As a recent graduate, I really feel the problem of managers being really unwilling to train people when the labor market is in surplus like this. Almost everything I've looked at, including jobs that should be entry-level, have demanded a couple of years of experience in the field that it's just not possible to get fresh out of school, so I've been stuck in my retail job while I wait for the market to heat up again. It's certainly not the worst place to be right now, but I hope to be able to find other options as we get into summer
Great article, I would be really interested in a discussion of the political economic impacts of running the economy below capacity. It seems like if the economy was working as you describe in the article that the demand for trade restrictions, minimum wages and other interventionist policies would be much lower. I think it could be an interesting lesson for the neoliberals of the world. If you want people to support competitive market institutions you need the economy to grow fast and run at or above capacity.
I find your assessment of the late-90s spot-on with my personal experience. Everyone was employed at a level above what their experience and/or capacity really allowed. This wasn't great for companies in the short run, but it did allow people to get ahead in a way that hasn't happened since--and perhaps also created a more productive workforce in the long run, as people who could hack it advanced quickly and those that couldn't found their ceiling
Other than that, I agree with everything in this post. I remember in the late 90s boom thinking that this is what the labor market should be like all the time.
This isn't a very informed comment but worrying about "overheating" the economy feels a little gross to me. Lots of people need help and the "overheating" thing strikes me as well-off people worried about their own wealth. I'm curious if others get the same impression?
Inflation phobia is one of those classic Krugman-style zombie ideas. Not only do we have a long trend of low inflation, but the factors that girded the last burst of inflation, in the late 70s/early 80s, no longer exist: the connection between oil prices and inflation (and the resultant huge impact of the oil crises) has been broken; the union power to tie wage increases to inflation, resulting in a permanent ratcheting, is gone too.
And yet so many people still have inflation fear -- fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts (h/t FDR!). That's what the CBO's underestimated output gap is. It's behind the mindless invocations of Weimar hyperinflation and the rise of the Nazis (when the story is the opposite: inflation didn't help the Nazis, but the catastrophic depression the early 30s most certainly did).
I don't know if $1.9T is the right number, and I'm suspicious of simplistic beliefs in the ability of the government to easily replace true economic production (i.e., the "output gap") by writing checks. And if the number is eventually $1.5T, I'll be fine with that too. But what I'm more concerned with is the underlying bias in the system that pushes us to take actions to prevent *any* movement toward higher prices, seeing that as the greater threat than unemployment, underemployment, and lagging wage growth and economic opportunity especially for those who have been most left out of that opportunity.
I’m no expert on the topic, but that first chart sure looks like we’re on a path toward soaring inflation. We’re pumping trillions into an economy that is only partially slow, while other parts of it are on fire. If you haven’t looked at the price of sports cards lately, head over to eBay and be amazed. It seems obvious that fiscal injections of this size would ultimately result in inflation, but Matt and others (who admittedly are much smarter than me) say not to worry. I hope they’re right, but I can’t help but wonder if they are outsmarting themselves...
This is a supply-side recession, completely unlike 2008-09 or any other modern one. There is plenty of savings and pent up demand, so if and when the pandemic is sufficiently controlled the economy will come roaring back. There is no need for fiscal "stimulus", though there is obviously still need for fiscal relief for the unemployed and state/local gov'ts, etc. The fact that inflation expectations are on target doesn't really say much about the appropriateness of the size of the fiscal package since if is too big the Fed will simply offset it with tighter monetary policy. It's reasonable for the bond market to expect this to happen.
This is quite possibly the worst-researched Slow Boring post I've ever read. While I appreciate the general argument that government officials should work harder to achieve full employment and be less scared about inflation, your understanding of macroeconomics is clearly faulty and your criticisms miss the mark. Three quick points:
1) Fundamentally, I you seem to misunderstand the underlying concept of "potential output". Your post implies that when the economy exceeds potential, we should be seeing runaway inflation and exceedingly tight labor markets. In some sense, this is right. But exceeding potential is not a switch that is turned to "On" or "Off". Instead, it's like a dimmer switch. If we exceed potential output by a little bit, inflation will accelerate a little bit. If we exceed potential output by a lot of bits, then we're likely to get runaway inflation. Now, we can argue what constitutes a little bit vs. a lot of bits, but my view is that a 1% gap between GDP and potential is not a lot. Consistent with that view, inflation was a little higher in 2018-2019 than it was in preceding years but not radically higher.
Put another way, you should not think of potential output as a limit that cannot be exceeded for fear of runaway inflation. Rather, you should think of it as the maximum output an economy can produce without generating ~inflationary pressure~.
