Joseph Stiglitz: Another Predictable Bank Failure

 ar 13, 2023

JOSEPH E. STIGLITZhttps://www.project-syndicate.org/commentary/predictable-silicon-valley-bank-collapse-by-joseph-e-stiglitz-2023-03?utm_source=Project+Syndicate+Newsletter&utm_campaign=47be6695f6-sunday_newsletter_03_19_2023&utm_medium=email&utm_term=0_73bad5b7d8-47be6695f6-93461969&mc_cid=47be6695f6&mc_eid=6194caf520

The collapse of Silicon Valley Bank is emblematic of deep failures in the conduct of both regulatory and monetary policy. Will those who helped create this mess play a constructive role in minimizing the damage, and will all of us – bankers, investors, policymakers, and the public – finally learn the right lessons?


NEW YORK – The run on Silicon Valley Bank (SVB) – on which nearly half of all venture-backed tech start-ups in the United States depend – is in part a rerun of a familiar story, but it’s more than that. Once again, economic policy and financial regulation has proven inadequate.
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Lessons from the SVB Coll


The news about the second-biggest bank failure in US history came just days after Federal Reserve Chair Jerome Powell assured Congress that the financial condition of America’s banks was sound. But the timing should not be surprising. Given the large and rapid increases in interest rates Powell engineered – probably the most significant since former Fed Chair Paul Volcker’s interest-rate hikes of 40 years ago – it was predicted that dramatic movements in the prices of financial assets would cause trauma somewhere in the financial system.

But, again, Powell assured us not to worry – despite abundant historical experience indicating that we should be worried. Powell was part of former President Donald Trump’s regulatory team that worked to weaken the Dodd-Frank bank regulations enacted after the 2008 financial meltdown, in order to free “smaller” banks from the standards applied to the largest, systemically important, banks. By the standards of Citibank, SVB is small. But it’s not small in the lives of the millions who depend on it.

Powell said that there would be pain as the Fed relentlessly raised interest rates – not for him or many of his friends in private capital, who reportedly were planning to make a killing as they hoped to sweep in to buy uninsured deposits in SVB at 50-60 cents on the dollar, before the government made it clear that these depositors would be protected. The worst pain would be reserved for members of marginalized and vulnerable groups, like young nonwhite males. Their unemployment rate is typically four times the national average, so an increase from 3.6% to 5% translates into an increase from something like 15% to 20% for them. He blithely calls for such unemployment increases (falsely claiming that they are necessary to bring down the inflation rate) with nary an appeal for assistance, or even a mention of the long-term costs.1

Now, as a result of Powell’s callous – and totally unnecessary – advocacy of pain, we have a new set of victims, and America’s most dynamic sector and region will be put on hold. Silicon Valley’s start-up entrepreneurs, often young, thought the government was doing its job, so they focused on innovation, not on checking their bank’s balance sheet daily – which in any case they couldn’t have done. (Full disclosure: my daughter, the CEO of an education startup, is one of those dynamic entrepreneurs.)

While new technologies haven’t changed the fundamentals of banking, they have increased the risk of bank runs. It is much easier to withdraw funds than it once was, and social media turbocharges rumors that may spur a wave of simultaneous withdrawals (though SVB reportedly simply didn’t respond to orders to transfer money out, creating what may be a legal nightmare). Reportedly, SVB’s downfall wasn’t due to the kind of bad lending practices that led to the 2008 crisis and that represent a fundamental failure in banks performing their central role in credit allocation. Rather, it was more prosaic: all banks engage in “maturity transformation,” making short-term deposits available for long-term investment. SVB had bought long-term bonds, exposing the institution to risks when yield curves changed dramatically.


New technology also makes the old $250,000 limit on federal deposit insurance absurd: some firms engage in regulatory arbitrage by scattering funds over a large number of banks. It’s insane to reward them at the expense of those who trusted regulators to do their job. What does it say about a country when those who work hard and introduce new products that people want are brought down simply because the banking system fails them? A safe and sound banking system is a sine qua non of a modern economy, and yet America’s is not exactly inspiring confidence.

