Macro Roundup

“…Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r [real return on capital]. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g [growth rate of output]….” Steve Comment: I’ve been wondering if the capital intensity of the US economy is about to go up. Between 1987 and 2021 tangible investment in terms of private investment as a percentage of private GDP net residential investment down ticked by 4 percentage points from 12.5% to 8.5%. During the same period, growth in intangible investment rose to 16.75% of GDP for a net increase in overall private investment of 1 percentage point. https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.36.3.3 A different measure with a different time frame gives directionally similar data. Between 1977 and 2017 overall nonresidential business investment relative to business sector gross value added grew from 21% to 26%. The tangible investment rate fell from 12.9% in 1977 to 10.6% in 2017. However, this was again offset by an increase in the intangible investment rate from 8.4% to 15.2 http://www.intaninvest.net/charts-and-tables/As you point out btw security demands (going back to a cold war era defense industrial base, the electrification process (Goldman Sachs recently forecast that globally $2.8T in annual investment is needed to meet zero carbon goals this decade. For example, meeting current goals will require an additional 1.8Mty of copper driven by increased demand for solar, wind and electric vehicles.) We need a great deal of really expensive tangible investment. https://www.goldmansachs.com/insights/pages/gs-research/2023-commodity-outlook-an-underinvested-supercycle/report.pdf Perhaps intangible investment has to decline in the face of demand from tangible investment so it nets out (hard to believe that given developments in say AI) but to me it suggests that there is going to be more competition for a limited pool of risk capital. I’m not sure of the implications of that other than hurdle rates continuing to rise. And already a project that in 2022 offered a return on equity of 7% no longer works. https://aswathdamodaran.substack.com/p/data-update-2-for-2023-a-rocky-year So my question is what does overall investment going up as a share of GDP imply?

Blanchard Comment: You ask some good questions. For the world as a whole, I think there has not been an increase in the investment to gdp ratio. (Figure 1-4 in the book shows no such trend in saving to gdp, and at the world level, saving=investment) But if I am wrong, an increase in capital intensity is what you would expect from a lower r, due to higher saving. (I do not think that the distinction between tangible and intangible investment is an essential one for the question at hand) Olivier Blanchard, “Secular stagnation is not over,” Peterson Institute For International Economics, January 24, 2023, https://www.piie.com/blogs/realtime-economics/secular-stagnation-not-over

Secular Stagnation Is Not Over

is secular stagnation over?

I do not think so. Today’s inflation will not last, but I believe that low rates will.

Secular stagnation, a concept put forward by the economist Alvin Hansen in 1938, refers to economies suffering from structurally low private demand, requiring very low interest rates to sustain demand and achieve potential output—indeed requiring interest rates so low that they are lower than the growth rate. This state is summarized by a formulation that has become famous (at least in macroeconomic discussions…): r < g, a safe interest rate lower than the growth rate of the economy. In 2013 Lawrence H. Summers stirred widespread interest by declaring that the advanced economies were in a state of secular stagnation.

The empirical evidence was indeed overwhelming that most economies were in such a state. Real interest rates (i.e., interest rates adjusted for inflation) had steadily declined since the mid-1980s and were much lower than growth rates, indeed typically negative. Accordingly, Summers and I (and many others) explored the fundamental implications of such a condition. I focused on the implications for fiscal policy, and my new book, drawing conclusions for fiscal policy, has just been published by MIT Press.

In the current inflationary context, however, the title of my book, Fiscal Policy under Low Interest Rates, seems like a provocation. Some will say the publication may be a nice history book but that it is already out of date because the world has changed. According to this view, interest rates are now high, not low, and we should now prepare for a world in which r > g on average. Indeed, Summers himself, at the recent meetings of the American Economic Association, opined that “we’ll not return to the era of secular stagnation.”

Disagreeing about secular stagnation with the first macroeconomist to identify it rightly as a contemporary phenomenon is something that one should do very carefully. Yet I must.

First, because the issue is a fundamental one: There may be no variable more important for macroeconomic policy than r − g.

Second, because I believe that global secular stagnation was and is driven by deep structural factors that neither COVID nor inflation have done anything to reverse. Once central banks have won the fight against inflation, which they will, we shall most likely return to a macroeconomic environment not dramatically different, at least in this respect, from the one before COVID. That means that safe interest rates—that is, rates for assets with no risk of default—will be low again. As a result, I see a high probability that r < g remains the prevalent regime for some time to come.

Why do I believe rates will remain low?

The decline in safe rates on government bonds (adjusted for expected inflation) has been a steady and global one since the 1980s. The decline may have started earlier in Japan, but essentially all advanced economies shared the condition until the post-COVID inflation of 2021. This trend did not result from particular events, say the global financial crisis or the COVID crisis: while these led to temporarily lower rates, these lower rates were short-lived deviations from an underlying downward trend.

WHAT MARKET RATES TELL US

This process was indeed interrupted by the rise of inflation starting in 2021, which has forced central banks to increase interest rates to get inflation down to target. But even now, at what may be close to the height of central bank interest rates in their fight against inflation, real interest rates are still surprisingly low (and real rates are what matters for r − g).

