Happy Birthday: America Turns 246

 

In celebration of America's 246th birthday, the U.S. Census Bureau released some fun facts. E.g., when America declared her independence from Great Britain in July 1776, there were an estimated 2.5 million people* in the 13 original colonies (vs ~7 million in the U.K.); today there are over 330 million Americans** (vs ~68 million Britons). Or that in 2021 the U.S. imported $6.7 million worth of American flags and exported $2.5 million worth. In any case, Happy 4th of July!

*Approximately 450,000 of the 2.5 million were African Americans, who pointedly didn't gain their independence in 1776.

**Over 48 million of whom are African Americans. 

Freakonomics: Will Repeal of Roe vs Wade Lead to More Crime?

In 1973, the U.S. Supreme Court legalized abortion in all 50 states in a seminal case called Roe v. Wade that quickly became a heated cultural divide in the U.S. Last week, after nearly 50 years, the conservative-majority Supreme Court overed turned Roe vs Wade, returning authority on abortion back to individual states. Justice (and history fan) Samuel Alito, writing for the majority, reasoned "abortion presents a profound moral question...the Constitution does not prohibit the citizens of each State from regulating or prohibiting abortion. Roe and Casey arrogated that authority. We now overrule those decisions and return that authority to the people and their elected representatives.” 

Ok, abortion is a hot-button issue and both sides have their points. But there may be another interesting angle to this topic...crime. In 2001 economist Steve Levitt published his (most?) famous paper linking abortions to reductions in crime: "Understanding Why Crime Fell in the 1990s." From 1991 to 2001, violent crime in the U.S. fell more than 30%, after rising for three decades and Levitt wanted to understand why, explains Steve Dubner and Levitt's Freakonomics co-author in a Medium post: 

Levitt explored all the commonly suggested reasons his 2001 paper...The six factors that, according to [his] analysis, did not contribute to the crime drop: a strengthening economy; the aging of the population; innovative policing strategies; gun control laws; right to carry laws; and the increased use of capital punishment. While each of these, in theory, might seem to have some explanatory power, Levitt found that none of them did...Then there were the factors he found did contribute: the increase in the number of police; an increase in the number of criminals imprisoned; and the decline of the crack-cocaine trade, which had been unusually violent. But these three factors could explain only about half of the massive drop in crime. It was as if there was some mysterious force that all the politicians and criminologists and journalists weren’t thinking about at all..."

"...Paging through the Statistical Abstract of the United States...[Levitt] saw a number that shocked him. Abortion rose so much after Roe v. Wade that by its peak (in 1990), there were 1.5 million abortions a year in the U.S. compared to 4 million live births. The magnitude surprised Levitt, and he wondered what sort of secondary effects it might have. He wondered, for instance, if it might somehow be connected to the huge drop in crime. Levitt spent a few weeks working on the idea before ultimately deciding it didn’t quite add up." 

But then one of Levitt’s collaborators, John Donohue, a professor of law at Stanford Law School who also has a PhD. in economics, pointed out the "unwantedness” factor—the expansive literature showing that "children born to parents who didn’t truly want that child, or weren’t ready for that child, were more likely to have worse outcomes as they grew up; not only were health and education outcomes worse, but these so-called “unwanted” kids were disproportionately likely to engage in criminal behaviors."

Levitt and Donohue divided states into three groups: high abortion-rate states, medium abortion-rate states, and low abortion-rate states and tracked crime in all three groups over time. They found there was a 30% difference in what had happened to crime between the highest abortion states and the lowest abortion states by 1997 and through other similar tests concluded that "legalized abortion appears to account for as much as 50% of the recent drop in crime."

The paper generated a lot of buzz in the mainstream media and managed to unite to both the Right and Left in their...condemnation of the results. The Right was uneasy because the findings suggested there were positive outcomes from what they considered a reprehensible act; and the Left felt it was endorsing a form of eugenics and Minority Report-style "pre-crime" judgement.