As Barry Ritholtz tweeted, “Just as there are no atheists in Fox Holes, there are also no Libertarians during a financial crisis.” A host of crusaders against government rules and regulations suddenly became champions of a government bailout of SVB, just as the financiers and policymakers who engineered the massive deregulation that led to the 2008 crisis called for bailing out those who caused it. (Lawrence Summers, who led the financial deregulation charge as US Treasury Secretary under President Bill Clinton, also called for a bailout of SVB – all the more remarkable after he took a strong stance against helping students with their debt burdens.)1

The answer now is the same as it was 15 years ago. The shareholders and bondholders, who benefited from the firm’s risky behavior, should bear the consequences. But SVB’s depositors – firms and households that trusted regulators to do their job, as they repeatedly reassured the public they were doing – should be made whole, whether above or below the $250,000 “insured” amount.

To do otherwise would cause long-term damage to one of America’s most vibrant economic sectors; whatever one thinks of Big Tech, innovation must continue, including in areas such as green tech and education. More broadly, doing nothing would send a dangerous message to the public: The only way to be sure your money is protected is to put it in the systemically important “too big to fail” banks. This would result in even greater market concentration – and less innovation – in the US financial system.

After an anguishing weekend for those potentially affected throughout the country, the government finally did the right thing – it guaranteed that all depositors would be made whole, preventing a bank run that could have disrupted the economy. At the same time, the events made clear that something was wrong with the system.

Some will say that bailing out SVB’s depositors will lead to “moral hazard.” That is nonsense. Banks’ bondholders and shareholders are still at risk if they don’t oversee managers properly. Ordinary depositors are not supposed to be managing bank risk; they should be able to rely on our regulatory system to ensure that if an institution calls itself a bank, it has the financial wherewithal to pay back what is put into it.

SVB represents more than the failure of a single bank. It is emblematic of deep failures in the conduct of both regulatory and monetary policy. Like the 2008 crisis, it was predictable and predicted. Let’s hope that those who helped create this mess can play a constructive role in minimizing the damage, and that this time, all of us – bankers, investors, policymakers, and the public – will finally learn the right lessons. We need stricter regulation, to ensure that all banks are safe. All bank deposits should be insured. And the costs should be borne by those who benefit the most: wealthy individuals and corporations, and those who rely most on the banking system, based on deposits, transactions, and other relevant metrics.

It has been more than 115 years since the panic of 1907, which led to the establishment of the Federal Reserve System. New technologies have made panics and bank runs easier. But the consequences can be even more severe. It’s time our framework of policymaking and regulation responds.

Dean Baker on SVB - Its a billionaire bailout; and it's Trump's Fault

 

There are two key points that people should recognize about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):

• It was a bailout

• Donald Trump was the person responsible.

The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.

We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value.

If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.

This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken ten minutes to examine SVB’s financial situation, which was mostly a matter of public record.    

For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the insurance that they did not pay for.

This brings us to the second point; this is Donald Trump’s bailout. The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.

This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.  

Prior to the passage of this bill, a bank the size of SVB would have been subject to regular stress tests. A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB.

If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.

But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.

Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)

What happened in 2018 was effectively allowing SVB to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.

It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. It is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.

Anyhow, this bailout is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.  

Dean Baker -- beating the Post --

The $119 Billion Spent on Food Stamps Last Year Was 1.9 Percent of Federal Spending, but You All Knew That, Right?

via Patreon

 The $119 Billion Spent on Food Stamps Last Year Was 1.9 Percent of Federal Spending, but You All Knew That, Right?

In a lengthy piece on Republican proposals for cutting the food stamp program, the Washington Post found room to tell us that we spent $119 billion on the food stamps last year. It did not find any room to put this figure in a context that might make it meaningful to its readers.

Yeah, $119 billion is a lot of money, more than almost anyone other than Elon Musk (pre-Twitter) will ever see, but is it a big deal for the federal government? We can debate what is “big” or “small,” but the federal government spent$6,272 billion last year, which means that food stamp program accounted for a bit less than 1.9 percent of total spending.

