The Hits to GDP

By John Mauldin


Economists and investors are rightly obsessed with growth. We always want more of it. We worry it won’t come or, worse, might turn into contraction. Economists of all stripes, from Paul Krugman to Lacy Hunt, recognize economic growth cures all manner of ills.

Yet, exactly what is growth?

We think we know, but in reality, it is a sticky question. We usually measure it with Gross Domestic Product. But that’s a statistic which, like the inflation numbers I questioned last month, is both hypothetical and subjective. Like inflation, there is a great deal of disagreement and discussion among those who specialize in it. We can’t be sure the GDP numbers mean what they say. We look at them because we need some kind of benchmark and we don’t have a better one. As Dwight Eisenhower said he learned in the Army, “Plans are worthless, but planning is everything.”

Today I want to look at some aspects of GDP we rarely consider, thinking about how they affect our analysis and choices. But first, let’s talk about where GDP is now and where it may go in the near future.

Viral Threat

According to the Commerce Department’s initial estimate (which will be revised), US real GDP grew at a 2.1% annualized rate last quarter. For calendar 2019, real GDP rose 2.3%, down from the 2.9% it posted in 2018.

So, without even digging into the details, we see growth decelerating but still positive. You can view that as a cup half empty or half full. In either case, it’s consistent with the slow but persistent recovery from the last recession. I think the base case has to be more of the same, barring surprises. But surprises happen.

As an example, there’s Boeing. The largest US exporter has stopped production on the 737 MAX and seems to keep finding more problems to fix. The damage is already trickling through its supply chain. I’ve seen estimates that Boeing alone could shave 20–30 basis points off GDP growth this year. Treasury Secretary Steven Mnuchin said this week it could be 50 basis points.

Many GDP forecasts presume the latest US-China deal takes trade-related risks off the table. However, that deal’s text says that if some disaster happens, either side can ask to renegotiate.

Does the Chinese coronavirus rise to that level? Here I have good news and bad news. The good news is that scientists will probably have an effective vaccine within a few months. I talked this week to Joseph Kim, CEO of Inovio, which has been leading research on infectious diseases like Ebola, MERS, and Zika. He said the Chinese are not at all overreacting. It is serious and far too easily transmittable. But within hours of getting the coronavirus DNA on January 10, Inovio already had a potential target vaccine that is now in animal trials. While the US process will go slower, my personal speculation is that China will speed approval if the tests look positive.

That being said, China’s travel restrictions and business closures will still have a serious and global economic impact. The disease will probably keep spreading until a vaccine is ready, as some reports suggest even asymptomatic patients can infect others. That would mean even those who show no symptoms can still spread the virus. It is not the most deadly virus we have come across, but it does spread.

We must remember that there is a reason we are encouraged to get flu vaccines every year. Five to 20% of the US population gets some kind of flu every year, with about 31 million outpatient visits every year. In 2017–18 it killed 80,000. Any flu can be serious. One that spreads faster and is more deadly than normal flu? There’s a reason authorities are concerned.

Similarly, the economic virus is already in motion. The many manufacturers around the world who depend on Chinese components may find their pipelines running dry in a few weeks. Then what? Lost sales, layoffs, and it gets worse from there.
 

We know intuitively that events like these depress growth, at least in the short term. GDP is an attempt to quantify this intuition. But now let’s look at how the concept of GDP came about and try to figure out what it actually measures.

The conclusion upfront: GDP (and its government statistical cousins CPI/PCE) are attempts to measure very important data. The conceit is that we can measure it close enough to have numbers two places to the right of the decimal. When was the last time you saw a GDP or CPI number released with the margin of error noted at the same time? I am confident, without having to go back and check, that the margin of error is almost always larger than the numbers to the right of the decimal point. Yet we use these numbers for all sorts of government programs, but perhaps most important, to guide monetary policy.   

Back in 2014 I wrote a long letter reviewing Diane Coyle’s excellent book, GDP: A Brief But Affectionate History. It is still the best book on GDP I’ve ever read. She digs into the history that made economists want such a measure and the bureaucratic battles over how to construct it. From the book:

There is no such entity out there as GDP in the real world, waiting to be measured by economists. It is an abstract idea… I also ask whether GDP alone is still a good enough measure of economic performance—and conclude not. It is a measure designed for the twentieth-century economy of physical mass production, not for the modern economy of rapid innovation and intangible, increasingly digital, services. How well the economy is doing is always going to be an important part of everyday politics, and we’re going to need a better measure of “the economy” than today’s GDP.

