It’s been almost two years since I started trying to draw people’s attention to the growing gap between economic perceptions and economic reality. At the time, the economic outlook was mixed, with rapid job growth but also rising inflation; Even given that mixed picture, consumer confidence seemed abnormally low.
I think it’s fair to say that I received a lot of criticism. Ultimately, inflation was still rising, and many economists warned that it would take a severe recession to bring it back down.
It hasn’t been like that. Unemployment remains near its lowest level in 50 years, yet inflation has fallen rapidly; consumer prices did not rise at all in October, although that was partly statistical noise. Many economists analyzing the data are almost stunned by how well things are going; The latest big report from Goldman Sachs (whose economists were right about disinflation) is titled “The Hard Thing is Over.”
However, consumer confidence surveys and political polls continue to show that Americans have a very negative view of the economy under Joe Biden. There is still no consensus on the reasons for this disconnection.
But there are some new studies that shed some light on what’s going on, and I have a new way of looking at the numbers that may also clarify things. I’ll start with Briefing Book, a blog written by former officials. They have developed a model (actually several models) that establishes the historical relationship between basic elements such as inflation and unemployment, on the one hand, and consumer confidence, on the other.
Until the pandemic, these kinds of models worked quite well; But at this point, consumers seem to feel much more pessimistic than they “should.” I will return to Briefing Book’s explanation for the gap. But first, let’s forget about aggregate economic statistics: what happens to workers?
For a time, many experts insisted that regardless of what was happening to gross domestic product, the fact was that wages were not keeping pace with inflation, which was true for a time. But not anymore. I already knew this more or less from the work of Amherst’s Arin Dube, but a comprehensive new analysis by Joseph Politano confirms it. No matter how you look at it, real wages are higher now than before the pandemic; for workers without supervisory roles, who make up the majority of the workforce, they are higher than would have been predicted from the pre-pandemic trend.
But the numbers are the least important. Americans say things are bad; Shouldn’t we trust his word? One answer is: watch what they do, not what they say. It turns out that the plunge in consumer confidence during the Biden years has been similar in magnitude to the plunge during and after the 2008 financial crisis, which is already a surprising observation, considering that the post-2008 depression was It dragged on for years, while after Covid we quickly returned to full employment. However, consumer spending, which stagnated during the last crisis, has continued to accelerate this time around. So even though consumers say the economy is terrible, their spending indicates that they are quite satisfied with their personal financial situation. I guess they think something bad is happening, but only to others.
In any case, the Briefing Book analysts delved into one of the possible reasons that would explain this disconnection, which I had already speculated about from the beginning, but they have crunched the numbers. It is now a proven fact that partisan orientation affects the opinions expressed about the economy: Democrats feel more optimistic when a Democrat occupies the White House, and Republicans when the president is a Republican.
What Briefing Book shows is that this effect is not symmetrical: it holds for both parties, but the partisan effect on trust is 2.5 times larger for Republicans than for Democrats. And they calculate that this “asymmetric amplification” alone explains 30% of the difference between confidence in the economy and economic fundamentals.
But wait, there’s more. The importance of partisanship in shaping economic perceptions tells us that much of what people say about the economy reflects what they hear, whether in the media or on social media, rather than their own experiences. Economists I speak to joke that even the mainstream media is finding it difficult to speak highly of Biden’s economy. When, for example, a new jobs report is released, the headlines don’t typically say things like “Job growth beats expectations,” but rather something like “Rapid job growth could soon slow, experts say.” which poses problems for Biden.”
Maybe they will say that these things are not important, that people know what is really happening. But the evidence on partisanship and perceptions suggests otherwise. Now, I’m not saying this is the whole story. Inflation may be slowing, but prices have risen sharply in recent years, and that still bothers people, although that anger didn’t seem to last after previous temporary bursts of inflation. And general unease over the social repercussions of the pandemic could be influencing what people say about the economy.
Still, we can acknowledge that there are other factors at play without denying two clear facts about the economy: Most American workers are indeed doing better than in the past, and a significant portion of negative economic commentary reflects sentiments. partisans, not reality. Oh, and one more thing: Negative economic sentiment may not matter as much for the 2024 election as many think, since much of it comes from people who would never vote for a Democrat under any circumstances.
Follow all the information Economy and Business in Facebook and xor in our weekly newsletter
The Five Day Agenda
The most important economic quotes of the day, with the keys and context to understand their scope.
RECEIVE IT IN YOUR EMAIL
Subscribe to continue reading
Read without limits
_
#insights #economics #malaise