Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
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  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, December 15, 2022

AI Summary. Median household market income — labor, business, capital, and retirement income — grew 26% after inflation from 1990 to 2019, in line with roughly one-third growth in inflation-adjusted average wages for nonsupervisory workers. The Congressional Budget Office finds median household income rose 55% after taxes and transfers, and 74% for the bottom 20% of households.

Michael Strain Project Syndicate
Date Posted:
Is Database:
Database

Citing CBO data, @MichaelRStrain finds that market income for the median household grew by 26% from 1990 through 2019 after adjusting for inflation. Including transfer payments and federal taxes, real median household income grew 55%. @AEIecon

Citing CBO data, @MichaelRStrain finds that market income for the median household grew by 26% from 1990 through 2019 after...

Has median household income actually stagnated over recent decades?

Core argument: Median household market income — labor, business, capital, and retirement income from past services — grew 26% after inflation from 1990 to 2019, in line with wage growth rather than stagnating.

Median household income from market activities – labor, business, and capital income, as well as retirement income from past services – was not stagnant from 1990 to 2019. Instead, after adjusting for inflation, it grew by 26%. This is in line with wage growth. By my calculations using Bureau of Labor Statistics (BLS) data, inflation-adjusted average wages for nonsupervisory workers grew by around one-third over this period. After factoring in social insurance benefits (from Social Security and unemployment insurance, for example), government safety-net benefits (such as food stamps), and federal taxes, the CBO finds that median household income increased by 55% from 1990 to 2019, which is significantly faster than wage growth and certainly not stagnate. The bottom 20% of households enjoyed even greater gains, with market income growth of 51% and after-tax-and-transfer income growth of 74%.

Takeaways by Macro Roundup® AI

  1. Median household market income — labor, business, capital, and retirement income from past services — grew 26% after inflation from 1990 to 2019, in line with wage growth rather than stagnating.
  2. The CBO finds median household income rose 55% from 1990 to 2019 after counting social insurance benefits, government safety-net benefits, and federal taxes, significantly faster than wage growth.
  3. The bottom 20% of households saw market income grow 51% and after-tax-and-transfer income grow 74% from 1990 to 2019.

AI Summary. Nominal growth is slowing while inflation-adjusted growth is rising as the economy normalizes from pandemic disruptions, so workers' fortunes are improving even with a softer labor market. Healing supply chains, easing labor needs, and lower prices boosting inflation-adjusted wages can be described as productivity growth.

Conor Sen Bloomberg
Date Posted:

Investor @conorsen argues that worker’s prospects will improve dramatically going forward as earnings growth will be coupled with lower gas prices, easing rents, falling car prices, and fully stocked shelves. @bloomberg

Investor @conorsen argues that worker’s prospects will improve dramatically going forward as earnings growth will be coupled...

Are workers better off even as the labor market softens?

Core argument: Nominal growth is slowing while inflation-adjusted growth rises as the US economy returns to normal from pandemic disruptions, leaving worker fortunes brighter even as the labor market softens.

While nominal levels of growth might be slowing, inflation-adjusted growth is rising as the economy slowly gets back to normal from the many disruptions that wreaked havoc during the pandemic. So even though the labor market is softer, worker fortunes are looking brighter. We normally think about real economic growth as a function of employment growth and productivity growth. What we’re now experiencing — supply chains healing, companies’ labor needs easing, and workers reaping the benefits of lower prices with a boost to their inflation-adjusted wages — could be called productivity growth.

Takeaways by Macro Roundup® AI

  1. Nominal growth is slowing while inflation-adjusted growth rises as the US economy returns to normal from pandemic disruptions, leaving worker fortunes brighter even as the labor market softens.
  2. Healing supply chains, easing corporate labor needs, and lower prices boosting inflation-adjusted wages amount to what could be called productivity growth, according to the author.
  3. Real economic growth is normally understood as a function of employment growth and productivity growth.

AI Summary. The US Commerce Department added 36 Chinese companies to its "entity list" trade blacklist, requiring American firms to obtain hard-to-get licenses to export critical technologies to them. The move extends US efforts to slow China's development of advanced chips and military technologies such as hypersonic weapons.

