Let’s not botch this growth thing we’ve got going…

December 5th, 2014 at 1:39 pm

Over at PostEverything.

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5 comments in reply to "Let’s not botch this growth thing we’ve got going…"

  1. Larry Signor says:

    Jared, you are running neck and neck with Dean as the funniest economist on the ‘net. “contraculation” and “and do-no-harm in the Congress. That doesn’t sound too hard, right? Right?? Anyone, anyone…Bueller??”…You ain’t doin’ too bad as an analyst, either. Good to have back up talents. Laffing my voodoo off.

  2. Tom in MN says:

    I keep hearing about the Fed wanting to normalize rates, but it seems to me they are already normalized. In the middle of previous business cycles Fed funds rates have been about 2 percentage points lower than 10 year rates. And 10 year rates have been steadily declining for decades, now to just above 2%. So Fed funds rates at zero are where they should be relative to 10 year rates and any increase I suspect will have a slowing effect on the economy.

    So I don’t share your optimism that the Fed won’t mess things up, as it seems to me any increase in their funds rate will cause a slow down. I will stop worrying when I see some indication that the Fed is considering raising their inflation target, as it appears to me that is what is causing inflation expectations and long term rates to decline. And as I’ve said before on your favorite cause, this is what is causing real wages to stagnate as we never get to full employment with inflation capped at 2%.

    I have a new analogy for you on this: As Fed Chair Yellen likes control theory, we can compare what the Fed is doing with the funds rate to the autopilot on an aircraft. It is designed to fly the plane steadily on course smoothing out the bumps. But that is the short-time (business cycle time scale) control loop. There is also the long time loop of the navigation system that points the plane in the right direction by telling the autopilot where to head for. If that direction is down then it does not matter how good the auto-pilot is, the plane will eventually hit the ground, just like our economy has hit the ZLB. So what for the economy is the equivalent of the Navigation input to the autopilot? It’s the 2% inflation target — that is where the Fed wants the economy to go long term. The problem is there is no indicator for what is level flight (steady state) in terms of inflation, 2% is just a guess and it’s now got us on a collision course with the ZLB and deflation. And no fiddling with the Fed funds rate can change this as aiming at 2% inflation is the problem.

    We can convert this to a car analogy once we all get self-driving cars. 😉

    • Smith says:

      The idea of a 2% target is laughable. Given the subtleties of managing inflation, there should be no fixed target, misused as a ceiling anyway. There seems to also be a bias towards whole numbers, but it’s ok to accept fractions like 2.75, 3.25, etc. The multiplicity of acceptable inflation rates depending on conditions and causes could be outlined in a spreadsheet or short paper, but isn’t. Wage induced inflation, price inflation, core inflation, headline inflation, bubble induced inflation, monthly, yearly, business cycle averages, productivity gains, where is the analysis or sanity in picking 2%? It’s stupid. It also contradicts the historic record.

      For 40 years, from 1967 to 2007, inflation was only 2% or below 5 years, 3% or below 13 years (the 13 includes the 5 at 2% or below).

      Economists should deride the idea of a 2% target. The Fed and even conservatives should be embarrassed to suggest it.

      Inflation rates taken from secondary source:
      Gives data source as US Bureau of Labor Statistics and Robert Shiller.

      To repeat, a target is not a ceiling.
      Fractions like 2.5% and 3.25% are ok to use.

  3. bill says:

    If the Fed really wants to “normalize” and not just use that word as a euphemism for tightening, then it needs to stop paying interest on reserves.