If theres one thing that continues to bother me is the constant obsession with rate hikes. Today, the US had a strong ADP jobs report more than twice the expected amount and yet, there is a 90 percent chance of rate hikes in the next FOMC meeting this month. Its also sad, that too many economists who want these rate hikes, don't get that the aggressive hikes have forced the fed gov to pump more interest income to bondholders and acts as another layer of gov spending. Inflation as we all know, has come off its peak primarily due to improved supply chains and lower energy prices. Outdated macro thinking won't get us anywhere.
The scariest part: average monthly inflation in March-May is 2.2%. Sure, core is still above the targeted 2 percent, but the focus on 12-month rates distorts a bit the fact that inflation has come down significantly.
And I get it, core inflation is a pain in the neck, but I also think that is going to take some time to come down. Rent, health care costs, shelter to name a few. Rate hikes aren't fixing that. We've got to drop this 2% mandate too.
There was a recent article featuring G7 economies and the US out of those nations in the G7 has the highest growth and the lowest inflation. To me, the media I think has to bear responsibility for so much of the negative sentiment on the economy. There is obviously nothing perfect but it has more than held its own.
Speaking as a family doc, a sociologist and epidemiologist, this column verges on insight but misses the mark. Your observation that "Nearly all ‘mainstream’ economists would criticize any form of industrial policy, and many feel the same about child care," demonstrated the herdish (lemming), faddish, blindered quality of economics: its practitioners and its theories. The contemporary fad of neoliberalism has been very influential, but resulted in the catastrophe of 2008 AND the inadequate policy response, as well as the total absence of redundancy (or flex capacity) in the name of efficiency in the health system resulting in probably tens of thousands of unnecessary deaths. Public health is the archetypal "public good," a whole category of necessary (for a well functioning society - ask Adam Smith) economic activity that neoliberals banished from consideration (after gaslighting Kenneth Arrow).
If economists cannot find a way to support a successful industrial policy or support of citizenry through publicly supported child care, education, health care, etc what good are they??
Hello Claudia, looking forward to your take on recent developments in economy. Why Fed is still pushing up rates? Is Philips curve officially dead? What is the big macro picture of today? Is Fed keeping the rates elevated as an contingency to prevent overheating from industrial policy? Hope you are in good health & spirits. Best regards.
This is one time I must disagree. Just like the Trump administration the Biden administration is just doing fiscal stimulus. I don’t disagree with the goals but we should have put in a carbon tax to pay for for this. The fiscal stylist goes against what the fed is doing. The pain of food inflation on families and individuals is awful. This should be the priority. Anyone in Washington or your readers should goto your local supermarket. That food cart that was 100 to 150 dollars is now probably 250.
What concerns me is the emphasis on industrial policy as a way to compete with China. When the government, rather than the market writ large picks winners and losers, mistakes will be made - especially in the tech sector.
An actionable macroeconomic strategy helps all societal boats rise evenly...the “market” selector works but without the required resiliency Claudia points out. A fiat currency requires effective communication, planning, understanding, empathy, and inherent dignity recognition of its citizens to effect the strategy. Unfortunately, this takes much effort and time to enact and proves challenging for us.
I fully agree with the risks of having the government pick winners. But we must acknowledge that markets (market participants) have short memory and short horizons. And both the global financial crisis and Covid illustrate that.
Yes, but buy the lowest cost product that give you the coverage you want. :) Encouraging production of strategic goods across NAFTA and Europe is going to be lower cost than encouraging it only in the US.
Yes(ish) (since I assume manufacturing in Europe will be expensive due to energy costs. I think the main component that will drop is the Just-in-time process. Companies will probably increase stocks or heavily diversify supply chains. Either way, it'll be a bit more costly.
On the question of resilience, in hindsight it’s good to have it around to inform your decisions. For example, with the Congressionally mandated Space Launch System, NASA not only has kept thousands of jobs safe, but managed an in-house public option to hedge against, say, a monopolist in private spaceflight. (It’s too expensive and used infrequently, but it’s at least there as a semblance of democracy.) Likewise, the DoD is soliciting smaller rocket startups as a hedge against said monopolist.
