We’re familiar with the idea that the economy can and should affect elections. The connection is borne out empirically (Roosevelt’s victory in 1932 following the depression, his landslide reelection in 1936 amid economic growth, Johnson and Reagan winning huge reelections during the boom periods of 1964 and 1984, Carter losing in the 1980 recession and Bush Sr. losing in the 1992 mini-recession) and theoretically, either from the principle of retrospective voting (giving a political party credit or blame for its stewardship of the economy) or prospective voting (giving the keys of the economy to the party that you think can do the job). A good starting point here is Steven Rosenstone’s book from 1983, Forecasting Presidential Elections.
Indeed, the principle of economic voting (“It’s the economy, stupid”) has become so familiar that it was overgeneralized to apply to off-year (non-presidential) elections as well. The evidence appears to show, however, that off-year elections are decided more by party balancing; see previous discussions from 2018 and 2022:
What is “party balancing” and how does it explain midterm elections?
The Economic Pit and the Political Pendulum: Predicting Midterm Elections
But this year a presidential election is coming, and the big question is why Biden is not leading in the polls given the strong economy. There are lots of reason to dislike Biden—or any other political candidate—so in that sense the real point is not his unpopularity but the implications for the election forecast. As the above-cited Rosenstone and others have pointed out, pre-election polls can be highly variable and so in that sense there’s no reason to take polls from May so seriously. In recent campaigns, however, with the rise of political polarization, campaign polls have been much more stable.
As we discussed the other day, one piece of the puzzle is that perceptions of the economy are being driven by political polarization. This is not new; for example:
A survey was conducted in 1988, at the end of Ronald Reagan’s second term, asking various questions about the government and economic conditions, including, “Would you say that compared to 1980, inflation has gotten better, stayed about the same, or gotten worse?” Amazingly, over half of the self-identified strong Democrats in the survey said that inflation had gotten worse and only 8% thought it had gotten much better, even though the actual inflation rate dropped from 13% to 4% during Reagan’s eight years in office. Political scientist Larry Bartels studied this and other examples of bias in retrospective evaluations.
That said, it does seem that polarization has made these assessments even more difficult, even when people are characterizing their own personal financial situations.
Here’s the question
The above is all background. Here’s my question: how is the effect of the economy on political attitudes and behavior supposed to work? That is, what are the mechanisms? I can see two possibilities:
– Direct observation. You lose your job or find a new job, or you know people who lose their jobs or find new jobs, or you observe prices going up or down, or you get a raise, or you don’t get a raise, etc.
– The news media. You read in the news or see on TV that unemployment or inflation has gone up or down, or that the economy is growing, etc.
Both mechanisms are reasonable, both in the descriptive sense that people get information from these different sources and also in the normative sense that it seems fair, to some extent, to use economic performance to judge the party in power. Not completely fair (business cycles happen!) and sometimes they lead to bad incentives such as pro-cyclical expansionary policies, but, still, there’s a strong logic there.
The thing I’m struggling with is how the direct observation is going to work. A 2% change in economic growth, or a 4% change in the unemployment or inflation rate, is a big difference, but how will it be perceived by an individual voter. Everybody’s experience is different, and it’s not clear that any simple aggregation will apply. If you think of each voter as having an impression of the economy, which can then affect that person’s vote, then, fine, the average impression will correspondingly affect the average vote—but any bias in the impressions will lead to a bias in the average, and there’s no reason to think that people’s perceptions are unbiased or even close to that, even in the absence of political polarization.
As I wrote a couple days ago:
Wolfers’s column is all about how individuals can feel one way even as averages are going in a different direction, and that’s interesting. I will say that the even the comments that are negative about the economy are much less negative than you’d see in a recession. In a recession, you see comments about people losing everything; here, the comments are more along the lines of, “It’s supposed to be an economic boom, but we’re still just getting by.” But, sure, if there’s an average growth of 2%, say, then (a) 2% isn’t that much, especially if you have a child or you just bought a new house or car, and (b) not everybody’s gonna be at that +2%: this is the average and roughly half the people doing worse than that. The point is that most people are under economic constraints, and there are all sorts of things that will make people feel these constraints—including things like spending more money, which from an economic consumption standpoint is a plus, but also means you have less cash on hand.
So, lots of paradoxes here at the intersection of politics, economics, and psychology: some of the components of economic growth can make people feel strapped—if they’re focusing on resource constraints rather than consumption. . . .
People have this idea that a positive economy would imply that their economic constraints will go away—but even if there really is a 2% growth, that’s still only 2%, and you can easily see that 2% disappear cos you spent it on something. From the economist’s perspective, if you just spent $2000 on something nice, that’s an economic plus for you, but from the consumer’s point of view, spending that $2000 took away their financial cushion. The whole thing is confusing, and I think it reflects some interaction between averages, variations, and people’s imagination of what economic growth is supposed to imply for them.
My point is not that people “should” be feeling one way or another, just that the link between economic conditions and economic perception at the individual level is not at all as direct as one might imagine based on general discussions of the effects of the economy and politics.
This makes me think that the view of the economy from the news media is important, as the media report hard numbers which can be compared from election to election. For example, back in the 1930s, the press leaned Republican, and they gave the news whatever spin they could, but they reported the economic news as it was; similarly for the Democratic-leaning news media in 1980 and 1984.
My current take on the economy-affecting-elections thing is that, in earlier decades, economic statistics reported in the news media served as a baseline or calibration point which individual voters could then adjust based on their personal experiences. Without the calibration, the connection between the economy and political behavior is unmoored.
The other issue—and this came up in our recent comment thread too—is what’s the appropriate time scale for evaluating economic performance? Research by Rosenstone and others supports a time horizon of approximately one year—that is, voters are responding to the relative state of the economy at election time, compared to a year earlier. So then the election turns on how things go in the next few months. Normatively, though, it does not seem like a good idea to base your vote on just one year of economic performance. So then maybe the disconnect between the economy and vote preference is a good thing?
Indeed, it is usually considered to be politically beneficial for a presidential term to start with a recession and then bounce back (as with Reagan or, to a lesser extent, Obama) than for a term to start good but end with a downturn (as with Carter)—even though up-then-down corresponds to higher economic output than down-then-up. Again, any individual voter is only experiencing part of the story, which returns us to the puzzle of why we should expect economic experiences to aggregate in a reasonable way when transformed to public opinion.
Summary
Journalists and political scientists (including me!) have a way of talking about the aggregate effect of the economy on voting, with the key predictors being measures of economic performance in the year leading up to an election. There’s a logic to such arguments, and they fit reasonably well to past electoral data, but the closer you look at this reasoning, the more confusing it becomes: Why should voters care so much about recent performance? and How exactly do economic conditions map onto perceptions? What are the roles of voters’ individual experiences, their observations of local conditions, and what they learn from the news media? There’s a lot of incoherence here, not just among voters but in the connections between our macro theories and our implicit models of individual learning and decision making.
P.S. Some discussion here from Paul Campos. I remain bothered by the gap in our political science models regarding how voters aggregate their economic experiences. At some level, yeah, sure, I get it: a good economy or a bad economy will on the margin make a difference. The part that’s harder for me to get is how this is supposed to work when comparing one election to another, years later.
There is another variable. What is the meaning of “the state of the economy?” Smart people, such as many on this blog, appear to have very different perceptions of whether the US economy is doing “well” recently – and there is plenty of disparate evidence to support very different views. So, the mechanism from state of the economy to political attitudes is muddied by the ambiguous state to begin with. One possibility is that people start from their beliefs, then find evidence to support those beliefs, and then the mechanisms you portray kick in. But I’m having trouble envisioning how the process works if people don’t start with their beliefs. They look at the “evidence” about the state of the economy and discover that it is mixed – from seemingly credible sources. So, how do they decide what to trust? If they have no prior belief (whether based on personal experience or tribal association), there is no clear trusted source. And the media reports focus on different things and are themselves polarized.
For me this is the one, also that people really feel compounded problems through time much more than a few months of growth. Some examples
1) compounded increases in rent or mortgage costs… Housing supply is lagging demand over decades. A lot of people are feeling the result which is high rents, high new-mortgage payments, low mobility, and high homelessness on the streets.
