biden was designing a jobs report to advance his Build Back Better agenda, he could not have done better than the September jobs report. (No, he didn't manipulate the data.) It shows the need for improving our caring infrastructure to make it possible for more women to work. It also shows the need to improve our infrastructure to limit supply chain disruptions.

But before getting to these issues, it's first important to dispel the idea that this was a bad jobs report. The September data showed a 0.4 percentage point drop in the unemployment rate, bringing it to 4.8 percent. Most analysts had predicted a drop of just 0.1 or 0.2 percentage points. We didn't get the unemployment rate down to 4.8 percent following the Great Recession until January of 2016. And, this decline was due to workers getting jobs, not the unemployed dropping out of the labor market. The number of employed in the household survey increased by 526,000.

The negative view of the September report is based on the weaker than expected job growth reported in the establishment survey. The increase of 194,000 in payroll jobs was well below the 400,000 to 500,000 job gain most analysts had expected. While that seems like a bad story, a closer look shows otherwise.

The biggest contributor to the weak job growth story was the loss of 161,000 jobs in state and local government education. There is not an obvious explanation for this job loss (I'll come to back to this issue), but suppose that we didn't see this sort of job loss in public sector education. Suppose that we instead regained more of the education jobs lost in the pandemic.

The private sector added a healthy 317,000 jobs in September. If the public sector had added 100,000 jobs for the month, as many had expected, the Bureau of Labor Statistics would have reported job growth of 417,000 in September, well within the generally expected range.

So, the big question is why are we losing jobs in education instead of adding them? It's hard to come up with a good story here. Some analysts have suggested the problem is with the seasonal adjustment. On an unadjusted basis, state and local education added 1,033,000 jobs in September. The argument is that the seasonal adjustment is inappropriate for this year, since the pandemic has altered the normal timing of the school year and employment patterns.

But this argument really doesn't fit. If we just look at the non-seasonally adjusted data, employment in public education is down 431,000 from the levels of September of 2019, a decline of 4.8 percent. Schools are back to in-class instruction pretty much everywhere. Unless we have seen a sharp rise in student-to- teacher ratios, or a large decline in support staff, this drop in employment from before the pandemic doesn't make sense.

Anyhow, we will need to sort out what is going on with employment in public schools, but if we set that issue aside for the moment, the jobs picture in the establishment survey looks pretty good. As noted earlier, the 317,000 private sector jobs added in the month was very much consistent with expectations. But an element of the picture that has not gotten nearly attention it deserves is the increase in the length of the average workweek.

The average workweek rose by 0.2 hours. This rise in average weekly hours, coupled with the rise in employment, led to a rise of 0.9 in the index of aggregate hours. This is the largest increase since March.

A story that is consistent with a rise in hours, coupled with a limited increase in payroll employment, is that employers are having trouble getting the workers they need to meet the demand they are seeing. They adjust to this situation by working their existing workforce more hours.

The continued rapid growth in wages, especially for lower paid workers, fits with this supply-side story. The average hourly for production and non-supervisory workers increased at a 6.7 percent annual rate comparing last 3 months (July August, September) with the prior 3 months (April, May, June).  In the leisure and hospitality sector (primarily restaurants) the annual rate of wage growth over this period has been 18.1 percent.

The implication of this view is that the limitation on employment growth at this point is largely a supply story, not a lack of demand. Workers are not returning to low-paying jobs, at least not without getting considerably higher pay and/or an improvement in working conditions.

The sectors showing the largest percentage drop in employment from pre-pandemic levels are overwhelmingly low-paying. Employment in nursing homes is down 15.2 percent.Employment in child care is down by 10.4 percent from its pre-pandemic level. Employment in the temporary help sector is down 8.7 percent. Restaurant employment is down by 7.6 percent from its pre-pandemic level. By comparison, overall employment in the private sector is down by just 3.0 percent.

It is worth noting here that the $300 weekly unemployment insurance supplements, and the special pandemic unemployment insurance programs, are not likely a big factor in discouraging people from working. Most states ended the supplements and pandemic programs in June and July. The national program ended in early September. If these benefits were discouraging people from working, we should have seen most of the effect from ending them by September.

Increasing Labor Force Participation

While we are going to see some reshuffling of the workforce, which will take time to work through, we can easily identify the reason some people, specifically women, are not working or looking for work. The BLS reported that 1.6 million people, 960,000 of them women, were not working or looking for work because of the pandemic.

This is presumably because they either fear getting Covid themselves or transmitting it to a family member who may have a health condition, or may be caring for a family member who is already ill. If these 1.6 million people were in the labor force, it would reduce by more than one third the falloff in labor force participation since the start of the pandemic. This again shows the economic importance of Biden's efforts to control the pandemic.

Of course, the issue of women's labor force participation long predates the pandemic. While the United States was near the top among wealthy countries in women's labor force participation four decades ago, it is now a laggard. It not only ranks below the Nordic countries, it has also been passed by France, Germany and even Japan in women's labor force participation.

According to the OECD, in 1980 the labor force participation rate (LFPR) for prime age women (ages 25 to 54) was 64.0 percent in the United States. That was slightly lower than the 64.7 percent rate for France, but well above the 56.7 percent rate for Japan and 56.6 percent rate for Germany. In 2020, the LFPR for prime age women in the United States had increased to 75.1 percent, but it had risen to 82.6 percent in France, 84.5 percent in Germany, and 80.0 percent in Japan.

The reason the U.S. is a laggard is not a secret. We lag in providing access to child care and family leave. Since woman continue to disproportionately have caregiving responsibilities for children and family members in need of assistance, our failure in these areas makes it difficult for many women to work.

This is a problem that has gotten worse in the pandemic. As noted earlier, employment in child care in September was 10.4 percent below its pre-pandemic level. Since there has not likely been a boom in productivity in this sector, this drop in employment means that the number of child care slots is likely close to 10.0 percent lower than before the pandemic. That means that finding quality child care is even more difficult today than it was a year and a half ago.

