Got a questions on the economy or economic policy? Please put them in the comment section or email me. I will reply here and write a follow-up post tomorrow.
I am not a fan, but it one of the ways that the Fed could push down on longer-run interest rates which are most relevant for household and business borrowing decisions.
Inbox Reader Question: In two years time (to strip out pandemic effects) would you support deliberately running the economy at 3% inflation to try and figure out the NAIRU?
If the Fed keeps its framework then no. If average inflation is persistently, on average, running above its 2% target (and unemployment is not high) then the Fed should reduce its support of the economy. It reduces the credibility of the Fed to say on thing and do another. I would leave NAIRU out of it.
Inbox Reader Question: I was wondering if you have done any work or have any knowledge about the federal definition of the poverty level. It’s a key metric used by many laws to determine eligibility for so many social programs. Does the poverty level have any role in Fed decision making? Does the definition of poverty in the US need to be updated? Do you have any opinions about the defined federal poverty level?
What's the best way to measure poverty is a long running debate. To the point that the U.S. Census which issues the 'official' measure also have a series of supplemental poverty measures https://www.census.gov/topics/income-poverty/supplemental-poverty-measure.html. It is important to develop measures that are up to date with the realities of life now and now not generations ago when the official measure was created. That said, whatever the measure we need to be consistent over time. Policies that fight poverty need to have a clear benchmark for success. The Federal Reserve has a full employment mandate. The rate of poverty and the number of jobs are related but not the same. So, no, I don't think its a measure that the Fed should bring into its decision-making specifically.
Inbox Reader Question: I often see you write about the unfairness in economics where “old white men” make all the decisions and denigrate people unlike themselves. But, surely this is only an issue in North America and Western Europe? The world is a lot bigger than those two regions. Are there no economists in large non-white countries like China, Japan, India, Indonesia, Nigeria, Egypt, Brazil, etc.? Surely there are.
Yes, of course. My concern is not about race. It's about powerful, dominant groups that suppress the voices of others. Across the globe, economics is dominated by men. The large influence of economists located in the United States (any gender identity) is also problem, since it narrows the scope of economic issues and voices.
Inbox Reader Question: What do you think of MMT? 1b. Haven’t their policies/prescriptions already been tried during the 1917 to 1991 experiment with state-controlled economies in the USSR and its satellites (Govt created all money, Govt decided how money gets allocated, etc)?
Inbox Reader Question: Where are the supply bottle necks and what is preventing producers from investing in production gains?
One thing I’m trying to wrap my head around is both PPI and CPI are up. (If PPI comes down then does that mean wider margins and some savings can be passed onto consumer?)
Policy is typically demand side with exception of regulations. Ending policy (especially fiscal) might lead to a demand softening, which also proves producers that the right move was to not increase capacity.
Inbox Reader Question: What are your thoughts on the component breakdown behind what is driving inflation?
There’s both weighting contribution as well as which goods/services have been going up the most. In the past it used to be education and healthcare costs that increase more than the average. While internet goods have been less. Leading to an “inflation in things we need but not in things we want”. (Ie this is up to 2017, need a 2022 update). While housing is arguably a high weight and probably drives a large part of index. With both low inventory and low rates, home prices have been steadily increasing.
The first chart in my recent post on inflation https://stayathomemacro.substack.com/p/inflation-is-cooling-some-but-not shows key drivers of the increase. It is very unusual to have goods prices pushing up inflation and it's also clear that Covid disruptions are a large part of that spike. I do not see much of a role for the changing composition of spending during Covid -- not PCE price index does adjust the shares of spending -- it's really just that prices are growing faster than usual, particularly for some Covid disrupted items.
Inbox Reader Question: As I understand, when the Fed wants to stimulate the economy, it buys bonds (OMO) to put money in banks, increasing loanable funds (LF) and so reducing interest rates. It sells bonds to raise rates.