Demetri Sevastopulo, Kathrin Hille and Qianer Liu Financial Times
Date Posted:

The United States added 36 Chinese firms to a trade blacklist as it expands export controls targeted at slowing Chinese development of advanced chips and technologies for military uses such as hypersonic weapons. @FT

The United States added 36 Chinese firms to a trade blacklist as it expands export controls targeted at slowing Chinese...

Is the US expanding export restrictions on Chinese technology companies?

Core argument: The US Commerce Department added 36 Chinese companies to its "entity list," escalating efforts to slow China's development of advanced chips and technologies for military uses such as hypersonic weapons.

The US has placed three dozen Chinese companies on a trade blacklist, in another escalation of its effort to slow China’s development of advanced chips and technologies for military uses such as hypersonic weapons. The commerce department put 36 Chinese groups on the “entity list”, a move that means American companies will require extremely hard-to-obtain licenses to export critical technologies to those customers in China.

Takeaways by Macro Roundup® AI

  1. The US Commerce Department added 36 Chinese companies to its "entity list," escalating efforts to slow China's development of advanced chips and technologies for military uses such as hypersonic weapons.
  2. Placement on the entity list requires American companies to obtain extremely hard-to-obtain licenses before exporting critical technologies to the 36 blacklisted Chinese customers.

AI Summary. Pew Research Center survey analysis finds that 41% of U.S. adults experienced high levels of psychological distress at least once during the coronavirus pandemic, including 58% of those ages 18 to 29.

Giancarlo Pasquini and Scott Keeter Pew Research Center
Date Posted:

Young Americans are experiencing high levels of psychological distress relative to other adults; 58% of 18 to 29 year old’s reported being distressed in surveys conducted between March 2020 and September 2022, relative to 41% of the 50 to 64 cohort. @pewresearch

How widespread was psychological distress among Americans during the pandemic?

Core argument: About 41% of U.S. adults experienced high levels of psychological distress at least once since the early stages of the coronavirus outbreak, according to a Pew Research Center analysis tracking survey responses from the same Americans over time.

About four-in-ten U.S. adults (41%) have experienced high levels of psychological distress at least once since the early stages of the coronavirus outbreak, according to a new Pew Research Center analysis that examines survey responses from the same Americans over time. Experiences of high psychological distress are especially widespread among young adults. A 58% majority of those ages 18 to 29 have experienced high levels of psychological distress at least once across four Center surveys conducted between March 2020 and September 2022.

Takeaways by Macro Roundup® AI

  1. About 41% of U.S. adults experienced high levels of psychological distress at least once since the early stages of the coronavirus outbreak, according to a Pew Research Center analysis tracking survey responses from the same Americans over time.
  2. Among U.S. adults ages 18 to 29, 58% experienced high levels of psychological distress at least once across four Pew Research Center surveys conducted between March 2020 and September 2022.

Friday, December 16, 2022

AI Summary. US data on foreign holdings of Treasury securities does not reliably identify the true owners, since several of the largest reported holders — including Belgium, the Cayman Islands, Luxembourg, and Ireland — are financial and custodial centers rather than real holders. Adjusting for Belgian accounts, China's visible holdings of US bonds have held near $1.6tn.

Brad Setser @Brad_Setser
Date Posted:

China’s visible holdings of US bonds have stayed constant over the past 5 years at ~ $1.6T, according to an analysis by @Brad_Setser. However, he notes that Japan’s holdings have dropped by $226B since December 2021.

Do official data reveal who actually owns US Treasury securities?

Core argument: China's visible holdings of US bonds have stayed constant at roughly $1.6 trillion over the past five years after adjusting for Belgian holdings, which appear to be a Euroclear account used by the People's Bank of China.

