Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday.<\/p>\n
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TRANSCRIPT:
Paul Krugman in Conversation with Jared Bernstein<\/p>\n
(recorded 4\/22\/26)<\/p>\n
Paul Krugman: Hi everyone. This week I\u2019ve got Jared Bernstein<\/a> with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it\u2019s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it\u2019s so compelling and then I\u2019ll chime in. We\u2019ve both done work on this, but you\u2019ve done more.<\/p>\n Jared Bernstein: Yeah, well, to me, it\u2019s personal because I was in the White House\u2014in the Biden administration\u2019s Council of Economic Advisers, as you know\u2014during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people\u2019s feeling about the economy\u2014these vibes\u2014just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices\u2014how much prices went up\u2014was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I\u2019m sure we\u2019ll get into.<\/p>\n Krugman: I mean, what was striking about it was that historically, there\u2019s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren\u2019t. But let\u2019s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That\u2019s how we kind of started. In your recent work, you started by saying, \u201cwell, maybe with inflation over a longer period,\u201d but this kind of morphed into this price level issue. So why don\u2019t you tell me about that?<\/p>\n Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper<\/a>, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version.<\/p>\n Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board\u2014I don\u2019t know how far back they go.<\/p>\n Bernstein: It actually goes back to \u201862, and U. Michigan goes back to \u201852. But that\u2019s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from \u201890 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the \u201820, \u201921, \u201822 inflation shock wasn\u2019t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel.<\/p>\n And I do want to get this down early on: that\u2019s a pretty complicated thing to explain\u2014how people feel about the economy. You know, you ask ten economists what \u201cvibes\u201d mean, or pollsters, whatever; they\u2019ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear\u2014 and you\u2019ve underscored this in some of your recent work\u2014 it\u2019s not the only thing. So, there\u2019s that.<\/p>\n I guess one other thing I\u2019ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that\u2019s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: \u201cWe just had 250,000 payroll jobs.\u201d You know, \u201cproductivity is up, GDP inflation\u2019s way down.\u201d \u201cGroceries had a 12% inflation rate. Now they have a 1.5% rate.\u201d These are the things we were talking about out on WHNL, and it always got back to [the press saying], \u201cWhy do people feel so bad about the economy? They\u2019re telling us things are too expensive. What are you going to do about that?\u201d So that really got into my head.<\/p>\n Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again\u2014 you or I would say, \u201cLook, inflation is way down.\u201d They said, \u201cWhat do you mean? Things cost so much more than they did in 2019.\u201d And so you kind of introduced this \u201cexcess price level\u201d as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there?<\/p>\n Bernstein: Yeah. So, they\u2019re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we\u2019re circling around the same thing, which is people\u2019s memory about prices. And that\u2019s key to this research. It\u2019s something I hadn\u2019t thought enough about but I\u2019ve more recently been kind of obsessed with, which is people\u2019s memory of what things used to cost. And this gets you down an interesting set of questions.<\/p>\n So if that were the only thing in play here, everybody\u2014including me and you\u2014would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it\u2019s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on\u2014that\u2019s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in \u201821, \u201922, people have this set of prices still emblazoned in their head. I used to call it the \u201cpersonal price vector,\u201d which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it\u2019s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by \u201ca while\u201d? And I\u2019m still wrestling with that question.<\/p>\n Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren\u2019t pining for the days of 15-cent McDonald\u2019s hamburgers. I started driving a lot earlier than you did. So, I don\u2019t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I\u2019m probably going to get all nonlinear here, but I mean, we\u2019re now five years on from the big price shocks from Covid. Admittedly, I am more affluent than most of the population, but I don\u2019t remember what ground beef or eggs cost in April 2021, but I\u2019m not sure that many people really do. So how is it that we are still feeling this?<\/p>\n Bernstein: Yeah. So this is something I think about a lot. And I think the answer is that it\u2019s not just that we had that one shock\u2014one and done, done and dusted. It\u2019s that we\u2019ve actually had a series of shocks and that people haven\u2019t had time. A lot of this comes under the rubric of Trumpian chaos or, put differently, horrible crap that the Trump administration has thrown at the economy. You know, just really bad economic policy that has continued to fuel the shock that consumers have been experiencing. So, again, if it was one and done, I think people would be feeling better. But you get the Trump tariffs\u2014that\u2019s the big shock to prices. Now granted, we only import 11% of our GDP in goods. But walk down the aisles of Target and Walmart, and you\u2019ll see a lot of those imports. So that\u2019s in play. And now we have the shock of the war. I think there are some other factors in play. Social media amplifies this stuff in a way that it hasn\u2019t in the past.