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The Math of the One Big Beautiful Bill

Mark G. Sheppard
June 29, 2025

Passing H.R. 1, the One Big Beautiful Bill, and clearing the vote threshold remains difficult for conservatives because the exact number of votes needed is somewhat challenged and even under lower threshold requirements the conservative coalition face opposing pressures. While the political future of the bill remains outstanding, evaluating the policy impact is also difficult as many of the analyses about the cost vary considerably, particularly the gap in deficit estimates, which mostly stems from different growth assumptions—because small tweaks to underlying economic parameters can swing the cost projections dramatically.

Congressional Republicans have advanced a tax bill to the U.S. Senate, analysis by the Congressional Budget Office would rank as the most regressive tax reform in decades, at a time when the overall economy seems fairly weak, internal congressional politics appear rather thin, and most Americans remain deeply concerned about an already regressive economy. Congressional cosponsors argue the bill informs long-run growth and reduces the deficit. As the Senate considers the One Big Beautiful Bill, widely criticized by economists as legislation that would disproportionately benefit upper-incomes at the expense of low and moderate income families. The Senate Republican majority remains tentative, with H.R. 1 advancing under budget-reconciliation rules, the bill can pass with a simple majority, with very little room for dissent.

Supporters argue that H.R. 1 increases long-run GDP and recoups significant static cost, delivers a marginal after-tax income bump to every quintile in the first two years, raising real wages through a lower corporate rate, spurs small-business investment via full expensing, and leaves debt-to-GDP slightly below the current-law path thanks to growth and back-loaded offsets. Opponents argue the bill would increase the deficit and shift the tax burden to moderate income households, proponents argue that the legislation would lower the deficit by reducing wasteful spending, that disagreement largely centers on different growth projections. While supporters and critics agree on the upfront cost of the bill, the numerical disagreement regarding the deficit relies on opposing GDP-growth assumptions, which leads supporters to project a deficit drop and opponents to predict a deficit increase.

The One Big Beautiful Bill has a target date of July 4th for a floor vote, though ongoing negotiations make the exact date unclear. With no Byrd-rule ruling yet, H.R. 1 remains a reconciliation bill needing only a simple majority to pass, though any part the Parliamentarian later flags as extraneous must be dropped or win a 60-vote waiver. Assuming the bill is advanced in its present form, with the current senate composition of 53-47, Republicans can only afford to lose 4 votes which may be tenuous considering that some members have already voiced concern, to pass leadership must satisfy both moderates and fiscal conservatives.

Following another month of somewhat negligible jobs data the Business Cycle Dating committee at the National Bureau of Economic Research, the group tasked with designating a recession, has not scheduled a formal meeting, which signals a cautionary reading of any potential downturn. Recent jobs data have delayed any official recessionary designations. While Americans still rank economic issues as the most important policy priority, survey data shows that most households have long concluded the economy is “bad.”

Long-running structural problems—stagnant real wages for most workers, regionally uneven job growth, and widening household-wealth gaps—have left millions to conclude that the benefits of any expansion never reached moderate-income households. Those weaknesses are visible in under-employment data, the U-6 rate, and in the stubbornly low labor-force participation of prime-age men, both of which remain well below pre-pandemic peaks. Even with headline unemployment flat, those deeper measures suggest slack that traditional indicators can miss—yet they are precisely the conditions economic stabilizers should target.

In terms of policy, H.R. 1 moves in the opposite direction. Non-partisan analyses show the largest permanent tax reductions in the One Big Beautiful Bill accrue to the top quintile, while many low-income households see either marginal gains or, after temporary credits expire, net tax increases. Because the plan, in order to remain roughly budget neutral, also pares back Medicaid and trims refundable credits tied to work hours, the legislation risks tightening the very household budgets that first register downturns when hours are cut. In short, the distributional tilt of the legislation intersects uncomfortably with the labor-market asymmetries that research identifies as early-warning signals.

Turning-point analysis shows mounting uncertainty, under-employment rising and the yield curve deteriorating, even as the headline jobless rate stays low. Fiscal capacity is not the only concern; policy timing matters too. With forward-looking GDP and sentiment gauges drifting down and inflation expectations edging up, most forecasters recommend a neutral or mildly counter-cyclical stance—keeping dollars in the hands of consumers most likely to spend them. A regressive cut financed by deficit expansion offers limited near-term demand support while increasing long-term rollover risk; it may also leave Congress with less room to act if a recession materializes, because the easiest revenue levers will already have been pulled.

Taken together, the bill neither addresses the chronic fragilities in the labor market nor builds the automatic stabilizers that could cushion the next shock, right as researchers have become concerned about a downturn. The legislation might satisfy a political preference for lower top-line tax rates on upper-incomes, but the bill does so by exposing the economy’s still-vulnerable middle and lower tiers to greater volatility. Given the Senate’s paper-thin margin and the country’s equally thin patience for policies perceived as one-sided, the question is no longer whether H.R. 1 can pass, but whether it meaningfully advances the mandate voters set: an economy that feels fair, resilient, and broadly shared. Whether the bill meets voter expectations for a fair and resilient economy could hinge on how these competing forecasts play out.

The Math of the One Big Beautiful Bill2025-06-30T01:12:46+00:00

The Election That Economists Lost

Mark G. Sheppard
February 25, 2025

In October, prior to the election, The Economist, arguably the most popular economic weekly journal, published an article entitled “America’s economy is bigger and better than ever”, this basic sentiment of topline success was echoed by a number of institutions from the Federal Reserve to BlueChip, from the OECD to a survey of top economists, and more. There was broad agreement among economists that the economy was doing fairly well, which generally bodes well for a presidential re-election bid, however the incumbent party not only lost the election, but the incumbent president was pushed out of the general election over falling polling numbers, largely informed by rising economic discontent. The topline economic figures were somewhat at odds with how voters and consumers experienced the economy. Survey data showed affordability concerns, specifically the gap between wages and prices, were a top priority.

Economists, including almost all living Nobel laureates, broadly supported Kamala Harris in an election that Donald Trump won handedly. That academic support was largely informed by economic policy preferences, but also of a descriptive political model that simply undervalued how discontent voters were with the economy. In the lead up to the election, while affordability concerns remained paramount for many American voters, economists spent months praising topline figures such as GDP, unemployment, inflation, and other metrics. Election modelers discounted the degree to which the economic fundamentals would downweigh the polls, producing estimates that showed a much tighter race; And economists were reluctant to acknowledge the extent to which —and the parts of— the economy that would matter in the election.

Right before the election, noted political statistician Nate Silver sounded the alarm that concerns over the economy could be informative in the election, by posting preliminary regression results of inflation and a shift in the polls, which were pretty widely criticized by economists mostly on the grounds that the underlying methodology would otherwise fall below academic publishing standards. And while the economists were probably technically right in that pushback —so was the basic intuition in the regression. The economic fundamentals were deeply unfavorable for an incumbent re-election bid. Interestingly, calibrating the exact amount that the economy could and would politically matter has been done in the past, but election modelers seemed hesitant to include those parameters.

Election models rely primarily on polling aggregation, and while many models performed well enough, the main issue in the modeling was two-fold: firstly, polls were about as wrong as they normally are, and secondly, the economy mattered more than the models factored-in. For politicians, pollsters, and economists looking to make sense of this rightward shift, voters were fairly clear in communicating economic discontent. And though pollsters were basically right, political forecasters could have anticipated the shift if traditional economic indicators were built-in.

Though inflation received much of the consideration in the aftermath of the election, long-run wage trends are also poor, with almost half of Americans earn less than a livable wage. Collectively, rising cost and stagnate wages are the main components of the growing affordability crisis. Recent gains in wages have been highlighted by economists interested in supporting recent policy successes, but the long run trends are mostly flat, which matter more to voters. From the ballooning housing-to-income ratio to the rising credit card delinquency rates, there is simply no shortage of concerning indicators.  

As the new administration begins its second term, inflation remains stubborn, consumer confidence remains troubled, and the underlying affordability issues will likely linger. Political strategists and pundits have been struggling to make sense of the rising non-white block of new conservative voters, but frustration with an unaffordable economy explains the diversity shift in the crosstabs, as inflation affects voters of all groups. However, issue polling and various statewide proposition results show most people broadly agree with the progressive policies that economists are endorsing, but voters are still clearly disagreeing with the economists on the state of the economy. Put simply, from the perspective of voters, an improving economy that is ‘technically better than peer countries’ is not a “good economy.” Looking ahead, political forecasters should remember that the economy matters in elections, and what matters most is not the aggregate statistics but rather how people experience the economy; Economists should learn this lesson too.

