Sahm has, as usual, an informative post on … wait for it … inflation …😊 The post fundamentally deals with two issues.
a) What the Fed did, did not do should and should not have done and should do now about inflation and employment.
b) Why people are more unhappy about “inflation” and “the economy” than they are about their personal finances
I have less reason to have a valid opinion of the latter than the former, but I will take a shot anyway as I see a link between the two that Sahm does not mention.
On the first issue, Sahm endorses the Bernanke-Blanchard story
come to the same qualitative conclusion but with a better, sectorally disaggregated model.] Neither B&B nor CJJ explicitly model Fed policy in arriving at these outcomes, however. This leads Sahm, implicitly I think, to blanketly endorse Fed actions. This is not necessarily wrong, but neither model considers demand shocks as consumers shifted massively from services to goods and then back as concern about COVID waxed and waned. This means that the models and Sahm cannot distinguish how much of Fed-engineered inflation was a) necessarily to deal with supply shocks, b) was necessarily to deal with demand shocks, and c) may have been in excess of what was needed for a) and b). [I discuss B&B and CJJ this at:]
In turn, this leaves Sahm’s position (and mine) that the Fed should now be cutting the EFFR, conceptually ungrounded.
An this is where I try to link the Fed actions to public perceptions.
The Fed has not been transparent in what it was trying to do: engineer enough inflation to allow the economy to adjust to shocks. I should be explicit, explaining that some part of the inflation it engineered was necessary to keep the economy fully employed and, if that’s what it thinks, admitting that it made mistakes in allowing too much inflation to go on for too long. Better understanding of Fed policies ought to diffuse at least some of the discontent with inflation and lead to the perception tat te economy is being better manages than previously thought.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
It may be helpful to remember that the original name for the field that we now call "Economics" was "Political Economy." Frankly we would all be better off if the field had remained securely rooted in its origins in the Humanities (which among other virtues required it to respect the other branches rather than engaging in an arrogant and sordid sort of academic imperialism) rather than wandering down the epistemological dead end of its pretentions as a "science."
I think I can explain the disconnect for you. While it’s true that the number doing ok financially in this survey hasn’t changed substantially versus pre-pandemic levels the number who say they are worse off than a year ago is over twice the level it was pre-pandemic.
That is not an insubstantial difference and the two survey results are not mutually exclusive. You can both be doing ok and struggling substantially more than you were a year ago. If twice as many people are worse off than there is a high probability that is either you or describes people you know eg friends, family, coworkers etc. If a third of the people you know are doing worse than last year you are likely either living that reality or hearing about it frequently.
I think the ability to buy a house (or not) has an outsized impact on people's perception of the economy. If I were polled, I would probably answer that I was living comfortably, because I am. However, my husband and I bought a small "starter house" in 2019 and we were hoping to move into a slightly bigger house as our kids got older. That ship has completely sailed, as rates went up and simultaneously prices in my city (San Diego) went WAY up. So, that issue doesn't affect the comfort of my day-to-day life, in fact I'm probably more comfortable because I'm not house poor now. But it's frustrating. I believe that is where the seemingly contradictory assessments come from.
Homeownership rates are up, including for younger adults: https://www.census.gov/library/stories/2023/07/younger-householders-drove-rebound-in-homeownership.html The mortgage rates (on purchases and refinances before 2022) are below pre-pandemic. Higher house prices have increased the wealth of homeowners. Also, the disconnect between own finances and national economy doubled in 2020 which is odd timing for the affordability crisis. All that said, we must build more housing and that starts current homeowners demanding new construction in the neighborhoods.
Claudia - "The mortgage rates (on purchases and refinances before 2022) are below pre-pandemic" - Is the data suggesting that people had higher mortgage rates pre-pandemic? Is that really the case? I am surprised.
Good morning. And thank for a great post. I read Bill McBride's Substack often (CalculatedRisk) and from that it seems we are in a strange doom loop. Higher rates have increased the switching cost of homes such that potential sellers have departed the market. Only "forced sellers" (people who have to move, upsize or downsize) participate, driving inventory down. The buyers on the other side have no choice but to pay higher prices for the scarce good. Keeping rates where they are will not change this dislocation. Lowering rates, on the other hand, could re-liquify the housing market, normalize price activity, and subdue the shelter component of CPI. What do you think?
