The Unassuming Economist

From Works In progress:

“There’s a pattern that we frequently see in the development of a new technology. Initially, the practical functionality is limited by the technology itself – what’s built and used is close to the limit of what the technology is physically capable of doing. As the technology develops and its capabilities improve, there’s a divergence between what a technology can physically do and what it can economically do, and you begin to see commercialized versions that have lower performance but are more affordable. Then, as people begin to build within this envelope of economic possibility, capability tends to get further constrained by legal restrictions, especially if the new technology has any (real or perceived) negative externalities.

Cars and speed limits provide an illustrative example. The first production car, the Benz Velo, was also the fastest car, with a top speed of about 12 miles per hour. The technology quickly improved, and by the 1940s the fastest production cars were capable of traveling over 100 miles per hour, with specially built test cars achieving nearly 375 miles per hour.

“Economic” speed lagged behind this – the maximum speed of the most popular car of 1952 (the Buick Roadmaster) was 91 miles per hour. And because traveling at high speeds has negative externalities (excess crashes, pedestrian safety, etc.), states began to enact speed limits as car speed increased that further capped how fast cars would be allowed to travel. The first speed limit in the US appeared in Connecticut in 1901, limiting speed in cities to 12 miles per hour (the most popular car sold that year, the Oldsmobile Curved Dash, topped out at around 20 miles per hour).

Construction technology also shows this dynamic, with engineering, economic, and legal maximums diverging. The economic height of buildings is lower than what’s physically capable of being built, and once that economic height rises high enough we will start to see legal restrictions spring up that further limit building height.

A brief history of building height

Civilization has been putting up buildings for long enough that we find buildings hitting their economic and legal limits even in ancient history. Roman builders were capable of constructing buildings over 150 feet (48 meters) in height, or about 13 modern storeys – the Colosseum is 159 feet (48.4 meters) tall, and the Pantheon is 141 feet (43 meters) tall. Economic height lagged behind this – textual evidence suggests that Roman residential buildings (insulae) maxed out at around 7 or 8 storeys, with 5 or 6 storeys being more common. Legal limits were sometimes even lower: to reduce the risk of collapse (which was apparently not uncommon) various emperors issued edicts limiting the maximum building height. Augustus limited the height of buildings to 70 Roman feet (slightly greater than an imperial foot), which was then further restricted by Trajan to 60 feet.”

Continue reading here.

From a paper by Tamás Kiss, Hoang Nguyen and Pär Österholm:

“In this paper, we have analysed the relevance of taking non-Gaussianity into account when empirically modelling Okun’s law in Australia, the euro area, the United Kingdom and the United States. Our results based on Bayesian VAR models with stochastic volatility suggest that heavier-than-Gaussian tails find support in some cases. Taking skewness into account is, however, less beneficial in this context considering our baseline sample. Our results confirm that it is important to account for heavy tails in the distribution of macroeconomic variables, an argument put forward by Fagiolo et al. (2008) and Ascari et al. (2015) among others.

It should be noted though that our results to some extent depend on whether data from the corona pandemic are included or not. We believe that including them might be problematic since they should probably be treated as outliers (see the discussion in Carriero et al., 2021). If they nevertheless are treated as regular observations, our analysis indicates that the evidence of non-Gaussianity strengthens. In addition, it can be noted that accounting for non-Gaussianity not only improves the model fit in several cases but it also captures the large swings in the variables without causing large swings in the stochastic volatility.

Apart from the modelling perspective, our analysis has also provided updated international empirical evidence concerning Okun’s law. We find that the dynamic relationship between the variables in all four economies is such that a shock to GDP growth has robustly negative effects on the change in the unemployment rate. This finding is robust to whether we include the period associated with the corona pandemic or not. It confirms Ball et al. (2017) and Ball et al. (2019) who argue that Okun’s law continues to be a robust relationship in empirical macroeconomics. This should be highly relevant information to the central banks of the economies studied here, suggesting that Okun’s law – which has been an important empirical relationship when modelling the economy continues to be useful regardless of modelling choices and time periods.”

Source: Structural Change, Productive Development, and Capital Flows: Does Financial “Bonanza” Cause Premature Deindustrialization?

A recent working paper by A. Botta et al (2022) of the Levy Economics Institute analyzes factors that may have hindered productive development for over four decades prior to the COVID-19 pandemic.

