Beating about the bush

Failing to recognize that the economic orchestra conductor is the Fed

I single out Jason Furman because I believe his statement is a good example of the failure to recognize who conducts the economic orchestra.

A Jason Furman tweet:

Jason Furman


Most of the economic problems we're facing (inflation, supply chains, etc.) are high class problems. We wouldn't have had them if the unemployment rate was still 10 percent. We would instead have had a much worse problem.

The question is: Why the unemployment rate is not 10%?

A trio of charts tell the story.

Going into the Great Recession (GR), the Fed let NGDP fall way below trend over a period of several months. Unemployment went to 10% over this period.

Then, the Fed placed NGDP on a stable rising trend (albeit quite a bit lower than the previous one). With NGDP growth stable, unemployment embarked on a long & gentle downtrend.

When Covid19 hit in early 2020, money demand skyrocketed (velocity tanked) and unemployment went very quickly (not over several months as in 2008/09) to almost 15%. The Fed reacted (it was not the cause of the shock) quickly, and NGDP was soon travelling back to the trend level path it was on before the pandemic.

Unemployment very quickly falls. Sure, if the Fed had been hesitant as in 2009, unemployment would have remained high. The economy also would not have hit the Covid19-induced supply bottlenecks and inflation would have not been pressured.

In short, the monetary policy choice of the Fed determines the performance of the “orchestra”!