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San Antonio Economic Forecast 2022

The San Antonio economy has bounced back from the pandemic-induced recession quite nicely, and I believe the economy will likely continue to show growth at or slightly above its long-term trend in 2022. I project employment growth this year to be in the range of 2.2-2.7%, and the unemployment rate will continue to decline to about 3.5-4.0%. The data, trends, and potential factors that I am seeing in my crystal ball that form the basis for this forecast are discussed in the rest of this post.

After a quick rebound from the pandemic-induced recession, the San Antonio economy has moved toward its more long-term average growth rate in employment. This is somewhat against the pattern seen in the other major metropolitan economies across Texas, as they have continued to maintain historically strong growth. This is especially the case for the Austin economy. These patterns are evident in the following chart showing the year-over-year employment growth. Even though many of these areas have continued to experience such strong growth, it is clear that there is a sizable gap between them and the Austin economy.

As shown in Chart 2, the Austin economy grew 8.11% percent in December, which was still substantially larger than the second-fastest growing region – Dallas – at 5.82% and Fort Worth, the third fastest growing region at 5.02%. The San Antonio economy grew 2.87% in December – the slowest among the major metropolitan regions and below the growth rate across the state of 5.08% and the U.S. at 4.52%.

The large disparities in the growth of the Austin economy relative to San Antonio, and the other major metropolitan economies in Texas for that matter, is worth exploring, and I will have a post on that soon. For now, I want to focus on San Antonio.

Chart 3 shows the year-over-year employment growth by month across broadly-defined industries from January 2019 through December 2021 for San Antonio. As expected, the hospitality industry took the largest dive during the lock down followed by the professional services industry. These two industries have also had the largest immediate recoveries, along with the other services industry.

Chart 4 and Table 1 show the employment growth by industry from the depth of the pandemic-induced recession in April 2020 to a year later in April 2021, i.e., from trough to peak, and then for the remainder of 2021. It needs to be kept in mind that these are similar lengths of time, but it is clear from these numbers that the growth rates across almost all of the industries in San Antonio have slowed considerably. The manufacturing, construction and mining, and education and health industries have seen their growth basically stall or even turn slightly negative in the last three quarters of 2021. The one exception is the hospitality industry that not surprisingly continues to experience growth far above average.

Table 2 compares employment growth in San Antonio over its history leading up to the pandemic (Jan. 1991-Dec. 2019) to the growth rates across industries over the past year. Overall employment growth in 2021 was 2.87%, a bit above the historical average of 2.37% growth. Five of the ten industries – manufacturing; trade transportation, and utilities (TTU); professional services; hospitality; and other services – continued to grow at above average rates in 2021. Not too surprisingly, the hospitality industry continues to lead the growth with a rate of 10.87% in 2021 – far above the industry’s historical average. Only two industries experienced declining growth in 2021 – construction and mining and information. As shown in Chart 3, the declining growth in the information industry is a regression back to the mean based on recent history. Not to give away too much of the punch line for my next post, but this explains, in part, the difference in growth rates between Austin and San Antonio.

I expect these overall slowing trends in employment growth to continue through 2022 in San Antonio. Some of this is just going to be a regression back to the mean from the large growth rates as the economy recovered from the pandemic-induced recession. The structure of the San Antonio economy is an additional reason, and the potential effects of growth in the global and national economies will also play a role, as discussed below.

Similar to the pattern in the other major metropolitan Texas economies and across the state and U.S, the unemployment rate in San Antonio has steadily declined after the precipitous fall following the re-opening of the economy ending 2021 at a rate of 4.2% (see Chart 5). As shown in Chart 6, San Antonio had one of the lowest unemployment rates among the major metropolitan economies in Texas before the pandemic at 3.0%. However, San Antonio experienced one of the largest surges in its unemployment as it climbed to 14.1% in April 2020 at the depth of the recession, but as noted, unemployment has been consistently declining and is similar to the rate in Dallas (4.1%) and Fort Worth (4.2%). The unemployment rate in San Antonio is also lower than the statewide rate at 5.0%, but it is a bit higher than the U.S. unemployment rate at 3.9%. Compared to San Antonio, the unemployment rate in Austin was 0.9 percentage point lower at the end of 2021 at 3.3%. The strong economic growth since April 2020 has surely been the main driver pushing unemployment rates down, but it should be kept in mind that at least part of this decline may be due to the decline in the labor force participation rate due to the Great Resignation phenomenon. In fact, while the labor force participation has been increasing, it is still below the pre-pandemic rate of 63.4% in February 2020 for the U.S.