The Election That Economists Lost2025-02-25T04:07:13+00:00

New York City Employment Recovery Complete, but Uneven across Industries

Khaled Eltokhy and James Orr
January 20, 2025

By the start of 2024 New York City employment had reached its pre-pandemic level of 4.7 million jobs, and more than 55,000 new jobs were added through November.  The city’s recovery from the significant pandemic-related disruptions defied some predictions though several city industries continue to face challenges.  In this post we look at the industries leading the recovery and expansion of jobs, including the traditionally strong Healthcare and Professional and Business Services industries, along with Finance.  We also look at industries where job counts have not yet recovered, including Retail Trade where the adverse effects of efforts to control the pandemic, as well as the increase in remote work, continue to have an impact.  We then point to a number of factors that could impact the growth of city employment this year.      

Employment Recovery in the Nation, New York State and New York City
New York was the epicenter of the Covid-19 pandemic.  In the space of a few months in early 2020 there was a staggering loss of life in New York City and the efforts to contain the spread of the virus lead to the loss of over 950,000 jobs—approximately 20% of overall city employment.  A significant number of deaths and job losses also occurred in other parts of the downstate area and upstate New York, as well as across the nation.  

Figure 1 traces out the downturn and recovery of jobs in the nation, New York State and New York City.  Nationally, the impact was substantial but less severe than that in the state or city.  It took the state and city about four years to regain their pre-pandemic employment levels.  


The recovery of employment has returned the unemployment rate in New York to roughly pre-pandemic levels.  Figure 2 below shows the sharp rise in rates at the onset of the pandemic and their subsequent gradual reduction in the nation and in New York State and City.  Unemployment rates in the city have ticked up recently and are now slightly above their year-ago levels.


Both the pandemic-related employment losses and the pattern of employment recovery have varied across industries.  In Figure 3, the Healthcare and Social Assistance industry is shown to have had a relatively mild employment downturn and one of the strongest recoveries.  The industry had been expanding prior to the pandemic and after some initial job losses employment continued to grow in part to meet the demand for pandemic-related services.  Jobs here continue to grow with a sizeable share of the job growth in the home health care segment of the industry.  Currently, the workforce is about 20 % larger than in early 2020. 

                                                       
Two office-using industries—Professional and Business Services and Finance and Insurance, which directly account for more than one million jobs in the city—saw relatively mild downturns and relatively rapid recoveries.  Unlike the personal services industries, many of the occupations here do not require a lot of face-to-face interactions which allows workers to work remotely.   Employment counts in the Professional and Business Services industry have only edged up recently while job counts in Finance and Insurance have seen a bit stronger growth.  In the securities sector, or Wall Street, employment declined only slightly with the onset of the pandemic and has held fairly steady since then.  Employment stability in this sector is critical: as of 2024, average annual incomes are approximately $470,000, and the sector generates over 15% of all earnings in the city.  

Both the Retail Trade and the Accommodation and Food Service industries saw large employment declines at the onset of the pandemic.  There is little substitute for face-to-face interactions here and the effective shutdown of the city to help prevent the spread of the virus took a huge toll.  Employment in the Accommodation and Food Service industry has seen fairly steady growth, though not yet sufficient to regain the lost jobs.  Employment in the Retail Trade industry continues flat to down.  Prior to the pandemic jobs in several segments of the industry were declining and the pandemic-related declines in foot traffic due to remote working and the lack of tourists further eroded employment.  The recovery has brought a return to employment in 
several sectors, such as grocery stores, but e-commerce trends appear to be a factor stunting the recovery in sectors such as department stores.

A comparison of average employment levels in the period September to November this year with the similar period in 2019 shows some interesting job developments in the city.  Job gains in the two transportation-related industries in Figure 4 below may not be at all surprising to residents and visitors.  


The air transportation industry in New York City now employs almost 3,000 more workers than it did prior to the pandemic.   The sector includes workers in airlines, airport operations, and airport enterprises, and passenger traffic at the region’s airports is up over its 2019 levels.  Couriers and Messengers also saw employment surpass 2019 job counts.  Workers here are engaged in delivering documents and packages and they may use bicycles, motor vehicles or public transportation.  Employment in a third industry, Building Construction, has not yet reached its pre-pandemic level.  This may be surprising to those out and about in the city as new construction and renovations certainly seem to be omnipresent.  

A Closer Look at Residents, Office Workers and Visitors
There are likely now fewer people in New York City on any given day than before the pandemic.  As the Covid-19 epidemic spread in New York City in early 2020, a number of residents opted to move out of the city.  The latest estimates, July 2023, show 8.26 million residents currently in the city, a decrease of about 546.000 since the 2020 Census estimate, with the decline driven largely by these early movers.  (These estimates exclude the increase in New York City’s shelter population in 2022 and 2023).  While the net flow of residents out of the city continues, it has returned to its pre-pandemic volume, similarly with net international migration to the city.  As a result, population losses have slowed considerably.  

While the number of office jobs in the city now roughly matches or exceeds pre-pandemic levels, working remotely is a common feature of many of these jobs.  One survey finds attendance in offices to be 72 percent of pre-pandemic levels and another measure similarly shows office visits are now about 80 percent of pre-pandemic levels.  On this measure, each office worker is now out of the office on average one additional day each week. One direct effect is reflected in the high office vacancy rates in Midtown and Downtown Manhattan, and fewer workers in offices has also had negative effects on activity in nearby restaurants and retail businesses.   

The figure below shows the city to still be a magnet for tourists.  


 After declining sharply during the pandemic, the number of both domestic and international tourists has rebounded. Spending by these visitors is crucial for multiple industries, particularly retail, and leisure and hospitality.  While hotel occupancy rates have improved significantly, the number of tourists visiting the city in 2024 is still below its pre-pandemic number.  The forecast has the number of tourists matching pre-pandemic levels this year.  

Looking Beyond the Recovery
Employment in New York City is expected to grow but at a somewhat slower pace over the next several years.  Even with this job growth, an ongoing issue is how many of the office workers will come into the city to work each day.  A recovery to pre-pandemic levels would help several sectors, particularly Retail Trade, and some major firms have called for a return to a five-day week.  However, a hybrid of home and office work appears to be a common office model.  

A number of national factors are likely to affect the jobs picture in 2025.  One is the potential impacts of the policies of the new administration.  There is not enough information now to evaluate their impact, but potential changes to immigration policy, tax policies, and the amount and composition of Federal spending will likely affect the trajectory of city employment.

Local issues will have an impact as well.  New York City just implemented a congestion pricing plan for the Manhattan Central Business District.  The goals of the plan include easing traffic and improving air quality and using the revenue to support public transportation.   The plan has been controversial and its costs and benefits will begin to play out this year.  

The city will also have to continue to address the issues surrounding the more than 200,000 asylum seekers who have arrived in New York City since April 2022.  Under its “right to shelter” mandate, the city must provide housing and basic services to those without homes. Currently, the city is providing shelter and services to approximately 65,000 asylum seekers.  A recent report shows the city recorded expenditures of $5.2 billion in FY 2023 and 2024.  Aside from the consideration of costs, it should also be noted that immigrants have historically always been a part of the New York City economy.  Immigrants currently make up 36 percent of city residents and 43 percent of the city’s workforce.   Analysts argue that new arrivals could help to bolster the city’s workforce and contribute to the economic recovery, and they urge the Federal government to do more to help the cities around the country that welcome new arrivals. 

 

New York City Employment Recovery Complete, but Uneven across Industries2025-01-21T00:06:11+00:00

The Transformation of the Diacritic U.S. Banking System and the Advent of the Dominant Financial Institutions

Fotis Siokis
June 24, 2024

Over the past forty years, the unique U.S. banking system has faced significant competitive challenges, in a rapidly changing technological environment, along with far-reaching regulatory reforms, ushering in an era of remarkable consolidation. In this post we outline the differences of the US Banking system compared to the other global banking systems, its transformation and how it evolved over the years.

The commercial banking system in the United States was distinct and complex when compared to the banking industry in many other industrialized countries. In one regard, it is distinguished by a fragmented system with a numerousness banking institutions; at its peak, in 1921, the United States had over 30,000 independent commercial banks. On the other hand, the hallmark of the US banking system is the so-called “dual banking system”, a co-existence of state and federal banking systems. The former was characterized by state chartering, established by state law and operates under state standards, while the latter was based on a federal bank charter established by federal law and oversights by a federal supervisor. The main reason for developing and maintaining such a system was the authority vested to the states to grant licenses and regulate the banking system. For most of the past years, the states perseveringly guarded this mandate and protected the instate banks from outside competition by prohibiting interstate and in some cases intrastate banking. Therefore, the exorbitant number of banks, with restricted authority to provide services in securities, insurance, and real estate-related financial service, were in essence one branch banks.

The decreasing number of banks

Historically, US banking regulations supported the existence of numerous small local/community independent banks. The vast majority of small banks were founded on the belief that they were essential to their community, farmers, and small companies, and that they could provide specialized and targeted goods to their customers, something larger banks could not. Despite the fact that most of the restrictions have been lifted on a continuous basis, since the 1980s, there are still over 4,100 insured commercial banks and over 580 insured savings institutions in existence in the United States. In contrast to the U.S. experience, most of the other countries tended to favor less but larger national institutions, like Canada’s where in 2023, had only 38 domestic banks, the Japanese economy with 163 banks (data 2019), while Germany has 261 commercial banks.

