Good post. Sticker shock when buying food or fuel seems to really bother people. The frequency of those purchases definitely shape peoples' perception of prices. Not having seen this kind of inflation for decades was also a way for things to be annoying in an unfamiliar way. The cognitive load you mention could be partially due to dealing with this novelty.
Employ the flip side of the logic presented in textbooks w/r/t the politics of trade and it's easier to understand. (Refresher for the curious: the benefits of trade are diffuse, but the costs are concentrated, so collective action dynamics will push towards protectionism without a broad consensus across the political class that this is not in the long-run interests of the nation (such consensus obv no longer exists, which is the first warning sign that trad political economy logics need updating.))
In the political economy of crisis-fighting the benefits of preventing 15% unemployment are concentrated: a supermajority of people have jobs either way. But the costs are diffuse: everyone experiences inflation. You think Elon and the network of used car dealers that love him give a shit about someone else's job? No, that's why the WSJ editorial page goes pre-emptively crazy about inflation whenever a Democrat even thinks about helping anybody. So the business class is against inflation always, and marginal voters whose jobs have been saved then employ some of the logic you described: "my job/wages are earned, but inflation takes from me, my bosses hate it and that's how my bread gets buttered, so I'll vote against it too".
Since the coordination mechanism for anti-inflation coalition-building is simple and inexpensive -- voting, on a pre-specified day known to all, as opposed to extended/indefinite lobbying for protection, as in trade policy -- it does not face a collective action problem. Thus, there is a very strong anti-inflationary bias in most democracies whose salience is a function of how far away the election is.
In the current situation "interest rate inflation" is pricing people out of housing in the places where job/wage growth is high, so there are both diffuse *and* concentrated costs associated with the current inflation. Real wage growth might keep up with CPI but not necessarily with a doubling of rents/mortgage costs. Irrespective of whether you prefer CPI/PPI, household balance sheets are pinched on both ends, but only one of these shows up in inflation statistics. Now look at recent voting patterns: Harris didn't get votes in the suburbs and cities that she was counting on, that's where rents and mortgages are still very elevated relative to incomes.
I.e., it's not just the inflation that's unpopular. It's the monetary policies being used to combat inflation that are also unpopular, which leaves governments with no good options other than to stick to principle and go down with the ship. In related news, every incumbent outside of Switzerland is getting smoked, irrespective of ideology (with the exception that zero progressive/left parties are winning), and Switzerland kept inflation low.
Chwieroth and Walter's research on the increasingly "Great Expectations" voting publics have for government macro management makes this a very difficult balancing act. In normal times with high levels of elite consensus that might be manageable without too much disruption, but in our current times of system-wreckers we're headed for system-wrecking.
Either way, hopefully MMTers and other left factions start taking this stuff more seriously or else we'll blast ourselves back into premodernity. Normie voters don't want a return to 1950s class politics, clearly. Kamala Harris got more votes in Vermont than Bernie Sanders did last week. Workers own assets now (2/3 of American households own stocks now, in the 1980s it was 20%). They want normie stabilization politics, not DSA-style "revolution" but 1990s technocracy, at least in the US. In fact they never stopped wanting it, US voters have voted for the candidate they perceived to be the "most moderate" in every recent election.
The CEO class *might* be in favor of inflation, assuming a growing economy, as all else held equal it would boost stock prices to better hit their targets for bonuses. Keeping down inflation also requires higher borrowing rates when an economy is strong, which makes it more expensive to take out loans for stock buybacks. I assume there's some sort of balance here though.
The CEO class does not have unified interests when it comes to inflation, which is why they defer to "whatever is good for the banks, since we need the banks to be working well". The banks typically prefer lower inflation -- or, most importantly, stable inflation -- for obvious reasons, assuming they know they have access to liquidity when times get tough (the Greenspan Put was necessary for a Great Moderation).
I think you have to include the way things are presented in the information space. Crime is over reported (if it bleeds it leads), inflation is over reported. And in the US, border and immigration threats are over reported.
It's easier to measure people's beliefs when they aren't bounded by reality.
Did you see the recent paper about how people really dislike negotiating, and that if you take that into account as a cost then inflation looks much worse?
More generally I think the phenomenon whereby prices go up 10% and you get a 1% raise but then you switch jobs and get a 15% raise is going to seem more like inflation is a problem than prices go up 10% and you get a 10% cost of living adjustment.
Or it's all relative. Anyone in the 20-35 bracket (2008 onwards) has only ever known super low interest rates and the decade (?) before that was pretty benign.
So to go from that to significant price rises in food and mortgage payments is outside their expectations.
If you are an old fucker like me who has lived in hyper-inflationary countries 5.5% sucks like a bad hoover but is hardly earth shattering.
