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Inflation outlook: 'Confusion is certainly better than being wrong', professor explains

Barry Schwartz, visiting professor at UC Berkeley School of Business, joins Yahoo Finance Live to weigh in on investor sentiment and the psychology behind deciding whether or not the U.S. economy is in a recession.

Video Transcript

[MUSIC PLAYING]

BRIAN CHEUNG: It is, to say the least, a weird time in this economy. The labor market is good. People are employed, but inflation is high. And there's no doubt Americans are feeling it. So how do headlines like this that you're seeing on your screen impact the psychology of the consumer in this weird economy? And how could that feed into the recessionary dynamics?

Let's bring in UC Berkeley Haas School of Business professor Barry Schwartz for this conversation. Professor, it's great to have you on because I feel like we need to take a big step back here and just acknowledge the role that the way that people think factors into the actual economic happenings that we're experiencing. What do you see as kind of the big play here in how the way that Americans are thinking and consuming factors into the immediate issue of high inflation?

BARRY SCHWARTZ: Well, let me just say "amen" to your sentiment. When economic uncertainty happens, you always go-- I mean, people always go to economists to try to explain what's going on. And economists have a lot to offer. But I think the main-- the really significant impact of things like inflation or recession is not in the short-term problems with supplies that might spark it. It's not that gas prices go up for a few weeks because of some political intrigue going on somewhere in the world.

What really matters is whether they persist. And whether they persist depends not on this immediate shortage, but on what people think this immediate shortage predicts about the future. Our decisions about whether to spend or save, whether to loosen our belts or tighten our belts, are all based on our predictions about what tomorrow's going to be. And that is really in the realm of psychology.

Do I think that hard times are coming? Well, if so, I'm going to cancel my vacation. I'm going to cancel my work project, updating my home and stuff like that. Do I think this is a temporary problem? Well, then, I'll go on my vacation, and I will get the workmen in to give me a new patio.

RACHELLE AKUFFO: So then when we look at-- we just had a chart up there showing how consumers are feeling versus how they're spending. So is that about confidence in the future? Or is this sort of spending-- comfort spending to make yourself feel better?

BARRY SCHWARTZ: Well, there's a little of both. So people may be very nervous about the future, but so down for whatever reason that they feel-- it's almost like they need to take a little-- another hit of a drug. Even though they know it's foolish, they do it because I feel so bad. Maybe this will make me feel a little bit better. But that's a short-term thing. The long-term thing, making strategic decisions about whether and when and how you're going to spend your money is really about whether you think the current economic conditions are going to persist.

Robert Shiller, Nobel Prize winning economist, has said that if there's a recession, it will almost be self-fulfilling. It'll be the result of our talking ourselves into a recession. There was an op-ed in the "New York Times" last week by Kyla Scanlon. And she said, quote, "The root of economic problems lies with expectations." And that's the realm of psychology. And I got to say, this has always been true.

But prior to the 24-hour news cycle, you just didn't get bombarded over and over and over again with economic news, trivial changes from one hour to the next. Now we're just assaulted with it in the same way that when we're driving around town, we keep seeing these signs for the price of gas, and we can't avoid it. Well, now you can't avoid people predicting that prices are going to go up or jobs are going to go down or what have you. And it just starts to infect you and lead you to have either optimistic or pessimistic predictions about what tomorrow is going to be like.

BRIAN CHEUNG: And professor, you talk about the 24-hour news cycle, right? I mean, people might be listening to our conversation and forming those views, but it also depends on what policymakers are saying as well. And we heard President Biden trying to take a bit of a victory lap over the July inflation numbers yesterday. Take a listen.

JOE BIDEN: I want to say a word about the news that came out today relative to the economy. Actually, I just want to say a number-- 0. Today, we received news that our economy had 0% inflation in the month of July, 0%.

BRIAN CHEUNG: But then you had economists like San Francisco Fed President Mary Daly, who has the ability to lever interest rates, saying in a new interview, quote, "Consumers and businesses are getting some relief, but inflation remains far too high and not near our price stability goal. This is why we don't want to declare victory on inflation coming down. We're not near done yet." Does this add to the confusion that Americans feel when they're getting these types of commentary out there?

BARRY SCHWARTZ: Surely, it does. But I got to say, confusion is better than simply being wrong, you know? It's being wrong about the future that leads people to go out on their lunch hour and buy groceries because by the time the workday is over, the price of groceries is going to be up 5%. If we're uncertain about the future, it's not going to lead to a kind of systematic explosion of expectations about what prices are going to be like in the future.

So if we just don't know what prices are going to be like in the future, chances are pretty good that will behave tomorrow the same way we behave today. And curse all of these people that we're watching because they're not all speaking out of the same side of their mouths. And I've got to say with respect to Biden's comment, I think this is an effort to try to diffuse the incessant talk about inflation or recession so that the expectation driven worsening of those conditions can, to some degree, be dampened.

There isn't zero inflation. He knew there wasn't zero inflation. He was just trying to tell people, listen, don't listen to all these hysterics on 24-hour news telling you how bad our economic future is. It's not bad.

RACHELLE AKUFFO: So then-- so as we look at this, then, you're trying to keep a level head, taking in this information. What should people do to really sort of-- so that they can get a real clear view of how they should be viewing the economy without sort of panicking at every bit of news data that comes out?

BARRY SCHWARTZ: I wish I knew how to answer that question. There's a joke among non-economists and some economists that the economic profession has predicted nine of the last three recessions. So everybody would like to know the secret of what tomorrow is going to be like, but nobody knows the answer to that question. So all I can say is to take all that you're hearing with a grain of salt. Many people-- most of the money they spend, they need to spend. They spend on necessities.

But there are a lot of people in a privileged position where a significant amount of their spending is discretionary. And so it seems to me if you're a little bit uncertain about the future, you pull in your belt a little bit for a month. It's not the end of the world to defer some of these discretionary expenditures. Get your new washer and dryer in October instead of getting it tomorrow.

And as things settle out, you'll come to a view about how stable the economic future is and in what direction it's moving. And then you can start pulling the trigger. But you can't find certainty. And I think uncertain-- confusion is better-- it is better to be confused than it is to believe the wrong thing.

RACHELLE AKUFFO: Well, we're going to leave that there. That's an interesting mantra to end on. Thank you for joining us. Barry Schwartz, UC Berkeley Haas School of Business professor, thank you for joining us this afternoon.

BARRY SCHWARTZ: Thanks for having me.