Sometimes it’s not easy being right. Last month, I had a debate with a colleague, where my argument was that the GDP forecast would be dropping soon. His position was something like: “Well, the Fed says 2.6%” – so it must be true, right? The Fed lowered their GDP forecast to 2% yesterday. I still think it has room to drop – somewhere around 1.7 or 1.8 by the end of the year.
Just to be sure, during normal “recoveries” after recessions, we have historically seen 5-7% increases in GDP. People getting giddy over 2.6% is not normal; or rather, it’s the “new” normal.
You don’t have to be a Keynesian, or a Hayek-ian (if there is such a word), or even a Marxist to understand one basic flow to the economy. I just don’t see the growth in the economy without employment levels going up, instead of down – and you don’t have to have a Nobel Prize to figure that out.
The GDP is the measure of health of the economy (in the production of capital). You cannot have GDP growth without either producing stuff or selling stuff. In order to produce stuff or sell stuff, you have to have people EMPLOYED to produce or sell stuff. And if no one can afford to BUY stuff, then it doesn’t matter how much stuff you produce, because you’ll never be able to sell your stuff.
As for the Fed, employment levels seem to be the last thing they’re worried about, despite it being in their mandate. Thinking about inflation without thinking about employment or demand is like living in a one-dimensional universe – it’s very flat.