There’s only one reliable rule of thumb in macro

This is a follow-up to the previous post.

There is an endless search for rules of thumb in macro.

In the 1940s, very low interest rates were the new norm.

In the 1950s, rates began rising and frequent mild recessions were the new norm.

In the 1960s, one long “Phillips Curve” expansion was the new norm. We had it all figured out.

In the 1970s, the Phillips Curve fell apart, and we just had to live with stagflation.

In the 1980s, we didn’t have to live with stagflation, but big deficits were the new norm.

In the 1990s, we achieved budget surpluses and a Great Moderation (noninflationary boom), something no one expected.

In the 2000s, the Great Moderation collapsed into a deep recession that few expected (certainly not me or Robert Lucas.) Also, America’s first big housing boom and bust. Also, bank runs that were supposedly ended by FDIC.

In the 2010s, we had near-zero interest rates even as the economy recovered and unemployment fell to moderate levels. Also unexpected.

Every decade produces a new and unexpected macro situation and the 2020s will be no different. Rules of thumb don’t hold up over time.

So don’t tell me, “When you look at history, it’s clear that X will happen.”

Sorry, but there’s only one reliable rule of thumb in macro:

Things change.

PS. I am reluctant to hazard a guess as to what will make the 2020s special; perhaps it will violate the rule of thumb that says, “American expansions never last more than 10 years.”

PPS. I have a post on the Steve Moore nomination at Econlog.

PPPS. But don’t read the Steve Moore post, read this one.


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31 Responses to “There’s only one reliable rule of thumb in macro”

  1. Gravatar of John Hall John Hall
    22. March 2019 at 11:25

    On the PS, why not make a bet?

  2. Gravatar of Michael Sandifer Michael Sandifer
    22. March 2019 at 12:40

    There might be at least one rule of thumb in macro. During the Great Moderation, nominal Treasury rates and NGDP growth were close together, on average. I don’t think this was a coincidence. For logical reasons I’ve laid out, flawed though they may be, and given this very slight bit of data consistent with, though not confirming of my hypothesis, I think it should at least be worthy of discussion.

    This is particularly true, since if I’m right, there is a better metric than otherwise for estimating r*.

    I suspect arbitrage at monetary equilibrium should have nominal Treasury rates close to NGDP growth rate expectations.

  3. Gravatar of Brian Donohue Brian Donohue
    22. March 2019 at 13:15

    1-month T-bill: 2.49%
    10-year T-note: 2.44%

    “Fed is behind the curve” seems like a decent rule of thumb.

  4. Gravatar of ssumner ssumner
    22. March 2019 at 13:39

    John, With who? If I want to bet, I’ll do it via the stock market. Come to think of it, I’m heavily invested, and hence am already making a big bet.

    Michael, I agree they are correlated, although growth has recently run above interest rates.

    Brian, The Fed is always a bit behind the curve.

  5. Gravatar of Michael Sandifer Michael Sandifer
    22. March 2019 at 13:49

    Scott,

    Yes, my suspicion is that when Treasury rates do roughly equal to NGDP growth expectations, then monetary policy is too loose or too tight. In the current case, I obviously think policy is too tight.

    If I’m correct, we even have a measure of approximately how tight monetary policy is, though it’s not perfect.

  6. Gravatar of Michael Sandifer Michael Sandifer
    22. March 2019 at 14:07

    That is, my suspicion is that when Treasury rates do not roughly equal to NGDP growth expectations, then monetary policy is too loose or too tight.

  7. Gravatar of Benjamin Cole Benjamin Cole
    22. March 2019 at 17:49

    There is still one rule of thumb in macro: the bulk of the profession will be fighting one of the last wars. And many will self-righteously carry an ideological escutcheon in front of them! And will happily hand out blinders to all who seek them.

  8. Gravatar of bill bill
    23. March 2019 at 08:51

    The Fed isn’t always behind the curve. See December rate hike. Tee hee.

