Americans are full of money and jobs. They also think the economy is horrible.


Americans are in many ways better off financially than they have been in many years. They also believe the economy is in dire straits.

That’s the great contradiction behind President Biden’s low approval ratings, recent Republicans state election victories, and the smooth negotiations over Biden’s legislative agenda. This poses a fundamental challenge to economic policy, which has succeeded in increasing the wealth, incomes and employment prospects of millions of people – but has not improved the situation of Americans, in their own perception of them – same.

Workers have gained the upper hand in the labor market, securing the largest increases in decades and quitting their jobs at an all-time high. The unemployment rate is 4.6 percent and has been declining rapidly. Cumulatively, Americans are sitting on piles of cash; they saved $ 2.3 trillion more over the past 19 months than one might have expected before the pandemic. The median household current account balance was 50 percent more in July this year than in 2019, according to the JPMorgan Chase Institute.

Yet the assessment of workers in the economy is scathing.

In a Gallup poll in October68 percent of respondents said they believed economic conditions were deteriorating. The proportion of those who thought things were improving was lower than in April 2009, when the global financial crisis was still ongoing. And it’s not just a partisan response to the Biden presidency. In University of Michigan consumer sentiment survey, Republicans assess current economic conditions worse than democrats do – but both groups are scoring about as low as in the early 2010s, when unemployment was much higher and Americans’ finances were a wreck.

The reasons appear to be related to the psychology of inflation and how people rate their economic well-being, as well as the uneven effects of rising prices and shortages on different families. It may well be shaped by the psychological scars of the pandemic, one manifestation of which is an era of exhaustion.

Whatever the exact causes, after decades in which the availability (or lack of jobs) of jobs boosted economic sentiment, inflation now appears to have become the most powerful force.

“The major problem is rising inflation and falling confidence in economic policies,” said Richard Curtin, who has overseen the University of Michigan survey for decades. “Consumers see prices going up and they don’t see any policies that would correct them.”

There is no doubt that prices are rising rapidly – the consumer price index has increased by 5.4% in the past year, and there are shortages and other drawbacks that do not appear in inflation data but reflect the same underlying phenomenon.

But this follows years of relatively low inflation; the index has averaged only 2.8 percent per year over the past three years. And higher prices came at the same time – probably no coincidence – as increased federal spending inflated Americans’ bank accounts. This includes stimulus payments of $ 2,000 per person earlier in the year and a child tax credit of up to $ 300 per month per child since the summer.

Americans seem relatively optimistic when asked in more detail about the outlook for their income or the job market.

“They tell us that in the future they expect better trading conditions, more jobs and increased incomes,” said Lynn Franco, senior director of economic indicators at the Conference Board, a business research group. Its consumer confidence index dipped slightly at the end of the summer but rebounded in October.

For economists, higher wages and higher prices for consumer goods are two sides of the same coin, and a surge in inflation creates both winners and losers. In the last few months at least, the public hasn’t seemed to view it that way – and inflation and the related shortages seem particularly significant in their overall perception of the economy.

Any group of individuals can fare better or worse in times of high inflation, depending on whether they are debtors or creditors, and whether their wages are rising faster or slower than the particular assets they have. buy.

A restaurant worker who received an 11% pay rise in the past year – the average for the leisure and hospitality industry, according to government data – likely has more purchasing power. high despite high inflation.

But many people lose out in times of rising prices – and even those who may end up being net winners may end up feeling the pain of higher prices more intensely than the benefit of higher wages or more manageable debt.

About 13 percent of workers have a salary that is unchanged over the past year, according to Atlanta Fed data. Many retirees receive pensions that are not adjusted for inflation.

And it was the middle- and upper-income earners whose wage gains were least likely to have kept up with inflation. In the 12 months that ended in September, those of the richest quarter of wage earners recorded gains of 2.7% of their hourly earnings, compared to 4.8% for the bottom quarter of wage earners. For low wages, this follows the years leading up to the pandemic in which wage gains exceeded inflation rates.

The details of what a person buys can have a disproportionate effect on how intensely they feel the pain of inflation. For someone who has not had to buy an automobile this year, the high inflation of cars and trucks has not been a problem.

Now consider someone whose car has broken down and needs another to get to work. A 40% price increase for used cars and trucks since the start of the pandemic has been a costly burden. The same goes for many other physical goods that have been in short supply, such as household appliances.

Rising costs for basic necessities tend to influence people’s perceptions of inflation. Gasoline prices, for example, can be seen on large billboards around every corner and are up 74% from their pandemic lows of May 2020.

But they are below their levels for most of 2011-2014, and average incomes have risen sharply since that time. Somehow, in October, it took about six minutes of working the average private sector wage earner to make enough money to buy a gallon of regular unleaded gasoline. In October 2013, it took almost nine minutes of work.

To better understand why high inflation can contribute to such negative assessments of the economy, it helps to look beyond the details of wage and price trends in 2021 and turn to economic research from the 1990s. , conducted by Robert J. Shiller, the Yale economist.

He has conducted surveys to try to determine why inflation, even at moderate levels, frustrates ordinary citizens far more than economic theory suggests. He found that people didn’t think they would receive adequate wage increases to cope with the rising prices. He also discovered that people believed it would hamper overall economic growth; that it would harm national morale; and that it could fuel political chaos or damage national prestige.

“When answering questions about what is really important and what our national leaders should really pay attention to, people can tend to rely on a deep intuition derived from life experiences,” said Professor Shiller. wrote in 1997. The idea of ​​inflation, he continued, evokes “arbitrary injustice, arbitrary redistributions and social bitterness” and “memories of social situations in which morale and a sense of cooperation were lost “.

Perhaps this is what makes surging inflation such a delicate political issue: It can be something deeper than the dollars in people’s pockets and the price of a gallon of money. gasoline.


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