David R. Henderson  

Good News on the Economy

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The job numbers are out today and they show that 200,000 jobs were added in January. That's good. Even better is that 164,000 of those jobs--over 80%-- were on private nonfarm payrolls.

Iain Murray at Competitive Enterprise Institute celebrates the 200,000 jobs and states:

It should be noted that these good job and GDP indicators have not come about as a result of any active government spending or direction. They are the result of supply-side stimuli--deregulation (or at least a halt to new regulation) over the past year and the reduction in tax burden as a result of the recent tax law.

I think that's roughly right. I would caution that his measure that he uses to show a halt in new regulation may well instead show simply slower growth in new regulation. Murray rightly points out that President Trump's administration has added fewer pages to the Federal Register and fewer new rules than any other president in the previous 25 years. But 61,950 pages of the Federal Register and 3,281 new rules do not a halt make. To be sure, many of those pages and many of those new rules are probably taken up with actual deregulation. When you eliminate or modify a rule, that takes pages and counts as a rule too. My guess, though, is that there has been on net new regulation.

But the spirit of his point is right. The economy can take a certain number of body blows annually and still grow. The fewer the body blows, the more likely that growth will increase.

He makes one fundamental point, though, that is mistaken. He writes:

Perhaps more importantly, the Federal Reserve Bank of Atlanta yesterday reported that its economic model suggested growth over the last quarter could be over 5 percent, double the consensus of economists. This would represent the economy bursting back into life after the long winter since the financial crisis. Indeed, such growth numbers would probably lead to inflationary pressure, which would in turn lead the Jerome Powell-led Federal Reserve to raise interest rates, probably at a much faster rate than expected. Of course, the Atlanta Fed's figures are only model projections, and so should be taken with a healthy pinch of salt.

The part that's mistaken? This one: "such growth numbers would probably lead to inflationary pressure."

The old saying is that inflation happens when more money chases the same amount of output. With an increase in economic growth, there's less inflationary pressure, not more.

Interestingly, in another part of his post, Murray links to an exposition of supply side policies that make the point I just made.


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COMMENTS (7 to date)
Iain Murray writes:

Thanks, David. A boneheaded mistake that I have corrected, with thanks.

People interested in the relative levels of regulatory and deregulatory pages in the Federal Register should look for Wayne Crews' forthcoming edition of Ten Thousand Commandments, which will cover this point in detail.

Scott Sumner writes:

Good post, but a couple observations:

1. The argument for an improved economy is stronger with real GDP than jobs. Job growth has actually slowed over the past year.

2. The question of growth and inflation is a complex one. Holding aggregate demand (NGDP) constant, growth is indeed deflationary, as you say. But of course aggregate demand can change.

My take is that we need to watch inflation over the next year or two, as that will help us to identify the extent to which (if at all) the recent growth is driven by demand side factors (which may be unsustainable) or supply side improvements (which are sustainable.) My hunch is that it's a bit of both.

Alan Goldhammer writes:

All this good news and the stock market drops by over 2% today?

Scott is correct about job growth slowing down. Furthermore, it's a little premature to discuss the impact of deregulation. David is correct; a number of major rules must go through notice and comment rulemaking and a number of others are or will be subject to major litigation efforts.

Mark writes:

Perhaps what he was trying to say (or should’ve been trying to say?) was that increased nominal growth suggested inflation had finally picked up, rather than would lead to inflation picking up.

Will these numbers likely be met as an ‘it’s about time’ moment for the many many people anticipating greater inflation (and confused by its absence) over the past few years?

David R Henderson writes:

@Iain Murray,
Good on ya, mate.
@Scott Sumner,
Good post, but a couple observations:
Thanks.
The argument for an improved economy is stronger with real GDP than jobs. Job growth has actually slowed over the past year.
I agree.
The question of growth and inflation is a complex one. Holding aggregate demand (NGDP) constant, growth is indeed deflationary, as you say. But of course aggregate demand can change.
I agree. I was holding growth of the money supply constant, as was Iain. See his comment above.
@Alan Goldhammer,
All this good news and the stock market drops by over 2% today?
No contradiction there. The good news might have been anticipated or even better news was anticipated.
@Mark,
Perhaps what he was trying to say (or should’ve been trying to say?) was that increased nominal growth suggested inflation had finally picked up, rather than would lead to inflation picking up.
No. See his comment above. He agrees that he made a mistake.

Chris H writes:

To be fair, before assuming a real effect has happened we really want to get the final adjusted numbers that come after a few months. People often focus on the numbers that come out immediately but later numbers often greatly increase or completely wipe out job numbers given in a month.

Dave Burstein writes:

With respect
This is post hoc ergo propter hoc reasoning. There are so many confounding variables here the continued (welcome) employment increase tells us very little about the effects of regulation.

Besides the regular variation, there are several other factors that might account for the trend.
Including:

  • The 10-15% devaluation of the dollar against European currencies. That's enough to have a major impact on trade and employment.
    • The increased confidence brought about by 8 years without a re
    cession.
The extraordinary gain in the stock market. That has makes people feel wealthier and probably invest more. In many areas, housing prices are also going up.
  • The prospect of massive economic stimulus, which has now come in the form of a tax cut.
Several other factors you can think of.
--------------

It's hard to separate out these factors in a large study over a longer period of time. They are likely to swamp the effect of the (relatively minor) change in regulation.

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