“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
The Colorado’s River’s flow has averaged less than 10M acre-feet a year in the past three years vs. a long-term average of under 15M. The reduced flows may force the Federal government to impose water use restrictions affecting 40M Americans. @Cflav
The states that rely on water from the shrinking Colorado River are unlikely to agree to voluntarily make deep reductions in their water use which would force the federal government to impose cuts for the first time in the water supply for 40 million Americans. The Colorado River Compact apportioned the water among two groups of states. The so-called upper basin states would get 7.5 million acre-feet a year. The lower basin got a total of 8.5 million acre-feet. A later treaty guaranteed Mexico, where the river reaches the sea, 1.5 million acre-feet. The premise that the river’s flow would average 17.5 million acre-feet each year turned out to be faulty. Over the past century, the river’s actual flow has averaged less than 15 million acre-feet each year. From 2000 through 2022, the river’s annual flow averaged just over 12 million acre-feet; in each of the past three years, the total flow was less than 10 million.
.@WSJ reports that 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.
.@jan_eeckhout suggests that, when the underlying inflation data is not especially noisy, it might be appropriate to use “instantaneous” measures of inflation, which consider only very recent data. “Instantaneous inflation” hit 2% in Dec ‘22.
Current practice to measure inflation for monetary policy uses the average annual inflation rate. When inflation changes fast, whether increasing or decreasing, the annual average rate is biased towards data from too far in the past and conveys the true price level with six months delay. I propose to use instantaneous inflation as a more adequate measure of the price change. The measure trades off noise in the data with the precision of the instantaneous price change. Using the latest inflation numbers, it shows that instantaneous inflation in the US and the Eurozone is back to the target of 2% and that the high inflation period is over. Instantaneous core inflation, which excludes food and energy, is falling, but at 4%, it remains higher than the inflation target of 2%. The conventional measure of core inflation is at 5.7%.
According to a new @USCBO forecast, US population growth after 2033 will be driven by immigration, which will account for all American population growth in 2042. @Bloomberg
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.
.@Edsall argues that a “white rural red wave” is the driving force of the Republican party today and cites shifts in Wisconsin suburban and rural voting patterns between 2016 and 2022.
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.
Value-added/full-time employee in the US construction sector was ~40% lower in 2020 than in 1970; had construction productivity grown at 1% a year, aggregate US labor productivity would have been 10% higher. @Austan_Goolsbee @ChadSyverson @nberpubs
Figure 1 shows indices of U.S. construction sector labor productivity and TFP from 1950 to 2020. For comparison, it also plots the same indices for the overall economy. Throughout the 1950s and well into the 1960s, both measures of construction sector productivity grew steadily. Indeed, they outpaced their whole-economy counterparts during that period. By 1970, however, the construction sector’s labor productivity and TFP had both begun to fall. By 2020, while aggregate labor productivity and TFP were 290 percent and 230 percent higher than in 1950, both measures of construction productivity had fallen below their 1950 values. This is stunningly bad productivity performance for a major sector. Construction labor productivity fell at an average rate of about 1% per year from 1970-2020. Had it instead grown at the (relatively modest) rate of 1%per year, aggregate labor productivity (and plausibly, income per capita) being about 10% higher than it actually was.
.@JBSay notes there have been at least 400,000 unexpected deaths among the US working-age population since 2020. Netting out Covid deaths and unnatural deaths (homicide, suicide, overdose, etc.) he finds a spike starting in 2021.
In 2021 group life [insurance] payments exploded by 20.7% over the five-year average and by 15% over the acute pandemic year of 2020. If we remove both Covid-19 and unnatural deaths (homicide, suicide, overdose, etc.), we see a dramatic spike of natural, non-Covid-19 deaths among working-age people beginning in the spring and summer of 2021. To overgeneralize: In 2020, the vulnerable died of Covid at unusually high rates. In 2021 and 2022, Covid continued its assault, but the young, middle-aged, and healthy also died in aberrantly high numbers of something else.
.@Brad_Setser and @EtraAlex note Japanese investors are withdrawing from global debt markets, selling $200B of debt in 2022 relative to buying a mean of $100B a year over the previous decade.
The global economy has already adjusted to a slowdown in Japanese institutional fixed-income demand—Japanese investors have gone from buying about $100 billion a year of foreign bonds on average over the last ten years to selling close to $200 billion in 2022. The most likely outcome in 2023 is a continuation of the roll down in Japanese holdings of foreign bonds observed in 2022, as the large pool of hedged Japanese investors allow maturing bonds to roll off at par rather than reinvest abroad. That more mundane reality still implies the large flow into global fixed income from Japanese institutional investors over the last decade will dwindle to a relative trickle.
According to a new analysis from the @stlouisfed, job switching is associated with lower earnings growth for lower-earning prime-age male workers but higher earnings growth for their higher-income peers.