Table 1. Number of commercial banks in the United States.

Source: FDIC.

As shown in Table 1, the number of banks has decreased significantly since 1935, with unit banks reporting a 20fold drop. The opposite trend was observed in the number of branches.

Supervision

Similar to the duality concept, the banking system is supervised and protected by a numerous and intricate network of regulatory bodies. The primary players in the commercial banking system include national banks, state member banks, and state non-member banks as well as foreign banks that opened offices in the United States. In addition, there are other types of banks, such as savings banks and credit unions. Every bank is required to apply for a bank charter and is then governed by the chartering body. Most of the banks are subject to supervision by more than one regulatory body. If a bank is chartered on a state level then is supervised by the state authorities and if it is insured in terms of deposits (almost in all cases) is regulated by the Federal Deposit Insurance Company (FDIC). In addition if this bank becomes member of the Federal Reserve System then the major supervising body is the Federal Reserve. This structure becomes even more complex for the bank and Financial Holding Companies (having subsidiaries) that are subject to another layer of regulation at the parent level. Therefore, the regulatory agencies that supervise and oversees the operations of the banking system have the authority to issue cease-and-desist orders, revoke membership and other divestiture or termination activities include: 1) The Federal Reserve System which is the major supervising agency for the banks that are members of the Federal Reserve System and for the bank and financial holding companies. 2). The Office of the Comptroller of the Currency (OCC), the oldest of the federal bank regulatory agencies. An independent bureau within the U.S. Department of the Treasury that charters, regulates, and supervises all national banks, federal savings associations, and branches and agencies of foreign banks. In 2009, the OCC absorbed the Office of the Thrift Supervision (OTT) that supervised Thrift Banks like the Savings &Loans Banks. 3. State banking agencies. The state banks along with foreign branches bank should comply with state laws. 4. Other major regulatory bodies including, the Security and Exchange Commission (regulates institutions that engage in security and investment related activities), the Federal Trade Commission and the Federal Financial Institutions Examination Council.

Regulatory reforms

The banking system had its most severe collapse during the Great Depression. Between 1929 and 1933, around 10,000 banks failed. Aside from the consequences of the Great Depression, the primary reason of bank failures was increased competition among banks, which caused the majority of them to take unnecessary risks in order to survive. The intense competitiveness caused by large commercial banks entering the investment banking industry compelled Congress to pass the Glass-Steagall Act (1933), which required the official separation of commercial and investment banking and effectively precluded banks from underwriting corporate securities.

Table 2. Major Banking Regulations since 1927.

 Source: fdic.gov/resources/regulations/important-banking-laws/index.html

The next major banking crisis took place in the 1980s with the extraordinary upsurge in the number of bank failures. The Q regulation, which capped interest rates for deposits, expired in 1986 and as competition intensified, and significant steps were taken to de-regulate the banking industry, (Garn-St. Germain Act, 1982), a large number of banks failed, primarily in the savings and loan industry. The causes for these failures were a) extremely high interest rates, which forced institutions to pay higher deposit rates, b) regulatory changes that enabled them to diversify their investments into more profitable but riskier areas, and lastly c) a series of severe regional and sectoral recessions and consequently the national economic downturn. From 1984 to 1994, more than 1,600 FDIC-insured banks closed or bailed out, more than in any period since the establishment of federal deposit insurance back in the 1930s. (see figure 1).

Figure 1. Number of failed banks and their assets as a percentage of the total banking system assets, 1980-2022.

Source: FDIC

As a result, in 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act, allowing banks to operate nationally, but in 1999, the Gramm–Leach–Bliley Financial Services Modernization Act essentially repealed Glass–Steagall by allowing commercial bank holding companies to merge with other financial participants like investment banks, or insurance companies.

The severity of the 2008 subprime mortgage crisis impacted the sixth-largest bank, Washington Mutual, making it the largest bankruptcy in history with $ 307 billion in assets, while IndyMac’s failure in June 2008 was the most expensive bankruptcy that cost the FDIC $ 12 billion. Over the following five years, approximately 500 banks failed, leading to a total loss of $73 billion for the FDIC. The deposit insurance fund (DIF) fell to the lowest point in its history, a negative $20.9 billion on an accounting basis, by year-end 2009. It is noteworthy to mention that following the onset of the crisis, Goldman Sachs became one of the largest Bank Holding Companies.

Against this backdrop, Congress decided to tighten regulation with the complex Dodd-Frank Wall Street Reform and Consumer Protection Act enacted in 2010. The complexity of the Dodd-Frank Act (such as increased reporting requirements for relevant banks) increased compliance costs, probably relatively more for smaller banks than for larger banks. This was a major factor in the US banking system losing one-third of its remaining independent banks between 2008 and 2018.Finally, in 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act relaxed financial regulations imposed by Dodd-Frank and raised the threshold at which a bank would be considered “too big to fail” from $50 billion to $250 billion. The immediate ramifications were apparent with the failures of SVB (the second largest failure in the history) and other banks of noticeable significance.

The rise of the alternative Financial Institutions

Another significant distinction between the US banking system and the rest of the world is the prominence of the other non-banks financial institution participants in the market. The Glass-Steagall Act not only increased the number of community banks, but it also paved the way for the establishment of other types of financial institutions as alternate sources of capital for businesses. The forms include Insurance Companies, Pension Funds, Mutual Funds, Brokers and Dealers and other financial companies that have come to control large shares of the total assets in the financial markets. The enriched and much more developed financial environment stands in stark contrast to other world systems, like Germany’s where banks take the center stage in terms of financing of private enterprises.

Figure 2. Shares of assets of Financial Institutions, USA.

Source: FRED, Saint Louis, FED.

In terms of assets, the market share of the banking system compared to the other sources of funding is around 30%, with pension funds’ share coming second. (But we should point out that asset trends could not be a good indicator for market share and volume activity because banks are engaging in off-balance -sheet activities like line of credits for enterprises that are not included in total assets). As figure 2 shows, in March 2000, the Gramm-Leach-Bliley Act had halted the trend of declining banking market share, by allowing the banks to offer securities and insurance services, but only through the creation of financial holding companies. This action brought the U.S. banking institutions on par with other global banking institutions.

The Great Consolidation

As noted above, the number of banks, particularly community banks, which the Federal Reserve defines as banks with less than $10 billion in assets, has declined precipitously. Along with bank insolvencies, and largely due to deregulation, there has been a continuous consolidation through mergers and acquisitions. The largest wave of mergers occurred following the crisis among savings and loan associations (S&Ls), as the elimination of state-to-state banking restrictions encouraged larger banks to operate across wider geographical areas and thus grow in size. Almost two thirds of banking institutions have ceased to exist since early 1980 and with a shift in deposits to larger banks. In the 1990’s the average amount of deposits per bank was around $ 330 million, while now the average is over $ 1.3 billion.

Figure 3. Market shares in the banking system (in terms of assets).

Source: FDIC

Figure 3 depicts the distribution of banks by assets since 2003. The share of community banks, had decreased to less than 15% (assets under $10B), while the number of behemoth institutions with assets over $250 billion has surged from four to fourteen banks, bolstering their market share by threefold, to 57.7% at the end of 2023. Despite a dramatic fall in their numbers, community banks remain critical to small company financing, accounting for more than 30% of commercial real estate loans, 31% of agricultural loans, and 36% of loans to small firms.
In addition, within the largest banks, the total assets of the top four banking institutions have more than tripled since 2003, totaling over $9 trillion at end 2023 (figure 4).

Figure 4. Total Assets of the top four banks, (in $ billion, current prices).

Source: FDIC

Consolidation appears to be ongoing, particularly in the wake of the recent abrupt demises of banks and the exodus of numerous depositors from small banks, sheltering to “safe heavens” of the larger banks. However, the emergence of new technologies and the rise of fintech companies as key value drivers could drastically disrupt the banking landscape. The new provision called “banking-as-service” which allows a bank, or non-bank financial institution to enter into an agreement with a fintech to provide certain services and products, has the potential to spark further intense competition- not only among banks- and transform the financial service industry.

The Transformation of the Diacritic U.S. Banking System and the Advent of the Dominant Financial Institutions2025-12-16T22:29:45+00:00

New York’s Employment Recovery: Almost There but Virus Effects Linger, New Issues Emerge

Gillian Fuchs and James Orr
January 31, 2024

Nearly four years after the onset of Covid-19 how is employment in New York City faring? In this post we outline the pattern of recovery of employment in the City and show how employment in different industries is evolving. Employment has just about reached its pre-pandemic level. Leading the rebound has been the recovery of jobs in several established sources of growth including Professional and Business services and Healthcare, along with Finance. Job growth is still uneven, however, and the effects of the pandemic and the efforts to contain it linger, particularly in the city’s retail trade sector, where job weakness reflects the incomplete return to the city of office workers and tourists. The job recovery has also helped to push unemployment down to its pre-pandemic rate, although the city’s labor force, like the population, is now smaller. While our focus is on the city’s employment recovery from the pandemic, we also discuss the recent growth in asylum seekers in the city which is adding a new post-pandemic dimension to the fiscal outlook.

