It may not be prominent in the academic literature but I suspect one of the underrated aspects of full employment is the wellbeing benefits of being able to tell your boss to go f***k themselves if they’re being unreasonable.
Agreed 100%. The question is how to get there given the real economic constraints you face. Sometimes, you have a crappier hand to play and there is only so far you can push it. As per my comment above, I'd argue 2019 was a great backdrop. 2021, not so much. So if you try to push too hard, it may backfire.
Maybe that's right in the aggregate, if only because managers typically have most or all of the leverage, so their mistakes will have the impact.
But I can tell you that having had the great fortune to work in a team of engineers who had great leverage over their employer, and that creates plenty of employee-driven inefficiencies, also, as it can become more challenging to get everyone on the same page. A manager understandably prefers someone doing something to no one doing nothing. So employees who flex their very real power to quit any day can sometimes get away with behavior that isn't in the team or firms best interest.
If you're right Matt, and I believe you are, the small business lobby is going to be angry for a pretty long time. Right now, they are grasping at straws because of the bonus UI that runs out in a few weeks, but what do they blame after that?
The reality is that many if not most small business owners operate businesses that, most of the time, require almost no innovation, clever pricing strategy, or in many cases, even risk. Some are risky because the unit economics are on the margin (see: restaurants). But the common thread you get at here is that many small businesses have never had to *recruit* workers at all, and now they find themselves in a game they are entirely unprepared for, and they're mad.
Imagine going your entire business life under the idea that the best way to motivate your people is to "let the beatings continue until morale improves", then suddenly be in a full employment world where that particular management technique starts to fail spectacularly.
Maybe we should start new job training programs for these poor guys so they can learn how to make it in this new world of small business that requires effective implementation of a talent strategy?
I think you're spot on. I live in the well off suburb of a small midwestern city. I'm in the professional class, but most of my neighbors and friends are in the small business owner class. They really resent the hell out of having to pay more and work harder to get employees, and to have to be more indulgent with employees in order to keep them --- think having to let guys leave work for family obligations instead of being able to say my way or the highway (I had an over the fence conversation just this weekend about that particular topic)..
They view every marginal dollar they have to pay their employees as a dollar belonging to them that is being unduly "taken" by someone else. It's very similar to their view of paying taxes, although not quite as vehemently resented.
Similarly with the idea of employees being able to demand some quality of life things, they take it personally as someone else telling them how to run THEIR business
My view is that small business owners have never had to find ways to increase worker productivity that don't make their employees lives more miserable. Now that they'll be forced to do that, some will come up with creative ways, some will fail, and the rest will survive long enough to copy what the creative people did. You only need a few smart people to come up with the better way of doing things under the new constraints - the problem before was that the smart people were operating in an environment with ample cheap labor.
Agree - and TBH, I fully believe that this is good for capitalism generally. It means that you *have* to invest in making products more useful, invest in making operations more efficient, etc. No more just using labor cost arbitrage for competitive advantage. Or as I say, less financial engineering, more *actual* engineering.
I think this is overly harsh on small businesses. Large businesses use more levers like outsourcing and working a smaller labor pool half to death more so than innovation. I’m also rather suspect of how much of their innovation of late is actually worthwhile.
Small businesses struggle with low profit margins... and to ask a guy who owns a liquor store to innovate something spectacular to boost business. Especially on a large scale.
I could address the issue with large tech businesses, since that is where I've spent time in my career when not working in startups. In tech, small businesses do most of the innovation, largely because it is actually easier to innovate when nobody is telling you that you have to maintain the giant old codebase which is, in most of them, the de-facto cash machine of the company.
There are incredibly innovative things going on in my sector at least, but it's happening mostly in pre-IPO and smaller companies that are still on their growth curve. Stripe (not an investor or employee, just really like them) - literally allows you to incorporate a business in DE now by filling out a form (and probably could do it using an API call). And there are hundreds of examples out there like that.
The guy who owns a liquor store, what is the innovation model there? Half of things like that seem less like entrepreneurship and more like a job that has a down payment and onerous licensing requirements.
I would say that the general “worker” at a small tech business is less comparable to a “worker” at a small business like a liquor store. A lot of tech startup workers are young, highly employable by huge companies, and hungry. They want to be a part of an innovative business, or want to take a chance at an equity stake of something that could be colossal.
This is not the case with workers at many small businesses. That doesn’t mean that what they’re doing should be undervalued. I love the idea of an economy in which a dumber person can be an entrepreneur. Who knows, maybe even in tech.
A guy who came around and said “I can use simple determinism to automate what a lot of data firms are charging you a king’s ransom for. And save you a lot of money.”
Maybe i read your initial comment incorrectly, but my reaction to it was “aw come on! Don’t count out the elbow greaser!”
You have a good point about the elbow greasers. And the good news is that entrepreneurship has zero degree requirements. If you're an felon, you can still incorporate a business in the US.
Most good entrepreneurs are more clever than smart. Being too smart is almost a burden - getting stuck in analysis paralysis trying to overplan everything.
The better ones are people that have enough sales skill to be dangerous (i.e. can speak in a crowd / work a room), clever enough to find an angle someone else hasn't considered, and dumb enough to believe they can make it work despite what might be very established competition.
Let's take a small business worker who, after years of working for other people, has an idea (maybe a better burger recipe they came up with by accident in the kitchen). One thing I've noticed is that many of the lowest wages are paid by businesses with the highest barriers to entry. One conjecture I have is that if you lowered those barriers to entry (i.e. say, ghost kitchens + doordash + streamlined licensing) - you would allow such strivers to innovate much more easily. If you look at what is happening with food trucks, which have far lower startup costs than brick and mortar restaurants... you get the idea of what happens when you drop the startup costs even more (i.e. no need for a truck + portable kitchen).
I actually have another conjecture that part of the "labor shortage" is that some of these lower skilled people are choosing gig work - because as fun as gig work might not be, at least in most cases, workers control their schedule. As someone who just founded a new company and left a high paying VP job in tech, I can appreciate this tradeoff, even when it means I might eat ramen for a few months :)
I wholeheartedly endorse this idea re: government doing seed funding of some of these investments that require far more up front capital. And I fully acknowledge my bias is based on working in an industry where me and one other person can whip up a commercial SaaS solution from scratch over 6 weeks of zoom calls. a few hundred bucks of online fees, and an idea.
Imagine if we were doing a few billion of funding in mRNA vaccines, which we'd have a lot more of if funding didn't depend on whims of a given quarter's financials.
This. It doesn't have to be 3D printed blockchain doodads. It could be "just be nice to people and be useful".
Same goes for recruitment, which could be "find good people, be kind do them, and help them be successful", which for many in the "small business right", could be a bridge too far.
Small business is an example of how everything has been turned into politics. Granted, small business owners tend Republican, but in the Trump (and post-Trump) era, it seems they see everything in political terms. Take a look at the small business optimism index and you can see what I mean (http://www.nfib-sbet.org/). Trump's election was the biggest event in the history of this index, and Trump being in office kept their optimism at the highest levels in the history of the index. The improving economy and the waning of COVID have led to a modest improvement, but clearly more than anything else, small business optimism is based on having someone like Trump in office.
I suspect that's also related to demographics. There are plenty of small businesses even in the most rural areas. Right now I'm in Branson Missouri and there are gobs of restaurants, gas stations, auto shops, hair salons and so on. It's not a dense area but that just means you hop in the car and drive 5-7 miles instead of 1-2 in the suburbs.