Getting more child care workers means raising the pay and improving conditions for child care workers. This is one of the key provisions of Building Back Better plan. Improved access to child care, along with paid parental leave (another provision) will give millions of women the option of working.

These provisions are also likely to lead to better outcomes for children in terms of education and employment, which is both good for them and good for the economy in the long-run. But, by increasing access to child care and providing parental leave, we can see a near-term boost to the economy from more people working. If getting more people working is a goal of our economic policy, this is an important route for getting there.

Supply Chain Problems

The September jobs report also gave us a reminder about the country's supply chain problems. The number of people employed in automobile manufacturing fell by 6,100. This is undoubtedly due to the widely publicized shortage of semiconductors, which is result of a fire at a major manufacturing facility in Japan. There surely are other industries where supply disruptions limited employment, although the link may be less clear than in the auto industry.

There are several points worth making here. First, in the context of a worldwide pandemic, our supply chains have actually held up remarkably well. At least in the United States, we have not had problems of people not getting food, medicine, and other necessities. Given the size of the shock, having to wait an extra month or two for a car, or paying five percent more, hardly sees like a great tragedy. Still, we don't want to see these delays and the resulting economic slowdown if it can be avoided.

It is important to note that the takeaway from the shortages is that we need diverse sources of supply, which does not necessarily mean domestic sources. If we rely on a manufacturer in Malaysia for a product, which then become unavailable for whatever reason, if we can get the product from Korea or Mexico, that is fine. There is no special virtue on this issue in getting it from the United States.

This matters because we can see shutdowns by U.S. producers as well. Marketplace radio had a piecelast month about a shortage of paint across the country. According to the piece, one of the main culprits was a shutdown by resin manufacturers (an ingredient in paint) in Texas last winter due to the unusually cold weather. In this case, relying on domestic suppliers did not prevent a supply chain disruption.

Another key point is that much of the problem is not actually in producing the items, but in transporting them. The Washington Post had an excellent piecethat described the backlog in our ports and on railways that is preventing items from getting to their destination. This means that even if we are getting the goods from China, Thailand, or anywhere else, they are not getting to where they need to go because of inadequate infrastructure. Modernizing our ports and railways is another key part of Biden's Building Back Better plan.

Global Warming and Supply Chain Disruptions

The last area where the September job report is an advertisement for the Build Back Better plan is on climate change. Many of the supply chain disruptions we are seeing now, and will see in the future, are the result of global warming.

The cold Texas weather, that led to the shutdown of the resin manufacturers, which contributed to the paint shortage, was an extraordinary weather event that likely would not have occurred if we were not experiencing climate change. More frequent hurricanes and other extreme weather events, that lead to shutdowns in manufacturing or distribution facilities, will be more common as global warming advances. And, we will see more crop failures and higher prices for a wide range of agricultural products due to excessive heat and droughts.

If we don't begin to make serious efforts to reduce greenhouse gas emissions, as proposed in the Build Back Better plan, we will see many more climate related economic disruptions in future years, as well as higher prices for a wide range of products.

Conclusion: The September Jobs Report Was an Advertisement for Build Back Better

There are many aspects to the jobs report that gave ambiguous signals about the near-term future for the economy. However, the problems that are most apparent in this report indicate the urgency of many of the items in Biden's agenda. Our senators and congresspeople should give them serious thought.


‘It’s Not Sustainable.’ What America’s Port Crisis Looks Like Up Close. [feedly]

'It's Not Sustainable.' What America's Port Crisis Looks Like Up Close.

 -- via my feedly newsfeed

text only

y Peter S. GoodmanPhotographs by Erin Schaff

Oct. 10, 2021, 11:35 a.m. ET

SAVANNAH, Ga. — Like toy blocks hurled from the heavens, nearly 80,000 shipping containers are stacked in various configurations at the Port of Savannah — 50 percent more than usual.

The steel boxes are waiting for ships to carry them to their final destination, or for trucks to haul them to warehouses that are themselves stuffed to the rafters. Some 700 containers have been left at the port, on the banks of the Savannah River, by their owners for a month or more.

"They're not coming to get their freight," complained Griff Lynch the executive director of the Georgia Ports Authority. "We've never had the yard as full as this."

As he speaks, another vessel glides silently toward an open berth — the 1,207-foot-long Yang Ming Witness, its decks jammed with containers full of clothing, shoes, electronics and other stuff made in factories in Asia. Towering cranes soon pluck the thousands of boxes off the ship — more cargo that must be stashed somewhere.

"Certainly," Mr. Lynch said, "the stress level has never been higher."

It has come to this in the Great Supply Chain Disruption: They are running out of places to put things at one of the largest ports in the United States. As major ports contend with a staggering pileup of cargo, what once seemed like a temporary phenomenon — a traffic jam that would eventually dissipate — is increasingly viewed as a new reality that could require a substantial refashioning of the world's shipping infrastructure.

As the Savannah port works through the backlog, Mr. Lynch has reluctantly forced ships to wait at sea for more than nine days. On a recent afternoon, more than 20 ships were stuck in the queue, anchored up to 17 miles off the coast in the Atlantic.

Nearly 80,000 containers jam the the port, 50 percent more than usual.

Such lines have become common around the globe, from the more than 50 ships marooned last week in the Pacific near Los Angeles to smaller numbers bobbing off terminals in the New York area, to hundreds waylaid off ports in China.

The turmoil in the shipping industry and the broader crisis in supply chains is showing no signs of relenting. It stands as a gnawing source of worry throughout the global economy, challenging once-hopeful assumptions of a vigorous return to growth as vaccines limit the spread of the pandemic.

The disruption helps explain why Germany's industrial fortunes are sagging, why inflation has become a cause for concern among central bankers, and why American manufacturers are now waiting a record 92 days on average to assemble the parts and raw materials they need to make their goods, according to the Institute of Supply Management.