The most important thing to know about the US data on foreign holdings of US Treasury securities is that the US doesn't really know who holds US Treasuries. US Treasury holders, in rank order, Japan, China, the UK, Belgium, the Caymans, Luxembourg, Switzerland, and Ireland Only Japan and China (and, to a degree Switzerland) are real holders; the rest are financial and custodial centers. The second most important thing to know -- apart from the continued (apparent) purchases of Treasuries from private investors abroad (even if the buyers are the Caymans and the UK in the transactional data) -- is that China isn't selling. It is, in fact, rather remarkable that after adjusting for the Belgian holdings (a euroclear account used by the PBOC it seems), China's visible holdings of US bonds have stayed constant for the last 5ys (at ~ $1.6 trillion).

Takeaways by Macro Roundup® AI

  1. China's visible holdings of US bonds have stayed constant at roughly $1.6 trillion over the past five years after adjusting for Belgian holdings, which appear to be a Euroclear account used by the People's Bank of China.
  2. US data on foreign holdings of Treasuries does not reliably identify who holds them, as the ranked holders — Japan, China, the UK, Belgium, the Caymans, Luxembourg, Switzerland, and Ireland — include financial and custodial centers.
  3. Among the largest reported holders of US Treasuries, only Japan and China, and to a degree Switzerland, are real holders, while apparent purchases by private investors abroad continue, with the Caymans and the UK appearing as buyers in transactional data.

AI Summary. Capacity to convert natural gas into liquefied form for shipping has run below the carrying capacity of the tanker fleet, with the gap projected to widen, suggesting liquefaction will be an important bottleneck for growth in liquefied natural gas trade. Investment in both tankers and liquefaction terminals has increased.

Fernando Leibovici and Jason Dunn Federal Reserve Bank Of St. Louis
Date Posted:

Until recently, international trade of natural gas had been largely restricted to the use of cross-country pipelines, but recent investments in liquefied natural gas infrastructure will increase the global tradability of natural gas. @stlouisfed

Is liquefaction capacity the bottleneck for growth in natural gas trade?

Core argument: Global LNG liquefaction capacity has run below LNG fleet capacity for roughly the past 18 years, with a gap projected to widen through 2027, suggesting liquefaction will likely be an important bottleneck for future growth in LNG trade.

Liquefaction capacity has been below fleet capacity for the past 18 years or so, with a growing gap that is projected to widen through 2027. These patterns suggest that liquefaction will likely be an important bottleneck for the future growth of LNG trade. Figure 3 shows that, after Russia's invasion of Ukraine, there have been increased investments in LNG fleets (new orders in Panel A) and LNG liquefaction terminals (number of terminals expected to be completed in Panel B).

Takeaways by Macro Roundup® AI

  1. Global LNG liquefaction capacity has run below LNG fleet capacity for roughly the past 18 years, with a gap projected to widen through 2027, suggesting liquefaction will likely be an important bottleneck for future growth in LNG trade.
  2. Following Russia's invasion of Ukraine, investment rose both in LNG fleets, measured by new vessel orders, and in LNG liquefaction terminals, measured by the number of terminals expected to be completed.

AI Summary. Public filings to Norway's population registry show at least 30 billionaires and millionaires with a combined fortune of NKr29bn ($3bn), who paid NKr550m in tax, moved from Norway to lower-tax Switzerland in a single year, more than in the previous 13 years combined. Norway levies a wealth tax on net fortunes above NKr1.7m ($173,000), at 1.1% for the richest.

Richard Milne Financial Times
Date Posted:

In 2022, 30 Norwegians with a net worth of $3B have expatriated themselves to Switzerland to avoid Norway’s wealth tax of 1.1% on net worth annually, including unrealized capital gains. @ft

In 2022, 30 Norwegians with a net worth of $3B have expatriated themselves to Switzerland to avoid Norway’s wealth tax...

Does a wealth tax push a country's richest residents to emigrate?

Core argument: At least 30 Norwegian billionaires and millionaires with a combined fortune of NKr29bn ($3bn) moved to Switzerland in 2022, according to public filings to Norway's population registry.

