Macro Roundup

"...The risk premium puzzle is worse than you think. Using a new database for the U.S. and 15 other advanced economies from 1870 to the present that includes housing as well as equity returns (to capture the full risky capital portfolio of the representative agent),standard calculations using returns to total wealth and consumption show that: housing returns in the long run are comparable to those of equities, and yet housing returns have lower volatility and lower covariance with consumption growth than equities.The same applies to a weighted total-wealth portfolio, and over a range of horizons. As a result, the implied risk aversion parameters for housing wealth and total wealth are even larger than those for equities, often by a factor of 2 or more. We find that more exotic models cannot resolve these even bigger puzzles, and we see little role for limited participation, idiosyncratic housing risk, transaction costs, or liquidity premiums...."

Òscar Jordà, Moritz Schularick, Alan Taylor, "The Total Risk Premium Puzzle," National Bureau of Economic Research, March 2019, https://www.nber.org/papers/w25653

"...A research team from Tsinghua University used satellite imagery to monitor the intensity of night lights in more than 3,300 cities and towns between 2013 and 2016. In 28 per cent of cases, the lights had dimmed. China now has 938 shrinking cities, according to Long Ying, an urban planning expert at China’s Tsinghua University, who founded and led the research group, Beijing City Lab. This is more than any other nation on Earth...."
Sidney Leng, "Almost one-third of Chinese cities are shrinking, but urban planners told to keep building,"South China Morning Post, March 18, 2019, https://www.scmp.com/economy/china-economy/article/3002219/almost-one-third-chinese-cities-are-shrinking-city-planners

"... Core-Mark Holding Co., which grew from a San Francisco tobacco shop in the 1800s to the second-largest distributor to convenience stores in the U.S., said last year it would relocate to a suburb of Fort Worth, Texas. CEO Scott McPherson said recruiting new employees to the Bay Area became challenging given housing prices and long commutes. McKesson Corp., the nation’s largest pharmaceutical distributor, in November said it would move its global headquarters from San Francisco to the Dallas suburb of Irving, Texas, bringing hundreds of jobs....Carl Guardino, chief executive of the Silicon Valley Leadership Group, said CEOs tell him “that any new job that doesn’t absolutely need to be in the Bay Area is located outside of the Bay Area.”The public-policy advisory group counts some 360 companies, including Silicon Valley’s largest, as members. There is no government data on how many companies and jobs have left California. An average of 80,000 homes were built each year in the past decade, far below the 180,000 homes needed year to keep up with population growth through 2025, according to state estimates...."

Nour Malas, "California Has the Jobs but Not Enough Homes,"Wall Street Journal, March 19, 2019, https://www.wsj.com/articles/california-has-the-jobs-but-not-enough-homes-11553007600

"...First, we observe major adjustments of labor supply in response to the ageing of the population. In this respect, the persistent call of central banks for reforms has been either anticipated or answered to by politicians, labor market institutions, employers and workers. This increase in participation implies that potential output should have increased. If the participation of 20% of the working population (population aged 55 to 64 over population aged 20 to 64) has nearly doubled, it means that aggregate output potential should increase as well. It would increase by roughly 10% if the productivity of older worker grows in line with the one of other workers. It should increase by less than 10% if the productivity of older workers is slower. It will in any case grow as long as the productivity growth of these older workers is not too negative.... wages have responded negatively to increased participation of older workers. Therefore, the change in the composition of the workforce is akin to a major labor supply shock by ageing workers. Most likely these aim to preserve their lifetime purchasing power through postponing their retirement....Second, (wage) inflation remains very much driven by cyclical forces and therefore it can be influenced by monetary policies. This result should be taken into account by those who fear that the “Phillips curve” transmission of monetary policy to inflation is broken. Central banks who spur activity and employment will eventually harvest domestic wage inflation, and, in all likelihood, inflation of goods and services. Third, it is not clear yet how high participation rates of older workers will go. We are probablundergoing a very long transition and we don’t know when it will end. But as long as this transition implies a larger slack than measured by the unemployment rate, the economy operates below its "NAIRU" potential. Taking a broader perspective, it seems that unemployement has not been a comprehensive indicator of labor market slack...."

Benoit Mojon and Xavier Ragot, " Can an ageing workforce explain low inflation?," Bank For International Settlements, March 2019, https://www.bis.org/publ/work776.pdf

Stephanie R. Aaronson, Mary Daly, William Wascher and David Wilcox, "Okun Revisited: Who Benefits Most From a Strong Economy?" Brookings Paper's on Economic Activity, March 8, 2019, https://www.brookings.edu/wp-content/uploads/2019/03/Okun-Revisited-Who-Benefits-Most-From-a-Strong-Economy.pdf