On the surface, the upheaval appears to be a series of intertwined product shortages. Because shipping containers are in short supply in China, factories that depend on Chinese-made parts and chemicals in the rest of the world have had to limit production.

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But the situation at the port of Savannah attests to a more complicated and insidious series of overlapping problems. It is not merely that goods are scarce. It is that products are stuck in the wrong places, and separated from where they are supposed to be by stubborn and constantly shifting barriers.

The shortage of finished goods at retailers represents the flip side of the containers stacked on ships marooned at sea and massed on the riverbanks. The pileup in warehouses is itself a reflection of shortages of truck drivers needed to carry goods to their next destinations.

For Mr. Lynch, the man in charge in Savannah, frustrations are enhanced by a sense of powerlessness in the face of circumstances beyond his control. Whatever he does to manage his docks alongside the murky Savannah River, he cannot tame the bedlam playing out on the highways, at the warehouses, at ports across the ocean and in factory towns around the world.

"The supply chain is overwhelmed and inundated," Mr. Lynch said. "It's not sustainable at this point. Everything is out of whack."

Born and raised in Queens with the no-nonsense demeanor to prove it, Mr. Lynch, 55, has spent his professional life tending to the logistical complexities of sea cargo. ("I actually wanted to be a tugboat captain," he said. "There was only one problem. I get seasick.")

Now, he is contending with a storm whose intensity and contours are unparalleled, a tempest that has effectively extended the breadth of oceans and added risk to sea journeys.

Last month, his yard held 4,500 containers that had been stuck on the docks for at least three weeks. "That's bordering on ridiculous," he said.

"Everything is out of whack," said Griff Lynch, the executive director of the Georgia Ports Authority.

That these tensions are playing out even in Savannah attests to the magnitude of the disarray. The third-largest container port in the United States after Los Angeles-Long Beach and New York-New Jersey, Savannah boasts nine berths for container ships and abundant land for expansion.


To relieve the congestion, Mr. Lynch is overseeing a $600 million expansion. He is swapping out one berth for a bigger one to accommodate the largest container ships. He is extending the storage yard across another 80 acres, adding room for 6,000 more containers. He is enlarging his rail yard to 18 tracks from five to allow more trains to pull in, building out an alternative to trucking.

But even as Mr. Lynch sees development as imperative, he knows that expanded facilities alone will not solve his problems.

"If there's no space out here," he said, looking out at the stacks of containers, "it doesn't matter if I have 50 berths."

Many of the containers are piled five high, making it harder for cranes to sort through the towers to lift the needed boxes when trucks arrive to take them away.

The port has nine berths for container ships and abundant land for expansion.
Containers are filled with everything from tires to holiday decorations.
Nearly 13 percent of the world's cargo shipping capacity is tied up by delays, data shows.

On this afternoon, under a merciless sun, the port is on track to break its record for activity in a single day — more than 15,000 trucks coming and going. Still, the pressure builds. A tugboat escorts another ship to the dock — the MSC AGADIR, fresh from the Panama Canal — bearing more cargo that must be parked somewhere.

In recent weeks, the shutdown of a giant container terminal off the Chinese city of Ningbo has added to delays. Vietnam, a hub for the apparel industry, was locked down for several months in the face of a harrowing outbreak of Covid. Diminished cargo leaving Asia should provide respite to clogged ports in the United States, but Mr. Lynch dismisses that line.

"Six or seven weeks later, the ships come in all at once," Mr. Lynch said. "That doesn't help."

Early this year, as shipping prices spiked and containers became scarce, the trouble was widely viewed as the momentary result of pandemic lockdowns. With schools and offices shut, Americans were stocking up on home office gear and equipment for basement gyms, drawing heavily on factories in Asia. Once life reopened, global shipping was supposed to return to normal.

The port is undergoing a $600 million expansion to relieve the congestion.

But half a year later, the congestion is worse, with nearly 13 percent of the world's cargo shipping capacity tied up by delays, according to data compiled by Sea-Intelligence, an industry research firm in Denmark.

Many businesses now assume that the pandemic has fundamentally altered commercial life in permanent ways. Those who might never have shopped for groceries or clothing online — especially older people — have gotten a taste of the convenience, forced to adjust to a lethal virus. Many are likely to retain the habit, maintaining pressure on the supply chain.

"Before the pandemic, could we have imagined mom and dad pointing and clicking to buy a piece of furniture?" said Ruel Joyner, owner of 24E Design Co., a boutique furniture outlet that occupies a brick storefront in Savannah's graceful historic district. His online sales have tripled over the past year.

On top of those changes in behavior, the supply chain disruption has imposed new frictions.

The port is enlarging the rail yard to 18 tracks from five to allow more trains to pull in, giving shippers an alternative to trucking.

Mr. Joyner, 46, designs his furniture in Savannah while relying on factories from China and India to manufacture many of his wares. The upheaval on the seas has slowed deliveries, limiting his sales.

He pointed to a brown leather recliner made for him in Dallas. The factory is struggling to secure the reclining mechanism from its supplier in China.

"Where we were getting stuff in 30 days, they are now telling us six months," Mr. Joyner said. Customers are calling to complain.

His experience also underscores how the shortages and delays have become a source of concern about fair competition. Giant retailers like Target and Home Depot have responded by stockpiling goods in warehouses and, in some cases, chartering their own ships. These options are not available to the average small business.

Bottlenecks have a way of causing more bottlenecks. As many companies have ordered extra and earlier, especially as they prepare for the all-consuming holiday season, warehouses have become jammed. So containers have piled up at the Port of Savannah.

Mr. Lynch's team — normally focused on its own facilities — has devoted time to scouring unused warehouse spaces inland, seeking to provide customers with alternative channels for their cargo.

