Here’s The Economist:

The economists who had warned that excessive stimulus and overheating demand, rather than production snarls, would make inflation a more serious problem seemed prescient. In the shorthand of the day, it looked as if “Team Persistent” had defeated “Team Transitory”.

Fast-forward to the present, and something strange has happened. The Fed, along with most other major central banks, has acted as if Team Persistent was right. It jacked up short-term interest rates from a floor of 0% to more than 5% in the space of 14 months. Sure enough, inflation has slowed sharply. But here is the odd thing: the opposite side of the debate is now celebrating. “We in Team Transitory can rightly claim victory,” declared Joseph Stiglitz, a Nobel prizewinner, in a recent essay.

It’s hard to believe that some prominent economists believe our recent inflation has been due to supply side factors. In fact, the inflation experienced over the past 4 years has been all demand side. The total amount of supply-side inflation has been zero, none, nada.

Over the past 4 years, the PCE price index is up 16.7%. Under FAIT it should have risen by 8.2% (i.e., 2%/year). Thus we’ve had roughly 8.5% excess inflation (a bit less due to compounding.)

Aggregate demand (NGDP) is up by 27.6%. Under FAIT targeting (which is similar to NGDPLT) it should have been up by about 17% (i.e., 4%/year). So we’ve had a bit less than 10.6% extra demand growth. That explains all of the extra inflation.

Supply shocks do explain inflation over shorter periods of time. But people who point to supply shocks tend to forget that they are transitory. For every negative supply shock like 2022, there’s a positive supply shock like 2023. Over any extend period of time the supply shocks cancel out, leaving virtually all excess inflation due to demand shocks.

It’s always been this way. The PCE price index rose at a 6.1% annual rate between 1965 and 1981. NGDP rose by 9.6% annual rate. That means the “Great Inflation” was 100% due to excessive growth in demand—supply shocks had nothing to do with it. Our textbooks are wrong. (Of course supply shocks do explain some of the inflation in individual years such as 1974 and 1980, but they do not contribute at all to the longer run trend in inflation during 1965-81.

As a first approximation, all supply side inflation is transitory, and all demand side inflation is permanent. Those who predicted transitory inflation (including for a brief period me) were completely wrong. In 2021, I naively believed the Fed was serious about FAIT.)

Some people seem to believe that transitory means something like the following inflation path:

2% 2% 4% 4% 4% 2% 2% 2% 2%

In fact, it would mean something like:

2% 2% 4% 4% 4% 0% 0% 0% 2%

If it’s truly transitory, then inflation should average 2% in the long run.

Some of the populists that infest my comment section have challenged my claim that the economy is doing well, despite 51% of the public rating it as “poor”. They suggest that I am arrogant to disagree with the general public. After all, doesn’t the average American understand his or her economic situation better than a pointy headed intellectual?

Yes, they do understand their own situation better than I do. And when asked how they are doing, they tend to respond that their own financial situation is pretty good:

The Axios Vibes poll has found that when asked about their own financial condition, or that of their local community, Americans are characteristically optimistic. . . . 63% of Americans rate their current financial situation as being “good,” including 19% of us who say it’s “very good.” . . . Americans who believe their community’s economy is strong outnumber those who think it’s weak. They’re right.

I agree! The average American only knows a tiny fraction of the 330 million people who live in this huge country. They have only two ways to evaluate the performance of the overall economy—their local situation, and what they read about the national economy in the media. So why are people more negative about the overall economy than they are about their own personal finances? There are several factors at play:

1. The news media is relentlessly negative. Thus people typically praise the school their children attend, even as they suggest that America’s educational system is going down the tubes.

2. One sector of the public is now highly irrational. In recent years, most GOP voters have become completely unhinged. (Look at the lunatic they just overwhelmingly voted for in the North Carolina gubernatorial primary.) When asked how the economy is doing, GOP voters fear that if they say “good” it will be viewed as an endorsement of Biden. Thus they overwhelmingly say “poor”. Dems are also biased, but far less so than Republicans. Ditto for the media. Both sides are biased, but the GOP media is far more biased.

In the past, the loonies were evenly distributed between the two parties. Lots of Dems thought 9/11 was an inside job. But in recent years most of the conspiracy nuts are moving toward the GOP, producing a very unbalanced situation. Indeed belief in absurd conspiracy theories is now almost a requirement if you wish to avoid the label “RINO”. “Of course Trump won the 2020 election!”

Put it all together and you have a situation where polls on the condition of the economy are essentially meaningless. The only poll that matters is the one asking people how they themselves are doing. And by that measure the economy is fine.

Yesterday, I saw Dune 2 in a huge theater (with only one other patron.) Before the feature presentation, I was subjected to 35 minutes of torture. First a series of ads, then one preview after another full of loud explosions and ridiculous CGI monsters. (Remakes of Planet of the Apes, King Kong and Mad Max, among other things.)

It’s fruitless for me to bemoan the state of modern cinema, as these films are not aimed at me. In fact, Hollywood is doing an increasingly effective job at giving viewers what they want. As a film lover I’m appalled, but as an economist I applaud.

