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Economic forecast: Inflation could hit 9% before easing as interest rates rise

A shopper reaches above empty shelves at a Target store in Queens, NY.
A shopper reaches over empty shelves at a Target store in Queens, NY, in January 2022. Inflation hit a 40-year high this month. (Photo by Anthony Behar/Sipa USA)(Sipa via AP Images)

Don’t be surprised if inflation, which hit a 40-year high of 7.5% in January, spikes even higher over the next few months as the U.S. government’s massive response to the coronavirus pandemic continues to ripple through the economy.

Inflation will likely ease in the second half of the year, but a drop to pre-pandemic levels is not in sight yet, according to a pair of economists who shared their outlook for 2022 and beyond at a virtual conference hosted by the Fisher Center for Real Estate and Urban Economics at UC Berkeley’s Haas School of Business this week.

“We way overdid it” with monetary and economic stimulus, said Kenneth Rosen, chair of the Fisher Center and a Berkeley Haas professor emeritus. He gave Congress credit for crafting emergency programs—such as enhanced unemployment, stimulus payments and Paycheck Protection Program loans—in 2020, but “I do think the stimulus in 2021 probably was unnecessary and should have been more targeted.”

Once the economy began to reopen, those stimulus programs quickly boosted demand for goods, while manufacturing, transportation and labor-force disruptions constrained supplies. The upshot: Inflation hit 7% in December and 7.5% in January, the highest since February 1982. Rosen said the “slow-moving” Federal Reserve waited too long to curb skyrocketing inflation by raising interest rates.

Inflation could hit 9%

That will change this year, when the Fed finally starts raising rates and fiscal stimulus begins to wear off, said Rosen and co-panelist Richard Barkham, global chief economist with CBRE.

Rosen sees inflation hitting 8% to 9% in a few months, before falling to 4 to 5% by year end. Chief executives he has spoken with recently said they are raising prices. They have labor problems and “don’t think it’s going to end quickly.”

Co-panelist Richard Barkham, global chief economist with CBRE, thinks inflation will peak at 9% in the first half of the year and drop to 3% to 4% by year end as kinks in the supply chain ease up and the reopening of schools and day care facilities let more people re-enter the workforce. But inflation will be “higher and more messy than people currently expect.”

Both economists expect the Fed will raise the short-term federal funds rate, now at 0.25%, by a quarter point four or five times this year. Barkham sees two more hikes next year, Rosen sees four.

Inflation will fall, but not to target rate

The two experts also agreed that after the transitory effects of the pandemic wear off, inflation will fall—but not to the Fed’s 2% target rate because the aging population and immigration constraints will keep an upward pressure on wages. A shift away from fossil fuels along with super-tight labor markets could also keep energy prices a bit higher, Barkham said.

Rosen said the U.S. economy will likely grow 3.5% to 4% this year as international tourism, conventions, and other sectors reopen. Also, individuals and businesses still have about half of the $5 trillion in fiscal stimulus doled out since 2020 sitting idle. Much of that will be spent this year and next, Rosen and Barkham agreed.

Immigration constraints will curb growth

Longer term, neither economist sees growth exceeding 2% annually unless the government bolsters immigration.

“Immigration and inter-regional migration was always the secret weapon of the U.S. economy,” said Barkham, who is a British citizen working in Boston. But legal and illegal immigration have fallen drastically in recent years, due to policies enacted during the Trump administration and Covid-related travel restrictions.

The United States should promote immigration, “but also be more aware of the actual and perceived distributional effects on income groups that have done poorly in the era of globalization,” Barkham said, noting that it’s tricky to put into practice. “I’m not particularly optimistic that we will see that increase in immigration” in the near and medium term. That means economic growth will have to come almost entirely from productivity gains, he said.

Rosen called immigration “the number one thing we can do” to promote long-term economic growth.

As for the stock and bond markets, expect more gyrations. Rising interest rates “will cause indigestion in the financial markets,” Rosen said.

More pain in 2023

Barkham said the real pain may not hit until 2023. Even if you had six rate hikes in 2022, “you still end the year with negative real interest rates,” which means short-term rates will be lower than the inflation rate. Real rates drive the economy and real estate markets, he said, and while they won’t be as deeply negative as they are now, “they will still support higher asset values.”