Recently, a major retailer completely filled its 3 million square feet of local warehouse space. With its containers piling up in the yard, port staff worked to ship the cargo by rail to Charlotte, N.C., where the retailer had more space.

Such creativity may provide a modicum of relief, but the demands on the port are only intensifying.

On a muggy afternoon in late September, Christmas suddenly felt close at hand. The containers stacked on the riverbanks were surely full of holiday decorations, baking sheets, gifts and other material for the greatest wave of consumption on earth.

Will they get to stores in time?

"That's the question everyone is asking," Mr. Lynch said. "I think that's a very tough question."


Friday, October 8, 2021

Enlighten Radio:Talkin Socialism: The Challenge of Big Tech

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Thursday, September 30, 2021

A brilliant essay by Dean Baker on a progressive path with China


The U.S. and China: A Productive Path Forward

The Biden administration, with the overwhelming support of the foreign policy establishment, seems determined to start a new Cold War with China. A new Cold War is likely to be bad news from the standpoint of inequality, world peace, and the climate crisis facing the planet. As with the last Cold War, it is likely to be driven by misunderstandings and deliberate misinformation. With so much at stake, it is important to head off a new Cold War, most importantly by correcting many misconceptions and laying out an alternative more productive path for future relations with China.

I will briefly go through the history of the economic relationship between China and the U.S. in the last two decades. Then I will describe the implications for inequality for the path Biden seems to be pursuing. The last part outlines an alternative more cooperative path for relations with China.

The Trade Deficit with China: Donald Trump’s Phony War

China was admitted to the World Trade Organization in 2000 after a major battle in Congress over granting the country Permanent Normal Trading Relations (PNTR), which was necessary for its admission. Much of the opposition came from the labor movement which argued that opening trade to China would lead a large expansion of the trade deficit, costing manufacturing jobs. Since manufacturing had historically been a source of high-paying jobs for workers without college degrees, this would put downward pressure on the pay of non-college educated workers more generally.

The mainstream of the economic profession ridiculed the idea that expanding trade with China could lead to any substantial job loss. For example, Gary Hufbauer, a prominent trade economist with the Peterson Institute for International Economics, dismissed the “extravagant claims” from the Economic Policy Institute (my former employer) that PNTR for China could lead to a loss of 813,000 jobs.

“The Economic Policy Institute ( has advanced the most extravagant claims about the US bilateral trade deficit with China. Based on a count of 13,000 jobs lost per billion dollars of manufactured imports, the EPI asserts that current trade with China already costs the United States 880,000 high-wage manufacturing jobs. Then, extrapolating the US ITC’s estimate of the one-time percentage import and export trade changes for 10 years, the EPI asserts another 817,000 US jobs will be eliminated through PNTR and Chinese membership in the WTO.”

This dismissive attitude was common in the profession at the time. PNTR passed by a relatively narrow 237 to 197 vote in the House (the Senate margin was much wider). The near unanimous support from the mainstream of the economic profession was almost certainly an important factor in determining the outcome of this vote.

Contrary to the predictions of Hufbauer and other mainstream economists, the trade deficit in goods with China did in fact rise rapidly, growingfrom $68.7 in 1999 to $418.2 billion in 2018.[1]The story behind this increase is not complicated. In simple trade stories, when a country is running a large trade surplus with another country, we expect that the value of the currency of the surplus country will rise relative to the value of the deficit country. This makes the items produced in the surplus country relatively more expensive in international markets, while making the items produced in the deficit country relatively cheaper.

That sort of currency adjustment did not happen for the simple reason that China’s government did not allow it to happen. China’s central bank bought up several trillion dollars of U.S. government bonds and other dollar assets in the first decade of the century.[2]This propped up the dollar, thereby preventing the sort of currency adjustment that we might expect between a country running a large trade deficit and a country running a large surplus.

At the time, many other developing countries also effectively tied their currencies to the renminbi to maintain their competitive position relative to China. When China raised the value of its currency against the dollar, countries like Vietnam and Thailand also raised the value of their currency. This meant that China’s decision to deliberately maintain an undervalued currency meant that other countries also under-valued their currency relative to the dollar, leading to higher trade deficits with these countries as well.

The explosion in the trade deficit let to a sharp drop in manufacturing employment between 2000 and 2007, before the start of the Great Recession. The country lost more than 3.5 million manufacturing jobs between December of 1999 and December of 2007, the official start date of the Great Recession. (It lost another 2.3 million between December 2007 and February 2010, the employment trough of the Recession.)[3]

While manufacturing had been falling as a share of total employment since the start of the 1970s, actual levels of employment had changed little, apart from cyclical fluctuations, until the 2000s. From December of 1970 to December of 1999 the sector lost less than 30,000 jobs. This is shown in Figure 1. By contrast, the job loss associated with the rise in the trade deficit from 1999 to 2007 amounted to more than 20 percent of total employment in the sector. Autor, Dorn, and Hansen (2016) put the job loss associated with trade with China alone at 2.0 million.

The massive job loss in manufacturing had the predictable effect on wages. Many of the higher paying union jobs were the ones that disappeared as the economy became more open to trade in manufactured goods. In other cases, workers were forced to take pay cuts to keep their jobs. The extent to which manufacturing offered higher paying jobs for workers (mostly male workers) without college degrees, declined substantially over this period, as both the number of jobs and wage premium fell sharply.

Figure 2 shows the real average hourly wage for production and non-supervisory workers in the private sector as a whole and for the manufacturing sector. As can be seen, workers in manufacturing enjoyed a 2.7 percent advantage by this measure in 1999. This imbalance flipped as the trade deficit expanded. By 2020, the average hourly wage for production and non-supervisory workers in manufacturing was 7.6 percent below the average for the private sector as a whole.

