Poland’s Electoral Catalyst

James BaileyLeave a comment

The latest Global Valuation update this week shows that Poland (along with Colombia) has some of the world’s cheapest stocks. Their overall Price to Earnings ratio is 8, compared to 28 for the US:

Does this mean Polish stocks are a good deal, or that investors are rationally discounting them as being risky or slow-growing? After all, they had a low P/E ratio last time I wrote about them too.

Stocks can rise either based on higher investor expectations (higher P/Es) or improved fundamentals (earnings rise, investors see this and bid up the price, but only enough to keep the P/E ratio roughly constant). Over the past year Polish stocks have done the latter; I bought EPOL (the only ETF I know of that focuses Poland) a year ago because its P/E was about 6. Since then its up 70% and the P/E is still… about 6.

Why haven’t investors been excited enough about this earnings growth to bid up the valuation? I think the biggest concern has been political risk, given that the ruling Law and Justice party has been alienating the EU and arguably undermining the rule of law and finding pretexts to arrest businessmen critical of the government.

The recent Polish election promises to change all this. A coalition of ‘centrist’ opposition parties won enough votes to oust the current government, and Washington, the EU, and business seem relieved:

As Europe’s sixth-largest economy, a revitalised pro-EU attitude in Poland would be particularly welcome.

“It will be a positive development for sure because it will unlock the (EU) money that has been withheld and reduce a lot of the tension that has been created with Brussels,” said Daniel Moreno, head of emerging markets debt at investment firm Mirabaud.

Some 110 billion euros ($116 billion) earmarked for Poland from the EU’s long-term budget and the post-pandemic Recovery and Resilience Facility (RRF) remain frozen due to PiS’ record of undercutting liberal democratic rules.

The case for optimism is an influx of EU funds, less risk for business, and an appetite for higher valuations among Western investors who no longer dislike the government.

Being an economist I also have to give you the “other hand”, the case for pessimism: the new government hasn’t actually formed yet, meaning the current one still has the chance for shenanigans; population growth has been strong recently with the influx of Ukrainian refugees, but it is likely to go negative again soon; and EPOL is almost half financial services, which have relatively low P/E even in the US right now.

Nothing is guaranteed but this is my favorite bet right now. I find it amusing that this “risky” emerging market has had a great year while “safe” US Treasury bonds are having a record drawdown (easy to be amused when I don’t own any long bonds and they have done surprisingly little damage in terms of blowing up financial institutions so far). I emphasize the investing angle here but hopefully this signals a bright future for the Polish people.

Disclaimers: Not investment advice, I’m talking my book (long EPOL), I’ve never been to Poland and I’m judging their politics based on Western media reports

Kids Are Much Less Likely to Be Killed by Cars Than in the Past

Jeremy Horpedahl8 Comments

On X.com Matt Yglesias posted a chart that sparked some conversation about child safety:

Of course, it was probably more his comment about the “rise of more intensively supervised childhood activities” that generated the feedback and pushback. And I assume his comment was partially tongue-in-cheek, as often happens on Twitter, and designed to generate that very discussion. Still, it is worth thinking about. Exactly why did that decline happen?

I’ve posted on this topic before. In my March 2023 post, I looked at very broad categories of child death. While all death categories have declined, about half of the decrease (depending on the age group, but half is about right) is from a decline in deaths from diseases, as opposed to external causes. And fewer disease death can largely be attributed to improvements in healthcare, broadly defined. Good news!

Of course, that means that about half of the decline is from things other than diseases. What caused those declines? Let’s look into the data. Specifically, let’s look into the data on deaths from car accidents.

Continue reading →

Why Is Stock Market Volatility ( VIX ) So Low?

Scott Buchanan1 Comment

What is the VIX and why should you care? The CBOE Volatility Index (VIX) is a measure of the expected near-term price swings in the S&P 500 stock index (SPX). The VIX value is derived from the prices that market participants are willing to pay for options that expire roughly 30 days in the future. Typically, movements upward in VIX correspond to movements downward in broad market averages, since price volatility is usually associated with some “problem” cropping up. During market turbulence, the VIX can shoot up very high, very fast, with a percentage of change far higher than for stock prices.