On the fiscal policy end, I have suggested an NIT program, basically similar to UBI but run as a tax credit with a monthly distribution; and, on the monetary policy end, I have suggested that in a recession, the Fed could advise the Treasury to issue new currency (not debt) into the NIT balance sheet for immediate distribution in the next month's checks. This would go into LF because it goes into bank accounts—personal when consumers receive the money, and then corporate when purchases are made—just the same as buying bonds. To counter unwanted rate increases, the Fed could sell bonds; balance is reached long-term by reducing bond buying in non-recession times, since some money was issued as direct payments.
Is this a sane approach to monetary policy? Would this be a useful tool for the Fed to have, or is it a Very Bad Idea™? There are probably implications for the Fed issuing currency and then selling bonds, rather than just buying bonds, but if they could buy bonds now then why can't they sell bonds now and buy them back later? Plus if they need to raise LF anyway, then any bond sales would be smaller than the amount distributed to consumers, right?
There are many things that Congress 'could' direct the Fed to do. I would shift the entire focus of that question to legislation and think of the Fed simply as one of the institutions that could carry it out. If Congress wants to send money out then it could have the Treasury sell securities or simply increase the deficit and then send the proceeds out to families directly (as it did with the stimulus checks). Fed Accounts are a neat idea but they're not necessary. I would focus on what do you want the policy to accomplish and then figure out how to best administer it.
Inbox Reader Question: What’s your best guess for why unemployment remains over 5%? What can the govt do to get that number lower without triggering inflation issues?
The unemployment rate was well below 4% for over a year before Covid. I firmly believe that we can get back to that level and then bring even more people into the labor market. The higher than usual inflation and unemployment now are not permanent problems, they are due to an incomplete and uneven recovery. Congress and the Fed has more work to do. And we must get the pandemic under control. That's the path back to normalcy.
Inbox Reader Question: 2. I saw you read the Noah Smith + Larry Summers interview, and you were quite critical of it. What in your opinion were the biggest flaws in Summers’ thinking, especially in regards to inflation?
But seriously, I am trying to keep my Substack a 'Larry-free' zone. I want to focus on the arguments that I think are good ones. When he has one, I will be sure to praise it.
Inbox Reader Question: I’m still really on the fence about how seriously to take inflation right now. I hear a lot of different opinions from people I respect on it. At what point do you think we should actually start to make policy changes to slow down inflation? Is there a particular threshold where you’d agree it’s time to slow things down a bit to prevent inflation from getting out of control? How far away are we from that threshold?
The Fed has a dual mandate of stable prices and maximum employment. The Fed must be vigilant on both parts of its job. Unfortunately the framework for decades of targeting 2% inflation, led to an undershoot on inflation and on jobs. After years of introspection, the Fed developed an average inflation target and committed to broad based and inclusive employment. Yes, inflation is not averaging about 2% during the crisis, but we are millions of job short of pre-Covid. Now is not the time for the Fed to pull back on its support of the economy, and especially not time to tap on the brakes. That said, out of control inflation is very bad for people and a well functioning economy. My advice is to look at the underlying drivers and keep an eye on the monthly changes. We are getting the pandemic under control, though the slow, bumpy progress is extremely painful, so the supply chain disruptions that are pushing up prices will abate (and even reverse). In fact, we have seen month over month inflation step down in recent months. We need to see more of that. The Fed must and will keep a close eye on inflation and on jobs. That's good.
I found it interesting that the Canadian conservatives would create a version of the Sahm Rule that would trigger at the provincial level, which would be like our states. It seems more fiscally efficient, especially if the economic fallout is hyper-localized.
All of this makes me wonder how such a discussion would go over in the U.S. if states had the same stabilizer but could “opt out.” That is what we essentially saw this year with cuts to extended unemployment benefits in some states. To prevent political or partisan interventions, would a more effective approach to automatic stabilizers preclude provincial opt-outs?
