7 economic trends to watch in 2024
Every year has its economic challenges — some old, some new. But in an election year — where control over Congress and the White House are at stake — policies dealing with inflation, labor disruptions, the rise of artificial intelligence, and other economic issues take on added significance. Below, seven experts affiliated with the Stanford Institute for Economic Policy Research (SIEPR) offer their research-based insights into what’s in store for the U.S. economy in the year ahead.
“These economic policy questions are right in our wheelhouse at SIEPR, and we’re very fortunate to have more than 120 faculty members tackling pressing economic issues and generating research that leads to better policies. The fact that we are in an election year makes their work even more important as we strive to get rigorous, nonpartisan research and analysis into the hands of policymakers, candidates, business leaders and voters.”
— Mark Duggan, The Trione Director of SIEPR and The Wayne and Jodi Cooperman Professor of Economics
The consumer disconnect in an election year
Neale Mahoney, George P. Shultz Fellow at SIEPR and Professor of Economics, School of Humanities and Sciences:
The U.S. economy is strong by all objective measures, with low unemployment, robust GDP growth, and easing inflation. Yet consumer sentiment is decidedly weak, with measures of the economic indicator at levels last seen during the global financial crisis. Given the strong correlation between consumer sentiment and election outcomes, it’s especially important to understand why there’s a disconnect ahead of this November’s vote.
Ryan Cummings, a visiting PhD student at Stanford, and I recently dived into the data and documented two new findings. First, sentiment isn’t as bad as the numbers suggest due to partisan skew. While both Democrats and Republicans rate the economy more strongly when their party controls the White House, Republicans cheer louder and boo harder, in effect, drowning out Democratic voices and artificially depressing consumer sentiment.
Second, consumer sentiment is being dragged down by prior years’ inflation. While prices rose only 3.2 percent this year, they increased by a cumulative 18.6 percent over the last 3 years, and these prior price increases are still weighing negatively on consumers. However, we also found that the downward drag from inflation has a half-life of about a year. This means that, if inflation continues to ease over the next 12 months, sentiment should improve as the post-pandemic inflation surge recedes.
These are challenging times for forecasting. The rise of social media as a prominent information source — with its tendency to amplify bad news — may be fraying the link between economic fundamentals and consumer sentiment. The partisan factors we document may intensify as the November election approaches. How consumer sentiment will trend, and what we should be making of these data in the current environment, are questions that will only be fully answered in the course of time.
COVID-19’s lingering labor effects
Gopi Shah Goda, SIEPR Senior Fellow and Professor (by courtesy) of Economics, School of Humanities and Sciences:
The COVID-19 pandemic disrupted many sectors of the economy, including labor markets. My research with Evan Soltas estimates that excess COVID-19-related absences from work through mid-2022 resulted in approximately 500,000 fewer people participating in the labor force. Other work has shown that more working-age adults are reporting serious difficulty remembering, concentrating or making decisions, and the increases are higher among women and non-college graduates. In addition, the share of workers who are not employed and not looking for work due to disability or illness is higher than its pre-pandemic trend.
COVID has clearly had harmful effects on the U.S. workforce overall, but there’s some good news heading into 2024. Between January and October of 2023, excess COVID-19-related absences from work were approximately 15 percent higher than pre-pandemic levels. While still elevated, this represents a sharp reduction from excess absences in March 2020-December 2022, which were 61 percent higher than pre-pandemic levels.
Going forward, the lower rate of excess absences in 2023 may suggest that the recent increase in disability rates could slow down if the two are causally related. However, the growing share of the population reporting cognitive difficulties — likely from a COVID-19 infection — suggest that programs and policies may be needed to support workers still struggling with pandemic-related illnesses.
Congress' fiscal cliff problem
John Cochrane, SIEPR Senior Fellow and the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution:
When you kick the can long enough, you run out of road. Our government’s inability to fix its finances means we’re pretty close to that point.
The U.S. has as much federal debt now as it did at the end of WWII. The Congressional Budget Office projects debt will grow exponentially. The federal deficit is 5.8 percent of GDP, though the economy is humming. The CBO projects 3 percent of GDP primary deficits — before interest payments — forever.
The problem is not this year or next. The government has made pension and health care promises that it cannot pay for. Trillion-dollar spending on industrial policies, subsidies, transfers, and bailouts don’t help. When the next recession, crisis, war or pandemic hits, the U.S. may simply be unable to borrow.
Higher tax rates are not the answer. There aren’t enough “rich” or “corporations” to soak for this much money. We could finance our European-style benefits with European middle-income taxes, but we would get stagnant European incomes in the bargain.
Tax revenue equals tax rate times income. Higher tax rates lead to lower long-run income, blunting revenue. The best way out is more long-term income growth.
