As the US economy bounced back from the post-pandemic inflation surge, consumer sentiment remained depressed even though unemployment was low, and inflation was falling. This confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which grew at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, were at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023.

En el informe Salud Global 2050, la Comisión de la revista The Lancet sobre la Inversión en Salud concluye que, para mediados de siglo, es posible lograr mejoras significativas en el bienestar humano con inversiones en salud focalizadas. El informe establece el objetivo de reducir en 50% la probabilidad de muerte prematura, es decir, morir antes de los 70 años, para el año 2050, respecto a 2019. Para lograr este objetivo conocido como “50 para el 50”, se propone tratamiento de 15 afecciones prioritarias: ocho enfermedades infecciosas y afecciones maternas, y siete enfermedades no transmisibles y lesiones, las cuales, se anota, deberían ser subsidiadas por los gobiernos de los países que decidan invertir en dichas mejoras en materia de salud. Estas intervenciones también deberían reducir la morbilidad y la discapacidad. Además, se propone el fortalecimiento de los sistemas de salud mediante intervenciones costoefectivas y políticas como impuestos elevados al tabaco. Finalmente, el informe enfatiza en la preparación ante pandemias (debido al riesgo excepcionalmente alto de mortalidad) y un apoyo financiero integral y global para garantizar el desarrollo y la accesibilidad universal a servicios y tecnologías de salud.

We investigate the bank lending channel of negative nominal policy rates from an empirical and theoretical perspective. For the empirical results, we rely on Swedish data, including daily bank-level lending rates. We find that retail household deposit rates are subject to a lower bound (DLB). Empirically, once the DLB is met, the pass-through to mortgage lending rates and credit volumes is substantially lower and bank equity values decline in response to further policy rate cuts. We construct a banking sector model and use our estimate of the pass-through of negative policy rates to lending rates as an identified moment to parameterize the model and assess the impact of negative policy rates in general equilibrium. Using the theoretical framework, we derive a sufficient statistic for when negative policy rates are expansionary and when they are not.

I am honoured to have the privilege of addressing this distinguished conference. I have read about Pakistan's accomplishments and problems for many years and since coming to the World Bank I have followed your government's bold reform efforts closely. I feel fortunate to finally have the opportunity to visit your country. I decided to speak today on "Investing in All the People" because an extensive body of recent research has convinced me that once all the benefits are recognised, investment in the education of girls may well be the highest return investment available in the developing world. And, as I will make clear, increasing the education of girls is an especially high priority for Pakistan. Women's education may seem an odd topic for an economist to address. But enhancing women's contribution to development is as much an economic as a social issue. Economics, with its emphasis on incentives, provides a useful way to understand why so many girls are deprived of education and employment opportunities. And concrete calculations demonstrate that there are enormous economic benefits to investing in women.

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We study how the recent run-up in housing and rental prices affects the outlook for inflation in the USA. Housing held down the overall inflation in 2021. Despite record growth in private market-based measures of home prices and rents, the government-measured residential services inflation was only 4% for the 12 months ending in January 2022. After explaining the mechanical cause for this divergence, we estimate that, if past relationships hold, the residential inflation components of the Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) are likely to move close to 7% during 2022. These findings imply that housing will make a significant contribution to overall inflation in 2022, ranging from one percentage point for headline PCE, to 2.6 percentage points for core CPI. We expect residential inflation to remain elevated in 2023.

There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this article constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics.

This paper uses historical labor market data to assess the plausibility that the Federal Reserve can engineer a soft landing for the economy. We first show that the labor market today is significantly tighter than implied by the unemployment rate: the vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2 percent unemployment rates. We highlight that the super-tight labor market coincides with current wage inflation of 6.5 percent – the highest level experienced in the past 40 years – and that firm-side slack measures predict further increases in wage inflation over the coming year. Finally, we show that high levels of wage inflation have historically been associated with a substantial risk of a recession over the next one to two years. We argue that periods that historically have been hailed as successful soft landings have little in common with the present moment. Our results suggest a very low likelihood that the Federal Reserve can reduce inflation without causing a significant slowdown in economic activity.

Since the outset of the Covid-19 pandemic, labor market indicators that traditionally move together have been sending different signals about the degree of slack in the U.S. labor market.While some indicators on the supply-side, such as the prime-age employment-to-population ratio, suggest that there is still some slack in the labor market, other indicators on the demand-side, such as the job vacancy rate and the quits rate, imply that the labor market is already very tight.In light of these divergent signals, this paper compares alternative labor market indicators as predictors of wage inflation.Using national time series and state cross-section data, we find (i) unemployment is a better predictor of wage inflation than non-employment and (ii) vacancy rates and quit rates have substantial predictive power for wage inflation.We highlight the fact that vacancy and quit rates currently experienced in the United States correspond to a degree of labor market tightness previously associated with sub-2 percent unemployment rates.Finally, we show that predicted firm-side unemployment has dominant explanatory power with respect to subsequent inflation.Our results, along with a cursory analysis of labor force participation information, suggest that labor market tightness is likely to contribute significantly to inflationary pressure in the United States for some time to come.