"Instead of workers competing with each other for jobs that are scarce, we want employees to compete with each other to attract work. We want the -- the companies to compete to attract workers. That kind of competition in the market doesn't just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace."
I did not know that Biden had expressed this view and it really raises my respect for him. This is exactly the right way to think about labor issues and I would love for the Democratic Party generally to take this line. The counterpoint to the respectable Republican "you don't want the government telling you how to live your life, do you?" argument is "well, I don't want my employer doing that either", and setting up a situation where workers (not unions, workers) have more power to stand up to a given employer and demand better is a way to promote individual freedom just as much as "getting the government's boot off your neck" is.
Pretty sure she can find an employer who doesn't require vaccination, unless she works with people highly vulnerable to Covid, in which case I suggest that she find another profession so that she doesn't kill her clients.
FWIW I worked at one of the regional Feds in 2016 with some labor economists, and folks in research departments took very seriously that Obama CEA report about how most of the LFP gap was structural (not cyclical). The hot question back then was "what share of the remaining LFP gap is due to opioids vs. disability vs. video games vs. criminal records vs. ..." But interest in that question seemed to wane by 2019. I suppose a vindication of Matt's views.
Full employment is nebulous enough and sufficiently difficult to define and measure that it is like a Rorschach blob. People see what they want to see and judging workers has been quite the rage. How dare they post video games, says the fat cat on his boat on a Friday afternoon.
It was in the late 90's that economists started to notice employment growth not responding as positively to economic growth as they expected based on past experience. Early 2000's was a jobless recovery.
And there has been an unexpectedly high amount of downward pressure on inflation for the last two decades.
People really should update their priors, but at this point you are totally right that nobody knows.
And if you go back to the time when current thinking made sense it was a totally different political economy with for example much more powerful unions etc.
It's very interesting to be reminded of that. Do you recall why there was pushback on really finding out where full employment was? I accept that NAIRU is a reasonable theory. So why not let the economy grow until inflation hit 2.1% or more before tapping the brakes? I wish the Fed had pushed harder (ie, IOR from 1913 to 2008 was zero. So why keep it at 0.25% from 2009 to 2018? Why taper QE before inflation exceeded 2.1%? These are not radical thoughts.) but I don't understand hitting the brakes when inflation was below target for so long. The trend from 2010 to 2015 was too slow but going in the right direction. Why tap the brakes in Dec 2015 when this modest asymptotic approach toward full employment might have actually paid dividends?
my reading of the FOMC politics of 2015 (no inside information on this) was that Yellen was balancing a slate of governors/presidents who flanked her on both sides. She had inflation hawks like George of KC, Kaplan of Dallas, Mester of Cleveland making noises. Plus the Fed wasn't used to being at the zero lower bound for so long, that was a new experience.
By 2018-19, the research department I was in started looking more carefully at re-evaluating NAIRU. But my sense is that they were spurred to do this c. 2018-19 because we had clearly blown through the 5% U6 figure most people thought it was. Pre-2018, if you think you know what NAIRU is and have no reason to believe otherwise, it seems logical to direct research efforts towards issues that seem more frontier/new (opioids, DI, video games, criminal records)
Thanks. One quibbly question. Why did they think they were at zero when IOR was at 0.25%? IOR had actually been at 0.00% for the 95 years from 1913 to October 2008. Paying IOR that exceeds the rate paid on T-bills really increases the demand for reserves. Yet people seemed to wonder "why are banks not lending? They're just putting the money into reserves."
Not sure of the answer to this, but it might be something about bank capitalization/leverage during and after the financial crisis. The Fed was rightly skittish about banks not having enough assets on hand.
The only real cost to overheating the economy is inflation. Moderate inflation ain’t so bad. It involves an increase both in prices and wages (indeed it can be driven by wage increases) so it is not inherently anti-worker. As an econ undergrad, I was taught that inflation is unpopular because workers attribute nominal wage increases to their skill and wonderfulness and feel that inflation robs them of the fruits of their industry. Employers feed this dynamic by providing raises based on performance reviews rather than cost of living adjustments plus truly merit biased raises.
I’m not sure this theory explains all or even most of the elite horror against inflation. I do know inflation is really bad for bond holders. If you are getting 5% from high quality corporate debentures and inflation climbs from 1 to 4%, your real income has cratered by 75%. The effects on mortgage holders are similar. Most economists want to consult for banks and other institutions that have very good reasons for hating inflation. Furthermore, economists are basically taught that self interest is not only natural but the cornerstone of the economy. They can be just as whorish as lawyers.
The late 40s were the golden era of the American working class— the first time in history any working class anywhere began acquiring enough money to buy houses and send children to universities. This is one of our greatest national achievements. Not coincidentally, it was presided over by a highly leveraged federal government that was happy to print money and have 6% inflation. The best of times for workers and the worst of times for rentiers. Let’s do it again!
Isn't it also just that elites are far more likely to be creditors while ordinary people are far more likely to be debtors, and inflation hurts creditors while helping debtors?
Elite are (far) less likely to lose their jobs in a downturn and much more likely to suffer from inflation in a hot economy. Opinions follow personal interests.
it really is about power a hot economy with wage inflation is one where workers have sufficient power to say take this job and shove it. most recent Slate money discussed this.
Also worth keeping mind is that a fair number of the things that caused 1970s inflation to be so traumatic have been fixed.
- Tax brackets weren't indexed to inflation. So even with no real wage increases, you'd start paying more tax, resulting in a real wage cut. Tax brackets are now indexed.
- Social Security didn't get cost-of-living adjustments. So millions of retirees had heart-tugging stories in the news about how hard up they were. Social Security is now index.
- Union contracts (far more relevant in 1970 which was the peak of private sector union membership) didn't have cost-of-living adjustment clauses. In 1970, only 10% of union contracts had a COLA. By 1979 over 60% of them did.
- Pensions, private and public sector, didn't have cost-of-living adjustments. While pensions without COLA are still somewhat common, many more have added COLA.
- There were no TIPS or I-Bonds that allowed savers to invest in government guaranteed inflation-linked savings vehicles.
With those things in place (and probably others I either don't know about or have forgotten), I think a bout of moderately high inflation like the 1970s would be far less damaging this time around.
Also, globalization has radically changed supply chains such that an uptick in domestic labor costs doesn't automatically raise prices by the same factor.
I always wondered about that fact with Trump—I didn’t know how much of his push for full employment was his (likely correct) belief that economic success of the working class was the key to his political future and how much was that he was a rich debtor instead of a rich lever, and therefore had less fear of inflation.
I think in some ways, it becomes a psychological problem for everyone because it adds volatility and uncertainty. That distorts economic decisions- at the personal level and the business level. It's just much harder to plan for the future. And think about the compound effects of 10% inflation versus 2% and you are considering an investment in, say, a 10 year asset.
It also adds an element of daily stress-- you can never keep up with the constant barrage of price increases and managing your budget and making sure your raise was sufficient, etc. How far will your dollar go next year? Will you get the raise you need? What if you buy that house and you can't afford the mortgage because groceries keep going up?
If you go back and watch the sitcoms of the 1970's, you'll find it was a frequent punchline. It sort of becomes an ambient grievance of the masses. And of course, if it gets way out of control, that's a whole other story and your currency collapses. But I'm just thinking of say 5-15% inflation.
Is it just me or is it super weird how little this is talked about or written about? Like if you ask voters jobs are almost always the top issue. Politicians talk about jobs literally all the time, but it's kind of a big secret that monetary policy is constantly trying to prevent us from having too many jobs.
