What’s in store for the U.S. economy in the new year? Five senior fellows at the Stanford Institute for Economic Policy Research (SIEPR) offer their insights into major headwinds — and what policymakers should do to counteract them.
The long tail of COVID-19
Arvind Krishnamurthy, The John S. Osterweis Professor of Finance, Graduate School of Business:
COVID continues to impact the U.S. economy in significant ways — from the tight labor market and rising inflation to troubles in the real estate market.
On jobs, the unemployment rate is at a historical low. Yet, extrapolating from pre-pandemic growth rates in the labor force suggests that we are currently missing roughly 3 million workers.
I am persuaded by the work of SIEPR scholars that point to significant COVID effects on the supply of workers. Falling ill (Goda and Soltas, 2022) and fears of falling ill (Barrero, Bloom, and Davis, 2022) are keeping people out of the workforce.
COVID has also impacted workers’ preferences over labor and leisure. It's harder to pin down, but this factor keeps appearing in the news. Senior management has to persuade workers to come into the office two days a week. All this incentivizing is surely costly. Thus, while work-from-home may be productivity enhancing in some sectors, this must not be true of most sectors. Effective labor hours have fallen, tightening labor supply further. Moreover, the fall in productivity can explain the decline in real wages, as prices have risen faster than wages.
The COVID-induced tight labor market has pushed up prices and wages, and I expect that these inflationary pressures will continue despite rising interest rates.
COVID has also impacted asset values, and particularly in real estate. Mortgage rates almost doubled in 2022, and significant declines in office occupancies are creating revenue problems for commercial real estate. Rising interest rates also means that refinancing commercial property will be difficult.
Keep a close eye on signs of trouble in real estate. They have a way of causing wider damage to the economy.
The Nike swoosh of working from home
Nicholas Bloom, William D. Eberle Professor of Economics, School of Humanities and Sciences:
I am often asked if a U.S. recession would end the remote work revolution.
Talking to hundreds of business leaders, I know that many older managers conditioned to in-person work are eager to bring employees back to the office full-time. To date, they have been restrained by incredibly tight labor markets and fears of a mass exodus of employees. If there’s a recession, many will drag employees back in.
But I’ve got news for these leaders: Working from home is here to stay.
After a temporary dip, remote work will surge to even higher levels. To understand why, consider what economists call “market-size effects”: When demand for a product or service rises, firms work harder to innovate to profit from the growing market. The market for remote work — which has grown about sixfold since 2020 — is accelerating technological progress as hardware and software firms innovate to meet market demand for work-from-home support.
My research (with Steven Davis and Yulia Zhestkova and now including Mihai Codreanu) finds that the number of new patent applications for remote products filed each week has doubled since 2020 and continues to rise steeply. Having researched working from home for 20 years, I have seen the clear impact of moving from telephone calls and emailing files to video calls and cloud-sharing files. They have all made working from home easier and more popular.
The next 10 years will bring even bigger changes in connectivity, remote-software and audio-visual hardware. To understand the likely effect of a U.S. recession on work from home policies, imagine a Nike swoosh: An initial drop, followed by a long and steady upward slope.
The urgency of pandemic learning loss
Sean Reardon, Professor of Poverty and Inequality in Education, Graduate School of Education:
The pandemic put enormous stress on children, their families and their teachers. The most recent data show that standardized test scores were down by half a grade level in math in 2022 compared to 2019 and down by a third of a grade level in reading.
My latest analysis, conducted with additional researchers from Stanford and Harvard, looks at how learning losses varied from one school district to another — exacerbating educational inequality in the United States. The academic harm was much more pronounced for children in high-poverty districts than in more affluent ones. Our data, available through this interactive tool, show that some students fell behind by more than a grade level; others performed the same as before the pandemic.
It’s easy and natural to fault school closures for the learning losses. But even in places where schools closed briefly, we find that test scores declined substantially.
The educational cost to children resulted from the myriad ways that the pandemic changed lives. Undoing the damage requires policymakers at all levels of government to devise a suite of responses. This includes school-specific strategies like extending school time, increasing school staff (especially mental health counselors) and providing intensive tutoring. But it also means coordinating with social workers, public health officials, educators, and state and federal policymakers to ensure that communities where the pandemic’s effects on learning were most severe have the resources to help children recover.
If measures aren’t taken now, the recent harms could turn into lifelong disadvantages for many children.
California’s outlook: Two reforms to tackle now
Mark Duggan, Trione Director of SIEPR and The Wayne and Jodi Cooperman Professor of Economics, School of Humanities and Sciences:
The country’s most populous state faces massive challenges — wildfire risk, water shortages, energy grid breakdowns, deficiencies in K-12 and higher education, unequal access to health care and rising crime, to name a few. Two others, however, should be top of mind for policymakers in 2023.
The first is homelessness, which has increased by 40 percent in the Golden State since 2014 even as it has fallen in the rest of the country. The second is California’s chronically underfunded unemployment insurance (UI) program, which currently owes $18 billion to the federal government because there isn’t enough money from state taxes to meet the demand for benefits.
Reducing homelessness is hugely complicated. A major reason why is that we don’t really know which solutions work best, whether it’s changes in housing policy, criminal justice reform, or improved access to education and health care. This is partly because we don’t have enough evidence. Existing data are siloed within different state and local government agencies, which hampers research and the coordinated response necessary to mitigate the crisis.
The state’s unemployment insurance problem, which I explored earlier this year in a SIEPR policy brief, is easier to fix. Policymakers need to increase the taxable wage base, which has been capped at $7,000 for each worker for 40 years. This would both reduce the state’s persistent unemployment insurance debt — whose interest payments alone will inevitably require increases in the UI tax rate or will crowd out spending on other important priorities — and benefit low-wage workers.
More investment by state and local policymakers in improving data infrastructure and asking the research community for help identifying which policies would be more effective would have a huge positive impact — for tackling not just homelessness, but also many of California’s other challenges.
Time for a crypto crackdown
Anat Admati, The George G.C. Parker Professor of Finance and Economics, Graduate School of Business:
For the much-hyped cryptocurrency sector, 2022 was marked by turmoil. There were sharp declines in the value of digital assets and many corporate failures, including crypto bank Celcius Network, hedge fund Three Arrows Capital, brokerage firm Voyager Digital Holdings, stable coin TerraUSD and, most spectacularly, the FTX Trading exchange. Investors big and small, many of whom believed that clever technology would make them rich and “free” of traditional banks and government oversight, face heavy losses.
Corporate scandals almost always expose failed governance and/or inadequate laws. The crypto crisis is no different. Venture capitalists once again failed to ask basic questions or to insist on proper risk controls. Investors and customers were too quick to trust glossy pitches selling empty promises. Crypto companies failed (and are still failing) to provide audited disclosures because they are not required to do so.
Now lawyers are sorting through the mess. The battle between the Bahamas, where FTX chose strategically to locate, and the United States, where it filed for bankruptcy, illustrates once again how the failures of global corporations leave stakeholders dependent on legal systems with potentially conflicting rules and objectives.
Requiring credible financial disclosures from crypto companies, and from more companies generally, is essential. Effective controls are particularly crucial if retail investors expect access to money they place in corporate hands. Individuals alone cannot evaluate a company’s claims or representations. Professional auditors also need stronger regulations to ensure they do not sign off on misleading disclosures (See: Wirecard).
But common sense is also important, especially in the crypto world. Buyer beware.