Almost two years have passed since I began trying to draw people's attention to the widening gap between economic perceptions and economic reality.
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.
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 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 a model (actually, several models) that lays 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.
I'll come back to their explanation of the gap. First, however, 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 anymore. 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.
Still, Americans say that things are bad; shouldn't we take them at their word?
One answer is: Look at what they do, not at what they say. Consumers may say that it's a lousy economy, but their spending suggests that they're feeling quite good about their personal financial situations.
The analysts at Briefing Book delved into one possible reason for this disconnect. 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. What Briefing Book shows is that this effect isn't symmetric: It applies to both parties, but the partisan effect on sentiment is 2 1/2 times as large for Republicans as it is for Democrats.
And it estimates that this "asymmetric amplification," all by itself, accounts for 30% of the gap between economic sentiment and economic fundamentals.
Wait, there's more. 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 I talk to that even mainstream news organizations apparently find it hard to say nice things about the Biden economy.
Now, I'm not saying that this is the whole story. Inflation may be slowing, but prices have risen a lot in recent years, and that still upsets people. 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 most American workers are, in fact, better off than they were in the past, and a significant part of negative economic commentary reflects partisanship, not reality.
Oh, and 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.