Let’s consider two male workers, one in the bottom (in the first two percentiles) and the other in the 65th percentile of the lifetime earnings distribution. Both experienced on average a 2% growth in annual earnings if they stayed with the same employer. However, if they changed employers, the bottom earner did not see any growth in his earnings, whereas the 65th-percentile earner enjoyed, on average, 3% growth. This large heterogeneity among switchers indicates that the nature of job switches is very different throughout the lifetime earnings distribution. More than 35% of job switches were a result of a significant unemployment spell for the bottom earners, compared with only around 15% in the top third of earners, suggesting a much higher unemployment risk for bottom earners. Finally, earnings growth for both job stayers and job switchers increases steeply in the top third, reaching around 10% for the highest earners.
.@GeneralTheorist notes that, while durable goods are deflating, service inflation has decelerated from 7.2% in the three months ending October to 4.7% in December, but remains well above the 2% pre-pandemic run-rate.
While underlying durables are now deflating, underlying services remain high—at about 5% over 3 months, accelerating to 7% month-over-month annualized in Dec. On the bright side, adjusted core service inflation has decelerated from 7.2% over 3 months (annualized) to Oct. to only 4.7% in Dec. This is clearly an improvement. But is that only because Oct. and Nov. prints were unusually soft, or was Dec. the outlier in an otherwise strong disinflation trend? The fear for the Fed then is super core services settling around 4-5% annualized instead of returning to the 2% run-rate that characterized the pre-pandemic norm. What will it be? It may take until March until we can be sure.
.@M_C_Klein notes the major buyer of Treasury debt has shifted from the Federal Reserve to US households and foreign buyers.
The Fed switched to “quantitative tightening”—an inelegant term for “letting some bonds mature”—which meant that new buyers needed to be found. State and local governments continued their purchases, but money-market funds shed Treasury bills and coupons for reverse repos with the Fed, while other buyers cut back on their purchases. The resulting mix of buyers in the first three quarters of 2022 looked a lot different than in prior periods. The entire net issuance was covered by the two most opaque sectors in the financial accounts: “households and nonprofit organizations” and “the rest of the world”.
Firms are using technology to shift work to remote employees and third-party subcontractors. Outsourcing intensity has doubled from 11% in 2005 to 22% in 2021, which may compress white-collar wages going forward. @TheEconomist
Pinning down just how much firms depend on outsiders is tricky—companies do not advertise this sort of thing. A measure, “outsourcing intensity,” [tracks] a firm’s external purchase commitments in the upcoming year as a share of its cost of sales. The Economist has calculated the measure using data from financial reports for a sample of large listed firms from America and Europe. Average outsourcing intensity across our sample has nearly doubled from 11% in 2005 to 22% in the most recent year of data (either 2021 or 2022). This growth is especially pronounced among tech titans such as Apple and Microsoft; businesses that grew little over the analyzed period, such as Unilever, a British consumer-goods giant, saw only small increases. This is consistent with research which finds that as firms grow ever larger and adopt more technologies, thus becoming more complex and unwieldy, they outsource more operations—precisely as Coase would have predicted.
.@joshrauh of the Stanford Graduate School of Business presents evidence that migration from California is being driven by high taxes rates, suggesting California has limited ability to raise taxes without losing revenue.
Figure 2 shows the net departure rates from the state by income tax bracket between 2003 and 2018. Since 2003, only middle-income earners in the 9.3 percent income tax bracket have entered California at higher rates than left during any year over the time period. The top bracket, and the highest earners within the top bracket in particular, display the highest net out-migration rate over the whole period. Higher-income earners who leave the state are not being replaced by other high earners at the same rate. California's top earners are particularly mobile, showing the highest rates of departure around tax policy changes such as Proposition 30 in 2012 and the Tax Cut and Jobs Act (TCJA) of 2017 as well as the COVID-19 pandemic in 2020. Consequently, potential net outflows of taxable income spiked to nearly $4 billion in the year TCJA was implemented and $10.7 billion around COVID-19. High-earning movers have been consistently more likely to leave California for zero-income tax states since 2012, and those who experienced larger tax increases under TCJA were more likely to depart.
New @nberpubs notes that the demand for safe assets from 1990-2020 grew even faster than the supply of safe assets, as rapidly growing emerging economies increasing desired to hold safe assets as FX reserves.
The sharp, secular decline in the world real interest rate of the past thirty years suggests that the surge in global demand for financial assets outpaced the growth in their supply. This phenomenon was driven by faster growth in emerging markets, changes in the financial structure of both emerging and advanced economies, and changes in demand and supply of public debt issued by advanced economies. The net foreign liabilities of advanced economies grew massively. The net foreign assets of advanced economies, as a share of their collective GDP, fell from close to zero at the beginning of the 1990s to about -20 percent in 2020.
