Big New Ideas and Bad Old Ideas

Economic assumptions in Washington are changing.

My latest piece is up at The New Yorker. It's a profile of Isabella Weber, an economist whose unlikely fall and rise illustrates the way economic ideas are changing in the post-pandemic world. Read the whole thing here. 

The basic point is that after she was trashed online for proposing price controls as an anti-inflation tool, a whole bunch of policymakers began experimenting with price regulations as part of the inflation-fighting toolkit. The future is as ever uncertain, but I'm optimistic about Europe and the United States developing a more rigorous inflation control program beyond interest rate management. As Weber says in the piece, deliberately engineering layoffs as your primary response to inflation is just not a very promising path in a world threatened by climate shocks, war and disease. Here’s hoping her work can help inform a more effective policy consensus.

For the opposite perspective, however, have a look at Jason Furman’s recent appearance on CNBC. Furman explicitly states that the unemployment rate would need to rise “into the sixes” in order to get inflation back to 2 percent, but assures the audience that an unemployment rate between 4.5 percent and 5.0 percent should result in a tolerable level of inflation.

https://twitter.com/paleofuture/status/1666166764860764162

I have been arguing against this stuff for years now, so you will not be surprised to hear me repeat that I think deliberately engineering millions of layoffs is a bad idea. But take a moment to note how imprecise all of this is. At the current unemployment rate of 3.7 percent, 6.1 million people who are actively searching for a job nevertheless find themselves without one. The last time unemployment breached 6 percent, it was April 2021, and 9.7 million people were jobless (the rate was 6.1 percent). An unemployment rate of 6.9 percent, which we last hit in October of 2020, resulted in 11.1 people being without a job. So the “in the sixes” range Furman sketches would involve firing somewhere between 3.5 million people and 5 million people — it’s unclear whether 1.5 million people will need be thrown out of work. Furman’s more humane 4.5 percent to 5.0 percent unemployment proposal would require firing somewhere between 1.3 million and 2.0 million people from current payrolls.

Casually throwing around a few million layoffs here and a few million layoffs there is no way to make policy. It’s great to see people like Isabella Weber exploring other approaches, and even better that policymakers are listening to them.

Read the New Yorker piece!

Correction: This piece initially cited Furman’s lower unemployment range as between 4.5 percent and 5.5 percent. It was between 4.5 and 5.0 percent.