But by 2023, real interest rates will turn positive, and recent history has shown the U.S. is not very tolerant of them. When rates rose in 2018, there were “two big stock market hiccups,” Barkham said. “The Fed doesn’t want a major correction, but a certain amount of chop is all part of the process of moving out of these emergency policy settings.”




Study: What if you knew how much your boss makes?

A hand holds up a bundle of dollars while many other hands do the same in the background
Credit: RapidEye for iStock/Getty Images

More states are requiring employers to disclose information about their workers’ salaries with the hope it will reduce gender and racial pay gaps. But increasing pay transparency can also have some surprising impacts on worker productivity, according to a new large-scale study that is the first to examine how employees respond when they find out how much both their peers and bosses make.

The study, co-authored by Assoc. Prof. Ricardo Perez-Truglia, asked over 2,000 employees at a large commercial bank in Southeast Asia to guess their peers’ and managers’ salaries, then monitored their work habits after they were given the salary information. The main findings: Employees became less productive when they discovered their peers were making more money than they thought, but they worked harder when they discovered their bosses were earning more than they estimated.

“It was not uncommon for employees to find out that some of their bosses got paid three, four, five times as much as they do, sometimes 20 times as much,” said Perez-Truglia, whose study is forthcoming in the Journal of Political Economy. “What shocked us was that when you compared yourself to your peers, small pay differences demotivate you. But when you find out your bosses make an obscene amount more than you make, you don’t care. If anything, you become more productive.”

The productivity boost was strongest for manager positions that were just a few promotions away from an employee’s current job, but the effect faded when it came to high-level, unattainable positions. This suggests workers believe, “If I work hard and get promoted, I will get paid an obscene amount myself,” Perez-Truglia said.

He and co-author Zoë Cullen of Harvard Business School also found that employees were better at guessing peer pay than manager pay. Employees also wanted the company to release more salary information—as long as it wasn’t their own.

The researchers did not study pay disparities by race or gender, but said their evidence relates to the growing debate on pay transparency laws. “There is a widespread view that forcing firms to be more transparent would reduce pay inequality,” they wrote. “Our findings suggest that these policies may be effective, but in a narrow sense: While transparency may pressure firms to reduce horizontal inequality (between peers), employees are unlikely to exert the same pressure to reduce vertical inequality (between employees and managers), which constitutes the bulk of pay inequality.”

The experiment

The research was conducted at an unidentified Southeast Asian bank in 2017, when Cullen was working there as chief economist. The researchers asked employees to guess the average base salaries of their managers and peers. Then, they conducted an experiment: half of the subjects, selected at random, would get to see an estimate of how much their peers or managers actually get paid.

The researchers then measured the behavior of these employees for 90 days after they saw, or did not see, what others were making. They found that employees worked harder–spending more hours at work, sending more emails from their company account and making more sales—when they found out their managers earned more than they thought. But those who found out their peers made more than they had estimated slacked off.

For example, they estimated that a 10% increase in manager salary over what employees had guessed increased the average hours employees worked by 1.5%, while a 10% increase in peer salary over what employees had guessed reduced the hours they worked by 9.4%.

The end of the survey included questions related to employee morale, such as job and pay satisfaction, and attitudes toward pay inequality. “When we tell them their peers get paid more, they say inequality is an issue. But when we tell them their bosses get paid more, they say they don’t care,” Perez-Truglia said.

On average, employees underestimated their bosses’ salaries by about 14%, but when it came to their peers’ pay, about half guessed too high and half guessed too low.

Would companies benefit?

Finding out how much peers earn “would positively affect some people and negatively affect some people,” with the net result for the company being about zero. “They cancel each other out,” Perez-Truglia said. Disclosing manager pay, however, would have a small positive impact on productivity.

On balance, the researchers concluded that companies and their employees could benefit from greater pay transparency.

Their results are consistent with previous research that found employees become demotivated when they find out their peers make more than they do. A 2012 study of University of California employees by UC Berkeley economists David Card, Emmanuel Saez, and Enrico Moretti along with Alexandre Mas of Princeton University showed that employees who found out they were earning less than the median for their unit were less satisfied with their job and more likely to look for a new one, while above-median earners were unaffected.

This new study is the first to look at the impact on employees who discover their boss’ pay, Perez-Truglia said.

He and Cullen also found that employees were hungry for salary information, and many were willing to “pay” for it. In the experiment, some employees gave up a chance to win almost $200 to see their boss’ or peers’ salaries. Employees may feel they need pay information “to decide whether to work harder to get promoted, or to use it as a bargaining chip in future salary negotiations,” they wrote.

Separately, in response to two survey questions, 65% of the employees said they would like their company to disclose to all employees the same type of average pay data provided in the experiment. However, 75% opposed disclosing everyone’s exact salary. “One plausible interpretation,” the authors wrote, “is that while employees value the salary information a lot, they may value their privacy even more.”


‘A giant of a person’: Economist John Morgan dies at 53

Professor John Morgan, an economist who found elegant new ways to analyze the world through the lens of game theory, and whose popular classes and sage mentorship made a deep impression on his students, passed away Oct. 6 at age 53. He died peacefully at his Walnut Creek home.

Headshot of Professor John Morgan
Professor John Morgan

During his nearly two decades at Berkeley Haas, Morgan left his mark through his prolific and wide-ranging research, his unconventional teaching that drew on strategy games he invented, and his generous leadership. He had been struggling with a painful autoimmune disease that put him on medical leave, but he continued with his research and had planned to resume teaching in the spring.

“It’s impossible to over-express what a force John was in this school, and it didn’t take long for anyone who met him to realize that his small physical stature was a disguise for the giant of a person he was,” said Prof. Steve Tadelis, a close colleague in the Economic Analysis & Policy Group. “We have great researchers, we have great teachers, and we have people who give freely of themselves. But I cannot think of a single person who embodies all three of these at the extreme levels that John did.”

It’s impossible to over-express what a force John was in this school… —Prof. Steve Tadelis


Morgan was the Oliver E. and Dolores W. Williamson Chair of the Economics of Organizations; co-director of the Fisher Information Technology Center; founding director of the Experimental Social Sciences Laboratory (XLab); a member of the California Management Review editorial board; and faculty director and tireless advocate for Berkeley Executive Education. In 2013, he was the inaugural winner of the Williamson Award, given to faculty who embody the school’s four Defining Leadership Principles. He also won the Cheit Award for Excellence in Teaching in 2006.

Professor John Morgan writing on a whiteboard.
Morgan teaching at the whiteboard in 2011. (Photo: Jim Block)

Pennsylvania native

Born on November 11, 1967, in Wilkes-Barre, Pa., Morgan was raised in Ashley, Pa. He met his future wife, Heather Evans, when they were teenagers working at the Osterhout Free Library in Wilkes-Barre. They went to different high schools but both attended the University of Pennsylvania, where Morgan graduated summa cum laude in economics from the Wharton School in 1989. The couple was married in 1991, and celebrated their 30th anniversary in August.

Morgan earned a PhD in economics from Pennsylvania State University in 1996 and landed an assistant professorship in economics and public affairs at Princeton University. Following stints as a visiting professor at Penn and New York University, and a visiting fellow at Nuffield College, University of Oxford, he joined Berkeley Haas in 2002. During his career at Berkeley, he also spent time as a visiting fellow, Trinity College, and an eternal fellow, Judge Business School, both at the University of Cambridge, U.K.

His doctoral thesis was an early example of his elegant reasoning, colleagues said. “Financing Public Goods by Means of Lottery” showed why, despite their reputation as regressive, lotteries are a very effective method of raising funds for public benefit: Unlike taxes, they are voluntary, and those who are paying have the chance to get some of the benefit distributed back to them.

Academic derring-do

Among the areas Morgan delved into were pricing and competition in online markets, auctions, expertise, reputations, and voting. He looked at why prices can vary so widely on the internet when it’s so easy to shop around; showed that people aren’t very good at accounting for hidden fees like shipping costs; and even had a paper on the economics of psych-outs, or why showing off can make competitive sense, despite being frowned upon.

No matter the topic, Morgan had an exceptional ability to dispassionately analyze problems, colleagues said. And while his brilliance with economic models stood out, he also loved experimental work, co-founding the Haas Xlab to allow researchers to see if their theories held up in practice.

