In terms of the state of the economy, more and more information is giving analysts cause to focus on the fact that the supply side of the economy is playing a bigger role in the current economic performance than anything else.
Nick Timiraos, picks up on this narrative in his current article in the Wall Street Journal.
I have been writing about this possibility in some of my recent posts. The last one of these articles appeared on last Thursday, November 16.
Mr. Timiraos focuses on two factors, the growth of the labor supply and the productivity of the labor supply. I add in a third component, the changing technology of the new era that we are entering.
But, the bottom line is that a year ago or so, we were all looking for a recession caused by a “demand-side” drop that would result in lowering the inflation that was being fought.
The attention was not on the supply side.
Well, many analysts asked, what was happening?
Most attention was paid to the fact that the Federal Reserve, in the middle of March 2022, began to raise its policy rate of interest, as it also entered into a program of “quantitative tightening” where it oversaw the regular reduction in the size of the Fed’s securities portfolio.
However, two other policy issues stood out that analysts had trouble dealing with.
First, the Federal Reserve had pumped “trillions” of dollars into the banking system in its efforts to combat the effects of the spread of the Covid-19 pandemic and the damage this event had on the wealth and spending of many people who also had strained financial situations because of current events.
These monies still remain in the banking and financial system and represent a “liquidity” base that needs to be removed from the economy in order to get back to a “more normal” environment.
Second, the federal government under the leadership of the Biden administration constructed very expensive programs of economic stimulus that generated a lot of government deficits that increased and is increasing the amount of outstanding federal debt.
These two policy issues have generated a lot of stimulus to the economy that works against what the Federal Reserve was trying to do.
What Has Happened?
All of these factors have given analysts a great many headaches.
I have often written about this being a world of “radical uncertainty,” a world where all the possible outcomes cannot be identified and that even if they can be identified, it is very, very difficult to assign probabilities to them.
And, I might add that the current world situation needs to be considered as one in which radical uncertainty still exists.
We still don’t know all that could happen let alone know what probability to assign all the possible outcomes.
Thus, we are trying to work things out as we go along.
Jerome Powell, the Chairman of the Board of Governors of the Federal Reserve System, and others within the Federal Reserve admit that they are in this same position as well.
But, what is happening now?
The year 2023 has produced a much stronger economic outcome than most expected. And, the picture for the future, for 2024, remains very cloudy.
But, the economy keeps pumping along, producing results that continue to amaze many. And, where is the source of this energy?
Well, it seems to be coming from the supply side of the economy.
There seems to be a good reason for this outcome, but, in addition, we are also going through a very, very exciting time when the current age is becoming the information age.
What does this mean?
Well, all transition periods into a “new era” carry a lot of uncertainty with them.
But, this “new era,” in all likelihood, will carry even more uncertainty with it than the usual situation.
In the manufacturing age, things were constructed out of steel, iron, and other “solid” goods. These things could be counted, added together, and observed.
In the Age of Information, the “things” people focus on are “zeroes” and “ones.”
The old models don’t work. Things can’t be added together as well if at all.
And, these “things” are not tangible.
This is just a start.
In the world we are leaving, so much of what was produced was “tangible” and could be added together.
Macroeconomics made sense.
In the world we are evolving into, micro is more important. Look, for example, at the book written by Steven Pinker, “The New Enlightenment.” Pinker discusses the process of innovation and production in the world today, but at no time discusses any “macro” issues.
Mr. Pinker looks at innovation in the areas of such things as health, the environment, knowledge, quality of life, wealth, etc.. But, the focus is on the advancements in individual sectors, and how growth and advancement take place there.
Another book, this on “Why Information Grows,” by Cesar Hidalgo, and one gets much the same picture here.
In both areas the ideas focus on what is happening in terms of how these companies and industries and how “supply” is really serving needed purposes.
If the focus of economics is going to be on innovation and the evolution of information and information technology, then our way of measuring these outcomes is going to have to change and become part of the playing field.
Going Forward
In looking back at the past few years I would argue that economic advancement is following this path, the movement into the world of information.
It is a different world. It is a world that is less driven by “demand” and “aggregate demand.”
Our old models and methods of thinking don’t work as well in this age.
Looking at 2024, car demand may not be that strong.
But, what about the networks that people are building? What about the accessories that people will be convinced to buy.? Who knows what time will be spent in “the information world?”
To me, the supply side is the place to look.
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