About that fiscal cliff

The unemployment rate in July was 10.2%. At the end of July, the fiscal stimulus ran out and Keynesians predicted a disaster if it were not renewed.

Three months later, unemployment was down to 6.9%, far lower than Keynesians predicted. Probably even lower than what they would have expected if a second round of fiscal stimulus had been enacted.

Sort of the opposite of 2009, when the unemployment rate with fiscal stimulus ended up even worse than what was was predicted to happen if Congress had failed to enact fiscal stimulus.

The embarrassing forecast misses keep piling up.



19 Responses to “About that fiscal cliff”

  1. Gravatar of BC BC
    6. November 2020 at 12:35

    “The embarrassing forecast misses keep piling up.”

    Yet, even now, some fiscal stimulus advocates still say things like, “I hope the low unemployment rate doesn’t make Congress complacent about the need for fiscal stimulus.” When fiscal stimulus doesn’t produce the promised results, proponents say that we didn’t do enough of it. When positive results come without fiscal stimulus, the proponents warn us not to let the positive results dissuade us from enacting the fiscal stimulus anyways.

  2. Gravatar of Federico Ricardo Checozzi Federico Ricardo Checozzi
    6. November 2020 at 12:46

    I’m remembering what Krugman (or folks like Werning) said about this crisis (supply issues with demand effects). I guess it’d be better to check their models to see how it fared (I expect some supply effects to have been dealt with, or US folks are crazy enough to ignore the pandemic and avoid those issues).

  3. Gravatar of Zach Zach
    6. November 2020 at 14:01

    Lars Christensen’s unemployment rate prediction was pretty impressive.

  4. Gravatar of ssumner ssumner
    6. November 2020 at 15:05

    Lars, Yes, I mentioned him over at Econlog.

  5. Gravatar of Benjamin Cole Benjamin Cole
    6. November 2020 at 17:04

    If Scott Sumner’s perspective is correct, then it means almost every major central banker on the planet has been wrong.

    Only on Thursday, Federal Reserve Chairman Jerome Powell repeated his call for more fiscal stimulus.

    Of course, the federal government is running a large deficit anyway, and concurrently running a quantitative easing program—a large helicopter drop,from the perspective of Michael Woodford.

    Is the right perspective, or framework this: A large federal program of helicopter drops has been effective in helping to combat the economic results of Covid-19 lockdowns.

    Perhaps the Keynesians and the monetarists are battling on the wrong hill, and the war has moved on to another region.

  6. Gravatar of janice janice
    6. November 2020 at 17:38

    I’m so tired of these big govt apparatchiks. Stimulus is THEFT.

    It is nothing but a clever way to steal from the American worker and bail out poorly run companies, or, in Nancy Pelosi’s case, her city of homeless degenerates. These losers always think they can make better decisions than market makers. Well, obviously you can’t! So get out of the way!

  7. Gravatar of Lizard Man Lizard Man
    6. November 2020 at 17:56

    I find the unemployment rate an exasperating statistic for thinking about the economy. What is the total number of persons employed? What is the ratio of persons employed to the prime age population? You know that the folks at NPR are talking about how women are dropping out of the labor force to care for their kids who cannot go to school, right? Aggregate income would be a great statistic as well.

  8. Gravatar of Jerry Brown Jerry Brown
    6. November 2020 at 19:48

    Maybe it is a different kind of disaster than the economy you are focused on. Where are we now, somewhat over 100,000 new cases a day? And going up pretty rapidly. It seems like a health disaster that will spill into the economy again. And it isn’t like 6.9% official unemployment is not a disaster all by itself, even if it is better than 10.2% in July- it is still about 2x where we were previously.

    If you are fully in agreement that ‘herd immunity’ is the best way to deal with the covid-19 right now, then, sure- don’t have the government support worker’s incomes. Many people will be forced, out of necessity, to work even if that means more and more cases. Unemployment will obviously fall- at least in the short term. But the health crisis becomes worse. There seems to be a trade-off to me. There are costs both ways- one is financial. The other is measured in health and life.

  9. Gravatar of ssumner ssumner
    6. November 2020 at 20:19

    Lizard, Read my recent Econlog post.

    Jerry, I agree that herd immunity is a horrible idea. Fortunately Trump is on his way out.

  10. Gravatar of Benjamin Cole Benjamin Cole
    6. November 2020 at 21:54

    From CBO

    The federal budget deficit in 2020 will be $3.31 trillion, or about 16.1% of GDP.

    In 2021, the federal budget deficit will be $1.81 trillion, or 8.0% of GDP, still about double long-term averages.

    I guess we can call that falling off the “fiscal cliff,” but we might also call it a “lowering of the fiscal flood”—but still, high waters.

