The year 2022 was certainly not dull economically, with mixed signals throughout the data. It’s been about one year since Fed Chairman Jay Powell admitted it was time to “retire” the word “transitory” when discussing inflation, and 2022 started with a bang, registering the fastest annual pace of inflation in 40 years, followed by a series of the fastest Fed Funds rate increases in history, made in an effort to tame the inflation dragon.
As the economic data flames made consumers feel more heat, Russia also invaded Ukraine and sent energy prices up, causing inflation to get hotter, especially in Europe. Given the oil product inputs needed for fertilizer, as well as Russia and Ukraine’s outsize role in the global wheat markets with 30 percent market share globally, food prices also began to sizzle from inflation. US consumers saw their grocery prices increase 11.4 percent in August, with food price increases felt even more acutely in the developing world, with some countries experiencing triple-digit increases. And the US dollar strengthened, hitting parity with the euro for the first time in two decades, demonstrating the impact of the Russian invasion and its energy blackmail on Europe’s economy.
Entire generations had never experienced inflation, but they sure started experiencing it at the start of 2022. And the first half of the year brought an odd combination of negative GDP growth but also low unemployment, which caused partisan fights over the technical definition of a recession.
Supply chain disruptions continued from the pandemic, and freight and shipping costs went sky high. While stimulus checks that had driven goods inflation dissipated by the end of 2022, wage increases continued to rise in the services sector to keep up with real wages. The economy was still missing some 3 million workers from the pre-Covid period, and over 10 million job openings remained unfilled by the year’s end. The tight labor market helped fuel the return of Big Labor, with workers having strong bargaining power. Concomitantly, fiscal policy continued to be expansive, with massive pieces of legislation appropriating billions for semiconductor chips and green energy, with federal funding directed to industrial policy and reshoring to compete with China. Some posited that the era of globalization ended in 2022.
As we bid adieu to the year 2022, EIG asked a few of our economic advisors what trends stood out to them this year and what their crystal ball holds for the economy in 2023. Here are their responses:
Nothing Lasts Forever, Including Ultra-Low Interest Rates
by Kenneth Rogoff, Professor of Economics and Maurits C. Boas Chair of International Economics, Harvard University
Forward-looking measures of real interest rates—nominal interest rates less expected inflation—fell sharply after the 2008 global financial crisis, moving 350 basis points from peak to trough, and around 200 basis points comparing the 2003-2007 average with the 2012-2021 average. The fall in the real interest rate was perhaps the central driver behind soaring housing prices and equity markets. It played a major role in monetary policy as central banks puzzled over just how low the “neutral” policy rate might be, and it dominated the debate on fiscal policy side as well, as politicians on both sides of the aisle came to see debt as a veritable free lunch given that carrying costs seemed negligible in an ultra-low interest rate world.
Politicians were not alone in this belief. Surveys suggest that a majority of the academic economics profession held similar views, with many arguing that social and environmental problems could be solved by issuing debt and without raising taxes significantly. An extreme version of this view can be found in the “Modern Monetary Theory” movement, but a number of leading economists wrote similar views. The idea that interest rates might be “lower forever” (or at least until global public debt rose dramatically) was most famously stated in 2013 by Lawrence Summers (albeit he was cautious in mainly viewing it as an argument for greater expenditure on infrastructure.) “Lower forever” seemed like a plausible forecast given that a large empirical literature seemed to support the idea that real interest rates do not necessarily revert to mean, even at long horizons.
In joint work with my co-authors Barbara Rossi and Paul Schmelzing, we challenge the consensus view by looking at long-maturity real interest rates (the large existing literature almost exclusively used short rates), and by looking at longer time series over a wider range of countries. With a longer lens, the data strongly support the hypothesis that real rates are mean reverting (more precisely, reverting to a very slight long-term downward trend).
There have been, in fact, several past episodes where real rates were low for an extended periods, and then they invariably came to an end. The half-life of deviations from trend (the number of years for half of a shock to go away) is roughly 2 to 6 years, depending on country and time period. Our results appear robust to expected inflation measure, country, and time period. Moreover, there is no strong evidence of a structural break in the post-World War II period, at least when one looks over a multi-century time horizon.
Last but not least, we show that popular ex-post rationales for why rates should stay low forever—demographic decline and slowing output growth—simply do not hold water over a longer period, and in fact, the correlations have typically been opposite to the recent period.