Downturn and Recovery in the Nation, New York State and New York City

The Covid-19 related job losses took place in the the space of several months in early 2020. New York City lost over 900,000 jobs, or about 20 % of its employment, and the state lost an equal share. As the epicenter of the virus the employment declines were significantly more severe than those of the nation. Figure 1 below traces out the downturn and recovery of employment and shows that the phases of the recovery in both the city and state mirror the nation: The initial sharp decline bottomed out in April 2020, turned around sharply and was followed by a fairly steady job growth through mid-2022, supported by a highly stimulative set of monetary and fiscal policies. The recovery then continued though at a slower pace since then, correlating with the shift to the higher interest rate environment. As of December of this year the city is just several thousand jobs short of its pre-pandemic peak. Given the depth of the downturn in the city, and also the devastating effect the virus had on the population, a return to the pre-pandemic level of employment is a milestone.

 

Figure 1. Total Employment: U.S., New York State and New York City

 

Note: January 2020= 100
Source: U.S. Bureau of Labor Statistics

 

The recovery of employment in the city has been led by several key industries: professional and business services, banking and securities, and healthcare. Together these industries employ over 2 million workers, about 45 % of all city jobs.

 

Figure 2. Total Employment in Selected Industries in New York City

Source: New York City Office of Management and Budget

 

The sharp downturn evident in total employment was not seen in these industries in large part because, except for healthcare, many of these workers had the option of continuing their employment from home or other remote location. During 2023, growth in professional and business services and banking and securities jobs was flat. However, the stability of the securities industry, or Wall Street, was crucial for the city due to its outsized contribution to activity, with more that 20 % of total earnings in the city directly generated by this sector. Healthcare workers largely remained in the city to address the increased demand for services related to the pandemic.

A more mixed picture is seen in the path of recovery of the accommodation and food service, retail trade and information industries reflecting both the impact of the pandemic and industry-specific developments.

 

Figure 3. Employment in Selected Industries in New York City

Note: January 2020= 100
Source: New York City Office of Management and Budget

 

Jobs in the accomodation and food service industry have roughly tracked those of the city as a whole but jobs in retail trade are still more than 10 % below their pre-pandemic peak. The lack of a full recovery in these industries, but particularly in retail trade, is associated with several lingering effects of the pandemic; namely, the loss of population, the decline in tourism and the fact that many office workers continue to work from home or a remote location. The chart below shows that the city’s population declined about 4% from April 2020 to 2021. A relatively large net out-migration of residents and slower net international in-migration were important factors. The decline in population was much more muted as of the last available data point, July 2022. Steep declines in tourists coming to the city and workers returning to their offices between 2020 and 2021 have been partially reversed, with tourism close to its previous level but office occupancy rates recovering more slowly.

 

Figure 4. Population, Tourism, and Office Occupancy in New York City

Sources: Population: https://bit.ly/423bozY
Tourism: https://bit.ly/426LRWr
Office occupancy: https://bit.ly/3StsjZn

 

Fewer residents, tourists and office workers in the city is bound to have an impact on spending and employment at the retail level where job counts are still down about 43,000. A recent report shows the number of national retail chain stores in the city down more than 1000 from its pre-pandemic level, linked to the reduction in the population and in the number of office workers coming into the city. Beyond the effects of Covid, however, the expansion of e-commerce had already been taking a toll on jobs in the sector. This changing consumer behavior has led to some restructurings and store closings and there is some uncertainty as to when jobs here will return to pre-pandemic levels.

The information industry includes firms engaged in traditional publishing activities, motion pictures and broadcasting, tech firms, including well-known companies such as Apple, Amazon, Google and Facebook, and a host of others engaged in activities such as app developing, data analysis and digital security. Employment in the industry passed its pre-pandemic peak in late-2021. However, growth paused starting in the second half of 2022 and job counts were back to their pre-pandemic level by May 2023. This mirrored a similar weakening nationally and was correlated with the rising interest rates. Tech firms are also major users of office space in the city and this weakening has affected the commercial office market. However, the city’s tech ecosystem, which includes factors such as availability of space, a skilled workforce and the ability of startup firms to attract venture capital, is still ranked second only to Silicon Valley. In New York, the recent sharp weakness in the sector reflects, in part, the strikes by writers over disputes with the motion picture and television producers from May to September and by the actors’ union from July through November.

As jobs fell in New York State and New York City, the number of unemployed New Yorkers rose sharply, peaking at more than 20 % in the city and 16% in the state, before declining along with the nation. While they remain slightly above the national rate and their pre-pandemic rates, they mirror the nation in not rising to any significant degree with the tightening of monetary policy. For the city, however, consistent with the decline in the population, the work force is down about 3.0 % since the pandemic.

 

Figure 5: Unemployment rates in the U.S., New York State and New York City

Source: U.S. Bureau of Labor Statistics

 

Looking Ahead

While concerns remain about the pandemic-related decline in population and the rising but still low office occupancy rates, as the city enters 2024 some new developments are taking on importance. One is the macroeconomic environment. The city’s jobs recovery, like the nation’s, was supported by the highly stimulative fiscal and monetary policies introduced in 2020 and 2021 to combat the virus and the efforts to contain it. However, the anti-inflation tightening of monetary policy beginning in the spring of 2022 saw rates rise from zero to 5 % in the span of a year and the pace of recovery slowed. Recently inflation has been moderating and now the high interest rates are expected to begin to decline over the course of 2024. The movement to a lower interest rate environment would support jobs in several interest rate-sensitive sectors, including information technology, construction, and finance. Total employment in the city is currently projected to expand over the next several years, though a risk for the city’s recovery is that inflation does not get under control and restrictive monetary policies are re-introduced.

Locally, about 165,000 asylum seekers have received care from the city since the spring of 2022 and currently about 68,000 are receiving city-funded care. Expenditures are incurred across a number of agencies for food and shelter as well as for services such as administrative, legal and health. The recently-released City of New York Preliminary Budget for Fiscal Year 2025 estimates the costs in the current 2024 fiscal year and in 2025 will total about $9 billion, smaller than earlier projections though above some other cost scenarios. The smaller estimates reflect lower projected numbers of asylum seekers and cost savings in service provision. Higher than expected tax revenues and a larger contribution from the state are projected to further limit the fiscal impact. Any significant unexpected increases in asylum seeker-related costs or declines in revenues remains a risk to the city’s fiscal situation.

New York’s Employment Recovery: Almost There but Virus Effects Linger, New Issues Emerge2025-12-16T22:30:45+00:00

Silicon Valley Bank failure explained

Fotis Siokis
March 28,2023

On March 10, 2023 the American banking system suffered the second biggest bank collapse in its history. How did this happen? In this post we examine the reasons behind the collapse of Silicon Valley Bank (SVB), which caused tremendous jitters in the financial markets and forced the authorities to step up to prevent a contagion effect and restore confidence. We examine the bank’s investment decisions and show how interest rate hikes can expose an institution to adverse shifts, particularly those like SVB that have used its deposits to invest heavily in long term assets with long durations.

Bank failure is defined as the situation when an institution is unable to meet its obligations to the depositors or/and creditors. Since 2000, 543 US- based banks failed, with more than half occurring during the Great Recession period alone. Although stricter regulation made failures rarer after the Great Recession, SVB, a California based bank with more than $200 billion in assets collapsed after a “bank run” triggered by fears of insolvency. A bank failure creates turmoil in the financial markets and could have a profound impact on the soundness of the banking system as a whole and the real economy.

Traditionally banks act as intermediaries taking short-term deposits from the so-called surplus agents, at relatively low interest rates, and provide/transfer capital (in the form of loans or bonds) to agents in deficit, at relatively higher interest rates, to meet their long term financing needs. This maturity transformation, called maturity mismatch, means that assets have longer duration (or maturity) than liabilities, and therefore are less liquid. For banks an excessive maturity mismatch is desirable-especially when the yield curve is positively sloped and longer-term interest rates are well above short-term rates-because it increases profitability. But for the financial system, maturity transformation is undesirable because it could create a liquidity crisis threatening the existence of the bank and undermine the confidence in the banking system. Although interest rate risk is intrinsic to the process of maturity transformation, borrowing short term and lending long-term, banks have the ability to hedge the risk by using interest rate derivative instruments, like interest rate swaps.

