Opinion | Ordinary People Don’t Think Like Economists. It’s a Problem. – The New York Times

by | Apr 6, 2022 | Financial

Expectations matter in economics. If people think inflation will rise, they will behave in ways that will help make it rise (e.g., asking for bigger raises). If they think the economy is about to grow robustly, they will get more confident, spend more and help create the future they anticipate.But what happens if people’s expectations are based on an unorthodox view of how the economy works? That’s a question raised by a fascinating paper released in January that finds big gaps between how most economists view the world and how ordinary people think things work.In textbook economic theory, for example, raising interest rates makes borrowing more expensive, which cools off economic growth and causes inflation to fall. But in a survey of 6,500 U.S. households, the researchers found that 57 percent of respondents thought that a rise in the federal funds rate, the short-term interest rate the Federal Reserve controls, would lead to a rise in inflation. That’s nearly twice as many as the 30 percent who thought it would lead to a fall in inflation.Likewise, while 80 percent of the 1,500 economists surveyed for the paper thought that a rise in government spending would lead to a decline in the unemployment rate, only 43 percent of the general public agreed, and 39 percent thought higher spending would actually make unemployment worse.I expect to get emails from readers arguing that the public is right to be worried about higher rates and more spending. OK, sure. After all, even a fair share of …

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