Cost of money and consumer sentiments
Last month, Larry Summers published a paper about Inflation and consumer sentiments. He (and co-authors) explain how higher interest rates pinch consumers and affect their economic sentiments. Summers also tries to make the point that inflation is high if we go by the old method of housing contribution to inflation. Factoring the higher personal interest payments would give a different picture of inflation measure. Summers also talks about how housing prices have not sufficiently corrected after pandemic housing boom. He says that the “cost of money”, the higher interest rate payments (home, auto, personal) are behind negative sentiments among consumers.
Alternative inflation figure as per Summers
It’s difficult to put Summers' thinking into a meaningful perspective by his own standards. Summers has vehemently argued for prolonged high interest rates for fighting inflation. If we agree that present situation is problematic and if we follow Summers prescriptions, we still won’t solve anything as Summers wants higher interest rates which results to the very problem which Summers is criticizing now.
Non mainstream (and borderline mainstream) thinkers have criticized the prescription of higher interest rates to tackle inflation as they believe that inflation of present times was mainly the result of an extraordinary supply shock caused by once in a century pandemic. Non mainstream economists also acknowledge that higher rates burden consumers while rewarding rentiers, the bond holders. Non mainstream experts propose using a myriad of policy tools to tackle inflation instead of blunt monetary policy instrument as inflation management strategy.
Short term ideas for tackling inflation includes using strategic Petroleum reserves to counter oil price volatility and using energy consumption subsidies (partial price controls in Europe) (1, 2). Long term ideas is addressing the supply chain bottlenecks in economy through building better infrastructure, green energy transition and lesser reliance on Oil & gas. Due to recent investments in Green energy projects, the electricity costs from Solar and Wind projects have gone down significantly while the total output has gone up greatly. Investments are necessary in reforming agriculture in Climate change era where long term sustainability is increasingly necessary.
On question of Housing prices, experts strongly suggest a more direct govt participation in building public housing. Indirect approaches of tax incentives, loan subsidies, lower rates etc isn’t really translating into affordable housing. The so called YIMBY movement is advocating proactive approach to increasing housing supply which seems to be a major problem in many states and causing intrastate migration (1, 2).
Summers also talks about negative consumers sentiments without giving much attention to political climate. Krugman makes interesting point on inflation sentiments. Krugman says that people are very much influenced by most recent experiences. US has just emerged from a period of high inflation, however inflation is now flattening. In a year or so when average rate of inflation over a longer period stabilizes at modest level, the negative sentiments of people will also subside.
Partisan driven economic sentiment in times of MAGA
Krugman and other experts have also pointed about Trump factor in economic sentiments. There is vast differences between economic sentiments of American people based on political affiliation. While people are generally influenced by near term experiences (which was not good in 2022 - early 2023), the Trump’s gaslighting of America is significantly skewing people’s opinions. The barrage of falsehoods, repetitions and fact-less affirmations on economy and inflation are doing a number on Republicans. Mind you that these are the same people who now believe that 2020 elections were stolen.
Larry Summers is trying to have both ways. He demands higher interest rates, even to extent to create a recession and large unemployment - all that to solve the inflation problem. At the same time, Larry also says that higher interest rates - higher cost of money - is also a form of inflation and consumers aren’t happy about it.
Off topic stuff. US has been playing both side-ism in Gaza Genocide. Air dropping food aid on Gaza strip while giving more bombs and missiles to Israel.
