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Friday, June 20, 2008

"Why Worry About the Economy?"

Why aren't people more upbeat about the economy?:

Why Worry About the Economy?, by Jill Stoddard, Columbia Business School, Public offering: The Washington Post reported yesterday that although Americans’ perceptions of the economy are very negative, two key measures show that the economy is not as bad as it may seem: unemployment is at 5.5 percent and inflation at 4.2 percent.

One reason for this disparity, according to Professor Eric Johnson, may be the frequency with which consumers are seeing higher prices. “Things that you buy more frequently and that have large percentage increases will weigh more in people’s perception of inflation,” Johnson was quoted as saying.

He elaborated in the article with the following example: a person paying an extra $25 to fill up the gas tank is reminded of that cost once a week, or more often if you count the times he or she sees a $4-per-gallon price in giant numbers on a sign. In contrast, a rent increase of $100 would only happen once a month but would have the same financial impact.

An inflation rate of 4.2% isn't as bad as it seems, it's just that people are reminded of it too often (where they are reminded by either the size of the purchase relative to the overall budget, or by the frequency of the purchase)?  It seems just as likely, or even more likely, that only being reminded once a month leads to an overly optimistic view of the economy. Out of sight might be out of mind, but it doesn't mean the problem isn't still there. In any case, I'm far from convinced that this explains the disconnect, or even that there is a disconnect.

Part of the problem is the presumption in the question, which has been around for several years now and is basically "why are people so gloomy when the economy is doing so well?" If you ask instead, "why are people so gloomy when the economy has all these problems, reduced economic security, stagnant real wages, rising health care costs, falling home values, rising college costs,  rising food costs, loss of employer based retirement programs, rising energy costs, worries about the future, etc., etc.," there's really no mystery.

Update: See comments from Andrew Leonard and Richard Green.

    Posted by on Friday, June 20, 2008 at 12:15 AM in Economics, Inflation | Permalink  TrackBack (0)  Comments (23)


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