Daily
May 30, 2023
Nicholas Eberstadt @AEI notes that, even prior to the Covid pandemic, the mortality rates of American adults born after 1980 exceeded previous cohorts.
The awful truth remains: By 2019—that is, even before COVID—the Class of 1980’s death rates at age 39 were higher than their counterparts’ from the Classes of 1970 and 1960. At age 29, the Class of 1990’s death rates were indistinguishable from those of the Class of 1950. In Japan, the Class of 1990’s mortality rate at age 29 was over 80 percent lower than those of their “grandparents” from the Class of 1930. In the US, the corresponding differential was less than 8 percent. If we look carefully at Figure 2, we can see unwelcome “crossovers”—where death rates in adulthood exceeded those of earlier cohorts—for every US cohort from the Class of 1950 onward in the years after the Berlin Wall fell (1990 onward). This is what prolonged stagnation—at times, even reversal—in national health progress looks like. Related: Who Won the Cold War? Part I and Who Won the Cold War? Part II
.@JosephPolitano estimates that Americans have only $750B of excess savings – or $650B adjusted for inflation. At the current pace of spending the excess savings will be exhausted by the end of 2023.
From most families’ perspectives, the excess savings accumulated during the pandemic are now entirely gone. The share of households saying they had savings worth 3 months of expenses dipped to just above pre-pandemic levels, with higher-income households being noticeably less likely to have a sufficient emergency fund than they were in 2019.
Advanced economies are facing a wave of immigration, with the foreign-born population of major advanced economies running at the fastest pace in several decades. @TheEconomist
Last year 1.2m people moved to Britain—almost certainly the most ever. Net migration (i.e., immigrants minus emigrants) to Australia is currently twice the rate before the covid-19 pandemic. Spain’s equivalent figure recently hit an all-time high. Nearly 1.4m people on net are expected to move to America this year, one-third more than before the pandemic. In 2022 net migration to Canada was more than double the previous record. In Germany it was even higher than during the “migration crisis” of 2015. The rich world as a whole is in the middle of an unprecedented migration boom. Its foreign-born population is rising faster than at any point in history.
.@Edsall provides evidence that younger Americans have shifted to the political left; but given older voters’ higher turnout rates, he argues it may take over 20 years for the Democrats to net 3pp on their vote share.
Defying the adage among practitioners and scholars of politics that voters become more conservative as they age — millennials (those born between 1981 and 1996) and Gen Z (those born in 1997 and afterward) have in fact become decidedly more Democratic over time, according to data compiled by the Cooperative Election Study. The graphic below, which is derived from the study, shows a significant increase in voting for House Democratic candidates among millennials and Gen Z. Brian Schaffner, a political scientist at Tufts observed "Because the population is very big and turnout rates tend to be much higher for older adults, these trends can be slow to lead to significant gains. For example, in 2018, I applied a life expectancy model to our C.E.S. data and using that model I calculated that it would take more than 20 years for Democrats to gain just 3 percentage points on their vote share from differential mortality. Those gains could easily be offset by Republicans doing a bit better among other groups. For example, part of what has helped them in recent elections is that even while the share of the population who are non-college white people is in decline, it is still a large group that (1) has come to vote more Republican in the past decade and (2) has seen its turnout rate increase during the same period." Related: Millennials are Shattering the Oldest Rule in Politics and What Happened In 2022
The first startup to ever spin off of German’s Max Planck Institute is using an alternative approach to fusion power that offers potentially more stable plasma than tokamak devices.
A German start-up has secured initial funding to develop a revolutionary fusion energy machine that it hopes can provide a future source of abundant, emissions-free power. Proxima Fusion, incorporated in January, aims to build a complex device known as a stellarator and is the latest company to join the emerging fusion industry’s effort to generate electricity by fusing atoms. Although the amount of funding is small at only €7mn, it is significant as Proxima is the first fusion company to spin out of Germany’s revered Max Planck Institute for Plasma Physics. Little known outside the world of plasma physics, a stellarator is an alternative to the better-known tokamak device. The twisted structure of the stellarator is more complicated to design and build than a traditional tokamak but produces a more stable plasma that could enable scientists to sustain the fusion reaction for longer.
.@JoshuaLKrieger @Danielle__Li @DimitrisPapan20 examine R+D investment in drug development and find that research into novel therapies often leads to profitable opportunities in successor therapies that are closely related.
If past research informs current work, then firms face a choice. Is it more valuable to learn from exploring new areas, or to exploit the information revealed by past work? In this paper, we show that despite novel drugs generating more learning, firms prefer to invest in incremental drugs, which are easier to evaluate. This presents a dynamic tension: while firms value the ability to discard incremental drugs that are unlikely to succeed, they are reluctant to make the types of exploratory R&D investments that improve future screening decisions. our results suggest that policymakers could provide stronger incentives for firms to develop novel drugs by making it easier for them to appropriate indirect revenues from potential successors. These revenues, which can exist even when the focal project fails, disproportionately increase the overall returns to investing in newer, more uncertain research areas.
May 26, 2023
According to @jasonfurman there is “nothing” in the PCE numbers that suggest inflation is on track to fall < 3.5% without further deterioration in the labor market.
Another high reading for core PCE inflation, up 4.7% at an annual rate in April--and a 4.3% annual rate over the last three months, continuing its sideways move. But, under the hood it looks a little better as noisy items and imputations drove a lot of the extra high reading. Overall where does this leave us? The 4.7% annual rate for core PCE in April is too pessimistic a read of the inflation situation. But there is nothing in this report that would give any comfort that inflation is on track to fall to 3.5% or below without a further easing of the labor market.
An analysis from the @KansasCityFed examined the impact of monetary tightening and financial stress from banking instability, and found that financial stress is only about “half as disinflationary as monetary tightening.”
A spike in the Kansas City Fed’s Financial Stress Index historically leads to higher unemployment and somewhat lower inflation. A one standard deviation increase in financial stress typically portends an increase in the unemployment rate of 0.7 percentage points. Financial stress historically reduces inflation as well: inflation, as measured by the consumer price index (CPI), falls by about 0.4 percentage points in the first year following an increase in financial stress. By this metric, financial stress is about half as disinflationary as monetary tightening. Could the recent increase in financial stress generate the same disinflationary effects as tighter monetary policy? The left panel in Chart 2 shows that monetary policy tightening, as measured by an unexpected increase in the expected path of the federal funds rate (blue line), slows economic activity and raises the unemployment rate, similar to an increase in financial stress. However, despite a similar increase in the unemployment rate, inflation falls by 0.65 percentage points in the first year following monetary tightening (right panel), a considerably larger decline than we estimate following an increase in financial stress.