I also struggle with the idea of hiking interest rates to control those bits of inflation which can't be controlled (food and fuel). If you consistently make people poorer then they will fight/strike for wage inflation (I was alive in the 1970s). Anyway, I'm sure that demand is weirdly inelastic.
Most people (really) hate maths. Figuring out where you stand with respect to inflation requires at least some mathematical thinking. Seems likely that people would have a particular antipathy to something that does that
OK, this is quite possibly going to sound very stupid indeed to anybody who knows anything at all about any economic things, because I do not (and therefore won't comment on them). It feels to me that people (by which I mean me, and a handful of other people around me I've just very briefly straw-polled) don't like inflation because the arrow of time and effect is perceived as pointing in the wrong direction. That is: what oughta happen is the following progression:
1. hey I got a pay rise! I am richer! I can buy more stuff I like!
2. everyone's put their prices up a bit, the robbing bastards, but that's OK because I'm a bit richer so I can afford it
but what actually happens is this:
1. everyone's put their prices up and I am poorer
2. I must struggle for a pay rise which maybe I won't get
3. I got a pay rise so now I can afford to buy the stuff I did before, just
These two aren't actually any different (in particular, there's not actually an ordering to them at all; it's all much more complex than "people get more wages so prices go up" or "prices go up so people get higher wages", even I understand that) but with approach 1 you _feel_ like you're always ahead of the game and the thieves in shops are trying to take it off you, which is annoying but you're the leader. With approach 2 you feel like you're always behind, constantly scrabbling merely to keep up like the red queen's race. I'm sure this is a known phenomenon (probably in, like, GCSE economics or something equally basic) but ... it does suggest that the perception of the thing is almost all of the point? So it doesn't matter if inflation is high or low as long as people perceive themselves to be ahead of it rather than behind, regardless of whether they actually are?
(obviously there are a bunch of reasons why it does matter if inflation is high or low, none of which I understand. Also the above assumes that price rises of stuff are not systematically outpacing wages going up in which case people are rightfully angry 'cos they're actually getting poorer, and again there will be tons of theory on this which I don't know about.)
Sorry for this primary-school economics from first principles thinking! I'd read some theory if I knew what. Maybe literally a GCSE economics textbook?
I guess that ought to imply inflation is less unpopular when collective bargaining is strong. You still have to figure out your consumption basket but at least the union will negotiate with your boss. Or, in other words, what's up with France?
Instinctively I love 'cognitive load' explanations for recent, as politically the actions of Anglo-American electorates look more like enraged lashing out than a thoughtful reorientation, and the situation doesn't otherwise seem to merit enraged lashing out.
On the other hand I'm not clear how e.g. the 8% UK inflation of 2022 is causing more cognitive load than the 9.5% UK inflation in 1990. The idea would have to be that some other thing has massively increased the load on people in their daily lives so that anything else causes stack overflow-> rage, and I'm not really clear what that other thing would be.
I remember, as an autodidact in economics a decade ago, thinking the same thing: "the problem with economics is that microeconomics has no microfoundations." A lot of supposed puzzles in economics arise from this, and would disappear if there were solid microfoundations.
Herbert Gintis and Samuel Bowles are about the only two names that immediately spring to mind as people trying to fix this.
We are in the comfortable class that pays no attention to the cost of fuel or food. We used to live in Silly Con Valley and experienced the amazing explosion of house prices. I never thought I would live in a 2million dollar house. I grew up in shacks and public housing.
With age we are exploring downsizing from 2 acre horse property to something less. I expected that out here in the Gamma Quadrant things would be priced to match incomes more closely. HaHaHaHaha!!! No! Downsizing will be to a one million dollar house.
Could the explanation be generalized to "people have expectations, and react more to events that negatively do not meet expectations than events that positively exceed them?" So a person expects a yearly incremental raise and relative price stability (especially now vs. say the eighties, when inflation was higher). A bigger than expected raise is nice, and all other things being equal would lead to a favorable opinion of the economy, but an equivalent rise in prices creates more disatisfaction, even if your overall purchasing power is constant.
To take another example that may just show my ignorance, my understanding is that the huge sums of money pouring into dumb venture capital ideas in the last decade was a function of low interest rates. Sovereign wealth funds and other institutions expected 8-12% returns, couldn't get them from typical investments, so placed a bunch of diversified bets knowing only a few would have to hit to get that rate of return. When inflation rose, I simplistically thought money to VCs would increase - these funds now had to get 13-17% to make the same inflation-adjusted returns. But no, they just expected 8-12% and assumed inflation was transitory, so the money to VCs dried up and they went looking for returns via more traditional methods.
Good post. Sticker shock when buying food or fuel seems to really bother people. The frequency of those purchases definitely shape peoples' perception of prices. Not having seen this kind of inflation for decades was also a way for things to be annoying in an unfamiliar way. The cognitive load you mention could be partially due to dealing with this novelty.