2) high education and childcare costs. Over decades people now have high student loan debt, high childcare costs, compounding debt from sketchy repayment plans, inability to escape debt from bankruptcy, and more and more people are having to forgo having children at all even though many of them actually want children
3) Food prices. You literally feel this one in your stomach or the number of hours of your life you are working to prepare food. People are buying more ingredients and cooking more. It can become like a second job, with a few hours a day devoted to cooking and cleaning after working.
Economists measure stuff that is more and more out of touch with everyday economic conditions. If employment goes up that may well be a bad thing for everyday people (I’ve got a second job to make ends meet kind of stuff) but of course it’s good for capitalists. If housing prices increase that’s good for REITS and it increases the GDP but it’s bad for 26 year old families with a new baby. If health care prices go through the roof and quality decreases then GDP/capita goes up while families go into debt and suffer chronic illness.
Basically given the inequality and rigging of the system today, and the nature of the measurements they use, if an Economist tells you the economy is doing well, you can be sure you are getting screwed harder unless you are well above the top 10% of income or wealth.
To add one thing I forgot to mention… In every first year economics class in the first week economists tell you that it’s the real economy that matters… Hours spent working, physical objects you buy, shelter you occupy, services you consume… These are the things that matter.
But after that first week, literally every measurement is some number of dollars of GDP or dollars of income or dollars of investment gain or whatever.
Ask a grandmother who is providing childcare because her daughter can’t afford the crappy unsafe one she’s at whether productivity went up or down. Ask a woman whose dream is to be an architect whether she’s happier staying at home with the kids even though their savings went up when she quit her job. Ask a new professor whether the 6 years in grad school and 7 years of postdoc was worth it to get a job that pays less than the first job her students get out of undergrad degree pushing crappy patented pharma products on doctors Etc etc…
measuring the wrong thing includes failing to take the real economy into account or measure people’s satisfaction with their ability to utilize their skills or consider any of the hours and hours of unpaid labor done in the home, or consider that people who forgoe children may have a lifetime of regret, or people who have children may have a lifetime of regret due to the excessive financial burden, or any of that.
I have not asked the questions you propose. Have you? How many people would one have to ask to get a representative sample? That would be the objective way of looking at the problem, but I think that most of us (including myself) use some zeitgeist gestalt that is influenced by our self interest, our desire to conform, the atmosphere created by propaganda, etc.
I have done a number of both formal and informal analyses over the years. In 2017 I downloaded the entirety of the American Community Survey public use microdata datasets (perhaps hundreds of gigabytes of data) spent hundreds of hours to set up a MySQL server machine, load them into MySQL, slice and dice them into different subsets, and went through and analyzed a number of questions of interest to me. For example, I think there’s considerable evidence of underemployment of highly educated married people. The cost of caring for children is so high, and the marginal taxes on a second person’s income in a family is so high, that a considerable number of well educated potentially upper middle class earning people are out of the labor force entirely. The evidence was pretty reasonable in plots and logistic regressions and soforth and you might estimate on the order of around 10M people in the US have Masters or PhD level education but are not in the labor force. If you just assumed $120k/yr for these people on average then you’re talking about 1.2 Trillion in lost economic activity from them not doing upper middle class jobs, plus probably at least 50% of that in addition from them not hiring people to do the childcare instead.
And then, when I look informally at people I know, one person with a PhD in occupational therapy quit his job and stays home with his kids. Another with a PhD in political geography quit his job and stays home with kids, another with a PhD in plant biology quit her job and stays home with kids, another with a Masters in Architecture quit her job and stays home with kids, another with an MD quit her job, took a marginal part time job teaching anatomy and stays home with kids, another with a PhD in Chemistry spent a decade or so doing minimal part time employment and then when her kids were older got a job doing educational outreach teaching at local schools. Probably she made less than a person with an undergrad degree in Econ working as a customer relations person at a local bank branch. I know a nurse practitioner who quit her job because it was so abusive and the employer wouldn’t even let her stay home during the pandemic **even though she was doing telephone work** they literally required her to go to a homeless person clinic and talk on the telephone there surrounded by potentially sick people instead… She didn’t work throughout the depth of the pandemic until vaccines were approved.
And then there’s informal discussions you can easily find online… Reddit, or Mastodon or various places. For example welders on r/Welding, These are people with considerable skills who may have attended 2 years of school to learn how metals behave at high temperatures, how to physically carry out a skilled labor task, and who have knowledge of health and safety related topics for an important industrial process… And they’re turning out craftsman level work… for $13/hr and can barely pay rent. But that cheap $13/hr labor is making some capitalist fucking rich! so GDP is up! They’re all urging each other to get involved in Unions, but of course there’s only so much union welding available.
And then there’s also considerable evidence of elderly people draining their entire savings in the last few years of their life leaving nothing for their children to inherit. Both at a personal level and at a statistical level. My grandfather at age 92 was urged by his heart doctor to undergo an ablation surgery and implant a pacemaker. The surgeon then breezed out of the room and went on vacation leaving a different surgeon to do the work. He underwent the surgery for which he was charged $150k he came out of the surgery hallucinating that he had been kidnapped by Nazis, he couldn’t eat for a day or two, he died within a week. But GDP WENT UP!
And of course it’s not just my grandfather… Cory Doctorow has a nice piece on the state of health care and its looting by private equity firms driven by enormous money creation through deficit spending…
In one hospital after the third round of private equity sale they abandoned the 5th floor because it was occupied by 5000 bats
https://doctorow.medium.com/when-private-equity-destroys-your-hospital-d3e6c290b1eb
The general purpose looting of private equity is pretty well described here:
https://doctorow.medium.com/the-long-bloody-lineage-of-private-equitys-looting-798597a4fa30
Consolidation of healthcare has gotten so bad that recently when Change healthcare was ransomware attacked by infosec criminals it took down pretty much the entire system for electronic transfer of prescriptions and **it’s still down** as far as I know. Pharmacies are basically operating on fax machines these days last I heard. https://www.washingtonpost.com/technology/2024/03/01/prescription-drug-hack-alphv/
I know multiple people who can’t get their ADHD medications because of drug shortages… They’re just not making the drugs in sufficient quantity, but also apparently to try to cover their asses, the DEA actually created many of these drug shortages by putting opaque quotas on the number of pills local pharmacies can dispense… Just one day you’ll get an order to fill and the “computer says no”. You’ve got the meds but you can’t fill it because DEA tells you you filled too many. There’s no count-down, no warning, just in the morning you find out you’re done for the month.
But beyond the DEA problems, the industry is just broken. We are undergoing RIGHT NOW historical record levels of drug unavailability
https://www.cnn.com/2024/04/12/health/drug-shortage-record-high/index.html
Emergency crash-carts aren’t being replenished at your local hospital. If you go for a surgery and your heart stops due to a bad reaction to anaesthesia or whatever, too bad for you.
So, yeah, I have actually spent a LOT of time thinking about, researching, reading about, and informally observing major major problems with our economy that have accumulated for DECADES.
While as far as I can tell, standard Economists do nothing. Only Heterodox economists are worth reading these days. The Jerome Powells and whatnot are just sock puppets.
“If you just assumed $120k/yr for these people on average then you’re talking about 1.2 Trillion in lost economic activity from them not doing upper middle class jobs, plus probably at least 50% of that in addition from them not hiring people to do the childcare instead. ”
That sounds like you are confusing the market economy with the real economy. Someone has to do childcare and the kind of person who can get a PhD will tend to be better at it than the kind of person who takes a poorly-paid people-facing job (plus gathering small children in crowded indoor groups has health costs). Feminist economists have pointed out for a long time that when you move domestic and social reproduction work into the market economy, suddenly it looks really expensive and valuable unless there is a precariat to do it. That value just does not show up in GDP stats, and the labour just shows up as people not in employment or education.
“And then there’s informal discussions you can easily find online… Reddit, or Mastodon or various places.”
You have to be careful because since smartphones came around, the Internet and social media are heavily weighted towards people who are unhappy. People with a good job and a significant other rarely have a lot of time to post, but unemployed or precariously employed single people post a LOT.
Sean I agree with both your points with certain caveats.
No I’m not confusing the real economy with the market economy, I believe economists make this distinction and they are wrong. There is only one economy, and it’s the real economy. And this is a major way in which economists get it wrong because they only measure and look at the flow of dollars usually. But people FEEL the real economy so Economists routinely Gaslight people telling them “the economy is good” when it’s deeply obviously not to everyday people.
