Outside the Beltway

The Economy is Better Than it Feels

Why public attitudes are lagging real world performane.

James Joyner · Wednesday, June 12, 2024 · 25 comments

Monday, I started but ultimately abandoned a longish response to Atlantic staff writer Rogé Karma‘s essay “The U.S. Economy Is Absolutely Fantastic” (since renamed “The U.S. Economy Reaches Superstar Status“). The hyperbolic title was actually exceeded by the lede paragraph:

If the United States’ economy were an athlete, right now it would be peak LeBron James. If it were a pop star, it would be peak Taylor Swift. Four years ago, the pandemic temporarily brought much of the world economy to a halt. Since then, America’s economic performance has left other countries in the dust and even broken some of its own records. The growth rate is high, the unemployment rate is at historic lows, household wealth is surging, and wages are rising faster than costs, especially for the working class. There are many ways to define a good economy. America is in tremendous shape according to just about any of them.

I spent quite a while attempting to Fisk the piece but gave up because it seemed, for reasons I couldn’t quite put my finger on, pointless. Driving in to the office yesterday morning, though, I listened to the latest episode of the Ezra Klein Show, “The Economic Theory That Explains Why Americans Are So Mad” and it clarified things for me.

His opening monologue begins:

Back in September, the economist put out this interesting model that pulled in a bunch of different bits of economic data, so things like the unemployment rate, inflation, gas prices, the S&P 500. And they used all that to predict how people would feel about the economy. And they showed that from 1980 to 2019. All these bits of data, they do predict how people feel about the economy.

And then the pandemic hits and the model completely falls apart.

By late 2023, the model is looking at low unemployment, it’s looking at falling inflation, it’s looking at a great stock market, and it predicts consumer sentiment. It’s going to be 98 out of 100, 98 out of 100. That is Joe Biden gets his face on a coin territory. Here, in reality, the actual consumer sentiment was 69. That is Joe Biden might lose re-election territory.

There’s been this debate for a year or two now about whether the economy is good or it is bad. And the language of that, the binariness bothers me. It’s like asking if the 19th century was good or bad. I mean, good or bad for whom? Compared to what? The economy is like this vast, multidimensional hyperobject. It’s a little too big for good or bad. I think we need to be more precise.

This debate is not about whether the economy is good or bad. The debate is about our expectations. Given what we’ve seen before, we would expect — we did expect people to be happier with the economy than they are right now, a lot happier.

I think that’s exactly right. While I quite agree with Khan (and the Biden team) that the U.S. economy is doing remarkably well by post-pandemic global standards, that’s not the metric most of us use. Further, debating whether something as complex as the American economy is either “absolutely fantastic”/in “superstar status” on the one hand or absolutely terrible on the other is just a dumb approach for the sort of people who read The Atlantic or OTB.

Later in the monologue, Klein continues,

So I’ve been working around this big theory of the economy right now. And it’s based on something that got published in The Atlantic in February of 2020, that cursed month right before everything shuts down.

In February of 2020, there’s this big piece on what they call “the great affordability crisis.” And the point the piece makes is that a lot is looking good in the economy — unemployment is down, wages are rising, people are feeling good. But if you look at the things people really need, housing, health care, education, child care, costs have just exploded. Quote, “The spiraling cost of living has become a central facet of American economic life.”

That piece read a little counterintuitively at the time. People felt the economy was great. How could you say there’s a crisis? And people hadn’t been paying much attention to costs for a while. The big problems after the Great Recession had been unemployment, consumer demand, financial fragility. This affordability problem, it was building in the background, but it wasn’t the thing we were looking at.

But then the pandemic hit, and then came inflation. And it was like this portal of salience for prices. Suddenly, all anybody was focused on was prices. The monthly inflation report got the attention that the monthly jobs report used to get — gas prices, food prices, car prices. Then the Federal Reserve begins raising interest rates, that makes it much harder to borrow money, much harder to finance buying a home.

And so the economy reorders itself to piss you off about how expensive everything is all of the time. The price of a cup of coffee is a reminder of the cost of a house, of child care, of a car, of a movie ticket. Maybe you can pay it. Maybe your financial situation is even OK after you pay it. But it doesn’t mean you like it and you’re reminded of it constantly.

What happened is not that the economy is terrible now and it was great in 2019, it’s at an affordability problem was building in 2019, a cost of living problem. Then inflation hit, and it made prices much worse, and it made the cost of living problem much worse. And now, prices and affordability are the part of the economy that people are seeing, and they hate it.

Now, it happens that said essay was written by Annie Lowrey, a star journalist who happens to be (since 2011) married to one Ezra Klein. And they have a very insightful back-and-forth that I encourage you to listen to or read in its entirety.

