Tim Duy on fiscal stimulus
By Scott Sumner
David Beckworth directed me to an interesting post by Tim Duy:
Most likely, net job growth will continue even if at a slower pace. That job growth will be sufficient to drive income growth, and income growth will support consumption. But what about the missing fiscal stimulus, you say? I know this will be widely hated, but the decline in spending in nominal and real terms at this point pretty much matches the decline in income excluding current transfer payments . . .
The fall in consumption exceeded the fall in incomes early in the cycle while, on net, transfer payments are ending up as forced saving. The virus is the key impediment to growth at this point; there are certain sectors of the economy, leisure and hospitality in particular, with limited prospects until the virus is under greater control. There isn’t really a debate on this point; there is simply a nontrivial supply-side constraint on the economy right now.
I don’t hate Tim Duy for saying that the key problem now is on the supply side, as I’ve also been making that argument. That’s not to say that demand stimulus would have no value right now—both Duy and I would prefer somewhat higher inflation expectations—but this isn’t the main factor currently holding back the recovery.
Some people complain that the Fed’s new “average inflation targeting” policy is quite vague and ambiguous. That’s true, but in an earlier blog post I argued that as a practical matter it is pretty clear what the Fed intends to do. Duy linked to a speech by Chicago Fed president Charles Evans that confirms my prediction:
Forget the many years of underrunning 2 percent since 2008, and let’s just start averaging beginning with the price level in the first quarter of 2020. Core PCE inflation in the SEP is projected to be 1-1/12 percent this year and then gradually rise to 2 percent in 2023.12 Suppose it hits 2-1/4 percent in 2024 and then stays there. In this scenario, cumulative average core inflation starting from the first quarter of 2020 does not reach 2 percent until mid-2026. That is a long time. If you can produce 2-1/2 percent inflation in 2024, you can get there about a year quicker.
That was my view as well, that the Fed would start the clock at the beginning of 2020 and begin to push inflation a few tenths of percent above 2.0% in 2024, until the near-term inflation undershoot was offset. I don’t think there’s much doubt any longer as to what the Fed intends to do. The only question now is whether they will do what they promise or renege on their promise. We’ll probably know the answer by 2025.