 
You can argue GDP as originally constructed had flaws but was still, as Coyle calls it, “a good enough measure of economic performance.” At least in my mind, it is clearly not good enough anymore. Like inflation’s problem with quality (that leads to absurd hedonic adjustments), GDP doesn’t capture intangible goods production, or the services that form a large part of today’s economy. It was designed for the agricultural and industrial economy its Depression-era designers knew.

The result is a measure that doesn’t reflect much of the “production” we think it does. From my review:

GDP is a huge undertaking, full of rules, with almost as many exceptions to the rules, changes, fixes, and qualifications, so that, as one Amazon reviewer noted, GDP is in reality so complex there are only a handful of people in the world who fully understand it, and that does not include the commentators and politicians who pontificate about it almost daily. The quarterly release of GDP statistics is more akin to a religious service than anything resembling a scientific study. The awe and breathlessness with which the number is discussed is somewhat amusing to those who understand the sausage-making process that goes into producing the number. Whether the GDP reading is positive or negative, it often changes less in a given quarter than the margin of error in the figure itself, and it can be and generally is revised significantly—often many years later when almost no one is paying attention. When’s the last time the mainstream media reported a five-year-old revision?

If you pay someone to mow your lawn and report wages paid, that adds to GDP. If you pay that person under the table, it doesn’t. If you pay your maid to clean your house, it adds to GDP. Except if you marry her, then it doesn’t. Unless of course she gets access to the credit card, in which case spending probably increases GDP dramatically. In England, sex with your wife does not add to GDP, but sex with a prostitute does—even if it is unreported. Go figure. There are so many jokes and one-liners that I could add to this litany, but I’m going to resist. Okay, just one. Can you imagine the reception if you came home with a blonde hair on your dark suit and your excuse was, “Honey, I was just doing my bit for the national economy. We all have to make sacrifices.”

Housekeeping, cleaning, cooking, and other such duties do not get counted in GDP, although without them GDP would suffer significantly. Perhaps that is because when the original discussions about what constituted GDP were underway, “woman’s work” was significantly undervalued.

 
All that is still true, but we have a new development in the almost six years since I wrote the above.

Overwhelming Stimulus

One of GDP’s big problems is the way it treats government spending. This was controversial when Simon Kuznets and others designed it back in the 1930s. Kuznets (who would later get a Nobel Prize for his foundational work on GDP) himself wanted to exclude defense spending. Other influential economists wanted to exclude government spending altogether, based on the fact that government spending came from taxes which should already be included in GDP, so adding government spending back into GDP is double counting.

Supposedly when Franklin Roosevelt saw the difference, like any politician, he chose the larger number that made his administration looked better. He wanted to avoid a scenario where the economy looked like it was shrinking even as they expanded government spending. So now we classify government spending as “production.” (Note that’s not a personal criticism of Roosevelt. I think any Republican president would have made the same decision.)

We are still basically using that same methodology in a radically different world. Manufacturing is now under 12% of GDP. Government spending (local, state, and national) is about 40% of GDP as we measure it today, but it consumes almost 2/3 of private production.

But we still use the same basic methodology for measuring GDP. Kuznets himself said that, “The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP… Goals for more growth should specify of what and for what.” It is critical to note that, as Jeremy Rifkin said:

The problem with the [GDP] index is that it counts negative as well as positive economic activity. If a country invests large sums of money in armaments, builds prisons, expands police security, and has to clean up polluted environments and the like, it’s included in the GDP.

If a company pollutes the environment then sells a product, that is seen as a positive contribution to GDP. So is cleaning up the mess. Just saying…

But What About Government Deficits?

A different problem emerges when government runs a deficit. That money theoretically comes from future tax revenue, assuming that the bonds the government sells to cover that debt will be paid back.

Deficits are no longer “if” or “when,” of course. They have become a fact of life and the only question is whether they are huge or gargantuan. This creates multiple problems, among which is GDP distortion. It overweights government spending and underweights private production.

This is a problem because GDP is key to the Keynesian macroeconomic theory on which most governments rely. If GDP is lagging, the answer is to dial up government spending, which is a direct input to GDP. Presto, growth appears.