The question of national or province (or state) indicators like the Sahm rule that automatically start extra unemployment benefits (or other support programs) depends on the policy goal: fighting a national recession or also a local downturn. In a national recession, the unemployment rate increases broadly. Regions concentrated in industries like oil and gas could experience a localized downturn. For that you would want to have a province indicator. I have not looked at the Canadian province data but I created Sahm rules for all 50 states and DC for a Hill office. All the state-level Sahm rules trigger on with recessions, and some states like Texas trigger on after oil prices plunged in 2014-15. Here's a post that I wrote about the Canadian proposal:. https://stayathomemacro.substack.com/p/o-canada
Before covid there was a consensus around the world about secular stagnation and the lack of aggregate demand against supply in the world economy broadly for several reasosn(inequality,deleveraging,savings among boomers), interest rates have been at the zero lower bound basically since 2008 to account for this. After the great depression there was a broadly similar period of stagnation, characterised by deflation and an inadequate fiscal response. The thing that got the US and other countries out of this period was WW2 and the enormous govt spending that it caused. After WW2 the US grew and prospered arguably until stagflation hit in the 1970s. My question is do you think the fiscal response from covid will do to secular stagnation what WW2 did to the Great depression? (Btw, im here after I heard u talk about the Sahm rule on the david mcwilliams podcast)
I disagree that secular stagnation is the cause of inequality. Fiscal policy choices in the United States, such as the erosion of unions, safety net and minimum wage, were important contributors too. We have structural problems in the economy but I think just looking at aggregate demand is a cop out.
I wound up responding to this upside down/backwards.
"Before covid there was a consensus around the world about secular stagnation and the lack of aggregate demand against supply in the world economy broadly for several reasosn(inequality,deleveraging,savings among boomers),"
The big reason driver given for secular stagnation is falling population (in Japan)/aging population due to low birth rates. Essentially an aging/shrinking population results in reduced consumption and investment, and increased saving/stuffing money under the mattress (which then does nothing and may as well not exist in terms of the circular flow). Inequality has some of the same effects (how many yachts can one human 'consume'?), deleveraging usually results in no longer needing to deleverage sooner or later (unless you are trapped in some kind of super-contraction), and savings *should* wind up being loaned out/spent by somebody somewhere.
Everything comes back to actual or effectively falling population. Since world population is increasing the only way to stop population increase in a given country is to halt all immigration (e.g. Japan). Even with Covid-10 population is still rising, not falling. So the main well-understood driver for secular stagnation is not a problem over the long run unless your country does a lot of dumb things.
"After the great depression there was a broadly similar period of stagnation, characterised by deflation and an inadequate fiscal response."
After the US stopped contracting in 30's when the US went off the gold standard, growth rebounded. The fiscal response was inadequate in terms of completely restoring the economy immediately to prior levels of employment, but the death of the gold standard and the fiscal response after 1932-33 meant that there was lots of inflation (which eventually repaired the deleveraging and interest rate problems). Fiscal policy was expansionary (minus 1937) so the overall economy grew over the entire time frame. Similar things happened in Europe (even, or maybe especially, in Nazi Germany), so when WWII arrived, the economy was set to kick into high gear.
"My question is do you think the fiscal response from covid will do to secular stagnation what WW2 did to the Great depression?"
The answer depends on why you think the secular stagnation is occurring in the first place. Lots of reasons have been given (in the US and Europe) for slow economic growth over the last decade: feminism, birth control, abortion, laziness, weeniness, narcissism, excessive playing of video games by teenaged boys, the internet in general, etcetera.
In the last decade the US population (and the Irish population!) have grown... so falling population is not the problem. Inequality and an aging population are functionally equivalent - old people are better financially after a lifetime of working. (Also, older people aren't necessarily joyless compulsive savers - spending their children's inheritance is a thing - if they even have children.)
If we discard all those reasons (because those are dumb reasons), all we have left is fiscal and monetary policy. During the last decade the US has dabbled in austerity and run a wide-open monetary policy. Europe has been committed to contractionary fiscal policy (austerity) and a stern monetary policy.
The Covid crisis delivered a serious hit to the economies of developed countries. However, US monetary and fiscal policy was expansionary, while European policy was neutral. The US is growing, European countries are flat or contractionary.
My answer then would be that secular stagnation will stick around if fiscal and monetary authorities revert to contractionary policies, and not if they don't.
