FRIDAY, SEPTEMBER 10, 2021
BLOGS/OP-EDS
A Momentous Shift Is Taking Shape in the Labor Market (John Authers, Bloomberg) ($)
John Authers notes that wage growth for the low skilled has now outpaced high skill wage growth for 3 months, a new record, “…The latest revision of the Atlanta Federal Reserve’s Wage Tracker, for August, is now out. It’s enthralling research that has been running since 1997, and breaks down earnings growth by gender, age, skill, level of education and so on. This is how wages have risen since 1997 for the high-skilled, compared to the low-skilled: For the third month in a row, wages for the low-skilled have risen faster than for the high-skilled. In the previous history of the survey, which now goes back almost 25 years, this had only ever happened in two months, in early 2010. Wage growth for the low-skilled is also exceeding that for the high-skilled by the most on record. In terms of the momentous macroeconomic issues of the moment, this is good for growth, as poorer people are more likely to spend their pay rises than richer people. It’s also potentially bad for inflation. Wage growth for the lowest skilled is the fastest since August 2008 (not coincidentally, the month before the Lehman bankruptcy), and that could easily lead to higher prices. More interestingly still, it does suggest a shift in the balance of power between labor and capital. This isn’t as yet a deep-seated or well-established trend, of course. But if it continues it could rattle a lot of assumptions, and alleviate a lot of social tension. And that leads to one final readthrough. Low-skilled workers endured a truly terrible deal from 2011 to 2013, when their wages didn’t even gain 1% per year. Higher-skilled workers did far better. Barack Obama was president at the time. If any one chart helps to explain how Donald Trump was able to disrupt the coalition that elected Obama, this might be it. And if this continues, it could be fantastic political news for Joe Biden, who could do with some at present. It’s worth watching this, very closely….”
The Smart Reason to be Worried About Inflation: a Conversation with Kevin Ferry (Matt Klein, The Overshoot) ($)
Matt Klein who remains sanguine about inflationary prospects on why he might be wrong, “…The short version is that, in his view, the pandemic won’t ever “end”, which means that the old normal will never return, which means that we will have years of shortages and price increases as consumers and businesses gradually adjust to the new order. Structural changes in the economy mean that the pre-pandemic world of “too much everything” is over. Inflation is one of the ways that societies manage the tradeoffs associated with these kinds of adjustments, which means we should expect more of it, along with rationing and delivery delays, in the years to come….[Kevin Ferry] “That means the change we saw in moving to goods will never fully be undone. It’s not just supply chains, it’s also operations. Everything is taking a lot longer and it’s not getting fixed. To me the question is: what is inflation? I think the stuff I learned in college was wrong. Back then they said it was all a “monetary phenomenon” caused by central banks. Now that I’m a “shortagist” or a “neo-inflationist” I think we have to go back to an old definition of inflation. It’s hard for me to say that there’s an abundance of stuff when there are shortages of lots of stuff. Maybe we need to invest more in making new stuff but that means a lot of reallocation. That takes time and it means that a lot of existing capacity has to be written off. I don’t think the labor shortage is because of UI, but it’s a lot harder to find workers than it used to be, even in industries like mine that are doing really well…”
Debt Markets’ Eerie Calm Echoes Eve of 2007 Credit Crisis (John Authers, Bloomberg) ($)
John Authers wonders if there is a signal in the lack of noise in high yield debt markets, “…This chart shows the yield on the Bloomberg U.S. Corporate High Yield index, which has been at its lowest ever this year, and its spread compared to Treasury bonds, which is closing in on its record tightest level set ominously on the eve of the credit crisis in summer 2007: This isn’t merely a phenomenon of the American junk bond market. If we look at the euro zone, where the bond market had to contend with what was in effect an extended crisis that lasted well into the last decade, we see spreads compared to Treasuries reaching record lows as well, on the eve of a European Central Bank meeting: Credit spreads in Europe haven’t been this tight this consistently since, again, the summer of 2007. In the credit market, unlike stocks, stability like this should ring alarm bells. Investment-grade issuers, and not just low-grade junk issuers, have rushed to issue more debt this week, locking in generously cheap funding while they have the chance. That means that that much more debt will have to be rolled over in future, creating that much more pressure on the Federal Reserve and other central banks to keep the liquidity flowing. If potential lenders aren’t able to refinance that debt in future, then we have the seeds of a Minsky Moment, the point at which investors recognize that debt is unsustainable and lose confidence. If we take this argument a step further, it suggests that there could be a grave error in what appears to be the current policy of first tapering off asset purchases (which help to provide potential lenders with liquidity by giving them cash in return for bonds they were holding) and only later raising rates. Raising rates while keeping the liquidity going would discourage yet more debt issuance, while ensuring that existing debt can be rolled over safely. That way, conceivably, it might be possible to retreat from the current extraordinarily lenient financial conditions without creating a crisis along the way….”
Asness On Rogoff On “Dow 36,000 (Clifford Asness on Twitter (@CliffordAsness)
Clifford Asness argues that in the Ken Rogoff op-ed we highlighted yesterday Rogoff misinterpreted the logic presented in “Dow 36,000”, “Unfortunately Ken is not interpreting Dow 36,000 correctly. Their claim was not “the Dow should be at 36,000 because real interest rates are going to scream down.” Their claim was stocks were riskless as they never lost to bonds over the long-term. And, thus, being long-term risk-less they shouldn’t offer a long-term premium in return to bonds. Thus they need to be priced much higher to eliminate that premium. None of that is what happened. Ken’s own article notes that the premium over bonds seems pretty normal right now. The logic of Dow 36,000 was circular and flawed. It said “stocks never lose to bonds so shouldn’t have to beat bonds as they’re not really risky.” But, stocks never (too strong a word) lost to bonds precisely because they have had a large return premium that adds up over time. If you remove all of that premium they will lose about 1/2 the time, and still be much more volatile than bonds. Then people will say “hey we need a premium to own these things.” Circular. I myself have (partially) defended Dow 36,000 as being one of the few authors during the tech bubble who actually understood that higher prices lead to lower long-term expected returns. Most ignored that. That doesn’t mean a zero return premium to bonds was ever reasonable. So, the logic of Dow 36,000 was never right. And the Dow hitting 36,000 20+ years later, perhaps primarily due to super low real interest rates, wasn’t what they predicted and certainly doesn’t show they were right. That can’t be done as they were just logically wrong. I assume we’ll all have to have this conversation every 10-20 years from now on.”
Housing Prices and Inflation (Jared Bernstein, Ernie Tedeschi, and Sarah Robinson, Council of Economic Advisors)
Jared Bernstein, Ernie Tedeschi, and Sarah Robinson on the relationship between housing prices and inflation, “…Our analysis, however, suggests that these higher shelter prices are likely to soon show up more clearly in the monthly CPI, potentially adding several more basis points (hundredths of a percentage point) to monthly inflation than they do now. As we show, some of this acceleration would simply represent a return to the normal pre-pandemic shelter contributions to inflation, and we note that these housing price dynamics are included in inflation forecasts, including our own, which show overall price growth decelerating in coming quarters….There is a risk of some further acceleration in the housing components of CPI in the months ahead, both because of recent home price appreciation and also, as Figure 9 shows, the fact that the level of rental and housing prices in CPI is below its pre-pandemic trend; a renormalization would require a temporary acceleration above the pre-pandemic pace of growth. If, illustratively, CPI: Rent and CPI: OER returned to trend by July 2022, that would imply roughly 13 basis points added to core CPI inflation every month, around 2 basis points more than they typically contributed before the pandemic and 1 basis point more than they contributed in June 2021. By comparison, in June, vehicle-related components of CPI—new and used cars, rentals, and parts—contributed more than 50 basis points to monthly core CPI inflation….”
