We Haven’t Been Measuring How the Economy Really Works
The Trump administration made some bold claims about the 2017 Tax Cuts and Jobs Act, which slashed the corporate-tax rate. Larry Kudlow, the head of the former president’s National Economic Council, said it would boost GDP so much that it would “virtually” pay for itself. Steven Mnuchin, the Treasury secretary, went further, saying the tax cut would “in fact create additional revenue.”
This was fantastical nonsense; tax cuts rarely if ever pay for themselves. But the Congressional Budget Office gave the Trump team’s sales pitch one important boost: The agency ran the bill through its model and concluded that it would have a positive, if muted, effect on long-term growth. Most Republicans were going to support Trump’s bill no matter what, but now they could do so with a straight face.
The CBO’s relatively sober prediction was wrong, a group of respected economists is charging. The Budget Office, along with other forecasters, assumes that when corporations get a tax cut, they take some of that money and reinvest it in their business, boosting growth and productivity. That assumption ignores a central dynamic of today’s economy: Many sectors are dominated by a small number of huge companies.
Much has been written over the past few years about the rise of corporate concentration. The Biden administration has made fighting monopolies one of its key economic-policy priorities. Yet none of the leading economic models takes consolidation into account. This is more than a purely technical concern. The risk is that conventional modeling is misinforming policy makers, Republican and Democratic alike, on how to structure policies that affect everyone. Governments may be relying on models that are too stuck in theory, too slow-changing, and too simplistic to be truly helpful.
“The existing models do not work well, particularly in the moments when it really counts,” such as a financial crisis, Joseph Stiglitz, the former chief economist for the World Bank, told me. “The underlying economics, the assumptions that go into the economics, are very badly flawed.”
Stiglitz is an adviser to American University’s new Institute for Macroeconomic & Policy Analysis, an initiative to update those assumptions and improve those forecasting tools. Today, IMPA is launching a new economic-forecasting model that researchers believe better captures how the economy works and, by extension, how policy changes will really play out.
Competitive economies and monopolized economies behave very differently, economists have found. When there’s plenty of competition, corporations tend to plow money into their business, investing more in research and development or raising worker pay to attract talent. But if a company doesn’t face much real competition, the pressure is off—it can simply pass the extra money along to shareholders. A model that ignores this distinction might be suitable for a tidy theoretical economy, but it won’t match the messy one we live in.
In the inaugural paper using IMPA’s model, the economists Lídia Brun, Ignacio González, and Juan Montecino conclude that the Trump tax bill was “harmful to the economy”—it slowed down growth and amped up inequality. Slashing the corporate-tax rate from 35 percent to 21 percent did not boost workers’ wages by thousands of dollars a year, as Trump appointees had predicted. Nor will it boost GDP in the long term. The IMPA model finds instead that cutting the corporate-tax rate “reduced the funds used for productive investment” by shunting money into investor payouts. What’s more, it suggests that raising taxes on business monopolies might stimulate growth by lowering those firms’ stock-market returns and thus spurring investors to pour money into more dynamic businesses.
The relationship between corporate-tax rates and business investment is a fiercely debated topic among economists, and some forecasters I spoke with didn’t think that rising corporate concentration was causing them to overestimate the economy’s growth. Mark Zandi, the chief economist at Moody’s Analytics, who did not work on the IMPA project, told me that concentration shows up indirectly in other variables commonly included in big forecasting models.
That said, several forecasters agreed that conventional models rely on questionable, even laughable, assumptions. Some models, for instance, assume that the country has perfectly competitive labor markets in which workers have total freedom to switch jobs and are paid precisely what they’re worth to a company’s bottom line. And the models generally don’t account for the ways in which having markets dominated by so few competitors—Google with web search, Amazon with online shopping—might skew profits, investments, and wages. “The assumption that there’s no market power is just wrong,” Stiglitz told me. “It’s so obvious. In many sectors of our economy, we don’t have anything that approaches that level of competition.” He cited the tech sector, drug stores, even dog food.
Creating the new IMPA model to account for monopoly power in the United States was a three-part process, Montecino and González told me. The researchers first constructed a complex mathematical model capturing a variety of factors that contribute to growth. They then tested it against historical data, seeing how well it would predict the 2015 economy using financial numbers from 2012, for instance. Finally, they let other economists critique it and review its predictions.
One of those economists was Kimberly Clausing, a tax expert at UCLA School of Law. She said that she appreciated the attempt to make a model that accounted for enormous companies’ outsize power. “Things look different when things get hyperconcentrated,” she told me. “Look at the economy of the 1970s, when there was less concentration. The labor share of income was higher. Investment was higher. So many of the main macro variables performed differently.”
Many of the forecasters I spoke with mentioned that forecasting is just plain hard—and something economists have not gotten much better at in recent decades. Chris Varvares of S&P Global Market Intelligence, a forecaster with decades of experience who is not affiliated with IMPA, noted that the economy is enormous and complex. Impossible-to-predict events, such as the coronavirus pandemic and the war in Ukraine, happen all the time. Even the world’s most influential economists often disagree on what causes what. “There’s not always good data,” he told me. “That’s just something we have to live with.”
