He writes: "In January 2020, the unemployment rate was 3.5 percent, the lowest since 1953; it can reasonably be taken as being close to the natural rate. Put another way, output was probably very close to potential."
Except that the unemployment rate is a poor measure of slack. The evidence we have accumulated post Great Recession makes it extremely clear that participation matters, and many who were considered irrelevant, like disabled and "don't want a job" are actually relevant slack.
So for some quick math, the prime employment rate hit 82% in the late 1990s, when btw we were a lot less educated... Pre pandemic, it was 80.5%. That's 1.5 pp of slack. If you take 1.5/82, that is a 1.8% labor gap.
So you could interpret that as a 1.8% output gap. Or we could use an Okun's rule of 2pp of GDP for every 1% of unemployment, and we get a 3% output gap. Now add that to the 4.2% output gap he estimates, and we are at 7.2%.
This would scale his $900 billion to $1.5 trillion.
This would scale his $900 billion to $1.5 trillion.
For awhile now I and others have been arguing w/ the profession about the unemployment rate vs prime epop. As the Fed has taken a more nihilistic approach, some people said hey take the win. I think we are far, far from done with this debate. As the stimulus discussion has shown
So if I sound like an obsessive who won't let prime epop go, it's not just because I want people to admit I and other prime epop advocates were right, but because we can't not have an opinion on labor slack levels. There is no "assume nothing" option. This debate matters.
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