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Key economic policy developments in 2022 and what to expect in 2023

Economic policy leaders and researchers were kept busy in 2022 by high inflation, a volatile labor market, crypto crashes, and major legislation like the…

By Wendy Edelberg, Richard G. Frank, Aaron Klein, Sanjay Patnaik, David Wessel

Economic policy leaders and researchers were kept busy in 2022 by high inflation, a volatile labor market, crypto crashes, and major legislation like the Inflation Reduction Act. We asked five Economic Studies scholars about important developments this year in their fields of study and developments that they expect in 2023.

Use the links below to explore their perspectives.


Health care

Richard Frank

What were the most important developments in health care from the last year?

The past year has seen dramatic developments in both mental health care and drug pricing. Concerns over mental health in the United States has- taken center stage. For example, the prevalence of mental illnesses increased over the last decade for the first time since the 1950s. That was largely driven by illness in children that more than doubled from 2010 to 2019. President Biden drew attention to the problem and sketched a vision of how to address it.

The U.S. Congress enacted the Inflation Reduction Act that established the ability of the federal government to negotiate prices for prescription drugs and established catastrophic protection against the costs of prescription drugs. These are historic changes in U.S. policy that will save American consumers and taxpayers tens of billion dollars.

What Brookings work have you done on these issues?

Our work on mental health policy during 2022 has focused on three specific issues: the mental health of children, the system for dealing with mental health crises, and the challenges of integrating behavioral health into general medical care. Some key points made in that work are as follows.

  • The growth in mental illnesses in children pre-dates the pandemic and the factors driving that change are not well understood. Nevertheless, there are numerous evidence-based interventions that can prevent and treat mental illnesses in children and adolescents.
  • We propose that schools can play a greater role in identifying need and engaging children in treatment. Treatment services can be delivered by a range of providers by integrating behavioral health services into a variety of settings facilitated by improved support from the Medicaid program.

Our work on prescription drugs has focused on two key issues. The first is on claims made regarding the impact of policies that negotiate drug prices on innovation and the supply of “new cures.” Our analyses highlighted several points. We showed that concerns over the impact of the Inflation Reduction Act’s impact on new cures was exaggerated and that the Congressional Budget Office’s estimate of a very modest impact was consistent with existing evidence. In addition, we examined various complementary policy measures that could be taken to promote innovations that would boost the health of Americans including greater investments in the NIH and other science agencies and government seeding of venture investments. The second area focused on regulatory impediments to competition. We offered a series of possible modifications to FDA regulations that would promote greater price competition in prescription drug markets that would generate savings to consumers and taxpayers and invigorate the emerging market for biosimilar products.

How do you see these issues evolving in 2023?

The attention and initial steps towards addressing the complex array of issues related to the American struggle with mental illnesses have provided a general direction for policy. In the coming year the details of the strategies for implementing policies at all levels of government and civil society will need to take shape. Our work will focus on both the development of federal policy and addressing barriers at the state and local levels that will be necessary to realize the vision that developed over the past several years.

There are a variety of critical implementation issues related to the prescription drug provisions of the Inflation Reduction Act that must be developed in 2023. Several of those will turn on the answers to analytical questions regarding how markets will respond to policy guidance that will guide the development of a price negotiation process. We intend to focus on some of those analytical issues. In addition, the President has called for ideas for addressing drug prices and competition beyond the provisions of the Inflation Reduction Act. We will be conducting several research projected specifically on those issues.

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Monetary policy

David Wessel

What was the most important development in monetary policy from the last year?

This past year was one of the most unusual in recent Federal Reserve history.  As inflation proved unexpectedly virulent, the Fed took interest rates from zero to over 4%, a faster pace of rate increases than any time since Paul Volcker.  This triggered a sharp decline in both stock and bond prices that eroded the value of Americans’ retirement accounts, a spike in mortgage rates that hit new-home buyers hard, and brought long-sought relief for those with savings in the bank or in market funds.