Note too that the spate of people staying home to take care of kids isn’t because these people make that choice in order to give their kids better quality of life. It’s because financially it makes no sense for them to do anything else. If their spouse makes say $120k/yr and they could take a job up to $120k themselves then, after federal, FICA, state, state disability taxes, childcare costs and increased transportation and associated working costs, they would come out financially behind or about breaking even, certainly not doing well for the effort they’re expending.
Taxes on those people in CA are about 45% (25% federal, 10% state, 8% FICA, 2% CA sdi) round off that means $66k take home after taxes, then childcare for two kids is $3000/mo or more, now they have $30k/yr, add commute costs and lunch at work and soforth, they’re working 9 hours days and commute for disposable income of $20k/yr maybe. Then eat out 4-5 times a month because you’re exhausted doing cooking when you get home from your 9-10 hrs of working plus commuting, and you’ve burned $6k off that…
On the other hand, a reasonably good nanny might cost $45k so the work they’re staying home doing has market value $45k. A world where they get paid $120k, pay 30% in taxes and hire a $45k nanny who pays 30% in taxes has higher velocity of money and GDP of $120k + $45k, and the parent then keeps $84k of it even after some of the extra expenses they’re $70k better off instead of $20k
But the high marginal rate of tax destroys that economic activity and leaves the educated person with no good choice financially.
I’ve been an advocate of ~35% flat tax and 10% GDP/capita UBI for two decades. I believe that would create easily a trillion dollars a year in extra economic value because it would enable many more activities which are not viable today.
When it comes to the bias in online discussions I’m aware of it but I’m not convinced that we understand it well enough to say that it’s somehow giving an invalid view of society. There are plenty of welders in the forum saying how great their current job is and giving advice about moving between jobs to the ones suffering. But one piece of advice is to just leave welding and go work at Wal Mart because you make more than $13/hr there. And that means the education is going to waste because there’s probably someone who needs that welding done and avg Wal Mart employees don’t have that skill
Construct validity is a HUGE problem for a lot of Economic measures.
A middle aged guy at the beginning of the pandemic takes advantage of cheap gas prices to take his Mazda Miata out on back country roads and teach his child to drive stick shift… They spend $200 a month having a great time while forgoing $200 a month in commute costs. GDP is unchanged. Which was more economically productive, before or after the pandemic?
The same guy has his rent go up in 2023 and food prices go way up, so that over the year he has to move to a much smaller apartment that feels cramped and produces a lot of conflict with the kids over keeping things clean and uncluttered and he has to sell his Mazda. Suppose his income goes up because of the sale of the car. Is he better off? Suppose even after the move his rent and food bill is still up dramatically so that his savings are depleted even with higher income. GDP is up a whole bunch! Yay! The economy! Vote Biden!
I don’t think so.
I can literally go on like this all day. I’ll try not to though.
In practice, I imagine people would use not only their direct, personal experience, but that of their friends and family, and extended social network. However, to estimate job finding, job loss, and unemployment rates with even a rough precision, one would need hundreds or thousands of observations. This is clearly not feasible.
But people do not have to be able to estimate these things with any precision. A simple rule such as “if I am employed during the X administration, I am Y percent more likely to vote for X” would give you an effect even if all voters are completely unaware of macro statistics.
I don’t know the political science literature, is the effect identified based on actual or perceived economic performance? (I guess these would be difficult to disentangle empirically).
Tomas:
I get the point that, even if individual voters are not assessing the economy with precision, the aggregate pattern averaging over voters can be stable. My concern here is not precision but bias: it’s not just that people’s observations are noisy but also that I don’t see how they can be comparing well to a baseline.
Regarding the political science literature: I’m not aware of all of it, but my general impression is that researchers and practitioners are aware of the distinction between actual and perceived economic performance—indeed, in the aftermath of the 1992 election I recall some George H. W. Bush supporters arguing that he lost because the economy was perceived to be in recession, even though the recovery was already happening—but I haven’t seen any convincing efforts to disentangle these.
Yep. When your neighbor loses their job, the unemployment rate is 20%. When you lose your job, it’s 100%.
The phrase, “the Democratic-leaning press in 1980 and 1984” nearly knocked me over. Back then, “the press” consisted mostly of right-wing newspapers and magazines which leaned overwhelmingly Republican. To be sure, that was a bunch of decades ago and newspapers and magazines had more clout back then; but still, my recollection does not square with 1980 and/or especially, 1984, the latter number being a particular favorite on this blog.
Paul:
In response to your comment, I changed “press” to “news media” in that line in the post, because I was mostly thinking of national TV news, which I think mostly drove the agenda at that time when it came to reporting on economic conditions.
Think I explained this in the other thread but no one responded to it.
https://statmodeling.stat.columbia.edu/2024/05/11/is-it-really-the-economy-stupid/#comment-2372106
For things growing roughly proportional to (1 +r)^t, such as GDP and inflation, annual percent change is usually approximately the rate r over time horizons of a few years. But this only works when r is small.
So whenever inflation or GDP increases faster than a few % it seems surprisingly high to people who perceive the actual growth rather than percent change used by economists.
Its for the same reason exponential growth can appear linear at first: (1 + r)^t ~ 1 + r*t (first two terms of the binomial expansion).
Is figure 1 here what people are talking about when they compare “perceived vs actual” inflation?
https://www.federalreserve.gov/econres/notes/feds-notes/inflation-perceptions-during-the-covid-pandemic-and-recovery-20240119.html
Eg, are we supposed to compare a quarterly average of “perceived” inflation (over the last 12 months) to monthly YoY % change in CPI?
Looks like perceived should follow CPI when its flat at ~2%. Then continue to follow it during the rise to 9%. Next, after % change in CPI peaks, perceived inflation overshoots a bit and drops with a lag. Finally, it plateaus at a higher value.
Is this the pattern that requires explanation?
Not sure who wants an explanation of what, but those are nice graphs, thanks for that.
It is specifically this (from the earlier thread):
But in general this is relevant to all the paragraphs that were written about how perceptions of inflation/economy may be influenced by the media and political bias. Seems to me there is no need for those theories if the difference can be explained quantitatively with averaging/normalization artifacts.
Here is what I get (compare to figure 1 in the above link): https://i.ibb.co/GsvjzNR/inflation.png
It looks pretty close. The main problem is that it plateaus too low at the end (4-5%) relative to the survey calculation (~6%), which uses the median. I wonder what the distribution looked like.
Also, there is about an extra quarter of lag after the peak (in the survey data). People may be looking back further than the 12 months they were asked. Maybe to the beginning of the previous year?
Anyway, that simple model captures the general pattern. I’d like to see more examples of this.
Anon
In Figure 5, the latest gap between inflation perceptions between Democrats and Republicans was only around 2%. At the peak, it was 9%. One looks “pretty close” the other does not. As for your grocery bill doubling, mine is definitely higher but not double. I get irritated by specific increases – AT&T just increased their international calling plans 20%. But my most recent airline tickets cost about the same as they did 4 years ago.
I’m not sure what you mean by dismissing what is in the graphs. I certainly don’t dismiss them – what I am dismissing is the belief that they more accurately represent reality than some of the “official” statistics. They represent a true perception of reality, but that may not be the same thing as reality itself. I think that is much of what we have been discussing.
This is what I am asking. Are we supposed to be explaining why there was a big spike for one quarter by republicans in 2021?
Like the model I came up with has one free parameter, the year of baseline CPI. If I change it from 2016 to 2000 (equivalent to multiplying by ~1.4), the results look like this:
https://i.ibb.co/mbPzhgD/inflation2.png
In that case it fits that plateau at the end but pre-covid is too high and the peak is too high. So that is a worse overall fit imo. But point is everyone comes up with their own model of perceived inflation as a function of CPI. Or maybe it is something that doesn’t use CPI at all.
But there needs to be some kind of observation everyone agrees should be explained, then we all work out the consequences and compare it to the observations. Perhaps no one really trusts the data to begin with, in that case why bother coming up with explanations though.
Can someone just try to replicate what I did here? Please.
Those are very interesting graphs. I won’t pretend to interpret them – there is enough in there to support almost any conclusion. But my big takeaways are (1) accuracy in stating the inflation rate may not be the same thing as whether or not someone believes inflation is a problem; (2) the very large differences in perceived inflation across political identification, and (3) the complex picture of media influence. Regarding (3), it makes me wonder whether the media are reporting public perceptions or creating them. Overall, the idea that people fairly accurately perceive the inflation rate strikes me as one of the less interesting aspects of these graphs.
