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Wolfers optimistic on inflation and recession risks

February 8, 2023

The U.S. economic recovery from the significant setbacks of the pandemic has seen inflationary pressure from supply chain disruptions and the war in Ukraine, among other factors. Justin Wolfers, Ford School professor of public policy and economics, has been commenting extensively on the current state of inflation in the U.S., the threat of recession, and what the future may hold.

In an interview with WDET, Detroit’s NPR Station, Wolfers explains that while inflation may still be distressing, the situation is improving. “Inflation has been coming down without unemployment rising, and so the economy may well be on a glide path to a soft landing,” Wolfers said.

Wolfers notes that “If we were to fall into recession, there’s no indication it would be a severe recession… Hopefully, it’ll be relatively mild, and the economy will resume its momentum pretty soon.”

Wolfers told Marketplace that the rate of inflation depends on where a person lives in the U.S. Housing is a big factor in measuring inflation, as it accounts for a third of the Consumer Price Index. Cities that have seen the biggest influx of people have considerably higher rates of inflation. For example, while housing prices are up 6.5% nationally, they are up almost 10% in Miami and less than 5% in San Francisco, a city where the population declined during the pandemic. 

Migration patterns affect the cost of everything because businesses pay higher rents, he said. A suddenly larger population creates more demand, which puts pressure on supply. This affects the cost of some purchases more than others.

Wolfers noted that “stuff that can sell across state lines usually sells for very similar prices.” That includes goods like food, clothing and electronics. However, when it comes to services and “stuff that can’t [go across state lines]—inflation can go in different directions.”  

The context of inflation within how to manage the nation’s debt is a major conversation taking place in Congress. In the Stay Tuned with Preet podcast, Wolfers discussed the intertwining of inflation with how Congress aims to address the issue of the government’s debt. 

“Figuring out what the value of our debt really is is a really complex matter,” Wolfers said. “Limiting the debt makes no sense, because what really matters is what you’re spending it on—are you spending it on good stuff or bad stuff? The debt limit doesn’t ask that question.”

One significant problem with the way Congress is going about solving the debt issue is that it is attempting to pass multiple conflicting bills. One set of bills is targeted at how much the government will spend for the upcoming year, while the other centers on establishing what the tax levels will be which determines the revenue the U.S. will receive. 

Yet, a third bill being discussed is about what the debt ceiling will be. “You can’t have all three bills made at the same time,” Wolfers explained. “It’s weird that Congress said to the Federal government to go into all this debt, but we’re not going to let you go into debt. You can’t tell someone simultaneously to jump and not jump.” 

He told Stateside, “This is an economy that is still healing from COVID. And so what we’re seeing is that many of the jobs are returning in the sectors where they went missing. Basically, things are going back to normal. ‘Normal’ for an economist is glorious.”

He continued his optimistic message in a Vox article, in which he was asked, “Is the economy good?”.

“If you want a dramatic one-word answer, the answer is yes. Unemployment’s at a 50-year low, that’s the standard metric for thinking about how the economy is performing,” he said. “Job growth is continuing, so it’s not only good, it’s getting better, and it’s getting better at a really rapid rate. In 2022, we added the second-most jobs in recorded history, all the way back to 1939.”

Read more about Justin Wolfers' comments:

Michigan economics professor says recession would be mild despite rising inflation, WDET, January 25, 2023

How much have prices increased over the past year? It depends on where you live., Marketplace, January 30, 2023

In Brief: It’s a Debt Trap, Stay Tuned with Preet, January 30, 2023

Another year of economic surprises, Stateside, February 3, 2023

Is the economy kind of good now?, Vox, February 8, 2023