Vibrations, the economy and the elections


An announcement from the Federal Reserve about the future of the funds rate is not the type of news that would normally be included in the analysis of public opinion and the economy. Typically, analysts look at numbers like gross domestic product and unemployment, not something as arcane as the federal funds rate.

But this is not a normal economy, and public opinion about the economy has not been normal either.

For two years, the public has said the economy is doing poorly, even though it appears healthy by many traditional measures. This has sparked fierce debate over whether public opinions are driven primarily by concrete economic factors such as high prices or something non-economic, such as a bad “vibe” caused by social media memes or Fox News.

The Federal Reserve's projection Wednesday that it will cut rates three times over the next year probably won't generate TikTok memes, but it's exactly the kind of event that could ultimately resolve this debate one way or another, with major consequences. and potentially decisive for the 2024 presidential elections.

To get right to the heart of the problem underlying this debate: high prices do not seem to fully explain why voters are this Upset about the economy.

Yes, voters are upset about high prices, and the prices are really high. This easily and even completely explains why voters think this economy is mediocre: In the age of consumer confidence data, inflation has never risen this much without pushing consumer confidence below average and usually well below of the average. This part is not complicated.

But it's harder to argue that voters should believe the economy is downright terrible, even after accounting for inflation. In early 2022, I estimated that consumer confidence was being at least 10 to 15 percentage points worse than what would be expected historically, after taking into account prices and real disposable income.

I could go over the numbers, but consider this: The nadir of consumer confidence in 2022 wasn't just low; was a record low for the index dating back to 1952. That's right: consumer confidence in 2022 was worse than in the 1970s, when higher inflation persisted for much longer, and worse than in the depths of the crisis. Great Recession.

Now, other indicators of consumer confidence don't show things that bad, but even the most optimistic measures show that Americans' economy is as low as it was 15 years ago, when mass layoffs caused the unemployment rate to double. to 10 percent and when household net worth fell by $11.5 trillion. You don't need fancy mathematics to see that there is something left to explain.

The two sides of this debate disagree about why, exactly, the public is so angry about the economy.

One side argues that public opinion on the economy is now being driven by non-economic factors and, in particular, by vibes or a prevailing mood that colors our perception of reality. From this point of view, the current environment is so vitriolic and harsh that public opinion no longer responds to material economic reality: the “environment” is bad, so voters cannot see that the economy is good.

Strictly speaking, there's no reason the vibes couldn't be based on tangible economic conditions (like the disappearance of stimulus checks), but in practice this ends up being an argument for how non-economic factors prevent voters from appreciating the economy. . Those factors could include conservative media, cynical social media, the mental health crisis, a pandemic hangover, President Biden or anything else that could weaken Americans' economic spirit.

There could well be something to the vibrations argument. There may even be a lot of that. But there just isn't much evidence to support it. This part is fundamentally based on a diagnosis of exclusion: if we do not accept the economic argument, then it must be non-economic, and if it is non-economic, it can really be anything. The power of vibrations here is naturally indeterminate, and allowing unlimited explanatory power to a theory without evidence should give any serious thinker pause.

If this side of the debate is correct, the consequences for Biden will be quite grim. From this point of view, the economy should be helping him, but instead will presumably be a major drag. An 81-year-old moderate white man may be the worst possible Democrat to change the vibe on TikTok.

The other side of the debate maintains that the explanation is fundamentally economic, but that standard economic statistics do not clearly reflect the factors that drag consumers down.

There are two types of adverse economic factors that this side of the debate has in mind. One is economic dysfunction: some basic things have become more difficult. It is more difficult to hire. It is more difficult to get a loan. It's more expensive to buy things. Sometimes it was impossible to buy things due to shortages in the supply chain. It is more difficult to buy a house. It is more difficult to sell a house. If you wanted to participate in these types of economic activities, you should have done them before autumn 2021.

It is easy to see how these challenges could affect economic perceptions, and economic statistics can overlook these issues. Standard data measures the extent of economic activity, not its ease. The fact that people still have the resources to spend, hire, and buy does not change the fact that voters can rationally conclude that the economy is bad if they find it more difficult to engage in economic activity.

The other type of adverse economic factor is pessimism about future growth. A statistic like unemployment says a lot about the economy today, but little about the economy tomorrow. Expectations of future growth are an important component of consumer confidence indices, and for good reason: the desire to turn money into more money is central to American capitalist culture. Here too there have been reasons to anticipate limited economic growth or even a recession. Investors expected it, as evidenced by the yield curve. There was even a reasonable assumption that the Federal Reserve would be so focused on slowing inflation by keeping interest rates high that a recession would be all but inevitable.

Unlike the “vibrations” theory, there is much evidence for these various phenomena. They also fit into the framework of consumer confidence based on specific economic conditions.

But it's much harder to say whether these nontraditional economic problems add up to explain what's happening. They could explain a lot and even explain everything, but it is impossible to prove it empirically without any precedent for today's economy in the era of modern consumer confidence data. There has simply never been a time when unemployment has stayed this low and prices have risen this much, let alone with all these added twists like supply chain shortages and recession expectations.

What can be said is that the theory of concrete economic problems will be put to the test as soon as economic reality improves, and that time may finally come.

After a few months of stubborn inflation, rising gas prices and interest rates, and a stock market crash, the last month has brought excellent economic news. The stock market has risen nearly 15 percent since the New York Times and Siena College polls were released in late October. The inflation trajectory seems good. Mortgage rates are falling. Gas prices have dropped. Once-skeptical economists have declared that a “soft landing” appears to be within reach. And now the Federal Reserve is forecasting rate cuts, which portends growth, confidence in lower inflation and, eventually, a return to a more normal economy.

If we add it up, the great economic barriers could be about to disappear. If they do so and the material economic side of the debate is correct, consumer confidence could begin to recover quickly. And Biden's re-election chances would begin to improve, at least to the extent that the economy and not another issue, such as his age, is responsible for Donald J. Trump's lead in the polls.

While it's too early to tell, there are certainly signs that consumer confidence could increase. For one thing, he's already been doing it. Overall, consumer confidence has risen nearly 20 points since inflation peaked in the summer of 2022. That pace of improvement is in line with previous, vigorous periods of economic expansion, such as during the 1990s. The monthly pattern of consumer confidence even appears to align with the news: Last month's strong economic data corresponded with a rebound in consumer confidence that erased the declines of the past four months, when economic news was worse than during the summer.

That's what we'd expect if real economic factors were driving consumer confidence, although it's not enough to disprove the vibe theory. To rule out the vibe argument, we would have to start seeing the gap between expected and actual consumer confidence close. If fears of a recession fade and a more normal economic environment returns, there could still be enough time for that gap to close before Biden runs for re-election.

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