#macro Feed

July 19, 2019: Weekly Forecasting Update

Cursor and FRED Graph FRED St Louis Fed

The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong:

Federal Reserve Bank of New York: Nowcasting Report: Jul 19, 2019: "1.4% for 2019:Q2 and 1.9% for 2019:Q3.News from this week's data releases decreased the nowcast for 2019:Q2 by 0.1 percentage point and increased the nowcast for 2019:Q3 by 0.1 percentage point. Negative surprises from housing data accounted for most of the decline for 2019:Q2, while positive surprises from survey data accounted for most of the increase in 2019:Q3...

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July 12, 2019: Weekly Forecasting Update

FRED Graph FRED St Louis Fed

The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share.

The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain, and has now recognized that its confidence over the past six years that we were close to full employment was simply wrong:

Federal Reserve Bank of New York: Nowcasting Report: Junly 5, 2019: "The... Nowcast stands at 1.5% for 2019:Q2 and 1.8% for 2019:Q3. News from the JOLTS, CPI, and PPI releases were small, leaving the nowcast for both quarters broadly unchanged...

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Note to Self: The establishment-survey payroll-employment number (red line) contain within them a guess as to how many newly-formed forms there are that have not yet caught up to and entered the payroll system. When a recession starts, that guess at the fudge factor can be way high.

On the other hand, the household-survey employment number (blue line) has a lot more statistical noise in it.

The bet right now is that late last year the household survey interviewers just happened by luck on a bunch of people enthusiastic about working, but nothing is guaranteed. It might be that the firm birth-death guess is leading the establishment survey (red line) astray:

Civilian Employment Level FRED St Louis Fed

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Risks of Debt: The Real Flaw in Reinhart-Rogoff: Hoisted from the Archives

There never was a 90% cliff. And most of the downward slope in teh scatter came not from debt accumulation but from growth that had been slow for other reasons. See Owen Zidar (2013): Debt to GDP & Future Economic Growth:

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Hoisted from the Archives: Risks of Debt: The Real Flaw in Reinhart-Rogoff: 2013: A country that spends and spends and spends and spends and does not tax sufficiently will eventually run into debt-generated trouble. Its nominal interest rates will rise as bondholders fear inflation. Its business leaders will hunker down and try to move their wealth out of the corporations they run for fear of high future taxes on business. Real interest rates will rise because of policy uncertainty, and make many investments that are truly socially productive unprofitable. When inflation takes hold, the web of the division of labor will shrink from a global web he'd together by thin monetary ties to a very small web solidified by social bonds of trust and obligation—and a small division of labor means low productivity. All of this is bound to happen. Eventually. If a government spends and spends and spends but does not tax sufficiently.

But can this happen as long as interest rates remain low? As long as stock prices remain buoyant? As long as inflation remains subdued. My faction of economists—including Larry Summers, Laura Tyson, Paul Krugman, and many many others—believe that it will not...

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July 5, 2019: Weekly Forecasting Update

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The right response to almost all economic data releases is: Next to nothing has changed. We are where we were a year ago: Stable growth at 2% per year with no signs of rising inflation or a rising labor share. The only significant difference that the Fed has recognized that its hope of normalizing the Fed Funds rate in the foreseeable future is vain. We are one year closer to full employment, yes. But we have extended our view of when we will reach full employment by nine months:

Federal Reserve Bank of New York: Nowcasting Report: Junly 5, 2019: "The... Nowcast stands at 1.5% for 2019:Q2 and 1.7% for 2019:Q3.... Higher than expected exports and imports data, the ISM manufacturing survey, and employment data...

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June 28, 2019: Weekly Forecasting Update

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The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast. Worth noting is that the ten-year CPI inflation breakeven is now 1.6%. If investors were risk neutral with respect to bearing this particular inflation risk, this breakeven ought to be 2.5% if investors expected the Federal Reserve to meet its 2.0% PCE inflation target over the next decade:

Federal Reserve Bank of New York: Nowcasting Report: June 28, 2019: "The... Staff Nowcast stands at 1.3% for 2019:Q2 and 1.2% for 2019:Q3...

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It is macro: recession, weak recovery, catastrophe, and then superweak recovery...

I confess I do not get this from Paul Krugman.

Yes, the trade deficit crowds-out traditionally-male blue-collar import-substituting manufacturing jobs, but imports crowd-in traditionally-male blue-collar wholesale trade jobs, and finance traditionally-male blue-collar construction (and capital-goods manufacturing) jobs. If you look at all traditionally-male blue-collar—wholesale, construction, manufacturing, and mining)–what you get is not a story of the trade deficit, but rather a story of (a) macro shocks to aggregate demand, and (b) the long-run technology-and-preferences trend—some of which is automation.

NAFTA is nowhere.

The 2002-2007 bilateral-trade "China shock" is simply not a terribly big deal for the country as a whole: employment in traditionally-male blue-collar occupations was flat. A big deal for places that found their manufactures competing with new imports from China, yes. But not for blue-collar traditionally-male employment in the country as a whole.

