Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Underlying inflation reflects income growth relative to output growth, and aggregate income is still rising a couple of percentage points faster than before the pandemic; with nominal incomes up 6-7% a year and trend output growth likely nearer 3% than 4-5%, inflation is likely to run somewhat faster than pre-pandemic. That argues against lowering interest rates.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues that nominal annual income growth at 6-7% is inconsistent with the Fed’s 2% target, and forecasts annual trend inflation in the 3-3.5% range based on current income and output growth.

Does income growth outpacing output growth keep inflation above 2%?

Core argument: Aggregate U.S. income is rising a couple of percentage points faster than before the pandemic, and if nominal incomes rise 6–7% a year, spending should rise by a comparable amount.

The underlying inflationary trend is a function of income growth vs. output growth, and aggregate income is still rising a couple of percentage points faster than before the pandemic. If nominal incomes are rising 6-7% a year—even after job market churn has normalized—then spending is going to be rising by a comparable amount. And while trend output may have accelerated from ~2% to ~3% a year, it probably has not accelerated to 4-5% a year, which would imply that inflation will also tend to be somewhat faster than before. Officials do not necessarily need to do anything about this. The current combination of robust growth, high employment, relatively tame inflation, and mid-single-digit yields on safe assets represents the best set of macroeconomic and financial outcomes for the U.S. in decades. But this also means that there is little reason for monetary policymakers to lower interest rates, despite what (some of) their models may be telling them.

Takeaways by Macro Roundup® AI

  1. Aggregate U.S. income is rising a couple of percentage points faster than before the pandemic, and if nominal incomes rise 6–7% a year, spending should rise by a comparable amount.
  2. Trend U.S. output growth may have accelerated from roughly 2% to 3% a year, but probably not to 4–5%, which would imply inflation somewhat faster than before the pandemic.
  3. The combination of robust growth, high employment, relatively tame inflation, and mid-single-digit yields on safe assets represents the best set of U.S. macroeconomic and financial outcomes in decades, leaving monetary policymakers little reason to lower interest rates.

Related Articles:

  • It’s All About Shelter — Producer price inflation for final demand tracks consumer price inflation excluding shelter closely, and both show inflation under control; overall consumer inflation looks hot only because the shelter component is up 5.6%. That shelter measure lags rents by construction, and more current rent series show no recent inflation.
  • Furman On CPI — Core consumer price inflation has run hot for three consecutive months, at a 3.5% annual rate over 12 months and 4.6% over the past three, undercutting the view that the early-year jump was a seasonal anomaly. Shelter inflation has plateaued around a 5.5% annual rate rather than falling as bottom-up forecasts assumed.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.
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