NEWS
Skilled Workers Are Scarce, Posing a Challenge for Biden’s Infrastructure Plan (Madeleine Ngo, New York Times) ($)
“…A recent U.S. Chamber of Commerce survey found that 88 percent of commercial construction contractors reported moderate-to-high levels of difficulty finding skilled workers, and more than a third had to turn down work because of labor deficiencies. The industry could face a shortage of at least two million workers through 2025, according to an estimate from Construction Industry Resources, a data firm in Kentucky….Infrastructure workers tend to be older than average, raising concerns about workers retiring and leaving behind difficult-to-fill positions. The median age of construction and building inspectors, for instance, is 53, compared with 42.5 for all workers nationwide. Only 10 percent of infrastructure workers are under 25, while 13 percent of all U.S. workers are in that age group, according to a Brookings Institution analysis….”
Cargo Congestion Worsens With More Ships Waiting to Enter U.S. Ports (Kevin Varley, Bloomberg) ($)
“…The number of container ships waiting to enter America’s top three ports has been on a steady rise since July.There were 40 container vessels waiting to offload at the adjacent ports of Los Angeles and Long Beach in Southern California as of Wednesday, the most since Bloomberg developed an index tracking port congestion globally. On the East Coast, Georgia’s Port of Savannah had 20 cargo carriers idling in queue, compared with just eight in port — the highest congestion rate of all major ports in the world. At the Port of New York and New Jersey, the queue swelled to its highest since April as well….Bloomberg’s container ship index counts container activity in three ways: the number of overall vessels in a port’s anchorage area, the number of anchored or waiting ships, and the congestion rate of anchored ships waiting as a share of those in port….”
Toyota cuts annual production target as pandemic hits supply chains (Kana Inagaki, Financial Times) ($)
“…Toyota has cut its production forecast this year because of the deepening semiconductor crisis after a resurgence of Covid-19 cases in Asia. The world’s largest carmaker warned it will need to trim annual production by 3 per cent as chip shortages worsen in south-east Asia, disrupting supplies and forcing factory closures. It comes less than a month after the Japanese company said it was slashing this month’s global production by 40 per cent because of supply chain problems….”
Pressure-driven meltdowns are surprisingly common in elite tennis (Staff, The Economist) ($)
“…A recent paper by David Harris, Samuel Vine and Mark Wilson of the University of Exeter and Michael Eysenck of Royal Holloway University of London finds that top-tier tennis players are surprisingly prone to mistakes caused by situation-driven anxiety—implying that this tendency may be too fundamental for coaching to cure it. The taxonomy of shots in tennis helps to isolate the impacts of consistency and risk appetite. When a player misses a routine shot and loses a point, it is scored as an “unforced error” (ue). Conversely, shots that bounce within the court without being touched by an opponent are “winners”. The study analysed the rates of both ues and winners among nearly 400,000 points from tennis’s four leading events in 2016-19. In high-pressure contexts such as break and set points, ues were 15% more common than under less stressful conditions. Similarly, during points following ues, the chances of a repeat blunder rose sharply. These effects reinforced each other, so that ues were even more common during high-pressure points following a prior ue than you would otherwise expect.Moreover, ues’ habit of bunching together narrowed the performance gap between players. Logically, players who went on to win matches had a lower ue rate than their rivals did. But this disparity shrank from three percentage points overall to two following ues. Under high pressure after ues, it dwindled from seven points to four. The rate of winners was unchanged by pressure. It did rise after ues, implying that players may try to make up for mistakes by putting away the next point decisively. Nonetheless, the gap in winner-to-ue ratios between matches’ eventual victors and losers was smaller on points after ues than in other contexts. The authors argue that ues raise awareness of the risk of failure. This could expose players who go on to win matches to the mental state felt more often by losers, causing hiccups in their play….”
Microsoft Delays Full Headquarters Reopening to Undetermined Future Date (Aaron Tilley, Wall Street Journal) ($)
“..Microsoft Corp is abandoning plans to fully reopen its headquarters and other U.S. sites early next month and won’t set a new date, for now, given uncertainty around Covid-19….Several big tech companies have already delayed office reopenings to next year. Apple Inc. last month said its U.S. corporate offices wouldn’t fully reopen until at least January. Amazon.com Inc. earlier that month announced similar plans….”
NEW ECON RESEARCH
The Inexorable Recoveries of US Unemployment (Robert Hall + Marianna Kudlyak, Federal Reserve Bank of San Francisco)
“….Unemployment recoveries in the US have been inexorable. Between 1949 and 2019, the annual reduction in the unemployment rate during cyclical recoveries was tightly distributed around 0.1 log points per year. The economy seems to have an irresistible force toward restoring full employment. Unless another crisis intervenes, unemployment continues to glide down to a level of approximately 3.5 percentage points. Occasionally unemployment rises rapidly during an economic crisis, while most the time, unemployment declines slowly and smoothly at a near-constant proportional rate. We show that similar properties hold for other measures of the US unemployment rate and for the unemployment rates of six other advanced countries….Figure 3 shows the results for the 10 recoveries in the HK chronology separately. The estimates from 1961 to 2020 cluster close to 0.10 with tiny standard errors. Over that 60- year period, with 7 recessions and recoveries, some mild and two quite severe, the recovery rates are remarkably similar. Estimated rates for the first three recoveries are more variable and have much higher standard errors. These results nail down the primary thesis of our study—the uniformity of recovery rates over the past 60 years and their remarkably low levels…For the US, the BLS publishes a number of alternative measures of unemployment, based on the CPS. The more interesting of these include more individuals than does the standard unemployment rate. Table 2 reports results in the framework of this paper for the three extended unemployment rates, called U-4, U-5, and U-6, over the period of publication, which began in 1994, after a comprehensive revision of the CPS. The results are quite similar to those in Figure 3. We believe that this evidence supports the hypothesis that our findings are robust across measures of unemployment and are not an artifact of the specific choices embodied in the standard unemployment rate. The Organisation for Economic Co-operation and Development compiles harmonized unemployment data that are adjusted to US definitions, for many countries . Table 3 reports results for countries in the G-7. Only Canada has a record almost as long as the US, with 9 recoveries. The unemployment recovery rates for advanced economies cluster in the range of the US rates for more recent recoveries, around 0.1 log points per year. Slow but sure is not limited to the US. The findings of this paper are not strictly limited to the US….”
NEW SCIENCE
MIT-designed project achieves major advance toward fusion energy (David Chandler, Massachusetts Institute of Technology)
“…On Sept. 5, for the first time, a large high-temperature superconducting electromagnet was ramped up to a field strength of 20 tesla, the most powerful magnetic field of its kind ever created on Earth. That successful demonstration helps resolve the greatest uncertainty in the quest to build the world’s first fusion power plant that can produce more power than it consumes, according to the project’s leaders at MIT and startup company Commonwealth Fusion Systems (CFS). That advance paves the way, they say, for the long-sought creation of practical, inexpensive, carbon-free power plants that could make a major contribution to limiting the effects of global climate change….“The challenges of making fusion happen are both technical and scientific,” says Dennis Whyte, director of MIT’s Plasma Science and Fusion Center, which is working with CFS to develop SPARC. But once the technology is proven, he says, “it’s an inexhaustible, carbon-free source of energy that you can deploy anywhere and at any time. It’s really a fundamentally new energy source.” Whyte, who is the Hitachi America Professor of Engineering, says this week’s demonstration represents a major milestone, addressing the biggest questions remaining about the feasibility of the SPARC design. “It’s really a watershed moment, I believe, in fusion science and technology,” he says….”