The original idea, at least according to Keynes, was for government to run deficits during recessionary periods, thereby creating demand that would boost GDP back into growth again. Then—and this is the part we now ignore—run surpluses during the boom times in order to be ready for the next downturn. Keynes didn’t envision the permanent deficits we now have.

I recently had a fascinating email exchange with Rob Arnott on the implications of all this. He produced this chart for me. What Rob calls “Structural PCGDP” is GDP less government deficit spending (or plus surplus). “Private Sector GDP” is simply GDP less federal, state, and local government outlays.
 


 
Rob also made a series of scatterplots, which I won’t reproduce, that show government surplus or deficit seems unrelated to GDP growth. But if you look only at private sector GDP, outlays soar when it is cratering. From this he makes an interesting conclusion.

The subsequent impact of deficit spending and of increased Government outlays is what Keynes predicted, but ironically not at all what neo-Keynesians would predict. Subsequent one- and two-year growth in Private Sector GDP is modestly better when the government is running deficits, as Keynes would have predicted, but rising outlays do material damage to Private Sector GDP.

So, when the deficit is because tax receipts are tumbling, the subsequent rebound is good, but when it’s because spending is soaring, subsequent private sector growth is lousy. This latter impact isn’t noticed because the economics profession is content to see GDP growth due to growth in “G,”[G is the abbreviation for government spending in the equation] every bit as much as from any other source. Never mind that we can’t *spend* (or invest) the G part of GDP.

Why can’t we spend it? Because government spending is funded by either taxes or borrowing. Either is removed from the resources that the citizenry (including government employees) can spend. The citizenry can only spend money that the government is also spending, if the borrowing is from external sources, but that has its own consequences.

The current surge in outlays is not an auspicious data point for future private sector GDP growth. Nor is it going to turn around any time soon, given that Trump and the Dems are all committed to massive increases in spending, mainly fighting over who controls the purse strings and where they’ll be spending the money.

 
In other words, we appear to be reaching the point at which government spending overwhelms any Keynesian stimulus benefit, in part because we failed to run surpluses that would have helped cover this spending. We instead expanded the debt, raising interest costs on top of the growing entitlement and defense spending.

Worst of all, there is no painless way out of this trap. I see approximately zero chance government spending will fall, no matter how this year’s elections turn out. Whether through deficits or borrowing, government is going to suck more and more of private GDP into the Treasury, from which it will be redistributed to favored groups. What we now call “politics” is really a battle to be one of those groups.

The on-budget deficit is already over $1 trillion. Combined with the off-budget spending, the national debt will probably grow $1.3 trillion or more this year. A recession would likely increase the deficit by another $1 trillion.

This isn’t entirely GDP’s fault, but GDP’s design encourages it. Whether GDP rises or falls is important, but not as important as the policies it is used to justify.

And Then There Is the Fed…

The Federal Reserve is now having to inject $60 billion a month to provide repo liquidity and other activity. Why? The Fed is essentially using its current QE program (although they don’t want to call it QE) to monetize over two-thirds of the deficit.

Furthermore, there is increasing talk about controlling the yield curve—another form of easing—to help GDP growth. Does it need such a boost? We can’t really know because GDP doesn’t tell us what we think it does.

You can Google “economic papers on GDP including new sources of growth” and read a library of papers by famous names concluding GDP no longer effectively measures growth in the US. There’s just so much that we are not counting in a service and digital economy.

Yet the Fed sets monetary policy as if those things did not exist. They fix the most important price in the world, short-term interest rates, based on flawed understanding of inadequate data. And the longer we continue to operate in that manner, the more difficult it will be to extricate ourselves from the problems we are creating.

That sounds like an idea for another letter, and a good place to close this one.

Dallas and New York

Shane and I are in Dallas this morning and I will be in New York in about two weeks, days to be determined. We fly back to Puerto Rico tomorrow afternoon.

This afternoon will be the weekly planning call for the Strategic Investment Conference. We just had Sam Zell confirm he is coming, along with Leon Cooperman. We are having conversations with other well-known names but already this is clearly going to be the best SIC ever. You will soon get your invitation, if you haven’t already. We are reducing the numbers of seats 40% this year, at the request of long-time attendees. We expect to sell out quickly. Put May 11–14 in Scottsdale, Arizona at The Phoenician in your calendar and be there.