These structural changes in the labor market are one of the risk factors to this forecast. I can see these changes potentially having both positive and negative effects on economic growth. If the labor market adjusts to these changes fairly quickly and workers fill the jobs at higher pay and with enhanced benefits, this could serve as a boost to overall economic growth. However, if the current trend continues for an extended period of time, this could continue to exacerbate the shortages in many markets and serve to dampen economic growth. These adjustments in the labor market may be forestalled in industries where there is a relative paucity of benefits, such as paid sick leave. If the shortages causing the rapid increase in the inflation rate do not diminish in the near future, the persistent inflation at relatively high rates will also likely be a deterrent to growth in and of itself. In response to this, the Federal Reserve has sent strong signals that it will most likely be raising interest rates several times this year, which will also serve to slow the economy some. There could also be bubbles in many asset markets, such as the stock and housing markets, and if one or more of those bubbles burst, they might also cause the economy to pause a bit, even if it does not push it into a recession. The strong economic growth was, at least in part, driven by the federal government stimulus, and with that coming to an end, consumer spending is likely to move back into a more typical pattern over time causing a moderation in U.S. economic growth. It is also likely that growth in the global economy will also slow this year because of similar trends, and the economic effects of the war in Ukraine may also slow global economic growth a bit. Overall, it seems these various factors combined with the structure of the San Antonio will mean the local economy will continue to grow fairly strongly in 2022 but at a slower rate than in 2021.

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Government Debt and Its Effects on Growth

As the government debt is swelling dramatically in the U.S. and other countries, there is concern that such high levels of debt will depress economic growth in the future. Research by Reinhart and Rogoff (2010) and Reinhart, Reinhart, and Rogoff (2012) indicate the threshold in which the level of debt as a proportion of GDP where growth rates start to decline is ninety percent. Others have argued that such a threshold does not exist because it is not the high debt that is causing growth to slow, but rather, it is slow growth that is causing the level of debt to escalate (Panizza and Presbitero, 2012; Herndon, Ash, and Pollin, 2013).

Pescatori, Sandri, and Simon (2014) take a little different look at the possibility of the existence of such a threshold and contribute some interesting insights. They look at different thresholds instead of focusing on just one, such as ninety percent, and they analyze growth performance over longer periods of time (5, 10, and 15 years) instead of just during the year after which a country’s debt level cross a threshold. This allows them to analyze the effects of changes in debt levels on growth and the longer-term effects. It also accounts for the potential reverse causality effects and the outlier periods of growth. Additionally, it mitigates some of the effects of omitted variables, such as automatic stabilizers (e.g., unemployment insurance).

Their findings are quite interesting.

…The sharp reduction in the following year’s growth that we observed in countries whose debt rose above 90 percent is no longer present for countries that have high but declining debt. In fact, even countries with debt ratios of 130 to 140 percent that are on a declining path have experienced solid growth. This suggests that high debt itself is not causing the low growth in these episodes. Furthermore,…the initial debt trajectory remains important event after 15 years, with falling debt associated with higher growth. That is, the trajectory of debt appears to be an important predictor of subsequent growth, buttressing the idea that the level of debt alone is an inadequate predictor of future growth [emphasis mine] (Pescatori, Sandri, and Simon, 2014, p. 41).

The data they analyzed covered the period from 1875 through the end of the last century. Recognizing that the wide variability in growth rates over some periods of this history (e.g., Great Depression, period following World War II) might distort their results, they “compared an economy’s average growth rate during an episode with the simple average of growth rates for all economies over the same period” (p. 41). Even after this adjustment, they still found

“that, in general, the growth performance of economies with high debt is fairly close to that of their peers with lower debt…Furthermore, we found that an economy’s debt trajectory still matters. Among economies with the same debt levels, the growth performance over the next 15 years in countries in which debt is initially decreasing is better than in countries where it is initially increasing…It is particularly striking for debt levels between 90 and 115 percent of GDP (for which average growth is 1/2 percentage point higher). Furthermore, there is no unique threshold that is consistently followed by a subpar growth performance…Economies with a debt level between 90 and 110 percent of GDP outperform their peers when debt is on a declining trajectory. At the least, this suggests that the debt level alone is insufficient to explain the growth potential of an economy. It also suggests that countries that have dealt with their budget deficits (as indicated by a declining debt level) may be well placed to growth in the future despite high debt levels” (Pescatori, Sandri, and Simon, 2014, p. 41).