IN OUR AIRPODS
Zoltan Pozsar on What’s Going on in Rates Markets Right Now (Bloomberg Odd Lots)
TOMORROW
The Real Heroes Are Dead (James Stewart, The New Yorker) ($)
“….“Stop crying,” he told her. “I have to get these people out safely. If something should happen to me, I want you to know I’ve never been happier. You made my life.”….Dan Hill says that Susan will understand someday, as he does. “What she doesn’t understand is that she knew him for four or five years. She knew a sixty-two-year-old man with cancer. I knew him as a hundred-and-eighty-pound, six-foot-one piece of human machinery that would not quit, that did not know defeat, that would not back off one inch. In the middle of the greatest battle of Vietnam, he was singing to the troops, saying we’re going to rip them a new asshole, when everyone else was worrying about dying. If he had come out of that building and someone died who he hadn’t tried to save, he would have had to commit suicide. “I’ve tried to tell Susan this, in a way, but she’s not ready yet for the truth. In the next weeks or months, I’ll get her down here, and we’ll take a walk along the ocean, and I’ll explain these things. You see, for Rick Rescorla, this was a natural death. People like Rick, they don’t die old men. They aren’t destined for that and it isn’t right for them to do so. It just isn’t right, by God, for them to become feeble, old, and helpless sons of bitches. There are certain men born in this world, and they’re supposed to die setting an example for the rest of the weak bastards we’re surround
THURSDAY, SEPTEMBER 9, 2021
BLOGS/OP-EDS
Why the Dow 36000 Forecast Was Right (Ken Rogoff, Wall Street Journal) ($)
Ken Rogoff on James Glassman and Kevin Hassett’s “Dow 36,000” as the DJIA near 36,000, “…Nevertheless, Messrs. Glassman and Hassett also got something very right. Their extreme take on the equity premium puzzle—the mystery of why the average return on stocks seems so high relative to safe bonds—hits an important point that has operational significance for many investors. Those with the wealth and liquidity to ride out short- and medium-run fluctuations have an enormous advantage. For those with little wealth, the advice to invest in stocks is not very helpful. Yet for the majority of middle-income Americans, who certainly understand long-term investing when it comes to housing, the equity premium is something they should know about and make their own decisions. What’s next? The two-plus decades of experience since “Dow 36,000” has changed my mind far more about the equilibrium real interest rate than it has about the riskiness of stocks, including in the medium and long run. Risk markets could wilt if and when global real interest rates start trending up, or if there were a real or cyber war. There is ample reason to be nervous. Nevertheless, if Messrs. Glassman and Hassett decide to publish a new edition called “Dow 72,000,” I will buy a copy….”
5 questions for Nicholas Bloom on innovation and work from home (James Pethokoukis, American Enterprise Institute)
James Pethokoukis interviews Nick Bloom on, among other things, the prospects for industrial policy, “….I’m not sure very top down industrial policy has a great track record. Paying company X to move to place Y historically has not worked out that well. If you want a lot of grads and post-grads in your city, you want to make the center of town safe but fun, enjoyable to live in, good schools, etc. In the data, basically a lot of research universities, a lot of graduates are very predictive of these technologies. I think it’s a good idea for the federal government to put more money into technology and research. And you certainly could target a few cities that have lots of potential — as in cheap housing, a reasonable supply of graduates, appealing to graduates as well — and put resources into those. And if you run it through universities and research centers, you’d get startups and spinoff growth, and you get a mini Silicon Valley picking up. So yes, absolutely….”
The World Is Getting Safer From Floods (Bjorn Lomborg, Wall Street Journal) ($)
Despite the recent flooding in the Northeast United States, Bjorn Lomborg argues that, relative to GDP and population, flooding damages have been declining, “…Though the images of abandoned cars in waterlogged East Coast streets might make you think otherwise, the relative toll that floods take on the U.S.—in property and lives—has decreased over time. Flooding costs as a share of gross domestic product declined almost 10-fold since 1903 to 0.05% of GDP, while annual flood death risk—fatalities per million—dropped almost threefold. World-wide data are sparser, but flood research shows costs relative to GDP and deaths relative to population have decreased globally from 1980 to 2010….”
NEWS
U.S. Initial Jobless Claims Fall by Most Since Late June in Week (Jill Shah, Bloomberg) ($)
“…Applications for U.S. state unemployment benefits fell last week by the most since late June as the labor market continues toward a full recovery. Initial unemployment claims in regular state programs decreased to 310,000 in the week ended Sept. 4, Labor Department data showed Thursday. The median estimate in a Bloomberg survey of economists called for a slight decrease to 335,000 new applications….”
Hedge funds muscle in to Silicon Valley with private deals (Joshua Franklin and Laurence Fletcher, Financial Times) ($)
“…Hedge funds are elbowing their way into Silicon Valley at an unprecedented rate with a record-smashing $153bn worth of investments in private companies in the first six months of 2021. A report from Goldman Sachs has found that hedge funds have done 770 deals so far this year, already beating the record number set in the whole of 2020, when 753 deals reached a total of $96bn. Just under three-quarters of this year’s agreements were “venture” bets on companies in their infancy…The bets are concentrated, but they leave a big impact. Hedge funds participated in just 4 per cent of deals in the first six months of 2021 but provided just over a quarter of all capital put into private companies, according to Goldman….Returns from private equity and venture capital investments have outperformed hedge funds in the decade to the end of last year, with average gains of 14.2 per cent compared with 7.1 per cent for hedge funds, the Goldman report found….”
Battery Makers Tied to Power Grid Attract Big Investors (Scott Patterson, Wall Street Journal) ($)
“…Between 2021 and 2023, power companies are expected to install large-scale battery systems capable of producing 10,000 megawatts of power, 10 times the capacity that existed in 2019, according to an August report by the Energy Information Administration. One reason is cheaper batteries. Battery-storage costs fell by 72% between 2015 and 2019, according to the EIA. Renewable energy makes up one-fifth of utility-scale electricity generation in the U.S., compared with about 60% that comes from natural gas and coal, with nuclear making up most of the rest, according to the EIA. The Energy Department on Wednesday released a report showing that solar energy alone could power as much as 40% of the nation’s electricity by 2035….Investor interest in energy storage has soared in the past year. Venture capital firms have invested $4.9 billion in rechargeable battery companies so far this year, up from $1.6 billion in all of 2020, according to PitchBook…”
The new economics of global cities (Staff, The Economist) ($)
“…One way to take the pulse of global cities is to use real-time mobility indicators. The Economist has constructed an “exodus index” using Google data on visits to sites of retail and recreation, public transport and workplaces. This compares mobility in large cities with that in their respective countries. In America, Britain, France and Japan activity remains substantially lower in cities than it does nationally (see chart). According to OpenTable, a booking platform, restaurant reservations in cities are low compared with elsewhere. Bookings in Canada are 8% above their pre-pandemic level but 9% lower in Toronto. Only a fifth of San Franciscan office workers are in the building, suggest data from Kastle Systems, a technology firm. Some parts of San Francisco feel more like an abandoned rustbelt city than a tech hub. Rural areas are not the prime beneficiaries of this shakeout. In the early part of this year sparsely populated American counties were a lot busier than dense ones, compared with their pre-pandemic levels. But in most places their advantage has faded (though activity in Japan may still be shifting slightly into the most sparsely populated areas). The data point more clearly to a different sort of reallocation. Like an egg broken onto a pan, economic activity is gradually seeping outward from the centre. What were once the liveliest urban areas are becoming less so. The less glamorous ones are taking more of the spoils….Employment in Britain’s suburbs is up by 2% compared with a year ago, even as nationwide employment is down. In America, too, labour demand is shifting away from big cities (see chart 2). There is, however, less evidence of egg-cracking in Australia, which until recently had largely escaped the ravages of covid-19. Employment in Sydney continues to be concentrated in dense areas….”