The VIX is know as the “fear gauge,” since it provides a standardized measure of market volatility expectations. It is thus a number that conveys significant information about the attitudes of market participants. Also, it provides opportunities for investors to make (or lose) a lot of money quickly. You cannot invest directly in the VIX (it is just a calculated number), but you can buy/sell VIX futures and options on those futures. Also, there are convenient funds that buy (e.g., VXX) or short (e.g., SVIX) the VIX futures. Because the VIX makes much bigger percentage moves than stock themselves, you can make a killing with a modest investment, providing you get the timing right.

For instance, over the past twelve months, the SPY S&P 500 fund has gone up by about 18%, so $10,000 would have gone to $11,800. That’s pretty nice. But in that same period, SVIX went up by 143%, which would take $10,000 to $24,300 (see below).  (Nerdy notes: (a) SVIX shorts the VIX, so it generally goes up when VIX goes down, i.e., when stocks go up. (b) There is another factor with SVIX called the monthly roll, when tends to make it rise something like 2-4% a month on average. This monthly roll factor is layered on top of the rise and fall in SVIX value based on VIX level. So even if VIX is flat, SVIX may go up something like 30% in a year. )

SVIX and SPY share prices for the past year. Source: Seeking Alpha

Of course, the price swings on SVIX cut both ways. It is down hugely from its highs a month ago, as VIX has increased from roughly 14 to 20. You can go even more crazy by purchasing/shorting VIX-related funds like UVXY that are leveraged at more than 1.0X.

Even you were even more clever, you could have made even more, much more, by working VIX options. Also, if you just want to hedge your stock portfolio against sudden drops, it is often more economical to do that by buying (call) options on the VIX, than by buying (put) options on the stocks (e.g., SPX, SPY) themselves.

During long periods of market stability, the VIX tends to slowly drift downward, to an asymptote  somewhere in the 12-13 range. For example, in the five-year plot below, VIX spend much of 2019 around 13, then shot up over 80 within a month when the scope of the COVID pandemic became apparent. It then drifted downwards (with many spikes along the way, especially during the big bear market of 2022), getting down to around 14 for much of June-September of this year.

VIX Level for past five years. Source: Seeking Alpha.

It is notable for VIX to be this low, considering a number of serious current market concerns (the relatively high valuation of the stock market, stubborn inflation, hawkish fed, gridlock in Washington, etc.). And now with serious conflict in the Middle East resulting from the massive attacks on Israeli civilians, the VIX has so far only risen to 20.

A number of market commentators have noted the seemingly anomalously low level of the VIX, and have proffered various explanations. They observe that macroeconomic outlook continues to look probably OK. They also point to some fundamental changes in the stock market operations. One factor is the rise of zero-day options, very short-term stock options that expire within one day. More of the speculative action has gone to those options, with proportionately less in the month-out options that drive the VIX.

Also, the stock exchanges have implemented various “circuit-breakers,” which halt trading for specified time periods, if swings in stock prices get out of hand. This gives participants a chance to cool off and recalibrate, and not have to make frantic, quick (possibly losing) trades in order to protect themselves. Here is a diagram illustrating these circuit breakers, which are triggered by big moves in the broad S&P 500 stock average:

 Source: Seeking Alpha, article by Christopher Robb

There are also Limit Up/Limit Down (LULD) rules in place that temporarily halt trading in an individual stock if its price swings exceed some designated band.  is designed to stop excess volatility in a single stock.  With these protective circuit-breakers in place, market participants seem less worried about huge price swings coming at them, and hence may feel less of a need to “buy insurance” by purchasing options. This suppression of stock option prices in turn leads to a lower calculated VIX.

As usual, this blog post is not meant to be advice to buy or sell any security. (And seriously, the “never bet more than you can afford to lose” rule applies doubly with the high-volatility products discussed here).

What’s the closest substitute for a firearm?

mdmakowskyLeave a comment

For those earnestly interested in addressing issues surrounding firearms in the United States (and not just aligning with a political coalition), this working paper from Moshary, Shapiro, and Drango (MSD from here on) is an absolute must read. The technical moves are an interesting overlap of industrial organization economics and marketing analytics, but the punchlines all hit on the same topic: how do current and possible future firearms owners respond to prices for different products? When MSD estimate the price elasticities for different firearms, they are in effect asking one of those deep questions in economics that is always lying below the surface: are these goods substitutes?

