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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and Louise Sheiner.
In an analysis of the decline in real interest rates, Maurice Obstfeld of the Peterson Institute for International Economics argues that the decline in real rates over the past three decades occurred in three phases. In the 1990s, retirement savings from the baby boom generation in advanced economies, higher inequality (which leads to higher savings by the wealthy), and higher firm market power (which reduces the demand for capital) pushed down interest rates. These trends continued through the Global Financial Crisis (GFC) and were compounded by highly accommodative monetary policy, globalization, and growth in emerging markets which increased global savings. Post-GFC but pre-COVID, demographic factors continued to weigh on real rates and global savings rose while higher risk aversion increased demand for safe assets. Obstfeld cautions that estimates of the neutral rate are unreliable guides for monetary policy because they come from closed-economy models that ignore global determinants of interest rates. Monetary policy, he argues, should consider not only the domestic market but also the current account and global financial conditions. Looking forward, Obstfeld expects that “The recent rates run-up evident in government bond markets is likely a peak that could recede not far down the road. While some fraction of the recent interest rate rises may prove persistent, real interest rates will not return durably to their levels of three decades ago anytime soon.”
Noncompete agreements (NCAs) that restrict workers from joining their employers’ competitors affect between 18% and 47% of the American workforce. Using variation in state enforceability of NCAs from 1991 to 2014, Matthew Johnson of Duke, Kurt Lavetti of Ohio State, and Michael Lipsitz of the Federal Trade Commission find that NCAs lower worker earnings. For example, a state that moves from the 25th percentile to the 75th percentile of enforceability sees a 1.7% average decline in annual earnings. NCAs also reduce labor market dynamism. For professions that are frequently bound by NCAs, such as physicians and hair stylists, this increase in enforceability results in a 3.7% decrease in job-to-job changes. The authors also find that the downward effects of NCAs on earnings are more pronounced among women and racial minorities.
The Jones Act requires that cargo shipped between U.S. ports be transported on ships that are built, managed, and crewed by Americans. Using data on petroleum product prices from 2018 to 2019, Ryan Kellogg of the University of Chicago and Richard Sweeny of Boston College find that eliminating the Jones Act would result in products from the U.S. Gulf Coast completely replacing imports of jet fuel and diesel for the entire U.S. East Coast. Gulf Coasts products would replace conventional gasoline imports in the Lower Atlantic region but not in northern coastal areas. Shipments of light crude oil from the Gulf Coast, however, would not out-compete foreign products. The authors estimate that from 2018 to 2019, removing Jones Act regulations would have reduced the average cost of gasoline on the East Coast by $0.63 per barrel, jet fuel by $0.80, and diesel by $0.82. To equalize with East Coast prices, gasoline prices on the Gulf Coast would rise by $0.30 per barrel on average. Removing Jones Act barriers would result in a net gain in efficiency totaling $403 million annually, the authors conclude.
Q: "When I look back over history, soft landings are quite rare..."
A: " Well, I agree with you that it is an unusual thing to have happen, and it certainly takes skill on the part of the Fed to calibrate monetary policy properly. But if you just look at the data, it looks as though that's the path we're on. So many economists were saying there's no way for inflation to get back to normal without its entailing a period of high unemployment, a recession. And a year ago, I think many economists were saying a recession was inevitable. But actually I've never felt there was a solid intellectual basis for making such a prediction because the times when you've in the United States, in a sense needed a downturn to get inflation down," says Janet Yellen, United States Secretary of the Treasury.
"Those were periods like after the oil shocks of the '70s when inflation expectations were clearly had moved much higher and inflation then becomes self-perpetuating. You have a wage price spiral that really the only way to bring inflation down is getting inflation expectations down. And that involves a period of high unemployment that pushes inflation down and shows people you were wrong, inflation's actually lower than you thought. That's a painful process. We didn't need that. And because inflation expectations had never meaningfully ratcheted up on a long-term basis, we just had to have the economy normalize and get the labor market back to a sort of full employment state to bring inflation down. Now of course, there were shocks along the way. Russia's invasion of Ukraine led to soaring food and energy prices that of course boosted inflation and had the potential to dislodge inflation expectations. So there've been many risks along the way, but we've managed to avoid the adverse real consequences of those risks. And I think we're on a soft landing path, which is highly desirable of course."
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