For the past 20 years the American economy has grown at a paltry 1.9% per year. Many economists suggest that, even before the pandemic, the economy was running about 5% below its potential. Interest rates have been very low and inflation hasn’t reach the Fed’s target of 2% for many years. We now have a team in place that seems ready to run the economy hot for a few years; it’s a unique opportunity.
The Federal government is injecting substantial stimulus into the economy with the $1.9 trillion Covid recovery package on top of previous relief packages. Look for another trillion in infrastructure investments to come. There seems to be about the same amount tied up in consumer accounts that might be released as the economy opens up and the Federal Reserve is committed to keeping interest rates near zero.
What does all this mean? In a hot economy, anyone who wants a job can get one. People who are now not in the labor market are going to re-enter and wages are going to rise. A hot economy will pull people into the economy that are now excluded. Those with criminal records who have difficulty getting a job will have no problem. Disadvantaged communities will see new opportunities. While it might seem to some that we have been close to full employment, it hasn’t generated any inflation because the way we count unemployment doesn’t adequately recognize those who are only part-time but want to be full time, those who have given up searching or those who are intentionally excluded.
Let’s take a chance and run the economy hot and give everyone a chance for a good job and a good wage.
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