Marc Levinson

Category: Uncategorized

  • Going Vertical

    The business world is prone to fads. Over the decades, nothing has been more faddish than ideas about how broad the scope of a company’s business should be.

    Back in the ’60s and ’70s, conglomerates were all the rage. This led to bizarre transactions like electronics company LTV’s acquisition of Wilson and Company, a meatpacker, in 1967, and Mobil Oil’s lustful embrace of mail-order giant Montgomery Ward in 1974. The executives concerned didn’t have good reasons for doing these things, except that Wall Street analysts advised that diversification could bring steadier earnings. When the analysts changed their minds, conglomerates went out of style and most of those mindless mergers were unwound, often at considerable cost to shareholders.

    The conglomerate fad was followed by the outsourcing fad. Outsourcing, of course, is the opposite of conglomeration: rather than engaging in all manner of businesses, companies were told to focus on their “core competence” and get rid of everything else. From executive dining rooms to mines and factories, whatever wasn’t a “core competence” was to be obtained by contracting with an outside supplier, leaving the company to do only what it did best. This dictum conveniently suited the needs of leveraged buyout groups that borrow heavily to fund their acquisitions and then dismember them in order to pay down their debts.

    The outsourcing fad was one reason big companies began to create long value chains in the late 1980s: if you’re going to purchase raw materials or components or services from others rather than producing them yourself, you might as well try to obtain those inputs wherever they are cheapest. Giant corporations, in this construct, became integrators, putting together pieces created by others, while largely dispensing with factories, vehicles, warehouses, and production equipment of their own.

    But the outsourcing fad seems to be over. Vertical integration, which involves companies buying up suppliers or customers — in some cases, the same types of suppliers or customers they sold off years ago — is back in vogue.

    You can see this most clearly in the auto industry. Vehicle manufacturers, almost all of which have long since hived off their parts subsidiaries, are now investing in battery plants to control the design and production of batteries for their electric vehicles. Much the same is happening in the aircraft industry, where, after expensive failures to deliver new products on schedule, companies like Boeing and Airbus seem to want to own key suppliers of everything from avionics to fasteners. Cleveland Cliffs, originally an iron miner, last year acquired two major steelmakers hungry for its iron pellets. Pharmaceutical companies are reconsidering their dependence on outside vendors for essential ingredients. Container ship lines increasingly want to own their own terminals to make sure their vessels receive priority service. The global semiconductor shortage has even made some companies consider whether they should manufacture a portion of their chips in house — a practice that most automotive and consumer-electronics manufacturers abandoned years ago.

    How far will the trend go? At this point, companies seem to be selective. Microsoft and Google have integrated vertically into designing electronic devices that run on their software, but they continue to outsource the manufacturing process. While Ford Motor wants close control over electric vehicle batteries, it seems less eager to make its own headlights and windshield wipers. Amazon.com owns its distribution centers, but it prefers to purchase transportation services, at least in part to avoid the possible unpleasantness of having to deal with labor unions representing truck drivers or pilots.

    Given increased worry about risk management in the business sector, vertical integration seems likely to gather steam. This fad, I’d bet, is just getting started.

  • Dow 36,000*

    Twenty-two years ago, James K. Glassman, a newspaper columnist, and Kevin Hassett, an economist, laid out the bullish case for U.S. stocks in a book called Dow 36,000. Their forecast drew a lot of attention. At the time, the famed stock market indicator was around 11,000, so the authors were implying that the 30 stocks in the Dow Jones Industrial Average would more than triple in value “soon.” Stocks had been undervalued for years, they asserted, but prices would leap to a new plateau as investors recognized that companies were poised to increase their dividends year after year. Looking at how much money an investor would earn from future dividends, they proclaimed, was a new way of valuing a stock, a measure they termed the “perfectly reasonable price.”

    Well, stock prices have been doing pretty well of late, and it’s conceivable that the Dow will hit 36,000 some day soon. But before we hear the bulls bellowing in triumph, it’s worth mentioning a few of the reasons I placed an asterisk on the headline above.

    One is that 36,000 isn’t what it used to be. Inflation has raised the Consumer Price Index 58% since September 1999. The Dow would need to be above 17,000 today just to have kept pace with inflation since the book was published. In inflation-adjusted prices, the Dow has not quite doubled since 1999. That’s not too shabby, but it’s a far less buoyant performance than the raw numbers suggest.

