The US economy is on fire and everyone hates it
Writing about the economy, especially the US economy, is something I really enjoy. Between that and electoral politics, those are my two favorite subjects. Something I like about both of them is their tendency to make fools out of all prognosticators, no matter how well credentialed and experienced they are. Unlike electoral politics, the economy is something I readily admit I know very little about. Never in one trillion years would I call myself an authority on it.
I have emphasized before that this economy is unlike anything we have ever lived through. Predicting large scale future events of any sort is always going to be hard, but when dealing with an unprecedented situation, we are all flying blind. The economy of the last three years has stumped everyone and I mean literally everyone. There is not one person on planet earth who hasn’t missed something big.
One thing that is unprecedented about the current US economy is the gap between how people feel about it and the objective reality of it. Simply put, the US economy is doing amazingly well, but people think it’s doing horribly. For evidence of the former, just look at any job market statistic. For evidence of the latter, just look at any polls or surveys taken about how people think things are.
Not only is the US economy doing well, but it has survived things that were thought to be unsurvivable. In January, it was not uncommon to find predictions of a recession happening this year. We’re almost done with the year and there is no recession in sight. It was taken by many economists and others as a law of physics that inflation couldn’t be brought down without unemployment rising significantly. Inflation has continued to go down this year to around 3% and jobs keep getting added each month.
The US economy has had to deal with inflation, a sharp rise in interest rates, Russia’s invasion of Ukraine, high gas prices and supply chain issues all in less than three years. On paper, a recession should have happened a while ago. In practice, economic growth in the third quarter of this year was more than 5%.
The idea of a soft landing, where the Fed brings down inflation without causing a recession, was long dismissed as highly improbable or impossible. Now, it’s seen by more and more people as the most likely scenario. By some metrics, we may have already achieved it. I’m not qualified to say whether that’s right, but I really hope it is. As far as I can tell, there seems to be a consensus that, as of now, inflation has been contained and there is no longer a need to keep raising interest rates. It may even be time to think about cutting interest rates as concerns about unemployment are starting to take precedence again.
As long as consumer surveys on the matter have existed, there has never been anywhere near as much pessimism on the economy despite low unemployment as there is now. The easiest thing to point to in explaining that is inflation. It’s true that for the better part of two years inflation increased faster than incomes. It also happened very quickly. While the inflation of the 1960s and 1970s took years to build up, the inflation that began in 2021 happened within one year. Unlike unemployment, inflation is something that affects everyone.
When inflation was increasing faster than incomes, people were worse off in real dollar terms. That is understandably something they didn’t like. However, that has now begun to reverse. If it continues there may be an increase in positive economic sentiment. I doubt that it will be a significant increase though. I say that because I think most of what is impacting people’s views of the economy are not things that are economic in nature.
There has been a debate going on for a while online among commentators and pundits about how much of the economic pessimism is warranted. That debate has centered around whether negative views of the economy are based on actual economic experience versus vibes. It’s not 100% one or the other and there certainly are people who are worse off now than they were in 2021 or earlier. For example, the child tax credit was expanded for one year in 2021, but has since expired. After its expiration, child poverty sharply increased.
At the same time, there are plenty of people who are better off and who are doing very well. The lowest income workers have seen the fastest wage increases, outpacing inflation more than any other group. Workers have much more leverage than they did a short while ago. The United Auto Workers union just won big concessions from the Big Three and other union and non-union workforces have seen big pay raises. There have also been minimum wage increases in many states.
Consumer behavior is doing a great job in illustrating the gap between stated and revealed preferences. On the one hand, people say that everything is terrible. On the other, people are out spending like everything is great. Some have tried to reconcile those contradictions by arguing that people are spending more because they have more money, but everything costs more and so they’re mad about it. That may well be right, but definitively proving it is hard to do.
The huge gap between economic feelings and reality may be a uniquely American phenomenon. Other countries have experienced inflation, too. In fact, very few countries haven’t had problems with it since 2021. In the US, inflation is now lower than it is in most European countries and economic growth has been higher. Economic sentiment should be much more positive than it is. Not only is it very negative, it’s even lower here than it is in some countries that are experiencing both higher inflation and lower growth.