I think Claudia's answer will fall along similar lines.
I will need to come back later to these questions / comments. It is very useful to set current policy debates in the broader context of time; however, a short Q&A here won't do justice to it.
Wow, tough one. We have spent so much time debating inflation this year that it feels like no stone left unturned. I will write this one up in my follow up post tomorrow. One topic is how national aggregates mask what's going on for most people. The Consumer Price Index tells us how the cost of the 'U.S. grocery cart' us increasing, and that tells us more about rich people's inflation, who spend a lot, than the rest of us. (I have a good chart to show this.)
How much deficit sending can a government realistically maintain? I am from Canada where we are in the midst of an election. The Liberal government is proposing running a budget deficit of 363 billion, or 17 per cent of gross domestic product, in the fiscal year that ended March 31. It's estimated that by the time it's all said and done, the Liberal government will have accumulated more debt than the 22 prime ministers that preceded him combined. Although I know the general rhetoric is that large deficits are bad and expensive to service (per the conservative party at least), I'm wondering how much of that is actually true.
Quantitative easing, that is the Fed purchases of U.S. Treasuries and Mortgage Backed Securities, is putting downward pressure on interest rates, which is boosting demand in interest rate sensitive spending. (Note, other market forces pushed down rates too.) Lower interest rates lower the borrowing costs for homes and thus increase demand for homes. As a result, demand for homes went up (a lot) and did so faster than the supply of housing, which led to house prices rising. Tapering or slowing the purchases of assets by the Fed would slow that demand for housing some put it would not solve the potential problem of high house prices. At the end of the day, the most important way to make housing more affordable in the United States is to build more. We have building shortages before the pandemic which have been exacerbated by the spike in demand during Covid. Restrictive zoning laws and other constraints on building are the problem and state and local governments have the most effective tools to solve the problem.
Inbox Reader Question: Thoughts on Yield Curve Control?
I am not a fan, but it one of the ways that the Fed could push down on longer-run interest rates which are most relevant for household and business borrowing decisions.
Inbox Reader Question: In two years time (to strip out pandemic effects) would you support deliberately running the economy at 3% inflation to try and figure out the NAIRU?
If the Fed keeps its framework then no. If average inflation is persistently, on average, running above its 2% target (and unemployment is not high) then the Fed should reduce its support of the economy. It reduces the credibility of the Fed to say on thing and do another. I would leave NAIRU out of it.
Inbox Reader Question: I was wondering if you have done any work or have any knowledge about the federal definition of the poverty level. It’s a key metric used by many laws to determine eligibility for so many social programs. Does the poverty level have any role in Fed decision making? Does the definition of poverty in the US need to be updated? Do you have any opinions about the defined federal poverty level?
What's the best way to measure poverty is a long running debate. To the point that the U.S. Census which issues the 'official' measure also have a series of supplemental poverty measures https://www.census.gov/topics/income-poverty/supplemental-poverty-measure.html. It is important to develop measures that are up to date with the realities of life now and now not generations ago when the official measure was created. That said, whatever the measure we need to be consistent over time. Policies that fight poverty need to have a clear benchmark for success. The Federal Reserve has a full employment mandate. The rate of poverty and the number of jobs are related but not the same. So, no, I don't think its a measure that the Fed should bring into its decision-making specifically.
Inbox Reader Question: I often see you write about the unfairness in economics where “old white men” make all the decisions and denigrate people unlike themselves. But, surely this is only an issue in North America and Western Europe? The world is a lot bigger than those two regions. Are there no economists in large non-white countries like China, Japan, India, Indonesia, Nigeria, Egypt, Brazil, etc.? Surely there are.
Yes, of course. My concern is not about race. It's about powerful, dominant groups that suppress the voices of others. Across the globe, economics is dominated by men. The large influence of economists located in the United States (any gender identity) is also problem, since it narrows the scope of economic issues and voices.
Inbox Reader Question: What do you think of MMT? 1b. Haven’t their policies/prescriptions already been tried during the 1917 to 1991 experiment with state-controlled economies in the USSR and its satellites (Govt created all money, Govt decided how money gets allocated, etc)?