These numbers measure only money wages and ignore benefits, which still tend to be higher in manufacturing than elsewhere in the economy. However, even when these benefits are factored in, we have almost certainly a sharp decline in the manufacturing premium. In an analysis that attempted to factor in benefits, Mishel(2018) found a 7.8 percent straight wage premium for non-college educated workers for the years 2010 to 2016, in an analysis that controlled for age, race, and gender, and other factors. That compares to a premium for non-college educated workers of 13.1 percent in the 1980s.

The analysis found that differences in non-wage compensation added 2.6 percentage points to the manufacturing wage premium for all workers, but the compensation differential may be less for non-college educated workers, since they are less likely to get health care coverage and retirement benefits. Since the ratio of money wages in manufacturing to the rest of the economy has continued to fall sharply in the years since this analysis, the manufacturing wage premium would almost certainly be far less in 2021.

There is one other important point on the quality of manufacturing jobs that is worth noting here. The unionization rates in manufacturing have plummeted over this period. In 2000, 14.9 percent of workers in manufacturing were union members compared to 9.0 percent for the private sector as a whole. The percent of union members in manufacturing had fallen to just 8.5 percent in 2020, only slightly higher than the 6.3 percent average for the private sector as a whole.

Also, the new jobs that have been created in manufacturing since the trough of the Great Recession have overwhelmingly not been union jobs. Until the pandemic hit in March of 2020, we had added back more than 1.6 million manufacturing jobs from the employment trough of the Great Recession in 2010. Nonetheless, the number of union members in manufacturing had fallen by almost 900,000.

This history is important because it shows that trade in general, and with China in particular, did have a very negative impact on the labor market prospects for a large segment of the working class. However, there are two important qualifications to the simple story that Donald Trump and his supporters are inclined to tell.

First, this is not a story of China winning and the U.S. losing. The trade deficit was not about China doing evil things behind the back of the political leadership in the United States. The trade deficit was a story of both U.S. manufacturers outsourcing to take advantage of low-cost labor in China and major retailers like Walmart setting up low cost supply chains as a way to undercut their competition.

The manufacturers that were able to get cheap labor from China were big gainers from the trade deficit, as were Walmart and other major retailers. Also, workers who were not directly affected by the loss of manufacturing jobs, such as doctors, lawyers, and other highly paid professionals, benefitted from lower cost manufactured goods, as well as lower cost services in many areas due to downward pressure on the wages of less-educated workers.

For this reason, it is wrong to treat this period as a story of China winning its trade battles with the United States. China gained from its trade with the United States, but so did the top end of the income distribution in the United States.

The other important qualification is that this history is not reversible. The manufacturing premium for less-educated workers was largely a story of its extraordinary rates of unionization. Now that the sector does not have an especially high rate of unionization, the premium has been largely eliminated. And, as we have added back jobs in manufacturing, they have not been union jobs.

For these reasons, there is little reason to prefer jobs in manufacturing over jobs in any other sector of the economy. In the past, the fact that manufacturing jobs were more likely to be high-paying union jobs was a good reason to focus on preserving them and seeking to make the manufacturing sector a larger share of the economy. This is no longer true.

The Get Tough with China Approach: Protectionism for the Highly Paid

The Biden administration has made clear that it intends to block imports from China in many high-tech sectors. While some restrictions can be justified as necessary to protect military technologies, it is clear that these protections are mainly for economic reasons.

For example, the Biden administration pushed through a billthat would provide more than $50 billion in subsidies to the semi-conductor industry over the next five years. It also is planning a programfor pandemic preparedness would spend more than $40 billion over the next decade developing vaccines, treatments, and tests that could be used in future pandemics. It has also left in place a wide variety of tariffs on Chinese imports, including an 18 percent tariff on solar panels, which is not helping the shift away from fossil fuels.

The subsidies for promoting technology in certain sectors are not necessarily bad economic policy. The U.S. economy has benefitted enormously from publicly supported research and development in a wide range of areas including pharmaceuticals, aerospace, agriculture, and computers and software. There is likely to be a large dividend from future spending on research and development.

The key issue here is who will have control over the products developed with this money and how it is being promoted as a competition with China. At this point, there are not clear guidelines on how the Biden administration envisions ownership rights to the publicly funded R&D he is proposing, but there is little reason to believe that he envisions moving away from the current pattern. As it stands, the government puts up the funds for much of the most important, and risky, research, and then private corporations are able to benefit by claiming ownership of the finished product.

This sort of story can be seen most clearly in the case of Moderna and the mRNA vaccine it developed last year. The Trump administration, through Operation Warp Speed, paid Moderna over $400 million to cover the cost of developing a vaccine and its initial Phase 1 and 2 trials. It then paid over $450 million to pay for the larger Phase 3 trials, in effect fully covering Moderna’s cost for developing a vaccine and bringing it through the FDA’s approval process.

It was necessary for Moderna to do years of research so that it was in a position to quickly develop a mRNA vaccine, but even here the government played a very important role. Much of the funding for the discovery and development of mRNA technology came from the National Institutes of Health. Without its spending on the development of this technology, it is almost inconceivable that any private company would have been in a position to develop a mRNA vaccine against the coronavirus.

In spite of this massive contribution from the public sector, Moderna has complete control over its vaccine and can charge whatever price it wants. It is likely to end up with more than $20 billion in profit from sales of its coronavirus vaccine. According to Forbes, the vaccine had made at least three Moderna billionaires by the middle of 2021, with the company’s CEO, Stephane Bancel, leading the way with an increase in his wealth of $4.3 billion. The company’s market capitalization was almost $180 billion on September 22, up from just over $7 billion before the start of the pandemic.

If this is the model for the way public investments in R&D are treated going forward, then we can expect to see many more millionaires and billionaires created as a result of Biden’s spending. Needless to say, there will be no shortage of economists and other policy types insisting that these extremes of wealth are just the inevitable result of technology, just as there was no shortage of policy types anxious to blame the huge loss of manufacturing jobs in the first decade of this century on technology.