I wonder if we're kind of glossing over the fact that yes, people who are polled think they are "comfortable," but they know people who are not yet comfortable, and they are still seeing the relative hardships of others in their communities and online.
The people who aren't comfortable don't even reside in a position to be asked these kinds of questions. Their opinions don't make it on the page.
How is someone who is homeless or living in their car being reached for polling? If you're the parent of an adult still living at home, who is picking up the phone when you call for polling? Probably not the adult child who can't afford an apartment of their own.
I feel lucky to have a home with a mortgage that was locked in before the current high lending rates and before housing in this area purportedly went up in value $100,000 over the last three years. But I also know that in order for me to move from this house to somewhere else under the current realities, I'd have to chose to move to a lower cost of living area, probably with a depressed local economy where housing is much cheaper than where I live now. Otherwise, all I'd be doing is trading my current affordable house payment to paying significantly more for the same amount of house.
I think post pandemic more of us are just attuned to the suffering of others, and the keen knowledge that even if we're "comfortable" now, many others around us are NOT, and we live under a economic system where any random crisis outside of our own personal control can destroy that comfort in a flash.
Many of us can no longer fool ourselves we have all that much in common with the Wall Street barons, and that the stock market record means we're in the money. Our real peers are the people still living in their cars or in a tent, which any of us could become through any fickle turn of events.
Being more "attuned to the suffering of others" due to the pandemic is a possible explanation, but that is not economics.
Also, the Survey of Household Economics and Decision-making is nationally representative. In addition, it takes extra steps to get responses from low- and moderate-income households and people in hard-to-reach group like Blacks and Hispanics and those without a high school degree.
Do you have a recommendation for how to look at better demographics of their real sampling?
Would their definition of a "low income household" include people who do not have housing? And is their sampling necessarily fairly representative of the roughly 7% of the population that is unhoused?
Reading their fact sheet and looking a their interactive charts don't really give a more clear indication of this, particularly in the absence of an ability to filter/chart responses by income levels.
The average of the responses can only tell us so much, particularly when the responses of those making $35,000 a year or less are probably going to be markedly different from those making $75,000 or more.
You are correct, however, that some groups like the homeless are almost certainly not represented. Even if their circumstances were different, the homeless are 600k out of 330 million US population. Surveys are not well suited for such small groups. On top of that the homeless are physically hard to reach. There are low income individuals in the survey and all the official statistics.
I don't mean to demean any work you have done in the past on this initiative. Just that for a long time The Fed seemed to want to operate without accounting for/considering what's happening at the extremes. I am glad people like you were there to push the methodologies to be a more fair/accurate picture.
Thanks, no offense taken. Consumer and Community Affairs is not like the rest of the Board. They saw the subprime meltdown coming (well before my time there), since they had 'boots on the ground.' The rest of the Fed, especially Greenspan, ignored them. We know how that ended, tragically. The Fed has made progress and has a long way to go. With the survey, it is very frustrating how hard it is to get everyone's voices. That's getting worse with the distrust of government and surveys.
It seems as if to me Bernanke and Blanchard are a day late and a dollar short when it comes to recognizing the supply shocks mainly in food and energy that were problematic during the pandemic. I personally would recommend the highly popular sellers inflation piece by Isabella Weber as well if nobody hasn't read it yet its a highly recommended piece. That said, I don't know if you agree or not, but I just don't think the fed can wait until September to cut and especially when many are still struggling to buy a home. Enjoy the New Zealand trip.
Pre-social media, our "comparison universe" was effectively our town or neighbourhood. For example, in the small town in which I grew up, most of my neighbourhood were on a similar socio-economic scale. There were a few "rich" families who would occasionally vacation in some place exotic, or buy some new car that the rest of us could only dream about buying, but, while we were envious, we were also accepting - because they were rich. Most of the rest of us were more or less equal socio-economically.
