Wrap Up for May 2023

ChatGPT was actually more accurate and empathetic than the doctors.

I was interested in the sixth chapter of this eBook as it explores issues surrounding rural healthcare markets.

It's not yet clear how AI can benefit healthcare at a basic level.

A debate on the $250,000 deposit insurance ceiling.

Imagine if rural communities in the U.S. had viable non formal learning centers such as this. Instead, taxpayers are still expected to support local educational institutions which - although they hold value, don't emphasize practical survival methods or local social connections.

What makes industrial policy today different from the past?

"Are banks inherently fragile?"

Immigration has proved a lifesaver for rural citizens who otherwise struggle to access local physicians.

"Austerity" doesn't have to be a dirty word this time.

Recession? The most important monthly indicators remain strong.

Rising interest rates are still being confused with monetary tightening.

What work is most exposed to ChatGPT?

There are still risks in the banking system.

Brink Lindsay begins to explore definite positive actions.

Two factors particularly account for the possibility of long term inflation.

The economics profession has a class problem.

Debt default would erode dollar dominance.

Diane Coyle reviews Seven Crashes by Harold James.

Encouraging "doing business" is not the same thing as economic reform.

Has progress slowed, or does it just manifest differently now?

Brink Lindsey considers ways that life could ultimately be made more affordable.

Robert Lucas: His greatest strength was asking good questions, which in turn motivated people to find solutions. Timothy Taylor highlights some of his thoughts on economic growth. In particular, he made people think about general equilibrium differently. Plus, Thomas Sargent highlights recollections of time spent with Lucas.

The productivity potential of AI.

A larger framing for fiscal burdens.

Jeanna Smialek has written a new book on the recent evolution of the Federal Reserve.

There's a resurgence in manufacturing across the U.S.

Martin Wolf recommends five books on the world economy.

What if no debt ceiling crisis actually exists?

Might low inflation return? It's certainly a possibility.

What may transpire this time instead of a recession.

Decoupling is inevitable. What will be changed? Also, an interview with Dan Wang.

David Beckworth highlights a paper re 400 years of central bank balances.

Dan McDowell details the international backlash against the dollar in a new book.

There's a 1949 electrical transmission grid map in this Construction Physics post. What especially stood out to me was an area in East Texas which didn't yet have lines. Many relatives from both sides of my family were - at the time - living here.

"Furman and Bernanke on NGDP as an indicator."

The geography of remote work is still evolving.

If globalization is "dead", what happens to productivity?

Michael Strain on the debt ceiling debacle.

How effective is current macro data for real GDP and productivity measurement?

Markets as knowledge ecosystems.

Women hold many of the jobs which could be affected by AI.

Full-reserve banking is not a good option to address banking failures.

R** and financial stability.

Kevin Erdmann highlights his recent papers.

Wrap Up for April 2023

The Fed Put was invalidated. But what does that mean?

A current visualization of global dollar dominance.

These industrial book recommendations aren't guides, rather, they are different ways of understanding the world.

"...across all measured countries, the real price of housing has increased nearly 30% on average since 2010."

Building construction costs are only about 25 percent of their total lifetime expenses, yet this is often not adequately considered.

Auto inflation is still with us.

"Financial dominance and fiscal dominance make the Fed's job harder."

An argument from Niskanen for affordable manufactured housing.

It's been a meaningful labour market recovery.

When "Made in America" goes too far.

Peter Turchin has a fairly simple model of societal breakdown.

Why isn't Europe ready to be a "third superpower'?

When it comes to knowledge accessibility, industrial policy is as problematic as ever. But for different reasons this time.

"Greenways can be a simple low-tech solution to complex intersecting issues."

U.S. national debt has an interesting history.

"The Role of Wages in Trend Inflation: Back to the 1980s?"

A debt default could have considerable macroeconomic effects. The possibility of debt default was also discussed in this FOMC 2013 meeting.

How will Republicans move forward?

Things have actually changed for millennials, and for the better.

Some cultural and geographic aspects of gun violence.

A simpler way to think about monetary policy.

There's more to regulations than meets the eye.

"...stopping supervolcanoes from erupting is something we as a civilization are likely underinvesting in." Especially since doing so could provide promising sources of electricity.

Does Joseph Tainter's model suggest potential societal solutions?

Might federal lands pose housing opportunities?

The debt limit drama has worse implications than millions of citizens currently recognize.

"The US banking system is still stressed."

"Software only nibbled around the edges of the world."