They develop a few policy implications from this research. One is that since there does not appear to be any threshold effect, governments can engage in short-term fiscal stimulus, such as is being done in many countries in response to the pandemic, without being concerned that once they cross a certain threshold with debt, economic growth will slow. It is the trend in the debt to GDP ratio that matters, so what has the trend been in the U.S.?

The chart above shows the debt to GDP ratio in the U.S. The data only go through Q4 2019, so it does not include the current stimulus in response to the coronavirus pandemic. Once that is taken into account, this ratio will move even higher. It does not appear that the trajectory of the level of U.S. is moving in the right direction over the past decade. This is clearly due in part to the response to the Great Recession, but even during the historically long growth period following that recession, the level of debt compared to GDP continued to grow. This does not mean we should not be pursuing a stimulus in response to the pandemic, but as noted by the authors, the U.S. will need to reverse this trend once the economy gets back on track if the high level of debt is not going to have deleterious effects on the future growth rate of the U.S. economy.

References:

Herndon, T., Ash, M., and Pollin, R. (2013). Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff. Political Economy Institute Working Paper No. 322 (Amherst, Massachusetts).

Panizza, U., & Presbitero, A.F. (2012). Public debt and economic growth: Is there a causal effect? MoFIR Working Paper No. 65 (Ancoma, Italy: Money and Finance Research Group).

Pescatori, A., Sandri, D., & Simon, J. (2014). No magic threshold. Finance and Development, 51(2), 39-42. Retrieved from: https://www.imf.org/external/pubs/ft/fandd/2014/06/pescatori.htm.

Reinhart, C.M., & Rogoff, K.S. (2010). Growth in a time of debt. American Economic Review, 100(2), 573-78.

Reinhart, C.M., Reinhart, V.R., & Rogoff, K.S. (2012). Public debt overhangs: Advanced economy episodes since 1800. Journal of Economic Perspectives, 26(3), 69-86.

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The Importance of the Sociological, Psychological, and Cultural Elements in Understanding the Labor Market

In the January 16, 2020 edition of the Financial Times, Edward Luce reviewed three books trying to understand the rise of populism in the United States. One of the books he reviewed was Dignity by Chris Arnade, which sounds like a fascinating read, as do the other two books. I have not read any of the books, yet, but they all of them are at the top of my reading list beginning with Dignity. Luce’s review is a fascinating read, but one brief paragraph in his article really grabbed my attention. To provide some context to the quote, Arnade was a bond trader on Wall Street before quitting his job to travel to poor communities around the U.S. to observe an experience what poverty in America is really like instead of just relying on data analysis and theories. His observations were counter to his preconceived notions.

Arnade’s journey also taught him about the importance of place. Again and again, he would ask people in desperate straits why they did not simply pack up and leave. “Because this is my home,” they would reply as if talking to a child. Whether he was in a black or white neighbourhood, or mixed, the answer was usually the same. None of the Arnade’s spreadsheets could explain why. He had to leave his own world to understand why religion and place were the life rafts people clung to (Source given below).

The reply, “Because this is my home,” really struck me because in economics we more often than not assume perfectly competitive labor markets, and in order for such markets to exist, we assume labor is mobile. So, if workers find themselves in a situation where they are not making enough money (i.e., they are living in poverty), they will simply move to find a higher paying job, if possible. Clearly, this is not always possible (or reasonable to expect) and is yet another example of why we need to understand the sociological, psychological, and cultural elements of economic behavior, if we really want to understand it.