I'm genuinely not equipped to have an opinion about the economic modeling but it's kind of shameful how much it's talked around and voters are treated like children.
One of the "nice" things about opportunistic disinflation was obscuring the role monetary policy plays in causing unemployment, and therefore reducing political pressure on the Fed to achieve try harder at the whole dual mandate thing.
Matt, I paid $48 for you to popularize ideas like this. I think its smart to dump the TDS and admit that this was a really stellar achievement by Trump as well. He convinced Dems they needed to do something. This was a very well argued piece. Well done!
Trump's efforts to maximize the country's pandemic death toll, his treasonous foreign policy, his vile and ever-present corruption (treating the administrative state as his personal possession), his coddling of white supremacists, his utter contempt for democratic norms and (last but not least) his failed coup attempt all justify a high degree of TDS even if, as you rightly point out, Trump's "run the economy hot" instincts were sound (a rare example of Trump's personal incentives aligning with the national interest).
I have a significantly different worldview than you, but I'm glad that Matt has convinced you that Trump in fact ran the economy hot and it was a good thing.
I grant you that the Trump administration kept the economy on the exact same trendline we saw in the last few Obama years. I give him credit for not totally screwing it up.
Ahh, the running above potential in 2019 theory. Trump broke with tradition and demanded Fed cuts after they increased rates from 1% to 3% from 2016 to 2019. We got a .25% cut in the summer of 2019 to 2.75%.
I don't think we were above potential in 2019. That's why I avoided Hot. If covid hadn't hit, I think the economy could have run like that, maybe even warmer, without triggering any increase in inflation. I will give Trump credit for hitting at the Fed. I give Obama even bigger demerits for not doing so at a time when the economy was much further from full employment.
I think Matt and I might agree that Powell should have listened more and run the economy hotter in 2019. We had that whole reelection thing on the horizon however.
I agree with almost this whole comment. But... did Trump want to run the economy hot? Which could raise wages at his hotels. Or just cutting taxes for himself and other rich people?
I think it’s worth taking Bill P’s point seriously ESPECIALLY if you think Trump is dangerous. He had good instincts on running demand hot, just like he did (to a lesser degree) on staying out of foreign wars. Those instincts explain some of the loyalty to him among working class people Democrats could reach.
Oh I think it's very irresponsible to dismiss Trump's instincts because Trump. He was right about a few things. There was that famous meeting with the senior generals and he went off on them. "Why aren't you winning? Why can't you win? If you can't win why are we there?" Or some such.
It's not entirely clear that the Fed would have allowed the economy to run this hot under, say, Bernie Sanders or HRC. There's some international evidence that central banks are prone to tighter monetary policy under left-wing governments.
He's big accomplishment was to sideline the tight money conservatives that spent the Obama era warning of runaway hyperinflation and the perils of deficits.
I get the sense that opposition to these ideas is not always drawn from economists and debates over models anyway. Instead it seems like some people are profoundly uncomfortable with burger flippers, uber drivers, and hair stylists having bargaining power and/or are profoundly uncomfortable with government stimulus boosting wages. I see this expressed in two ways. First, there are assertions made that people at the bottom of the labor pool don’t *deserve* higher wages and bargaining power. If they were truly clever, hardworking people they wouldn’t be at the bottom. Meritocracy! Second, there is a suspicion that rising wages are fake. That is, the only reason wages are going up is because employers have to compete with the “artificial” expanded UI benefits and stimulus money. Once that is withdrawn, as some states are already doing, then the “natural” conditions of the employment market will return. Although I haven’t heard it expressed this way, I take it to mean that wages will fall or at least stop growing.
Don’t forget that fiat money is fake too. Only work that is paid in gold has moral worth. We should tolerate persistent deflation to keep bond holders from being cheated by greenbacks.
I can't speak for Matt, but the stress-reducing effect of knowing there's virtually no chance I'm going to miss my flight AND that I've got ample time to grab a bite or do some shopping or read (or what have you) -- can easily pass for "enjoyment."
I don't like cutting things close. "Getting there early" is a basic stress management technique for me.
Well, somebody or another (NY Times?) ran an article a few weeks back about the apparently quite large sub-culture of persons who try to constantly beat their personal bests in terms of leaving late for the airport. Different strokes. (Actually, that would give me a stroke!).
Missing a flight is genuinely no big deal. Flights get delayed or cancelled all the time, and airlines are happy to put you on the standby list for the next flight at no cost. On the other hand, car accidents are a very big deal.
Missing a flight is "genuinely no big deal" if you get there reasonably early in the day and you're flying a popular (usually domestic) route. In that case there'll be alternatives, even if you have to take a different route with different connections. But if it's late in the day, or if there's "weather" in the country, your options can rapidly narrow, and you might reach your destination a day late. Not the end of the world, sure, but a shitty thing, all things considered. Also, I'm extremely careful about booking an aisle (or, on a shorter flight maybe a window) seat near the front, and that can easily go out the window if a flight is missed.
Also, are you saying there are no rebooking fees these days? In a different life I used to fly on my employer's dime, but now I mostly pay for my own flights, and last time I had to rebook (this was an international flight, Guangzhou-JFK) Delta charged me a couple hundred bucks.
Even aside from any worries about missing the flight, I just think the most annoying things about flying are (1) the trip to the airport and (2) security, and it's just so much more pleasant to get those things over with and have them in my past rather than my future!
I agree. I get way over-stressed about potentially missing a flight. I don't love sitting around an airport, but with a cell phone to read the internet (including Matt's Twitter page) and make a few phone calls, it's about the same as being at home anyway. The only time there is a trade off is early morning flights when I could theoretically still be sleeping (but I don't sleep because I'm too nervous about missing the flight, Lol).
I was in college, but the only time I've actually missed my flight was back when you had to check in with an attendant at a desk and they wrote your gate number on your boarding pass. Anyways, the attendant wrote gate 6, but I thought it was gate 9 and missed my flight because I was listening to music, totally missing the speaker system calling my name (I got a bit screwed in that gate 9 was also going to the same destination, just at a different time, so it wasn't immediately obvious).
Aeroplanes are pretty. The ultimate example of form following function. Take the 747 - it was designed that way for purely pragmatic reasons, the designers could hardly afford any extravagance with their design; they had to primarily account for things such as a weight, aerodynamics etc. And yet it is beautiful.
And yet new apartment buildings, which have to go through extensive design review and match the existing character of a neighborhood, are invariably decried as ugly.
If you've got Admirals Lounge membership then DFW is a fine place to do your e-mails for the day. But you need to then plan to have at least two hours there, and can deal with up to eight. An hour in an airport is basically wasted time.
Yes, and that's a big advantage of trains over planes - the time is chunked into more efficient and useable blocks. Four fours sitting in a train is more useable time than 2 hours sitting a plane and 2 hours frittered away standing in lines and walking around an airport.
Most of the big airports I've been in are, in my opinion, reasonably pretty and have nice clean bathrooms, art and museum displays, comfortable seating, good shopping...I mean clearly they have every incentive to try to make them places where you can spend a lot of time comfortably, and for me at least they succeed!
To be fair to restaurant owners, they've been through hell for the last 15 months. I think the bonus UI is playing at least some role in the current worker shortage, and that we won't really know if "some" is 10% of it or 70% of it for a while. The transition to a post-pandemic is totally new and has lots of uncertainty. A legitimate fear is raising wages by $5 per hour to get fully staffed to only find out 4 months later that the shortage was a blip. If the new wage level turns out to be a plateau, restaurants will adjust. Higher wages, higher prices, and potentially some shrinkage in the industry because if a restaurant meal costs a new, higher multiple of eating at home, some people will cut back eating out a little (though probably after a summer binge that may also prove temporary).