There have been other criticisms of the paper on methodological grounds, but even in a recent update to the paper, Levitt and Donohue continue to find a strong relationship between abortion and crime between 1997 and 2014 — "states with high abortion rates saw crime rates fall 60 percent more than states with the lowest abortion rates. The magnitude of the effect is enormous." According to Levitt, the “cumulative effect over the last 30 years, if you just look at our numbers, suggests that abortion might explain something like 80 or 90 percent of the entire decline in crime.”

We'll see what the next update of the paper in 20 years or so finds.

U.S. Gas Prices Top $5 in Historic First

As we wrote yesterday, CPI was up 8.6% year-on-year ("YoY") in May---the fastest pace in 40 years. A significant driver of headline inflation was record gas prices, though core CPI (excluding volatile food and energy components) was also worse than expected, rising 6.0% YoY. While core CPI may be a better measure for policy making, food and energy prices impact people more urgently and intensely. Energy costs are 34.6% higher compared to a year ago, driven by a nearly 50% jump in gas prices. As a result, the typical US household is spending about $460 more every month than they did last year to purchase the same basket of goods and services. AAA's tracking of gas prices shows the price of a gallon of regular gas nationwide was over $5.00 for the first time on June 12, 2022. (Click chart to enlarge)

Source: AAA

California had the highest average gas prices at $6.43/gallon, while Georgia had the lowest at $4.48/gallon. Nearly half the states average gas prices of $5.00/gallon or more. Higher fuel costs are making travel, food and other products more expensive across the economy. 

Higher energy prices are supposed to reduce demand, but there's no sign yet of the so-called "demand destruction." Road travel in the busy summer season has remained relatively strong, just a couple of percentage points below pre-pandemic levels. That just means inflation, which was supposed to have peaked in April, will likely continue to go up.

The Remarkable Rise of Bangladesh

When people think of the Indian Subcontinent, they think of, well, India, and secondarily Pakistan, two rival nuclear powers. Often lost in the mix is another populous country with a long, shared, and bloody history: Bangladesh.

The end of British colonialism in India was associated with a rushed and botched partition of the country by Viceroy Mountbatten (better known to Americans as Prince Charles' ambitious uncle in Netflix's The Crown). In any case, at the stroke of midnight on August 15, 1947, two countries were born: Hindu-majority India, and Muslim-majority Pakistan. Pakistan itself was divided into two parts, East and West, separated by over a thousand miles (the two green sections, as shown below). In 1971, Bangladesh declared its independence from the richer and more powerful (West) Pakistan.

At the time, there seemed to be little hope for the new nation, reeling from a brutal war and a terrible famine. Henry Kissinger, then National Security Advisor, famously called it a “basketcase.” Oh, how times have changed! Fifty-years on, Bangladesh has emerged as an unlikely economic success eclipsing its two larger neighbors. In a fascinating piece for Bloomberg, Mihir Sharma argues that Bangladesh is South Asia's standout star. Per Sharma:

Bangladesh's GDP per capita grew by 9% over the past year, rising to $2,227 [in 2020-21]. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. One Pakistani economist glumly pointed out that “it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030.”

India — eternally confident about being the only South Asian economy that matters — now must grapple with the fact that it, too, is poorer than Bangladesh in per capita terms. India’s per capita income in 2020-21 was a mere $1,947.

Bangladesh’s growth rests on three pillars: exports, social progress and fiscal prudence...Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. The success is largely due to the country’s relentless focus on products, such as apparel, in which it possesses a comparative advantage. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP. Fiscal restraint has allowed Bangladesh’s private sector to borrow and invest.

But Sharma also notes that success brings its own set of problems. For one, Bangladesh's exports benefit from the country’s participation in various mechanisms that allow tariff-free access to developed economies, such as the U.S.’s Generalized System of Preferences. These groupings are only open to the world’s least developed countries. Thanks to its growth, Bangladesh will likely have to give up these privileges by 2026 or so. Structurally, as its economy matures, its comparative advantages will also change. Like Vietnam and others, it will then have to shift emphasis away from garments to higher-value exports. The transition will test Bangladesh as it has those other nations.

These are good problems to have, and Bangladesh has demonstrated an ability to meet challenges. Moreover, the country isn't content to just be a local success story. It aims to be a developed economy by 2041. Ambitious? Yes. But as Sharma notes, "the past 50 years have shown how unwise it is to bet against Bangladesh."