Figure 5 on that Fed page shows minor difference in perception across political identification. All are higher than CPI and male vs female difference is just as large at the “plateau”.
I don’t think any of these numbers reflect my experience. My grocery bill would have about doubled since 2020 if I hadn’t become more careful. And when I buy things like a bathroom fan or shoes from the store they break quicker (shrinkflation).
I also didn’t find the info on who was answering this survey and precisely what they were asked, who could tell if inflation is 4% vs 6%?
But if you dismiss whats shown in these “nice graphs” then what in the world is everyone writing paragraph after paragraph about? There is just nothing to be explained in that case.
It’s interesting to think about this methodologically. What exactly are the potential mechanisms you might test for, and how would you do that? Poll questions are often poor proxies for the sort of perceptual and psychological traits we’re interested in, and, if there were funding, maybe we could write ones that come closer. And of course it would be good to be able to link stated perceptions with more objective measures, or at least have clusters for analyzing network effects in responses, a la the Framingham Heart Study. Of course, I’m speculating on all this at a time when response rates are dipping year after year, so maybe it’s pointless.
FWIW, I think people are much more responsive to changes in economic variables than their levels, which would explain the relatively short term time frame in the political business cycle literature. Think of “Morning in America”, when the economy was only so-so but way improved over the second dip of 1982. It’s also true that the official economic measures are imperfectly related to actual conditions (underground economy, mismatches, care economy, other costs like commuting, etc.), and changes in these relationships would be especially relevant.
I don’t think anybody gives any heed to reported economic numbers. Most people don’t follow the news at all, and a large subsection of them are almost completely innumerate. I agree with Tamas above… They use their own experience, augmented by Social network chatter. NOT online networks. You worry that those observations may be biased, Andrew. Yes they can be… But when the economy is really strong or really weak, they probably won’t be. Not enough to make a sign error. And adjusting for the voting population shouldn’t affect that decision much. One thing that really certain though, in a low trust environment, neither the gov’ts announcements nor Krugman’s or Kudlow’s gloss on those announcements carry much weight at all. It’s all individual observation including local gossip.
Jonathan,
I don’t know how things are now, but I’m pretty sure that back in the day (for example, 1980 and 1984), people were very aware of the inflation and unemployment numbers. These were in the headlines; they were a big deal. Lots of discussion about the inflation being 5% or 10% or whatever, similarly with unemployment.
Similarly when there was a major financial crash, and when COVID hit… If there’s an all-of-a-sudden shock, people recognize they can’t necessarily rely on their recent experience to extrapolate to next month or 6 months or a year. So they start paying attention to what experts are saying.
But if it’s day to day stuff, I agree with Jonathan… Where I may or may not disagree is… when Economists official numbers diverge from people’s felt experience, which should you trust? I say trust overall felt experience much more than official numbers. This is for a number of reasons but the first one is that what matters is dimensionless ratios, and those are what’s *felt* but a lot of official numbers aren’t dimensionless ratios of interest to individuals. GDP or GDP/capita for example, or Median household income, or median home price, or price of eggs, the size of the deficit, the national debt, debt per capita, Dow Jones Industrial Avg, S&P 500 index value, Price of Gasoline, Median Wage, Minimum Wage changes in dollars/hr…
Literally none of those matter by themselves. NONE of them. It’s not just that people don’t understand them and if they did they would be meaningful, it’s that they have *literally no real meaning* by themselves until formed into an appropriate dimensionless group.
Let me give an example “we raised the strength of the bolts holding your bungee jump cord by 500 lbs”. Great, but, is the strength of the apparatus at least 2 or 3 times the expected load when I jump off the bridge? (dimensionless ratio) Because if not, it doesn’t matter than it’s 500lb more than it was. It literally isn’t important at all.
Percentage changes are dimensionless, but lots of things have considerable lag before they are felt, and changes bobble up and down noisily, what tends to matter is the accumulated trend, so percentage changes are also usually meaningless “The DJIA was up today 1.2%” … so what. “Economists say the Median Sale Price of Homes was up 11% year over year” ok… that means completely different things to buyers than it does to sellers and there are basically equal numbers of each.
If Economists were measuring 10-20 dimensionless ratios in the economy and publishing those we could have a discussion about how to understand if people are doing well.
Daniel
I know dimensionless ratios are a favorite topic of yours, but I really don’t get this. Any number, dimensionless or not, is meaningless by itself. As Tufte (I believe) has stated (and which I’ll paraphrase), the essential question is “compared to what?” So, comparisons are necessary. Your dimensionless ratios are comparisons. The example of a 500 pound strength will be meaningful if we compare it to something or have some context for it. If we could measure the strength of a bolt by the weight that it can safely hold and that happens to be 500 lbs, I find that a meaningful number, though it is not dimensionless. The fact that the DJI goes up by 1.2% I also find meaningless, but that is because it needs to be compared to something – how much is the daily variation, for example. Yes, the % change in the median home price in the past year is meaningful. It would also be meaningful to say that it went up by $25,000 if we are given some context of what the starting price was (sure, why not calculate the % change, but the absolute magnitude still has some value), or what median household income is, or….. So, I don’t see the issue of dimensionless ratios as particularly fundamental to the way that economic data is developed or reported. It sounds like an attempt at a mathematical demonstration of why current economic thinking is all wrong – but I don’t think it does that at all.
Dale, the meaningful ratio question for the bungee jumper is the dimensionless ratio Strength Of The Bolt / Expected Load From The Jump. As long as that ratio is considerably above 1 then the jump will be safe. Notice how regardless of whether we measure the strength in pounds, or in Newtons or in Stones or in Mega Newtons, provided we measure both forces using the same units, then we will always get the same number.
The strength of the bolt being 500 pounds, we can think of as the dimensionless ratio
Breaking Force / Earths Gravitational attraction of one british pint of water (I think?)
Now we have introduced a completely extraneous measurement, namely the choice made by some people a couple hundred years ago to describe “a pound” as the weight of some particular chunk of stuff (a pint of water I think?)
If the numerical value of that ratio by itself mattered to the question of whether Bungee jumping is safe, we could make the bungee jump safer by just all agreeing that from now on a pound will be the gravitational weight of half as much water as what was decided 350 years ago or whenever. That would make the number 2x bigger, and that would (by hypothesis) make the whole thing safer. Since that is obvious nonsense, then it’s not sufficient for the purposes of bungee safety to compare a bolt breaking strength to a standard reference force, it must be compared to *something else relevant to the safety of bungee jumping* namely the force that will be applied to the bolt by the jump.
The same thing is true for GDP/capita for example, we have compared the income in money to the money value of a particular piece of printed paper (a dollar bill) and the population to a particular measure of people (namely the unit of 1 person, not a dozen, not a classroom full, not the population of Alaska, but exactly 1 person). Now the exactly one person is kind of a distinguished unit of people, I agree. But there’s no reason we can’t measure income per person in terms of the money face value of a Govt bond (1000 dollars) or the exchange rate value of Euros you can get for 1 dollar… or whatever.
To decide whether a particular GDP/capita number is “good for the economic conditions of a family or not” we must compare it to “something that is good for families”.
In the examples https://statmodeling.stat.columbia.edu/2024/05/15/the-income-of-the-average-american-will-double-approximately-every-39-years-who-says-that-sort-of-thing-show-some-respect-for-uncertainty-dude/#comment-2372424
I compare GDP/capita (in units of dollars / person/year) to the cost of replacing washing machines every time they conk out (in dollars / person served by the washing machine / year). The ratio of these two things is a *meaningful real ratio in the economy* and is something people feel and gives the exact same numerical value whether you measure dollars in bond par value or Renminbi exchange, and whether you measure people in dozens or multiples of the population of Alaska, and whether you measure time in days, weeks, months, or years. In other words, it’s symmetric to irrelevant choices of measurement technology.
Of course, my example is very relevant to a microecon question about washing machine makers, but for the macro-economic questions, probably we should aggregate across all durable household appliances, and include the cost of running the appliance as often as people do tend to need to run it, and average across washing machines, water heaters, dishwashers, garbage disposals, vacuum cleaners, and various other durable appliances… and then we’d have a meaningful aggregate measure of “average income to the cost of keeping your houses’ appliances running”
Once we do that we can finally start doing Economics
I hope I’ve convinced you. If not, please let me try again.
