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Reviews |  Ordinary people don’t think like economists.  It’s a problem.


Expectations matter in economics. If people think inflation will rise, they will behave in a way that will help push it up (for example, by asking for bigger increases). If they believe the economy is about to grow strongly, they will gain confidence, spend more, and help create the future they anticipate.

But what if people’s expectations are based on an unorthodox view of how the economy works? That’s a question raised by a fascinating paper published in January that finds big discrepancies between how most economists see the world and how ordinary people think things work.

In classical economic theory, for example, rising interest rates make borrowing more expensive, which slows economic growth and lowers inflation. But in a survey of 6,500 US households, researchers found that 57% of respondents believed that a hike in the federal funds rate, the short-term interest rate controlled by the Federal Reserve, would cause a to get up in inflation. That’s almost twice as much as the 30% who thought it would lead to lower inflation.

Similarly, while 80% of the 1,500 economists polled for the paper believed that an increase in government spending would lead to a lower unemployment rate, only 43% of the general public agreed and 39% believed that an increase in spending would aggravate unemployment. .

I expect to receive emails from readers saying that the public is right to be concerned about rising fares and increased expenses. OK of course. After all, even a good portion of the economists surveyed disagreed with the textbook answers on interest rates and spending. (The Rational Expectations Theory, for example, says that deficit spending is ineffective in stimulating spending because far-sighted consumers realize that the resulting debts will have to be repaid and they will have to cut spending to save for future bills. taxes.)

But for now, let’s assume that the textbook policy prescriptions are correct and consider the difficulty this disconnect with the public creates for policy makers. Imagine that the Federal Reserve wants to stifle inflation by raising interest rates, but in doing so it tricks many people into believing – and behaving as if – inflation is going to rise. It’s a fail. Or imagine Congress wants to stimulate the economy, but its deficit spending partially backfires by causing many people to tighten their belts because they see trouble ahead.

The research paper is titled “Subjective Models of Macroeconomics: Evidence from Experts and Representative Samples.” It’s by four economists: Peter Andre of the Briq Institute for Behavior and Inequality in Bonn, Germany; Carlo Pizzinelli of the International Monetary Fund; Christopher Roth from the University of Cologne in Germany; and Johannes Wohlfart of the University of Copenhagen.

In an interview, Andre and Wohlfart said that one of the implications of the article is that decision makers need to communicate to the public why they do what they do and not rely on the action itself to do all the work. behavioral influence work.

Economist Yuriy Gorodnichenko of the University of California, Berkeley, who did similar research, said he agreed with the authors’ conclusions. “What we have in our business models and what people have in their heads are not the same thing,” he said. The difference in perception blunts the effectiveness of economic policies, but it is not large enough for them to have the opposite effect to the intended effect, he added.


Unexpected inflation is great for debtors, and there is no bigger debtor than the United States federal government. Inflation doesn’t just raise prices; all other things being equal, it also increases the number of dollars the government receives in taxes. Past debts remain fixed, so their “real” cost of ownership – that is, inflation-adjusted interest payments – goes down.

The following graph, based on data from Table S-1 of President Biden’s budget request for fiscal year 2023, which begins October 1, shows that the federal government’s inflation-adjusted interest bill is heavily negative right now because inflation is above the average interest rate on the debt. It should turn positive in FY2025, but remain modest.

Net real interest payments have averaged about 1% over the past four decades and about 2% in the 1990s, the Office of Management and Budget says in a supplemental document.

Even when inflation-adjusted interest payments are positive, as they likely will be later in the decade, the burden of paying them becomes lighter if payments grow more slowly than inflation-adjusted growth in the economy. ‘inflation. But it is a separate phenomenon that is not addressed in the budget documents.

Olivier Blanchard, former chief economist of the International Monetary Fund, told me that the numbers in Table S-1 demonstrate that a nation’s debt-to-gross domestic product ratio, which is a commonly quoted measure, is a inadequate affordability. “It’s like saying people have a mortgage that’s three times their income,” said Blanchard, who is now a senior fellow at the Peterson Institute for International Economics. “Whether that’s a problem depends on the interest rate.” The inflation-adjusted interest rate, ie.


“Europe will be forged in crises, and will be the sum of the solutions adopted for these crises.”

— Jean Monnet, “Memoirs” (1978)

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