Raphael Stevens

THE PANDEMIC has fundamentally transformed the American workplace. More people than ever are working from home. Meetings have moved from offices to screens. Employees are quitting their jobs in droves, pushing job vacancies to record highs. Amid widespread labour shortages, firms are handing out pay rises and bonuses to attract workers. But what about other perks, which make up a big chunk of employees’ overall compensation? If you listen to bosses, firms have expanded benefit plans in the wake of the pandemic, providing workers with more flexible hours, emergency sick leave and mental-health services. But official statistics show only modest gains in fringe benefits since the start of the pandemic. Although the value of non-wage compensation for low-paid workers grew faster than that for better-paid employees last year, the disparity in the level of provision remains vast.Health insurance, paid leave, pensions and other “fringe” benefits doled out by private-sector firms accounted for 29% of total compensation, on average, in 2021, up from 20% in 1970, according to the Bureau of Labour Statistics (BLS). If perks such as free food were to be included, the figure would be higher still. Although they are harder to measure, amenities such as flexible working hours are valuable, too. A paper published in 2018 by researchers at Harvard Medical School, the University of California, Los Angeles, and the RAND Corporation analysed survey data and concluded that the freedom to set one’s own schedule is worth a pay increase of 9%, and the ability to work from home is worth a raise of 4.1%.But such benefits, much like wages, tend to be unevenly distributed. Some 94% of private-sector workers in the top quartile of the income distribution have access to health insurance from their employer, compared with just 40% of workers in the bottom quartile, according to the BLS. Similar disparities exist for life insurance (84% v 25%), retirement benefits (90% v 44%) and paid sick leave (94% v 52%). Differences in working conditions make things even more lopsided, according to new research by Jason Sockin of the University of Pennsylvania. Using data from Glassdoor, a website that lets users post anonymous reviews of their employers, Mr Sockin finds that high-paying firms tend to offer better amenities, thereby exacerbating labour-market inequality.Efforts to improve benefits during the pandemic appear to have done little to expand provision to more workers. The latest national compensation survey by the BLS found that access to paid sick and family leave at private firms rose on average by only four and five percentage points, respectively, between March 2019 and March 2021. Flexible working hours, defined as the freedom to set your own schedule, expanded by just three percentage points. Peter Cappelli of the University of Pennsylvania’s Wharton School says that, although some companies have introduced signing bonuses and free university tuition to attract workers, they have been reluctant to shell out for pricier perks. “I think they really are resisting moving towards benefits that are going to cost them much of anything,” Mr Cappelli says.Although access to benefits has changed little, perks are at least becoming more generous for some recipients. Every year the BLS tots up the value of employees’ compensation costs. In 2021, workers in the bottom tenth enjoyed a 9.2% increase in the real value of benefits, on average, the biggest rise since data were first collected in 2009. In the 12 months ending in September 2021 average benefit costs for service-sector workers including cooks, carers and cleaners rose by 3.3%, compared with 2.6% across the workforce as a whole.The hope is that such increases continue if labour remains scarce. Mr Sockin says that employees may also be taking stock: “I think the pandemic has led to this recognition among workers that they may want more than just a wage.” But with the value of benefits amounting to less than $3 per hour worked for someone in the bottom tenth of the income distribution, compared with $25 for someone in the top 10%, the gap that needs closing is truly vast. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “On the fringe” More

TO BELIEVERS, OPEN, public blockchains provide a second chance at building a digital economy. The fact that the applications built on top of such blockchains all work with each other, and that the information they store is visible to all, harks back to the idealism of the internet’s early architects, before most users embraced the walled gardens offered by the tech giants. The idea that a new kind of “decentralised” digital economy might be possible has been bolstered over the past year as the numerous applications being built on top of various blockchains have boomed in size and functionality.Perhaps the most significant part of that economy has been decentralised-finance (DeFi) applications, which enable users to trade assets, get loans and store deposits. Now an intensifying battle for market share is breaking out in this area. Crucially, Ethereum, the