I agree that this is a good piece, but it misses a basic point that economists tend to be too concerned with their models, and not concerned enough with data. Many years ago, when I was a graduate student at UCLA, I used to attend a seminar run jointly by economists and theoretical biologists. They were using similar models and thinking about things in similar ways, but theoretical biologists had to deal with more empirically oriented colleagues in a way that economists didn't. Tony Atkinson and his crew (Piketty, Saez, etc.) are now playing that role.
I have often wondered how much of bad economic policy is a result of economic models saying one thing while the data say something very different and the policy makers going with the model.
I wish this was one of the posts that was available to everyone, not just paid subscribers, because this is one the most consequential issues of our time and "preaching to the choir" on such an important issue is a real downside of the paid subscriber model.
You can forward to email to whoever you want. Honestly, just sharing links on Twitter is just as much "preaching to the choir". An email to someone you actually know IRL is vastly more likely to effect any kind of change.
This is an excellent piece. I strongly endorse the conclusions that the business "cycle" is not a cycle, not symmetrical, and largely a reflection of random downward shocks (plucking). I also endorse the view that macro policy has, in recent decades, been insufficiently expansionary and too quick to put the damper on expansions. That being said, I think the analysis here is in some ways incomplete. I would like to see future posts address two points:
(1) Is the "accelerating inflation model" that started as heterodox and became orthodox in the 1970s and 1980s really wrong, or has it just not yet been tested in the 21st century? According to that model, the level of real output depends, in part, on the relationship between contemporaneously observed output prices and the expected level of input prices. During episodes of unexpected acceleration of inflation, observed output prices exceed expected input prices, leading firms to undertake higher levels of output and staffing than they would, in retrospect, have wanted if they had had better information. Such episodes result in temporary periods when output in a meaningful sense does rise above its long-term potential. In a period that includes such episodes (say, the 1960s and 1970s, but not the 21st century so far) you can't draw a red line along the cyclical peaks and call that "potential real output." A sequel to this post should include a discussion of whether that model still applies to the US economy, and if not, why not.
(2) Another point regarding inflation: Modern Monetary Theory (MMT), which perhaps for slightly different reasons, shares the view of this post that it is a good idea to run the economy hot, includes a safety mechanism to avoid excessive inflation. That safety mechanism is to raise taxes when inflation threatens. That is great in theory, but unfortunately, the US political system includes no mechanism to actually adjust taxes in that way. Is that institutional constraint an important consideration in deciding how hot to run the economy? Would it be a good idea to implement institutional reforms that would allow flexible adjustment of taxes for purposes of avoiding unwanted macroeconomic outcomes?
MMT is bunk. Raising taxes (or cutting spending) will not in and of itself curb inflation. LBJ tried balancing the budget to curb the inflation of the late '60s to no avail. The exploding deficits of the early '80s did not prevent the Volker disinflation. This is because inflation is always and everywhere a monetary phenomenon.
I struggle to reconcile the default Progressive position to "trust the science (experts)" with this openness to MMT - which I would characterize is fringe at best. Seems like our version of "trickle down" - just a belief system.
Some of MMT is a belief system and some is orthodox Keynesian economics. The idea that you can control aggregate demand by varying taxes is the latter. See "functional finance."
>>Raising taxes (or cutting spending) will not in and of itself curb inflation. LBJ tried balancing the budget to curb the inflation of the late '60s to no avail.<<
Also, the LBJ years offer no evidence whatsoever of the inflation-reducing effects of tax increases. Far from "balancing the budget," federal borrowing under LBJ was approaching 3% of GDP toward the end of his second term, which was high by the standards of those days.
If I were a critic of MMT, LBJ is the last presidency I'd be citing as evidence for the theory's shortcomings. We ran the economy hot during in the late 60s and federal spending was rapidly growing. The result -- a pick-up in inflation and good conditions for the non-rich -- is exactly what an MMTers would expect.
MMT is wrong because it views government spending as always positive, and allowing us to utilize unknown infinities of “slack” in the economy. There isn’t, of course, enough slack there, but it’s an unfalsifiable article of faith.
The problem with deficits isn’t deficits - it’s the spending. To raise taxes to cover deficits is the wrong way to think about it. When the government spends money, it’s taking money away from what people want most (what they buy, what they invest in) and spends it on what they did not want to spend it on (when left alone). Moreover, with no real competitive pressure costs and corruption can blossom - look at how expensive it is to build something in the public sector.
Nevertheless, our monetary policy should be a bit more expansionary. However, mmt is the wrong way to go about it, and promises us only to make everything as notoriously efficient and cost effective as the government usually is.
My parents were just road tripping and saw $15 an hour wages advertised at the Cody, WY Walmart. I see a minimum advertised wage of $11 at fast food places in Cheyenne (which even before may have been competing with Fort Collins, especially for workers with a car). I hope this keeps going.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I think there is something to the point about ‘mathiness’ and models. But fundamentally, I believe the expert econ community decided some time ago that a 2% constraint (not an average) is the RIGHT target for inflation. But why?
So I asked Claudia Sahm why the Fed uses a 2% benchmark instead of say 3 or (gasp) 4% target (check out the Regan/Volker era and 4% seemed to be the target they were shooting for). She didn’t know why 2 was the magic number and crowdsourced it among her Twitter followers and I feel like someone just made up 2% in the 80s-90s.
In other words, I think a fundamental premise backing the right amount of inflation in our country (if not the world) seems to be based on intuition and not on any well grounded study...with consequential impact to our economy and polity.
It may not be prominent in the academic literature but I suspect one of the underrated aspects of full employment is the wellbeing benefits of being able to tell your boss to go f***k themselves if they’re being unreasonable.
Indeed
This is kind of a theme in Marx. Reserve army of unemployed is what disciplines the working class
Kelecki
Utterly impractical, as usual.
Agreed 100%. The question is how to get there given the real economic constraints you face. Sometimes, you have a crappier hand to play and there is only so far you can push it. As per my comment above, I'd argue 2019 was a great backdrop. 2021, not so much. So if you try to push too hard, it may backfire.
Maybe that's right in the aggregate, if only because managers typically have most or all of the leverage, so their mistakes will have the impact.
But I can tell you that having had the great fortune to work in a team of engineers who had great leverage over their employer, and that creates plenty of employee-driven inefficiencies, also, as it can become more challenging to get everyone on the same page. A manager understandably prefers someone doing something to no one doing nothing. So employees who flex their very real power to quit any day can sometimes get away with behavior that isn't in the team or firms best interest.
If you're right Matt, and I believe you are, the small business lobby is going to be angry for a pretty long time. Right now, they are grasping at straws because of the bonus UI that runs out in a few weeks, but what do they blame after that?
The reality is that many if not most small business owners operate businesses that, most of the time, require almost no innovation, clever pricing strategy, or in many cases, even risk. Some are risky because the unit economics are on the margin (see: restaurants). But the common thread you get at here is that many small businesses have never had to *recruit* workers at all, and now they find themselves in a game they are entirely unprepared for, and they're mad.
Imagine going your entire business life under the idea that the best way to motivate your people is to "let the beatings continue until morale improves", then suddenly be in a full employment world where that particular management technique starts to fail spectacularly.