.@JohnHCochrane argues in favor of work requirements and writes that the debate would be more productive if “we talked about the constraint posed by incentives, rather than the usual moral mudslinging.”
Work requirements are an imperfect method to try to replace the incentive to work that social programs eliminate. Our government does this sort of thing all over to transfer income but contain the disincentives: Subsidize gas, and then regulate against its use for example. By the way, supposedly socialist Europe, after its experience with "the dole" in the early 1990s, is much more heard-hearted about these sorts of incentives than we are. Is there a better way? I've long played with the idea of limiting help by time rather than by income. That's how unemployment insurance works. We understand that replacing people's paycheck forever if they lose their job has bad incentive effects. Unemployment is understood as a temporary misfortune, and understanding the incentives, you get unemployment checks for a limited amount of time. Could not many other programs aimed at misfortune also be limited by time -- but then allow you to keep each extra dollar of earnings? Perhaps even unemployment should be a fixed amount of time, and you can keep receiving it for the full (normally) 26 weeks even if you get a job.
Related: The Real Stakes of the Debt-Ceiling Fight
Nicholas Eberstadt @AEI notes that the age-adjusted mortality rates for Americans born in 1990, the year after the Berlin Wall fell, is now higher than for those born in 1960, and 4X higher than Italy and Spain.
Compare mortality in young adulthood for America’s Class of 1990 with their counterparts from affluent Cold War allies. Since breakdown by sex does not add much information here, we display overall mortality rates at ages 20 through 31 for the US and select Western European allies in Figure 3. Death rates at age 20 were universally lower for the treaty allies than Americans in the Class of 1990—usually much lower. Further, mortality curves for these allies generally remained much “flatter” over the course of their 20s than for the US. Consequently, the divergence in mortality risks between the US and the allies tended to increase over young adulthood for the Class of 1990, even before COVID. By age 29—i.e., in 2019, before the pandemic—mortality rates for the Class of 1990 were almost twice as high in the US as in New Zealand; two and a half times higher than in France; three time higher than in Japan; four times higher than in Italy or Spain.
Related: Who Won the Cold War? Part I
In 2021 the US birth rate was 1.66/woman vs the “replacement rate” of 2.1. If the US rate had continued at its at 2007 peak, there would be 9.6mm more children in the US.
Sociologists Karen Benjamin Guzzo and Sarah Hayford found that when millennials (born 1981 to 1996) and the oldest members of Generation Z (starting in 1997) were surveyed in their late teens and early 20s, they said, on average, that they wanted to have at least two children. But the gap between women’s intended number of children and their actual family size has widened considerably. The researchers found that by the time women born in the late 1980s were in their early 30s, they had given birth, on average, to about one child less than they planned. That is roughly double the size of the shortfall for women born two decades earlier, and it is likely too large to be erased by a spurt of childbearing in their late 30s. The median age at which women give birth is 30, three years older than it was in 1990. Despite advances in fertility treatments, women who delay having kids until their final childbearing years reduce their chances of doing so—not just because it narrows their biological window but because other priorities and roadblocks can more easily derail their plans.
May 25, 2023
.@arpitrage @VrindaMittal2 @SVNieuwerburgh update their research on the pandemic’s impact on New York City commercial office space and find a 39% long run decline in overall office values, representing $453B in value destruction.
We revalue the stock of New York City commercial office buildings taking into account pandemic-induced cash flow and discount rate effects. We find a 45% decline in office values in 2020 and 39% in the longer-run, the latter representing a $453 billion value destruction. Higher quality office buildings were somewhat buffered against these trends due to a flight to quality, while lower quality office buildings see much more dramatic swings. These valuation changes have repercussions for local public finances and financial sector stability. The decline in office values and the surrounding CBD retail properties, whose lease revenues have been hit at least as hard as office, has important implications for local public finances. For example, the share of real estate taxes in NYC’s budget was 53% in 2020, 24% of which comes from office and retail property taxes.
The rise in asset prices in 2020-21 shielded New York state from the consequences of the flight of higher income workers. @foxjust
The 2020-21 numbers here were released in late April by the Internal Revenue Service. They sort taxpayers by whether and where they moved between filing their taxes in 2020 and filing them in 2021; the adjusted gross incomes are for the 2020 tax year. It has been two years since May 17, 2021 — that year’s belated income tax filing deadline — and a lot has changed. But New York has continued to lose population, and if the trend depicted above were to continue, even in less extreme form, it would be disastrous for the finances of a state that relies on income taxes paid by those making $200,000 or more a year for almost half its revenue. That the loss of affluent taxpayers didn’t lead to disaster during the pandemic mainly had to do with how much the prices of stocks, houses and other assets rose in 2020 and 2021.
Since the end of 2009 US nominal GDP growth has been higher than nominal rates, outside of the acute pandemic period. Based on current forecasts, this is about to change, creating increasing risks for private and public debtors. @TheEconomist
In an i > g world [nominal interest rates higher than nominal growth,] growth in the revenues, wages or tax receipts that a debtor earns will be slower than the interest accumulating on their borrowing, meaning debt levels have the potential to explode. An i > g world is unfamiliar to America and most of the West. Since the end of 2009 nominal growth has been higher than nominal rates (aside from the first half of 2020, when the covid-19 pandemic crashed the economy). Now America is about to cross the threshold, [based on a panel of economists surveyed by Bloomberg.] It is far easier to swallow a high cost of capital when it is matched by high returns on said capital. And that will not be the case for much longer.
.@jasonfurman differs from @benbernanke and @ojblanchard1, arguing that core inflation was primarily driven by the “original sin” of excessive fiscal stimulus.