2) Your post implies that you have no idea how CBO constructs its estimate of potential output. This is a weird take, given that their methodology is publicly viewable in a document written by Shackleton (2018). Basically, CBO uses a supply-side model in which they estimate potential labor hours, potential capital services, and potential labor/capital productivity. Those factors are estimated by looking at historical trends in each series. It's fair to quibble over specific modeling assumptions, but I'm not sure you've actually read through their methodology. Here's a link: https://www.cbo.gov/publication/53558
3) Before you accuse CBO's forecasting of being "bad", I'd encourage you to read CBO's Economic Forecasting Record (2019). The report examines two-year and five-year forecasts made between 1980 and 2017. It compares forecasts made by CBO, OMB, and the Blue Chip consensus of private sector forecasters. The report finds that CBO's forecasts are generally more accurate than OMB's forecasts and roughly comparable to the private sector forecasters. This finding extends to the agency's interest rate forecasts, which seem no better and no worse than those produced by other organizations. Essentially, forecasting interest rates is highly challenging, and this is especially true in our anomalous interest rate environment. Instead of dunking on the CBO, you should understand the inherent difficulty of their task. Here's a link to the forecast accuracy report: https://www.cbo.gov/publication/55505
I'll conclude with my own thoughts on this issue. I think Larry Summers and the CRFB are being overly cautious with regards to the need for more fiscal stimulus. I'm much more closely aligned with Janet Yellen, who argues that the risks of a too-small stimulus far outweigh the risks of a too-big stimulus. But your decision to criticize a nonpartisan bureaucracy for making average to above-average forecasts is an odd way to channel your frustration. Instead, you should direct your ire toward the people who are ~actually~ calling for less stimulus instead of scapegoating the CBO.
I know nothing about economics, but I have absorbed the message that the "anomalous interest rate environment" baffles economists of all stripes and that it underpins a lot of the "wrong" projections and models. My cynical assumption is that it will take another financial crisis to figure it out, similar to the "obivous systemic risks" of mortgage backed securities and whatnot that everyone saw *after* the Great Recession.
I was coming to highlight point #3. The Fed, markets (forward rates) and sell side banks have all gotten this wrong as well. It’s not right to single out the CBO.
The dual mandate of the Fed to control inflation and maximize employment has always leaned towards controlling inflation since they define full employment as the level that does not increase inflation. It's a tautology that has resulted in the extremely slow growth (or actual decline depending on your metrics) of wages for the last several decades.
The thing about the TIPS markets, is that the Fed exists and has openly and consistently communicated a target inflation of 2% (which they then consistently hit just below). So a bond trader is essentially betting that the Fed will continue to successfully target inflation in the same manner. So, it's a bit of a Goodhart's Law issue, as your later post on the Fed reaction makes clear.
F*** that was a great read..
Along with our K shaped recovery comes K shaped inflation. https://twitter.com/fintechjunkie/status/1361426740384583680?s=21
Some redistribution would do everyone good.
This. This type of article is why I pay for slow boring.
As a recent graduate, I really feel the problem of managers being really unwilling to train people when the labor market is in surplus like this. Almost everything I've looked at, including jobs that should be entry-level, have demanded a couple of years of experience in the field that it's just not possible to get fresh out of school, so I've been stuck in my retail job while I wait for the market to heat up again. It's certainly not the worst place to be right now, but I hope to be able to find other options as we get into summer
Great article, I would be really interested in a discussion of the political economic impacts of running the economy below capacity. It seems like if the economy was working as you describe in the article that the demand for trade restrictions, minimum wages and other interventionist policies would be much lower. I think it could be an interesting lesson for the neoliberals of the world. If you want people to support competitive market institutions you need the economy to grow fast and run at or above capacity.
I find your assessment of the late-90s spot-on with my personal experience. Everyone was employed at a level above what their experience and/or capacity really allowed. This wasn't great for companies in the short run, but it did allow people to get ahead in a way that hasn't happened since--and perhaps also created a more productive workforce in the long run, as people who could hack it advanced quickly and those that couldn't found their ceiling
Once I turned 50, I decided I don’t like the phrase “prime-age adults” to refer to people ages 25-54.
Other than that, I agree with everything in this post. I remember in the late 90s boom thinking that this is what the labor market should be like all the time.
Always good to be frontrunning Krugman
https://paulkrugman.substack.com/p/nonstimulus-arithmetic?r=cgrc&utm_campaign=post&utm_medium=web&utm_source=copy
This isn't a very informed comment but worrying about "overheating" the economy feels a little gross to me. Lots of people need help and the "overheating" thing strikes me as well-off people worried about their own wealth. I'm curious if others get the same impression?
Inflation phobia is one of those classic Krugman-style zombie ideas. Not only do we have a long trend of low inflation, but the factors that girded the last burst of inflation, in the late 70s/early 80s, no longer exist: the connection between oil prices and inflation (and the resultant huge impact of the oil crises) has been broken; the union power to tie wage increases to inflation, resulting in a permanent ratcheting, is gone too.
And yet so many people still have inflation fear -- fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts (h/t FDR!). That's what the CBO's underestimated output gap is. It's behind the mindless invocations of Weimar hyperinflation and the rise of the Nazis (when the story is the opposite: inflation didn't help the Nazis, but the catastrophic depression the early 30s most certainly did).
I don't know if $1.9T is the right number, and I'm suspicious of simplistic beliefs in the ability of the government to easily replace true economic production (i.e., the "output gap") by writing checks. And if the number is eventually $1.5T, I'll be fine with that too. But what I'm more concerned with is the underlying bias in the system that pushes us to take actions to prevent *any* movement toward higher prices, seeing that as the greater threat than unemployment, underemployment, and lagging wage growth and economic opportunity especially for those who have been most left out of that opportunity.