Push to Let Teens Drive Trucks Interstate Divides the Industry (Lydia O’Neal, Wall Street Journal) ($)
“…Proposed legislation to test letting people as young as 18 years old drive big rigs interstate is exposing a divide in the trucking sector, where companies are having trouble finding workers for the grueling job of hauling goods over long distances. A provision in the infrastructure bill the Senate approved in August would set up a pilot program allowing 18- to 20-year-olds to drive tractor-trailers across state lines. Most states allow people under 21 to get commercial driver’s licenses, but federal rules restrict those drivers to working within state borders. Some in the industry say the measure could help expand the pool of available drivers. But others say it wouldn’t address core problems that cause people to leave trucking for other blue-collar work such as construction. Those issues include demanding work conditions and pay too low to compensate for the long hours behind the wheel and time away from home….”
‘Reversing Gears’: China Increasingly Rejects English, and the World (Li Yuan, New York Times) ($)
“…That’s why it came as a shock to many when the education authorities in Shanghai, the most cosmopolitan city in the country, last month forbade local elementary schools to hold final exams on the English language….Last year, China’s education authority barred primary and junior high schools from using overseas textbooks. A government adviser recommended this year that the country’s annual college entrance examination stop testing English. New restrictions this summer on for-profit, after-school tutoring chains affected companies that have taught English for years….The president of prestigious Tsinghua University in Beijing came under fire this summer after sending each new student a Chinese-language copy of Ernest Hemingway’s “The Old Man and the Sea.” He wrote in a letter that he wanted the students to learn courage and perseverance. Some social media users questioned why he would choose the work of an American author or why he didn’t encourage the students to study for China’s rise….”
NEW ECON RESEARCH
On the Persistence of the China Shock (David Autor, David Dorn, Gordon Hanson, Brookings Papers on Economic Activity)
“We evaluate the duration of the China trade shock and its impact on a wide range of outcomes, building on analyses in Autor et al. (2013a) and Acemoglu et al. (2016). This shock plateaued in 2010, enabling study of its effects for nearly a decade past its culmination. Adverse impacts of import competition on manufacturing employment, employment-population ratios, and income per capita in more trade-exposed U.S. commuting zones are present out to 2019. Reductions in population headcounts, which indicate net out-migration, register only for foreignborn workers and the native-born 25-39 years old, implying that exit from work is a primary means of adjustment. More negatively affected regions see larger increases in the uptake of government transfers, but these transfers primarily take the form of Social Security and Medicare benefits and replace only a small fraction of lost personal income. Adverse outcomes are more acute in regions that initially had fewer college-educated workers and were more industrially specialized. Impacts are qualitatively—but not quantitatively—similar to those caused by the decline of employment in coal production since the 1980s, indicating that the China trade shock holds lessons for other episodes of localized job loss. Import competition from China induced shocks to income per capita across local labor markets that are much larger than the spatial heterogeneity of income effects predicted by standard quantitative trade models. Even using higher-end estimates of the consumer benefits of rising trade with China, a substantial fraction of commuting zones appears to have suffered absolute declines in real average incomes.”
The Case for a Robust Attack on the Tax Gap (Natasha Sarin, U.S. Department Of The Treasury)
“…, the “tax gap”—the difference between taxes that are owed and collected—totals around $600 billion annually and will mean approximately $7 trillion of lost tax revenue over the next decade. The sheer magnitude of lost revenue is striking: it is equal to 3 percent of GDP, or all the income taxes paid by the lowest earning 90 percent of taxpayers….. As Table 1 demonstrates, estimates from academic researchers suggest that more than $160 billion lost annually is from taxes that top 1 percent choose not to pay….”
Turn and Face the Strange (Michael Mauboussin + Dan Callahan, Morgan Stanley)
“….3-point shots have an expected value of about 1.1 overall with a slightly higher value in the corners, which are closer to the basket. Exhibit 2 shows that the expected value of 3-pointers was 14 percent higher than 2-pointers in the 2003/04 season. The natural way to arbitrage that expected value differential is to take more 3-point shots and fewer mid-range 2-point shots. Exhibit 3 shows that is precisely what happened. A quarter century ago, about 40 percent of shots were midrange 2-pointers and 10 percent were 3-pointers. Today, those totals have nearly flipped. As a result, the gap in expected value between 3-pointers and 2-pointers is now less than four percent. Daryl Morey, president of basketball operations for the Philadelphia 76ers and a leader in basketball analytics, “estimated that, at its inception, the strategy of taking more 3s at the expense of mid-range jumpers resulted in approximately 12 more wins a year, roughly equivalent to spending $30 million more a year on star players.” To bring the point home, Goldsberry’s analysis by shot distance shows that a 21-foot shot has an expected value of less than 0.80 while shots a foot longer in the corner, and 2.75 feet longer everywhere else, are worth about 40 percent more. Note that the 3-point shot has been around for 40 years, but it has been fully embraced only in the last decade or so. Exhibit 4 shows how the top 200 shot locations has changed from the 2001/02 season to the 2019/20 season. What used to be a potential source of edge has now become the ante to play the game competitively. The inefficiency associated with the 3-point shot has now been largely competed away…”
NEW SCIENCE
The effects of a warmer world are visible in animals’ bodies (Staff, The Economist) ($)
“…For humans, adapting to climate change will mostly be a matter of technology. More air conditioning, better-designed houses and bigger flood defences may help ameliorate the effects of a warmer world. Animals will have to rely on changing their bodies or their behaviour. In a paper published in Trends in Ecology & Evolution, a team led by Sara Ryding, a phd candidate at Deakin University, in Australia, shows that is already happening. Climate change is already altering the bodies of many animal species, giving them bigger beaks, limbs and ears. In some species of Australian parrot, for instance, beak size has increased by between 4% and 10% since 1871. Another study, this time in North American dark-eyed juncos, another bird, found the same pattern. Similar trends are seen in mammals, with species of mice, shrews and bats evolving bigger ears, tails, legs and wings. All that dovetails nicely with evolutionary theory. “Allen’s rule”, named for Joel Asaph Allen, who suggested it in 1877, holds that warm-blooded animals in hot places tend to have larger appendages than those in temperate regions. Such adaptations boost an animal’s surface area relative to its body volume, helping it to shed excess heat. Being richly endowed with blood vessels, and not covered by insulating feathers, beaks make an ideal place for birds to dispose of heat. Fennec foxes, meanwhile, which are native to the Sahara desert, have strikingly large ears, especially compared with their Arctic cousins. Ms Ryding examined museum specimens, comparing their bodies to those of their modern counterparts. She is not the first researcher to take that approach. But it is hard, when dealing with individual species, to prove that climate change was the cause of an anatomical alteration. All sorts of other factors, from changes in prey to the evolving reproductive preferences of males or females, might conceivably have been driving the changes. Looking at the bigger picture makes the pattern clearer, says Ms Ryding. Her team combined data from different species in different places. Since they have little in common apart from living on a warming planet, she says, climate change is the most plausible explanation….”
IN OUR AIRPODS
Edward Glaeser and David Cutler on the Health and Wealth of Cities (Tyler Cowne, Conversations w. Tyler)
WEDNESDAY, SEPTEMBER 8, 2021
BLOGS/OP-EDS
If Prices Fall, Mortgage Foreclosures Will Rise (Andrew Haughwout + Belicia Rodriguez, Federal Reserve Bank of New York)
Andrew Haughwout and Belicia Rodriguez estimate the implications of a housing correction and warn that if housing prices fall foreclosures will rise, “…Each color in the chart below corresponds to a CLTV level: light blue and dark gray correspond to properties that are in negative equity—a CLTV over 100 percent – while light gray, gold, and dark blue reflect decreasing leverage levels. As the chart shows, negative equity is very rare now, while more than 85 percent of all properties have a CLTV<80, meaning they have at least a 20 percent equity cushion. This sounds quite comforting: households generally have a lot of equity in their properties. However, the situation was much the same in 2005. We can look deeper into another indicator that complements equity position and shows a difference between now and 2005: credit score….In order to fully understand the riskiness of this stock of debt, we go one step further by calculating expected delinquency transitions under various adverse price scenarios. Those scenarios are described in the table below and include prices which revert to their level from two years ago (HPI-2) and four years ago (HPI-4) in each county. (In cases where the stress scenario produces an increase in prices, we set price change to zero.) These scenarios are fairly severe in light of strong recent price growth – the median county would see prices fall by more than 27 percent under HPI-4 . Even the 10 percent least affected counties would see double-digit declines….As the maps show, however, there is significant geographic dispersion in the expected default rates. Relatively high rates of delinquency transitions appear in some expected places—Arizona, Florida, and Nevada are all above average risk for the HPI-2 and HPI-4 scenarios. But California is now at below average risk from these shocks, while Georgia, Idaho, Indiana, Mississippi, and Utah have emerged as newly vulnerable, given strong recent price growth in many of those states. Still, none of these states would be expected to match the national average default rates observed during the crisis, let alone the very high rates witnessed in Arizona, California, Florida, and Nevada….”