Source: Luce, Edward. January 16, 2020. “Populism and the Smouldering Rage of American Poverty.” Financial Times. https://www.ft.com/content/24bb69aa-3621-11ea-a6d3-9a26f8c3cba4

 

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Arts and Cultural Amenities Increase Economic Growth but Their Effects on Quality of Life Alone Are Also Important

In their article, “The Phantom of the Opera: Cultural Amenities, Human Capital, and Regional Economic Growth,” Falck, Fritsch, and Heblich show that the presence of baroque opera houses in Germany helps attract “high-human-capital employees” to these regions. Upon showing this existence of this effect, they extend their analysis to see if these high-human-capital workers will generate knowledge spillovers. They state that: “Answering this question is of practical relevance for local government because in the absence of positive spillovers, it is difficult to justify using taxpayers’ money to subsidize cultural amenities” (Falck, Fritsch, and Heblish, 2011, p. 761). Their finding that cultural amenities do lead to knowledge spillovers and increases in productivity and economic growth is very interesting and important. While I agree with their statement about this being a justification to subsidize the arts, I think their is a nuance here that also need to be mentioned.

Even if there was no knowledge spillovers as they found, there could still be justification for funding of the arts based on the enhancements to the quality of life it brings to the residents of the community. I just feel the need to mention this because I think economics puts too much emphasis on growth in productivity and GDP. It is often argued that if a policy does not increase productivity or GDP growth then it is just not worth pursuing. I understand that these effects are all interrelated in that cultural amenities help attract and retain labor because it enhances quality of life, which could then drive economic growth higher. But, what if the cultural amenities just enhanced the quality of life of those living in the community without boosting economic growth? Could that value not be enough to justify subsidizing the arts? I argue that it could.

Falck, O., Fritsch, M., & Heblich, S. (2011). The phantom of the opera: Cultural amenities, human capital, and regional economic growth. Labour Economics, 18(6): 755-766.

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Insights #2: Innovation is a Collective Process.

I am currently reading The Value of Everything by Mariana Mazzucato, and one of the great insights she provides in the book is the key role that the public sector plays in innovation. It busts the stereotype of innovation being driven by the lone inventor toiling away in his or her garage or dorm room. I believe she has written a book on this very topic, which I have not read, yet, but it is high on the reading list. I think the following passages summarize this insight pretty well.

Understanding both the role of the public sector in providing strategic finance, and the contribution of employees inside companies, means understanding that innovation is collective: the interactions between different people in different roles and sectors (private, public, third sectors) are a critical part of the process. Those who might otherwise be seen as lone entrepreneurs in fact benefit from such collectivity; moreover, they stand on the shoulders of both previous entrepreneurs and taxpayers who, as we will see, often contribute to the underlying infrastructure and technologies on which innovation builds (p.194).

Examples she provides include:

  • The smartphones many of us depend on these days are driven by technologies created with public funding.
    • The internet and SIRI were developed with funding from the U.S. Department of Defense.
    • Touchscreen display was developed with funding from the CIA.
    • GPS was developed with funding from the U.S. Navy.
  • The U.S. National Institutes of Health has funded the research supporting the development of two-thirds of the most innovative pharmaceuticals.
  • U.S. Department of Energy has funded many of the greatest breakthroughs in energy (p. 194).

As she then goes on to point out, “In the very early days it is often public R&D agencies or universities that fund the science base, and only when innovation is close to having a commercial application do private actors enter” (p. 195).

 

Source:

Mazzucato, M. (2018). The Value of Everything. New York, NY: PublicAffairs.

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Insights 1: Econs and Humans

I am launching a new series – called “Insights” – that will include posts on brief statements of wisdom or viewpoints that I come across in my readings or other sources. My hope is that this will pique your curiosity and encourage further exploration of the topic.

The first insight comes from Dr. Daniel Kahneman. I just finished reading his book, Thinking, Fast and Slow, which is full of great insights, especially if you have an interested in human behavior and economics. If you have not read it, I highly recommend it.

In this passage from the book, an “Econ” is the name given to the fictitious person modeled in neoclassical economics.

In a nation of Econs, government should keep out of the way, allowing the Econs to act as they choose, so long as they do not harm others. If a motorcycle rider chooses to ride without a helmet, a libertarian will support his right to do so. Citizens know what they are doing, even when they choose not to save for their old age, or when they expose themselves to addictive substances. There is sometimes a hard edge to this position: elderly people who did not save for retirement get little more sympathy than someone who complains about the bill after consuming a large meal at a restaurant. Much is therefore at stake in the debate between the Chicago school and the behavioral economists, who reject the extreme form of the rational-agent model. Freedom is not a contested value; all the participants in the debate are in favor of it. But life is more complex for behavioral economists than for true believers in human rationality. No behavioral economists favors a state that will force its citizens to eat a balanced diet and to watch only television shows that are good for the soul. For behavioral economists, however, freedom has a cost, which is borne by individuals who make bad choices, and by a society that feels obligated to help them. The decision of whether or not to protect individuals against their mistakes therefore presents a dilemma for behavioral economists. The economists of the Chicago school do not face that problem, because rational agents do not make mistakes. For adherents of this school, freedom is free of charge (p. 412).