Public filings to Norway’s population registry show that at least 30 billionaires and millionaires swapped the prosperous Scandinavian nation for the lower-tax Alpine jurisdiction in 2022. The group of rich Norwegians who left for Switzerland this year had a combined fortune of NKr29B [$3B] and paid NKr550M in tax [$550M], according to the country’s open-access annual tax returns. The 2022 exodus is greater than in the previous 13 years combined, newspaper Dagens Naeringsliv calculated. At the heart of the debate is Norway’s wealth tax which is levied on all net fortunes greater than NKr1.7M ($173,000) at a rate of 1.1 per cent for the richest. Switzerland also has a wealth tax but offers deals for foreigners.

Takeaways by Macro Roundup® AI

  1. At least 30 Norwegian billionaires and millionaires with a combined fortune of NKr29bn ($3bn) moved to Switzerland in 2022, according to public filings to Norway's population registry.
  2. The Norwegians who left for Switzerland in 2022 paid NKr550m in tax, and newspaper Dagens Naeringsliv calculated that the year's exodus exceeded the previous 13 years combined.
  3. Norway levies its wealth tax on all net fortunes above NKr1.7m ($173,000), at a rate of 1.1 per cent for the richest, while Switzerland has a wealth tax but offers deals for foreigners.

AI Summary. Japan plans to spend ¥43tn ($313bn) over five years on defense, raising military spending to roughly 2% of current gross domestic product, including ¥5tn for Tomahawk cruise missiles, longer-range domestic missiles and hypersonic weapons, and ¥3tn for integrated air and missile defense. The largest share, ¥15tn, goes to basic needs such as ammunition stockpiles and fuel.

Kana Inagaki Financial Times
Date Posted:

Scraping its “pacifist” post-Second World War defense strategy, Japan plans to spend $313B over the next five years to bring military expenditure to roughly 2% of GDP. @ft

Scraping its “pacifist” post-Second World War defense strategy, Japan plans to spend $313B over the next five...

How is Japan reshaping its defense spending to counter China?

Core argument: Japan plans to spend ¥43tn ($313bn) over five years to strengthen its defense capabilities, bringing military expenditure to roughly 2% of its current GDP as it scraps its pacifist post-war defense strategy to counter China.

Over the next five years, Tokyo plans to spend ¥43tn ($313bn) to strengthen its defense capabilities, bringing military expenditure to roughly 2% of its current gross domestic product.  The budget includes ¥5tn to buy Tomahawk cruise missiles from the US, expand the range of its domestic surface-to-ship cruise missiles and develop hypersonic weapons, according to the medium-term Defence program. Another ¥3tn will be spent on enhancing integrated air and missile defense capabilities, including a radar upgrade for the Patriot missile system to counter hypersonic weapons. The largest portion of the military spending, ¥15tn, will be designated to strengthening the SDF’s basic needs, including ammunition stockpiles and fuel tanks, reflecting concerns that Japan’s armed forces will not have the capability to persevere in a prolonged conflict such as one over Taiwan.

Takeaways by Macro Roundup® AI

  1. Japan plans to spend ¥43tn ($313bn) over five years to strengthen its defense capabilities, bringing military expenditure to roughly 2% of its current GDP as it scraps its pacifist post-war defense strategy to counter China.
  2. The medium-term Defence program allocates ¥5tn to buy US Tomahawk cruise missiles, extend the range of Japan's domestic surface-to-ship cruise missiles and develop hypersonic weapons, plus ¥3tn for integrated air and missile defense including a Patriot radar upgrade.
  3. The largest share of Japan's military spending, ¥15tn, goes to the Self-Defense Forces' basic needs such as ammunition stockpiles and fuel tanks, reflecting concerns the armed forces could not persevere in a prolonged conflict such as one over Taiwan.

AI Summary. Federal Reserve remittances flow one way: earnings are sent to the Treasury, but losses are not reimbursed by the Treasury and are instead paid with newly created dollars. The Federal Reserve records those losses cumulatively and must recoup them from future earnings before remittances to the Treasury resume.

The Last Bear Standing The Last Bear Standing
Date Posted:

From 2011 through early 2022, the Fed remitted $1 trillion in QE portfolio earnings to the US Treasury. Current rate mismatches mean these remittances will no longer be available, putting further stress the Treasury market. @LastBearStandng

How does the central bank cover its losses?

