Economists are often criticized for assuming people behave like homo economicus – some kind of perfectly rational machine making emotionless decisions based entirely on money. Of course, no competent economist actually thinks this way, just as no competent physicist believes that billiard balls are perfectly round spheres operating in a vacuum on a perfectly flat, frictionless surface. But just as a physicist, while playing a game of pool, might find it useful to model the pool balls and table as if that was the case, there are also cases where economic models might usefully employ simplified understandings of human behavior. But nobody actually thinks these simplifying assumptions are literally true, or even useful in every analysis. One area where the homo economicus model assumption can be counterproductive is in homebuying. I recently learned about a clause that’s sometimes used when people submit an offer to buy a house, called an escalation clause. It works in a way that’s similar to a feature you can use on eBay. When bidding for an item on eBay, you can set your bid to, say, $50, but also program it to nudge your bid all the way up to a set amount, say $100, whenever anyone else makes a bid between your starting point and your upper bound. This saves you the time and effort of having to continually monitor an item during the bidding period. An escalation clause works something like that. Suppose there’s a house for sale for $500k. (If the bidding is taking place in San Francisco, assume it’s a listing for a hammock set up inside a garden shed.) An escalation clause in an offer might say “I’ll offer you $500k, but I’ll increase my offer in $5k increments above any other offers you receive, up to $560k.” I recently had a discussion with a real estate agent and asked about these clauses, and how often they come up. She told me that she and other realtors strongly advise against including an escalation clause. Offers containing these clauses, she explained, are actually more likely to be passed over in favor of offers that still fall below the set upper bound. So why does this eBay style approach backfire when bidding for a house? Well, in eBay, the knowledge about the difference between your current bid and your maximum willingness to pay is asymmetric. You know that you’ll bid as much as $100 for the item. But the seller of the item doesn’t know that. If the eBay system sends your bid up to $75, for all the seller knows, that number was also the best you were willing to offer. Obviously they know that buyers prefer to spend less and sellers prefer to sell for more, but it’s at least plausible for them to feel like they got the best offer they could have gotten. But an escalation clause takes that away. In putting down an escalation clause, you are explicitly telling the homeowner “I like your house enough to be willing to pay $560k, and I can in fact afford to pay $560k for it. However, I’m only going to offer you $500k right now, unless someone else gives me a reason to offer you something better.” Suppose in that case, a second offer comes in that’s just a straight offer of $530k. Homo economicus would then accept the bid from the offer with the escalation clause for $535k. But most people will choose the $530 bid, even though it wasn’t actually the highest bid they could have gotten. This is because people want to feel like they’re getting your best offer when you make a bid on their home. And even if the person making the $530k bid might have been willing and able to pay more than that, the seller doesn’t actually know that. Because the offer didn’t make it explicit through an escalation clause, the seller can still plausibly retain the feeling that this buyer was making their best offer, just as an eBay seller can think. And it turns out that the majority of people will pass up on an extra $5k to avoid doing business with someone they feel was trying to lowball them. It may cost them an extra $5k, but it makes them feel more respected. To be clear, none of what I’m writing about right now is showing some flaw in how economists understand the world. Any halfway competent economist understands that nonmonetary factors matter in decision making. Nonmonetary factors help explain why astronauts, despite doing some of the most physically and mentally challenging and dangerous work on the planet make a much lower wage than one might think – because being an astronaut is itself a huge nonmonetary benefit! A question for the readers – what are some nonmonetary benefits (or costs) that have influenced your choices regarding jobs, transactions, or other similar decisions? (0 COMMENTS)