leading DeFi platform, seems to be losing its near-monopoly. The struggle shows how DeFi is subject to the standards wars that have broken out in other emerging technologies—think of Sony Betamax versus VHS video cassettes in the 1970s—and illustrates how DeFi technology is improving lightning-fast.The idea behind DeFi is that blockchains—databases distributed over many computers and kept secure by cryptography—can help replace centralised intermediaries like banks and tech platforms. The value of assets stored in this nascent financial system has climbed from less than $1bn at the start of 2020 to more than $200bn today (see chart).Until recently the Ethereum blockchain was the undisputed host of all this activity. It was created in 2015 as a more general-purpose version of Bitcoin. Bitcoin’s database stores information about transactions in the associated cryptocurrency, providing proof of who owns what at any time. Ethereum stores more information, such as lines of computer code. An application that can be programmed in code can be guaranteed to operate as written, thereby removing the need for an intermediary. But just as Ethereum improved upon Bitcoin, it too is now being usurped by newer, better technology. The fight resembles competition between operating systems for computers, says Jeremy Allaire, the boss of Circle, a firm that issues USD Coin, a popular crypto-token.Current blockchain technology is clunky. Both Bitcoin and Ethereum use a mechanism called “proof of work”, where computers race to solve mathematical problems to verify transactions, in return for a reward. This slows the networks down and limits capacity. Bitcoin can process only seven transactions per second; Ethereum can handle only 15. At busy times transactions are either very slow or very costly (and sometimes both). When demand to complete transactions on Ethereum’s network is high, the fees paid to the computers that verify them climb and settlement times grow. Your correspondent has paid as much as $70 to convert $500 into ether and waited for several minutes for a transfer from one crypto-wallet to another to take place.Developers have long been trying to improve Ethereum’s capacity. One prong of that is, in effect, rewiring it. Plans are afoot to shift Ethereum to a more easily scalable mechanism called “proof of stake” later this year. Another idea is to split the blockchain up, through a process called “sharding”. The shards will share the load, expanding capacity. Some developers are also working on ways to bundle transactions, reducing the number of them that must be directly verified.The problem is that each advance comes with costs. DeFi’s supporters tout the virtue of being able to conduct transactions securely and without centralised intermediaries. But gains in scale could come at a price, by making the platform less secure, or less decentralised. Pooling transactions before they reach the blockchain tends to be done by centralised entities. And it might be easier for hackers to attack a single shard of a blockchain than the entire thing. As a result, Ethereum developers have been slow to make changes.This sluggishness has made the network vulnerable in a different way—by encouraging rivals. In early 2021 nearly all of the assets locked in DeFi applications were on Ethereum’s network. But in a recent research note JPMorgan Chase, a bank, estimates that the share of DeFi applications using Ethereum fell to 70% by the end of 2021. A growing number of networks, such as Avalanche, Binance Smart Chain, Terra and Solana, now use proof of stake to run blockchains that do the same basic job as Ethereum, but much more quickly and cheaply. Avalanche and Solana, for instance, both process thousands of transactions a second.The experience of USD Coin illustrates these shifts. The token was launched on Ethereum just over three years ago, but has since been launched on a number of competitor networks, including Algorand, Hedera and Solana. Mr Allaire says that whereas transactions on Ethereum are subject to cost and speed limitations, those on Solana can handle “Visa-scale volumes” with “settlement finality in about 400 milliseconds and a transaction cost of about a twentieth of a penny”. Other DeFi applications, like SushiSwap, an exchange founded on Ethereum, have also launched on several other blockchains.With the planned changes to Ethereum likely to take at least a year, if not longer, “the risk is that…the Ethereum network will lose further market share”, wrote Nikolaos Panigirtzoglou of JPMorgan. For Mr Allaire, the picture is pleasingly competitive: “Just like with the web, where Windows, iOS and Android all compete, there are competing blockchain platforms, too.” He thinks the ultimate victor will be the platform that attracts the best developers to build applications and therefore reaps network effects.But the operating-system metaphor may only extend so far, in part because of the nature of open, public blockchains. Anyone can access the data they produce and view their operating code, making it possible to build bridges or applications that work across many blockchains, or which aggregate information from different blockchains. Some applications, like 1inch, already scan exchanges on several blockchains in order to find the best execution prices for various crypto transactions. “Multi-chain” blockchains, like Polkadot and Cosmos, act like bridges between different networks, making it possible to work across them.For as long as decentralised finance holds promise, competition to be the network of choice will naturally be fierce. But the idea that the eventual winner will take everything, gaining overall control over the digital economy and how it develops, may one day come to seem as outdated as the video cassette. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Battle of the blockchains” More