Core argument: Federal Reserve remittances to the Treasury flow only one way: positive earnings are sent to the Treasury, but the Treasury is not required to reimburse the Fed for losses.

First, remittances are a one-way street. If the Fed has positive earnings, it remits the earnings to the Treasury. But if the Fed incurs losses, the Treasury isn’t required to cut a check to the Fed to cover those losses. Instead, the Fed “prints” the difference. It simply pays the excess interest expense with newly created dollars, in the same way that it prints dollars to buy bonds in QE. The Fed keeps track of its cumulative losses, and when the Fed starts earning money again in the future, it will first go to recoup those losses before remittances to the Treasury resume. In other words, the positive balances shown in the graph above are in-period (since earnings are constantly swept to the Treasury), while the losses over the past several months are cumulative, since they accrue over time.

Takeaways by Macro Roundup® AI

  1. Federal Reserve remittances to the Treasury flow only one way: positive earnings are sent to the Treasury, but the Treasury is not required to reimburse the Fed for losses.
  2. When the Fed's interest expense exceeds its earnings, the Fed pays the difference with newly created dollars, the same mechanism by which it prints dollars to buy bonds under quantitative easing.
  3. The Fed tracks its losses cumulatively and will apply future earnings to recouping those losses before resuming remittances to the Treasury, while reported positive earnings are in-period because they are constantly swept to the Treasury.

AI Summary. House Republicans secured their majority by a combined 6,670 votes across the five closest districts, or 0.006% of the nationwide popular vote, meaning an additional 6,671 Democratic votes in those races would have flipped control. A prior Democratic majority of 222 seats similarly rested on a combined 34,734-vote margin in its five closest wins.

Jacob Rubashkin Inside Elections
Date Posted:

House races are getting more competitive according to an analysis by @JacobRubashkin. The Republican house majority rests on 6,670 votes, the cumulative margin of the 5 closest seats the Democrats lost that would have allowed them to hold the house.

How narrow were the vote margins deciding House majority control?

Core argument: House Republicans won the majority by 6,670 votes, equal to 0.006 percent of the nationwide popular vote.

The historical narrowness of the incoming GOP majority becomes clear when comparing this cycle to previous elections over the past decade. House Republicans won the majority by 6,670 votes, or 0.006 percent of the nationwide popular vote. Had Democrats won an additional 6,671 votes across five districts, they would have maintained their majority. In 2020, Democrats won 222 seats. But their majority rested on the 34,734-vote combined margin of victory in their five closest victories. Those decisive votes were just 0.023 percent of the 152,576,055 ballots cast nationwide.

Takeaways by Macro Roundup® AI

  1. House Republicans won the majority by 6,670 votes, equal to 0.006 percent of the nationwide popular vote.
  2. An additional 6,671 Democratic votes across five districts would have left Democrats in control of the House.
  3. The 222-seat Democratic majority in 2020 rested on a combined 34,734-vote margin in the party's five closest victories, or 0.023 percent of the 152,576,055 ballots cast nationwide.

AI Summary. Fusion progress is tracked by Q, the ratio of energy released to energy used: one experiment delivered 3.15 megajoules from 2.05 megajoules of laser energy, a Q of about 1.5, but the full reactor consumed roughly 300 megajoules, putting whole-system Q near 0.01, about 1% of break-even.

Josh Zumbrun Wall Street Journal
Date Posted:

According to the chief research officer at Princeton Plasma Physics Laboratory “If you gain a factor of 10 on the fusion and 10 on the efficiency,” fusion achieves energy breakeven. With government support, this could be achieved in 10-20 years. @WSJ

According to the chief research officer at Princeton Plasma Physics Laboratory “If you gain a factor of 10 on the...

How far is fusion from whole-system energy break-even?

Core argument: The fusion experiment put in 2.05 megajoules and released 3.15 megajoules, yielding a Q ratio of about 1.5, where Q is energy released divided by energy used.