Also note that someone smart like Carlos may come along and say “real cpi-all-items adjusted dollars” tries to do something like this already, Economists aren’t so dumb after all! But it does so incredibly unsuccessfully. First of all, it really attempts to get at a kind of “Monetary inflation across the whole economy” question, rather than specific real consumption question related to household expenditures. We need multiple dimensions… Oooh but each category of CPI gives us that right? Well, sort of, but it does so in a problematic manner.
Rather than trying to “inflation adjust dollars” notice that the example ratio I mentioned about washing machines is *already* inflation adjusted but is also sensitive to other important aspects of appliances.
GDP/capita / (cost to run and replace all typical household appliances averaged over time) immediately is sensitive to things mentioned elsewhere by Josh Rushton, namely when the manufacturers decrease the expected life, and also decrease the price, and also decrease the energy utilized and also there is price inflation across the board… when those all happen simultaneously it could be good or bad, the ratio I mentioned would immediately tell you. True inflation would presumably increase GDP as well as increase the cost of buying the washing machines, and so since we have a ratio of dollars / dollars its inflation symmetric. But it’s also sensitive to things like longevity and energy cost per load etc (if you include that in the cost).
Consumer Expenditure Surveys average across all sorts of preferences and can’t distinguish between “some people just really like running many loads of laundry per week these days especially because they’re rich” and “the way in which we make laundry machines inherently increases the cost to operate your laundry even if you’re only running the minimum number of loads per week”. I claim that we should be making our denominators set relative to some fixed meaningful quantity of the item, a “minimum” or a “median” quantity rather than an avg which is strongly affected by outliers which are again affected by preferences of the rich.
So the CES may give us very useful information for setting our reference denominators but taking averages is not the way to go, and also segmenting the population into different kinds of households etc is also probably an important way to go. (for example households with and without children probably have completely different economic experiences when baby food and diapers prices change).
Daniel
I think you are missing my point. All your examples are fine – but they don’t prove that the problem is measurements with units nor that problems are solved by using dimensionless measures. In all cases, numbers are only meaningful in relation to something else. By definition, the dimensionless measures are compared to “something else” but whether or not that is meaningful depends on what that “something” is – as your expansive critique of the CPI demonstrates. Your logic appears to be that since you can show that measurements with dimensions are meaningless in themselves, that your preferred dimensionless measures are the meaningful ones. Meaningful to you, perhaps, but you haven’t convinced me that your comparisons are the appropriate ones. I would agree that if a family spends 35% of their income on childcare, then that is a serious problem. But you haven’t provided evidence of how relevant that particular example is. You reject the comparison of families that spend 0% of their income on childcare (such as the elderly), but that sounds like you define first the group that you find horribly disadvantaged and then use them as proof that the whole system is bad.
I think when it comes to particular policies, we may be more in agreement than disagreement. I am not proposing the US economy as a well-functioning model. But I find your critiques too broad, and without providing better models. If you think the FED has been purposely enriching the banker class at the expense of everyone else, then what form of central banking would you propose in its stead? (I believe you can provide an answer to that question – but consider it rhetorical, in that the more you propose to change each feature of our economic system, the more unrecognizable the whole becomes to me).
Dale, you’re absolutely right that which thing we compare to is an important question, but this doesn’t invalidate the criticism that looking at GDP, or median income or kilowatt hours per month or anything else with units is meaningless by itself.
The meaninglessness of it is of a stronger form than “you chose to compare to a specific thin slice of humanity that most of us don’t care about”. At least that kind of dimensionless number has meaning for that thin slice. GDP or whatever dimensional number by itself is “pre meaning” it hasn’t yet been given a connection to any process or physical or economic question.
A lot of people don’t recognize this is true because internally they immediately compare some dimensional number to some other dimensional number… “DJIA reached 40,000 this week” means something to someone who follows that number and can compare it to last week or last year. “Wow that’s double what it was back when I last looked” for example.
500 lb bolts, well I only weigh 160lbs so that should hold my weight ok… (500/160 ~ 3)
1500 kilowatt hours this month, my electrification of my heating and cooling really increased my electricity consumption it was only 720 before… (1500/720 ~ 2)
The issue that we should argue why our choice of denominator is important is completely different kind of question vs whether we need a denominator.
By the way I did argue why we should care about my approximately uniform CPI, namely that 100% of people who are the parents of people who will be adults 20-30 years from now are subject to expenditures which are much better modeled by something like that than something like CPI all items.
You haven’t really argued that isn’t true. Instead you argued that I’m “cherry picking”
The biggest point I’d like to make is that your Economist background has taught you to treat creating a denominator to explicitly study a particular group is illegitimate “cherry picking” whereas I am arguing that it is a necessary first step to being scientific. If it weren’t we could study the safety of bungee jumping by comparing all bolts to the breaking strength in pounds since the pound is a universal denominator we can always compare to. And that’s obvious nonsense. It matters critically for safety not how many pounds you can hang from a bolt, but how many bungee jumpers!
Let me try to illustrate how meaningless GDP/capita in dollars/person/year is … suppose in the land of Frobenia they measure GDP over a period of Frob days and in the currency of Frobnitzes and I tell you that GDP/capita this year went up by 3 Frobnitzes per person per Frob
By itself that’s got precisely as much meaning as GDP/capita/year in dollars/person/year
any meaning you think that dollars/capita/year has comes from you internally *provide a denominator that is relevant to your interests* because you have internal general knowledge of prices of things you care about in dollars and wage rates in dollars/year.
But when I remove your knowledge of how much a Frobnitz can buy and how long a Frob is you can’t provide that meaning by referring to something you know and care about.
On the other hand, suppose I tell you that a person making 3 more Frobnitzes/Frob in Frobenia typically can purchase a full size house every 1/3 of a Lifetime… immediately you actually know something… they’re earning 3 houses per lifetime more. Presumably houses are relevant and lifetimes are relevant, whereas Frobnitzes and Frobs are by themselves just tools for calibrated measurement defined presumably by FNIST (the Frobenia National Institute of Standards and Technology)
Until Economists start constructing measures that measure the slice of people they care about in terms of quantities those people care about and make arguments about why those measures are good, we will be in the Frobnitzes/Frob fog.
Daniel
About your last paragraph: I agree that analysis is better if it is focused on a particular question. The more precise the question, the more meaningful the analysis (or the better understood will be its limitations). Families with children are important to study – single parent households is an important group to consider. I don’t think that focusing on these is “cherry-picking” unless they are then represented as true for other subgroups as well. The use of “average” measures is always problematic, since none of the subgroups are likely to be average. So, if it is agreed that there is one particular subgroup we are focused on, then the measures should be appropriate for that subgroup. When I read the Wolfers’ quote in the post, I didn’t think the subgroup was median households with 2 children. I read the statement as a general statement of the welfare of future generations compared to today’s generations. I have major issues with Wolfers’ statement from that perspective that are different than the issues you have raised. Your issues refer to particular subgroups and the averages tell me that their are other groups with quite different outcomes. But I have concerns with Wolfers’ statement even for those groups. Even wealthy households with no children must live in a world where environmental quality, inequality, and civil discourse matter. Wolfers’ statement essentially assumes away those aspects of life. I view this as more serious (or at least different) than whether the children of a moderate income household are likely to be “wealthier” or not than their parents.
I want to add one more comment – almost completely off-topic but one that has me so bothered today and that I have no other outlet for (other than exposing my wife to my tirade). Its tenuous relationship with this post is on the accuracy of people’s perceptions vs “official” measurements. This example focuses on Republican voters, not in their entirety and certainly without considering similar issues with Democratic voters. But the Republican Party appears to be making a big issue out of voting by illegal aliens. Presumably they believe a large number of their followers will be motivated by this. What I find astounding is the belief that this could be an issue. We’ve had discussions on this blog about the potential irrationality of voting. While I do think there are “rational” reasons to vote, I think it is undeniable that the influence of a single vote on election outcomes is severely limited. Against this calculation is the risk that an illegal alien exposes themselves to by voting. To me, there is no logic in believing that a large number of such people would expose themselves to these risks in order to cast a vote of limited (close to zero) effect on the election outcome. Yet, apparently large number of people can believe this. Just like I think a large number of people can believe that they are losing ground compared to inflation when they may not be. It is such things that make me hesitant to place much weight on the accuracy of public perceptions of reality.