THE GENERAL public learned far more about supply chains last year than it probably cared to. A host of disruptions to production and shipping interacted with soaring demand for goods to produce bare shelves and rising prices. Although goods have been in short supply, the number of measures tracking supply-chain woes has proliferated at an impressive pace in recent months. All paint a picture of historically high levels of disruptions, and an uncertain path ahead.One gauge is an “ocean timeliness indicator”, published by Flexport, an American logistics firm. This reports how long it takes a shipment to move from the supplier’s warehouse to the departure gate of the destination port, for two big freight routes out of China: to Europe and America. Three years ago the journey to Europe took just under 60 days, and that to America just under 50. Travel times then rose steadily after the pandemic struck. But the trends for the two routes have diverged a little in recent months. Shipping times to Europe have fallen from above 110 days down to 108. Transport to America, at 114 days’ total journey time, takes longer than ever (see chart, left-hand panel).A global supply-chain pressures index, compiled from a variety of indicators by economists at the Federal Reserve Bank of New York, tells much the same story. Before the pandemic the highest-ever reading of the index (which the researchers have computed back to the 1990s) was in April 2011. Then, troubles associated with an earthquake and tsunami in Japan pushed the index up to 1.7 standard deviations above its long-run average. The measure surged much higher in spring 2020, to 3.9 standard deviations above the mean; last year it rose even further still, reaching 4.4 in October. It has since retreated, but only by a touch, continuing to signal a high level of stress (see chart, right-hand panel).Another indicator, maintained by Capital Economics, a consultancy, takes account of both goods and labour shortages across the G7 group of large economies. It also suggests that stresses remained intense in late 2021. Freight rates, for their part, rocketed during the first nine months of 2021, before flattening off in the final quarter of last year. Yet as high rates become negotiated into longer-duration shipping contracts, elevated costs could persist into 2023 and beyond.Whether and when matters improve depends on the course that both the virus and the global economic recovery now take. The appearance of the Omicron variant in parts of China could lead to lockdowns and further disruptions at ports. In America, a record number of covid-19 cases has meant that fewer longshoremen and truck drivers are in work. Hopes are dimming that a pause in production, associated with China’s new year holiday in early February, might allow ports to work through existing backlogs.Respite could come instead from cooling demand in the rich world, particularly in America, which in 2021 displayed a voracious appetite for all manner of goods. Analysts at Morgan Stanley, a bank, have constructed an indicator of supply-chain stress that looks at both supply and demand conditions. Their measure suggests that the latter are mainly responsible for the easing of pressures since late 2021. Trade growth has decelerated, for instance, thanks to reduced demand for both consumer and capital goods.Flexport predicts that, although Americans’ demand for goods relative to their appetite for services will remain unusually high in 2022, the imbalance should become less pronounced in the months ahead than it was over the past year. If people start to hear a little less about supply-chain snarls, their own shifting shopping habits may explain why. ■This article appeared in the Finance & economics section of the print edition under the headline “Chain reactions” More