I will write more about Modern Monetary Theory later. I do not have a firm view and I need more space than a short Q&A to flesh out my thinking.
Inbox Reader Question: Where are the supply bottle necks and what is preventing producers from investing in production gains?
One thing I’m trying to wrap my head around is both PPI and CPI are up. (If PPI comes down then does that mean wider margins and some savings can be passed onto consumer?)
Policy is typically demand side with exception of regulations. Ending policy (especially fiscal) might lead to a demand softening, which also proves producers that the right move was to not increase capacity.
Covid.
Inbox Reader Question: What are your thoughts on the component breakdown behind what is driving inflation?
There’s both weighting contribution as well as which goods/services have been going up the most. In the past it used to be education and healthcare costs that increase more than the average. While internet goods have been less. Leading to an “inflation in things we need but not in things we want”. (Ie this is up to 2017, need a 2022 update). While housing is arguably a high weight and probably drives a large part of index. With both low inventory and low rates, home prices have been steadily increasing.
The first chart in my recent post on inflation https://stayathomemacro.substack.com/p/inflation-is-cooling-some-but-not shows key drivers of the increase. It is very unusual to have goods prices pushing up inflation and it's also clear that Covid disruptions are a large part of that spike. I do not see much of a role for the changing composition of spending during Covid -- not PCE price index does adjust the shares of spending -- it's really just that prices are growing faster than usual, particularly for some Covid disrupted items.
Inbox Reader Question: As I understand, when the Fed wants to stimulate the economy, it buys bonds (OMO) to put money in banks, increasing loanable funds (LF) and so reducing interest rates. It sells bonds to raise rates.
On the fiscal policy end, I have suggested an NIT program, basically similar to UBI but run as a tax credit with a monthly distribution; and, on the monetary policy end, I have suggested that in a recession, the Fed could advise the Treasury to issue new currency (not debt) into the NIT balance sheet for immediate distribution in the next month's checks. This would go into LF because it goes into bank accounts—personal when consumers receive the money, and then corporate when purchases are made—just the same as buying bonds. To counter unwanted rate increases, the Fed could sell bonds; balance is reached long-term by reducing bond buying in non-recession times, since some money was issued as direct payments.
Is this a sane approach to monetary policy? Would this be a useful tool for the Fed to have, or is it a Very Bad Idea™? There are probably implications for the Fed issuing currency and then selling bonds, rather than just buying bonds, but if they could buy bonds now then why can't they sell bonds now and buy them back later? Plus if they need to raise LF anyway, then any bond sales would be smaller than the amount distributed to consumers, right?
There are many things that Congress 'could' direct the Fed to do. I would shift the entire focus of that question to legislation and think of the Fed simply as one of the institutions that could carry it out. If Congress wants to send money out then it could have the Treasury sell securities or simply increase the deficit and then send the proceeds out to families directly (as it did with the stimulus checks). Fed Accounts are a neat idea but they're not necessary. I would focus on what do you want the policy to accomplish and then figure out how to best administer it.
Inbox Reader Question: What’s your best guess for why unemployment remains over 5%? What can the govt do to get that number lower without triggering inflation issues?
The unemployment rate was well below 4% for over a year before Covid. I firmly believe that we can get back to that level and then bring even more people into the labor market. The higher than usual inflation and unemployment now are not permanent problems, they are due to an incomplete and uneven recovery. Congress and the Fed has more work to do. And we must get the pandemic under control. That's the path back to normalcy.
Inbox Reader Question: 2. I saw you read the Noah Smith + Larry Summers interview, and you were quite critical of it. What in your opinion were the biggest flaws in Summers’ thinking, especially in regards to inflation?
Reality.
But seriously, I am trying to keep my Substack a 'Larry-free' zone. I want to focus on the arguments that I think are good ones. When he has one, I will be sure to praise it.