For the country as a whole, it is aggregate demand—2001-3 recession, weak recovery, 2007-9 catastrophe, and then superweak recovery—with a supporting role for technology-and-preferences:

Https fred stlouisfed org graph graph id 577417 rn 817

Paul Krugman: "Yang asserts that automation destroyed lots of manufacturing in the midwest, [but] you don't have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging trade deficit:

18 Paul Krugman on Twitter And while Yang asserts that automation destroyed lots of manufacturing in the midwest you don t have to be a protectionist to realize that the acceleration of job loss after 2000 was mainly about the surging

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Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers: "Fiscal Policy in a Depressed Economy

Il Quarto Stato

Weekend Reading: Discussion of J. Bradford DeLong and Lawrence H. Summers (2012): "Fiscal Policy in a Depressed Economy:

Robert Hall observed that a better title for the paper would be “Eta,” since the paper’s surprising results all stem from the authors’ beliefs about the value of their hysteresis parameter η. The other parameter values the authors used for their simulations seemed mostly reasonable and uncontroversial to Hall. He noted that although Valerie Ramey had estimated a relatively low value for the multiplier on fiscal spending, the standard error on her estimate was large and did not rule out the possibility that the authors’ baseline value of 1.5 was correct. Hall also observed that some alternative ways of analyzing government spending data from World War II generated higher estimates of the multiplier. He found the authors’ value for the growth rate reasonable, and although he shared Ramey’s concern about the authors’ real interest rate assumptions, he thought their baseline value might be reasonable as well.

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June 21, 2019: Weekly Forecasting Update

Outlook Slides: https://www.icloud.com/keynote/0iqGf9C1E8-9mHJVeQdy1U7YQ

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The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways.

About the only news in the past week or so is that the Federal Reserve has—behind the curve—become convinced that it raised interest rates too much in 2018. To the extent they attribute their change of view to news, the news is that President Trump is a chaos monkey with respect to international trade—but that was well known back in 2015.

Worth noting is that the ten-year CPI inflation breakeven is now 1.6%. If investors were risk neutral with respect to bearing this particular inflation risk, this breakeven ought to be 2.5% if investors expected the Federal Resrve to meet its 2.0% PCE inflation target over the next decade:

Federal Reserve Bank of New York: Nowcasting Report: June 21, 2019: "The New York Fed Staff Nowcast stands at 1.4% for 2019:Q2 and 1.3% for 2019:Q3. News from this week's data releases left the nowcast for 2019:Q2 largely unchanged and decreased the nowcast for 2019:Q3 by 0.4 percentage point. For 2019:Q3, negative surprises from regional survey data drove most of the decrease...

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Federal Reserve Talking Points for Bloomberg: June 19, 2019

For ten years now, the Federal Reserve has:

  • overestimated how fast the economy will grow without exceptional support.
  • underestimated how many people the US can put to work at "full employment"—the point beyond which inflationary pressures start to build.
  • overestimated how fast an inflationary spiral could take hold.
  • underestimated the dangers of renewed recession.

 

And the result has been the worst economic recovery in American history. For example:

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  • The unwillingness of the Federal Reserve to change its 2%-going-forward inflation target deprived the economy of the usual faster-than-trend bounce-back from the depths of a depression.

  • The Federal Reserve's decision to treat 2%-going-forward as a ceiling rather than a target left banks with little incentive to lend out the massive reserves that quantitative easing had led them to hold.

  • The Federal Reserve's mid-2010s decision to announce that the time of extraordinary support would soon end nearly brought on a recession.

  • The Federal Reserve's end-of-2016 decision to initiate a tightening cycle has left it in it current situation, with the 10-year inflation breakeven for the PCE at 1.3%/year—0.75-points below the Federal Reserve's formal target, in which it dearly wishes the interest rates it controls were lower than they are but does not quite dare take steps to reduce them yet.

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

 

More generally:

  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Keynesian fiscal stimulus to growth that has now ebbed.
  • The past month has seen an 0.8%-point decrease in our estimate in what seasonally adjusted annual-rate production growth was comparing April-June to January March.
    • This is in part an impact of Trump's attempt to fight a trade war with China
    • Plus Trump's attempts to add a trade war with Mexico to the mix.
  • But this is mostly due to what Larry Summers calls "secular stagnation":
    • Financial markets are failing to mobilize the risk-bearing capacity of American society.
    • Thus even very low safe government-debt interest rates have not made capital affordable enough to induce the investment boom we would like to see.

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More than Two Decades of Macroeconomic History Through the Lens of Four Key Components of Aggregate Demand

It is remarkable the extent to which you can tell the story of the U.S. macroeconomy over the past twenty-five years through the reactions of four components of aggregate demand to policies and shocks:

  1. The dot-com boom unleashed by the Clinton deficit-reduction program and high-tech innovation.
  2. The dot-com bust.
  3. The housing boom.
  4. The successful rebalancing of aggregate demand—housing sits down, while exports and business investment stand up as money flows are successfully redirected.
  5. The Fed well behind the financial-stability curve: the financial crisis and the collapse.
  6. Inadequate recovery: The Geithner Treasury and the Obama White House's failure to do anything to promote a recovery of residential construction.
  7. Inadequate recovery: Republican (and Obama) fiscal austerity.
  8. Inadequate recovery: Bernanke's highly premature taper tantrum.
  9. The Trump rebound.

 

Dot-Com Boom:

FRED Graph FRED St Louis Fed

 

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June 14, 2019: Weekly Forecasting Update

JOLTS Day Graphs April 2019 Report Edition Equitable Growth

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news is that over the past month we have seen an 0.8%-point decrease in our estimate in what production will be over April-June, largely driven by reductions in durable goods orders, capacity utilization, net exports, and this morning employment. This might be an impact of Trump's attempt to fight a trade war with China, plus Trump's attempts to add a trade war with Mexico to the mix.

Federal Reserve Bank of New York: Jun 14, 2019: Nowcast: "1.4% for 2019:Q2 and 1.7% for 2019:Q3. News from this week's data releases increased the nowcast for both 2019:Q2 and 2019:Q3 by 0.4 percentage point. Positive surprises from retail sales, capacity utilization, and industrial production...