That said, IMPA’s economists stressed that rising corporate concentration has profoundly changed our economy over the past several decades. It seems past time for it to also change how we model the economy.
People in China are so worried about the economy they’re asking for divine intervention
China’s post-Covid reopening was supposed to be the stimulant that the world needed. But after an early burst of activity, growth in the world’s second largest economy appears to be stalling.
Disillusioned by the deteriorating economic outlook, young people are flooding to Buddhist and Taoist temples to pray for divine intervention in securing jobs, getting into good schools or becoming rich overnight.
Data released this week showed Chinese exports fell 7.5% in May from a year ago, much more than expected, as global demand waned. Factory activity contracted again last month, and youth unemployment stands at a record high.
Economic uncertainty has driven temple visits and tourism to new heights, according to analysts and travel websites.
“No school-going, no hard-working, only incense-burning” has been a popular hashtag on social media since March, referring to a growing trend among young people in China who escape a pressure-cooker society by going to temples to pray for luck.
“Incense-burning youth” has become the number one catchphrase in China’s tourism industry this year, according to a survey jointly conducted in April by Qunar.com, a travel website, and Xiaohongshu, an Instagram-like app, which looked at the top travel trends.
The jobless rate for people between 16 and 24 years old reached a record 20.4% in April, according to official statistics.
The youth unemployment rate could get even worse as a record 11.6 million college students enter the already tough job market this summer, as the education ministry estimated earlier this year.
Different temples tend to attract different types of worshippers. The Yonghe Temple in Beijing, also known as the Lama Temple, which caters to the Tibetan Buddhism faith, is a popular site for those looking for career or financial success.
It recorded the biggest increase in visitors of any temple in the country in March and early April, up 530% from the same period last year, according to Qunar.
Lots of incense burning
China is officially an atheist nation, but it recognizes five faiths: Buddhism, Taoism, Protestantism, Catholicism and Islam. The first two religions are an essential part of Chinese culture, with tens of thousands of temples and monasteries across the country.
Temple visits have surged this year more than fourfold from a year ago, according to recent data from Qunar and Trip.com, another travel site. About half of the visitors are people in their 20s and 30s, according to the sites.
“Under pressure about school, jobs, marriage and relationships, more and more young people are turning to traditional culture, such as temple prayer and blessings, to relieve stress,” said Yang Yan, an analyst with Chinese brokerage firm Nanjing Securities.
Social media has also fueled the boom in temple tourism, as young people like to share their experiences on social networks, she added.
Emei and Jiuhua are two of China’s famous “four sacred mountains of Buddhism,” home to the country’s largest Buddhist temples and cultural heritage sites.
Emei Mountain in southwestern Sichuan province received 2.48 million visitors between January and May, up 53% from the same period in 2019, before any pandemic restrictions were imposed.
Emei Shan Tourism, which provides travel services around the mountain, has enjoyed soaring sales, posting a record $9.8 million in net profit in the first quarter, up 262% from the same period in 2019.
Its stock surged 44% over the past 10 trading sessions, becoming one of the best performers on Chinese stock markets during the period.
Anhui Jiuhuashan Tourism Development, which runs the Jiuhua Mountain scenic area in central Anhui province, also shattered quarterly sales records.
Its revenue for the January-to-March period jumped 43% from the same period in 2019 and was the highest since its 2015 listing. Its shares were up 34% over the past 10 trading sessions.
Taoist sites have also seen strong growth in worshippers.
Longhu Mountain in Jiangxi province, one of the birthplaces of Taoism, received 4.73 million visitors during the first quarter, up 47% from the same period in 2019.
Wudang, another famous Taoist site featured in the film “Crouching Tiger, Hidden Dragon,” recorded a 23% jump in visits for the January-to-March period compared with 2019.
Besides praying to deities for career success, supplicants are seeking luck in winning the lottery.
The Communist Party banned gambling in China when it took power in 1949. But the government runs two types of lotteries to raise money for sports events and welfare projects.
Lottery sales hit 50.33 billion yuan ($7.1 billion) in April, up 62% from a year ago, according to data released by the finance ministry in late May. That’s the highest sales for the month of April in a decade.
“It’s clearly a real-life placebo,” analysts at Hangzhou-based Caitong Securities wrote in a research report Sunday. In medical research, the placebo effect is the experience of feeling better after a dummy pill or treatment
During uncertain economic times, more people tend to seek solace in faith or other comforting activities such as buying lottery tickets, raising pets, attending concerts or spending time on hobbies such as anime or comics, the analysts said.
“The core attraction of buying lottery tickets is to bring people solace,” they added.
Are we in a recession right now? What economists have to say
Over the past year, economists have proclaimed that the U.S. is headed toward recession so relentlessly, you might think we’re already knee-deep in a slump.