MUCH AS HIGHER milk prices are typically good news for dairy farmers, higher interest rates are meant to be good news for bankers. Conventional lenders make their money on the difference between the interest they pay out to depositors and the interest they earn on loans and investments. As rates rise, that gap widens. And as interest rates are set by central banks that only tend to raise them when the economy is strong—when jobs are plentiful, spending is high and inflation is climbing—rising rates typically also imply that borrowers will be well placed to repay their debts.Treasury yields and interest-rate expectations in America have marched higher since the middle of December, when the Federal Reserve announced it would accelerate plans to taper its asset purchases. The yield on ten-year Treasuries climbed to 1.9% on January 18th, its highest level in two years. As recently as October investors expected just a solitary interest-rate increase from the Fed in 2022. But they have rapidly revised expectations as consumer-price inflation has surged, pencilling in between four and five rate rises over the course of the year.So when six of America’s largest banks—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo—reported earnings for the final quarter of 2021 between January 14th and 19th, their executives merrily offered guidance of greater interest income to come. Jamie Dimon, the boss of JPMorgan, thought that market expectations of interest-rate rises could even be too conservative. “My view is that there is a pretty good chance there will be more than four,” he said on an earnings call on January 14th. “It could be six or seven.”Yet, surprisingly, the lenders’ stock prices have tumbled (see chart). Shares in JPMorgan have fallen by nearly 12% since the bank reported its earnings. Goldman’s shares dropped by 7% in a single day on January 18th, after it released its earnings. What resolves this seeming paradox?The first potential explanation is costs, and climbing wage bills in particular. Compensation costs at Goldman in 2021 jumped by 33%, year on year, to $17.7bn, an increase of $4.4bn. Citi’s wage bill spiked by 33% in the fourth quarter, compared with a year earlier, and compensation expenses rose by 14% at JPMorgan and 10% at Bank of America over the same period.Higher wage costs in part reflect booming business: Goldman’s profits for 2021 as a whole were more than 60% above their previous all-time high. But dearer compensation adds to growing unease about how pervasively inflation has taken root in America. “There is real wage inflation everywhere in the economy,” David Solomon, Goldman’s boss, told investors on the bank’s earnings call.An alternative explanation for the share-price fall is that investors are fearful that higher rates are not unequivocally good news for America’s banks. The flood of cheap money pumped by the Fed into financial markets in 2020 and 2021 helped asset prices reach dizzying new heights. Goldman made $22bn from trading in 2021, the most since 2008.Easy money also helped fuel a bonanza in company-financing activity. The pace of dealmaking and initial public offerings (IPOs) has been almost bewildering. Global IPOs raised the mammoth sum of $600bn in capital in 2021, compared with around $200bn in 2019. Trading and corporate finance have together generated extraordinary profits for Wall Street firms. Global investment-banking revenues amounted to $129bn in 2021, a 40% increase over those of the year before, according to Dealogic, a data provider.But now, as inflation hots up and monetary policy shifts, the period of bumper profits that banks enjoyed since the middle of 2020 may be coming to an end. A look at the profits for the final three months of 2021 suggests that the slowdown may have already begun. Trading revenues dropped by 11% at JPMorgan, compared with the same period a year earlier (although revenues were still 6% above their level in 2019).Considering that bank bosses have been warning for months that trading and dealmaking revenues would eventually return to pre-pandemic levels, their imminent normalisation should, perhaps, have not come as a surprise to investors. The fact that share prices have fallen, then, could hint at a lurking fear. The arrival of extraordinary stimulus prompted an unusual period of profitability for bankers. Perhaps punters are worried that the removal of such stimulus could prove unusually dismal. ■For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Mixed messages” More

WHEN THE pandemic first struck, unemployment soared. Not since the Depression had American joblessness surpassed 14%, as it did in April 2020. But fears of a prolonged period of high unemployment did not come to pass. According to the latest available data, for November, the unemployment rate for the OECD club of mostly rich countries was only marginally higher than it was before the pandemic. By now it may even have drawn level. The rich world’s labour-market bounceback is the latest phenomenon provoking economists to look again at a foundational question in the discipline: whether robots help or harm workers.The gloomy narrative, which says that an invasion of job-killing robots is just around the corner, has for decades had an extraordinary hold on the popular imagination. Warning people of a jobless future has, ironically enough, created plenty of employment for ambitious public intellectuals looking for a book deal or a speaking opportunity. Shortly before the pandemic, though, other researchers were starting to question the received wisdom. The world was supposedly in the middle of an artificial-intelligence