In new NBER paper with @MA_Bolhuis, @juddcramer and Oskar Shulz, we argue that the unprecedented increase in borrowing costs is crucial to explaining the low consumer sentiment of the last two years. 1/N nber.org/papers/w32163
With higher rates, mortgage payments, car payments, and other credit payments required to finance everyday purchases have risen as well. It is not surprising that this would affect how consumers feel about the economy. 2/N
Since Okun invented his misery index in the 1970s, economists have looked at unemployment and the inflation rate to gauge consumer sentiment. But now that unemployment is low and inflation has declined, consumer sentiment remains depressed. 3/N
Pre-1983, mortgage costs were in the CPI as were car payments pre-1998. Now, price indexes do not include borrowing costs. Thus, when interest rates jumped last year, official inflation did not fully capture the effects it would have on consumer well-being. 4/N
In the paper, we show that the variation in the current University of Michigan Index of Consumer Sentiment, which cannot be explained by official inflation and unemployment, has historically shown a strong correlation with proxies for borrowing costs. 5/N
We also show that the underlying questions in the survey provide direct evidence that concerns of consumers about borrowing costs are at historic highs, surpassed only by the Volcker-era. 6/N
We then develop alternative CPI measures that explicitly incorporate the cost of money. The CPI does not only exclude mortgage costs, but also personal interest payments, which increased by more than 50 percent in 2023. 7/N
We show that if we make an effort to reconstruct the CPI of Okun’s era—which would have had inflation peak last year around 18%, we are able to explain 70% of the gap in consumer sentiment we saw last year. 8/N
We also show the sentiment gap in 2023 was not only a U.S. phenomenon as rates have jumped around the world. Overall, our paper highlights how consumers care about the cost of money, with potential for consumer sentiment to rise significantly if and when interest rates decline. 9/9
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In nearly 50 years of @Harvard affiliation, I have never been as disillusioned and alienated as I am today.
The silence from Harvard’s leadership, so far, coupled with a vocal and widely reported student groups' statement blaming Israel solely, has allowed Harvard to appear at best neutral towards acts of terror against the Jewish state of Israel.
Unlike President Bacow’s strong statement of support for Ukraine after Putin’s invasion and the decision to fly the Ukraine flag over Harvard yard...rb.gy/zx7ff
@HarryStebbings asked me: What is the path out of US indebtedness?
First of all, we need to put it in perspective. A growing company can have a permanently growing debt. A growing economy can have a permanently growing government debt.
A company probably wouldn't think about its debt by comparing its debt to its earnings. It would probably be much more likely to compare its debt service to its cash flow or to compare its debt to the market value of its equity.
While I am glad to see that the “debt limit crisis” is in the rearview mirror, CBO projects budget deficits will exceed 7 percent of GDP and be on an upwards trajectory a decade from now.
For all of the post financial crisis/ pre-pandemic period I feared secular stagnation and opposed fiscal alarmism. But now I am alarmed because we are in new and dangerous territory.
Current CBO medium term deficit projections are twice as large as those when the Simpson- Bowles process was initiated in 2011 and substantially larger than those faced by the incoming Clinton administration in 1993.
Very good @WSJ interview with the very wise Bob Rubin on his new book, The Yellow Pad: Making Better Decisions in an Uncertain World, and the challenges facing the United States.
The fact that the US is the only country where a career like Bob Rubin’s is possible makes me--for all our problems--more optimistic about our prospects than those of any other country.
I learned an enormous amount from Bob @ finance & financial mkts but even more @ decision making & leadership. Long after the issue set has changed, Bob's insights @ thinking in probabilities, relying on disciplined & inclusive process, & getting best out of people will endure.
@JakeSullivan46 is a very thoughtful leader and it's probably the most carefully intellectually developed exposition of the administration's philosophy that we have had to date.
Certainly, he's right that the world has changed. He's right that China represents a new kind of challenge. He's right to emphasize after what we've seen in Europe with oil, other things, the importance of resilience.
But I was disappointed that the speech did not emphasize the central importance of importing low-priced goods. That is a substantial part of what determines the living standards of Americans.
Today marks the 75th Anniversary of President Truman’s signing of the Marshall Plan into law. It might well be the greatest act of American foreign policy since World War II. Interesting to reflect on it today.
Could Congress imaginably today commit 2 percent of GDP, or about $500 billion, to a 4-year foreign assistance venture? Would the Marshall Plan have passed in 1948 if it had been focus grouped?
Relative to the total scale of the countries being assisted, it represented only about .5 percent of GDP per year. Why was it so successful compared to modern reconstruction and aid efforts that are often 10 to 100 times as large relative to recipient economies?