Top economic policy challenges for 2023

Top economic policy challenges for 2023

Top economic policy challenges for 2023

arvind_krishnamurthy

Arvind Krishnamurthy, The John S. Osterweis Professor of Finance, Graduate School of Business:

COVID continues to impact the U.S. economy in significant ways — from the tight labor market and rising inflation to troubles in the real estate market.

On jobs, the unemployment rate is at a historical low. Yet, extrapolating from pre-pandemic growth rates in the labor force suggests that we are currently missing roughly 3 million workers.

I am persuaded by the work of SIEPR scholars that point to significant COVID effects on the supply of workers. Falling ill (Goda and Soltas, 2022) and fears of falling ill (Barrero, Bloom, and Davis, 2022) are keeping people out of the workforce.

COVID has also impacted workers’ preferences over labor and leisure. It’s harder to pin down, but this factor keeps appearing in the news. Senior management has to persuade workers to come into the office two days a week. All this incentivizing is surely costly. Thus, while work-from-home may be productivity enhancing in some sectors, this must not be true of most sectors. Effective labor hours have fallen, tightening labor supply further. Moreover, the fall in productivity can explain the decline in real wages, as prices have risen faster than wages.

The COVID-induced tight labor market has pushed up prices and wages, and I expect that these inflationary pressures will continue despite rising interest rates.

COVID has also impacted asset values, and particularly in real estate. Mortgage rates almost doubled in 2022, and significant declines in office occupancies are creating revenue problems for commercial real estate. Rising interest rates also means that refinancing commercial property will be difficult.

Keep a close eye on signs of trouble in real estate. They have a way of causing wider damage to the economy.

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