In one of its banner anthems from the early 2000s – “Roll with the Changes” – the popular classic rock band REO Speedwagon belts out the sing along chorus, “Keep on rollin’, keep on rollin’…”
NY Times columnist David Brooks seems to feel the same way about the American economy.
In a recent column, he observed: “You can invent fables about how America is in economic decline…But the American economy doesn’t care. It just keeps rolling on.”
Brooks’ colleague David Leonhardt notes that when it comes to economic innovation and productive might, no country can match the U.S. – with Apple, Google, Amazon, Tesla and OpenAI blazing new trails.
Leonhardt writes, “The standard measure of a nation’s economic performance is per capita gross domestic product — the value of the economy’s output divided by the size of the population.”
He points out that even as China’s share of global GDP has skyrocketed over the past few decades, the U.S. still comprises virtually 25% of worldwide output – about the same as in 1990.
But as Nobel laureate and economist Paul Krugman reminds us, GDP doesn’t measure everyday Americans’ standard of living.
Because per capita GDP is an average, it can be distorted by outliers. One major example: income inequality in the U.S. is significant, which means the wealthy own a much larger share of output than in other countries.
As Leonhardt points out, per capita GDP in the U.S. has risen 27% in the new millennium – from around $50,000 in 2000 to a little over $60,000 at the end of 2021 (it was less than $25k in 1970).
“But median household income has risen only 7%,” while income for the top 0.1% of earners has [soared] 41%.”
Broader quality of life metrics show even more clearly how the U.S. isn’t looking so good relative to other comparable nations.
Leonhardt notes we have the lowest life expectancy of any high-income country, with “uniquely poor access to health insurance and paid parental leave.”
Krugman says, “It’s always important to bear in mind that GDP, at best, tells us how much a society can afford.
“It doesn’t tell us whether the money is well spent; high GDP need not translate into a good quality of life. Individuals can be rich but miserable; so can countries.
“And there are good reasons to believe that America is using its economic growth badly.”
Leonhardt thinks it’s a mistake to see the economy as separate from living standards:
“The unequal American economy continues to churn out an impressive array of goods and services while also failing to deliver rapidly improving living standards. And polls suggest that most people aren’t fooled.”
By Dave Allen for Discount Gold & Silver
In one of its banner anthems from the early 2000s – “Roll with the Changes” – the popular classic rock band REO Speedwagon belts out the sing along chorus, “Keep on rollin’, keep on rollin’…”
NY Times columnist David Brooks seems to feel the same way about the American economy.
In a recent column, he observed: “You can invent fables about how America is in economic decline…But the American economy doesn’t care. It just keeps rolling on.”
Brooks’ colleague David Leonhardt notes that when it comes to economic innovation and productive might, no country can match the U.S. – with Apple, Google, Amazon, Tesla and OpenAI blazing new trails.
Leonhardt writes, “The standard measure of a nation’s economic performance is per capita gross domestic product — the value of the economy’s output divided by the size of the population.”
He points out that even as China’s share of global GDP has skyrocketed over the past few decades, the U.S. still comprises virtually 25% of worldwide output – about the same as in 1990.
But as Nobel laureate and economist Paul Krugman reminds us, GDP doesn’t measure everyday Americans’ standard of living.
Because per capita GDP is an average, it can be distorted by outliers. One major example: income inequality in the U.S. is significant, which means the wealthy own a much larger share of output than in other countries.
As Leonhardt points out, per capita GDP in the U.S. has risen 27% in the new millennium – from around $50,000 in 2000 to a little over $60,000 at the end of 2021 (it was less than $25k in 1970).
“But median household income has risen only 7%,” while income for the top 0.1% of earners has [soared] 41%.”
Broader quality of life metrics show even more clearly how the U.S. isn’t looking so good relative to other comparable nations.
Leonhardt notes we have the lowest life expectancy of any high-income country, with “uniquely poor access to health insurance and paid parental leave.”
Krugman says, “It’s always important to bear in mind that GDP, at best, tells us how much a society can afford.
“It doesn’t tell us whether the money is well spent; high GDP need not translate into a good quality of life. Individuals can be rich but miserable; so can countries.
