Mundo #19 - Road tripping through NY State

G'day, and welcome to edition 19 of Mundo.

I'm often asked by my Australian and Colombian friends and family - how could someone vote for Donald Trump? Our recent road trip through New York State gave us a first hand look at the economic drivers behind his strong support only a few hours from Manhattan. I also lift the hood on inflation figures, which serve as a reminder that during an economic shock like the Covid Crisis, traditional economic indicators that rely on historical norms may not be as accurate in such unusual times. Sudden jumps in inflation are a well known contributor for social unrest, and it's easy to miss a signal if the data is off.

Plus a podcast recommendation.

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Also, are you a runner? Have a look at our new project, Bunji Running.

Approximate reading time: 5 minutes.

Taken near North Branch, NY

A road trip through the rust belt

You don't have to drive far out of New York City to see a vastly different side of the state than the heaving, big-business-centric Manhattan metropolis. Two weeks ago we took a road trip through the entire north west of the state. Snaking our way through corn crops, dairy farms, and rusting industrial estates, the difference in fortunes between New York City and its otherwise rural state is obvious. Rolling through towns and villages settled just after the American Revolutionary War, it was generally a picture of small town decay, ushered by the exit of industry through the 20th century.

Everywhere we stopped we saw history of a once mighty union between Wall Street's financiers and the state's industrial pioneers, each enabling the other to establish themselves at the centre of global commerce for almost a century. However, as automation rose and multinationals steadily shifted production to cheaper labour markets, the bonds of New York City capital and New York State industry cracked, and eventually crumbled.

The D&H Canal, "America's first million dollar private enterprise". Taken in Wurtsboro, NY

New York State's manufacturing industry has sharply declined since 1970. In 1970, 40% of all private sector jobs were in manufacturing in upstate cities such as Binghamton. This was a higher concentration than other rust belt states such as Michigan and Ohio. Binghamton was the "valley of opportunity", a crossroads of freight, a hub of manufacturing. It was a cigar powerhouse in the 1890s, a shoe city in the 1940s, and a technology capital, following the founding of IBM in nearby Endicott after the Great Depression. From 1970 to 2014, the state shed 1.2 million manufacturing jobs. Binghamton was one of the hardest hit areas, while New York overall suffered the greatest percentage loss in manufacturing jobs (below).

Credit: Policy By Numbers

The divergence in employment between New York City and the rest of the state after 2001 is stark. The decade from 2001 to 2010 was the worst for employment upstate, with a 33% decline in manufacturing jobs, against an overall private sector employment decline of 1.7%. In contrast, New York City's employment growth since 2001 was consistently one of the strongest in the state.

Taken in Narrowsburg, NY

As manufacturing declined in the state, inequality climbed. The economic separation between New York City and Upstate New York soured into a political divorce. Overall, New York state is a Democratic stronghold. The last time it went to a Republican in a presidential race was in 1984, to Ronald Reagan. But beyond New York City limits, most of the state votes Republican. However unlike other rust belt swing states, upstate's Republican wishes are swept away by the dense population of New York City's Democratic voters. The maps below show the outcome of presidential elections since 2000, by county, with counties voting majority Republican in red, majority Democrat in blue.

Some other observations

Enforcement and compliance with Covid-19 social distancing and face mask requirements was heavy, yet in good spirit, almost everywhere we visited. There appears to be a "gravitational" effect, where the tragic toll of the virus in New York City is known first or second hand. It's more tangible and less prone to skepticism than appears to be the case through the southern states, before the virus rushed in this summer. The New York Times agrees with this speculation as one factor that continues to dampen the in-person shopping habits of Americans, with significant variation (and economic consequences) across states.

Credit: New York Times

With the politicisation of the U.S. Postal Service by Donald Trump, it was impossible to miss the centrality of the Postal Service in the small towns and hamlets we passed through. In almost every town the post office was a hive of activity, and we frequently passed postal delivery vans and post boxes on back roads.

Taken in North Branch, NY

Hidden Figures

In edition 13 of Mundo I wrote how "the map is not the territory". When reality changes, our maps, models, and summary measures can lose validity, seeing us miss important signals.

The shift in consumer spending during the Covid Crisis seems to be having this impact with inflation figures. In the United States, the official Consumer Price Index measures inflation by assessing the price change of a representative basket of goods, determined annually by the Bureau of Labor Statistics.

Alberto Cavallo shows how the sudden shock of pandemic shutdowns provoked a marked divergence from typical consumer habits to such a degree that actual inflation is significantly greater than official CPI inflation. According to his research, Covid-adjusted inflation in the United States was 0.95% (annualised) in May compared to the standard CPI measure of 0.13% in the same month. There's divergence between income groups, where Covid-adjusted inflation was 1.12% in May for low income households, and 0.57% for high income households. The difference arose from greater spending on groceries, which became more expensive, and away from categories that saw deflation, such as transportation, recreation, and dining out.

Low income households typically spend a higher proportion of their income on food. The Covid Crisis amplified this pattern, driving greater inflation for this group compared to high income households.

Given the study's most recent data comes from May, is this still relevant? June and July data, shown above, still show higher grocery and lower transportation and dining expenditure than normal - but it's clearly converging to "normal" levels of February and March. You'd expect true inflation to still be higher than official CPI estimates, however this gap is probably narrowing. Reversions to stricter lockdowns and social distancing with another wave would see this disparity rise again.

Cavallo also calculated similar differences in 16 other countries, with Brazil showing the highest difference between his Covid adjusted inflation (2.53%) and official inflation (1.65%). However, his adjustments were based on shifts in U.S. consumption patterns, so it's to be interpreted with caution.

From a political risk perspective, inflation figures, particularly food inflation are an important indicator to watch for heightened risks of social unrest. However, global food prices have been lower so far this year according to the Global Food Security Index, partly from a weak U.S. dollar, which most food commodities are priced in. In December 2019 (prior to the Covid Crisis), the index reported substantial deteriorations in the food security - the affordability, availability, and quality and safety of a country's food supply in Nicaragua, Argentina, Ecuador, Tunisia, and Mali. Local conditions have no doubt worsened these countries' food security during the Covid Crisis. An appreciation of the U.S. dollar with an American economic rebound would only exacerbate food insecurity - and the risk of social unrest - in these countries. Food price shocks were a crucial factor in seeding the Arab Spring of 2010, and contributed to major historical upheavals such as the French Revolution and the fall of the Soviet Union.

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Something to listen to

I'm a little late to the party, but have you listened to Wind of Change yet? It's a ripping 8-part series looking into a wild question - did the CIA write the song Wind of Change that became the anthem for the end of the Cold War?

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Thanks to everyone who has emailed me with their thoughts and ideas. Keep them coming! Forward this along to others who might find this an interesting read. Stay calm, think of others, stay healthy. Mitch