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The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging: Hoisted from the Archives

Cursor and 30 Year Treasury Inflation Indexed Security Constant Maturity FRED St Louis Fed

Until secular stagnation ends—until the yield on U.S. government debt exceeds the growth rate of the economy—worry about reducing of even stabilizing the debt-to-GDP ratio of a country like the U.S. that has assume running room via financial repression to stabilize demand for its debt is premature. Thus the takeaway is this: It would be much more productive right now to worry about how do we maintain normal levels of net investment in a high government debt post-interest rate normalization environment than to propose sending the economy back into recession in order to reduce government debt accumulation. Recession and high unemployment in the short- and medium-run are problems. Low investment in the medium- and long-run are problems. Government debt is a tool to avoid the first and a source of risk of the second. But it is better to keep your mind focused on the things that are real problems:

Hoisted from the Archives: The Intergenerational Burden of the Debt: Nick Rowe Tempts Fate Weblogging...: Nick Rowe:

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DeLong Smackdown Watch: Yield Curve: Hoisted from the Archives from 2006

Ooh boy. Was I wrong in 2006. I am not betting against the yield curve again:

From 2006: DeLong Smackdown Watch: Yield Curve: Worthwhile Canadian Initiative thinks I'm wrong when I write: Yes, we should be worrying about the US yield curve: This inversion of the yield curve, however, is generated not by domestic investors' thinking that a recession is on the way, but by foreign central banks' desires to keep buying lots of dollar-denominated bonds in order to keep their currencies from appreciating. Thus while an inverted yield curve is usually a sign that a bunch of people are trading bonds on their belief that a recession is likely, that is not what is going on in this case...

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Joseph Schumpeter on "Liquidationism": Hoisted from the Archives

Il Quarto Stato

Hoisted from the Archives: Joseph Schumpeter on "Liquidationism": Hoisted from the Archives: "The problems presented by periods of depression may be grouped as follows: First, removal of extra economic injuries to the economic mechanism: Mostly impossible on political grounds. Second, relief: Not only imperative on moral and social grounds, but also an important means to keep up the current of economic life and to steady demand, although no cure for fundamental cases. Third, remedies: The chief difficulty of which lies in the fact that depressions are not simply evils, which we might attempt to suppress, but—perhaps undesirable—forms of something which has to be done, namely, adjustment to previous economic change. Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, undoubtedly turn depression in to the sham prosperity so familiar from European postwar [i.e., World War I] experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one it was called in to remedy...

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June 7, 2019: Weekly Forecasting Update

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news is that over the past month we have seen a 1.2%-point decrease in our estimate in what production will be over April-June, largely driven by reductions in durable goods orders, capacity utilization, net exports, and—this morning—employment growth. This might be an impact of Trump's attempt to fight a trade war with China, plus Trump's attempts to add a trade war with Mexico to the mix:

Federal Reserve Bank of New York: Jun 07, 2019: Nowcast: "1.0% for 2019:Q2 and 1.3% for 2019:Q3. News from this week's data releases decreased the nowcast for 2019:Q2 by 0.5 percentage point and decreased the nowcast for 2019:Q3 by 0.7 percentage point. Negative surprises from the ISM manufacturing survey, employment data, and international trade data drove most of the decrease...

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May 31, 2019: No Significant Changes: Weekly Forecasting Update

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news these past three weeks is an 0.7%-point decrease in our estimate in what production will be over April-June, driven by a reduction in estimated durable goods orders and capacity utilization. This might be an impact o Trump's trade war, plus Trump's attempts to add a trad ar with Mexico to the mix:

Federal Reserve Bank of New York: Nowcasting Report: "May 31, 2019.... The New York Fed Staff Nowcast stands at 1.5% for 2019:Q2. News from this week's data releases increased the nowcast for 2019:Q2 by 0.1 percentage point...

 

Key Points:

Specifically, it is still the case that:

  • The Trump-McConnell-Ryan tax cut has been a complete failure at boosting the American economy through increased investment in America.
    • But it has been a success in making the rich richer and thus America more unequal.
    • And it delivered a short-term demand-side Kerynesian fiscal stimulus to growth that has now ebbed.
  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.

  • A change from 3 months ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast. The falling-apart of Trump's trade negotiating strategy with China will harm Americans and may disrupt value chains, and the might be becoming visible in the data flow.

  • Changes from 1 month ago: Industrial production appears to be falling as new durable goods orders come in below expectations. Industrial production may have peaked last December:
     
    Industrial Production Index FRED St Louis Fed

  • A change from 1 week ago: Trump has now added a possible trade war with Mexico to the mix...

  • Over the past 20 years: United States manufacturers are ordering no more in the way of the nominal value of capital goods than they order two decades ago. Deflators here are very hazardous, but I believe that translates to a zero increase in real orders as well. This is unprecedented for the U.S. economy: nothing like it has happened before:
     
    Manufacturers New Orders Durable Goods FRED St Louis Fed

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James Buchanan (1997): Has Economics Lost Its Way?: Hoisted from the Archives

Hoisted from the Archives: This serves as a good index of how much Milton Friedman's redefinition of "neutral monetary policy" to mean "whatever monetary policy keeps nominal GDP on its trend growth path" led people prone to motivated reasoning in a laissez-faire direction completely and horribly astray. It also serves as an example of an astonishing failure to mark one's beliefs to market. Never mind that the rough constant of M2 velocity before 1980 had been an obvious example of Goodhart's Law, and never mind that even before 1980 forecasts of the state of the economy one and two years out based on M2 were inferior to other forecasts, by 1997 James Buchanan had just seen a remarkable five-year 30% runup in M2 velocity. and the complete ditching of monetary aggregates not just as targets but even as indicators by Alan Greenspan in favor of a neo-Wicksellian "neutral interest rate" approach that had nothing whatsoever to do with an "effective monetary constitution" of any type:

FRED Graph FRED St Louis Fed

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May 24, 2019: Weekly Forecasting Update

The right response to almost all economic data releases is: Next to nothing has changed with respect to the forecast—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. About the only news these past two weeks is an 0.8%-point decrease in our estimate in what production will be over April-June, driven by a reduction in estimated durable goods orders and capacity utilization. This might be an impact o Trump's trade war.