I will hit some of the points that particularly struck me below.

First, Lowrey contends that, during the Bush and Obama administrations, “the economy is defined by low growth, low interest rates, low inflation, high inequality. And the primary problem that policymakers are trying and failing to solve has to do with consumer demand, with demand in the economy.” While people mostly perceive the economy as doing well, there is an underlying cost crisis related to five sectors: health care, child care, higher education, housing, and elder care.

Ezra Klein: So one of the ways you would frame that piece, that was part of why it struck me at the time, was that everybody was really happy about the economy in early 2020. You have this line up top where it’s like, some of the best years the economy has ever recorded, people are getting bled dry on all these dimensions. If all of that was as bad as you’re saying, and it was, why aren’t people more upset in February of 2020?

Annie Lowrey: There’s a few things. So one is that directionality matters quite a bit. If things are rapidly improving or are falling apart, deteriorating really quickly, that’s going to matter more than a steady state. And here, I think that you are seeing a reversal of some of the trends in wage and inequality that we’ve had for a long time. That’s changing. And I think that people react to that.

The other thing is that the cost of living crisis that I had laid out, it built very slowly over decades. It’s a boiling the frog thing where just extremely, extremely slowly, you start to see all of these things ratchet up. And again, it’s a crisis not of inflation, not of change, it’s a crisis of level at that point.

And so I think that people, it’s less front of mind. The salient things about the economy are the wage gains. These kind of long standing problems are not quite front of mind for people. And things are getting better in a really noticeable way for folks.

Ezra Klein: I want to pick up on a word you just used, which is “salient,” because this has been — my motivation in this conversation a bit is trying to think about the economy and the politics of it this year, which we’ll get to. And the thing that keeps coming to mind is this question of salience, which is, we can’t hold the whole economy in our head, even in periods when we say there’s a really good economy, it’s bad for a lot of people. Millions of people are in poverty. Millions of people are losing their jobs. Periods where there’s a bad economy, lots of people are starting businesses, people are still getting rich. In a very complicated way, we have to choose what to pay attention to.

[…]

And then the pandemic hits and everything scrambles for a while. And then inflation comes. And inflation makes prices salient. And even now, as inflation eases, that doesn’t stop.

This concept frames the rest of the conversation. There are anchoring effects at work, so that public perception of the economy is based on what they’re used to, not some absolute standard. And the metrics economists and economics reporters use aren’t necessarily related to public perception.

Annie Lowrey: So to give a little bit of a historical perspective on inflation, inflation is really high when Ronald Reagan comes into office. It’s like 13 and 1/2 percent. Then it goes on this long, slow whoosh down through the George H.W. Bush administration. And it’s in a 2 percent to 4 percent range from George W. Bush, Obama, it’s really low, it’s less than 2 percent.

So you have this long period of quietude in which consumer prices, overall, are not changing that much. And the cost of some really important consumer goods, things that people are transacting for on a day to day basis actually go down. Electronics are the most notable example of this. But as a general point, you have this extremely long period of time in which stuff and basic services, things like haircuts or whatever, it’s all really cheap. It’s really, really cheap.

And what happens is in the first half of 2021, we see price increases concentrated among a relatively small set of items in the basket of things that the government looks at to determine the Inflation rate. So energy and car prices go up. You start to see really spiking commodity prices. Then you have this two-year period in which there’s giant spikes in almost everything. Food at home spikes. Food away from home, it spikes. Gas prices go up, natural gas prices, electricity prices. Shelter prices don’t increase in the way that food prices do, but they increase a lot, and they’re so expensive that that really matters. Commodities outside of food and energy go up. So it’s really, really unbelievably broad-based.

And so now, we’ve seen inflation, overall, come down from a 9 percent annual rate to a 3 percent annual rate. But basically, what it did, it was big enough to create this phase shift in prices. And prices don’t really go down.

So, a double shock. Not only are prices going up on things where people are really price-aware, but it’s happening against a backdrop of decades of stable prices. You have to be pretty old to remember anything like this. (Hell, I’m 58 and, while I remember it, I was still a kid, not an adult responsible for paying the bills.)

After some back-and-forth about how useful the standard metrics the government uses to assess various aspects of the economy and how little control the government (and thus the Biden administration) has over prices, they get to this:

Annie Lowrey: Inflation affects literally everybody. In an economy, and when I talk to people, inflation is much more pernicious for lower income folks because they’re really spending every dollar that they have on basic necessities, and for higher income folks, that’s not true. But you can talk to really rich people and they will be mad about inflation. They are mad about how much they are paying for things. It’s just universally enraging to people.