    Another reason for viewing the numbers cautiously is that this isn’t your grandfather’s Dow. The people who run the average systematically cook the books, adding stocks that look poised for good things and discarding the dogs. Back in 1999, the Dow still was mainly an industrial average: 23 of the 30 companies actually manufactured things. Today, by my count, 14 of the 30 Dow companies aren’t really industrials at all. Over time, tech stocks like salesforce.com and Cisco and financial companies like Visa have been added to the average, while underperformers like General Electric, ExxonMobil, and Alcoa have been dumped. If you had purchased the 30 Dow stocks in 1999 and held them until today, you’d be sorry.

    Also, the promised dividend increases have proved nowhere near as reliable as Glassman and Hassett implied. Three of the companies in the Dow average in 1999, General Motors, Eastman Kodak, and Sears Roebuck, ended up in bankruptcy. Their their shares lost all value, and their dividends proved not to be a reliable source of income.

    As I explain in The Economist Guide to Financial Markets, there is no ideal measure of stock market performance. Each of the many available averages and indexes tells a different story. The Dow Jones Industrial Average is among the least meaningful. So when the Dow hits 36,000, as it inevitably will, I wouldn’t break out the champagne.

  • General Average

    In the modern world of global commerce, it isn’t easy being small. Yes, if you go on the internet to book passage for a container of your precious cargo, the ship line will accommodate you. But you may be sorry. You’ll have to pay the carrier’s published rate for your box, which will undoubtedly be far higher than the rates negotiated by the large manufacturers, retailers, and freight forwarders that ship hundreds of containers each week. You’ll be subject to all sorts of indignities from customs authorities and security officials who are suspicious of unfamiliar shippers, likely delaying your goods. And, in case you haven’t heard, you may be on the hook if something goes wrong with the ship that is carrying your cargo.

    In the eight days since Evergreen Marine’s ship Ever Given was freed from the muck of the Suez Canal and sent north to the Great Bitter Lake for inspection, it’s become clear that small shippers are likely to be among the biggest losers from its ignominious grounding. The reason is something called the General Average, a practice that requires a shipowner and the shippers whose cargo is aboard to share the costs of saving the vessel after a major casualty.

    In this case, the shipowner, the Japanese company Shoei Kisen, has declared a General Average and has engaged a London-based insurance adjuster called Richards Hogg Lindley to figure out the value of each of the thousands of shipments on board. Once the cost of the casualty has been determined, each owner will be assessed a proportionate share of the costs, usually expressed as a percentage of the value of its cargo.

    Figuring out the cost of the casualty will take a while. In order to get the ship underway sooner, the cargo owners are expected to put up deposits to have their cargo released. For most big companies with goods aboard, that should be no problem: they’ll call their marine insurers, who will provide guarantees. But small shippers — think of a tiny umbrella manufacturer in south China, or a Belgian discount store with an order of cheap blouses on the way — may have skipped marine insurance to save money. To gain control of their cargo, they’ll need to put up cash deposits, but they may be hard pressed to raise the cash without controlling the cargo. If they fail to resolve this chicken-and-egg problem, the ship owner can hold and, eventually, sell the goods. Some of the shippers may lack the resources to withstand the loss.

    As maritime accidents go, the grounding of Ever Given will probably not be among the most costly. Even so, there are likely to be many parties that claim damages, including Egypt’s Suez Canal Authority and the owners of the hundreds of vessels that were delayed while the canal was closed. We can expect to see enough claims and counterclaims to keep lawyers busy for years. And I expect we’ll read the sad stories of small business owners with big dreams, who discovered that the global marketplace hides risks they’d never thought about, such as responsibility for an accident they did not cause.

  • Stuck in the Mud

    On the morning of March 23, a container ship called Ever Given ran aground in the Suez Canal, blocking passage to the 50 or more vessels that transit the canal each day between the Red Sea and the Mediterranean. This disruption to global supply chains is likely to prove extremely costly. The grounding is one more example of how the shipping industry’s insane quest for size and scale has made global value chains more fragile and less reliable.

    Ever Given was launched in March 2018. The ship, a quarter-mile long and nearly 200 feet across, is reportedly able to carry the equivalent of 20,388 20-foot containers — enough cargo to fill more than 10,000 over-the-road trucks. It was en route from China to Northern Europe, one of the few ocean routes on which such enormous vessels are practical. The number of containers on board at the time of the grounding has not been disclosed, but in recent months load factors on the Asia-Europe route have been high.

