Confusion about "overheating"
A recent article in the NYT criticizes Larry Summers, who correctly predicted that economic policy in 2021 was too expansionary. This caught my eye:
Mr. Summers has been focused on a different story, warning that government spending could increase inflation. With prices rising at the fastest rate in 40 years, he has been lauded for making the right call. “Does the WH owe Larry Summers an apology?” Politico asked last November.
The problem with this reading is that the economy hasn’t really overheated. Real gross domestic product and employment are still lower than prepandemic projections, according to government statistics. Yes, consumer spending patterns have shifted from services to goods, but that began two years ago; the fact that our supply chains still cannot adjust reflects a bigger problem with how they were designed.
It is frustrating to see respectable outlets like the NYT repeatedly make EC101 level mistakes. Economic overheating has nothing to do with real GDP; rather it represents excessive growth in nominal spending. And nominal GDP has risen to well above the pre-pandemic trend line. The economy is clearly overheating to some extent.
In 2008, real GDP in Zimbabwe was sharply depressed. Would anyone claim their economy was not overheating at a time when inflation reached a billion percent?
The NYT has a wealth of talented reporters. I am convinced that they try to be accurate, at least most of the time. That’s why I find this sort of story to be so maddening.
I also blame the economics profession. If the top economists in America (who mostly share the NYT’s ideology) were more critical of its reporting of economic issues, then it would face pressure to clean up its act. Conservatives might not believe this, but the NYT does care about elite opinion. Instead, we repeatedly see this sort of sloppy reporting. It doesn’t seem to be getting better.
PS. If the NYT hired a competent economist to proofread their economics stories, they could weed out dozens of mistakes each month, making it a better paper. Why don’t they do that—they have lots of money? (Yes, they have editors, but I’m talking about proofreaders with knowledge of economics.)
Off topic, I really like this Matt Yglesias tweet:
If you want more than a tweet, check out this article.