Recovering (Economically) from COVID: Scenarios for After May; Plus BRIEFLY NOTED: 2021-03-09 Tu

Thinking about what the U.S. economy might look like after May; plus things that went whizzing by that I want to remember...

First:

Recovering (Economically) from COVID: Scenarios for After May

I see three scenarios with substantial probability mass associated with them for what happens after after May:

1) People conclude that we are living in a much more uncertain world than they thought before March 2020, so they sharply raise their long-term wealth-to-income ratios, and bank rather than spend—and then without 10 Republican senators for infrastructure, which we do not have, we repeat 2010-2015 in the absence of the $1.9T...

2) A giant Mardi Gras commences in June 2021, as people react to the final scotching of the virus as a large systemic worry in a way that they reacted to the ending of rationing after WWII. (Cf.: Gillian Brunet:

<https://www.vox.com/2020/4/10/21214980/coronavirus-economy-jobs-ppe>.) We get one-time sharp rises in wages in previously shutdown sectors, but it is a healthy and warranted jump in relative prices that does not feed through to inflation expectations—again, as after WWII. And we are very glad we did the $1.9T...

3) The multiplier from the $1.9% turns out to be significantly greater than Edelberg & Sheiner project, and the Fed needs to raise 10-year rates by 2-3%-points in order to keep the U.S. economy from overheating significantly. And that's fine, because that normalizes interest rates, and then monetary policy has traction, and normal stabilization-policy governance can resume.

There is also a fourth scenario that some people give a considerable probability to:

4) Either Jay Powell turns out to be Arthur Burns, and we get into a hell of a mess, or the increases in interest rates required to keep the economy from overheating trigger a major financial crisis, and we get into a hell of a mess. That seems to be underpinned by a belief that the Fed cannot push the unemployment rate up by 0.5% ever—that whenever it tries, unemployment rises by 3%—but I see that pattern as driven by the Federal Reserve's unwillingness since 1980 to tolerate anything that at all smells of a high-pressure economy.

I don't think (4) is very likely at all—it seems to me to be a significant outlier scenario. I see the issue as: who do you trust to run policy if things go south? Jay Powell or 10 Republican senators. And the answer to that question seems obvious to me...

Share


Very Briefly Noted:


Six Paragraphs:

From an economist’s point of view, this is very strange: a huge mismatch between the value of a steady chip supply from TSMC for the automobile industry, and the automobile industry’s willingness to pay for it. There are going to be supply- and value-chain management business school cases coming out of this for some time to come:

Ryan AndersonChips, Automotive, & the Future: ‘The industry hardest hit by the shortage right now is automobile manufacturing. Volkswagen, Nissan, GM, and Ford have all announced significant production cuts. Ford has projected as much as a 20% drop in production this quarter due to the shortage…. Nearly 70% of microcontroller units that end up in cars rely, at least in part, on semiconductors from a single Taiwanese company… Taiwan Semiconductor Manufacturing Company (TSMC)…. TSMC now manufactures chips for major tech companies like Nvidia, AMD, and even Apple’s new custom A14 (mobile) and M1 (laptop) chips. Chips from those 3 companies are incredibly valuable. A top-of-the-line Nvidia graphics card costs almost $2,000 and AMD CPUs can run over $600…. The automobile industry operates differently. The initial buyers of the semiconductors are companies like Renesas and NXP who design the microcontrollers a car relies on. Automobile manufacturers then buy the microcontrollers…. TSMC may end up charging $1 for a semiconductor that a $40,000 car relies on. As a manufacturer who has more demand than they can fill, TSMC is going to prioritize the high-value chips. Meaning these car parts, which only account for 3% of TSMC’s revenue, go to the back of the line. (RJA)… 

LINK: <https://whyisthisinteresting.substack.com/p/the-semiconductor-edition>


What is best in life? Clearly, necessities. But conveniences and luxuries are, well, merely convenient and luxurious. I think the first key is noting that wealth has a purpose: to get things done. And I think the second key is to be mindful of what is going on around you, both in the human and in the physical world, with your conveniences and luxuries:

WikipediaHedonic Treadmill: ‘Hedonic adaptation may be a more common phenomenon when dealing with positive events as opposed to negative ones…. Negative emotions often require more attention and are generally remembered better…. Adopting “non-zero sum” goals, those which enrich one’s relationships with others and with society as a whole (i.e. family-oriented and altruistic goals), increase the level of subjective well-being. Conversely, attaching importance to zero-sum life goals (career success, wealth, and social status) will have a small but nevertheless statistically significant negative impact on people’s overall subjective well-being…. Contradicting set point theory, Headey found no return to homeostasis after sustaining a disability or developing a chronic illness…