What Brookings work have you done on these issues?

For the Fed to make policy that will bring inflation under control, they first have to know how high it is, and measuring inflation is no easy task. We’ve published several explainers to help reporters, average Americans, and even policymakers understand how the federal government—primarily the Bureau of Labor Statistics (BLS) – does it. Measuring the price of housing—both rental and owner-occupied – turns out to be particularly messy, and housing plays a big role in the official inflation measures, as we explain here.

In the second half of 2022, we hosted an illuminating series of discussions alongside the monthly releases of the BLS Consumer Price Index report. Guests including Wendy Edelberg (The Hamilton Project), Justin Wolfers (Brookings nonresident fellow), Jason Furman (Harvard), Neil Irwin (Axios), and Betsey Stevenson (University of Michigan) joined me to share their perspectives on the drivers of inflation, the Fed’s response, and the road ahead. You can read takeaways from the latest discussion here.

How do you see these issues evolving in 2023?

We hosted Fed Chair Jerome Powell in December, and he made it as clear as anyone has that we will continue to face challenges from inflation well into the future. We will be watching closely to see how quickly inflation comes down and how far the Fed raises rates in 2023 – and whether, as I expect, the U.S. economy will slide into recession during 2023.  We’ll also be thinking about the questions the Fed needs to address when it reviews the monetary policy framework it adopted in August 2020 in light of the recent bout of inflation.

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The Labor Market

Wendy Edelberg

What was the most important development in labor market policy from the last year?

A combination of factors—long-COVID, excess retirements, high demand for labor, among others—has contributed to a volatile labor market in 2022. Some observers have focused on the low unemployment rate compared to the job opening rate and concluded that the unemployment rate will likely have to rise to startling high levels just to stabilize the labor market and get rid of the upward pressure on inflation. Instead, the fill rate (the ratio of job openings to hires) shows that firms looking to hire large numbers of workers are indeed expanding employment at a rapid pace. It’s a complex and unique situation.

What Brookings work have you done on these issues?

In this piece, I argued with some of my colleagues at The Hamilton Project that in order for the economy to return to more stable footing, the labor market needs to soften, but not at much as some think. What squares the circle between the unemployment rate and the fill rate is that right now, the unemployment rate is doing a relatively poor job of capturing the pool of potential workers—many are coming straight into jobs from outside the labor force.

Figure 1: Labor Market Indicators, March 2001-September 2022

How do you see these issues evolving in 2023?

We show that the labor market dynamics since 2021 suggest that getting the job openings rate back to a more sustainable pace means we need the pace of hiring to return to roughly 2015 levels. Such a labor market in the year or so ahead would be softer than today’s, but not startling so.

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Finance

Aaron Klein

What were the most important development in finance from the last year?

Bank overdraft fees exploded over the last twenty plus years, growing by some estimates to over $30 billion a year. Overdraft penalizes people who run out of money with fees (typically $35 each time) that directly flow into bank profit. This year, most of America’s largest banks and many smaller ones announced major changes to their overdraft programs that will reduce the high cost to be poor. By my estimate, changes from the largest banks alone will result in $5 billion a year back in the accounts of those living paycheck to paycheck.

Digital assets and crypto currency exploded and imploded with a series of high-profile losses and bankruptcies. Regulating crypto will likely be front and center before Congress and financial regulators who spent last year writing reports requested by President Biden’s executive orders earlier this year.

What Brookings work have you done on these issues?

In 2022, many banks changed their overdraft policies absent any new regulation or legislation, as highlighted at this Brookings event focused on early adopters. New research, public name and shame, and potential competition from financial technology (FinTech) firms finally forced major changes across the industry. President Biden claimed some credit for this as part of his crack down on “junk fees” but regardless of why banks changed their way, the reality is a major win for working families who run out of money, which sadly is by some estimates half of all Americans.