    What went wrong? At this point, much is speculation. But the vessel’s massive size was likely a factor, for at least two different reasons.

    The first is that ultra-large container ships need deep water: when the ship is fully loaded, the deepest part of Ever Given‘s keel lies 15.7 meters — nearby 52 feet — beneath the water line. If a ship of that size wanders out of the proper channel, it can quickly wander into trouble.

    The second factor that may have contributed to the grounding is the ship’s heavy load. The only way to fit 10,000 40-foot containers aboard a single ship is by stacking boxes high on its deck. Ever Given, photographs suggest, had containers stacked 10-high from stem to stern, in addition to the many boxes in its hold. Steaming north through the canal, it would have presented a solid 80-foot-high wall longer than four football fields to winds blowing from the west. If, as reported, a wind storm struck the canal that day, it is easy to imagine how the vessel could have been blown off course. Something similar happened to Ever Given before. In February 2019, less than a year after its launch, high winds pushed it up against a ferry in the Elbe River in Hamburg, with unfortunate consequences for the ferry.

    The price tag on the physical damage is likely to be far less than the cost of the economic disruption the grounding has caused. Hundreds of ships have been delayed, each potentially facing tens of thousands of dollars per day in crew wages and lease or mortgage payments while it rests at anchor. The bill facing cargo owners will be even higher, as they face the carrying costs on the tens of billions of dollars’ worth of cargo marooned aboard vessels now moored at either end of the Suez Canal.

    It’s not clear whether they will be able to recover these losses, or who might pay for them. Like many merchant ships, Ever Given has a complicated chain of control, with its Japanese owner having chartered it out to a Taiwanese ship line which engaged a German company to operate it. Future litigation promises to be interesting.

    The Ever Given incident is one more demonstration of the vulnerabilities of extended value chains, a subject I discuss in Outside the Box. An accident can happen to any ship, and the potential cost needs to be factored into decisions about where to make things and how to transport them.

  • Why Global Trade Won’t Depend on Bitcoin

    Is Bitcoin really the currency of the future? Citibank seems to think so. Its new report on cryptocurrencies, detailed by the Financial Times, contends that Bitcoin could “become the currency of choice for international trade” in the next seven years or so. This report is one of the most ridiculous pieces of investment bank research I’ve ever seen.

    Bitcoin, of course, has made headlines as the first and best-known cryptocurrency — a term coined (pun intended) to refer to digital currencies that are not issued by governments or central banks. Bitcoins are created by networks of computers that “mine” blocks of data that contain information about previous Bitcoin transactions. The appeal is mostly ideological: the creation, trading, and record keeping related to Bitcoin are entirely decentralized, and there is no central authority that can alter the amount in circulation. This feature excites people of libertarian inclination, anarchists, a few technophiles, and a surprising number of entrepreneurs who hype Bitcoin for profit. Whether the entities that dominate certain parts of the Bitcoin ecosystem are any more trustworthy than governments and central banks is another matter.

    Why is Citibank so high on the potential for Bitcoin to become a medium for international trade? One main reason, according to the report, is that Bitcoin has a “lack of foreign exchange exposure.” If this were true, it would be a very big deal. Exchange-rate fluctuations can disrupt the world economy, and a sensible method of avoiding them would be extremely popular.

    But the claim that Bitcoin is not exposed to exchange-rate fluctuations is nonsensical. It’s likely that not even the most fanatical Bitcoin miner lives in an all-Bitcoin world. If people who own Bitcoins wish to eat or pay the rent, they must transform their Bitcoins into dollars or euros or renminbi. With respect to Bitcoin, all of those are foreign currencies, and the Bitcoin owner must trade for them at the current market rate. That’s foreign exchange exposure in spades.

    In theory, that foreign-exchange risk could be avoided if individuals and businesses are willing to do business with one another in Bitcoin. Citibank asserts that they are; a graphic in its report shows that “36% of small-medium businesses in the U.S.” were accepting Bitcoin in 2000.

    This statement, it turns out, is based on a survey of 505 businesses selected in an undisclosed manner, conducted for a company that wants to sell businesses insurance against cyber fraud. The claim is simply implausible. When I drop by the dry cleaner or the hardware store or the donut shop in my neighborhood, I don’t find any of them accepting Bitcoin. In fact, the authors of the Citibank report are quite aware that Bitcoin is not widely used. As they write elsewhere in the report, “We do not know how many users — people and companies who send or receive transactions — the network has….”

