Wednesday Briefs – 14 October 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Stimulus Galore; One Billion Americans?; Coronavirus in the USA; Chart; Reading List.

Stimulus Galore

The headlines at the time of last week’s Wednesday Briefs were that President Trump was walking away from stimulus talks and deferring any new action until after the Election. This seemed strange and we speculated that there would be a stimulus deal before the Election, so long as it was close enough to November 3rd to allow the President to take credit for a resolution and to transform that credit into additional votes.

Now the President is back at the negotiating table (via Secretary Mnuchin) and there is renewed talk of a deal. Unfortunately for the President however, there seems to be a new dynamic at play that is tied to his drop in the most recent polls. These polls show Vice-President Biden with a two-digit lead and with increased odds of the senate turning Democrat. Under that scenario, the eventual stimulus passed by a Democrat-controlled Congress could be even larger than any Mr. Trump would now approve.

The combination of a Democrat-majority senate and a President Biden would not cheer the markets under normal circumstances because Mr. Biden has vowed to raise taxes on individuals and corporations. But for the time being, the markets are focused on the likelihood of greater and greater stimuli in the months ahead. Although the candidates do not refer to it in these terms, this is Modern Monetary Theory in action, an expansion of the government’s role in the economy with little concern for the expanding budget deficits.

One Billion Americans?

Matthew Yglesias’s new book One Billion Americans: The Case for Thinking Bigger seems to echo Fareed Zacharia’s The Post-American World: The Rise of the Rest from a decade ago in its misconception of how demographics impact economics. Back then, Zacharia had published a summary of his thesis in a Newsweek article that included this passage:

“It is an accident of history that for the last several centuries, the richest countries in the world have all been very small in terms of population. Denmark has 5.5 million people, the Netherlands has 16.6 million. The United States is the biggest of the bunch and has dominated the advanced industrial world. But the real giants—China, India, Brazil—have been sleeping, unable or unwilling to join the world of functioning economies. Now they are on the move and naturally, given their size, they will have a large footprint on the map of the future.”

In Rise of the Rest: A Vision Deferred, we contrasted Zacharia’s thesis with this section from Winston Churchill’s Fifty Years Hence speech given in 1931:

“When we look back beyond a hundred years over the long trails of history, we see immediately why the age we live in differs from all other ages in human annals. Mankind has sometimes travelled forwards and sometimes backwards, or has stood still even for hundreds of years. It remained stationary in India and in China for thousands of years. What is it that has produced this new prodigious speed of man? Science is the cause. Her once feeble vanguards, often trampled down, often perishing in isolation, have now become a vast organized united class-conscious army marching forward upon all the fronts towards objectives none may measure or define. It is a proud, ambitious army which cares nothing for all the laws that men have made; nothing for their most timehonoured customs, or most dearly cherished beliefs, or deepest instincts. It is this power called Science which has laid hold of us, conscripted us into its regiments and batteries, set us to work upon its highways and in its arsenals; rewarded us for our services, healed us when we were wounded, trained us when we were young, pensioned us when we were worn out. None of the generations of men before the last two or three were ever gripped for good or ill and handled like this.”

Yglesias doubles down on Zacharia’s erroneous thesis by envisioning that the US would counteract the heft of the demographic giants by itself becoming a demographic giant. He offers the following math about the US vs. China:

“A three-to-one advantage in population is really hard to overcome. Chinese people don’t need to become as rich as Americans for China’s overall economy to outweigh ours. If they were to manage to become about half as rich as we are on a per person basis, like the Bahamas or Spain, then their economy would be far larger than ours in the aggregate. To become one-third as rich as we are, like Portugal or Greece, would be enough to pull even.”

This is not relevant to real prosperity in at least two ways. One is the obvious fact that GDP does not measure wealth creation but economic activity. As such, GDP is a closer measure of revenues than of profits or free cash flows, two better measures of wealth. Two is the fact that demographic growth on its own does not create prosperity or geostrategic power. If it did, Nigeria and DR Congo would be African powerhouses, and Brazil, Indonesia and the Philippines would be the shining stars of their continents. It is true that prosperity can result from a change in demographics, but this has in the past entailed the combination of a modestly-growing population and a declining dependency ratio. We discussed this evolution in The Relationship of Fertility and National Income, in Achieving the Demographic Dividend and in The Economics of Dependency.

Coronavirus – USA

It is clear that the number of confirmed cases in the USA has been rising. The seven-day average of new daily cases has risen from 40,000 to over 50,000 in the past 30 days. This increase is matched by the number of nationwide daily tests that has risen from about 650,000 to over one million (7-day average) in the same period. The percent of those testing positive has fallen from 6% to less than 5%. With the end of summer and the reopening of schools, there were plenty of new reasons for people to subject themselves to PCR tests. This may explain the increase in testing and also suggests that there are a lot of people who have the virus but are asymptomatic.

We would have expected the number of deaths to start rising a week or ten days ago but so far, deaths have continued to flatline or trend modestly down, which gives more hope to the thesis that the increase in cases is mainly a testing phenomenon so far and not the result of a massive wave. Of course, on a more local basis, there is very real concern regarding some states that are truly seeing a worsening situation, not just one that only appears worse due to increased measurement.

In the chart, we would expect the green line to remain flat if the death rate is steady. But the increase in asymptomatic diagnoses and the improvement in therapies should lead to a decline in this ratio over time.

Chart: Personal income and personal consumption

From Exante Data’s Jens Nordvig:

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