February 25, 2024 — By now, quite a variety of explanations have been offered for the puzzle that the unusually good state of the US economy has not been reflected in public opinion surveys, and especially not in polls regarding President Joe Biden’s bid for re-election in November. At least six hypotheses have been put forward regarding the performance-perception gap.
Perception biases
- Some charge that the official statistics must be wrong, out-of-touch, failing to capture the true state of the economy. This hypothesis is itself wrong. While any given number is subject to measurement error, the evidence from a wide variety of statistics, most of them gathered separately, has been overwhelming. They tell a very positive story, whether one looks at the measures of economic growth (GDP), strength in the labor market (jobs created or unemployment), or inflation (either CPI or PCE, and either headline or core).
Media commentary over the last two years has emphasized that the economy and job market have been slowing down. They usually fail to note that, although this is true relative to the breakneck growth of the year that immediately followed the 2020 pandemic shutdown, the current rates of expansion of GDP and employment are above their post-2000 averages.
One must acknowledge that there is a lot of paranoia in corners of the population. But any claims that the government is faking the statistics come from a lack of knowledge regarding the integrity of how the professional bureaucracy works at the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), and other agencies. To illustrate the actual procedure, the Secretary of Labor never even knows what the employment numbers will be, until the moment when his BLS statisticians announce them, on the first Friday of each month.
- The reported unpopularity of Bidenomics reflects the weight of highly partisan survey responses among Republicans, as Paul Krugman has been pointing out. Despite the old reflexive tendency to describe the two parties symmetrically, they in fact are not comparably partisan. Movements over time among Republican poll-respondents are heavily influenced by which party controls the White House: When Donald Trump succeeded Barack Obama as president (2017), Republicans decided that the economy was not as bad as they had been saying; but when Joe Biden succeeded Trump (2021), they suddenly rediscovered the economic deprivation of the American household. Meanwhile, Democratic respondents in polls react more to changes in the actual state of the economy.
- Media tend to focus on the downside. Increases in gasoline prices are reported more prominently than decreases. Journalists in 2022 gave frenzied attention to those forecasters who proclaimed that a recession in 2023 was near certain, while paying less attention to those who disagreed. A post on social media that reports a single misleading anecdote of a price increase can go viral.
- Perceptions lag behind reality. At the time that President George H.W. Bush lost his bid for re-election in November 1992, the US was thought to be still in recession, even though the recession had ended in March 1991. In the November 2010 congressional election, and even when President Barack Obama ran for re-election in November 2012, many Americans thought the country was still in the grip of the Great Recession, even though it had ended in June 2009. It takes two years for a change in inflation to have ¾ of its cumulative long run effect on consumer sentiment. Under this lag hypothesis, there has not yet been enough time for perceptions to adjust, since inflation did not start to come down until June 2022.
Money illusion - People are still upset about inflation, even after it has come well down from its peak, because the level of prices remains much higher: 16 % higher, for the CPI, from January 2021 to January 2024. The claim is that the intervening inflation of the last three years has left households with a lower standard of living.
Let’s look into this last explanation. Of course, pundits must never suggest that elite observers might know something about the economy that the public is getting wrong. That is not just a rule of politics. It could also be interpreted as a rule of economics — that one must take the public’s tastes as given. De gustibus non es disputandum; there is no arguing with tastes. If the public dislikes inflation as much as it dislikes unemployment, economists should take that as a given. But we don’t have to accept erroneous reports about the increase in prices eroding real incomes.
True, it is hard to get used to encountering sticker shock. But that doesn’t mean that the 16% increase in prices since 2021 has left people with a lower standard of living. During this same period of time, hourly wages have also gone up 16 %, national income has risen 18 %; nominal GDP has increased more than 21 % and dollar consumer spending has expanded a remarkable 23 %. It follows arithmetically that households’ purchasing power is higher in real terms than it was three years ago
To be sure, inflation can be dangerous, especially when it becomes embedded. Even though the genuine costs of moderate inflation are low in a given year, compared to the real economic benefits of growth, it is not possible to keep the economy overheated permanently. Inflation that creeps up will interfere with the working of the economy.
But media reporting, whether mainstream or alternative, often says that the rise in prices makes it harder for many Americans to make ends meet, that inflation has undermined incomes, and that it has caused the typical household to cut back on spending. There is no question that many people find it hard to make ends meet. But that was also true before the inflation.
There are at least two current indications that people, at some level, feel that their lot is improving. First, as Krugman points out, poll respondents are more positive about their own economic finances; it is when asked about others that they reflect pessimism. Second, consumer spending has in fact risen rapidly.
So, while the economist must accept the unpopularity of inflation, or even a higher price level, it would not be truthful to accept claims that it has reduced purchasing power. Perceptions of impaired real income are mostly due to money illusion.
- The next stop is the fear that, even if inflation is not hurting the average citizen, it is hurt those on lower incomes. It isn’t. Real weekly wages have been rising since inflation peaked in the second quarter of 2022. That is particularly true for the lowest decile of workers. What about the elderly person who lives off social security, and makes mortgage payments on their house that in 2020 left their bank account empty at the end of the month? They are now ahead of the game, because social security payments are indexed to inflation.
Is the perception gap ending?
While there need not be one single explanation for perceptions of poor economic performance, the lag hypothesis seems most persuasive. Indeed, some of the most recent survey numbers suggest the beginnings of a possible turnaround in popular attitudes. Although the University of Michigan’s consumer sentiment index was puzzlingly low in 2022 and early 2023, it has risen since November. The Gallup poll reports fewer voters rating economic issues the most important US problem than it did in November, and more expressing confidence. Some media are reporting improved perceptions.
In just two years, the dominant narrative has shifted from “we are currently in recession” (early 2022), to “a coming 2023 recession is inevitable” (late 2022), to “confidence in the economy is low” (early 2023), to “there is a gap between bad perceptions of the economy and good statistics” (late 2023). Perhaps the narrative tomorrow will be simply that people recognize a good economy.
(A shorter version appeared at Project Syndicate. Comments can be posted at Econbrowser. Thanks are due Sohaib Nasim for research assistance.)