In sum, economists should have never expected the ultra-low interest rate period to last indefinitely, and policies that are not robust to that assumption do, indeed, entail significant risks. Inflation is likely to eventually come down to the Fed’s target, although, despite the recent softening of inflation, a soft landing in 2023 remains a stretch. Longer term, even after inflation cools—however far in the future that may be—the general level of interest rates relative to inflation is likely to remain notably higher than investors and policymakers had become accustomed to in the preceding decade.
Five Reasons to Cheer the Big Shift to Remote Work
by Prof. Steven J. Davis, the William H. Abbott Distinguished Service Professor of International Business and Economics at The University of Chicago Booth School of Business and Senior Fellow, The Hoover Institution
COVID-19 triggered a huge uptake in remote work, as workers and employers reacted to contagion fears and complied with government lockdowns. Before the pandemic, working from home accounted for only 5% of all workdays. Now it’s common to find employees up and down the job ladder—from rookie hires to the CEO—working from home part of the week. As of December 2022, nearly 30% of paid workdays happen at home. Working arrangements will continue to evolve in 2023, but there will be no return to the pre-pandemic status quo.
Here are five reasons to cheer the big shift to remote work:
- Americans save an average 65 minutes a day in commuting and grooming time when working from home. That’s a whole lot of time savings when multiplied by tens of millions of workers per day.
- Less commuting also means reduced fuel consumption and less pollution. Because remote-savvy workers and clients are more open to remote meetings, business travel between cities is also down.
- Most people like the extra flexibility and greater personal autonomy that comes with working from home. That’s doubly true for parents with young children.
- Well-designed managerial practices around remote work can raise productivity by recognizing that some tasks benefit from deep thought and intense focus, while other tasks call for in-person activities and socializing. That’s why hybrid arrangements that split the workweek between home and office have become so common.
- The rise of remote work prompted some professionals to move away from city centers. That eases upward pressure on house prices and rents, making it easier for younger workers, for example, to live in the city.
Here Comes 1981 Again
by Kevin Hassett, Distinguished Visiting Fellow, The Hoover Institution, Stanford University
We have all spent this year thinking about the economic consequences of high inflation and wondering what policies could best help us achieve a soft landing. Looking at the latest data gives one a distinct feeling of déjà vu.
Back in 1980, the Federal Reserve decided to get tough on inflation, which had soared to an annual rate of 13.3 percent. The federal funds rate was hiked to 13.8 percent, and unemployment spiked to 7.8 percent. The National Bureau of Economic Research (NBER), the official arbiter of recessions, scored this slowdown as a recession.
But in 1981, inflation stayed stubbornly high, well north of 10 percent, and Paul Volcker’s Fed lifted the federal funds rate to 19 percent, pushing the unemployment rate to 10.8 percent. The NBER scored it as a “double dip” recession.
The first half of this year saw negative growth as the Fed began to crack down on inflation, but the second half of the year inched forward, even while inflation stayed high. A number of special factors drove the numbers up in the second half. In the third quarter, there was a puzzling surge in net exports. In the fourth quarter, GDP seems set to be healthy again, as unswerving consumers binge on a 15 percent year-over-year increase in credit card debt. Borrowing increases like that cannot, of course, be sustained, so 2023 begins with serious headwinds. In addition, the Fed has promised rate hikes at least to 5 percent, but will, of course, go past that if inflation, as was the case in 1981, refuses to budge. The Federal Reserve staff seems resigned to bad news on this front, writing in the footnotes to the minutes that “the possibility that a persistent reduction in inflation could require a greater than assumed amount of tightening in financial conditions was seen as another downside risk.”
It would be better to mark that one down as a base case. After all, inflation was ignited by an avalanche of bipartisan COVID relief, with government spending set to be about $600 billion higher this year than was expected pre-pandemic, even after the relief has been removed. Back in 1981, Ronald Reagan reduced discretionary spending enormously to help the Fed fight inflation. This time around, the Fed can expect little help from fiscal policy.
The deep recession of 1981 helped tame inflation, but probably did so because all policy measures were pointed in the same direction. If congress fails to get spending under control next year, don’t expect inflation to come under control, either.
Reports of the Death of Globalization are Greatly Exaggerated
by Matthew J. Slaughter, Dean of the Tuck School of Business, Dartmouth College
To paraphrase Mark Twain, the death of globalization in general—and of global supply chains in particular—has been greatly exaggerated. For so many countries and companies, the pandemic simply underscored that the gains from global engagement come not just from efficiency but from resiliency as well.
In the new year, nations and firms will continue to reassess what balance of global connections make best sense. Beyond that, here is a prediction and a hope.
