Stumbling to Scarcity

By John Mauldin


In economic forecasting, reality is usually somewhere between the extremes. The best-case and worst-case rarely happen. That’s why, when they do happen, markets react so quickly to the “missed expectations.”

I saw this early in my career. Realizing we will “muddle through” most of our problems was immensely valuable and sometimes profitable. But as our problems grow in scale, I’ve had to change my attitude. Now I usually expect to “stumble through,” as we see more of those extremes, and more extreme reactions to them. We still make it, but with some bruised knees and painful scrapes.

Consider two views of the current US inflation outlook.

Some expect major economic growth as we subdue the coronavirus and stimulus spending moves through the economy. Prices will rise and generate significant inflation, due to both increased demand and supply chain disruption. 

That’s why the Fed maintains (and I agree) that we will likely see higher inflation but it will be transitory. Nine to 12 months from now, much of the supply/demand mismatch should be back in balance—at least in the US. Much of the world is far from that point.

Another view is that controlling the virus will simply send the economy back where it was in 2019, with low growth, low inflation, low interest rates, and already-excessive debt that is now far worse. People saw problems coming but thought they had time.

My view is somewhere in between those. I think we will probably have a few months of significantly higher inflation. It will fade but meanwhile hurt certain people and industries. It will be like one of those extremes causing bruised knees and volatile markets.

That means we must juggle two seemingly incompatible outlooks: We don’t need to fear generalized inflation, but localized inflation could be a significant problem just ahead. With some prices rising while others hold steady or even fall, there may be little change in the broad CPI and PCE benchmarks. You may not feel it personally, depending on your location, business, and so on. But it will be there.

Then we have to think about long-term changes. The trends that were underway in 2019 are still unfolding. Even as we put this horrible time behind us, the Great Reset of global debt is still coming—and probably sooner now because the debt is growing faster.

If we rationalize the debt, we will also have to rationalize the things the debt bought, especially in government spending. Think it can’t happen in a major country? Think 1993 in Canada and Sweden. Those were painful periods.

I hear some of you now: “But John, you’re Mr. Optimist! What are you saying?”

It’s all about the timing. We can be concerned or even pessimistic in the short term but long-range optimistic. That’s not inconsistent. Though, I’ll admit, it is a kind of fine distinction that is hard to make in the social media age. Today I’ll try anyway.

Meanwhile, the countdown to our Strategic Investment Conference 2021—again fully virtual for your safety and convenience—is ticking down. We now have 48 top-of-the-line presenters and panelists, including Howard Marks, co-chairman of Oaktree Capital... John Hussman, founder and president of Hussman Strategic Advisors... Ron Baron of the famous Baron Funds... Richard Fisher and Danielle DiMartino Booth, who used to work together at the Dallas Fed... Cathie Wood, venture capitalist extraordinaire… Joe Lonsdale who co-founded Palantir among other companies.. David Rubenstein… Ian Bremmer…

Doug Kass just wrote to his readers:

This might be the best conference ever... I mean it! Just gaze at the roster below!! …This is going to be super fun and what a roster of speakers! I can't wait to interview Byron Wien, the greatest strategist of all-time, and Gerry Jordan Jr., the smartest trader in the world.

Plastic Explosion

An inflationary economy is marked by widespread price shocks, often in products you don’t expect. And, less obviously, prices of other things may not rise, but they stop falling. We have all benefited from technology-driven lower prices for 30 years. It has been a deflationary/disinflationary positive environment of abundance. That trend is not going to stop during the decade, but simply slowing down for a year or so as we rebalance the supply chain will mean more inflation in some segments.

You know about more expensive energy, housing, food, labor, and healthcare. 

But here’s one you may have missed: plastics. 

And no, I’m not quoting Mr. McGuire giving his famous tip to a young Dustin Hoffman in The Graduate. Plastics really are hot.


Source: YouTube

Here’s a note from Bain’s Macro Trends Group (whose head, Karen Harris, is on the SIC agenda, by the way) that crossed my desk last week.

Plastic resins—the ubiquitous building blocks that are used to make the soda bottles we drink from, the fibers in our athletic clothing, the personal protective equipment that medical providers rely on, and the dashboards in our cars—are yet another input facing unexpected supply and price shocks due to the COVID-19 crisis. Over the last year, the prices of the two most common resin types, polypropylene and polyethylene, have increased by around 100% and 60%, respectively, in the US. In Europe, which has access to a broader range of suppliers, prices for the two resin types have increased by 20% and 5%.