Federal Reserve Bank of New York: Nowcasting Report: May 24, 2019: "The New York Fed Staff Nowcast stands at 1.4% for 2019:Q2. News from this week's data releases decreased the nowcast for 2019:Q2 by 0.4 percentage point. Negative surprises from the Advance Durable Goods Report drove most of the decrease...

 

Key Points:

Specifically, it is still the case that:

  • The Trump-McConnell-Ryan tax cut:
    • To the extent that it was supposed to boost the American economy by boosting the supply side through increased investment in America, has been a complete failure.
      • To the extent that it was supposed to make America more unequal, has succeeded.
      • Delivered a substantial short-term demand-side fiscal stimulus to growth that has now ebbed.
        • (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017,
        • pushing the level of Gross National Income up from 2.0%/year from this demand-side stimulus.)
  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.

  • A change from 3 months ago: The Federal Reserve's abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.

  • Changes from 1 month ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast. The falling-apart of Trump's trade negotiating strategy with China will harm Americans and may disrupt value chains, and the might be becoming visible in the data flow.

  • A change from 1 week ago: Industrial production appears to be falling as new durable goods orders come in below expectations. Industrial production may have peaked last December:
     
    Manufacturers New Orders Durable Goods FRED St Louis Fed

  • Over the past 20 years: United States manufacturers are ordering no more in the way of the nominal value of capital goods than they ordered two decades ago. Deflators here are very hazardous, but I believe that translates to a zero increase in real orders as well. This is unprecedented for the U.S. economy: nothing like it has happened before.

Continue reading "May 24, 2019: Weekly Forecasting Update" »


Historical Nonfarm Unemployment Statistics

Historical Nonfarm Unemployment Statistics: An updated graph that Claudia Goldin had me make two and a half decades ago. The nonfarm unemployment rate since 1869:

2016 04 05 Historical Nonfarm Unemployment Estimates numbers

Then it was 1890-1990, now it is 1869-2015, thanks to:

  • J.R. Vernon (1994): http://delong.typepad.com/1-s2.0-0164070494900086-main.pdf
  • C.D. Romer (1986): http://delong.typepad.com/spurious-volatility.pdf
  • BLS (2015): http://data.bls.gov/cgi-bin/surveymost?ln

with spreadsheet at: http://tinyurl.com/dl20160405

The assumption–debateable–is that “unemployment” is not a farm thing–that in the rural south or in the midwest or on the prairie you can always find a place of some sort as a hired hand, and that “unemployment” is a town- and city-based nonfarm phenomenon.

I confess I do not understand how anyone can look at this series and think that calculating stable and unchanging autocorrelations and innovation variances is a reasonable first-cut thing to do.

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May 17, 2019: Weekly Forecasting Update

Industrial Production Index FRED St Louis FedManufacturers New Orders Nondefense Capital Goods Excluding Aircraft FRED St Louis Fed

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways.

Federal Reserve Bank of New York: Nowcasting Report: May 17, 2019: "The New York Fed Staff Nowcast stands at 1.8% for 2019:Q2. News from this week's data releases decreased the nowcast for 2019:Q2 by 0.4 percentage point. Negative surprises from industrial production and capacity utilization data largely offset positive surprises from housing and regional survey data...

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Joseph Schumpeter (1927): The Explanation of the Business Cycle: Weekend Reading

Il Quarto Stato

Joseph Schumpeter (1927): The Explanation of the Business Cycle: "§1. The childhood of every science is characterised by the prevalence of "schools," of bodies of men, that is, who swear by bodies of doctrine, which differ toto caelo from each other as to philosophic background and fundamentals of methods, and aim at preaching different "systems" and, if possible, different results in every particular—each claiming to be in exclusive possession of Truth and to fight for absolute light against absolute darkness. But when a science has "gained man's estate," these things, whilst never ceasing to exist, tend to lose importance: the common ground expands, merits and ranges of "standpoints" and "methods " become matter of communis opinio doctorum, fundamental differences shade off into each other; and what differences remain are confined within clear-cut questions of fact and of analytic machinery, and capable of being settled by exact proof...

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May 10, 2019: Weekly Forecasting Update: Little Change

Real final sales to domestic purchasers FRED St Louis Fed

Real Final Sales of Domestic Product FRED St Louis Fed

Real Gross Domestic Product FRED St Louis Fed

Real Final Sales to Private Domestic Purchasers FRED St Louis Fed

Federal Reserve Bank of New York: Nowcasting Report: "The New York Fed Staff Nowcast stands at 2.2% for 2019:Q2. News from the JOLTS, CPI, PPI, and international trade releases left the nowcast for 2019:Q2 broadly unchanged...

Key Points:

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways.

What has changed in the past week is: The falling-apart of Trump's trade negotiating strategy with China will harm Americans and may disrupt value chains, but the effects are unlikely to be clearly visible in the data flow.

It is still the case that U.S. potential economic growth continues to be around 2%/year, that inflation is unthreatening, and tha trhe donomy is closing in but not yet at full employment.