The business meetings in Dallas have gone better than I could possibly hope for. In the not-too-distant future, I should be able to provide more services and opportunities to my readers and clients. Technology has completely reshuffled the deck of what we can do for the average client. I wish we could’ve done this 20 years ago, but even one year ago the technology to band them together did not exist. I know that I am writing a book on how fast things are changing, but I am living it in my own life and business, and it amazes me.

And with that I will hit the send button. You have a great week!

Your making 10–20-year plans at 70 analyst,


John Mauldin
Co-Founder, Mauldin Economics

Intolerant India

Narendra Modi stokes divisions in the world’s biggest democracy

India’s 200m Muslims fear the prime minister is building a Hindu state

 


Last month India changed the law to make it easier for adherents of all the subcontinent’s religions, except Islam, to acquire citizenship. At the same time, the ruling Bharatiya Janata Party (BJP) wants to compile a register of all India’s 1.3bn citizens, as a means to hunt down illegal immigrants.

Those sound like technicalities, but many of the country’s 200m Muslims do not have the papers to prove they are Indian, so they risk being made stateless. Ominously, the government has ordered the building of camps to detain those caught in the net.

You might think that the bjp’s scheme was a miscalculation. It has sparked widespread and lasting protests. Students, secularists, even the largely fawning media have begun to speak out against Narendra Modi, the prime minister, for his apparent determination to transform India from a tolerant, multi-religious place into a chauvinist Hindu state.  In fact, the scheme looks like the most ambitious step yet in a decades-long project of incitement. The BJP first rose to national prominence by agitating for the demolition of a mosque in the city of Ayodhya, to make way for a temple to Ram, a Hindu deity.

The destruction of the mosque in 1992 by a mob of Hindu extremists, followed by deadly riots, only propelled the party’s ascent. Likewise, a massacre of Muslims in the state of Gujarat in 2002, when Mr Modi was chief minister, made him a hero to Hindu nationalists around the country.

Alas, what has been electoral nectar for the bjp is political poison for India. By undermining the secular principles of the constitution, Mr Modi’s latest initiatives threaten to do damage to India’s democracy that could last for decades. They are also likely to lead to bloodshed.

The sad truth is that Mr Modi and the bjp are likely to benefit politically by creating divisions over religion and national identity. Such subjects keep the party’s activists and their allies in Hindu-nationalist groups energised—always a boon, given India’s relentless sequence of state elections. They also distract attention from awkward topics such as the economy, which has struggled since the BJP’s thumping election victory last year.

Most important, Mr Modi seems to calculate that a sizeable minority of Indian voters are sympathetic to his constant insinuation that Muslims are dangerous fifth-columnists, always scheming to do Hindus down and sell out their country to Pakistan. That is enough to keep him in office. Because of India’s first-past-the-post electoral system and a divided opposition, the bjp won its outright majority in parliament with just 37% of the vote.

Just now the bjp may be hunting for a new grievance. The Supreme Court recently issued a ruling that had the effect of depriving it of its favourite cause, by clearing the way for a Hindu temple to be built at the site of the demolished mosque in Ayodhya.

The citizenship ruckus appeals to the party for the very same reasons that it has prompted widespread alarm. The plan to compile a register of genuine Indians as part of a hunt for foreign interlopers affects all 1.3bn people in the country. It could drag on for years, inflaming passions over and over again, as the list is compiled, challenged and revised.

Just how the register will be drawn up, and what the consequences of exclusion are, remain woolly. Indeed, Mr Modi is already claiming it has all been misunderstood. Meanwhile, the hullabaloo helps reinforce the notion, so electorally valuable to the bjp, that Hindus, although about 80% of the population, are threatened by shadowy forces that it alone has the courage to confront.

This imperils the inspiring idea of India as the world’s largest democracy. Mr Modi’s policies blatantly discriminate against his Muslim compatriots. Why should a secular government shelter persecuted Hindus from Afghanistan, Bangladesh and Pakistan, but explicitly vow not to take a single downtrodden Muslim?

The citizenship row is only the latest in a series of affronts, from the bjp’s lionising of vigilantes thought to have killed Muslims to the collective punishment of the people of the Kashmir valley, who have suffered arbitrary arrests, smothering curfews and an internet blackout for five months.

Since independence, India has confounded predictions that its democracy would crumble by accommodating its many constituencies of language, ethnicity, caste and religion. A secular and impartial government, even if flawed in many other ways, protects all these groups.