Like many of the shortages we’ve seen recently, the resin shortages are due to the pandemic’s effects on both supply and demand Demand for resins did not decline as much as expected due to the virus because locked-down consumers started purchasing more consumer electronics and packaged food, milk, and juices. At the same time, the global supply of resins grew more slowly than expected, as cautious producers delayed new plant openings and opted to draw down inventories in the early months of the recovery rather than ramping up production. Unplanned production outages caused by hurricanes in the fall of 2020 and the winter storms across much of the US South in February further curtailed supply.

Plastic resin isn’t in everything we buy, but darn close. If its price doubles, other prices get pressured in turn. Often, it’s just in the packaging of something more valuable. Packaging can be changed But sometimes the product is plastic. Think of outdoor furniture, waste baskets, many automotive parts. They’re just pieces of plastic in different shapes and colors—and they’re getting more expensive.

This is exactly the kind of thing that will, if it persists, feed through to other prices. That may not happen; the Bain analysts think plastic resin prices will ease later this year. But it still has an effect in the meantime. 

Companies that need resin have to respond. They will find alternative materials, swallow the cost as lower profit margins, or raise selling prices. Competitive pressure may prevent the latter.

Another obvious example is lumber, up as much as 200% according to the NAHB. Part of the problem is a beetle which has been destroying trees for decades, plus forestry and lumber mills have faced lower labor availability and COVID-19 restrictions. 

Trucking costs have increased. But again, this should smooth out as we return to normal business activity.

Rising prices in key goods have a psychological effect, too. People wonder what prices will rise next. They may begin stockpiling or stop buying other goods to offset the higher cost. The impact is unpredictable, but quite real.

The inflation talk we hear right now doesn’t all emanate from Wall Street bond traders. Some of it is from real people and businesses seeing inflation firsthand. It may not last, but they’re not imagining it. 

They are thinking about how to “do without” items they once thought critical. 

That thinking, if it takes hold, leads nowhere good.

Abundance to Shortage

My friend, Gavekal co-founder Louis Gave, is a systematic thinker. He doesn’t simply say that A leads to B. He adeptly identifies the multiple components that combine to produce an economic or market effect. It is one of his trademark abilities (we will also hear from him at the SIC).

Recently Louis explained (Over My Shoulder members can read his full report here) why we may be moving from an age of abundance (my basic position) to an era of shortages. Obviously, not everything has been abundant, nor will everything become scarce. But the general trends matter.

I will try to summarize Louis’s vision. I don’t 100% agree, but he brings up critically important points. 

First, recognize what happened in recent decades.

  • Globalization created abundant labor. Or actually, the labor was already there; transportation and communications technology unlocked it, letting people in Asia “work” in the US and Europe without actually moving. Job automation is having a similar effect.
  • Energy became cheap and abundant thanks to the shale oil revolution, which put the nail in the coffin of the “peak oil” fantasy [which I have said was a silly idea for decades]. Recent advances in other energy sources—solar, wind, nuclear, hydrogen, etc.—amplify this trend. The same was true for other commodities.
  • Information flowed freely around the world, enabling rapid innovation and technological advances.

Abundant labor, energy, and information combined to generate the economy we’ve known since 1990 or so. 

Hence, it may be a problem that all three of these are now in the process of changing direction.

  • The COVID-19 pandemic, along with US-China trade tensions, is accelerating the re-localization of global supply chains. Technology was already doing this (hundreds of thousands of jobs have already come back from offshore) but the trend is accelerating. Louis argues labor is no longer in surplus, which leads to price (wage) pressure.
  • Fossil fuel prices are rising faster than “green” energy sources come online to replace them. Energy and food prices seem to be entering long-term uptrends. These are related because energy is necessary for growing and transporting food. The same is true for commodities generally, so it seems we will also lose the advantage of cheap, abundant natural resources.
  • Knowledge is ceasing to propagate as freely as it did a few years ago as companies try to maintain monopolies, public debate becomes more constrained, and governments see technology as a military advantage they must protect.