“Until Economists start constructing measures that measure the slice of people they care about in terms of quantities those people care about and make arguments about why those measures are good, we will be in the Frobnitzes/Frob fog.”
And until statisticians start constructing measures of what a probability means in terms of what people care about and why that is a good measure of such things (e.g., the probability that a candidate will win an election, the probability that a policy will lead to higher wages 10 years in the future, the probability that a renewable energy policy will keep global warming less than 2 degrees in the next 20 years, etc.), we will continue to live in a world of binary thinking.
My point is not to disagree with you – I agree. But I think these issues are shared by almost all disciplines. Economists are not alone in their inability to make their expertise relevant. Academicians live in a world where they believe that it is people’s responsibility is to understand their “superior” knowledge, rather than a world where they have the responsibility to bridge the gap from their disciplinary backgrounds to the concerns of non-experts. Economists are particularly bad at this – but so are most disciplines (my version of a Lake Wobegon effect).
I have stayed clear of your debate with Dale, Daniel, for a whole lot of reasons, but I’m going to wade gently in to make a single observation. Inflation and GDP estimates aren’t really eben intended by *economists* to answer the question of how people are faring. Inflation is an attempt to answer the question of whether there is some common factor inflating the numeraire of prices when all we have is thousands of individual price changes to look at. By itself, the inflation number is no more interesting, even if completely accurate, than the question of whether people are better off is we stopped looking at things in dollars and started looking at them in pennies. But if we did so, we would know that when something went from $1 to 50 pennies it had gotten a lot cheaper. That might or might not be important! GDP is somewhat closer to an index of “national happiness,” but it is a Freshman Macro exam question to explain why that’s stupid. That people want to discuss that stupidity and argue with it is waste of their time, not mine. That said, the salience of the GDP change may be high at times when the stupid parts are lower and low when the stupid parts are higher.
Jonathan,
Economists always mention that GDP isn’t about human thriving in the first week or the first chapter of the book or whatever. This is so that they can point to something and say “gotcha” when they do what economists do which is to immediately begin using CPI-all-item adjusted GDP/capita (which they call “real GDP per capita”) as the measure of how well everyone is doing. I mean, the whole Wolfer’s quote from the other day basically said “GDP/capita is growing at 2% per year and so my children are virtually guaranteed to be 2x as wealthy as I am and I am going to be envious of the amazing things they will have access to”.
Meanwhile rather than being 2x as wealthy as their parents the paper I found showed actual IRS records showed the median income parents had kids who were 30 years later, very roughly, approximately the same as them in CPI-all-item inflation adjusted dollars maybe a bit worse.
So, economists have that little thing there so they can say “gotcha” when you point out that they are 100% completely full of shit.
In many regressions, CPI adjusted GDP/capita does in fact relate statistically to various measures of well being. For example although increased GINI is positively linearly related to log homicide rate, log(GDP/capita) is negatively linearly related to log homicide rate.
If it were up to me and I had say a couple million dollars budget to get 10 or so research economists at the BEA or Fed or Census or whatever to do some research, I’d divide the economy into households with and without children, renters vs owners, city vs rural, and split by education levels of the oldest occupants. This is about 24 discrete categories. Then I’d calculate how many people there are in each category and how that’s changed through time. And I’d divide the CES by these categories and look at how the expenditures vary by time and age. I’d look in the CES and look at categories of spending that I consider “essential to providing the basic needs in a Maslow type hierarchy for a developed country”. That would be climate controlled shelter, food, child safety, transportation to and from work, and base level healthcare (ie. care of chronic deadly diseases like diabetes, kidney disease, as well as accidents/trauma and such). Then I’d form a dollar cost of providing that core base level of needs, and form a measure of household income divided by this dollar cost and track it through time for all 24 categories and how it varies across spatial areas defined by the census (metropolitan areas and such).
At that point, we’d be able to *begin* to answer questions about welfare of the population of the US through time. Until we get something approximately like that we’ll still be stuck.
Note that I actually worked on this problem in 2017 (not quite exactly as described but similar in spirit) and had to give up after about 6 months because there was no multi-million dollar budget to fund it. There wasn’t even **any** budget to fund it. But they did have a multi-million dollar multi-year long process to create a “supplemental poverty measure”. https://www.census.gov/topics/income-poverty/supplemental-poverty-measure.html unfortunately they still have a kind of binary “in or out of poverty” emphasis in this research project. But they do have “cutoffs” which you can interpret as the point at which income/poverty_income = 1
https://www2.census.gov/programs-surveys/demo/tables/p60/280/tableB-5.xlsx
According to the supplemental poverty measure, California has 13% of its population in poverty. That’s more than any other state (DC has higher rate but isn’t a state). That seems to be a major problem to me, particularly when CA is generally regarded as one of the most thriving states economy wise. Our GDP/capita is considerably higher than most other states… which goes to show that I’m right about needing dimensionless ratios and the BEA know it, they just haven’t bothered to do the work for the first century or so of their existence.
Daniel
Two comments about your last post. First, I agree completely with the disconnect (hypocritical) between chapter 1 of the textbook saying GDP is not a measure of well-being with its subsequent use as if it is. Economists use the first statement to cover the many issues with measures based on market activities alone to then implicitly act as if the unmeasured parts of economic life aren’t that important (at least until they find a way to publish a targeted article at one particular nonmarketed activity).
As for breaking the economy into the groups you mention, it isn’t a bad idea but I think you should recognize that it has a political dimension. For example, the same kind of breakdown of health care expenditures would be extremely revealing. Given that 80% of health care expenditures are incurred by 20% of the population (or something like that), these subgroups vary a lot in the services they use. But highlighting these differences contains an obvious danger – once we identify the groups with the largest expenses, there will be pressure to separate them from the rest of the population when it comes to policy. Understanding GDP and Price index measures in these subgroups doesn’t quite have the same danger – but I think it would point more clearly to where policy is needed (that would be one of its benefits in my mind). There are political reasons why that may not be desired. It isn’t at all clear to me that there is a public desire to enact policies that truly deal with issues of poverty, homelessness, and mental health.
Daniel
I wonder what you think of this data source: https://www.bls.gov/cex/pumd_data.htm. It appears that the public use microdata allows for the type of analysis you want. It also appears that the work done by BLS addresses a number of relevant issues, but most of the reports I’ve seen use broader averages than you would like. Whether that is a political decision, methodological bias, or something else, I do not know. But I do believe the data they provide is suitable for addressing many of the issues you think should be addressed.
Dale, of course it has a political dimension, and that’s precisely my complaint about Economists… They want to pretend to be apolitical by continuing to do what is “standard in their field” instead of examining what should be done. This is why they are (as a group, on average) terrible people. Because ignoring the actual questions of how are people doing in favor of “GDP went up” or “interest rates should be adjusted” or “banking stability requires that we invent money out of thin air and buy bonds at par value from banks to prevent the ultra wealthy from experiencing the consequences of their bad investments” is all just shilling for maintaining an abusive power structure.
But don’t listen to some weird anarchist data analyst / civil engineer on the internet… You can refer to a “Nobel Prize” winning Economist who is saying **precisely the same things I am**:
https://www.bloomberg.com/news/articles/2023-09-29/angus-deaton-s-new-book-says-economists-value-markets-over-people
> It isn’t at all clear to me that there is a public desire to enact policies that truly deal with issues of poverty, homelessness, and mental health.
Then the public is morally bankrupt.
RE the CES public use microdata.
Yes, I’m pretty sure some amazing things could be done with CES public use microdata. I did look at it a little bit at one point. But this data has been around for decades, we spend literally Billions of dollars on Economics grants from the NSF and yet it hasn’t been done.
My experience trying to build a detailed model from ACS in 2017 is that the work required is significant if it’s all to be done by one person. If someone were to fund it, I’d love to work on it. I honestly don’t think most econ grad students are up to the task because it takes a considerable amount of computer science and programming talent to do the work, and I think that’s just usually absent from Econ education. Give me half a million dollars and 1 CS, 1 engineering, and 1 econ recent grads from decent *undergrad* programs and 12 months and I think some amazing stuff could be done, including an interactive website showing multi-plots of different groups economic conditions through time. I’d also like to tie it to mortality records, and state educational testing scores and a variety of additional things.
