Half of Germans and French thought that rising prices were a top issue, even when inflation was just 2.5%. The EC Consumer Survey, asks people how much they think prices have risen in the past 12 months. In May 2012, 28% of German, 36% of French, and 40% of Austrians thought that prices had risen "a lot."
Neil Irwin recently wrote that "The leading economies of the industrialized nations may not have a lot in common, but they are all afflicted by this: Inflation is too low." Even though inflation is too low, a lot of people think it is high-- and think that rising prices personally affect them more than unemployment. Public opinion is a powerful force, so we see policymakers being more reluctant to raise inflation when it it too low, than to lower it when it is too high.Quantitative Ease by Carola Binder
Europeans' Biggest Problem
The moron problem. Morons can be counted on to get it 180° out. The EZ is hopeless.
Europe has far bigger problems than distorted inflation expectations. I was listening to a podcast last week where an author described the evolution of polite public opinion over the past four years, and he said that until very recently most Europeans hadn't "noticed" the astronomical unemployment rates among youth in Europe. Europe is so divided by ethnic and class bigotry, and so addled with cognitive dissonance, that the most salient and catastrophic events are not noticed.
ReplyDeletePeople always tend to think that they don't live in evil times, and that all of the evil stuff happened in the past. But not noticing when 50% of a country's young people are jobless is similar to an earlier generation's not noticing that some people are being loaded up in trains and shipped off to execution camps.
As for Binder, I am amazed by the overwhelming mystical weight the younger generation of economic thinkers gives to inflation expectations. The percentage of people in the real economy whose decision-making is influenced by inflation expectations is minuscule, and to the extent that they are so influenced, expectations of higher inflation are just as likely to be correlated with the feeling that inflation is "bad" and correlated with a bad economy than they are to be correlated with the feeling that the higher inflation signals more spending and growth.
Yes, prices are rising a lot, cause taxes are rising a lot.
ReplyDeleteWe need bigger deficits, and the very first thing to do is lower taxes, which are astronomical. Specially funny is how the "poor people" taxes like VAT are rising in Spain, so majority of the people purchasing power is diminishing, with 2 million households without any income at all, and the participation rate at all time low. Not only that, but there is no activity at all, the economy is life support right now, I cannot trust official data from my experience in almost every sector of the economy.
We are in 'war economy', stuff is pricey and expensive, and at the same time there is no income. I hope they start calling it for what it is, a depression. And the rest of Europe is heading that way too.
Some day there may be justice for the treason the citizens of Europe are suffering, but not for now.
I like your comment Dan, but I think Ignacio is onto something. People will certainly notice if their paychecks don't last as long as they think they should. Some call that inflation but it could be taxes.
ReplyDeleteBut inflation aside the unemployment rates of around 30% in Greece and Spain are in depression territory. If you add in all the people in this country who want jobs the number exceeds 25 million.
Ignacio is right. There's a treason going on in the Western world and damned no one sees it.
Dan, I don't actually think that distorted inflation expectations are Europe's biggest problem. The title is just about what Europeans say is their biggest problem. I agree that astronomical unemployment, especially among the young, is a much bigger issue, and rightly classified as an evil. So I think it is stunning that more people think inflation is a problem, than think unemployment is a problem.
ReplyDeleteCarola says, “I think it is stunning that more people think inflation is a problem, than think unemployment is a problem.”
ReplyDeletePerhaps not so stunning when you consider the total contempt that insiders have always had for outsiders. Here’s just one example. Greece has severe unemployment, as we all know. Plus Greece has a bloated bureaucracy, and the Euro authorities have been trying to get Greece to shrink this bureaucracy. But up to a month or two ago, not one single government bureaucrat had been sacked.
And possibly still none have been sacked - I’m not sure.
Ignacio, people do notice inflation. They also notice rises in prices on a few goods and think its inflation. Sometimes there is inflation and they don't notice it. Sometimes there is inflation that they notice and resent, but didn't expect; sometimes they expect inflation, but it doesn't happen, etc.