"....We use two variables: annual own income (sum of all earnings and all other income) and annual household income (sum of all income across all household members). All measures from the ADF are annual and refer to the years 1988 to 2017, corresponding to the calendar year preceding the survey year. In line with previous research we focus our attention on 25-64 year olds because this age group consists of individuals who are most likely to be finished with schooling and below normal retirement age. Within this group we examine the relative outcomes of historically less advantaged groups defined by race, gender, and educational attainment. We define three mutually exclusive groups for race and ethnicity: African Americans/blacks (we will use the terms interchangeably); Hispanics or Latinos (again, we will use the terms interchangeably); and whites.....A key feature evident in figure 2 is that fluctuations in the unemployment rates for African Americans and Hispanics—both males and females—are roughly synchronized with fluctuations in the unemployment rate for whites (top tier of panels). However, these rates are uniformly higher than the rates for white men and women and exhibit considerably greater amplitude. As a result, when the labor market weakens, the gaps between these rates widen markedly; they then shrink again when the labor market tightens. Compared to the unemployment rate, the labor force participation rate (middle tier of panels) is considerably less cyclically sensitive. A much greater fraction of the variation in the gaps in labor force participation rates across different races and ethnicities appears to reflect secular trends. Overall, black men have lower labor force participation rates than white or Hispanic men. Among women, Hispanic women participate at a lower rate than either black or white women. Finally, the employment-to-population ratio (EPOP), which combines the information in the unemployment rate and the labor-force participation rate, also varies considerably over the business cycle.9 In terms of levels, black men and Hispanic women have lower EPOPs than their counterparts, reflecting both their lower rates of labor force participation and higher unemployment rates....Figure 3 presents similar information for groups at different levels of educational attainment. On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree....On average, the unemployment rates (top two panels) of individuals without a college degree are more cyclically sensitive, rising by more in downturns and falling by more in expansions. At all points the unemployment rates for those without a college degree are higher than the rates for those with a college degree. Labor force participation rates and EPOPs (the middle and lower panels) are lower for those with less education.Similar to the results by race and ethnicity, labor force participation exhibits very little observable cyclical sensitivity. EPOPS are slightly more cyclical. The gaps in both LFPRs and EPOPs by educational attainment are large and persistent.....That said, there is very little visual evidence that the strength of the labor market affects the gaps in these variables across less-advantaged and more advantaged groups. In general, these aggregate income measures for blacks and Hispanics are far lower than the analogous measures for whites; similarly, the average incomes of those with lower educational attainment are well below those of persons with higher educational attainment....... A few observations seem clear. First, as previous researchers have shown, when the economy gets weak everyone suffers and when the economy gets stronger, everyone benefits. This is seen most clearly in unemployment rates: Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately.Third, inspired by Arthur Okun, we have also searched for evidence that high-pressure economies are qualitatively different, and found suggestive evidence that this is the case. A high-pressure economy does afford greater improvement for some less-advantaged groups in some key labor market variables, although the evidence is complicated by the heterogeneity observed across the various cycles. Finally, we also find suggestive evidence that these benefits persist at least for a while. All in all, the evidence presented here supports the idea that high-pressure economies are different than normal expansions, but just how different remains a topic of further study...."

Fed economist are presenting this at Brookings tomorrow. Supports your view of the high cost of low skilled workers, paper finds that tight labor markets boost the employment of marginal workers, "...Over our entire sample, the unemployment rates of each group we study moves in tandem with the aggregate unemployment rate. Second, like others, we also find that the fluctuations of less advantaged groups including blacks, Hispanics, and those with less than a college education are more pronounced. When the labor market weakens, these groups tend to suffer disproportionately; when it recovers, their experience improves disproportionately...."

Paper Martin Sandbu mentioned

"....Real risk-free interest rates have trended down over the past 30 years. Puzzlingly in light of this decline, (1) the return on private capital has remained stable or even increased, creating an increasing wedge between public and private rates of return; (2) stock market valuation ratios have increased only moderately; (3) investment has been lackluster....Our main empirical result here is that the rising spread between private and public capital is driven mostly by a confluence of two factors: rising market power and rising macroeconomic risk. This rising macroeconomic risk in turns implies that the equity premium, which previous researchers have argued fell in the 1980s and 1990s, may have risen since 2000.Moreover, we show how previous researchers, who have used models without risk, have attributed too big a role to rising market power. We also find little role for technical change. Our estimates offer a better understanding of the drivers of investment, profitability, and valuation ratios. Finally, stepping outside of the model, we provide further independent corroborative evidence of the increase in the equity premium using simple reduced-form methods. When we incorporate intangibles, we see that a significant increase in their unmeasured component can help explain the rising wedge between the measured marginal product of capital and the risk-free rate. Interestingly, we find that intangible capital reduces the estimated role of market power in our accounting framework, while preserving the role of risk.... Table 1 shows that the average one-year rate falls from around 2.8% in the first half of our sample (1984-2000) to -0.3% in the second half of our sample (2001-2016). The long-term rate similarly falls from 3.9% in the first half to 1.1% in the second half....We provide a simple accounting framework that allows decomposing the changes observed over the past 30 years in some key macro-finance trends into “semi-structural”parameters using a fairly clear identification. We say “semi-structural” because, allowing these parameters to vary over time flexibly suggests they are not microfounded and invariant to policy. Yet we find the results useful because deeper explanations have to be consistent with the changes of parameters implied by our approach. We find that about half of the increase in the spread between the return on private capital and the risk-free rate is due to rising market power, and half due to rising risk. Technical change plays little role. Higher savings supply and higher risk are the prime proximate contributors to the decline of the risk-free rate. Rising market power help explain the evolution of the capital share, profitability, and capital accumulation, but its contribution is substantially overstated if the model is estimated using a macro approach that abstracts from risk. Finally, taking into account intangibles reduces further the estimated increase in the market power. One limitation of our approach is that we treat the parameter changes as independent causal factors, but they might actually be driven by common causes; for instance, higher market power might reduce innovation and hence productivity growth, but we treat these as independent. Our analysis also does not incorporate some factors which could help explain the evolution of some of the big ratios that we study. In particular, we abstract from taxes and from agency issues (e.g. external finance or corporate governance frictions) or market incompleteness, that could also give rise to wedges that might vary over time. Our study of transitional dynamics is only scratching at the vast possibilities. Finally, it would be interesting to study these issues taking into account the specific open economy considerations or at least to study these same facts for a variety of countries...."

Emmanuel Farhiy and FranÁois Gourioz, " Accounting for Macro-Finance Trends: Market Power, Intangibles, and Risk Premia," Brookings Papers on Economic Activity, September 13, 2018, https://www.brookings.edu/wp-content/uploads/2018/09/BPEA_Fall2018_Accounting-for-Macro-Finance-Trends.pdf