11 Comments

"But if there is one lesson I have learned in 40+ years of trying to understand the business cycle, it is that there is no empirical regularity in the macroeconomy, no matter how well grounded in historical data, in statistical estimation, or in theoretical concepts, that can be trusted not to crumble beneath our feet in a remarkably short time."

DeLong's Law. Or is it named already?

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"But the Federal Reserve does not dare start to end this post-soft landing touchdown period of reverse thrust until it sees signs of reduced forward employment groundspeed."

Sorry, but this would be malfeasance. Congress did not empower the Fed to give a fig about how rapidly employment is increasing as long as it is at a maximum.

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Bingo! for the last paragraph.

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Theory: Rate hikes in the US weaken the economy by raising borrowing costs of businesses, causing weak, leveraged businesses to reduce investment and employment. But this cycle the weak, leveraged businesses tapped private credit, which has grown by ~$900 billion since 2020. Bank lending rates and even repo rates on junk bonds have therefore been circumvented. Private credit is now bigger than junk bonds. Someday it blows up and we find the hidden linkages, but for now - party on.

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Still good enough reason to reduce the deficit. It shifts resources from investment to consumption and reduces growth.

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Yes—as long as you do not reduce the deficit by cutting government investment, or government spending that enables private investment...

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I always say reduce the deficit by raising taxes. Of course there are expenditure and tax expenditures that should be cut farm/ethanol subsidies, EV subsidies, Jones Act enforcement, but that's peanuts and will never get us 5-7% gdp. We could have done better with IRA than subsidizing INVESTMENT IN reducing CO2 by just subsiding the zero CO2 energy produced or stored or transmitted. [Understanding the Tinbergen Principle and the Lerner Theorem , ought to be Constitutional requirement for holding public office. :)]

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"far higher by 2%-points or so above what anyone five years ago, back before the plague, would have guessed at the value of the 'neutral' interest rate that, in the words of John Maynard Keynes, “bring[s] about… [proper] adjustment between the propensity to consume and the inducement to invest…'"

Maybe that just means that people are wasting their time guessing what the r* (vector of monetary policy instrument settings) that is consistent with full employment at the real income maximizing rate of inflation given the degree of "Brownian movement of shocks and the average downward stickiness of nominal prices. Out of equilibrium, the cat is in a dead/alive superposition. Suffice it to "know" that r (the actual vector) is too restrictive even if we do not , cannot know what r* is.

[https://thomaslhutcheson.substack.com/p/arrrrr]

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Did you see that the labor force growth has roughly touched the trend rate again over the past two months. It was in the 1.5%-2.0% range for a while. The transitional dynamic due to the increase in the labor supply might be coming to an end. But then, your last paragraph still applies.

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I lean towards the neutral interest rate being higher now than it was due to the change in fiscal approach. The Biden investment regime is very different from the prior decade+ of fiscal consolidation

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I agree, but I still do not think that is a good basis for deciding what the vector of monetary policy instruments in month t0 should be (unless you think that r=r* and has since December).

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