Tag Archives: inflation

Six Explanations for Misperceptions Regarding the Strong Economy

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February 25, 2024 — By now, quite a variety of explanations have been offered for the puzzle that the unusually good state of the US economy has not been reflected in public opinion surveys, and especially not in polls regarding President Joe Biden’s bid for re-election in November.  At least six hypotheses have been put forward regarding the performance-perception gap.

Perception biases

  1. Some charge that the official statistics must be wrong, out-of-touch, failing to capture the true state of the economy. This hypothesis is itself wrong.  While any given number is subject to measurement error, the evidence from a wide variety of statistics, most of them gathered separately, has been overwhelming.  They tell a very positive story, whether one looks at the measures of economic growth (GDP), strength in the labor market (jobs created or unemployment), or inflation (either CPI or PCE, and either headline or core).

Media commentary over the last two years has emphasized that the economy and job market have been slowing down.  They usually fail to note that, although this is true relative to the breakneck growth of the year that immediately followed the 2020  pandemic shutdown, the current rates of expansion of GDP and employment are above their post-2000 averages. read more

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Japan’s Consumption Tax: Take it Slow and Steady

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Japan’s consumption tax rate is scheduled to increase substantially in April (from 5% to 8%).  The motive is to address the long-term problem of very high debt.  (Takatoshi Ito has stated the case in favor of the tax increase.)  Prime Minister Shinzō Abe has apparently decided to go ahead with it.   Many observers, however, are worried that the loss in purchasing power resulting from the sharp increase in the sales tax rate will send the Japanese economy back into recession.

It is very reminiscent of April 1997.   I remember Larry Summers, who was then Undersecretary of the US Treasury, repeatedly warning the Japanese government that if it went ahead with the consumption tax hike that was scheduled for that date, Japan’s economy would go back into recession.  I was in the US government then too.  As the date drew near, I asked Summers why he persisted in offering Tokyo this unwanted advice, given that the prime minister of the day was clearly locked into the policy politically.    Summers told me that he knew he was unlikely to change their minds, but that he wanted to be sure the Japanese would realize their mistake when they went ahead with the tax increase and his prediction subsequently came true – as it did. read more

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Nominal GDP Targeting is Left, Right?

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The recent surge in interest in Nominal GDP Targeting, as an alternative to money targeting or inflation targeting if the central bank is to commit to a nominal target of some sort, has prompted some pushback.   This is not surprising.  But one of the responses is most peculiar.  This is the allegation (1) that the surge comes from liberals opportunistically adopting an idea that was originally proposed by conservatives, and (2) that they will not stick with this “fad” in the longer run because it is only designed to fit current circumstances of high unemployment and low output.   Remarkably, every component of this argument is wrong. read more

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