Was inflation the result of unpredictable shocks (i.e., unfortunate events) or was it predictable (i.e., original sin)? My view: core predominantly original sin but excess of headline was due to an unfortunate accident. An elegant paper but it does not answer whether inflation was “a series of unfortunate events” or “original sin”. The paper does suggest that food and energy shocks do not explain core inflation. Shortages are consistent with demand increases—and demand supporting higher overall consumption. It may be more fruitful to ignore the labor market in assessing large non-linear shocks. Regardless, we all agree about the present situation--and the unlikelihood of a soft landing to 2% inflation.
Related: What Caused the U.S. Pandemic-Era Inflation?
In 2022, global defense spending increased 4% to at least $2T a year. @TheEconomist argues this won’t be inflationary as the spending is still low relative to Cold War levels.
Last year defence spending worldwide increased by nearly 4% in real terms to over $2trn. The share prices of defence firms are performing better than the overall stockmarket. We estimate that total new defence commitments and forecast spending increases, if implemented, will generate over $200bn in extra defence spending globally each year. It could be a lot more. Imagine that countries which currently spend less than 2% of GDP per year meet that level and that the remainder increase spending by half a percentage point of GDP. Global defence outlays would rise by close to $700bn a year. There is little reason to believe that the new cold war will be sharply inflationary. Not even the fiercest hawks are calling for defence spending, as a share of GDP, to return to the levels of the 1960s or 1970s.
Microsoft uncovered a Chinese attack on American infrastructure that would enable the Chinese government to disrupt communication between the US and Asia during a crisis.
Microsoft has uncovered stealthy and targeted malicious activity focused on post-compromise credential access and network system discovery aimed at critical infrastructure organizations in the United States. The attack is carried out by Volt Typhoon, a state-sponsored actor based in China that typically focuses on espionage and information gathering. Microsoft assesses with moderate confidence that this Volt Typhoon campaign is pursuing development of capabilities that could disrupt critical communications infrastructure between the United States and Asia region during future crises. Volt Typhoon has been active since mid-2021 and has targeted critical infrastructure organizations in Guam and elsewhere in the United States. In this campaign, the affected organizations span the communications, manufacturing, utility, transportation, construction, maritime, government, information technology, and education sectors. Observed behavior suggests that the threat actor intends to perform espionage and maintain access without being detected for as long as possible.
May 24, 2023
.@PaulKrugman argues the decline in black unemployment might have powerful spillover effects in terms of combating the social dysfunction that has plagued black America.
The improvement in Black employment matters a lot, and not just because of the income generated. As the sociologist William Julius Wilson argued, the loss of economic opportunities as jobs moved out of urban areas was a major driving force behind social dysfunction in Black communities. I’ve long seen the recent emergence of social dysfunction in largely white small towns and rural areas left behind by a changing economy as a vindication of Wilson’s thesis (and a repudiation of “cultural” explanations). So the fact that Black America is working again is really good news on multiple fronts. But while full employment helps, racial gaps are considerably smaller now than they were circa 2000 — arguably the last time we had truly full employment. Why? I’d argue — this will probably get me in trouble on both the right and the left — that racism and racial discrimination, while both still very real, have gradually declined over time, at least in a way that’s reflected in employment numbers.
A @GoldmanSachs analysis notes that China’s youth unemployment is not an outlier globally but that misalignment between college discipline and business requirements remains a persistent challenge.
Young people aged 15-24 years old appear particularly vulnerable when economic growth slows and labor market faces stresses. For example, International Labor Organization (ILO) data showed youth unemployment rate in 2021 was more than 20% in a few European countries such as Spain, Italy, and close to 10% in the US in 2021. Note ILO’s definition is slightly different from NBS’s. ILO uses the 15-24 age group while China’s National Bureau of Statistics (NBS) survey looks at the 16-24 age group. China does not seem to be an outlier when comparing its youth unemployment rate relative to income level among global peers. Although our analysis above suggests youth unemployment rate is quite cyclical and is set to decline as service activity growth improves, there may be other structural headwinds contributing to the high youth unemployment rate. In particular, mismatches between skillset graduates acquired from their higher education and skillset required by employers in industry with booming labor demand might have caused frictions in the labor market and therefore contributed to high youth unemployment rate.
Natural gas prices are in retreat globally in what should be a positive energy shock to Europe and emerging markets.
This time last year, natural-gas prices were skyrocketing after Russia’s invasion of Ukraine kicked off the worst energy crisis since the 1970s. To the surprise of many prognosticators, that energy shock has now subsided, with gas prices in full retreat around the world. The result is a windfall for the global economy, especially as it contends with stubbornly high inflation. Energy-intensive businesses are restarting operations, consumers are about to enjoy lower bills and fears of a winter shortage have eased.
Weekly
Week of May 15, 2023
Prime age (here 21-64) college educated workers are now moving out of the 12 most expensive metropolitan areas in the US.
It appears in domestic migration data that, years after lower-wage residents have been priced out of expensive coastal metros, higher-paid workers are now turning away from them, too. For most of this century, large metros with a million residents or more have received all of the net gains from college-educated workers migrating around the country, at the expense of smaller places. But among those large urban areas, the dozen metros with the highest living costs — nearly all of them coastal — have had a uniquely bifurcated migration pattern: As they saw net gains from college graduates, they lost large numbers of workers without degrees. At least, that was true until recently. Now, large, expensive metros are shedding both kinds of workers.
The American labor force grew by 32.8M workers between 1995-2022, and 70% of that growth consisted of immigrants or children of immigrants. Immigrants and their children are 29% of the total American workforce.
From 1995 to 2022, the U.S. labor force increased from nearly 131.6 million workers to over 164.3 million—an increase of nearly 32.8 million workers: 16.1 million of that increase came from immigrant workers (49%) and 6.7 million were children of immigrants (21%), according to data from the Current Population Survey’s Annual Social and Economic Supplement. Just 9.9 million were U.S.-born citizens without a foreign‐born parent. The actual effect of cutting off all immigration would have been even greater since the working immigrant population would have declined without more immigration by about 4.5 million. Immigrants have increased from about 10% of the U.S. labor force in 1995 to 18% in 2022, and immigrants and their children have gone from 18% to 29%.
James Montier @GMOInsights notes that American firms’ profit margins have been supported by persistent fiscal deficits and argues that the current historically-high PE multiple “dooms investors to low returns in the long run.”
