Arnold Kling  

Jackson Hole Macro

Kotlikoff Anecdote... Son of Simon...

At Jackson Hole, Alan Greenspan said,

The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial intermediaries, of course, routinely convert capital gains in stocks, bonds, and homes into cash for businesses and households to facilitate purchase transactions.6 The conversions have been markedly facilitated by the financial innovation that has greatly reduced the cost of such transactions.

Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.

The last sentence is wonderful Greenspan-speak for "watch out for bubbles."

Thanks to New Economist's reconstruction of the conference agenda, I also went to Bob Hall's web site, where I found Hall's Jackson Hole paper.

The traditional idea is that neoclassical constructs—production functions, consumption demand functions, labor supply functions, embedded in markets that clear—describe the actual operations of the economy in the longer run. There is a *-economy that generates
variables such as y*, called potential GDP, u*, called the natural unemployment rate, r*, called the natural real interest rate, and so on.

Hall then proceeds to knock down each of these concepts. Because so much of the short-term and medium-term movements in GDP are due to productivity changes, he says,

Potential GDP is not a useful guide to making monetary policy.

I think that if Hall were to read my essay on Labor Force Capacity Utilization, he would dismiss that concept, also. But for different reasons, having to do with his pet labor matching model.

If he's right, then the 1970's macro that I have to teach for the AP econ test (I feel like I should come to class in mutton-chop sideburns, with bell-bottoms, and a paisley shirt) is just all the more out of date. Maybe the Jackson Hole conference will come to be known as the The Last Roundup for Macro.

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CATEGORIES: Macroeconomics

COMMENTS (1 to date)
spencer writes:

In the 1960 to 1974 era of strong productivity growth productivity growth average about 66% of real gdp growth. In the 1975-94 era of low productivity this ratio fell to 50%. But since 1995 it has averaged almost 90%.

This means that from 1960 to 1974 a one percentage point increase in real gdp was asociated with a 0.33 percentage point employment increase. From 1975 to 1994 each percentage point increase in real gdp was associated with a 0.5 percentage point increase in employmnet.
But since 1995 employment only increased 0.1
percent for each percent increase in GDP.

Your Lucy concept is very interesting. But I look at things a little different. I am more interested in what will happen to wages. So I have a wage equation that makes wages a function of inflation expectations, the unemployment rate and capacity utilization. Each has about a one-third weight. It has worked extremely well since 1967 -- if I include Nixon, a dummy variable for price controls -- and it bottomed just before actual wages did two years ago. It now implies wages ought to be growing, as they are.

But if this equation is correct it implies that the drop in labor force participation rate is structural and the Fed assesment that the economy is close to full employment is fairly accurate.

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