Louis concludes:

Setting aside the near-term data—whether year-on-year inflation figures, the growth of US money supply, the surge in the US budget deficit, or the growing US trade deficit—we face an important structural question. Do we still live in an age of abundance? If so, the environment will remain fundamentally disinflationary over the longer term. Or are we now entering an age of shortages?

Admittedly, there appears to be no shortage of capital in the world today; and central banks do not appear keen to engineer any such shortage. But beyond that, the “abundance versus shortage” equation might be changing in front of our eyes. In the coming decade, it is unlikely that knowledge will be shared as freely as in the past two decades. Labor is unlikely to be as plentiful as it was in the early years of the century. And, most visibly, a number of commodities are already showing telltale signs of shortages—you can’t find them.

I think the problems Louis brings up are very real. But like my view on inflation, I think they are “transitory.” Reshoring was already increasing. Over the next few years, I expect the reeducation and redeployment of unskilled labor to skilled jobs will become a major factor. Just as businesses in the early part of the last century took farm workers and made them factory workers, the same will happen all across the spectrum.

What does this mean for financial markets? The inflation vs. disinflation question is important but only scratches the surface. This is structural. The megatrends that enabled the economic growth we enjoyed for so long didn’t form overnight and won’t disappear overnight, either. But as they change, growth prospects in the traditional sense diminish. It’s not as simple as buying miners because gold will go up. Bigger things are happening.

Wage Inflation

I want to go deeper on Louis Gave’s labor point. He looks at China’s 2001 admission to the World Trade Organization as a key event. Companies moved jobs to places with lower-wage workers as a vast new supply of labor became available. 

This produced a flood of inexpensive goods from Asia to the West. In theory, the Western workers whose jobs were being moved overseas were going to be retrained for better things. That didn’t happen.

Moreover, low-wage countries that couldn’t compete with China became even more impoverished, leading many of their workers to seek work in Western countries, at wages high by their standards but a bargain for their Western employers. This affected the overall wage level, capping growth for other workers.

The chart below shows inflation-adjusted annual US wage growth since 2000, considering average hourly earnings and average weekly hours. That adjustment is important because sometimes fewer work hours can offset a higher hourly wage. 

You can see that until 2020, real wage growth only rarely touched 3% and didn’t stay there long. Often it was negative wage growth. By this measure, real wages rose a total (not annualized) of about 11% from 2000 to the end of 2019. 


Source: Advisor Perspectives


Keep in mind, CPI doesn’t necessarily reflect real-world living costs. As I’ve discussed, it underweights housing, for instance This “real” wage growth wasn’t as real as it appears for many workers. Wages were stagnant for many, perhaps most, blue-collar workers… for the better part of 20 years. Is it any wonder we saw discontent, populism, and resentment of immigrants?

By the way, that wage spike you see in 2020–2021 is largely a “compositional” effect showing the disproportionate 2021 job losses for low-wage workers. If you lay off millions of restaurant workers while keeping all the software engineers, average wages will rise even if nobody gets a raise.

But at a more basic level, this shouldn’t be surprising. Globalization increased the labor supply. Other things being equal, that should push wages lower, or at least keep them from rising, which is exactly what happened. Louis Gave points out that all this is now reversing. The COVID crisis showed producers that highly optimized global supply chains, built on lower-wage overseas labor, are inherently fragile. Manufacturers are looking more at their total cost of production versus just labor costs. A recent survey showed that 71% of those operating in China don’t plan to move jobs back to the US, which suggests 29% are at least thinking about it. That’s huge in real terms.

Meanwhile, policy changes are also raising the cost of labor: rising minimum wages in many countries, higher unemployment benefits, and so on. National security concerns are making governments hesitant about imports as well.

All that points to less abundant labor, which should raise wages. But how much is not yet clear. Also, some kinds of labor will be in higher supply than others.

How all this will shake out is unclear. If, going forward, we see even 2% real annual wage growth for middle-class workers, it will be a big turnaround from the last two decades. It would certainly mean some inflationary pressure, but I don’t think it would be Weimar Germany kind of inflation.

Some of today’s inflation hawks have short memories. Not so long ago, 3% annual CPI inflation was normal and expected. We had higher interest rates, yes. But that meant you could get a decent return on fixed income investments, and real GDP growth was often much better than we’ve seen lately. It wasn’t ideal, but it wasn’t hellish, either We got by.