Between 1950 and 2011, the fiscal deficit averaged just less than 3% of GNP each year. In the period from 2012 to 2022, the fiscal deficit was more than double the previous average, at 6.6%. This isn’t just the impact of the pandemic: the same basic pattern holds even when I exclude the Covid years! The main sources of the increased deficit have been health spending and social security expenditure (again true even with Covid data excluded). Is this era of what Minsky would have called “Big Government” here to stay? Even if I take a very bullish view, that this is indeed a new era of permanent deficits and thus profit margins will remain elevated relative to history, I still cannot find any valuation attraction in U.S. equities in aggregate. The Shiller P/E naturally embodies the decade of higher-than-normal profit margins and yet still stands at 30x. Even without any valuation or margin mean reversion, this dooms investors to low returns in the long run.
John Williams announces @NewYorkFed research that finds “there is no evidence that the era of very low natural rates of interest has ended.”
Based on the new r-star estimates for Canada, the Euro Area, and the United States, we see no signs of a significant reversal of the decline in r-star estimates evident in prior decades. In fact, in all three economies, the r-star estimates in 2022 are within two-tenths of a percentage point of the corresponding estimate in 2019. The current Holston-Laubach-Williams model estimates of r-star in the United States are shown in Figure 3. For comparison, the figure also shows estimates using a version of the model that is not adjusted to take into account COVID or outliers and holds the parameter values fixed at estimates using data through the end of 2019. The two sets of estimates are very similar through 2019. They differ sharply during the acute period of the pandemic, however, when the estimates from the unmodified model exhibit large swings due to the presence of sizeable outliers. Interestingly, the two estimates are very close to each other at the end of the sample.
Week of May 8, 2023
.@AswathDamodaran suggests that the “stickiness” of a bank’s deposit base has strong explanatory power for overall resiliency. Banks with the highest deposit growth in the past five years (suggesting low stickiness) have tended to see big declines.
It is banks with the least stick deposits that should have seen the biggest declines in market capitalization. My proxies for deposit stickiness are limited, given the data that I have access to, but I used deposit growth over the last five years (2017-2022) as my measure of stickiness (with higher deposit growth translating into less stickiness): The results are surprisingly decisive, with the biggest market capitalization losses, in percentage terms, in banks that have seen the most growth in deposits in the last five years. To the extent that this is correlated with bank size (smaller banks should be more likely to see deposit growth), it is by no means conclusive evidence, but it is consistent with the argument that the stickiness of deposits is the key to unlocking this crisis.
American public debt as a % of GDP is now higher than Portugal and Spain and on track to be higher than Italy by 2028 and Greece by 2030 @ChrisGiles_
The US federal budget is haemorrhaging money. The non-partisan Congressional Budget Office calculates that in the first seven months of the 2023 fiscal year, underlying government revenues are down 10% with spending up 12%. This leaves the federal budget deficit more than three times larger than in the same months of the 2022 fiscal year. The CBO’s latest forecasts show the level of federal debt held by the public as a share of national income to be 98% in 2023, just 7.6% below its wartime peak in 1946 and on track to exceed it in 2028. For comparison, UK public debt, also at a multi-decade high relative to gross domestic product, is still less than half the level it was at the end of the second world war. To make a comparison with eurozone countries that required support in the 2010s, Portugal, Ireland and Spain already have lower gross debt levels than the US, IMF forecasts show US debt set to exceed that in Italy by 2028 and Greece by the end of the decade.
According to a new analysis from the @sffed there is still $500B of excess personal savings in the economy which could support consumer spending through Q4 of this year.
We estimate that accumulated excess savings, in nominal terms, totaled around $2.1 trillion through August 2021, when it peaked (green area). After August 2021, aggregate personal savings dipped below the pre-pandemic trend, signaling an overall drawdown of pandemic-related excess savings. The drawdown to on household savings was initially slow, averaging $34 billion per month from September to December 2021. It then accelerated, averaging about $100 billion per month throughout 2022, before moderating slightly to $85 billion per month in the first quarter of 2023. Cumulative drawdowns reached $1.6 trillion as of March 2023 (red area), implying there is approximately $500 billion of excess savings remaining in the aggregate economy. Should the recent pace of drawdowns persist—for example, at average rates from the past 3, 6, or 12 months—aggregate excess savings would likely continue to support household spending at least into the fourth quarter of 2023.
A wealth effect from the rise in asset prices during the pandemic period can explain over 80% of the 2.2M “excess retirements” from 2019-21 among US workers aged 55+. @mfariacastro
The U.S. labor force participation rate (LFPR) experienced a record drop during the early pandemic. While it has since recovered to 62.2% as of December 2022, it was still 1.41 pp below its pre-pandemic peak. This gap is explained mostly by a permanent decline in the LFPR for workers older than 55. Table 2 shows that between 45% and 82% of the 2.2 million excess retirements can be explained by wealth effects for those aged 55-70 or 55 and older. For the entire 2019-2022 period, between 20% and 36% of the 3.3 million excess retirements can be explained by wealth effects.
Related: Retirements, Net Worth, and the Fall and Rise of Labor Force Participation
From 2019-2022 students in the mean school district fell half a year behind in math and a third of a year behind in reading. The learning losses were more significant in poorer school districts.
According to our calculations, the average student was half a year behind in math and a third of a year behind in reading. In 2019, the typical student in the poorest 10 percent of districts scored one and a half years behind the national average for his or her year – and almost four years behind students in the richest 10 percent of districts – in both math and reading. By 2022, the typical student in the poorest districts had lost three-quarters of a year in math, more than double the decline of students in the richest districts. The declines in reading scores were half as large as in math and were similarly much larger in poor districts than rich districts. The pandemic left students in low-income and predominantly minority communities even further behind their peers in richer, whiter districts than they were.
Gun homicides in the US are being driven not by an increase in gun ownership but a decline in local trust levels. @jburnmurdoch
Levels of trust in the US have been eroding for decades and the share of Americans who say they do not trust other people in their neighbourhood is now roughly double what you would expect based on US socio-economic development. Few appreciate that at country and state level, the statistical relationship between gun availability and gun deaths is driven almost entirely by suicides. The more people who have access to guns, the more who use them to take their own lives. And since the vast majority of all gun deaths are suicides, this dynamic dominates the overall guns-deaths link. Look only at gun homicides instead, and the link with the number of guns is much weaker, whether the unit of analysis is different countries or US states. But add in interpersonal trust as well as gun ownership, and the relationship returns. In other words, it’s the interplay between guns and fear that sends homicide rates climbing.