and machine-learning revolution, but by 2019 employment rates across advanced economies had risen to all-time highs. Japan and South Korea, where robot use was among the highest of all, happened to have the lowest rates of unemployment.Many thought that the pandemic would at last prove the doom-mongers right. In mid-2020 a highly cited paper published by America’s National Bureau of Economic Research argued that covid-19 “may accelerate the automation of jobs”, and another asserted that it was “reinforcing both the trend towards automation and its effects”. A paper published by the IMF wondered whether the jobs lost during the pandemic would “come back”. Part of the logic was that since robots don’t fall ill, bosses would turn to them instead of to people—as seemed to have happened in some previous pandemics. Others noted that bursts of automation tend to occur during recessions.Two years on, though, the evidence for automation-induced unemployment is scant, even as global investment spending is surging. The rich world faces a shortage of workers—by our reckoning there are a record 30m unfilled vacancies across the OECD—which is hard to reconcile with the idea that people are no longer necessary. Wage growth for low-skilled workers, whose occupations are generally thought to be more vulnerable to replacement by robots, is unusually fast. There is still little evidence from America that “routine” jobs, thought to be easier to automate, are shrinking relative to other sorts of jobs.Considering that so many doubts about the “robots kill jobs” narrative have arisen, it is not surprising that a different thesis is emerging. In a recent paper Philippe Aghion, Céline Antonin, Simon Bunel and Xavier Jaravel, economists at a range of French and British institutions, put forward a “new view” of robots, saying that “the direct effect of automation may be to increase employment at the firm level, not to reduce it.” This opinion, heretical as it may sound, does have a solid microeconomic foundation. Automation might help a firm become more profitable and thus expand, leading to a hiring spree. Technology might also allow firms to move into new areas, or to focus on products and services that are more labour-intensive.A growing body of research backs up the argument. Daisuke Adachi of Yale University and colleagues look at Japanese manufacturing between 1978 and 2017. They find that an increase of one robot unit per 1,000 workers boosts firms’ employment by 2.2%. Another study, by Joonas Tuhkuri of the Massachusetts Institute of Technology (MIT) and colleagues, looks at Finnish firms and concludes that their adoption of advanced technologies led to increases in hiring. Unpublished work by Michael Webb of Stanford University and Daniel Chandler of the London School of Economics examines machine tools in British industry and finds that automation had “a strong positive association with firm survival, and that greater initial automation was associated with increases in employment”.Non-economists can be forgiven for rolling their eyes at the profession’s apparent about-face. But things are not as simple as saying that economists had got it wrong before. For a start, statistical methods have improved since the publication of the foundational papers in robonomics, such as one by Carl Benedikt Frey and Michael Osborne of Oxford University in 2013, which was widely interpreted as saying that 47% of American employment was at risk of automation. The methodology used by Mr Adachi and his co-authors is particularly clever. One problem is untangling causality: firms on a hiring spree may also happen to buy robots, rather than the other way round. But the paper shows that firms buy robots when their prices fall. This helps establish a causal chain from cheaper robots, to more automation, to more jobs.The onrushing wave…of researchA second qualification is that the “new view” does not establish that automation is “good”. So far, it has had little to say about job quality and wages. But a forthcoming book by David Autor, David Mindell and Elisabeth Reynolds of MIT finds that even if robots do not create widespread joblessness, they may have helped create an environment where the rewards are “skewed towards the top”. Others argue that automation reduces job quality.Mr Aghion and his colleagues add that even if automation boosts employment at the level of the firm or industry, the effect across the economy as a whole is less clear. In theory robot-adopting companies could be so successful that they drive competitors out of business, reducing the total number of available jobs. Such questions leave researchers with plenty more to investigate. But what seems clear at this stage is that the era of sweeping, gloomy narratives about automation is well and truly over. ■Read more from Free Exchange, our column on economics:Will remote work stick after the pandemic? (Jan 15th)The IMF bashes the IMF over Argentina (Jan 8th)New research counts the costs of the Sino-American trade war (Jan 1st)For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.This article appeared in the Finance & economics section of the print edition under the headline “Update in progress” More