Bloomberg has an article with the following title and subhead: How Torsten Slok Solved the ‘Sherlock Holmes Mystery’ of the Economy When others thought a recession was inevitable, Apollo’s chief economist correctly predicted more growth. He did it by looking at the data.  Sløk seems to be one of the few economic pundits that is able to avoid the temptation to reason from a price change: Adding to the difficulty, the 54-year-old has lately concluded that much of the economics he learned at school is broken. After the punishing series of rate hikes that began in 2022, the field’s models concluded with near certainty that higher interest rates would tip the US into recession. Instead, the economy powered ahead with barely any sign of a slowdown. Bad forecasts aren’t just an occupational hazard of Slok’s chosen discipline—they seem to be the default state. “The economics profession was totally wrong. And why were they wrong?” he asks rhetorically. “They were too wedded to the textbook. They basically said, ‘Oh, when the Fed raises rates, it always goes bad.’” You might quibble that good textbooks don’t say that higher rates always lead to recessions, but in a broader sense Sløk is correct that most economists put far too much weight on changes in market interest rates.  Long-time readers may recall that I was also skeptical of the claim that higher interest rates in 2022 constituted “tight money”. The past year showed that high interest rates alone can’t trigger a downturn. That left Slok with a “little Sherlock Holmes mystery” to solve, he says. Why exactly did rates stop being that one metric a forecaster could depend on? Slok has a guess. On the one hand, the economy in the US is now much less sensitive to rates than it used to be, with homeowners and companies alike locking in low-rate debt during the pandemic. On the other hand, the country has economic “tailwinds” the rest of the world doesn’t, namely an artificial intelligence boom as well as fiscal stimulus from the Inflation Reduction Act and other federal legislation signed by President Joe Biden.  Higher rates are only a problem for the economy when the Fed pushes its policy rate above the natural rate of interest.  As Sløk implies, both the AI boom and fiscal stimulus somewhat raised the natural interest rate in real terms, and of course higher inflation expectations in 2022 were a factor pushing up equilibrium nominal interest rates. It’s also worth revisiting the issue of inverted yield curves.  In the past, I’ve argued that while inverted yield curves are often correlated with subsequent recessions, the correlation is far from perfect.  The fact that a recession did not occur in 2023 or 2024 is a black mark for the supposedly “infallible” yield curve prediction model.  I suspect that if not for Covid the model would have also failed in 2020. (0 COMMENTS)

I gave an OLLI (Osher Lifelong Learning Institute) talk on Tuesday on President Trump’s economic policies and actions. As you might imagine, it was pretty negative–on failure to cut major spending programs, on cracking down on both illegal and legal immigration, and on tariffs. The one potentially bright spot was on DOGE. I led by telling them that I don’t have a DOG in the hunt. But I pointed out something about DOGE’s limits that I learned from my research and also from a discussion with a fellow economist. From my research Alex Nowrasteh and Ryan Bourne noted, in “Six Ways to Understand DOGE and Predict Its Future Behavior,” the following: According to Chris Edwards, total compensation for the 3.8 million federal defense and nondefense workers accounts for only 8 percent of spending(excluding postal employees). Why does this matter? Because government isn’t like most of the private sector. The private sector produces things. A huge amount of the federal government involves government handing people massive amounts of money. So if the number of employees falls, even by, say 10 percent, you probably won’t cut government spending by even 1 percent. From a discussion with an economist friend It matters which employees you cut. Of course, many people have noted that. You probably aren’t going to cut the right employees by cutting probationary workers, for example. But I’m getting at something different. An employee at certain government agencies–I’m looking at you, SEC and EPA–might have the ability and the power to impose $10 million in costs for little benefit. Cut that employee and make sure the other employees are too busy to pick up his portfolio, and you would save $10 million. The saving on his salary would be rounding error. But cut the number of Park Service employees by 5% and you’ll save a little by possibly giving up valuable things they were doing.   Added note: When I was prepping my talk last Friday, I remembered a funny line that Alan Simpson, the former Republican senator from Wyoming, had had about politics. I googled his name to find it and, lo and behold, learned that he had died that day. I did find a funny line I remembered but not the one I was looking for. Here’s the funny line I found (here at the 8:37 point): Politics is derived from Latin. Poli means many and tics means blood-sucking insects. There’s another one I’m going from memory on, and I used it to criticize a recent bipartisan measure to increase Social Security benefits for retirees who have state and/or local government pensions. Apparently, Simpson was giving a tour of the Capitol building to a bunch of Japanese dignitaries and was trying to explain the U.S political system in a few lines. Here’s what he said: There are two parties in America, the evil party and the stupid party. I’m a member of the stupid party. Occasionally, we do something both evil and stupid. That’s called bipartisanship.         (0 COMMENTS)

