Big data suggests a difficult recovery in US jobs market

This is a summary of a column that appeared in the FT on 5 July 2020.

The full column appears here:

https://www.ft.com/content/607f24f5-71ed-452c-b68e-716145584e3d

Private data sources paint a detailed and worrying picture of the labour market after the Covid-19 shock

The latest US employment data showed that a marked recovery in the labour market continued into June, although only about a third of the jobs lost during the coronavirus shock have so far been regained.

The improvement is good news, but it should not be taken to imply that the labour market will rapidly return to normal, either in a macroeconomic sense, or in the distribution of job opportunities across the population.  A full return to pre-coronavirus jobs health will be long and difficult.

New data sources derived from private sector business activities, such as credit card flows and hiring websites, as well as Google searches, provide much richer sources of information about the behaviour of the labour market than have been available in previous recessions.

For example, on the macro side, Raj Chetty of Harvard University, a leading proponent of big data to improve economic research, has released an impressive website that provides daily information on US consumer spending and much else, using private sources.

Professor Chetty's data shows that after a surge in consumer activity up to mid May, the recovery has slowed down, with consumption recording a growth rate around 0.2 per cent a day up to the latest data on 24 June. The slowdown may well continue now that California, Texas, Florida and Arizona, together representing about 30 per cent of the US economy, are suffering from a worrying upsurge in Covid-19 cases.

On the micro side, the concentration of employment losses among unskilled workers in specific locations, with many permanently failed businesses, will become increasingly difficult to correct. The serious concerns about a deep-rooted scarring of the labour market, forcibly expressed by many Federal Reserve officials, would then be entirely justified.

The top three priorities to fix the jobs market in the US and elsewhere are virus policy, virus policy and virus policy. Focusing on general demand expansion won't work.

The safe asset shortage after Covid-19

This is a summary of a column that appeared in the FT on 28 June 2020.

The full column appears here:

https://www.ft.com/content/b98078c0-6acc-43e6-929b-13883c211288

Demand for safe assets has far out-stripped supply since 2009 but the latest crisis may help redress the balance.

One of the long-term consequences of the 2008 financial crisis was a lack of safe assets that could be used by institutions to store their wealth, meet regulatory requirements and provide collateral to borrow additional funds. This problem has been identified as an important reason for low capital investment and the slow growth rate in the global economy in the past decade. It was also a prime cause of the European sovereign debt crisis, which peaked in 2012.

A silver lining from the Covid-19 shock is that the policy response may actually alleviate the safe-asset shortage, according to new research by Fulcrum economists (see table). That’s because it will leave a legacy of much higher government debt in the most advanced economies, including the US, which is the main global source of these assets.

Economists including Ricardo Caballero and Emmanuel Farhi have established that in some models a shortage of safe asset supply can result in a “safety trap” that affects the global economy. This is a close cousin of the “liquidity trap” that appears in many New Keynesian models. Because interest rates cannot fall enough to balance the supply and demand for safe assets, national income and wealth shrink to eliminate the excess demand for them.

The Covid-19 crisis will help because government debt in the US and other advanced economies is surging. Although central bank and private sector demand for safe assets may offset some of this extra supply, the overall effect may be to reduce the safe asset shortage for a while as the global economy recovers.

Will public debt be a problem when the Covid-19 crisis is over?

This is a summary of a column that appeared in the FT on 21 June 2020.

The full column appears here:

https://www.ft.com/content/da150515-a5e9-4237-9b70-757dd958bf0d


There is unanimity about macro-economic policy for now, but not about the exit strategy

The major change in the major economies that is certain to follow the Covid-19 shock is a large and permanent rise in public debt ratios, including a rise in the US debt ratio to a new high for the series in the entire history of the Republic.

Macro-economists have been almost unanimous in agreeing that the stimulus packages to protect economic activity during the lockdowns have been appropriate, but an important debate is developing about the long term impact of higher debt ratios on the global economy.

Mainstream New Keynesian macro-economists (for example, Larry Summers and Paul Krugman) are not concerned about possible damage from higher public debt per se, and some appear to believe that this will actually be a positive, because it may offset the forces of secular stagnation. They also believe that debt servicing costs (ie bond yields) will probably remain below nominal GDP growth rates indefinitely, so high public debt and borrowing will be sustainable.

However, there is an important group of macro-economists, led by Ken Rogoff and John Cochrane, who believe that high debt ratios can lead to “runs” in public debt markets, even in advanced economies with their own central banks. They are therefore concerned that high and rising debt may result in financial calamity.

Although the New Keynesians are almost certainly right in the short and medium term, the debt school should not be ignored. A new strategy for the exit needs to be developed to mitigate these risks.