“Let's face it: this is a good economy.”
This was stated by Jerome Powell, Chairman of the Federal Reserve, in his press conference on Wednesday after the central bank's latest policy meeting.
And he is right, although public opinion is not entirely convinced.
In fact, Powell is clearly grappling with a dilemma that many countries would like for themselves: What is the appropriate monetary policy when the news is good on almost all fronts?
Contrary to what you may have heard, this is not a “Goldilocks economy”;
Learn children's stories well, friends!
Goldilocks found a bowl of porridge that was neither too hot nor too cold.
We have an economy that is both very hot (in terms of growth and job creation) and refreshingly cold (in terms of inflation).
Hence the dilemma of the Federal Reserve.
He raised interest rates to try to reduce inflation, even at the risk of causing a recession.
Now that inflation has plummeted, should I quickly reverse those rate hikes, or should I keep them high because we haven't actually experienced a recession (yet)?
I believe that the risk of an economic slowdown is much greater than that of an inflationary spike and that rate cuts should come sooner rather than later.
But that is not the type of discussion that is going to be settled in the opinion pages.
What I want to talk about is more what good economic news says about strategy and politics.
Before getting into the matter, a brief summary of the good news of recent weeks.
First of all, inflation.
For historical and technical reasons, the Federal Reserve aims for 2% inflation;
Over the past six months, your preferred price indicator has risen at an annual rate of... 2%.
“Core” inflation, which excludes volatile food and energy prices, has been slightly below target.
The Fed also looks at wage growth, not because workers caused inflation, but because wages are often the trickiest part when prices rise and therefore an indicator of whether disinflation is sustainable.
Well, on Wednesday, the Labor Cost Index was below expectations and is now more or less in line with the central bank's target.
On Thursday we learned that productivity has increased rapidly, making unit labor costs easily compatible with low inflation.
It is true that prices have not fallen again, but it is normal for a specific rise to occur after a major disruption, such as the return to a peaceful economy after World War II or a pandemic that temporarily paralyzed normal activity.
Finally, real GDP grew a solid 3.3% in the fourth quarter, making all those predictions of a recession in 2023 seem even more absurd.
As usually happens when there is a Democrat in the White House, the usual suspects question the official data.
But the strength of the labor market and the decline in inflation are confirmed by numerous independent surveys of consumers and businesses.
So, it's all good news.
This is arguably the best economy we've had since the late 1990s.
What does all this say about politics?
Although some on the left refuse to believe it, President Joe Biden has spent a lot of money on progressive priorities.
Many skeptics, including some Democrats, predicted that this spending would have catastrophic effects.
Perhaps the most famous comment is that of Larry Summers, a senior official in the Clinton and Obama administrations, who called the 2021 American Rescue Plan the “least responsible” fiscal policy of the last 40 years.
We did indeed suffer a one-time spike in inflation, but so did other advanced countries, and the United States has largely outperformed its counterparts in other respects, probably due in part to Biden's spending boosting growth and employment.
Now that we've achieved what appears to be a better-than-Goldilocks soft landing,
bidenomics
looks pretty good in retrospect.
Perhaps, in the end, progressive economic policies do not necessarily lead to disaster.
And what about the political consequences?
There was a time when a president running an economy like the one we have today would have been very well positioned for re-election.
But we live in an era of hyperpartisanship, in which the state of the economy seems to influence elections much less than it did a few decades ago.
In fact, many voters—especially Republicans—seem to base their assessment of the economy on their political opinions, rather than the other way around.
Amid all the good news I just laid out, 71% of Republicans say the economy is getting worse, while only 7% believe it is getting better.
That's why I don't think Biden will ride to an easy victory thanks to his economic success.
But the economy is doing well enough that Donald Trump is once again insisting that the unemployment numbers are false and claiming, absurdly, that, for some reason, he should be given credit for the rise in the stock market.
And there has been a perceptible change in the Republicans' message, which has gone from the economy (although they still claim it is terrible) to immigration;
I will talk another day about his extraordinarily cynical strategy on this topic.
For now, the point is that Powell is right: this is a good economy.
Paul Krugman
is a Nobel Prize winner in Economics.
© The New York Times, 2024
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