Inflation may become a challenge ahead, and sometimes a big one, but we will stumble through. And the kind of technology breakthroughs I expect may well create enough new abundance to offset it after the initial transitory uptick.

Puerto Rican Opportunities, Thoughts on Taxes, SIC, and Airplanes

My business partners, Steve Blumenthal of CMG, Kevin Malone of Greenrock Research, and Dick Pfister of AlphaCore will all be here next weekend to visit local Puerto Rican business leaders and discuss opportunities here. There are just so many. I really think Puerto Rico is getting ready to boom. 

Reshoring, green energy, affordable housing, and pharmaceuticals. It’s all here… And I want to be part of it.

Seriously, look at the list of SIC speakers and tell me there has ever been a better conference anywhere in terms of speakers. Certainly not for the price. Then sign up and make a date to be with me. It is just a little over one week from now and I am truly pumped over the entire thing.

I’ve been asked in a few media interviews for my thoughts on the Biden tax proposal. It will apparently (though we don’t have full details yet) raise capital gains rates for top-bracket taxpayers. 

If that’s the plan, I give it four thumbs down. 

Basic macro 101: You don’t raise taxes in a nascent recovery. Just Not Done. 

It would spark recession and the mere threat will have implications. 

Fortunately, I don’t think it would pass as presently described and probably wouldn’t even get through the House. 

But the simple proposal, even as an opening gambit, is wildly offsides.

After SIC, I will start planning to travel somewhat. It now looks like Dallas may be my first stop rather than Florida. I want to get to New York City, and Maine in August for the annual fishing trip. 

I would like to visit NYC/Washington/the East Coast every 4 to 6 weeks. 

I miss it, the friends and the dinners, and the opportunities to meet clients and investors

With that, let me hit the send button and wish you a great week. Follow me on Twitter @JohnFMauldin.

Your beyond excited about the SIC starting in 10 days analyst,



John Mauldin
Co-Founder, Mauldin Economics

Covid-19 vaccines

With millions vaccinated, rare side-effects of jabs are emerging

The challenge is to sort them from the medical emergencies that happen every day


CHRIS WHITTY, England’s chief medical officer, vividly recalls a nerve-racking moment on December 8th 2020. 

That was the day when England became the first country to roll out a covid-19 vaccine, a jab developed by Pfizer and BioNTech. 

Near midnight on vaccination day one “We were discussing it and just thinking ‘What are we dealing with here? 

These are small numbers and we’ve already had several dangerous near misses’,” said Dr Whitty in a recent talk at the Royal Society of Medicine. 

In some people, it had turned out, the vaccine sets off anaphylaxis, a life-threatening allergic reaction. 

But this is rare. It occurred just once among the 22,000 or so people vaccinated in the trial, which could have been by chance. 

Now, with hundreds of millions vaccinated, the rate at which it occurs is clearer: five per million.

Fortunately, this side-effect is not only extremely rare but shows up soon after the jab. 

And treatment for it exists. 

Everyone who receives the Pfizer vaccine is now asked to stick around for 15 minutes, just in case. 

There have been no deaths from anaphylaxis related to the vaccine.

As millions of jabs of various covid-19 vaccines are administered every day, such rare adverse reactions will inevitably emerge. 

On April 7th both Britain’s health officials and the European Medicines Agency (EMA), which regulates drugs in the European Union, said there is strong evidence that AstraZeneca’s covid-19 vaccine may be linked with very rare blood clots, often in the brain or the abdomen. 

The EMA experts reached their conclusion based on a review of 86 reported cases, 18 of which were fatal. 

Britain’s experts reached the same conclusion from data on 79 cases, 19 of which were fatal. 

Both the EMA and Britain’s drug regulator concluded that the vaccine’s benefits outweigh the potential risk of the clots. 

But Britain’s officials, armed as usual with some nifty charts for their televised briefing, said that for people under 30 the risks and benefits from the vaccine were “finely balanced”, so a different jab may be preferable.

The investigation of the suspected clots from the AstraZeneca jab has been a prime example of the challenge of sorting the signal of a vaccine’s side-effects from the cacophony of medical emergencies that happen to millions of people every day.

Vaccine-safety experts have two ways to untangle whether a rare medical problem is caused by a vaccine, says Kathryn Edwards of the Vanderbilt University School of Medicine, in Nashville, Tennessee. 

