Consumer Expectations Don't Tell Us Much About The Real State Of The Economy

On this Rothbard wrote,

After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depression" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937–38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession". From that point on, we have been through quite a few recessions, but not a single depression. But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only "downturns", or, even better, "slowdowns", or "sideways movements". So be of good cheer, from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns". Such are the wonders of the "New Economics".1

Again, the main reason for this gentle talk is a view that soft language is not going to upset an individual's confidence. If people’s confidence is kept stable, then stable economic activity is likely to follow suit or so it is held.

Can Transparent Government Policies Support Economic Growth?

Since it is held that stable individuals’ expectations imply economic stability, economists recommend that government and central bank policies should be transparent. If policies are made known in advance, surprises will be avoided and volatility will be reduced. 

Some economists, such as Milton Friedman, maintain that if inflation is expected by producers and consumers, then it will cause very little damage.2

The problem, according to Friedman, is with unexpected inflation, which causes a misallocation of resources and weakens the economy. According to Friedman, if a general rise in prices can be stabilized by means of a fixed rate of monetary injections, people will adjust their conduct accordingly. Consequently, Friedman says, expected general price increases, which he calls expected inflation, are going to be harmless, with no real effect.

Observe that, for Friedman, bad side effects are not caused by increases in the money supply but by the outcome of that—increases in prices. Friedman regards money supply as a tool that can stabilize general rises in prices thereby promoting economic growth. According to this way of thinking, all that is required is to fix the growth rate of money supply, and the rest will follow suit.

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