Post social media, our "comparison universe" is so much larger. We are constantly bombarded with social media showing people doing/buying/owning things that we, realistically, have not much hope of emulating. People reading your post, Claudia, will know that pretty much all of this media is fake, but people reading this post are also unlikely to manifest such a large gap between their own finances, and the national economy.
I appreciate that there are many theories, and this is just my opinion, but my favourite explanation lies in the act of comparing oneself to the Joneses - as people have always done - but now the Joneses against which one compares oneself are both fake, and are no longer local.
Phil, to understand the phenomenon of unlimited wants creation, consumer demand, theory of production , you can read The Affluent Society by Galbraith. One of the best books of last century.
Informative post, as always. Dr. Sahm is lucky to visit New Zealand. It's a great compliment to her to be invited by the best little Treasury in the world. Quite a few Americans put in sabbatical stints at NZ Treasury -- e.g., tax policy expert Eric Toder. NZ has had a really interesting macro experience from 1930s on -- e.g., first country to adopt inflation targeting in 1980s. From googling, I see that there has been lots of debate in NZ about the Sahm rule.
Thanks! I have very much enjoyed working on my paper for NZ Treasury and looking forward to my trip. Yes, the NZ economy and economic policy is interesting. I have learned a lot.
Good article. If I may speculate on the non-academic side, I wonder how much academic literature there has been on the topic of greedflation, since the word was introduced around early 2023 but started getting traction on Google Trends this March. I bring this up because the Bernanke-Blanchard paper does not mention greedflation at all.
In light of the FBI’s RealPage raid, and the FTC’s probe into alleged oil company collusion, there needs to more discussion on how antitrust enforcement, if scaled properly, could affect home and energy prices. Same with auto insurance and repairs.
In this vein, it’s also clear to me that the IIJA, CaSA and IRA, being centered US investments in long-term productivity, just doesn’t translate as well to the average voter as, say, extending the Child Tax Credit or UI expansions, or trying a German-style rail pass discount scheme. Perhaps respondents are factoring in losses from the 2020-21 social welfare and relief acts, or as Les Leopold suggested, fear of layoffs.
You might enjoy the latest Odd Lots episode on pricing: https://omny.fm/shows/odd-lots/corporations-learned-the-maximum-amount-they-can-c. Also, Isabella Weber's academic work on seller's inflation is very good. The anti-trust movement appears to be in re-birth and re-orientation. Finally, I agree that the long-term investments in people hit the cutting room floor, which is unfortunate. Even so, we had the expanded Child Tax Credit for a year and we now know it works. Take the win and keep pushing.
This is what your excellent post inspired me to post in turn:
Inflation: Policies and Perceptions
https://stayathomemacro.substack.com/p/inflation-inflation-inflation?utm_source=post-email-title&publication_id=280281&post_id=145230218&utm_campaign=email-post-title&isFreemail=true&r=8ylpe&triedRedirect=true&utm_medium=email
Sahm has, as usual, an informative post on … wait for it … inflation …😊 The post fundamentally deals with two issues.
a) What the Fed did, did not do should and should not have done and should do now about inflation and employment.
b) Why people are more unhappy about “inflation” and “the economy” than they are about their personal finances
I have less reason to have a valid opinion of the latter than the former, but I will take a shot anyway as I see a link between the two that Sahm does not mention.
On the first issue, Sahm endorses the Bernanke-Blanchard story
https://www.piie.com/sites/default/files/2024-05/wp\24-11.pdf?utm_source=substack&utm_medium=email
of Inflation being caused by negative supply shocks and a residual of other things. [Comin, Johnson, and Jones
https://www.nber.org/papers/w31179
come to the same qualitative conclusion but with a better, sectorally disaggregated model.] Neither B&B nor CJJ explicitly model Fed policy in arriving at these outcomes, however. This leads Sahm, implicitly I think, to blanketly endorse Fed actions. This is not necessarily wrong, but neither model considers demand shocks as consumers shifted massively from services to goods and then back as concern about COVID waxed and waned. This means that the models and Sahm cannot distinguish how much of Fed-engineered inflation was a) necessarily to deal with supply shocks, b) was necessarily to deal with demand shocks, and c) may have been in excess of what was needed for a) and b). [I discuss B&B and CJJ this at:]
https://substack.com/home/post/p-145235739?source=queue
and
https://thomaslhutcheson.substack.com/p/pandemic-and-inflation
In turn, this leaves Sahm’s position (and mine) that the Fed should now be cutting the EFFR, conceptually ungrounded.
