The United States had a genuinely good employment report earlier this month – the country is adding jobs like it’s 1999, and we’re finally seeing some actual wage growth.
But – you knew there would be a “but” – good news can turn into bad news if it encourages complacency.
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There will, predictably, be calls to respond to the good news by normalizing monetary policy and raising interest rates soon.
And we will want to raise rates above zero at some point. But it’s important to say that (a) we are still highly uncertain about the underlying strength of the economy, and that (b) the risks remain very asymmetric, with tightening too soon being more dangerous than tightening too late.
On (a), the uncertainty involves several dimensions: We don’t know how long the good news about jobs will continue; we don’t know how far we are from full employment; and we don’t know how high interest rates should go even when we do get to full employment.
On (b), we know how to deal with above-target inflation – it’s a problem, not a trap. But if you get into a trap like the one Japan is experiencing, or like the one the eurozone already seems to be in, getting out is very hard. You really don’t want to risk tightening too soon, and then find yourself desperately trying to get traction in a zero-rate environment.
So: The Fed should wait until it sees the whites of inflation’s eyes before it raises rates – and by inflation I mean inflation clearly above 2 percent, and if I had my way, higher than that.
Famous Fake Prediction Failures
Dean Baker, the co-director of the Center for Economic and Policy Research, has been annoyed, and rightly so, at recent claims that Keynesians failed to predict a slow economic recovery in the United States. Mr. Baker and I were both tearing our hair out in early 2009, warning that the Obama stimulus was too small and too short-lived.
But actually it’s worse than that. As Mr. Baker pointed out on the CEPR blog, Robert Samuelson, a columnist at The Washington Post, is taking the fact that this business cycle didn’t look like previous cycles as evidence that Keynesians don’t understand macroeconomics, and therefore shouldn’t even try to help the economy. But I was predicting a protracted jobless recovery long before the recession was official, and explained carefully why.
Also, I often get comments along the lines of “If you’re so smart, how come you didn’t see the housing bubble,” when I not only did see it (although Mr. Baker saw it much earlier), but got a lot of flak for daring to raise questions about the Bush Boom.
Well, I guess you can’t expect people to be aware of what I’m saying, seeing as how I only write for an obscure publication nobody has heard of.