In the United States, the 10-year nominal rate on government bonds is currently 3.4 percent, while the 10-year inflation forecast by the Congressional Budget Office (CBO) is 2.4 percent, implying a 10-year real rate of 1.0 percent. At the same time, the 10-year CBO growth forecast is 1.7 percent, implying that, even today, the 10-year forecast for r − g is still negative: −0.7 percent. Similar computations for the eurozone and for Japan yield even more negative values for the 10-year r − g: −1.3 percent for the euro zone, −1.2 percent for Japan.

These are 10-year averages, and thus reflect both the forecasts of higher short rates in the near future and the depressing effects on long rates of quantitative easing on long rates. An alternative is to use data from the overnight index swaps curve for 1-year bonds 10 years out and from 1-year inflation swaps also 10 years out, together with the CBO forecast for 1-year growth 10 years out. These imply an even greater negative value of r − g: −1.2 percent 10 years out from today.

Or one can instead look at what the Fed expects to happen. The December “Summary of Economic Projections” based on forecasts from the Federal Open Market Committee gives a median long-run forecast for the policy rate of 2.5 percent, an inflation forecast of 2 percent, and a GDP growth forecast of 1.8 percent. These imply a real rate of 0.5 percent and a value for r − g of −1.3 percent.

Investors, and even the Fed, can be wrong, however. Indeed, they did not predict the current increase in nominal rates. So, one must dig deeper.

LOOKING AT FUNDAMENTALS

One must try to both identify the factors behind the earlier decline in rates and forecast their evolutions in the future. Conceptually, one can think of three sets of factors. The first two are the factors affecting saving and the factors affecting investment; together, they determine capital accumulation, and by implication the economy’s marginal product of capital and the distribution of real rates depending on their relative riskiness. The third are the factors that affect the preference for safety among investors, which in turn determines how low the safe rate is relative to more risky rates of return such as stock returns.

It is fair to say that, while the (abundant) literature has identified the likely factors at work, it has not pinned down the relative contributions of these three sets of factors. Some give a main role to stronger saving and weaker investment. Others focus on an increased demand for safe assets. Yet I believe that, for most of the relevant factors, there is no reason to expect a dramatic turnaround from their pre-COVID evolution.

Take saving. I see the two main forces behind high saving as demographics and higher income. To the extent that longer life expectancy—which dominates demographic evolutions in advanced economies—leads to a longer retirement, it induces people to save more in anticipation of their longer retirement.[1] Higher income levels (rather than higher income growth) increase the proportion of the population that is able to save, either for precautionary motives or for life cycle saving purposes. These factors will continue to be relevant in the future.

Summers has argued that the increase in public debt due to the fiscal response to COVID will lead, other things equal, to an increase in r. He is right about the sign of the increase in public debt’s impact on r, but the effect is likely to be quite small. The debt-to-GDP ratio in advanced economies has increased only from 75 percent in 2019 to 82 percent in 2022; under standard assumptions, this implies an increase in r of no more than 15–30 basis points. That would be insufficient to offset the pre-COVID downward trend in safe rates, let alone to close the gap between r and g.

Turn to the demand for safe assets. A rise in this demand was an important factor in leading to a larger discount on the safe rate pre-COVID. In particular, regulation requiring financial institutions to hold a higher proportion of liquid assets clearly played a role. This is unlikely to change. And, if anything, the world looks more uncertain than it was pre-COVID, leading not only to more precautionary saving but also to a higher proportion of wealth to be held in liquid and safe assets (and fewer countries’ assets being considered safe).

This leaves the likely evolution of investment, and this is where I freely admit that there is more uncertainty. The rate of technological progress is notoriously difficult to predict from decade to decade. If progress were to speed up again, the effect on r − g would be ambiguous: it would lead to higher growth, which would lead to an even lower r − g; but it would also trigger higher investment, which in turn would lead to a higher r and thus a higher r − g. Such a technological explosion did not happen in the last 40 years, but it could.

One can think of other reasons why investment might become stronger. Geopolitics suggest that defense spending, a form of investment, may go up. Reshoring and friendshoring, for security or other reasons, may imply both higher investment and possibly lower growth as some of the benefits of trade are lost. The fight against global warming will increase green investment, while at the same time potentially slightly decreasing growth. All these may lead to an increase in r − g and thus reduce the room for fiscal space and the use of fiscal policy.[2] It would however take an unusual investment boom to reverse the sign of r − g and this cannot be the baseline scenario.

In short, one can never be sure. But I see the inflation episode and the higher rates as an interlude. Looking beyond this episode, I see low interest rates and a negative r − g as the most likely scenario for the future. If I am right, this is the time to think about fiscal and monetary policy once the fight against inflation is won.[3]

NOTES

1. It has been argued that longer life expectancy means a larger proportion of dissavers and thus lower saving. This is incorrect. While it is true that the proportion of dissavers goes up, over their lifetime people need to save more in anticipation of a longer retirement, leading to a higher aggregate saving rate.

2. To be clear and as I argue in the book, such an increase in r, if it came from an increase in desirable investment, would be a good thing, even if it reduced fiscal space.

3. A summary of what I see as the main implications for macroeconomic policy in general, and for fiscal policy in particular, is in my previous blog.

