The macroeconomy is weird, so it’s natural to want to try to describe it in terms of metaphors. But I think this kind of language promotes mistakes:
Patrick O’Keefe, director of economic research at J. H. Cohn, an accounting and consulting firm, said the recent run of gains was approaching “escape velocity,” adding, “The jobs recovery will finally have achieved the momentum that is necessary.”
The report followed a flurry of positive economic reports about the American economy, including a continued rise in consumer confidence and growing strength in the manufacturing sector.
This morning I read someone remark that today’s jobs report probably means we won’t hear much more about a new round of Quantitative Easing. But why not? As of last week, the case for QE was clear, simple, and overwhelming—the economy is much further from the Fed’s employment target than from its inflation target and has been for some time, so the Fed must do more to boost employment. As of today, the economy is still much further from the Fed’s employment target than from its inflation target and has been for some time, so the Fed must do more to boost employment.
Physics analogies about momentum and escape velocity promote complacency. Like the rocket of the American economy is now on track to hit the Moon so we don’t need to worry. What’s better is to just say what’s going on. There is a “natural” rate of interest at which the resources (capital, land, labor) available to the economy will be fully utilized but the rate of inflation will not accelerate. The financial crisis pushed this natural rate well below zero and prompted a depression. Over time, thanks to depreciation the natural rate has risen and today the gap between the natural rate and the Fed’s rate is much smaller than it used to be. But as witnessed by the 8.3 percent unemployment rate, it’s still really big! Back in 2007, nobody thought an unemployment rate of 8.3 percent and falling would count as “escape velocity” they’d wonder what people had done to screw up so badly that the unemployment rate reached 8.3 percent. It’s great that the gap is narrowing, but we need to make it narrower still. Momentum doesn’t increase Americans’ material living standards or give workers valuable on-the-job training—jobs do, and we still need plenty more.