Physicists have created objects that retain a memory of their past, a step towards “error-tolerant quantum computers.” @QuantaMagazine
Physicists working with the company Quantinuum announced that they had used the company’s newly unveiled, next-generation H2 processor to synthesize and manipulate non-abelian anyons in a novel phase of quantum matter. Their work follows a preprint posted last fall in which researchers with Google celebrated the first clear intertwining of non-abelian objects, a proof of concept that information can be stored and manipulated in their shared memory. Together, the experiments flex the growing muscle of quantum devices while offering a potential glimpse into the future of computing: By maintaining nearly indestructible records of their journeys through space and time, non-abelian anyons could offer the most promising platform for building error-tolerant quantum computers.
Week of May 1, 2023
Using evidence from two large retailers @RDMetcalfe @ASollaci @ChadSyverson find that individual managers, outside of firm-wide management practices, explain 25-35% of variance in store level productivity.
Overall, managers explain between 25 and 35% of the variance of store-level productivity, which is about 50-70% of the explanatory power of store fixed effects. In the four largest connected sets across both companies, moving a manager from the 10th percentile to the 90th percentile increases overall productivity by between 22% and 82%. On average, this implies an effect on output equivalent to adding a fifth employee to a team of four. We estimate that replacing a manager at the bottom of the distribution by one at the top could increase a store’s productivity by at least 50%, and perhaps as much as doubling it, depending on the company and the relevant connected set.
In an effort to improve India’s growth trajectory, India’s government is making significant investments in railroad and highway infrastructure.
India will spend 1.7% of GDP on transport infrastructure this year, around twice the level in America and most European countries. If such infrastructure were a central-government department, it would have the third-biggest budget after the finance and defence ministries. The stated aim of the splurge is to cut the cost of logistics within India from around 14% of GDP today to 8% by 2030.
Enrico Moretti and @wilson_daniel_j find 35% of billionaires leave states that have an estate tax. However, for the average state the additional revenues from an estate tax exceed the loss of revenues from forgone income taxes by 31 percent.
We find that billionaires responded strongly to geographical differences in estate taxes by increasingly moving to states without estate taxes, especially as they grew older. Our estimated elasticity implies that $80.7 billion of 2001 Forbes 400 wealth escaped estate taxation in the subsequent years due to billionaires moving away from estate tax states. Yet despite the high elasticity of geographical location with respect to the estate tax, we find that for most states the benefit of additional revenue from the estate tax exceeds the cost of forgone income tax revenue by a significant margin. Adoption of an estate tax implies a one-time tax revenue gain for the state when a resident billionaire dies, but it also reduces its billionaire population and thus their flow of income tax revenue over remaining lifetimes. For the average state the benefit of additional revenue from the estate tax exceeds the cost of forgone income tax revenue by 31 percent. While the cost-benefit ratio varies substantially across states, most states that currently do not have estate taxes would experience revenue gains if they adopted estate taxes. California, which has the highest personal income top tax rate, is the main exception In California, the cost-benefit ratio is 1.45, indicating that if California adopted the estate tax on billionaires, the state would lose revenues by a significant margin. (Currently, California does not have an estate tax.)
An earlier version of this research was cited in my chapter The Economics of Inequality in High-Wage Economies in Oxford University Press's United States Income, Wealth, Consumption, and Inequality
Opposition to mass immigration seemingly peaked in the West in 2016. @jburnmurdoch
Remember the rise of the right? First Brexit, then Trump, then a wave of rightwing populism broke over Europe. There were dozens of news articles on the “rising tide of anti-immigrant sentiment.” Except it turns out that in the west, 2016 was a high water mark for such views. This is true of almost all western countries, but the most dramatic shifts have come in the US, Canada and, in particular, Britain, where the share of people saying there should be strict limits — if not an outright ban — on immigration has more than halved from 66 per cent on the eve of the EU referendum to 31 per cent last year. We see similar shifts in the general public’s attitude towards members of other ethnic groups and faiths. Just 3 per cent of Americans and 2 per cent of Britons say they would not want someone of a different race as a neighbour, with only Sweden scoring lower across the developed world. Discomfort with people from other faiths falls to just 3 and 1 per cent in the US and the UK respectively.
A new @NBERpubs paper shows that parents’ comparative skill advantage in math (vs. language) is significantly linked to the comparative skill advantage of their children. @EricHanushek @SimonWiederhold
Our analysis shows that comparative skill advantages are transferred across generations: Parents who were relatively better at math (vs. language) in childhood are more likely to have children with a similar comparative skill advantage in math. We also find that parents’ comparative skill advantage is a strong predictor of their own STEM choices and those of their children. The new Intergenerational Transmission of Skills (ITS) database that we develop permits matching skills of Dutch parents and children derived from similar tests taken at similar ages. We measure comparative skill advantage as the ordinal difference between math and language skills in the parent and child generation, respectively, each assessed by the percentile position in the nationwide skill distribution. We find that parents with a comparative advantage in math skills are significantly more likely to have children with a similar math skill advantage.
Higher oil prices are now a tailwind for the American trade deficit as the US is a net energy exporter. Since June 2021, the dollar has been moving in the same direction as the oil price, which is a reversal of the long-term relationship. @BIS_org
A more structural determinant of the change in the commodity price-dollar nexus is the changing composition of US trade. Historically, the United States has been a net oil and gas importer. This pattern has changed recently. The shale oil boom that began in the early 2010s expanded US energy production substantially. The country became a net exporter of natural gas in 2017 and of oil in late 2019 (Graph 2.B). These changing trade patterns have altered the relationship between commodity prices and the US terms of trade (ie the ratio of US export prices to US import prices). Historically, higher oil prices were associated with a deterioration in the US terms of trade. But as US oil production rose, the relationship between the two series flipped, so that higher oil prices now correspond to an improvement in the US terms of trade.
Torsten Sløk @apolloglobal notes the median time from the start of the Fed’s hiking cycle until unemployment bottoms is 14 months. We are 13 months into the current hiking cycle.