Michael Cembalest notes that it has been difficult for legislators to increase tax receipts beyond 19% of GDP, and yet entitlement spending plus interest is likely to exceed that level by 2032. “…The above chart plots the history of US tax increases since 1950 (as % of GDP and vs Federal receipts as a % of GDP). While there have been tax increases of 2% of GDP or more, they occurred when overall tax receipts were much lower. The red square shows the required increases in taxes, which if spent entirely on increasing discretionary spending, would reduce the ratio of entitlements to non-defense discretionary spending back to 2.2x (its 2006 level). The Sanders high net worth income and capital gains tax plan and the Warren wealth tax plan appear as well….”

Michael Cembalest, “American Gothic,” J.P. Morgan, January 24, 2023, https://am.jpmorgan.com/us/en/asset-management/institutional/insights/market-insights/eye-on-the-market/american-gothic/

Year-over-year wages for the bottom 10% of earners increased 9.8% relative to 7.4% for the median for all workers. Workers in the top 10% of earnings saw a 5.7% gain., “…Median weekly earnings for all workers were 7.4% higher, year-over-year, at the end of 2022, according to an analysis of newly released Labor Department data. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%. Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains. The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher. The median raise for Black Americans employed full-time was 11.3%, compared with the prior year….”

Gabriel Rubin, “Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners,” Wall Street Journal, January 23, 2023, https://www.wsj.com/articles/biggest-pay-raises-went-to-black-workers-young-people-and-low-wage-earners-11674425793

Biggest Pay Raises Went to Black Workers, Young People and Low-Wage Earners

Black workers, young workers and people on the bottom of the income scale were among those who saw the largest pay increases last year, when employers were readily handing out raises in a tight labor market and high inflation environment.

Median weekly earnings for all workers were 7.4% higher, year over year, at the end of 2022, according to an analysis of newly released Labor Department data. That outpaced the consumer inflation rate of 7.1% in the fourth quarter, from a year earlier.

For some workers, the gains were even larger. The median raise for Black Americans employed full time was 11.3%, compared with the prior year. Weekly pay for workers between 16- and 24-years old rose more than 10%. The bottom 10th of wage earners—those that make about $570 a week—saw their pay increase by nearly 10%.

The pay increases were welcome relief for those groups who have experienced “decades of pain” in the labor market, said Aaron Sojourner, an economist at the Upjohn Institute for Employment Research. “It’s been a struggle for those folks to find a productive place in the community where they can contribute and earn and build families and success.”

While the labor market remains tight, both wage gains and broader inflation have begun to cool, along with consumer spending. That is the result of the Federal Reserve’s efforts to stifle demand and bring down inflation. Workers’ ability to continue to receive large pay increases this year is likely under pressure. Economists surveyed by The Wall Street Journal forecast job losses in 2023, after recent strong hiring.

Here is a look at which Americans saw the largest, and smallest, raises in 2022.

Better pay increases late last year went to workers who attended college, a reversal from earlier in the pandemic when those who hadn’t completed high school saw outsize gains.

The annual rate of wage growth for workers with less than a high school diploma touched a recent peak in the second quarter of 2022, when it was up 11.1% over the prior year, higher than the 7.6% wage growth during that period for workers with a bachelor’s degree or higher.

But by the end of 2022, the median worker without a high school diploma was making $675 a week, or 3.7% more than during the last quarter of 2021. Wage gains for the less educated plummeted as more low-skilled jobs were filled and economic growth cooled.

The median worker with at least a bachelor’s degree, by contrast, saw 5.5% wage growth from a year earlier to $1,547 a week. Those who only finished high school saw a 5.3% annual raise.

Wage growth was uneven across racial groups.

The median Black worker’s weekly pay increased at the fastest rate among those measured, growing to $896 from $805 a year earlier. The median Hispanic or Latino worker saw a 4.8% raise to $837 a week. White and Asian workers saw wage growth slightly higher than the overall workforce.

Still, white and Asian workers continued to earn far more than other racial groups. Median weekly earnings for full-time Asian workers was $1,496, and white workers earned $1,111.

By sex, weekly wages for the median woman rose 5% to $975 in the fourth quarter, from a year earlier. The median man received a 6.6% raise to $1,176 a week. Women had median weekly earnings that were 82.9% of that for men.

The rate of raises between workers ages 16 to 24 and other age groups widened in 2022.

It isn’t unusual for young workers to experience faster wage growth in percentage terms, largely because they typically start from the lowest base. A person making $15 an hour who gets a 10% raise is now making $16.50 an hour.

That youngest cohort, earning a median of $716 a week, ended the year with 10.8% annual wage growth, compared with 7.2% for the next-strongest group, aged 25 to 54. The median worker in those prime working years earned $1,134 a week. At the end of 2021, younger workers had 5.2% annual wage growth, and prime-age workers saw a 4.4% gain.

Older workers, those in the 55-64 bracket and those over 65 years old, who often start from higher bases compared with younger cohorts, saw the slowest wage growth last year, at 2.8% and 3.9%, respectively.

The lowest-paid workers saw larger raises last year than the top 10% of wage earners.

