Inflation: The Making of a Good Story

by | June 3, 2024

The author Richard Powers has noted, “The best arguments in the world won’t change a single person’s point of view. The only thing that can do that is a good story.”

Not just today, confronted as we are by a hyper-partisan world of political discord, but over the millennia, the route to persuasion has rarely resided merely in logic, reasoning, or facts. A good story is almost always required. To be convinced of something, most listeners must ‘relate,’ and find elements in the narrative to which they can identify.

Superficially, that is neither surprising nor profound. Nevertheless, Powers’ observation is as distressing as it is true. 

Most stories are collections of anecdotes. They have appeal precisely because we feel uniquely touched by a connection that we, alone with our thoughts, make with the narrator. Yet data, the basis on which scientific hypotheses are tested, refuted, and only occasionally permitted to be accepted (at least until such time as they are successfully challenged and discarded) are not the plural of anecdote. A collection of anecdotes is just that, nothing more.

And because stories are usually anecdotal, they can be dangerous. For in our zeal to persuade, success is often achieved by exploiting the inherent human tendency to comprehend through feeling not fact, passively not critically, emotionally not logically. When tellers and rapt audiences connect solely on the emotional level, the risk is that there isn’t much room left in our minds for substance, reason, critical thinking, or logic.

Inflation stories we believe

And so, we come to inflation. 

In a fascinating new National Bureau for Economic Research working paper, a team of academics explores people’s (mis)-understandings of inflation. 

The authors begin by noting that inflation is a complex topic, one whose origins and dynamics continue to perplex even highly qualified economists, never mind the public. Not mentioned, but perhaps also worthy of note, is the observation that, as an imperfect social and behavioral science, the discipline of economics is riven with debate, with few ‘settled’ theories. That may also contribute to the general sense that, if trained academic and professional economists cannot explain inflation, then pretty much any compelling story will do.

Which is exactly what the NBER paper suggests is going on. Using surveys of Americans, the authors collect data on how the public thinks about inflation, its sources, consequences and what ought to be done about it.

The results would make fodder for late night comedy, were it not for the fact that common misperceptions also underpin critical social, political, and economic outcomes.

According to the paper, for example, Americans believe that US foreign aid is a more important driver of US inflation than any other fiscal policy action, including debt-financed spending on social security, defense, infrastructure, countercyclical measures during downturns, or tax cuts. 

That is, of course, remarkably preposterous (redundancy intended). In 2022, the US government spent approximately 1% of its budget on foreign aid, as compared to 13% on national defense or 45% on Social Security, Medicare and Medicaid. It is arithmetically impossible for foreign aid to budge US inflation, never mind become its principal cause. 

Yet, Americans choose to believe otherwise.

It gets worse. The survey indicates that Americans believe foreign aid is a more important driver of high US inflation than the Federal Reserve’s increases in the money supply, supply chain disruptions, or wage gains.

According to the survey results, Americans apparently believe that inflation can be reduced without economic costs (such as weaker growth or higher unemployment), or without the need for higher interest rates (most respondents believe that cutting interest rates will lower inflation). The former might be true in this cycle, but generally that has not been the case. The latter is unfounded belief.

What should we conclude?

It is tempting to shake one’s head, sigh, or tut-tut about the failings of our education system, resigning ourselves to broad ignorance plainly on display. Yet resignation, however understandable, is not the appropriate conclusion to draw from these results. 

Yes, economists, educators, and civic-minded people everywhere should do a better job at raising awareness about the facts of our economy, as well as logic inference we should make about cause and effect.

But as Richard Powers reminds us, changing minds is rarely achieved with evidence or logic alone. Stories are required.

But they must be good stories. 

So, when it comes to education about science, including social science, what are the elements of a good story that educates and even persuades?

The best stories take a body of genuine, dispassionate, and appropriately conducted scientific inquiry, and distill its complexity, the wonders of its limitations, its counterintuitive and even contradictory findings, and turn them into an understandable narrative. These stories have their foundations in well-collected and parsed data, appropriate statistical analysis, and sound analytical frameworks (‘models’). They are not based on anecdote divorced from statistical pattern, nor hunch about how things may work. They seek to explain regularity and rhythm, or when irregularity and dissonance occur, they seek to explain exceptions to principle and past observation.

Critically, the best stories eschew the language and convention of academe. They adopt plain English, its simplicity and ease, its colloquialisms, its rhythms. 

The (social) sciences need to learn from the humanities. Both need to learn from the ways humans navigate their ordinary lives. They must learn the power of distilling complexities of data, logic, and reasoning into narratives to which we can relate.

Never has this been so important as today. Modernity offers all, those well trained and those less so, access to unrivalled volumes of data, in numbers and words. Yet data, not properly organized, analyzed, and understood is easily abused, as social media reminds us 24/7.

Fortunately, economics (and other academic disciplines) have a distinguished history of using the turn of a phrase to distill data, logic, and inherent complexity into relatable expressions. 

Notables include this one from Adam Smith: ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.’, which beautifully conveys how self-interest, and markets promote the general welfare.

Noble prize-winning economists Robert Solow (‘the computer is everywhere to be seen except in the productivity data’) and Milton Friedman (‘helicopter money’) similarly used pithy, simple language to convey important messages. John Maynard Keynes use of the English language was without rival, and he endowed us with countless quotable quips, of which ‘in the long run we are all dead’ is but one. 

Science is a gift. It is beautiful. It reveals relationships seemingly (and sometimes actually) invisible. It opens minds.

Yet science can also be numbingly complex. We might all wish to possess F. Scott Fitzgerald’s definition of wisdom (‘The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.’), but typically most of us struggle to comprehend complexity.

And so, science requires storytellers. Without them, disciplines such as economics would be dead, or at least confined to monastic scholarly enclaves.

But it is not just the responsibility of specialists to communicate in the narrative. The audience must do its part. Passive participation won’t do. Information can never be accepted without question, without critical thinking. Seeking information to confirm one’s thinking is pernicious, a route to delusion, despair, and worse. If we require of the storyteller a simple narrative derived from fact and reason, then we must equally require of the audience the skepticism of a mind open to challenge, willing to work to think.

About the Author

Larry Hatheway has over 25 years’ experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, a non-profit offering commentary and analysis on the global economy, matters of public policy, and capital markets. Larry is also the founder of HarborAdvisors, LLC, an investment advisory firm catering to family offices and institutional clients worldwide.

Previously, Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making, and multi-asset investment strategy.

From 1992 until 2015 Larry worked at UBS Investment Bank as Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). Larry is widely recognized for his appearances on Bloomberg TV, CNBC, the BBC, CNN, and other media outlets. He frequently publishes articles and opinion pieces for Bloomberg, Barron’s, and Project Syndicate, among others.

Larry holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and resides with his wife in Redding, CT, alongside their dog, chickens, bees, and a few ‘loaner’ sheep and goats.

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