The deliberate and sustained persecution of one of them constitutes an implicit threat against all—and so puts the political system at risk. Voters should recall that the bjp has experimented with policies that disadvantage other minorities, from low-caste Hindus who defy the party’s view of their religion to speakers of languages other than Hindi.

Because his rabble-rousing has a human cost, Mr Modi is also tarnishing the memory of Mahatma Gandhi, a preacher of non-violence. As it is, many Muslims have been lynched or beaten to death for supposed slights to Hinduism, such as loving a Hindu woman or killing a cow.

From time to time the stoking of anti-Muslim sentiment leads to massacres like the one in Gujarat, in which more than 1,000 people were killed. By perpetually firing up Hindus and infuriating Muslims, the bjp makes fresh bloodshed more likely.

Mr Modi may imagine he can keep communal tensions under control, ramping them up and tamping them down as his political fortunes demand. But even if he is only cynically exploiting religious bigotry, many in the Hindu nationalist rank-and-file are true believers. They are not easily restrained, as the slaughter in Gujarat showed.

With his warlike rhetoric about Pakistan, his head-cracking in Kashmir and his flagrantly biased approach to citizenship, the prime minister has raised the zealots’ expectations. He may not want to take things too far—he has a country to govern—but they will have no such compunction.

Something worth defending


Happily, many Indians have already had enough, as the recent protests show. The Supreme Court, which this week declined to suspend the citizenship law, should heed this, show some unexpected spine and declare it unconstitutional.

And rather than stoke hostility between two of the world’s great religions, Mr Modi should look for other paths to voters’ hearts.

Solar storms are a threat to our electricity-dependent world

Society needs the knowledge to be able to cope without power for extended periods

Izabella Kaminska

Cobra - Amazon Prime & Sky - Victoria Hamilton as Chief of Staff Anna Marshall & Robert Carlyle as Prime Minister Robert Sutherland
A scene from the TV series 'Cobra'. The fictional crisis is a massive solar storm that frazzles the UK’s electric infrastructure © Sky/Amazon Prime


Thanks to the new Sky drama Cobra, another potential planetary emergency may be about to join climate change at the top of the agenda. Cobra stands for Cabinet Office Briefing Room A. It is the UK equivalent of the US government’s “situation room”, where the top brass gather to monitor and deal with crises.

The fictional crisis is a massive solar storm that frazzles the UK’s electric infrastructure. The prime minister must get the lights back on before social collapse, food shortages and anarchy threaten the population.

The drama explores the consequences of having insufficient transformers in reserve to help restore electricity quickly. There’s also the added challenge of transporting the ones the UK does have to the right locations. So far, so helpful in ramping up the tensions on screen.

But according to national resilience experts, this scenario is entirely plausible. It may indeed be time to start worrying about the chances of a solar storm ejecting plasma from the sun.

The last time the US National Research Council looked at the issue in any depth was 2008. It concluded that the economic impact of a severe solar storm could exceed $2tn. That’s nearly 12 times the cost of Hurricane Katrina, which caused $161bn worth of damage and was the costliest natural disaster in US history.

Since then, our worldwide dependence on electronics and power grids has only increased.

Decarbonisation is likely to heighten that dependency, as the world focuses on electrifying automobile fleets and even aeroplanes.

Meanwhile, weird things are happening to the planet’s geomagnetic field. It is weakening and in flux: this could heighten the frequency with which solar storms and solar flares occur; the magnetic field forms the planet’s natural defence against solar interference.

The magnetic North pole is racing towards Siberia at an unprecedented rate. Scientists remain unsure as to whether the growth of the South Atlantic Anomaly, a radiation hotspot, is indicative of the first stages of a magnetic pole shift, which would expose us to higher levels of radiation.

Scientists agree the vulnerability mostly exists on two levels. The less serious scenario is the social fallout from having to shut down power systems in anticipation of flares detected by solar weather watchers. This remains the best way to protect all-important kit that might otherwise get fried.

The problem is, it’s hard to predict how long such shutdowns might last. Even 24 hours without power can be enough to cause widespread disruption to society and the economy — and life-threatening shortages in some areas.

The Cobra drama explores the second, more serious scenario of what might happen if we fail to take precautionary measures and the nation’s extra high voltage transformers, huge in size, are irreparably burnt out by a solar event. It’s a real world threat because the warning times for solar events can be very short and we don’t have the spare parts at hand that are needed.