<\/p>\n And, you know, actually, while I take your point about remembering what things cost\u2014from talking to a few people, looking at some polling\u2014 actually, people do still remember at least what eggs cost, which was around $2 a dozen, or $1.50 a dozen. Although it\u2019s not that far from that now, it\u2019s closer to $2.50 or $3, depending on what kind of sale you can get. It wasn\u2019t that long ago that it was four and five because of avian flu. So there\u2019s been a lot of other shocks to prices in the interim. And I think that\u2019s played an amplification role.<\/p>\n Krugman: Let me just say, people hate inflation. I mean, there\u2019s a widespread view among economists\u2014which, if you are not sufficiently cautious and laying it out, can sound condescending\u2014but if you have a big increase in prices, but also a big increase in wages\u2014which is kind of what happened during the Biden years\u2014people should be saying, \u201cOh, I\u2019m okay. My real income has kept up.\u201d But they don\u2019t. They think that they earned the wages and that the prices were done to them. Are you okay with that view, or do you think there\u2019s something more going on here?<\/p>\n Bernstein: I think that view is correct. And that goes way back to research from many decades ago and has recently been updated by Stefanie Stantcheva, who shows precisely that people, right or wrong, kind of understandably feel like: \u201cIf I get a raise, it\u2019s because of my hard work and I deserve it. If something happens to the price, that\u2019s not me. That\u2019s something somebody else did.\u201d And in a world of politically intense partisanship and vicious social media, that \u201csomeone\u201d became Biden. So, you get, \u201cI got my raise, but Biden did this to my price.\u201d And so I do think that plays out in both political and economic spheres.<\/p>\n Krugman: Something that I think I was quite wrong about was I thought that the bad vibes would kind of alleviate, or diminish, with the new president, much as I thought that there was a strong element of partisanship in moving those numbers, and that has not happened; if anything, it\u2019s the reverse. And just a few hours before we had this conversation, I posted something about that. But what\u2019s your view on that?<\/p>\n Bernstein: I have a strong view on this. And you captured it in your graphic this morning. I think that what\u2019s happening to Trump\u2014and this is not rocket science, by the way; if Elliott was here, he\u2019d have more authoritative points on this, but I\u2019m pretty sure I\u2019m right. I think there are three groups in the electorate. There is the Never Trumpers, the Always Trumpers, and then this really key group in the middle that\u2019s pretty dispositive in terms of which way they swing and it\u2019s dispositive in terms of determining election outcomes. Some people call them \u201cpersuadables.\u201d What I think of them, at least in the context of our conversation, are people who believed Trump when he said, \u201cI\u2019m going to lower prices on day one.\u201d But these are folks, according to my theory which we\u2019ve talked about so far\u2014these are people walking around saying, \u201cDamn it, I want my old prices back. I want my old interest rates back. I want my old mortgage rates back. And this guy not only is saying that he\u2019s going to give them to me, but actually, the last time he was president, prices were lower and interest rates were lower. So let\u2019s put him back and, you know, maybe we\u2019ll get back there.\u201d So they rolled the dice and they bet on the wrong pony. Whoops, I mixed the metaphor. But you get what I\u2019m saying.<\/p>\n And now they understand that they\u2019ve bet on the wrong guy and that their prices are right back to where they were. And in fact, inflation, if anything, has accelerated because of decisions Trump\u2019s made. It\u2019s not just that he\u2019s ignored affordability or called it a hoax; it\u2019s that he\u2019s pushed hard in the wrong direction on these things. And this key middle group\u2014which I think is behind some of the numbers you posted this morning\u2014is very disenchanted by what they\u2019ve seen.<\/p>\n Krugman: Yeah. Again, it\u2019s hard to talk about this stuff without seeming condescending, but the people who swung to Trump in 2024 and swung hard against him now are disproportionately low-information, which\u2014you know\u2014that\u2019s not a pejorative. It\u2019s just a description there. He defines it as people who don\u2019t know which party controls Congress. And I guess the argument is that they may well have actually kind of believed Trump, or at least either believed Trump\u2019s promises, or just remembered that they were feeling pretty good in 2019.<\/p>\n Bernstein: I also want to be very careful not to sort of criticize anybody for being what looks gullible to an economist, because economists know that the only thing that really brings the price level down\u2014meaning broad price deflation\u2014is a deep recession, and nobody wants that. But people are getting jammed with all kinds of signals about how \u201cI\u2019m going to make your life better for you.\u201d And I don\u2019t think the media has distinguished themselves in helping people sort this out. So, you know, why not throw the dice and make a bet on someone who you think is going to do that kind of magic for you?<\/p>\n The problem that a lot of people face\u2014the group that we\u2019re talking about\u2014 is nobody ever seems to really help them enough. So that is a very important part of the agenda\u2014what I call the affordability agenda\u2014that I think we need to be working on and delivering on, you know, sooner than later.