The unemployment rate falls when the Fed hikes rates, see chart below. In fact, the declining unemployment rate is precisely the reason why the Fed is raising interest rates. And the chart below suggests that when the unemployment rate starts moving higher is when the Fed stops hiking. Looking back in history, the median time it takes from when the Fed starts hiking until the unemployment rate bottoms and moves higher is 14 months, and using this historical pattern as a guide, with the first Fed hike in March 2022, we should begin to see the unemployment rate increase within the next couple of months. The bottom line is that it usually takes 12 to 18 months for the Fed to soften the labor market, and today is no different.
Real hourly earnings for the bottom 10% earners rose by 6.4% between January 2020 and September 2022. Real hourly earnings for the top 10% and median earners were down in real terms.
America’s lowest-earning workers are enjoying higher wage growth than top earners, after taking into account the effects of the recent bout of high inflation. Since 2020, real wages for the bottom 10 percent of the workforce have returned to their pre-pandemic level. In contrast, top earners and those on average incomes have taken a substantial hit once the effect of price growth is taken into account. Real hourly earnings for the lowest earners rose by 6.4 percent between January 2020 and September 2022.
Week of April 24, 2023
Doug Sosnik documents that voting behavior has polarized around educational attainment resulting in a new political geography of eight battleground states which have educational levels near the national average.
In a sharp contrast to a previous era, college educated voters are now more likely to identify as Democrats, and those without college degrees - particularly white voters, but increasingly all Americans – support Republicans. Culturally, a person’s educational attainment increasingly correlates with their views on a wide range of issues, including abortion, attitudes about LGBTQ+ rights, and the relationship between government and organized religion. This educational sorting has made the vast majority of states no longer politically competitive. It is the battleground states in the middle - where education levels are neither disproportionately high nor low - that will decide the 2024 presidential election. Democrats will likely enter the General Election with 222 electoral votes, compared to 219 for Republicans. That leaves only eight states, with 97 electoral votes – Arizona, Georgia, Michigan, New Hampshire, North Carolina, Nevada, Pennsylvania, and Wisconsin – up for grabs. The education levels in these states are at or near the national average - Pennsylvania (23rd), Georgia (24th), North Carolina (25th), Wisconsin (26th), Arizona (30th), and Michigan (32nd) - not disproportionately highly educated nor toward the bottom.
Database
Week of March 27, 2023
John Fernald @sffed argues that slower total factor productivity growth is likely not a function of the business cycle or scarring due to the crisis, as growth slowed in advance of 2008 across advanced economies.
TFP is the main factor accounting for differences in labor productivity growth across countries and over time. Since the mid-2000s, TFP growth has been lackluster across the large economies we analyze here. At the level of the market economy, productivity slowed because the productivity frontier (the U.S.) slowed, with similar slowdowns elsewhere. At a more disaggregated level, the frontier economy is sometimes different, but the pattern of slow TFP growth since the mid-2000s is evident in both manufacturing and market services. Qualitatively as well as statistically, the evidence suggests that, following that mid-1990s pickup, U.S. TFP growth slowed before the Great Recession.
Week of March 20, 2023
Nicholas Eberstadt and Peter Van Ness @AEIecon find significant variation in labor force participation across metropolitan areas. Notably, they find no correlation between local LFP and the change in manufacturing jobs’ share of employment since 2000.
For many years, a stylized fact floating in the economic policy ether (on both the left and the right) has been the now widely accepted notion that deindustrialization has driven down post-war LFPRs for American men. The figure above squarely challenges that assumption. Less ephemerally, careful studies by David Autor of the Massachusetts Institute of Technology and his colleagues have detailed the devastating impact of the "China shock" — the shift in worldwide trade patterns that followed China's accession into the World Trade Organization in 2001 — on the U.S. manufacturing sector. That immediate shock was, alas, very real, but our chart suggests it was also temporary. This figure, we believe, should be taken as an invitation to reexamine a matter many scholars and policymakers consider settled.
A Spanish antipoverty program that gave recipients a cash transfer equivalent to almost 50% of the national minimum wage had strong negative labor market effects, with primary recipients 20% less likely to work relative to the control group. @iza_bonn
In this paper, we studied the employment effects of an antipoverty program that does not include any such conditions. The two-year program, implemented in Barcelona (Spain), consisted of a monthly cash transfer to households with income below the subsistence level. The benefit level depended on the household income, size, and composition. On average, households received roughly e500 ($792 PPP) per month, equivalent to nearly 50 percent of the national minimum wage. Although the benefit was household-based, transfers were made to the account of a designated household member, the main recipient. Our findings for overall impacts can be summarized in four parts. First, we find strong evidence for sizeable negative labor supply effects. After two years, households assigned to the cash transfer were 14 percent less likely to have at least one member working compared to households assigned to the control group; main recipients were 20 percent less likely to work. Second, negative employment effects persisted until at least six months after the last payment. Third, we find tentative evidence that effects are mainly driven by households with care responsibilities. Fourth, there is no evidence of effects on social participation and education-related activities.
.@mtkonczal updates @Mark_J_Perry price changes graph and argues the implication isn’t government regulation drives price shifts but that goods have deflated and services have inflated.
In our version of the AEI chart the number one item isn’t health care but ‘delivery services,’ which is “fees for delivery of items such as letters, documents, and packages at non-US Postal Services facilities.” Think UPS or FedEx. This is pretty far from a government monopoly, indeed it’s the private sector alternative to a government program. But it is services and it is labor intensive. The biggest thing, to me, isn’t “regulations” but whether it’s a service or a good. This is academically well known, check out The Missing Inflation Puzzle: The Role of the Wage-Price Pass-Through, which finds that the low inflation of pre-pandemic era “can be traced to a growing disconnect between unemployment and core goods inflation” and that “increased import competition and rising market concentration reduce pass-through from wages to prices” when it comes to goods.
Week of March 13, 2023
.@paulkrugman argues that higher marginal taxes rates won’t be enough to close the long-run fiscal gap. “We’ll eventually have to raise taxes, at least somewhat, on people making less than $400,000.”