Those in the bottom 10% saw weekly pay grow 9.8% from a year earlier at the end of 2022, to $571 a week. The top 10% received a raise of 5.7%, to $2,584 a week.

Gains for low-income and low-skilled workers drove broader wage growth throughout the post-reopening period of the pandemic, as employers who shed workers in 2020 scrambled to hire, and retain, workers. Quit rates soared as workers found that they could jump to another job for higher wages, with the mismatch between job openings and available workers at an all-time high.

Those fast gains have cooled. Hiring in sectors such as leisure and hospitality and retail eased toward the end of last year.

Analysis from New York Fed shows that Americans spend 60 million fewer commuting hours each day vs. pre-pandemic. They allocated this time primarily toward leisure activities and sleeping, while reducing overall work hours.

“…In the aggregate, Americans now spend 60 million fewer hours traveling to work each day. We investigate how people spend this saved time on other activities. The chart above shows how one hour of foregone commute time is allocated toward other activities. First, we find a substantial fall in time spent working. Overall paid-work hours fell because of substitution toward other activities throughout the day: we see notable increases in leisure time and sleeping. The rise in leisure was particularly pronounced among younger Americans, who reported spending more time at social events, eating at restaurants or bars, and exercising….” David Dam, Davide Melcangi, Laura Pilossoph, and Aidan Toner-Rodgers, “What Have Workers Done with the Time Freed up by Commuting Less?,” Federal Reserve Bank Of New York, https://libertystreeteconomics.newyorkfed.org/2022/10/what-have-workers-done-with-the-time-freed-up-by-commuting-less/

What Have Workers Done with the Time Freed up by Commuting Less?

The COVID-19 pandemic has dramatically changed the way Americans spend their time. One of the most enduring shifts has occurred in the workplace, with millions of employees making the switch to work from home. Even as the pandemic has waned, more than 15 percent of full-time employees remain fully remote and an additional 30 percent work in hybrid arrangements (Barrero, Bloom, and Davis). These changes have substantially reduced time spent commuting to work; in the aggregate, Americans now spend 60 million fewer hours traveling to work each day. In this post, we investigate how people spend this saved time on other activities. Using detailed data from the American Time Use Survey (ATUS), we find that employed individuals allocate their saved commute time toward leisure activities and sleeping, while reducing overall work hours.

Measuring Time Spent

The ATUS is a nationally representative survey that measures both the amount of time people spend on various activities and where these activities take place. ATUS respondents are randomly selected from a subset of households in the Current Population Survey, allowing us to link demographic and employment information to respondents’ time use information. Because COVID-19 disrupted the survey’s data collection between March 18 and May 9 of 2020, the survey results for 2020 reflect data only from May 10 to December 31. To make comparisons with prior years, we restrict the data to this period in the other years as well.

To examine how workers allocate their saved commute time, we apply the methodology of Aguiar, Hurst, and Karabarbounis to the COVID-19 period. For those interested in the details, we aggregate individual ATUS responses to the state-level and exploit variation across states in the extent of commute time reduction. After categorizing more than 400 time use activities into nine major categories, we regress yearly changes in time use for each category on changes in commute time. Our first-differences approach enables us to account for time-invariant state characteristics, and we also include a variety of state-level control variables to account for worker composition. Across specifications, we restrict our analysis to employed individuals in order to exclude reductions in commute times due to job loss. Additionally, to account for the possibility that COVID-19 induced firms to cut hours just as employees were shifting to remote work, we also consider a sample of only full-time employees and find similar results.

Changes in Time Use

The main results are presented in the chart below in which we show how one hour of foregone commute time is allocated toward other activities. First, we find a substantial fall in time spent working; the decrease in hours worked away from home is only partially offset by an increase in working at home. This is in line with results from Bloom, Han, and Liang, who find that remote work led to a decrease in overall hours worked. Moreover, our findings help reconcile earlier work on commute times, which found that even though employees reported allocating 35 percent of their saved commute time to work, they spent fewer total hours in paid employment (Barrero, Bloom, and Davis). Our results from the ATUS suggest that although individuals may have increased time working in the precise time-slot they used to commute, overall paid-work hours fell because of substitution toward other activities throughout the day.

Second, we see notable increases in leisure time and sleeping. The rise in leisure was particularly pronounced among younger Americans, who reported spending more time at social events, eating at restaurants or bars, and exercising. Older age groups, on the other hand, tended to allocate more time to nonmarket work, such as activities related to childcare, the maintenance of the household, repairs, and meal preparation.

Who Are the Activities Conducted With?

The ATUS also includes information on who physically accompanied the respondent during each activity. We use this variable to classify which activities were done with people outside of the immediate household. We categorize solitary activities and those with household members into one category, and activities with friends, co-workers, clients, and non-household family members into the other. As we would expect, the next chart shows that time spent on activities done alone or with household members increased, such as leisure (+2.30 hours) and nonmarket activities (+0.69). Differentiating by age, we see that younger people were the only group to significantly increase their leisure time with non-household members (+1.13), likely reflecting the differential risks of COVID-19.