It’s uncanny how much of the disputes within economic policy and regulation come down to how one defines substitutes. Is Coca-Cola a monopoly? Well, that depends on whether or not you think Pepsi or water is a close enough substitute. Should vapes be banned? That depends on how much demand you think will shift over to traditional cigarrettes. No matter your thoughts on marijuana legalization, I promise you the marketing and lobbying wings of the largest alcohol distributors have invested a lot in determining if cannabis is a substitute for their products (spoiler: it is).

Should assault weapons be banned? I am on the record as saying they should be, but the results in MSD give me pause. The bulk of firearms deaths are from handguns, and the bulk of people in the market for an assault rifle point to a handgun as their next-best alternative if an assault rifle is not an option. Would an assault rifle ban have the unintended consequence of pulling more handguns into the market and, in turn, create more firearms deaths?

This is not an easy question to answer because we haven’t actually taken the time to define the good. And by define the good, I mean define the bundle of attributes actually being purchased. The most obvious attribute of a firearm is the ability to point it at a living creature and take away its entire future. That it is such a chilling capacity that we sometimes fail to fill in the rest of the ledger. Firearms are a source of personal security, no small detail for isolated individuals. They are a means of pest control, an absolute necessity for anyone farming or raising smaller livestock. They are a way of signaling your group identity to others. Of affirming your idependence and strength. They are collectable, both as historical vintages and customizable baubles. They are highly effective at hunting game. They are fun to shoot at targets.

All of that means that when we consider banning, regulating, or taxing a specific class of firearm, we have to think really hard about the bundle of attributes being purchased and consumed, and what the next best alternative is for each customer shifted to a different product on the margin. The outcomes are perhaps more unpredictable than is often considered. Who is the marginal customer and what exactly is it that they want?

Consider a ban on assault rifles. Some will shift their demand to the black market. Despite the obvious danger in a group of individuals who illegally purchase high power firearms, we can actually ignore them at this stage because there’s no option where they don’t acquire assault weapons. What about the rest? Some are desperate to protect their homes. Hopefully they will be easier to persuade now that a shotgun is their best option (pro tip: it always was). Some want to maximize their capacity to do harm: absent maximal power, they may now opt for concealability and mobility i.e. a handgun. This seems like a particularly viable story in states that allow for the carrying of concealed weapons in public with or without a license.

Some, however, might view their $1200-$3000 might be better spent putting a snorkel on their jeep engine ($700), a bowie knife on their hip ($250), and bottle of Michters Single Barrel Whiskey on their shelf ($500*). Maybe they’ll blow it all at once on a lift kit for their truck. We can rest assured that the marketplace will offer no shortage of goods that offer little value save for people to impress their friends with what they just bought, which is a blessing. Substitution to tactical sunglasses and raunchy mudflaps is unequivicably preferable to more Glock 19s.

What about a ban on handguns? Here MSD identifiy an important asymmtry: customers in the market for a handgun don’t consider long guns, while would be purchasers of long guns frequently explicitly consider a handgun on their 2nd choice. From the point of view of minimizing firearms deaths, a ban on handguns may be optimal, but it is hard to predict what the substitutes will be. Based on their measured elasticities of demand for different types of guns, MSD estimate that a 10% tax on all firearms would have the same net effect on total firearms in the market. Perhaps most importantly, it is highly unlikely to backfire into a shift in market composition towards assault weapons, something that can’t be ruled out by a handgun ban. Combined with current political realities, a tax on firearm would appear more feasible than any broad class bans.

For a large, but not unanimous, share of social scientists studying firearms, the outcome desired is 1) a smaller fraction Americans with access to firearms, and 2) reduced capacity to commit large scale acts of violence with high powered firearms. Putting aside any disagreement on the desired outcomes, the policy steps forward still allow for meaningful uncertainty. Yes, I know that heavily restricting firearms in Australia has been wildly successful. It’s hard to argue with a total homicide rate roughly a tenth of the US rate. But we can only consider the policy options that are actually on the table and the voter status quo. Current options are likely limited to either a narrow ban on a subset firearms or a modest tax on them all. The status quo is one where a third of all Americans own a gun, 81% of whom feel safer because they have one.