An this is where I try to link the Fed actions to public perceptions.
The Fed has not been transparent in what it was trying to do: engineer enough inflation to allow the economy to adjust to shocks. I should be explicit, explaining that some part of the inflation it engineered was necessary to keep the economy fully employed and, if that’s what it thinks, admitting that it made mistakes in allowing too much inflation to go on for too long. Better understanding of Fed policies ought to diffuse at least some of the discontent with inflation and lead to the perception tat te economy is being better manages than previously thought.
[Standard bleg: Although my style is know-it-all-ism, I do sometime entertain the thought that, here and there, I might be mistaken on some minor detail. I would welcome comments on these views.]
It may be helpful to remember that the original name for the field that we now call "Economics" was "Political Economy." Frankly we would all be better off if the field had remained securely rooted in its origins in the Humanities (which among other virtues required it to respect the other branches rather than engaging in an arrogant and sordid sort of academic imperialism) rather than wandering down the epistemological dead end of its pretentions as a "science."
Claudia, I'm thankful to have you brilliantly (and succinctly and accessibly) explaining this much-needed data for us.
I think I can explain the disconnect for you. While it’s true that the number doing ok financially in this survey hasn’t changed substantially versus pre-pandemic levels the number who say they are worse off than a year ago is over twice the level it was pre-pandemic.
That is not an insubstantial difference and the two survey results are not mutually exclusive. You can both be doing ok and struggling substantially more than you were a year ago. If twice as many people are worse off than there is a high probability that is either you or describes people you know eg friends, family, coworkers etc. If a third of the people you know are doing worse than last year you are likely either living that reality or hearing about it frequently.
I think the ability to buy a house (or not) has an outsized impact on people's perception of the economy. If I were polled, I would probably answer that I was living comfortably, because I am. However, my husband and I bought a small "starter house" in 2019 and we were hoping to move into a slightly bigger house as our kids got older. That ship has completely sailed, as rates went up and simultaneously prices in my city (San Diego) went WAY up. So, that issue doesn't affect the comfort of my day-to-day life, in fact I'm probably more comfortable because I'm not house poor now. But it's frustrating. I believe that is where the seemingly contradictory assessments come from.
Homeownership rates are up, including for younger adults: https://www.census.gov/library/stories/2023/07/younger-householders-drove-rebound-in-homeownership.html The mortgage rates (on purchases and refinances before 2022) are below pre-pandemic. Higher house prices have increased the wealth of homeowners. Also, the disconnect between own finances and national economy doubled in 2020 which is odd timing for the affordability crisis. All that said, we must build more housing and that starts current homeowners demanding new construction in the neighborhoods.
Claudia - "The mortgage rates (on purchases and refinances before 2022) are below pre-pandemic" - Is the data suggesting that people had higher mortgage rates pre-pandemic? Is that really the case? I am surprised.
Good morning. And thank for a great post. I read Bill McBride's Substack often (CalculatedRisk) and from that it seems we are in a strange doom loop. Higher rates have increased the switching cost of homes such that potential sellers have departed the market. Only "forced sellers" (people who have to move, upsize or downsize) participate, driving inventory down. The buyers on the other side have no choice but to pay higher prices for the scarce good. Keeping rates where they are will not change this dislocation. Lowering rates, on the other hand, could re-liquify the housing market, normalize price activity, and subdue the shelter component of CPI. What do you think?
I agree.
A time to cut has been here for quite a while.
