Self Criticism: What Happened to Recovery Winter?

On December 30, I published a very bullish column about the 2012 economic outlook that obviously doesn’t look so good today. What went wrong?

In narrow analytic terms, I don’t think much of anything went wrong. After all, I put a hedge in the piece:

None of that means we’ll remember 2012 as the best of times. What we’re talking about is a spurt of rapid employment growth from a low base, not a tight labor market and rapidly rising wages like we had in the late ’90s. But compared with the past four years, it’ll look like a magnificent boom.

Unless, that is, policymakers screw it up. If you imagine a world in which several million people go from unemployed to daily commuting, and large numbers of people abandon their roommates and get a place of their own, then there are likely going to be spikes in the prices of gasoline, rent, and other commodities. This will temporarily push inflation above normal levels and increase pressure on the Fed to tighten money and nip the boom in the bud. The central bank’s recent statements indicate that they won’t do this, but they haven’t been as clear as they should be.

So if you want to know why growth turned disappointing, blame the Federal Reserve. In its January and April releases (PDF and PDF) the central bank “forecast” that both core and comprehensive PCE inflation would remain persistently at or below two percent. But of course when a central bank makes a “forecast” that’s not just a forecast, it’s a statement of policy. In particular they were “forecasting” that if inflation came in modestly below-target, they’d be indifferent even if unemployment was above target while promising firmly that inflation would not drift above target no matter how badly job growth lagged. And they have achieved their intended effect—sluggish job growth. I don’t run a central bank, so my forecasts are really forecasts. In my case, it was a conditional forecast that we’d have strong growth if the Fed would clarify it’s willingness to tolerate a temporary burst of inflation. Instead, the Fed clarified its unwillingness to do so.

On one level, in other words, the piece holds up fine.

On another level, obviously the piece does not hold up fine. There’s a common sense difference between what you put in your headline and what you put in your hedge near the end of the piece. December 30 is a good time to publish a bold prediction for the New Year and a bad time to publish a wishy-washy hedge, so I chose the emphasize the bold prediction and the prediction didn’t pan out. There’s also, as any writer knows, an inherent tension between trying to capture all the nuances of an issue in your text and trying to have a good punchy headline. Sometimes that tension works out well, but other times it misfires. If the exact same piece had been headlined “THE MISTAKE THE FED MUST AVOID TO GIVE US A HAPPY 2012” then I think it would look much better, but that’s not what we did.