Continue reading "May 10, 2019: Weekly Forecasting Update: Little Change" »


The Great Depression: An Intake from "Slouching Towards Utopia?: An Economic History of the Long Twentieth Century 1870-2016"

This is the current draft of chapter 10 of Slouching Towards Utopia?. I am, again, of several minds with respect to it. I think it says what really needs to be said. I am not sure it says it in the right length. And I am not sure that I have successfully assembled the puzzle pieces in the right way...

So tell me what you think of it:


The road to Wigan Pier 75 years on Books The Guardian

X. The Great Depression

https://www.icloud.com/pages/0mzIvbURq0n3I0Ct0e3aCZbEw

George Orwell (1937): The Road to Wigan Pier:

Presently the train hove in sight. With a wild yell a hundred men dashed down the slope to catch her as she rounded the bend. Even at the bend the train was making twenty miles an hour. The men hurled themselves upon it, caught hold of the rings at the rear of the trucks and hoisted themselves up by way of the bumpers, five or ten of them on each truck. The driver took no notice. He drove up to the top of the slag-heap, uncoupled the trucks, and ran the engine back to the pit, presently returning with a fresh string of trucks. There was the same wild rush of ragged figures as before. In the end only about fifty men had failed to get on to either train.

We walked up to the top of the slag-heap. The men were shovelling the dirt out of the trucks, while down below their wives and children were kneeling, swiftly scrabbling with their hands in the damp dirt and picking out lumps of coal the size of an egg or smaller. You would see a woman pounce on a tiny fragment of stuff, wipe it on her apron, scrutinize it to make sure it was coal, and pop it jealously into her sack.

 

10.1: Understanding the Business Cycle

10.1.1: Say’s Law

When market economies emerged, there was great worry that things would not necessarily fit together: Might not the farmers be unable to sell the crops they grew to the artisans because the artisans could not sell the products they made to the merchants who would be unable to make money carrying artisans products to the farmers because the farmers would not purchase anything? Back at the beginning of economics it was Jean-Baptiste Say who wrote that such an idea of a “general glut”—of economy-wide “overproduction” and consequent mass unemployment—was incoherent. Nobody, Say argued, would ever produce anything for sale unless they expected to use the money they earned in order to buy something else. Thus, “by a metaphysical necessity”, as subsequent-generation economist John Stuart Mill outlined Say’s argument in 1829, there can be no imbalance between the aggregate value of planned production-for-sale, the aggregate value of planned sales, and the aggregate value of planned purchases. This is “Say’s Law”.

Continue reading "The Great Depression: An Intake from "Slouching Towards Utopia?: An Economic History of the Long Twentieth Century 1870-2016"" »


May 3, 2019: Weekly Forecasting Update: Little Change

Today: U.S. Bureau of Labor Statistics: Employment Situation Summary: "Total nonfarm payroll employment increased by 263,000 in April, and the unemployment rate declined to 3.6 percent.... Notable job gains... in professional and business services, construction, health care, and social assistance..." Note that all of the decline in the unemployment rate is a shift of workers from "unemployed" to "out of the labor force", which now stands 800,000 lower than it did in December. The unemployment rate is broken as an indicator of the business-cycle state of the labor market.

Today: Federal Reserve Bank of New York: Staff Nowcast: "May 03, 2019: The New York Fed Staff Nowcast stands at 2.1% for 2019:Q..." In the past week, good news about employment and personal consumption largely offset by bad news about manufacturing.

 

Key Points:

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. Specifically, it is still the case that:

  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • Thus there are till no signs that the U.S. has gone beyond or is even at "full employment".
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • Printing money (and bonds) to increase the global supply of safe assets and using the proceeds to buy useful stuff continues to look like good business cycle-management policy.
  • The unemployment rate is broken as an indicator of the business-cycle store of the labor market.
  • The Trump-McConnell-Ryan tax cut:
    • To the extent that it was supposed to boost the American economy by boosting the supply side through increased investment in America, has been a complete failure.
    • To the extent that it was supposed to make America more unequal, has succeeded.
    • Delivered a substantial short-erm demand-side fiscal stimulus to growth that has now ebbed.
      • (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017, pushing the level of Gross National Income up by 2.1% from this demand-side stimulus.)

  • A change from 3 months ago: The Federal Reserve's abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.
  • A change from 1 month ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast—but the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast.
  • A change from 1 week ago: The disjunction between household- and establishment-survey views of the labor market continues to grow: since December seasonally-adjusted establishment payrolls have grown by an average of 210000 a month, while the CPS reports that the seasonally-adjusted number of workers with jobs has fallen by 80000 a month.

Table A 1 Employment status of the civilian population by sex and age

All Employees Total Nonfarm Payrolls FRED St Louis Fed

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April 26, 2019: Weekly Forecasting Update

Today: U.S. Bureau of Economic Analysis: Gross Domestic Product Release: "Real gross domestic product (GDP) increased 3.2 percent in the first quarter of 2019, according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent...

 

Key Points:

The right response to almost all economic data releases is: Nothing has changed—your view of the economic forecast today is different from what it was last week, last month, or three months ago in only minor ways. Specifically, it is still the case that:

  • The Trump-McConnell-Ryan tax cut, to the extent that it was supposed to boost the American economy by boosting the supply side through increased investment in America, has been a complete failure.
  • The Trump-McConnell-Ryan tax cut, to the extent that it was supposed to make America more unequal, has succeeded.
  • The Trump-McConnell-Ryan tax cut delivered a substantial short-erm demand-side fiscal stimulus to growth that has now ebbed.
    • (A 3.2%/year rate of growth of final sales to domestic purchasers over the seven quarters starting in January 2017, pushing the level of Gross National Income up by 2.1% from this demand-side stimulus.)
  • U.S. potential economic growth continues to be around 2%/year.
  • There are still no signs the U.S. has entered that phase of the recovery in which inflation is accelerating.
  • There are still no signs of interest rate normalization: secular stagnation continues to reign.
  • There are still no signs the the U.S. is at "overfull employment" in any meaningful sense.