“And there are good reasons to believe that America is using its economic growth badly.”
Leonhardt thinks it’s a mistake to see the economy as separate from living standards:
“The unequal American economy continues to churn out an impressive array of goods and services while also failing to deliver rapidly improving living standards. And polls suggest that most people aren’t fooled.”
Is This the New Normal?
Perhaps more importantly, Axios’ Courtenay Brown and Neil Irwin say we’re now in the early stages of “adapting and readjusting to the end of ultra-low interest rates that were a basic assumption across the global economy.”
They add that events like the failure of Silicon Valley Bank and the UK’s debt and currency market fiasco last year are examples of what could be a series of other headaches ahead.
Indeed, they warn, as the world adjusts to a new “normal” where money is no longer free, it's hard to envision a smooth road in the coming years.
Boomers are retiring, with smaller generations filling in behind them, threatening labor supply, pressuring wages – and, in the U.S., putting pressure on Social Security and government revenues in general.
Some are even warning that we may be in the early stages of deglobalization, as companies try to make their supply chains more sustainable.
Plus, there’s the deteriorating relationship between the U.S. and China, the U.S. and Russia, and the U.S. and Iran.
But some observers believe that large-scale investment is underway. Brown and Felix Salmon say look at activity in semiconductors, battery manufacturing and solar cells, which some Wallstreeters are calling the "mother of all capex cycles."
Many policy experts, they report, view these developments as “long-lasting forces, not likely to dissipate any time soon.”
Fed chair Jerome Powell said late last year that "it feels like we have a structural labor shortage out there."
ECB president Christine Lagarde argued this week global supply will be less elastic in the new normal – meaning routine disruptions will cause bigger price hikes than in the past.
If these views are correct, Brown and Irwin warn, something resembling today's rates of about 5% will become part of the new normal — with the risk of them going even higher.
The problem, they add, is that banks, governments and investment funds have built their business models around a different landscape replete with interest rates near, at or even in come cases (Europe) below zero.
The question then is what other pockets of the global financial system will have a similar readjustment as the impact of higher interest rates multiplies through global economies.
Will banks face big losses on especially commercial real estate loans when low-rate debt matures and have to be rolled over into higher-rate debt — coupled with a loss in office rental income from people working at home?
Will the U.S. actually run future budget deficits of 6% or more of GDP over the next decade, as forecast by some – a level that in the past occurred only during wars or recessions?
And will higher rates and/or a debt ceiling impasse cause a crisis in the Treasury market?
Brown and Irwin say there’s good cause to think that “ripples from higher rates will not cause the kinds of financial catastrophes seen in 2008; [that] the damage should be much more contained.”
In fact, a few (excluding yours truly) believe that the U.S. may actually avoid a recession altogether.
Getting Back to Wages
For months, central bankers around the world — including those at the Fed — feared that rising wages would be a big problem for inflation. Felix Salmon says for now, that doesn't appear to be the case.
Yes, inflation is still higher than we want and need it to be. But don’t blame rising pay as the primary factor fueling price increases at the moment.
Late last year, Powell said wages were not "the principal story of why prices are going up."
His Euro counterparts had a similar message. Just last month, ECB officials noted wages "had only a limited influence on inflation over the past two years" there.
Since Powell's comments, worker pay gains have slowed down more and are now below inflation.
In the 4th quarter of 2022, average hourly earnings rose at a 4.7% annual rate. But last quarter, wages increased at a 3.2% vs. the CPI’s 3.7%
Salmon says that pace of wage growth “is consistent with inflation settling at the Fed's 2% target. It's also similar to the pace seen in the same time period in 2019.”
Indeed, economist James Knightley at ING warns that higher labor bills are "going to be fading as an excuse for companies to keep prices rising."
He believes much of the inflation we’re seeing now “is basically margin expansion” (higher corporate profits).
He adds that should those profit margins start to come down (don’t hold your breath just yet!), “that could aid in painlessly lowering inflation.”
Keep your eye on this Friday’s release of the government’s Employment Cost Index. You know that Jay Powell & Co. will be.