Source:

Kahneman, D. (2011). Thinking, Fast and Slow. New York, NY: Farrar, Straus, and Giroux.

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Credit Cycle Starting to Worsen

I have been saying for the past few months that I think we are likely to have a recession within the next couple of years. One reason for this is that it seems the credit cycle is starting to reverse itself, especially as it relates to consumer credit.

The following four graphs pulled from the Federal Reserve Economic Database give some indication of this. As shown in Charts 1-3, delinquency rates for other consumer loans, credit card loans, and consumer loans declined pretty steadily since the economic recovery began, but since 2015, the delinquency rates have started to rise.

Furthermore, the increase in delinquencies seems to pick up pace in 2016 for all of the categories of loans with consumer loans and credit card loans maintaining the increase through 2017. Delinquencies in automobile loans have also been rising (see here).

On the positive side, delinquency rates on single-family mortgages appear to continue to decline (see Chart 4). This might just indicate that consumers are clearly financially stressed, but they are continuing to pay their mortgages on time in an attempt to at least keep their homes. If the economy does go into recession, we will see delinquency rates rise on mortgages, as well.

Consumers under financial stress are not likely to maintain their strong spending patterns, and since consumer spending is two-thirds of gross domestic product, a slowdown in consumer spending is not going to bode well for continued economic growth.

On the commercial side, the credit market seems to be fairly strong as delinquency rates are continuing to fall. It is just a matter of time, though, before this trend reverses course, too. If consumer spending starts to decline, this means goods and services will go unsold, eventually causing businesses to decrease production as inventories increase and demand for services falls. With less revenues flowing into the business, we will likely see delinquency rates start to rise. A recession cannot be far away at this point.

Chart 1. Delinquency Rate on Other Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinqunecy Rate on Other Consumer Loans All Commercial Banks

Chart 2. Delinquency Rate on Credit Card Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Credit Card Loans All Commercial Banks

Chart 3. Delinquency Rate on Consumer Loans, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on Consumer Loans All Commercial Banks

Chart 4. Delinquency Rate on Single-Family Residential Mortgages, All Commercial Banks (Seasonally Adjusted – gray bars indicate recessions)

Delinquency Rate on SF Mortgages All Commercial Banks

Maybe this is all just a regression to the historical mean, but I think these trends are a bit concerning and worth watching.

Steve

SRN-LogoMark-Green-FORWEB

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“Inextricable Connections” Are Important for Economic Development

As an economist whose research focuses on regional economies, I have often wondered about the economic and social impacts of the movement to online retail and social engagement in general through online means and away from interactions among physical persons. As one whose graduate degrees are in political economy, I am aware of the close connections between politics, a well-functioning government, and the functioning of the economy. Like many U.S. citizens, I am also increasingly concerned about the acrimony of our political environment in the U.S., especially, but also around the world.

I am reading Brene Brown’s, Braving the Wilderness, and among the many great insights in the book, she makes the point that we have a human need for “inextricable connection.”

All of these examples of collective joy and pain are sacred experiences. They are so deeply human that they cut through our differences and tap into our hardwired nature. These experiences tell us what is true and possible about the human spirit. We need these moments with strangers as reminders that despite how much we might dislike someone on Facebook or even in person, we are still inextricably connected. And it doesn’t have to be a big moment with thousands of strangers. We can be reminded of our inextricable connection after talking with a seatmate on a two-hour flight.

The problem is that we don’t show up for enough of these experiences. We clearly need them. But it’s vulnerable to lean in to that kind of shared joy and pain. We armor up. We shove our hands into our pockets during the concert or we roll our eyes at the dance or put our headphones on rather than get to know someone on the train (Brown, 2017, pp. 128-129).

The disrupting or tearing apart of these connections not only has social ramifications, but it also has economic effects that are not good. One of the key lessons I took away from the book is that it is easy to hate and spread nonsense when you can hide behind email and social media. One of her chapter titles summarizes it perfectly: “People Are Hard to Hate Close Up. Move In” (p. 63).