Rise of the Proletariat Robot Class?

Robots can do a lot, from building cars in factories to sorting items in warehouses, and even patrolling streets. But until very recently there were some, almost basic, things robots could not do...like picking apples from a tree. A Guardian article finds advances in robotics now have the potential to transform agriculture. 

While picking fruits is a simple thing for humans, developing a robotic implement that can "pick an apple and drop it into a bin without damaging it is a multimillion-dollar effort that has been decades in the making." Teams around the world, including Joe Davidson's at the Orgon State University, have tried various approaches. Their collective efforts are helping turn "fruit-picking – a backbreaking, time-consuming human task – into one that’s speedy and easier on farm workers." From the Guardian article:

Teaching robots to perform these tasks requires modernized versions of both the orchard and the apple. Traditional orchards, with irregularly shaped trees and giant canopies, are too much of a challenge for algorithms to parse and process. Shifting sunbeams, fog and clouds add to computer vision’s challenges. Tangled, tall old trees are problematic even to human pickers, who end up spending much of their time hauling and positioning ladders, not picking fruit. Now, many growers have transitioned to orchards where trees grow flat against trellises, their trunks and branches at right angles to create a “wall of fruit” (see below) ...the thinner canopy also lets more sunlight in, encouraging fruits to form. 

In orchards with trellised trees, robots...essentially a giant arm mounted on a rolling platform reach up for the fruits...sensors under each [robotic] fingertip track the pressure, speed, angle and other aspects of its grasp to help the robot complete its task...the fingers tighten, then twist, and the apple – successfully picked – rests in the robot’s palm. Here's an example of a good pick:

And an example of a bad one:

The robot's hit rate isn't that great, so far. It has picked an apple successfully about only half of the times. Still, the robotic arm has cracked some problems that posed hurdles to automation. For instance, it can avoid damaging both fruit and tree limbs in the harvesting process. Rapid improvements in computing make Davidson and others hopeful the robots will work on farms within the next five to 10 years. That's right, the tech to teach robots how to pick fruit may still be a decade away. It's that deceptively hard...do you suddenly have more respect for your species? 

It’s unclear to many farm workers how the robots will affect their livelihood...Across various industries, including agriculture, waves of automation have led to job losses and a devaluing of human work...[but] the emergence of robotic farm workers could even be an opportunity for humans to engage in different – and far less strenuous – work than pruning or harvesting, says Ines Hanrahan, executive director of the Washington Tree Fruit Research Commission. “When you take the physical aspect out, these tasks become more accessible to older workers or those less physically capable of lugging ladders and things. It enables more people to be drawn into this work.”

We'll see. In any case, it's still a while off before farm robots lead a revolution and go from targeting apples to humans.

GEICO Needs a Tie-in with Durex

GEICO is America's second most popular auto insurance provider writing over $33 billion in premiums per year. Its catchy ads feature a talking gecko telling you how easy it is to save money. But is your auto insurance also your health insurance? It can be...and apparently the no-fault rule applies: An appellate court ruled that "Geico must pay a Missouri woman $5.2 million after she caught HPV from unprotected sex with her then-boyfriend in his insured automobile." Huh?

The woman (identified as "M.O.") said that she "engaged in unprotected sexual activities in Insured's vehicle" in November and December 2017 and that he "negligently caused or contributed to" her catching the human papillomavirus (HPV), a common sexually transmitted infection, court papers said. After Geico turned down her claim, M.O. took the matter to an arbitrator, who found in her favor before a court affirmed the $5.2 million judgment.

Geico appealed, claiming it never had a chance to contest the claim. "But GEICO did have the opportunity to participate and defend its interests — including the ability to challenge liability and damages — by entering a defense of Insured," according to the appeals court opinion, which put the word "did" in bold italics. The insurance company has "no right to relitigate those issues" now in appeal, the court said.