Experts from the UCL Institute for Strategy Resilience and Security told me that the TV series was right to point out that the real threat to human life would come from the breakdown in social networks and the tribal politics that would consequently emerge.

So what, if anything, can be done?

Current efforts are focused on improving our solar weather forecasting capabilities, with a number of space projects dedicated to bringing in more detailed solar data. But true resilience is likely to come in maintaining good power reserves, be that in battery or other “potential energy” form. Society needs to be equipped with the knowledge to get by without power for extended periods of time. Think no-deal Brexit planning to the power of 1,000.

In the meantime, we can only hope such events remain infrequent. Worryingly, the last truly severe solar event, known as the Carrington Event — which saw the Aurora borealis appear as far south as Colombia — occurred in 1859. It caused havoc with the world’s fledgling telegraph systems even then.

That may imply we’re more than overdue for another big storm.

Building Cooperation in an Unsettled World

While the changing nature of global power may tempt some actors to seek advantage through confrontation, the expanding field of stakeholders offers the possibility of a course correction. With the geopolitics of the new era currently in flux, there is still an opportunity to steer the world toward cooperation and away from potentially damaging competition.

Børge Brende

bbrende2_Photographer is my lifeGetty Images_globecitydataconnections


DAVOS – The world is at a turning point, with power shifting and dispersing in ways that signal the emergence of a new multipolar era. In the resulting turbulent global environment, opportunities to compete or cooperate are increasing across several domains. In areas such as the economy, technology, and the environment, the question is whether parties will seek progress toward common objectives or strategic advantages over competitors.

For much of the post-Cold-War era, issues like trade, scientific research, and climate change were largely insulated from considerations of global competition. For example, the US and Chinese economies prospered together for 20 years, boosting market and investment opportunities for others through an open global system of finance and trade.

Similarly, the Internet boom of the early part of this century was made possible by a common and easily accessible platform that stood largely apart from national rivalries. As a result, the number of people worldwide using the Internet increased exponentially, from just over 400 million in 2000 to approximately two billion in 2010.

And even during the Cold War, governments and other actors managed to set aside strategic competition in order to address global issues such as the environment. Most notably, the widening hole in the ozone layer spurred collective climate action. Beginning with the 1987 Montreal Protocol, and over the course of subsequent decades, states reduced their use of chlorofluorocarbons to the point that the atmosphere is now expected to recover.

Today, however, issues once marked by partnership now risk becoming frontlines of strife.

Global economic growth is expected to weaken in the near term – a situation made worse by the fact that trade is being used as an instrument to pursue geopolitical advantage rather than joint prosperity. Moreover, unlike the depletion of the ozone layer, the melting of the Arctic ice cap has not served as a clarion call for more ambitious climate action.

Instead, states see an opening to compete for the natural resources and trade routes opening in the far north. And as for technology, the benefit of a common global communications platform is now at risk, owing to the possibility of “decoupled” US and Chinese communications systems operating on separate 5G networks.

But these developments do not necessarily mean that we should resign ourselves to a period of geopolitical competition rather than cooperation. The expanding nature of geopolitics – with power dynamics operating across new domains – also means that new actors are exerting influence. As a result, a diverse set of parties can shape the course of international relations.

For starters, rising and mid-size powers are responding to the possibility of a fractured global order by reasserting the need for multilateralism. France and Germany are working with other like-minded countries to forge an Alliance for Multilateralism, which aims to boost international cooperation in areas such as digitalization and climate change. In Africa, states are strengthening economic ties through the African Continental Free Trade Area Agreement, which will bring together 54 African Union member states and encompass over $2 trillion of GDP.

In Southeast Asia, meanwhile, ASEAN member states are taking steps to strengthen regional partnerships and integration, and intend to sign the Regional Comprehensive Economic Partnership later this year. This trade agreement – which also will include China, Japan, South Korea, Australia, and New Zealand – will cover an estimated 45% of the world’s population and create the world’s largest trading bloc.

Non-state actors are also in a position to exert increasing influence. Today, global businesses account for an important part of the world’s economic output, and private-sector leaders are increasingly committing themselves to looking beyond short-term profit. Last year, for example, 87 large companies announced that they would work to help limit global warming to 1.5°C. And many CEOs are speaking out about the potential dangers of a technological “cold war” between the United States and China, or the decoupling of the two countries’ economies.

While the changing nature of global power may tempt some actors to seek advantage through confrontation, the expanding field of stakeholders offers the possibility of a course correction.