Wrap Up for March 2023

Presently, China globalizes its auto sector as the U.S. (temporarily?) caters mostly to higher income groups.

On the decline of knowledge diffusion.

What is really responsible for the failures of Britain's economy?

Chronic loneliness alters the brain in unfortunate ways.

Lack of housing access is the primary cause of homelessness.

Monetary Policy Report from the Fed dated March 3, 2023.

A visual of the world's forests.

Nearly one quarter of U.S. mortgages originated in 2021.

Noah Smith reflects on the 2000s.

Why isn't low inflation an alternative to quantitative easing?

It didn't take long to reduce the debt/GDP ratio.

More (Macro) musings on the current state of the economy.

Keeping NGDP stable continues to be the best way to manage inflation.

Noah Smith provides details of the SVB bank run. And a take from Adam Tooze. Joseph Politano explains the Fed's quick actions. 

The real bailout story is about much more than SVB liabilities. The Fed's new collateral treatment is unsettling to some since it represents a regime change. However, Joseph Politano notes that the program is but a small part of present totals, and it might even end up stigmatized. In all of this, there has also been confusion regarding moral hazard.

Adam Tooze highlights various sources regarding the banking crisis.

Many young people in the U.S. now face auto loan problems.

Douglas Diamond explains how SVB violated basic tenets of sound banking.

Why did other banks come to First Republic's rescue?

Still, what if the debt ceiling debacle turns out to be worse than the bank crisis?

Or, what if the U.S. uses an inflation "tax" in a long proxy war with China?

With greater nominal stability, banks would have fewer problems overall with their balance sheets.

Ricardo Reis provides helpful references for dollar swap operations.

Private school choice is not always an option for rural counties in Texas. Ultimately we'll need a new approach for local education, one that is not only economically sustainable for populations as a whole, but also takes student preferences into consideration. 

On recent declines in bank asset values.

Banks have not responded quickly enough to QT and QE on the part of the Fed.

David Beckworth discusses the SVB collapse with Steven Kelly.

"The 1950s was an anomaly."

What countries hold the most U.S. debt?

What makes it possible for banks to "create money"?  Scott Sumner explains profit maximizing and non profit maximizing factors. 

Since high costs and immigration restrictions get in the way of semiconductor production in the U.S., why not encourage the more optimal conditions in Canada?

Cities are trying new approaches for extreme flooding events.

Tyler Cowen notes how our living history is rapidly changing.

Younger people are primarily driving less for economic reasons. Younger people also account for a considerable amount of the decline in U.S. life expectancy.

A failure to raise the debt ceiling is more dangerous than government shutdowns.

It's time to get serious about budget reform.

In real estate, there's a new east-west divide.

It turns out some of that "robust" hiring activity was actually an illusion.

Scott Sumner provides a link in this post to a free copy of his new book, Alternative Approaches to Monetary Policy.

An agenda from Niskanen Center for abundant housing.

Higher interest rates will be needed as a component of future Fed stress tests.

NPR highlights the "Shorter Lives" study.

Wrap Up for February 2023

What might happen if the debt ceiling disaster can't be averted?

While the labour market remains overheated, excessive wage expectations aren't entrenched, and that makes a "hard landing" less likely.

California could finally be making progress with more accessible housing.

Building cost trends are headed in an unfortunate direction.

Highlights of a recent NBER paper, and Brookings notes: 

Julian di Giovanni of the Federal Reserve Bank of New York and co-authors estimate the impact government spending had on inflation between December 2019 and June 2022. According to the authors, the surge in aggregate demand generated two-thirds of recent headline inflation. Of this, fiscal stimulus accounted for roughly half of the total increase in aggregate demand. Sectoral supply shocks, measured as deviations in the total hours worked, and sectoral demand shocks, measured as deviations in consumer spending, also contributed to overall inflation.

Some national growth predictions in GDP.

The latest job numbers are anything but recessionary, to say the least.

India could still become quite a success story.

After remote workers left, rural housing costs remained high.

Some real wage declines in the last three years.

Velocity is an important part of monetary policy that is often missed.

Global inflation will still run high in 2023. also what countries have lower inflation? 

The White House is keeping a close watch on services inflation.

Many jobs don't even need the skills sets that are taught in college, which is especially true for the care of young children.

How to respond to an economy that remains stronger than expected?

Are central bankers becoming less independent over time?

Matthew Klein's interview with Jonathan Haskel.

How does fiscal dominance affect rising interest rates? For David Beckworth, a continuing theme.

Some predictions for near future fertility by country.