  • A change from 3 months ago: The Federal Reserve is now supporting the recovery rather than focusing on policies that are likely to keep PCE chain inflation at 2%/year or lower.
  • A change from 1 month ago: The Federal Reserve's abandonment of its focus on policies that are likely to keep PCE chain inflation at 2%/year or lower does not mean that it is preparing to do anything to avoid or moderate the next recession.
  • A change from 1 week ago: The U.S. grew at 3.2%/year in the first quarter of 2019—1.6%-points higher than had been nowcast.
    • But the growth number you want to put in your head in assessing the strength of the economy is the 1.6%/year number that had been nowcast.
    • The U.S. grew faster than had been nowcast by borrowing 1%-point of growth from the future via what is likely to turn out to be noise in net exports—thus a borrowing highly likely to be reversed.
    • The U.S. grew faster than had been nowcast by investing heavily in inventories, which contributed 0.6%-point of growth.
      • This inventory investment may or may not be reversed: it may be a reaction to the economic and political-economic uncertainty created by Trump-as-chaos-monkey, and a resulting unwillingness of companies to run their value chains as lean as they used to.
      • If so, then while this inventory investment raises measured growth, it actually reflects a subtraction from American economic welfare.

Https www bea gov system files 2019 04 gdp1q19 adv pdf

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Dotting i's and Crossing t's with Respect to Olivier Blanchard's "Secular Stagnation" Fiscal-Policy-in-an-Era-of-Low-Interest-Rates AEA Presidential Address

Il Quarto Stato

Consider the semi-canonical Diamond (1965) overlapping-generations model, with a wedge between the safe government-bond interest and the risky profit rate driven by risk aversion. Blanchard (2018) shows that the effects of increased debt have two effects that:

  • raise (lower) reprentative-agent utility,
    • evaluated after the resolution of uncertainties when the agent is young:
  • a direct-transfer effect that holds when the safe government-bond rate is lower (higher) than the economy's growth rate, and
  • a factor-price effect that holds when the risky average profit rate is lower (higher) than the economy's growth rate.

Robert Waldmann has convinced me that this second factor-price effect can be neutralized by a balanced-budget profit tax-funded wage subsidy.

Hence in the semi-canonical Diamond (1965) overlapping-generations model the economy is dynamically-inefficient—can be made better off by reducing its productive capital stock and introducing sustainable pay-as-you-go transfer schemes—whenever the safe government-bond rate is less than the economy's growth rate, no matter what the level of the expected profit rate:

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On "On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation:

I have been thinking about this by Łukasz Rachel and Lawrence H. Summers this week: On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation.

It says an awful lot of true things. The average "neutral" 10-year safe real interest rate consistent with full employment in the Global North does look like it has fallen from 4% per year in the 1990s to -0.5% per year today. That does pose a huge problem for central banks that seek to use monetary policy s as the principal depression-fighting tool: a small negative shock that reduces this rate by only a little bit more would drive an economy into territory where the central bank cannot do its job. During this period of decline, increased government debts have put perhaps 2%-points of upward pressure on the neutral rate: the actual decline has been 6.5%-points.

But I find myself uncertain on what conclusions to draw from their paper. They focus on only one of what I think are three key interest-profit-discount rates in play here:

  1. There is the (short or long) real safe interest rate on the securities of governments that issue reserve currencies and thus possess exorbitant privilege. This is down to today's -0.5% from 3% 20 years ago and 4.5% 40 years ago.

  2. There is the long-term real risky discount rate at which the cash flows accruing to owners of capital are discounted in the market—the expected return on financial investments in stocks. This is at to 5% today, up from 4% 20 years ago, down from 12% 40 years ago, and down from 6% 50 years ago.

  3. There is the societal profit rate earned by new investments in physical or intellectual capital. This is ??? to today's ???, from ??? 20 years ago and from ??? 40 years ago.

This third social profit rate is in some sense the fundamental opportunity-benefit-of-investment ground out by the real economy of production and distribution on top of which the financial superstructure is built.

The second is the quotient of profit flows over the market value stock, and takes the societal profit rate returns to society's capital and adds to them the amount of monopoly rents captured by enterprises, subtracts from them labor rents and spillover benefits, both organizational and technological, that are not captured by those who undertake the actions that generate those spillovers, and then values those cash flows at the long-term risky discount rate.

The first of safe interest rate is the second minus the liquidity and safety terms that lower the required rate of return on safe assets.

Https www brookings edu wp content uploads 2019 03 On Falling Neutral Real Rates Fiscal Policy and the Risk of Secular Stagnation pdf

Łukasz Rachel and Lawrence H. Summers focus on rate (1): the (short or long) real interest rate on the safe securities of governments that issue reserve currencies and thus possess exorbitant privilege. The problem is that the wedge between this (1) safe interest rate and the risky discount rate (2)—the rate at which risky cash flows are discounted—is worse than poorly understood by economists: it is not understood at all.

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Debt-Derangement Syndrome: No Longer Fresh at Project Syndicate—Long Version

Debt Derangement Syndrome by J Bradford DeLong Project Syndicate

Debt-Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics.


For the past decade the public sphere of the Global North has been in a fit of high madness with respect to its excessive fear of government debts and deficits. But this affliction may be breaking. In the past two weeks I have noted two straws in the wind.

