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Macroeconomics is Irregular, 7/18
Every episode is different
This recession—if that’s what it is—isn’t like other recessions. According to the latest employment report issued by the Bureau of Labor Statistics, the economy added 372,000 new jobs in June, with the unemployment rate remaining stable at 3.6%. Over the past 12 months, according to the same report, average hourly earnings increased by 5.1%, another sign of a tight labor market. What explains a full-employment recession?
Macroeconomic theories describe regularities. But in the real world, regularities are scarce.
One of the most reliable regularities used to be Okun’s Law, which said that a 1 percentage point decline in the unemployment rate would be associated with about 2.5 percent higher real GDP. This year, the unemployment rate has declined by 3/10 of one percent, which should be associated with an increase in real GDP of close to 1 percent. But instead, real GDP has declined at an annual rate of more than 1 percent. Call the cops: Okun’s Law is being broken.
Consider what we have observed in the past 25 years or so:
The stock market crash of 2000, as the Dotcom bubble ended. An enormous destruction of wealth, with only the mildest of recessions.
The Financial Crisis of 2008. Arguably a smaller destruction of wealth, but the most severe downturn since the Great Depression.
The COVID economy, with all sorts of supply disruptions but a stock market that recovered to rise past its previous peak.
The current economy, with inflation soaring, a lot of “we’re hiring” signs, and a lot of companies shifting production away from Russia and at least thinking about shifting production away from China.
Of course, now we can tell stories that fit these episodes. But if you had tried to predict each episode using a set of equations that fit only the prior history, you would have failed.
Macroeconomics in textbooks and newspaper stories is a science of regularities. But you might be wiser to think of it as just-so stories and 20/20 hindsight.