Many sanguine about the Fed’s ability to clean up any undesirable inflation.

Maybe.

But in the past the Fed has mostly done this by causing recessions.

And the inverse of the flat Phillips curve may be a high sacrifice ratio—a lot of UR needed to reduce 1pp of inflation.
We have overworried about inflation for decades. As I tweeted earlier markets still expect below target inflation (and presumably markets are factoring in a large rescue plan).

But still, worth thinking hard about how to balance all the risks, not an easy/obvious issue.
And let me preregistration my view: if we get inflation of 3% I would argue for resetting that as our new target. And that would give us more space to deal with future recessions.
Some support a 4% target, I worry that would make inflation too noticeable to people so not worth it.

And pushing for a higher target when we could not even get up to 2 seemed a bit feckless, locking in 3 less so.

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Jason Furman

Jason Furman Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @jasonfurman

7 Feb
This isn’t a debate that can be settled by theory.

The theory (as well as evidence and financial market data) are clear: larger fiscal measure = more inflation.
The questions are magnitudes and balancing risks:

1. How much benefit from relief/stimulus?

2. How much inflation?

3. Is extra inflation desirable/undesirable?

4. If undershoot on output or overshoot on inflation how costly to correct later?
Having a “stimulus” theory or “relief” theory doesn’t tell us $1T, $2T, or $5T.
Read 9 tweets
6 Feb
Can make an even stronger point than Ezra is making here. Incentive effects do, indeed matter, on the margin.

But if you give people a flat amount of money you actually are not doing anything at the margin. Is an income effect not a substitution effect.
This matters because when you do what economists call “welfare analysis” (which, confusingly, is not actually analysis of what people used to call welfare programs), income effects don’t actually cause any deadweight loss. This is because they actually don’t matter at the margin.
That is to say, they don’t make it more expensive to, for example, work.

They do give people the ability to make more choices. They make different choices but that is an improvement and good, not actually a “distortion”.
Read 4 tweets
5 Feb
A story about the unpopularity of one-time checks in 2008 and their replacement with reduced withholding in Making Work Pay in 2009 and 2010.

Now checks are popular.

I don't think this has been told before. Will tell it, speculate about the reason, and guess at a moral.
In February 2008 Congress enacted a bipartisan plan that included checks that totaled $1,200 for a family of four (about $1,500 in today's dollars). The checks mostly went out in May, June and July.
When we went to Congress in November & December 2008 the near universal view of Democrats was please, please, please do not do another round of one-time checks.

We shifted to Making Work Pay which operated through reduced withholding and was spread out throughout the year.
Read 9 tweets
5 Feb
Back in November the market was very worried about inflation. Worried it would be too low.

Now with rising stimulus expectations the market expects considerably more inflation. But still is below the Fed's average inflation target.
Technical note: market expects 2.25% CPI inflation over 5 yrs. Need to subtract ~35bp to get the PCE inflation measure the Fed targets. So the expectation for PCE inflation is more like 1.9%.

Under the Fed's average inflation targeting goal they should be above 2%.
Huge uncertainty.

So much is unprecedented: size of stimulus (absent wartime wage/price controls), size of supply-shift due if we get COVID under control, balance sheet improvements.

We don't know what multipliers will be like, how quickly the supply side can rebound, etc.
Read 7 tweets
27 Jan
Some confusion about the term "pent up demand".

Short version, should distinguish btwn:

"Excess savings" (which we know households, in aggregate, have)

"Pent up demand" (a hypothesis that people will buy more this year to make up for the stuff they didn't buy last year).
The "excess savings" (stock) is because saving (flow) was higher last year due to higher disposable personal income (due to transfers) and lower consumption. This was $1.6T for 2020 and it is more now with the latest checks.

Note, is an aggregate, many households worse off.
This "excess saving" *could* be used to satisfy "pent up demand" if everyone who skipped a travel vacation in 2020 took one that was twice as long in 2021 or ate out twice as much.

If this happened the saving rate would be lower-than-average in 2021 and could even be negative.
Read 7 tweets
27 Jan
GDP for Q4 is coming out tomorrow. It won't tell us much about how the economy is doing very recently but will be a great moment to look back at 2020 as a whole and will provide some glimpses of 2021. A preview thread.
We only get GDP numbers for quarters not for months. If we got them for months GDP would likely have fallen in November and December. But the way the quarterly arithmetic works, GDP will likely be up around 4% at an annual rate in Q4. Not a good measure of now.
GDP will be down about 3-1/2 percent for 2020 relative to 2019. This is the largest decline in GDP since the demobilization from World War II in 1946, worse even than the 2.5 percent decline in 2009.

This is because Q2 GDP was very low and then it only partly recovered in Q3&Q4. Image
Read 8 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!