The Unassuming Economist

From the Institute for New Economic Thinking (by Arjun Jayadev):

“Axel Leijonhufvud showed economists a promising path forward. They should have taken it. Leijonhufvud passed away on May 5, 2022

C an we theorize the economy as an entity that is growing, evolving, never in equilibrium? An economy passes through periods of intense instability and groping towards an uncertain future as a matter of course? How might one begin?

 “The pretense that we know the future probabilistically as a given set of probability distributions of every damn thing is, I think, a pretty dangerous delusion, but it’s also a comforting one to some people.”

The year was 1967. Young Axel Leijonhufvud sat in front of a pile of papers, full of unfinished notes, half-worked through arguments and intellectual dead-ends that he had been at for nearly four years. Two years into a tenure track position in the economics department at the University of California Los Angeles, he seemed unable to fashion a coherent dissertation from the morass of ideas in the sprawl. This year was his last chance to do so if he wanted to remain in academic employment.

The Swedish émigré had rather immodestly and perhaps unwisely decided that his doctoral work should be on some of the deepest problems of macroeconomics: why was it that the capitalist economy sometimes fails calamitously, and why was it that the Great Depression (still very much in the public memory in the 1960s) had been so very different from ordinary recessions? In trying to understand that defining period of the 1930s he had undertaken a wide range of reading of earlier economists, including a closer reading of the ur-text of the discipline –the General Theory of Employment, Interest and Money by John Maynard Keynes.”

Continue reading here.

Source: Peterson Institute of International Economics

While a lot of research conducted from 2021 until March of 2022 suggests that labor markets in the US reached record high levels of tightness as job openings and quits rose, recent evidence collected by the Peterson Institute indicates the possibility of a potential cool down. The underlying argument driving this idea is that the sharp spike in nominal wages in 2021 could have been a result of some post-pandemic factors that shaped expectations of longer-run inflation which ultimately got dragged until 2022. So even though labor force participation rates in the US in April 2022 remained at 3.6%, 0.1% higher than the corresponding pre-pandemic level, the authors argue that this shortfall in employment is driven by a labor supply shortage as demand is robust.

The article also touches upon related issues like rising nominal wages that are beginning to plateau now and a somewhat alarming drop in real wages.

Read the full article to know more.

On cross-country:

• Changes in the geography housing demand after the onset of COVID-19: First results from large metropolitan areas in 13 OECD countries – OECD
• EU Plans to Block Russians From Buying European Real Estate. Measure to affect Russian nationals, residents and entities. Member states must sign off on ban, which is subject to change – Bloomberg

On the US:    

• The Extraordinary Wealth Created by the Pandemic Housing Market. Rarely have so many Americans gained so much equity in so little time, but it’s also inseparable from the housing affordability crisis. – New York Times
• Joe Biden Takes Another Stab at Zoning Reform. The administration is proposing to spend $10 billion over ten years incentivizing local and state governments to remove regulatory barriers to new housing construction. – Reason
• Is Real Estate a Shelter From Inflation? Not Always. Property is typically considered a haven when prices are rising. This time, investors should be choosy about where they put their money. – Wall Street Journal
• How the pandemic has changed American homebuyers’ preferences. They are flocking to warm suburbs – The Economist
• The Fed wants to cool the U.S. housing market. Here’s what that feels like – Reuters
• Home Buyers Are Finding Ways to Take the Sting Out of Rising Mortgage Rates. More borrowers are paying upfront fees and considering adjustable-rate mortgages to lower their monthly payments – Wall Street Journal
• The Policymaking Implications of Record-High Mortgage Origination Profits During the Pandemic – Harvard Joint Center for Housing Studies
• What Does Affordable Housing Do to Nearby Property Values? A new Urban Institute study examined low-income housing in Alexandria, Virginia, to look for new answers to an age-old question. – Bloomberg
• First-Time Homebuyers are Driving the Market Forward – Freddie Mac
• A housing crash is unlikely, but a correction could be around the corner. Here’s the difference. – Business Insider
• Are soaring US property prices here to stay? Two analogous periods — 2007 and 1843 — offer big clues to what happens next – FT

On China

• Mobility restrictions and their implications on the rental housing market during the COVID-19 pandemic in China’s large cities – Cities
• Why easing policies might not revive China’s property market any time soon – Straits Times
• China Bets the House on New Houses – Council on Foreign Relations

On other countries:  

• [Australia] New policies barely lighten the load when it comes to affording a home –Sydney Morning Herald
• [Canada] Canada open to Politicians are selling us a myth on housing: that more supply will be ou salvation – Globe and Mail
• [Canada] From boom to glut: Canada’s housing plan could backfire on Trudeau – Reuters
• [New Zealand] RBNZ Says Sharp Housing Correction ‘Plausible’ as Rates Rise – Bloomberg 
• [United Kingdom] Mortgage rate rises point to slowdown in UK housing market. Higher home loan costs and the cost of living crunch are bringing caution to buyers – FT

From Apricitas Economics:

“In the years before and after the 2008 recession, American homebuilding completely collapsed. The financial crisis caused housing starts to plummet, and a weak labor market couldn’t support a recovery in rents until 2011. By 2015, though, the problem swapped: weak construction levels couldn’t support a recovery in the labor market. Real rents began climbing rapidly and consistently—something that hadn’t happened before in modern American history.

Today, new housing starts are higher than at any point since early 2006—but it’s nowhere near enough to keep up with population growth, let alone make up for the decade of lost construction. The pandemic has driven increased demand for housing as living patterns shift and incomes improve, but construction is falling behind. Supply chain issues are increasing building costs, keeping housing completions low, and preventing many projects from even breaking ground. Underconstruction has pushed vacancy rates to the lowest levels in nearly 40 years, indicating just how severe the housing shortage has gotten.

There may be a construction boom, but it’s a false boom—one dwarfed by the size of the demand it is trying to satiate. Across America (but especially in major cities), it still remains incredibly difficult or outright illegal to build new housing of any type. More and more Americans are moving into lower cost cities in the South and Southeast, but even these places are failing to keep up. The US will still need millions more homes before demand is even close to satiated—and today’s construction boom needs to be placed in the proper context of an acute housing shortage.”

From The Economist:

“Lifestyle changes had bigger effects. Because city dwellers could not meet face-to-face, they dispersed, mostly to the suburbs. Holding other factors constant, price changes were 10-15 percentage points greater in middling-density counties like Williamson than in big cities or rural areas.

Covid has also led people to spend more time outdoors. In turn, buyers have bid up homes in areas where it seldom rains, summers are balmy or, like Collier, winters are mild. Weather explains 16 percentage points of the gap in price gains between sunny California and frigid Minnesota.

A final factor is remote labour. Before the pandemic, geographic inequality had been rising: areas that were already expensive saw the biggest price gains. In counties that rely on industries, like construction, in which people have to turn up to work, this trend has continued since 2020.

However, the pattern has reversed in areas dominated by industries amenable to remote work, such as finance. Since covid emerged, price gains have been large where housing was previously cheap, and smaller elsewhere. This supports recent research showing that remote workers tend to move to reduce their cost of shelter.”