Partisanship is another factor that shouldn’t be underestimated. Measures of consumer confidence in the economy are no longer as reliable as they used to be because peoples’ views of the economy are often influenced by whether they like the president. When Trump was in office, Republicans overwhelmingly saw the economy as great. The second Biden was sworn in, those numbers tanked and not because they all became unemployed. When Obama was in office, Democrats were much more likely to see the economy as good compared to when Trump was in office even though their situations hadn’t changed.
My guess is that partisan views of the economy are much more intense in the US than they are in many other countries. The media ecosystem here likely plays a big role in that. For example, in the UK, nearly 60% of people there read, watch and/or listen to the BBC. That common source of information helps to keep them in the same world, regardless of which party they support.
No media outlet in the US has anywhere near that much of an audience. Here, Republicans and Democrats tend to get their information from a completely different set of sources. I’m hard pressed to think that doesn’t contribute heavily to polarization on all kinds of issues, including views of the economy.
The age gap and media coverage
There is a big gap in views of the economy between different age groups. Younger people are much more likely to think things are bad compared to older people. There are many explanations for that. One is that older people have experienced inflation before. Those who were around in the 1960s and 1970s remember what it was like and may be better able to adjust to it. For those who were not around then, this is their first time dealing with inflation of any significance. It’s a big shock to go from seeing price increases that are barely noticeable to seeing prices quickly surge.
Older people are also more likely to have greater savings and wealth. This is a great time to be a homeowner, especially one without a mortgage to pay. Older people also benefit from Social Security, whose payments are adjusted for inflation. Younger people, particularly Millennials, are just now looking at home buying and the timing couldn’t be worse. With higher interest rates comes higher mortgage payments, which can put home buying out of reach for many.
In the case of Millennials, they had to deal with the aftermath of the financial crisis. Unemployment was needlessly high for years and growth was sluggish. It wasn’t until the end of the decade when things picked up and that period was made much less enjoyable because of who was president. Just as things were finally getting good, we had a pandemic that threw a wrench in everything. Since then, there has been inflation, higher interest rates and all the ripple effects from it.
For Generation Z, they had to endure remote schooling and isolation for up to a year. Fortunately for them, their job opportunities are much better than Millennials' were last decade . Unfortunately for them, they’re the first generation to grow up entirely with social media, which has wrecked many of their lives. The role of social media in spreading negative sentiment on the economy (or any subject) can never be emphasized enough.
More than any other source, TikTok has been the biggest culprit lately in spreading negative economic stories. It’s on that site where things like “Silent Depression” get hundreds of thousands of “likes.” Seriously, there are people out there claiming life today is worse than it was in the 1930s. I’m heavily inclined to think that site should be banned given its ownership, but that’s for another blog post.[i] Quantifying how much social media is responsible for negative economic views probably can’t be done with anything close to precision, but it’s definitely significant.
Media coverage tends to be relentlessly negative no matter what the subject is. Stories that are negative get wall-to-wall coverage while positive stories don’t get nearly as much attention or are framed in a negative light. Social media in particular is designed to maximize engagement. Stories that go viral and get the most engagement are almost always about something bad.
It’s important to remember that traditional and social media companies are businesses. Twitter, Meta, TikTok, The New York Times and The Wall Street Journal are all for-profit entities. The same is true with CNN, MSNBC and Fox. Their goal is to make money, which they do buy selling advertising slots/space and/or subscriptions. Since negative stories sell better than positive stories, media outlets will run more of them. In the case of subscription-based outlets, more negative stories mean more subscribers. In the case of advertising-based outlets, more negative stories mean more viewers/listeners and so they can charge advertisers more for each available slot/space.
I’m not alleging any conspiracy here. That is just how those organizations work. It’s why having Trump around is great for them while Biden is bad because he gives them much less to talk about. There is case to be made that it’s in their best interest to have Trump win next year. I don’t know that I agree with it, but it’s something to keep in mind when thinking about their incentives.
