What Many Economists (and I) Got Wrong About This Economy
Mar 5, 2024
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Judd Cramer, a Harvard economist and co-author of a paper on inflation metrics, challenges common economic perceptions. He explains how traditional inflation measures overlook the staggering impact of soaring interest rates on everyday costs. As housing prices rise, the true cost of living, especially in terms of mortgages and loans, is often misrepresented. Cramer argues that this disconnect fuels economic anxiety and questions the validity of current economic indicators, offering a fresh perspective on what really drives consumer sentiment.
Inflation metrics fail to reflect the burden of rising interest rates on living expenses.
Government aid reductions, like the child tax credit, have a significant impact on poverty rates.
Deep dives
Challenges in Measuring Inflation for Poor Americans
When discussing the economy, it's crucial to consider the impact of inflation on low-income individuals. While real wages may be rising for the poor, they often face higher inflation rates due to the unique basket of goods they use. Additionally, the reduction in government transfers, like the child tax credit, has affected poverty rates, highlighting the complex interplay between wage growth and cost increases for those at the lower end of the income spectrum.
The Impact of Interest Rates on Consumer Sentiment
The podcast delves into the significance of interest rates in shaping consumer sentiment. Traditional inflation measures fail to account for the financial burden imposed by rising interest rates, affecting not only debt holders but also individuals considering borrowing. As interest rates play a substantial role in the overall cost of living, a reevaluation of how inflation is measured could provide a more accurate reflection of economic realities and public perception.
The Global Significance of Interest Rates on Economic Sentiment
The analysis extends beyond the US, revealing a widespread discrepancy between measured inflation, unemployment, and consumer sentiment across various Western democracies. By considering the impact of interest rates on daily expenses like housing and car payments, the researchers uncovered a notable correlation between rising rates and subdued economic outlooks. This underscores the importance of reassessing inflation metrics globally to align with the economic stressors experienced by citizens worldwide.
One of my New Year’s resolutions for 2024 was to do more episodes with people who think I'm wrong about something. For example, I've done several episodes about how the U.S. economy is doing much better than most Americans think. Today’s guest says my analysis (and that of many economists and economic commentators) is missing something big. Official inflation measures do a poor job of capturing the effect of higher interest rates. When a home goes from $200k to $220k, that’s a 10 percent increase in the value of the home. But, with higher rates, the monthly cost of living in that house with a mortgage might go up 300 percent. The same is true for financing a new car with higher interest rates. Or paying credit card debt. Judd Cramer, an economist who teaches at Harvard University, is the coauthor of a new paper on how our inflation data doesn't properly account for skyrocketing interest rates—and why the so-called "vibecession" isn’t as much of a mystery as we think.
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