    Was it fiscal or monetary easing that helped the economy recovery? Which totem has been elevated?

    Which analogies do you prefer—-floods or cliffs?


  11. Gravatar of Ralph Musgrave Ralph Musgrave
    7. November 2020 at 02:00

    “The embarrassing forecast misses keep piling up.” So where ARE these “forecasts”???????????

  12. Gravatar of rayward rayward
    7. November 2020 at 05:10

    This is not a cyclical slowdown, it’s a pandemic induced disaster. Almost a million women dropped out of the workforce just in September. Sumner lives in California, so he can see up close the disaster of idle men and women. Down in Florida, which is dependent on tourism for the huge hospitality sector, the disaster can be seen right outside the gates of Disney, as once thriving hotels and motels on International Blvd. have become squatters housing as the owners of the hotels and motels have abandoned them. My point is that the unemployment rate doesn’t come close to measuring the disaster that continues.

  13. Gravatar of Jay Jay
    7. November 2020 at 05:24

    If you look at statistics on savings and bank deposits, it appears that – in AGGREGATE – the fiscal stimulus from this year has just been saved by the private sector. But we all know that there are acute and large pockets of pain, as mentioned by several people above.

    There is probably need of ongoing fiscal support among the areas of the economy that are disproportionately gutted by the pandemic. But, any assistance would need to be far more surgical. How you can apply it surgically – without angering too many people on either side of the divide – is a real challenge. Should we juice unemployment benefits for longer, to help some who need it, but discourage others who don’t need it from working?

    It’s too nuanced and ideological for our fiscal policy makers to figure out what to do.

    But for once in my life, I agree with McConnell that throwing $3 trillion at the problem is not the right approach.

  14. Gravatar of Ray Lopez Ray Lopez
    7. November 2020 at 05:45

    Unsourced Sumner post, he doesn’t even mention the date. I distinctly recall around 2012 there was talk of a fiscal cliff and no less than 500 leading Keynesian economists, including the wife of Paul Krugman, herself a leading economist, signed a letter calling for increased spending to ward off a recession. I questioned why these leading savants were assumed wrong, and no less than the great David R. Henderson of the Hoover Institute wrote a column about me, rebuking me, a trait both me and the great economist Tyler Cowen share in common.

  15. Gravatar of D.O. D.O.
    7. November 2020 at 09:09

    Holiday season, which we are nearing, usually provides plenty of spending and temporary employment. Number gamers might want to adjust. (Just in case it is not clear, I do not support fiscal stimulus to maintain temp employment in the retail sector, I really don’t know how macroeconomics interacts with seasonal ondulations, someone might write a blog post about it…)

  16. Gravatar of ssumner ssumner
    7. November 2020 at 09:18

    Ralph, The media was full of scare stories quoting Keynesian economists back in July and August.

    Rayward, See my Econlog post from yesterday.

  17. Gravatar of Mark Z Mark Z
    7. November 2020 at 09:24

    Lizard Man, the employed to population ratio went up as well by 0.7 percentage points since September, so most of the change in unemployment rate was people going back to work.

    Also, women dropping out of the labor force to take care of kids isn’t going to be helped by stimulus spending if the reason is that daycares are too unsafe in the minds of the parents or unable to operate because of restrictions (or have become more expensive in order to deal with requirements imposed on them).

  18. Gravatar of Spencer B Hall Spencer B Hall
    9. November 2020 at 10:16

    re: “The embarrassing forecast misses keep piling up”

    How appropriate. And “Only on Thursday, Federal Reserve Chairman Jerome Powell repeated his call for more fiscal stimulus”

    Powell’s not talking about what happened in the past tense. The forward outlook is dismal.

    Rates-of-change in monetary flows, volume times transaction’s velocity, are equal to roc’s in P*T in American Yale Professor Irving Fisher’s truistic “equation of exchange” (where N-gDp is both a subset and proxy).

    This is in direct contrast to Nobel Laureate Dr. Milton Friedman’s thesis: FOR some years now, I have been engaged in extensive empirical studies of the relation between the stock of money and economic activity”… “The central empirical finding in dispute is my conclusion that monetary actions affect economic conditions only after a lag that is both long and variable.”

  19. Gravatar of Spencer B Hall Spencer B Hall
    9. November 2020 at 12:40

    The real problem is Jerome Powell. He discontinued reserve requirements and stopped publishing vault cash.

    Why did he do it? Because Powell thinks banks are intermediaries. So, how does that square with the fact that it’s virtually impossible for the DFIs to engage in any type of activity involving its own non-bank customers without an alteration in the money stock.

    Economists have sht for brains.

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