Wrap Up for January 2023

2022 was "supposed to be the year that we returned to normal."

Has inequality become less of a problem?

When institutions "try to preserve the problem to which they are the solution."

Wars have often gone hand in hand with high inflation.

Why is employment being viewed as a lagging indicator when it comes to recession?

Chatbots are already good at answering common medical questions.

Countries have started paying residents to move to lower population density regions.

Real wages can fall when capital becomes the constraint on supply. Still, some of the inflation run up was perceived as fiscal necessity.

Might pigeons be able to properly discern medical images?

Employment growth rates and NGDP are highly correlated in the short run.

Noah Smith highlights some recent economics news.

Highlighting those who no longer work as many hours as before.

Some new insights on Roman concrete. Still, there are good reasons for today's concrete to be built via reinforcement.

"A new model for mobile home buyouts."

Ideally, the Fed could achieve its macroeconomic objectives with a much smaller balance sheet. Meanwhile as Scott Sumner noted, QE seems to be the lesser of evils.

On the importance of central bank independence. 

"Biggest sources of electricity by state and province."

Robert Hetzel's proposal for a soft landing.

Happiness is turning out to be rather subjective for precise economic measurements. I'm still convinced that the optimal economic indicator, calculates how our economic time contributes to general welfare.

Core CPI remains higher than expected. The price of services continues to rise.

There's no macroeconomic models which actually predict recessions.

The Eurozone continues to face more supply side constraints than the U.S.

The decades-long decline in construction sector productivity.

Has macro lost some of its relevance in economics education?

Technological innovations can take longer when higher levels of human capital are involved.

Victoria Guida discusses financial regulation and other Federal Reserve developments.

If the U.S. political system continues to malfunction, (think debt default), the dollar becomes more risky to hold around the world. Which would in turn greatly impact our way of life. This argument is just part of what is an important Macro Musings conversation.

The Fed is also paying close attention to core services other than housing.

Arthur Burns is not a good candidate for a revisionist explanation re 1966-1981 inflation.

Noah Smith reviews three recent technology books.

De-dollarisation? Not yet.

Global auto production still struggles with supply side issues.

Doubts regarding U.S. healthcare existed well before the pandemic.

"rent dispersion has increased far less than price dispersion"

"3.5% today is not the same thing as 3.5% unemployment in early 2020." 

Despite other issues, Japan's housing policies have encouraged overall economic growth.

Can we build the institutions that would be necessary for a more inclusive capitalism?

"Why the goods trade ratio declined"

Lael Brainard explains that the Fed needs to stay the course on inflation.

How will the ECB deal with inflation in 2023?

Inflation in the U.S. should continue its decline in the months ahead.

There's been plenty of inflation which wasn't even associated with supply side shocks.

This highlighted climate change statistic made me smile.

Are we still faced with secular stagnation?

The conditions that suggest a "soft landing" are possible in housing markets.

Don't Forget About Basic Resource Scarcities

Not long ago, some became convinced society's main problem was finding better ways to share resource abundance! But it didn't take long for a global pandemic and the vicissitudes of war, to remind everyone once again that resource scarcities are still part of the equation. For mature economies in particular, resource scarcities in the utilization of time and place are starting to impact how the Fed manages inflation. Limited markets in time based services are evident in high skill human capital, but this phenomenon is also emerging in simpler forms of (highly sought after) personal attention. Meanwhile, place based scarcity is reflected in the high costs of housing relative to actual incomes. 

Still, it's easy to forget how these imbalanced markets affect current underlying inflationary levels. Instead, macroeconomic discussions tend to alternate between employment issues or irresponsibility on the part of fiscal and monetary policy. At the very least, some of our supply side resource scarcities should resolve in 2023 via resource substitution, which can in turn help ease inflation. Unfortunately though, time and place based resources need to be framed in more understandable context, before the Fed benefits from supply side assistance towards monetary stability. In the meantime, the Fed is reduced to inadequate measures such as reducing traditional housing starts, when what is really needed is more accessible non traditional housing production!

One way to think about the natural scarcities of economic time and place, is determining how we created too many additional layers of artificial scarcity to the real scarcities we already face. It could also help to respect the rationale that existing institutions initially used for additional limits to market access, then move forward to create new beginnings from this understanding.

Respect for existing institutions which work with resources involving time and place based product, means fewer attempts to dismantle them, and more attempts to evolve production processes where these institutions are actually growing fragile. Consider for instance what it actually means when builders cannot afford to build affordable homes for low to middle income consumers! Recall as well the fragile nature of healthcare institutions which can ill afford to function in many areas which don't benefit from vast wealth holdings. Both of these are institutional fragility. New institutional efforts would do well to create alternative means of social support to address where older institutions can no longer easily function. 

Indeed, by not attacking existing institutions directly, we can still respect how they evolved to address different sets of social realities and historical contexts. For instance, Nimby based zoning allowed people to at least partially manage their personal fears around living close to others they didn't know enough to trust. Likewise, skills use limitations were a way to address people's fears about what might happen if they paid for services which turned out poorly. And enforced professional limits in human capital, also made it possible for professionals to live among others who already benefited from higher and more directly derived incomes.

Nevertheless, regulatory moves which increase artificial scarcity now mean basic non discretionary markets beyond reach of average consumers. Such markets also require a level of monetary representation which makes the job of central bankers more difficult. What's more, these domestic market income sources - not to mention their corresponding housing representation - contribute to an NGDP growth level which is currently too high to maintain economic stability. Clearly, more is now at stake than missing markets for lower income consumers, as this aspect of market dominance could compel central bankers to impose additional reductions in aggregate demand. Alas, doing so would further reduce the output potential of discretionary markets in more direct wealth origination sources as well. 

Should new institutions arise to create broader domestic market options, they would nonetheless need to acknowledge the main reason consumers tolerated earlier forms of market dominance for so long despite lack of access: trust. Many countless regulations arose in environments where social trust had been eroded at least to some extent. Hence people became willing to pay dearly (when and if they could) for specific quality promises in time based services and housing options. New institutions need to build much more than just greater economic access, for they would need to restore societal trust through time value which doesn't require the same level of monetary compensation as in decades past.

At the very least, we've been quite fortunate our current services sectors functioned as long and as well as they have. Nevertheless, we appear to have entered an era in which today's services sectors could impart undue burdens for inflation, should new domestic markets not materialize. For this reason I might add that when it comes to Fed inflation management, I would probably understand if they maintain a "hawkish" stance in response to continued supply side inaction. Especially should NGDP levels remain as high as is currently the case.