Employ the flip side of the logic presented in textbooks w/r/t the politics of trade and it's easier to understand. (Refresher for the curious: the benefits of trade are diffuse, but the costs are concentrated, so collective action dynamics will push towards protectionism without a broad consensus across the political class that this is not in the long-run interests of the nation (such consensus obv no longer exists, which is the first warning sign that trad political economy logics need updating.))
In the political economy of crisis-fighting the benefits of preventing 15% unemployment are concentrated: a supermajority of people have jobs either way. But the costs are diffuse: everyone experiences inflation. You think Elon and the network of used car dealers that love him give a shit about someone else's job? No, that's why the WSJ editorial page goes pre-emptively crazy about inflation whenever a Democrat even thinks about helping anybody. So the business class is against inflation always, and marginal voters whose jobs have been saved then employ some of the logic you described: "my job/wages are earned, but inflation takes from me, my bosses hate it and that's how my bread gets buttered, so I'll vote against it too".
Since the coordination mechanism for anti-inflation coalition-building is simple and inexpensive -- voting, on a pre-specified day known to all, as opposed to extended/indefinite lobbying for protection, as in trade policy -- it does not face a collective action problem. Thus, there is a very strong anti-inflationary bias in most democracies whose salience is a function of how far away the election is.
In the current situation "interest rate inflation" is pricing people out of housing in the places where job/wage growth is high, so there are both diffuse *and* concentrated costs associated with the current inflation. Real wage growth might keep up with CPI but not necessarily with a doubling of rents/mortgage costs. Irrespective of whether you prefer CPI/PPI, household balance sheets are pinched on both ends, but only one of these shows up in inflation statistics. Now look at recent voting patterns: Harris didn't get votes in the suburbs and cities that she was counting on, that's where rents and mortgages are still very elevated relative to incomes.
I.e., it's not just the inflation that's unpopular. It's the monetary policies being used to combat inflation that are also unpopular, which leaves governments with no good options other than to stick to principle and go down with the ship. In related news, every incumbent outside of Switzerland is getting smoked, irrespective of ideology (with the exception that zero progressive/left parties are winning), and Switzerland kept inflation low.
Chwieroth and Walter's research on the increasingly "Great Expectations" voting publics have for government macro management makes this a very difficult balancing act. In normal times with high levels of elite consensus that might be manageable without too much disruption, but in our current times of system-wreckers we're headed for system-wrecking.
Either way, hopefully MMTers and other left factions start taking this stuff more seriously or else we'll blast ourselves back into premodernity. Normie voters don't want a return to 1950s class politics, clearly. Kamala Harris got more votes in Vermont than Bernie Sanders did last week. Workers own assets now (2/3 of American households own stocks now, in the 1980s it was 20%). They want normie stabilization politics, not DSA-style "revolution" but 1990s technocracy, at least in the US. In fact they never stopped wanting it, US voters have voted for the candidate they perceived to be the "most moderate" in every recent election.
The CEO class *might* be in favor of inflation, assuming a growing economy, as all else held equal it would boost stock prices to better hit their targets for bonuses. Keeping down inflation also requires higher borrowing rates when an economy is strong, which makes it more expensive to take out loans for stock buybacks. I assume there's some sort of balance here though.
The CEO class does not have unified interests when it comes to inflation, which is why they defer to "whatever is good for the banks, since we need the banks to be working well". The banks typically prefer lower inflation -- or, most importantly, stable inflation -- for obvious reasons, assuming they know they have access to liquidity when times get tough (the Greenspan Put was necessary for a Great Moderation).
Is what's good for banks also what's good for private lending?
I think you have to include the way things are presented in the information space. Crime is over reported (if it bleeds it leads), inflation is over reported. And in the US, border and immigration threats are over reported.
It's easier to measure people's beliefs when they aren't bounded by reality.
Did you see the recent paper about how people really dislike negotiating, and that if you take that into account as a cost then inflation looks much worse?
More generally I think the phenomenon whereby prices go up 10% and you get a 1% raise but then you switch jobs and get a 15% raise is going to seem more like inflation is a problem than prices go up 10% and you get a 10% cost of living adjustment.
Or it's all relative. Anyone in the 20-35 bracket (2008 onwards) has only ever known super low interest rates and the decade (?) before that was pretty benign.
So to go from that to significant price rises in food and mortgage payments is outside their expectations.
If you are an old fucker like me who has lived in hyper-inflationary countries 5.5% sucks like a bad hoover but is hardly earth shattering.
I also struggle with the idea of hiking interest rates to control those bits of inflation which can't be controlled (food and fuel). If you consistently make people poorer then they will fight/strike for wage inflation (I was alive in the 1970s). Anyway, I'm sure that demand is weirdly inelastic.
