Our Economy Isn’t ‘Goldilocks.’ It’s Better.
Feb. 1, 2024, 7:00 p.m. ET
“Let’s be honest, this is a good economy.”
So declared Jerome Powell, the chair of the Federal Reserve, in his news conference on Wednesday after the Fed’s latest policy meeting. He’s right, even if the public isn’t fully convinced (although the gap between economic perceptions and reality seems to be narrowing). In fact, Powell is clearly wrestling with a dilemma many countries wish they had: What’s the right monetary policy when the news is good on just about all fronts?
Contrary to what you may have heard, this is not a “Goldilocks economy” — get your children’s stories right, folks! Goldilocks found a bowl of porridge that was neither too hot nor too cold. We have an economy that is both piping hot (in terms of growth and job creation) and refreshingly cool (in terms of inflation).
Hence the Fed’s dilemma. It increased interest rates in an attempt to reduce inflation, even though this risked causing a recession. Now that inflation has plunged, should it quickly reverse those rate hikes, or should rates remain high because we have not, in fact, had a recession (yet)?
I believe that the risk of an economic slowdown is much higher than that of resurgent inflation and that rate cuts should come sooner rather than later. But that’s not the kind of argument that’s going to be settled on the opinion pages. What I want to talk about, instead, is what the good economic news says about policy and politics.
Before I get there, a quick summary of the good news that has come in just in the past few weeks.
First, inflation. For both historical and technical reasons, the Fed aims for 2 percent inflation; over the past six months, its preferred price measure has risen at an annual rate of … 2 percent. “Core” inflation, which excludes volatile food and energy prices, has been running slightly below target.
The Fed also looks at wage growth, not because workers have caused inflation, but because wages are usually the stickiest part of inflation and therefore an indicator of whether disinflation is sustainable. Well, on Wednesday, the Employment Cost Index came in below expectations and is now more or less consistent with the Fed’s target. On Thursday we learned that productivity has been rising rapidly, so unit labor costs are easily consistent with low inflation.
It’s true that prices haven’t actually gone back down, but a one-time jump in prices is normal after a major disruption, like the conversion back to a peacetime economy after World War II or a pandemic that temporarily shut down normal activity.
Finally, real G.D.P. grew a very solid 3.3 percent in the fourth quarter, making all those predictions of a 2023 recession look even sillier.
As typically happens when there’s a Democrat in the White House, the usual suspects are questioning the official data. But the strength of the job market and the fall in inflation are confirmed by many independent surveys of consumers and businesses.
So it has been good news all around. This is arguably the best economy we’ve had since the late 1990s.
What does all of this say about policy and politics?
Although some on the left refuse to believe it, President Biden has spent a lot of money on progressive priorities. Many critics, including some Democrats, predicted that this spending would have catastrophic effects. Perhaps most famously, Larry Summers, a top official in both the Clinton and Obama administrations, called the 2021 American Rescue Plan the “least responsible” fiscal policy in 40 years.
We did in fact get a one-time burst of inflation, but so did other advanced countries, and America has in other ways greatly outperformed its peers — probably in part because Biden’s spending boosted growth and employment. Now that we’ve achieved what appears to be a better-than-Goldilocks soft landing, Bidenomics looks pretty good in retrospect. Maybe progressive economic policies don’t necessarily lead to disaster, after all.
What about the political consequences?
Once upon a time, a president presiding over our current economy would have been strongly positioned for re-election. But we live in an age of hyperpartisanship, where the state of the economy seems to have much less effect on elections than it did a few decades ago. Indeed, many voters — especially Republicans — seem to base their evaluation of the economy on their politics rather than the other way around. Amid all the good news I’ve just laid out, 71 percent of Republicans say the economy is getting worse, while only about 7 percent say it’s getting better.
So I don’t expect Biden to ride to easy victory on the strength of economic success. But the economy is doing well enough that Donald Trump is back to insisting that the unemployment numbers are fake and claiming, ludicrously, that he somehow deserves credit for a rising stock market.
And there’s been a perceptible shift in Republicans’ messaging away from the economy (although they’re still claiming it’s terrible) to immigration — I’ll talk about their remarkably cynical strategy on that issue another day.
For now, the point is that Powell is right: This is a good economy.
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Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman