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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
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  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
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  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

AI Summary. Running the US economy at high pressure appears to support the "reverse hysteresis" hypothesis that sustained strong demand draws people into the labour force and boosts business investment, research and development, and dynamism. As inflation cools toward central bank targets, the economy and labour market have shown marked resilience, though US budget deficits are projected at 6% of GDP.

Julia Coronado Financial Times
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Julia Coronado argues the US economy’s outperformance relative to other advanced economies suggests “reverse hysteresis” where tight labor markets due to fiscal stimulus are driving increased investment and productivity.

Does running the economy at high pressure boost labor supply and investment?

Core argument: Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.

Janet Yellen pondered in 2016 whether a “high-pressure economy” could prompt more labour force engagement, business investment, research and development, and generally greater dynamism — a sort of reverse hysteresis. The combination of the pandemic and the policy failures in the aftermath of the financial crisis effectively led the US to run the experiment of running a high-pressure economy. The results are increasingly supportive of Yellen’s reverse hysteresis hypothesis. Pandemic frictions and generous policy support initially contributed to spiking global inflation and a hard turn towards restrictive monetary policy. But as inflation cools towards central bank targets, we have seen a stunning degree of economic and labour market resilience. Bond markets have been understandably nervous with budget deficits in the US projected at 6% of GDP for the foreseeable future.

Takeaways by Macro Roundup® AI

  1. Janet Yellen's 2016 hypothesis that a "high-pressure economy" could raise labour force engagement, business investment, research and development, and dynamism — a reverse hysteresis — is increasingly supported by US outcomes.
  2. The pandemic combined with post-financial-crisis policy failures effectively led the US to run the high-pressure economy experiment, with pandemic frictions and generous policy support initially contributing to spiking global inflation and a hard turn to restrictive monetary policy.
  3. US budget deficits are projected at 6% of GDP for the foreseeable future, leaving bond markets nervous even as inflation cools towards central bank targets alongside economic and labour market resilience.

Related Articles:

  • Why is the U.S. GDP Recovering Faster Than Other Advanced Economies? — The U.S. output advantage over other advanced economies is attributed mainly to faster labor productivity growth and secondarily to hours worked per employee. Rigid foreign labor markets and job-retention policies kept workers attached to firms producing below capacity, while the U.S. saw about 3x more sectoral worker reallocation and a surge in new firm formation.
  • Does Worker Scarcity Spur Investment, Automation, and Productivity? Evidence from Earnings Calls — The authors estimate that a one-unit increase in a firm's labor issues, as measured by earnings calls, raises its investment by 28 basis points, implying roughly $55bn in additional US investment attributable to tighter labor markets. The effect is concentrated in industries relying heavily on routine manual tasks, such as manufacturing assembly and warehouse packaging.
  • U.S. Business Investment in the Post-COVID Expansion — Business fixed investment has held at roughly the same share of U.S. GDP as before COVID, a better outcome than after every other recession since 1980, when investment typically fell as a share of GDP and contributed less well into the recovery. American businesses invested $430bn more than if investment had followed its usual historical pattern.
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