Abstract: We investigate the role of (non-FDI) net capital inflows as a potential source of premature deindustrialization. We consider a sample of 36 developed and developing countries from 1980 to 2017, with major emphasis on the case of emerging and developing economies (EDE) in the context of increasing financial integration. We show that periods of abundant capital inflows may have caused the significant contraction of manufacturing share to employment and GDP, as well as the decrease of the economic complexity index. We also show that phenomena of “perverse” structural change are significantly more relevant in EDE countries than advanced ones. Based on such evidence, we conclude with some policy suggestions highlighting capital controls and external macroprudential measures taming international capital mobility as useful tools for promoting long-run productive development on top of strengthening (short-term) financial and macroeconomic stability.

Source: International Labor Organization

The report examines the impacts of the COVID-19 crisis on global and regional trends in employment, unemployment, and labor force participation, as well as on job quality, informal employment, and working poverty. It also offers an extensive analysis of trends in temporary employment both before and during the pandemic.

On the basis of the latest economic growth forecasts, the ILO is projecting that total hours worked globally in 2022 will remain almost 2 percent below their pre-pandemic level when adjusted for population growth, corresponding to a deficit of 52 million full-time equivalent jobs (assuming a 48-hour working week). Global unemployment is projected to stand at 207 million in 2022, surpassing its 2019 level by some 21 million. Region-wise, the European and Pacific regions are projected to come closest to that goal, whereas the outlook is the most negative for Latin America and the Caribbean and for SouthEast Asia.

The report also goes on to discuss ways for ensuring a sustainable and inclusive recovery. Action points highlighted in the adoption of the Global Call to Action for a Human Centred Recovery from the COVID-19 Crisis that is Inclusive, Sustainable and Resilient at the June 2021 ILO Conference are centered on the theme of addressing systemic and structural inequalities and other long-term social and economic challenges, such as climate change, that pre-date the pandemic.

On cross-country:

• Housing affordability and responses during times of stress: A preliminary look during the COVID-19 pandemic – Contemporary Economic Policy

On the US:    

• Something Has to Give in the Housing Market. Or Does It? There appears to be no quick reprieve coming for rising prices: “It’s not a bubble, it really is about the fundamentals.” – New York Times
• A growing share of Americans say affordable housing is a major problem where they live – Pew Research Center
• Housing-Market Risks in U.S. Are Clustered Around NYC, Chicago. Attom data rank areas by affordability, level of foreclosures. Outside of California, the West is the least fragile market – Bloomberg 
• Available Homes Shrink More Than 30% in Hottest Housing Markets. It would take less than a week to sell all the inventory in Seattle, and about 9 days for San Jose and Denver at current prices, according to Redfin. – Bloomberg
• The YIMBYs are starting to win a few. Slowly but surely, progressives are realizing that they need to build, build, build – Noahpinion
• Austin’s Mayor Seeks $500 Million Bond to Help Ease Housing Crunch – Bloomberg
• Homes Above $800,000 Drive Bidding Wars in the U.S. Housing Market. Nearly two-thirds of pricey homes had competition in December, while supply remains tight due to low mortgage rates and booming demand. – Bloomberg
• Short term rentals are an opportunity for some, but are impacting affordable housing – NPR
• Blackstone’s new real estate play: the rent-to-buy market. Home Partners believes it has created an alternative path to home ownership. But is it really more like another corporate landlord? – FT
• Cincinnati Agency Buys Nearly 200 Rental Homes, Thwarting Private Investors. City plans to upgrade rental homes and sell to tenants in affordable-housing effort – Wall Street Journal
• A Progressive Real Estate Firm Faces Accusations of Discrimination. Redfin has staked its reputation on making a racist industry more equitable. Critics say it has been denying services to Black homebuyers and sellers. – Bloomberg 
• Mortgage denial rates by race in 2020 – Axios
• Study: 20% of Black mortgage applicants in Ga. rejected – Axios
• Black Mortgage Applicants Denied 84% More Often than White Borrowers – Zillow 
• Rising mortgage rates could slow house price surge – Axios
• To Senator Toomey: The Process of Exiting GSE Conservatorship Is Not So Simple – Harvard Joint Center for Housing Studies
• New State Rule Would Force Suburbs to Legalize Thousands of New Apartments Near T Stops – StreetsblogMASS
• Fraud and the financial crisis – AEA
• Housing finance: Insights on the new normal – American Enterprise Institute
• Good news for buyers? New-home construction activity increases, amid a surge in building permits. U.S. home builders face a growing backlog of construction projects they haven’t started work on, which should continue to pump supply into the housing market in 2022 – MarketWatch
• Multi-family housing boosts U.S. homebuilding; supply constraints seen unrelenting – Reuters
• Boom in Home Remodeling May Peak in 2022 – Harvard Joint Center for Housing Studies