If the Republicans cut the program by 20 percent, which would be a large cut, it would reduce federal spending by $24.8 billion, or a bit less than 0.4 percent. It would have been helpful to provide this context, since it would make the point clear that Republicans will not get very far towards balancing the budget with cuts to the food stamp program.

It also would have been worth noting that research on the proposal for strengthening food stamp work requirements, a measure that is discussed at length in the piece, shows that these requirements have no impact on work. They do reduce the number of people getting benefits.

This research indicates that if the point of these requirement is to encourage work, they are not successful. However, if the point is to reduce the number of people benefitting from the program, the requirements will have this effect.

JOSEPH E. STIGLITZ: How Not to Fight Inflation

 

via Project Syndicate, Jan 26, 202

A careful look at US economic conditions supports the view that inflation was driven mainly by supply-side disruptions and shifts in the pattern of demand. Given this, further interest-rate hikes will have little to no effect – and will cause far-reaching problems of their own.


NEW YORK – Despite favorable indices, it is too soon to tell whether inflation has been tamed. Nonetheless, two clear lessons have emerged from the recent price surge.



First, economists’ standard models – especially the dominant one that assumes the economy always to be in equilibrium – were effectively useless. And, second, those who confidently asserted that it would take five years of pain to wring inflation out of the system have already been refuted. Inflation has fallen dramatically, with the December 2022 seasonally adjusted consumer price index coming in just 1% above that for June.

There is overwhelming evidence that the main source of inflation was pandemic-related supply shocks and shifts in the pattern of demand, not excess aggregate demand, and certainly not any additional demand created by pandemic spending. Anyone with any faith in the market economy knew that the supply issues would be resolved eventually; but no one could possibly know when.

After all, we have never endured a pandemic-driven economic shutdown followed by a rapid reopening. That is why models based on past experience proved irrelevant. Still, we could anticipate that clearing supply bottlenecks would be disinflationary, even if this would not necessarily counteract the earlier inflationary process immediately or in full, owing to markets’ tendency to adjust upward more rapidly than they adjust downward.

Policymakers continue to balance the risk of doing too little versus doing too much. The risks of increasing interest rates are clear: a fragile global economy could be pushed into recession, precipitating more debt crises as many heavily indebted emerging and developing economies face the triple whammy of a strong dollar, lower export revenues, and higher interest rates. This would be a travesty. After already letting people die unnecessarily by refusing to share the intellectual property for COVID-19 vaccines, the United States has knowingly adopted a policy that will likely sink the world’s most vulnerable economies. This is hardly a winning strategy for a country that has launched a new cold war with China.

Worse, it is not even clear that there is any upside to this approach. In fact, raising interest rates could do more harm than good, by making it more expensive for firms to invest in solutions to the current supply constraints. The US Federal Reserve’s monetary-policy tightening has already curtailed housing construction, even though more supply is precisely what is needed to bring down one of the biggest sources of inflation: housing costs.

Moreover, many price-setters in the housing market may now pass the higher costs of doing business on to renters. And in retail and other markets more broadly, higher interest rates can actually induce price increases as the higher interest rates induce businesses to write down the future value of lost customers relative to the benefits today of higher prices.

To be sure, a deep recession would tame inflation. But why would we invite that? Fed Chair Jerome Powell and his colleagues seem to relish cheering against the economy. Meanwhile, their friends in commercial banking are making out like bandits now that the Fed is paying 4.4% interest on more than $3 trillion of bank reserve balances – yielding a tidy return of more than $130 billion per year.

To justify all this, the Fed points to the usual bogeymen: runaway inflation, a wage-price spiral, and unanchored inflation expectations. But where are these bogeymen? Not only is inflation falling, but wages are increasing more slowly than prices (meaning no spiral), and expectations remain in check. The five-year, five-year forward expectation rate is hovering just above 2% – hardly unanchored.

Some also fear that we will not return quickly enough to the 2% target inflation rate. But remember, that number was pulled out of thin air. It has no economic significance, nor is there any evidence to suggest that it would be costly to the economy if inflation were to vary between, say, 2% and 4%. On the contrary, given the need for structural changes in the economy and downward rigidities in prices, a slightly higher inflation target has much to recommend it.

