Macro Roundup

Ed Comment:Clearly, we seem to permanently lose potential GDP growth in downturns. That is, we seem to grow from a permanently lower base. We do seem to get some bounce back recovery however (probably from the negative feedback loop from the Keynesian paradox of the thrifty and emotional overreaction) that we did not seem to get after the Financial Crisis (as I predicted). It’s hardly obvious to me that we can avoid these loses or cyclical downturns by trying run hot in between downturns. Unlike the animal sprits view of cycles, I believe we predominantly hit downturns because of misallocations of resources that eventually need to be corrected—offshore savings funding unsustainable subprime consumption for example. When that comes to an end, resources serving subprime consumption must be permanently reallocated. Finding and creating/engineering new demand and supply to serve that demand takes good ideas, innovative risk-taking, investment, learning, time, etc. Running hotter prior to the downturn only makes the reallocation process worse. It reduces resources that should have been allocated to new discovery prior to the crisis that never should have been allocated (to subprime consumption) in the first place. That leaves us further behind than we could have been had demand not been so hot. And there is no hope of being smarter than the market. We get downturns because people are naive about the pre-crisis dynamics—subprime consumption for example. They were cheering them on. No surprise, the mistaken view that cycles are predominately driven by animal spirts, leads to bad ideas/conclusions/policy. You know my view, policy and conclusions are largely the mistaken byproduct of analysis filled with unintended consequences of a world too complex to analyze performed by a bunch of wishful thinkers working backward from their desired conclusion to a set of unprovable foundational beliefs. What amazes me is it not their stupidity, but their reckless confidence.PS I am also skeptical of hysteresis hurting workers in downturns enough to cause the permanent lose of production capability that we see. The cheapest-to-replace workers are the first ones laid off and the last ones rehired. They tend to be the ones who are unreliable and unproductive relative to the average worker at their skill level. The productive workers tend to keep their jobs, college graduates for example tend to have low unemployment rates, even in downturns. So it’s hard to see damage from unproductive easy-to-replace worker being a primary reason why we seem to permanently lose output in a downturn. I gave you one reason—misallocations that cause downturns. Bad policy is another—restricting lending at time when you need to replace subprime consumptions as the incremental user of excess savings, for example.

In general he finds that recent literature suggests contractions leave scarring and high pressure expansions may have permanent positive effects.

"...In the last 25 years we have seen the development of an alternative model of business cycle that emphasizes the effects that business cycles can have on the drivers of long-term economic growth. In these models GDP is history dependent and all shocks can have permanent effects on output, what we refer to as hysteresis. This represents a change from the traditional cycle-trend decomposition that defined cycles as deviations from a trend that was independent of any of the traditional demand shocks that could be responsible for economic fluctuations. Our review of the theoretical literature has highlighted that in the presence of endogenous growth hysteresis is a natural outcome of many business cycle models. And the empirical literature has by now produced a strong set of empirical results that emphasizes the persistent nature of fluctuations and that identifies how much of this persistence can be associated with shocks that are related to demand, which in the traditional framework had been assumed to be temporary. In the traditional framework, policy makers had to assess how much of the observed change in GDP was cyclical and how much was structural. Stabilization policy would only react to the cyclical component. Errors in reacting to cyclical events could be costly but only in the form of additional GDP volatility. In the presence of hysteresis, the costs of cyclical shocks or the lack of action of policy makers are much larger because of the permanent scars they can leave on GDP through their interactions with the endogenous forces that drive long-term growth or the dynamics of labor markets. Aggressive and fast action during recessions becomes optimal policy. And during expansions, the cost of acting too early on fears of inflationary pressure can also be very costly as it can either reduce the potential growth of the economy or hinder positive developments in the labor market. In this new framework, policy makers should understand the likely large supply costs of not being as close as possible to potential output by running a “high-pressure” economy...."

Ed Comment: Bad economic policy since the CBO estimated the business tax cuts, chiefly the corp cut, paid for itself, i.e., raised more tax revenues from faster growth, than it cost to finance, namely because deficits build before growth gradually raises revenues.

Effective corporate tax burden would be at top range of OECD average"...We find thatif all countries in the OECD had the same share of net corporate capital income as a percent of GDP as the U.S., the average corporate tax collections would be 1.2% of GDP between 2013 and 2017 (1.3% if weighted by GDP), 0.7 percentage points lower than the pre-TCJA U.S. share of 2.0%. This places the U.S.’ burden the second highest, behind France. The Tax Cuts and Jobs Act reduced the share of corporate tax revenue as a percent of GDP to roughly the same as the adjusted OECD average of 1.3%. Contrary to what the Biden administration claims, its plan to raise corporate tax revenue would push the U.S. burden higher than the OECD average after adjusting for differences in corporate sectors. Their plan to increase corporate tax revenue collection to 1.8% of GDP would push collections well above the adjusted OECD average of 1.3% and would be the fourth-highest among the countries we examined (although it would still be slightly below the Pre-TCJA average between 2013 and 2017)...."