They can compare its rate in vaccinated people against the “background” rates of it that are observed in the unvaccinated. 

And they can look for unusual features of the medical condition being investigated.

The first signals emerged in late February, when doctors in several European countries noticed clusters of blood clots in people recently given the AstraZeneca jab, some of whom died. 

Most were women under 60, which was not terribly surprising because many EU countries were, at first, not convinced that the jab worked in the elderly and used it largely for essential workers, such as nurses, teachers and social-care workers—professions in which most employees are women.

The EMA’s data as of March 22nd suggested that the rate of brain clots in people under the age of 60 who had had Astra­Zeneca’s vaccine was one in 100,000—higher than would be expected normally. 

Precisely how much higher, though, is hard to tell. The rates of such rare and difficult-to-diagnose conditions vary a lot by country, age and sex. 

Estimates of the incidence of such brain clots have ranged from 0.22 to 1.57 cases per 100,000 people per year, and they are more common in younger people and women.

As doctors began to look more closely, something curious emerged. 

Many patients with suspected clots from the vaccine had unusually low levels of platelets. 

These are fragments of special precursor cells that float in the blood. 

Their job is to form blood clots (they rush to the site of a cut or other bleeding). 

Low platelet levels therefore usually result in uncontrolled bleeding, not clots.

With this new information to hand, Britain’s medical regulators searched their data on vaccinated people for the unusual tandem of clots and low platelet counts. 

They found four cases per million people vaccinated, a rate several times lower than in the EU. 

One explanation is that Britain, unlike the rest of Europe, had used the jab primarily in older people. 

The rate at which the clots occurred in Britain declined steadily with age. 

Importantly, Britain’s experts found that the clots occurred as much in men as they did in women.

This combination of blood clots and low platelet counts is something that doctors know how to diagnose and treat, says Jean Marie Connors, a haematologist at Brigham and Women’s Hospital, in Boston. 

It resembles a condition seen in some people who are given heparin, a drug used widely to treat blood clots. 

For unknown reasons, some people develop an immune reaction to heparin, which results in blood clotting so profound that it depletes their platelets. 

The same reaction appears to be provoked by the vaccine.

Medical societies in several countries have already issued guidelines to doctors on how to spot and treat this rare reaction to the AstraZeneca vaccine. 

With vigilance and appropriate care, the extremely rare deaths that may result from it will become even rarer.

Johnson & Johnson does DIY to solve vaccine woes

Drugmaker joins growing group using vertical integration to address bottlenecks and resilience

Brooke Masters 

© Ellie Foreman-Peck


If you want something done right, do it yourself. 

Johnson & Johnson put that adage into practice over the weekend, as it took over a supplier’s factory that makes a key ingredient for its coronavirus vaccine.

The American drugmaker said it was “assuming full responsibility” for the Baltimore plant and would be adding specialists in “manufacturing, quality and technical operations”. 

J&J had good reason to elbow aside Emergent BioSolutions. 

Workers had spoiled 15m doses of J&J’s vaccine by accidentally mixing its ingredients with those for the Oxford/AstraZeneca jab.

The action comes at a time when other companies are also moving towards vertical integration to give them control over everything from raw materials to interaction with retail customers. 

Once dismissed as outdated, the strategy is getting a fresh look amid shortages of key parts and materials, and pressure on companies to act as good corporate citizens.

The 19th-century steel magnate Andrew Carnegie helped pioneer industrial vertical integration. 

He built steel mills, then purchased coke fields and iron ore deposits and the railroads and ships needed to supply them. It made him one of the world’s richest men.

But doing everything in-house is capital intensive and requires wide-ranging expertise. More recently, global companies have sought cheaper raw materials and labour abroad, and relied on local partners. 

Cost-conscious executives saw advantages to outsourcing parts of the production process. 

Specialist suppliers developed efficiencies, orders could be increased or shrunk on demand and, unlike employees, suppliers did not have to be paid immediately, effectively providing a form of short-term financing. 

The world’s largest companies have thousands of suppliers: Airbus says it works with more than 12,000; Nestlé says it has 165,000.

Pioneering companies often opt for vertical integration to give them a sustainable edge. Electric carmaker Tesla produces most of its parts in-house. 