Some also will say that inflation has remained tame precisely because central banks have signaled such resolve in fighting it. My dog Woofie might have drawn the same conclusion whenever he barked at planes flying over our house. He might have believed that he had scared them off, and that not barking would have increased the risk of the plane falling on him.


One would hope that modern economic analysis would dig deeper than Woofie ever did. A careful look at what is going on, and at where prices have come down, supports the structuralist view that inflation was driven mainly by supply-side disruptions and shifts in the pattern of demand. As these issues are resolved, inflation is likely to continue to come down.

Yes, it is too soon to tell precisely when inflation will be fully tamed. And no one knows what new shocks await us. But I am still putting my money on “Team Temporary.” Those arguing that inflation will be largely cured on its own (and that the process could be hastened by policies to alleviate supply constraints) still have a much stronger case than those advocating measures with obviously high and persistent costs but only dubious benefits.

Dean Baker contra Fed recession plans....

 

via Patreon

After Fourth Quarter GDP, Economy Looks Solid Unless Fed Derails Economy

While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. Just to start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slighter stronger 3.1 percent in the third quarter. This is very far from the negative growth that we see in a recession.

When we look at the individual components the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.

However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of negative impact in future quarters. Housing stands out here. The drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third quarter growth by 1.42 percentage points.

The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so for the moment the rapid plunges of the summer and fall seem to be behind us.

New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.

Another bright spot for housing is that mortgage refinancing has fallen back to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.

Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.

Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.

Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.

The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of jobs growth, and rising real wages, there is no reason to expect any sharp downturn in consumption.

This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption in the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at 2.6 percent annual rate.

The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it, and keeping overall consumption growth in positive territory.

The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.

The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.

In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.

The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in coming months, which will be a huge factor lowering the core inflation rate.

Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.

This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.

Compared to the falling productivity in the first half, even a modest pace of positive growth will go far towards alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.

In short, the world is looking good, we just have to keep the Fed from messing it up.

Dean Baker refutes the Summers-Fed thesis on the recession threat

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The Good and Better News About the Economy
Dean Baker

Everyone who carefully follows the news about the economy knows that we are in the middle of the Second Great Depression. On the other hand, those who read less news, but deal with things like jobs, wages, and bills probably think the economy is pretty damn good. We got more evidence on the pretty damn good side with the December jobs report and other economic data released in the last week.

The most important part of the jobs report was the drop in the unemployment rate to 3.5 percent. This equals the lowest rate in more than half a century. While many in the media insist that only elite intellectual types care about jobs, not ordinary workers, since the ability to pay for food, rent, and other bills is tightly linked to having a job, it seems that at least some workers might care about being able to work.

For these people, the tight labor market we have seen as the economy recovered from the pandemic recession is really good news. Not only do people have jobs, but the strong labor market means they can quit bad jobs. If the pay is low, the working conditions are bad, the boss is a jerk, workers can go elsewhere.

And, they are choosing to do so in large numbers. In November, the most recent month for which we have data, 2.7 percent of all workers, 4.2 million people, quit their job. This is near the record high of 3.0 percent reported at the end of 2021, and still above the highs reached before the pandemic and at the end of the 1990s boom.

The ability to quit bad jobs has predictably led to rising wages. Employers must raise pay to attract and retain workers. Real wages were dropping at the end of 2021 and the first half of 2022, as inflation outpaced wage growth, but as inflation slowed in the last half year, real wages have been rising at a healthy pace.

From June to November, the real average hourly wage has increased by 0.9 percent, a 2.2 percent annual rate. (We don’t have December price data yet.) Workers lower down the pay scale have done even better. The real average hourly wage for production and non-supervisory workers, a category that excludes managers and other highly paid workers, has risen by 1.4 percent since June, a 3.3 percent annual rate of increase. In the hotel and restaurant sectors, real pay has risen by 1.8 percent since June, a 4.4 percent annual rate of increase.