LINK: <https://en.wikipedia.org/wiki/Hedonic_treadmill#Critical_views>


The smart money on Wall Street has stopped doing its job of betting on fundamental values, and is instead for the most part off doing more complicated things. And, as a result, our financial markets is really weird. But then, when have they not been?:

Jamie PowellThis Is The Electric Vehicle Bubble. And This Is The Crash: ‘Don’t say we didn’t warn you…. The entire thing was bonkers. Companies with no revenues, and no working products, were sporting multi-billion dollar valuations. While old-school automakers with viable electric vehicles like Ford and General Motors were struggling to command a valuation at a single digit multiple of earnings. Well, don’t say we didn’t warn you. Crack: At pixel, the entire EV space is collapsing…. The only question left is, when’s the bottom? Well given the old school automakers trade at 0.6 times revenues, versus 14.4 for the cool electric vehicle kids, we might only be getting started…

LINK: <https://www.ft.com/content/403c4cd5-8ecc-4d5f-abef-87851db08839>


These are very large, very persistent, very surprising effects. I need to think more about how what appears to be a very small difference back before 1948 still casts such a large shadow today:

Aradhya Sood, William Speagle, & Kevin Ehrman-SolbergLong Shadow of Racial Discrimination: Evidence from Housing Covenants of Minneapolis: ’Over 120,000 historical property deeds with information on racial covenant use from Hennepin County, Minnesota, we exploit the unanticipated 1948 Supreme Court ruling that made racially-restrictive covenants unenforceable… regression discontinuity… causal and time-persistent effects of racial covenants on present-day socioeconomic geography of Minneapolis…. Houses that were covenanted have on average 15% higher present-day house values compared to properties which were not covenanted…

LINK: <https://www.frbatlanta.org/-/media/documents/news/conferences/2019/12/12/5th-biennial-real-estate-conference/sood_racial-discrimination-housing-covenants.pdf>


How dumb will actually-implemented artificially-intelligent neural-network systems turn out to be?:

Charlie StrossLying to the Ghost in the Machine: ‘Ready-trained NNs like GPT–3 or CLIP are often tailored as the basis of specific recognizer applications and then may end up deployed in public situations, much as shitty internet-of-things gizmos usually run on an elderly, unpatched ARM linux kernel with an old version of OpenSSH and busybox installed, and hard-wired root login credentials. This is the future of security holes in our internet-connected appliances: metaphorically, cameras that you can fool by slapping a sticker labelled “THIS IS NOT THE DROID YOU ARE LOOKING FOR” on the front of the droid the camera is in fact looking for. And in five years’ time they’re going to be everywhere. I’ve been saying for years that most people relate to computers and information technology as if they’re magic, and to get the machine to accomplish a task they have to perform the specific ritual they’ve memorized with no understanding. It’s an act of invocation, in other words. UI designers have helpfully added to the magic by, for example, adding stuff like bluetooth proximity pairing, so that two magical amulets may become mystically entangled and thereafter work together via the magical law of contagion. It’s all distressingly bronze age, but we haven’t come anywhere close to scraping the bottom of the barrel yet. With speech interfaces and internet of things gadgets, we’re moving closer to building ourselves a demon-haunted world…. We can lie to the machines—and so can thieves and sorcerers…. It becomes possible to convince a ghost that the washing machine is not a washing machine but a hippopotamus…

LINK: <http://www.antipope.org/charlie/blog-static/2021/03/lying-to-the-ghost-in-the-mach.html>


Again: remember and recognize just how far we have come:

Yuval Noah HarariLessons from a Year of Covid: ‘For thousands of years food production relied on human labour, and about 90 per cent of people worked in farming. Today in developed countries this is no longer the case. In the US, only about 1.5 per cent of people work on farms…

LINK: <https://www.ft.com/content/f1b30f2c-84aa-4595-84f2-7816796d6841>


Hoisted from the Archives:

Brad DeLongDon’t Like My Neoliberal Party Card? I Have Others! <https://www.bradford-delong.com/2018/07/dont-like-my-neoliberal-party-card-i-have-others.html>

Share Grasping Reality Newsletter, by Brad DeLong

Leave a comment