More short-term, for any1 interested in the CPI tomorrow, here are my estimates:
https://open.substack.com/pub/arkominaresearch/p/may-2024-cpi-estimate?r=1r1n6n&utm_campaign=post&utm_medium=web
I wonder if we're kind of glossing over the fact that yes, people who are polled think they are "comfortable," but they know people who are not yet comfortable, and they are still seeing the relative hardships of others in their communities and online.
The people who aren't comfortable don't even reside in a position to be asked these kinds of questions. Their opinions don't make it on the page.
How is someone who is homeless or living in their car being reached for polling? If you're the parent of an adult still living at home, who is picking up the phone when you call for polling? Probably not the adult child who can't afford an apartment of their own.
I feel lucky to have a home with a mortgage that was locked in before the current high lending rates and before housing in this area purportedly went up in value $100,000 over the last three years. But I also know that in order for me to move from this house to somewhere else under the current realities, I'd have to chose to move to a lower cost of living area, probably with a depressed local economy where housing is much cheaper than where I live now. Otherwise, all I'd be doing is trading my current affordable house payment to paying significantly more for the same amount of house.
I think post pandemic more of us are just attuned to the suffering of others, and the keen knowledge that even if we're "comfortable" now, many others around us are NOT, and we live under a economic system where any random crisis outside of our own personal control can destroy that comfort in a flash.
Many of us can no longer fool ourselves we have all that much in common with the Wall Street barons, and that the stock market record means we're in the money. Our real peers are the people still living in their cars or in a tent, which any of us could become through any fickle turn of events.
Being more "attuned to the suffering of others" due to the pandemic is a possible explanation, but that is not economics.
Also, the Survey of Household Economics and Decision-making is nationally representative. In addition, it takes extra steps to get responses from low- and moderate-income households and people in hard-to-reach group like Blacks and Hispanics and those without a high school degree.
Do you have a recommendation for how to look at better demographics of their real sampling?
Would their definition of a "low income household" include people who do not have housing? And is their sampling necessarily fairly representative of the roughly 7% of the population that is unhoused?
Reading their fact sheet and looking a their interactive charts don't really give a more clear indication of this, particularly in the absence of an ability to filter/chart responses by income levels.
The average of the responses can only tell us so much, particularly when the responses of those making $35,000 a year or less are probably going to be markedly different from those making $75,000 or more.
The survey methods begin on page 71: https://www.federalreserve.gov/publications/files/2023-report-economic-well-being-us-households-202405.pdf I managed the survey my last two years at the Fed. We worked very hard to bring in low-income voices. See the rest of the survey sections on topics, too. The survey done out of the Division of Consumer and Community Affairs, which focuses on low- and moderate-income families and communities in all it's work. https://www.federalreserve.gov/publications/2022-ar-consumer-and-community-affairs.htm I never worked anywhere that brought more heart and skill in their work.
You are correct, however, that some groups like the homeless are almost certainly not represented. Even if their circumstances were different, the homeless are 600k out of 330 million US population. Surveys are not well suited for such small groups. On top of that the homeless are physically hard to reach. There are low income individuals in the survey and all the official statistics.
Thanks for the follow up.
I don't mean to demean any work you have done in the past on this initiative. Just that for a long time The Fed seemed to want to operate without accounting for/considering what's happening at the extremes. I am glad people like you were there to push the methodologies to be a more fair/accurate picture.
Thanks, no offense taken. Consumer and Community Affairs is not like the rest of the Board. They saw the subprime meltdown coming (well before my time there), since they had 'boots on the ground.' The rest of the Fed, especially Greenspan, ignored them. We know how that ended, tragically. The Fed has made progress and has a long way to go. With the survey, it is very frustrating how hard it is to get everyone's voices. That's getting worse with the distrust of government and surveys.
It seems as if to me Bernanke and Blanchard are a day late and a dollar short when it comes to recognizing the supply shocks mainly in food and energy that were problematic during the pandemic. I personally would recommend the highly popular sellers inflation piece by Isabella Weber as well if nobody hasn't read it yet its a highly recommended piece. That said, I don't know if you agree or not, but I just don't think the fed can wait until September to cut and especially when many are still struggling to buy a home. Enjoy the New Zealand trip.