But the economy has been remarkably resilient and, though wobbly at times, has repeatedly defied forecasts of a downturn. Economists, in turn, have continued to push out their estimates of when a recession will begin.
Yet forecasters still say there’s a 61% chance of a mild slide this year, according to those surveyed by Wolters Kluwer Blue Chip Economic Indicators.
All this begs the question: Are we in a recession now?
What happens in a recession?
Many Americans are familiar with the informal definition of a recession: Two straight quarters of declining gross domestic product, which is the value of all goods and services produced in the U.S.
But the real litmus test is more subtle. A recession is “a significant decline in economic activity that is spread across the economy that lasts more than a few months,” according to the National Bureau of Economic Research. NBER looks at a variety of indicators, particularly employment, consumer spending, retail sales and industrial production. The non-profit group often announces when a recession has begun and ended months after those milestones have occurred.
GDP fell each of the first two quarters of 2022 but much of the drop was traced to changes in trade and business inventories – two categories that don’t reflect the economy’s underlying health.
Why do economists expect recession?
Over the past 14 months, the Federal Reserve has raised interest rates at the fastest pace in 40 years to bring down inflation. Typically, when the Fed hikes rates so aggressively, borrowing to buy a home, build a factory and make other purchases becomes much more expensive. Economic activity declines, the stock market tumbles and a recession results.
Was there already a recession?
No. During the pandemic, households amassed about $2.5 trillion in excess savings from hunkering down at home and trillions of dollars in federal stimulus checks aimed at keeping workers afloat through layoffs and business closures.
As a result, Americans have a big cushion of savings to help them weather high inflation and interest rates. They’ve whittled down much of those excess reserves but about $1.5 trillion still remains, according to Moody’s Analytics.
Consumers also still have lots of pent-up demand to travel, go to ballgames and dine out now that the health crisis has receded. So while consumption has flagged, rising just 1% annualized at the end of last year, it bounced back and grew 3.8% in the first quarter.
Also, both households and businesses have historically low debt levels, Moody’s says, and so they’re not burdened by high monthly debt service payments.
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Are we in a recession right now?
The vast majority of top economists say no. Housing has been in the doldrums, with home prices starting to decline, because of high mortgage rates. And manufacturing activity has contracted for seven straight months, also in part because of high rates that have dampened business capital spending.
But consumer spending, which makes up about 70% of GDP, has been surprisingly healthy, jumping 0.5% in April after adjusting for inflation.
As a result, the most critical economic indicator- employment – has stayed strong, with the public and private sector adding an average of 283,000 jobs a month from March through May. Also, longstanding labor shortages have led many businesses to hold onto workers instead of laying them off despite faltering sales.
All told the economy has lost some steam but it’s not shrinking. GDP grew at a 1.3% annual rate in the first quarter. And it’s projected to grow 1% in the current quarter, according to S&P Global Market Intelligence.
Will there be a recession in 2023?
Most economists still expect a recession in the second half of the year. They say the Fed’s high interest rates eventually will be felt more profoundly by consumers and businesses. At the same time, banks are pulling back lending because of deposit runs that led to the collapse of several regional banks early this year.
Perhaps the most reliable indicator of a coming recession is an inverted yield curve. Normally, interest rates are higher for longer-term bonds than shorter-term ones because investors need to be rewarded for risking their money for a longer period.
But the yield on the 2-year Treasury bond has been well above the 10-year Treasury for months. That’s been a consistent signal of recession because investors move money into safer longer-term assets – pushing their prices up and their yields down – when the economic outlook grows dimmer.
US and Allies Condemn Economic Coercion With Attention on China
(Bloomberg) — The US and five major allies condemned economic coercion and non-market policies regarding trade and investment in a joint declaration that didn’t cite China by name but clearly had Beijing in mind.
The six countries expressed concern about practices that they say “undermine the functioning of and confidence in the rules-based multilateral trading system.”
The message from the US, Australia, Canada, Japan, New Zealand and the UK carries no economic consequences and mirrors one released by Group of Seven nations after a meeting of leaders last month.
A US Trade Representative official, speaking to reporters on condition of anonymity before the statement’s release, said China has been the biggest perpetrator of the behavior condemned in the declaration.
The official mentioned China’s decision to cut off trade with Lithuania in 2021 after that Baltic nation allowed Taiwan to establish a diplomatic office there as an example of the kind of economic coercion that the declaration singles out.
Read More: G-7 Eyes China With New Joint Effort Against Economic Coercion
In response to a reporter’s question, the official rejected any comparison to the US, which has become one of the most prolific purveyors of measures that could be seen as economic coercion, chiefly through financial sanctions and limits on technology exports to countries including China.
US sanctions occurred in accordance with US laws and procedures, and in light of relevant rules and norms, the official said. The declaration makes explicit that it didn’t apply to actions that have “a legitimate public policy objective.”
“These legitimate public policy measures include: health and safety regulations, environmental regulations, trade remedies, national security measures and sanctions, and measures to protect the integrity and stability of financial systems and financial institutions from abuse,” according to the declaration.
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