On China

• Slowdown in Chinese town highlights potential pitfalls of property reforms. Homeowners’ struggles demonstrate challenge of cooling sector without damaging wider economy – FT
• China Considers Major Step to Ease Developer Cash Crunch. Regulators mull policy package to ease crisis: person familiar. Government is fine-tuning industry crackdown as economy slows – Bloomberg
• China’s Home Market Slump Persists on All Fronts, Hurting Growth – Bloomberg
• China’s GDP growth slows as Covid restrictions and property woes hit demand. Central bank cuts lending rate as economy expands 4% year on year in fourth quarter – FT
• China’s Economy Is Slowing, a Worrying Sign for the World. Economic output climbed 4 percent in the last quarter of 2021, slowing from the previous quarter. Growth has faltered as home buyers and consumers become cautious. – New York Times
• China’s Spreading Property Debt Crisis Pressures Xi to Ease – Bloomberg
• Xi Reshapes China Property Market Paving Way for State Dominance. Officials seeking to quash speculation, limit financial risk. State-owned developers seen taking over the key industry – Bloomberg
• China Experts Map Out Endgame for Xi’s Revamped Property Sector. State-owned firms seen taking control of real estate market. Transition will be ‘long and painful,’ Bocom’s Hao Hong says – Bloomberg
• How Too Many Boys Skew China’s Economy. The government’s fight to control housing prices and insulate the economy is bound up with some very fundamental human impulses—and decisions made decades ago – Wall Street Journal

On other countries:  

• [Canada] Housing demand in Canada: A novel approach to classifying mortgaged homebuyers – Bank of Canada
• [Canada] We don’t expect an increase in interest rates to have a huge impact on housing supply: CHBA CEO – Bloomberg
• [Canada] House hunters in Canada face tightest market on record. There are so few homes for sale in Canada that people are starting to call it a housing crisis. – Al Jazeera
• [Czech Republic] EU’s Hottest Property Market Fuels Aggressive Czech Rate Hikes – Bloomberg
• [France] Working from home and corporate real estate – VoxEU
• [Germany] Bundesbank warns German lenders of complacency as house prices soar. Credit risks have been ‘underestimated’, vice-president Claudia Buch tells FT – FT
• [Ireland] Rising rents and surging prices trigger ‘collapse’ in home ownership. Housing in Ireland is ‘severely unaffordable’, report by Parliamentary Budget Office says – The Irish Times
• [Italy] The Agglomeration of Urban Amenities: Evidence from Milan Restaurants – NBER
• [New Zealand] New Zealand Home Price Increases Show Signs of Moderating – Market Watch
• [New Zealand] New Zealand’s house prices skyrocketing – Global Property Guide
• [Slovak Republic] Slovak Republic’s house price growth accelerating – Global Property Guide
• [United Kingdom] UK mortgage demand cools amid economic concerns. Would-be homebuyers confound forecasters and turn cautious, BoE survey – FT
• [United Kingdom] The big idea: could fixing housing fix everything else, too? From inequality to pollution, Britain’s housing crisis sits at the root of a surprising range of problems – The Guardian
• [United Kingdom] Mortgage values fall from nutty 2020 high but new homebuyers are still feeling the pain. Surge in mortgages during pandemic suggests house prices will continue to grow for first half of 2022 – at least – The Guardian
• [United Kingdom] UK house prices rise annual 10.0% in November – Reuters
• [South Africa] Rate Hikes Unlikely to Weigh on South Africa Home Buying in 2022 – Bloomberg
• [Taiwan] Taiwan Central Bank Chief Repeats Stance on Rates-Housing Link – Bloomberg