Remind me to take some economics courses, so I can contribute intelligently.
Pretty much the only thing that I feel like I have a dog in the fight in, is the discussion about skills gaps.
That’s a conversation I would like to see in depth.
I actually have a bachelors degree in computer programming, Igot it in the Air Force, because I figured it would help me with whatever I do.
But my job is blue-collar, skilled technical, working with Welder’s, pipefitters, millwrights, engineers.
I make more money than programming, because it’s harder for companies to find skilled technical labor than it is computer programmers.
My 21-year-old daughter, got pregnant and had a baby earlier this year, single mom (Not a brag, just made a mistake and we are pro-life in a non-force on others way).
She had already failed out of college, studying the normal liberal arts stuff.
She knew she had to do something, so we sat down and talked about her options, re-what skills are really needed to survive, and thrive.
She ended up choosing, at my encouragement, a mechatronics program (Fixing robots on automated systems) at the local community college. Equal parts electronics, electro mechanical, hydraulic, and coding.
She is absolutely loving it, and, this is brag, she has the top grades in the class, despite some of her class meets already working in related field.
She fully expects to get a job starting out making 30 bucks an hour. Amazon is building one of their super distribution centers right beside the school. They are already bugging the school, saying they need more technicians to help them maintain their robots.
Her class cohort consists of 13 people. Nowhere near enough to satisfy the demand. There are probably 50 times at number of local students who are in rolled in normal academic programs at schools in the area who will probably fail. Many of these, would have success in programs like my daughters.
Part of the skills gap, is cultural. We tell all these kids that they need a college degree to be successful. Or they need to learn how to code. But there is a big gap, where the economic activity actually happens.
And quite simply, a lot of talented students are getting lead wrong.
Skills follow economic activity, but the presence of skills also help companies decide where and what to do. China is so strong in technical production because even as wages rise there, they have access to the technical expertise needed for these areas.
I dictated this whole thing on my phone. Apologize for any grammatical and punctuation mistakes.
I really don't understand why the Fed is consistently so focused on coming in just short of 2% inflation. Like, if your goal is really 2% over the longer term and you're consistently coming in under, why not just keep monetary policy loose until you're really at 2.5%+ for multiple quarters and THEN raise rates. A year where we exceed a 2% target isn't going to kill us.
Sometimes I wonder if my view would be different if I had lived through 70s, but it feels like there is this excessive fear of even just slightly above target inflation.
Good point about the Fed board. Given the recent Shelton confirmation fight, with what looks to have been attempted sabotage of the Fed by the GOP, it is unclear that a 52-48 Senate would let anyone reasonable be seated in a Fed vacancy. I think it's naïve to say that the Fed appointments will be treated any differently than the Federal Bench during the Biden admin by McConnell. Plus, there would be a lot less grassroots energy urging Biden to play hardball with the Fed than some other appointments, as it is so obscure.
Maybe the business community would be really upset at obstruction, but I think this would only be if things got genuinely unworkable, not just if the GOP tried to money with the body's ideological leaning through appointments manipulation.
I love a good gerontocracy as much as the next guy. But, she's 74. Maybe fear of the stagflation of the 1970s rates higher in her mind because it occurred when she was in her early 30s. It's certainly great to remember history but it's also important to weigh 1972, 1929, 1907, etc. the same and don't rate 1972 higher because you personally remember it.
I shudder every time I see "skills gap". But just when you think the conversation couldn't get any dumber a couple years go by and the timing of the hike was also the era of the, "do video games cause unemployment?" stuff came around.
What has Yellen, Brainard, et al said about what they would've done differently? Has there been any econometric soul searching among them revealed in recent speeches/interviews?
Love this choice of article MattY. It's a good refresher for sure, very engaging. I'm honestly just glad there's a well written author out there that shares most of my political and economic priors.
It always seems like someone shares some of my political views then writes a piece praising Stephanie Kelton/MMT, or someone that shares most of my views on economic policy then gets upset at trans people. While it's good to read differing views, it's nice to have a niche too.
If you consider, housing, medical and education costs inflation is pretty high, and it seems like a lot of these decisions are being made based on a make believe economy where wages are reasonable and costs are stable.
Matt, thanks for this good post! You note at the end, "there is no actual evidence of any significant ideological disagreement between these three women about anything Treasury has authority over" (non-italics mine). What are the most important things that Treasury has authority over, and how does the Treasury Secretary's influence on fiscal stimulus compare with the OMB and NEC directors'? I guess it ultimately depends on who Biden listens to, but I don't know much about their usual roles and would be really interested in your thoughts!
Sort of seems like monetary policy doesn't have nearly as much power to change where we are in the unemployment/inflation dimension as everyone thought it did.
I'm not a classically trained economancer, but maybe it's more correct to think about the fed funds rate and QE as toggling us between unemployment and asset price inflation. The Fed can flood the economy with cheap cash, but it can't put that cash in people's hands. It all just builds up in the banking system, where it goes looking for a rate of return. The way you get money to earn more money is that you loan it out or use it to buy an asset, so equities and gold and houses and buttcoins get bid up for no other reason than there's a whole lot of money that needs to be invested.
Eventually, some of that money lands in the lap of a company that uses it to build a factory, then they hire some people to work there and unemployment drops. Only at this point do you start to get upward pressure on consumer price inflation when those people spend their wages.
I wonder what happens when A) the government starts spending big bucks on stimulus or B) we get UBI or some other mechanism that allows money to flow quickly from the Fed presses to consumers. I expect that A is way less inflationy than B, just becuase a lot of that stimulus is going to end up in the hands of large companies which may very well sit on it. B seems like it could lead to the huge inflation that was supposed to happen after QE and sustained 0% interest rates.
I feel like all of that is either total nonsense or super obvious, but I can't decide which one it is. Someone let me know pls!
All this macro stuff is interesting but outside of my ability to comment with any expertise. I am curious though about the consistency with with you have posted items early in the morning. As a writer who struggles with routine and what time of day to write (I find I have my best ideas in the evening but do the best work in the morning) let me ask you: do you write these posts when you get up or before you go to bed? I am very curious about your writing process. Has any of these time of day issues affected your desire to return to blogging? Do you like writing one larger article and then replies to comments all day? It seems like these articles take time to research and would be difficult to put together first thing in the morning.
Excellent post. One small quibble about the suggestion that 1/4% rate hikes are not that important. That's usually the case, but not always. What matters is the gap between the policy rate and the so-called "natural interest rate". A rate hike also reduces the natural rate, by slightly slowing the economy. Normally this is not a big deal, but it can be at a turning point in the business cycle. You could argue that the initial downturn in December 2007 was caused by the Fed not cutting rates fast enough, at a time when the natural rate was falling rapidly due to the housing crisis.
One can also make the argument that the rate hike of December 2015, combined with some less than dovish forward guidance, contributed to the slowdown in GDP growth in 2016, which might have even cost Clinton the election. That's speculative, but there is no reason to assume that even a 25 basis point rise is inconsequential---it depends on the economic context in which it occurs. Interest rates do not measure the stance of monetary policy; it's the market rate minus the natural rate that matters.
As far as Kinsale's comment about ammunition, a rise in interest rates actually reduces the Fed's ammo, by reducing the natural interest rate (i.e. slowing the economy). The Fed's ability to influence the economy through conventional policy depends on the level of the natural rate of interest, not the market rate.
Love this! Give me more wonky takes of past Fed decisions, monetary vs fiscal policy, and conversations around the tools used by the Fed beyond interest rate setting. Bonus if we can compare the actions of the US to Europe over the past decade or so.
My takeaway from this is Yellen's mistake was minor, she is very well qualified, and Brainard would be a good Fed chair - lets hope both women get these jobs.
Warren's opposition to Summers was not without merit, you sort of glossed over that Matt.
I agree with most of this article, but I will say that it is easy to classify something as a “mistake” which at the time seemed to be very sound economic footing. Why raise the Fed Funds rate? Our old friend the Phillips Curve, of course. This relationship between inflation and unemployment had held for the past several decades, and now looks tired and outdated only with the benefit of hindsight.
At the time there was ample evidence to support Yellen and Fischer’s position. Not only did you have lots of data to support this link between inflation and unemployment, you also did have unparalleled asset purchases from the Fed and by extension a large increase in the money supply. If you had to take an action with this as your background, I think most rational people would have a very difficult time choosing the more unsubstantiated claim. There was a lot of debate at the time about whether employment would accelerate given the large growth in the money supply, but it never came. That’s just hypothesis testing, and I’m not sure we assign blame to those who make the ultimately wrong call so long as it is well-grounded.
In fact, this article shows the diminishing value of QE1 (QE2?) and lowering the Fed Funds rate had on the unemployment rate! The Fed pulled out incredibly unconventional tools and only managed an unemployment rate slightly below 5% by Jan 2017. When I look at those chart lines, that is further affirmation of anemic fiscal policy being the culprit, rather than slightly increasing the Fed Funds rate.
When I look around ... I see asset bubbles inflating everywhere. Seems to be the result of taking the risk free rate to zero. Just look at what poured into VC starting in 2012 and then the throughline to the SoftBank Vision Fund for why this is a bad idea. For those that own assets ... this is awesome but certainly also the cause of this widening wealth inequality especially post COVID.
Remind me to take some economics courses, so I can contribute intelligently.
Pretty much the only thing that I feel like I have a dog in the fight in, is the discussion about skills gaps.
That’s a conversation I would like to see in depth.
I actually have a bachelors degree in computer programming, Igot it in the Air Force, because I figured it would help me with whatever I do.
But my job is blue-collar, skilled technical, working with Welder’s, pipefitters, millwrights, engineers.
I make more money than programming, because it’s harder for companies to find skilled technical labor than it is computer programmers.
My 21-year-old daughter, got pregnant and had a baby earlier this year, single mom (Not a brag, just made a mistake and we are pro-life in a non-force on others way).
She had already failed out of college, studying the normal liberal arts stuff.
She knew she had to do something, so we sat down and talked about her options, re-what skills are really needed to survive, and thrive.
She ended up choosing, at my encouragement, a mechatronics program (Fixing robots on automated systems) at the local community college. Equal parts electronics, electro mechanical, hydraulic, and coding.
She is absolutely loving it, and, this is brag, she has the top grades in the class, despite some of her class meets already working in related field.
She fully expects to get a job starting out making 30 bucks an hour. Amazon is building one of their super distribution centers right beside the school. They are already bugging the school, saying they need more technicians to help them maintain their robots.
Her class cohort consists of 13 people. Nowhere near enough to satisfy the demand. There are probably 50 times at number of local students who are in rolled in normal academic programs at schools in the area who will probably fail. Many of these, would have success in programs like my daughters.
Part of the skills gap, is cultural. We tell all these kids that they need a college degree to be successful. Or they need to learn how to code. But there is a big gap, where the economic activity actually happens.
And quite simply, a lot of talented students are getting lead wrong.
Skills follow economic activity, but the presence of skills also help companies decide where and what to do. China is so strong in technical production because even as wages rise there, they have access to the technical expertise needed for these areas.
I dictated this whole thing on my phone. Apologize for any grammatical and punctuation mistakes.
I really don't understand why the Fed is consistently so focused on coming in just short of 2% inflation. Like, if your goal is really 2% over the longer term and you're consistently coming in under, why not just keep monetary policy loose until you're really at 2.5%+ for multiple quarters and THEN raise rates. A year where we exceed a 2% target isn't going to kill us.
Sometimes I wonder if my view would be different if I had lived through 70s, but it feels like there is this excessive fear of even just slightly above target inflation.
Good point about the Fed board. Given the recent Shelton confirmation fight, with what looks to have been attempted sabotage of the Fed by the GOP, it is unclear that a 52-48 Senate would let anyone reasonable be seated in a Fed vacancy. I think it's naïve to say that the Fed appointments will be treated any differently than the Federal Bench during the Biden admin by McConnell. Plus, there would be a lot less grassroots energy urging Biden to play hardball with the Fed than some other appointments, as it is so obscure.
Maybe the business community would be really upset at obstruction, but I think this would only be if things got genuinely unworkable, not just if the GOP tried to money with the body's ideological leaning through appointments manipulation.
I love a good gerontocracy as much as the next guy. But, she's 74. Maybe fear of the stagflation of the 1970s rates higher in her mind because it occurred when she was in her early 30s. It's certainly great to remember history but it's also important to weigh 1972, 1929, 1907, etc. the same and don't rate 1972 higher because you personally remember it.
I shudder every time I see "skills gap". But just when you think the conversation couldn't get any dumber a couple years go by and the timing of the hike was also the era of the, "do video games cause unemployment?" stuff came around.
What has Yellen, Brainard, et al said about what they would've done differently? Has there been any econometric soul searching among them revealed in recent speeches/interviews?
Love this choice of article MattY. It's a good refresher for sure, very engaging. I'm honestly just glad there's a well written author out there that shares most of my political and economic priors.
It always seems like someone shares some of my political views then writes a piece praising Stephanie Kelton/MMT, or someone that shares most of my views on economic policy then gets upset at trans people. While it's good to read differing views, it's nice to have a niche too.
If you consider, housing, medical and education costs inflation is pretty high, and it seems like a lot of these decisions are being made based on a make believe economy where wages are reasonable and costs are stable.
The best thing about being an economist is that you will occasionally be right about something.
Matt, thanks for this good post! You note at the end, "there is no actual evidence of any significant ideological disagreement between these three women about anything Treasury has authority over" (non-italics mine). What are the most important things that Treasury has authority over, and how does the Treasury Secretary's influence on fiscal stimulus compare with the OMB and NEC directors'? I guess it ultimately depends on who Biden listens to, but I don't know much about their usual roles and would be really interested in your thoughts!
Sort of seems like monetary policy doesn't have nearly as much power to change where we are in the unemployment/inflation dimension as everyone thought it did.