    People and businesses that are actively engaged in the global economy are exceedingly familiar with exchange-rate risk, and they are likely to understand full well that Bitcoin doesn’t make it go away. Citibank’s report sees the solution in something called “stablecoins,” a type of cryptocurrency that is backed by a “reserve asset” — something like dollars or euros, or perhaps gold or silver. Exactly how this is meant to work out, and who is meant to pay for the dollars and euros that supposedly guarantee the value of the cryptocurrency, is a bit unclear. As the Financial Times reported last week, the best-known company promoting stablecoins just agreed to pay a penalty to the New York State Attorney General’s office, which charged that the company “recklessly and unlawfully covered up massive financial losses to keep their scheme going and protect their bottom lines.”

    So although Citibank opines that “Bitcoin may be optimally positioned to become the preferred currency for global trade,” you can count me as a nonbeliever. Globalization, as I’ve asserted elsewhere, is likely to have less and less to do with moving goods across borders and more to do with exchanging services and ideas. I expect it to have very little to do with cryptocurrencies.

  • Trading in an EV World

    Super Bowl LV makes it official. No, not that Tom Brady is the best quarterback in the National Football League; we were already convinced of that. The novelty is an old-line auto manufacturer’s high-profile commitment to electric vehicles.

    Auto execs have been saying all the right things about battery-powered cars for a good while, even as their assembly lines churn out highly profitable gas guzzlers that will be spewing greenhouse gases into the atmosphere for decades to come. But now, jealous of Tesla’s insane price-earnings ratio — as of today, its stock sells for 293 times projected 2021 earnings per share, compared to about 14 times for Toyota and 9 for Volkswagen — the incumbent automakers are desperate to convince the world that they are committed to an all-electric future. Which is why GM spent megabucks to tout its forthcoming electric Cadillac Lyriq and Hummer SUV during the Super Bowl.

    The first house I ever purchased cost $16,000, so you can guess what I think about spending $90,000 for the Lyriq’s platinum version or six figures for the battery-powered Hummer. But I do want to point out that the impending shift to electric vehicles, which promises to be rapid by auto-industry standards, is going to cause major dislocations across the industry’s value chains.

    Note that I wrote “value chains,” not “supply chains,” and for a good reason. The auto industry and its suppliers are about to travel the same road the apparel and electronics industries have been on for decades, adding value mainly by engineering and marketing, not by bashing metal and molding plastic.

    This past week, for example, Volkswagen confirmed that it now employs 5,000 people to write software, which it described as a core part of its business. Meanwhile, news broke that Apple is negotiating with the Hyundai-Kia conglomerate to build Apple-branded vehicles. Apple sells hundreds of millions of smartphones each year but manufactures no phones or components itself; similarly, its contributions to the Apple Car are likely to involve design, engineering, and software, not stamping bodies and installing wire harnesses supplied by a plant in Mexico, Vietnam, or Romania.

    The auto industry’s transformation is possible largely because electric vehicles are akin to battery-powered computers on wheels. They lack the engines, transmissions, and exhaust systems that make gasoline-powered vehicles so complicated to produce. An EV is likely to have several thousand fewer parts than its gasoline-powered counterpart. The proliferation of EVs will change the geography of automotive manufacturing. There will be less need for parts factories and for workers who make parts and assemble vehicles, which means manufacturers will have less reason to farm production out to low-wage countries. The major component in electric vehicles, the battery, is heavy and bulky, and several recent investment announcements indicate that the most sensible place to make a battery is near the assembly plant where it will be installed in a vehicle.

    The logistics industry has a major role in motor vehicle manufacturers’ value chains, and electrification will hurt it. Truckers and railroads that haul parts from Mexico to the United States will see that business shrink. Ship lines that move containers of auto parts between continents will lose a large amount of cargo. In countries with large auto parts industries, jobs will vanish, factories close. And international trade in goods, temporarily feverish due to the pandemic, will settle in to a much slower rate of growth.

  • The Container Crunch

    When a pandemic is raging, what do you do with your money?

    This is a question which has never much preoccupied economists, but we now know the answer: when you can’t fly off on holiday, take in a concert, go out to dinner, or send your toddler to child care, you spend your money on stuff. Especially in Europe and North America, we’ve seen a surge in spending on consumer goods, many of which are imported from Asia.