And there’s this perceptual problem. So the economist, Stefanie Stantcheva, who is at Harvard, who has found that Americans believe that their purchasing power is falling in a world in which there’s a lot of inflation. About four in five respondents to this survey that she conducted said that prices systematically increase faster than wages. That means nobody’s really getting ahead. This is not true, but this is what people think, real consumption and real wages are up.

[…]

Ezra Klein: I want to hold on that. How does somebody experience a wage gain? Your boss calls you into the office and says, we’re giving you a 6 percent, a 5 percent, a 7 percent raise. You’ve done great work. Thank you for everything you’ve done. Or you go look for a job and are able to bargain a higher salary than you were able to do before. That feels like something you did. I got a good raise.

And inflation feels like something happening to you. I got this raise. I’m making $2 more an hour than I was. And inflation is eating 80 percent of that. Inflation is a bad thing happening to you. And wage gains are a good thing you did. And the fact, frankly, that any of your wage gain is getting eaten by faster than normal inflation or prices that you have not in any way adjusted to, it’s really maddening.

Annie Lowrey: Absolutely. And look, the reason that interest rates are so high right now is to get inflation down because inflation is economically destabilizing when it’s too high, and it’s socially destabilizing. This is really well known. And again, you can tell people over and over and over again that they’re better off, but if you have inflation rates at 9 percent, people aren’t going to listen to you. They don’t like it. They don’t want to have to do mental math every time they go to the grocery store.

And when I talk to people about why they think the economy is bad, the first thing that people say to me, often, is, lunch at Chick-fil-A is $15. And lunch at Chick-fil-A being $15 is neither here nor there in the grand universe of what people are earning and paying for, but it’s a price that people notice, and it really ticks them off. The other thing is inflation has come down. It’s going to take a while for people to believe that. And one thing that I do think is changing now is that you are starting to see companies really start to compete for consumers on price. So both Burger King and McDonald’s have set out these $5 value meals. And Target said that it’s cutting prices for 5,000 frequently purchased items — things like diapers, and cat food, and dog food.

[…]

Ezra Klein: How much do you think the high prices of the small things act as a constant reminder of the high prices of the big things, which is to say, in a world where you know that health care, and housing, and education are incredibly expensive, how much does the fact that Chick-fil-A is $15, that a cup of coffee is $7 act as this constant salience portal to keep you thinking about this thing that is making you mad all through the economy?

Annie Lowrey: I think this is really important. So let’s say, as an example, the average American adult makes a purchase two or three times a day. And some people make purchases way more frequently than that. And a lot of families make purchases less often. They get gas once a week. They get groceries once a week and maybe a few other little things.

And so if two or three times a day, you are being reminded of the fact that your money is going less far than it used to be, I think that you’re going to be pretty angry about that. So one in three Americans eats something from a fast food restaurant every day. And about two in three Americans eat something from a fast food place once a week. It’s just really, really, really common. And the prices for fast food went up a lot. And I think that that contributed quite a lot also. Americans are currently spending more than 11 percent of their income on meals. That’s the largest share since the 1990s. So I think a lot of this is about food and restaurant costs going up quite sharply.

Between the summer of 2021 and the summer of 2022, grocery store prices go up nearly 14. And the cost of some grocery store staples — so dairy products, things like sugar and oil, cereals, it’s more than percent. And so I think that for high frequency items, all of a sudden, you just get this blasted in your face again and again and again. And even if you’re not spending that much overall on these things, I think it’s basically just tapping your shoulder over and over and over again and saying your money is going less far.

Whereas, even something like rent, which people complain about and talk about all the time, but it usually gets set once a year and you pay it monthly, so you’re reminded of it less frequently, even though that’s a much bigger line item on the budgets and fundamentally, I think a much more problematic part of the economy. And notably, rent goes up a tremendous amount during the pandemic. It’s a nightmare. It was really expensive. It’s even more expensive now.

So, I don’t buy a lot of fast food. But I have certainly noticed the increases in prices, which have seemed massive. Getting a regular hamburger, fries, and a fountain drink at Five Guys is now over $20 where I live; it’s nuts. Or, to take a particularly annoying example, the price of canned soft drinks skyrocketed during the pandemic (ostensibly because of aluminum shortages) and have remained sky-high.

I seldom drink more than one 12-ounce can a day, but my wife and kids drink considerably more. Mostly out pf principle, we wait for it to go on a “sale” wherein buying in bulk gets the price of a 12-pack to $5 or less. But it’s a perfect example of what Lowrey is talking about: a consumable that has relatively minimal impact on the family budget but is nonetheless extremely noticeable because of the frequency in which it’s purchased.

