If President Biden fails to win re-election, one of the main reasons will be the widespread belief that the economy is performing poorly under his administration. Numerous polls indicate that Americans view economic conditions as very bad and give Biden low approval ratings for his handling of the economy. Strangely, these negative ratings persist even though, by standard measures, the economy has been doing extremely well. In fact, we have recently experienced what Goldman Sachs refers to as a “soft landing summer,” with inflation decreasing by nearly two-thirds since its peak in June 2022, and without the recession and significant job losses that many economists predicted. Real wages, especially for nonsupervisory workers, are also higher than they were before the pandemic. It’s important to note that these figures include food and energy prices, contrary to a commonly held misconception. The government does calculate “core” inflation measures that exclude these prices for analytical and policy purposes. So why are people negative about an economy that is, by all measures, performing well?
When I initially started discussing the discrepancy between public economic perceptions and what seemed to be economic reality, I faced two distinct forms of criticism. First, some argued that there were genuine economic problems that justified the negative public sentiment. People dislike inflation, even if their incomes are keeping up, and a year ago, real wages were still somewhat depressed. However, at this point, inflation has significantly decreased, and real wages have risen. Second, others contended that the customer is always right. If people feel they are doing poorly, we should figure out why, rather than lecturing them on how they should feel better.
Interestingly, there is substantial evidence suggesting that people do not feel personally disadvantaged. Surveys and consumer behavior indicate that while most Americans believe they are doing fine, they perceive the economy as performing poorly, with “the economy” presumably referring to other people. Let’s examine some of this evidence.
The Federal Reserve conducts an annual survey on the economic well-being of households. At the end of 2022, 73 percent of households reported being “at least doing OK financially,” a slight decrease from the previous year, likely due to the termination of pandemic aid programs. However, this number is not significantly different from 2019. In 2019, half of the population considered the national economy to be good or excellent, but in 2022, that figure dropped to just 18 percent. Despite this negative perception, consumer spending has remained strong, implying that American families are not overly concerned about their financial situation.
What about inflation? A recent poll by The Wall Street Journal found that 74 percent of Americans believe inflation has worsened in the past year, a result that sharply contradicts the data, which shows a decline in inflation. However, when several organizations regularly survey consumers about their inflation expectations, these expectations have significantly decreased, further contradicting claims that inflation is worsening.
Moreover, surveys that inquire about businesses’ own prices or costs provide even more compelling evidence. The National Federation of Independent Business asks small-business owners whether they have increased or reduced prices in the past three months. While more businesses are raising prices than lowering them, the difference is much smaller than last year. The Federal Reserve Bank of Atlanta asks businesses about their expected cost increases for the next year, with the median answer being 2.5 percent, down from 3.8 percent last year. When people are asked about their personal experiences, rather than “the economy” as a whole, their views on inflation align with official data that demonstrate significant improvement.
To summarize, there is a clear disparity between what Americans say about the economy and the reality of the situation. This disconnect exists not only in official data but also in people’s individual experiences. It would be foolish to deny the existence of this disparity. So what explains this negativity toward a strong economy? Partisanship likely plays a role, as Republicans’ assessment of the current economy closely resembles their view in June 1980 when unemployment and inflation were much higher. Additionally, recent events such as inflation, higher interest rates, the disruption caused by Covid, and the perceived political division in the country may contribute to a general sourness and an unwillingness to acknowledge positive news when it arises.
Now, Biden administration officials are diligently promoting their economic accomplishments, as they should. However, it remains uncertain whether public opinion will shift. We live in a world where people’s beliefs may have little connection to facts, including the facts of their own lives.