Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “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
  • “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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
Upside of Inequality Oxford Unintended Consequences

AI Summary. 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%.

Marijn Bolhuis, Judd Cramer, Karl Oskar Schulz and Lawrence Summers National Bureau of Economic Research
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US consumer sentiment is significantly lower than expected based on unemployment and inflation. Alternative measures of inflation that include borrowing costs can account for almost three quarters of this gap. @MA_Bolhuis @juddcramer @LHSummers

Do borrowing costs explain weak consumer sentiment that inflation and unemployment cannot?

Core argument: The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.

We show that the variation in the current University of Michigan Index of Consumer Sentiment, which cannot be explained by inflation and unemployment, has historically shown a strong correlation with proxies for the growth of consumer borrowing costs, such as the growth of interest rates for mortgages or car loans and the willingness of banks to extend consumer installment loans. We show that the other questions in the survey that measure consumer sentiment provide direct evidence that concerns of consumers about borrowing costs are at historic highs, surpassed only by the Volcker-era. We develop alternative CPI measures that explicitly incorporate the cost of money. When interest paid is considered as a cost borne by consumers and included in the CPI, the year-on-year inflation rate increases by one percentage point throughout the last year. When both personal interest payments and the cost of homeownership are accounted for in the CPI, the inflation rate increases from 3 to 9 percent in November. In January, after most of the research for this paper was completed, consumer sentiment jumped to its highest level since 2021. Although this is just one month of data, it appears consistent with our hypothesis. If high borrowing costs explain the consumer sentiment anomaly of 2023, then the recent moderation of the growth rate of borrowing costs in recent months could help consumers significantly in 2024, but further rises could prolong consumer dissatisfaction.

Takeaways by Macro Roundup® AI

  1. The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.
  2. Variation in the University of Michigan Index of Consumer Sentiment unexplained by inflation and unemployment has historically correlated strongly with proxies for growth in consumer borrowing costs, including mortgage and car loan rates and banks' willingness to extend installment loans.
  3. Other University of Michigan survey questions show consumer concerns about borrowing costs at historic highs, surpassed only by the Volcker era, and the authors argue moderating borrowing-cost growth could help consumers in 2024 while further rises could prolong dissatisfaction.

Related Articles:

  • 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.
  • Asymmetric Amplification and the Consumer Sentiment Gap — Consumer sentiment surveys show Republican respondents' views swing about ±15 index points relative to predicted levels depending on which party holds the presidency, while Democrats' views swing only about ±6 points. The authors estimate that adjusting for this asymmetric amplification shrinks the gap between observed and predicted consumer sentiment by 30%.
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