Polls show that Europeans have no idea what inflation is; hence the ECB should generate more inflation

I’ve frequently argued that the average person has no idea what “inflation” is, and hence public opinion polls about inflation are meaningless.  Even in the 1930s, when prices were falling fast, there was lots of concern about inflation.  Most people conflate the terms “cost of living” (price level) and “standard of living” (RGDP.)  Hence when RGDP does poorly, people (wrongly) think inflation is a big problem.

Now Carola Binder has a blog post that beautifully illustrates this confusion.  She shows that 45% of Europeans consider inflation to be a big problem, far more than those who worry about unemployment.  Even in Greece 26% view inflation as the big problem, only slightly below the 30% for unemployment.  Only the Swedes are economically literate.  And keep in mind that there is virtually no inflation in Europe, indeed the price level would probably be falling, if measured using a reasonable index.

Because people wrongly equate “inflation” with “having trouble paying my bills” (i.e. falling RGDP), the European public would actually prefer a policy of higher inflation, as it would lead to higher RGDP, and hence people would have an easier time paying their bills.  They just don’t know it.

For the same reason we should pay no attention to polls showing people don’t care about health care inflation.  With third party payment systems, the main effect of health care inflation is to keep median take home pay from rising as fast as otherwise.  If you want to understand how people feel about health care inflation, you’d be better off asking them how they feel about stagnating real incomes.  Oh wait, I forget that the public doesn’t know what real incomes are.  So ask them about inflation.  They’ll say they care a lot about inflation, which means they actually care a lot about stagnating real incomes, which means they actually care a lot about rising health care costs.

Or you could stop polling the public on economic questions, and get on with the job of fixing the economy by putting people back to work.

HT:  J


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21 Responses to “Polls show that Europeans have no idea what inflation is; hence the ECB should generate more inflation”

  1. Gravatar of Becky Hargrove Becky Hargrove
    24. May 2013 at 06:14

    It’s Carola Binder!

  2. Gravatar of marcus nunes marcus nunes
    24. May 2013 at 06:19

    Even academics love the sound of the word Inflation!
    http://thefaintofheart.wordpress.com/2013/05/24/more-on-the-it-trap/

  3. Gravatar of J J
    24. May 2013 at 06:54

    Thanks for the HT! :)

  4. Gravatar of Dan in Euroland Dan in Euroland
    24. May 2013 at 07:33

    So any thoughts on Japan? A lot of pessimism out there that buying bonds will create a crisis.

    http://www.bloomberg.com/news/2013-05-23/boj-bond-buying-to-be-overwhelmed-by-investor-sales-bass-says.html

    http://www.bloomberg.com/news/2013-05-23/kuroda-struggles-with-communications-test-as-bond-yields-climb.html

  5. Gravatar of Randomize Randomize
    24. May 2013 at 07:49

    LOL. Imagine if Einstein had relied on polls to develop the bomb: “I’m sorry, Al, but 51% of the public says we should connect the blue wire to the green wire…”

  6. Gravatar of W. Peden W. Peden
    24. May 2013 at 07:53

    Yep. In fact, people’s desire for higher RGDP is revealed by the fact that falls in inflation are reported positively because they raise real incomes. People aren’t worried about more AD, they’re worried about low real incomes.

  7. Gravatar of Ashok Rao Ashok Rao
    24. May 2013 at 08:03

    We should run two polls. (1) “Is inflation a problem”. (2) “Do you want a higher wage”.

    Everyone who says “yes” to (2) and (1) should be disqualified from having an opinion. Just like “your spending is my income”, “your wages are my inflation”.

  8. Gravatar of Philo Philo
    24. May 2013 at 08:07

    “ . . . we should pay no attention to polls . . . .” But we live in a democracy, where political issues are settled by “polls” (votes), so they can’t really be ignored. I believe Robin Hanson has proposed that people vote only on *ends*, leaving the technocrats to select the *means*: the technocrats presumably know more about how to achieve the ends than the general public does. But, really, the over-arching end—maximum utility/happiness—doesn’t have to be voted on; on the other hand, you can’t completely trust the technocrats. In the end, we are left depending on luck. If we were lucky, we’d have Scott Sumner as one of our chief technocrats; instead, we have Ben Bernanke.

    Better luck next time!

  9. Gravatar of Doug M Doug M
    24. May 2013 at 08:17

    In 2009, when CPI was negative, Social Security beneficiaries did not get a cost of living increase. An economist would say that their benefits are rising in real terms and they should be thrilled. The press repeatedly referred to this constant rate of benfit as a cut.

  10. Gravatar of JN JN
    24. May 2013 at 08:35

    I’m not sure about the Eurozone, but in the UK, I can clearly feel the effects of inflation…

    My standard of living tends to stall, or even slightly fall, despite my salary increasing. Local supermarket’s chicken prices have gone up by something like 20%, same for croissants, monthly underground card were around £85 in 2008 and are £117 now, rents got ridiculous, and even video games have seen prices jump in the last few years.

    So I find it hard to believe the accuracy of price indexes. Unless the items I tend to buy (higher quality ones) don’t reflect at all what the mainstream customer buys…

  11. Gravatar of ssumner ssumner
    24. May 2013 at 09:39

    Thanks Becky, I just corrected it.

    Dan, I don’t understand where Koo is coming from. I thought he believed in the so-called “Japanese liquidity trap.” Why is he worried?