Inbox Reader Question: I’m still really on the fence about how seriously to take inflation right now. I hear a lot of different opinions from people I respect on it. At what point do you think we should actually start to make policy changes to slow down inflation? Is there a particular threshold where you’d agree it’s time to slow things down a bit to prevent inflation from getting out of control? How far away are we from that threshold?
The Fed has a dual mandate of stable prices and maximum employment. The Fed must be vigilant on both parts of its job. Unfortunately the framework for decades of targeting 2% inflation, led to an undershoot on inflation and on jobs. After years of introspection, the Fed developed an average inflation target and committed to broad based and inclusive employment. Yes, inflation is not averaging about 2% during the crisis, but we are millions of job short of pre-Covid. Now is not the time for the Fed to pull back on its support of the economy, and especially not time to tap on the brakes. That said, out of control inflation is very bad for people and a well functioning economy. My advice is to look at the underlying drivers and keep an eye on the monthly changes. We are getting the pandemic under control, though the slow, bumpy progress is extremely painful, so the supply chain disruptions that are pushing up prices will abate (and even reverse). In fact, we have seen month over month inflation step down in recent months. We need to see more of that. The Fed must and will keep a close eye on inflation and on jobs. That's good.
I found it interesting that the Canadian conservatives would create a version of the Sahm Rule that would trigger at the provincial level, which would be like our states. It seems more fiscally efficient, especially if the economic fallout is hyper-localized.
All of this makes me wonder how such a discussion would go over in the U.S. if states had the same stabilizer but could “opt out.” That is what we essentially saw this year with cuts to extended unemployment benefits in some states. To prevent political or partisan interventions, would a more effective approach to automatic stabilizers preclude provincial opt-outs?
The question of national or province (or state) indicators like the Sahm rule that automatically start extra unemployment benefits (or other support programs) depends on the policy goal: fighting a national recession or also a local downturn. In a national recession, the unemployment rate increases broadly. Regions concentrated in industries like oil and gas could experience a localized downturn. For that you would want to have a province indicator. I have not looked at the Canadian province data but I created Sahm rules for all 50 states and DC for a Hill office. All the state-level Sahm rules trigger on with recessions, and some states like Texas trigger on after oil prices plunged in 2014-15. Here's a post that I wrote about the Canadian proposal:. https://stayathomemacro.substack.com/p/o-canada
Before covid there was a consensus around the world about secular stagnation and the lack of aggregate demand against supply in the world economy broadly for several reasosn(inequality,deleveraging,savings among boomers), interest rates have been at the zero lower bound basically since 2008 to account for this. After the great depression there was a broadly similar period of stagnation, characterised by deflation and an inadequate fiscal response. The thing that got the US and other countries out of this period was WW2 and the enormous govt spending that it caused. After WW2 the US grew and prospered arguably until stagflation hit in the 1970s. My question is do you think the fiscal response from covid will do to secular stagnation what WW2 did to the Great depression? (Btw, im here after I heard u talk about the Sahm rule on the david mcwilliams podcast)
Daniel O'Neill 16yrs old, Ireland
I disagree that secular stagnation is the cause of inequality. Fiscal policy choices in the United States, such as the erosion of unions, safety net and minimum wage, were important contributors too. We have structural problems in the economy but I think just looking at aggregate demand is a cop out.
I wound up responding to this upside down/backwards.
"Before covid there was a consensus around the world about secular stagnation and the lack of aggregate demand against supply in the world economy broadly for several reasosn(inequality,deleveraging,savings among boomers),"
The big reason driver given for secular stagnation is falling population (in Japan)/aging population due to low birth rates. Essentially an aging/shrinking population results in reduced consumption and investment, and increased saving/stuffing money under the mattress (which then does nothing and may as well not exist in terms of the circular flow). Inequality has some of the same effects (how many yachts can one human 'consume'?), deleveraging usually results in no longer needing to deleverage sooner or later (unless you are trapped in some kind of super-contraction), and savings *should* wind up being loaned out/spent by somebody somewhere.