ReplyDeleteAnd sometimes the expectations people have about inflation influence their behavior, while sometimes they don't; and sometimes these expectations influence behavior in exactly the opposite way people they would influence an economists.
I see two main arguments about inflation expectations bandied about:
1. Increases in inflation are correlated in a rough way with increases in economic growth; and so if people expect higher inflation they will expect higher growth; and if they expect higher growth their confidence increases.
2. The higher the rate of inflation, the faster one's money is losing its real purchasing power; and the faster it is losing its purchasing power power, the more prompt one is in spending it, and the less likely one is to hold it.
In both cases psychological behavioral conclusions are deduced from dubious premises. In the first there is a fallacious inference from a statement of the form:
1. P usually happens when Q happens
to a corresponding statement something like:
2. Usually, when one expects P, one expects Q.
This is clearly a fallacy since it's like arguing from:
1. Usually, when a fever occurs there is an elevated release of prostaglandin E2.
to
2. Usually, when one expects a fever, one expects an elevated release of prostaglandin E2.
Expectations a re psychological phenomena and are not in general transitive across every correlation that occurs in nature and the social world. If one has a degree in economics, then one might have a deep-seated conviction about the correlation between inflation and growth, and so one might come to expect higher growth if one expects higher inflation. But I doubt this psychological phenomenon is pronounced among a significant number of people.
Also, many people, correctly or incorrectly, associate inflation with a poor or malfunctioning economy. For them, if they come to expect higher inflation they might thereby come to expect lower growth.
The second argument above is likewise a dubious behavioral conclusion deduced from dubious a priori behavioral premises attributing relatively high levels of economic sophistication to the general population, and also making unwarranted assumptions about how people view their future income. There is even some evidence out there that many people respond to a situation in which the believe the purchasing power off money is decreasing while income is stagnant by saving more so as to spread their purchases evenly over time - completely the opposite of the textbook behavior.
Anyway, the whole business is part of the contemporary neo-monetarist infatuation with central bank-engineered, trickle down stabilization techniques, often put forward - as we have seen many times - in woeful ignorance of the actual mechanics of central bank operations.
I find it astonishing that people looking at Europe, where a continent of tight-fisted governments are woefully neglecting the need for massive public enterprise and state-led investment to put the continents millions of unemployed to work, would conclude that the solution to the mess is more central bank asset-swapping of the sorts known as QE.
This comment has been removed by the author.
ReplyDeleteCarola, fair enough. But the preoccupation with inflation expectations, to the extent that I read about it on the economics blogs, usually seems to be connected with a preoccupation with central banks and the exaggerated Merlin-like powers that have been attributed to them ever since Volcker. It's also sometimes connected with the dubious a priori behavioral psychology of the rational expectations schools.
ReplyDeleteMy gripe is that the contemporary economics profession, whether they see themselves this way or not, has a very conservative outlook and tends to confine their policy discussions to a small toolkit of options characterized by an avoidance of bold, progressive, socially boat-rocking approaches focused on incomes, direct and activist governmental engagement and investment and democratic participation - and that the preference for these techniques is a sign of the profession's subordination to economic elites and the status quo.
Prices are objectively rising, but more important, incomes are not rising. There is a perception of diminishing purchasing power amongst the population. Add to that the sensation of skewed liabilities:assets ratio, and falling incomes to cover this.
ReplyDeleteThis is not some 'expectation voodoo' economists are obsessed with. There is official data backing it up (and official data, specially aggregates, do not even tell the whole story). Rises in prices, generalized rises and more specifically rises in the consumer basket of the majority of the people, we are talking about basic goods here, no fancy electronics no one can afford to buy any more, adjusted by flamboyant 'hedonist' modifiers.