On the crypto side, Brookings was glad to host, among others, the Commodity Futures Trading Commission Chairman, Acting Federal Deposit Insurance Corporation Chairman, and the New York State Banking Superintendent in a series of events discussing how they are regulating crypto. We recently created a resource for people interested in digital asset markets with key takeaways from a number of these events, along with summaries of recent research on crypto regulation.

How do you see these issues evolving in 2023?

While the voluntary progress on overdraft fee policies was welcome, can and must take action. There are still banks (and likely some credit unions) operating on unsafe and unsound business models reliant exclusively on overdraft. I outlined a series of steps regulators should take: stopping any bank from relying on overdraft fees for a majority of their profit in consecutive years, fixing America’s real-time payments system, and a requirement for all financial institutions to offer a no-overdraft, low-cost, basic bank account. I hope Congress will consider these important measures in 2023.

One key question likely to be discussed in 2023 on crypto will be whether the Federal Reserve can or should issue its own central bank digital currency (CBDC). America already runs on commercial bank digital currency (credit/debit cards, digital banking, etc.) so it remains to be seen whether swapping the first C in CBDC from Commercial to Central will unlock benefits for the American economy or whether it is more in reaction with countries like China which are rolling out CBDC’s for their own reasons which are often very different than ours.

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Climate policy

Sanjay Patnaik

What was the most important development in climate policy in the last year?

The Inflation Reduction Act (IRA), signed into law in August of this year, is the most significant piece of climate legislation passed in this country’s history. The law provides a total of $386 billion for climate and energy issues, including $271 billion in clean energy tax credits and incentives, $40 billion to reduce air pollution and fund clean energy and infrastructure projects, $35 billion in conservation and rural development, and $27 billion for a greenhouse gas reduction fund that will award grants to national and local green energy and electrification projects.

This law provides significant incentives for large and small businesses as well as for consumers to adopt more low-carbon energy initiatives. It also specifically provides funding for disadvantaged communities to help grant them access to clean technologies and fight against the effects of climate change. Current modeling predicts that instead of reducing greenhouse gas emissions by 27% from 2005 levels by 2030, the US could potentially be able to reduce greenhouse gas emissions by an estimated 42% from 2005 levels by 2030 because of the climate provisions in the IRA.

What Brookings work have you done on these issues?

One example is our recent article on permitting reform, which discusses that the U.S. needs to clear major regulatory delays and enable an unprecedentedly rapid build-out of solar, wind, and electric transmission infrastructure to fully realize the benefits of funding from the Inflation Reduction Act and meet the Biden administration’s climate goals. Permitting obstacles include local and state government delays, as well as a long list of federal permits and reviews that can take many years to complete.

Another example is our explainer video on climate risk. From homeowners in flood-prone areas facing rising home insurance rates to corporations facing pressure to disclose climate risks, nearly everyone is exposed to climate risks. Understanding and proactively mitigating these risks is critical to protecting people and places from climate change.

How do you see these issues evolving in 2023?

With a divided incoming Congress, I do not see much room for additional climate legislation to pass. A bipartisan compromise on permitting reform, with concessions to the left on environmental protection and to the right on fossil fuel infrastructure, seems unlikely but remains possible.

This will essentially mean that with much of the grant money set aside in the Inflation Reduction Act still to be allocated, regulatory agencies such as the Department of Energy, the Department of Transportation, and the Environmental Protection Agency will play an even more significant role in implementing climate regulation in 2023. This is why, in addition to continuing to perform research on permitting reform as well as tracking climate regulation implemented by agencies, looking at how IRA money is allocated will be key in the next year.

Other significant climate developments I anticipate in the near future include a final Securities and Exchange Commission rule requiring climate risk disclosures by public companies and additional details from the EPA on their cap-and-trade program for hydrofluorocarbons.