There will be some number of manufacturing jobs created as a result of this initiative. Someone has to manufacture the semi-conductors, vaccines, and other products developed with this funding and there is probably a greater likelihood that these factories will be located in the United States as a result of Biden’s policies.

However, this is not much consolation. With manufacturing no longer providing a substantial wage premium for workers without college degrees, there is no more reason to value manufacturing jobs in these sectors than jobs in warehouses, distribution centers, or health care. With the right institutional support, any job can be a high-paying job, there is no reason to especially prize the manufacturing jobs that might be created through this initiative.

In short, this is yet another path for furthering the upward redistribution we have been seeing for the last four decades. It is ironic that our policy elites have managed to flip 180 degrees on their core economic principles to continue the drive for upward redistribution. In the decade from 2000 to 2010, when “free trade” with China cost millions of manufacturing jobs and put downward pressure on the pay of less-educated workers more generally, free trade was a sacred mantra in elite policy circles.

Now that China is in a situation to pose a real threat in our most advanced industries, costing jobs of engineers, biochemists, and other highly educated workers, our elites are gung ho on a protectionist agenda to confront China. And, we are supposed to believe that it is just a coincidence that the main winners on both sides of this flip are those at the top of the income ladder.

It is also important to note that motivating this agenda as a way to confront China inevitably poses risks. As the U.S. seeks to shore up an anti-China economic and military front with its allies in Europe and Asia, there will always be a risk that mistakes and mis-judgements can turn a Cold War into an actual war.

While rational people would recognize that any full-scale war between China and the United States would be disastrous for both countries and the world, political actors can get forced into positions from which it is difficult to backdown while preserving their careers. The greater the background level of hostility between the two countries, the greater the likelihood that miscalculations can lead to actual war.

A Better Path: Cooperation in Developing Technologies to Save the Planet

We can choose a better path in dealing with China going forward. Instead of wasting resources in military competition, and bottling up technologies in trying to gain economic advantage, we can look to have a path where we try to maximize cooperation between the superpowers, bringing in most of the rest of the world in the process.

The idea of sharing knowledge, rather than locking it down for private profit with patent, copyrights, and related protections, goes in the exact opposite direction of public policy for the last four decades. Nonetheless, it is important to get it on the table as pole in public debate. People have to recognize that there is an alternative to the path that Biden appears set on taking the country, which would have very different implications for both our dealings with China and also inequality in the United States.

The cooperative alternative would involve sharing technology, especially in areas where the world has a clear shared interest, such as limiting the damage from global warming and containing the pandemic, a well as health care more generally. The basic logic would be that the United States, China, and other countries we pull into the system would commit to spend a certain amount of money to supporting research in the designated areas based on their GDP and per capita income.

For example, we could require that a rich country like the United States would contribute 1.0 percent of its GDP to research and development, or roughly $210 billion a year, based on 2021 GDP. Middle income countries like China might be expected to contribute a smaller share of their GDP, say 0.5 percent. For China, that would come to $130 billion a year (on a purchasing power parity basis) based on its 2021 GDP. Poorer countries might be expected to make a token contribution, or pay nothing at all.

Obviously, it would be necessary to negotiate the exact formulas. There would also need to be some mechanism for dealing with countries that refused to participate, perhaps applying something like patent monopolies to countries that remained outside the network. (I outline some of the issues that would have to be dealt with hereand in chapter 5 of Rigged [it’s free].)

There are issues that would be difficult to hammer out in trying to work out arrangements for sharing along these lines, but the process of synchronizing rules on intellectual products is also very difficult now. The Trans-Pacific Partnership almost certainly would have been finalized at least two years sooner if not for the battles over the intellectual property rules that would be included in the pact.

The potential gains from this sort of sharing of knowledge and technology are enormous. Instead of looking to lock up new discoveries behind patent monopolies, a condition of getting funding should be that all results are posted on the web as quickly as possible, so that researchers around the world could benefit. The Bermuda Principles, of posting results on the web nightly, which the scientists working on the human genome project adopted, would be a useful model.

The idea that science advances most rapidly when it is open should not seem far-fetched. We benefit from having as many eyes as possible on new discoveries and innovations so that researchers can build on successes and uncover flaws.

We got some great examples for this view in the pandemic. Pfizer reportedin February that it had found a way to alter its production process that cut it production time by 50 percent.  It also discovered that its vaccine did not have to be super-frozen at minus 94 degrees Fahrenheit, but instead could be kept in a normal freezer for up to two weeks. It also discovered in January that its standard vile contained six vaccine doses, not the five that it had expected, causing one sixth of its vaccines to be thrown out at a time when they were in very short supply.

Imagine Pfizer had open-sourced its whole production process. These discoveries would almost certainly have come considerably sooner, allowing many more people to be vaccinated. There are undoubtedly other efficiencies that could be discovered both about Pfizer’s vaccine and the vaccines produced by other manufacturers, if engineers around the world could review their production methods.

Of course, the biggest gain from having open-sourced the technology would have been that manufacturers around the world would have been able to produce all the vaccines. We likely could have had enough vaccines for the whole world by the first half of 2021. This could have saved millions of lives, and prevented hundreds of millions of infections.

This logic applies to health care more generally. Why would we not want every researcher in the world to have full access to the latest developments in the areas where they work. Are we worried that a researcher in China or Turkey might develop an effective treatment for a particular cancer or liver disease before researchers in the United States? There doesn’t seem an obvious downside to going this route.

The same applies to climate technology. We should want researchers to be able to quickly build on each other’s innovation in wind and solar energy, as well as energy storage. Slowing global warming is a shared crisis. We should want to do everything possible to develop the best technology and to have it installed as widely as feasible.

There are other areas of research where cooperation may prove more difficult. For example, we may want to keep more control over communications technologies that could have military uses. But, at the very least, health care and climate are two major areas of research where both China and the U.S., as well as the rest of the world, can benefit from having shared and open research. And, if we can successfully implement a system of cooperative technology development in these two areas, we should be able to find other areas of the economy where we can adopt similar systems.