Weakened Regulatory Environment, Lax Supervision and Governance

After the 2008 global financial crisis, the authorities passed a tough financial reform, “Dodd-Frank Wall Street Reform and Consumer Protection Act”. However in 2018, the government rolled back the regulations and exempted banks with assets less than $250 billion from some of the rules of the Dodd-Frank Act. Nevertheless, even with this, it’s at the FED’s discretion to apply enhanced prudential supervision-including how frequently to conduct required supervisory stress tests-to banks with at least $100 billion in assets. On that ground, SVB was not required to comply with certain reporting, disclosure or to keep as high a liquidity coverage ratio as banks with over $ 250 billion of assets (this ratio is the proportion of highly liquid assets held by banks to ensure their ongoing ability to meet short-term obligations, enough to fund cash outflows for 30 days).

The cycle of interest rate hikes and the impact to bonds’ prices

In early 2022 the FED reacted to the mounting inflationary pressures and started tightening monetary policy by raising the Federal Funds policy rate. From interest rates being essentially zero during the pandemic, referred to as the zero lower bound, the policy rate has rapidly crested at 5.0% within one year (graph 1). Although this is the conventional way to combat inflation, a sharp increase in the interest rates could also adversely impact banks’ balance sheets and pressure the soundness of the banking system. Increasing interest rates erode the value of long-term bonds much more than the value of short-term securities, especially the ones bought when interest rates were close to zero and bonds prices higher. Consequently when interest rates rise the price of these bonds decline and create a balance sheet problem for the banks.

Graph 1. The Federal Funds Rate

Source: Fred, Federal Reserve Bank of St. Louis

A massive expansion of “hot money” deposits and investments in long-term securities

The year 2021 saw the raising of enormous capital for start-ups through Venture Capital firms. During the last four years, deposits in SVB increased dramatically from $50 billion in 2018 to almost 191 billion in 2021, before declining to 176 billion at end of 2022 (graph 2). This led to a threefold expansion in its total assets from $56 billion to $210 billion. The deposit growth rate was about 280%, compared with 30% for all the insured banks. SVB was flooded with deposits, primarily from start-up and tech companies concentrating in a unique client/deposit base and mainly uninsured deposits, and thus exposing itself to concentration risk.

Graph 2. Deposits and Total Assets for SVB .

Source: Federal Financial Institutions Examination Council, Schedule RC-Balance Sheet

In addition to the huge unstable deposit base and the moderate demand for loans ($ 76 billion), totaling around $ 115 billion, search for greater return prompted the bank to invest the excess capital ($191 -$76) in long-term security investments rather than to place them in shorter-term instruments and/or in cash.

Based on the Consolidated Reports of Condition and Income, SVB invested mainly in longer-term, higher yielding government and government agency mortgage back securities, like Fannie Mae and Freddie Mac. Investments in securities are typically classified in the balance sheet, for accounting purposes, as a) held-to-maturity and b) available-for-sale. Based on the amortized cost method, in 2022, SVB had placed $91.3 billion under the first category and $28.5 billion in the second, totaling around $120 billion (table 1). But due to the interest rates hike, the fair value of the portfolio went down to $102 billion, causing a hefty unrealized loss of $18 billion at the end of 2022. Typically, the decline in value is not a major issue, unless due to liquidity problems the bank is forced to sell part of the portfolio. The unrealized loss would have been much lower if SVB had invested in shorter maturities, like into two-year notes or less, since longer-term securities are more sensitive and more exposed to rising interest rate.

Table 1. SVB Security holdings, Held-to-maturity and Available-for-sale, in Amortized Cost and Fair Value (end of 2022)

Source: Schedule RC-B-Securities. Consolidated Reports of Condition and Income-FFIEC 031

The combined value of securities held was overwhelmingly large in terms of total assets. From 39% in 2020, the ratio went up to 57% in 2022, well above the 13% average of the State of California banks and 20% of all banks in nation (graph 3, left panel). One could argue that SVB failed to hedge against risk by diversifying its investments portfolio, since more than 85% of the capital was invested in securities with maturity of greater than 5 years (right panel ).

Graph 3. Comparison of SVB’s Investment Portfolio with peer groups and maturity

Source: Federal Financial Institutions Examination Council, Schedule RC-Balance Sheet and Securities

Graph 4 illustrates the interest rate risk indicator for SVB and in comparison to the peer group average and shows that. SVB decided to increase the holdings of the held-to-maturity category since 2021, even though the FED, through the forward guidance tool, had informed the markets of the upcoming cycle of rising interest rates. The SVB management had the time to rebalance the assets portfolio (and the liabilities) and to hedge against the interest rate risk. Nevertheless, according to the consolidated report, the management decided to continue its policy, while setting the risk indicator index between four and eightfold times higher than the peer group average (panel b).

Graph 4. The composition of SVB’s Investment Portfolio and comparison with peer group.

Source: Federal Financial Institutions Examination Council, Schedule RC-Balance Sheet

The impact of higher interest rates, adverse market conditions and the Bank Run

The rapid rise in the Federal Funds rate (graph 1) led to a sharply-inverted yield curve and the risks faced by SVB became a reality. As graph 5 shows, long-term interest rates were above short-term rates as recently as a year ago but have now moved below short-term rates.

Graph 5. Changes in the Yield Curve

Source: U.S. Department of the Treasury

Associated with the rise in interest rate was a weakening of the economic environment and as market conditions worsened and firms-mainly start-ups- required more working capital (cash), deposit withdrawals escalated. The excessive and increasing reliance on these “hot money” type of deposits, in the absence of other long-term funding sources and a means of keeping deposits intact, like a revolving credit line facility, formed a potentially fragile and insolvent bank environment. And informed depositors are more likely to run away with the first sign of trouble. In an attempt to meet depositors’ claims for cash, and improve the bank’s liquidity profile, SVB was forced to sell $21 billion from the $26 billion of its available-for-sale securities portfolio, and, given the inversion of the yield curve, it had to incur a vast loss of $2 billion. Following this sale and to strengthen its balance sheet, SVB announced an unsuccessful sale of $2.25 billion worth of stock shares ($1.25 billion of common stock to the public, $0.5 billion to the General Atlantic firm, and $0.5 billion from a convertible preferred stock offering). The sequence of these events triggered one of the biggest runs in history, with more depositors racing to withdraw their capital. The run heralded SVB’s failure: as the value of the stock plunged and after trading was halted, regulators placed the bank under receivership and created a bridge bank transferring all insured deposits.

In conclusion, the Basel Committee emphasizes the problems with excessive liquidity risk and maturity transformation. While most of the investments were in longer term securities, for the purpose of increased profitability SVB failed to adjust the duration gap between assets and liabilities before the beginning of the sharp interest rate hikes. In addition, and equally importantly, in an adverse economic environment, the unstable and non-diversified deposits base, together with the lax regulatory supervision created the grounds that drove SVB’s demise.

Silicon Valley Bank failure explained2024-04-19T14:12:14+00:00

New York City’s Evolving Jobs Recovery

by Maryam Fatemi and James Orr

September 7, 2022

Overall employment in New York City has not fully recovered from the huge shock it took following the Covid-19 outbreak in early 2020. But looking across industries, both the depth of the downturn and pace of recovery has been uneven. In this post we examine how key industries in the city are faring, from those that were hard hit by the pandemic and still see significant shortfalls to those where job counts now match or exceed their pre-pandemic peaks. We then take a closer look at the performance of the city’s tech sector and the components that have helped jobs there hold up particularly well throughout the pandemic.

The Jobs Recovery to Date

The downturn in employment in New York City at the start of the pandemic is significantly deeper than in either of the city’s previous downturns. The monthly index of employment in the figure below, which looks one year before and up to five years after each peak, shows the 20 percent initial decline in employment was unmatched even at the worst of the downturn in the early 2000s and in the downturn that began in 2008 with the financial crisis. The unemployment rate in May of 2020 reached 21 percent, double the highest rate in either of the previous cycles.

Source: U.S. Bureau of Labor Statistics

The nature and depth of each downturn is different, and recovery patterns are influenced by many factors. For example, the shock of the 9/11 terrorist attack on New York City was preceded by the end of the dot.com boom and followed by a national recession. In the current recovery health concerns are playing a unique role and the recently elevated levels of new cases is a reminder that risks remain. Thankfully, the rise has not lead to significantly more hospitalizations and deaths.

Assuming health conditions do not worsen, the recovery of jobs will reflect both a return to pre-pandemic activity as well as the changes brought about by the pandemic. In particular, it is important for many industries, particularly those in retail and recreation activities, to get residents, commuters and office workers, and tourists back into the city. There is some evidence that the declines seen at the start of the pandemic are being reversed. The city’s population fell about 330,000 (4%) from April 2020 to mid-2021 as residents left the city, immigration slowed, and there were fewer births and higher deaths; since then, each of these components of population change is returning to its pre-pandemic pattern. For many commuters, the broadening of work-at-home options meant not having to be in the city. A recent survey of firms in Manhattan indicates workers are returning to their offices, but a hybrid model of less than a full workweek in the office may become permanent. The decline in tourists in 2020 and into 2021 reduced activity in hotels and restaurants, but domestic and international tourism to the city is projected to rebound this year and next. Each of these trends should support a return to normalcy in the city and a continuation of the jobs recovery.