Our results show important relationships in the substitutability of time use. The findings lend credence to the various reports on employees’ preferences for flexible work arrangements, given that cutting the commute enables people to spend their time on other activities, such as childcare or leisure. This added benefit of working from home—for those who want it—will be an important consideration for the future of flexible work arrangements.

The aging of the American population has left the US short 1.9M workers relative to 2019. A decline in labor force participation of older workers is responsible for a drop of another 500,000 workers, “…The labor-force participation (LFP) rate of prime-age workers (aged 25-54) and the foreign-born workforce have almost fully recovered. Neither explains the current squeeze. The biggest shortfall comes from Americans getting older and leaving work behind. Since 2019 those aged at least 65 have gone from less than 16% of the population to nearly 17%. Moreover, unlike prime-age workers, many people who retired early as covid-19 struck have not come back to work. LFP among older Americans, which rose from 12.5% in 2000 to 20.7% in early 2020, has dipped to 19.3%, the same as in 2016. The aging of the population accounts for the loss of 1.9m workers (0.7% of people aged at least 16), while the overall drop in LFP, mainly among the old, is responsible for a further 0.5m (0.2%)….”

Elliott Morris and Simon Rabinovitch, “Where have all America’s workers gone?” The Economist, January 24, 2023, https://www.economist.com/graphic-detail/2023/01/24/where-have-all-americas-workers-gone

Where have all America’s workers gone?

For months economists have warned of recession in America, but in one crucial area the economy seems overheated: employers are still struggling to find workers. Why is the labour market so tight?

Companies’ hiring plans suggest that the economy remains robust for now. Total labour supply (people who have or are seeking jobs) is roughly back to pre-pandemic levels. By contrast, labour demand (filled plus open jobs) has increased by 3m positions. The excess demand represents about 3% of all those employed, which has contributed to big nominal wage gains. Slower gdp growth—whether a recession or not—will help restore balance.

The supply picture is more complex. During the pandemic, many workers took time off. Immigration, a key source of labour, also fell. Now, however, the labour-force participation (lfp) rate of prime-age workers (aged 25-54) and the foreign-born workforce have almost fully recovered. Neither explains the current squeeze.

Instead, the biggest shortfall comes from Americans getting older and leaving work behind. Since 2019 those aged at least 65 have gone from less than 16% of the population to nearly 17%. Moreover, unlike prime-age workers, many people who retired early as covid-19 struck have not come back to work. lfp among older Americans, which rose from 12.5% in 2000 to 20.7% in early 2020, has dipped to 19.3%, the same as in 2016. The ageing of the population accounts for the loss of 1.9m workers (0.7% of people aged at least 16), while the overall drop in lfp, mainly among the old, is responsible for a further 0.5m (0.2%).

Some think that a trend among younger people to scale back their working intensity, known as “quiet quitting”, may have caused the labour market to tighten. Recent research by scholars at Washington University in St Louis reveals a clear reduction in hours worked by those in jobs. But most quiet quitters are high-earning workers, whereas the biggest labour shortages have been in basic service jobs. That points to another factor: illness. In 2022 an average of 1.6m Americans missed at least one week of work per month to recuperate—whether from covid, flu or something else—up from 1m before covid.

Little by little, Americans will get back to better health. Unfortunately for employers, baby-boomers are unlikely to come out of retirement.

“…US population growth will be driven entirely by immigration within two decades, according to the latest forecasts by the Congressional Budget Office. The projections, published on Tuesday, show a population of 373 million by 2053 — about 3 million more than the CBO was expecting a year ago. That’s partly due to a sharp increase in the forecast for immigration in 2023 and the following two years, after pandemic travel restrictions eased — adding some 1 million to the population over that period. Much of the growth is projected to come in the so-called prime-age bracket, between 25 and 54, that is the core of the workforce. The CBO expects that cohort to increase by about 1.1 million people, or 0.9%, each year….”

Alexandre Tanzi, “Immigration to Drive All US Population Growth Within Two Decades,” Bloomberg, January 24, 2023, https://www.bloomberg.com/news/articles/2023-01-24/immigration-to-drive-all-us-population-growth-within-two-decades?sref=U3dOGIDF

Immigration to Drive All US Population Growth Within Two Decades

US population growth will be driven entirely by immigration within two decades, according to the latest forecasts by the Congressional Budget Office.

The projections, published on Tuesday, show a population of 373 million by 2053 — about 3 million more than the CBO was expecting a year ago. That’s partly due to a sharp increase in the forecast for immigration in 2023 and the following two years, after pandemic travel restrictions eased — adding some 1 million to the population over that period.

At a time when many analysts have focused on demographics as a potential drag on the US economy, the higher forecast offers some encouragement. Much of the growth is projected to come in the so-called prime-age bracket, between 25 and 54, that is the core of the workforce. The CBO expects that cohort to increase by about 1.1 million people, or 0.9%, each year.

Still, by 2042 deaths in the existing population are expected to exceed births, meaning only immigration will expand the population.

The CBO’s population estimates are used for calculating Social Security payroll taxes and benefit increases.