Reading the book highlighted one of the concerns I have been thinking about with respect to the effects of moving our everyday economic transactions and engagement with others both socially and economically to the online world. I took from Dr. Brown’s discussion that as this social disruption continues, the lack of personal engagement will decline as brick and mortar stores go out of business. Even though the interactions we have as we shop at one of these stores might be brief, it seems to me that they are very important per the points Dr. Brown makes as previously highlighted. As we lose these physical in-person interactions, it seems to me that it only exacerbates our vitriolic political climate, which is not good for our economic future.

Additionally, we may also lose the benefits and efficiencies that come from clusters of people (be they large or small numbers) engaging with one another in person. These are called agglomerations economies in economics. One of the biggest benefits that comes from these interactions are the transmission of ideas that lead to innovations that facilitate business growth, new business creation, and ultimately, economic development. Some argue that these can occur just as well in an online environment, and to some extent they do. What gets missed is the richness of the discussions that occur when in the physical presence of others that do not occur in an online environment. Sometimes (often times?), this just happens serendipitously as we wander the streets or engage in our daily activities – including our consumer activities at physical stores.

As usual, Dr. Brown states the importance of the physical interactions much more eloquently than I do.

As I started digging into this question [i.e., Is social media a toll to achieve collective joy and pain or more for the spreading of hate, unfounded statements, and picture of cute animals?] with research participants, there was very little ambiguity It became clear that face-to-face connection is imperative in our true belonging practice. Not only did face-to-face contact emerge as essential from the participant data in my research, but studies across the world confirm those findings. Social media are helpful in cultivating connection only to the extent that they’re used to create real community where there is structure, purpose, and meaning, and some face-to-face contact.

One of the most well-respected researchers in this area is Susan Pinker. In her book The Village Effect: How Face-to-Face Contact Can Make Us Healthier and Happier, Pinker writes, “In a short evolutionary time, we have changed from group-living primates skilled at reading each other’s every gesture and intention to a solitary species, each one of us preoccupied with our own screen.” Based on studies across diverse fields, Pinker concludes that there is no substitute for in-person interactions. They are proven to bolster our immune system, send positive hormones surging through our bloodstream and brain, and help us live longer. Pinker adds, “I call this building your village, and building it as a matter of life or death.”

…Social media are great for developing community, but for true belonging, real connection and real empathy require meeting real people in a real space in real time (Brown, 2017, pp. 140-141).

To be clear, I am not against shopping online or the internet or social media. I do my share of shopping online and certainly use the internet and social media, but I do think there are negative consequences for the economy that we need to keep in mind. One of these negative consequences is that it reduces our physical interactions with others, which reduces our understanding and tolerance of others. This leads to an inability to have reasonable and productive public debates and a dysfunctional democracy. Whether you love or dislike the government, a poorly functioning government has serious negative consequences for economic development. This lack of face-to-face interaction may also stifle the benefits of agglomerations economies, which could also slow economic development. In other words, the demise of online retail seems to be more than just structural changes happening in the economy. The reduction in face-to-face interactions leads to destructive social problems and slower development of the economy.

Just something to keep in mind as many of us consider where to shop at the end of the holiday season and spend all of those gift cards afterwards. Now, out the door I go to finish my last minute holiday shopping.

May you enjoy the season with those you love.

Steve

SRN-LogoMark-Green-FORWEB

 

References

Brown, B. (2017). Braving the Wilderness: The Quest for True Belonging and the Courage to Stand Alone. New York: Random House.

 

 

 

 

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The Imperative of Understanding the Role of Institutions, Culture, and History in Economics

I recently read an article by Dr. Avner Greif of Stanford University titled, “Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and individualist Societies.” While it is a somewhat dated article being published in 1994 (see citation below), Dr. Greif’s conclusion struck me as being very important and still applicable to understanding economic development and economics in general today. I think his concluding remarks are also important to take into consideration when one is attempting to apply economics in the making of public policy or just trying to understand a certain issue or event.

Here are the highlights I took from Dr. Greif’s conclusion.

…This paper points to factors that make trajectories of societal organization – and hence economic growth – path dependent. Given the technologically determined rules of the game, institutions – the nontechnological constraints on human interactions – are composed of two interrelated elements: cultural beliefs (how individuals expect others to act in various contingencies) and organizations (the endogenous human constructs that alter the rules of the game…). Thus the capacity of societal organizations to change is a function of its history, since institutions are combined of organizations and cultural beliefs, cultural beliefs are uncoordinated expectations, organizations reinforce the cultural beliefs that led to their adoption, and past organizations and cultural beliefs influence historically subsequent games, organizations, and equilibria.

