Shortest Recession in US History

The Business Cycle Dating Committee of the National Bureau of Economic Research has a very important job. It is responsible for determining the peaks and troughs of business cycles in the United States. It thus decides how long recessions are and also how long expansions are. The Chair of the Committee is Professor Robert Hall of Stanford University.

The latest decision of Committee occurred just this week on July 19, 2021. The Committee decided that a trough in monthly economic activity occurred back in April 2020. They also determined that the previous peak occurred back in February 2020. Thus the recession, measured by the decline in employment from peak to trough, lasted only two months. It was the shortest recession in United States history. It was completely caused by COVID-19.   

This chart shows total employment in the United States. You can see that the peak in employment occurred in February and the trough occurred in April. Though only lasting two months the decline in employment was huge at 25.4 million.

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Monetary Policy a Half Century Ago, and Now

Today I  published an article in Project Syndicate. It starts with a memo sent fifty years ago, on June 22, 1971, by Fed Chair Arthur Burns to President Richard Nixon. Inflation was rising and Burns wrote to Nixon that the Fed was not to blame. Rather the economy had changed and a new policy – a wage and price freeze and controls—was needed.  

The memo convinced Nixon, and wage and price controls were implemented. But the intrusive nature began to show and the government controls were failing. Moreover, the Fed let the money supply increase, inflation rose to double digits, and the unemployment rate rose.

Last year, George Shultz and I wrote a book about this period, and we included the full text of the Burns memo because it is a perfect example of how bad ideas lead to bad policies, which in turn lead to bad economic outcomes. By the same token, good ideas lead to good policy and good economic performance, as Schultz and I showed.

The lesson for today is clear: inflation is picking up, and the Fed is once again claiming that it is not responsible for that development. Rather it is simply a bounce back from low inflation of 2020.

Moreover, the Fed’s policy is interventionist. The balance sheet has exploded, the growth rate of M2 has risen sharply, and the federal funds interest rate is now low compared to monetary policy rules in the Fed’s Monetary Policy Report.

It is not too late to learn and to change, but time is running out.

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Amazing New Facts About the 2007-2009 Global Financial Crisis

This week Raghu Rajan spoke at the Hoover Economics Policy Working Group on “Going the Extra Mile: Distant Lending and Credit Cycles” a joint paper João Granja and Christian Leuz. Here is a video of his presentation along with the slides and the paper itself

Raghu focused on the causes of the Global Financial Crisis of 2007-2009. He brought entirely new data to the question of what caused the crisis. He examined the distance between lender and borrower. Raghu argued that greater distance is a measure of increased risk, holding the technology of making loans, which can provide better information on the probability of repayment, constant. The lower the interest rate–as generated by the federal funds rate which is in turn set by the Fed–the more there is a tendency to go to longer distances and thus increase risks in an effort to preserve profit margins.

Raghu and his colleagues find by this measure that the period leading up to the financial crisis was a period of increased risk taking. A higher federal funds rate set by the Fed would have reduced long distance lending, and thus riskiness of the loans. A higher federal fund rate would have resulted in less risk taking, and would have avoided or at least greatly mitigated the financial pressures which led to the crisis. In this sense, Raghu Rajan argues that a monetary policy closer to what I argued for back in a 2007 paper would have been better.

The following chart of the interest rate illustrates the issue. The chart is from the 2007 paper which I gave at Jackson Hole, “Housing and Monetary Policy,” and published in Housing, Housing Finance, and Monetary Policy, the proceedings of FRB of Kansas City Symposium. I did not use the informative data or the measures that Raghu and his colleagues use now. I simply looked at policy rules and the deviations from the rules. The counterfactual interest rate is what would have been implied by a policy rule. The actual rate is much lower. The conclusion is clear and Raghu’s recent work supports it: a somewhat higher interest rate in 2003-2006 would have been a better approach for the Fed and would have avoided much of the Global Financial Crisis.

