Macro Roundup

“…This paper studies the impacts of Covid-19 illnesses on the labor supply of U.S. workers using longitudinal data from the Current Population Survey (CPS). We first document that the rate of week-long health-related absences has been substantially elevated during the pandemic relative to pre-pandemic seasonal patterns, and that these excess absences appear to reflect Covid-19 illnesses. In a typical pandemic week, about ten workers per thousand missed an entire week of work due to their own health problems, as compared to six health-related absences per thousand workers in an average week from 2010 to 2019.Excess absences covary with reported Covid-19 cases both in the national time-series and a state panel, and are higher among occupations with higher Covid-19 exposure. Second, we show that health-related absences generate persistent reductions in labor supply. Using an event study, we find that workers who miss an entire week due to probable Covid-19 illnesses are approximately 7 percentage points less likely to be in the labor force one year after their absence compared to otherwise-similar workers who do not miss work for health reasons. These estimates appear representative for Covid-19 illnesses specifically, not only as an average over myriad health issues, and they are about the same as the average effects of pre-pandemic health-related absences. One reason why Covid-19 illnesses reduce labor supply is that they push older workers into retirement. Our results are thus best interpreted as identifying not “long Covid” in isolation but rather the overall labor-supply adjustment, across mechanisms, induced by Covid- 19 illnesses. We next use our results to assess the aggregate impacts of Covid-19 illnesses on the U.S. labor force participation rate. Combining our event-study results with the excess rate of health-related absences, we estimate that Covid-19 illnesses have reduced the labor force participation rate by 0.2 percentage points, or by approximately 500,000 workers, through June 2022. This point-in- time impact is near our estimates of the steady-state impact of Covid-19 illnesses at the average rate of health-related absences in 2021. These losses fundamentally reflect an overall increase in the health-related absence rate with no change in the average long-run impact of an absence. We also discuss additional considerations that would increase or reduce the total effect of Covid-19 illnesses on labor supply relative to our preferred estimate. Overall, the loss in U.S. labor supply from Covid-19 illnesses appears substantial, comparable to an additional year of U.S. population aging at its current pace.Finally, we calculate the average cost of a Covid-19 absence in forgone labor earnings through fourteen months after the absence, including both extensive and intensive margins of adjustment. The average Covid-19 absence results in forgone earnings of at least $9,000, about 90 percent of which is due to persistent labor-supply reduction beyond the week-long absence itself. This economic cost can be viewed as a revealed-preference measure of the medium-term health impact of Covid-19 illnesses. In aggregate, we calculate that the per-year value of the lost labor supply is approximately $62 billion, which is about half of estimated losses from cancer or diabetes….”

Evidence of Covid Impact on LFP

“…We find that Covid-19 illnesses have likely become, over the last two years, an important contributor to the net change in the participation rate. By June 2022, Covid-19 illnesses reduced the participation rate by 0.18 percentage points, with a range of 0.13 to 0.22 percentage points, as we show in Appendix Figure A21. These reductions in the participation rate imply that approximately 500,000 adults are neither working nor actively looking for work due to the persistent effects of Covid-19 illnesses, with a range of 340,000 to 590,000 adults. This point-in-time participation-rate loss is near the steady-state loss associated with the 2021-average rate of health-related absences. That is, if the health-related absence rate remains near its 2021 level, and if the impacts of Covid- 19 absences are unchanged, then our estimates suggest the participation rate will be persistently reduced by approximately 0.2 percentage points….”

Gopi Shah Goda and Evan Soltas, "The Impacts of Covid-19 Illnesses on Workers,"National Bureau Of Economic Research, September 2022, https://www.nber.org/papers/w30435

“…Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970sThe puzzle of why labor-force participation fell so much among US men of all ages was a major topic of economic discussion in the 2010s that’s probably due for a revival. For those in their late 50s and early 60s the decline wasn’t all bad news, as generous early retirement packages surely drove some of it. Those are less common than they used to be, whileboosting male 55-64 labor force participation back to, say, the August 1970 rate of 82.6% would add 2 million would-be workers to the US job market. Bringing the participation rate for so-called prime-age men (25-54) back to 1970 levels would add another 4.5 million.Reversing changes that happened half a century ago is surely a lot harder than reversing those of the past couple of years. But maybe it’s the next frontier….”