Given these unavoidable constraints, good firearms policy (not optimal, merely good) requires knowing what it is that people are buying so we can tilt the playing field in the right way. We live in a world where politicians are sending AR-15 toting Christmas cards and pantomime tough guys are ordering their Subway Chicken Teriyakis while armed to the gills. There’s no policy prescription that’s going to magically create earnest politicians and emotionally secure men, but everyone responds to prices.

*I apologize to fans of Michters, I just don’t like their bourbon very much relative to the price. If you want to impress your friends, track down a bottle of William Larue Weller. It’s expensive, but it might be the best bourbon in the world, and that includes all of the Pappys.**

**Okay, its not as good as the Stitzel-Weller Pappy 20 I first tried in 2011. That’s still the greatest thing I’ve ever consumed. But that doesn’t exist anymore as far as I know or could hope to afford. My advice is to let it all go and just buy a bottle of Four Roses Single Barrel. Always less than $50, always fantastic.

Can anyone be an entrepreneur?

Joy BuchananLeave a comment

Hardly the most important thing going on this week, but Matt Yglesias said something I have some evidence against. Yglesias claimed that, “basically anyone could massively increase the value of a large plot of land in the United States if he were exempted from land use rules.”

What percent of people do you think could massively increase the value of a barren plot of land, even with no land use rules?

When I ran an experiment about intellectual property protection with Bart Wilson, we created a space for people to mine valuable “creative” goods, analogous to writing a hit song. The goods could be distributed to the rest of the subjects in the experiment to create a surplus for everyone.

This screenshot shows time spent in the “studio” for groups that did have intellectual property protection. Group 1 (IP1) spent less time in the studio even than any of the groups who were not offered intellectual property protection. We concluded that Group 1 did not have any people with entrepreneurial tendencies. We had not expected this to happen, so we highlighted the role of entrepreneurs in our conclusion from this experiment. Institutions interact with entrepreneurship. We found that more “entrepreneurship” emerged under the IP institution.

Is the repair revolution coming?

Joy Buchanan4 Comments

Every sentence in this article is fascinating, since I have been writing about fast fashion.* Anything I put in quote form comes from The Guardian.

The word “revolution” in the title of this article is minor clickbait. Perhaps it would be more accurate to say: “Clothes repaired in workshop, 19 people employed” That wouldn’t get any clicks. However, I am an idealist, and I am going to stay a bit on board with the revolution. I, too, have pondered and grieved over the amount of waste heading into landfills. There could be some kind of revolution ahead, whether it is of the repair type or not.

The communal garden and bespoke textile art lend a creative startup feel, and the slogan “repair is the new cool” appears everywhere. But what’s happening here is far from ordinary startup stuff. At United Repair Centre (URC), newcomers to the Netherlands from across the world, many of them former refugees, are using their tailoring skills to mend clothes on behalf of some of the world’s biggest brands. 

Immigrants are sewing, but no Dickensian horrors here. This place “has a laid-back Dutch vibe.”

Ambrose, who greets me, mans the front desk. He’s a 20-year-old Palestinian fashion fan, who was born in Syria and lived in Abu Dhabi before moving to the Netherlands in May; he is working in parallel with studying for a fashion and design diploma. Ambrose started at URC in May and loves it: the way he gets to work in collaboration with the tailors, giving advice and learning from their years of experience. “It’s really easy, fun, chill … “

The verdict is in. Work is fun.

Repair might be cool, but is it new? Consider Jo March from “Little Women” who was an American bouncing around between rich and poor status in the 1860s. American GPD per capita in 1860s was less than $3,000. That would be considered very poor today. Since manufactured goods were expensive and Jo March had a low opportunity cost of time, she spent lots of time mending clothes. Her passion was writing but she had no choice – that was how she contributed to her household production. Very few families at that time, even in the upper class, could afford to regularly buy new clothes from a shop.

Don Boudreaux explained that even modern rich people “recycle” clothes when it’s in one’s selfish interest. Washing and “re-use” of clothes, typically, is beneficial enough to outweigh the cost of maintaining and storing them. Sometimes we go above and beyond by donating them or maintaining them specifically because we are trying not to “waste” something, but that comes at an individual cost to us.

The author of the article writes:

I take a taxi from the station to URC because I’m running late, but I’m taken aback when en route the driver points out the many conveniently located stations and tram stops I could use for my return journey.

