Talking Vibes With Jared Bernstein

Jared Bernstein, former top Biden economist and all-round economic expert, and I bat around the puzzle of persistent negative economic sentiment. Recorded Wednesday. . . . TRANSCRIPT: Paul Krugman in Conversation with Jared Bernstein (recorded 4/22/26) Paul Krugman: Hi everyone. This week I’ve got Jared Bernstein with me for a talk about economic vibes. We had planned and hoped to have G. Elliott Morris in on the conversation, but he came down sick. So it’s just going to be two economists talking about why people are still so negative about the economy. Clearly this is very important for lots of purposes, but also just kind of interesting. So, hi Jared. Maybe you should lead off by explaining why it’s so compelling and then I’ll chime in. We’ve both done work on this, but you’ve done more. Jared Bernstein: Yeah, well, to me, it’s personal because I was in the White House—in the Biden administration’s Council of Economic Advisers, as you know—during this period when what began to be called the vibecession arose. I associate that term with Kyla Scanlon. This was a situation where we were posting some good strong macroeconomic numbers. GDP was strong. It was above trend. We got back to full employment very quickly after the pandemic-induced recession. But there was a big spike in inflation. As that spike came down, we were rolling down the other side of inflation mountain in the second half of 2022, we thought that was a pretty good development, given how upset people were. But consumer sentiment, consumer confidence, people’s feeling about the economy—these vibes—just kept getting worse. And it seemed to me at the time that that shock, not just to inflation, but to the level of prices—how much prices went up—was more important than most economists were realizing. As you well know, people in our field think a lot about inflation and inflationary shocks. We think less about the level of prices and sort of take that as a given. So that struck me as quite important at the time. And I began to look into it in ways I’m sure we’ll get into. Krugman: I mean, what was striking about it was that historically, there’s a pretty good relationship between consumer sentiment and macroeconomics. And way back they called it the misery index, which is the inflation rate plus the unemployment rate. It was designed by Arthur Okun, and it did a pretty good job. And then you added a little more sophisticated version of that, and it has historically done a pretty good job of tracking sentiment. But after 2022, even by these measures that had worked before, it looked like an economy that should have had people feeling a lot happier, but they weren’t. But let’s talk a little bit about price level because what always struck me, even from the beginning, was a question about: what period of inflation are we talking about? You know, why should it be the one-year rate of inflation that enters into the misery index as opposed to a two-year, or three-year, or four-year? That’s how we kind of started. In your recent work, you started by saying, “well, maybe with inflation over a longer period,” but this kind of morphed into this price level issue. So why don’t you tell me about that? Bernstein: So, a couple of things to amplify points you were just making. My coauthor on a recent paper, Daniel Posthumus, and I made a model of consumer sentiment. And this works both on the Michigan version and on the Conference Board version. Krugman: By the way, people should know that U. Michigan is the longest-standing regular survey of how people feel. But the Conference Board—I don’t know how far back they go. Bernstein: It actually goes back to ‘62, and U. Michigan goes back to ‘52. But that’s kind of relevant for what I was about to say. So we built a model to predict the sentiment or confidence indices. We used the stock market returns, real consumer spending, inflation, and unemployment. Very simple. And we ran it from 1990 to 2019. It then predicts very well what the index does all the way back to the 1950s. So even though we ran it from ‘90 to 2019, it tracks the index very well. And then as you said, it breaks down in 2019. And as you well know, the ‘20, ’21, ‘22 inflation shock wasn’t the first inflation shock in our history. But it was the first one in this series where you see this big gap between how people should feel based on those variables, those predictors, and how they do feel. And I do want to get this down early on: that’s a pretty complicated thing to explain—how people feel about the economy. You know, you ask ten economists what “vibes” mean, or pollsters, whatever; they’ll tell you ten different things. But I think what happened to prices is very important. But I want to be clear— and you’ve underscored this in some of your recent work— it’s not the only thing. So, there’s that. I guess one other thing I’ll say: I have a particular set of experiences. I used to go out on WHNL, which stands for White House, North Lawn, and that’s where we used to go and talk to the cameras about how things were going. And no matter where we started, no matter what we were talking about, like a good unemployment report: “We just had 250,000 payroll jobs.” You know, “productivity is up, GDP inflation’s way down.” “Groceries had a 12% inflation rate. Now they have a 1.5% rate.” These are the things we were talking about out on WHNL, and it always got back to [the press saying], “Why do people feel so bad about the economy? They’re telling us things are too expensive. What are you going to do about that?” So that really got into my head. Krugman: So your story is one that I have largely gone with. You did the hard work on the econometrics, which I have not, but again— you or I would say, “Look, inflation is way down.” They said, “What do you mean? Things cost so much more than they did in 2019.” And so you kind of introduced this “excess price level” as a story, which is very widespread. But why not that as opposed to just inflation over a longer period, or is there really a better story there? Bernstein: Yeah. So, they’re quite similar. Inflation over a longer period is basically asking the question: how much did the level of prices go up over this period? So you raise a fair point. Most of what we talk about on inflation day is the change in the monthly inflation rate or, maybe, the yearly rate. But I think in some senses we’re circling around the same thing, which is people’s memory about prices. And that’s key to this research. It’s something I hadn’t thought enough about but I’ve more recently been kind of obsessed with, which is people’s memory of what things used to cost. And this gets you down an interesting set of questions. So if that were the only thing in play here, everybody—including me and you—would be walking around totally depressed all the time because when I started driving, gas cost $0.60 a gallon. And, you know, right now it’s a $4 national average, but this increase from $0.60 to where it is now or any other price you want to focus on—that’s salient to the consumer market basket. It tends to go up very gradually. When you have a shock, like we did in ‘21, ’22, people have this set of prices still emblazoned in their head. I used to call it the “personal price vector,” which is this idea that we walk around knowing what the things we buy kind of cost. And when that gets shocked, you know, it’s really quite upsetting to folks, and it takes a while for them to acclimate. The question is, what do we mean by “a while”? And I’m still wrestling with that question. Krugman: Yeah, I think there has to be a statute of limitations there somewhere. I mean, people aren’t pining for the days of 15-cent McDonald’s hamburgers. I started driving a lot earlier than you did. So, I don’t remember what gas cost, but I do remember a quarter to go to the movies. But obviously, at some point, people stop remembering. I’m probably going to get all nonlinear here, but I mean, we’re n… Get full access to Paul Krugman at paulkrugman.substack.com/subscribe