Its giant Nevada gigafactory gives it capacity to grow even as competitors struggle to source enough batteries. 

Amazon built outward from online book sales into logistics and cloud services. But a vertical structure has also helped Ukrainian poultry group MHP achieve higher margins than UK rival Boparan.

Now a squeeze on computer microchips, which has hobbled the car industry, and shortages of medical equipment and vaccine ingredients, have led other groups to rethink. 

Many are reconsidering supply chains that relied heavily on one country or region to reduce their vulnerability to shipping bottlenecks, geopolitics and disease.

Further pressure comes from activists and a new law in Germany which seeks to hold companies responsible for human rights and sustainability in their supply chains. 

Nike and H&M, among others, have been caught between western demands that they criticise forced labour in Xinjiang and Chinese boycotts over those statements.

Meanwhile, many companies are insisting on “virtual integration”, often relying on technology to share information about suppliers’ work processes and inventories. 

This has led some companies to cut ties with suppliers who fail to provide the necessary transparency. 

The UK’s Boohoo did so last month after coming under fire for alleged mistreatment of garment workers.

In key areas, some groups opt to set up joint ventures, as General Motors did with LG Energy Solutions to build a $2.3bn battery plant in Ohio. 

More innovative companies go further: Amazon Web Services is designing customised chips, and Tesla has said the company will not just design and build batteries but emulate Carnegie by buying and processing raw lithium.

To make vertical integration work, companies should focus on areas with significant intellectual property where suppliers are hard to find. 

“The places where you have the most risk are capacity constrained for the whole market and not substitutable. 

If you make dog food, you might think dogs prefer chicken but you can use pork. 

But you can’t make an electric car without a battery,” says Daniel Swan, who heads McKinsey’s supply chain work.

The advantages of tighter integration need to be weighed against the capital cost, the challenge of operating a different kind of company and the potential for legal trouble. 

This is particularly true when the supplier involved has other customers — and most do. 

“Companies considering buying a supplier should be asked: ‘Do you have the expertise to sell what they sell and would your competitors be willing to buy from a supplier owned by you?’” says Bindiya Vakil, head of Resilinc, a supply chain intelligence group.

Last week, the US Federal Trade Commission sued to block biotech group Illumina’s $7bn purchase of cancer screening start-up Grail. 

Grail, which was founded by the larger company, uses genetic sequencing machines made by Illumina, but so do other companies. 

The FTC argues that full ownership could tempt Illumina to raise prices for Grail’s rivals or starve them of supplies.

J&J does not have these problems in Baltimore. 

It took over the plant at the request of the US government, which also insisted that AstraZeneca move its manufacturing to another plant to avoid future contamination risks. 

Other companies will have to tread more carefully. 

Still, the rewards for selective integration could be substantial. 

China as a Third World Country

By: George Friedman


There is much discussion about the surging Chinese economy and the expanding international influence of China. 

There is no question that China’s economy has consistently expanded in the last 40 years, since the death of Mao Zedong. 

But Mao had created an extraordinarily poor China, based on ideology and the desire to eliminate the power of the old economic elite that was concentrated along the coast. 

Mao feared them as a threat to the revolution. 

In fact, he feared the bourgeois tendency toward wealth and comfort as a challenge to the revolution. 

He throttled the Chinese economy, and as a result, virtually any rational behavior by Chinese rulers would generate dramatic growth. 

China, with a vast potential workforce and a basically sophisticated culture, inevitably surged by shedding the malevolent and strange grip of Mao.

Forty years later, under a reasonably rational political structure, China has surged to being one of the largest economies in the world, second only to the United States. 

The gap between the U.S. and China is still substantial, with China’s gross domestic product at only 70 percent of the United States'. 

This is of course much narrower than 40 or even 20 years ago. 

Still, it is a substantial gulf. But GDP represents the aggregate production of a nation, and from an aggregated point of view, China’s $14 trillion economy is a miracle.

But it is simply not the miracle it seems to be. 

One measure of an economy among many is GDP, the economy as a whole. 

Another way to look at an economy is per capita GDP, the aggregated divided by the population. 

This gives a sense, imperfect but useful, of how Chinese citizens are faring compared to citizens of other countries. 

Looking at the economy as a whole, China is impressive. 

In per capita GDP, it is another matter.

There are two ways to measure such things. 

