Economic ignorance might bring on a recession

Usually, when people decry the need for better economics education, they mean teaching high school students how to balance a checkbook and prepare a basic household budget. I’d settle for teaching reporters and politicians basic economics – perhaps with a side order of grade school math.

Everybody agrees that current inflation is pretty bad and they understand that the solution to inflation is to have the Fed raise interest rates. In addition, Republicans pretend they believe “runaway spending by the Biden administration” adds to inflation, so we need to cut spending on Social Security and Medicare. And Washington reporters solemnly repeat all this on a daily basis. So much economic illiteracy, so little time.

In fact, today’s inflation seems to be based on a number of causes, few of which are affected in any way at all by rising interest rates. Supply shortages of articles such as semiconductors (which affect car prices and supply), building materials (which affect housing prices), and food; rents; medical and drug costs; and inflation in the housing market.

With the exception of housing, which of those will be ameliorated by increased interest rates? Food and gas prices are high because of supply issues and Russia’s war with Ukraine. Rents are high because our dysfunctional housing market doesn’t build affordable housing. Supply shortages have many causes, including labor shortages and other issues with restarting the economy. Medical and drug costs are high because of regulatory policy and profiteering.

The Fed a little bit suffers from the phenomenon that “if your only tool is a hammer, every problem looks like a nail.” Hey, Fed, inflation is high, do your thing.  So month after month, the Fed flails away and wonders why 6 interest rate increases haven’t caused builders to build more affordable housing or turned back on Ukrainian grain exports or stopped insulin suppliers from price gouging.                                                       

There’s another way in which our attitudes toward inflation are even more misguided. The other problem with inflation statistics and how they get reported is that every month, it’s reported that “inflation last month remained high at 8%, suggesting the Fed will continue its policy of rate hikes.” And month after month, markets plunge on the news and consumer outlooks darken. The problem with this terminology – and the actions and expectations that follow – is that it mis-states the actual situation. That’s because the “inflation this month” numbers that get reported are actually a 12-month average. Despite the fact that inflation seems to have peaked (running at less than 4% on a current basis for the past three months), the numbers still get reported suggesting inflation is still rampant. Since that reporting affects perceptions, this uninformed reporting runs the risk of influencing consumer (and voter) sentiment. And the Fed continues to hurl interest rate hikes at a problem that seems already to have improved.

This is a serious concern. Expectations of a recession can become self-fulfilling. Except for the Republicans’ historically incompetent 2022 election campaign, this largely illusory issue should have cost the Democrats the election. It’s time for the country to go back to school.