Sunday, May 19, 2024
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In 2019, while working as a senior economist at the Federal Reserve, Claudia Sahm published a measure to show when the US has fallen into a recession. What came to be known as the Sahm Rule is elegant in its simplicity and has been praised for its accuracy by the likes of Nobel laureate Paul Krugman.

It holds that the economy is contracting when the three-month moving average of the unemployment rate rises by 0.5 percentage points relative to the low point during the previous 12 months. Sahm’s single-variable formula is the closest there is to a real-time recession monitor. By comparison, the eight-person committee at the National Bureau of Economic Research that’s officially in charge of determining the start and end of a downturn considers at least half a dozen indicators and typically takes about a year to make a call. (Even with scattered signs the job market is cooling, the chart below shows that as of June, Sahm’s indicator was nowhere near the threshold.)

Now, as the US continues to defy forecasts for a steep downturn, the Sahm Rule has never seemed more relevant—yet its namesake rues all the attention. (An item she published in December as part of her Stay-at-Home Macro newsletter was titled “I Created a Monster.”)

“If it was ever going to break it would be now, and I would be so happy to see it break,” says Sahm, 47. “I would love it to trigger and there not to be a recession.” Her point is that if unemployment was to modestly increase without a broader recession being created, Sahm would be fine with that. “I won’t be sad. I would be a lot more sad if the economy goes down.”

“The whole point of it was ‘OK we need to get people to help,’ because if you can get in at the beginning of a recession you can do so much to soften the blow,” she says.

Sahm is among the small but growing number of economists who believe the US is headed for a soft landing—meaning the Federal Reserve’s barrage of interest-rate hikes will succeed in subduing inflation without a recession that causes unemployment to spike.

Sahm says there’s never been a more pressing time for economists to be humble. (One could indeed describe forecasters’ incredible string of misses over the past few years as humbling.) Shocks stemming from the pandemic and Russia’s invasion of Ukraine have tested decades of conventional wisdom about how economies function, she says, which is why most in the profession, including central bankers, were caught off guard when inflation reemerged after years of lying dormant.

“Everyone who is a macroeconomist, including myself, has made some very big errors thinking about the economy since the pandemic showed up,” she says. “The world is upside down and backwards, it doesn’t make sense.”

Sahm predicts that like the US inflation crisis of the late 1970s and early ’80s, this one will spark years of introspection among economists. “I don’t know what it’s going to be after this, but it clearly will be a big discussion,” she says. “I would expect lots of papers and books to be written, and, in good macroeconomist style, one will say something totally different from the other.”

As debates on economic policy once confined to academic research papers or the editorial pages of major newspapers have spilt over into Twitter and Substack, views have become more polarized, the discourse more aggressive, Sahm says. That’s been especially evident in sparring between those who think it’s possible to douse inflation without hammering the labour market and those who think that’s a fairy tale.

“It’s almost as if the angry macroeconomists need their own Twitter,” says Sahm, who recently returned to the social media platform after a couple of months’ hiatus, but only to share her work rather than engage in punchy debates.

It’s not as if Sahm has always shied away from controversy. In 2020, some months after leaving the Fed, she published a 6,000-word-plus blog post titled “Economics Is a Disgrace.” She said her profession was rife with racism, sexism and elitism, detracting from the quality of policy advice, and called out some of the field’s most prominent academics.

After 12 years at the Fed and a stint as a member of President Barack Obama’s Council of Economic Advisers, Sahm landed at the Center for Equitable Growth, a left-leaning think tank in Washington where she was director of macroeconomic policy. She quit in October 2020 and now runs her own consulting firm from her home in Arlington, Virginia.

Sahm says she was drawn to economics by a desire to shape public policy. After graduating from Denison University and earning a PhD from the University of Michigan, she acted on a mentor’s advice and applied for a job at the Fed in Washington, where she stayed until 2019.

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