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The Impact of the Pandemic and Lasting Lessons for Teaching Economics

Yesterday, I gave a keynote talk at the tenth American Economic Association Conference on Teaching and Research in Economic Education (CTREE). I have been teaching economics for 53 years. I love teaching economics. I love researching economics. And I love doing policy in economics. So it was a pleasure to talk about teaching economics, and the questions from other economic teachers and researchers in the audience were really good. Here are the slides. I talked mainly about teaching introductory economics. My main message is that students and teachers have benefited greatly, and can benefit greatly, from the new technology–including Zoom– but that basic economic ideas still work just fine when applied to the recent pandemic around the world, especially if we learn how to use the new technology well.

Ten years ago, I gave a keynote talk at the first CTREE and here are my slides from ten years ago. Yesterday I built on that earlier lecture. The Conference was then a major new initiative of the AEA to focus on teaching economics at all levels.  The first conference was an outstanding success, as was the one held virtually in the past few days. It is a great idea to have a conference on teaching. I have written economics textbooks, including one with Bob Hall that was first published 35 years ago and one on Principles of Economics with Akila Weerapana that was first published 25 years ago, and is now in the 9th edition with FlatWorld.

But much has changed about teaching over the years, and COVID-19 and the responses have provided more lessons. My talk is in three parts

(1) What we learned about teaching following the Global Financial Crisis?

(2) What we learned about teaching in the current crisis?

(3) What are the lessons about teaching for the future?

Posted in Financial Crisis, Fiscal Policy and Reforms, Monetary Policy, Regulatory Policy, Stimulus Impact | Leave a comment

A New Look at Income Inequality in the US

Yesterday, at the Hoover Economic Policy Working Group (EPWG), David Splinter of the Staff of the Joint Committee on Taxation discussed a paper he wrote with Gerald Auten of the Office of Tax Analysis at the Department of Treasury. A video of Splinter’s presentation, including many questions and answers, is posted on the EPWG web page here along with the paper “Income Inequality in the United States: Using Tax Data to Measure Long-term Trends” My internet went down so the video is really nice to have. There are also links there to Splinter’s excellent web page.

The paper and presentation explore in fascinating detail various data sources that bear on the widely reported finding of Thomas Piketty and Emmanuel Saez that the income distribution has widened. By adjusting for key technical issues and examining alternative assumptions for distributing income, their paper shows that there was little change in after-tax top income shares since the early 1960s, in contrast to the findings of Piketty and Saez (2003), which are based on individual tax returns.

Many have written about this topic and many, including me, have noted limitations of the data, including that IRS data are not ideal for measuring income because, for example, people report more income when the tax rate goes down, or because transfers are not in the data.  The important and highly original contribution of Splinter and Auten is that they have actually done the empirical work in a convincing quantitative way. Here is a graph from their paper which illustrates the difference.

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But even if the Piketty-Saez series are correct, policy should focus on the cause of the change. Is it a poor education system in which educational opportunities are restricted, especially for those who are disadvantaged, a fact that COVID 19 has made very clear? More generally, the explanation for the widening inequality may be restrictions on economic freedom. Not extending economic freedom to all in education is one example. Regulatory capture, crony capitalism, deviations from the rule of law are other examples.

Ironically some argue that moving away from the principles of economic freedom—higher marginal tax rates, more regulations, more discretion for regulators, more interventionist macro policy—is the way to change the distribution of income.  That would be a great tragedy since history shows that it has been more economic freedom that has pulled people out of poverty. And as Splinter and Auten show, it may not even be a distribution problem.

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Time for a Reentry to a Monetary Policy Strategy

In a new paper I examine the ways for the Fed to engage in a reentry to a rules-based monetary policy. For several years, starting around 2017, the Fed had begun to move to a rules-based monetary policy that had worked well in the US in the 1980s, 1990s, and in other years. Many papers were written at the Fed about the benefits, and the Fed began to report on rules-based policy in its Monetary Policy Report.

That move was interrupted in the first quarter of 2020 when COVID-19 hit. The Fed took a number of actions to deal with the effects and by most accounts these actions were special and were not consistent with rules-based policies. The Fed also stopped reporting on rules-based policy in its Monetary Policy Report.

Later in 2020 the Fed completed a review of its monetary policy and reported on possible changes in policy. By early 2021 the Fed began to put rules back in its Monetary Policy Report and the new rules reflected some of these changes.  But these changes have not yet affected actual monetary policy decisions and there is evidence of big difference between the rules-based policy and the actions of the Fed.

To develop an optimal reentry, I consider a recent paper by David Papell and Ruxandra Prodan.  For the Taylor (shortfalls) rule & the balanced approach (shortfalls) rule, they replaced the difference between the unemployment rate in the long run and actual unemployment rate with minimum of the difference and 0. If the unemployment rate is 3.5 percent and long run level is 4.0 percent, the interest rate is not raised.  That is, zero is the minimum of .5 percent (=4.0-3.5) and zero.

They also considered another adjustment which results in a Taylor (consistent) rule and a balanced approach (consistent) rule. They assume that the Fed would not adjust the interest rate if inflation is 2.0 or 2.1 percent; rather it would watch for inflation going above 2.2 percent.  Also assumed is that the equilibrium real interest rate is .5 percent.

I looked at the period from the 4th quarter of 2020 through the 4th quarter of 2023. Figure 9 from the paper copied below shows a big difference between the rules-based policy and the actions of the Fed.

It is time for reentry.

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Principles of Economics — Open – Online – Ready To Go

This spring we will be offering an open online version of the Principles of Economics course. To get more information and sign up, go to The course begins on Monday, March 29, 2021. It is self-paced so students can move ahead at the most appropriate pace. The video-lectures are based on my Stanford course.  People who watch the video-lectures and take short quizzes can earn a Certificate. There is an on-line forum on which Yiming He and I will be commenting and answering questions.

This on-line course covers all of economics at a basic level.  It stresses the key idea that economics is about making purposeful choice with limited resources and about people interacting with other people as they make these choices. Most of those interactions occur in markets, and this course is mainly about markets, including product markets, labor markets, and capital markets.  We will show why free competitive markets work well to improve people’s lives and how they have removed millions from people from poverty around the world, with many more, we hope, still to come.

The textbook for the course, Principles of Economics by John B. Taylor and Akila Weerapana, is available online here: It covers the key issues related to COVID-19 and the economic policy responses. I am looking forward to the course. Virtual online economics courses are becoming much more popular with the Coronavirus epidemic. But, economics is more important than ever, and we have been doing the online course for several years now, and have a great deal of experience. Here is a sampling of views about the online course which have been previously posted on Twitter:

Russell Roberts‏ @EconTalker: Great class. Great teacher. No charge. Get your basics right here.

Ike Brannon‏ @coachbuckethead: The most entertaining economist I know.

Brian Wesbury‏ @wesbury:  If you want to learn Economics from one of the best, click on this link!  What great news!

Juan Carlos Martinez‏ @juank700410: Educación gratuita y de calidad

Tom Church @TomVChurch Interested in economics? Take Econ-1 online. Pass the quizzes and get a statement of accomplishment! Plus, you’ll learn a thing or two.

Chris Pippin @ChrisPippin This is the class and the professor that made me an Econ major. Thanks to the generosity of @EconomicsOne and the miracle of the internet, now anyone can take it.

Nicolas Petit  @Competition Prof Great course by terrific teacher, comprehensive & more than all eye opening on real world problems like trade wars and monetary policy.

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The Need for a Monetary Strategy

Today the Federal Open Market Committee described its upcoming plans for the federal funds rate through 2023.  It is good, as I wrote last month on this blog that “Rules Are Back In The Fed’s Monetary Policy Report,” after a short absence, but it would more helpful if the Fed incorporated some of these rules or strategy ideas into its actual decisions.

Apparently this did not happen, as the chart below shows. The chart gives the FOMC’s projection of the federal funds rate and three different rules-based paths for the federal funds rate through 2023. This FOMC projection is the “value of the midpoint of the projected appropriate target range for the federal funds rate or the projected appropriate target level for the federal funds rate at the end of the specified calendar year,” as stated in Table 1 of the Fed’s Summary of Economic Projections.