Justin Fox, "The 55-and-Older Labor Market Exodus Is a Statistical Mirage,"Bloomberg, September 9, 2022, https://www.bloomberg.com/opinion/articles/2022-09-09/americans-older-than-55-haven-t-given-up-working

The 55-and-Older Labor Market Exodus Is a Statistical Mirage

I’m in my late 50s and I’m on the job. So are more than 70% of Americans aged 55 through 59, according to the Bureau of Labor Statistics. In fact, my age group’s labor-force participation rate was approaching record levels earlier this year before undergoing its usual summer decline.

Americans in their early 60s are pretty close to record labor-force participation, too. The big declines are all among those 65 and older. But — and here’s where things get really weird — those declines are still smaller in percentage-point terms than those for the 55-and-older group overall. This strange data quirk is the result of so-called composition effects, caused by the shifting age distribution within the age group, which I’ll discuss a little later. First, though, let’s get around the strange quirk by looking at labor market changes for smaller age groups.

The reason the 55-and-older numbers get so much attention is that it’s the one of the few age groups for which the BLS provides seasonally adjusted labor market data. The unadjusted numbers come with big seasonal swings and, especially when you’re looking at narrow age groups such as 55 through 59, a fair amount of month-to-month statistical noise. Still, there are ways to deal with both, such as comparing three-month averages from this summer with those from before the pandemic in 2019.

As for the two under-60 age groups that haven’t returned to or surpassed their summer 2019 participation and employment rates, those in their early 20s may be staying in college longer to make up for pandemic gap years and other delays, or still struggling to recover from the many disruptions to the job market and society in general in 2020. For those in their late 30s child-care complications could be a culprit, although curiously, women in that age group are back to pre-pandemic levels while men are not.

For workers 60 and older, who in the decades before the pandemic had been experiencing steady gains in labor-force participation and employment, it makes sense that a disease that was far deadlier for the elderly drove many out of the labor force — because of either fear of catching Covid-19 or struggles with Long-Covid complications after catching it. The remarkable performance of stocks and other assets in 2020 and 2021 may also have led some affluent older workers to retire earlier than planned.

But again, members of the 60-to-64 age group left only briefly. Their labor-force participation rate hit an all-time high in March 2020, when low response rates amid lockdowns may have skewed the data, and came close to that again last November. (“All-time” for these numbers only goes back to June 1976, but statistics available back to 1948 for the broader 55-to-64 age group indicate that recent rates are the highest over that period too.)

Those 65 and older have in fact seen a clear drop in labor-force participation after decades of gains. But 65-plussers made up only 6.6% of the labor force in August, compared with the 16.4% share accounted for by those 55 through 64. Their 1.1 percentage point labor-force participation decline since summer 2019 works out to 626,835 missing would-be workers — not nothing, but also not that huge a deal in a labor force of almost 165 million.

The labor-force participation decline for the broad 55-and-older category is 1.7 percentage points whether measured in seasonally adjusted data from February 2020 or in unadjusted summer-2019-to-summer-2022 comparisons, as I did with the other age groups. How can this be bigger than the decline for those 65 and older, not to mention those in their late 50s and early 60s? Well, the youngest baby boomers are turning 58 this year, meaning that the younger end of the 55-and-older group is now being replenished with the less-numerous members of Generation X.

Because of this, the average age of Americans in the 55 and older category rose even through the ravages of Covid-19 and will continue doing so. 1 Meanwhile, labor-force participation tends to peak around age 40, and decline as people age beyond that. So with each passing year, the 55-plus labor-force participation rate will drop even if the rates for every year of age within the group remain the same. The reverse transpired as the baby boomers began to enter the age group two decades ago, as will also be the case for the 75-plus age group that they started joining last year.

