Arnold Kling  

Forecasting

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On Being Certain... Isn't That Just an Asian Effec...

Tyler Cowen writes,


"Dormant inflation" will spring to life, at some point quite rapidly, and the Fed will choose to tighten. Five to six percent inflation for a while would be OK but we will be faced with the prospect of more than that.

I think of the recession as a massive adjustment problem. Economic activity consists of people dividing labor and purchasing goods and services from the market, rather than doing things for themselves. If you build your own deck or mow your own lawn, that is contractionary. The challenge is to arrive at a division of labor that has everyone creating useful output, as opposed to excess output in housing construction, automobiles, and financial services.

Whether households lean toward more consumption or more saving is not the big issue that everyone thinks it is. The key issue is new enterprises that profitably employ young people entering the labor force.

I agree with Tyler that the outlook for inflation is bad. That in turn will cause a lot of distortions in people's behavior and slow the recovery. The "stimulus" will turn out to be a permanent increase in government spending. It will have its maximum effect on reducing unemployment in 2011.

The big upside surprise would be a snap-back in housing and autos, due to pent-up demand. The biggest downside risks are: (a) that other countries will have even worse adjustment problems, and their adjustment problems will feed back on ours; (b) that there is a sudden collapse of confidence in the solvency of the U.S. government, forcing us to sharply raise taxes or reduce spending.


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CATEGORIES: Macroeconomics



COMMENTS (7 to date)
Robert Simmons writes:

"If you build your own deck or mow your own lawn, that is contractionary."

So by that logic, typing this comment on this post is contractionary? I did it myself, didn't pay anyone.

Gary Rogers writes:

I think your logic ignores the consequences federal debt. The reason for the expected inflation is not only the amount of money pumped into the economy, but the likelyhood that we will not be able to sell enough bonds to prevent it. If the stimulus ends up as a permanent increase in government spending as you predict, the only option will be to crank up the printing presses, and all of us know what that means. We have reached a turning point in our economy that was forced on us because we did not make important choices earlier and it means we cannot continue the unsustainable practice of pumping up our economy with borrowed money.

When we borrow trillions of dollars, they must be paid back. And, if we are not a good credit risk, they must be paid back sooner rather than later. We can take our GDP from 2007 and subtract the part that was financed by government borrowing then subtract an additional amount that we will need to make payments on our debt and that gives a best case scenario of what we can expect our economy to look like.

The good news is that if we quit borrowing from our export customers, we will no longer depress our exports and that provides an avenue for growth. Mostly, though, we need to understand where we are economically and what we have to do to remain prosperous. Right now even the economists are giving bad advice.

Yancey Ward writes:

From Gary:

Right now even the economists are giving bad advice

Right now?

Billy writes:
Whether households lean toward more consumption or more saving is not the big issue that everyone thinks it is. The key issue is new enterprises that profitably employ young people entering the labor force.

That sounds pretty Austrian to me.

Bill writes:

"If you build your own deck or mow your own lawn, that is contractionary."

Where is Frederic Bastiat ("What is seen and what is unseen") when we need him?

michael pettengill writes:

"The key issue is new enterprises that profitably employ young people entering the labor force."

Isn't the problem of getting those over say age 50 back into long term middle income employment an even bigger issue?

With what little "retirement savings" drastically slashed in price and at the same time, income slashed and personal costs (health care) increased significantly, the older workers need good jobs for decades to come. In the 80s, early retirement programs, asset price appreciation, etc, allowed many of those over 50 to get by on under employment or no employment. That seems unlikely to repeat in the 10s and 20s.

Dave writes:

"I think of the recession as a massive adjustment problem. Economic activity consists of people dividing labor and purchasing goods and services from the market, rather than doing things for themselves. If you build your own deck or mow your own lawn, that is contractionary. The challenge is to arrive at a division of labor that has everyone creating useful output, as opposed to excess output in housing construction, automobiles, and financial services."

Can someone please ensure that Paul Krugman reads this post? It might clue him into what's going on in the real world.

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