In nations where income is decreasing and being skewed towards a minority, and basic consumption prices are rising, people perceive they can buy less with what they earn (which is also falling). No expectations voodoo, I know what I'm talking about cause I have bills to compare and the data is there, GDP in negative numbers for years, stagnant incomes (when not falling, wage deflation), and still there is positive CPI numbers.
Granted most of these rises could be avoided by lowering some of the tax hikes idiotic governments all over the place are doing. So it's a problem, off course it's a problem for people who barely remain employed on lower incomes (which a lot of people in Europe, including the precious Germany with it's 400 EUR minijob crap that plague the youth). There is no 'spending of your purchasing power because prices are rising' because the majority does not have disposable income to spare wasting around! How are economists so oblivious to this hurts my brain.
They spend all their income to survive on monthly basis covering their exorbitant obligations and cost of life. There are no savings, the situation is asymmetrical, cause people with most savings are in the minority, off course they don't care when pricey cars are getting cheaper because we live in a permanent depression, when real estate assets are getting cheaper, when there is a premium for liquidity and capital because of the environment. But the guy on the street is surviving paying mortgages without any haircuts (while on negative equity), and with the income they have left, they can pay the bills, buy some food, and those who are lucky, maybe (just maybe) can afford a dinner once a month in the restaurant in the corner of the street or a film in the movie. Off course then you notice prices are rising, and they are rising for real.
We are being ROBBED by traitor politicians, 'technocrats', burocrats, the wealthy and corporate types etc. Robbed of jobs AND robbed of 'purchasing power', both of these ar enot mutually exclusive (in fact they are the same thing). I'm fed up with the situation seeing how my country is being destroyed by that scum and most Europe is following the same path and I'm not willing to adorn reality with fancy words to suit politicians and other scum
If 'inflation' is being used as an excuse for 'unemployment' (NAIRU) then we better call them for what they are for: scumbags; and point the right thing to them. But I'0m not going to say something is not a problem because there is other, more immediate, problems.
After all something is more than 0, and people with 0 income should be helped to get something, as the sooner the better before people starts to decide they have nothing to lose and we start to see some of these traitors pursued by 'unusual means'. But that does not mean we don't have an other problem of increasing poverty by the means of diminishing purchasing power (and increasing obligations, which is the other part of the equation).
We are being ROBBED by traitor politicians, 'technocrats', bureaucrats, the wealthy and corporate types etc.
ReplyDeleteYes. And 90% of the economics profession works for them. But they would prefer to say we are being "disciplined", not robbed.
The survey to which Carola makes reference does not mention "inflation" but rather "rising prices." Rising prices (anecdotal) are often confused with inflation as an economic index. As we know, the prices with which most people are most concerned are food and energy, which are volatile and their movement is not coordinated with the inflation index. Moreover, in countries with a VAT and an austerity policy, tax increases will result in higher goods prices, and Ignacio observed. This is a natural reaction to be expected.
ReplyDeleteHowever, complaints over "rising prices" are apparently interpreted by those in charge as inflation-related, so they pursue a policy of inflation-targeting instead of employment targeting for political reasons.
This is the implication, and I suspect that there is at least some truth to it. However, I don't think that it is in any way at the bottom of the push for austerity, which is basically a neoliberal policy agenda.
We are being ROBBED by traitor politicians, 'technocrats', burocrats, the wealthy and corporate types etc. Robbed of jobs AND robbed of 'purchasing power', both of these ar enot mutually exclusive (in fact they are the same thing).
ReplyDeleteThat's the neoliberal agenda.
Even Paul Krugman recently reversed his opinion of Naomi Klein's Shock Doctrine, saying he was initially "predisposed" against it as a professional economist, but now he sees the light.
@tom did you catch Naomi Klein's tweet in reply? "After yr neoliberal 90,s I was predisposed to dislike u 2 so dont sweat it" ouch
ReplyDeleteDidn't see that, Andy. Thanks for posting.
ReplyDelete