Noah Smith & Brad DeLong Record the Podcast We, at Least, Would Like to Listen to!; Aspirationally Bi-Weekly (Meaning Every Other Week); Aspirationally an hour...
My sense is that the price index is more important in people's minds than the YOY inflation rate. Everyone who shops for food can recall the far lower prices that existed even a year or two ago. Some prices have risen egregiously for no apparent reason. Fruit, vegetables, and a number of staples are seriously expensive now. The perception of inflation declining will only come when these high proices are normalized in one's mind. Until then, anyone can say that X food is now Y times more expensive than "recent" (pre-pandemic?) memory and therefore "inflation remains high". It may not be rational as a metric, but that is a perception confronting food shoppers every day or week whenever a shopping trip is warranted.
This seems a reasonable surmise. But what is the policy implication and for whom?
In _my_ model the Fed is trying to facilitate the adjustment of relative prices to shocks subject to the constraint that some prices cannot fall so all of the adjustment has to come from prices that rise. Suppose the Fed has a model that links the maximum facilitation to settings of its policy instruments and these setting result in an upward trajectory of some price level. How should the public's focus on its sense of some price index level (in which gasoline, eggs, etc. are overweighed) versus focusing on the rate of change of that or some other index, affect Fed instrument setting? Same question if the Administration or Congress has a model of how the Fed reacts to changes in the deficit or other dimensions of fiscal policy?
That is a very technocratic POV. Not wrong, but it could exacerbate the problem of misperception. If the Fed raises interest rates, that shows up in increased floating mortage rates, probably increased rents, increased credit card debt, etc, etc, providing more support for the idea that inflation is bad. Wealthy or very comforatble people with financial cushions don't understand how people living paycheck to paycheck have to deal with such rising prices. (Recall Wilbur Ross' stupid comments about people borrowing if they need money?). Price and rent controls do not work (in the medium to long term), as neither do wage freezes. Just look at the chaos in the UK with what appears to be persistently higher inflation.
The use of fiscal policy in the US seems rather limited other than the GOP constantly trying to create tax breaks for the wealthy and corporations using the old "Laffer Curve" and trickle down econ arguments that are rather stale.
Policy could be much more granular - a mix of interest rate and fiscal policy to ensure that those who are really getting squeezed are compensated by taxing those whose consumption is barely touched. Interest rates are hard to make granular in impact unless their effects are decoupled from various uses. My sense is that it is a very blunt instrument and may not even target the source of inflation. if it is due to supply shortages, rather than excess money supply.
I'm wary of the economic outlook on 2024 still. Short term (before eoy), employment is increasing, but unemployment length numbers are creeping up. We're also looking at some really startling numbers in the commercial real estate world that feels like a looming popping bubble. Feels like some things are hanging by a thread.
Medium term (2024), labor/capital relations are getting tense, not just with unions either. WFH and the call to return to office is deepening a rift, and threats from management of AI replacing workers aren't helping. I fear a push to return to offices heads in the opposite direction of lowering inflation by putting more pressure on increased compensation OR boiling over into much bigger, disruptive labor disputes.
The perception of inflation is based on 1) anchoring to long standing regular purchase prices (gas, bread, hamburgers, etc..), and 2) media reports. Media reports, and even people who should know better continue to report inflation in YoY, often with the maddening "this month's data shows that (YoY) inflation remains stubbornly high." Of course it is stubbornly high because only 8% of the data is new! Economists need to shout down this type of reporting. YoY also leads to not noticing early enough when inflation spikes or plummets. Of course looking at just one month of data can be too noisy and misleading, so some trend analysis is needed - but not 12 months. After all, do we report employment, retail sales, equity prices, or GDP mostly in YoY?
Australia’s superpower is monetary policy that never produces recessions.
Inflation is politically much worse that unemployment. So why didn’t Biden start blaming inflation on the Fed back in Jan 2021. Why didn’t Democrats criticize the Trump deficits and make sure that their relief act did not add to them? And then start to work on tax reform to bring down the structural deficit to shift resources via lower interest rates from consumption to investment. (Yes, I am assuming that taxes hit consumption somewhat, not 100 reductions in savings and that private investment is somewhat interest responsive.) I would not recommend _lying_ about deficits causing inflation as Republicans do, but if the public should naively give Democrats credit deficit reduction reducing inflation, we could just smile politely.
We do not REALLY know how much wages have moved. We do not have any wage indexes. We have only wage unit values.
BTW There is still plenty of time for the Fed to create a real recession. Just slowly reducing the EFFR starting now may not be enough!
I always suspected this was partially a result of being able to export resources to China over the last 50 odd years. Total naive take, not meaning to disrespect the Aussie hard work, but it just strikes me as odd.