Interview: Larry Summers, economist (Noah Smith, Noahpinion) ($)
Noah Smith interviews Larry Summers and asks if the burst of Covid spending is enough to break the US out if his secular stagnation framework, “…[Noah Smith].: OK, but now you’re warning about sustained higher inflation. Is there a quantitative model that predicts that we’re in danger of sustained inflation now, or is that a judgement based largely on your experience doing macroeconomic policy advising and observing financial markets? And to the extent it’s the latter, doesn’t your instinct become an important question? Also, let’s talk about the secular stagnation hypothesis. For years, you warned that the U.S. had entered a low-demand, low-growth equilibrium — a trap from which the only escape was substantial fiscal stimulus. So…did we do it? Did the Covid relief bills bust us out of that stagnation, so that now we’re back in a region of normal demand, where we have some sort of tradeoff between inflation and unemployment again? [Larry Summers].: Fair questions. My arguments regarding inflation do not derive from a specific econometric model. Indeed I believe the problem with much of the conventional wisdom is that models fit to the last 40 years of data, where inflation has never accelerated, will almost definitionally yield complacent conclusions. My judgement has been that there is a one third chance of significant sustained inflation, a one third chance that inflation would be contained by some kind of significant slowdown and a one third chance of a downturn. This rests on several pillars. First, I looked in conventional ways at aggregate demand and supply. As of the beginning of the year, it looked to me like worker incomes were running $30 billion a month below trend and this was rapidly declining. Against this gap, we were adding a stimulus program that would spend out 150 billion a month or more, an especially easy monetary policy with the loosest financial conditions in history, and a savings build-up from rationed spending of 2 trillion mostly in liquid assets. The question to me was why, given standard views about inflation arising from demand and supply and reasonable multiplier estimates, this wouldn’t risk inflation. I have not seen any economic analysis recommending a 2.8 trillion fiscal program from the perspective of last winter. Second, I am influenced by historical analogies. The fact that the 2009 program was too small did not for me justify a program that measured relative to the prospective GDP gap was 5 to 10x as large. I was struck also by the similarity between all the arguments being made this spring and those made by the Vietnam era as inflation was baked in before the supply shocks. Third, the data flow as I read it corroborates my concerns. Job opening and quit rates suggest record levels of labor tightness, as do surveys of employers about hiring. Unemployment and employment measures suggest some slack relative to pre pandemic NAIRU estimates but these are imprecise and record levels of structural change are likely to raise NAIRU estimates. We know wage acceleration is very sticky but it is coming. The same can be said about housing, the largest part of household budgets. Whether the problem is lags or flaws in the indices I don’t know but housing has been pulling down measured inflation. In reality whether you look at ownership prices or rental prices, they have risen at a double digit rate for an item that comprises a quarter of household budgets. Core CPI rose at a double digit rate during the second quarter. Of course most of this is transitory. But that was never the basis of my argument, it was entirely unpredicted by those seeking to explain it away, and leaves aside the question of whether inflation expectations are in danger of becoming unhinged. By the way, transitory goes both ways. When in the next few months used car prices mean revert the CPI will be distorted down. How clearly this is acknowledged by the inflation optimists will be a test of integrity. Expectations are I think in danger of being unanchored especially when so many are so intent on promoting demand as the central objective of policy. Noah, I’ve gone on at length here. With respect to secular stagnation: with deficits running at double digit rates, continuing massive Fed bond buying and a record level of job vacancies we don’t have it. Much as Alvin Hansen was right about the economy of the late 1930s and then World War II changed things, everything macroeconomic has changed in the last 18 months. I saw secular stagnation as emerging from a gap of perhaps 3 percent between Intended saving and investment, with normal deficit levels. No surprise that it’s blown out by double digit deficits. For the medium term I’m not sure. The fact that consensus forecasts look to negative real rates, still very large– though reduced– deficits and an economy that is not overheating, suggests a return to secular stagnation or at least a major saving absorption problem. I’m not sure how to think about the medium term or more broadly about the implications of very low real rates…”
Your Fall 2021 syllabus (Michael Cembalset, J.P. Morgan)
Some good factoids on concentration from JPM’s Michael Cembalset, “…Industry concentration is at an all-time high and is attracting antitrust attention. But the tech/communications services opportunity set is much bigger than the 5 megacap firms: secular growth tech stocks we discussed in our 2021 Outlook are performing in line with the megacap stocks this year, and carry a lot less antitrust baggage. As long as wages are the largest component of overall business expenses (last chart), the corporate sector will look to tech companies to help reduce their unit labor costs and improve productivity. In other words, we expect strong demand for technology goods and services to continue, and do not expect any mean reversion in sector profit margins….”
How I reluctantly became an inflation crank (Alan Cole, (Full Stack Economics)
Alan Cole argues that the pandemic has resulted in product substitutions and quality changes which aren’t reflected in inflation numbers, “…over the last 18 months, we’ve had the opposite problem: goods and services are getting worse faster than the official statistics acknowledge, suggesting that our inflation problem has actually been bigger than the official statistics suggest….Sometimes, product degradation comes with a plausible COVID-19 justification but also conveniently cuts labor costs. For example, hotels clean rooms less frequently on multi-night stays, which may limit contagion between housekeeping and guests, but also makes for a worse customer experience. Sometimes, problems are clearly downstream of pandemic difficulties, but have no obvious consumer welfare justification: shipping delays are longer, and phone hold times at airlines are worse, a fact acknowledged by Delta CEO Ed Bastian….But some pre-2020 product quality has clearly been lost, and those losses aren’t always reflected in the official data….”
Foreclosure Rates and On-Time Mortgage Payments during COVID-19 (Juan Sánchez + Olivia Wilkinson, Federal Reserve Bank of St. Louis)
Juan Sánchez and Olivia Wilkinson of the FRBSL highlight that a dip in on-time mortgage payments has not been accompanied by an uptick in foreclosures, likely driven by the CARES act and a housing market that allowed underwater owners to exit, “…The percentage of residential mortgage loans with on-time payments fell significantly in 2020. This was the biggest drop in the share of current accounts since the global financial crisis, yet a wave of foreclosures didn’t occur…The figure below shows the December breakdown of noncurrent loans by status for three different years: 2009, which represents the peak of nonpayment during the Great Recession; 2019, which represents the pre-pandemic situation; and finally 2020 to capture the COVID-19 pandemic, they wrote….This figure shows two main points on which to focus, the authors noted. The percentage of loans at least 90 days overdue was significantly higher in December 2020 (at 4.7%) than in the previous year, and the 2020 number was only about a half a percentage point lower than in 2009. The mildly late status (30 to 59 days overdue) and foreclosure percentages in December 2020 were much lower than in December 2009. The mildly late status was also lower in 2020 than in 2019 because the surge in delinquencies occurred earlier in 2020…..A portion of mortgages were selected to understand what happened to noncurrent loans. Sánchez and Wilkinson looked at loans that were current in February 2020 and had become 90 or more days overdue by June, and they then analyzed what happened to these loans in the following six months. The authors found that 2.8% of the loans that were current in February 2020 were 90 or more days late by June 2020. Then they did a similar exercise for 2009, finding that about 0.7% of the loans that were current in February 2009 were late 90 days or longer in June 2009.The figure below shows how these seriously delinquent loans progressed for the remainder of 2009 and 2020….”
