Macro Roundup: Week of November 25, 2024

Summary of Economic Articles & Papers From Ed Conard’s Researchers

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r-g before and after the Great Wars 1507-2023 Kenneth Rogoff and Paul Schmelzing National Bureau of Economic Research

The smooth downward trend in r-g since 1504 reversed sign and gave way to marked volatility around 1932. Though current rates are moderate, “growth rates are drifting downwards, creating secular pressures on r-g and debt sustainability.” @paul_schmelzing

Over the observation period of 1931-2023, "Global AW [average weighted over 4 key economies]" duration-matched r-g [the difference between long-term interest rates and trend growth rates] increases by an annual average of 7bps when measured on a linear [trend] basis, but the period exhibits substantial volatility. The post-1932 era represents a substantial qualitative change compared to the downward trend of 2.7bps observed for the same series over 1507-1931, but If one looks at the longer sample, the idea that the world today can likely count on favorable trends in r-g and public debt sustainability dynamics, as much recent literature has done, becomes questionable. Our reconstructions reveal many historical examples of fairly sharp (visual) reversals in duration-matched r-g, for instance during the 1550s or during the 1690s (the Glorious Revolution and Louis XIV’s European Wars), the Napoleonic Wars, or the 1860s (the Crimean and Prussian Wars). In all these cases, fiscal outlays surged rapidly and r-g increases of more than 4% were observed within a decade of a new multi-decade r-g low.SHARE

Related: Long-Run Trends In Long-Maturity Real Rates, 1311–2022 and Rethinking Short-Term Real Interest Rates and Term Spreads Using Very Long-Run Data and Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies

Productivity During and Since the Pandemic John Fernald, Huiyu Li, Brigid Meisenbacher and Aren Yalcin Federal Reserve Bank of San Francisco

John Fernald and @huiyu_li find since 2023 productivity growth is slightly above the slow post-2004 trend however it remains well under the 1995-2004 pace. TFP growth has outpaced its 2010-19 pace in the post-pandemic period.

Since the beginning of 2021, TFP grew just slightly faster than its average 2010–19 pace. In sum, the surge in productivity growth in 2020 appears to reflect large cyclical dynamics superimposed on a continuation of the slow pre-pandemic trend. Since the middle of 2023, productivity grew somewhat faster than what our analysis predicted but is still much slower than the pace from 1995 to 2004. The surge and retreat in productivity follows the pre-pandemic cyclical relationship in which U.S. productivity rises temporarily in recessions.SHARE

Related: Productivity in the World Economy During and After the Pandemic and The Productivity Slowdown in Advanced Economies: Common Shocks or Common Trends? and Post-Pandemic Productivity Dynamics in the United States

America's Productivity Boom Joseph Politano Apricitas Economics

American economic output per hour worked has risen 8.9% since 2019—faster than any point in the 2010s —in spite of the COVID-19 pandemic, and more than double the productivity growth of the UK, the next-fastest major comparable economy.

American economic output per hour worked has risen 8.9% over the last five years—faster than the five years prior or any point in the 2010s—in spite of the COVID-19 pandemic. The already-great productivity recovery we had going into this year got a major upward revision from recent updates to GDP data, and preliminary estimates suggest they’ll get another boost as job growth will likely be revised down significantly at the start of next year. That success is all the more remarkable compared to the dismal productivity numbers seen across many of America’s peer nations and how long it took US productivity growth to sustainably recover from the Great Recession. Since late 2019, the US has seen more than double the productivity growth of the next-fastest major comparable economy, building on an already significant lead it built up in the years before COVID. Plus, unlike the 2nd-place UK, the US has achieved this while increasing overall employment levels instead of leaving less-productive workers out of a job.SHARE

Related: American Productivity Still Leads The World and Does Worker Scarcity Spur Investment, Automation and Productivity? Evidence from Earnings Calls and Why is the U.S. GDP Recovering Faster Than Other Advanced Economies?

Why Has Construction Productivity Stagnated? The Role of Land-Use Regulation Leonardo D'Amico, Edward Glaeser, Joseph Gyourko, William Kerr and Giacomo Ponzetto National Bureau of Economic Research

.@leonardo_damico and @william_r_kerr argue that the decline in housing units per construction employee since 1970 coincided with increases in land-use regulation, resulting in “particularly small and unproductive construction establishments.”

Homes built per construction worker remained stagnant between 1900 and 1940, boomed after World War II, and then plummeted after 1970. What stopped it? Local land-use controls [proxied by land-use cases per capita and % of CA cities with land-use regulation] limit the size of building projects. This constraint reduces the equilibrium size of construction companies, reducing both scale economies and incentives to invest in innovation.coincides with increases in our best proxies for land-use regulation. The size of development projects is small today and has declined over time. The size of construction firms is also quite small, especially relative to other goods-producing firms, and smaller builders are less productive. Areas with stricter land use regulation have particularly small and unproductive construction establishments. Back-of-the-envelope calculation indicates that, if half of the observed link between establishment size and productivity is causal, America’s residential construction firms would be approximately 60 percent more productive if their size distribution matched that of manufacturing.SHARE

Related: The Strange and Awful Path of Productivity in the U.S. Construction Sector and Economic Perspectives on Infrastructure Investment and Construction Industry Has Work, Needs More Workers

Would U.S. Tariffs Shift Beijing’s Focus to Consumption? Michael Pettis Carnegie Endowment for International Peace

.@michaelxpettis argues that the potential Chinese responses to US tariffs are restructuring, a rise in unemployment, unproductive government investment, or stimulus to temporarily boost consumption. He expects a stimulus.