DEI is often criticized as a modern religion. Without getting into the weeds of that discussion, I would say that my attitude toward DEI, broadly understood, actually does fit neatly into the First Amendment’s view of religion – that the state should pass no law establishing it, nor prohibit the free exercise thereof. Many companies have recently scaled back their DEI programs. Others have chosen to keep them. I’m content to let companies make their own decisions about who they want to hire and on what basis. My concern as a consumer is if the company is serving my wants or needs at the end of the day. If it is, I’ll exchange with them. And if not, then I won’t. I didn’t make any effort to avoid shopping at Target when they were big into DEI, and I’m not even slightly tempted to boycott them now that they are scaling back their DEI programs. I shop at Target because they sell lots of things that fit my lifestyle, wants, and budget. I think there’s something deeply psychologically unhealthy about the desire to make the place I shop for oatmeal and paper towels into a fundamental part of my personal identity. Recently, the shareholders of Apple overwhelmingly voted to maintain the company’s DEI program. The news story linked above adds the following observation: The proposal targeting Apple’s DEI policies was backed by the National Center for Public Policy Research, a conservative think tank, which had also put forward the proposal at Costco. It argued that the existence of Apple’s diversity and inclusion programs exposed the firm to “litigation, reputational and financial risks”, pointing to the wider corporate retreat and noting that recent lawsuits have made it easier for workers to sue over discrimination. To loosely quote President James Dale from the movie Mars Attacks!, two out of three ain’t bad. That is, it’s fine if maintaining the DEI program exposes Apple to financial or reputational risks. As a private company, taking on those risks is Apple’s choice to make – or more precisely, a choice to be m made by Apple executives and shareholders. If you’re an Apple shareholder and those risks worry you, you can sell your shares. If you’re not a shareholder but just fundamentally object to any company that chooses to use these practices, then you can simply not buy anything Apple sells. If you’re neither an Apple customer nor a shareholder, then it’s just none of your business how Apple manages these decisions. The risk of litigation should not be a factor here. The test of how Apple manages its internal affairs should be how well they are satisfying the needs of consumers on the marketplace. If Apple’s hiring practices or internal governance makes them less effective at producing things consumers want, then Apple and their shareholders will pay the price for that in the marketplace. And that’s great! Or maybe Apple’s practices will work out for them, and they’ll continue to produce lots of stuff consumers want to buy, and reap huge success. Also great! But the answer to that question should emerge from a process of capitalist acts among consenting adults, rather than because someone in Washington decided they should be able to make these decisions on Apple’s behalf. (0 COMMENTS)

On March 4, I had the great pleasure of giving a talk at UW – Superior on my research on cascading expert failure (ungated version here).  You can find a video of the talk on my YouTube channel .  Thanks to Dr Joshua K. Bedi for hosting and for the Wisconsin Institute for Citizenship and Civil Dialogue for sponsoring the event. In the talk, I discuss how the decision early in the pandemic to reserve COVID-19 tests to just hospital cases led to cascading expert failure.  I failed, however, to bring that story to its conclusion, so I rectify that here. By restricting tests to hospitals, there was an upward bias in the results making COVID-19 appear far more deadly than it actually was.  Those results were fed into models like the now-infamous Imperial College London model, leading to forecasts in the millions over a period of months.  This, in turn, fed into the narrative of lockdowns.  Even as more and more evidence emerged that the virus was not as deadly as once thought and that the lockdowns actually contributed to the spread, those bad policies persisted. (0 COMMENTS)

A recent essay by Eugene Ludwig published by Politico argues that despite most economic data showing a healthy US economy in 2024, things are actually really bad. He tries to convince us by providing alternative data. However, a close examination of his alternative data is unconvincing. These alternative measures are not better measures of labor markets and personal income are faring in the US. And even by many of the alternative measures, Americans are still doing well economically. The Labor Market Ludwig presents a measure of “true” unemployment, developed by his own organization, which suggests that about one-fourth of the potential workforce is unemployed, underemployed, or poor. While this figure may seem alarming, it is primarily an expanded measure of poverty rather than a traditional unemployment metric. This measure sets a threshold of $25,000 per worker, rather than per household, which distorts its comparability to standard poverty measures. Measuring poverty is useful, but there is no need to merge a measure of poverty and a measure of employment. Doing so only adds confusion. Even by the author’s own measure, however, the data does not support a narrative of economic decline. The January 2025 reading of 23.3 percent was the second-lowest January reading on record, with only January 2024 registering a slightly lower rate at 23.0 percent. Furthermore, this figure is 10 percentage points