Three cheers for the Great Rethink of macroconomic policy
Two weekend posts? Both excellent? Man, the value proposition of a Slow Boring subscription is insane. Seriously I think it’s the best of any media I purchase.
It’s nice to see a piece calling out where you went wrong in a previously published article and where you were on target. It often feels like so much of the discourse is people saying “that’s not what I meant!”. Meaning what you say and then being willing to correct it on the record is the mark of an honest person. Thanks Milan!
"we will have effectively cured recessions." Said King Canute. This is hubris.
No mention of the enormous debt the stimulus policies added. Little of the sums wasted (my late mother received her stimulus payment after she died. My golf club thanks you taxpayers for financing our renovation with unnecessary PPP loans.)
"What this all adds up to is a world of persistently weak demand leading to higher unemployment and weak inflation, as a symptom of an economy with too much slack and not enough growth."
Perhaps that is a future that is Japanese, but I'm not sure. Japan is actually doing pretty well! Per capita GDP growth is fine; unemployment is not a problem. Paul Krugman gives us the bottom line: "In some ways, Japan, rather than being a cautionary tale, is a kind of role model — an example of how to manage difficult demography while remaining prosperous and socially stable." https://www.nytimes.com/2023/07/25/opinion/japan-china-economy.html
But overall, I agree with this piece. It was much better to overshoot and undershoot. Milan puts together an excellent argument with which I have no problems. I do kinda wonder what grade it would get if he submitted it to Harvard professor Jason Furman, though.
Another though. Milan contends that voters are likely to prioritise under stimulus to over stimulus because the harms of inflation are distributed broadly, while those of unemployment are narrowly felt. This seems explicitly contrary to public choice theory, which suggests large diffuse harms are frequently outweighed by smaller more intense harms in electoral politics.
Great article Milan!
Great piece overall, but this part seems...optimistic:
(The return of actual fiscal constraints in budgeting has the added benefit of restoring sanity to politics by realigning disputes along a traditional left-right axis on economic issues.)
I wonder if there are confounding variables that might also explain the difference in European vs American GDP, since we've been outperforming them since the end of the Cold War. I also wonder if there was anything unique about Greece in the post-GFC era that might not make them a representative country for the European experience in that time period.
Great Post, Milan - Curious if you’ll do one of Matt’s “alt. history” posts about what the optimal Covid stimulus would have looked like and the possible outcome (i.e., full employment, lower inflation, etc.)
It feels a bit like we’re ignoring the other cost of stimulus. It’s not just an unemployment vs inflation tradeoff. Stimulus is exceedingly expensive, that money will need to be payed back, and it will require increasing debts to eh services at ever higher interest rates crimping the capacity of the government to do other things.
Great post! I learned a lot. Your research and grasp of economics is impressive
I really don't understand the hatred this blog has for using the Child Tax Credit as a one time pandemic measure. People's kids were at home and not at school! They needed child care! Plus it was a stimulus!
That credit helped a lot of people during an emergency and saying "it wasn't worth helping those people because our plan to trick the American people into making it permanent failed" just strikes me as flat wrong.
Weekend posts are great, and Milan is really flexing here with a banger here.
I’m glad to see you called out the risks of bailouts (moral hazard, and loss of creative destruction most importantly).
I think the very most important thing we got right with this big Covid stimulus is to focus on individuals and not corporations.
The key to a dynamic economy is to have intense competition between businesses. But in a world of intense competition, tons of businesses, have to die all the time. That is painful for individuals but as long as they can ride out the turbulence they’ll end up better off in the long run.
This is the dynamic that we’ve had for the last 20 years in Silicon Valley: people get laid off all the time, companies come and go every day, no incumbent is ever truly safe. But because this is a very high income industry with very low unemployment this all still works out well for the workers.
If only we could get there for all Americans! To do that we need a mix of safety net, to drive down the cost of living, and when external crises like COVID hit, stimulus targeted at individuals to help them invent the next economy.
Ehh... I still think it was an overshoot, though I agree that an undershoot is worse than an overshoot. I also appreciate the explanation of Japanification. I do agree that the long term challenge is boosting productivity. The problem for progressives there is that one possible solution is to try to find ways to encourage people to work for longer if we are in fact living longer, like increasing the retirememt age. Temporarily we've got a worse problem which is that our life expectancies have dipped. Ideally the goal is longer life expectancies accompanied by a longer working life, as most people will be healthier in to their 60s and early 70s.
As for the 2022 midterms, I still think the Democrats dodged a bullet with Dobbs and weirdo candidates from the GOP.
It was neither American, a rescue, nor a plan.