The normal Taylor rule takes into account the difference between inflation and a target inflation, and output and a targeted potential output. I will take a modified version of the Taylor rule and apply it to both capital output and labor output. First, capital output… Simulated nominal interest rate of capital = N + p […]

I would like to ask a question of the readers for their comments. Has aggressive monetary policy made labor less valuable? The idea is that cheap money for so long to investors has made profits easier to obtain, and that labor was not valued and rewarded as a means to produce profits. Therefore, wages held […]

If only China played their economy as masterfully as this man plays the Chinese bamboo flute.  

As output increases, there is an effective demand limit which slows down the utilization of capital and labor. Utilization of capital typically slows down before labor. The circled areas show times in the US when capacity utilization (blue) declined as employment (red) was rising or holding steady. This pattern normally happens before a contraction in […]

The weather has been great in Phoenix for months, but even so, the housing market is slowing down. Nick Timiraos, Real Time Economics from the Wall Street Journal, has an article today that presents the Phoenix housing market as the canary in the coal mine. If the housing market in Phoenix cools down, then other […]

Yes, potential output is lower than people thought, much lower. I have been saying for almost a year that potential output is lower. (link 1, link 2) Commentators on Mark Thoma’s blog thought I was nuts. Mark Thoma himself did not agree with me. Mark Thoma now offers one explanation to his class that the […]

There is a bedtime story of a young boy who put all his eggs into one basket and when that basket fell, all the eggs broke. It is risky to put your eggs into one basket. Investors overcome this risk by diversifying their portfolio. Even the colossal derivatives market is said to lower risk through […]

Antonio Fatas writes that the central bankers are estimating smaller output gaps in Europe, the UK and the US. I have been saying for a year that potential GDP is far less than the CBO estimate. But other economists have been sticking to the claim that the output gap is still quite large.  Economists do […]

In a post 3 days ago, I referred to an article by Doug Short on his graph for the ratio of initial unemployment claims to the civilian labor force. He made the point that the ratio may have already hit a trough. If that turns out to be true, weekly initial unemployment claims will trend […]

I have a student in Mozambique, Africa, who is doing an essay on how to create real economic growth among the general population. His main thesis was… “The Strenth of a man is determined by his ability to rise when he falls” I asked him to change his thesis to this idea… “The Strength of […]