There also is an important potential side benefit to going this route. Back in the 1990s, when we were debating more open trade between the United States and China, many advocates of the trade path we took argued that China would become more liberal and democratic if it had a strong growing economy. The argument was essentially that there was link between capitalist economies and liberal democracies.

In retrospect, that argument has not held up very well. China has seen very strong growth for the last four decades. Its economy is more than five times as large as it was when it was admitted to the WTO in 2000.  Yet, China is no one’s image of a liberal democracy. It’s not even clear that it has become more open in the last two decades.

This history should make anyone cautious about making broad claims on political evolution in China as a result of its economic progress, but there is an important difference about the route outlined here. If China were to engage in large-scale exchanges of knowledge and research in health care, climate, and possibly other areas, it would mean that tens of thousands of their researchers were in regular contact with their counterparts in the United States and other liberal democracies.

Most of the actors in China’s manufacturing export boom in the first decade of this century were low-paid (by U.S. standards) and relatively uneducated workers in factories. In this story of collaborating in some of the most sophisticated areas of technology, the main actors are highly educated and relatively well-paid workers. They will be the parents, siblings, and children of the people holding positions of political power in the country’s government. It is reasonable to believe that they might have more influence in pushing for a more open and liberal society than poorly educated workers in a textile factory.

Again, anyone should be very cautious in making strong claims about how a particular economic policy will lead China to a path of liberal democracy. But it is reasonable to believe that having relatively privileged actors in its economy in regular contact with their counterparts in the West could have a positive impact on the country’s politics from the standpoint of promoting liberal democratic values.

There is one group that is likely to be a loser from going this path of cooperative technological development: the most highly paid scientists and engineers, as well as CEOs and shareholders of the companies that are directly affected. To be clear, under a system along the lines outlined here, there is every reason to believe that accomplished researchers would still be well-paid, with the most successful likely getting high six-figure or even seven figure salaries. There would still be plenty of profits available to companies that contract to do research in these areas, just as companies that contract to design weapon systems for the Pentagon can make very healthy profits.

However, we would probably not see the vast fortunes that many individuals and companies have earned based on their patent monopolies. For example, we would probably not see scientists earning multi-billion fortunes that the top executives at Moderna were able to pocket in the pandemic. We also would be less likely to see a company’s stock increase more than 2000 percent in a year and half, adding $170 billion to its market capitalization.

The smaller paychecks at the top, coupled with the elimination of all the waste associated with the patent system, will effectively mean higher paychecks at the middle and bottom. By my calculations, if we sold all prescription drugs in a free market, without patents or related protections, we would spend around $80 billion a year. That is a saving of $420 billion, or $3,000 per family, compared with the $500 billion a year that we now spend on drugs. That translates into a lot of additional money in the pockets of low- and middle- income people as a result of lower health care spending.

In short, going the route of cooperative development of technology with China is likely to not only reduce tensions between the world’s two super-powers, but can be a major factor in reversing the upward redistribution of the last four decades. It can very directly lead to less money going to those at the top end of the income distribution and increased real wages for those at the middle and the bottom.

Another Trade Policy for the Rich? We Won’t Get Fooled Again

In the 1990s and 2000s the leadership of both political parties pushed trade policies that were quite explicitly designed to redistribute income upward. They put U.S. manufacturing workers in direct competition with low-paid workers in China and other developing countries, while largely protecting the most highly educated workers.

The predicted and actual effect of these policies was to put downward pressure on the wages of manufacturing workers, as it cost millions of jobs in the sector. Since manufacturing had historically been a source of relatively well-paying jobs for workers without college degrees, the drop in pay and loss of jobs in this sector put downward pressure on the wages of non-college educated workers more generally.

As we move into a new decade, we are being promised a sharp turn to protectionist policies, with the protectionism most directly protecting some of the most highly paid and highly educated workers in the U.S. economy. As a side benefit, we are told that this protection will mean more manufacturing jobs, although the sector no longer provides a substantial wage premium over jobs in other sectors.

Our political elites were able to get their way in pushing their trade agenda in the 1990s and 2000s, with devastating consequence for millions of workers. The consequences of their new agenda could be even more devastating since it is not only a path designed to further the upward redistribution of income, but also a path designed to put us in continual conflict with the world’s other major superpower.

We were fortunate that the first Cold War never lead to direct conflict between the United States and the Soviet Union, although it did lead to proxy wars that killed millions and cost trillions. We should not go down the same path again.

[1]Many people have argued that the official bilateral trade figures overstate the actual deficit because much of the value-added in goods imported from China comes from other countries. The classic example is an Apple iPhone which might be assembled in China and then imported into the United States. Our trade figures would count the full value of the iPhone as an import from China.

While this does lead to an overstatement of the value of our imports from China, there is also an understatement for an analogous reason. When we import items from Japan, South Korea, or even Europe, it is likely that some of the value added came from China. It is likely that the overstatement from counting the full value of finished goods imported from China exceeds the understatement from not counting the value added in goods imported from third countries, it does not make sense to just count one source of bias in determining the size of the trade deficit.

[2]China’s buying of dollar assets has often been referred to as currency “manipulation.” This word implies that China’s actions were somehow undercover and secretive. In fact, China quite explicitly pegged its exchange rate to the dollar and openly intervened to support this peg. It would be more accurate to say that China “managed” its exchange rate.

[3]There was a bizarre argument in policy circles as to whether the massive loss of manufacturing jobs from 2000 to 2007 was due to trade or technology. This argument was always strange (how can a trade deficit – which is not caused by rapid growth – not imply fewer jobs in manufacturing?), but it has gotten even stranger over time. To believe that the massive job lost from 2000 to 2007 was due to technology, it would be necessary to believe that somehow technology didn’t cause job loss in manufacturing from 1970 to 2000, or in the years since 2010, but somehow in the years when we saw a rapid rise in the trade deficit, technology was causing large-scale job loss in manufacturing.