The Federal Reserve seeks to cool an overheated US labor market to ease wage hikes and reduce job vacancies, without a painful spike in unemployment. But empirical evidence indicates that these goals have never been accomplished together and remain unlikely now. In fact, fighting inflation will require a reduction in job vacancies and also an increase in unemployment. The inverse relationship between job vacancies and unemployment is measured by the Beveridge curve, named after a British economist. Blanchard, Domash, and Summers find that the Fed’s hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence. The current low unemployment rate and the very high vacancy-to-unemployment ratio suggest that the labor market is overheating and the natural unemployment rate has increased. It has increased about 1.3 percentage points from its pre-COVID level, implying the labor market is even more overheated than suggested by the current unemployment rate.

We argue the revenue potential from increasing tax rates on capital gains may be substantially greater than previously understood.First, many prior studies focus primarily on short-run taxpayer responses, and so miss revenue from gains that are deferred when rates change.Second, the composition of capital gains has shifted in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined.Third, focusing on capital gains tax collection may understate fiscal spillovers from decreasing the preferential tax treatment for capital gains.Fourth, additional base-broadening reforms, like eliminating stepped-up basis and making charitable giving a realization event, will decrease the elasticity of the tax base to rate changes.Overall, we do not think the prevailing assumption of many in the scorekeeping community-that raising rates to top ordinary income levels would raise little revenue-is warranted.A crude calculation illustrates that raising capital gains rates to ordinary income levels could raise $1 trillion more revenue over a decade than other estimates suggest.Given the magnitudes at stake, scorekeeping procedures employed in evaluating capital gains should be made more transparent and be the subject of external professional debate and review.

We study the productivity-pay relationship in the United States and Canada along two dimensions. The first is divergence: the degree to which productivity has grown faster than pay. The second is delinkage: the degree to which incremental increases in the rate of productivity growth translate into incremental increases in the rate of growth of pay, holding all else equal. In both countries there has been divergence: the pay of typical workers has grown substantially more slowly than average labour productivity over recent decades, driven by both rising labour income inequality and a declining labour share of income. Even as the levels of productivity and pay have grown further apart, however, we find evidence for a substantial degree of linkage between productivity growth and pay growth: in both countries, periods with faster productivity growth rates have been periods with faster rates of growth of the pay of average and typical workers, holding all else equal. This linkage appears somewhat stronger in the US than in Canada. Overall, our findings lead us to tentatively conclude that policies or trends which lead to incremental increases in productivity growth, particularly in large relatively closed economies like the USA, will tend to raise middle class incomes. At the same time, other factors orthogonal (i.e. statistically independent) to productivity growth have been driving productivity and typical pay further apart, emphasizing that much of the evolution in middle class living standards will depend on measures bearing on relative incomes.

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In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate somewhere between $60 and $100 billion in additional revenue over a decade. This is qualitatively correct. But quantitatively, the revenue potential is much more significant than the CBO report suggests. We highlight five reasons for the CBO’s underestimation: 1) the scale of the investment in the IRS contemplated is modest and far short of sufficient even to return the IRS budget to 2011 levels; 2) the CBO contemplates a limited range of interventions, excluding entirely progress on information reporting and technological advancements; 3) the estimates assume rapidly diminishing returns to marginal increases in investment; 4) the estimates leave out the effect of increased enforcement on taxpayer decision-making; and 5) the use of the 10-year window means that the long-run benefits of increased enforcement are excluded. We discuss these issues, present an alternative calculation, and conclude that a commitment to restoring tax compliance efforts to historical levels could generate over $1 trillion in the next decade.

Rising profitability and market valuations of US businesses, sluggish wage growth and a declining labor share of income, and reduced unemployment and inflation have defined the macroeconomic environment of the last generation. This paper offers a unified explanation for these phenomena based on reduced worker power. Using individual, industry, and state-level data, we demonstrate that measures of reduced worker power are associated with lower wage levels, higher profit shares, and reductions in measures of the non-accelerating inflation rate of unemployment (NAIRU). We argue that the declining worker power hypothesis is more compelling as an explanation for observed changes than increases in firms' market power, both because it can simultaneously explain a falling labor share and a reduced NAIRU and because it is more directly supported by the data.