Very high marginal tax rates create problematic incentives. Conservatives emphasize how taxes reduce the incentive to work and create wealth; this effect is surely overrated, but it does exist. More important, high tax rates encourage extraordinary efforts to avoid taxes (which is legal) or evade them (which isn’t). Estimates of the revenue-maximizing top tax rate tend to be in the range of 70 percent to 80 percent, well above the federal maximum of 37 percent — but bear in mind that many high earners also face state and local taxes that raise their effective marginal rate to something like 50 percent. So, the amount of additional revenue we can raise from taxing the rich, while substantial, is considerably less than their remaining untaxed income.
Robert Hall argues that a substantial rise in the volatility of costs can free the prices of a significant fraction of goods and services prices from the grip of New Keynesian “zone of inaction.” @NBERpubs
The basic idea of this paper is that a substantial rise in the volatility of costs and other determinants of prices can completely free the prices of a significant fraction of goods and services from the grip of New Keynesian stickiness, when the volatility of cost rises. There is a critical configuration of the model such that at lower values of the of the cost volatility, the price is a constant over time—resetting never occurs, except possibly to bring the price into the zone of indifference at the beginning of time. The surprising implication of this investigation is that an increase in the volatility of cost that leaves the average level of cost unchanged can trigger a near collapse of price stickiness. The next section of the paper presents an empirical analysis demonstrating a large increase in cost volatility around the time of a burst of inflation during and after the pandemic, followed by a reversal.
Week of March 6, 2023
Persistently loose monetary policies are associated with financial crises. A 1pp lower mean in a five-year window increases the probability of a financial crisis in the next 5 to 7 years by 5.5pp and by 15.5 in the following 7-9 years. @MSchularick @sffed
We are the first to show that, as a causal matter, a loose stance has strong implications for medium-term financial instability. The sample consists of 18 advanced economies over the period from 1870 until 2020. Since the unconditional probability of experiencing a crisis in a 3-year window is 10.5%, these effects are big. Moreover, these results are robust to alternative measures of stance and alternative definitions of financial stability. Lower interest rates in general and loose monetary policy in particular imply, ceteris paribus, higher asset valuations. This opens the door for collateral-driven credit booms. Such credit and asset price booms, in turn, have been identified by the literature as harbingers of financial turmoil.
The wave of murders associated with the pandemic has seemingly crested. Homicide rates are still well above the pre-pandemic level, but 2022 homicides were down 5% from 2021. @foxjust
The shocking rise in murders that began in the summer of 2020 looks as if it may have played out. In the nearly complete tally of 2022 homicide statistics from 93 US cities compiled by AH Datalytics, murder and non-negligent manslaughter was down 5% from the year before. There were still many more people murdered in the US in 2022 than before the pandemic in 2019 — going by the AH Datalytics estimates it was 4,764, or 28.7%, more. Murder rates are also much, much higher in the US than in other wealthy nations. But with weekly crime statistics from the three biggest US cities showing a continuing and possibly accelerating murder decline so far in 2023, it does look as if a return to the awful conditions of the 1970s through early 1990s probably isn’t in the cards.
Week of February 27, 2023
A strong rebound in immigration in 2022 helped offset tight U.S. labor markets, contributing to a 6-percentage point reduction in the ratio of job vacancies to unemployed workers. @sffed
Immigration flows into the United States slowed significantly following immigration policy changes from 2017 to 2020 and the onset of the COVID-19 pandemic. Analysis of state-level data shows that this migration slowdown tightened local labor markets modestly, raising the ratio of job vacancies to unemployed workers (V-U) 5.5 percentage points between 2017 and 2021. More recent data show immigration has rebounded strongly, helping to close the shortfall in foreign-born labor and ease tight labor markets. Data for 2022 show a strong rebound in immigration that has helped offset tight U.S. labor markets by contributing a 6-percentage point reduction in the V–U ratio.
As American energy exports to Europe surge, @DanielYergin notes that, “America is back in the most predominant position it has been in world energy since the 1950s.” @WSJ
Since February 2022, when Russia invaded Ukraine, average monthly seaborne cargoes to the continent jumped 38% compared with the previous 12-month period, according to ship-tracking firm Kpler. According to the White House, U.S. natural gas shipments to Europe more than doubled last year, cushioning the continent’s households and manufacturers after Russia throttled supplies. A fleet of skyscraper-size tankers carried more crude to Germany, France and Italy—the European Union’s largest economies—as well as Spain, which alone boosted purchases by about 88% over the period. The pull of oil shipments from the Gulf Coast to Europe, which Kpler pegged at 1.53 million barrels a day in January, has in recent months made the continent a larger destination for U.S. crude than Asia.
.@seba_hill documents that almost all the decline in real interest rates since 1980 occurred in a 3-day window around Fed announcements.
A narrow window around Fed meetings fully captures the secular decline in U.S. Treasury yields since 1980. By contrast, yield movements outside this window are transitory and wash out over time. This is surprising because the forces behind the secular decline are thought to be independent of monetary policy. Why did the secular decline in interest rates occur around FOMC meetings? While the Fed might have no direct control of long-term yields, it seems possible that the Fed provides information to the market about the long-run level of interest rates. This long-run Fed information effect might therefore explain why long-term interest rates move around FOMC meetings. In recent decades, this would imply that the market learned about secular interest rate decline – including the trend in r∗– from the Fed.
Money flowing into startups globally fell by a third in 2022 as valuations declined; however, there is still $300B of VC dry powder in the US alone. @TheEconomist
The tech-heavy Nasdaq index fell by a third in 2022, making it one of the worst years on record and drawing comparisons with the dotcom bust of 2000-01. According to the Silicon Valley Bank, a tech-focused lender, between the fourth quarters of 2021 and 2022, the average value of recently listed tech stocks in America dropped by 63%. And the plunging public valuations dragged down private ones. The value of older, larger private firms (“late-stage” in the lingo) fell by 56% after funds marked down their assets or the firms raised new capital at lower valuations. What new VC funding there is increasingly flows into mega-funds. Data from PitchBook, a research firm, show that in America in 2022 funds worth more than $1bn accounted for 57% of all capital, up from 20% in 2018.