One is nominal GDP, which is measured against the U.S. dollar, the world’s reserve currency. 

The other way to measure is purchasing power parity (PPP). 

This looks at the amount of housing or food that can be purchased for a fixed amount of money. 

On the surface this is the best way, but it suffers from two defects.

One is that in a country as vast as the U.S. or China, the cost of housing or other commodities varies dramatically. 

Finding a single value for housing – and the myriad other data points – that includes San Francisco and Little Rock, Arkansas, can be done, if you accept that you will be way off lots of times In addition, these are obviously manipulated for political reasons. 

Still, nominal GDP and PPP together gives you a good sense of the reality. 

In per capita nominal GDP, China is ranked 59 in the world, behind Costa Rica, Seychelles and the Maldives. 

In PPP terms, China is ranked 73, immediately behind Guyana and Equatorial Guinea.

By comparison, the United States ranks fifth nominally, behind Luxembourg, Switzerland, Ireland and Norway. 

The U.S. is seventh in PPP terms. 

Per capita GDP tends to be highest in relatively small, socially and ethnically homogenous countries, built around finance or a single high-value commodity. 

The U.S. is large and socially and ethnically diverse, with a vastly diverse economy. 

Under the circumstances, ranking fifth in the world is a significant achievement.

China’s rankings of 59 and 73, and the countries it ranks alongside, give you a very different picture of China’s status. 

On an aggregate basis, it is bested only by the United States. 

On a per capita basis, it ranks with much poorer Third World countries. 

So there are at least two ways to look at China: as a world-class economic power and as a Third World country.

It is possible to be both. 

When we aggregate China’s wealth, it has the ability to shape parts of the global economy as well as build a significant military capability, but when it aggregates economic value, it can do so only by transferring wealth to some sectors of society and away from other sectors. 

In other words, those who benefit from China’s strategy control and consume much greater wealth than the average GDP. 

By extension, those not part of this group possess a substantially smaller share. 

Put in comparative terms, the wealthiest Chinese enjoy a status on par with the wealthiest Americans; most others live worse than someone in Guyana or Equatorial Guinea.


All countries have inequality. 

It can sometimes have no effect, it can at other times destabilize the country. 

China has surged by creating a vast and significant economy. 

The majority of society not part of the coastal elite that manages international trade, banking and investment, or that is part of the military-industrial structure, live lives at least comparable to their equivalents in the United States. 

The large majority in the interior of the country lead lives on the order of Equatorial Guinea. 

Few Americans live lives on that order, although undoubtedly some can be found.

Per capita GDP provides an unreal number. 

But it does allow you to see how a nation compares with its peers. 

But then you must imagine the degree of inequality required to maintain the aggregate GDP and the manner in which wealth concentrates, and then consider the consequences of living well below the per capita income. 

In the case of China, it creates a vast but sometimes hard to see mass living like the Third World. 

In the U.S., also filled with inequality, the excluded still live lives in the context of Euro-American expectations. 

With exceptions, they do not live below the lives of those in Equatorial Guinea.

Aggregated GDP concentrated for high-tech or finance can have significant power in the world. 

The risk is social unrest by those excluded. 

It should be remembered that when Mao failed in an uprising in Shanghai, he took the Long March to the interior to raise a peasant army from those excluded from the wealth accumulating among some engaged in international trade along the coast, and he used that army to overthrow the regime they blamed for their misery. 

Xi Jinping of course knows the story well, and the crackdown on some of the wealthiest in China, done very visibly, is intended I think to demonstrate the Chinese Communist Party’s commitment to the poor. 

Whether he can do more of this without damaging the machine that created his country’s aggregate GDP is the question. 

I may be wrong in my speculation on the nature of his acts, but the fact is that the status of China, by any measure, has bred a wealth equal to the best in the world, and a poverty equal to the worst.

Rebuilding Social Trust in Post-COVID America

Lack of trust has been a critical barrier to US economic policy in recent years, because the solutions to the country's main problems all require some degree of redistribution. But Americans' shared sacrifices during the pandemic have created a unique opportunity to make much-needed progress.

Nancy Qian


CHICAGO – At first glance, the coronavirus pandemic has deepened economic divisions within the United States. 

It has magnified income and social inequality, and highlighted many longstanding systemic problems.

For example, women are more adversely affected than men. 