Maybe we should start new job training programs for these poor guys so they can learn how to make it in this new world of small business that requires effective implementation of a talent strategy?
I think you're spot on. I live in the well off suburb of a small midwestern city. I'm in the professional class, but most of my neighbors and friends are in the small business owner class. They really resent the hell out of having to pay more and work harder to get employees, and to have to be more indulgent with employees in order to keep them --- think having to let guys leave work for family obligations instead of being able to say my way or the highway (I had an over the fence conversation just this weekend about that particular topic)..
They view every marginal dollar they have to pay their employees as a dollar belonging to them that is being unduly "taken" by someone else. It's very similar to their view of paying taxes, although not quite as vehemently resented.
Similarly with the idea of employees being able to demand some quality of life things, they take it personally as someone else telling them how to run THEIR business
My view is that small business owners have never had to find ways to increase worker productivity that don't make their employees lives more miserable. Now that they'll be forced to do that, some will come up with creative ways, some will fail, and the rest will survive long enough to copy what the creative people did. You only need a few smart people to come up with the better way of doing things under the new constraints - the problem before was that the smart people were operating in an environment with ample cheap labor.
Agree - and TBH, I fully believe that this is good for capitalism generally. It means that you *have* to invest in making products more useful, invest in making operations more efficient, etc. No more just using labor cost arbitrage for competitive advantage. Or as I say, less financial engineering, more *actual* engineering.
I think this is overly harsh on small businesses. Large businesses use more levers like outsourcing and working a smaller labor pool half to death more so than innovation. I’m also rather suspect of how much of their innovation of late is actually worthwhile.
Small businesses struggle with low profit margins... and to ask a guy who owns a liquor store to innovate something spectacular to boost business. Especially on a large scale.
I could address the issue with large tech businesses, since that is where I've spent time in my career when not working in startups. In tech, small businesses do most of the innovation, largely because it is actually easier to innovate when nobody is telling you that you have to maintain the giant old codebase which is, in most of them, the de-facto cash machine of the company.
There are incredibly innovative things going on in my sector at least, but it's happening mostly in pre-IPO and smaller companies that are still on their growth curve. Stripe (not an investor or employee, just really like them) - literally allows you to incorporate a business in DE now by filling out a form (and probably could do it using an API call). And there are hundreds of examples out there like that.
The guy who owns a liquor store, what is the innovation model there? Half of things like that seem less like entrepreneurship and more like a job that has a down payment and onerous licensing requirements.
"Half of things like that seem less like entrepreneurship and more like a job that has a down payment and onerous licensing requirements."
I've never heard it described that way. But it sure fits in many cases.
It absolutely describes owning a franchise.
Fair point. Solid points made.
I would say that the general “worker” at a small tech business is less comparable to a “worker” at a small business like a liquor store. A lot of tech startup workers are young, highly employable by huge companies, and hungry. They want to be a part of an innovative business, or want to take a chance at an equity stake of something that could be colossal.
This is not the case with workers at many small businesses. That doesn’t mean that what they’re doing should be undervalued. I love the idea of an economy in which a dumber person can be an entrepreneur. Who knows, maybe even in tech.
A guy who came around and said “I can use simple determinism to automate what a lot of data firms are charging you a king’s ransom for. And save you a lot of money.”
Maybe i read your initial comment incorrectly, but my reaction to it was “aw come on! Don’t count out the elbow greaser!”
You have a good point about the elbow greasers. And the good news is that entrepreneurship has zero degree requirements. If you're an felon, you can still incorporate a business in the US.
Most good entrepreneurs are more clever than smart. Being too smart is almost a burden - getting stuck in analysis paralysis trying to overplan everything.
The better ones are people that have enough sales skill to be dangerous (i.e. can speak in a crowd / work a room), clever enough to find an angle someone else hasn't considered, and dumb enough to believe they can make it work despite what might be very established competition.
Let's take a small business worker who, after years of working for other people, has an idea (maybe a better burger recipe they came up with by accident in the kitchen). One thing I've noticed is that many of the lowest wages are paid by businesses with the highest barriers to entry. One conjecture I have is that if you lowered those barriers to entry (i.e. say, ghost kitchens + doordash + streamlined licensing) - you would allow such strivers to innovate much more easily. If you look at what is happening with food trucks, which have far lower startup costs than brick and mortar restaurants... you get the idea of what happens when you drop the startup costs even more (i.e. no need for a truck + portable kitchen).
I actually have another conjecture that part of the "labor shortage" is that some of these lower skilled people are choosing gig work - because as fun as gig work might not be, at least in most cases, workers control their schedule. As someone who just founded a new company and left a high paying VP job in tech, I can appreciate this tradeoff, even when it means I might eat ramen for a few months :)
Good luck with your new venture!
I wholeheartedly endorse this idea re: government doing seed funding of some of these investments that require far more up front capital. And I fully acknowledge my bias is based on working in an industry where me and one other person can whip up a commercial SaaS solution from scratch over 6 weeks of zoom calls. a few hundred bucks of online fees, and an idea.
Imagine if we were doing a few billion of funding in mRNA vaccines, which we'd have a lot more of if funding didn't depend on whims of a given quarter's financials.
This. It doesn't have to be 3D printed blockchain doodads. It could be "just be nice to people and be useful".
Same goes for recruitment, which could be "find good people, be kind do them, and help them be successful", which for many in the "small business right", could be a bridge too far.
Small business is an example of how everything has been turned into politics. Granted, small business owners tend Republican, but in the Trump (and post-Trump) era, it seems they see everything in political terms. Take a look at the small business optimism index and you can see what I mean (http://www.nfib-sbet.org/). Trump's election was the biggest event in the history of this index, and Trump being in office kept their optimism at the highest levels in the history of the index. The improving economy and the waning of COVID have led to a modest improvement, but clearly more than anything else, small business optimism is based on having someone like Trump in office.
I suspect that's also related to demographics. There are plenty of small businesses even in the most rural areas. Right now I'm in Branson Missouri and there are gobs of restaurants, gas stations, auto shops, hair salons and so on. It's not a dense area but that just means you hop in the car and drive 5-7 miles instead of 1-2 in the suburbs.
I'd posit that if those folks spent half as much energy doing recruiting as they did spending time airing grievances, they'd be far more successful.
Do you think Steve Ballmer and Bill Gates spent their time complaining about Jimmy Carter and taxes when they started Microsoft?
"Instead of workers competing with each other for jobs that are scarce, we want employees to compete with each other to attract work. We want the -- the companies to compete to attract workers. That kind of competition in the market doesn't just give workers more ability to earn a higher wage, it gives them the power to demand to be treated with dignity and respect in the workplace."
I did not know that Biden had expressed this view and it really raises my respect for him. This is exactly the right way to think about labor issues and I would love for the Democratic Party generally to take this line. The counterpoint to the respectable Republican "you don't want the government telling you how to live your life, do you?" argument is "well, I don't want my employer doing that either", and setting up a situation where workers (not unions, workers) have more power to stand up to a given employer and demand better is a way to promote individual freedom just as much as "getting the government's boot off your neck" is.
Is there a crossover where we also don't want employers telling us to get vaccinated? Asking for a sister.
Pretty sure she can find an employer who doesn't require vaccination, unless she works with people highly vulnerable to Covid, in which case I suggest that she find another profession so that she doesn't kill her clients.
FWIW I worked at one of the regional Feds in 2016 with some labor economists, and folks in research departments took very seriously that Obama CEA report about how most of the LFP gap was structural (not cyclical). The hot question back then was "what share of the remaining LFP gap is due to opioids vs. disability vs. video games vs. criminal records vs. ..." But interest in that question seemed to wane by 2019. I suppose a vindication of Matt's views.
