Tech & trade – “must discuss” topics for Jackson Hole

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Fed forecasters have erred because they’ve missed how tech and trade have transformed our economy. As monetary policy leaders design a new framework at Jackson Hole, how they adapt to this transformation will be a top measure of their success.

 

Ben Bernanke, in his recent Brookings blog post, helpfully listed three items on which Federal Open Market Committee (FOMC) member views have been shifting because of “persistent errors in forecasting.” These items are Potential Gross Domestic Product (GDP), natural rate of unemployment and longer-run Federal Funds rate.

Students heading back to university can see the impact of tech and trade. A used textbook can be shipped from India to the U.S., or an electronic copy can be rented with near zero cost to the publisher. Student dorm rooms are stocked with what would have been $250,000 of electronics in their parents’ day. Today, shoppers find abundance rather than scarcity and buy more as prices fall.

Our point today is simple – many of the FOMC’s forecasting errors can be resolved by realizing that goods are far more abundant today, thanks to the tech and trade transformation.

To show this, we’ll compare the FOMC’s standard view with a more data-rich view from prior FDF analyses.

**As this summarizes prior FDF analyses, follow any link to see that prior analysis. **

Why is Potential GDP falling?

Why is the natural rate of unemployment falling?

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  • Striking is the “fork” that occurred between goods and services. Goods pivoted nearly 90 degrees from prices growing faster than services to prices falling.
  • Digital products (hard and soft) have costs falling so fast they are demonetizing GDPbig product benefit at a small price.
  • Falling costs have more quickly become falling prices because shoppers are changing the composition of their purchases (including sharing economy) and searching prices online.

Why is the longer-term Federal Funds rate falling?

In summary, Fed forecasters persistently erred because they failed to realize how tech and trade have transformed our economy.

This all means that the top measure of progress at the Jackson Hole Symposium is the prominence given tech and trade in the Fed’s new framework. It also suggests three new questions:

  • How policy will change to reflect the: 1) shift toward a less supply-constrained economy and 2) fork between services and goods
  • How to measure the extent to which falling prices are due to: short-term excess supply versus longer-term lower “research to retail” (value chain) product costs
  • How to measure the extent to which less investment is due to excessive cost cutting, fear or lower cost structures
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