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The current situation: What should be done?

Explore the current economic situation characterized by low GDP growth and a tightening job market that is not yet at full employment. This analysis delves into the factors contributing to these dynamics and offers policy recommendations to address them, including infrastructure investment, higher inflation target, closing tax loopholes, labor standards enforcement, and more.

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The current situation: What should be done?

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  1. The current situation:What should be done? Jared Bernstein CBPP 6/14/16

  2. What is “the current situation?” • Low GDP growth - Solid job growth = low productivity • Job market increasingly tighter but clearly not at full emp (Levin gap, ~ 1.5 ppts; U6* = 8.5%) • Some nominal wage acceleration, but not an inflationary threat. • Why not? • NIWG: Fed target + prod growth + Bivens x = 2% + 1% (?) + 1% (for awhile!) • Most important: wage growth not bleeding into price growth

  3. Source: author’s analysis of Levin

  4. The current model is…um…not well understood.

  5. What are forecasters missing? • PC on the ropes • “Temporary” headwinds • Craze to raise (“normalize”) • Savings glut, sec stag, trade deficits Source: 2016 ERP

  6. Global macro at the ZLB • Actually, pretty familiar to progressives • Surplus countries export secular stagnation: suppress consumption, export savings, import labor demand, at ZLB (and dysfunctional fiscal authorities) demand takes hit. • Implications for Fed: small hikes can be overshoot on growth

  7. What should be done? • Infrastructure (duh) • S>I, sec stag, savings glut, trade deficits • Higher inflation target (but Fed loves its anchor) • Close wasteful tax expenditures that incent saving • Capital controls, enforceable currency disciplines • Labor standards • Direct job creation • (The new rules of the road for FTAs) • Collective bargaining • Adequate oversight of financial markets, capital misallocation • Full employment (FEPM?)

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