95 Comments

Hi Noah, another good article.

If you don't mind a meta comment, personally I read and follow you for your economic writings because you explain contemporary topics of economics and political economy using economic theory and empirical economic science and reference them in your text while having a research background in this field yourself. This is what differentiates you from what one can find in typical news magazines.

Lately I had the feeling that there was an increase in more political commentary, e.g. regular jabs at "leftists", mostly on twitter but tempered also on Substack. While I share your political opinion in this regard, I think this is a sort of "cheap dopamine" for writer and readers that is detriment to long term quality of the content and the readership.

Best regards

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The U.S. got lucky, but I think it’s because the U.S. is a unique place.

We are the largest oil producer in the world, this both insulated us from and benefitted us with the energy price shock.

The U.S. also provided the largest helicopter drop of money in history during a period when you couldn’t really spend the money and many consumers deleveraged. Many businesses also deleveraged. It is plausible there was a massive reduction in debt which lessened the likelihood of a debt-deflationary cycle being tipped off by say a collapse in Tech Stocks. So systemic risks and contagion were minimized.

Finally after a decade of very low interest rates, where the private sector signaled to the government it wanted public investment, we got public investment. The U.S. implemented an industrial policy, which resolved first mover and hold up problems limiting the private sector’s investment in productivity enhancing investments. The opportunity cost of money and investment is now higher than it was years ago when VC funding was just being spent on Juiceros.

The Federal Reserve’s interest rate hikes didn’t cause a recession because they were small tailwinds relative to underlying fundamentals.

Or course some dissertations will sort this out in a decade, unless the real bullshit cycle theorists desk reject all reality based macro at journals and signal to students not to answer why things happened.

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If we do get the full soft landing, I'm making a shrine to Powell in my room.

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LOL.... four simple theories.....none of which address the real cause... a rise in productivity driven by an unprecedented absorption of technology across the broad economy accelerated by the Covid shock. Not really surprised... economist seem to walk around with a static model of the underlying economy.

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Expectations are probably the biggest part but another factor to consider is much of where real growth comes from in the US, research & development & engineering (including software) was if anything positively impacted by the pandemic. Friends who are very high level technical management or research academics had very productive periods 2020-2022. Friends in their 3rd or 4th biotech startup also had a productive period. A big factor: travel, more specifically a lack of it. As a research director no more short notice travel from Boston (Varian in Gloucester) to Taiwan for a 4 hour meeting and then dinner and flying home. His research team (ca. 14 PhD's) continued to work in the lab through this period while he mostly worked from home (but went to the lab, usually on his bicycle, 14mi, regularly, not worried about covid under clean-room conditions in his labs). A friend at Intel, (PhD Theoretical Physics, Cambridge) had a group of 105 PhD mathematicians (semi-seriously he would tell me he only hired Russian mathematicians because their skills were what he needed) and was one of the 3 or 4 people that had to sign off on building a new chip, negotiated with Intel to no longer manage a large group, and go back to doing the math and coding for determining if a processor design will actually work (an interesting problem because it is true NP-hard, it is impossible to verify the logic of a modern computer chip for every possible set of conditions). He went back to being a peak technical contributor at Intel on his terms.

Across a number of occupations (including starting and owning major companies) among family and friends more people made, combined pay and stock, over $1m in 2022 than any time before.

While that is anecdotal I think it probable that the people who work primarily with their brains had overall a pretty productive period so it isn't surprising the GDP growth curve looks like it does. Basically you can take real GDP growth rate, chop out the 2020-2021Q1|Q2|Q3 period, and you can't detect the removed period. Fiscal stimulus was critical in avoiding financial crisis for service workers and others sidelined by the pandemic response. One can debate if the level was optimum, but the fact that we basically recovered our full economic output on trend indicates the response was close to optimum.

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I think you should add option 5:

The U.S. achieved a soft landing by not achieving a soft landing and prematurely saying "mission accomplished." It wouldn't be the first time.

i.e. There was no soft landing and there will be no soft landing.

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It seems very strange to describe "Fed irrelevance" as a contradiction of Old Keynesianism. The central point of Old Keynesianism was/is the importance of fiscal policy relative to monetary policy. It was only after the defeat of the Old Keynesians in the 1970s by Friedman's monetarism (the name tells the story) that central banks came to rule the roost..