Any post is a good post to try to enlist the support of our host and readers for the Treasury creating more intermediate tenor TIPS. It's interesting to know that markets expect inflation to undershoot the Fed's targets over the next 5 years, but what about over the next 1, 2 or 3 year?
Resilience really is not separate from “efficiency.” It is quite inefficient and costly to a firm not to be able to buy inputs at any price. The difference of “resiliency” is that, like liquidity, it may look very different at the firm and market level and have different costs. There can be a collective action problem: as a group the firms would be better off if they had a multitude of different suppliers, but this may not result if each maximizes its profits separately. Having supplies cut off for political reasons is one very specific kind of risk that firms individually may not be in good position to manage.
State action is a possible solution to this collective action problem. But since “state action” is not ipso facto guaranteed to resolve the collective action problem at least cost (or even at lower cost than the collective action problem it ostensibly addresses, each policy must sit on its own bottom. My sense is that policies to diversify chip supply away from China/Tiwan is sensible. Trying to relocate it too the US alone is not. At the very least the US should include NAFTA and Europe in it’s “onshoring” of strategic goods like CHIPS.
And collective action is not the only strand of industrial policy. So long as we do not have a tax on net CO2 emissions, there are many investments in CO2 emissions saving technologies, or Carbon Capture and Storage whose private returns are less than their social returns. In this case, subsidies area second best solution. But the subsidies need to be carefully crafted and should probably be aimed as closely at the CO2 saved or captures, not the investment in saving or capturing.
In summary, I’d give Biden a solid B for a good try not very well executed. Of course if we are grading on a curve considering Republicans, he gets an A+ 😊
If theres one thing that continues to bother me is the constant obsession with rate hikes. Today, the US had a strong ADP jobs report more than twice the expected amount and yet, there is a 90 percent chance of rate hikes in the next FOMC meeting this month. Its also sad, that too many economists who want these rate hikes, don't get that the aggressive hikes have forced the fed gov to pump more interest income to bondholders and acts as another layer of gov spending. Inflation as we all know, has come off its peak primarily due to improved supply chains and lower energy prices. Outdated macro thinking won't get us anywhere.
The scariest part: average monthly inflation in March-May is 2.2%. Sure, core is still above the targeted 2 percent, but the focus on 12-month rates distorts a bit the fact that inflation has come down significantly.
And I get it, core inflation is a pain in the neck, but I also think that is going to take some time to come down. Rent, health care costs, shelter to name a few. Rate hikes aren't fixing that. We've got to drop this 2% mandate too.
There was a recent article featuring G7 economies and the US out of those nations in the G7 has the highest growth and the lowest inflation. To me, the media I think has to bear responsibility for so much of the negative sentiment on the economy. There is obviously nothing perfect but it has more than held its own.
Stephanie Kelton should hit the major news outlets consistently and the Biden Administration should hire her.
Speaking as a family doc, a sociologist and epidemiologist, this column verges on insight but misses the mark. Your observation that "Nearly all ‘mainstream’ economists would criticize any form of industrial policy, and many feel the same about child care," demonstrated the herdish (lemming), faddish, blindered quality of economics: its practitioners and its theories. The contemporary fad of neoliberalism has been very influential, but resulted in the catastrophe of 2008 AND the inadequate policy response, as well as the total absence of redundancy (or flex capacity) in the name of efficiency in the health system resulting in probably tens of thousands of unnecessary deaths. Public health is the archetypal "public good," a whole category of necessary (for a well functioning society - ask Adam Smith) economic activity that neoliberals banished from consideration (after gaslighting Kenneth Arrow).
If economists cannot find a way to support a successful industrial policy or support of citizenry through publicly supported child care, education, health care, etc what good are they??
And we have a very successful economy and a very strong labor market in the face of historic Fed tightening.
Hello Claudia, looking forward to your take on recent developments in economy. Why Fed is still pushing up rates? Is Philips curve officially dead? What is the big macro picture of today? Is Fed keeping the rates elevated as an contingency to prevent overheating from industrial policy? Hope you are in good health & spirits. Best regards.