“…In 2016, Ron Johnson rode Trump’s coattails and the Republican trail blazed by the former governor Scott Walker to a 3.4 point (50.2 to 46.8) victory and swept into office, in large part by running up huge margins in Milwaukee’s predominantly white suburbs. That changed in 2022. Craig Gilbert, a fellow at Marquette Law School conducted a detailed analysis of Wisconsin voting patterns and found that Johnson, “performed much worse in the red and blue suburbs of Milwaukee than he did six years earlier in 2016. So again, how did Johnson win? The simple answer: white rural Wisconsin. As recently as 17 years ago, rural Wisconsin was a battleground. In 2006, Jim Doyle, the Democratic candidate for governor, won rural Wisconsin, about 30 percent of the electorate, by 5.5 points. “Then came the rural red wave,” Gilbert writes. “Walker carried Wisconsin’s towns by 23 points in 2010 and by 25 points in 2014.” In 2016, Johnson won the rural vote by 25 points, but in 2022, he pushed his margin there to 29 points….”

Thomas Edsall, “The Resentment Fueling the Republican Party Is Not Coming From the Suburbs,” New York Times, January 25, 2023, https://www.nytimes.com/2023/01/25/opinion/rural-voters-republican-realignment.html

The Resentment Fueling the Republican Party Is Not Coming From the Suburbs

Rural America has become the Republican Party’s life preserver.

Less densely settled regions of the country, crucial to the creation of congressional and legislative districts favorable to conservatives, are a pillar of the party’s strength in the House and the Senate and a decisive factor in the rightward tilt of the Electoral College. Republican gains in such sparsely populated areas are compensating for setbacks in increasingly diverse suburbs where growing numbers of well-educated voters have renounced a party led by Donald Trump and his loyalists.

The anger and resentment felt by rural voters toward the Democratic Party are driving a regional realignment similar to the upheaval in the white South after Democrats, led by President Lyndon Johnson, won approval of the Civil Rights Act of 1964.

Even so, Republicans are grasping at a weak reed. In a 2022 article, “Rural America Lost Population Over the Past Decade for the First Time in History,” Kenneth Johnson, the senior demographer at the Carsey School of Public Policy and a professor of sociology at the University of New Hampshire, notes: “Between 2010 and 2020, rural America lost population for the first time in history as economic turbulence had a significant demographic impact. The rural population loss was due to fewer births, more deaths and more people leaving than moving in.”

The shift to the right in rural counties is one side of a two-part geographic transformation of the electorate, according to “The Increase in Partisan Segregation in the United States,” a 2022 paper by Jacob R. Brown of Princeton, Enrico Cantoni of the University of Bologna, Ryan D. Enos of Harvard, Vincent Pons of Harvard Business School and Emilie Sartre of Brown.

In an email, Brown described one of the central findings of the study: “In terms of major factors driving the urban-rural split, our analysis shows that rural Republican areas are becoming more Republican predominantly due to voters in these places switching their partisanship to Republican. This is in contrast to urban areas becoming increasingly more Democratic largely due to the high levels of Democratic partisanship in these areas among new voters entering the electorate. These new voters include young voters registering once they become eligible and other new voters registering for the first time.”

There are few, if any, better case studies of rural realignment and the role it plays in elections than the 2022 Senate race in Wisconsin. The basic question there is how Ron Johnson — a Trump acolyte who derided climate change with an epithet, who described the Jan. 6 insurrectionists as “people that love this country, that truly respect law enforcement” and who proposed turning Social Security and Medicare into discretionary programs subject to annual congressional budget cutting — got re-elected in Wisconsin.

In 2016, Johnson rode Trump’s coattails and the Republican trail blazed by the former governor Scott Walker to a 3.4 point (50.2 to 46.8) victory and swept into office, in large part by running up huge margins in Milwaukee’s predominantly white suburbs. That changed in 2022.

Craig Gilbert, a fellow at Marquette Law School and a former Washington bureau chief of The Milwaukee Journal Sentinel, conducted a detailed analysis of Wisconsin voting patterns and found that Johnson “performed much worse in the red and blue suburbs of Milwaukee than he did six years earlier in 2016. Johnson lost Wauwatosa by 7 points in 2016, then by 37 points in 2022. He won Mequon in Ozaukee County by 28 points in 2016 but only by 6 in 2022. His victory margin in Menomonee Falls in Waukesha County declined from 32 points six years ago to 14 points.”

So again, how did Johnson win? The simple answer: white rural Wisconsin.

As recently as 17 years ago, rural Wisconsin was a battleground. In 2006, Jim Doyle, the Democratic candidate for governor, won rural Wisconsin, about 30 percent of the electorate, by 5.5 points. “Then came the rural red wave,” Gilbert writes. “Walker carried Wisconsin’s towns by 23 points in 2010 and by 25 points in 2014.” In 2016, Johnson won the rural vote by 25 points, but in 2022, he pushed his margin there to 29 points.

In her groundbreaking study of Wisconsin voters, “The Politics of Resentment: Rural Consciousness in Wisconsin and the Rise of Scott Walker,” Katherine Cramer, a political scientist at the University of Wisconsin-Madison, prompted a surge of interest in this declining segment of the electorate. She summed up the basis for the discontent among these voters, saying, “It had three elements: (1) a belief that rural areas are ignored by decision makers, including policymakers, (2) a perception that rural areas do not get their fair share of resources and (3) a sense that rural folks have fundamentally distinct values and lifestyles, which are misunderstood and disrespected by city folks.”