Then again, there is another composition effect at work in these statistics that I haven’t discussed. While women’s labor-force participation rates rose from the 1950s through 1990s, men’s fell. So while the current labor-force participation rate for all Americans in their late 50s and early 60s is near an all-time high, for men it’s well below the rates that prevailed before the mid-1970s

"...This latest dollar uptrend has already run longer than each of the periods of multiyear gains since the greenback was taken off the gold standard by President Richard Nixon in the early 1970s.Mr. Barth thinks it could run much longer still, because something interesting has happened with capital spending. U.S. private fixed investment, excluding housing, has stabilized at a fairly high share of GDP, avoiding the boom-and-bust of past dollar cycles. Despite frequent complaints that the private sector doesn’t invest enough, the 10-year average is now the highest since Ronald Reagan left office. Research-and-development spending is also at all-time highs as a share of GDP..."

Why Is the Dollar So Strong? American Innovation

The dollar is having a once-in-a-generation surge of supremacy over the world. After 11 years and a 40% gain on a real trade-weighted basis, some are starting to wonder if it is time for a fall.

In the short run a weaker dollar is plausible, as Europe’s governments absorb the financial threat to their economies from energy prices and foreign central banksrush to catch up with the Federal Reserve on rate rises. The burst of optimism in the markets on Friday led the dollar to fall back, as money that had sought it out as a haven left again.

But the long periods of strengthening or weakening in the past haven’t obviously coincided with the economic or monetary policy cycles. Something else has been going on, and to try to spot the end of this megacycle in the dollar we need to consider what.

Each innovation sparked a wave of investment to take advantage of it. This improved profitability and attracted foreign capital—pushing up the dollar.

Inventions don’t stay in one country for long. But in each case America’s head start gave it a few years’ lead before investments elsewhere looked as profitable. By then, the earnings generated had flowed out into society and funded a consumption boom that eventually turned into a housing boom. To finance housebuilding, the U.S. sucked in capital even after losing its competitive advantage—so the dollar had to fall to make it attractive to foreign money.

The story is a nice one, and helps explain how the dollar’s long-run trends can carry on even through the temporary interruption of recessions.

As evidence, Mr. Barth studied the length of cycles for various economic variables by using a frequency-analysis technique from engineering. The cycle for the share of capital spending in gross domestic product matches that of the dollar, at about 17 years, while things important in the short term, such as monetary policy, have little influence at such a long horizon.

There’s nothing magical about past cycles having been 17 years long, and no reason to think future ones will be the same length. This latest dollar uptrend has already run longer than each of the periods of multiyear gains since the greenback was taken off the gold standard by President Richard Nixon in the early 1970s.

Also potentially extending the cycle is deglobalization, which will both require more capital to be deployed domestically to replace international supply chains and hinder the spread of new inventions.

Even investors who don’t buy the innovation story can’t deny that the U.S. has done a far better job than the rest of the developed world in rebuilding its economy since the financial crisis. It now has the advantage of being an energy powerhouse too, thanks to another U.S.-led innovation, fracking.

“This cycle is very much about U.S. economic supremacy,” says Kit Juckes, head of FX strategy at Société Générale, who thinks it might be nearing its top.

In the short term, the usual issues of interest rates and recession fears will swing the dollar around. But if the U.S. can maintain its economic vitality relative to the rest of the world, the dollar could stay high for a long time yet.

“..We use discounted cash flow analysis to measure the fiscal capacity of the U.S. federal government. We apply our valuation method to the CBO’s projections for the U.S. federal government’s primary deficits between 2022 and 2052 and projected debt outstanding in 2052. The proper discount rate for projected cash flows and future debt includes a GDP or market risk premium. In spite of low interest rates, we find that U.S. fiscal capacity is currently more limited than you might think. Because of the back-loading of projected primary surpluses, the duration of the surplus claim far exceeds the duration of the outstanding Treasury portfolio. This duration mismatch exposes the government to the risk of rising rates, which would trig-ger the need for higher tax revenue or lower spending. Reducing this risk by front-loading primary surpluses requires a major fiscal adjustment….”

