Americans Feel Economy Much Worse Than it Is
It turns out "the economy" isn't just one thing.
At the NYT Upshot blog, Neil Irwin reports “Americans Are Flush With Cash and Jobs. They Also Think the Economy Is Awful.” While I was expecting a treatise on the irony of it all, the piece contains some useful insights as well as a healthy dollop of conjecture.
The setup is an elongated form of the headline:
Americans are, by many measures, in a better financial position than they have been in many years. They also believe the economy is in terrible shape.
This is the great contradiction that underlies President Biden’s poor approval ratings, recent Republican victories in state elections and the touch-and-go negotiations over the Biden legislative agenda. It presents a fundamental challenge for economic policy, which has succeeded at lifting the wealth, incomes and job prospects of millions of people — but has not made Americans, in their own self-perception, any better off.
Workers have seized the upper hand in the labor market, attaining the largest raises in decades and quitting their jobs at record rates. The unemployment rate is 4.6 percent and has been falling rapidly. Cumulatively, Americans are sitting on piles of cash; they have $2.3 trillion more in savings in the last 19 months than would have been expected in the prepandemic path. The median household’s checking account balance was 50 percent higher in July of this year than in 2019, according to the JPMorgan Chase Institute.
Yet workers’ assessment of the economy is scathing.
The assessment is much more complicated but the key thing to remember is that the median isn’t necessarily the same as the mode.
In a Gallup poll in October, 68 percent of respondents said they thought economic conditions were getting worse. The share who thought things were getting better was lower than in April 2009, when the global financial crisis was still underway. And it is not merely a partisan response to the Biden presidency. In the University of Michigan’s consumer sentiment survey, Republicans rate current economic conditions worse than Democrats do — but both groups give ratings about as low as they did in the early 2010s, when unemployment was much higher and Americans’ finances were a wreck.
The reasons seem to be tied to the psychology of inflation and the ways people assess their economic well-being — as well as the uneven effects that rising prices and shortages have on different families. It may well be shaped by the psychological scars of the pandemic, one manifestation of this being an era of exhaustion.
Regardless of the exact causes, after decades in which the availability of jobs (or lack thereof) drove economic sentiment, inflation now appears to have become the more powerful force.
As a federal employee in my mid-50s, inflation is mostly a nuisance. I definitely see higher gas and food prices and find it annoying. And I’ve already been hit hard by increased property taxes (housing and especially used cars are more expensive and thus our basis is higher) and expect to be socked with increased winter heating bills given higher propane prices. But my salary should more-or-less keep up with the cost of living and my retirement savings, which are mostly in index funds, will likely go up as a result of the stronger economy.
But not everyone is in that boat.
“The major issue is rising inflation and falling confidence in economic policies,” said Richard Curtin, who has overseen the University of Michigan survey for decades. “Consumers see rising prices, and they see no policies that would correct it.”
There is no doubt that prices are rising rapidly — the Consumer Price Index is up 5.4 percent over the past year, and there are shortages and other inconveniences that do not show up in inflation data but reflect the same underlying phenomenon.
To economists, higher wages and higher prices for consumer goods are two sides of the same coin, and a spurt of inflation creates both winners and losers. In the last few months at least, the public hasn’t appeared to view it that way — and inflation and related shortages seem to loom particularly large in their overall perception of the economy.
That’s not surprising. And gas prices, in particular, seem to take a huge psychological hit because they’re the only thing we buy with the price displayed in three-foot numbers visible from the highway.
Interestingly, the way inflation is hitting is topsy-turvy this time:
Any group of individuals might end up better or worse off in a time of elevated inflation, depending on whether they’re debtors or creditors, and whether their wages rise faster or slower than the particular goods they buy.
A restaurant worker who has received an 11 percent pay increase over the last year — the average for the leisure and hospitality sector, according to government data — probably has higher spending power despite high inflation.
But many people are losers in times of rising prices — and even those who may end up being net winners can end up feeling the pain of higher prices more intensely than the benefit of higher wages or more manageable debts.
About 13 percent of workers have a paycheck that is unchanged over the last year, according to data from the Atlanta Fed. Many retirees receive pensions that are not adjusted for inflation.
And it is middle- and high-income earners whose pay gains were least likely to have kept up with inflation. Over the 12 months that ended in September, those in the top quarter of earners experienced 2.7 percent gains in hourly earnings, compared with 4.8 percent for the lowest quarter of earners. For lower earners, that follows years leading up to the pandemic in which pay gains exceeded inflation rates.
It’s good news for people low on the wage scale that businesses are competing hard for their services, increasing their bargaining power. But a relatively small percentage of the populace is in that boat and everyone who uses those services are paying more, often for a worse customer experience.
The details of what a person buys can have an outsize effect on how acutely he or she feels the pain of inflation. For someone who has had no need to buy an automobile this year, steep inflation in cars and trucks has been a nonissue.
Now consider someone whose car broke down and who needs another one to get to work. A rise in prices of 40 percent for used cars and trucks since the start of the pandemic amounts to a costly burden. The same applies to many other physical goods that have been in short supply, like home appliances.
And, obviously, those of us who aren’t in the market for a car or refrigerator don’t feel any surplus relief that we’re not paying higher prices. So the effects on sentiment about the economy is almost entirely negative, unless you happen to sell cars or refrigerators.
As previously noted,
Rising costs for staple goods tend to influence people’s perceptions of inflation. Gasoline prices, for example, are visible on big signs on every street corner, and have risen 74 percent from their pandemic lows of May 2020.
But they are below their levels for most of 2011 to 2014, and average earnings have risen sharply since that period. To look at it one way, in October it took about six minutes of work at the average private sector wage to earn enough to buy one gallon of regular unleaded gasoline. In October 2013, it took almost nine minutes of work.
But people’s perceptions of these things are just odd. I remember gas prices being over $4 a dozen-plus years ago and am still find it annoying to pay $3.25 after so long in the $2 range.
To get a better idea of why elevated inflation can contribute to such negative assessments of the economy, it helps to go beyond the details of wage and price trends in 2021 and turn to a piece of economic research from the 1990s, conducted by Robert J. Shiller, the Yale economist.
He led surveys to try to ascertain why inflation, even at moderate levels, frustrated ordinary citizens so much more than economic theory implied it should. He found that people did not believe they would receive adequate pay raises to keep up with rising prices. He also found that people believed it would hinder overall economic growth; that it would be harmful to national morale; and that it could fuel political chaos or damage national prestige.
“In answering questions about what is really important and what our national leaders really ought to pay attention to, people may tend to rely on some deep intuition derived from life’s experiences,” Professor Shiller wrote in 1997. The idea of inflation, he continued, evokes “arbitrary injustice, arbitrary redistributions and social bitterness,” and “memories of social situations in which morale and a sense of cooperation were lost.”
That may be what makes the inflation surge such a tricky policy problem: It can be about something more profound than dollars in people’s pockets and the price of a gallon of gas.
This is essentially Prospect Theory, the idea the psychologist Daniel Kahneman won an economics Nobel for. We’re not rational calculators; rather, we have all manner of biases based on set points. Most notably, we value losses much higher than we do gains. So, if prices go up 10 percent and we get a 10 percent raise, we’re still likely to think we’re falling behind.