Industry Recovery Patterns

Compared to pre-pandemic peaks, shortfalls remain in the hard-hit accommodation and food service, retail trade and construction industries. Two industries, finance and insurance and professional and business services, have matched their pre-pandemic peaks. These were not hit as hard because many employees had options to work from home and the demand for their services continued. In fact, Wall Street profits since the pandemic have been at record highs.

Employment in the healthcare and social assistance industry and the information industry have now surpassed their pre-pandemic peaks. Healthcare is one of the city’s largest industries and appears to have re-established its pre-pandemic expansionary trend. Notably, the life sciences sector is continuing to expand and it supports several industries in and outside of healthcare through its research and development in biotechnology and medicine, its many medical and diagnostic testing laboratories and its production of pharmaceuticals and medicines.

New York City’s Tech Sector

The strength of tech employment in the city throughout the pandemic is noteworthy and we want to take a deeper look what we mean by the tech industry. The information industry (2017 North American Industry Classification System code 51) is typically used to represent the tech sector which, as noted in an earlier city jobs update, now employs as many workers in the city as Wall Street (code 523). Recently released data show that employment and wages held up in both industries during the pandemic, with Wall Street wages rising significantly and maintaining its more than 20 percent share of all wages paid in the city.

Figure 3: Information Industry and Wall Street Employment and Wages, 2019-2021

The information industry captures firms that are involved in some way with the production and distribution of information as part of their core business. The content is typically intangible and products include news, websites, software programs, web search portals, and wireless telecommunications. The distribution of the information takes many forms including newspapers, theaters and on-line. Household names include Google, Microsoft, Facebook and Yelp, but there are a huge number of startups and other perhaps less well-known firms that make up the sector. Although we use this definition of tech, the reality is that the application of technology has permeated the activities of workers and businesses to such a large extent that it is hard to think of jobs that do not have at least some tech component.

The list of products and distribution activities in this sector is long and growing. We look first at employment and wages in the publishing sector (511), which excludes internet publishing. Here are the publishing and broadcasting companies, both the more traditional news and entertainment ones as well as more specialized broadcasting outlets. Included are software publishers, the firms that design, document, install and support computer programs for general use by consumers and businesses. One could think of Microsoft and Adobe as being in this category as well as firms producing tax computation software. A second category is internet publishing (51913) which includes firms publishing or broadcasting content on the internet. Netflix would be an example. The sector includes web search portals providing access to news and information and enabling users to socially network for example Facebook and Twitter. The chart below shows employment and wages paid in both components in the city expanded from 2019-2021.

Figure 4: Publishing Industry Employment and Wages, 2019-2021

Another sub-category of the information industry we label as data processing (518) which includes firms that provide services such as computer time-share on mainframes, scanning data, and storing large amounts of data, and can be thought of as services that might be needed by small businesses. Both employment and wages were steady over the period, though it pays a healthy $2 billion in wages annually. Firms providing customized computer services for individual companies, something like “tech solutions” which we label computer systems design. This sector (5415) is not part of the information industry but we consider these closely-related activities. The customization includes the design of a company’s computer system and the writing, installing and maintaining of that software and differentiates it from the firms producing computer software for more general use included in internet publishing. Employment in the sector increased marginally but wages rose by about 30 percent to $14 billion.

Figure 5: Data Processing and Computer System Design Employment and Wages, 2019-2021

The graphs show the range of activities in the city’s tech sector and the importance of the internet publishing component in its growth in terms of jobs and especially wages. Further support for continued growth of the sector in the city is seen in a set of innovation indicators that show record levels of venture capital funding for city tech firms last year. Looking ahead, recent layoff announcements by tech firms in the city and nationwide may point to some slowing in the pace of expansion. Also, the pandemic led to worker concerns about location, lifestyle and remote working and there was some indication that the major hubs, such as New York and San Francisco, would lose out to smaller hubs. Our look at the data found no loss of the city’s share of national employment or wages during the pandemic.

For the city overall, jobs stand at roughly 4 percent below their pre-pandemic peak. At growth rates seen prior to the pandemic, the city’s pre-pandemic employment peak would be reached sometime in 2024; any sustained pickup in growth would pull this forward. However, rising interest rates are a potential drag. The Fed continues its fight against high inflation and interest rate sensitive sectors, such as construction and housing, and the strengthening dollar could slow growth in exports and tourism. Furthermore, the fight against inflation in many European countries and the slowing in growth in China will further weaken demand. As in past cycles, any national weakness will feed back on the city and slow the recovery.

New York City’s Evolving Jobs Recovery2024-06-27T21:18:04+00:00

Will China Surpass the U.S. to Become the Number One Economic Power?


Hengzhong Liu
June 18, 2022

This article argues that the current wave of deglobalization will not stop China from surpassing the United States as the largest economy in the next decade, but it will prevent China from becoming the No. 1 economic power in the foreseeable future because economic size does not necessarily translate to economic power. This is because the economic power of a country depends not only on the size but also on the “quality” of its GDP mainly determined by the level of technology.

I. The economic power of a country is measured by both the size and the quality of its GDP

The dominance of a country’s economy depends not only on the size of its GDP, but also on many other factors. For example, GDP per capita or median income, the high-tech content of its goods and services, the resilience of the economy in crisis events, the degree to which other countries depend on its exports, and how much other countries wish to hold its currency as reserves. For ease of reference, we assume that all of these factors make up the concept “GDP quality” or “economic strength” that is specifically introduced in this article.

Taking GDP size as the magnitude of an economy and GDP “quality” as the strength of an economy, how do these two aspects interact to form the economic power of a country?, The curves in Figure 1 illustrate this relation. Given the size of a country’s GDP, the higher the quality of its GDP, the greater is its economic power. Symmetrically, given the quality of a country’s GDP, the larger the size of its GDP, the greater is its economic power.


The combination of all GDP scale and quality on the same curve represents the same level of economic power, and can be called an “equal economic power curve”. That is, on the same curve, a smaller GDP with a higher economic strength has the same level of economic power as a larger GDP with a lower economic strength. In other words, greater economic size does not necessarily mean greater economic power.

In Figure 1, the solid red circle and the solid blue circle represent China’s and the US’ current economies, respectively. Because the Chinese economy has much lower economic strength than the U.S. economy, the U.S. has higher economic power than China although China is quite close to the U.S. in GDP size.

II. Global decoupling won’t stop China from becoming the world’s largest economy in the next decade

After more than 30 years of globalization, China has become the world’s second largest economy and gained significant momentum over the U.S. economy. In recent years, however, globalization has faced a dramatic and often hostile backlash, especially against China, due to protectionist policies and nationalist movements around the world and the COVID-19 pandemic crisis. These factors raise legitimate doubts about whether China will avoid the so-called middle-income trap (e.g. remaining at the same middle level of income) and overtake the U.S. as the largest economy, as most previously believed.

Undoubtedly, as the current headwinds of globalization persist, advanced economies will see less trade and investment with China whose exports and investment in them will decrease accordingly. This presents significant challenges to the growth that China needs to catch up with the United States.

However, the economy of 1.4 billion people is still developing, and the per capita GDP is not even 20% of that of the United States. Moreover, unlike 40 years ago when China began to “reform and open up”, the current economic system, technology and talent, and saving rate make China’s sustained growth momentum unstoppable. But, to ensure that China’s economy almost doubles in the next ten years, there needs to be enough market demand, enough advanced technology and talent, and enough investment sources. Let us discuss them one by one.

1) Even without developed country markets, China’s own domestic market is sufficient to support its catch-up growth.

We are talking about a market of 1.4 billion people, almost twice the size of the entire developed world today. Yet what matters is not just size, but the characteristics of this huge economy.

First, the population of leading regions such as the Pan Pearl River Delta region including Hong Kong, the Pan Yangtze River Delta region, and Bohai Bay region exceeds 200 million. The per capita GDP in these regions has reached $20,000-$30,000, which is close to the threshold of $30,000 for developed economies. These regions can set a good example at home and lead the rest of the country.

Secondly, the per capita income gap between the eastern coastal areas and other regions is 1.5-2 times, and the gap between urban and rural areas is 2.5-3 times. With more than 500 million rural population and more than 8 million in the mid and west regions, further urbanization alone has the potential to double the Chinese economy.

2) Even without further importing top-notch technology from advanced economies, China’s existing technology and talent are sufficient for overcoming the middle-income trap.

Note that to surpass the size of the U.S. GDP, China only needs to reach 40%-50% of developed levels in most economic sectors and indicators or only needs to reach ¼ of the U.S. GDP per capita. To this end, a state-of-the-art technology is not an absolute requirement.

Specifically, China’s continued urbanization mainly includes housing improvements, rural roads construction, irrigation and water supply systems building, agricultural modernization, expansion of the health and medical sector, increases in domestic vehicles and improvements to public facilities. Obviously, these jobs do not absolutely require the latest technologies, and the technology and talent China currently has should be good enough.

