The Unassuming Economist

Like Jim Hamilton, I like the visual device suggested by my friend and former colleague Charlie Evans (a.k.a. President Evans of the Chicago Fed) of using a bull’s eye to show where the economy is relative to the Fed’s likely targets. Jim’s latest update shows the U.S. economy moving back towards the bull’s eye.

A nice paper by Philip Cross on what the different measures of GDP tell us. HT: Dave Giles’ Blog.

Jim Hamilton offers a characteristically clear summary of a Bank of England paper on the factors affecting global saving and investment and hence global real interest rates. It is a good example of how economists use supply and demand to analyze current developments.

http://econbrowser.com/archives/2016/12/factors-in-low-real-interest-rates

Try this at home. The chart below shows you the relationship between unemployment and output (to be precise, it is the relationship between the change in unemployment and output growth). The chart is automatically updated, starting with the relationship as it appeared in 1948 to 1963, and then adding 10 additional years at a time to bring it all the way to the present. (You can also click on this link to see these charts: Okun’s Law Over Time.) Now here’s the first question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?

Here’s the link to another macroeconomic relationship, this one between unemployment and inflation. Same deal: first you see the relationship over the 1948 to 1963 period and the charts that follow add 10 years at a time. (You can also click on this link to see these charts: Phillips Curve Over Time.) Second question on the test: Do you think the relationship shown in these charts has remained strong and stable over time?


If you are suspecting a trick you are right. To the lay person, it probably seems that the first relationship, known as Okun’s Law, is strong and stable and the second relationship, known as the Phillips Curve, is weak and unstable. But macroeconomists actually worry a lot that Okun’s Law is dead. And—using special goggles known as ‘econometrics’—they are able to see the Phillips Curve where the lay person may just see a cloud.

Robert Gordon, a renowned macroeconomist, for example has proclaimed the demise of Okun’s Law and noted that, in contrast, the Phillips Curve is ‘alive and well’. This is what keeps macroeconomics interesting: things may not be what they seem. (For what it’s worth, I think that Okun’s Law is alive and well and that the Phillips Curve is being kept alive with artificial resuscitation—but then I’m closer to a lay person than to a renowned macroeconomist.)