“I wished we could bottle John, and give every economist a dose of his clear thinking,” said Prof. David Levine, chair of the Economic Analysis & Policy Group, who had been working with Morgan to return to the classroom in the spring. “He thought about ethics. He took the perspectives of other people. He was smarter than me—in fact, he was smarter than just about everyone.”

According to Tadelis, Morgan’s “rate of publication was second to none” before his illness took a toll. Levine was among several colleagues who commented on Morgan’s academic derring-do, which stood out even at an elite institution. “Sometimes his brilliance was intimidating—for example, the time he had two different articles in the same issue of the preeminent economics journal, the American Economic Review,” Levine said.

Prof. Ernesto Dal Bó, a political economist, often discussed voting theories with Morgan. “I enjoyed a front-row seat as he wrote really clever models investigating the informational and welfare properties of important voting institutions,” Dal Bó said. “John’s mathematical models of voting often delivered surprise, and always delivered significant truth and beauty. He was a uniquely gifted researcher who made those around him think much harder, while cheering us up with his wit.”

Mentor and father figure

Those qualities also made an impression on the doctoral students who sought him out for his attentive mentorship and unique approach to life and work.

“Conversing with him was like being on an adventure. He would throw himself at intellectual challenges and follow them wherever they went, and he was willing to challenge convention and be controversial on certain topics.” said Bo Cowgill, PhD 15, now an assistant professor at Columbia University. “On top of that he was hilarious—he could bring down the house with his mixture of humor and insights and game theory and economics.”

He was devoted to his students, a number of whom became good friends and repeated co-authors after they graduated.

“He would generously give his time to PhD students. He put in the hard work to make them better—and they did quite well on the job market,” Cowgill said. “Yet he also cared about things outside of academic success and climbing the career ladder. He would encourage students to take time for their mental health and their lives outside of their careers. He was like a father figure, or a mentor for questions about life.”

Morgan sometimes offered his own money as prizes for students who won his strategy games.

“Survivor” at Haas

Morgan taught strategy, leadership, microeconomics and policy, and his long-running game theory class was one of the most popular at Haas. He blasted rock music to welcome students to class and energize them for competition in his signature strategy games, which he eventually incorporated into a semester-long game based on the reality TV show Survivor. He said his goal was to teach students to be “outward thinkers,” by which he meant they would need to be able to relate to others to succeed in business.

“You don’t really learn how to empathize by having some professor tell you about the need to empathize. It’s like reading a self-help book. It doesn’t work. You actually have to do it,” he said.

He received awards from the National Science Foundation, and was selected as a visiting scholar at the Hoover Institution and the International Monetary Fund. He consulted on auctions and dynamic pricing for Google, was a research scientist at Yahoo!, and served as a consultant to the Federal Trade Commission.

“We will dearly miss John’s sharp wit, brilliant intellect, and personal warmth,” said Dean Ann Harrison. “He was greatly beloved by colleagues and students alike.”

Devoted family man

John Morgan wearing a Red Sox shirt
Morgan was a passionate fan of the Boston Red Sox.

Yet Morgan had another side, as a grounded and devoted husband to Heather, an enthusiastic father to his son. He also pursued many non-academic interests. “John was a brilliant, loving, quirky, wonderful man who never had just hobbies; they always became obsessions,” said Heather Morgan. He had a deep and wide-ranging knowledge of history, which he loved to share. He also loved golf, travel, and hiking, as well as fountain pen collecting, photography, drawing, watercolor, and painting miniatures for strategy board games and Dungeons & Dragons. (For many years, he ran a weekly D&D game for his son and friends.) He was also an enormous fan of the Boston Red Sox, and he shared a love of the Oakland A’s and fantasy sports with his son.

In addition to his wife and son, Aidan, Morgan is survived by his mother, Diana Williams Morgan, of Wilkes-Barre, Pa.; father, Roy J. Morgan, Zephyrhills, Fl.; brother, David W. Morgan (Julie), Longwood, Fl.; aunt, Maxine Williams, Ashley, Pa.; nieces and nephews, and brothers and sisters-in-law. Plans for a memorial are still being discussed. Donations in John’s memory may be made to the American Autoimmune Related Diseases Association (AARDA) or The Humane Society of the United States.





Prof. David Teece named a Citation Laureate for pioneering economics research

UC Berkeley Haas School of Business Professor David J. Teece has been named as a 2021 Citation Laureate in economics for his pioneering research on entrepreneurship, innovation, and competition.