<\/p>\n Krugman: So, this is me being probably more partisan than you, despite the fact that you were actually in the administration, but I would have said that Biden did a lot to help people, that there were a lot of aid programs. I remember how worried people were about long-term economic scarring from Covid, and instead, we had this roaring recovery. And yet it didn\u2019t seem to penetrate. People didn\u2019t seem to give it any credit.<\/p>\n Bernstein: Well, the roaring recovery was real. I mean, you\u2019ve been writing about this. I know we both admire Arindrajit Dube\u2019s recent book<\/a>, which is really a great documentation of the wage impacts back then. We wrote a chapter much like what Arin is saying in one of our economic reports for the President, where we documented the benefits of such low unemployment to folks. So, yeah, it\u2019s true that we definitely were delivering some things that improve living standards, but some of them, based on just the political hurly-burly of the time, didn\u2019t last long enough.<\/p>\n So the child tax credit was hugely important and took child poverty down to historically low rates. Cut it in half. And that was amazing. And by the way, it also underscores the point that whatever the child poverty rate is or the poverty rate in general, that\u2019s a policy choice. And Biden chose to make it a lot lower. I thought it was the right policy choice. But, you know, it wasn\u2019t okay with Joe Manchin, and so it went back up when that program ended.<\/p>\n And then when it comes to a lot of the investments, like building our industrial policy, building new computer fabrication plants, and investing in clean energy, that stuff takes a long time to pay off, and folks don\u2019t really see that. And then when it comes to affordability, people were concerned with housing prices, healthcare, childcare, and the price of energy, which you highlighted this morning. And those were areas where we tried but weren\u2019t able to do enough.<\/p>\n Krugman: The consumer price index\u2014 the standard measures of price level\u2014do not include interest rates. I mean, the way we measure housing prices is by either rents or an estimate of what your house would rent for if it were rented; \u201cowner\u2019s equivalent rent.\u201d And when I look at different things, one thing that really does stand out, the one thing where prices have effectively risen a lot more than wages, is in fact the mortgage payments. So how much do you think…? I mean, there was a paper by Larry Summers\u2014though that doesn\u2019t discredit the work\u2014 saying that was a big part. What\u2019s your view on that?<\/p>\n Bernstein: I think that that is true. I mean, I think the point of that paper and my reference earlier to interest rates and mortgage rates is that this is the price of money. So it\u2019s prices again. You know, \u201cI want my old prices back.\u201d Well, what\u2019s the interest rate? It\u2019s the price of borrowing. And so, yeah, I think that\u2019s in play. But I think where that rubber meets the road is definitely in housing costs. Housing costs really went up very quickly over this period. And a very big part of this sentiment that we\u2019re talking about\u2014and this has been documented\u2014is a lot of young people feeling like they\u2019ll never be able to afford to buy a house. Which is very pervasive. That sentiment and that truth is very pervasive. And how do many young people start building wealth? Through home equity, through buying a home. So that\u2019s a source of a lot of upsetness.<\/p>\n But it\u2019s the rental side of the equation that was really giving folks a lot of problems back in the period when these negative vibes started to percolate\u2014and still do. If you look at the numbers, the share of income that people are paying on rent, it\u2019s 30, 40, 50% in some cases. And that makes it really hard to get by. So I think both the interest rate and housing costs are part of this puzzle. Absolutely.<\/p>\n Krugman: It\u2019s one of those things, because if you look at rents, rents really shot up in \u201821, \u201922 and then they really sort of flatlined after that. And I\u2019m not sure that, at this point, rents are any higher relative to 2020 and before. Maybe I\u2019m wrong about that, but I thought rents were actually not looking like that big a problem now.<\/p>\n Bernstein: Yeah, at least in terms of inflation. The shelter, or the housing component of the CPI is back to where it was pre-pandemic. So again, this is a level thing. So, this gets back to something we said before. I would go out to talk to the TV cameras, and I\u2019d say, \u201cInflation was 9-10%. Now it\u2019s 2%.\u201d And people would kind of hear: \u201cOk, so the prices that I already don\u2019t like\u2014they\u2019re not falling. They\u2019re going up more slowly. And you want me to stand up and applaud for that?\u201d And I think that dynamic has been in play in rental markets as well.<\/p>\n Krugman: I think that was an old John Kenneth Galbraith line where he said: \u201cWhen people say inflation has fallen, they\u2019re saying that things are getting worse more slowly.\u201d Which is not really right, but on the other hand, it gets at this.<\/p>\n Bernstein: I would say that\u2019s \u201cnot really right,\u201d but just what you said. And I have this theory that I\u2019m working on with some folks. I don\u2019t want to lean too far into something that I haven\u2019t empirically really fleshed out yet. But I think there\u2019s something that goes on in this space when you have a shock to the price level. When instead of gradual movements in something people care about, if something\u2019s getting bad, I guess it\u2019s the boiling frog story. If something\u2019s getting kind of bad, really slowly, you can learn to live with it. You can adapt. And if your income and wages are kind of going up at around the same rate, then you\u2019re not really the boiling frog. You\u2019re pretty comfortable and you\u2019re getting along, or you\u2019re pretty uncomfortable.<\/p>\n