I’ve repeatedly thought of starting a nonprofit to try to push for this kind of research, but I just don’t see any obvious mechanism from getting from here to there. Creating the organization would be easy. Finding people to fund it is entirely a different story. It doesn’t benefit powerful people, in fact it’s more or less precisely the opposite.
Discussions by whom? We live in an age now where the biggest cleavage between the two parties is along the college-educated axis. If there were a lot of college-educated people in 1984 having a discussion and taking note of inflation and unemployment numbers the political salience of those discussions might be meaningful. Even if those discussions have continued with the same intensity and prevalence today (and I doubt it, but it doesn’t really matter for my argument) these are now all like-minded people with like-minded voting preferences talking amongst themselves. They aren’t changing who they’ll vote for based on those discussions. And obviously those that lack trust in governtment statistics (of whom there are at least two species: those who distrust authority and those who distrust methodology (looking at you Daniel)) are sublimely unconcerned with these outputs.
The economic statistics we’re used to now (official monthly reports of unemployment, inflation, etc) didn’t appear until the 1940s. Before then, they were scattered, and newspaper reporting was more influenced by the owner’s politics. I don’t know whether surveys from the 1930s asked about perceptions of economic conditions, but if they did it would make an interesting comparison.
My gut feeling is a lot of the problems can summarised in a statistical context: we are using point estimates to explain a whole distribution. For example, wealth largely follows a power law. Using just the average from GDP misses that the rich have (probably?) been getting a disporportionate share of that gain. It is entirely possible for overall GDP to be growing steadily, but for the majority of people to not be feeling that its true for them. (I was tempted to post this for the Justin Wolfers article too!)
A challenge to those of you who think inflation perceptions are the reality and economic measures are abstract fictions: The April Gallup survey found “Republicans are far more likely than Democrats and independents to name immigration as the most important issue. In the latest poll, 48% of Republicans, compared with 8% of Democrats, mention immigration. Independents fall roughly in the middle, at 25%.” My guess (perhaps this is incorrect – I’m sure someone will correct me if I am) is that more Democrats live near the border than Republicans. In fact, many of those Republicans live in states far from the border where there is little migration. It sure seems to me that the public perceptions are dominated by political association. I similarly think public perceptions of economic conditions are just as unreliable as perceptions about immigration. In both cases I believe the perceptions are distorted from reality via political/tribal beliefs. Of course, the perceptions are real in themselves, thus there are real problems trying to talk about reality.
Daniel –
Not sure where to put this, don’t know if you’ll see it, but kind of interesting information regarding the public’s perception of the economy (and whether it’s accurate and “experts” just can’t see it because of their academic stupidity and their elitism):
New Harris-Guardian poll:
– 56% say US is in recession (reality: 7 straight quarters of positive GDP growth)
– 49% say stocks are down YTD (reality: S&P500 up 12%)
– 49% say unemployment at a 50-year high (reality: U3 has been under 4% longer than any period since the 1960s)
https://x.com/DKThomp/status/1793270876550398329
I kinda feel that the “there are structural problems” is mostly a kind of post hoc fallacy reasoning, often by lefties because they have a hard time being judgemental about the working class. So they think it must be the elitist neoliberal economists who don’t see how people are really suffering. I mean sure, it’s hard for a lot of people for sure, but I think a ton of those who think the economy sucks now think it was peachy keen during Trump’s administration. I think that’s explained best by ideology-based cognition. People don’t like Biden, Trump appeals to them, so the economy was great then and sucks now.
Of course thar could be wrong but that’s my story and I’m sticking to it. 😉
Joshua, I did see this. I’m not sure how much of the discussion I had with Dale you followed, so I’ll in good faith try to explain the fundamentals of that argument.
First, let me concede one of your points. There’s no question in my mind that everyday people probably don’t have much connection to official statistics in terms of reading them frequently etc, and so it doesn’t surprise me that people don’t know whether stocks are down. For reference 40% of the country own NO stocks at all. And it’s probably near 100% of the people who are struggling https://news.gallup.com/poll/266807/percentage-americans-owns-stock.aspx many of those who do own stocks do so only in their retirement accounts where they don’t track them at all. So, yes, there is definitely disconnect.
The main argument I made with Dale is that things like 7 straight quarters of GDP growth **fundamentally, and at a mathematically provable level** can not ever address the question of whether the economy is doing well or poorly for families. And yet, economists continue, despite this proof having been given in 1878 by Joseph Bertrand, to address questions of the economy as if those kinds of measures had a hope of addressing them. https://en.wikipedia.org/wiki/Buckingham_%CF%80_theorem
I can’t stress this enough, if a mathematical proof shows that *logically* your measure is unable to provide useful information about a process and you continue to quote it in the newspaper and use it as fundamental to your “science” then your “science” is not a science. At least MacroEcon as practiced in the media is a fundamentally pre-scientific discipline and very roughly approximately in the same relationship to power as the Catholic church of the 1200s or something. There are “important questions” (angels dancing on the head of a pin for example) that are “addressed” by the “priests/Economists” in such a way as to reassure everyone that the world is just fine and everything which leads to rich people getting richer is fundamentally the correct way things should be at a “scientific” level.
In order to even begin to address the question of whether working class people are experiencing more or less economic well being, we must *provably by pure logic* compare two quantities of the same dimensions. One candidate might be for example median household income (currency/time) divided by the ongoing cost of purchasing some fundamentally necessary goods for quality of life (currency/time). Examples of those things might be the rent of a certain minimal size house or apartment (size dependent on the number of household members, you might say something like 250sqft/person), the utilities to keep that house heated or cooled against damaging weather extremes, the electricity or gas to cook, food to eat, transportation to and from the job that lets you pay the rent and food bill, healthcare costs to address at least any deadly issues like diabetes or heart disease or emphesema or sudden infections, dental care sufficient to keep teeth from falling out or rotting, sufficient childcare to keep children safe and fed, basic clothing, basic communications.
I worked hard at one point to try to estimate that cost through time for every public use microdata area in the country from 2000-2017, but found that I was spending far too much time on a project that I had no hope of getting paid for, so I stopped. But until we have those kinds of measures we will still be in the pre-scientific era of Economics.
As a very very rough approximate example, consider the following measure, which is median household income divided by a weighted sum of consumer price components which are roughly proportional to a dollar cost per unit time of related quantities.
Because Carlos objected to my pure uniform weighted CPI I spent an afternoon looking up prices of things in LA county and calculating a budget for a family of 2 adults and 2 children (the kind of family I likely to be saying maybe the economy isn’t necessarily so great). I came up with the following weights (as percentage of the sum of these costs, not as percentage of income)
Rent: 40%
Childcare: 26%
Food: 14%
Transport: 13%
Health: 7%
So, here’s median household income divided by that index, the overall formula is:
100*a/(.4*b+.26*c+.14*d+.13*e + .07*f) where a is median household income, and b,c,d,e,f are index values proportional to dollars/year in the order listed above all individually scaled to 100 on 2019-01-01
Because the index values are only proportional to their cost not the actual dollars/year cost the thing remains in units of dollars/year you can think of these as “2019 dollars”
https://fred.stlouisfed.org/graph/?g=1o8oT
This graph shows that there’s been a long term DOWNARD trend since 2001 (as far back as the complete data goes because the healthcare index doesn’t go back super far). That trend has been strongly downward from 2001-2012 bobbled around for a few years, and started to climb in 2014 hit a peak in 2019 that was still below what the value was in 2001, and then declined since 2019 until the last data point 2022 is very roughly 92% of what a family was making in 2001
More recent data isn’t available but the basic experience is “families with kids are in decline” according to this measure.
Now, I give you a logically sound approximate measure of income of a family in dimensionless type form, it shows a decline, interviews of people who live in families report a decline in their economic conditions, economists who use a provably logically unsound methodology report improvements, who are you going to believe? The people who experience it, the logical sound measure that approximately attempts to address the question that quantitatively agrees with the reported experience, or the provably logically unsound measure by the “high priests of the economy” that shows 7 straight quarters of increase in a logically irrelevant number?
I can’t emphasize this enough. Economists who write that stuff in the newspapers and online as part of a high priesthood type power and control scheme who don’t even know about Buckingham Pi theorem can get f***ed
Daniel –
I only half followed the convo with Dale… I think it’s pretty clear that an increasing number of people are rent burdened (30% on rent) or severely rent burdened (over 50%) over the last couple of decades. Obviously, that’s a huge factor.