Children from poor households are less able to adapt to virtual schooling than those from wealthier families. 

Experts think that domestic violence and child abuse have risen rapidly during the pandemic, but much of the increase has gone unreported because of the reduction in monitoring due to school closures. 

Lower-income individuals face higher health risks because many of the factors that worsen COVID-19 consequences are negatively associated with income.

But, despite these painful and unevenly distributed costs, could America’s trial by fire during the pandemic help to restore the mutual trust needed to improve the economic well-being of all Americans in the long run?

Trust, by which economists mean a person’s confidence in the honesty and integrity of someone they don’t personally know, is an essential component of a successful economy. 

It is also often overlooked.

To trust in an economic sense is to believe that the other person is not out to take advantage of you. 

To lack trust is to feel that you must fight for the maximum share of the pie at every turn. 

Trust makes policy compromises possible, because all parties understand that the gains will be shared over time, even if not everyone benefits at the moment the agreement is reached. 

As with a healthy personal relationship, people can take turns getting what they want, because they know there will be many future interactions requiring compromise, so that things will even out in the long run.

Moreover, empirical evidence shows that trust explains a substantial part of the differences in economic growth across countries, and increases political stability during economic recessions. 

The ability to cooperate improves outcomes for everyone.

Surveysshow that, among European countries or others whose populations are largely descended from Europeans, Scandinavian countries have the highest levels of trust, with over 70% of the population saying that they trust people they don’t personally know. 

Brazil and North Macedonia have the lowest levels of trust, at around 7% and 13%, respectively.

Trust levels within the US are midway between those in Northern and Eastern Europe, with 41% of Americans saying that they trust people they don’t know. 

Given the empirical evidence that Americans’ mistrust is likely rooted in historical discrimination, it is not altogether surprising that the US has lower levels of trust than Northern Europe. 

Nor is it surprising that US political debate has become increasingly divisive, in part because media organizations have found that stoking anger is more profitable than nurturing compromise.

Lack of trust has been a critical barrier to US economic policy in recent years, because the solutions to the country’s main problems all require some degree of redistribution. 

Providing better opportunities for underrepresented minorities and women through policies such as affirmative action takes away opportunities from other groups. 

Likewise, protecting US manufacturing and agricultural jobs can raise prices – the equivalent of a tax on American consumers.

To break the policy impasse, voters must be willing to set aside some of their own immediate self-interest. 

They are more likely to do this if they trust that their dispensation will be reciprocated. 

People build trust by working toward a common goal, and it increases with social and economic cooperation – especially if the activity generates value for other members of society.

This is exactly what has happened during the pandemic. 

The restrictions and economic costs entailed by the US national shutdown are the prices that young and healthy Americans are paying to protect high-risk individuals. 

And unlike in many other countries, a large number of restrictions were ultimately self-enforced and voluntary.

In the US, as opposed to the United Kingdom and European Union countries, no one is fined for not wearing a mask or monitored to ensure compliance with a quarantine. 

This, of course, has obvious downsides. 

The lack of enforcement and a coordinated response contributed to the third-highest infection rate and twelfth-highest death rate of any country in the world. 

But there is also an important upside: people’s behavior reveals their willingness to contribute to public welfare, and not just their fear of penalties for non-compliance.

Low-risk individuals adhere to COVID-19 restrictions because they want to, and believe that doing so will help to keep others safe as well as themselves. 

During the pandemic, the healthy majority has paid a high price to protect a vulnerable minority. 

Because federal and state governments did not coerce compliance, we can say that people paid it willingly (although perhaps not happily). 

The effort was not uniform and not everyone followed the same precautions. 

But, ultimately, tens of millions curtailed their own freedom and quality of life for over a year. 

This costly effort is notable, given widespread fears that America is currently being undermined by populism and self-interest.

It would be a shame if Americans lose sight of this hard-earned silver lining in their assessment of the pandemic. 

Trust is also transmitted intergenerationally. Parents should remind their children, and teachers should educate their students, about the sacrifices made by millions to keep strangers safe. 

The US now has a unique opportunity to bolster trust, solidarity, and cooperation – and thus to confront the economic challenges ahead.


Nancy Qian is Professor of Managerial Economics & Decision Sciences at Northwestern University's Kellogg School of Management and Director of China Lab.