Understanding the sources of institutional path dependence indicates the factors that forestall successful intersociety adoption of institutions for which there are many historical and contemporary examples…The view of institutions developed in this paper indicates why it is misleading to expect that a beneficial organization of one society will yield the same results in another. The effect of organizations is a function of their impact on the rules of the game and the cultural beliefs of the society within which this game is embedded. Analyzing economic and political institutions and the impact of organizational modifications requires the examination of the historical development and implications of the related cultural beliefs.

Past, present, and future economic growth is not a mere function of endowment, technology, and preferences. It is a complex process in which the organization of society plays a significant role. The organization of society itself, however, reflects historical, cultural, social, political, and economic processes. Comparative historical analysis is likely to enhance our comprehension of the evolution of diverse societal organization, since this process is historical in nature. Furthermore, such an analysis provides the historical perspective and diversity required to examine institutional evolution and the interrelations between culture, the organization of society, and economic growth (Greif 1994, 943-944).

What this means to me is that if we are truly going to understand economics, the process of economic development, and the functioning of economies, we have to also understand the related historical, political, social, cultural, and institutional elements. We can’t only rely on mainstream economic theory. The culture and institutions that are embedded within an economic system are vitally important to fully understanding how that economy functions at a macro level, as well as gaining a full understanding of the economic behavior at the micro level.

Furthermore, since history (along with culture) plays a key role in determining the path dependence of the economy’s institutions, it is imperative to understand the historical context of an economy in order to be able to appropriately apply economic theory to the development and implementation of effective policy. Institutions, culture, and history matter, but yet, we ignore them, for the most part, in mainstream economics…much to the detriment of society.

Reference

Greif, A. (1994). Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualist societies. Journal of Political Economy, 102, 5, 912-950.

 

Steve

SRN-LogoMark-Green-FORWEB

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San Antonio 2018 Economic Forecast

I had the pleasure and honor of being on a panel at an event this past Friday hosted by Texas CEO Magazine in partnership with the Bill Greehey School of Business at St. Mary’s University in which I presented my economic forecast for the San Antonio economy in 2018.

The presentation can be found here.

Employment growth in San Antonio remains healthy but has been slowing a bit over the past twelve months, which follows a similar pattern to the other major metropolitan economies across the state through August. Given the length of the economic expansion, growth rates have regressed toward the long-term average. The unemployment rate in San Antonio is still quite low at 4.1% in August, but it has started to tick up over the past year.

Again, a similar pattern is occurring across the other major metropolitan areas, too. We are at the point in this phase of expansion where the economy is at or very near full employment, so growth is going to be driven by population growth and/or growth in productivity, so it is difficult to see that growth will be much greater than average, if it is at all in 2018. For next year, I believe we continue to see growth in San Antonio with employment increasing in the range 2.25-2.50%, which is around the historical average growth rate of 2.43%. I project that the unemployment rate in 2018 will probably be in the range of 4.00-4.25% in San Antonio in 2018.

You will also see in the slides that I think we need to consider the possibility of the U.S. economy going into recession in the next two to three years. This is simply due to the fact that the current expansion is already 100 months old, which makes it the third longest in history. If growth continues over the next two to three years, it will become the longest expansion in history.

If we learned anything in the last recession, it is that growth does not go on forever. The expansion is long in the tooth. As already mentioned, growth in the foreseeable future is going to come from population growth and/or higher levels of productivity. Given the trends in demographics with the aging baby boomer generation and limitations being put on immigration, it is difficult to see where the population growth is going to come from in the next few years. Boosts in productivity are, in part, going to be driven by technological change, and while that is exceedingly difficult to forecast, it is hard to envision from where the boost in productivity will come in the near future. With this in mind, it seems that the odds are pretty high that the economy will run out of steam within the next two to three years.

Of course, all of this is contingent on various risks, and the biggest risk I see at this point is political risk. The national and global political situation has injected a massive amount of uncertainty into the business and economic environment. This, in and of itself, can be a deterrent to economic growth, but it certainly makes economic forecasts more difficult.

Steve

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