Pethokoukis, Economics, U.S. Economy

A return to new normalcy


With (a) the US economy nowhere back to its pre-recession job and GDP trends, and (b) inflation nowhere to be found, it is disappointing that the Fed seems on the verge of doing less rather than more. I have to say, I more or less agree with Paul Krugman here:

Why is this happening? Part of the reason is that the Fed is constantly under pressure from monetary hawks, who always want to see tighter money and higher interest rates. These hawks spent years warning that soaring inflation was just around the corner. They were wrong, of course, but rather than change their position they have simply invented new reasons — financial stability, whatever — to advocate higher rates. At this point it’s clear that monetary hawkery is mainly a form of Puritanism in H. L. Mencken’s sense — “the haunting fear that someone, somewhere may be happy.” But it remains dangerously influential.

What the “new normal’ really means is establishing a new economic baseline, looking forward, and forgetting about the past. So if we get 3% growth and 200,000 jobs a month, that’s not so bad. And it wouldn’t be — if we had a catch-up phase after the Great Recession. But we didn’t. Thus the gaps. Instead of acting as if the worst is over, Washington should be treating the current recovery as the long economic emergency that it really is.

5 thoughts on “A return to new normalcy

  1. More money-crankery from Jim, but at this point, why should we expect anything else?

    The fact is that inflation has been occurring but has been confined so far to the capital plant. Since no one complains when his stock portfolio goes up in value, this inflation is masked, and Keynesians like Pethokoukis, like the proverbial ostrich with its head in the sand, refuse even to count it.

    But, what happens when that inflation breaks into the consumer market? This is what the Fed has to prepare against.

    At a deeper level, the “hawks” need to understand the fundamental weakness of the Keynsian argument: The “positive” statistical models developed by von Neumann do not provide us with economic truth but only economic history. That is because statistics, though they can measure well, do not penetrate the underlying legal base. Crude as they sometimes are, only the “normative” methods of the late Austrians (von Mises, Hayek, Rothbard) reveal to us what actually is happening. These men apparently missed one important, contributing factor (John Hicks’s fundamental theorem of capital), but as von Mises, himself, once acknowledged, the cure for error is not abandonment of economics but better reasoning.

  2. Ah well, what can we do at this point? Try to work harder? Tax the poor and middle class in the name of new social spending? Seems like that’s where it’s headed, again.

  3. Bernanke should say, “We will taper up, or taper down, depending on conditions.”

    And then state clearly those conditions.

    This “we may taper down, but it is a secret when and if we do and by how much” approach can only rattle markets.

    There are signs that the excess reserves in banks are entering the economy through consumer spending and commercial and industrial loans. But the Fed needs to hold firm, and stay the course until we get a full-fledged recovery.

    Weakness now could be lethal to a robust economic recovery.

    Anyone who thinks tight money works needs to study Japan. You can also move to Japan if you like tight money.

  4. Economic growth has been crippled, as in Europe, by government spending and regulations which consume about 60% of our economy. It results in slow growth and high unemployment, especially for those trying to enter the workforce. Economic growth will be slowed as long as goverment is so oversized. The 15 PE of the stock market is no longer justified because future returns will be crippled.

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