I'm not a classically trained economancer, but maybe it's more correct to think about the fed funds rate and QE as toggling us between unemployment and asset price inflation. The Fed can flood the economy with cheap cash, but it can't put that cash in people's hands. It all just builds up in the banking system, where it goes looking for a rate of return. The way you get money to earn more money is that you loan it out or use it to buy an asset, so equities and gold and houses and buttcoins get bid up for no other reason than there's a whole lot of money that needs to be invested.
Eventually, some of that money lands in the lap of a company that uses it to build a factory, then they hire some people to work there and unemployment drops. Only at this point do you start to get upward pressure on consumer price inflation when those people spend their wages.
I wonder what happens when A) the government starts spending big bucks on stimulus or B) we get UBI or some other mechanism that allows money to flow quickly from the Fed presses to consumers. I expect that A is way less inflationy than B, just becuase a lot of that stimulus is going to end up in the hands of large companies which may very well sit on it. B seems like it could lead to the huge inflation that was supposed to happen after QE and sustained 0% interest rates.
I feel like all of that is either total nonsense or super obvious, but I can't decide which one it is. Someone let me know pls!
All this macro stuff is interesting but outside of my ability to comment with any expertise. I am curious though about the consistency with with you have posted items early in the morning. As a writer who struggles with routine and what time of day to write (I find I have my best ideas in the evening but do the best work in the morning) let me ask you: do you write these posts when you get up or before you go to bed? I am very curious about your writing process. Has any of these time of day issues affected your desire to return to blogging? Do you like writing one larger article and then replies to comments all day? It seems like these articles take time to research and would be difficult to put together first thing in the morning.
Excellent post. One small quibble about the suggestion that 1/4% rate hikes are not that important. That's usually the case, but not always. What matters is the gap between the policy rate and the so-called "natural interest rate". A rate hike also reduces the natural rate, by slightly slowing the economy. Normally this is not a big deal, but it can be at a turning point in the business cycle. You could argue that the initial downturn in December 2007 was caused by the Fed not cutting rates fast enough, at a time when the natural rate was falling rapidly due to the housing crisis.
One can also make the argument that the rate hike of December 2015, combined with some less than dovish forward guidance, contributed to the slowdown in GDP growth in 2016, which might have even cost Clinton the election. That's speculative, but there is no reason to assume that even a 25 basis point rise is inconsequential---it depends on the economic context in which it occurs. Interest rates do not measure the stance of monetary policy; it's the market rate minus the natural rate that matters.
As far as Kinsale's comment about ammunition, a rise in interest rates actually reduces the Fed's ammo, by reducing the natural interest rate (i.e. slowing the economy). The Fed's ability to influence the economy through conventional policy depends on the level of the natural rate of interest, not the market rate.
Love this! Give me more wonky takes of past Fed decisions, monetary vs fiscal policy, and conversations around the tools used by the Fed beyond interest rate setting. Bonus if we can compare the actions of the US to Europe over the past decade or so.
My takeaway from this is Yellen's mistake was minor, she is very well qualified, and Brainard would be a good Fed chair - lets hope both women get these jobs.
Warren's opposition to Summers was not without merit, you sort of glossed over that Matt.
Good article!
I agree with most of this article, but I will say that it is easy to classify something as a “mistake” which at the time seemed to be very sound economic footing. Why raise the Fed Funds rate? Our old friend the Phillips Curve, of course. This relationship between inflation and unemployment had held for the past several decades, and now looks tired and outdated only with the benefit of hindsight.
At the time there was ample evidence to support Yellen and Fischer’s position. Not only did you have lots of data to support this link between inflation and unemployment, you also did have unparalleled asset purchases from the Fed and by extension a large increase in the money supply. If you had to take an action with this as your background, I think most rational people would have a very difficult time choosing the more unsubstantiated claim. There was a lot of debate at the time about whether employment would accelerate given the large growth in the money supply, but it never came. That’s just hypothesis testing, and I’m not sure we assign blame to those who make the ultimately wrong call so long as it is well-grounded.
In fact, this article shows the diminishing value of QE1 (QE2?) and lowering the Fed Funds rate had on the unemployment rate! The Fed pulled out incredibly unconventional tools and only managed an unemployment rate slightly below 5% by Jan 2017. When I look at those chart lines, that is further affirmation of anemic fiscal policy being the culprit, rather than slightly increasing the Fed Funds rate.
When I look around ... I see asset bubbles inflating everywhere. Seems to be the result of taking the risk free rate to zero. Just look at what poured into VC starting in 2012 and then the throughline to the SoftBank Vision Fund for why this is a bad idea. For those that own assets ... this is awesome but certainly also the cause of this widening wealth inequality especially post COVID.