3) It is reasonable to assume that China will have sufficient resources to continue increasing investment in both the public and private sectors to drive further urbanization and growth.

Over the past 30-40 years, investment from developed countries has undoubtedly helped China’s economy take off. Meanwhile, as Figure 3 shows, China’s saving rate has been almost double that of developed countries. In addition, a number of economic reform measures, such as bringing the then state-owned housing to the market, also stimulated a large amount of private investment.

source: https://data.worldbank.org.cn/indicator/NY.GDS.TOTL.ZS

III. China is unlikely to become the number one economic power in the foreseeable future

If we measure economic strength in terms of GDP per capita, then as Table 1 below shows, China’s economic strength is only 1/4 that of the United States, even though its GDP has grown to a size comparable to that of the U.S. That is to say, as shown in Figure 1, even if China were to become the largest economy one day (indicated by the red circle), its economic power would still be very low compared to the United States (indicated by the blue circle), which would still be the No. 1 superpower.

Source: GDP in local currency: https://data.imf.org/regular.aspx?key=63122827

Conversion of Chinese Yuan to USD for 2021 GDP: http://www.gov.cn/xinwen/2022-01/17/content_5668815.htm.

For a country to become the No.1 economic power, it must first be self-sufficient in food and energy supplies, or at least have access to resources in the event of a food or energy crisis. The United States clearly fits that standard. In contrast, China is barely self-sufficient in food and it relies on imports for more than 60% of its natural gas and oil consumption. Since a hostile oil ban alone could have a fatal impact on the Chinese economy, few would hold large amounts of Chinese currency as reserves. A country that does not have a major reserve currency cannot be called an economic superpower. Thus, China is ineligible to become the greatest superpower until its energy shortage is safely addressed.

The share and composition of a country’s exports, or more precisely other countries’ demand for its goods, can also be used as a measure of its economic strength. For ease of discussion, let’s break down exports into three categories: geography-based products such as food, energy and element minerals, manufactured goods, and advanced technology.

Obviously, the export of advanced technology has the highest economic strength, because due to patents and technical barriers, truly advanced technology can only be provided by one or few countries for a long time, and most countries need it to promote economic development. Geography-based products have the second highest economic strength because they are only produced in certain places, and in some cases food and energy exports even have decisive power. The exports of manufactured goods have the weakest economic strength because they can always be produced elsewhere at similar or even lower costs.

What does America offer the rest of the world? Geography-based agricultural products and advanced technology, and now possibly natural oil and gas. What does China export the most? Manufactured goods. So obviously, in this regard, although China has become the largest trading partner of most countries, its economic strength is indeed relatively weak.

Constrained by land and population, China will not be able to export food and natural energy, at least in the near future. The only way for China to surpass the United States in economic strength is to drive technological innovation.

However, the general consensus is that China’s basic technology in most fields such as aero-engines, microchips, and system software lags behind the United States by about 20 years, and that China’s current system, while potentially effective in organizing mass production, does not best foster innovation and invention that often requires free competition and diverse approaches. In addition, continued global decoupling makes it harder for China to obtain the latest technologies from developed countries. Taken together, unless China makes its system more lucrative for technology advancements, these headwinds will keep China from catching up with the United States in technology for a quite long time, perhaps at least several decades.

Will China Surpass the U.S. to Become the Number One Economic Power?2025-12-16T22:47:31+00:00

Covid-19 in New York City: The Pandemic Unequally Impacts New Yorkers in Health and Employment

Fotis Siokis


January 7, 2022

In early March 2020, the Covid-19 virus spread quickly across the United States and virulently disrupted every facet of the society. A public health crisis immediately developed into an economic crisis, as severe government restrictions were put in place to mitigate the spread. Unemployment quickly increased from 3.5percent in February to 14.8percent in April 2020, while economic activity measured by GDP dropped by an annualized rate of 31.4percent in the 2nd quarter of 2020. Along with the unprecedented crisis, with lasting deleterious economic effects, the pandemic triggered a health and human tragedy and has laid bare deep divisions in the society.

New York State was hard hit and considered to be the epicenter of the health crisis. At the onset, the reported Covid-19 case numbers (37.1 cases per 100,000 people) were six time higher than the national average, prompting the State government to curtail everyday life. But the attempt to contain the fatal outcomes of the virus spread – by shuttering businesses and schools, along with other measures – exacerbated pre-existing inequities that became especially hard on the most vulnerable people in New York City, predominantly those in low-income households.

In this post, we will examine how the pandemic unequally impacted the people of New York City and in particular in the areas of health and employment/income.

Health

By early December 2021, more than 50 million cases of confirmed infection were reported in the United States, with almost 800,000 deaths, bringing the case fatality rate to 1.6 percent. For the City of New York, approximately1.2 million Covid-19 total cases were reported with around 35,000 deaths, putting the city’s case fatality rate at a shocking 3.1 percent, double that of the country’s average rate. Interestingly enough, according to NYC healthcare statistics, 11 out of every 100 infected New Yorkers were hospitalized.

Furthermore, it became abundantly clear that low-income families and minorities have been disproportionally affected by the Covid-19 pandemic. Many of NYC’s low-income areas suffered the most, with more infected cases and deaths per 100,000 people. Our analysis is based on zip code Covid-19 data, which was provided by NYC health and shows that areas with low per capita income suffered a greater loss than areas with much higher income. Figure 1 depicts the relationship between per capita income and deaths per 100,000 people for each zip code area in NYC.

Figure 1. The relation between Covid-19 deaths and per capita income, per zip code, NYC.

Source: NYC health, Income by zip code and author’s calculations

This outcome could mainly be attributed to two reasons. Most of the low-income people are working as front line workers, the lifeblood of the city, whose jobs require close interaction with the public and therefore being at a higher risk of developing infection from exposure to Covid-19. The majority of the essential workers who continued to work on-site were mostly Black, around 31 percent, compared with 14 percent of Latino and roughly 10 percent of white workers. While many higher-income workers transitioned easily to remote work, low-wage people did not have access to flexible work arrangements and in many cases experienced retaliation for requesting these benefits including paid sick leave. According to a census survey, adults in households with annual incomes of $200,000 or more were nearly six times more likely to have switched to telecommuting in 2020 than those with incomes of less than $25,000.

In addition, a significant percentage of the American population does not have any healthcare insurance coverage and could not bear the heavy cost of the medical bills. Based on data provided by the Bureau of Labor Statistics, 8.6 percent of people, or 28.0 million, in the United States, did not have healthcare insurance coverage at any point during the year 2020. Hispanic/Latinos had the highest uninsured rate (18.3 percent), followed by Blacks (10.4 percent), Asians (5.9 percent), and Whites (5.4 percent). Almost the same percentages applied to the case of NYC. Most of the uninsured people are low-wage people of color and immigrants of legal (and not) statuses who cannot afford to take leave sick from work or seek medical assistance and face unbearably high medical bills. In the case of a Covid-19 infection, uninsured people delayed their medical treatment until they required hospitalization. This fact is evidenced by a recent nationwide survey that shows almost 31 percent of people responded that they had deferred procedures, tests, or care due to high costs within the past year.

Vaccination rate

As we moved into late of 2021, the variants of the virus – such as Delta and recently Omicron –- have caused great concern and pose a perpetual threat. Although the percentage of fully vaccinated people in NYC stands at 72 percent as of late December 2021, and is higher than the nationwide percentage (62 percent), there are still significant disparities in vaccination rates, across race and age groups (table 1). Fully vaccinated people of Asian ethnicity pave the way with almost 89 percent, followed by the Hispanic/Latino group, who despite having the highest fatality rate (with 753 deaths per 100,000 people as compared to 691 deaths per 100,000 of black ethnicity) are recorded as having a vaccination rate of 64 percent. In addition, 58 percent of the white group had received both doses, which is higher than the rate of the Black group (51 percent). When it comes to age groups, the percentage of fully vaccinated people of ages 65+ is not greater than that of the age groups of 55-64 and 45-54, despite the fact that the campaign initially was targeted at this oldest age group.

Table 1. Vaccination rate in terms of Race, Sex and Age groups, for NYC (as of December 30th, 2021)

Source: NYC health/Covid-19, Vaccine-data

Figure 2 depicts the percentage of vaccinated people per zip code in relation to the income per capita. Although the vaccination rate is positively correlated with income per capita (as we move to higher per capita income, vaccination rates increase, thus indicating a positive trend), there are some areas with lower income that exhibit very high vaccination rates. For example, the 11355 zip code area in Queens was very hard-hit by Covid-19, but vaccine uptake there is remarkably high – reaching the upper level of 90 percent thus confirming that those who have directly experienced infection were not hesitant to be vaccinated.

