Seven possible explanations for what’s going on
Earlier this month, a Financial Times poll of about 1,000 registered voters found that most Americans believe their financial situation has gotten worse since Joe Biden became president. The economist Claudia Sahm tweeted that the results were “impossible,” adding, “The vast majority of Americans are better off financially. Full stop”—before receiving so much pushback for her statement that she deleted the post. This online drama was part of a larger debate among economists, policy makers, and commentators who have different explanations for why Americans report negative assessments of the economy despite some objective positive measures.
Economists who agree with Sahm are heavily influenced by low unemployment, often considered the standard metric for how the economy is performing. Last month the unemployment rate was down to 3.9 percent. But it’s not just unemployment that’s headed in the right direction. The Consumer Price Index was unchanged. A new paper shows that wage inequality has fallen over the past three years, driven by workers leaving their old jobs for better-paying ones. The U.S. has been adding jobs at a record clip. And wages—adjusted for inflation—may have finally surpassed pre-pandemic levels.
James Surowiecki: Why Americans can’t accept the good economic news
Despite these positive signs, the Financial Times poll was hardly the only survey to find widespread economic gloom. The Conference Board’s Consumer Confidence Index indicated in October that people remain “pessimistic” about the future. And an August CNN poll found that 75 percent of respondents rated economic conditions as very or somewhat poor.
Here are seven possible explanations for what’s going on.
1. People need a second to adjust.
COVID-19 caused an unprecedented social and economic crisis, including job loss for lots of people. In May 2020, roughly 60 million people reported that they had been unable to work in the preceding month because their employer had closed or lost business due to the pandemic. Then inflation kicked in, raising food, energy, rent, and housing prices.
Although price jumps are leveling off, it’s important to appreciate that economic conditions changed really fast in both directions, and people may need time to register what’s going on. One researcher found that although public opinion has “historically followed the business cycle” (it declines during recessions and improves during expansions), the difference now is that pay hasn’t been keeping up with inflation. That’s only just beginning to change. If job growth, wage growth, and low inflation all continue apace, people may well start to feel better about the economy.
Many of these polls, moreover, are not simply asking whether the economy is good; they’re asking whether Joe Biden’s economy is good. Even if respondents think conditions are improving, they’re rating the Joe Biden Economy based on the past two years, not just last month, and their perceptions may be baked in.
2. Inflation is just really that bad.
People seem to be more sensitive to inflation than to unemployment. The Financial Times poll found that 60 percent think avoiding inflation is more important than keeping good-paying jobs; just 30 percent favor the latter. Economists tend to think a good economy is one with a low unemployment rate, but for the public, that’s not enough.
One explanation for inflation sensitivity is that it hits everyone. Whether you’re a billionaire or a minimum-wage worker, you can see that prices have changed over the past few years. Conversely, even in periods of high unemployment, just a fraction of people lose their jobs. And although of course high unemployment has ripple effects beyond those laid off or fired, those effects are, by definition, indirect. Further, people may view raises or new jobs as fruits of their own labor, whereas inflation is out of their control, as the economist J. W. Mason argued last year. If someone has a good-paying job in an inflationary environment, they may tell a pollster that they’re doing well—but the economy is doing poorly.
3. Expectations are high.
During the pandemic, the federal government provided Americans unprecedented support. It stopped evictions; it dropped thousands of dollars into personal bank accounts; it paused student-loan repayments; it gave aid to unemployed workers; it provided tax breaks to parents of young children, and billions in aid to state and local governments. In doing so, the government may have raised expectations for what a “good economy” is supposed to feel like.
Given all of those supports, many people actually are doing worse on some measures than they were a few years ago: Real disposable personal income reached a high in March 2021 and has declined since then. In May, the economics writer Joey Politano noted that Americans had spent nearly all of the money they’d set aside during the pandemic. Put another way: In 2020 and 2021, Americans acquired new sources of income, which have since disappeared. If I found $10,000 on the ground one year, and was not so fortunate the next, I would be correct in telling a pollster that I’m worse off, even if I got a $5,000 raise.
Real wages are above where they were in January 2020, but they are below where they were in mid-2020. An added wrinkle is that most of the wage growth is accruing to low-income workers, which could explain why middle- and high-income workers don’t believe that the economy is doing better.
