Staying the Course

In a recent Wall Street Journal piece*, Jason Furman strongly advised President Biden and his economic team to “Stay the Course.”

Staying the course usually means sticking to a policy. If you decided to start a diet with no barbecue ribs – staying the course means you don’t eat any barbecue ribs. I am not sure what it means for Biden to stay the course. He has only been in office for a short time. He has no course. Should he continue Trump’s policies? Should he continue Obama’s? Or should he continue FDR’s course?

Anyway, Furman doesn’t really mean stay the course. What he means is that Biden should not stay any particular course. When it rains, Biden should wear a rain suit. When it snows, he should don his best parka and winter boots. When the sun shines, he should wear cool aviator’s sunglasses.

This sounds logical and easy and cool. Especially the sunglasses part. But wait, we learned in econ the difference between ex ante and ex post. Ex post we know if it is raining, or snowing, or sunny. But ex ante is where it is all at. Suppose you don’t trust the weather lady and you have to decide what to wear before you actually know for sure what the weather will be?

Now, all of a sudden, this is no longer a trivial decision. What do you wear if you are not sure of the weather?

What’s this got to do with Furman? Furman says Biden should keep the stimulus accelerator down as long as the economy needs it. Then when the economy clearly does not need the stimulus, take his foot off the gas pedal. Sounds cool.

But wait. Our problem/challenge is not about the economy in the past. It is about the future. Today's policy can't change the past. Policy always takes time to have impacts. You put in a policy today to ward off the evils of tomorrow. Just like farmers who plant in the spring, you don’t harvest until later. 

If the future is easily knowable, this is all trivial and meaningless. But farmers don’t know how cold and rainy the coming spring will be. And Biden does not know how weak or strong the economy will be in the next six months. Maybe the last zillion dollars of stimulus will kick in. Maybe it won't. 

We don’t know the course of the future economy? No … we don’t! Would Jason Furman please show me the models he uses that predict the future of the US economy?

Will he also look into history and show me that similar stimulus programs did not backfire? I think he is old enough to have experienced or at least learned what happened to the US economy in 1969 and then again in 1979.

Larry. Silly boy. That was so long ago! This same thing has happened since but these two examples are too beautiful to forget. These two examples defined a new term – Stagflation. Stagflation was a terrible time period in which both unemployment and inflation soared.

You do not want to live through time periods when inflation makes goods too expensive to buy and unemployment prevents you from finding work and income. No government would ever purposely visit its people with stagflation!

So why did they do that? Not because they planned it. They did it because, just like Furman, they cannot forecast the future. They don’t know when the economy no longer needs stimulus and thus, they don’t know when to back off the accelerator. Waiting too long to remove the stimulus is like waiting too long to tend to a broken leg. You have to do it in a timely fashion or you create an even bigger problem.

Waiting too long to remove stimulus causes inflation and unemployment to rise. That is called a No-Win situation. Why? Because once you have twin problems in the economy, the traditional macro tools no longer work. If you attack high unemployment you make inflation worse. If you attack high inflation, you make unemployment worse. 

So Mr. Furman,  Ms Yellen, and Mr. Biden. Please do not try to fine-tune the economy like you would fine-tune your radio. Your dials might move you from one station to the next -- but there are no dials for the economy. Pretending that there are will get you nothing but static. I lived through the 1970s once. Please don't put us through that again. I especially didn't like the leisure suits and bell-bottom jeans. Great advice: Don't wear a bell bottom if you have one!