    That’s one reason ocean shipping costs are soaring. A year ago, sending a truck-size 40-foot container from Qingdao to Long Beach cost $1,500 or so; these days, unless there’s a long-term contract that locks in a lower rate, the price is three times that. Some shipments from Asia to Europe are said to have cost more than $10,000 per box, four times as much as last summer. On average, ships are much larger than they were just a few years ago, complicating loading and unloading and often leading to delays even on short-haul routes. Many sailings are being cancelled due to ships being out of position, which makes capacity even more scarce and allows carriers to hike prices.

    But that’s not the whole story. The stunning increases in freight rates are the consequence of a prolonged shake-out in container shipping that has left about 85% of global capacity in the hands of three alliances of ship lines. The carriers have scrapped older ships while curbing orders for new ones, so the overcapacity that plagued the industry as recently as last summer, when more than 6% of the global fleet was idle, has pretty much vanished. Although the companies in each alliance remain independent, the alliance structure allows the industry to maintain a certain discipline when it comes to building new ships. There are still 20 or more companies outside the alliance system, but they collectively control so little capacity that they don’t much interfere with the dominant players.

    For the moment, everybody in the industry is making real money for the first time in a dozen years. Once the pandemic-driven boom is over, though, the growth of international trade will likely turn sluggish as consumers in upper-income and middle-income countries up their outlays on services, including education and healthcare. If the world economy grows 4% to 5% per year, as the International Monetary Fund expects, the number of containers moved by sea might rise 2% to 3% annually, on average. That is well below what shipowners were expecting when, a decade ago, they started ordering vessels each able to carry more cargo than 10,000 trucks.

    Equally problematic, most of the growth in container shipments will come on routes from East Asia’s factory hubs to South Asia and Africa. These routes are relatively short, which means that over the course of a year, a vessel can carry twice as many containers between Shanghai and Mumbai as between Shanghai and Rotterdam. The industry will probably require less tonnage as trade patterns shift. My guess is that profits will be harder for ship lines to come by, and old timers will fondly recall the days when it unexpectedly cost more to ship a metal box from East Asia to Europe than to fly there first class.

  • Productivity and the Pandemic

    Across from my apartment, there’s a new restaurant with a new way of doing business. No one hands you a menu or takes your order; instead, you use the QR code taped to the table to see what’s available and choose what you want to eat. There’s a carafe of tap water on the table, along with four glasses; if you want to fill a glass, you do it yourself. To settle your bill, you can put your credit card details into the restaurant’s app — or, better yet from the restaurant’s point of view, you can use the app to establish an account, so on your next visit the bill will be handled automatically.

    A year ago, before the COVID-19 pandemic, none of these practices was common in the United States. In most restaurants, collecting a customer’s payment required the server to make four separate visits to the table: once to present the bill; another to pick up cash or card and take it to the cash register; a third to bring the patron change or a credit card voucher; and then once more to collect the cash tip or the signed voucher. With fewer steps in the payment process, each server can handle more tables, allowing a restaurant to operate with less staff than before.

    Something similar is happening in many different industries, raising the prospect of faster productivity growth economy-wide. This matters: in the long run, higher productivity — that is, using fewer workers and resources to create a given amount of output — is what makes economies grow. Some of the best-known scholars of productivity, such as Robert Gordon, have argued that there are no great innovations on the horizon that are likely to boost productivity growth like railroads, electricity, and expressways all did at various times in the past. This, obviously, would not bode well for raising living standards. My own view has been less pessimistic. As I pointed out in An Extraordinary Time, economists have a terrible track record when it comes to forecasting productivity improvements, which often arise unexpectedly: just because artificial intelligence and virtual reality haven’t moved the productivity numbers so far doesn’t mean they won’t revolutionize entire industries very soon.

    Changes like those evident in my neighborhood restaurant are leading to speculation that the pandemic will bring a productivity revival. The Economist recently hypothesized that “The pandemic could give way to an era of rapid productivity growth,” and Greg Ip of the Wall Street Journal asserts that “much of what started out as a temporary expedient is likely to become permanent.” If they are right, we could be in for an odd sort of boom coming out of the pandemic, in which the economy grows smartly but unemployment remains high until workers find not just new jobs but new occupations that are in demand because of new ways of doing business.

    Yet it’s also possible that the productivity gains from the pandemic turn out to be modest. While the server at my neighborhood restaurant saves time by skipping repeated visits to my table, she also misses out on the opportunity to describe the wonderful tiramisu or ask if I’d like an espresso to top off my meal. The QR code taped to the table may be efficient when it comes to taking my order, but it’s not an efficient way of maximizing my bill. That’s probably not good for the economy, although it may be good for me as a diner. I didn’t really need that dessert anyhow.