During the course of my life, I’ve seen corporate America become better and better at figuring out what people want. Here are a few other examples:

My wife and I often complain that restaurant food is too salty. But why is that? it probably reflects the fact that most people like salty food. The restaurant industry is become more efficient, better at producing giant portions of the sort of salty (and sweet) food that people wish to consume. Hence obesity.

When I was young, the news media consisted of dignified figures like Walter Cronkite and David Brinkley. Now you turn on the cable news and see mindless bimbos screeching out partisan propaganda at the top of their lungs. (Fox is the worst, but many other news sites have also gotten worse.) The TV industry figured out that people don’t want Walter Cronkite; they want wild conspiracy theories promoted by people yelling at the TV screen.

In the film American Splendor, there was this exchange between two characters

Mattress Guy #1: So is the girl smart?

Mattress Guy #2: Well, I guess she’s about average.

Mattress Guy #1: Average! Man, average is dumb!

With a few notable exceptions, the vast majority of readers of this blog have IQs well above 100. It’s tempting to assume that people with IQs of 100 are stupid. But they aren’t—they are average. In the days of Cronkite and Brinkley, TV news was pitched to people with IQs of 115. Now it’s aimed at average people. They only seem stupid, because you and your acquaintances live in a bubble surrounded by people who are above average.

The modern media is getting better at delivering what consumers want. Don’t like it? You are not the target audience.

PS. Even Trump and Biden presumably have IQs above 100. They only seem dumb because we subconsciously expect our presidents to be above average.

PPS. So what does average intelligence look like? This:

Robinson, who is the state’s lieutenant governor, has said he “wouldn’t be surprised” if the 1969 moon landing was fake and the 9/11 terrorist attacks were an “inside job.” He’s “SERIOUSLY skeptical” of President John F. Kennedy’s assassination and of the 2017 mass shooting in Las Vegas. He falsely accused David Hogg, a survivor of the 2018 mass shooting at Marjory Stoneman Douglas High School in Parkland, Florida, of being a paid actor. He’s claimed that climate change is based on “junk science.” . . .

In lesser-noticed social media posts, Robinson has said that news coverage of police shootings is part of a media conspiracy “designed to push US towards their new world order.” He and his wife both liked a since-deleted Facebook comment that stated, “WWG1WGA are my ‘Identity’ letters,” a reference to the QAnon rallying cry “Where we go one, we go all.” In October 2018, on a day when authorities intercepted pipe bombs intended for President Barack Obama, Secretary of State Hillary Clinton and CNN, Robinson suggested on Facebook that they had done it to themselves. “If you can’t beat ’em, bomb yourself,” he wrote.

When Trump finally passes from the scene, Robinson will be the new face of the GOP.

There are times when the claims of bubble proponents becomes so far-fetched that you wonder if it’s all just a spoof. Bloomberg provides a recent example:

Nvidia Corp.’s rise is captivating the stock market and driving the S&P 500 Index to new highs. But it also raises cautionary reminders of another investor darling that soared on dreams of a technological transformation, only to tumble back to earth when those hopes turned to disappointment.

That stock belongs to Tesla Inc., which sparked its own mania in 2017 as investors bet that electric vehicles were going to take over the world.

Yes, shed a tear for those foolish investors that bought Tesla during its 2017 stock “mania”.

I’m not sure which is more embarrassing, the fact that most economists believe in bubbles, or the fact that most economists seem to believe that interest rates show the stance of monetary policy.

This made me laugh out loud:

Biden can’t catch a break. For the past year, Dems have been scheming to run against Trump, arguably the weakest candidate in US history. Now they are finally getting their wish, and Biden’s going to lose. (They don’t read my blog.)

Here are some truths about the current US economy:

1. It’s in very good shape (say between good and excellent.)

2. In the 1970s and 1980s, it was widely believed that it was impossible for the economy to be this good—to have such low inflation during a period of 3.7% unemployment.

3. The foreign media is almost universally drooling over how good the US is doing, and frequently compares the booming US economy to the weak economies of Europe and China. The economy is so strong that there is a huge surge of people desperately trying to get into the US. Is it any surprise that workers in countries paying $2/hour are attracted to a place where McDonalds pays $20/hour? Good luck with that wall Mr. Trump!!

Unfortunately for Biden, the people of the past don’t vote and foreigners don’t vote. Actual living Americans believe the economy sucks.

So am I sad that Biden is getting such bad luck? Not really. While the economy is good to excellent, his economic policies are fair to poor. (The poor part is his fiscal policy and his industrial/trade policies—the rest is fair.) Voters are right about Bidenomics, but for completely bogus reasons. Heck, most voters probably support his stupid policies.

And then there’s the bad karma from the Dems’ cynical attempt to pump up the Trumpian part of the GOP in the hope that it would be easier to defeat.

PS. I know, I know, it’s the high grocery store prices. And Trump’s going to fix that problem by . . . . checks notes . . . running massive budget deficits, an easy money policy, high tariffs on imported food and expelling all the illegal farm workers. As usual, Matt Yglesias nails it: