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Why Official Inflation Measures Don't Work

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Modern macroeconomics has made price stability the primary objective of monetary policy. It is assumed that central banks can ensure price stability by skillfully managing the money supply, thereby creating the conditions for economic growth and prosperity.

In order to provide a safety buffer against the dreaded price deflation, central banks around the world try to generate a positive but moderate rate of price inflation. Price stability thus means a stable rate of inflation. The prices of goods and services should on average rise slowly at a constant rate over the medium and long term. In the eurozone, the aim is to achieve a price inflation rate close to but below 2 percent.

However, it cannot be denied that measuring a general price level and its rate of change is associated with major problems. The formal inflation target of the central banks must be operationalized in practice. It is therefore necessary to determine which prices are targeted and how they are to be summarized in a weighted average.

The Harmonized Index of Consumer Prices

The member states of the eurozone have agreed on a standardized procedure for measuring inflation. The Harmonized Index of Consumer Prices (HICP) is the operationalized target variable of monetary policy. The calculation of the HICP is relatively complex,1 as attempts are made to eliminate possible distortions in the measurement of inflation by means of elaborate procedures and estimates. However, it is highly questionable whether this is successful. In the following, I would like to take a closer look at two important sources of bias.

Substitution Effects

The HICP consists of twelve subindices2 which group together different classes of goods. Each of the subindices consists of different subcategories, which are again subdivided until the individual prices of certain goods and services are reached at the lowest level. These unit prices must be adequately weighted for the calculation of the index. The principle is that goods and services on which a large proportion of income is spent must be given a higher weighting than those goods and services that are purchased only very sporadically and in small quantities. Formally, therefore, the weights are determined by the real turnover shares. In Germany, for example, the weight of the subindex “Food and non-alcoholic beverages” (CP01) currently stands at 11.3 percent, which means that the average German household is assumed to spend 11.3 percent of its consumption expenditure on goods in this category. By comparison, the weight for “Alcoholic beverages, tobacco and narcotics” (CP02) is 4.2 percent.

As consumption decisions are constantly changing, the weighting scheme applied may lead to distortions in the measurement of inflation. In the 1990s, for example, the Boskin Commission found a systematic overestimation of price inflation rates in the US of 0.4 percentage points per year.3 The cause of the distortion was the systematic substitution behavior of households.

The argument is as follows. Let us assume a base year with a given weighting scheme for all individual goods and services included in the index. This weighting scheme reflects the consumption behavior of households in the base year. This behavior changes over time, partly because prices for some goods rise faster than for others. Over time, households will tend to buy less of those goods whose prices rise faster. And they will instead buy more of other goods that have remained relatively cheap. Households will thus substitute goods with a relatively high rate of inflation for goods with a relatively low rate of inflation. If the weighting scheme is not changed, an upward distortion of the measured price inflation will result. One would overestimate price inflation.

Let me illustrate this with a simple example. Imagine a price index for soft drinks. The purchase prices of Coke and Pepsi are included in the index at 50 percent each, because on average households spend proportionally the same amount on both beverages. Assume that over a certain period of time the price of Pepsi increases by 5 percent per year. The price of Coke increases by only 1 percent annually. If the weighting is not changed, the overall inflation rate is 3 percent. In fact, however, the consumption behavior has shifted due to the different inflation rates. On average, households now buy more Coke and less Pepsi. Let us assume that households now spend four times as much on Coke as on Pepsi. The weighting would therefore have to be adjusted so that Coca Cola is included in the index at 80 percent and Pepsi at only 20 percent. The adjusted annual inflation rate, using the new weighting scheme, would therefore be 1.8 percent instead of 3 percent.4

As a result of this reasoning, the weighting scheme of the HICP is now continuously adjusted, with the result that reported price inflation is lower than it would have been otherwise. Let us disregard any possible inaccuracies and assume that the adjustments to the weighting scheme perfectly reflect changing consumer behavior. Wouldn’t this be overlooking a crucial point?

The answer is yes. If consumers do not switch to other products because of changing preferences, but simply because the prices of the products they would actually prefer have risen disproportionately, then consumers are worse off. The economist would call this a welfare loss. This welfare loss corresponds to a real increase in the cost of living, which is not reflected in the official figures if the weighting scheme in the index is adjusted accurately according to the changing consumption decisions of households. We end up with a downward distortion of the measured price inflation. The rate of inflation is then underestimated.

Quality Changes

The second major sources of distortions in official inflation statistics are changes in the quality of goods. Here, too, the Boskin Commission of the 1990s found an upward bias of 0.4 percentage points per year in the US because quality improvements in products were not adequately priced in.5 The measured inflation rate was therefore once again too high.

The theoretical argument is compelling. Assume that prices do not change over a given period of time, but that the quality of the goods increases steadily. Then consumers get better quality for the same money. If you now say that the inflation rate is 0 percent, you are exaggerating. In fact, ceteris paribus the standard of living has improved: you get more quality for the same money, or the same quality for less money. Hence, the reported inflation rate should be negative.

In the following period, not only in America, but also in Europe, so-called hedonic methods of quality adjustment were introduced. For many products, therefore, not only are the observed purchase prices included in the index, but adjusted prices that are supposed to reflect the quality changes.6 In the following, I would like to address only two fundamental problems with quality adjustment.

First, producers have an incentive to highlight the quality improvements in the products they sell. When a car or computer becomes more powerful or faster, this can be seen in measurable core values. The car has more horsepower. The computer has a faster CPU. Manufacturers will openly communicate these core values and use them to promote their products. Quality improvements will thus be made transparent and comprehensible for buyers. They can therefore also be taken into account relatively easily in official statistics.7

On the other hand, producers have an incentive to conceal possible deteriorations in quality from buyers. If the casing and wiring of a computer are made of inferior material, this is usually not mentioned in the product description. If you want to detect deteriorations in quality, you often have to look very closely. In many cases, they are not easily detectable and cannot be quantified.

This leads to a systematic distortion. On the one hand, quality improvements are visible and taken into account. The prices of the products in question are reduced in the official statistics. Quality deteriorations, on the other hand, remain undetected and the prices of the products concerned are not increased accordingly. It is therefore probable that the adjustments made here also create a downward bias. The official statistics then report a price inflation rate that is too low.

The second point I would like to add has not yet been taken into account at all in the relevant literature. Let us assume that all quality changes are accurately priced in by official statistics. Even if this were the case, it would create a downward bias in reported price inflation. The reason for this is that a given quality improvement in a product already creates deflationary price pressures on other goods without any adjustment being made at all. This pressure arises in particular for the previously common and now inferior predecessors of the new product.

For example, when Apple launched the very first smartphone on the market, the iPhone, a negative price pressure on conventional mobile phones arose, because Apple dug away market shares from competing mobile phone manufacturers with its new product. As a result, competitors were forced to charge lower prices for their products than would otherwise have been the case. Only by offering lower prices could at least some buyers be convinced not to switch to the new iPhone.

This negative price pressure on competing products, which results from innovation, is already reducing the measured inflation rates. This means that a given improvement in quality is partly reflected in falling prices for other goods. If the price of the quality-improved good is adjusted in addition to this market adjustment (assuming that it is even possible to do this accurately), we would overshoot the mark. Price inflation would be underestimated.

Conclusion

There is no doubt that both substitution effects and changes in the quality of goods and services pose practically insoluble problems for official inflation statistics. Quality changes cannot be quantified objectively. This circumstance alone opens up enormous discretionary scope for official price statistics, which also has an impact on monetary policy. The M1 money supply in the euro area has increased more than fivefold since its inception.8 This could also be politically justified, because the reported price inflation was relatively low. Prices in the euro area have officially increased by only slightly more than 40 percent since 1999. Is price inflation systematically underestimated? The suspicion is obvious.

Even if the practical problems of measuring inflation, which arise from substitution effects and quality changes, could be solved sufficiently well, the application of the procedures currently used in official statistics would lead to a systematic underestimation of price inflation. The upward biases, which are undoubtedly relevant, once identified are reversed into downward biases when we consider other factors. On both points—substitution effects and quality changes—the results would overshoot the mark, even if the current methods could be applied accurately and flawlessly.

In addition, there are other gaps in the official measurement of inflation. Asset prices are not taken into account. However, disproportionate price inflation has been taking place in recent decades, especially for long-term assets such as real estate and stocks. It is not surprising that the median of subjectively perceived price inflation rates in the eurozone is 5 percentage points higher per year than the officially reported inflation rate.9

  • 1. It is therefore also not transparent for the outside observer. The statistical offices provide much of the data used, but far from all. In particular, they do not provide information on the raw data used, i.e., on the prices actually observed and documented before they are included in the statistics after various adjustments.
  • 2. The twelve subindices are CP01: Food and non-alcoholic beverages; CP02: Alcoholic beverages, tobacco and narcotics; CP03: Clothing and footwear; CP04: Housing, water, electricity, gas and other fuels; CP05: Household goods and routine household maintenance; CP06: Health; CP07: Transport; CP08: Post and telecommunications; CP09: Recreation and culture; CP10: Education; CP11: Restaurants and hotels; and CP12: Miscellaneous goods and services.
  • 3. For Germany, the distortion was found to be somewhat less pronounced shortly afterwards (0.1 percentage points). See Hoffmann “Probleme der Inflationsmessung in Deutschland” (Discussion Paper, Deutsche Bundesbank, 1998).
  • 4. In this simplified example, the adjusted inflation rate results from the newly weighted average of the individual inflation rates: 0.8*1+0.2*5=1.8; in contrast to the original weighting: 0.5*1+0.5*5=3.
  • 5. For Germany, the estimated distortion due to quality improvements was 0.45 percentage points.
  • 6. No information on the extent of the quality adjustments is provided by the relevant offices. Raw data prior to quality adjustment are not made publicly available in Europe.
  • 7. The word “relatively” is important here. In the final analysis, quality improvements are of course impossible to price in and quantify, because they are subjective.
  • 8. From January 1999, when the euro was introduced as book money, M1 rose from €1,807,005 million to €9,335,181 million in March 2020, an increase of 5.17 times.
  • 9. See Karl-Friedrich Israel, “Why Has There Been So Little Consumer Price Inflation?,” Mises Wire, May 11, 2020, https://mises.org/wire/why-has-there-been-so-little-consumer-price-inflation?fbclid=IwAR2y6PQnZpTM2kuQp-XLCom3r0SP2rWC1WLzqOQ3npAWFaEFRaAyQ61PJeA.



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Economy

The Media Has Conveniently Forgotten George W. Bush's Many Atrocities

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Former president George W. Bush has returned to the spotlight to give moral guidance to America in these troubled times. In a statement released on Tuesday, Bush announced that he was “anguished” by the “brutal suffocation” of George Floyd and declared that “lasting peace in our communities requires truly equal justice. The rule of law ultimately depends on the fairness and legitimacy of the legal system. And achieving justice for all is the duty of all.”

Bush’s declaration was greeted with thunderous applause by the usual suspects who portray him as the virtuous Republican in contrast to Trump. While the media portrays Bush’s pious piffle as a visionary triumph of principle, Americans need to vividly recall the lies and atrocities that permeated his eight years as president.

In an October 2017 speech in a “national forum on liberty” at the George W. Bush Institute in New York City, Bush bemoaned that “Our politics seems more vulnerable to conspiracy theories and outright fabrication.” Coming from Bush, this had as much credibility as former president Bill Clinton bewailing the decline of chastity.

Most media coverage of Bush nowadays either ignores the falsehoods he used to take America to war in Iraq or portrays him as a good man who received incorrect information. But Bush was lying from the get-go on Iraq and was determined to drag the nation into another Middle East war. From January 2003 onwards, Bush constantly portrayed the US as an innocent victim of Saddam Hussein’s imminent aggression and repeatedly claimed that war was being “forced upon us.” That was never the case. As the Center for Public Integrity reported, Bush made “232 false statements about weapons of mass destruction in Iraq and another 28 false statements about Iraq’s links to Al Qaeda.” As the lies by which he sold the Iraq War unraveled, Bush resorted to vilifying critics as traitors in a 2006 speech to the Veterans of Foreign Wars.

Bush’s lies led to the killing of more than four thousand American troops and hundreds of thousands of Iraqi civilians. But since those folks are dead and gone anyhow, the media instead lauds Bush’s selection to be in a Kennedy Center art show displaying his borderline primitive oil paintings.

In February 2018, Bush was paid lavishly to give a prodemocracy speech in the United Arab Emirates, ruled by a notorious Arab dictatorship. He proclaimed: “Our democracy is only as good as people trust the results.” He openly fretted about Russian “meddling” in the 2016 US election.

But when he was president, Bush acted as if the United States were entitled to intervene in any foreign election he pleased. He boasted in 2005 that his administration had budgeted almost $5 billion “for programs to support democratic change around the world,” much of which was spent on tampering with foreign vote totals. When Iraq held elections in 2005, Bush approved a massive covert aid program for pro-American Iraqi parties. The Bush administration spent over $65 million to boost their favored candidate in the 2004 Ukraine election. Yet, with boundless hypocrisy, Bush proclaimed that “any (Ukrainian) election…ought to be free from any foreign influence.” US government-financed organizations helped spur coups in Venezuela in 2002 and Haiti in 2004. Both of those nations, along with Ukraine, remain political train wrecks.

In that October 2017 New York speech, Bush proclaimed: “No democracy pretends to be a tyranny.” But ravaging the Constitution was apparently part of his job description when he was president. Shortly after 9-11, Bush turned back the clock to before 1215 (when the Magna Carta was signed), formally suspending habeas corpus and claiming a prerogative to imprison indefinitely anyone he labeled a terrorist suspect. In 2002, Justice Department lawyers informed Bush that the president was entitled to violate the law during wartime—and the war on terror was expected to continue indefinitely. In 2004, Bush White House counsel Alberto Gonzales formally asserted a “commander-in-chief override power” entitling presidents to ignore the Bill of Rights.

Under Bush, the US government embraced barbaric practices which did more to destroy America’s moral credibility than all of Trump’s tweets combined. Bush’s “enhanced interrogation” regime included endless high-volume repetition of a Meow Mix cat food commercial at Guantanamo, head slapping, waterboarding, exposure to frigid temperatures, and manacling for many hours in stress positions. After the Supreme Court rebuffed some of Bush’s power grabs in 2006, he pushed through Congress a bill that retroactively legalized torture—one of the worst legislative disgraces since the Fugitive Slave Act of 1850. During his years in the White House, Bush perennially denied that he had approved torture. But in 2010, during an author tour to promote his new memoir, he bragged about approving waterboarding for terrorist suspects.

Is Bush nominating himself to be the nation’s racial healer? When he was president, Bush inflicted more financial ruin on blacks than any president since Woodrow Wilson (who brought Jim Crow barbarities to the federal government). Bush trumpeted his plans to close the gap between black and white homeownership rates and promised in 2002 to “use the mighty muscle of the federal government” to solve the problem. Bush was determined to end the bias against people who wanted to buy a home but had no money. Congress passed Bush’s American Dream Downpayment Act in 2003, authorizing federal handouts to first-time homebuyers of up to $10,000 or 6 percent of the home’s purchase price. Bush also swayed Congress to permit the Federal Housing Administration to make no–down payment loans to low-income Americans. Bush proclaimed: “Core American values of individuality, thrift, responsibility, and self-reliance are embodied in homeownership.” In Bush’s eyes, self-reliance was so wonderful that the government should subsidize it. And it didn’t matter whether recipients were creditworthy, because politicians meant well. Bush’s 2004 reelection campaign trumpeted his down payment giveaways, a shining example of “compassionate conservatism.”

