Numerous commentators—especially those defending President Biden’s economic record—have puzzled over why Americans are sour about the state of the U.S. economy. Unemployment rates have returned to pre-pandemic lows, commentators correctly point out, and the official rate of inflation is declining. So why are Americans ignoring the view of many experts that the economy is doing well?
According to a striking new paper by a group of economists from Harvard and the International Monetary Fund, headlined by former Treasury Secretary Larry Summers, the answer is that Americans have figured out something that the experts have ignored: that rising interest rates are as much a part of inflation as the rising price of ordinary goods. “Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels” since the early 1980s, they write. “Alternative measures of inflation that include borrowing costs” account for most of the gap between the experts’ rosy pictures and Americans’ skeptical assessment.
At the heart of the issue is a misconception that bedevils academics, journalists, and ordinary Americans: the idea that the official inflation rate is an objective number, impervious to human biases, much in the way that someone’s height or weight can be objectively measured with a ruler and a scale.
In fact, the formula used to calculate the inflation rate is subjective. It requires economists to make hundreds of judgment calls about how one assesses the overall trajectory of prices. What goods and services should be included in the “basket” of prices in the formula? How should those goods and services be weighted against each other? How do we account for the fact that poor people consume different things than rich people, or that people in different parts of the country may consume different things in different proportions?
And, most relevant to the new research: What is the best way to measure changes in the price of important things like housing? There has always been considerable debate about this.
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