Running the economy hot?


I keep reading about this concept in the news. From what I understand it means stimulating the economy even when it growing. Is that right? What’s the benefit?

In: Economics

Yeah, basically.

Only problem is doing so can result in inflation and asset price bubbles which then spark a new recession.

It means running the economy until we start to see enough inflation which causes the Fed to increase interest rates.

This is how the Fed used to run the economy in the 80s, 90s and early 00s and everything was fine.

Since the financial crisis of 2007-2008, there has been a fear of running the economy hot again. So we’ve been running with lower employment for a long time.

So there are two ways to prop up an economy, broadly speaking:
1. Monetary Policy
2. Fiscal Policy

Look these up.
Expansionary fiscal policy is gubment spending money.
Expansionary monetary policy is central bank “printing” money. (Actually open market operations. Again, just look that up on investopedia)

Expansionary monetary or fiscal policy is classically done when the economy is slowing, in order to prop it back up.
There is a degree to which expansionary policies today makes your expansionary policies in the future less effective. So the general idea is you do the expansionary policies when the economy is shitty, then when it’s good you stop with your expansionary policies so that they can kind of regain their powers.
Thing is, expansionary policies are super bomb in the short run. So if a gubment does a ton of expansionary policies they’ll look like they’re super successful for the economy, even if they kind of leave us with our pants down for the next recession.
That’s kind of the gist of it. So “running the economy hot” means going with expansionary fiscal and monetary policy when the economy is already doing well. That’s exactly what Trump did in the US during his 4 years. You can basically coke up the economy.
Then any future gubment that stops the coking up will be the one who suffers through the hangover. Thus, you can basically expect expansionary fiscal and monetary policy until they’ve completely overloaded the pumps and are fresh-outa-bumps.

There are three main tools that the government uses to try to help an economy that’s not doing great:

– Printing lots of money
– Big government spending programs
– Low interest rates

All of these have a downside: They can cause *inflation*, which means the prices of things goes up. (Simply put, prices go up because there’s more money chasing the same amount of goods and services.)

Economists think too much inflation is bad, and negative inflation (deflation) is very bad. In the US, the ideal inflation rate is considered 2%.

“Running the economy hot” means letting inflation go above 2% for a while, to make up for the fact inflation has been below 2% for many years.