One Stat That Shows the Huge Inflationary Impact of Used Cars (Joe Weisenthal, Odd Lots) ($)
Joe Weisenthal on how an uptick in housing costs will probably be offset by used cars prices in terms of CPI “…the future of CPI will be a push-pull tension between rent prices (which make up a huge share of the overall basket, but which are still moving up slowly) versus used cars (which make up a small share of the basket, but which moved up at blazing speed)….”So another two percentage points from where we are today. What that basically means is you’re looking at overall core inflation rising by roughly about another 80 basis points. You know, rent’s got about a 40% weight. You go up two percentage points, that’s about 80 bps on the Core CPI. Now that sounds like a lot, but you mentioned used cars earlier. They’re adding over 130 basis points to the Core CPI right now on a year-over-year basis.”….Even if owner’s equivalent rent were to accelerate at a pace that’s well above pre-crisis trends, it still wouldn’t counteract a reversal in the jump we’ve seen from used cars alone….”
David Autor’s Mix of Insight, Error, and Confusion (David Henderson, The Library of Economics and Liberty)
David Henderson on David Autor’s critique of the US labor market we highlighted yesterday, “…Autor argues that a labor shortage (he really means “increased labor scarcity”) is driving up real wages at the bottom end of the pay scale and will likely drive them up further. His reasoning is good assuming all of his premises are right. But I doubt one of his premises: that paying millions of unemployed people more to be unemployed than to work does not cause a lot of people to stay unemployed. …Here’s the problem with his reasoning: he gets the shift in the supply curve wrong. Means-tested benefits tend to make workers less willing to supply hours of work at a given wage. So the programs he cites (other than the earned income tax credit, which is more complicated) shift the supply curve to the left, not the right, making wages higher than otherwise and making that burger more expensive than otherwise….”
How can we track trends in educational attainment by parental income? Hint: not with the Current Population Survey (Matthew Chingos + Susan Dynarski, Brookings Institution)
Housekeeping: a 2015 post from Matthew Chingos and Susan Dynarski implies that the WSJ report on college entry by parental income we highlighted yesterday is likely wrong in terms of income range, “….To put it bluntly, these statistics are wrong. They are based on data from the monthly Current Population Survey (CPS). It would be wonderful if the CPS provided the income of young adults’ parents, but as a rule it does not. Parental information is present in the CPS only if the young adult is currently living at home, or is temporarily away from home. The primary reason a young adult is temporarily away from home is to attend college. Once a child forms her own household, she disappears from her parents’ CPS record. If we limit our analysis of the educational attainment of young adults to those who are linked to their parents’ CPS records, we have committed the mortal sin of selection bias: selecting the sample on the variable of interest….”
NEWS
Americans Say They’re Now Less Likely to Work Far Into Their 60s (Alexandre Tanzi, Bloomberg) ($)
“..Americans say it’s increasingly unlikely that they’ll work deep into their 60s, according to new data from the New York Federal Reserve. The share of respondents expecting to work past the age of 62 dropped to 50.1% in the New York Fed’s July labor-market survey, from 51.9% a year earlier — the lowest on record in a study that’s been conducted since 2014. The numbers saying they’re likely to be employed when they’re older than 67 also dropped, to 32.4% from 34.1%. The data reinforces other research pointing to a wave of early retirements triggered by the pandemic. More than 1 million older workers have left the labor market since March 2020. Some Americans have been rethinking their priorities after the trauma of Covid-19 — with a bigger nest egg to fall back on, thanks to exuberant financial markets. For others the withdrawal may be involuntary, driven by a lack of employment prospects….”
Office Occupancy Sputtered in August as Delta Variant Foiled Return-to-Work Hopes (Konrad Putzier + Peter Grant, Wall Street Journal) ($)
“…Offices in 10 major U.S. cities were just 33.1% occupied in the week ending Aug. 25, according to Kastle Systems, an access-control company that tracks how many people swipe into buildings. That figure is a slight increase over the prior week but down from a 34.8% peak in late July. In New York and San Francisco, the two worst markets among the 10 major metros tracked by Kastle, occupancy rates were a mere 22.3% and 19.7%, respectively. Both were slightly off their July highs….The decreases are partly seasonal. Some workers go on vacation or retreat to country houses in August. But the low numbers also reflect concerns that new Covid-19 variants could put people at risk of infection in the workplace. Amazon.com Inc. and Apple Inc. last month said that they would delay a return to the office until 2022, and a number of major companies have moved their return date back to October or later….”
Ford Hires Apple Car Chief in Coup for Recovering Automaker (Craig Trudell + Keith Naughton, Bloomberg) ($)
“…Ford Motor Co. is hiring the head of Apple Inc.’s car project away from the iPhone maker, a stunning development that brings the 118-year-old automaker an executive with Silicon Valley chops. Doug Field is coming aboard as chief advanced technology and embedded systems officer, Ford said in a statement. Field also previously worked as a top engineer at Tesla Inc. between two stints at Apple — most recently as a vice president in its special projects group — and played a major role at Tesla launching the Model 3 sedan….”
NEW ECON RESEARCH
Some International Evidence on Indebted Demand (Joshua Brault + Hashmat Khan, Carleton University)
“…Our interpretation of the Mian, Straub and Sufi (2021) story is that if inequality is exerting downward pressure on natural rates of interest, this should appear in the latter component of the natural rate, zt . To this end, Figure 3 presents the decomposition of the natural rate where we plot the relationships between: (1) income inequality and the estimated trend growth rate of the natural rate of output; and (2) income inequality and other determinants of r ? , that is, zt . The top panel in Figure 3 quite clearly shows a minimal relationship between income inequality and trend growth rates of the natural rate of output. OLS estimates of income inequality on trend growth rates are not statistically different from zero by any conventional standard. In sharp contrast, the bottom panel of Figure 3 shows a strong negative relationship between other determinants of the natural rate of interest and income inequality. This relationship is significant at the 1% level. Our findings lend support to the central prediction of the theory of indebted demand proposed in Mian, Straub and Sufi (2021), that income inequality is putting downward pressure on natural rates of interest….”
In Search of the Origins of Financial Fluctuations: The Inelastic Markets Hypothesis (Xavier Gabaix + Ralph Koijen, NBER)
“We develop a framework to theoretically and empirically analyze the fluctuations of the aggregate stock market. Households allocate capital to institutions, which are fairly constrained, for example operating with a mandate to maintain a fixed equity share or with moderate scope for variation. As a result, the price elasticity of demand of the aggregate stock market is small, so flows in and out of the stock market have large impacts on prices. Using the recent method of granular instrumental variables, we find that investing $1 in the stock market increases the market’s aggregate value by about $5. We also show that we can trace back the time variation in the market’s volatility to flows and demand shocks of different investors. We also analyze how key parts of macro-finance change if markets are inelastic. We show how pricing kernels and general equilibrium models can be generalized to incorporate flows, which makes them amenable to use in more realistic macroeconomic models, and to policy analysis. Government purchases of equities have a large impact on prices. Corporate actions that would be neutral in a rational model, such as share buybacks, have large impacts too. Our framework allows us to give a dynamic economic structure to old and recent datasets comprising holdings and flows in various segments of the market. The mystery of apparently random movements of the stock market, hard to link to fundamentals, is replaced by the more manageable problem of understanding the determinants of flows in inelastic markets. We delineate a research agenda that can explore a number of questions raised by this analysis, and might lead to a more concrete understanding of the origins of financial fluctuations across markets.”