This is a perfect encapsulation of why rich people do not repair clothes. They are zipping around to high-productivity work meetings. The opportunity cost of time has gone up. Taking the bus is costly in terms of time, the scarcest resource of the rich.

Where I see hope for the repair “revolution” is in artificial intelligence (AI). AI can make up for our scarce time and attention. If AI can make repairs less costly in terms of time, then rich people might do it. If it doesn’t make economic sense, then it won’t scale the way the author is hoping.

Currently, the “revolution” is employing 19 people full-time. By the year 2027, all they are hoping for is to expand to 140 tailors. Hardly a revolution on the jobs front. But that’s the hopeful scenario. If it’s labor-intensive, then it won’t work. (See my ADAMSMITHWORKS post on cloth production and labor.)

Is repair reaching a tipping point?

There’s one unlikely scenario in which expensive repairs will get paid for. What rich people resoundingly want is kitchen renovations and new clothes, partly because it confers status. Could it become cool to live with those outdated cabinets and wear that repaired Patagonia vest for the next two decades? … could it? Vision: “Wow. I see that you guys have outdated ugly countertops. Nice. You resisted the desire to renovate your kitchen even though it’s within your budget.”

Even changing status markers are unlikely to tip the scale in the case of broken equipment or torn clothes. AI might allow us to repair a refrigerator instead of trash it.

URC tracks repairs using software initially developed by Patagonia, which it has built on and uses for the other brands involved.

There it is. Software makes the dream work.

Shein and the like are out there, churning out, in dizzying volumes, fast fashion that can’t be repaired.

In my conversations with Americans, many do not know what “fast fashion” is. That’s fast fashion. The 19-140 tailors are currently no match for Shein.

There isn’t always much common language – operational manager Hans says they resort to Google Translate quite a bit – but there’s plenty of laughter.

The AI, again! We are living in the globalized AI-powered future.

Lastly, the article was brought to my attention on Twitter (X) by Bronwyn Williams and Anna Gat.

* I’m going to have a fashion article coming soon in this series: https://www.cato.org/defending-globalization

The Goldin Nobel

James BaileyLeave a comment

This week the Nobel Foundation recognized Claudia Goldin “for having advanced our understanding of women’s labour market outcomes”. If you follow our blog you probably already know that each year Marginal Revolution quickly puts up a great explanation of the work that won the economics Prize. This year they kept things brief with a sort of victory lap pointing to their previous posts on Goldin and the videos and podcast they had recorded with her, along with a pointer to her latest paper. You might also remember our own review of her latest book, Career and Family.

But you may not know that Kevin Bryan at A Fine Theorem does a more thorough, and typically more theory-based explanation of the Nobel work most years; here is his main take from this year’s post on Goldin:

Goldin’s work helps us understand whose wages will rise, will fall, will equalize going forward. Not entirely unfairly, she will be described in much of today’s coverage as an economist who studies the gender gap. This description misses two critical pieces. The question of female wages is a direct implication of her earlier work on the return to different skills as the structure of the economy changes, and that structure is the subject of her earliest work on the development of the American economy. Further, her diagnosis of the gender gap is much more optimistic, and more subtle, than the majority of popular discourse on the topic.

He described my favorite Goldin paper, which calculates gender wage gaps by industry and shows that pharmacists moved from having one of the highest gaps to one of the lowest as one key feature of the job changed:

Alongside Larry Katz, Goldin gives the canonical example of the pharmacist, whose gender gap is smaller than almost every other high-wage profession. Why? Wages are largely “linear in hours”. Today, though not historically, pharmacists generally work in teams at offices where they can substitute for each other. No one is always “on call”. Hence a pharmacist who wants to work late nights while young, then shorter hours with a young kid at home, then a longer worker day when older can do so. If pharmacies were structured as independent contractors working for themselves, as they were historically, the marginal productivity of a worker who wanted this type of flexibility would be lower. The structure of the profession affects marginal productivity, hence wages and the gender gap, particularly given the different demand for steady and shorter hours among women. Now, not all jobs can be turned from ones with convex wages for long and unsteady hours to ones with linear wages, but as Goldin points out, it’s not at all obvious that academia or law or other high-wage professions can’t make this shift. Where these changes can be made, we all benefit from high-skilled women remaining in high-productivity jobs: Goldin calls this “the last chapter” of gender convergence.