David Hopkins, a political scientist at Boston College, described how the urban-rural partisan divide was driven by a conflation of cultural and racial controversies starting in the late 1980s and accelerating into the 1990s in his book “Red Fighting Blue: How Geography and Electoral Rules Polarize American Politics.”

These controversies included two Supreme Court abortion decisions, Webster v. Reproductive Health Services (in 1989) and Planned Parenthood of Southeastern Pennsylvania v. Casey (in 1992); the 1989 appointment of Ralph Reed as executive director of the Christian Coalition; the fire-breathing speeches of Pat Robertson and Pat Buchanan at the 1992 Republican Convention (Buchanan: “There is a religious war going on in this country. It is a cultural war for the soul of America”); and the 1993 debate about gays in the military, to name just a few.

“The 1992 election represented a milestone,” Hopkins writes, adding: “For the first time in the history of the Democratic Party, its strongest electoral territory was located exclusively outside the South, including Massachusetts, New York, New Jersey and Maryland in the Northeast; Illinois in the metropolitan Midwest; and the Pacific Coast states of Washington, Oregon and California — all of which have supported the Democratic candidate in every subsequent presidential election.”

In retrospect it is clear, Hopkins goes on to say, that “the 1992 presidential election began to signal the emerging configuration of ‘red’ and ‘blue’ geographic coalitions that came to define contemporary partisan competition.”

Hopkins compares voter trends in large metro areas, small metro areas and rural areas. Through the three elections from 1980 to 1988, the urban, suburban and rural regions differed in their vote by a relatively modest five points. That begins to change in 1992, when the urban-rural difference grows to roughly 8 percentage points and then keeps growing to reach nearly 24 points in 2016.

“For the first time in American history, the Democratic Party now draws most of its popular support from the suburbs,” Hopkins writes in a 2019 paper, “The Suburbanization of the Democratic Party, 1992-2018.” Democratic suburban growth, he continues, “has been especially concentrated in the nation’s largest metropolitan areas, reflecting the combined presence of both relatively liberal whites (across education levels) and substantial minority populations, but suburbs elsewhere remain decidedly, even increasingly, Republican in their collective partisan alignment.”

The same process took place in House elections, Hopkins observes: “The proportion of House Democrats representing suburban districts rose from 41 percent after the 1992 election to 60 percent after 2018, while the share of Democratic-held seats located in urban areas remained fairly stable over time (varying between 33 percent and 41 percent of all party seats) and the share of rural districts declined from 24 percent to 5 percent of all Democratic seats.”

Hopkins pointedly notes that “the expanded presence of suburban voters and representatives in the Democratic Party since the 1980s was accompanied by a dramatic contraction of Democratic strength in rural areas.”

Justin Gest, a political scientist at George Mason University whose research — presented in “The White Working Class” and “Majority Minority” — focuses on cultural and class tensions, has a different but complementary take, writing by email that the rising salience of cultural conflicts “was accelerated when the Clinton administration embraced corporate neoliberalism, free trade and moved Democrats toward the economic center. Many differences persisted, but the so-called third way made it harder to distinguish between the economic approaches of Democrats and Republicans.”

The diminution of partisan economic differences resulted in the accentuation of “the very cultural differences that Gingrich-era Republicans sought to emphasize — on issues like homosexuality, immigration, public religion, gun rights and minority politics. These issues are more galvanizing to the Upper Midwest regions adjacent to the South (West Virginia, Ohio and Indiana) — which are trending more conservative.”

The Upper Midwest, Gest continued, is “a region unto itself — defined by manufacturing, unions and social conservatism. As the manufacturing industry has moved offshore, union power declined, and one of the richest, most stable parts of America became uniquely precarious inside a single generation. It is now subject to severe depopulation and aging, as younger people who have upskilled are more likely to move to cities like Chicago or New York. They have total whiplash. And Trump’s nostalgic populism has resonated with the white population that remains.”

Gest is outspoken in his criticism of the Democratic Party’s dealings with rural communities: “Democrats have effectively redlined rural America. In some corners of the Democratic Party, activists don’t even want rural and white working-class people in their coalition; they may even deride them. Rural and white working-class Americans sense this.”

One of the dangers for Democrats, Gest continued, is that “Republicans are now beginning to attract socioeconomically ascendant and white-adjacent members of ethnic minorities who find their nostalgic, populist, nationalist politics appealing (or think Democrats are growing too extreme).”

Nicholas Jacobs and Kal Munis, political scientists at Colby College and Utah Valley University, argue that mounting rural resentment over marginalization from the mainstream and urban disparagement are driving forces in the growing strength of the Republican Party in sparsely populated regions of America.

In their 2022 paper “Place-Based Resentment in Contemporary U.S. Elections: The Individual Sources of America’s Urban-Rural Divide,” Jacobs and Munis contend that an analysis of voting in 2018 and 2020 shows that while “place-based resentment” can be found in cities, suburbs and rural communities, it “was only consistently predictive of vote choice for rural voters.”