4. The rent is too damn high.
Housing affordability hit a historic low in August as high interest rates have meant that the typical family cannot afford to buy. Although inflation overall is slowing, shelter inflation is still rising.
If renters who want to own are frustrated, so are some of the so-called winners—those who have already bought their homes—because they feel locked in place by their low mortgage rate. Moving now comes with the high penalty of giving up that rate.
Annie Lowrey: Everything is about the housing market
When asked about current conditions for buying a home, survey respondents are utterly despondent, and that could be coloring their overall perception of the economy. And of course, the main federal response to inflation has been to raise interest rates, which actually increases housing prices as mortgages and the cost of construction rise.
5. The biggest winners are at the bottom.
A new study showing declining inequality found that Americans whose incomes rank in the bottom 10 percent have seen their inflation-adjusted wages rise to new heights since the pandemic. Neither the 50th nor 90th percentile has seen similar real-wage growth. Perhaps that’s why a long-running index out of the University of Michigan found that those in the top third of the income distribution have seen the largest decline in consumer confidence, down 24 points in 2023 versus the 2000-to-2020 average. Consumer confidence among the bottom third has declined only 15 points.
Although in absolute terms, high-income people are doing better than low-income people, they may be more sensitive to the “costs” of a tight labor market.
Low unemployment—which is obviously good—does come with side effects. In a tight labor market, employers have a hard time finding workers for low pay, and a hard time retaining trained employees; customers experience worse service because of understaffed restaurants and retail establishments. These downsides may be felt more broadly than the benefits: Almost everyone with disposable income goes to restaurants or orders items online and interacts with customer-service representatives; not everyone has a new, better-paying job.
6. The media loves bad news.
When asked last month why “most people still don’t feel positive or feel good news about the economy,” Biden responded in part:
You all are not the happiest people in the world—what you report …You get more legs when you’re reporting something that’s negative. I don’t mean, I don’t mean you’re picking on me or I’m—just the nature of things. You turn on the television, and there’s not a whole lot about “boy saves dog as he swims in the lake.” You know?
Those who blame the media tend to emphasize the apparent gap between how people discuss their own financial situation and how they describe their feelings about the broader economy. According to the progressive economist Dean Baker, this gap “must be attributable to things that [people] are hearing about the economy from places like Fox News and the New York Times.” The media does have a negativity bias, which has some effect on how Americans perceive the state of the world. But when people are asked about the amount of negative or positive news they’ve heard about the economy, survey responses look relatively stable since 2020.
7. Democrats are bad cheerleaders.
A recent paper on partisanship and the economy finds that, going back to the Reagan administration, “individuals who affiliate with the party that controls the White House have systematically more optimistic economic expectations” than those who affiliate with the other party. That is, Democrats think the economy is good under Democratic presidents, Republicans under Republican presidents.
Read: Is Biden toast?
But Democrats may benefit less and suffer more from partisan cheerleading than Republicans, suggest two former Biden-administration economists. “When a Republican is in the White House, Republican survey respondents feel about 15 index points better than predicted about the economy, whereas Democrats feel around 6 index points worse,” they wrote recently. But when a Democrat is in the White House? Republicans feel 15 points worse and Democrats feel only six points better.
Beyond the question of why Americans’ feelings about the economy may have diverged from the actual economy is another, perhaps equally important question: Why are policy makers and commentators so eager to explain it—or explain it away?
I attribute all of this energy to a mad dash to set the narrative following the pandemic recession. Some believe that the government’s robust response to the crisis proves that we could stabilize working- and middle-class family finances in perpetuity. Others believe that ensuing inflation was too high a price to pay for those social supports. Yet others wish that policy makers would focus more on how their ideas and victories are translated through a fragmented media ecosystem.
Narrowly, this debate is about whether voters think the economy is good or bad, and why; the bigger issue is what lesson future politicians will draw about how to respond to recessions. Will they cower at the potential inflationary effects of fiscal stimulus? Will they require that any new social supports remain permanent rather than risk voters’ wrath when they are removed? Policy makers tend to overlearn the lessons from the last war, and every side is fighting to say what, exactly, those lessons are.
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