Simple Economic Explanations Keep Breaking Down

 

The obvious-seeming narratives of what’s happening in the U.S. economy keep falling short

Government spending matters, monetary policy matters and there is a natural link between growth, unemployment and inflation. 

None of the three proved reliable in the past four years, yet each seems self-evidently true, baked into the very structure of the economy. 

It is, in a word, confusing.

Spending big when the economy is already running hot will create inflation. Simple.

Yet, the government kept on spending into a hot economy. 

Over the past two years—well after the pandemic stimulus—the federal deficit has been larger as a share of the economy than any time since World War II,

aside from the deep recession after Lehman Brothers collapsed in 2008 and the pandemic itself.

Blanchard says the stimulus ended up having less impact than he anticipated because much of it was saved, smoothing out the effect over time.

Monetary policy hasn’t been particularly useful for forecasting, either. 

If you had asked any reputable economist what would happen to the economy if you jacked up rates from zero to above 5% in a little over a year, they would have predicted a deep recession.  

The Fed thought it would bring down inflation by reducing demand, but since the Fed started raising rates consumer demand has been expanding as fast as it was before the pandemic and seems to be accelerating.

The jobs market has been messy, too. Some version of the so-called Phillips curve that shows a trade-off between unemployment and inflation is built into most macroeconomic models, but it hasn’t really worked. 

By this point economists will be raising their hands and saying hang on, things are complicated. 

The economy has repeatedly refused to do what basic models suggest it should, and no one knows if the excuses—saved stimulus checks, snarled supply chains, productivity, immigration—were one-offs or if there will be a new reason next year to explain why they were wrong.

James Mackintosh Wall Street Journal 22 October 2024

https://www.wsj.com/economy/simple-economic-explanations-keep-breaking-down-heres-why-2a968abe

Why the bulls are running and the consumers are buying

https://englundmacro.blogspot.com/2023/06/why-bulls-are-running-and-consumers-are.html

I now claim to coin the term "balance sheet boom".

https://englundmacro.blogspot.com/2024/10/balance-sheet-boom.html

Tillbaka till Wall Street och Stockholm 22 oktober 2024

https://englundmacro.blogspot.com/2024/10/wall-street-och-stockholm-22-oktober.html