So, the appellate court ruled on the procedure, rather than the merits, of the case. Now it's going to federal court with GEICO arguing that "it never had any responsibility to defend the boyfriend, identified only as "M.B.," because it should be on the hook only for damages coming "out of the ownership, maintenance or use of the ... auto.” Umm, wait, use of the car? Hmm, maybe they got you there GEICO...cars are commonly used for sex, no? Nearly 2/3 of Americans have admitted to doing "it" there. Presumably, as a major auto insurer, GEICO knows a lot about cars and what people do in them. Well, GEICO's position is that "M.O.’s alleged damages have no nexus to the ownership, maintenance, or covered use of the 2014 Hyundai Genesis...[in] other words, the vehicle’s covered use did not cause M.O.’s alleged injuries; instead, her injuries arose from an intervening cause — namely, her failure to prevent transmission of STDs by having unprotected sex."

That seems like common sense, but we'll see. Lawyers are an enterprising bunch. Regardless, we are certain that going forward auto insurance policies will have explicit (no pun intended) language about sex in cars. And maybe policies will also include tips on safe sex, just in case.

Inflation: Is 2022 the New 1980?

Yesterday's CPI report upended a narrative that had taken hold in recent weeks by (ever optimistic) sell-side analysts and strategists (see one prime example here) that inflation had peaked. After headline CPI for April fell to 8.3% year-on-year ("YoY") versus 8.5% in March, many CNBC guests were selling the idea of a soft landing and new bull market in stocks. Not so fast...here's a summary of the May report: 

• YoY headline inflation reached 8.6%---a fresh 40-year high vs 8.3% consensus
• Worse, core CPI (excluding the more volatile food and energy components) was up 6.0% vs 5.9% consensus 
• Goods inflation was just 1.7% of the 8.6%; declining as supply chain disruptions moderate. However, service inflation was up 3.0%---the highest rate in 4 decades. (Click chart below to enlarge)
  
  
  
   Source: Zerohedge

Not surprisingly, the markets did not react well. The S&P 500 and NASDAQ Composite were down 2.9% and 3.5%, respectively, on Friday. The two benchmarks are now down 18.7% and 29.4%, respectively, from their 4Q21 peaks. And for the tech-heavy NASDAQ there are real shades of 2000, as shown below. After 140 trading days, or ~6 calendar months following the peak, the NASDAQ of 2000 and the NASDAQ of 2021 are tracking each other almost to the percentage. As reminder, the NASDAQ eventually lost 80% of value following the dotcom bubble. 

                                                                Source: Yahoo Finance, Mantabye

 

We'll at least inflation is nowhere near as bad as in the 1980s, right? Nominal inflation was after all running over 14% YoY in early 1980. Or was it? Larry Summers, who correctly warned about inflationary pressures last year, is now cautioning that inflation may be worse than what the official numbers show. How's that? In a new paper, Summers and co-authors Marijn Bohuis and Judd Cramer, argue that prior to 1983, the CPI did not correctly account for consumer spending on housing. The authors claim that the way housing spending was measured pre-1983 was "without conceptual foundation...and resulted in a substantial upward bias in the CPI." You see, the pre-1983 index included both home purchase prices and the total outlay of mortgage payments, despite mortgages being paid out gradually over several years." Summers and colleagues argue that "this caused inflation measures before 1983 to look artificially high at the beginning of the tightening cycle, and to recede artificially fast." According to Summers, Bohuis, and Cramer ("SBC"), when the alleged problem with housing spending is removed the official inflation rate of 13.6% in 1980 falls to 9.1%. That's just 50 basis points higher that yesterday's reading. Yikes! 

The upshot is that if SBC's methodology is accurate, it could mean that Federal Reserve will have to get far more aggressive to bring inflation under control, despite recession risks, like Paul Volcker did. For example, SBC estimates that "a return to 2% core CPI inflation today may require nearly the same amount of disinflation as achieved under Chairman Volcker." As reminder, Volcker’s monetary tightening increased the federal funds rate up about 10 percentage points, to a peak of 20% in the early 1980s to bring core CPI down by 5 percentage points. So, by that logic, bringing core CPI down from 6% to 2% may require hiking the feds fund rate by 7-8 percentage points! Good luck with that!