Thanks in large part to his policies, minority households saw the fastest growth in homeownership leading up to the 2007 recession. The housing collapse ravaged the net worth of black and Hispanic households. “The implosion of the subprime lending market has left a scar on the finances of black Americans—one that not only has wiped out a generation of economic progress but could leave them at a financial disadvantage for decades,” the Washington Post reported in 2012. The median net worth for Hispanic households declined by 66 percent between 2005 and 2009. That devastation was aptly described in a 2017 federal appeals court dissenting opinion as “wrecking ball benevolence” (quoting a 2004 Barron’s op-ed I wrote). But almost none of the media coverage of the ex-president reminds people of the economic carnage of this Bush vote-buying binge.

It is possible to condemn police brutality and, even more importantly, the evil laws and judicial doctrines that enable police to tyrannize other Americans without any help from a demagogic ex-president who ravaged our rights, liberties, and peace. As I commented in an August 2003 USA Today op-ed, “Whether Bush and his appointees will be held personally liable for their [Iraq War] falsehoods is a grave test for American democracy.” The revival of Bush’s reputation vivifies how our political media system failed that test. As long as George Bush doesn’t turn himself in for committing war crimes, all of his talk about “achieving justice for all” is rubbish.



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Economy

Police Are Killing Fewer People In Big Cities, But More In Suburban And Rural America 

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Six years after nationwide protests against police violence captured the country’s attention, the recent killings of Breonna Taylor and George Floyd have put the issue of police violence back into national focus. Many are left asking what, if anything, has really changed?

In the absence of comprehensive federal data, databases such as Fatal Encounters, Mapping Police Violence and The Washington Post’s Fatal Force project have tracked these killings year after year. And the data produced by these projects suggests that police, at least on a national level, are killing people as often now as they were before Michael Brown’s death in Ferguson, Missouri, sparked widespread protests in 2014.

But these numbers don’t tell the whole story. While the nationwide total of people killed by police nationwide has remained steady, the numbers have dropped significantly in America’s largest cities, likely due to reforms to use-of-force policies implemented in the wake of high-profile deaths. Those decreases, however, have been offset by increases in police killings in more suburban and rural areas. It seems that solutions that can reduce police killings exist, in other words — the issue may be whether an area has the political will to enact them.

Indeed, looking only at the 30 most populous cities in the country,1 you see a substantial decrease in the number of people killed by police in recent years.

Police departments in America’s 30 largest cities killed 30 percent fewer people in 2019 than in 2013, the year before the Ferguson protests began, according to the Mapping Police Violence database. Similarly, The Washington Post’s database shows 17 percent fewer killings by these agencies in 2019 compared to 2015, the earliest year it tracks.

This data isn’t perfect. The databases have slightly different methodologies for collecting and including police killings. And not everyone who’s shot winds up dying, which means some people who are shot by police don’t end up in one of these tracking projects. So to better test and understand the progress made in these big cities, I compiled an expanded database of all fatal and nonfatal police shootings by these departments, which expands our view of any changes in police behavior. Based on data published on police departments’ websites and reported in local media databases, I found data covering police shootings in 2013-2019 for 23 of the 30 departments.2 An analysis of this data shows that police shootings in these departments dropped 37 percent from 2013 to 2019.

So why haven’t these trends resulted in fewer people killed by police nationwide?

Examining the geography of police killings based on population density (a methodology developed by the real estate site Trulia, which was featured in a previous FiveThirtyEight article), police killings in suburban and rural areas appear to have increased during this time period — offsetting reductions in big cities.

This shift mirrors other trends within the criminal justice system. For example, since 2013, the number of people in jail per capita in urban areas has fallen by 22 percent, while rates have increased by 26 percent in rural areas, according to a study by the Vera Institute of Justice.

Similarly, arrest rates have declined in major cities at a faster pace than arrest rates in suburban and rural areas. Fewer arrests means fewer police encounters that could escalate to deadly force — police are substantially more likely to use force when making an arrest than in other interactions with the public — so falling arrest numbers could have a marked effect on police killings. Comparing police shootings data to the arrests data each department reported in the FBI Uniform Crime Report shows that departments that reported larger reductions in arrests from 2013-20183 also reported larger reductions in police shootings. Specifically, cities that reduced police shootings also made 35 percent fewer arrests in 2018 than 2013, compared to only a 4 percent drop in arrests in cities where police shootings increased or remained constant. These declining arrest rates have been attributed, in part, to reforms reducing enforcement of low-level offenses such as marijuana possession, disorderly conduct, loitering and prostitution.