below its January 1995 level, which was the first year in their data series. If anything, this suggests a long-term improvement in economic conditions rather than the economic distress the author implies, even if the number is much larger than official U-3 rate, which is currently 4 percent. Income and Earnings Ludwig’s second critique of economic data focuses on the BLS’s reporting of median weekly earnings, arguing that the measure excludes part-time workers and thus presents an incomplete picture. However, this complaint ignores the fact that the BLS does produce a measure specifically for part-time workers, which is also included in their monthly report. The full-time measure is valuable because the majority of the workforce—over 80 percent—consists of full-time workers. Furthermore, tracking separate measures for full-time and part-time workers is beneficial, not misleading, as it allows for a clearer understanding of labor market trends. Many part-time workers are students, caregivers, or individuals who voluntarily choose part-time work for lifestyle reasons. While their earnings are important, lumping them together with full-time workers would distort the overall picture of wage trends. More importantly, inflation-adjusted median earnings for part-time workers have reached record highs, except for the anomalous quarters during the pandemic. While part-time wages remain lower than full-time wages, the trend does not support the claim that earnings data systematically understate economic distress. Inflation and the Consumer Price Index The essay also challenges the accuracy of inflation data, though at least this critique does not rely on extreme revisions such as those from ShadowStats. However, the claim that alternative measures provide a substantially different picture of inflation is exaggerated. The BLS itself already produces an experimental CPI broken down by income quintile. The differences between the author’s preferred measure and official CPI figures are relatively modest. Since the end of 2005—when the BLS began providing a specific research series—prices have increased by 64.4 percent for the lowest income quintile, 60.7 percent for the middle quintile, and 56.8 percent for the highest quintile. While the lowest-income households have experienced slightly higher inflation, the variation is not as drastic as the author implies. Furthermore, when using these inflation figures to adjust for real wage growth, data shows that real wage gains have been strongest for low-income workers since 2019. This contradicts the argument that inflation has uniquely harmed the lower-income segment of the workforce. Instead, evidence suggests that wage growth at the bottom of the income distribution has outpaced price increases, resulting in real gains for lower-income workers. GDP and Income Distribution The author’s final critique centers on GDP, arguing that a single measure cannot capture income distribution effectively. While this point is reasonable—GDP does not and cannot account for inequality—the implication that economic gains have not been shared is misleading. He mentions a survey from the Federal Reserve which suggests Americans without college degrees are worse off since 2013, but data from the Federal Reserve’s Survey of Consumer Finances (SCF), which looks at the actual wealth levels of families, paints a different picture. The SCF shows that inflation-adjusted wealth gains have been largest for individuals without college degrees, even though those with degrees still hold significantly more wealth. This suggests that, despite disparities, economic gains have not been confined to the wealthiest segments of society. We can also look at data on the Ludwig Institute’s own website to see weekly earnings across the income distribution. Their data shows that across the income distribution, wages have grown substantially and are essentially at record highs. Their series starts in 1982, and since the largest real income gains have come at the bottom of the distribution, with the 25th percentile worker seeing a 71 percent increase in earnings, compared with a 49 percent increase for the richest workers they track (the 90th percentile). Conclusion The author of the Politico essay says that we want prosperity that is shared. He even put that phrase as the title of his Institute. But using his own data, as well as other data sources, we can see that we already have shared prosperity in America: incomes have been rising across the distribution, poverty is at some of the lowest levels we have ever seen, and unemployment is near record lows. America faces many economic challenges, but many of the solutions to those problems involve continuing the path of economic growth we have already followed, not changing course.   Jeremy Horpedahl is Associate Professor of Economics at the University of Central Arkansas. He blogs at Economist Writing Every Day. For more articles by Jeremy Horpedahl, see the Archive. (0 COMMENTS)