What people really want with prices
A recent poll asked respondents whether they would prefer that their incomes go up or prices go down. Only 37% said the former while 63% said the latter. Economists seeing those results would jump out a window, but it’s not terribly surprising people prefer that. It’s also insane and the economists are right.
A big reason people are still upset about inflation is that even though it is lower than before, the price level is a lot higher than it was a short while ago. Lower inflation means prices are still increasing, just at a slower rate. For policymakers, that is a victory. For many consumers, it’s not or at least doesn’t feel that way.
What people really want to have happen is for the overall price level to drop. For individual items, that happens all the time. There are many products today whose prices have gone down due to an increase in supply and/or a decrease in demand. That has happened as long as economies have existed and is perfectly normal and good. What is not normal and good is for the overall price level to drop.
Those who lament that price levels are higher than they were before the pandemic are going to be disappointed and thankfully so. When people say they want 2019 price levels, what they’re asking for is not low inflation, but deflation. When deflation happens, it’s very bad.
Going back more than fifty years, the overall price level has been negative only once. That was right after the financial crisis hit. When deflation happens, that means the economy is falling off a cliff. The Great Depression is probably the best example of that. The good news with deflation is prices are declining. The bad news is unemployment is surging, businesses are failing and consumer spending is in the gutter. It’s not a trade worth making.
To be sure, high inflation, i.e., going above 4%, is bad, too. In countries like Argentina, it has been well over 100%, meaning the prices of many items have more than doubled in just a year. Even the high inflation the US had, which peaked at 9%, was not good and needed to be brought down. What is normal and good are small price increases each year.
In the US, that has meant the Fed aiming for a target of 2% annual inflation. That number and approach are not without their critics, but it has been official Fed policy for more than ten years. Small, consistent price increases usually mean the economy is growing, peoples’ incomes are rising and businesses can make plans for the future with at least some predictability.
High inflation is something to be avoided, but deflation is much worse. When the pandemic hit, policymakers could have decided to not keep their economies afloat and let demand fall along with supply. Had that been done, inflation wouldn’t be a problem now, but we would be in a depression on par with or worse than the 1930s. It should go without saying that it’s a good thing that didn’t happen.
When deflation happens, like inflation, it can become self-fulfilling. If consumers and businesses believe prices will keep falling, they might hold off on spending in anticipation of it. If that happens on a large scale, consumer and business spending collapses. When spending collapses, that means businesses can’t sell anything, which means their income falls or evaporates. When that happens, businesses fail and unemployment goes way up. People say they want prices to go back to where they were before the pandemic, but they would rue the day that happened.
I’m not going to lie, all the negativity on the economy really bums me out. It’s just downright depressing and is making people anxious and upset for no reason. No, everyone, things aren’t terrible and the world is not going to hell. It’s not healthy to be upset just because, well, just because.
I figure I should do something to make things better. Anything I can do to reduce bad thoughts about the economy would be worthwhile. So to help with that, I decided to write a little something with an assist from a certain member of a certain band:
Imagine a soft landing
It's easy if you try
No job loss below us
Above us, wages are high
Imagine all the people
Earning high incomes
Ah
Imagine there’s no layoffs
It isn't hard to do
No need for high interest rates
And no deflation, too
Imagine all the people
Livin' prosperously
You
You may say I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will boom as one
Imagine no recessions
I wonder if you can
No more cheap labor
An economy of man
Imagine all the people
Enjoying all the growth
You
You may say I'm a dreamer
But I'm not the only one
I hope someday you'll join us
And the world will boom as one
[i] No, this doesn’t contradict my recent piece on free speech. TikTok is owned by ByteDance, which is a Chinese company. It’s technically a private company, but, let’s not kid ourselves, nothing big happens in China without the government’s approval. I don’t care what kind of stuff gets posted on TikTok, I don’t want a hostile foreign government to have a foothold here. Foreign governments don’t have free speech rights. If during the Cold War the Russian government tried to buy a news station it never would have been allowed. By same token, a hostile foreign government shouldn’t have control over a major social media company, regardless of what content is on it.