A simple ratio known as Q provides an easy and intuitive way to understand if scientists are making progress: It’s energy released divided by energy used. A Q below one means the reaction consumed more energy than it produced. A Q above one means more energy was produced than consumed. In this latest experiment, scientists put in 2.05 megajoules of energy and got 3.15 megajoules out. Q was 3.15 divided by 2.05, or about 1.5. To generate 3.15 megajoules of energy, the lab consumed about 300 megajoules of energy to fire its laser. The Q value for the entire reactor is about 0.01—roughly 1% of break-even. “If you gain a factor of 10 on the fusion and 10 on the efficiency, that gives you a factor of 100 roughly,” said Jonathan Menard, chief research officer at Princeton Plasma Physics Laboratory. “That would be in the ballpark of break-even. Both of those are theoretically possible.” With government support that could take one to two decades, he said.

Takeaways by Macro Roundup® AI

  1. The fusion experiment put in 2.05 megajoules and released 3.15 megajoules, yielding a Q ratio of about 1.5, where Q is energy released divided by energy used.
  2. Counting the roughly 300 megajoules the lab consumed to fire its laser, the entire reactor's Q was about 0.01, or roughly 1% of break-even.
  3. Jonathan Menard, chief research officer at Princeton Plasma Physics Laboratory, said gaining a factor of 10 on fusion and 10 on efficiency would be in the ballpark of break-even, is theoretically possible, and with government support could take one to two decades.

AI Summary. An analysis argues that an aging population has lowered the share of people working or seeking work, meaning economic activity must run lower to avoid persistent wage and price inflation. Union activity is increasing, with a 10% rise in strikes and protests and more new union applications, suggesting worker leverage and wage growth may persist.

Ethan Wu Financial Times
Date Posted:
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Database

BlackRock analysis argues declining LFP means economic activity ‘will need to run at a lower level to avoid persistent wage and price inflation.’

Does an aging workforce plus rising union activity sustain wage inflation?

Core argument: BlackRock's analysis notes that 1.3m individuals have exited the US workforce upon reaching retirement age, with another 630,000 retiring earlier than planned because of the pandemic.

Blackrock's analysis highlights a declining Labor Force Participation (LFP) rate, driven by an aging population, which necessitates lower economic activity to prevent persistent wage and price inflation. The participation rate, representing those aged 16 and over who are working or seeking work, plummeted during the pandemic and has not fully recovered due to demographic shifts. As of October, 1.3m individuals have exited the workforce upon reaching retirement age, with an additional 630,000 retiring earlier than planned due to the pandemic. This shrinking workforce relative to the population suggests that economic activity must adjust, particularly in labor-intensive sectors, to mitigate inflationary pressures. Despite this, union strength is rising, with a 10% increase in strikes and protests and a notable rise in new union applications, indicating that worker leverage may persist even amid potential recessions. This dynamic could contribute to sustained inflationary pressures as wage growth remains robust.

Takeaways by Macro Roundup® AI

  1. BlackRock's analysis notes that 1.3m individuals have exited the US workforce upon reaching retirement age, with another 630,000 retiring earlier than planned because of the pandemic.
  2. BlackRock argues the declining labor force participation rate, driven by an aging population, requires lower economic activity, particularly in labor-intensive sectors, to prevent persistent wage and price inflation.
  3. Strikes and protests have risen 10% alongside a rise in new union applications, which BlackRock reads as worker leverage that may persist even amid potential recessions and sustain wage growth.

Blackrock analysis forecasting declining American labor force participation rates driven by aging. This implies that economic activity“will need to run at a lower level to avoid persistent wage and price inflation.”,“…The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an aging population account for most of the remaining shortfall. More people have hit 64 years old, the age at which most retire. That’s taken 1.3M out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64. That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labor-heavy services sector…”

This is, in our judgment, one of the most important macro questions right now. We wish we knew for sure what’ll happen. But the uptick in union strength suggests that workers’ leverage isn’t going away, even if a recession interrupts. We suspect that this strength can coexist with 2 per cent inflation, but with low confidence. Let us know what you think.

