Here’s what I wrote a month ago:

The latest employment report is a disappointment, but the job market is actually somewhat stronger than this number would suggest. Consider the following:

While the payroll survey shows gains of only about 450,000 over the past two months, the (less accurate) household survey shows gains of over 1.7 million. That’s a phenomenal number, as household employment has gone from a deficit of 4.6 million to a deficit of 2.9 million in just two months.

But why pay any attention to the less accurate household survey? Because even though it is less accurate, it provides some information, at the margin. Thus it picks up gains in self-employment, which might matter during a period where people like working at home to avoid Covid.

It’s also worth noting that the payroll figures will likely be adjusted upward. How do I know this? Because the payroll numbers were revised upward in each of the past 8 months. The odds of that happening randomly are 1 in 256. Let’s revisit my prediction in two months to see if I’m right:

It turns out there was no need to wait two months. Here’s the FT:

“America’s job machine is going stronger than ever,” Biden said from the White House on Friday after data showed the US economy added 467,000 jobs last month despite the surge of Omicron. “[It’s] fuelling a strong recovery and opportunity for hardworking women and men all across this great country. America is back to work.”

The surprise increase in payrolls defied predictions by economists surveyed by Bloomberg, who had projected job gains of 150,000.

In addition to the jump in payrolls in January, there were large upward revisions to data from previous months, with the Bureau of Labor Statistics undercounting the number of jobs created by roughly 700,000 in November and December.

The monthly revisions of 398,000 for November and 311,000 for December were each greater than the largest single upward revision posted in April 1981, on a seasonally adjusted basis.

If newspapers reported these figures correctly (new estimate of levels vs previous estimate) they would have reported nearly 1.2 million more payroll jobs than the month before.

Update: Stefan pointed out that revisions to earlier months mean there was only a net gain of 688,000 compared to the previous month’s estimate (not 1.2 million). Interestingly, the household survey again came in very strong, with a 1.2 million gain. That lowers the employment gap from 2.9 million to only 1.7 million–a very rapid rate of closure in just one month.

I’m searching my old textbooks trying to find the model that says the Fed should set rates at 0% and do QE when inflation is 6% and the economy is booming. Can someone help me?

PS. This is especially scary:

US labour costs have, in turn, surged, as employers raised wages and sweetened benefits to compete for talent. Hourly earnings rose 5.7 per cent last month compared with a year earlier, and 0.7 per cent compared with December, a larger jump than expected.

I recall that in the spring of 2020, Lars Christensen predicted a very rapid reduction in the unemployment rate. His specific prediction was a bit overly optimistic, as there was an unexpected summer surge in Covid. But he was mostly correct in arguing that economists were greatly underestimating how quickly labor markets would recover.

PPS. Here’s my theory of why the jobs figure was stronger than expected. Perhaps employment normally falls off after the holiday season—which factors into the seasonal adjustment formula. But given the current worker shortage, why would firms lay off workers now?

PPPS. LOL, Fox News obviously doesn’t read my blog.

Economists are split between mainstream economists who believe that higher interest rates are disinflationary and NeoFisherians who believe that higher interest rates are inflationary. The public is also split on the issue:

I’m in the “not sure” camp, or more precisely “it depends”. If the higher interest rates are caused by a monetary policy change that causes the spot exchange rate to appreciate (as in Dornbusch overshooting), then it’s deflationary. If the higher rates are caused by a monetary policy that causes the spot exchange rate to depreciate, then it’s inflationary.

Most economists believe that higher interest rates are deflationary, at least in the US. So why does the public disagree? I see two possible explanations:

1. Maybe the public is NeoFisherian. They notice that inflation is higher when interest rates are higher (1960s, 1970s), and lower when interest rates are lower (1930s, 2010s.)

2. Maybe the public is thinking about the fact that higher interest rates make it more costly to finance the purchase of cars, homes, etc. In other words, they define “inflation” differently from the way economists define inflation.

Any other theories?

PS. Can we safely ignore public opinion on monetary policy? That’s one thing I am sure about. The answer is YES. Most of the public (not you guys) doesn’t have even a clue as to what monetary policy is.

When John Lennon wrote his famous song about utopia, he should have also asked us to imagine a world where velocity was constant. Here are some characteristics of such a world:

1. No long and variable lags in monetary policy. Indeed no lags at all.

2. Money supply targeting would be identical to NGDP targeting.

Many people wrongly assume that “monetarists believe velocity is constant”. And yet we are also told that “monetarists believe in long and variable lags.” These people must think monetarists are pretty stupid, as a constant velocity implies no lags at all. So which is it? What do monetarists actually believe?

The answer is simple. Monetarists believe in long and variable lags and they don’t believe that velocity is constant. Rather monetarists believe that velocity would be relatively stable if monetary policy were stable. They believe that actual real world movements in velocity are mostly due to unstable monetary policy. More specifically, a highly expansionary monetary policy will often cause velocity to fall in the short run and rise in the medium to long run. It depends on the persistence of the monetary expansion—is it one time increase in M, or a permanent (inflationary) increase in the money supply growth rate?

It would be wonderful if velocity were constant, especially base velocity. All of Keynesian economics would immediately collapse. The entire ideology would become essentially useless. Fiscal policy would have no impact on NGDP. There would be no paradox of thrift. Animal spirits would not affect aggregate demand. The IS/LM model would become meaningless.

The reason I don’t favor monetary aggregate targeting is not because monetarism was tried and failed—it was never tried for an extended period of time—rather because my reading of the evidence is that velocity would not be stable enough to produce good results even were the Fed to stabilize growth in the monetary aggregates over a period of many decades. Thus I prefer using market forecasts as a guidepost.

Some monetarists disagree with me, but pointing to unstable real world velocity doesn’t really address this question.