    Philo, I want voters to reward economic competence, and I want markets to determine the setting of the base and interest rates most likely to lead to stable NGDP growth. Regardless of what the Greek voters say in polls, when they go to the only poll that counts they do not reward governments for reducing inflation from 3% to 0%, not when unemployment soars to 27%.

    Doug, Good point.

    JN, Britain has much higher inflation than the eurozone.

  12. Gravatar of Scott Freeland Scott Freeland
    24. May 2013 at 09:59

    Scott,

    Just out of curiosity, if you’re a country in the EU with an depressed economy and don’t want to leave the Euro, would you be okay with trying revenue neutral fiscal stimulus? That is, taxing the wealthy more heavily and cutting taxes/increasing spending/incenting hiring for the poor? My rough impression is that while it may lower RGDP potential, it may increase NGDP.

  13. Gravatar of Geoff Geoff
    24. May 2013 at 10:30

    So…give people what they don’t want by force if they’re too stupid to know what they should want for themselves according to you.

    This post should have been ended with “All this in the spirit of Lenin.”

    ——————

    “Because people wrongly equate “inflation” with “having trouble paying my bills” (i.e. falling RGDP), the European public would actually prefer a policy of higher inflation, as it would lead to higher RGDP, and hence people would have an easier time paying their bills. They just don’t know it.”

    This is just pure ignorance. RGDP can be rising, and yet SOME PEOPLE, whose nominal incomes are rising slower than the prices relating to cost of living, can still be having more trouble paying their bills because the prices of those things have gone up faster than their incomes, because inflation happened to increase those prices more than their wages.

    Inflation, for the 437,824,538,972,453,689,536th time, does not affect all prices nor all incomes equally over time.

    Inflation always always always affects some prices and incomes more than other prices and incomes. RGDP could be going up, but those whose incomes rise slower than others, due to the way in which newly created money spreads out from their initial injection points, they could be faced with a higher cost of living because of inflation and not because of declining RGDP.

    This blog is going from bad to downright terrifying as time goes on.

  14. Gravatar of Geoff Geoff
    24. May 2013 at 11:38

    Guess this whole EMH faith in the market was just for show.

  15. Gravatar of Scott Sumner Scott Sumner
    24. May 2013 at 11:55

    Scott, I would cut payroll taxes paid by employers, as a way of boosting employment. I believe the Germans did something like this. I would not raise taxes on the rich, unless they were consumption taxes.

    Geoff, Don’t confuse the market with public opinion polls. Markets show little or no fear of inflation.

  16. Gravatar of Edward Edward
    24. May 2013 at 18:11

    “This blog is going from bad to downright terrifying as time goes on”

    I think what you might terrifying is the logical coherence of Scott’s arguments, which challenge your Austrian nonsense.

    “Inflation, for the 437,824,538,972,453,689,536th time, does not affect all prices nor all incomes equally over time.”

    For the 437,824,538,972,453,689,537th time, the harmful effects of inflation can be protected against. And your right that inflation does not affect all prices nor incomes equally. Some incomes rise by 6%, while their cost of living rises by 4%, some by 10%, while their cost of living by 6. Most demand side inflation BOOSTS real incomes. If you are level targeting from a catastrophic depression

  17. Gravatar of Polls show that Europeans have no idea what inflation is; hence the ECB should generate more inflation « Economics Info Polls show that Europeans have no idea what inflation is; hence the ECB should generate more inflation « Economics Info
    24. May 2013 at 20:00

    [...] Source [...]

  18. Gravatar of Joe Eagar Joe Eagar
    25. May 2013 at 07:35

    I think we all know why Europe needs higher inflation, and it isn’t higher growth through the traditional mechanism of reducing an economy-wide output gap.

    Europe needs higher inflation, because that’s how monetary unions keep current account balances between member regions sustainable. Assuming a functioning currency union (e.g. strong fiscal rules, currency-wide regulatory harmonization, etc) inflation will naturally cluster in highly productive regions, driving investment into poorer areas.

    The eurozone is highly imperfect, of course, and its new fiscal rules have yet to be truly tested. It also lacks a harmonized regulatory policy (especially where service industries are concerned). But given the current adjustment programs already underway in southern Europe, I think it’s safe to say that an inflationary policy by the ECB will have the desired effect; prices will rise in Germany and northern Europe, and the added demand will make economic and fiscal adjustment in southern Europe more politically sustainable.

  19. Gravatar of Joe Eagar Joe Eagar
    25. May 2013 at 07:44

    Geoff, that’s a function of stagnant productivity in the particular worker’s industry, not inflation per se. Productivity differentials is an entirely different can of worms from inflation.

    For example, a modestly high level of wage-driven inflation can actually *lessen* productivity differentials (it incentivises employers to invest in physical capital and better management practices). It does tend to burn out the labor market if left unchecked, though, which is why no developed country uses a growth model of inflating wages today.

  20. Gravatar of bankster bankster
    27. May 2013 at 08:45

    Αlea jacta est by the “emperor” Draghi

    http://failedevolution.blogspot.gr/2012/09/lea-jacta-est-by-emperor-draghi.html

  21. Gravatar of Floccina Floccina
    28. May 2013 at 10:58

    Might be a little tyranny of the majority those with jobs over the minority those without jobs.

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