  9. Gravatar of rayward rayward
    23. March 2019 at 10:08

    I admire Sumner’s honesty, including about Powell. As for a rule of thumb in macro, expect continued reliance on rising asset prices and high levels of consumer debt to keep aggregate demand and the economy from collapsing. What would be a better alternative, what polices would promote it, and how do we transition to it without risking another depression? More tax cuts for the rich? That reminds me of the insult directed at the fat girl jogging alongside the road: “It ain’t working!”

  10. Gravatar of ssumner ssumner
    23. March 2019 at 11:52

    Rayward, And I admire your dishonesty.

  11. Gravatar of Larry Larry
    23. March 2019 at 13:30

    “Sorry, but there’s only one reliable rule of thumb in macro:

    Things change.”

    Well, then, what good is macro?

    Why teach it if it doesn’t work?

    I’ll give you a rule for macro: Rich folks twist the rules to get richer until poor folks can no longer stand it. Then there is hell to pay. Or FDR comes back from the dead.

  12. Gravatar of ssumner ssumner
    23. March 2019 at 16:04

    Larry, Aren’t you confusing micro and macro?

  13. Gravatar of E. Harding E. Harding
    23. March 2019 at 21:15

    Aw, come on, Sumner. Lots of things change, lots of things stay the same, lots of things can be seen a mile away, lots of things are unpredictable.

  14. Gravatar of Sunday assorted links – Marginal REVOLUTION Sunday assorted links - Marginal REVOLUTION
    24. March 2019 at 09:12

    […] 2. There is only one reliable rule of thumb in macro. […]

  15. Gravatar of Matthew Moore Matthew Moore
    24. March 2019 at 12:13

    Why study macro then? Genuine question.

  16. Gravatar of H_WASSHOI (Maekawa Miku-nyan lover) H_WASSHOI (Maekawa Miku-nyan lover)
    24. March 2019 at 12:15

    CLS and PSPACE is too big. So we are often going to fishing some “useful” structure from proper subclass (subject to limited calculation power)

  17. Gravatar of Lawrence H White Lawrence H White
    24. March 2019 at 13:43

    Larry Summers has a rule of thumb for you: “typically interest rates come down 500 basis points to contain recessions.” Without “500 basis points of room” to cut nominal rates, central bankers “don’t really have the fuel in the tank to respond” to a new recession.

  18. Gravatar of Christian List Christian List
    24. March 2019 at 15:28

    Scott,

    now that the deep state witch hunt took a little break,

    what about another TDS post?

    What happened to the illegal Trump-Russia collusion to win the elections?

    What happened to obstruction of Justice?

  19. Gravatar of ssumner ssumner
    24. March 2019 at 19:52

    Matthew, To understand how policy impacts the macroeconomy.

    Larry, Yes, that’s the Keynesian view. As you can guess it’s not mine (or presumably yours.)

    Christian, Trump colluded with the Russians and obstructed justice. He did so publicly, so it’s not really in dispute. Whether he violated any laws in that area is another question.

    BTW, let me know when you’ve read the actual report, and not Trump’s interpretation of the report.

  20. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2019 at 02:19

    Big swoon today in Asian stock markets on inverted yield curve. Can the Fed reverse course?

    Scott Sumner says cutting rates is not reversing course, just steering. Explain that to the Fed.

    “You know, when a bus makes a screeching u-turn, that is just steering!”

  21. Gravatar of ssumner ssumner
    25. March 2019 at 06:19

    Ben, You said:

    “Explain that to the Fed.”

    I just did.

    Unfortunately, you didn’t seem to understand the post. Try reading it again–it’s not that difficult to understand.

  22. Gravatar of Christian List Christian List
    25. March 2019 at 08:22

    Christian, Trump colluded with the Russians and obstructed justice. He did so publicly, so it’s not really in dispute.

    Scott,

    you are really, really scary sometimes. OMG.

    And I thought for a second, that I saw all your abysses by now.