In this respect, conditions in rural areas have worsened, with an exodus of jobs and educated young people, which in turn increases the vulnerability of the communities to adverse, negative resentment.

“Rural America,” Jacobs and Munis write, “continues to grow older, poorer and sicker — urban America wealthier and more diverse. These stark material divisions have contributed to partisan schisms, as individuals increasingly live in places that are politically homogeneous. A consequence of this is that, as Bill Bishop concludes, Americans “have become so ideologically inbred that we don’t know, can’t understand and can barely conceive of ‘those people’ who live just a few miles away.””

In their 2022 paper “Symbolic Versus Material Concerns of Rural Consciousness in the United States,” Kristin Lunz Trujillo, a postdoctoral research fellow at Harvard’s Kennedy School, and Zack Crowley, a Ph.D. candidate in political science at the University of Minnesota, sought to determine the key factor driving rural voters to the Republican Party: anger at perceived unfair distribution of resources by government, a sense of being ignored by decision makers or the belief that rural communities have a distinct set of values that are denigrated by urban dwellers.

Trujillo and Crowley conclude that “culture differences play a far stronger role in determining the vote than discontent over the distribution of economic resources.” Stands on what they call symbolic issues “positively predict Trump support and ideology while the more material subdimension negatively predicts these outcomes, if at all.”

While rural America has moved to the right, Trujillo and Crowley point out that there is considerable variation: “poorer and/or farming-dependent communities voted more conservative, while amenity- or recreation-based rural economies voted more liberal in 2012 and 2016,” and the “local economies of Republican-leaning districts are declining in terms of income and gross domestic product, while Democratic-leaning districts are improving.”

The Trujillo-Crowley analysis suggests that Democratic efforts to regain support in rural communities face the task of somehow ameliorating conflicts over values, religion and family structure, which is far more difficult than lessening economic tensions that can be addressed through legislation.

The hurdle facing Democrats is reflected in a comment James Gimpel, a political scientist at the University of Maryland, emailed to me, describing the roots of rural discontent with Democratic urban America: “The disrespect is felt most acutely by the fact that dominant cultural institutions, including mass media, are predominantly urban in location and orientation. Smaller towns and outlying areas see themselves as misunderstood and mischaracterized by these media, as well as dismissed as out of touch and retrograde by urban populations. There is a considerable amount of truth in their perceptions.”

A May 2018 Pew Research Center report, “What Unites and Divides Urban, Suburban and Rural Communities,” found large differences in the views and partisanship in these three constituencies. Urban voters, according to Pew, were, for example, 62 percent Democratic and 31 percent Republican — the opposite of rural voters, 54 percent Republican and 38 percent Democratic. Fifty-three percent of those living in urban areas said rural residents have “different values,” and 58 percent of those living in rural communities said urban residents do not share their values. Sixty-one percent of those living in rural communities said they have “a neighbor they would trust with a set of keys to their home” compared with 48 percent in urban areas.

I asked Maria Kefalas, a sociologist at Saint Joseph’s University who wrote “Hollowing Out the Middle: The Rural Brain Drain and What It Means for America” with her husband, Patrick J. Carr, who died in 2020, to describe the state of mind in rural America. She wrote back by email: “My best guess would be that it comes down to brain drain and college-educated voters. It has always been about the mobility of the college educated and the folks getting left behind without that college diploma. Not one high school dropout we encountered back when we wrote about Iowa managed to leave the county (unless they got sent to prison), and the kids with degrees were leaving in droves.”

Those whom Kefalas and Carr defined as “stayers” shaped “the political landscape in Ohio, Iowa, etc. (states where the public university is just exporting its professional class).” The result: “You see a striking concentration/segregation of folks on both sides who are just immersed in MAGA world or not,” Kefalas wrote, noting that “people who live in rural America are surrounded by folks who play along with a particular worldview, yet my friends from Brooklyn and Boston will tell you they don’t know anyone who supports Trump or won’t get vaccinated. It’s not open warfare. It’s more like apartheid.”

Urban-rural “apartheid” further reinforces ideological and affective polarization. The geographic separation of Republicans and Democrats makes partisan crosscutting experiences at work, in friendships, in community gatherings, at school or in local government — all key to reducing polarization — increasingly unlikely to occur.

Geographic barriers between Republicans and Democrats — of those holding traditional values and those choosing to reject or reinterpret those values — reinforce what scholars now call the calcification of difference. As conflict and hostility become embedded in the structure of where people live, the likelihood increases of seeing adversaries as less than fully human.

“….Starting in 2019, tighter immigration policies under the Trump Administration followed by pandemic disruptions depressed the US foreign-born working-age population. The foreign-born labor force fell 2.8 million below its long-term trend level in April 2020 and remained 1.2 million below trend in March 2022. In Exhibit 1, the left panel shows the foreign-born population has grown 137k per month in the past 18 months, compared to 68k per month from Jan. 2010 to Jan. 2019. The right panel shows the foreign-born labor force has grown 110k per month in the past 18 months, compared to 42k per month during the prior period…..”

Tim Krupa, “The Immigration Rebound,” Goldman Sachs, January 19, 2023, https://idfs.gs.com/as/authorization.oauth2