I’m not fully on board with your broader point about economists but while neither do I think you’re totally off base…your focus seems to me a bit off on a tangent from my point.
Sure, a large % of poor people don’t own and don’t follow stocks, but that doesn’t explain why, when asked their opinions about unemployment numbers or whether we’re in a recession they do in fact have opinions, but their opinions are wrong. They aren’t saying “These numbers from economists are irrelevant to me because they don’t really measure anything relevant to my life.” They’re stating wrong opinions. If their opinions were merely rooted in ignorance you wouldn’t expect such a strong political signal, particularly one that is inconsistent with what the numbers actually are.
They could accurately estimate unemployment numbers or growth numbers even as they recognize that they’re having a harder time making ends meet. This poll isn’t measuring an opinion on whether the economy is worse *for them*. It’s asking opinions on discrete measures where they have formulated incorrect opinions. It isn’t just that they think the economy sucks, they think that Biden is to blame and Trump is excused from blame. I think you’re mixing some things together here.
I think that to strengthen your arguments here you need to find a way to incorporate the strong political signal in the polling data.
So, the only one I agree with you on is the stock market question since it’s posed in a way that is plausibly likely to be interpreted as asking about nominal dollar price levels.
If I ask a random person “is the US economy in a recession” I would expect them to interpret that as essentially “is the typical level of real consumption of goods and services up or down relative to recent years” and GDP as I discussed simply doesn’t answer that real question. Even “real GDP deflated by CPI” doesn’t necessarily answer that question either as a massively increasing fraction of GDP isn’t available to typical people to spend… I’m not familiar enough with the precise definition of what goes into GDP but I could easily imagine for example the Red Lobster strip mine contributed to increased GDP while it should have in fact lowered GDP by accelerating depreciation of real assets.
So the everyday person hears the question and answers is as if it were about the real consumption capacity of the say 99% of people excluding the top 1% who do completely different stuff than normal people… And there is no correct known answer to the question to compare against because no one has yet defined such a measure.
When it comes to unemployment I think few people know how it’s officially defined and they tend to think more in terms of a number defined similarly to labor force participation rate
https://fred.stlouisfed.org/series/CIVPART
Which has been lower than ever before in my lifetime, took a major hit in COVID pandemic and recovered back to… The lowest level in my lifetime.
Ok but we know the boomers are retiring so, what about core working age participation rate? That’s been up since the pandemic shock but still basically returning to a level we were last at 20 years ago.
https://fred.stlouisfed.org/series/LNS11300060
We can also split out men and women
Women
https://fred.stlouisfed.org/series/LRAC25FEUSM156S
Men
https://fred.stlouisfed.org/series/LRAC25MAUSM156S
Women are at an all time high, but men are near an all time low.
I believe everyone knows that COVID disrupted everything so what they are comparing to is a world pre COVID, not a world 12 months ago.
Also, I’m not sure if participation rate includes the disabled in the denominator or not
But the number of people who are disabled is WAY up at an all time high (long COVID is basically what this is)
https://fred.stlouisfed.org/series/LNU01074597
So I take the first and third question as likely being understood as “is the real productivity of the economy for most people up or down relative to your previous lifetime experience especially pre-covid” and the answer is like Brandt says “Well Dude, we just don’t know”
And I take the third question to be “are people like you working at productive jobs” and the answer is “I know a whole bunch of newly disabled people and a lot more men who arent working than I knew about before COVID” and that’s also plausibly the correct answer to the question they are likely to understand.
@Daniel
Please take a step back and realize if your argument requires so many paragraphs then it is a bad argument.
Instead identify precisely what requires explanation in past data, then predict what will happen in the future if your explanation is better than the others. Doesn’t need to be perfect.
Daniel –
> Please take a step back and realize if your argument requires so many paragraphs then it is a bad argument.
FWIW, I think Anoneuoid’s heuristic is absurd. I appreciate you taking the time to explicate your view.
That said, I still don’t think you’re entirely right, and basically for the reason I stated earlier – you should account for the political signal in the polling data in your argument.
I certainly agree that the metrics used to assess the economy don’t capture everything people experience. GDP may track with “happiness” but I certainly wouldn’t consider it a sufficient metric to assess well-being.
I think your disdain for economists is somewhat overdrawn but I entirely agree overall with the points you make about the weaknesses in the metrics’ validity.
Joshua, I don’t disagree with the point that polling data has a political signal. But it’s far more complicated than “the Trumpers say the economy is bad because they hate Biden and Dems say the economy is good because they like Biden” heuristic.
Both the political component and the disconnect between what economists look at and what would actually answer relevant questions are simultaneously in effect at the same time I think there’s no doubt there.
Daniel –
I think we’re approaching agreement. As Thompson says in his follow on Tweet:
1. High prices and rates create objective economic hardship and frustration.
2. Americans keep expressing opinions about this economy that are flatly, wildly wrong.
We don’t have to isolate narratives (1) or (2). Both true. Both matter.
So we could add…
3. the disconnect between what economists look at and what would actually answer relevant questions…
They all matter.
Although I would still disagree with your categorical framing. What economists do look at, while insufficient, is also a part of the picture, not just entirely irrelevant. I think painting them all broadly with the same brush is probably too strong. Surely, many look at a wide range of factors. But I think it’s fair that just saying “The economy is doing great, why don’t people see that?” based on limited metrics is a common, and facile, narrative.
Joshua,
I can’t stress this enough…
>What economists do look at, while insufficient, is also a part of the picture, not just entirely irrelevant.
When what they look at is a dimensionless ratio then it has a hope of being relevant. But when it’s a dimensional measurement, like GDP, it is entirely irrelevant by logic alone.
Well, not entirely irrelevant, it’s obviously something you can use to create a dimensional ratio, but it’s irrelevant to any question that matters until such a ratio has been formed.
Economists intuitively know this but they tend to believe they’ve “solved the problem” with things like “Real GDP/capita”. however, they haven’t.
Let’s look at Real GDP/capita, we can think of it as C * (GDP/capita) / Price_basket_of_goods
Where C is a dimensional *constant* in dollars (it’s the price of the basket of goods at a specific point in time). Since that’s a constant we can ask the question maybe does the rest have no dimensions and is therefore relevant?
GDP/Capita has units of dollars/person/year, Price_basket_of_goods has units dollars/basket_of_goods, so that has units of:
baskets/(people * years)
So it’s still irrelevant!
We could make it relevant to some question by combining it with things relevant to that question. For example we might divide it by a number that has units of (baskets of goods / person/year), basically a rate at which you buy those goods…. and then it would become “how many multiples of the basket of goods you do buy is your income?” but this will vary from group to group, so that GDP/capita is much less relevant for anyone who doesn’t buy much of the goods defined in the CPI-all-items average.
Specifically, if you spend almost all your money on very basic goods and services (rent, food) then the relevance of “gdp/capita goes up” is much less, because the basket includes things like say luxury automobiles and fancy dinners and tickets to concerts and fishing trips.
The problem as I see it is that Economists *don’t want* their measures to be relevant and specific. It’s much much more politically powerful to have a message that says “the *world* is getting better” than “these specific 18 billionaires are getting better” or “anyone who makes 1.5x median income or more is getting better” or “actually… 70% of people in the country got worse but the billionaires did really well”
Disaggregating and making relevant measures requires you to make judgements about who you are discussing, and they want to **hide the fact** that such judgements are absolutely necessary.
And I’m not the only one calling them out on it. Angus frikin Deaton is calling them out. https://www.bloomberg.com/news/articles/2023-09-29/angus-deaton-s-new-book-says-economists-value-markets-over-people
So I know it’s been a while since we started this conversation, but I saw this article today which was incredibly relevant and I thought Dale and a few others might care:
https://www.cnn.com/2024/05/21/economy/economic-wellbeing-2023-inflation/index.html
According to research done by The Fed, 65% of households say that their financial situations were worse last year than the previous year, and the final section mentions that parents with children under 18 the share who were “doing well” in 2023 was 64% compared to 75% in 2021 and 69% in 2022 (so two straight years of decline). And those with younger children had child care expenses which were 50-70% of their housing bill
“Child care… homeowner’s insurance, food sufficiency, and caregiving responsibilities” were important topics for this group.
25% of people who live in the south, made $50k/yr or less and own a home were unemployed