  If you seek his monument, look around. I learned yesterday that Manny Klausner died recently at age 85. I remember Murray Rothbard referring to H.L. Mencken as the “joyous libertarian.” For me, Manny was the joyous libertarian. My late friend Harry Watson and I came down from Canada in September 1972 to start in the Ph.D. economics program at UCLA. We had been reading Reason magazine regularly and following the libertarian movement that way and through other publications. We were charmed by much of what we read. So we arrived somewhat familiar with the American libertarian landscape. We knew enough to know that Los Angeles was one of the hotbeds of libertarianism. Naturally, we started looking around for libertarian events and we found out about the Libertarian Supper Club that met once a week (or was it once a month?) to discuss issues and developments. It met at a restaurant called the Eaters’ Digest. There was a very positive vibe at the time and so people would stand up and briefly share something that they had read or heard in the mainstream press or on talk radio that was somewhere between vaguely libertarian and actually libertarian. I think it was there that I first met Manny. I remember that he handed out a pamphlet he had produced because he was running as a write-in candidate for Congress in the 1972 election. That makes him the first candidate for Congress I ever met. I don’t remember all the policy positions in his pamphlet, but I do remember that they weren’t hard-core libertarian but, rather, something I found more sensible: laying out policies that would take us closer to freedom. I got a kick out of one particular position he took and I thought it made sense. He proposed ending the federal civil service system and returning to a 19th century-style spoils system. I think he told me, or maybe it was in the pamphlet, that the advantage of such a system is that it would be cheaper: instead of funding new programs to pay off supporters, successful politicians could fire the current employees and replace them with their supporters. I’m not positive any more that it’s a good idea but I think it is. I was talking to my friend Eric Garris this morning about Manny. Eric worked in the Reason office in 1974-75 and got to know Manny that way. Manny was part of a group that had bought Reason from its founder, Lanny Friedlander, in 1970. It was a very small publication at the time. But Eric tells me that Manny was hugely important in growing Reason as a business. British architect Sir Christopher Wren’s famous epitaph was “Lector, si monumentum requiris, circumspice.” Translation: Reader, if you seek his monument, look around. It is inscribed on his tomb in St. Paul’s Cathedral, one of 56 churches he was instrumental in building, including St. Paul’s Cathedral itself, after London’s massive fire of 1666. Similarly, if you seek Manny’s monument, look at Reason and the Reason Foundation. Note: Both Brian Doherty and Bob Poole have done excellent remembrances of Manny. P.S. Later today, I will post a more personal remembrance of Manny on my Substack. I’ll update here when that is done. (0 COMMENTS)

Everyone knows Social Security is broke and broken. According to the latest OASDI Trustees Report, Social Security has been paying out more than its total revenue (payroll taxes and trust fund) since 2021, and the latest projections have the Social Security trust fund depleted by 2033. After that date, it will only pay 79% of scheduled benefits if significant changes aren’t made. Reform, however, is well-nigh politically impossible. Old people are the most reliable voting bloc. No sane politician dares tamper with their precious entitlements, lest he invite the wrath of the AARP—just ask Paul Ryan or George W. Bush. Raising payroll taxes also won’t fly. Unlike the personal income tax, which is strictly progressive, lower earners pay proportionately higher shares of their income to Social Security—as of 2025, the only the first $176,000 of payroll income is taxed. While many proposals to fix Social Security include simply eliminating this “wage base” and taxing all payroll income, it’s likely that stabilizing the program would require payroll tax hikes on everyone—a political non-starter.  To fix Social Security, we need to think outside the box. Tweaking the retirement age, tax rates, and/or benefits won’t do. We don’t need “reform” so much as an escape hatch. If we can wean a relatively small number of people off of Social Security, we can preserve the substance of the program for those who truly need or desire it. What we need is a buyout.  Companies have used buyouts for decades to resolve unfunded pension liabilities. In a buyout, the company lets workers out of the retirement plan in exchange for some kind of payment. The pension plan member who opts out typically receives a lump-sum, which he/she gets to invest and manage; sometimes a more reliable annuity contract from a reputable financial company is offered. Buyouts are voluntary and therefore by nature win-win propositions: the company fixes its finances by offloading its pension obligations; workers who accept buyouts gain greater security, control, and freedom with their entitled funds. Here’s my idea for a Social Security buyout: I renounce the benefits that I’m entitled to when I reach retirement age. In return, the government will give me a modest, gradual reduction of my portion of the payroll tax. I crunched the numbers for a 10-year phased-in reduction of the employee’s share of the Old Age tax, from 5.3% to zero. Both Social Security and I come out ahead, easily. This is because Social Security does not invest tax “contributions.” Instead, it pays them directly over to retirees, in true Ponzi scheme fashion. Its rate of return ranges from pathetically