Most people (really) hate maths. Figuring out where you stand with respect to inflation requires at least some mathematical thinking. Seems likely that people would have a particular antipathy to something that does that
OK, this is quite possibly going to sound very stupid indeed to anybody who knows anything at all about any economic things, because I do not (and therefore won't comment on them). It feels to me that people (by which I mean me, and a handful of other people around me I've just very briefly straw-polled) don't like inflation because the arrow of time and effect is perceived as pointing in the wrong direction. That is: what oughta happen is the following progression:
1. hey I got a pay rise! I am richer! I can buy more stuff I like!
2. everyone's put their prices up a bit, the robbing bastards, but that's OK because I'm a bit richer so I can afford it
but what actually happens is this:
1. everyone's put their prices up and I am poorer
2. I must struggle for a pay rise which maybe I won't get
3. I got a pay rise so now I can afford to buy the stuff I did before, just
These two aren't actually any different (in particular, there's not actually an ordering to them at all; it's all much more complex than "people get more wages so prices go up" or "prices go up so people get higher wages", even I understand that) but with approach 1 you _feel_ like you're always ahead of the game and the thieves in shops are trying to take it off you, which is annoying but you're the leader. With approach 2 you feel like you're always behind, constantly scrabbling merely to keep up like the red queen's race. I'm sure this is a known phenomenon (probably in, like, GCSE economics or something equally basic) but ... it does suggest that the perception of the thing is almost all of the point? So it doesn't matter if inflation is high or low as long as people perceive themselves to be ahead of it rather than behind, regardless of whether they actually are?
(obviously there are a bunch of reasons why it does matter if inflation is high or low, none of which I understand. Also the above assumes that price rises of stuff are not systematically outpacing wages going up in which case people are rightfully angry 'cos they're actually getting poorer, and again there will be tons of theory on this which I don't know about.)
Sorry for this primary-school economics from first principles thinking! I'd read some theory if I knew what. Maybe literally a GCSE economics textbook?
Have you seen this? https://www.imf.org/en/Publications/fandd/issues/2022/03/Future-of-inflation-partII-Agarwal-kimball
I guess that ought to imply inflation is less unpopular when collective bargaining is strong. You still have to figure out your consumption basket but at least the union will negotiate with your boss. Or, in other words, what's up with France?
Planned inflation is seen by society as a government ploy to make people dependent on
Instinctively I love 'cognitive load' explanations for recent, as politically the actions of Anglo-American electorates look more like enraged lashing out than a thoughtful reorientation, and the situation doesn't otherwise seem to merit enraged lashing out.
On the other hand I'm not clear how e.g. the 8% UK inflation of 2022 is causing more cognitive load than the 9.5% UK inflation in 1990. The idea would have to be that some other thing has massively increased the load on people in their daily lives so that anything else causes stack overflow-> rage, and I'm not really clear what that other thing would be.
2 things.
1. 30 years of Great Moderation adjusting expectations for an entirely new generation of voters.
2. The 1990 inflation didn't follow a horrifying pandemic and extreme (but inconsistently enforced) isolation policies.
Are real incomes rising? Doesn't look like it to me.
https://fred.stlouisfed.org/series/MEHOINUSA672N
£7 for a pint… say no more…
I remember, as an autodidact in economics a decade ago, thinking the same thing: "the problem with economics is that microeconomics has no microfoundations." A lot of supposed puzzles in economics arise from this, and would disappear if there were solid microfoundations.
Herbert Gintis and Samuel Bowles are about the only two names that immediately spring to mind as people trying to fix this.
We are in the comfortable class that pays no attention to the cost of fuel or food. We used to live in Silly Con Valley and experienced the amazing explosion of house prices. I never thought I would live in a 2million dollar house. I grew up in shacks and public housing.
With age we are exploring downsizing from 2 acre horse property to something less. I expected that out here in the Gamma Quadrant things would be priced to match incomes more closely. HaHaHaHaha!!! No! Downsizing will be to a one million dollar house.
Could the explanation be generalized to "people have expectations, and react more to events that negatively do not meet expectations than events that positively exceed them?" So a person expects a yearly incremental raise and relative price stability (especially now vs. say the eighties, when inflation was higher). A bigger than expected raise is nice, and all other things being equal would lead to a favorable opinion of the economy, but an equivalent rise in prices creates more disatisfaction, even if your overall purchasing power is constant.
To take another example that may just show my ignorance, my understanding is that the huge sums of money pouring into dumb venture capital ideas in the last decade was a function of low interest rates. Sovereign wealth funds and other institutions expected 8-12% returns, couldn't get them from typical investments, so placed a bunch of diversified bets knowing only a few would have to hit to get that rate of return. When inflation rose, I simplistically thought money to VCs would increase - these funds now had to get 13-17% to make the same inflation-adjusted returns. But no, they just expected 8-12% and assumed inflation was transitory, so the money to VCs dried up and they went looking for returns via more traditional methods.