The US and Japanese armed forces have “seen exponential increases…just over the past year” in their joint preparations for a possible conflict with China, according to Lieutenant General James Bierman, the commanding general of Marine Forces Japan. @ft
The US and Japanese armed forces are rapidly integrating their command structure and scaling up combined operations as Washington and its Asian allies prepare for a possible conflict with China. The two militaries have “seen exponential increases . . . just over the last year” in their operations on the territory they would have to defend in case of a war, Lieutenant General James Bierman, commanding general of Marine Forces Japan, told the Financial Times in an interview. “Why have we achieved the level of success we’ve achieved in Ukraine? A big part of that has been because after Russian aggression in 2014 and 2015, we earnestly got after preparing for future conflict: training for the Ukrainians, pre-positioning of supplies, identification of sites from which we could operate support, sustain operations,” he said. “We call that setting the theatre. And we are setting the theatre in Japan, in the Philippines, in other locations.”
New @nberpubs research finds that Americans are working 3% fewer hours annually in the aftermath of the pandemic. This reduction in hours worked means labor markets are even tighter than LFP would imply.
The negative impact of the Great Recession on aggregate hours worked and the ensuing slow recovery through 2019 materialized almost exclusively along the extensive margin. However, of the 3% decline in annual hours worked per person (including those who do not work) between 2019 and 2022, more than half is accounted for by the intensive margin. That is, focusing only on the extensive margin (lower employment and participation rates) will underestimate the total decline in labor supply by more than half. The most striking fact is the lower participation of young male cohorts without a bachelor's degree, whose participation rate is up to 7pp below that of older cohorts at the same age. The Great Recession seems to be casting a very long shadow, even on those who were in their teens when it happened.
.@davidautor shows high school workers’ wage growth overtaking college wage growth in the aftermath of the pandemic and argues that higher wages better reflect rising productivity as companies compete more intensively for workers.
For first time in four decades, wage inequality falling, due to rising lower tail. Despite inflation, real wages rising among young HS grads, 1st quartile workers. It’s tempting to attribute this change to ‘tight’ labor markets—but what does this mean in practice? The simplest explanation is that labor markets are operating on a higher point on the labor demand curve. Evidence indicates this explanation too simple: Competition has intensified. Distinction is critical: Rising competition means higher wages that better reflect productivity and higher aggregate productivity — a double dividend.
J.P. Morgan estimates consumers still have $900B of excess savings, down from a peak of $2.1B in August 2021.
From March 2020 to August 2021, consumers amassed a peak $2.1 trillion in excess savings relative to the pre-pandemic trend. Since August 2021, consumers have drawn down on these excess savings. Household debt payments were 9.8% of disposable personal income in Q4 ’22 vs. a peak of 13.2% in Q4 of ’04.
The American college workforce is 5% larger than in Feb 2022, whereas the high school workforce is 4% smaller. This has likely contributed to the decrease in earnings inequality in the post-pandemic period. @Greg_Ip
In the decades before the pandemic, the wages of lower-paid, less skilled hourly employees steadily lost ground to those of skilled workers, college graduates, managers, and professionals. In the two years since, those trends have sharply reversed. We don’t know if this narrowing in inequality will last. Perhaps it is a function of labor shortages that, like semiconductor shortages, will disappear as the pandemic recedes. Maybe it is the result of a tight labor market whose days are numbered as the Federal Reserve seeks to cool the economy. Some of this was catalyzed by the pandemic, which shrank the supply of people willing to do traditionally low-paid work. Many dropped out of the labor force, retired, or died from Covid-19. The college-educated labor force was 5% larger last month than in February 2020; the high school-educated and high school dropout labor force is 4% smaller. (Data between the two periods isn’t strictly comparable.)
.@mfariacastro at @stlouisfed estimates that the decline in asset values in 2022 drove 170,000 workers aged 51-65 back into the labor force. This represents 16% of the increase in LFP from Jan through Oct 2022.
The figure above plots the estimated average change in net worth per head of household age category during 2022. People between the ages of 55 and 74 lost, on average, over $100,000 in net worth due to falling asset returns between January and October 2022. This partly reverses some of the net worth gains in 2020-21, which were particularly high for these age groups. This is explained by the high exposure (in absolute terms) of people in these age groups to asset classes such as stocks and bonds, which performed reasonably well in 2020-21 but posted significant negative returns during 2022. Focusing on only people between the ages of 51 and 65, whose decision to participate in the labor force tends to be more sensitive to wealth effects, we find that the decline in asset values may have caused an extra 170,000 people to return to the labor force. This corresponds to an increase in the LFP rate of 0.06 percentage points, or about 16% of the total increase observed through October 2022.