small to negative for all but the oldest and lowest-earning participants—well below the returns available with stock market index funds. The buyout is calibrated to offer a significantly higher rate of return and gain in net wealth. To address concerns of paternalistic ninnies who fear that buyout accepters will spend and not invest, the legislation can require buyout takers to invest, within an IRA or similar tax-qualified plan, the amount of the payroll tax reduction. Because I still have decades to invest before retirement, I will come out ahead compared to what Social Security would have provided. There are many like me, probably millions, who similarly aren’t counting on Social Security and are self-funding retirement. They too will voluntarily leave, as long as the value of the buyout exceeds the net present value of their scheduled Social Security benefits.  According to my initial calculations, a Social Security buyout should be a clear win for workers ages 45 and under in the top half of the income distribution. For the government, the benefits of this kind of buyout are back-loaded—they don’t really start saving money or approach fiscal balance until 15 or 20 years down the road, when benefit checks zero out for the first cohort to opt out. Cash flow would also be somewhat negative for that first 15-20 years, as the payroll tax is phased out for the buyout accepters. Social Security’s “trust fund” assets and continuing payroll taxes can cover the initially negative cash flows; once the buyout-takers reach retirement age, Social Security can again become a surplus-generating program. In the meantime, taxpayers and the general public stand to benefit immensely, with increased personal wealth and increasing real investment into the US economy. It’s very difficult to predict the cash flows that this kind of voluntary buyout, operating under a truly massive government spending program, might entail. It is straightforward, however, to calculate investment performance for both potential buyout-taking taxpayers and the Social Security system. The policy paper includes spreadsheet models with internal rate of return and present value calculations for both individuals and the Social Security system. These simple models demonstrate the significant gains available for millions of participants. If enough people take carefully crafted buyouts, Social Security could eventually be made solvent, and here’s the best part, politically speaking: this requires ZERO changes to benefits, retirement age, or tax schedules for those who choose to stick with the program.  I’ve never liked Social Security, and I’ve long been on the record with harsh critiques. Libertarians and conservatives will probably latch on to the moralistic and/or financial critiques of Social Security, but the program remains both popular and a hot-button issue with the wider public, with HUGE vested interests and fiercely defensive political reflexes. Any proposal to fix Social Security, or even just slightly improve its fiscal stance, is going to have to involve political deal making that acknowledges sunk costs, avoids massive changes, and presents clear mutual benefits. With the ascent of Trump, the coming of DOGE, and an inkling of fiscal responsibility in the air in Washington, maybe the time is ripe for this kind of outside of the box proposal.    Find the entire policy paper here: https://inpolicy.org/2024/12/white-paper-the-art-of-the-deal-a-win-win-proposal-to-save-social-security/ Comments, suggestions, and questions welcome: tylerwatts@ferris.edu   (1 COMMENTS)

The Department of Government Efficiency (DOGE), the quasi-official advisory board led by Elon Musk to recommend workforce reductions and cost-savings in the Federal Government, has a laudable goal.  There certainly is a lot of waste in the government.  Fraud, too.  There are probably many tasks that the Feds currently do that states or private entities could do better.  Furthermore, without substantial changes, the Federal budget deficit is unsustainable.  There is a lot of fat that must be trimmed from the Federal government budget.  However, there is a right way and a wrong way to reduce budgets.  When facing cuts, one wants to right the ship in the least painful manner.  Indiscriminately cutting can make the situation worse.  In my years as a consultant before graduate school, I saw many firms turn a budget problem into a budget crisis (and, in one extreme case, turn a minor issue into bankruptcy) simply because they did poor budget cuts.   The wrong way to do cuts is what DOGE is now: slash and burn.  It’s hard to tell what criteria they are using to recommend cuts.  As best as I can tell, the reasoning is “I don’t understand this, so it must be waste or fraud.”  They’ve had to walk back several recommendations upon discovering they were recommending firing key personnel .  Cuts like these reduce the productivity of the organization and eliminate institutional knowledge, undermining the purpose of the cuts (to right the ship and get the organization running more efficiently).  Not only that, but seemingly arbitrary cuts undermine morale, which in turn reduces productivity further.  Budgetary problems persist, more cuts are needed, and the organization continues to become weaker.  This can lead to a vicious cycle of cuts and cuts, the ship never quite righting. This vicious cycle is not always maliciously intended.  