NEW SCIENCE
One Lab’s Quest to Build Space-Time Out of Quantum Particles (Adam Becker, Quanta Magazine)
“…in a small lab just outside Palo Alto, the Stanford University professor Monika Schleier-Smith and her team are trying a different way to test quantum gravity, without black holes or galaxy-size particle accelerators. Physicists have been suggesting for over a decade that gravity — and even space-time itself — may emerge from a strange quantum connection called entanglement. Schleier-Smith and her collaborators are reverse-engineering the process. By engineering highly entangled quantum systems in a tabletop experiment, Schleier-Smith hopes to produce something that looks and acts like the warped space-time predicted by Albert Einstein’s theory of general relativity….In a paper posted in June, her team announced their first experimental step along this route: a system of atoms trapped by light, with connections made to order, finely controlled with magnetic fields. When tuned in the right way, the long-distance correlations in this system describe a treelike geometry, similar to ones seen in simple models of emergent space-time. Schleier-Smith and her colleagues hope to build on this work to create analogues to more complex geometries, including those of black holes. In the absence of new data from particle physics or cosmology — a state of affairs that could continue indefinitely — this could be the most promising route for putting the latest ideas about quantum gravity to the test….”
IN OUR AIRPODS
Patrick O’Shaughnessy on the Next Big Thing in Passive Investing (Bloomberg Odd Lots)
TUESDAY, SEPTEMBER 7, 2021
BLOGS/OP-EDS
Delta slows US labor market recovery in August but effect is much smaller than first wave (Jason Furman + Wilson Powell, PIIE)
Jason Furman and Wilson Powell on Friday’s job report: perhaps a signal in the noise as long term unemployment continues to fall though the Delta variant is likely a real headwind, “…the economy still remains 7 million jobs short of pre-pandemic projections as shown in figure 1…the unemployment rate and the “realistic” unemployment rate, which adjusts for misclassification and the unusually large decline in the labor force participation rate, tell a similar story (figure 2). Both measures continued to improve in August, though at a slower ould still be 1.0 unemployed workers per job opening, as shown in figure 5, suggesting that the labor market still had somewhat more slack than it had just prior to the recession….”
Climate Policy Should Pay More Attention to Climate Economics (John Cochrane, National Review)
John Cochrane points out the surprising small likely economic impact of climate change,“….the best guesses of the economic impact of climate change are surprisingly small. The U.N.’s IPCC finds that a (large) temperature rise of 3.66°C by 2100 means a loss of 2.6 percent of global GDP. Even extreme assumptions about climate and lack of mitigation or adaptation strain to find a cost greater than 5 percent of GDP by the year 2100. Now, 5 percent of GDP is a lot of money — $1 trillion of our $20 trillion GDP today. But 5 percent of GDP in 80 years is couch change in the annals of economics. Even our sclerotic post-2000 real GDP grows at a 2 percent annual rate. At that rate, in 2100, the U.S. will have real GDP 400 percent greater than now, as even the IPCC readily admits. At 3 percent compound growth, the U.S. will produce, and people will earn, 1,000 percent more GDP than now. Yes, that can happen. From 1940 to 2000, U.S. GDP grew from $1,331 billion to $13,138 billion in 2012 dollars, a factor of ten in just 60 years, and a 3.8 percent compound annual growth rate….”
Transition Pulls Ahead (Gregor MacDonald, The Gregor Letter) ($)
Gregor MacDonald’ 2021 estimate of combined wind+solar’s market share in the US electricity system is 12.8% “…Combined wind+solar’s market share in the US electricity system continues to grow strongly, nearly wiping out growth from other sources. Wind and solar crossed the important 5% share level in 2015, and are now on pace to reach 12.8% of US electricity this year. As the EIA has increasingly pointed out, nearly all the new growth in US power generation comes from renewables. The estimate for 2021 is based on full, first-half of the year data….”
Housing: A Look at “Affordability” Indexes (Bill McBride, Calculated Risk) ($)
Bill McBride points out that housing is historically affordable right now and cautions that doesn’t say anything about future returns “…Mortgage rates have been declining for 40 years, and are currently close to 3%. In a falling mortgage rate environment, buyers could refinance at lower rates – and that would mean already purchased houses would become more affordable over time (not included in this calculation). So here is what the index looks like (lower is more affordable like the FirstAm index): Note that by this index, during the early ‘80s, homes were very unaffordable due to the very high mortgage rates. During the housing bubble, houses were also less affordable using 30 year mortgage rates, however, during the bubble, there were many “affordability products” that allowed borrowers to be qualified at the teaser rate (usually around 1%) that made houses seem more affordable. In general, this would suggest houses are fairly affordable right now. But this says nothing about if now is a good time to buy! Here is a graph showing affordability, and the 5 year real return (red) on the house purchase (annualized). Update: The 5 year real return is the future return on the Case-Shiller index, adjusted for inflation. When affordability was poor in the early ‘80s, it was actually a good time to buy (and that was before refinancing!). Another good time to buy was in the mid-to-late ‘90s. And another good time was around 2011 or 2012 (When I wrote The Housing Bottom is Here) and also the next several years. The worst time to buy (using a 5 year real return) was in the runup to and during the housing bubble. Since the real return is based on 5 years, we don’t know the return after mid-2016. The bottom line is affordability probably hints at the level of demand (although there was plenty of demand during the housing bubble due to loose lending practices). But affordability tells you nothing about the future return….”
The Housing Boom and the Decline in Mortgage Rates (Haoyang Liu et al., Liberty Street Economics)
FRBNY suggests the housing boom is rate driven, “…The chart below shows the response of each variable when excluding (orange) and including (blue) the contemporaneous controls after a 1 percentage point decline in the mortgage rate. We find significant effects, with the expected signs, and with stronger and more persistent responses when not including controls. The (maximum) semi-elasticity of house prices to mortgage rates is -2, with or without contemporaneous controls. This is less than a tenth as large as what is predicted by the user cost model. Housing activity is, instead, very sensitive to mortgage rates. After a 1 percentage point decline in mortgage rates, permits rise more than 10 percent, existing homes sales increase 5-10 percent, and residential investment expressed as a contribution to real GDP increases 0.3 percentage point (0.2 percentage point with controls)….The semi-elasticity of house prices to interest rates implied by the theoretical user cost model suggests that the decline in mortgage rates during the pandemic can quantitatively account for the national house price boom. But our empirical estimates and prior studies suggest that the decline in mortgage rates can only explain low single-digit house price increases. Instead, we find that housing activity, both sales and construction, are very sensitive to interest rates…”
The American Housing Market Is Stifling Mobility (Edward Glaeser + David Cutler, Wall Street Journal) ($)
Edward Glaeser and David Cutler on the high costs of expensive housing, “…Silicon Valley is a perfect example of the long-term problem. According to the Bureau of Economic Analysis, four counties in northern California—Marin, San Francisco, San Mateo and Santa Clara—have per capita incomes over $100,000. Given that extraordinary prosperity, you might think that people would be flooding into the region, as they did after gold was discovered at Sutter’s Mill in 1848. Yet they are not. Taken together, those counties’ population grew by only 6.5% between 2010 and 2020, below the average growth rate for large counties. For comparison, Harris County, Texas, where Houston is located, has 35% less land than the four California counties, but in the 2010s its population grew 175% faster. The reason for this is not hard to find. House prices in Silicon Valley make living there prohibitive for all but the very wealthy. Data from the National Association of Realtors show that in the second quarter of 2021, the median sales price for a new home was $1.7 million in San Jose and $1.4 million in San Francisco. In Houston, the median sales price was $307,000. Given the ease of building in greater Houston, house prices there may actually decline once we get through the pandemic. There is little chance that prices will fall in Silicon Valley….”