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The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": Weekend Reading

Weekend Reading: The Federal Reserve in 2011 Debates Christina Romer's Ideas About the Need for "Regime Change": https://www.federalreserve.gov/monetarypolicy/files/FOMC20111102meeting.pdf

I believe that in a generation or two the histories of the Bernanke Fed are overwhelmingly likely to concentrate on two puzzles:

  1. The failure to seek an environment in which inflation was high enough to allow a Federal Funds rate of 5% or so at the [peak of the business cycle, so that Bernanke's successors would have room to respond to a downturn in aggregate demand.

  2. The failure to use the credibility of its commitment to low inflation long and painfully built up by Volcker and Greenspan to support policies to rapidly return prime-age employment to its normal share of the population.

In late 2011, in a context in which prime-age employment was severely depressed and not going anywhere, the failure to see these two as policy priorities that called for, well, "regime change" is likely to appear largely inexplicable, and to be judged harshly:

Employment Rate Aged 25 54 All Persons for the United States FRED St Louis Fed

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Still Haunted by the Shadow of the Greater Recession...


key: https://www.icloud.com/keynote/0UtILjGfChXSFFUBSCJ3PTf1g
pages: https://www.icloud.com/pages/0eLbd_zXINsC-YRNSL1zQxIdA
html: http://www.bradford-delong.com/2019/02/haunted-by-the-shadow-of-the-greater-recession.html

#highlighted #presentations #greatrecession #macro #economicgrowth #economichistory #economics #finance #monetaryeconomicss

Note to Self: Thinking About Blanchard's Presidential Address...: Blanchard's calculations of the effect of debt on welfare in his AEA Presidential Address all take the form of evaluating the welfare of a generation of economic agents young in some period t after the resolution of all period-t stochastic elements. That is a fine thing to do. That is not quite the same thing as the effect on expected well-being behind the veil of ignorance, from the nunc stans, taken without any knowledge of the resolution of period-t or indeed of any earlier stochastic elements. But I have not yet been able to wrap my head around what the differences are, or how they matter for conclusions. My notes...

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Debt Derangement Syndrome: Fresh at Project Syndicate

Debt Derangement Syndrome by J Bradford DeLong Project Syndicate

Project Syndicate: Debt Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics: For the past decade, politics in the Global North has been in a state of high madness owing to excessive fear of government debts and deficits. But two recent straws in the wind suggest that this may at long last be changing.... Ken Rogoff.... Brendan Greeley... reported... “a panicked email” from the Committee for a Responsible Federal Budget (CRFB)... Olivier Blanchard.... What Rogoff and Blanchard are saying today is standard policy economics. In fact, I always found it hard to believe–and still do–that anybody can take exception to it. Whenever the private sector stops spending enough to keep unemployment low and jobs easy to find, the public sector needs to fill the gap in aggregate demand... Read MOAR at Project Syndicate

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Note to Self: Trying and failing to gain conceptual clarity about and work my way through the algebra involved in a minor point in Blanchard's excellent and stimulating presidential address: Public Debt and Low Interest Rates: https://nbviewer.jupyter.org/github/braddelong/WS2019/blob/master/Thinking_About_Blanchard%27s_Presidential_Address....ipynb?flushcache=true...

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Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: when prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way: Felix Martin: Will there be another crash in 2019?: "One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive...

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By Popular Demand: What Is “Modern Monetary Theory”?

Brad DeLong s Grasping Reality

What Is “Modern Monetary Theory”?

Ever since the Great Depression it has been settled doctrine in the nations of the North Atlantic that the government has a responsibility to keep the macroeconomy in balance: The circular flow of spending, production, and incomes should be high enough to keep there from being unnecessary unemployment while also being low enough so that prices and inflation are not surprisingly and distressingly high.

To accomplish this, governments use fiscal policy—the purchase of goods and services, the imposition of taxes, and the provision of transfer payments—and monetary policy—the provision by the central bank to the system of those liquid assets called “money” and its consequent nudging up and down of interest rates and asset prices—to attempt to keep the circular flow of spending, etc., in balance with the economy‘s sustainable productive potential at the expected rate of inflation .

Modern Monetary Theory says (1) that that is all there is to worry about, and (2) that fiscal policy should play the principal role in this balancing process.

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Costs and Benefits of International Capital Mobility: Reply to Bhagwati: Hoisted from 20 Years Ago

Needless to say, time has left me a lot wiser: We need to design economies so that they can operate without disaster even when deregulatory clowns like those of the George W. Bush or the Donald J. Trump administrations are in control of the levers of policy at key moments. How to do that is not so clear. What is clear is that only a fool today would think that our political economy would support a clever technocracy so that we might have our cake and eat it too. Indeed, the most likely scenario seems to be that we will be unable to eat our cake, and then the kleptocrats will steal it out from under our noses so that we will not have it either. In short: I should have listened harder to Jagdish 20 years ago...

2000s_financial_deregulation_republican_congressmen_-_Google_Search.png


Hoisted from the Archives: Reply to Bhagwati: "I open my May/June [1998] issue of Foreign Affairs to discover myself pilloried in an article by Jagdish Bhagwati between Paul Krugman and Roger C. Altman (excellent company to be in, by the way: much better than I am used to) as a banner-waving proponent of international capital mobility, guilty of "assum[ing] that free capital mobility is enormously beneficial while simultaneously failing to evaluate its crisis-prone downside."

I rub my eyes in surprise. I had not thought of myself as a banner-waving proponent of international capital mobility.