It’s probable that Musk and Trump are doing what they believe through their experience businessmen is the right action.  I’ve seen the exact same mistakes made by many firms: bosses seek to “share the burden” of the cuts, asking various departments to all cut by an equal amount.  Or, also like DOGE, they lay off probationary employees (who tend to be easier to fire), thus cutting off the firm from young, maturing talent.  They target parts of the firm they do not understand, rather than relying on managers to help them make informed decisions. What’s the right way to make cuts?  Fortunately, economics can help us.  The optimal way to make cuts is to find the least marginally productive workers and target them for cuts.  Who, on the margin, is contributing least to the firm’s output?  Are there certain departments not advancing the goal?  These are questions that need to be answered.   Of course, just because this method is right doesn’t mean it is easy.  Measuring marginal productivity is no easy task, especially when one has an organization like a government where there are no products being willingly sold.  Furthermore, someone may appear unproductive, but actually has a wealth of institutional knowledge that would disappear with them. Righting a sinking corporate ship is no easy feat.  There’s a reason so many businesses fail, even those helmed by great leaders.  Nevertheless, it is a task that must be done from time to time.  And if one is to do it at all, one must do it well.  Trump and Musk would be wise to slow down and make reasoned, deliberate cuts, rather than flashy, often misunderstood, cuts for the camera. (0 COMMENTS)

The Federal Reserve has begun a review of its monetary policy framework. The previous review was conducted in 2020, and led to the “Flexible Average Inflation Targeting” framework. The FAIT approach would have been effective, if it had been tried. Unfortunately, the Fed forget the meaning of “average”.In a recent podcast with David Beckworth, Evan Koenig explained what went wrong with monetary policy in 2021: Right now, I think another example which addresses the question you raised is an article I wrote along with Tyler Atkinson and Ezra Max. This was a Dallas Fed Economics blog piece that came out in January of 2022, but we wrote it in the fall or, yes, the late fall of 2021, where the latest GDP data were for the third quarter of 2021. The reason we wrote it was because if you looked at an extrapolation of nominal GDP growth from before the COVID crisis, given the Fed’s 2% inflation target, given that most estimates of long-run potential growth in the economy at the time were 2%, and given that the economy before COVID was roughly at full employment, the natural target path for nominal GDP would have been a 4% growth path extended out from late 2019. We did that; we extrapolated a 4% growth path out, and we plotted nominal GDP since the beginning of the COVID recession. As it happened, in the third quarter of 2021, we just got back to that hypothetical target path, which is great. That’s what you want to do. The problem was that if you looked at the projections of private forecasters, and though we couldn’t talk about it at the time, if you looked at internal Fed projections, the projection was that nominal GDP was going to overshoot, substantially overshoot, that path and not come back to it. Our argument was, “hey, great so far, but trouble ahead unless the Fed starts removing accommodation. We should be in a neutral policy stance now, neutral in the sense of stabilized nominal GDP growth at 4%. The recovery in nominal GDP has been completed. We should be at neutral, and we’re not at neutral. We’ve got our foot all the way down to the floor on the accelerator pedal, interest rates at zero, and we’re doing asset purchases.” In their Dallas Fed paper, they clearly indicated that current Fed policy (in late 2021) was too expansionary: But will NGDP stay on that path? Professional forecasters think not. Blue Chip forecasters see NGDP growth exceeding 4.0 percent from now through 2025. Thereafter, growth stabilizes, leaving the level of NGDP 4.2 percent above trend, as depicted in the right panel of Chart 1. If the pandemic has no lasting effect on real output, that upward shift in NGDP would imply a price path 4.2 percent higher than before the pandemic. If the pandemic leaves a lasting negative mark on output, the upward shift in the price path will be even larger. The expectations of Fed policymakers, as documented in the latest Summary of Economic Projections, are broadly consistent with this outlook. An NGDP-targeting strategy would prescribe removing policy accommodation more rapidly than currently expected in order to keep incomes nearer their prepandemic trends and reduce the long-run price-level impact of the pandemic. They provide a chart showing the outcome they feared.      The actual NGDP overshoot was even worse than anticipated, but at least the Dallas Fed economists understood that policy was too expansionary.  I hope that the people revising the Fed’s policy framework will take into consideration which parts of the Fed correctly warned that policy was off course in 2021.  When policy mistakes are made, it makes sense to ask for advice from those who opposed those mistakes.   PS.  David Beckworth has a new Substack blog. (0 COMMENTS)