Ethan Wu, "Unions’ inflation warning?"Financial Times, December 8, 2022, https://www.ft.com/content/96a5dba9-da0b-4af9-a7cc-94636ad98698

Unions’ inflation warning?

Are unions a bellwether of sticky inflation?

We wrote on Monday about the resilience of US wage growth, which, with inflation above 7 per cent, scares investors. You hear different formulations for why (“cost-push spiral”, “wage-price persistence”), but the throughline is the same. Prices and wages are linked and once both are rising, both must be forced down together.

That’s worth thinking about, but it’s also worth appreciating that most US observers don’t suspect a 1970s-style wage-price spiral is on the cards. That is, notably, not so in the UK, where the wage-price spiral debate is very much alive. This chart probably has something to do with it:

Unions inflation warning?: Extended Excerpt Image 1


The argument here is that the 1970s spiral depended on cost-of-living wage adjustments written into union contracts, creating a fixed relationship between wages and prices. Everyone figured out pay and prices would keep rising, and acted that way. Inflation expectations soared.

But now, US organised labour is weak, cost-of-living adjustments aren’t widespread and businesses can be more judicious about price increases.

Could that change? On the margins, it already is. From rail workers and teaching assistants to Starbucks and Amazon, this year’s surge in labour action has been hard to miss. Cornell’s tracker finds a 10 per cent bump in strikes and protests, while National Labor Relations Board data show a sharp rise in new union applications. Some combination of a post-lockdown bounceback and a tight labour market probably explains the shift, but that doesn’t necessarily mean it’s temporary. Tight labour markets could be here to stay. BlackRock’s in-house think-tank has been banging the drum on this: "A smaller share of the US population is in the workforce than pre-Covid. That’s unlikely to change, we think. Why? The participation rate, or the share of people aged 16 and over that have or are looking for work, nosedived when the pandemic hit and people left the workforce. Some of that sharp decline has been made up as people return. But we don’t see it recovering further because the effects of an ageing population account for most of the remaining shortfall. More people have hit 64-years-old, the age at which most retire. That’s taken 1.3mn out of the workforce as of October, we find. Another 630,000 left as the pandemic caused fewer people to work past retirement age and hastened retirement for people coming up to 64... That implies the workforce will keep shrinking relative to the population. Economic activity will need to run at a lower level to avoid persistent wage and price inflation, especially in the labour-heavy services sector."

Here’s their chart:

Unions inflation warning?: Extended Excerpt Image 2


We spoke recently to Ian de Verteuil, a managing director at CIBC, who made the case that investors are not thinking enough about this. He concedes that, in general, organised labour’s position is diminished. But he points to the wage increases already pencilled into union agreements. From a database of union contracts covering 350,000 workers, he calculates that an average of 4 per cent wage growth is locked in for each of the next three years (except 2023, at 6.7 per cent): " are the only place where you can see one, two or three years out. A lot of wage expectations data is backward-looking. But if someone negotiates a contract in the third quarter of 2022 at 6.7 per cent... then we’re starting to lock in these higher levels. Why are still hiring if you can see the slowdown? Part of it is, ‘Gee whiz, we fired everyone during Covid, and couldn’t get them back.’ So even if I have a slowdown, do I let the worker go?... In an environment where we don’t have enough workers now, where we’re bringing manufacturing back to the United States, where unions are starting to demand more and more, where employers are still trying to hire, that is an environment that makes inflation stickier than you think."

The unionisation rate, de Verteuil said, doesn’t have to budge for wage pressures to persist; what unions are demanding is indicative of labour conditions more broadly.

Along similar lines, Claudia Sahm of Sahm Consulting noted to us that fear of unions could matter as much as unions themselves: "We’ve had this labour shortage long enough that you can see companies pulling these levers. Because the thing they want to avoid more than anything else is a union, because a union makes them pull the levers."

But Sahm welcomes the recent burst of wage growth, and is not very worried about any wage-price feedthrough, citing recent IMF research that found such episodes are historically uncommon. She points out that rising wages will probably eat into margins, but that companies are often loath to increase prices quickly, for fear of losing customers.