There's no going back to the old normal

Our backdoor jobs program, men leaving the labor market, stock buybacks and rising interest rates

Photo by Remy Gieling on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter about our changing economy and the misguided ideas that hold it back.

Maybe interest rates aren’t going back down

Don’t count on refinancing your mortgage any time soon.

It somehow became conventional wisdom that an aging population put downward pressure on interest rates. The thinking went that older people, facing a longer life expectancy, save more and invest in bonds, increasing the stock of saving money, meaning naturally lower interest rates.

But this never sounded quite right to me. I mean, haven’t we under-saved, and aren’t we probably going to have to go into debt to pay for our aging populations? Additionally, as people age, they need to spend their savings, which means more bonds and less demand for them, increasing rates.

Then the explanation goes, there are younger countries who will buy our debt, but this all sounds sort of desperate to me. The story now states that older people are unproductive, which will lower the marginal product of capital (another way of saying interest rates). However, that assumes there’ll be no new technology, which in these times seems like an odd assumption.

I think rates fell and kept falling, and we needed a reason why. It just so happened that growth fell, and the population aged, bringing all this together into a neat little story that infected every international organization and justified spending forever more.

This theory is also inconsistent with how I was trained to think about bond pricing, where risk (on longer bonds) is a big component. I suspect falling and stable inflation took the bond risk premium to near zero. So, rates fell, and demand for them increased. If an aging population means higher inflation—then rates will inevitably rise.

But who knows? No one can predict the future. As I explain in Bloomberg, we can’t count on low rates in the future just because we are older. It’s possible the last 15 years were something of an anomaly.

The other thing I learned from finance is that you need to use very long-time horizons to make good long-term inferences. Even 20 years is not a complete debt cycle. When you go beyond that, the relationship between age and interest rates is unclear.

Stock buybacks

We may not have to worry about debt because of the new revenue from the proposed tax on stock buybacks. Or not. The president wants to quadruple the rate from 1% to 4%, which I believe is silly. I see why the optics are bad. A corporation issues debt or uses profits to buy its own stock, which seems to increase the share price and enrich all the wrong people when that money should have been used to invest in new projects.

As Ken French once said, “Buybacks are divisive; they divide people who understand finance and those who don’t.”

Buybacks are not really terrible. Buybacks are just a way to return money to shareholders, like a dividend, and there is not much evidence that they even increase share prices. And taking out debt to buy shares is just changing your financing from debt to equity. This was a reasonable thing to do when interest rates were low, and we were being told they would never increase again because we’re an older country.

There is just so much bad populism these days on both sides.

Men without work and the women who love them

Prime-age men leaving the labor force is one of the bigger economic problems of our time. It’s bad for our economy and society. There are a million explanations for it, including the changing structure of the economy from manufacturing to services, education that has become less hospitable to boys, drugs, and video games.

But the pattern is clear, during every recession, many prime-age men leave the labor force and don’t come back, even when the economy recovers. Even now, there is a labor shortage for traditionally “male” jobs like construction, but fewer prime-age men are working. This means we tend to focus on cyclical rather than structural causes when the two interact. For example, a bad labor market causes a man who is marginally attached to the labor force to drop out.

But why are so many men marginally attached to the labor force? I think this includes all the reasons I listed. But here’s another one: more women work. That means larger household incomes, which enables men to avoid the need to work. True, men who don’t work tend to be unmarried. But they also have mothers, sisters, girlfriends, and grandmothers—all of whom are earning more than before, making working to survive less necessary.

Women’s economic success is a sign of progress, even if it’s enabling a destructive economic trend. So, what can we do? We can reduce the number of men who have a marginal labor force attachment, such as by dealing with opioids or reforming education—that would help. But to some extent, the equilibrium participation rate may just be lower than it used to be, which may explain why we see the trend in other countries too.

Did we pass a jobs program, and no one noticed?

It suggests bringing back manufacturing may not solve all our problems.

Matt Yglesias has an interesting Bloomberg column on our new industrial policy. He argued that when the government invests in the economy, it should do it as cheaply and efficiently as possible, which seems like an obvious point. We all love multipliers larger than 1. But he has noticed that the infrastructure bill, CHIPS Act, etc., do not even try to do this. In fact, they aim to make labor very expensive. These are not just programs to revamp our infrastructure and rebuild a modern, vital manufacturing sector; they are also a middle-class jobs program.

I spoke to Price Fishback last week about the benefits and costs of these kinds of policies. He’s an expert on the Dew Deal and, in particular, all the public works and jobs programs. He explains why doing these projects efficiently is not only better for growth and taxpayers but is also much better for workers. The Works Progress Administration is overrated.

In other news

I gave a speech on Zoom for Zoom about risk.

And I did a Munk debate where, despite all evidence to the contrary, I argue that Work From Home is not the future.

Until next time, Pension Geeks!

Allison