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Oct 22, 2023Liked by Claudia Sahm

This Article from The Atlantic I thought was interesting to read from a few days ago. America truly doesn't need a recession as we've come this far from inflation off its peak in July of last year. A fed induced recession would be tough and yes especially for women and just as important people of color. Hopefully Powell sticks to his word and doesn't hike in Nov and Dec.https://www.theatlantic.com/ideas/archive/2023/10/america-recession-disinflation-fed/675700/

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I have a Substack post specifically commenting on the Karma article. "The Rise and Fall of the Phillip's Curve": https://thomaslhutcheson.substack.com/p/the-rise-and-fall-of-the-phillips

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Another reason for the Fed to hold is to watch for (further?) signs that high rates are having an effect. While people tend to focus on the housing sector — an important transmission channel — and don’t see much distress for a whole assortment of reasons, there are other places to look that urge some caution. Examples for consumers include auto loan and credit card delinquency rates, and I’ll bet lower rated corporates are also having trouble. All corporates and commercial real estate borrowers who must refinance are facing high costs. Lastly, while SVB was an egregious example of a bank doing a really bad job of managing their asset/liability mismatch and their designation of assets held for sale vs assets held for investment, they will not be alone.

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I fully agree that the housing sector is not the only place interest rate increases have an effect. It's often given as an example because it is clear to see it there. The Fed watches a variety of credit indicators for consumers and businesses, capturing supply (lending standards), demand for loans, and signs of stress (delinquencies). And anything in the banking does (should) get scrutiny. SVB was egregious and a sign of interest rate risks in the system.

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I've always wondered why certain obvious economic policies are not addressed by our political system. For example as you point out having child care handled by the State rather than being the total responsibility of individual female workers who must leave the workforce to engage in child care is an obvious plus for productivity. Yet our political system will not do this. Why? It makes sense to do so in terms of productivity and it enhances family life and household income. Why doesn't capitalism see the advantage in having an efficiently run childcare system? Why do women put up with it?

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The answer to your question is beyond my expertise. I write about why programs like childcare or child tax credit would help families financially and the productivity of the country, but I do not have much to say on how to make it happen politically.

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Actually the first part of my comment is not a political question of how to make an economic policy happen at all but an economic question central to how an advanced capitalist economy functions. If the state doesn't provide for childcare then the parent must. That economic burden must be paid for either through a parent reducing their labor time in the work force or seeking a greater wage from their employer to pay for childcare. In each of these options produ tivity is reduced. So why wouldn't capitalism enthusiastically support transferring the childcare burden to the state. It reduces the cost of employing workers, increases the labor pool and allows parents to continue to build employment skills, all of which contribute to greater profits.

In a competitive environment the enterprise functioning in a state that assumes the burden of childcare should have a cost advantage.

When the demands of production were intensively physical an enterprise might have been willing to sacrifice its female workers to childcare but in advanced capitalism where production demands mental over physical labor the enterprise productivity cost of sacrificing fenale workers to childcare is greater. The social cost to society is also greater since the childcare burden falls upon younger women who might chose to postpone reproduction to obtain needed work skills.

So these are economic questions. Before we knew the science behind bacterial contamination of water we might have unknowingly contracted colera but once the science made the cause of colera evident only a desperate person would drink contaminated water. So I think these questions fall within your area of expertise.

Capitalism isn't a stagnant economic system. Politics often trails economics. My apologies if you have dealt with this type of question elsewhere.

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As to the political part. A Washington Post article on employers providing child care estimated a 23 billion cost to employers of child care employee work interference related problems and 122 billion hit to the economy. All due to no state funded/operated solution. Last time I checked a woman was in charge of the US Treasury with a serious background in economics. Did she check her degree at the door? Therefore my political point-why do women put up with this?

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One more comment on this-part of the spin cycle to the right in politics, where you have workers voting against their economic interests for huckster candidates who promise to fix things, is when those with power, those who know what can be done to fix things don't do it. The educated and empowered American elite is crumbling under the Maga attack because they don't solve these problems or they compromise away the solution with a I can't do anything about it lack of principles yielding to Larry Summers attack on those checks being sent out. Did the checks prevent a Depression? Would a single payer health care system lead to greater economic prosperity? The polls show ordinary people favor these economic reforms but our elites don't take action and then cry big tears when the voters move right at the polls

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Great assessment Claudia. Thanks. We should shit-can current macro economic models and develop new ones using small cross functional teams of geopolitical strategists, macro economists, geographers, philosophers, and a mix of educators from contemporary disciplines. The federal government would then empower these teams to create holistic models that produce strategic guidelines to improve sustainable societal outcomes. MMT offers the foundation to make this possible. We destroy so many useful resources now with current actions, it’s beyond time to take iterative alternatives to develop actionable national political strategies.

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It will need to be a team effort. Don't give up on the macro, though I agree it's not enough.

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"When growth is above trend, it’s a sign of unsustainably strong demand."

No. It could be further/better adjustments in relative prices, relaxing of the kinks generated (by the kinks generated) by the Covid/post Covid recovery, Putin/Saudi oil shock, supply chain problems.

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It was me explaining the Fed/standard macro thinking, not me agreeing with it. And yes, there are many reasons why growth could (and should) be higher now.

