The economy expanded at a nearly 5 percent annual rate during the most recent quarter, the Commerce Department reported Thursday. Economic growth is strong, unemployment is low, and inflation is falling. Yet people are still unhappy about the economy. Gallup’s latest numbers show only 20 percent of Americans consider the economy excellent or good, while 48 percent consider it poor.
People have tried to explain the apparent disconnect, theorizing that it’s because of misleading media “narratives” about the economy, Republican voters’ partisanship, free-floating “grumpiness” or a public desire to see prices actually fall.
The truth might be simpler: Wages haven’t kept up with prices. Average wages are down in real terms — adjusted, that is, for inflation — since President Biden took office. They are roughly 3 percent lower than their peak in April 2020.
That’s partly because real wages spiked early in the pandemic for the worst reason: Low-wage workers lost their jobs. But even when you compare wages today with the pre-pandemic trend, they are still about 2 percent lower than people had reason to expect. That’s what this graph, constructed with data provided by my American Enterprise Institute colleague Michael Strain, shows.
If that is what is weighing down public perceptions of the economy, there’s ample precedent for it. Unemployment and inflation were low in 2005 and 2006, and supporters of President George W. Bush wondered why few Americans considered the economy good or excellent. Real wages, though, were stagnating. Something similar happened under President Barack Obama. For much of his presidency, inflation was low, the economy grew, and unemployment fell. But wages were also stagnant for much of his time in office, and people rated the economy poorly.
During the past 30 years, there have been only two periods when Gallup found that most Americans considered the economy good: from late 1997 through early 2001, and from mid-2018 through March 2020. While unemployment was falling and inflation was low in both eras, that doesn’t distinguish them from other times when the public was unsatisfied with the economy. What sets the two happy periods apart is that real wages were rising to new peaks.
The pattern strongly suggests that Americans will not consider the economy to be performing well unless their paychecks rise faster than their bills. Beyond that, the data leave some questions unanswered. It might be that the public would be satisfied with inflation at its current level if wages were rising faster. Inflation over the course of the year 2000 was roughly as high as it has been in recent months, and people didn’t seem to mind.
On the other hand, Americans might be having a stronger negative reaction to today’s inflation because of its context: a multiyear uptick after decades when it was, for the most part, low. Even real wage growth, then, might not be enough to diminish our displeasure from sticker shock. Inflation is falling but still high compared with our recent experience (and to the Federal Reserve’s target inflation rate). So prices are high — the gap between the price level and its pre-pandemic path keeps increasing — and rising faster than normal. It might not be much comfort to consumers that the second derivative of prices is negative — which is what it means to say that inflation is falling.
It is probably wise to assume that when the people who make up an economy say it is not doing well, it isn’t. That’s especially true when their perception has a rational basis in data. Americans have to cast their minds back only a few years to remember what a good economy looks like, and this isn’t it.
Opinion | Why Americans still don't like Biden's economy - The Washington Post
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