The prediction is that global flows of data and ideas will continue to expand apace. As was recently reported by the McKinsey Global Institute, in the pre-pandemic decade, global flows of services, international students, and intellectual property grew nearly twice as fast as global flows of goods—while global flows of data exploded at nearly 50 percent per year. All this global flow of information, embodied in people and also through the internet, still holds the potential for great gains.
The hope is that the United States once again reasserts leadership in global economic policy. This does not mean rolling over or trying to win popularity contests. It means working constructively with like-minded countries who share a commitment to open and rules-based markets—and working within the multilateral forums that the United States helped build generations ago and from which we have benefitted so greatly. America’s drift towards protectionism and industrial policy harms not just itself but the overall world. The pandemic has done enough harm. Policy and political leadership can and should help us all move past it.
Labor as the Comeback Kid—Will it Last?
by Teresa Ghilarducci, Irene and Bernard L Schwartz Professor of Economics and Policy Analysis, The New School for Social Research
Looking back on 2022, aftershocks from the pandemic continue to reverberate throughout the economy. The labor force, in particular, continued to stay tight, with some 3 million workers missing from the workforce since the start of the pandemic. As a result, this year marked the comeback of Labor, with new types of workers organizing from Apple to Amazon. There was more popular support for the union movement since 1955; unions made gains by both winning more collective actions in more than 20 years and went on strike three times more than in 2021. As a result, union workers gained large wage increases in 2022—the most in 20 years.
Almost forgotten in the labor discussion has been the caregivers who were particularly stressed in the period of Covid before vaccines had wide uptake. Their plight exposed the fundamental fragility of a society depending on undervalued, as well as free, family care.
But in spite of those Big Labor wins, wages still did not keep up with inflation and Congress did not keep up with human needs for care. The upshot was a worsening of inequality in terms of both wealth and security.
Women are most of the nation’s caregivers, and women were hit harder in Covid than men (the so-called “Shecession”), so let’s drill down: Women earn less than men because their paid and nonpaid jobs have heavy care components. For example, 95 percent of childcare workers, paid on average $13.00 per hour, are women, while only 29 percent of janitors and building cleaners, who earn $18.00 per hour, are women. Women’s jobs are so devalued that a 10 percentage-point increase in the female fraction within an occupation leads to a 9 percent decrease in average male wages and a 14 percent decrease in average female wages over the ensuing 10 years.
Women’s role in childcare for themselves also was impacted by the pandemic. Women’s labor force participation in the paid labor force fell during the pandemic, particularly for those with young children.
Women having fewer years in the workforce and earning less in comparable jobs than men catch up with them in securing their old age. Life-long lower pay reduces retirement wealth. (Note: Earning under $5.00 per hour less compounds so that over a 35-year career—assuming the same contribution rates and investment returns—the female will $160,000 less in her retirement fund than her male counterpart.)
Inadequate retirement income of one generation perpetuates the degradation of retirement income for the next generation. A daughter or daughter-in-law is more likely to forgo paid work to help a child, parent, or in-law which adds up to $522 billion losses in income and career growth. Earnings losses now mean retirement wealth losses later when it is most needed.
There are some things women can do for themselves, and I, a practical economist, can list many: get a good education, choose male-dominated higher paying occupations, and don’t do care work. But this advice is both right and pointless, often unrealistic, brutal, and would not make much of a dent.
Women will not be able to make private choices that overcome systematic losses from the socially, politically, and economically embedded gendered division of labor. Community solutions are needed.
Congress and society need to own up to the facts of life—people need care. The Inflation Reduction Act (IRA) of 2022 passed only when provisions for universal pre-kindergarten, lower-cost child care, paid family and sick leave, and the enhanced child tax credit were eliminated.
Increasing access to a portable, tax-advantaged retirement savings account that offers federal matching contributions for low- and middle-income workers would disproportionately help women and others with lower incomes and spells of nonemployment. The Retirement Savings for Americans Act would establish a new program that provides nearly universal access to retirement.
The year 2022 showed us workers crushed by high prices that fed record high profits fought back. Workers have clearly shown they want to and deserve to be rewarded for work with wages and decent pensions. Women lifted up the hidden and slow-burning danger of how the tug of gendered-care work disadvantages women’s wealth, well-being, and increases the risk of poverty in old age.
What will 2023 bring? An historically tight labor force increased the bargaining power of workers in 2022, but I expect this rare spike in labor power to dissipate if the Federal Reserve’s rate increases do indeed inflict the “pain” they have promised, and workers are less likely to ask for a raise or quit their jobs under threat of unemployed. A recession will set back women and all workers in the present, but also have repercussions for their future asset building and retirement security.