Source: A Grand Gender Convergence: Its Last Chapter

There is much more to the post, particularly on economic history; it concludes:

When evaluating her work, I can think of no stronger commendation than that I have no idea what Goldin will show me when I begin reading a paper; rather, she is always thoughtful, follows the data, rectifies what she finds with theory, and feels no compunction about sacrificing some golden goose – again, the legacy of 1970s Chicago rears its head. Especially on a topic as politically loaded as gender, this intellectual honesty is the source of her influence and a delight to the reader trying to understand such an important topic.

This year also saw a great summary from Alice Evans, who to my eyes (admittedly as someone who doesn’t work in the subfield) seems like the next Claudia Goldin, the one taking her work worldwide:

That is the story of “Why Women Won”.

Claudia Goldin has now done it all. With empirical rigor, she has theorised every major change in American women’s lives over the twentieth century. These dynamics are not necessarily true worldwide, but Goldin has provided the foundations.

I’ve seen two lines of criticism for this prize. One is the usual critique, generally from the left, that the Econ Nobel shouldn’t exist (or doesn’t exist), to which I say:

The critique from the right is that Goldin studied unimportant subjects and only got the prize because they were politically fashionable. But labor markets make up most of GDP, and women now make up almost half the labor force; this seems obviously important to me. Goldin has clearly been the dominant researcher on the topic, being recognized as a citation laureate in 2020 (i.e. someone likely to win a Nobel because of their citations). At most politics could explain why this was a solo prize (the first in Econ since Thaler in 2017), but even here this seems about as reasonable as the last few solo prizes. David Henderson writes a longer argument in the Wall Street Journal for why Claudia Goldin Deserves that Nobel Prize.

Best of all, Goldin maintains a page to share datasets she helped create here.

Is the Job Growth Driven by Part-Time Workers?

Jeremy Horpedahl1 Comment

A few weeks ago I wrote about several measures of the labor market, and whether the labor market was actually doing well. It’s a good idea to look beyond the headline unemployment rate, but even looking at alternative unemployment rates, labor force participation, employment rates, and unemployment insurance claims, I concluded in that post that the labor market is still looking healthy.

Lately I have heard another objection to the job growth numbers: part-time employment. I’ve seen this pop-up a few times on Twitter lately and just yesterday my co-blogger Scott Buchanan (in a post primarily about excess savings) stated that “much of the jobs creation this year has been in the part-time category.”

So is the jobs recovery mostly about part-time jobs? What is going on?

First things first: most of the data on part-time employment is from the household survey. There’s already a lot of noise in the household survey, due to the sample size, and part-time workers are a small share of the workforce, so expect it to be even noisier. In short, don’t trust one-month fluctuations too much. Furthermore, most of the data folks look at is seasonally adjusted. That’s generally good practice! But again, for a small number in a small sample, the seasonal adjustment factors won’t be perfect. Don’t read too much into one or a few months of data.

Let’s get the big picture first. How much of the labor force in the US is usually working part-time (defined in most data as less than 35 hours per week)? As usual FRED is the best place to go for graphing BLS data:

Continue reading →

Pandemic Excess Savings Still Powering the Hot Economy

Scott Buchanan2 Comments

Well, the great “Recession Starting Next Quarter” that has been predicted for nearly two years is nowhere in sight. In fact, the Bureau of Labor Statistics just last week posted an absolute blowout jobs number:

The U.S. economy churned out a blockbuster 336,000 jobs in September, smashing economists’ expectations and heightening the risk that policymakers will have to push even harder to slow down the economy. The data released Friday by the Bureau of Labor Statistics offered yet another snapshot of the job market’s remarkable strength, with the unemployment rate holding at 3.8 percent and wage growth outpacing inflation in a boost to workers. But it was also the latest example of an economy that simply refuses to slow down, despite the Federal Reserve’s aggressive attempts to get prices and hiring closer to normal levels…The September report, which showed the largest number of gains since January, had been expected to indicate continued moderation in the labor market, with forecasts of around 170,000 jobs created. Instead, it came in at nearly twice that amount. (Lauren Kaori Gurley and Rachel Siegel , Washington Post)

Before we get too excited, let’s note that the BLS numbers have a strong component of BS: nearly every jobs number they put out is quickly, quietly revised downward by 20% or so. Also, much of the jobs creation this year has been in the part-time category (so employers don’t have to pay health benefits). That said, it is indisputable that despite ferocious interest rate hikes, the economy continues to hum along, much more robustly that nearly anyone predicted six or twelve months ago. Why?