With the geopolitics of the new era currently in flux, there is still an opportunity to steer the world toward cooperation and away from potentially damaging competition.


Børge Brende, President of the World Economic Forum, is an author of the new report Shaping a Multiconceptual World.

Cash, Plastic or Hand? Amazon Envisions Paying With a Wave

Tech giant plans terminals to let consumers link credit card information to their hands

By Anna Maria Andriotis


      Emil Lendof / The Wall Street Journal


Amazon.com Inc. AMZN +0.03%▲ wants to make your hand your credit card.

The tech giant is creating checkout terminals that could be placed in bricks-and-mortar stores and allow shoppers to link their card information to their hands, according to people familiar with the matter. They could then pay for purchases with their palms, without having to pull out a card or phone.

The company plans to pitch the terminals to coffee shops, fast-food restaurants and other merchants that do lots of repeat business with their customers, according to some of the people. Amazon declined to comment.

Amazon, like other tech companies, is trying to further integrate itself into consumers’ financial lives, leaving banks and card networks on edge. Apple Inc. AAPL +0.33%▲ introduced a credit card last year, and Google is rolling out checking accounts. If the Amazon terminals succeed, they could leapfrog mobile wallets such as Apple Pay while expanding Amazon’s already-extensive access to consumer data.

Amazon’s projects are closely watched both by tech and financial companies, which are increasingly colliding in payments. Amazon has been experimenting with payments at its Amazon Go stores, where customers can walk out without stopping to pay. It has also been building out Amazon Pay, a digital wallet that consumers can use to make payments at online merchants not owned by Amazon. Chief Executive Jeff Bezos has stressed the importance of financial services and payments to some senior executives, The Wall Street Journal previously reported.

The plans for terminals are in early stages. Amazon recently began working with Visa Inc.to test transactions on the terminals and is in discussions with Mastercard Inc.,according to some of the people.



Amazon CEO Jeff Bezos has stressed the importance of financial services. Photo: michael reynolds/Shutterstock 


Amazon has discussed the project with card issuers. JPMorgan Chase& Co., Wells Fargo& Co. and Synchrony Financialhave expressed interest in enabling consumers’ card accounts to work with these terminals, according to some of the people.

Card companies are trying to figure out whether tech giants such as Amazon intend to be collaborators or competitors, though some believe it is safer to participate in big tech’s payments ambitions than risk being left out. Amazon, for its part, wants the card companies’ expertise in safeguarding consumers’ card accounts. 
Still, Amazon will have to allay the concerns of card issuers and networks, including how the terminals would detect fraud. The company will also have to win over customers wary of providing even more personal information and navigate a climate in which regulators are increasingly skeptical of big tech.
Amazon envisions that customers would first use the terminals to link their debit or credit card information to their hands, the people said. The company is weighing a few options for how to do so, one of the people said. For example, customers might insert cards into a terminal and then let the terminal scan their hands. From then on, they would only need to place a hand over the terminal to pay at a participating merchant.


Amazon recently filed a patent application for what it described as a “non-contact biometric identification system” that includes “a hand scanner that generates images of a user’s palm.”

Data that would pass through the terminals, including where consumers shopped and when, would be stored on Amazon’s cloud, according to some of the people. The company would like to integrate this data with consumers’ Amazon.com spending, those people said. That could give Amazon more leverage to charge higher prices to advertisers based on the idea they can better predict what customers are likely to buy.

The New York Post earlier reported that Amazon was testing a payments system that would let consumers use their hands to pay at Amazon’s Whole Foods chain.

Amazon has had limited success with another payments project pitching bricks-and-mortar merchants on accepting its Amazon Pay digital wallet. One roadblock: Stores didn’t want to remind their customers about Amazon and risk encouraging them to buy there instead. That could be a challenge with the new terminals as well.

In the near term, Amazon wants to nudge card issuers and networks to innovate along with it, according to people familiar with Amazon’s strategy. Some payments companies worry that in the long term, tech companies including Amazon could just cut them out.

Card companies have raised concerns about the potential for fraud with the terminals, including how to catch people who try to link their hands to a stolen card. Amazon has said it could blacklist people who use the system fraudulently, some of the people said. But that might not stop cheaters from making one-time purchases of electronics or other big-ticket items.

Card issuers are also asking how consumers would be able to add more than one account to their palms and how they would be able to choose between those cards when they pay.