Everything comes back to actual or effectively falling population. Since world population is increasing the only way to stop population increase in a given country is to halt all immigration (e.g. Japan). Even with Covid-10 population is still rising, not falling. So the main well-understood driver for secular stagnation is not a problem over the long run unless your country does a lot of dumb things.
"After the great depression there was a broadly similar period of stagnation, characterised by deflation and an inadequate fiscal response."
After the US stopped contracting in 30's when the US went off the gold standard, growth rebounded. The fiscal response was inadequate in terms of completely restoring the economy immediately to prior levels of employment, but the death of the gold standard and the fiscal response after 1932-33 meant that there was lots of inflation (which eventually repaired the deleveraging and interest rate problems). Fiscal policy was expansionary (minus 1937) so the overall economy grew over the entire time frame. Similar things happened in Europe (even, or maybe especially, in Nazi Germany), so when WWII arrived, the economy was set to kick into high gear.
"My question is do you think the fiscal response from covid will do to secular stagnation what WW2 did to the Great depression?"
The answer depends on why you think the secular stagnation is occurring in the first place. Lots of reasons have been given (in the US and Europe) for slow economic growth over the last decade: feminism, birth control, abortion, laziness, weeniness, narcissism, excessive playing of video games by teenaged boys, the internet in general, etcetera.
In the last decade the US population (and the Irish population!) have grown... so falling population is not the problem. Inequality and an aging population are functionally equivalent - old people are better financially after a lifetime of working. (Also, older people aren't necessarily joyless compulsive savers - spending their children's inheritance is a thing - if they even have children.)
If we discard all those reasons (because those are dumb reasons), all we have left is fiscal and monetary policy. During the last decade the US has dabbled in austerity and run a wide-open monetary policy. Europe has been committed to contractionary fiscal policy (austerity) and a stern monetary policy.
The Covid crisis delivered a serious hit to the economies of developed countries. However, US monetary and fiscal policy was expansionary, while European policy was neutral. The US is growing, European countries are flat or contractionary.
My answer then would be that secular stagnation will stick around if fiscal and monetary authorities revert to contractionary policies, and not if they don't.
I think Claudia's answer will fall along similar lines.
elm
if not, i will stand preemptively corrected
I will need to come back later to these questions / comments. It is very useful to set current policy debates in the broader context of time; however, a short Q&A here won't do justice to it.
What is typically left unsaid when inflation is discussed?
Wow, tough one. We have spent so much time debating inflation this year that it feels like no stone left unturned. I will write this one up in my follow up post tomorrow. One topic is how national aggregates mask what's going on for most people. The Consumer Price Index tells us how the cost of the 'U.S. grocery cart' us increasing, and that tells us more about rich people's inflation, who spend a lot, than the rest of us. (I have a good chart to show this.)
How much deficit sending can a government realistically maintain? I am from Canada where we are in the midst of an election. The Liberal government is proposing running a budget deficit of 363 billion, or 17 per cent of gross domestic product, in the fiscal year that ended March 31. It's estimated that by the time it's all said and done, the Liberal government will have accumulated more debt than the 22 prime ministers that preceded him combined. Although I know the general rhetoric is that large deficits are bad and expensive to service (per the conservative party at least), I'm wondering how much of that is actually true.
Question: Does QE have a significant impact on the soaring US house prices? And when do you expect the Fed to raise interest rates?
Quantitative easing, that is the Fed purchases of U.S. Treasuries and Mortgage Backed Securities, is putting downward pressure on interest rates, which is boosting demand in interest rate sensitive spending. (Note, other market forces pushed down rates too.) Lower interest rates lower the borrowing costs for homes and thus increase demand for homes. As a result, demand for homes went up (a lot) and did so faster than the supply of housing, which led to house prices rising. Tapering or slowing the purchases of assets by the Fed would slow that demand for housing some put it would not solve the potential problem of high house prices. At the end of the day, the most important way to make housing more affordable in the United States is to build more. We have building shortages before the pandemic which have been exacerbated by the spike in demand during Covid. Restrictive zoning laws and other constraints on building are the problem and state and local governments have the most effective tools to solve the problem.