Our mantra should be “reform” and “incentives,” not “cuts” and “austerity.” Fundamental tax reform, such as the introduction of a consumption tax, can raise substantial revenue with less economic damage. Change at the edges, such as the debate over extending the 2017 cuts, won’t address the immense problem. Reformed social program incentives can save money and help people more. Regulatory reform can speed growth. Smart immigration can bring in more taxpayers.
Year of the WFH pancake
Nicholas Bloom, SIEPR Senior Fellow and the William D. Eberle Professor of Economics, School of Humanities and Sciences:
It’s the $64,000 workplace question: Will workers continue to be allowed to work from home (WFH)? I predict the rates of WFH will, as the British say, be “flat as a pancake” this year and into 2025 before picking up again in 2026.
I’ve previously likened the WFH revolution to the Nike swoosh. From 2020 to the end of 2022, levels of WFH dropped as the pandemic-induced surge waned. In 2023 we saw rates stabilize as attempts by employers to bring workers back into the office largely failed.
But WFH rates will start to slowly climb again. This will be driven by ever-improving technologies for remote working. We’ll see innovations around, for example, audio and visual, apps, holograms, and augmented reality. Looking back over my life, we have seen working from home go from paper-based in the 1970s and 1980s, to supported by PCs in the 1990s, with the internet in the 2000s and then cloud computing and video calls in the 2010s.
The recent explosion in WFH has accelerated this rate of technological progress. Every hardware and software firm I talk to is targeting this massive new market of WFH employees and firms. What the future will bring is not clear, but it clearly will be better and more efficient than 2023 tech.
My message for 2024: Underneath WFH’s “pancake” year is a massive revolution. WFH is here to stay and looking to a rapidly growing future.
The need for Treasury market reforms
Darrell Duffie, SIEPR Senior Fellow and the Adams Distinguished Professor of Management and Professor of Finance, Stanford Graduate School of Business:
U.S. Treasury securities are the world’s safe-haven asset — not only because of their low default risk but also because of the depth and liquidity of the market in which they are traded. In March 2020, that safe-haven role was tested when COVID unleashed a dash for cash caused by severe selling of Treasuries. The dealers who handle essentially all investor trading of Treasuries could not adequately handle the surge of demands. Catastrophe was averted only when the Federal Reserve took unprecedented steps to restore liquidity in the market.
According to a recent Federal Reserve Bank of New York analysis that I co-authored, the crisis exposed structural weaknesses in the U.S. Treasury market that, if unaddressed, threaten its ability to remain a safe haven for global investors. The capacity of dealers to temporarily warehouse the flood of investor sales while they negotiate trades with buyers is critical. And yet, the total amount of Treasuries outstanding is growing rapidly relative to the intermediation capacity of dealers because of large and persistent U.S. fiscal deficits and the limited flexibility of dealer balance sheets.
The resilience of the Treasury market should not be called into question just when its safe-haven role becomes critical. Significant structural improvements to the Treasury market are needed in 2024 and beyond. Policy options include broadening central clearing of Treasuries and all-to-all trade; boosting the intermediation capacity of dealers with real-time post-trade transaction reporting; improving capital regulations so they do not lower the overall capital buffers of globally systemic banks; and backstopping the Treasury market liquidity with transparent central-bank purchase programs.
The beginning of the end for non-competes
Mark Lemley, SIEPR Senior Fellow; the William H. Neukom Professor of Law, Stanford Law School; Director, Stanford Program in Law, Science & Technology:
The reinvigoration of antitrust enforcement will continue in 2024. The Federal Trade Commission in particular will continue to challenge mergers that it deems anticompetitive. It will also take a number of steps to open up the labor markets: It will ban or significantly restrict non-compete agreements that prevent workers from moving to competitors. It will challenge other restrictive employee agreements, from no-poach deals and arbitration secrecy clauses to overbroad nondisclosure agreements and "stay or pay" clauses.
These challenges will be met by skeptical courts trained in 40 years of Chicago School orthodoxy on the primacy of free markets. Entrenched companies that don’t like the idea of facing competition rather than agreeing to avoid it will howl. The November general election will likely determine the extent to which the pace of FTC enforcement continues beyond 2024. And if the FTC suffers setbacks in court, proponents of stricter enforcement may need to look to Congress to act.
For California, tough choices
Preeti Hehmeyer, Managing Director of California Policy Research Initiative (CAPRI) at SIEPR:
The coming year will be eventful for Californians, to say the least. Looking to the general election in November, many observers believe that the Golden State will be one of the most important battlegrounds for Congressional control. California also needs to climb out of its $31 billion budget deficit while dealing with the ongoing challenges of affordable housing, homelessness, extreme weather, and rising electricity costs. Politicians make the decisions, but CAPRI can help the state better understand the roots of its problems and choices going forward.