After a bit of discussion of the Partisan Economic Expectations Gap, in which those of the President’s party tend to view the economy more favorably than those in the out-party, which partially explains why traditional metrics aren’t as predictive of people’s economic sentiments as they once were, we get this:

Ezra Klein: There’s something weird happening among the Democrats. They’re not giving Joe Biden the economic pass that you might expect from what we’ve seen in that data before. Why do you think that is?

Annie Lowrey: There’s two answers, and I don’t know which one it is. One is that they don’t really like him. Joe Biden is a somewhat less compelling politician for Democratic partisans than some other folks are in terms of his ability to stir the electorate and increase things like turnout. I think he’s a somewhat less vigorous campaigner than we’ve seen. And I think that he has somewhat lower favorability ratings and higher unfavorability ratings among his own partisans than we’ve seen in the past.

The second is that inflation is hitting them, and they’re just subject to the same forces that everybody else is in the economy. So Democrats are somewhat clustered more in the Northeast than on the Western coast, where you’ve seen really large increases in specifically, housing costs. But then you’ve seen urban housing costs go up everywhere. And so to the extent that we have all of these blue islands, that’s exactly where the prices have gone up, and it’s been really, really, really pretty bad.

That said, I do think that over the past, call it 10 years, you’ve started to see the housing crisis spread to communities that we would never think of as having won before. Rural areas, you’ve seen really dramatic increases in housing costs. Ex-urban areas, you’ve seen dramatic increases in housing costs. It’s everywhere now.

As to a theory favored by many OTB commenters, that blame public perceptions on the mass media (particularly the NYT):

Annie Lowrey: I would note that the mediating influence of the news media probably matters here quite a bit. So we know that holding economic conditions constant, media coverage of the economy has gotten more negative. And it’s especially more negative in social media where a lot of folks are now getting their news.

And I don’t think that that’s entirely the fault of journalists. People seek out bad stories, that’s what people want to read. So these are all headlines that have come out recently about household financial health and consumer spending — Americans keep on spending, but big retailers doubt it’ll last, Slump in big purchases clashes with government’s strong consumer data, Americans are still spending like there’s no tomorrow, Americans plan vacations even as they sour on the economy. These are all great stories. I’m not picking. These are all great. They’re really, really sensitive and really well-reported.

Ezra Klein: Does this media explanation actually feel true to you? Because here’s what I have experienced, as a person who writes about the economy, is married to a person who writes about the economy, and works in a place full of people who write about the economy, what I noticed happening was there was all this very sunny coverage of the economy, and everybody doing it was getting yelled at.

[…]

You write something about how the economy is actually looking really strong or we’re avoiding that recession or something. And people just got slammed by their audiences. They got slammed as out of touch. I don’t want to blow up your spot here, but you’ve written some pieces saying like, this economy’s actually pretty good. My sense is the reader feedback on that can be spicy, sometimes.

[…]

And I feel like the media got whipped by its audience a little bit into taking at least, some portion of the audience’s economic experience more seriously, which I’m not saying is a good or a bad thing, I think it’s a complicated thing. But it isn’t my impression that the economics reporting profession wanted to be negative on the economy. It’s that when they started covering the economy positively, what they heard from their readers or viewers or whatever, and then what they saw in the polling data, how people actually felt about the economy, was that people were not experiencing the economy positively at all.

I’ve seen the media in periods when we want to cover the economy negatively because the data is really negative. And that has not been what I’ve noticed happening here. In fact, I see a lot of stories about why aren’t people happier, given all this good economic data? And then all these people yelling at the author of those stories, explaining why it is that they’re not happy.

Lowrey agrees with all that and adds:

I think that people’s understanding of inflation is not economists’ understanding of inflation, which is something you were just trying to. I think it is real that people feel extraordinarily taxed by high prices. And the fact that the prices have only gone up 3 percent, they just went up 10 percent. I really credit that because I think that people are experts in their own experience. And I think what people are experiencing is really, really important.

Nevertheless, it feels to me important to point out that inequality dropping, that’s amazing. Declines in child poverty, that’s amazing. This is going to sound, perhaps, simplistic, but we have a gigantic economy. We’re not like Germany, where the entirety of the E.U. And so there’s just always a lot happening. And it can be hard when you’re doing these big gestural stories about the big headline statistics. You’re constantly missing things that are happening in this really vast, really, really, really diverse, really politically diverse, racially diverse, ethnically diverse country in which there’s really, really big problems.

People are allowed to be mad at stories. And I think you just have to hew to the complicated economic truth of any situation. It’s why I actually think that a lot of those headlines are correct. But I think that that leaves a lot of space for people to read in their partisan priors or read in their view of things.

There’s a whole lot more but I’ll stop there.