Show Your Work, 5/16
explain why you changed your mind; Alan Blinder's macro vs. mine
If you live long enough, and haven’t been lobotomized, you’ll change a lot of your views and opinions. Life does that. The world changes; you change; and for most people, who don’t air their views publicly for a living, the process is murky.
For the rest of us, the hacks/public intellectuals, I think there’s another standard: if you change your mind on an issue, at some point, explain why. What principles or ideas have you now abandoned? Which have you now embraced? What new facts have you learned? It’s a basic form of intellectual hygiene.
If you want to earn an “open mind” point in Fantasy Intellectual Teams, you have to show your work. Fill in the blank in either “I would change my mind if ____” or I changed my mind because ____.”
Recently, I was re-reading my macro memoir, and you can think of it as close to 100 pages describing the process by which I changed my thinking about macroeconomics. You may well think of this as showing my work to excess.
I went back to it because I was sent a review copy of Alan Blinder’s forthcoming book on macro that covers the same time period and many of the same issues. Blinder and I held the same views in the late 1970s. Mine changed much more than his, which hardly changed at all.
Blinder has pretty much stuck with the IS-LM-AS framework that was taught to economics students around 1975. There are three causal impulses in that framework: fiscal policy, monetary policy, and supply shocks.
Interestingly, all three of those impulses are strongly negative right now. In textbook jargon, all three curves are shifting to the left. Fiscal policy is contractionary, as the COVID stimulus wears off. Monetary policy is contractionary (by traditional measures), as the Fed tries to fight inflation. And the war and China’s COVID restrictions are adversely affecting supply.
Blinder must be confidently expecting a recession within the next twelve months. It would not shock me to see a recession, but there are a few indicators that might suggest otherwise. The sort of rapid job growth that we have seen in the last two months usually persists for a while. Historically, such growth has never come to a screeching halt.
But one lesson of my memoir is that the economy is constantly changing. And maybe this time is different. The WSJ reports,
Among entrepreneurs, many conversations have turned more recently on how to conserve funds, said Maria Colacurcio, chief executive of the technology company Syndio Inc., an analytics platform that helps employers identify and fix pay discrepancies. “Everyone’s shifting to cash preservation, runway, ‘I don’t want to raise money in this environment,’”
So perhaps the rapid U-turn in the stock market will lead to an equally rapid U-turn in job creation.
‘ If you live long enough, and haven’t been lobotomized…’
Only if you have a frontal lobe to start with. Today’s political class and Socialists are born without one.
" Fiscal policy is contractionary, as the COVID stimulus wears off." -- No.
Going from very, wildly expansionary (Biden) to very expansionary (pre-Covid Trump) is still not absolutely contractionary, tho one might call it relatively contractionary. Like calling a Zuckerberg or Musk whose market wealth has dropped by tens of billions "now poor".
If a fiscal policy is at the non-inflationary maximally expansionist, as I feel Trump's was (prove me wrong!), than any more gov't spending / fiscal policy will be inflationary (by post hoc definition). So Biden's excessive stimulus was too much.
The memoir looks interesting. I'll be especially interested in the thoughts about Japan. I used to believe Friedman more, but now believe that, while printing money is a necessary condition for inflation, it's not always sufficient.
The 70s US & global inflation was part of the Baby Boomers economically being adult consumers faster than they became experienced & highly productive producers: - so a LOT more goods were being bought, including on new credit cards, with "working poor" folk wanting to become middle class consumers. And more workers, including more women, increased supply (production), but at lagged rate until high school graduation rates plateaued.
This demographic increased demand shock caused a lot more factories to be made and to expand to supply the desired products (at prices buyers would pay for).
There was also increased US money creation, especially after Nixon ended the final gold standard -- this was necessary, but not sufficient.
The HUGE increase in oil prices as OPEC became an effective cartel, resulted in big incomes shifts away from oil-importing countries, like the US was and became more so, even as oil import prices increased. Energy price increases look a lot like inflation, because everything sold includes some energy cost component.
Demographics, US policy, oil/energy shock -- all three were important in the 70s Stagflation.
(This week, but not tonight, I'll read more...)