Good post, Claudia
This is one time I must disagree. Just like the Trump administration the Biden administration is just doing fiscal stimulus. I don’t disagree with the goals but we should have put in a carbon tax to pay for for this. The fiscal stylist goes against what the fed is doing. The pain of food inflation on families and individuals is awful. This should be the priority. Anyone in Washington or your readers should goto your local supermarket. That food cart that was 100 to 150 dollars is now probably 250.
What concerns me is the emphasis on industrial policy as a way to compete with China. When the government, rather than the market writ large picks winners and losers, mistakes will be made - especially in the tech sector.
An actionable macroeconomic strategy helps all societal boats rise evenly...the “market” selector works but without the required resiliency Claudia points out. A fiat currency requires effective communication, planning, understanding, empathy, and inherent dignity recognition of its citizens to effect the strategy. Unfortunately, this takes much effort and time to enact and proves challenging for us.
I fully agree with the risks of having the government pick winners. But we must acknowledge that markets (market participants) have short memory and short horizons. And both the global financial crisis and Covid illustrate that.
I wonder if governments especially politicians don’t also have horizons and memories that are just as short.
Really like the perspective of efficiency vs resilience. I think that's a very helpful to lens to see the current economic restructuring.
It's like insurance - it's costly, but better to have it if something goes wrong.
Cost doesn’t matter to a sovereign fiat currency...people do.
Yes, people just can't get looking at money as being a commodity out of their head!
Yes, but buy the lowest cost product that give you the coverage you want. :) Encouraging production of strategic goods across NAFTA and Europe is going to be lower cost than encouraging it only in the US.
Yes(ish) (since I assume manufacturing in Europe will be expensive due to energy costs. I think the main component that will drop is the Just-in-time process. Companies will probably increase stocks or heavily diversify supply chains. Either way, it'll be a bit more costly.
Good post, though I will say that what gets dismissed as ‘everything-bagel liberalism’ is important for both child care and semiconductor workforce efforts--after all, a chip designer looking for a job can’t just take their kid to work. It’s good for coalition-building too. (See https://prospect.org/economy/2023-05-25-liberalism-that-builds-power/ and https://prospect.org/infrastructure/connecting-public-transit-great-manufacturing-jobs/)
On the question of resilience, in hindsight it’s good to have it around to inform your decisions. For example, with the Congressionally mandated Space Launch System, NASA not only has kept thousands of jobs safe, but managed an in-house public option to hedge against, say, a monopolist in private spaceflight. (It’s too expensive and used infrequently, but it’s at least there as a semblance of democracy.) Likewise, the DoD is soliciting smaller rocket startups as a hedge against said monopolist.
Any post is a good post to try to enlist the support of our host and readers for the Treasury creating more intermediate tenor TIPS. It's interesting to know that markets expect inflation to undershoot the Fed's targets over the next 5 years, but what about over the next 1, 2 or 3 year?
Resilience really is not separate from “efficiency.” It is quite inefficient and costly to a firm not to be able to buy inputs at any price. The difference of “resiliency” is that, like liquidity, it may look very different at the firm and market level and have different costs. There can be a collective action problem: as a group the firms would be better off if they had a multitude of different suppliers, but this may not result if each maximizes its profits separately. Having supplies cut off for political reasons is one very specific kind of risk that firms individually may not be in good position to manage.
State action is a possible solution to this collective action problem. But since “state action” is not ipso facto guaranteed to resolve the collective action problem at least cost (or even at lower cost than the collective action problem it ostensibly addresses, each policy must sit on its own bottom. My sense is that policies to diversify chip supply away from China/Tiwan is sensible. Trying to relocate it too the US alone is not. At the very least the US should include NAFTA and Europe in it’s “onshoring” of strategic goods like CHIPS.
And collective action is not the only strand of industrial policy. So long as we do not have a tax on net CO2 emissions, there are many investments in CO2 emissions saving technologies, or Carbon Capture and Storage whose private returns are less than their social returns. In this case, subsidies area second best solution. But the subsidies need to be carefully crafted and should probably be aimed as closely at the CO2 saved or captures, not the investment in saving or capturing.
In summary, I’d give Biden a solid B for a good try not very well executed. Of course if we are grading on a curve considering Republicans, he gets an A+ 😊