  • The Risks of China

    “We have no choice but to follow the party,” a Chinese seafood entrepreneur told the Wall Street Journal recently. The Chinese government, the Journal asserts, is increasingly forcing private firms to follow Communist Party guidance and using its control over financial markets to punish those that don’t comply. In the process, state-owned enterprises are playing a larger role in the economy, reversing years of effort to downsize the state sector and expand the economic role of private investment. It’s a pretty good bet that China’s economy will become less innovative in the process.

    This development is one more nail in the coffin of what I have called the Third Globalization, the period when international trade grew by leaps and bounds due to long, complicated value chains. As I point out in Outside the Box, this model gained favor in the late twentieth century in part because the corporate bean counters who demanded that manufacturing be located where production and transportation costs were lowest failed to account for risk. Yet risks can’t simply be wished away. If goods don’t get delivered on time, investments are confiscated, or proprietary information ends up in the hands of potential competitors, the costs of long value chains can far exceed the advantages of low production costs and cheap shipping.

    As foreign businesses see it, China now has risks in spades. Dozens of foreign companies, from Abercrombie & Fitch to Zara, face the threat of of trade sanctions and customer displeasure due to allegations that their value chains include producers who use forced labor in the western province of Xinjiang. Foreign banks lost an estimated $400 of fees in an instant when the Chinese government blocked a $40 billion stock offering by the financial company Ant Group in November. The threat that Communist Party functionaries will play a greater role in guiding the activities of foreign-owned enterprises and joint ventures in China is just one more risk that has to be pencilled in.

    In response to the perception of greater risk, firms are carefully shifting their supply chains out of China and are trying to avoid tying up their money there. According to OECD data, the stock of foreign direct investment in China, which was around 25% of the country’s GDP between 2008 and 2016, fell five percentage points between 2016 and 2019. (For comparison, the share in the United States is over 40% and rising.) In 2019, the net inflow of foreign direct investment into China came to 1% of the economy, the lowest level since 1991.

    Skip the eulogies: globalization is by no means dead. But as firms and governments assess its true costs, the global economy is looming less important in our lives. We can expect international trade in goods to grow more slowly than the world economy over the next few years, and perhaps to start declining. One consequence, as Paul Krugman wrote recently, is that “America’s future will be defined by what we do at home, not on some global playing field.” The came could be said of many other countries as well.

  • Inflation Again

    It used to be that inflation was just part of life: the 11% increase in consumer prices in 1974 and the 9% rise the following year seemed inevitable at the time, and even after Paul Volcker painfully put the kibosh on inflation in the early 1980s, annual price rises hung around 4% for a decade. These kids today (he says disdainfully) don’t know anything about that. Over the past decade, the average annual inflation rate in the United States has run well below 2%. Many people who didn’t live through the inflation-ridden ’70s or ’80s have come to take that as normal. A recent study by the Cleveland Fed estimates that the financial markets are pricing in a U.S. inflation rate averaging 1.37% per year through 2030.

    I hope they’re right, but I’m not so sure. In my new book, Outside the Box, I argue that international trade, and in particular trade in manufactured goods, will decline in importance in the coming years, growing more slowly than the world economy. This is likely to have important effects on the inflation rate in the United States and around the world.

    Since the early years of this century, the vast influx of goods from East Asia has played a major role in holding down U.S. consumer prices. The abrupt shift of manufacturing supply chains to East Asia, while extremely painful for U.S. factory workers, caused a flood of cheap imports. Bedroom furniture costs about 8% less than it did twenty years ago, according to the Bureau of Labor Statistics, while prices of clocks and lamps have fallen by two-thirds. Such drastic price drops have allowed the Federal Reserve to control inflation without raising interest rates so high that they choked off economic growth.

    But that’s history. As manufactured imports account for a smaller share of Americans’ spending, they will become steadily less important in restraining prices. The Fed will have to rely more heavily on its power to influence interest rates to do the job of keeping inflation down. And that doesn’t allow for the likelihood that the federal government will rely on inflation reduce the burden of repaying the trillions of dollars of debt it has issues to keep the economy alive during the COVID-19 pandemic. That’s why I expect 2.5% mortgages and 10-year Treasury bills yielding a fraction of one percent interest won’t be with us for long — and why there’s a good chance that inflation rate over the coming decade will be a percent or two higher than the benign rates we’ve become used to.