“….we develop an upper bound on fiscal capacity by using the expected return on a claim to GDP, also known as the total wealth portfolio or the market portfolio, to discount future taxes, spending, and future debt. This discount rate is the sum of a maturity-specific risk-free interest rate and the GDP risk premium. We argue that a plausible value for the GDP risk premium should be at least 2.5% per year. When we use the proper discount rate, the PDVof future debt is well-behaved even when the risk-free rate is lower than the growth rate (see Lucas, 2021, for an exposition on the proper discount rate for pension liabilities). In the discounted cash flow approach, the PDV of debt outstanding in the distant future converges to zero, or the transversality condition (TVC) holds, because the discount rate applied to future debt includes a GDP risk premium.3 Hence our definition of fiscal capacity as the PDV of future primary surpluses.4 The PDV of the CBO-projected deficits between 2022 and 2052 is $21.16 trillion in 2021 dollars, roughly equal to the U.S. GDP at the end of 2021. In addition, the projected debt outstanding in 2052 is 185% of GDP. Starting in 2053, the U.S. would need to generate a steady-state surplus of 2.16% to pay back the debt outstanding in 2052. Discounted back to 2021 at the appropriate discount rate, the 2052 debt is worth about $33.5 trillion. When we combine the PDV of projected deficits until 2052 with the 2021 value of the projected debt outstanding in 2052 of $33.5 trillion, we end up with an upper bound on the U.S. fiscal capacity of around $12.38 trillion. This is our baseline estimate of an upper bound on fiscal capacity. It falls $10 trillion short of the actual $22.28 trillion value of all U.S. Treasuries outstanding at the end of 2021…A 1% point increase in yields of all maturities, holding constant nominal GDP growth and projected primary surpluses until 2052, requires an increase in surpluses of 2.67% of GDP each year after 2052 relative to the baseline model….”

Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh, and Mindy Z. Xiaolan, "Measuring US fiscal capacity using discounted cash flow analysis,"Brookings Papers On Economic Activity, September 7, 2022, https://www.brookings.edu/bpea-articles/measuring-u-s-fiscal-capacity-using-discounted-cash-flow-analysis/

Their cash flow model

“…Two recent studies reported in the media focus on the terminus of glaciers—i.e., where the ice, the ocean and the ground come together. One study used an underwater drone to map the seabed at a depth of 2,000 feet, about 35 miles from the terminus of the Thwaites Glacier in Antarctica. Detailed sonar scans showed a washboard pattern of ridges, most less than 8 inches high. The ridges are caused by daily tides and serve as a record of where ice touched the seabed in the past. Researchers could read that record to infer that at some time in the past the glacier retreated for half a year at more than twice the fastest rate observed between 2011 and 2019. The cause of the specific event at the Thwaites Glacier remains unknown, in part because the time of the rapid retreat hasn’t yet been determined. It likely happened more than 70 years ago, if not several centuries ago. But the media goes with this angle: “A ‘doomsday glacier’ the size of Florida is disintegrating faster than thought.” A correct headline would read: “Thwaites Glacier retreating less than half as rapidly today as it did in the past.”A second study tested the idea that freshwater from the melting of one glacier could be carried by currents along the shore to accelerate the discharge of nearby glaciers. Because global climate models are insufficiently detailed to describe the ocean near the coast, researchers constructed a special model to prove out their idea. If ocean currents can connect the discharges of distant glaciers, that would add to the complexity and variability of changes in the Antarctic ice sheet. …”

Steven Koonin, "Don’t Believe the Hype About Antarctica’s Melting Glaciers,"Wall Street Journal, September 20, 2022, https://www.wsj.com/articles/dont-believe-the-hype-about-antarcticas-melting-glaciers-ice-sheet-climate-change-global-warming-sea-levels-greenland-iceberg-ocean-11663618509

Don’t Believe the Hype About Antarctica’s Melting Glaciers

Alarming reports that the Antarctic ice sheet is shrinking misrepresent the science under way to understand a very complex situation. Antarctica has been ice-covered for at least 30 million years. The ice sheet holds about 26.5 million gigatons of water (a gigaton is a billion metric tons, or about 2.2 trillion pounds). If it were to melt completely, sea levels would rise 190 feet. Such a change is many millennia in the future, if it comes at all.

Much more modest ice loss is normal in Antarctica. Each year, some 2,200 gigatons (or 0.01%) of the ice is discharged in the form of melt and icebergs, while snowfall adds almost the same amount. The difference between the discharge and addition each year is the ice sheet’s annual loss. That figure has been increasing in recent decades, from 40 gigatons a year in the 1980s to 250 gigatons a year in the 2010s.

But the increase is a small change in a complex and highly variable process. For example, Greenland’s annual loss has fluctuated significantly over the past century. And while the Antarctic losses seem stupendously large, the recent annual losses amount to 0.001% of the total ice and, if they continued at that rate, would raise sea level by only 3 inches over 100 years.

Many fear that a warming globe could cause glaciers to retreat rapidly, increasing discharge and causing more rapid sea-level rise. To get beyond that simplistic picture, it is important to understand how glaciers have flowed in the past to predict better whether they might flow faster in the future.

Two recent studies reported in the media focus on the terminus of glaciers—i.e., where the ice, the ocean and the ground come together. One study used an underwater drone to map the seabed at a depth of 2,000 feet, about 35 miles from the terminus of the Thwaites Glacier in Antarctica. Detailed sonar scans showed a washboard pattern of ridges, most less than 8 inches high. The ridges are caused by daily tides and serve as a record of where ice touched the seabed in the past. Researchers could read that record to infer that at some time in the past the glacier retreated for half a year at more than twice the fastest rate observed between 2011 and 2019.

The cause of the specific event at the Thwaites Glacier remains unknown, in part because the time of the rapid retreat hasn’t yet been determined. It likely happened more than 70 years ago, if not several centuries ago. But the media goes with this angle: “A ‘doomsday glacier’ the size of Florida is disintegrating faster than thought.” A correct headline would read: “Thwaites Glacier retreating less than half as rapidly today as it did in the past.”

A second study tested the idea that freshwater from the melting of one glacier could be carried by currents along the shore to accelerate the discharge of nearby glaciers. Because global climate models are insufficiently detailed to describe the ocean near the coast, researchers constructed a special model to prove out their idea. If ocean currents can connect the discharges of distant glaciers, that would add to the complexity and variability of changes in the Antarctic ice sheet.

Under scenarios deemed likely by the United Nations’ Intergovernmental Panel on Climate Change, a connection between ocean currents and discharge would increase the overall discharge rate in one region of the continent by some 10% by the end of the century. But to emphasize the idea being tested, the modelers used human influences almost three times larger. Even though that fact is stated in the paper, reporters rarely catch such nuance, and the media goes with headlines such as “Antarctic Ice Melting Could Be 40 Percent Faster Than Thought” with the absurd statement that “a massive tsunami would swamp New York City and beyond, killing millions. London, Venice and Mumbai would also become aquariums.” A more accurate headline would read: “Ocean currents connecting antarctic glaciers might accelerate their melting.”

These two studies illustrate the progress being made in understanding a dauntingly complex mix of ice, ocean, land and weather, with clever methods to infer past conditions and sophisticated computer modeling to show potential future scenarios. These papers describe the science with appropriate precision and caveats, but it is a shame that the media misrepresents the research to raise alarm. That denies the public the right to make informed decisions about “climate action,” as well as the opportunity to marvel at the science itself.

Mr. Koonin is a professor at New York University, a senior fellow at the Hoover Institution and author of “Unsettled: What Climate Science Tells Us, What It Doesn’t, and Why It Matters.”