I’m no expert on the topic, but that first chart sure looks like we’re on a path toward soaring inflation. We’re pumping trillions into an economy that is only partially slow, while other parts of it are on fire. If you haven’t looked at the price of sports cards lately, head over to eBay and be amazed. It seems obvious that fiscal injections of this size would ultimately result in inflation, but Matt and others (who admittedly are much smarter than me) say not to worry. I hope they’re right, but I can’t help but wonder if they are outsmarting themselves...
This is a supply-side recession, completely unlike 2008-09 or any other modern one. There is plenty of savings and pent up demand, so if and when the pandemic is sufficiently controlled the economy will come roaring back. There is no need for fiscal "stimulus", though there is obviously still need for fiscal relief for the unemployed and state/local gov'ts, etc. The fact that inflation expectations are on target doesn't really say much about the appropriateness of the size of the fiscal package since if is too big the Fed will simply offset it with tighter monetary policy. It's reasonable for the bond market to expect this to happen.
This is quite possibly the worst-researched Slow Boring post I've ever read. While I appreciate the general argument that government officials should work harder to achieve full employment and be less scared about inflation, your understanding of macroeconomics is clearly faulty and your criticisms miss the mark. Three quick points:
1) Fundamentally, I you seem to misunderstand the underlying concept of "potential output". Your post implies that when the economy exceeds potential, we should be seeing runaway inflation and exceedingly tight labor markets. In some sense, this is right. But exceeding potential is not a switch that is turned to "On" or "Off". Instead, it's like a dimmer switch. If we exceed potential output by a little bit, inflation will accelerate a little bit. If we exceed potential output by a lot of bits, then we're likely to get runaway inflation. Now, we can argue what constitutes a little bit vs. a lot of bits, but my view is that a 1% gap between GDP and potential is not a lot. Consistent with that view, inflation was a little higher in 2018-2019 than it was in preceding years but not radically higher.
Put another way, you should not think of potential output as a limit that cannot be exceeded for fear of runaway inflation. Rather, you should think of it as the maximum output an economy can produce without generating ~inflationary pressure~.
2) Your post implies that you have no idea how CBO constructs its estimate of potential output. This is a weird take, given that their methodology is publicly viewable in a document written by Shackleton (2018). Basically, CBO uses a supply-side model in which they estimate potential labor hours, potential capital services, and potential labor/capital productivity. Those factors are estimated by looking at historical trends in each series. It's fair to quibble over specific modeling assumptions, but I'm not sure you've actually read through their methodology. Here's a link: https://www.cbo.gov/publication/53558
3) Before you accuse CBO's forecasting of being "bad", I'd encourage you to read CBO's Economic Forecasting Record (2019). The report examines two-year and five-year forecasts made between 1980 and 2017. It compares forecasts made by CBO, OMB, and the Blue Chip consensus of private sector forecasters. The report finds that CBO's forecasts are generally more accurate than OMB's forecasts and roughly comparable to the private sector forecasters. This finding extends to the agency's interest rate forecasts, which seem no better and no worse than those produced by other organizations. Essentially, forecasting interest rates is highly challenging, and this is especially true in our anomalous interest rate environment. Instead of dunking on the CBO, you should understand the inherent difficulty of their task. Here's a link to the forecast accuracy report: https://www.cbo.gov/publication/55505
I'll conclude with my own thoughts on this issue. I think Larry Summers and the CRFB are being overly cautious with regards to the need for more fiscal stimulus. I'm much more closely aligned with Janet Yellen, who argues that the risks of a too-small stimulus far outweigh the risks of a too-big stimulus. But your decision to criticize a nonpartisan bureaucracy for making average to above-average forecasts is an odd way to channel your frustration. Instead, you should direct your ire toward the people who are ~actually~ calling for less stimulus instead of scapegoating the CBO.
I know nothing about economics, but I have absorbed the message that the "anomalous interest rate environment" baffles economists of all stripes and that it underpins a lot of the "wrong" projections and models. My cynical assumption is that it will take another financial crisis to figure it out, similar to the "obivous systemic risks" of mortgage backed securities and whatnot that everyone saw *after* the Great Recession.
I was coming to highlight point #3. The Fed, markets (forward rates) and sell side banks have all gotten this wrong as well. It’s not right to single out the CBO.
I don't know when the post-Covid travel boom will happen, but when it does it will be something to behold
The dual mandate of the Fed to control inflation and maximize employment has always leaned towards controlling inflation since they define full employment as the level that does not increase inflation. It's a tautology that has resulted in the extremely slow growth (or actual decline depending on your metrics) of wages for the last several decades.
The thing about the TIPS markets, is that the Fed exists and has openly and consistently communicated a target inflation of 2% (which they then consistently hit just below). So a bond trader is essentially betting that the Fed will continue to successfully target inflation in the same manner. So, it's a bit of a Goodhart's Law issue, as your later post on the Fed reaction makes clear.