I suggest that we follow the time-tested approach of investigative reporters, which is to follow the money. We have noted earlier that since 2020 a key factor in consumer spending, which constitutes about 70% of the economy, has been the ginormous windfall of free money, over $4 trillion, that was put into the economy via various pandemic-related programs (enhanced unemployment benefits, direct stimmie payments, etc.). The story of the recent strong jobs market is largely the story of spending down that windfall.

When we were locked down in late 2020-early 2021, we consoled ourselves with ordering tons of goods on Amazon. While this generated some jobs for longshoremen and UPS and Amazon drivers, it was mainly Chinese workers who benefited from this phase. But for the past year and a half, we are out there in planes, trains, automobiles, and cruise ships, spending for services and restaurant food at a brisk pace. This has buoyed up the domestic economy, which in turn is keeping inflation far above the Fed’s 2% target.

Part of the incoming-recession story has been that the COVID windfall money is about to run out. For instance, here is a June, 2023 chart from Fed authors de Soyres, et al.  showing that in the U.S. (black curve below) this money has already been exhausted:

A different set of Fed authors (Abdelrahman and Oliveira of the San Francisco Fed) wrote, also in June, that there remained a smidge of excess savings, but that “would likely be depleted in the third quarter of 2023.”

However,  the Bureau of Economic Analysis (BEA) recently completed an update of national economic data that lowered the savings rate prior to the pandemic and increased it in 2020 and 2021. This basically reflected a change in the way the BEA accounts for income from mutual funds and REITS. The bottom line is that it has forced Wall Street economists to increase their excess savings projections to date by as much as $600 billion to $1 trillion, depending on the economics team. This in turn leads them to delay forecasts of recession by yet another 6-12 months.

For instance, James Knightley of ING Global Markets Research writes that there are still plenty of excess savings around; recent revisions in their numbers show the remaining hoard is even larger than they originally thought:

They did not break down this excess saving by income group, so it is possible that much of it remains with the upper 10-20% who may hoard/invest it, versus the bottom quartiles who have been spending it all into economy and now may be tapped out. We shall see how this continues to play out.

Video for new ChatGPT users

Joy BuchananLeave a comment

Have you not gotten around to trying ChatGPT for yourself yet?

Ethan and Lilach Mollick have released a series of YouTube videos that encapsulate some current insights, aimed at beginners, posted on Aug. 1, 2023. It covers ChatGPT, Bing, and Bard. Everyday free users are using these tools.

Practical AI for Instructors and Students Part 2: Large Language Models (LLMs)

If you are already using ChatGPT, then this video will probably feel too slow. However, they do have some tips that amateurs could learn from even if they have already experimented. E. Mollick says of LLMs “they are not sentient,” but it might be helpful to treat them as if they are. He also recommends thinking of ChatGPT like an “intern” which is also how Mike formulated his suggestion back in April.

  • I used GPT-3.5 a few times this week for routine work tasks. I am not a heavy user, but if any of our readers are still on the fence, I’d encourage you to watch this video and give it a try. Be a “complement” to ChatGPT.
  • I’ll be posting new updates about my own ChatGPT research soon – the errors paper and also a new survey on trust in AI.
  • I hear regular complaints from my colleagues all over the country about poor attempts by college students to get GPT to do their course work. The experiment is being run.
  • Ethan Mollick has been a good Twitter(X) follow for the past year, if you want to keep up with the evolution and study of Large Language Models. https://twitter.com/emollick/status/1709379365883019525
  • Scott wrote this great recent tutorial on the theory behind the tools: Generative AI Nano-Tutorial
  • It was only back in December 2023 that I did a live ChatGPT demonstration in class, and figured that I was giving my students there first ever look at LLMs. Today, I’d assume that all my students have tried it for themselves.
  • In my paper on who will train for tech jobs, I conclude that the labor supply of programmers would increase if more people enjoyed the work. LLMs might make tech jobs less tedious and therefore more fun. If labor supply shifts out, then quantity should increase and wages should fall – good news for innovative businesses.