Other reforms may be making a difference as well. Police shootings dropped in Philadelphia, San Francisco and Baltimore after the cities began reforming their use-of-force policies to match recommendations from the Department of Justice. In Chicago, police shootings dropped following protests over the shooting of Laquan McDonald and fell further after the city adopted more restrictive use-of-force policies and a new police accountability system. Denver also adopted more restrictive use-of-force policies in 2017, requiring de-escalation as an alternative to force. Los Angeles police shootings reportedly declined to the lowest number in 30 years in 2019, which officials attribute to new policies requiring officers to use de-escalation and alternatives to deadly force. Shootings dropped precipitously in Phoenix a year after public scrutiny led the department to evaluate its practices and implement changes to its use-of-force policy. And, in response to local protests over the 2012 killing of James Harper, Dallas implemented a range of policies to emphasize de-escalation, which local authorities credit with producing a sustained decline in police shootings.

This suggests that reforms may be working in the places that have implemented them. Many of these reforms were initiated in response to protests and public outcry over high-profile deaths at the hands of police — most notably in Baltimore following the police killing of Freddie Gray, in San Francisco following the killing of Mario Woods, and in Chicago and Dallas following the deaths of Laquan McDonald and James Harper. This suggests that protests and public pressure may have played an important role in producing policy changes that reduced police shootings, at least in some cities.

Of course, that’s a double-edged finding. The absence of reforms in more suburban and rural cities and towns could explain why police killings haven’t decreased in those areas — though it may not explain why they increased. There’s still a lot we need to investigate about how policing is changing in rural and suburban areas. More Latinos are being killed by police in suburban areas than before, according to Mapping Police Violence data, while more white people are being killed in rural areas than before. Some of this might reflect demographic shifts (though killings have dropped in urban areas across all races) or other changes in the criminal justice system — for example, the share of the population that’s in jail awaiting trial has been increasing in rural areas. Gun-related suicides and gun deaths in general appear to be increasing in rural areas, which might also be spilling over into policing practices and responses.

Still, if we know that certain policies reduce police violence, adapting those reforms to smaller cities, suburban and rural communities could be a pathway to reducing police violence in the U.S. overall. But that would take political willpower at the local level, and the country’s growing urban-rural political divide might make that difficult.

FiveThirtyEight Politics Podcast: The data behind police violence



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Newsletter: The Slow Process of Healing the Economy

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This is the web version of the WSJ’s newsletter on the economy. You can sign up for daily delivery here.

The American Economy is Healing—Slowly

The U.S. economy didn’t deteriorate as badly in May as it did in April. That is a far cry from saying that it is getting better. The Institute for Supply Management said its index for nonmanufacturing activity climbed to 45.4 last month from 41.8 in April. That came on top of its report Monday that its manufacturing index had climbed to 43.1 from 41.5. But anything under 50 indicates worsening activity. The underlying message: Even though restrictions to stem the spread of the novel coronavirus eased last month and more Main Street businesses were able to at least partially resume operations, the crisis is far from over, Justin Lahart writes.

WHAT TO WATCH TODAY

The European Central Bank releases a policy statement at 7:45 a.m. ET.

U.S. jobless claims for the week ending May 30 are expected to fall to 1.8 million from 2.123 million a week earlier. (8:30 a.m. ET)

The U.S. trade deficit for April is expected to widen to $50 billion from $44.4 billion the prior month. (8:30 a.m. ET)

U.S. productivity is expected to fall 2.7% in the first quarter, unrevised from a previous estimate. (8:30 a.m. ET)

Japan household spending for April is out at 7:30 p.m. ET.

