Jim Dandy to the Rescue

 In 1969 a music group named Black Oak Arkansas played the song, Jim Dandy to the Rescue. 

One verse went like this:

One day, I met a girl named Sue.
She was feeling kind of blue.
I'm Dandy, the kind of guy
Who can't stand to see a little girl cry.
Jim Dandy to the rescue!
Go, Jim Dandy! Go, Jim Dandy!

Apparently Jerome Powell and his buddies at the Fed took that song to heart. Powell said recently  in a Wall Street Journal article, more than two million Americans have permanently lost their jobs and 11 million fewer Americans were employed last month than in February. Mr. Powell said it would be important for Congress to spend more money to support these households, along with hard-hit businesses and state and local governments, to limit additional damage to the economy.https://www.wsj.com/articles/fed-signals-interest-rates-to-stay-near-zero-through-2023-11600279214

Powell previously had stated that the Fed would keep interest rates near zero for at least three years. But that’s not enough. He says he wants Congress to do even more.

While I love the song Jim Dandy, it made me realize how far we have come with respect to macroeconomic policy since I was in school.

Let's start with microeconomics. Draw a supply and demand curve for anything – let’s say masks. Note the intersection of the curves tells you the equilibrium value of output and prices of masks. Cool.

Now let's suppose people listen to Donald Trump or their barber and they decide to stop buying masks. The demand curve for masks shifts downward. What does the model say happens next? When I was teaching that sort of thing, I broke it down.

1.     With prices unchanged, supply would now be greater than demand.

2.     We call that situation a glut or an excess supply.

3.     Masks are sitting around gathering dust in storerooms.

4. Firms will cut back on mask production and employment.

5.    Firms would rather sell those masks than have them sit in a warehouse.

6.     Firms, faced with this new situation, lower the price of masks.

6.     Lower prices for masks raises demand for masks and they sell more masks at the new lower price.

Cool, eh. This is what people call market economics because competition in markets means there is a more or less automatic mechanism in a market economy. If demand and output decline, you don’t need Jim Dandy to come to the rescue. If demand and output decline, prices fall and as they do, this restores some of the lost demand. Presto. Problem resolved.

Some of you might be skeptical but this is what we believed for a long time. Somehow now, we never even speak of markets working. If there is a problem in a market – we need to bring Jerome Powell or Nancy Pelosi together to save the day.

You scoff. Larry, you are into the JD again.

So I went to the Bureau of Labor Statistics to look at price data. They have a lot of price data and I won’t bore you with all that. I will tell you that in the very extreme and dire situation in the US after 1929, we had a really big economic contraction called the Great Depression. Guess what happened to prices? Prices, as measured by the annual percentage change in the Consumer Price Index, fell during four straight years

            1930  -2.3%, 1931 -9.0%, 1932 -9.9%, 1933 -5.1%.

Did that solve the problem of the Great Depression? No. Did fiscal policy solve it back then? No.  

But a trip to the Bureau of Economic Analysis  (https://apps.bea.gov/iTable/iTable.cfm?reqid=19&step=2#reqid=19&step=2&isuri=1&1921=survey ) shows real GDP growing at very high rates from 1934 to 1944 (except for 1938 when it declined by 3.3%). In those 11 years the annual increases in real GDP ranged from 18.9% in 1942 to 5.1% in 1937.

So maybe prices did fall to clear the markets?

This is not a sophisticated historical or statistical exercise. But I can tell you that after a major collapse in the economy, prices did fall, and that was followed by a vigorous economic expansion.

A subsequent shift in policy advocacy towards Jim Dandyism means that markets don’t clear anymore. Why would a firm accept a lower price if it knows the government is going to come to the rescue? When Powell tells all of us, powerfully, that he wants inflation to be higher, it seems to me markets will never function properly. 

Look at the data again. Between 1949 and 2019 there were only three years in which the price level fell. Those three years were quite interspersed – 1949, 1955, and 2009. In every other year between 1949 and 2019, prices rose. Since 2017, the price index has increased by about 2% per year. Prices did not generally fall in recessions. 

If Powell would quit singing Jim Dandy and stop cheerleading for higher prices, and instead lecture firms about their social and economic responsibility during a recession, maybe then we might get a recovery -- a recovery that does not involve huge mountains of money sitting in banks and an enormous increase in national debt. Maybe worth trying?