It's one of the biggest economic and political problems in America — people are mad about the economy, even though economists think the economy is pretty good.
This is one of those moments that may show that the cold-blooded science of economics, which we have made one of our primary intellectual tools for explaining the world, can't explain everything. What's the point of a "good" economy if people hate it? I doubt that a bunch of eggheads waving graphs and charts at people is going to get them to think any differently about their situation in life.
And yet, the economists have a point. Almost all of the statistics are great! American GDP is growing fast, consumers are spending a lot of money, wages are up, and inflation is down. Especially given the massive disruption of a global pandemic that shattered some industries and transformed how millions of Americans work, the last few years could be considered a masterclass in macroeconomic management. To have made it through such a disruption with only a temporary spike in inflation, and to have brought inflation back down to 3% so quickly without causing a huge recession, is a pretty remarkable outcome.
Nevertheless, Americans seem to be mad about the economy. Consumer sentiment hasn't gotten anywhere close to pre-pandemic levels. A plurality of Americans say that they're worse off economically under Joe Biden. Only 19% of Americans think the economy is good. So why does the economy feel so bad when it looks pretty good on paper?
- Inflation is an uneven ratchet
Many of the discussions of inflation that I've seen have ignored a key point. Economists focus on the rate of price increases, but consumers don't care about that — they focus on the prices themselves. The rate of inflation has gone back down to fairly normal levels, but most prices that went up during the period of inflation will never go down.
Consumers notice this in their everyday shopping. Like most people, I suppose, I have certain price thresholds in my head that determine when I will buy certain groceries. Pepperidge Farm goldfish crackers used to go down to 99 cents a bag every couple of weeks at my local supermarket, so I'd wait to stock up until they hit that price. Now, I never see them for less than $1.99. Pepperidge Farm must have realized that they could double their prices, lose sales to a few cheapskates like me, and still make a fat profit because most parents will just give in to their toddlers' demands in the cracker aisle.
The goldfish are just one example. Every time I go shopping, I'm constantly recalibrating my expectations for what things should cost. I'm always recalibrating upward. Inflation is uneven, too — why is cheese basically back to what it cost before the pandemic, but cheesy crackers will forever cost double what they used to? It's God's own mystery.
Even though prices aren't increasing all that quickly anymore, they're still higher than our mental models for what stuff should cost, and they're not going down. That doesn't feel good, and will take a long time to get used to.
2. Confirmation and media bias
About half of the country seems to want the economy to be bad. As I've written before, a lot of consumers' feelings about the economy are dictated by their political preferences. When pollsters ask consumers how they perceive the economy, consumers' answers mostly reflect whether they belong to the same party as the current president. It's possible, I suppose, that Republicans are experiencing a totally different economy than Democrats, but it's more likely that Republicans start from an assumption that Joe Biden is doing a bad job and then search for evidence that this is true (and vice versa, for Democrats).
I would guess that, all other things being equal, consumer sentiment numbers will generally be worse under Democratic presidents than Republican ones because we have an unbalanced media ecosystem. Fox News and its ideological brethren have shown that they will rail against the "Biden economy" and then, the second a Republican takes office, begin crowing about America's economic turnaround. But the mainstream media is a different story. They've been, as Paul Krugman wrote in the New York Times, engaging in "desperate efforts to find bad news in the economic data."
There's been a relentless string of stories in media outlets about why good economic news is actually bad, or warning that good news obscures the storm clouds on the horizon. Here's the beginning of a typical Times story from April, 2023:
Unemployment Is Low. Inflation Is Falling. But What Comes Next?
Despite hopeful signs, economists worry that a recession is on the way or that the Federal Reserve will cause one in trying to rein in inflation.
There are two starkly different ways of looking at the U.S. economy right now: what the data says has happened in the past few months, and what history warns could happen next.
So people on the right are hearing from Fox News that the economy is terrible because Joe Biden is a bad president, and everybody else is hearing from their media sources that, though the economy seems good, disaster looms around every corner. No wonder everybody thinks things are terrible.
3. The luxury economy
Though many things have gotten back to normal in the economy, a few key sectors are still messy. Unfortunately, several of the prices that have gotten out of control are the ones that loom largest in our economic anxieties — the price of cars and the price of housing. Both of these represent not just most households' biggest investments, but they're aspirational goods that we think about a lot, even if we don't buy new houses and cars all that often.
Car prices have soared since the pandemic. Some of this was a result of supply-chain shortages and other temporary problems, but the prices didn't go down much once the pandemic disruptions ended. The average price of a used car is $7000 — one-third — higher than it was in early 2020. The average new car costs $48,000 (!) — almost $10,000 more than it did in 2020.
Housing prices have increased, as well. The median home price in America is about $430,000 (!) — up about $100,000 from pre-pandemic days. On top of that, interest rates are higher, meaning that people's mortgage payments on new home purchases will be brutal. As with car prices, some of this is due to temporary factors — especially the fact that nobody wants to sell homes because they have locked-in low mortgage rates that they don't want to give up, making the supply of homes for sale very small.
But there's an underlying problem in both of these markets that seems to be driving much of the problem. Nobody's really making cheap cars or houses anymore for people on a budget.
One reason that car prices have soared in recent years is that few companies are making entry-level cars anymore. The equivalent of my first car — an entry-level Toyota Corolla whose fanciest "feature" was an AM/FM radio — is getting rarer and rarer. Analyst Ivan Drury of Edmunds says, "Every new car is a luxury purchase at this point." Car companies don't even make many cars anymore; they make a lot more trucks and SUVs than they do smaller, cheaper sedans.
Part of the reason for this shift is what Americans want — we apparently like RAV4s and Highlanders more than we like Priuses and Corollas — but it's also that SUVs and trucks are far more profitable for car companies than cars are. As a result, manufacturers are eliminating entry-level budget models and replacing them with feature- (and profit-) laden cars that cost half of what my first house did.
Speaking of my first house — in the housing market, there's a similar problem. Builders simply aren't producing many starter homes. The average size of new homes is about 2.5 times bigger than it was in the 1950s. This is because construction companies can profit more from building a $750,000 McMansion on half an acre than from building three $200,000 starter homes on the same land.
My first home — bought on the meager salary of a teacher with a small child — was a small, modest, Cape Cod. Nobody's building those anymore, and my old house (which I bought for about $100,000 in the early aughts) is, according to Zillow, worth $260,000 today. If I were in my late 20s today, there's no way I would have been able to get on the ladder of home ownership.
Both of these changes are bad news, especially for younger or lower-income people. Owning a home and a car are parts of the American Dream, and they're becoming either unattainable or financially crippling. And don't get me started on the cost of college, a third pillar of the American Dream.
This shift in cars and housing is emblematic of a larger change in our economy. We're moving toward a luxury economy in which companies are realizing that they can make more money catering to the wishes of the upper- and upper-middle classes than from providing more basic goods and services to the masses. No wonder the economy feels terrible — many of the most important big-ticket purchases are sailing out of most Americans' reach.
There are a lot of binary arguments about the economy. It's good! No, it's bad! But it's more complicated than that and, right now, the economy is pretty weird, which is unsettling. It's not easily explainable with one easy story — a recession or a boom — because there's a lot of contradictory stuff going on.
The bad news is that the economy will likely get weirder. I don't see much of what I've described above changing in the near future. And the costs of climate change and the disruptions from the energy transition will begin to take hold more and more in the coming decades. We're going to have to get used to weird, and maybe develop new benchmarks for what a "good" economy looks like.
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