Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

AI Summary. Measured using the 1970s-era method, which treated home purchase prices and mortgage interest rates as the cost of housing rather than the current approach based on rental costs, the recent inflation episode would have registered higher than the worst of the 1970s. The change in measurement complicates comparisons of inflation across time.

John Cochrane The Grumpy Economist
Date Posted:

.@JohnHCochrane comments on @LHSummers’ new working paper on inflation which accounts for interest costs. “[Their] new way is closer to right, if the question is to measure changes in the cost of living right now for the average person.”

Does housing measurement make recent inflation look lower than the 1970s?

Core argument: Measured with the 1970s methodology, the recent bout of inflation would exceed the worst of the 1970s, according to the author's recomputation.

If we measured inflation as we did in the 1970s, the recent bout of inflation would have been even higher than the worst of the 1970s! No wonder the deplorables are ungrateful for Bidenomics, is essentially the author’s point, though quantified and much more politely stated. The main difference is that the old measure counts the price and interest rate you have to pay to buy a new house as the cost of the house, while the new measure is based on what it costs to rent a house. You can see that the new and old methods are the same in the initial run up of inflation starting in 2021, but then the new measure shoots up when the Fed raised interest rates. But the change in measurement makes it hard to compare over time. It would be nice to recompute the old data with new measurement. But when you can’t do that, computing new data with the old measurement is a nice way to compare over time on an even basis.

Takeaways by Macro Roundup® AI

  1. Measured with the 1970s methodology, the recent bout of inflation would exceed the worst of the 1970s, according to the author's recomputation.
  2. The older measure treated the purchase price and interest rate paid on a new house as the cost of housing, while the newer measure is based on what it costs to rent.
  3. The two measures move together during the inflation run-up beginning in 2021 and diverge after the Federal Reserve raised interest rates, a change in measurement that the author says makes comparison over time difficult.

Related Articles:

  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
  • Americans Are Suddenly a Lot More Upbeat About the Economy — The University of Michigan's consumer sentiment survey recorded a 29% rise over two months, the largest two-month increase since 1991. The improvement was broad-based across consumers of different ages, incomes, education levels, and regions.
  • Digesting Inflation — The authors estimate that inflation's drag on consumer sentiment decays about 50% per year, with a 10% inflation shock cutting sentiment by 35 index points in the current year, 16 the next, and 8 the year after. On these estimates, inflation over the prior three years is holding sentiment down by 16 index points.
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