The three other rate paths show the federal funds rates from three policy rules using the same parameters as those in the Taylor rule–discussed in the Monetary Policy Report–with the so-called equilibrium interest rate reduced from 2 percent to 1 percent, as has been suggested at the Fed. The three policy rules use the four-quarter inflation rates of the GDP price index, the PCE price index, or the core PCE price index, based on the most recent Congressional Budget Office (CBO) projections. They use the same percentage deviation of real GDP and from potential GDP as in the CBO report. Most other forecasters do not have inflation and real GDP much different from CBO.

Even with this smaller equilibrium interest rate, the Fed’s path for the federal funds rate is well below any of these policy rules. There is a difference now (in the first quarter of 2021), and the difference grows over time.

There is no mention of why the discrepancy exists between the Fed’s actual decisions and the rules. Does this mean that the Fed will actually keep the rate this low under these circumstances regarding real GDP and inflation?  Will it then raise the rate sharply in 2024? Taken literally, this is the implication because there is no indication that the Fed will do otherwise. I see no reason why the Fed could not be indicating now that its strategy is to raise policy interest rate as economic growth increases and inflation rises. Such an interest rate strategy would clarify the Fed’s monetary policy and facilitate the market adjustment when it takes place. So would a strategy for asset purchases and other aggregates.  

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Rules Are Back In The Fed’s Monetary Policy Report

The Federal Reserve’s latest Monetary Policy Report just released on February 19, 2021 has a whole section on monetary policy rules.  That policy rules are back in the Report is a very welcome development. It re-initiates a helpful reporting approach that began in the July 2017 Monetary Policy Report, as I discussed here, when Janet Yellen was Fed chair. The approach continued under Chair Jay Powell in 2018, 2019 and early 2020, but it was dropped in July of last year. The good news is that it is back.

Five rules are discussed in the February 2021 Monetary Policy Report, especially on pages 45 through 48. To quote the Report, these include “the well-known Taylor (1993) rule, the ‘balanced approach’ rule, the ‘adjusted Taylor (1993)’ rule, and the ‘first difference; rule.  In addition to these rules” and this is very important, there is a new “‘balanced approach (shortfalls) rule,’ which represents one simple way to illustrate the Committee’s focus on shortfalls from maximum employment.” Here is a table of rules from the Report:

There were also five rules on the earlier Reports, but one is out and a new one–the Balanced-approach (shortfalls) rule–is in. As stated in the document this modified simple rule “would not call for increasing the policy rate as employment moves higher and unemployment drops below its estimated longer-run level. This modified rule aims to illustrate, in a simple way, the Committee’s focus on shortfalls of employment from assessments of its maximum level.”

How much different would this shortfalls rule be compared with the regular balanced-approach rule? There is a helpful graph in the Report which answers this question. I have magnified a portion of that graph below so it is easier to see. Notice that the balanced-approach (shortfalls) rule is below the balanced-approach rule in 2017 through the start of the pandemic in 2020. This is the period when the actual unemployment rate in the United States is lower than the estimate of the long-run unemployment rate. Thus the shortfalls rule does not increase the interest rate as does the balanced approach rule without the shortfall. The rule in between these two in the graphs is the Taylor rule. The shortfalls and the non-shortfalls rule then move together during the start of the pandemic as the unemployment rate rises well above the long run rate. The adjusted Taylor rule stays above zero, but then will stay low for longer than the Taylor rule.

The important contribution of this new discussion is that one now has an explicit way to think about the Fed’s new “shortfalls from maximum employment” approach. One can see if the new rule performs better that the balanced approach or the modified Taylor rule, for example, by simulating models. A huge amount of research can take place both outside as well as inside the Fed. There is much work to do. So let’s get going!

