Listen to the gloom about the economy and do something to fix the problems
Inflation is higher than in decades, millions are out of work, businesses are struggling to find workers, and people are still dying from Covid. The recent declines in consumer sentiment are real.
The Scream by Edvard Munch.
So, where’s the economy is headed? Yesterday, Paul Krugman at New York Times basically told us to ignore the opinions of everyday Americans:
“Start with the state of the economy. You might be tempted to assume that in a world in which getting and spending occupies a large part of everyone’s life, people would have a pretty good sense of how the economy is doing …
Indeed, the role of partisan skew has gotten so large recently that the Michigan Survey of Consumers, probably the most influential gauge of economic perceptions, highlighted it in its most recent data release; you might say that the Michigan Survey has warned us not to trust the Michigan Survey.”
During my time at the Fed, I was the expert on the Michigan Survey. I used it in forecasting consumer spending and in my research on how families use relief in recessions. The survey can be hard to interpret—hello, people can be hard. And I know it’s a valuable window into what people are experiencing.
Now, I do not blame Paul entirely. Richard Curtin, Director of the Michigan Survey, was the one who suggested politics, not economics were driving sentiment now.
Politics are a thing
It is true that Democrats have a more upbeat outlook for the economy now than Republicans. And it’s long been the case that people are more optimistic about the future when the President is from their party.1 The outlook of independents is similar to the overall average, noting that each group is about one-third of respondents.
What’s the takeaway? Consumer expectations are, on average, as affected by politics now as they were in the past. Yes, the gaps by political affiliation are larger now, but many longstanding gaps exist in the survey across groups of people. Newsflash: we ain’t got one “economy.” Moreover, since the summer—regardless of politics—people have become gloomier about the economy’s future. Do not look away and write this off as politics ‘breaking’ the survey. More likely the gloom is about Covid and inflation. Politics touch both, and both are causing real problems. Listen to people.
Politics ain’t the only thing
Yes, people have politics. And we are so much more. We are certainly more than an index number. Here are the three questions behind the lines in the chart above:
Now looking ahead--do you think that a year from now you (and your family living there) will be better off financially, or worse off, or just about the same as now?"
Now turning to business conditions in the country as a whole--do you think that during the next twelve months we'll have good times financially, or bad times, or what?
Looking ahead, which would you say is more likely--that in the country as a whole we'll have continuous good times during the next five years or so, or that we will have periods of widespread unemployment or depression, or what?
How would you answer these questions? And why?
I have listened to the phone interviews. I learned a lot about the people behind the statistics I used in my work. People reply quickly. Often it sounds like a gut reaction. Makes sense. There’s a lot going on in our guts: we’re thinking about the balance of our bank account, our paycheck, how much it takes to feed the kids, what we heard on the news, what we heard from family and friends, and so on. In a few seconds, we roll it all up and answer an impossibly hard question: what’s next? Yes, politics color the way we look at the economy and where it’s headed. How could it not? It’s complicated.
Speaking of complicated. Here are indexes for the three questions. All are down. None are at record lows. Recall inflation is at a multi-decade high, gas is well over $3 per gallon, some stuff like cars are hard to find, millions have not come back to work, and businesses are struggling to hire. Even if we are in a better place than a year ago, I have argued, it’s no guarantee that things will keep getting better.
What to do about it?
Instead of dismissing the decline in sentiment as partisanship, policymakers and those who advise them need to focus on solutions to the problems. Clearly, enemy number one is Covid. The public health leadership from Washington D.C. since the crisis began has been uneven, confusing, and slow. No, you can’t fix the politics around Covid. You can get the vaccine to every person who wants it and communicate honestly with people who are on the fence. Enforce vaccine mandates immediately.
Then there’s inflation. The Fed cannot fix the inflation due to economic disruptions from Covid. They cannot get shots in arms or unload shipping containers. The Administration needs to work with port authorities and other transportation operators, open up the strategic oil reserve, and reduce tariffs on imports. Do more. Do it now. I fully believe that inflation is “transitory,” because I believe Covid is too. But both are still here. The sooner Covid is under control the sooner inflation is too.
These solutions are not exhaustive, but it’s exhausting that we are two years into this mess and we do not have a real plan. Covid keeps coming back. We move two steps forward and one step back. People are dying from Covid. Many did not have to die. Want to know why people are gloomy? Do you even need to ask?
We are not doomed. People are frustrated with policymakers, but it’s been worse.2
I don’t think we are headed toward a recession (or in one), largely because prior economic relief, the new Child Tax Credit, and growth in wages at the bottom are offsetting the rise in prices for most people, at least for now. But we are not in a safe place. We are not back to normal. Not even close.
Good things are happening in Washington D.C. Congress recently passed a bipartisan infrastructure bill and is close to passing its ‘kids, care, and climate’ package. But unlike the American Rescue Plan, most benefits will come over years not months. So these good things are not good enough. Congress must fix today’s crisis too.
Don’t listen to Paul, listen to people. They are telling us they are increasingly worried about the future. I am worried. Mostly, I am worried that Congress, the White House, and State Governors will wait for our problems to solve themselves. They won’t.
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Before 2017, the Michigan Survey only asked about political affiliation sporadically and around elections. It’s not possible to interpolate these data but there’s a clear association between politics and economic outlook.
The games of chicken over the debt ceiling were not popular in 2011. Raise it immediately! People are battered down by the world. Do not scare them even more.