On the international front, the recently-announced provisional agreement on the European Union Carbon Border Adjustment Mechanism (CBAM) is a major development. It will target imports of carbon-intensive products, functionally applying a carbon tax to imports to bring them into compliance with the EU’s climate ambitions. The CBAM will begin phase-in in October 2023, and is likely to have significant impact globally.

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The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here. The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation.

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February Employment Situation

By Paul Gomme and Peter Rupert The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000…

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By Paul Gomme and Peter Rupert

The establishment data from the BLS showed a 275,000 increase in payroll employment for February, outpacing the 230,000 average over the previous 12 months. The payroll data for January and December were revised down by a total of 167,000. The private sector added 223,000 new jobs, the largest gain since May of last year.

Temporary help services employment continues a steep decline after a sharp post-pandemic rise.

Average hours of work increased from 34.2 to 34.3. The increase, along with the 223,000 private employment increase led to a hefty increase in total hours of 5.6% at an annualized rate, also the largest increase since May of last year.

The establishment report, once again, beat “expectations;” the WSJ survey of economists was 198,000. Other than the downward revisions, mentioned above, another bit of negative news was a smallish increase in wage growth, from $34.52 to $34.57.

The household survey shows that the labor force increased 150,000, a drop in employment of 184,000 and an increase in the number of unemployed persons of 334,000. The labor force participation rate held steady at 62.5, the employment to population ratio decreased from 60.2 to 60.1 and the unemployment rate increased from 3.66 to 3.86. Remember that the unemployment rate is the number of unemployed relative to the labor force (the number employed plus the number unemployed). Consequently, the unemployment rate can go up if the number of unemployed rises holding fixed the labor force, or if the labor force shrinks holding the number unemployed unchanged. An increase in the unemployment rate is not necessarily a bad thing: it may reflect a strong labor market drawing “marginally attached” individuals from outside the labor force. Indeed, there was a 96,000 decline in those workers.

Earlier in the week, the BLS announced JOLTS (Job Openings and Labor Turnover Survey) data for January. There isn’t much to report here as the job openings changed little at 8.9 million, the number of hires and total separations were little changed at 5.7 million and 5.3 million, respectively.

As has been the case for the last couple of years, the number of job openings remains higher than the number of unemployed persons.

Also earlier in the week the BLS announced that productivity increased 3.2% in the 4th quarter with output rising 3.5% and hours of work rising 0.3%.

The bottom line is that the labor market continues its surprisingly (to some) strong performance, once again proving stronger than many had expected. This strength makes it difficult to justify any interest rate cuts soon, particularly given the recent inflation spike.

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Mortgage rates fall as labor market normalizes

Jobless claims show an expanding economy. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

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Everyone was waiting to see if this week’s jobs report would send mortgage rates higher, which is what happened last month. Instead, the 10-year yield had a muted response after the headline number beat estimates, but we have negative job revisions from previous months. The Federal Reserve’s fear of wage growth spiraling out of control hasn’t materialized for over two years now and the unemployment rate ticked up to 3.9%. For now, we can say the labor market isn’t tight anymore, but it’s also not breaking.

The key labor data line in this expansion is the weekly jobless claims report. Jobless claims show an expanding economy that has not lost jobs yet. We will only be in a recession once jobless claims exceed 323,000 on a four-week moving average.

From the Fed: In the week ended March 2, initial claims for unemployment insurance benefits were flat, at 217,000. The four-week moving average declined slightly by 750, to 212,250


Below is an explanation of how we got here with the labor market, which all started during COVID-19.

1. I wrote the COVID-19 recovery model on April 7, 2020, and retired it on Dec. 9, 2020. By that time, the upfront recovery phase was done, and I needed to model out when we would get the jobs lost back.

2. Early in the labor market recovery, when we saw weaker job reports, I doubled and tripled down on my assertion that job openings would get to 10 million in this recovery. Job openings rose as high as to 12 million and are currently over 9 million. Even with the massive miss on a job report in May 2021, I didn’t waver.