While this is an excellent start, more could be done. It is a bit disappointing, for example, that, as the Report says, the aims “of having inflation average 2 percent over time to ensure that longer term inflation expectations remain well anchored, are not incorporated in the simple rules analyzed in this discussion.” This is a very important issue and may be the subject of future Fed Reports.

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Watch, Listen, and Enjoy a Film About Thomas Sowell

The new one-hour program “Thomas Sowell: Common Sense in a Senseless World,” is a must watch. Beautifully narrated by Jason Riley of the Wall Street Journal, it tells the amazing life story of Thomas Sowell, born in 1930 in North Carolina, raised by a great aunt after both his parents died, moved to Harlem at 8 years old, joined the Marines, went to Harvard for college and Chicago for a Ph.D., taught at Cornell and UCLA, finally settled at the Hoover Institution at Stanford University, and in the process became “one of the greatest minds,” as Riley puts it, “of the past half century.”  

Free to Choose Network just announced that they are releasing this fascinating documentary “for airing on public television stations across the country – and for streaming on Amazon Prime, YouTube, and at” The public TV airings begin this month, but already the response on YouTube is huge with over 2 million views in just one week.

There is so much to like about this film. Visuals stream across the screen with a perfect selection of background music, as we see photo after photo, including a 1940 vintage rotary telephone which young Tommy wished he had. And Jason Riley takes us on location to 720 St Nicholas Ave in Harlem where Sowell lived, and to the front of the Harlem Branch of the New York Public Library, where a slightly older friend, Eddie Mapp, told him about library cards and books, and changed his life forever.

We watch teachers in the classroom helping little kids learn, illustrating Sowell’s long-term interest in the value of education. We hear friend Walter Williams reminisce about the days when he and Sowell were the only two Black conservatives, so people would say that they should not travel on a plane together. Larry Elder speaks on how Sowell causes “people to rethink their assumptions,” Stephen Pinker on how Sowell will never compromise just to appear agreeable, Victor Davis Hanson on how “Tom is an empiricist,” and Peter Robinson on the many books Sowell published after turning 80. They all talk about what Thomas Sowell means to them and what he is like.

Tom’s special gift for explaining things and sharing with others is illustrated with Rapper Eric July and his Backwordz style of music. We hear Dave Rubin ask Sowell in a TV interview about why he changed course away from Marxism early in life: “So what was your wake up to what was wrong with that line of thinking?” asks Rubin, and Sowell simply answers “Facts,” with maybe the best one-word answer in history. And that sets the stage for much of Tom Sowell’s unique empirical, eye-opening approach to research and writing, whether about economics, race, history, discrimination, education or culture. Throughout the program Jason Riley shows time after time that Sowell is one of those very rare people: “an honest intellectual.”

Throughout the show we see quotes on the screen from Sowell: “My great fear is that a black child growing up in Harlem today will not have as good a chance to rise as people in my generation did, simply because they will not receive as solid an education.”  He talks of a turning point in the 1960s after which there was no longer a stigma from being on welfare, and urban schools went downhill. His latest book, Charter Schools and their Enemies, recounts the story of the Success Academy in New York City and holds out hope for the future.

Tom’s long held view is that there are no “solutions” to the difficult real world problems we face as a society; there are only “tradeoffs” where you try to get as close as possible to the optimal answer. Here the film develops a clever analogy with Tom Sowell’s avid hobby—photography—where one is always changing and adjusting the aperture or the focus to improve the image, but never reaching an all-encompassing solution.

The film squeezes in meaningful interludes, such as his common sense book about Late-Talking Children based on a very personal story, or the saga of Steinway pianos where freedom to set up a new firm in America and try out new ideas was essential.

The film includes his time at the Hoover Institution where instead of teaching thousands in classrooms he reaches millions with his books and his welcome emphasis on free markets and personal responsibility.  He was drawn there in part by his teacher when at Chicago, Milton Freidman.

Lucky for us, Jason Riley is about to publish a new book about Thomas Sowell. It is a biography called Maverick. I have had a chance to take a peak, and it is wonderful, a perfect book to read after the movie. Indeed, it is a must read.

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