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What Will Cause the Next US Recession?: Live at Project Syndicate

The Digital Research Library of Illinois History Journal™ The Panic of 1893 in Illinois and Chicago

Live at Project Syndicate: U.S. Recession No Longer Improbable: The next recession most likely will not be due to a sudden shift by the Fed from a growth-nurturing to an inflation-fighting policy. Given that visible inflationary pressures probably will not build up by much over the next half-decade, it is more likely that something else will trigger the next downturn.... The culprit will probably be a sudden, sharp “flight to safety” following the revelation of a fundamental weakness in financial markets. That... is the pattern that has been generating downturns since at least 1825, when England’s canal-stock boom collapsed.

Needless to say, the particular nature and form of the next financial shock will be unanticipated. Investors, speculators, and financial institutions are generally hedged against the foreseeable shocks.... The death blow to the global economy in 2008-2009 came not from global imbalances or from the collapse of the mid-2000s housing bubble, but from the concentration of ownership of mortgage-backed securities... Read MOAR at Project Syndicat

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Note to Self: I need to resolve this. I am profoundly dissatisfied with teaching the origin of business cycles and "general gluts" via John Stuart Mill's 1829 "excess demand for money is excess supply of everything else", and in an economy of sticky prices, wages, and debts produces the recessions and depressions that we all know and love so well. It is a quick way to get into the subject. It is a convincing way. But it is not a correct way. There are, however, two problems:

  1. What is the "correct" way, exactly?
  2. How can we teach something closer to the "correct" way than Mill's "excess demand for money is excess supply of everything else" without losing our audience?

In the meanwhile, think upon:

Daniel Kuehn: Whack-A-Mole General Gluts and Money: The interest rate is really one price functioning in two markets.... You can arbitrage your way out of whack-a-mole gluts. You cannot arbitrage your way out of an overdetermined system...

Nick Rowe: Walras' Law vs Monetary Disequilibrium: "Walras' Law says that a general glut (excess supply) of newly-produced goods (and services) has to be matched by an excess demand for... money... bonds; land; old masters; used furniture; unobtainium; whatever.... Monetary Disequilibrium Theory says that a general glut of newly-produced goods can only be matched by an excess demand for money. There's only one mole to whack. Money is special. A general glut is always and everywhere a monetary phenomenon...

Paul Krugman: There's Something About Macro: "Money as an ordinary good begs many questions: surely money plays a special sort of role.... [Plus] there is something not quite right about pretending that prices and interest rates are determined by a static equilibrium problem.... Finally, sticky prices play a crucial role... [but] the assumption of at least temporarily rigid nominal prices is one of those things that works beautifully in practice but very badly in theory...

And please tell me what to do instead of Mill (1829)!

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No. The Fed Was Wrong to Raise Interest Rates

Measuring the Natural Rate of Interest FEDERAL RESERVE BANK of NEW YORK

I see this argument a bunch of places. Here it is from the sharp Felix Salmon. But I think it is wrong: Felix Salmon: Why the Fed Was Right to Hike: "When interest rates stay very low for an extended period of time, that has the effect of creating asset bubbles like the credit and housing boom of the mid-2000s.... If your stocks, bonds and real estate holdings were worth the same today, relative to GDP, that they were worth in 1995, they would have to crash in value by 33%, or $43 trillion. That's more than enough to trigger another financial crisis...

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The Great American Tax Heist Turns One: No Longer Live at Project Syndicate

Let me hammer this point again: the failure of any of Barro, Bhagwati, Boskin, Calomiris, Cogan, Holtz-Eakin, Hubbard, Lazear, Lindsey, Mankiw, Rosen, Shultz, Taylor, and a hundred-odd others to write about—or even express curiosity about why—their confident predictions of a year ago that the Trump-McConnell-Ryan corporate tax cut would generate a huge investment boom—that silence speaks very loudly about the genre in which they viewed their forecasts back at the time:

Clowns (ICP)

A year ago there were a substantial number of economists who were assuring us that the Trump-McConnell-Ryan corporate tax cut was not just a giveaway to rich stockholders but would provide a sustained and substantial boost to investment in America that would boost productivity by:

And Kevin Hassett and Greg Mankiw told us that these productivity gains would primarily boost wages not profits—because the relevant model was not one in which the tax cut raised after tax profit and interest rates but rather one in which foreigners would flood America with savings, lending to and investing in this country on a large scale to finance the bulk of this surge and investment.

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The Fed ought to pursue a symmetric 4%/year inflation target. It cannot even successfully communicate and pursue a 2%/year symmetric inflation target. And Tim Duy is an unhappy camper: Tim Duy: Fed Hikes Rates, Market Tumbles: "The implication here is that there is substantial downside risk to the economy. So much that the Fed is reducing its forecasts across the board. So much so that the Fed anticipates they will fall short of their inflation target yet again. And yet they continue to hike rates and signal more rate hikes to come. It is an unnecessarily and explicit hawkish message that is an artifact of a communications strategy that only made sense when you could reasonably promise zero rates for an extended period...

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If the Fed had had a 4%/year inflation target for the past decade, odds are that right now the Federal Reserve would be in a situation without great worries. But it hasn't, and it isn't: Mohamed A. El-Erian: Fed Rate Hike: Powell Tries to Balance Growth and Volatility: "Fed’s No-Win.... Powell increasingly must make the best of factors mostly outside his control, increasing fears of a policy mistake...

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The Democrats’ Deficit Line in the Sand: Hoisted from the Archives

Federal Surplus or Deficit as Percent of Gross Domestic Product FRED St Louis Fed

From ten years ago: J. Bradford DeLong: The Democrats’ Line in the Sand: "A dilemma for Democratic deficit-hawk economists trying to determine what good economic policies would be should Barack Obama become president.... A chain is only as strong as its weakest link, and it seems pointless to work to strengthen the Democratic links of the chain of fiscal responsibility when the Republican links are not just weak but absent...

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