Currently, the jobs openings, quit percentage and hires data are below pre-COVID-19 levels, which means the labor market isn’t as tight as it once was, and this is why the employment cost index has been slowing data to move along the quits percentage.  

2-US_Job_Quits_Rate-1-2

3. I wrote that we should get back all the jobs lost to COVID-19 by September of 2022. At the time this would be a speedy labor market recovery, and it happened on schedule, too

Total employment data

4. This is the key one for right now: If COVID-19 hadn’t happened, we would have between 157 million and 159 million jobs today, which would have been in line with the job growth rate in February 2020. Today, we are at 157,808,000. This is important because job growth should be cooling down now. We are more in line with where the labor market should be when averaging 140K-165K monthly. So for now, the fact that we aren’t trending between 140K-165K means we still have a bit more recovery kick left before we get down to those levels. 




From BLS: Total nonfarm payroll employment rose by 275,000 in February, and the unemployment rate increased to 3.9 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, in government, in food services and drinking places, in social assistance, and in transportation and warehousing.

Here are the jobs that were created and lost in the previous month:

IMG_5092

In this jobs report, the unemployment rate for education levels looks like this:

  • Less than a high school diploma: 6.1%
  • High school graduate and no college: 4.2%
  • Some college or associate degree: 3.1%
  • Bachelor’s degree or higher: 2.2%
IMG_5093_320f22

Today’s report has continued the trend of the labor data beating my expectations, only because I am looking for the jobs data to slow down to a level of 140K-165K, which hasn’t happened yet. I wouldn’t categorize the labor market as being tight anymore because of the quits ratio and the hires data in the job openings report. This also shows itself in the employment cost index as well. These are key data lines for the Fed and the reason we are going to see three rate cuts this year.

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January…

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Inside The Most Ridiculous Jobs Report In History: Record 1.2 Million Immigrant Jobs Added In One Month

Last month we though that the January jobs report was the "most ridiculous in recent history" but, boy, were we wrong because this morning the Biden department of goalseeked propaganda (aka BLS) published the February jobs report, and holy crap was that something else. Even Goebbels would blush. 

What happened? Let's take a closer look.

On the surface, it was (almost) another blockbuster jobs report, certainly one which nobody expected, or rather just one bank out of 76 expected. Starting at the top, the BLS reported that in February the US unexpectedly added 275K jobs, with just one research analyst (from Dai-Ichi Research) expecting a higher number.

Some context: after last month's record 4-sigma beat, today's print was "only" 3 sigma higher than estimates. Needless to say, two multiple sigma beats in a row used to only happen in the USSR... and now in the US, apparently.

Before we go any further, a quick note on what last month we said was "the most ridiculous jobs report in recent history": it appears the BLS read our comments and decided to stop beclowing itself. It did that by slashing last month's ridiculous print by over a third, and revising what was originally reported as a massive 353K beat to just 229K,  a 124K revision, which was the biggest one-month negative revision in two years!

Of course, that does not mean that this month's jobs print won't be revised lower: it will be, and not just that month but every other month until the November election because that's the only tool left in the Biden admin's box: pretend the economic and jobs are strong, then revise them sharply lower the next month, something we pointed out first last summer and which has not failed to disappoint once.

To be fair, not every aspect of the jobs report was stellar (after all, the BLS had to give it some vague credibility). Take the unemployment rate, after flatlining between 3.4% and 3.8% for two years - and thus denying expectations from Sahm's Rule that a recession may have already started - in February the unemployment rate unexpectedly jumped to 3.9%, the highest since February 2022 (with Black unemployment spiking by 0.3% to 5.6%, an indicator which the Biden admin will quickly slam as widespread economic racism or something).

And then there were average hourly earnings, which after surging 0.6% MoM in January (since revised to 0.5%) and spooking markets that wage growth is so hot, the Fed will have no choice but to delay cuts, in February the number tumbled to just 0.1%, the lowest in two years...