Figure 2. The relation between income and the vaccination rate, per zip code in NYC (as of December 2021)

Source: NYC health, Income by zip code and author’s calculations

Employment/Income

Along with the significant differences in fatality rates, the unemployment rate in NYC stands much higher than the national level, with many jobs lost since the outbreak of the crisis. Though employment is rebounding, the unemployment rate is falling slowly settling at 9.0 percent in November 2021 yet more than double the national level of 4.2 percent. The disproportional difference in unemployment rates is largely explained by the specific industries impacted the most by the health crisis since NYC is heavily reliant on tourism, restaurants, hotels and other service industries.

The economic fallout caused many New Yorkers to lose their jobs resulting in major difficulties particularly for low-income workers, especially among women and people of color. In particular, Black and Hispanic/Latino adults (who constitute approximately 75 percent of the front line workers) disproportionately bore the brunt, while 60 percent of whom are women and 50 percent foreign born. Major disparities across race and ethnicities were revealed by a survey conducted by the Center on Poverty and Social Policy, at Robin Hood and Columbia University, as on average around 57 percent of low-income workers in New York City reported loss of employment income. Across ethnicity groups, 59 percent of the Hispanic/Latino group lost income followed by Blacks (55 percent) and whites (43 percent).

Similarly, acute economic suffering changed the landscape and exacerbated food hardship and food pantry use. In Sept-Oct 2020, the rate of food hardship, that is, households that often run out of food, increased to 42 percent, while people seeking food pantry help increased to 32 percent from10 percent just prior to the onset of the health crisis. Unemployed people, people who lost employment income, people of color and people with educational attainment of a high school diploma or less comprise those who needed food assistance.

Figure 3. Food hardship by race.

Source: Columbia University (Center for Poverty and Social Policy) and Robin Hood

Conclusion

The statistics describing the public health crisis in New York City at times conceal the significant unequal impacts across income and demographic groups. These disparities are recognized in federal interventions, with implementation of vast policies aimed at helping vulnerable socioeconomic groups. The provisions of the extended child tax credit, the generous unemployment insurance benefits, numerous cash payments and other policies have played a catalytic role in easing the strains on household budgets and forestalling a massive increase in the poverty level due to the pandemic outbreak, especially among Black and Hispanic/Latino children. Particularly the CARES Act (Coronavirus Aid, Relief, and Economic Security Act,), and later the ARPA Act (American Rescue Plan Act) managed to keep one million New Yorkers out of poverty during 2020 with cash assistance allocated to pay for basic needs such as food, rent, mortgages etc. These programs help to address the inequalities in impact and help to support the economy of the city and the health of New Yorkers.

Covid-19 in New York City: The Pandemic Unequally Impacts New Yorkers in Health and Employment2024-06-27T21:23:30+00:00

New York’s Ongoing Employment Recovery from the Pandemic


James Orr
December 13, 2021 
 
Recent employment data show New York is continuing its recovery from the effects of the COVID-19 pandemic and the efforts to contain it, though job counts in both the state and the city have yet to reach pre-pandemic peaks Vaccinations, looser restrictions on activities and a recovering national economy have helped the recovery of jobs, though the recent rise in new virus cases and the appearance of the Omicron variant suggests that risks both to health and to the recovery remain. This post updates the employment figures for New York State and New York City and assesses the extent of recovery in some industries that are important drivers of job growth in the city. The post also looks at employment developments in the city’s tech sector that suggest it is getting back on its pre-pandemic upward trend.

Trends in COVID-19 Cases in New York City

The figure below plots the daily new COVID-19 cases in New York City and the seven day average of new cases, beginning with the severe outbreak in March 2020 when the virus was becoming a driving force in the city’s economy. The decline in new cases in that summer was followed by a resurgence later in the year and into 2021. Then, as that wave appeared to be settling down mid-year, cases began to rise again associated with the Delta variant. Looking over the past year, the generally lower average number of new cases corresponds to the substantial increase in vaccinations—currently almost 80% of all residents in the city have received at least one dose of the vaccine. The most recent increase in new cases has not been on the same scale as the earlier two episodes, though the data show hospitalizations are increasing modestly. Deaths due to the virus are not rising though, unfortunately, the virus to date has resulted in over 34,000 deaths across the city.

Figure 1. New York City COVID-19 cases: Daily cases and seven-day-average

Source: nyc.gov

New York’s Labor Market

The figure below uses a monthly index to track the downturn and recovery of employment in the nation and in the New York State and New York City (NYC) from the pre-pandemic period to the present. The 20 percent decline in jobs in the first few months of the pandemic in both the state and city was unprecedented and exceeded the 14 percent decline nationwide. These employment patterns to a large extent mirror new COVID-19 cases, in particular the weakness in the recovery in late 2020 and early 2021 as cases resurged.

Figure 2. Total employment: U.S., New York State and New York City

Note: January 2001 = 100

Source: U.S. Bureau of Labor Statistics

The recent picture is one of an ongoing but somewhat bumpy recovery. Job counts continue to grow though, relative to pre-pandemic peaks, employment levels in October were still down about 8 percent in New York State and 10 percent in New York City. These percentages translate into shortfalls of about 800,000 jobs across the state and about 475,000 in the city. The recovery nationally has been on a slightly higher trajectory but still pre-pandemic levels have not been regained.

As jobs fell in New York State and New York City, the number of unemployed New Yorkers rose sharply. In New York City, the unemployment rate peaked at 20 percent last May before trending down; New York State’s rate rose to about 16 percent before trending down. Since then, rates remain on a generally declining trend and reflect the recovery in employment.

Figure 3. Unemployment Rate: U.S., New York State and New York City

Source: U.S. Bureau of Labor Statistics

Notably, the labor force participation rate in New York City, which had fallen sharply in the early months of the pandemic, has recovered to its pre-pandemic level; statewide, the rate did not fall as much as the city and is now about a half point below its pre-pandemic peak. Nationwide, labor force participation is still about 1.5 percentage points below its pre-pandemic peak, suggesting some places have a significant number of potential workers on the sidelines.

The pandemic had different impacts across industries with some having felt the brunt of the lockdown and restrictions on travel, tourism and shopping to a much greater degree than others. The figure below shows the varied pattern of decline and recovery of employment in seven industries in New York City. The more office-using industries such as Finance, Information, Professional and Business Services were not as affected as work-at-home options were relatively more easy to institute, and the recoveries there are continuing. At the other end are the hard-hit Accommodation and Food Service, Construction and Retail Trade industries where the recovery still has ground to make up.

Figure 4. Employment in Selected Industries in New York City

Note: January 2020 = 100

Source: New York City Office of Management and Budget

Looking in more detail at the city’s tech sector, measured by jobs in the Information industry, the longer-term steady increase in employment appears to be reasserting itself. This industry includes firms engaged in traditional publishing activities, well-known newer firms, such as Apple, Amazon, Google and Facebook, and a host other tech startups engaged in activities such as app developing, data analysis and digital security. The chart below shows jobs in the industry declining with bursting of the tech bubble in the early 2000s, followed by a steady rise to 230,000 at the outbreak of the pandemic. Even now employment is above its 2001 peak.

Figure 5. Employment in New York City’s Information and Securities Industries

Source: New York City Office of Management and Budget

One feature of this rise is that it has been accompanied by the expanded demand for office space. Despite concerns about the work-at-home option overtaking in-person office usage, tech firms are reportedly at the forefront of the purchase and lease of offices: in Manhattan, for example, both Amazon and Facebook are leasing large amounts of office space, and Google recently purchased the 1.7 million square foot space it was leasing near its existing offices. The size of the new spaces and the announced plans of these firms to increase employment suggest the new space is not simply for consolidation but for expansion. Evidently, these firms see an opportunity to obtain space and see workers in offices as a component of their future operations.

The expansion of jobs in the Information industry is also notable in that it has occurred at the same time as jobs in the securities component of the finance sector in the city, or Wall Street, have expanded more slowly and remain below their 2001 and 2008 peaks. The Finance sector, and particularly the securities industry, continues to play a significant role in generating income in the city, but a comparison suggests that tech firms are gradually becoming important sources of jobs; and these are on average good jobs with annual salaries over $200,000, well above the average of the private sector though still below average Wall Street salaries–$438,000.

Looking Ahead

The coronavirus remains a risk to the jobs recovery, particularly if the new Omicron variant leads to the types of individual, business and government responses that New York saw in the early stages of the pandemic. Apart from the virus, both monetary and fiscal policies will influence the path of recovery in the state and city, and the nation, during 2022. A downside risk is the lessening of support given to the economy by the Federal Reserve which has announced a gradually reduction in the size of its bond purchases which could over time adversely affect the more interest rate-sensitive sectors, such as housing, manufacturing and construction. The sizeable Federal fiscal support to combat the effects of the virus on individuals, businesses and local governments will be winding down though there will be some offset from the new Federal infrastructure bill. New York City is slated to receive roughly $100 billion over the next several years for improvements to the transportation and other infrastructure. The recovery will also be influenced by New York State’s new governor and the incoming mayor of New York City as they develop their economic initiatives and policies.

New York’s Ongoing Employment Recovery from the Pandemic2024-06-27T21:14:24+00:00
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