Our Economy Isn’t ‘Goldilocks.’ It’s Better.

by Paul Krugman,

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.

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