That is my recollection of what Fed staff were working on as well.
Full employment is nebulous enough and sufficiently difficult to define and measure that it is like a Rorschach blob. People see what they want to see and judging workers has been quite the rage. How dare they post video games, says the fat cat on his boat on a Friday afternoon.
It was in the late 90's that economists started to notice employment growth not responding as positively to economic growth as they expected based on past experience. Early 2000's was a jobless recovery.
And there has been an unexpectedly high amount of downward pressure on inflation for the last two decades.
People really should update their priors, but at this point you are totally right that nobody knows.
And if you go back to the time when current thinking made sense it was a totally different political economy with for example much more powerful unions etc.
I don't spend my time playing frivolous games! *Is on golf course 8-10 hours a week*
What is post video games? You can do that?
It's very interesting to be reminded of that. Do you recall why there was pushback on really finding out where full employment was? I accept that NAIRU is a reasonable theory. So why not let the economy grow until inflation hit 2.1% or more before tapping the brakes? I wish the Fed had pushed harder (ie, IOR from 1913 to 2008 was zero. So why keep it at 0.25% from 2009 to 2018? Why taper QE before inflation exceeded 2.1%? These are not radical thoughts.) but I don't understand hitting the brakes when inflation was below target for so long. The trend from 2010 to 2015 was too slow but going in the right direction. Why tap the brakes in Dec 2015 when this modest asymptotic approach toward full employment might have actually paid dividends?
my reading of the FOMC politics of 2015 (no inside information on this) was that Yellen was balancing a slate of governors/presidents who flanked her on both sides. She had inflation hawks like George of KC, Kaplan of Dallas, Mester of Cleveland making noises. Plus the Fed wasn't used to being at the zero lower bound for so long, that was a new experience.
By 2018-19, the research department I was in started looking more carefully at re-evaluating NAIRU. But my sense is that they were spurred to do this c. 2018-19 because we had clearly blown through the 5% U6 figure most people thought it was. Pre-2018, if you think you know what NAIRU is and have no reason to believe otherwise, it seems logical to direct research efforts towards issues that seem more frontier/new (opioids, DI, video games, criminal records)
Thanks. One quibbly question. Why did they think they were at zero when IOR was at 0.25%? IOR had actually been at 0.00% for the 95 years from 1913 to October 2008. Paying IOR that exceeds the rate paid on T-bills really increases the demand for reserves. Yet people seemed to wonder "why are banks not lending? They're just putting the money into reserves."
Not sure of the answer to this, but it might be something about bank capitalization/leverage during and after the financial crisis. The Fed was rightly skittish about banks not having enough assets on hand.
Thanks
The only real cost to overheating the economy is inflation. Moderate inflation ain’t so bad. It involves an increase both in prices and wages (indeed it can be driven by wage increases) so it is not inherently anti-worker. As an econ undergrad, I was taught that inflation is unpopular because workers attribute nominal wage increases to their skill and wonderfulness and feel that inflation robs them of the fruits of their industry. Employers feed this dynamic by providing raises based on performance reviews rather than cost of living adjustments plus truly merit biased raises.
I’m not sure this theory explains all or even most of the elite horror against inflation. I do know inflation is really bad for bond holders. If you are getting 5% from high quality corporate debentures and inflation climbs from 1 to 4%, your real income has cratered by 75%. The effects on mortgage holders are similar. Most economists want to consult for banks and other institutions that have very good reasons for hating inflation. Furthermore, economists are basically taught that self interest is not only natural but the cornerstone of the economy. They can be just as whorish as lawyers.
The late 40s were the golden era of the American working class— the first time in history any working class anywhere began acquiring enough money to buy houses and send children to universities. This is one of our greatest national achievements. Not coincidentally, it was presided over by a highly leveraged federal government that was happy to print money and have 6% inflation. The best of times for workers and the worst of times for rentiers. Let’s do it again!
Isn't it also just that elites are far more likely to be creditors while ordinary people are far more likely to be debtors, and inflation hurts creditors while helping debtors?
Elite are (far) less likely to lose their jobs in a downturn and much more likely to suffer from inflation in a hot economy. Opinions follow personal interests.
it really is about power a hot economy with wage inflation is one where workers have sufficient power to say take this job and shove it. most recent Slate money discussed this.
old money abhors stocks because they involve needless risk. better to buy long term investment grade bonds.
Also worth keeping mind is that a fair number of the things that caused 1970s inflation to be so traumatic have been fixed.
- Tax brackets weren't indexed to inflation. So even with no real wage increases, you'd start paying more tax, resulting in a real wage cut. Tax brackets are now indexed.
- Social Security didn't get cost-of-living adjustments. So millions of retirees had heart-tugging stories in the news about how hard up they were. Social Security is now index.
- Union contracts (far more relevant in 1970 which was the peak of private sector union membership) didn't have cost-of-living adjustment clauses. In 1970, only 10% of union contracts had a COLA. By 1979 over 60% of them did.
- Pensions, private and public sector, didn't have cost-of-living adjustments. While pensions without COLA are still somewhat common, many more have added COLA.
- There were no TIPS or I-Bonds that allowed savers to invest in government guaranteed inflation-linked savings vehicles.
With those things in place (and probably others I either don't know about or have forgotten), I think a bout of moderately high inflation like the 1970s would be far less damaging this time around.
Also, globalization has radically changed supply chains such that an uptick in domestic labor costs doesn't automatically raise prices by the same factor.
I always wondered about that fact with Trump—I didn’t know how much of his push for full employment was his (likely correct) belief that economic success of the working class was the key to his political future and how much was that he was a rich debtor instead of a rich lever, and therefore had less fear of inflation.
if i own buildings and they are mortgaged at fixed rates, inflation rocks
I bought a house this year, so I am hoping for mild inflation and an influx of tech companies to my location 😀
that is best thing about trump is he told the inflation hawks and strong dollar people to shove it.
I think in some ways, it becomes a psychological problem for everyone because it adds volatility and uncertainty. That distorts economic decisions- at the personal level and the business level. It's just much harder to plan for the future. And think about the compound effects of 10% inflation versus 2% and you are considering an investment in, say, a 10 year asset.
It also adds an element of daily stress-- you can never keep up with the constant barrage of price increases and managing your budget and making sure your raise was sufficient, etc. How far will your dollar go next year? Will you get the raise you need? What if you buy that house and you can't afford the mortgage because groceries keep going up?
If you go back and watch the sitcoms of the 1970's, you'll find it was a frequent punchline. It sort of becomes an ambient grievance of the masses. And of course, if it gets way out of control, that's a whole other story and your currency collapses. But I'm just thinking of say 5-15% inflation.
Is it just me or is it super weird how little this is talked about or written about? Like if you ask voters jobs are almost always the top issue. Politicians talk about jobs literally all the time, but it's kind of a big secret that monetary policy is constantly trying to prevent us from having too many jobs.
I'm genuinely not equipped to have an opinion about the economic modeling but it's kind of shameful how much it's talked around and voters are treated like children.
One of the "nice" things about opportunistic disinflation was obscuring the role monetary policy plays in causing unemployment, and therefore reducing political pressure on the Fed to achieve try harder at the whole dual mandate thing.
Matt, I paid $48 for you to popularize ideas like this. I think its smart to dump the TDS and admit that this was a really stellar achievement by Trump as well. He convinced Dems they needed to do something. This was a very well argued piece. Well done!
