Hicks
I’m calling the time we live in the ‘Great Discordance’ between the perceptions Americans have about the economy and the actual state of the economy. By nearly every measure we are in a period of remarkably strong economic performance. This is especially true of those measures economists typically use to judge the overall strength of an economy.
However, the widely respected Consumer Sentiment Survey, along with several political surveys about the economy, tell a very different story. The disagreement here isn’t just wonky economist talk about data. The real ‘Great Discordance’ is between what Americans say they feel about the economy and how they are actually behaving in their real lives.
Much of our perception of the national economy comes from our local experience. America’s cities are growing quickly, and remain places of prosperity and opportunity. However, outside cities, growth is largely stagnant. Half of Midwestern counties have lost population for three or four decades. These are places where grown children will not return, and home values won’t keep up with inflation.
The national divergence in economic conditions means that perhaps a third of Americans will live in or be from counties that are in decline. Even if these folks do well individually, the perception of decline in these places weighs heavily on opinions.
Obviously, recent inflation plays a role in perceptions of economic unease. For some, this is warranted, but for most, it is not. That understanding requires an understanding of inflation and what caused it.
Our current bout of inflation was caused by too much spending during the COVID recovery and monetary policy that responded too late. Most of that overspending was in the 2020 CARES Act, which was supported by the Trump administration and nearly every member of Congress. Later bills, such as the American Recovery Plan, worsened it. Inflation is always and everywhere a monetary phenomenon — too much money chasing too few goods.
Inflation is a decline in the value of the dollar. The choice we made in during COVID was between the risk of inflation and a deeper, longer economic downturn. We got inflation. It’s normal to complain about inflation, but again the inflation we just went through involved a trade-off between higher, longer unemployment and higher inflation. It is clear that political sentiment favors higher unemployment to higher inflation. That Americans appear to prefer higher unemployment over historically mild inflation is not something any of us should be proud of.
By ‘historically mild,’ I mean that inflation since the start of COVID has averaged a 4.6% annual rate of growth. But, the average over my lifetime is 3.8%. The trade-off between that extra 0.8% inflation and employment is pretty clear. It took six years and eight months for employment to rebound from the 2007-2009 recession. It took only two years and one month to recover from the far deeper job losses of the COVID downturn.
Moreover, private sector wage growth has outpaced inflation since the start of COVID. Likewise, Social Security has also kept pace with inflation. So, the vast share of Americans are earning more in inflation-adjusted terms than they were before COVID. That is not true for everyone.
No other public sector pension — military, federal or state — has kept up with inflation. Pay for public sector employees has likewise trailed inflation, sometimes substantially. That is the source of the recruiting problems in the military, which is spreading to other occupations from school teachers to police officers. Indeed, almost all the budget windfall by state governments is simply money illusion.
Retirees who live on savings have felt a pinch, as stock markets have suffered a bad couple of years due to inflation. So, there are reasons for some folks to feel glum about the economy. Still, for most Americans, this is a time when we should be pleased with the national economy and hopeful that we might be entering a period of more robust growth. There is even some evidence we are entering a national period more like the 1990s than the last decade.
Labor markets are tight, but we’ve seen three-quarters of productivity growth. That is a very robust sign of a longer expansion. Labor force participation has returned to pre-COVID levels, for both men and women. Again, average wages have outpaced inflation since the start of COVID, with the greatest wage growth among the bottom two-thirds of workers. We have more people working, at higher inflation-adjusted wages, than at any time in history.
The lack of a lengthy COVID business cycle and the increase in home values has led to substantial growth in wealth by households. The balance sheet of American households has never been stronger than it is today. Consumer spending is likewise at a record pace. Black Friday and Cyber Monday sales were at a record high. This is surprising given the longer period between Thanksgiving and Christmas this year, which tends to reduce early sales.
The simple fact is that Americans are behaving as if they are in the midst of a very strong economy. But, that is not what they are telling surveyors. And yes, I am aware there are a lot of young people worrying about mortgage rates. This week a 30-year fixed-rate mortgage averaged 7.29%. But, the average over the past 50 years was 7.74%. In fact, from the year the first Baby boomer turned 30 until the last one turned 30, the 30-year fixed rate mortgage average was 10.43%.
Doubtless part of the perception about the economy is due to election season politicking. That’s to be expected, but we shouldn’t be seeking our own bespoke reality. I have plenty of complaints about the current administration, but since Joe Biden took office, GDP growth has topped 3.1% annualized rate. In contrast, Trump managed only 2.4%, Obama 2% and Bush only 1.9%. We are in the best economy since the late 1990s boom.
The plain fact is that we are in the midst of an unusually robust recovery, that is broadly beneficial to Americans. That is what economic data plainly report, but more importantly, that is how Americans are actually acting, both as consumers and as business owners.
Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics in the Miller College of Business at Ball State University. Send comments to [email protected].
