July 14, 2022

You've seen the headlines this week: OH NOES IT'S THE MOST INFLATION EVER! Like the rest of us, Paul Krugman is trying to figure out exactly what's going on with our economy. Via the New York Times:

Are you confused? You should be. I’ve been in this business a long time, and I can’t remember any period when economic numbers were telling such different stories. On the other hand, we’ve never before faced the kind of shocks we’ve gone through in the past few years: Both the pandemic-induced recession and the recovery from that recession were, to use the technical term, weird, and maybe we shouldn’t be surprised the measures we normally use to track the economy aren’t working too well.

My guess about what’s really happening is that the economy is indeed slowing, but probably not into a recession, at least so far. And a moderate slowdown is actually what we want to see.

At the beginning of 2022, the U.S. economy was almost surely overheated, and this overheating was contributing to (although not the only source of) inflation. We wanted to see the economy cool down before inflation got entrenched in expectations, and that’s an area where all the available data — slowing wage growth, inflation expectations in the financial markets, surveys that ask consumers what inflation rate they expect over the next few years — are telling the same story: Inflation is not, in fact, getting entrenched.

Overall, the picture appears consistent with a “soft landing” — a slowdown that falls short of a full-on recession, or involves a mild recession at worst, together with stabilizing inflation.

But, of course, we don’t know that. In fact, given the wide discrepancies in economic data, economic pundits (including me) have unusual freedom to believe whatever they want to believe. Just pick and choose the numbers that tell you what you want to hear and glue them together.

A few days since this column appeared, Krugman tweeted this:

"NOT saying it's all good. But a combination of statistical issues and the media's focus on year-on-year makes it look as if inflation is getting worse, when it's actually probably getting better," he tweeted.

Right now, economist Larry Summers and the usual suspects are insisting we aim for a permanent unemployment rate of 5% -- which would cause severe economic pain for many.

Remember: Krugman was the person who sounded the alarm about the impending mortgage crash. If he's telling us we probably don't have to worry, I'm going to take him at his word. One less apocalypse to obsess about!

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