Trump's efforts to maximize the country's pandemic death toll, his treasonous foreign policy, his vile and ever-present corruption (treating the administrative state as his personal possession), his coddling of white supremacists, his utter contempt for democratic norms and (last but not least) his failed coup attempt all justify a high degree of TDS even if, as you rightly point out, Trump's "run the economy hot" instincts were sound (a rare example of Trump's personal incentives aligning with the national interest).
I have a significantly different worldview than you, but I'm glad that Matt has convinced you that Trump in fact ran the economy hot and it was a good thing.
I grant you that the Trump administration kept the economy on the exact same trendline we saw in the last few Obama years. I give him credit for not totally screwing it up.
I'm convinced that the economy was very warm in 2019 and I credit Powell.
Ahh, the running above potential in 2019 theory. Trump broke with tradition and demanded Fed cuts after they increased rates from 1% to 3% from 2016 to 2019. We got a .25% cut in the summer of 2019 to 2.75%.
Every president wants lower interest rates. Trump just made a big stink about it. There's no evidence it influenced Powell's thinking.
I don't think we were above potential in 2019. That's why I avoided Hot. If covid hadn't hit, I think the economy could have run like that, maybe even warmer, without triggering any increase in inflation. I will give Trump credit for hitting at the Fed. I give Obama even bigger demerits for not doing so at a time when the economy was much further from full employment.
I think Matt and I might agree that Powell should have listened more and run the economy hotter in 2019. We had that whole reelection thing on the horizon however.
I agree with almost this whole comment. But... did Trump want to run the economy hot? Which could raise wages at his hotels. Or just cutting taxes for himself and other rich people?
I feel it's safe to say that Trump's understanding of macroeconomic dynamics is pretty limited.
Yes, I think the evidence mostly shows he wanted a "hot" economy because he calculated that would boost his reelection odds.
Even a blind squirrel occasionally finds a nut.
I think it’s worth taking Bill P’s point seriously ESPECIALLY if you think Trump is dangerous. He had good instincts on running demand hot, just like he did (to a lesser degree) on staying out of foreign wars. Those instincts explain some of the loyalty to him among working class people Democrats could reach.
Oh I think it's very irresponsible to dismiss Trump's instincts because Trump. He was right about a few things. There was that famous meeting with the senior generals and he went off on them. "Why aren't you winning? Why can't you win? If you can't win why are we there?" Or some such.
[citation needed]
Do blind squirrels survive long enough to ever find a nut? Regardless, they don't become President. :-)
It's not entirely clear that the Fed would have allowed the economy to run this hot under, say, Bernie Sanders or HRC. There's some international evidence that central banks are prone to tighter monetary policy under left-wing governments.
He's big accomplishment was to sideline the tight money conservatives that spent the Obama era warning of runaway hyperinflation and the perils of deficits.
Noting that this may yet all end in tears, but this is an illustration of Biden's amazing hidden superpower.
I like Bernie, but oh what a disaster that would have been.
Put Jim Clyburn's face on Mt. Rushmore.
I get the sense that opposition to these ideas is not always drawn from economists and debates over models anyway. Instead it seems like some people are profoundly uncomfortable with burger flippers, uber drivers, and hair stylists having bargaining power and/or are profoundly uncomfortable with government stimulus boosting wages. I see this expressed in two ways. First, there are assertions made that people at the bottom of the labor pool don’t *deserve* higher wages and bargaining power. If they were truly clever, hardworking people they wouldn’t be at the bottom. Meritocracy! Second, there is a suspicion that rising wages are fake. That is, the only reason wages are going up is because employers have to compete with the “artificial” expanded UI benefits and stimulus money. Once that is withdrawn, as some states are already doing, then the “natural” conditions of the employment market will return. Although I haven’t heard it expressed this way, I take it to mean that wages will fall or at least stop growing.
Don’t forget that fiat money is fake too. Only work that is paid in gold has moral worth. We should tolerate persistent deflation to keep bond holders from being cheated by greenbacks.
I feel like a simple heart button is not capable of accurately capturing my reaction.
The bond holders are the fed and China lol
There's plenty to like in this post, but I will never understand why you enjoy spending time in airports.
I can't speak for Matt, but the stress-reducing effect of knowing there's virtually no chance I'm going to miss my flight AND that I've got ample time to grab a bite or do some shopping or read (or what have you) -- can easily pass for "enjoyment."
I don't like cutting things close. "Getting there early" is a basic stress management technique for me.
If you have never had a near fatal car accident, you're taking too much time to get to where you need to go.
Well, somebody or another (NY Times?) ran an article a few weeks back about the apparently quite large sub-culture of persons who try to constantly beat their personal bests in terms of leaving late for the airport. Different strokes. (Actually, that would give me a stroke!).
Missing a flight is genuinely no big deal. Flights get delayed or cancelled all the time, and airlines are happy to put you on the standby list for the next flight at no cost. On the other hand, car accidents are a very big deal.
Missing a flight is "genuinely no big deal" if you get there reasonably early in the day and you're flying a popular (usually domestic) route. In that case there'll be alternatives, even if you have to take a different route with different connections. But if it's late in the day, or if there's "weather" in the country, your options can rapidly narrow, and you might reach your destination a day late. Not the end of the world, sure, but a shitty thing, all things considered. Also, I'm extremely careful about booking an aisle (or, on a shorter flight maybe a window) seat near the front, and that can easily go out the window if a flight is missed.
Also, are you saying there are no rebooking fees these days? In a different life I used to fly on my employer's dime, but now I mostly pay for my own flights, and last time I had to rebook (this was an international flight, Guangzhou-JFK) Delta charged me a couple hundred bucks.
Cumulative time in the car going places >> time spent in the airport.
But really, I just meant it as a joke.
Even aside from any worries about missing the flight, I just think the most annoying things about flying are (1) the trip to the airport and (2) security, and it's just so much more pleasant to get those things over with and have them in my past rather than my future!
I agree. I get way over-stressed about potentially missing a flight. I don't love sitting around an airport, but with a cell phone to read the internet (including Matt's Twitter page) and make a few phone calls, it's about the same as being at home anyway. The only time there is a trade off is early morning flights when I could theoretically still be sleeping (but I don't sleep because I'm too nervous about missing the flight, Lol).
I was in college, but the only time I've actually missed my flight was back when you had to check in with an attendant at a desk and they wrote your gate number on your boarding pass. Anyways, the attendant wrote gate 6, but I thought it was gate 9 and missed my flight because I was listening to music, totally missing the speaker system calling my name (I got a bit screwed in that gate 9 was also going to the same destination, just at a different time, so it wasn't immediately obvious).
"It can hardly be a coincidence that no language on Earth has ever produced the expression 'as pretty as an airport.""
Aeroplanes are pretty. The ultimate example of form following function. Take the 747 - it was designed that way for purely pragmatic reasons, the designers could hardly afford any extravagance with their design; they had to primarily account for things such as a weight, aerodynamics etc. And yet it is beautiful.
The world's most aesthetically-pleasing objects are often the most reliably efficient. Form follows function...
And yet new apartment buildings, which have to go through extensive design review and match the existing character of a neighborhood, are invariably decried as ugly.
If you've got Admirals Lounge membership then DFW is a fine place to do your e-mails for the day. But you need to then plan to have at least two hours there, and can deal with up to eight. An hour in an airport is basically wasted time.