Unless U.S. tariffs on Chinese imports are high enough to shift the distribution of income within China from producers to households, U.S. tariffs on Chinese imports will only shift the direction of Chinese exports and U.S. imports; so even as trade between the two is reduced, it won’t change the overall trade imbalances of either country. This, by the way, is exactly what happened after the administration of president Donald Trump first imposed bilateral tariffs on China in March of 2018: both China’s trade surplus and the U.S. trade deficit continued rising, just not with each other. Unless Beijing is willing to accept a rise in unemployment, it must choose between a stimulus designed to boost investment and a stimulus designed temporarily to boost consumption. I think most analysts assume it will be the latter. This is likely what Goldman analysts mean when they say that trade conflict “would accentuate the shift towards domestic demand.” If so, I suspect they are probably right.SHARE

Related: A User’s Guide to Restructuring the Global Trading System and Fiscal, Macroeconomic, and Price Estimates of Tariffs Under Both Non-Retaliation and Retaliation Scenarios and Trade Intervention for Freer Trade

Fiscal Policy Under Trump II: The Role of Scott Bessent and Basic Budget Math Jens Nordvig Money: Inside and Out

.@jnordvig notes that Trump ran an expansionary fiscal policy in his first term, growing the deficit 1.5pp to 4.6% of GDP in 2019. Scott Bessent’s goal of halving the deficit from 6.4% of GDP in 2024 to 3% by 2029 implies a contractionary policy.

We also saw notable expenditure expansion during Trump I, leading to a significant expansion in the fiscal deficit, even before the COVID shock hit in 2020. Specifically, the fiscal deficit was 3.1% in 2016, but had grown to 4.6% in 2019. This may seem like a small deterioration, and visually it is small compared to the mega-deficit of 2020. But historically it was a quick 1.5% deterioration which was rare in an economy experiencing ‘ok growth.’ But 2024 is different from 2016. The Federal debt level has grown from 105% of GDP to 123% of GDP. And the fiscal deficit has doubled, from 3.1% in 2016, to more than 6% in 2024. Hence, it will be hard to pursue expansive fiscal policies in the same way as in the first Trump administration. Linked to this, we have seen much more volatility in US bond markets, with supply concerns contributing to yield spikes during 2022 and 2023, and perhaps recently too. The 10-year government bond yield is currently around 4.50% compared to less than 2% when Trump was elected in 2016, with important implications for the debt service bill and debt dynamics (the government interest expense has grown from 1.3% in 2016 to around 3.1% in 2024).SHARE

Related: Long-Term Interest Rates, Fiscal Policy, And The Term Premium and As the Fed Cuts Rates, Treasury Yields Are Rising and How to Manage the Dollar (Part III)

Early-Life Local Labor Market Conditions and Old-Age Male Mortality: Evidence from Historical Deindustrialization of the New England Textile Sector Hamid Noghanibehambari and Jason Fletcher National Bureau of Economic Research

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We compare old-age longevity of individuals born in counties with higher versus lower exposure to the deindustrialization after the 1920s versus before and find reductions in longevity of about 3.3 months for exposed cohorts who reside in non-urban areas and whose family did not migrate from their county-of-birth until 1940. The negative impacts are primarily concentrated among people and places with fewer alternative job prospects. These effects measure the potential impacts among all people in as defined above. We expect to observe larger effects as we focus on the subpopulations who are more likely to be affected- [e.g.] low educated individuals [who] are less likely to switch occupations.We find that high-exposed counties (top-tercile of 1900 textile) reveal about 7 percentage-points drop in textile employment. Using the 3.3 months applying to the [at risk cohorts as described above] and deflating by the first-stage effect of 0.07 in Table 4 [“father not in textile industry”], a back-of-an-envelope calculation suggests a loss [of life expectancy] about 4 years among non-urban non-migrants whose fathers lost their job due to deindustrialization.SHARE

Related: The China Shock Revisited: Job Reallocation and Industry Switching in U.S. Labor Markets and Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock and Manufacturing Jobs Boom Not Reaching Places Hit By The China Shock

Also Noted

MSS’s “Salt Typhoon” exploit may require rebuilding the basic infrastructure of the American telecommunications system in order to evict Chinese intelligence from the system.

Goldman Sachs is writing its $896mm investment in Swedish battery maker Northvolt to zero. As recently as 7 months ago the position was marked at a 4.29x multiple-of-money, and they had projected an increase to a 6x multiple over the next year.

The US lags both China and Germany in industrial robots per 10,000 manufacturing employees, with only 63% as many as China and 69% as many as Germany, despite significantly higher US labor costs.

Bill Galston argues that the architects of Bidenomics “set aside inflationary concerns in favor of faster labor-market gains” meaning they valued labor market gains over price stability.

China’s defense minister is currently under investigation for corruption; his predecessor was fired in December 2023 for corruption as part of Xi’s broader crackdown on corruption in the Chinese military.