Clueless DeLong Still Clueless, But Slightly Less So: Hoisted from Ten Years Ago: High-Grade Structured Credit, and Time for the Fed to Start Cutting Interest Rates

Clueless DeLong Was Clueless: Hoisted from the Archives from 2007: The Domestic Macroeconomic Outlook: February 28, 2007

Clueless DeLong Was Clueless: Hoisted from February 2007: The Domestic Macroeconomic Outlook: February 28, 2007 It looks like I'm not going to get to give my short talk on the domestic macroeconomic outlook up at Lake Tahoe this weekend:

That's too bad, because such talks quickly grow stale.

One of the major points of my schtick is that the macroeconomic outlook rarely changes suddenly, so that 90% of the time it is perfectly OK to say, "things are like they were, only three months ago." Nevertheless such talks have a very short half life: people like to know how the most recent news affects things, even if the usual answer is "not much"--except, of course, for those turning points where things do change a great deal, and which we usually see clearly only in retrospect.

I was going to hit three big points:

The Great Moderation:

  • The business cycle is smaller than it used to be
  • Fewer recessions in industrial production
  • Largely good luck
  • But are there structural causes--better financial intermediation, et cetera?
  • We don't really know:
    • Why shallower recessions in industrial production?
    • Is the Federal Reserve is doing a much better job of responding to recessions in real time?
    • How has, in large part, the Federal Reserve has not let itself get wedged into a situation where it feels it can't respond to recession because inflation is still uncomfortably high?
    • Does it matter that industrial production matters less for the economy as a whole?
      • It used to be that fluctuations in the harvest were a really big deal for the macroeconomy
      • Someday, somebody will write: "it used to be that fluctuations in industrial production were a really big deal for the macroeconomy"--but not today, not quite yet
  • Major but still low-probability risk: a steep fall in the dollar accompanied by substantial import price passthrough wedges the Federal Reserve


Productivity and Its Contents:

  • The alarmingly large productivity gains of the early 2000s appear to have been one-off benefits from restructuring
  • However, the Silicon Valley-driven productivity speedup of the 1990s is still with us, as strong as ever:
    • In the late 1990s the gains went to established high-tech companies and to dot-commers and their VCs
    • Since 2000 the gains have gone to companies that use computers and communications, and as competition sets in to their customers
    • The productivity future looks like the recent past--and you don't have to say "biotech, nanotech" in order to reach that conclusion


Factor Shares and the Strength of the Labor Market:

  • Rising profit shares because the labor market has been weak
  • The unemployment rate has been giving bad signals of labor market relative strength
  • Lots of people not in the labor force nevertheless appear to be pretty easy to hire
  • Unless the Federal Reserve allows the unemployment rate to fall further, wage picture looks grim--which means profit picture looks very bright
  • Political implications of still further increases in income inequality
    • Any connection between globalization and labor market weakness?
      • Hard to build a sensible model in which there is...
    • But that may reflect economists' limited imagination--lots of people out there in the world think they see it happening