Yes, and that's a big advantage of trains over planes - the time is chunked into more efficient and useable blocks. Four fours sitting in a train is more useable time than 2 hours sitting a plane and 2 hours frittered away standing in lines and walking around an airport.
Most of the big airports I've been in are, in my opinion, reasonably pretty and have nice clean bathrooms, art and museum displays, comfortable seating, good shopping...I mean clearly they have every incentive to try to make them places where you can spend a lot of time comfortably, and for me at least they succeed!
To be fair to restaurant owners, they've been through hell for the last 15 months. I think the bonus UI is playing at least some role in the current worker shortage, and that we won't really know if "some" is 10% of it or 70% of it for a while. The transition to a post-pandemic is totally new and has lots of uncertainty. A legitimate fear is raising wages by $5 per hour to get fully staffed to only find out 4 months later that the shortage was a blip. If the new wage level turns out to be a plateau, restaurants will adjust. Higher wages, higher prices, and potentially some shrinkage in the industry because if a restaurant meal costs a new, higher multiple of eating at home, some people will cut back eating out a little (though probably after a summer binge that may also prove temporary).
I agree that this is a good piece, but it misses a basic point that economists tend to be too concerned with their models, and not concerned enough with data. Many years ago, when I was a graduate student at UCLA, I used to attend a seminar run jointly by economists and theoretical biologists. They were using similar models and thinking about things in similar ways, but theoretical biologists had to deal with more empirically oriented colleagues in a way that economists didn't. Tony Atkinson and his crew (Piketty, Saez, etc.) are now playing that role.
I have often wondered how much of bad economic policy is a result of economic models saying one thing while the data say something very different and the policy makers going with the model.
I wish this was one of the posts that was available to everyone, not just paid subscribers, because this is one the most consequential issues of our time and "preaching to the choir" on such an important issue is a real downside of the paid subscriber model.
You can forward to email to whoever you want. Honestly, just sharing links on Twitter is just as much "preaching to the choir". An email to someone you actually know IRL is vastly more likely to effect any kind of change.
This is an excellent piece. I strongly endorse the conclusions that the business "cycle" is not a cycle, not symmetrical, and largely a reflection of random downward shocks (plucking). I also endorse the view that macro policy has, in recent decades, been insufficiently expansionary and too quick to put the damper on expansions. That being said, I think the analysis here is in some ways incomplete. I would like to see future posts address two points:
(1) Is the "accelerating inflation model" that started as heterodox and became orthodox in the 1970s and 1980s really wrong, or has it just not yet been tested in the 21st century? According to that model, the level of real output depends, in part, on the relationship between contemporaneously observed output prices and the expected level of input prices. During episodes of unexpected acceleration of inflation, observed output prices exceed expected input prices, leading firms to undertake higher levels of output and staffing than they would, in retrospect, have wanted if they had had better information. Such episodes result in temporary periods when output in a meaningful sense does rise above its long-term potential. In a period that includes such episodes (say, the 1960s and 1970s, but not the 21st century so far) you can't draw a red line along the cyclical peaks and call that "potential real output." A sequel to this post should include a discussion of whether that model still applies to the US economy, and if not, why not.
(2) Another point regarding inflation: Modern Monetary Theory (MMT), which perhaps for slightly different reasons, shares the view of this post that it is a good idea to run the economy hot, includes a safety mechanism to avoid excessive inflation. That safety mechanism is to raise taxes when inflation threatens. That is great in theory, but unfortunately, the US political system includes no mechanism to actually adjust taxes in that way. Is that institutional constraint an important consideration in deciding how hot to run the economy? Would it be a good idea to implement institutional reforms that would allow flexible adjustment of taxes for purposes of avoiding unwanted macroeconomic outcomes?
I look forward to more on this topic!
MMT is bunk. Raising taxes (or cutting spending) will not in and of itself curb inflation. LBJ tried balancing the budget to curb the inflation of the late '60s to no avail. The exploding deficits of the early '80s did not prevent the Volker disinflation. This is because inflation is always and everywhere a monetary phenomenon.
I struggle to reconcile the default Progressive position to "trust the science (experts)" with this openness to MMT - which I would characterize is fringe at best. Seems like our version of "trickle down" - just a belief system.
The default position is actually "trust the experts that agree with our preconceived views".
Most of MMT is unfalsifiable pseudoscience.
Some of MMT is a belief system and some is orthodox Keynesian economics. The idea that you can control aggregate demand by varying taxes is the latter. See "functional finance."
“Trickle down” is also a fringe belief of progressives.
>>Raising taxes (or cutting spending) will not in and of itself curb inflation. LBJ tried balancing the budget to curb the inflation of the late '60s to no avail.<<
Raised taxes? LBJ famously signed one of the largest tax CUTS in history shortly after taking office: https://en.wikipedia.org/wiki/Revenue_Act_of_1964
Also, the LBJ years offer no evidence whatsoever of the inflation-reducing effects of tax increases. Far from "balancing the budget," federal borrowing under LBJ was approaching 3% of GDP toward the end of his second term, which was high by the standards of those days.
https://fred.stlouisfed.org/series/FYFSGDA188S
If I were a critic of MMT, LBJ is the last presidency I'd be citing as evidence for the theory's shortcomings. We ran the economy hot during in the late 60s and federal spending was rapidly growing. The result -- a pick-up in inflation and good conditions for the non-rich -- is exactly what an MMTers would expect.
>>>The exploding deficits of the early '80s did not prevent the Volker disinflation.<<<
Reagan's 49-state landslide would like a word.
MMT is wrong because it views government spending as always positive, and allowing us to utilize unknown infinities of “slack” in the economy. There isn’t, of course, enough slack there, but it’s an unfalsifiable article of faith.
The problem with deficits isn’t deficits - it’s the spending. To raise taxes to cover deficits is the wrong way to think about it. When the government spends money, it’s taking money away from what people want most (what they buy, what they invest in) and spends it on what they did not want to spend it on (when left alone). Moreover, with no real competitive pressure costs and corruption can blossom - look at how expensive it is to build something in the public sector.
Nevertheless, our monetary policy should be a bit more expansionary. However, mmt is the wrong way to go about it, and promises us only to make everything as notoriously efficient and cost effective as the government usually is.
Tax brackets were not indexed in the 70s, so they were an inflation-dependent means of raising taxes but they didn't have much effect on inflation/
My parents were just road tripping and saw $15 an hour wages advertised at the Cody, WY Walmart. I see a minimum advertised wage of $11 at fast food places in Cheyenne (which even before may have been competing with Fort Collins, especially for workers with a car). I hope this keeps going.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
https://marginalrevolution.com/marginalrevolution/2010/07/zero-marginal-product-workers.html
https://marginalrevolution.com/marginalrevolution/2011/01/scott-sumner-on-zero-mp-workers.html
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
https://marginalrevolution.com/marginalrevolution/2011/01/cowen-and-lemke-on-the-job-market.html
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I think there is something to the point about ‘mathiness’ and models. But fundamentally, I believe the expert econ community decided some time ago that a 2% constraint (not an average) is the RIGHT target for inflation. But why?
So I asked Claudia Sahm why the Fed uses a 2% benchmark instead of say 3 or (gasp) 4% target (check out the Regan/Volker era and 4% seemed to be the target they were shooting for). She didn’t know why 2 was the magic number and crowdsourced it among her Twitter followers and I feel like someone just made up 2% in the 80s-90s.
In other words, I think a fundamental premise backing the right amount of inflation in our country (if not the world) seems to be based on intuition and not on any well grounded study...with consequential impact to our economy and polity.