A recent article in the NYT criticizes Larry Summers, who correctly predicted that economic policy in 2021 was too expansionary. This caught my eye:
Mr. Summers has been focused on a different story, warning that government spending could increase inflation. With prices rising at the fastest rate in 40 years, he has been lauded for making the right call. “Does the WH owe Larry Summers an apology?” Politico asked last November.
The problem with this reading is that the economy hasn’t really overheated. Real gross domestic product and employment are still lower than prepandemic projections, according to government statistics. Yes, consumer spending patterns have shifted from services to goods, but that began two years ago; the fact that our supply chains still cannot adjust reflects a bigger problem with how they were designed.
It is frustrating to see respectable outlets like the NYT repeatedly make EC101 level mistakes. Economic overheating has nothing to do with real GDP; rather it represents excessive growth in nominal spending. And nominal GDP has risen to well above the pre-pandemic trend line. The economy is clearly overheating to some extent.
In 2008, real GDP in Zimbabwe was sharply depressed. Would anyone claim their economy was not overheating at a time when inflation reached a billion percent?
The NYT has a wealth of talented reporters. I am convinced that they try to be accurate, at least most of the time. That’s why I find this sort of story to be so maddening.
I also blame the economics profession. If the top economists in America (who mostly share the NYT’s ideology) were more critical of its reporting of economic issues, then it would face pressure to clean up its act. Conservatives might not believe this, but the NYT does care about elite opinion. Instead, we repeatedly see this sort of sloppy reporting. It doesn’t seem to be getting better.
PS. If the NYT hired a competent economist to proofread their economics stories, they could weed out dozens of mistakes each month, making it a better paper. Why don’t they do that—they have lots of money? (Yes, they have editors, but I’m talking about proofreaders with knowledge of economics.)
Off topic, I really like this Matt Yglesias tweet:
If you want more than a tweet, check out this article.
READER COMMENTS
Michael Sandifer
Feb 28 2022 at 2:32pm
My problem with this take on inflation in the US is that, as I understand it, NGDP targeting should focus on outer years, particularly during real shocks. We should be focused on inflation expectations, not current inflation right now.
Of course, by the standards of a 4% NGDPLT, monetary policy has been too loose. even looking at expectations. That’s a respectable argument, but the choice of 4% is debatable.
dlr
Feb 28 2022 at 3:10pm
The point isn’t about the optimal target. The point is that we have an actual target, however imperfectly defined, and we are undeniably missing it. This is what not only confounds the expectations of everyone trying to set their watches, but risks a really bad equilibrium where the market so distrusts the fed’s target, the cb has to do something painful to earn its credibility back.
It’s important not to be too soothed by muted longer term breakevens. It is possible the market implicitly expects the Fed to continue to miss its target, but eventually realize it’s mistake and tighten fairly “dramatically” to catch up. There are many paths to 2-3pct inflation over 10 years and some of them are less fun than others. In the short run, the markers exports the fed to continue to miss its target, even if you ignore making up for past inflation entirely.
Michael Sandifer
Feb 28 2022 at 4:20pm
How are we undeniably missing a 2% flexible average inflation target, coupled with a full employment mandate? Powell even said that above 2% inflation now doesn’t mean we have to have below 2% inflation later. It’s too vague to say we’re missing it.
dlr
Feb 28 2022 at 4:28pm
if you think a 2% inflation target is being observed when you have 6% inflation in year zero, with over 4% implied by market breakevens for the following year… because there is another unquantifiable variable in your equation, you do not have a monetary policy target, you have platonic discretion.
Michael Sandifer
Feb 28 2022 at 10:05pm
dlr,
I refer to my previous comments.
Andrew_FL
Feb 28 2022 at 3:57pm
You give away the game when you say that you think the point of a target is to be observed more in the breach.
Andrew_FL
Feb 28 2022 at 4:03pm
What does the word “overheat” mean? There is no engine. This is nonsense hydraulic macro mumbo jumbo. When there are fluctuations in the effective money stream there are clusters of errors in investment plans at odds with consumption plans. It is nonsense to refer to this as some vague “overheating”. As far as I can tell “overheating” is what Mainstream Macroeconomists say when the public has become uncomfortable with the rate of price inflation so their inflationist preferences are no longer politically viable.
Mark Z
Feb 28 2022 at 5:18pm
I think you’re too generous to the Times. This seems pretty typical for an NYT oped. Its writers commonly confuse macroeconomic issues like inflation with issues like how free markets should be in an effort to create a simple political narrative. The whole ‘everything is Milton Friedman’s fault’ narrative is a common theme in the Times oped section.
Dylan
Feb 28 2022 at 5:24pm
Count me as one that is confused by the term overheating. In my understanding, inflation may be a symptom of an overheated economy, but not the overheating itself. Overheating is when an economy is producing above a sustainable rate, meaning unemployment falls below the natural rate. So late 90s and 2006-07 period, overheating. Late 70s, not overheating.
This Investopedia article lays out I think the common understanding of the term.
Philo
Feb 28 2022 at 5:50pm
I can give you a non-economist’s take on “overheating”: it is an undesirably high rate of inflation together with an increase—at least fairly rapid–in real GDP. Undesirably high inflation without much (or any) growth in real GDP is not “overheating”: it is “stagflation.”
BC
Feb 28 2022 at 7:15pm
“If the top economists in America (who mostly share the NYT’s ideology) were more critical of its reporting of economic issues, then it would face pressure to clean up its act.”
Summers and Krugman are engaged in just such a debate over whether economists should correct poor economic reasoning when such poor reasoning might be helpful to Democratic politicians, whether economists should “flatter the prejudices of the constituency they have chosen” in Summers’s words. Guess which side Krugman is on.
https://twitter.com/LHSummers/status/1496672099519320065
Danny
Feb 28 2022 at 8:52pm
Ok, but this was an oped by the editor of The American Prospect. None of our major newspapers seem to rigorously fact check their opeds, especially when they’re written by guests, though I wish they would.
Scott Sumner
Feb 28 2022 at 8:58pm
Everyone, Overheating occurs when spending exceeds the ability of the economy to produce goods at stable prices (or say 2% inflation.) It’s basically excess aggregate demand.
Real GDP does not tell us if an economy is overheating, as we have no way of knowing the natural rate of output at any given moment.
An an analogy, an engine can overheat even if not all cylinders are firing.
Alan Goldhammer
Mar 1 2022 at 8:36am
That’s fine but your post suffers in that you do not state that this is an op-ed and not a piece written by a NY Times staff writer. The NYT has a lot of capable writers including Neil Irwin and Benyamin Applebaum among others. You are throwing a dart at the wrong target.
Philo
Mar 1 2022 at 1:50pm
‘Overheating’ is just inflation–or inflation in excess of 2%–by definition? That is not my impression of how the term is used in popular discourse (as I indicated above).
Scott Sumner
Mar 1 2022 at 2:28pm
Whatever definition you use, the NYT claim that slow RGDP growth shows that policy was not too expansionary is flat out wrong, indeed almost nonsensical.
Capt. J Parker
Mar 1 2022 at 10:33am
Totally agree that reporting on economics is abysmal. It’s not just the Times. WSJ has printed its share of muddled articles.
The thing I’m trying to understand about Summers inflation speculation is this:
In the post 2008 era, Scott Sumner educated us about how fiscal stimulus is usually not going to be very effective because of monetary offset. Larry Summers no doubt would disagree based on Summer’s statements in the WaPo article Scott Sumner linked to. So what happened to monetary offset with respect to the Biden fiscal stimulus? Why was Summer’s Keynesian view seemingly the better model? Why wasn’t the Fed more ready and willing to adjust monetary policy if the Biden stimulus was as oversized as Summer’s says it was?
Spencer Bradley Hall
Mar 1 2022 at 11:20am
re: “the economy hasn’t really overheated”
Powell: “The connection between monetary aggregates and either growth or inflation was very strong for a long, long time, which ended about 40 years ago”
That’s heresy. Nothing’s changed in > 100 years. The rate-of-change in monetary flows, volume (means-of-payment money), times its transaction’s velocity (or proxy for inflation), peaked in January, and so did the roc in prices.
Brian
Mar 2 2022 at 12:27am
The FRED series on real GDP (code GDPC1, 2012 dollars, updated 2022 Feb 24 with 2021 Q4) seems to show real is near the best fit line and above the pre-pandemic level so I don’t understand why the NYT said it isn’t.
Regarding “overheating”, it may be that the NYT will do better if they knew where to look. I have the book by Cowen and Tabarrok “Modern Principles” 3rd Edition but “overheating” is not in the glossary nor the index. Wikipedia’s first paragraph on overheating isn’t as clear as your definition. The words nominal and real are not used in the first paragraph so I stopped reading.
A question: Was Larry Summers right mainly because of the delta and Omicon variants of the virus? In other words, had those two variants not appeared, the Fed would have appeared much less wrong?
Scott Sumner
Mar 2 2022 at 11:53am
“had those two variants not appeared, the Fed would have appeared much less wrong?”
Somewhat less wrong, but still wrong. Even NGDP growth is excessive.
Michael Rulle
Mar 2 2022 at 9:19am
Economics as a science (I believe economists believe it is a science) is pretty much a disaster. While it is true that the basics of Economics are universally accepted, it is these issues on the margin that are complex. We readers are not people who have studied economics for 40 years. How can we possibly know who is “right” or even if anyone is right? Perhaps those who make consistent predictions based on then current policies is good enough. But few do this consistently. In fact, rather than take Sumner or Summers view—-shouldn’t they predict something based on their view? Shouldn’t they track these predictions? I do not see this happening——accept sometimes after the fact.
Scott Sumner
Mar 2 2022 at 11:51am
“While it is true that the basics of Economics are universally accepted”
Obviously, the basics are not universally accepted.
Thomas Lee Hutcheson
Mar 2 2022 at 10:13am
“Larry Summers, who correctly predicted that economic policy in 2021 was too expansionary.” No, Summers was confusingly warning against too much fiscal spending, not that the Fed was too expansive.
Spencer Bradley Hall
Mar 2 2022 at 12:55pm
The “confusion” is a deliberate policy to make it impossible to evaluate what the FED is doing. The FED has relentlessly stoked the fire of inflation, even after inflation accelerated. It has continued with its POMOs, it has eliminated reserve requirements, it has continued to purchase MBS, it has eliminated withdrawal restrictions on savings accounts. I.e., Powell is not reversing any of the policies that he unleashed to plug the gDp gap.
Knut P. Heen
Mar 3 2022 at 8:05am
I expected this to happen. It is as simple as this. No party during the pandemic. Big party after the pandemic. Unfortunately, no beer has been produced during the pandemic. We are now paying the price for producing less during the pandemic.
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