The success of expansionary fiscal policy in the GFC and Covid supports Old Keynesianism, as does the contraction produced by fiscal austerity. As regards monetary policy, the most notable tenet of Old Keynesianism as the liquidity trap idea that expansionary monetary policy is "pushing on a string" The failure of a decade of zero interest rates to produce a strong recovery from post-GFC austerity is consistent with this.

That said, most Keynesians would agree that highly contractionary monetary policy, sustained long enough, can produce a recession. But, fortunately, that's not what the Fed did.

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Why does the Quantity Theory of Money not get a shoutout? According to the QTM, MV=PY, where M is the total supply of money, v is the velocity of money (how many times the average dollar is spent in a year), P is the price level, and Y is GDP. The pandemic begins, we quarantine, Y drops and V plummets. The government responds by printing money, M2 goes up by 25% (https://fred.stlouisfed.org/series/M2SL), and so P stays relatively stable. Then we get vaccines, people start to emerge into the outside world once more, V starts creeping back up (https://fred.stlouisfed.org/series/M2V), but the Fed doesn't reduce M2 by anywhere near as much and so P goes up.

IMO, this also has the advantage of being the most parsimonious theory of them all. GDP is (roughly) the same before and after the pandemic, and the same amount of value is divided between far more dollars, so each dollar is worth less.

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I wonder if the collapse of crypto helped. The theory is that all this money running around at near zero rates caused speculative pricing on financial assets. A lot of that went into crypto. The wealth effect meant that people felt wealthier, so spent more. Crypto crashed wiping out paper wealth. People pulled back on spending, without needing job losses to do so. There were job losses across the IT industry, but it had shortages of people anyway, so most of those people probably found jobs of some kind quickly, even if not at pay as high as before.

This theory could be disproven by showing that consumer spending stayed on its previous trend line.

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Couple of things: 1) During Volker's time, President Reagan also increased spending significantly. The difference is that he spent on military and Biden spent on the people of the U.S. This achieved a classic case of the multiplier effect which benefited the U.S. economy. I calculated the amount and talked about it here: https://medium.com/datadriveninvestor/the-multiplier-effect-the-case-for-continuing-a-1-200-monthly-check-a080ea4618bc 2) I was one of the economists (panel of economic experts on Finder) that predicted a soft landing. Monetarists consistently downplay the power of fiscal policy. 3) Demand went up because it was pent up for almost two years of lockdown. That was a weird, temporary fluke that doesn't fit into past models at all. I'd love to see an analysis that includes these three things. Thanks for writing. I always enjoy your work.

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Over here in the real world, there has been no such thing as a soft landing. We are still in the clutch of a full blown recession. People are hurting and rhetoric is not making it go away.

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Inflation has not come back to the 2% target and Noah has already declared victory? This sounds ab awful lot like Bernanke telling us the fundamentals of the economy are sound in 2007. We are also at a time of historically low prime age male employment, so the official unemployment line does not properly capture the millions of American who are not working but would have been in a previous generation.

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It is absolutely insane to declare the battle against inflation over without a recession when the Fed has yet to declare a single rate cut. This is willful blindness.

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The hybrid theory may have too many moving parts to be elegant, but it seems right nonetheless.

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The problem I have with the expectations theory is that Fed threats are not, or should not be, credible.

The Fed was threatening to do everything it could to bring inflation down to 2%? Was this the same Fed that set as its target 2% inflation and yet inflation stubbornly persisted well below that target? And what did the Fed do to actually achieve its oft-stated goal? Not much, from what I could tell over the years.

So why was the Fed credible this time? Oh I get it. It's because businessman and financial types, who passionately hate inflation and are happy with a slack labor market, knew the Fed was lying when it said it was committed to getting inflation up to the 2% level but, because the Fed is biased toward their view, was actually very serious about getting inflation down to 2%, even possibly if that meant greatly increasing unemployment to squeeze that last bit of inflation from 3% or even 2.5% down to the sacred, credibility-confirming 2% level.

Or do I sound cynical?

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Once again, completely ignores the roles of corporate greed in this situation.

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