In many ways, Americans are in a better economic position than they have been for many years. They also believe that the economy is in terrible shape.
This is the stark contrast to President Biden’s poor approval ratings, recent Republican victories in state elections and the touch-and-go negotiations on the Biden Legislative Agenda. It poses a fundamental challenge to economic policy, which has succeeded in raising the wealth, incomes and job prospects of millions of people – but which has not made the Americans, in their own self-perception, better off.
Employees have gained the upper hand in the labor market, achieved the largest increases in decades and laid off their jobs at record speeds. Unemployment is 4.6 per cent and has been falling rapidly. Cumulatively, Americans sit on piles of cash; they have accumulated $ 2.3 trillion more in savings over the last 1[ads1]9 months than would be expected in the prepandemic path. The median household’s current account balance was 50 percent higher in July this year than in 2019, according to the JPMorgan Chase Institute.
Nevertheless, the workers’ assessment of the economy is frightening.
In a Gallup poll in October, 68 percent of those polled said they thought economic conditions were getting worse. The proportion who thought it was better was lower than in April 2009, when the global financial crisis was still ongoing. And it’s not just a party political response to the Biden presidency. In the University of Michigan’s consumer survey, Republicans rate current economic conditions worse than Democrats do – but both groups give about as low grades as they did in the early 2010s, when unemployment was much higher and the US economy was a wreck.
The reasons seem to be related to the psychology of inflation and the ways people assess their financial 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, a manifestation of which is an era of exhaustion.
Regardless of the exact reasons, after decades in which the availability of jobs (or lack thereof) drove economic sentiment, it now appears that inflation has become the more powerful force.
“The main problem is rising inflation and declining confidence in economic policy,” said Richard Curtin, who has overseen the University of Michigan survey for decades. “Consumers are seeing rising prices, and they see no guidelines that will correct it.”
There is no doubt that prices are rising rapidly – the consumer price index has risen 5.4 per cent in the last year, and there are shortages and other disadvantages that are not shown in inflation data, but which reflect the same underlying phenomenon.
But years of relatively low inflation follow; the index has only averaged 2.8 per cent a year over the past three years. And higher prices have come at the same time – probably not accidentally – as a wave of federal spending has inflated Americans’ bank accounts. This includes incentive payments of $ 2,000 per person earlier in the year and a tax deduction for children worth up to $ 300 a month per child since the summer.
Americans seem to be relatively optimistic when asked more narrowly about the prospects for their income, or for the labor market.
“They tell us that when they look ahead, they expect business conditions to improve, they expect more jobs, and they expect revenues to rise,” said Lynn Franco, senior director of economic indicators at the Conference Board, a business research group. The consumer confidence index fell slightly in late summer, but picked up again in October.
For economists, higher wages and higher prices of consumer goods are two sides of the same coin, and a spurt of inflation creates both winners and losers. At least in recent months, the public has not seemed to see it that way – and inflation and related deficits seem to be particularly large in their general perception of the economy.
Any group of individuals can end up better or worse in a time of high inflation, depending on whether they are debtors or creditors, and whether their wages rise faster or slower than the particular goods they buy.
A restaurant worker who has received a wage increase of 11 percent in the past year – the average for the leisure and hospitality sector, according to government data – probably has higher purchasing power despite high inflation.
But many people are losers in times of rising prices – and even those who may end up becoming net winners may end up feeling the pain of higher prices more intensely than the benefit of higher wages or more manageable debt.
About 13 percent of workers have a pay cut that has been unchanged over the past year, according to data from the Atlanta Fed. Many pensioners receive pensions that are not inflation-adjusted.
And there are middle- and high-income earners whose wage gains were least likely to have kept pace with inflation. During the 12 months ending in September, they experienced a 2.7 percent increase in hourly earnings in the top quarter of earnings, compared with 4.8 percent for the lowest quarter of earnings. For lower incomes, it follows the years leading up to the pandemic where wage gains exceeded inflation rates.
Understand the supply chain crisis
The details of what a person buys can have a big effect on how acutely he or she feels the pain of inflation. For someone who has not needed to buy a car this year, high inflation in cars and trucks has been a non-issue.
Now think of someone whose car has broken down and who needs someone else to get to work. A price increase of 40 percent for used cars and trucks since the start of the pandemic constitutes a costly burden. The same applies to many other physical goods that have been in short supply, such as white goods.
Rising costs for basic commodities tend to influence people’s perceptions of inflation. Gasoline prices, for example, are visible on large signs on every street corner, and have risen 74 percent from their lowest pandemic level in May 2020.
However, they are below levels for most of 2011 to 2014, and average earnings have risen sharply since that period. To put it one way, in October it took about six minutes of work to average private sector wages to earn enough to buy one gallon of regular unleaded gasoline. In October 2013, it took almost nine minutes of work.
To get a better idea of why rising inflation can contribute to such negative assessments of the economy, it helps to go beyond the details of wage and price developments in 2021 and turn to a piece of economic research from the 1990s, conducted by Robert J. Shiller, Yale Economist.
He led research to try to find out why inflation, even at moderate levels, frustrated ordinary citizens so much more than economic theory suggested it should. He found that people did not think they would get sufficient wage increases to keep up with rising prices. He also found that people believed it would hinder overall economic growth; that it would be detrimental to national morality; and that it can lead to political chaos or damage national prestige.
“When answering questions about what is really important and what our national leaders really should be aware of, people may tend to rely on a deep intuition drawn from life experiences,” Professor Shiller wrote in 1997. The idea of inflation , he continued. evokes “arbitrary injustice, arbitrary redistribution and social bitterness” and “reminiscent of social situations where morality and a sense of cooperation were lost.”
That may be what makes rising inflation such a difficult political problem: it may be about something more profound than dollars in people’s pockets and the price of a liter of petrol.