Perception vs. reality

Almost two years have passed since I began trying to draw people’s attention to the widening gap between economic perceptions and economic reality. At the time, the economic picture was mixed, with rapid job growth yet rising inflation; even given that mixed picture, consumer sentiment seemed abnormally low.

I encountered a lot of pushback. Inflation was rising, and many economists warned that getting it back down would require a punishing recession.

But it didn’t. Unemployment is still near a 50-year low, yet inflation has been falling fast; consumer prices didn’t rise at all in October, although that was partly statistical noise. Many economists who crunch the data are almost giddy with how well things are going; the latest big report from Goldman Sachs (whose economists got disinflation right) is titled “The Hard Part Is Over.”

Yet surveys of consumer sentiment and political polls continue to show that Americans have a very negative view of the economy under President Joe Biden. There’s still no consensus about the reasons for this disconnect. 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.

Let me start with Briefing Book, a blog written by former government staffers. They have put together several models that lay out the historical relationship between fundamentals like inflation and unemployment on one side and consumer sentiment on the other. Until the pandemic, models like this worked pretty well; but at this point, consumers appear to be far more pessimistic than they should be.

Never mind aggregate economic statistics: What’s happening to workers?

For a while, many pundits were insisting that whatever might be happening to gross domestic product, the fact was that wages weren’t keeping up with inflation—which was true for a while. But not any more. I already knew this from work by Amherst’s Arin Dube, but a comprehensive new analysis by Joseph Politano really drives the point home. By any measure, real wages now are higher than they were before the pandemic; for nonsupervisory workers, who make up the majority of the workforce, they’re higher than you would have predicted from the pre-pandemic trend.

Never mind these numbers. Americans say that things are bad; shouldn’t we take them at their word?

Look at what they do, not at what they say. As it happens, the plunge in consumer sentiment during the Biden years has been similar in magnitude to the plunge during and after the 2008 financial crisis, which is itself a remarkable observation, given that the post2008 slump dragged on for years, while after covid we rapidly returned to full employment. However, consumer spending, which stalled during the last crisis, kept powering along this time.

So consumers may say that it’s a lousy economy, but their spending suggests that they’re feeling quite good about their personal financial situations. I guess they believe bad things are happening, but only to other people.

Anyway, the analysts at Briefing Book delved into one possible reason for this disconnect, which I speculated about right from the start, but they’ve done the math. It’s now a well-established fact that partisan orientation affects expressed views about the economy: Democrats are more positive when a Democrat holds the White House, Republicans more positive when the president is a Republican.

Briefing Book shows that this effect isn’t symmetric: It applies to both parties, but the partisan effect on sentiment is 2½ times as large for Republicans as it is for Democrats.

And it estimates that this “asymmetric amplification” accounts for 30 percent of the gap between economic sentiment and economic fundamentals.

The importance of partisanship in shaping economic perceptions tells us that a lot of what people say about the economy reflects what they hear, either from news organizations or on social media, rather than their own experiences. And it’s a running joke among economists that even mainstream news organizations apparently find it hard to say nice things about the Biden economy.

When, say, a new employment report comes in, the headlines don’t usually say things like “Job growth comes in above expectations.” They’re more likely along the lines of “Rapid job growth may slow soon, experts say, posing problems for Biden.”

You might say that such things can’t really matter, that people know what’s really happening. But the evidence on partisanship and perceptions suggests otherwise.

I’m not saying this is the whole story. Inflation may be slowing, but prices have risen a lot in recent years, and that still upsets people—although that anger didn’t seem to last after previous temporary bursts of inflation. And general malaise over the social impacts of the pandemic may be bleeding into what people say about the economy.

Still, we can acknowledge that there are other factors at work without denying two facts about the economy: Most American workers are better off than they were in the past, and a significant part of negative economic commentary reflects partisanship, not reality.

One other point: Negative economic sentiment may not matter as much for the 2024 election as many think, since a lot of it is coming from people who would never vote for a Democrat under any conditions.