THE NICETIES of corporate finance rarely attract the attention of activists. It is rarer still that those at either end of the political spectrum agree on the need for change. When it comes to the tax system’s preferential treatment for debt over equity, however, both the left-wing Tax Justice Network and the fiscally conservative Tax Foundation agree that the “debt bias” needs correcting. But the degree of consensus belies the difficulty of getting it done.Most countries that levy taxes on corporate profits treat debt more favourably than equity, largely because they allow interest payments, like other costs, to be deducted from tax bills. That gives companies a huge incentive to borrow, rather than to fund themselves through equity. In America, Britain, Germany and Japan, debt-based finance is taxed at rates that are 3.8-6 percentage points lower than those on equity investments, according to the OECD. The result is more indebtedness than would otherwise have been the case. According to the Securities Industry and Financial Markets Association, the value of outstanding debt securities amounts to $123trn, exceeding the $106trn in listed equities globally. The IMF estimated in 2016 that the debt bias explained as much as 20% of investment banks’ total leverage.The bias affects a swathe of firms, from small and unlisted family affairs to the world’s biggest public companies; and higher debt loads in general leave them more exposed to economic shocks. But, because trouble at highly leveraged lenders can easily throw the rest of the financial system into turmoil, researchers have tended to concentrate on the effects on banks. Total earnings are often thin relative to the large flows of interest payments made to and by lenders, and removing the tax deductibility of interest could make some of them unprofitable.The debt bias grows as corporate taxes rise, posing headaches for governments hoping to shake down profitable companies to plug fiscal holes. It has therefore not gone unnoticed by the authorities—though recent attempts to restore balance have been marginal. A rule that came into effect this year in America caps debt-interest tax-deductibility at 30% of a company’s earnings before interest and taxes, as part of President Donald Trump’s 2017 tax reforms. The EU is mulling a “debt-equity bias reduction allowance” , the details of which are yet to be made public.What would wholesale reform look like? In a paper published in 2017, Mark Roe of Harvard Law School and Michael Tröge of ESCP Business School put forward some ideas. One is to treat debt less preferentially. They imagine a bank with $50bn in gross profits and $40bn in interest payments. With full deduction for interest and a corporate-tax rate of 20%, the bank would pay tax of $2bn, and have an incentive to rack up debt. But if the interest deduction were removed altogether, a tax rate of 20% would wipe out the bank’s entire net profit. One solution would be to withdraw deductibility, but to lower the tax on gross profits. A rate of 7% in that scenario would yield as much to the taxman, and pose the same burden to the bank, as a 35% tax on net profits.Another option, which may be more politically viable than cutting tax rates, is to make issuing equity more attractive. The researchers propose a version of an allowance for corporate equity (ACE), which would make some share of a bank’s equity—above its regulatory requirements—as tax-friendly as debt. If a bank had $100bn in equity above what it was required to issue, an allowance of 5% would reduce its taxable profit by $5bn, the same way that $100bn in debt with an interest rate of 5% would be treated. The principle could be applied just as easily to non-financial firms.Indeed, some European countries, such as Italy and Malta, have introduced ACE schemes for a wider set of companies. The OECD reckons that Italy’s tax bias in favour of debt is now less than a percentage point. The European Commission finds that the country’s scheme has reduced the leverage ratio of manufacturers by nine percentage points, with a larger effect on smaller firms.Reducing the bias, then, is not impossible. But working out whether reform will upset the vast edifice of debt financing will be much harder to do, especially in the larger markets of America or the wider EU. (Italy’s scheme covers only newly issued equity for this reason.) The preference for debt is deep-rooted enough that ripping it out could have large, enduring effects on portfolios around the world. Serious change may not come as quickly as the activists hope.For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.Read more from Buttonwood, our columnist on financial markets:The faster metabolism of finance, as seen by a veteran broker (Jan 15th)Why gold has lost some of its investment allure (Jan 8th)Why capital will become scarcer in the 2020s (Jan 1st)This article appeared in the Finance & economics section of the print edition under the headline “Conflict of interest” More