China’s household savings rate was 33% in 2022, 3pp above the pre-pandemic trend, and big industrial companies added $1.1 trillion in liquid assets on average each year, more than double the $467 billion annual increase in the five years before Covid. @WSJ
Chinese families, constrained by Covid lockdowns, hoarded cash and pushed up the country’s household saving rate to a multiyear high of 33% in 2022. Economists from HSBC and Morgan Stanley say the end of China’s strict zero-Covid policies will at minimum fuel a strong recovery in services spending, lifting consumption growth to at least its prepandemic rate of around 8% a year. A large portion of new deposits accumulated by Chinese households last year was locked up in three-year to five-year deposit instruments, which can’t as easily be converted into spending as short-term deposits can, according to a study by research firm Rhodium Group.
Week of February 20, 2023
.@paulkrugman argues that Medicare financing is on stable ground as health spending is leveling off: “since 2010 we’ve already done quite a lot to ‘bend the curve.’”
Historically health spending has risen faster than GDP. Excess cost growth has slowed considerably since around 2010 the leveling off is unmistakable. Here’s national health spending as a percent of G.D.P. C.B.O. projections now show social insurance spending as a percentage of G.D.P. eventually rising by about 5 points, which is still a lot but not unimaginably large. And here’s the thing: Half of that is still the assumed rise in health care costs. Since 2010 we’ve already done quite a lot to “bend the curve.” It’s not at all hard to imagine that improving the incentives to focus on medically effective care could limit cost growth to well below what the C.B.O. is projecting, even now.
.@DailyMail reports that 8% of very wealthy New Yorkers (those earning >$25 million per year) left the state during 2021.
The number of those earning more than $25 million that fled the state in 2021 is 1,453, just 520 less than the amount that left at the height of lockdowns and intense social distancing [implying 17% of this cohort over two years]. The top one percent of earners in New York account for close to half of the state's income tax revenue. Between 2019 and 2020, New York City lost six percent of those earning between $150,000 and $750,000. EJ McMahon of the Empire Center for Public Policy claimed the data showed a 1.3 percent decline in the number of New Yorkers with adjusted gross annual income of more than $1 million. The precise figure fell from 55,100 to 54,370 - 730 individuals, while the national number climbed from 554,340 to 608,549 - a nearly 10 percent jump. According to new Census Bureau data, New York experienced the largest population decline of any US state this year - losing 0.9 percent of its residents.
.@Birdyword reports that Asian alternatives to China (including India, Indonesia, Bangladesh, and Vietnam) have larger working age populations and exported more goods to the United States in the 12 months ending Q3 ‘22: $634B vs. China’s $614B.
Chinese labor is no longer that cheap: between 2013 and 2022 manufacturing wages doubled, to an average of $8.27 per hour. More important, the deepening techno-decoupling between Beijing and Washington is forcing manufacturers of high-tech products, especially those involving advanced semiconductors, to reconsider their reliance on China. Alternative Asian supply chain—call it Altasia—looks evenly matched with China in heft, or better. Its collective working-age population of 1.4bn dwarfs even China’s 980m. Altasia is home to 154m people aged between 25 and 54 with a tertiary education, compared with 145m in China—and, in contrast to ageing China, their ranks look poised to expand. In many parts of Altasia wages are considerably lower than in China: hourly manufacturing wages in India, Malaysia, the Philippines, Thailand, and Vietnam are below $3.
A new @NBERpubs paper shows that newer firms have more earnings dispersion than older firms, and that this pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. @WallskogMelanie
We plot the between-firm variance of earnings within a cohort over time. We find two striking patterns. First, within a cohort, between-firm earnings inequality declines as the cohort ages. Second, each subsequent cohort of firms enters with a higher level of between-firm earnings inequality before declining on a path approximately parallel to previous cohorts. We find that between-firm pay dispersion declines within a cohort. Second, there are striking cohort patterns: more recent cohorts are more dispersed than older cohorts. This pattern accounts for a large fraction of the aggregate rise in between-firm earnings inequality. As older cohorts are replaced with cohorts with inequality “technology” of the more recent vintage, we expect inequality to continue to rise, even without a change in that underlying technology.
A “demand reallocation shock” associated with the pandemic was responsible for 3.5 percentage points of the rise in inflation. @FedResearch
Our main finding is that the shift in consumption demand from services towards goods can explain a large proportion of the rise in U.S. inflation between 2019:Q4 and 2021:Q4. This demand reallocation shock is inflationary due to the costs of increasing production in goods-producing sectors and because such sectors tend to have more flexible prices than those producing services. The aggregate labor supply shock provides a smaller inflationary impulse, despite the fact that it explains the majority of the decline in employment. The sectoral productivity shocks actually lower inflation slightly, as average productivity grew strongly over this period. Our confidence in the model and its predictions is boosted by the fact that it provides an excellent description of cross-sectional developments in prices and quantities
Week of February 13, 2023
The median return on capital for an American firm in January 2023 is 7.4%, which is above the 5.6% cost of capital at the start of 2022, but below the 9.6% cost of capital at the start of 2023. @AswathDamodaran
The after-tax returns on capital, at least in the aggregate, are unimpressive, with the median return on capital of a US (global) firm being 7.44% (5.19%). There are a significant number of outliers in both directions, with about 10% of all firms having returns on capital that exceed 50% and 10% of all firms delivering returns that are worse than -50%. A combination of rising risk-free rates and surging risk premiums (equity risk premiums and default spreads) has conspired to push the cost of capital of both US and global companies more than any year in my recorded history (which goes back to 1960). A company generating a 7.44% return on capital (the median value at the start of 2023) in the US, would have comfortably cleared the 5.60% cost of capital that prevailed at the start of 2022, but not the 9.63% cost of capital at the start of 2023.
.@fuxianyi estimates that the Chinese population is currently 1.28 billion (vs 1.43 billion estimated by World Population Prospects).
While the United Nations’ 2022 World Population Prospects puts the Chinese population at 1.43 billion people, I estimate that it is now smaller than 1.28 billion. Even if China succeeds in increasing its fertility rate to 1.1 and prevents it from declining, its population will likely fall to 1.08 billion by 2050 and 440 million by 2100. The country’s share of the world’s population, which declined from 37% in 1820 to 22% in 1950-80, will fall to 11% in 2050 and 4% by 2100. The share of Chinese people aged 65 and older will rise from 14% in 2020 to 35% in 2050. Whereas five workers aged 20-64 supported every senior citizen aged 65 and older in 2020, the ratio will continue to decline to 2.4 workers in 2035 and 1.6 in 2050.