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The serious difference between the 1990s and today, is that Clinton had a budget surplus which means that the private sector had a deficit. A deficit that was filled in with private bank credit. Today, household debt is low, and budget deficits are adding money to private bank accounts.

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"adding money to private bank accounts" of transferees and suppliers of items on which expenditures are made and with drawing money from the accounts of purchasers of the new debt. Neither of which is essentially significant for inflation as the Fed is in the middle

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How can hiring be "great" when dominant industries of Southern California (show business, where the WGA and SAG-AFTRA have been on lengthy strikes) and Northern California (software tech, which is undergoing a contraction after Silicon Valley Bank collapsed late 2022, and venture capital can't borrow as cheaply following the first string of consecutive interest rate increases in over a decade) have been in chilled hiring phases? How is hiring across this variegated number reduced by so many economists to one word either "bad" or "good"? Honestly puzzled. Any information appreciated.

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Look at this whole thread and tell me hiring is "great". It stems from a man on his 11th month searching for a job, and the replies are filled with many of the same: https://www.linkedin.com/feed/update/urn:li:activity:7122979284524171265?commentUrn=urn%3Ali%3Acomment%3A%28activity%3A7122979284524171265%2C7123051800290545664%29&dashCommentUrn=urn%3Ali%3Afsd_comment%3A%287123051800290545664%2Curn%3Ali%3Aactivity%3A7122979284524171265%29

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A recession is a broad based decline in economic weakness. A regional contraction is not the same. Sometimes, pockets of weakness occur before a recession, but that's not a given. https://stayathomemacro.substack.com/p/looking-local-for-early-signs-of

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We are in age of challenges of global warming (ecological priorities), realignment of world economy (geopolitics, slow demise of globalization etc) and newly recognized priorities of social development. A national economic policy should be identifying set of priorities & working the way through with them - energy modernization, new infrastructure & better supply chains to tackle with climate disruptions, building sustainable cities, nurturing strategically important sectors (industrial policy - Chips, Biotech, AI etc) and reorganizing human resources and labor force to keep pace with economic transformation (lifting the student debt burden, higher minimum wages, better social security, building better society etc).

Whatever the growth rate is, it's a post facto of our policy choices. Policy makers (both elected and unelected) should abandon their narrow linear thinking on obsession of trends of growth and simplistic narratives on inflation, monetary policy, employment and zero sum tradeoffs (employment, growth and inflation on balancing scales). The challenges faced by present world are vastly different from the past. People are still trapped in anachronistic thinking & past follies - fearing repeat of wage price spirals of 70s and Philips curve constraints, treating inflation with planned unemployment, sanctity of laissez-faire etc.

Econ needs to evolve in 21st century.

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All of this is true. Meanwhile the Biden administration fiddles with unproductive foreign entanglements as its own "fly-over country" burns. Fools.

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On a side note: Why doesn't anyone talk or write about the Fed's balance sheet? It's being drained by almost $70 billion a month. This is having a huge impact on bank reserves and liquidity. Credit is being rationed at a much higher cost. Your thoughts in the balance sheet will be much appreciated!

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The balance sheet is not one of my areas. You can find many smart commentators on the topic, often former Fed economists and also in financial markets. David Beckworth's podcast Macro Musing has guests on it, as does Tracy Alloway and Joe Wiesenthal's Odd Lots.

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Thanks Claudia! To Peter Paul Santa Ana's point, my university (which I believe is Claudia's as well - Denison) created a new major after I graduated called PPE (politics, philosophy and economics) to bridge the gaps. Today I would add psychology to the mix as well. Seeing monetary policy through Taylor's Rule is far too simplistic. For example, inflation in the Northeast is half of that in the Southeast. The cost of credit is beyond what most people today have ever seen. Bankruptcies are approaching April 2020 levels. I've often joked that Powell needs to listen to the other Taylor: You Need to Calm Down.

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Yes, I went to Denison with political science, economics, and German majors.

The Taylor rules are simple guides, and the Fed does not do rule-based monetary policy for the very reason that the world is more complex and dynamic than those rules.

My read of bankruptcy and delinquency is that they are rising from very low levels in the pandemic and are now around pre-pandemic levels. Pre-pandemic, we were in one of the longest economic expansions on record.

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Dr Sahm, can you put forward best & worst case scenarios of failure to understand economic growth trends? If growth is higher than some pre-assumed trend and is allowed to do so ( with Fed rates laxity, more good fiscal etc). What's the downside in that? Unsustainable business cycle? Minsky moment? Higher risks of recession down the road? High inflation down the road?

The myriad of tools available with the Fed today, armed with better economic understanding & if backed by hawk eyes on financial stability (no repeat of SVB oversight debacle) , i think Fed should let the economy takes its course. Policy makers should continue on fiscal (addressing the present challenges as mentioned above) and economy should be nudged for proper transformations. I don't see any real risks in not adhering to trends.

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I have a post coming that at least partly addresses your question.

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Is economic growth trends/cycles endogenous or exogenous? I think partly endogenous (economy takes its own course - investment driven by long term uncertainty) and partly exogenous (Govt & CB guiding economic policy with fiscal & rates). In this view, what sense does it make to constrain economy on some pre-assumed past economic trend?

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