How might supply side constraints be framed?

Tim Harford worries about "chronic economic disease" in the UK.

Some fiscal considerations regarding inflation.

How have automakers adapted to fuel saving technologies?

What were the Dutch doing better than the English?

Nearly half of Texas hospitals are operating in the red.

The pandemic is unexpectedly coming back to bite on used car prices.

How much have house prices really gone up since 1970? This chart is astounding.

"...the Fed desperately doesn't want to get caught in the crossfire of one of the bitterest economic struggles of modern history."

States are benefiting from unprecedented rainy day funds.

World War 2 was not as good for the economy as it may have seemed.

Modular is still the way to go for building in the future.

A discussion of the paper "Managing Disinflations".

Plastic asphalt slows pothole formation and also helps to resist rainwater. Plus, some plastics innovation is occurring below the road surface.

Fiscal policy has its own effects on inflation.

What accounts for Starbucks latte price differences by country?

Too many of the same obstacles to land development are still in place.

Low Income Wage Pressures in General Equilibrium

As the Fed's efforts regarding wage deceleration continue, the good news is unprecedented job growth which now holds greater responsibility than nominal wage gains. However, while nominal wages were rising, low income groups actually benefited the most. As Joseph Politano earlier noted:

Arguably, the only group to see real wage gains since the pandemic has been low-income workers, with workers in the bottom 10% seeing very strong real gains. The labor shortage has also enabled rapid wage gains for young, non-white, non-college-educated, and part time workers to a degree that is nearly historically unprecedented, and was helping break America out of the cycle of labor market underperformance it suffered throughout the 2010s.

How might one think about this phenomenon at a general equilibrium level? For one, even as the earlier low wage pressures affected nominal stability, the fact remains this group needed its real wage gains the most, since there's been too little supply side effort to generate housing and time based services for a full income spectrum. Just the same, the Fed was slow to react - and nominally adjust for - the fact many employers ended up "paying the price" to retain low income workers who otherwise would have gone elsewhere, or possibly exited the workplace.

Given this relatively brief but substantive rise in low income levels, why weren't there also real wage gains for higher income level groups? Indeed they've mostly missed out on this latest inflation cycle. One reason could be micro level pressures haven't been as strong as for lower income groups. Perhaps the lack of such pressures is due to (most) middle to upper income groups having sufficient economic options to remain gainfully employed.  

Alas, while lower income levels still have fewer economic options for workplace participation, their employers can only offer additional monetary reimbursement up to a point. Consequently, some time based services which people find valuable will gradually become more difficult to offer on monetary terms, which is one reason I've argued for time arbitrage. Unfortunately, many municipalities don't yet understand this general equilibrium reality, which especially matters in terms of housing options. Consider also that as many Baby Boomers retire, housing and time based services limitations affect them in crucial ways. Not only do fixed income retirees struggle to find affordable low maintenance housing, retirees of all income levels struggle to obtain home services, since many of these workers have understandably departed for more rewarding employment options.

There's another important aspect of secondary market domination in time based services for higher income levels. While employment options are plentiful now for these groups, this unprecedented scenario still obscures the fact aggregate price making in time based services is only feasible up to a point, given general equilibrium revenue needs for redistribution. Granted, such revenues were expanding alongside originating wealth gains in primary markets during the Great Inflation, and more recently, via redistribution which accompanied global dollar dominance during the Great Moderation. However now, aggregate revenue potential for secondary markets in time based services is plateauing in mature economies, which is why high income wage growth is more likely to result in inflation. Indeed, this helps explain a recent healthcare paradox in Britain, which was noted by Marginal Revolution:

Universities have been told they must limit the numbers of medical school places this year or risk fines, a move attacked as "extraordinary" when the NHS is struggling with staff shortages.

Lest this seem ridiculous, only recall how the conundrum is more evident for Britain due to the straightforward nature of its healthcare system. Less obvious are similar sets of supply side problems in the U.S., which are more difficult to discern due to numerous intermediaries between healthcare practitioners and patients. 

Nevertheless, underneath it all, the evolving general equilibrium dynamic is the same. Even though secondary market higher income levels have become relatively less likely to benefit from wage gains, lower income levels must deal with the reality of partial and incomplete non discretionary markets. It's these incomplete markets which can create financial obligations that are higher than wage realities. So much so, there will likely be more instances in the foreseeable future, the Fed needs to adjust monetary representation downward once again, should low income citizens need additional wages just to participate in work activities which citizens and businesses alike, continue to find important enough to maintain.

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.