A Very Austrian Pandemic (Paul Krugman, Krugman Wonks Out)
Krugman on how the pandemic produced an Austrian style reallocation shock and how inflation is helpful in such an environment, “…Why should the need to move workers out of a sector lead to unemployment? Why shouldn’t it simply lead to lower wages? The answer in practice is downward nominal wage rigidity: Employers are really reluctant to cut wages, because of the effects on worker morale. Here’s the distribution of wage changes in 2009-10, from the linked paper: The big spike at zero represents large numbers of employers who had an abundance of job applicants but didn’t want to cut wages, so they just left them unchanged. However, if wages can’t fall in the sector that needs to shrink, why can’t they increase in the sector that needs to expand? Sure, it would lead to a temporary rise in inflation — but that would be OK. Guerrieri et al.[See New Economic Research] argue, with a formal model to back them up, that the optimal response to a reallocation shock is indeed a very expansionary monetary policy that causes a temporary spike in inflation. Workers would still have an incentive to change jobs, because real wages would fall in their old jobs but rise elsewhere. But there wouldn’t have to be large-scale unemployment….”
Good News: There’s a Labor Shortage (David Autor, New York Times) ($)
David Autor makes the case that the current labor market could create a new equilibrium with new reservation wages for low skilled workers, “…Couldn’t raising wages spur employers to automate many low-paid service jobs? Yes — but that’s not bad. There’s no future in working the fry station at White Castle. We should welcome the robot that’s now doing that job at some locations. Automating bad jobs has positive consequences for productivity. When employers pay more for human labor, they have an incentive to use it more productively. Otherwise, workers aren’t worth paying for. And one way to use people more productively is to train them. This may be one reason that employers provide more training opportunities in a tightening labor market — something happening now….As pandemic stimulus programs wind down, the current labor crunch could vanish, but I wouldn’t bet on it. For years, social scientists have warned that because of declining birthrates, retiring baby boomers and severe immigration restrictions, we’re approaching an era of labor scarcity. The good news is that this long-term demographic crunch is going to make cheap labor more rare. Countries undergoing similar demographic changes have seen rising wages among young non-college-educated workers, falling inequality, and more “healthy” automation — like those fast-food robots. Labor scarcity may mean you’ll be speaking your orders to a conversational AI at the drive-through. But it won’t hurt that much, and the workers who are not doing those jobs will probably be better off in the jobs they’ll do instead….”
Why real wages are stagnating in Japan and Korea (Hyunbae Chun et al,m Center for Economic and Policy Research)
According to the Center for Economic and Policy Research, A change in the terms of trade helps explain why wages have not keep pace with labor productivity in Japan and South Korea, “…In Japan and Korea, labour productivity has increased by 22.8% and 46.7%, respectively, over the past 20 years, but real wages have increased by only 2.6% and 27.2%, respectively. In both countries, the increases in real wages are much smaller than the increases in labour productivity. The main reason for the stagnation in the real wages is the large decline in labour’s terms of trade in both countries which fell by 14.2% and 15.5%, respectively….As shown in Figure 1, the changes in labour’s terms of trade – the CPI–GDP deflator differential – and the real wage-labour productivity growth gap are positively correlated with a correlation coefficient of 0.664. Widening real wage-labour productivity gaps have been witnessed in the past and in several studies in the related literature such as Bosworth and Perry (1994), Feldstein (2008), and Pessoa and Van Reenen (2013), which provided a similar explanation for the observed gap…. In countries that import primary commodities such as crude oil and agricultural products and export electronic products, automobiles, and machinery, labour’s terms of trade are more likely to deteriorate according to the fall in the relative price of export products through technological progress. The decline in labour’s terms of trade may also be attributed to the fact that products of the same quality as those produced domestically are produced in large quantities overseas through foreign direct investment (FDI). It is notable that the declines in the labour income share explain a relatively small portion of the stagnation of real wages in both countries….”
NEWS
A Generation of American Men Give Up on College: ‘I Just Feel Lost’ (Douglas Belkin, Wall Street Journal) ($)
“…Men are abandoning higher education in such numbers that they now trail female college students by record levels. At the close of the 2020-21 academic year, women made up 59.5% of college students, an all-time high, and men 40.5%, according to enrollment data from the National Student Clearinghouse, a nonprofit research group. U.S. colleges and universities had 1.5 million fewer students compared with five years ago, and men accounted for 71% of the decline. This education gap, which holds at both two- and four-year colleges, has been slowly widening for 40 years. The divergence increases at graduation: After six years of college, 65% of women in the U.S. who started a four-year university in 2012 received diplomas by 2018 compared with 59% of men during the same period, according to the U.S. Department of Education. In the next few years, two women will earn a college degree for every man, if the trend continues, said Douglas Shapiro, executive director of the research center at the National Student Clearinghouse. No reversal is in sight. Women increased their lead over men in college applications for the 2021-22 school year—3,805,978 to 2,815,810—by nearly a percentage point compared with the previous academic year, according to Common Application, a nonprofit that transmits applications to more than 900 schools. Women make up 49% of the college-age population in the U.S., according to the Census Bureau….At Baylor University, where the undergraduate student body is 60% female, the admission rate for men last year was 7 percentage points higher than for women. Every student has to meet Baylor’s admission standards to earn admission, said Jessica King Gereghty, the school’s assistant vice president of enrollment strategy and innovation. Classes, however, are shaped to balance several variables, including gender, she said….The college gender gap cuts across race, geography and economic background. For the most part, white men—once the predominant group on American campuses—no longer hold a statistical edge in enrollment rates, said Mr. Mortenson, of the Pell Institute. Enrollment rates for poor and working-class white men are lower than those of young Black, Latino and Asian men from the same economic backgrounds, according to an analysis of census data by the Pell Institute for the Journal…..”
More College-Educated Women Are Having Babies Outside Marriage (Janet Adamy, Wall Street Journal) ($)
“…Nearly a quarter of highly educated women in their mid-30s had their first babies outside marriage, according to new research published Monday in the Proceedings of the National Academy of Sciences. The study, conducted by Johns Hopkins University sociologist Andrew Cherlin, found that nonmarital childbearing has increased significantly among women of all educational levels over the past quarter-century. Yet the sharpest increase has been among women who hold a bachelor’s degree or more. About 24.5% of them ages 32 to 38 weren’t married when they had their first babies, according to surveys from 2017-2018. That is a sixfold increase from 1996, when the share was 4% for that group….Prof. Cherlin arrived at his conclusions using demographic data from the National Longitudinal Survey of Youth, the National Longitudinal Study of Adolescent to Adult Health, and the National Survey of Family Growth. Based on his research, he projects that among college-educated women currently in their 30s who will ever have a first child, 18% to 27% will be unmarried at the time of the birth….The research shows that the less education a woman has, the more likely she is to have her first baby outside marriage. Among women ages 32 to 38, about six in 10 women with only a high-school diploma were unmarried at the time of their first baby. For those lacking a high-school diploma in that age range, the figure was 86.5%….”
Poorly devised regulation lets firms pollute with abandon (Staff, The Economist) ($)
“…A new paper by Eric Zou of the University of Oregon makes use of satellite images to spy on polluters at times when they think no one is watching. nasa, America’s space agency, publishes data on the concentration of aerosol particles—ranging from natural dust to man-made toxins—all around the world, as seen from space. For every day in 2001-13, Mr Zou compiled these readings in the vicinity of each of America’s 1,200 air-monitoring sites. Although some stations provided data continuously, 30-50% of them sent reports only once every six days. For these sites, Mr Zou studied how aerosol levels varied based on whether data would be reported. Sure enough, the air was consistently cleaner in these areas on monitoring days than it was the rest of the time, by a margin of 1.6%. Reporting schedules were almost certainly the cause: in areas where stations were retired, average pollution levels on monitoring days promptly rose to match the readings on non-monitoring days. The size of this “pollution gap” differed by region. It was biggest in parts of Appalachia and the Midwest with lots of mining, and in the northern Mountain West, where paper and lumber mills are common….”