My sense is that the price index is more important in people's minds than the YOY inflation rate. Everyone who shops for food can recall the far lower prices that existed even a year or two ago. Some prices have risen egregiously for no apparent reason. Fruit, vegetables, and a number of staples are seriously expensive now. The perception of inflation declining will only come when these high proices are normalized in one's mind. Until then, anyone can say that X food is now Y times more expensive than "recent" (pre-pandemic?) memory and therefore "inflation remains high". It may not be rational as a metric, but that is a perception confronting food shoppers every day or week whenever a shopping trip is warranted.
This seems a reasonable surmise. But what is the policy implication and for whom?
In _my_ model the Fed is trying to facilitate the adjustment of relative prices to shocks subject to the constraint that some prices cannot fall so all of the adjustment has to come from prices that rise. Suppose the Fed has a model that links the maximum facilitation to settings of its policy instruments and these setting result in an upward trajectory of some price level. How should the public's focus on its sense of some price index level (in which gasoline, eggs, etc. are overweighed) versus focusing on the rate of change of that or some other index, affect Fed instrument setting? Same question if the Administration or Congress has a model of how the Fed reacts to changes in the deficit or other dimensions of fiscal policy?
That is a very technocratic POV. Not wrong, but it could exacerbate the problem of misperception. If the Fed raises interest rates, that shows up in increased floating mortage rates, probably increased rents, increased credit card debt, etc, etc, providing more support for the idea that inflation is bad. Wealthy or very comforatble people with financial cushions don't understand how people living paycheck to paycheck have to deal with such rising prices. (Recall Wilbur Ross' stupid comments about people borrowing if they need money?). Price and rent controls do not work (in the medium to long term), as neither do wage freezes. Just look at the chaos in the UK with what appears to be persistently higher inflation.
The use of fiscal policy in the US seems rather limited other than the GOP constantly trying to create tax breaks for the wealthy and corporations using the old "Laffer Curve" and trickle down econ arguments that are rather stale.
Policy could be much more granular - a mix of interest rate and fiscal policy to ensure that those who are really getting squeezed are compensated by taxing those whose consumption is barely touched. Interest rates are hard to make granular in impact unless their effects are decoupled from various uses. My sense is that it is a very blunt instrument and may not even target the source of inflation. if it is due to supply shortages, rather than excess money supply.
I'm wary of the economic outlook on 2024 still. Short term (before eoy), employment is increasing, but unemployment length numbers are creeping up. We're also looking at some really startling numbers in the commercial real estate world that feels like a looming popping bubble. Feels like some things are hanging by a thread.
Medium term (2024), labor/capital relations are getting tense, not just with unions either. WFH and the call to return to office is deepening a rift, and threats from management of AI replacing workers aren't helping. I fear a push to return to offices heads in the opposite direction of lowering inflation by putting more pressure on increased compensation OR boiling over into much bigger, disruptive labor disputes.
Sorry, Noah, but Brad is objectively correct: Xitter is the Nothing App.
The perception of inflation is based on 1) anchoring to long standing regular purchase prices (gas, bread, hamburgers, etc..), and 2) media reports. Media reports, and even people who should know better continue to report inflation in YoY, often with the maddening "this month's data shows that (YoY) inflation remains stubbornly high." Of course it is stubbornly high because only 8% of the data is new! Economists need to shout down this type of reporting. YoY also leads to not noticing early enough when inflation spikes or plummets. Of course looking at just one month of data can be too noisy and misleading, so some trend analysis is needed - but not 12 months. After all, do we report employment, retail sales, equity prices, or GDP mostly in YoY?
Where in the world do you get the idea that I have a "theory" anything like that?
That should have been "Noah's theory springing out of Rick Perlstein's take on the 1970s—that we are replaying it..."
Awl I cn saye is, great colloquy! Th references to & reactions, responses to economic commentators far & wide is fun & fairly enlightening.
Australia’s superpower is monetary policy that never produces recessions.
Inflation is politically much worse that unemployment. So why didn’t Biden start blaming inflation on the Fed back in Jan 2021. Why didn’t Democrats criticize the Trump deficits and make sure that their relief act did not add to them? And then start to work on tax reform to bring down the structural deficit to shift resources via lower interest rates from consumption to investment. (Yes, I am assuming that taxes hit consumption somewhat, not 100 reductions in savings and that private investment is somewhat interest responsive.) I would not recommend _lying_ about deficits causing inflation as Republicans do, but if the public should naively give Democrats credit deficit reduction reducing inflation, we could just smile politely.
We do not REALLY know how much wages have moved. We do not have any wage indexes. We have only wage unit values.
BTW There is still plenty of time for the Fed to create a real recession. Just slowly reducing the EFFR starting now may not be enough!
I always suspected this was partially a result of being able to export resources to China over the last 50 odd years. Total naive take, not meaning to disrespect the Aussie hard work, but it just strikes me as odd.
Labor participation rate may be more reflective of public sentiment.
It is on now! (I read somewhere August 11).
Bring it on!