These real pay gains follow declines in 2021 and first half of 2022, but for many workers pay is already above the pre-pandemic level. For production and non-supervisory workers, the real average hourly wage is 0.3 percent above the February, 2020 level.  For production and non-supervisory workers in the hotel and restaurant sectors real pay is up by 4.7 percent. The overall average for all workers is only down by 0.3 percent, a gap that will likely be largely eliminated by the wage growth reported for December.

While we may still have problems with inflation going forward, the sharp slowing in recent months was an unexpected surprise. We saw gas prices fall most of the way back to pre-pandemic levels. Many of the items where prices rose sharply due to supply chain problems, like appliances and furniture, are now seeing rapid drops in prices. Rents, which are a huge factor in the Consumer Price Index (CPI) and people’s budgets, have slowed sharply and are now falling in many areas. It will be several months before this slowing shows up in the CPI because of its methodology for measuring rental inflation, but based on private indexes of marketed housing units, we can be certain we will see rents rising much more slowly soon.

In short, there are good reasons for believing that we will see much slower inflation going forward. If we continue to see moderate nominal wage growth in 2023, that will translate into a healthy pace of real wage growth.

Homeownership

Also, contrary to what is widely reported, we had a largely positive picture on housing in the last three years. While current mortgage rates are pricing many people out of the market, homeownership did rise rapidly since the pandemic

The overall homeownership rate increasedby 1.0 percentage point from the fourth quarter of 2019 to the third quarter of 2022. For Blacks, it rose by 1.2 percentage points, from 44.0 percent to 45.2 percent. For young people it rose by 1.7 percentage points, from 37.6 percent to 39.3 percent.  For lower income households it rose by 1.3 percentage points from 51.4 percent to 52.7 percent.

It is striking that this rise in homeownership, especially for the most disadvantaged groups, is 180 degrees at odds with whatis being reportedin the media. These data come from the Census Bureau, which is generally considered an authoritative source. Nonetheless, the media have insisted that this has been a period in which young people, minorities, and low-income households have faced extraordinary difficulties in buying houses.

Income Growth

The media have also frequently told us that people are being forced to dip into their savings and that the saving rate is now at a record low. While the saving rate has fallen sharply in the last year, a major factor is that people have sold stock at large gains and are now paying capital gains taxes on these gains. Capital gains do not count as income, but the taxes paid on these gains are deducted from income in the national accounts, thereby lowering the saving rate. It’s not clear that people who sold stock at a gain, and then pay tax on that gain, are suffering severe financial hardship.

We also have the story of rapidly rising credit card debt. This has been presented as another indication of financial hardship. There actually is a simple and very different story. In 2020 and 2021, tens of millions of homeowners took advantage of extraordinarily low mortgage rates to refinance their homes. When they refinanced, they often would borrow more than their original mortgage to pay for various expenses they might be facing.

The Fed’s rate hikes have largely put an end to refinancing, including cash-out refinancing. With this channel closed to households, people that formerly would have looked to borrow by refinancing mortgage are instead turning to credit cards. This is hardly a crisis. Furthermore, tens of millions of families that were paying thousands more in mortgage interest, now have additional money to spend or save. This is not reflected in aggregate data.

It’s also worth noting one reason that inflation may have left many people strapped: the cost-of-living adjustments for Social Security are only paid once a year. This meant the checks beneficiaries were getting could buy around 7.0 percent less in December than they had the start of the year. However, Social Security beneficiaries are seeing an 8.7 percent increase in the size of their checks this month. That should make life considerably easier for tens of millions of retirees, and also modestly boost the saving rate.

Productivity Growth and Working from Home

Other bright spots in the economy include the return of healthy productivity growth and the huge increase in the number of people working from home. We saw two quarters of negative productivity growth in the first half of last year.

Productivity growth is poorly measured and highly erratic, but there seems little doubt that productivity growth was very poor in the first and second quarters of 2022. This added to the inflationary pressure that businesses were seeing.