  23. Gravatar of gab gab
    25. March 2019 at 13:24

    I don’t believe the Fed is behind the curve and I think (God strike me dead) that the inverted yield curve is not signaling an imminent recession.

    The US economy is still in decent shape, not booming, but decent and the curve is merely reflecting foreign buying and lack of long term non-risk assets of reasonable valuation. When 10 year bunds are at -3 basis points, you’re gonna get big inflows into the long end of the treasury curve.

  24. Gravatar of Christian List Christian List
    25. March 2019 at 14:46

    The “moderator” on econlog is a censorship machine again, that wipes out critical comments, so I write my critical comment here as OT (sorry):

    When Trump questioned his own intelligence service on Russia, you ridiculed him. Who could you trust more, Russia or your own intelligence community, that was your pseudo question.

    The same act during the Mueller Affair, which was also initiated by the intelligence community. Trump questioned his own agencies again, and said it was just bullying.

    Now, the very same intelligence community says that Huawei and China are very dangerous, and Trump is following them for once, nevertheless you are as unhappy as ever.

    My impression that, there is no coherence in your arguments, except partisan hackery???

    https://www.econlib.org/good-news-on-trade-2/

    The great thing is that you are not banning people for a simple opinion, that’s a very positive feature, which unfortunately has become extremely rare today.

  25. Gravatar of Benjamin Cole Benjamin Cole
    25. March 2019 at 18:42

    Scott:

    I want Ralph “Fed” Kramden to make a u-turn!

    You can call it “steering.”

  26. Gravatar of Nostalgia & McLuhan’s Tetrad | Noah Brier dot Com Nostalgia & McLuhan’s Tetrad | Noah Brier dot Com
    26. March 2019 at 05:13

    […] the answers to articles like these almost always come back to the one rule of life: Things change. Technology hardly ever solves all the world’s problems or ruins society. Mostly what […]

  27. Gravatar of Scott Sumner Scott Sumner
    26. March 2019 at 06:32

    Christian, There is lots of evidence that Russia tried to influence the US election.

    There is no evidence that Huawei is a security threat to the US.

    How complicated is that?

  28. Gravatar of Matthew Waters Matthew Waters
    26. March 2019 at 06:37

    Christian,

    The Barr letter says definitively that Russia hacked the DNC and made several approaches to Trump’s team.

  29. Gravatar of Brian Brian
    26. March 2019 at 13:16

    Scott,

    All joking and insults aside, a surplus isn’t something you ‘achieve’ in the 90s. The other side of the g’ment’s surplus was the private sector’s deficit. This was a red flag to those who understood the realities of our monetary system (MMTers). You admit you missed the great recession. MMTers did not. Ever wonder why?

    Brian

  30. Gravatar of Christian List Christian List
    26. March 2019 at 17:16

    Scott,

    Russia tried to influence the US election.

    No doubt about that. But that wasn’t your claim at all. You claimed Trump conspired with the Russians.

    Christian, There is lots of evidence that Russia tried to influence the US election.
    There is no evidence that Huawei is a security threat to the US.

    What you call “evidence” is information fed through the intelligence and media channels. It’s exactly the same. I trust those guys to some extent, so both accusations must be true to some extent. What’s not possible is your method of endless biased cherry-picking.

  31. Gravatar of ssumner ssumner
    26. March 2019 at 20:55

    Christian, I actually heard Trump publicly encourage the Russians to interfere in the US elections. You might not have been paying attention, but that doesn’t mean it didn’t happen.

    I did not see any evidence that Huawei is a threat to our national security. Obviously such evidence might exist, but our allies don’t think so, and that evidence has not been presented to either the press or our allies. In addition, Trump has offered to lighten up on Huawei if the Chinese give in to our trade demands. That’s public information. It’s not hard to see what’s really going on here.

    Brian, You said:

    “You admit you missed the great recession. MMTers did not. Ever wonder why?”

    If you want to comment here, it might be useful for you to try to discover what I actually believe. Otherwise you are just wasting your time.

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