The Macroeconomic Situation: How We Got Here

by: Brad DeLong

Labour markets: The wrong direction | The EconomistClick to enlarge

Back in December 2008 I thought that prudent macroeconomic policy--policy geared to deal with a 20%-percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look--involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets.

We got a real number of $600 billion in effective fiscal stimulus.

We really needed more. And we could still have more--(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table.

Ryan Avent tells us why we need them:

Labour markets: The wrong direction: I mentioned I wouldn't cover initial jobless claim announcements until they stopped hovering around 450,000, as they'd done since late last year. Well, they're no longer in the 400,000 range.... Last week, initial claims touched 500,000.... Long-term inflation expectations dipped again from July to August. The Cleveland Fed notes:

The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.68 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.

With the employment picture looking grim and inflation forecast to miss the Fed's target for years, it would seem to be an appropriate time to begin taking aggressive steps to reverse the economy's course.

Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80th-percentile forecast?