... for one simple reason: last month's average wage surge had nothing to do with actual wages, and everything to do with the BLS estimate of hours worked (which is the denominator in the average wage calculation) which last month tumbled to just 34.1 (we were led to believe) the lowest since the covid pandemic...

... but has since been revised higher while the February print rose even more, to 34.3, hence why the latest average wage data was once again a product not of wages going up, but of how long Americans worked in any weekly period, in this case higher from 34.1 to 34.3, an increase which has a major impact on the average calculation.

While the above data points were examples of some latent weakness in the latest report, perhaps meant to give it a sheen of veracity, it was everything else in the report that was a problem starting with the BLS's latest choice of seasonal adjustments (after last month's wholesale revision), which have gone from merely laughable to full clownshow, as the following comparison between the monthly change in BLS and ADP payrolls shows. The trend is clear: the Biden admin numbers are now clearly rising even as the impartial ADP (which directly logs employment numbers at the company level and is far more accurate), shows an accelerating slowdown.

But it's more than just the Biden admin hanging its "success" on seasonal adjustments: when one digs deeper inside the jobs report, all sorts of ugly things emerge... such as the growing unprecedented divergence between the Establishment (payrolls) survey and much more accurate Household (actual employment) survey. To wit, while in January the BLS claims 275K payrolls were added, the Household survey found that the number of actually employed workers dropped for the third straight month (and 4 in the past 5), this time by 184K (from 161.152K to 160.968K).

This means that while the Payrolls series hits new all time highs every month since December 2020 (when according to the BLS the US had its last month of payrolls losses), the level of Employment has not budged in the past year. Worse, as shown in the chart below, such a gaping divergence has opened between the two series in the past 4 years, that the number of Employed workers would need to soar by 9 million (!) to catch up to what Payrolls claims is the employment situation.

There's more: shifting from a quantitative to a qualitative assessment, reveals just how ugly the composition of "new jobs" has been. Consider this: the BLS reports that in February 2024, the US had 132.9 million full-time jobs and 27.9 million part-time jobs. Well, that's great... until you look back one year and find that in February 2023 the US had 133.2 million full-time jobs, or more than it does one year later! And yes, all the job growth since then has been in part-time jobs, which have increased by 921K since February 2023 (from 27.020 million to 27.941 million).

Here is a summary of the labor composition in the past year: all the new jobs have been part-time jobs!

But wait there's even more, because now that the primary season is over and we enter the heart of election season and political talking points will be thrown around left and right, especially in the context of the immigration crisis created intentionally by the Biden administration which is hoping to import millions of new Democratic voters (maybe the US can hold the presidential election in Honduras or Guatemala, after all it is their citizens that will be illegally casting the key votes in November), what we find is that in February, the number of native-born workers tumbled again, sliding by a massive 560K to just 129.807 million. Add to this the December data, and we get a near-record 2.4 million plunge in native-born workers in just the past 3 months (only the covid crash was worse)!

The offset? A record 1.2 million foreign-born (read immigrants, both legal and illegal but mostly illegal) workers added in February!

Said otherwise, not only has all job creation in the past 6 years has been exclusively for foreign-born workers...

Source: St Louis Fed FRED Native Born and Foreign Born

... but there has been zero job-creation for native born workers since June 2018!

This is a huge issue - especially at a time of an illegal alien flood at the southwest border...

... and is about to become a huge political scandal, because once the inevitable recession finally hits, there will be millions of furious unemployed Americans demanding a more accurate explanation for what happened - i.e., the illegal immigration floodgates that were opened by the Biden admin.

Which is also why Biden's handlers will do everything in their power to insure there is no official recession before November... and why after the election is over, all economic hell will finally break loose. Until then, however, expect the jobs numbers to get even more ridiculous.

Tyler Durden Fri, 03/08/2024 - 13:30

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