This situation was reversed in the third quarter, with productivity growth coming in at close to 1.0 percent, roughly in line with the pre-pandemic trend. It looks like productivity growth will be even better in fourth quarter. GDP growth is now projected to be well over 3.0 percent, while payroll hours grew at just a 1.0 percent annual rate, implying a productivity growth rate close to 2.0 percent. This would be great news if it can be sustained, but as always, a single quarter’s data has to be viewed with great caution.

The other big positive in the economic picture is the huge increase in the number of people working from home. One recent paper estimated that 30 percent of all workdays are now remote, up from around 10 percent before the pandemic. While that number may prove somewhat high, it is clear that tens of millions of workers are now saving thousands a year on commuting costs and hundreds of hours formerly spent commuting. That is also a huge deal which is not picked up in our national accounts.

If the Economy Is Great, Why Do People Say They Think It Is Awful?

I’m not going to try to answer that one, other than to note that there has been a “horrible economy” echo chamber in the media, where facts have often been distorted or ignored altogether. I don’t know if that explains why so many people say they think the economy is bad, I’m an economist, not a social psychologist.

I will say that people are not acting like they think the economy is bad. They are buying huge amounts of big-ticket items like appliances and furniture, and until very recently houses. They are also going out to restaurantsat a higher rate than before the pandemic. This is not behavior we would expect from people who feel their economic prospects are bleak.

To be clear, there are tens of millions of people who are struggling. Many can’t pay the rent, buy decent food and clothes for their kids, or pay for needed medicine or medical care. That is a horrible story, but this unfortunately is true even in the best of economic times. Until we adopt policies to protect people facing severe hardship we will have tens of millions of people struggling to get the necessities of life.

But this is not the horrible economy story the media is telling us. That is one that is suppose to apply to people higher up the income ladder. And, thankfully that story only exists in the media’s reporting, not in the economic data.

Tomonthebeach

12h

Dean, while you are correct that the media is more interested in clickbait than informing the public, one place where the economy still looks dismal is Wall Street. My IRA lost the price of a new Bentley last year. For a retiree - 2021 was a very bad year for retirement investments. Also, many of the COLAs only start to kick in this month - ergo many checkbooks might not yet be balancing. Lastly, we have been bombarded by GOP claims that the US economy is in terrible financial shape due to radical liberal Democrats. We need to drastically cut federal spending and balance the budget immediately. Of course, as Stephanie Kelton points out in her book the Deficit Myth, zero deficits usually trigger a recession.

CR Rent Trends

 From housing economist Tom Lawler:

Recently released data from various private entities that track US rent trends indicate that US rent growth has weakened considerably this Fall, and several measures suggest that rents have fallen by more than the seasonal norm over the last few months.

Here is a table showing monthly % changes in the Apartment List Rent Index (ALRI, not smoothed), the Zillow Observed Rent Index (ZORI, smoothed via 3-month moving average), and the CoreLogic Single Family Rent Index (CLSFRI, smoothed via 3-month moving average.)  I’ve included the ALRI on a 3-month moving average basis to be comparable to the other two indices.

As the table indicates, all three rent indices have shown recent declines over the last few months.  Another provider of “same-store” rent indices, RealPage, reported that its national rent index declined by 0.59% in November, the third straight monthly decline.

RealPage said that its apartment rent index was up 6.5% YOY in November, a huge drop from the 15.9% YOY gain in March 2022.  (Sadly, I don’t have access to RealPage’s historical data).  RealPage noted that the decline in rents over the past two months was larger than the “normal” seasonal decline for that time of year.

And speaking of seasonality, all the above-mentioned rent indices display modest but statistically significant seasonal fluctuations, with seasonal peaks occurring around August and seasonal troughs occurring around January.  Only Zillow reports its rent index on a seasonally adjusted basis, but below is a table showing my estimates for monthly seasonally adjusted % changes in the other indices.

Here is a chart from RealPage showing the YOY % change in its rent index, as well as the YOY % changes in the rent indices for Phoenix and Las Vegas.

These rent indices show not only has US rent growth slowed sharply, but that rents have actually begun to fall this Fall, and by more than the seasonal norm.

Note: The above was from housing economist Tom Lawler.

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