China’s Power Crunch Steals Macro Limelight

via Randy Shannon from

"Yet another growth shock."

That's how Goldman described China's worsening energy crunch on Tuesday.

You could also call it the latest blow to macro sentiment at a time of gathering headwinds.

In a new note, Hui Shan cut the bank's growth outlook for the world's second largest economy to 0% for Q3. That's a sequential projection. YoY, the Chinese economy likely expanded 4.8% this quarter, Goldman said. Their full-year projection is now 7.8%, down from 8.2% previously.

You can make this story as complicated or as simplistic as you like, but the bottom line is that between Beijing's efforts to meet environment targets, pandemic effects and a coal supply shortage, there's not enough power.

Factories are being compelled to curtail operations at a time when rampant supply chain disruptions are already upending the global economy. Mandates aimed at cutting electricity consumption will invariably weigh on growth in key provinces, and at the worst possible time.

Growth was already decelerating and between sub-50 prints on both the official and Caixin non-manufacturing PMIs and an extremely poor read on retail sales for August, it seems highly unlikely that the services sector is in a position to pick up the slack.

"It presumably was not the intention of policymakers to provoke a sharp tightening, at least when the [environmental] goals were initially formulated [but] the peculiar nature of the COVID shock has made the economy more energy-intensive, at least temporarily," Goldman said, adding that "the boom in exports has boosted energy-intensive manufacturing industries [while] efforts to reduce coal-fired related emissions and a reduction in coal imports have affected supply levels at least on the margin, contributing to a sharp increase in prices."

Apparently, the diplomatic spat with Australia is making the situation worse. "China stopped buying the highly energy-efficient Newcastle grade from Australia starting last year," Bloomberg noted.

Beijing's "zero tolerance" COVID policy already had macro watchers worried. Strict adherence to draconian containment measures led to two high-profile port disruptions over the spring and summer, testing the global shipping industry anew.

Ultimately, exports were undaunted but signs of "friction" are painfully easy to spot. Shipping rates have skyrocketed, for instance (figure below, from BofA).

This has some concerned ahead of the holiday shopping season in the West. The factory curbs are almost sure to make things worse.

Take Clark Feng, who spoke to Bloomberg Monday, for example. Feng "buys tents and furniture from Chinese manufacturers to sell overseas," the linked article explained, before noting that "electricity curbs in the eastern province of Zhejiang, where the company is based, have dealt another blow to businesses [while] fabric makers in the province that are suffering production halts have started to hike prices and postpone taking new overseas orders."

That short anecdote neatly encapsulates the multi-faceted problem as it's manifesting "on the ground," so to speak.

Nomura's Ting Lu, who last month characterized China's property crackdown as a kind of "Volcker moment," now sees the economy shrinking on a QoQ basis. "With market attention laser focused on Evergrande and Beijing's unprecedented curbs on the property sector, another major supply-side shock may have been underestimated or even missed," he wrote, in a new piece which contained the following useful recap:

In September 2020, President Xi Jinping announced that China would reach peak CO2 emissions before 2030 and carbon neutrality by 2060. After that, the State Council and several ministries set ambitious 2021 targets for cutting energy intensity and energy consumption. Enforcement is key, and the real game changer came in mid-August, when the National Development and Reform Commission (NDRC), China's state planner, announced that 20 mainland Chinese provinces failed to achieve their goals on cutting either energy consumption or energy intensity in H1 this year. These 20 provinces account for 70.2% of China's GDP and 73.5% of the secondary sector. News flow seems to suggest that these regions need to remedy this shortcoming over the remainder of this year, and some major cities in the economic powerhouses of Jiangsu and Zhejiang provinces have already rolled out draconian measures to suspend the operation of many factories.

And, so, factories are closing down, either because local governments are ordering them to or else because they don't have any power.

Nomura's YoY Q3 and Q4 GDP forecasts are now 4.7% and 3.0%, respectively, down from 5.1% and 4.4%. The bank's annual GDP growth projection for this year is 7.7%, a touch below Goldman's.

As the figure (on the left, above) shows, Nomura sees GDP growth of -0.2% QoQ in Q3. "Even with these cuts, we see more downside risk to our forecasts," the bank warned.

In addition to supply shocks associated with green measures, energy and soaring factory-gate inflation, Nomura reiterated (in the same report) that China also faces a trio of "major negative demand shocks." These are familiar. One is new COVID waves, another is a potential property meltdown and a third is a prospective deceleration in export growth.

Needless to say, the situation is fluid. All of this comes amid Xi's sweeping regulatory crackdown on everything from big-tech to ride-hailing to food delivery to actors' pay.

Goldman called uncertainty around Q4 "very large." "A lot of this comes down to the stance of both macro and regulatory policy," the bank remarked, citing the possibility that Beijing could take measures "to stabilize housing sector activity and stretch out the deleveraging in the property sector." It's also possible, Goldman said, that Xi could order a "temporary relaxation of regulatory pressures to meet energy use targets."

Who knows. What we do know is that this is yet another potentially gale-force macro headwind at a time when some developed market central banks, including the Fed, are keen to dial back stimulus.

On Tuesday, the PBoC's Yi Gang said the Chinese economy is expected to maintain a potential growth rate of between 5% and 6%. He also said central banks should avoid asset purchases as much as possible. QE, he remarked, could damage market functioning.

For their part, Nomura cautioned that this is no small matter. "The power-supply shock in the world's second-biggest economy and biggest manufacturer will ripple through and impact global markets," the same cited report warned.

"I believe global markets will feel the pinch of a shortage of supply from textiles, toys to machine parts," Ting Lu said. "The hottest topic about China will very soon shift from 'Evergrande' to 'Power Crunch.'"

Randy Shannon

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