TOP STORIES

Back to Work

Last week’s jobless claims report showed the number of people receiving unemployment benefits fell for the first time since February. Another drop would suggest people are being rehired. Even so, it could take years for the economy to regain the millions of jobs lost during the coronavirus pandemic, Sarah Chaney reports. 

The latest report is out today at 8:30 a.m. ET.

States across the country are being hit by unemployment-benefit fraud, reflecting the vulnerabilities that workers and governments face in the midst of historically high levels of jobless claims. Scott Dahl, the inspector general for the U.S. Labor Department, said at least $26 billion in unemployment insurance payments could be wasted during the pandemic, Sarah Chaney reports.

The coronavirus pandemic caused unemployment to rise in every metropolitan area in the U.S. in April. Tourist destinations and factory towns were hardest hit, Eric Morath reports.

Damage, Devastation

Looting strikes a second blow to businesses in minority neighborhoods. Vandalism and theft at many large retailers are delaying efforts to restart an economy that lost millions of jobs to the Covid-19 pandemic. The damage to small businesses could be more devastating, potentially permanently closing doors. Small businesses, especially minority-owned ones, typically have little savings and very often don’t have multiple locations to help blunt the ravages of the pandemic and the looting, Scott Calvert and Ruth Simon report.

Jumbled supply chains and new safety protocols are hobbling U.S. manufacturers as they look to emerge from coronavirus shutdowns. Some factories are looking for alternative suppliers to compensate for plants that remain closed or are overwhelmed by orders for items in high demand. Other companies say new protective equipment and procedures to add space between workers will weigh on their profits and productivity, Austen Hufford and Bob Tita report.

After the Money’s Gone

Nine weeks after Congress approved its largest-ever economic relief measure to counter the coronavirus pandemic, most of the direct cash assistance aimed at keeping the economy afloat has been spent or committed. The so-called Cares Act included a projected $1.2 trillion in direct aid; Congress topped up that sum in April with an additional $400 billion. Of the total, roughly $1.12 trillion, or about 70%, has been distributed, Kate Davidson and Paul Kiernan report.

Germany adopted its second economic-stimulus package since the start of the coronavirus pandemic, bringing their total cost to €1.3 trillion ($1.5 trillion), by far the largest in Europe as a share of gross domestic product. Years of budget surpluses and negative borrowing costs have allowed Germany to rapidly deploy a vast protective shield to cushion the impact of the pandemic, Bojan Pancevski and William Boston report.

U.S.-China Chill

The Trump administration threatened Wednesday to bar mainland Chinese airlines from flying to and from the U.S. starting later this month, saying Beijing has failed to approve resumption of these routes by U.S. carriers. The threat of a ban was the latest sign of souring U.S.-China relations that are at their worst in more than three decades, Alison Sider and Ted Mann report.

Chinese state-controlled companies have canceled some shipments from U.S. farm exporters, according to maritime officials. The cancellations involve orders made following the phase one trade pact between the two countries signed in January. China committed in the agreement to increasing purchases of U.S. goods and services by $200 billion over 2017 levels, Costas Paris reports.

Hot Soup

Campbell Soup raised earnings expectations for its fiscal year after demand skyrocketed for its soup and snacks during the coronavirus pandemic. Sales in its latest quarter jumped 17% on a comparable basis, including a 35% surge in U.S. soup sales—the strongest performance by that metric in decades. But demand has exceeded Campbell’s manufacturing capacity, causing it to lose market share in heat-and-eat soups, Annie Gasparro reports.

QUOTE OF THE DAY

“This is the biggest recession we’ve experienced in our lifetime. It’s like a car crash, without an airbag.” —Jérôme Haegeli, chief economist at insurance company Swiss Re

WHAT ELSE WE’RE READING

Could anything good come of coronavirus? “If more of us end up working remotely after the pandemic, there is one change that could make work better: ending the misalignment between the school day and the work day. The gap between 3 p.m. and 5 p.m. in many countries is grossly unfair to working parents. Some propose making school days longer, but I advocate shorter work days,” the University of Pennsylvania’s Adam Grant writes in the Economist.

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