Prof. David Teece
Prof. David J. Teece

Teece is among 16 researchers from six countries whose work was deemed to be “of Nobel class” by the Institute for Scientific Information. These researchers are among the most highly cited within the Web of Science, a global database of citations in peer-reviewed journals managed by analytics firm Clarivate.

“I’m humbled to be included with such esteemed names, and wish to thank the University of California, Berkeley, the Haas School, and the Institute for Business Innovation for providing the environment that has enabled me to flourish as a scholar-entrepreneur,” said Teece, who is the Thomas W. Tusher Professor in Global Business, faculty director of the The Tusher Initiative for the Management of Intellectual Capital, and also the founder and executive chairman of Berkeley Research Group.

A global authority on the theory of firm and strategic management, competition policy, and intellectual property, Teece has written over 30 books and two hundred scholarly papers, and has been cited over 186,000 times (per Google Scholar).

Teece is well-known for his theory of “dynamic capabilities,” which says that what matters most for business is corporate agility, or the ability to sense new threats, seize opportunities, and reconfigure as necessary. His seminal 1997 paper on the concept has been cited almost 12,000 times in its original version, and 47,000 times in all versions.

For context, out of some 52 million articles indexed in the Web of Science since 1970, only 6,500 (or .01%) have been cited 2,000 or more times. Citation Laureates are identified and selected from among this group. “They are individuals whose research publications are highly cited and whose contributions to science have been extremely influential, even transformative,” according to Clarivate’s announcement.

“For a paper to be cited 2,000 times or more is a rarity,” said David Pendlebury, senior citation analyst at the Institute for Scientific Information at Clarivate. “Authors of very highly cited papers are usually members of national academies of sciences, hold senior appointments in universities and other research institutes, and have received many top international prizes in their fields. Indeed, many of them have helped to shape their fields of study.”

Clarivate uses quantitative data in addition to qualitative assessment to provide insights about the world’s most influential researchers. Citation Laureates are awarded in the areas recognized by the Nobel Prize: Physiology or Medicine, Physics, Chemistry and Economics. Since 2002, 376 researchers have been awarded Citation Laureates, and 59 of them have gone on to receive a Nobel Prize.

Teece has been a professor at the Haas School of Business since 1982. He formerly served as faculty director of the Institute for Business Innovation. He holds a PhD in economics from the University of Pennsylvania as well as 10 honorary doctorates.

“I cherish the atmosphere of open discussion and the ability to challenge received paradigms, which is a quintessential Berkeley trait,” Teece said. “We must all work hard to maintain these traits along with an interdisciplinary focus, and linkages between theory and practice. It is only by pursuing these goals that our frameworks, theories, and models can be both rigorous and relevant.”


Two Haas profs elected to the American Academy of Arts and Sciences

Berkeley Haas professors Annette Vissing-Jørgensen and Stefano DellaVigna are among the six UC Berkeley faculty members elected to the American Academy of Arts and Sciences (AAAS) for 2021.

The organization, which was founded in 1780 to honor top scholars and leaders from every field who address issues of “importance to the nation and the world,” announced 252 new members today.

Prof. Annette Vissing-Jørgensen
Annette Vissing-Jørgensen

“We are honoring the excellence of these individuals, celebrating what they have achieved so far, and imagining what they will continue to accomplish,” said David Oxtoby, president of the American Academy, in the announcement. “The past year has been replete with evidence of how things can get worse; this is an opportunity to illuminate the importance of art, ideas, knowledge, and leadership that can make a better world.”

Annette Vissing-Jørgensen holds the Arno A. Rayner Chair in Finance and Management and serves as chair of the Finance Group. Her research focuses on empirical asset pricing, monetary policy, household finance and entrepreneurship, and  spans both asset pricing and corporate finance.

Stefano DellaVigna
Stefano DellaVigna

Stefano DellaVigna is a professor of business administration at Berkeley Haas and is the Daniel Koshland Sr. Distinguished Professor of Economics in the Department of Economics.  He is co-director of the Berkeley Initiative for Behavioral Economics and Finance, and his research interests include behavioral finance and economics, psyschology and economics, and applied microeconomics.


See the full list of Berkeley faculty elected to the AAAS.