There’s only one reliable rule of thumb in macro

26th March 2019 Off By binary
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This is a follow-up to the previous post.

There is an endless search for rules of thumb in macro.

In the 1940s, very low interest rates were the new norm.

In the 1950s, rates began rising and frequent mild recessions were the new norm.

In the 1960s, one long “Phillips Curve” expansion was the new norm. We had it all figured out.

In the 1970s, the Phillips Curve fell apart, and we just had to live with stagflation.

In the 1980s, we didn’t have to live with stagflation, but big deficits were the new norm.

In the 1990s, we achieved budget surpluses and a Great Moderation (noninflationary boom), something no one expected.

In the 2000s, the Great Moderation collapsed into a deep recession that few expected (certainly not me or Robert Lucas.) Also, America’s first big housing boom and bust. Also, bank runs that were supposedly ended by FDIC.

In the 2010s, we had near-zero interest rates even as the economy recovered and unemployment fell to moderate levels. Also unexpected.

Every decade produces a new and unexpected macro situation and the 2020s will be no different. Rules of thumb don’t hold up over time.

So don’t tell me, “When you look at history, it’s clear that X will happen.”

Sorry, but there’s only one reliable rule of thumb in macro:

Things change.

PS. I am reluctant to hazard a guess as to what will make the 2020s special; perhaps it will violate the rule of thumb that says, “American expansions never last more than 10 years.”

PPS. I have a post on the Steve Moore nomination at Econlog.

PPPS. But don’t read the Steve Moore post, read this one.




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