Great work! I like the balanced discussion: everyone who dunks on central bankers and forecasters for having gotten it so wrong just proves how little he knows about the complexity of it all.
Worse case would be that the Fed tightening spills over internationally with a stronger USD that kills supply faster than domestic demand. It’d keep inflation high and continued tightening.
One thing I find amusing is that there is a model of the world that is compatible with both "team transitory" and austerity. I remember reading this 2020 interview of a Mexican government economist who was trying to justify the (very controversial) lack of a countercyclical spending program in this country. He basically said that the COVID recession wasn't caused by the usual short-term shortfall of aggregate demand and so boosting spending wasn't really necessary because the economy would get back on track once the supply issues (forced unemployment, supply chain kinks, whatever) solved themselves.
If one truly followed his line of reasoning, the obvious conclusion was that not only was spending unnecessary, it would also necessarily be inflationary, although this was left unsaid (IIRC, I read that a long time ago and I can't find it, unfortunately). This line of reasoning seems broadly consistent with your observation that the US labour market had a fantastic recovery, although I guess some of that recovery is due to the several large waves of government spending. On the other hand, Mexican unemployment is at 3.5% without the government having spent a lot, so it's certainly plausible (maybe even obvious) that COVID unemployment was extremely not-sticky. Then again US policymakers had their 2014-2018 experience guiding their thinking on job market slack and made reasonable assumptions off of that. Economics is hard!
A while back I looked for papers on the forecasting skill of economists. The results didn’t look great. If everything was ticking along fine and GDP growth was 1-2% then the economists' predictions were pretty good. Once it started deviating the forecasts were terrible.
People, governments want predictions of the near future, but maybe we don’t have any that can be distinguished from guesswork and feelings?
Well written, thanks. I guess the key question now is given central bank models have proven themselves inadequate for the task of guiding monetary policy, are they going to consider changing them?
“But in a similar vein to how the Federal Reserve ignored some of the signs of of elevated inflation last year they are now ignoring some of the signs of elevated recession risks this year.” Really? I don’t think they are ignoring it, its pretty clear ONLY a recession will liquidate the current inflation surge, and Powell & co. understand this but cannot for obvious political reasons say it.
Great work! I like the balanced discussion: everyone who dunks on central bankers and forecasters for having gotten it so wrong just proves how little he knows about the complexity of it all.
Worse case would be that the Fed tightening spills over internationally with a stronger USD that kills supply faster than domestic demand. It’d keep inflation high and continued tightening.
Yeah nice work Joey. Great to see you working out where you may have got it wrong. Not a lot of others do!
Good post as always, Joey.
One thing I find amusing is that there is a model of the world that is compatible with both "team transitory" and austerity. I remember reading this 2020 interview of a Mexican government economist who was trying to justify the (very controversial) lack of a countercyclical spending program in this country. He basically said that the COVID recession wasn't caused by the usual short-term shortfall of aggregate demand and so boosting spending wasn't really necessary because the economy would get back on track once the supply issues (forced unemployment, supply chain kinks, whatever) solved themselves.
If one truly followed his line of reasoning, the obvious conclusion was that not only was spending unnecessary, it would also necessarily be inflationary, although this was left unsaid (IIRC, I read that a long time ago and I can't find it, unfortunately). This line of reasoning seems broadly consistent with your observation that the US labour market had a fantastic recovery, although I guess some of that recovery is due to the several large waves of government spending. On the other hand, Mexican unemployment is at 3.5% without the government having spent a lot, so it's certainly plausible (maybe even obvious) that COVID unemployment was extremely not-sticky. Then again US policymakers had their 2014-2018 experience guiding their thinking on job market slack and made reasonable assumptions off of that. Economics is hard!
A while back I looked for papers on the forecasting skill of economists. The results didn’t look great. If everything was ticking along fine and GDP growth was 1-2% then the economists' predictions were pretty good. Once it started deviating the forecasts were terrible.
People, governments want predictions of the near future, but maybe we don’t have any that can be distinguished from guesswork and feelings?
Exactly right! Global pandemic shutdown & fiscal/monetary stimulus "unprecedented"! Not a "normal" business cycle!!
Inflation coming down already
Well written, thanks. I guess the key question now is given central bank models have proven themselves inadequate for the task of guiding monetary policy, are they going to consider changing them?
Hi Joey,
Can I ask where you got the "Lowest possible estimate" for "Prime-age Employment-population" ratio of ~82%?
Is it literally just because that's where it peaked? (Looking at FRED it hit 81.9% at the tech bubble peak)
Trying to figure out if there's some other calculation going on.
Thanks,
Jason
“But in a similar vein to how the Federal Reserve ignored some of the signs of of elevated inflation last year they are now ignoring some of the signs of elevated recession risks this year.” Really? I don’t think they are ignoring it, its pretty clear ONLY a recession will liquidate the current inflation surge, and Powell & co. understand this but cannot for obvious political reasons say it.
Again good work and a candid attempt to explain the mystery of inflation this time round.