Economist Justin Wolfers has a great column on the unknowns facing the economy in 2015 in today’s paper.
I wish I knew where the economy will be heading next year. If I did, I might become rich. But, alas, I don’t — and even if we don’t always acknowledge it, no economists do.
Wolfers offers “six questions whose eventual resolution will shape the economic year ahead.”
1. How much slack really remains in the labor market?
2. Will the Federal Reserve treat its target for 2 percent inflation as a goal or a ceiling?
3. How fast does the economy need to grow to stay healthy?
4. Can the American economy keep motoring without help from the rest of the world?
5. What will be the consequences of lower oil prices, which have fallen by about half since June?
6. What, as Donald H. Rumsfeld, the former defense secretary, asked, are the unknown unknowns?
A few reactions:
‐ I agree with Dr. Wolfers that optimism is the correct posture regarding the long-term unemployed’s ability to transition back into “normal” labor market experiences. Some sound public policies could help ease that transition, and I hope the new Congress and the president focus on this in 2015.
‐ I would have been just a bit stronger in rejecting the headline unemployment rate as a sufficient indicator of the amount of “slack” in the labor market. My guess is that in 2015 this currently unconventional view will gain more adherents.
‐ Regarding Wolfers’s (2), the Fed’s inflation target could be thought of as a medium-term (or even short-term) average. This would imply that inflation should overshoot the target for a time as a way to help return the labor market to normal.
‐ What we should think of as “solid growth” really is an open question. I haven’t given up on something over three percent, but there is reason for doubt.
‐ Maybe I’m overly sanguine, but I’m not terribly worried about the rest of the world knocking the U.S. off course.
‐ Dr. Wolfers’s discussion of lower oil prices provides much-needed nuance to our current discussion. We’re a leading producer now, so low prices cut both ways. (My youngest brother fracks for a living. Over Christmas my father was trying to talk him into taking the LSAT as a backup plan. It didn’t take.)
‐ In addition to his six questions, I would add four more: Are households done paying down debt, and will consumer spending accelerate as a consequence? Will the housing market’s recovery pick up steam? Will wage growth return to normal? (This is a component of Wolfers’s (1).) Will Congress and the president help the economy, hurt it, or have a neutral effect?
Wolfers’s conclusion is spot on:
I wish I could offer clearer guidance about next year, but an honest account focuses on the limits of our knowledge. We’re not sure how much further the economy can improve next year, or even if it will actually do so, and we don’t know what might drive it off course.
So instead of a forecast, I’ll offer advice: Prepare for the worst, hope for the best and count on being surprised.
— Michael R. Strain is deputy director of economic policy studies and resident scholar at the American Enterprise Institute. You can follow him on Twitter at twitter.com/MichaelRStrain.