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Goldilocks economy and new business1/13/2024 Therefore, slowing down the recovery would have been a serious mistake if the inflation peak of 2021 did not turn into a spiral of wages and prices, and in the end we managed to lower inflation again without going through a major recession. A high level of unemployment is not only harmful while it lasts, but also has destructive effects in the long run because, as evidence shows, the earnings of young people who start their working lives in a situation of economic weakness are permanently damaged. In other words, unless political decision makers have access to some magic wand that I am not aware of, in 2021 we could only have kept inflation low at the cost of a much slower job recovery. The truth is that I do not see how we could have reduced the prices of services to the maximum without doing the same with employment in the sector. , which was to make all the adjustment by increasing the prices of goods. But we could have had lower headline inflation if we had forced the prices of services down - for example, by cutting aid to families or raising interest rates, thus limiting private spending - instead of doing what we did. This relative inflation of goods compared to that of services was inevitable if we were not to suffer a crippling shortage that we have, in fact, avoided: some consumer items have been hard to come by, but forecasts of a supplies apocalypse during Christmas has not materialized. ![]() And indeed, the relationship between the durable goods price index and that of services has risen sharply, reversing the normal technology-driven downward trend. And supply chains have struggled to keep up with increasing product purchases.īasic principles of economics teach us what is supposed to happen when there is a distortion of demand and a limitation of supply: the prices of the things that people rush to buy should rise relative to the prices of which they buy. Real acquisitions of consumer durables continue to exceed the pre-pandemic level by more than 20%, while services recently returned to their level of two years ago. Fear of contagion has limited demand for face-to-face services, such as restaurant meals, and people have compensated by buying physical goods such as cars and appliances. Let's start with what should be an unquestionable point: the recovery from the COVID era has been very unbalanced. I can already hear the screaming, but have a little patience. In fact, taking into account the dislocations related to the current pandemic, what we have implemented has been a “goldilocks” economy, or the right point: neither too cold nor too hot. Now, if I am correct on both counts, a surprising conclusion follows: economic policy in 2021 has actually been quite good. Could we have had considerably lower inflation without a much worse job outlook? And if not,Would it have been a good idea to accept a slower economic recovery in employment in exchange for less inflation? My answer is a resounding no to the first question and a probable, though not entirely certain, not to the second. However, there are two questions related to this combination of good and bad news that people should ask themselves, but that, to my knowledge, most do not. So the economists who warned about inflation early last year were right, while those of us who downplayed risk or predicted only a brief interlude of rising prices were wrong. ![]() The bad news is that inflation is at its highest level in decades. The good news is that unemployment plummeted thanks to rapid growth and job creation. Well, maybe it wasn't too bad, but still. For the US economy, 2021 has been both the best and the worst of times
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