Pre-social media, our "comparison universe" was effectively our town or neighbourhood. For example, in the small town in which I grew up, most of my neighbourhood were on a similar socio-economic scale. There were a few "rich" families who would occasionally vacation in some place exotic, or buy some new car that the rest of us could only dream about buying, but, while we were envious, we were also accepting - because they were rich. Most of the rest of us were more or less equal socio-economically.
Post social media, our "comparison universe" is so much larger. We are constantly bombarded with social media showing people doing/buying/owning things that we, realistically, have not much hope of emulating. People reading your post, Claudia, will know that pretty much all of this media is fake, but people reading this post are also unlikely to manifest such a large gap between their own finances, and the national economy.
I appreciate that there are many theories, and this is just my opinion, but my favourite explanation lies in the act of comparing oneself to the Joneses - as people have always done - but now the Joneses against which one compares oneself are both fake, and are no longer local.
Phil, to understand the phenomenon of unlimited wants creation, consumer demand, theory of production , you can read The Affluent Society by Galbraith. One of the best books of last century.
If I remember correctly, it was New Zealand that started the 2% inflation target.
ECB makes the first rate cut move. Fed will still delay.
Every measure is both absolute from one period to another and relative based on how one thinks one is doing vs peers
There’s also another more subtle relative measure which is how one thinks one is doing vs expectations or potential
These squishier measures are at least as important as the more precise ones
Informative post, as always. Dr. Sahm is lucky to visit New Zealand. It's a great compliment to her to be invited by the best little Treasury in the world. Quite a few Americans put in sabbatical stints at NZ Treasury -- e.g., tax policy expert Eric Toder. NZ has had a really interesting macro experience from 1930s on -- e.g., first country to adopt inflation targeting in 1980s. From googling, I see that there has been lots of debate in NZ about the Sahm rule.
Thanks! I have very much enjoyed working on my paper for NZ Treasury and looking forward to my trip. Yes, the NZ economy and economic policy is interesting. I have learned a lot.
New Zealand isn't my idea of a shining example of forward thinking policy, thank you very little -- it's entirely subject to neoliberal capture.
Good article. If I may speculate on the non-academic side, I wonder how much academic literature there has been on the topic of greedflation, since the word was introduced around early 2023 but started getting traction on Google Trends this March. I bring this up because the Bernanke-Blanchard paper does not mention greedflation at all.
In light of the FBI’s RealPage raid, and the FTC’s probe into alleged oil company collusion, there needs to more discussion on how antitrust enforcement, if scaled properly, could affect home and energy prices. Same with auto insurance and repairs.
In this vein, it’s also clear to me that the IIJA, CaSA and IRA, being centered US investments in long-term productivity, just doesn’t translate as well to the average voter as, say, extending the Child Tax Credit or UI expansions, or trying a German-style rail pass discount scheme. Perhaps respondents are factoring in losses from the 2020-21 social welfare and relief acts, or as Les Leopold suggested, fear of layoffs.
You might enjoy the latest Odd Lots episode on pricing: https://omny.fm/shows/odd-lots/corporations-learned-the-maximum-amount-they-can-c. Also, Isabella Weber's academic work on seller's inflation is very good. The anti-trust movement appears to be in re-birth and re-orientation. Finally, I agree that the long-term investments in people hit the cutting room floor, which is unfortunate. Even so, we had the expanded Child Tax Credit for a year and we now know it works. Take the win and keep pushing.
I’ll check out the episode, thanks. By the way, Mr. Leopold just came out with a new article about the vibecession and historical trust in government, which dovetails neatly with this one and might be fodder for a response: https://open.substack.com/pub/lesleopold/p/vivisection-of-the-vibe-recession
Also, one of the papers he cites covers how the wealthiest Americans’ spending habits are likely driving services inflation, it could use some scrutiny and/or exposure: https://www.ineteconomics.org/uploads/papers/WP_221-Ferguson-and-Storm-Second-Coming-final-May-17.pdf
Oh look! The episode has David Dayen, I’m a big fan