The majority of Americans believe their economic situation has worsened since Joe Biden assumed office, as indicated by a Financial Times survey of approximately 1,000 registered voters earlier this month. The findings sparked controversy, with economist Claudia Sahm initially stating that they were “impossible” and then retracting her statement amid backlash. This online debate reflects a broader discourse among academics, policymakers, and commentators who offer various explanations for why Americans express unfavorable economic assessments despite some objectively positive indicators.
Low poverty, often considered a key measure of economic well-being, holds significant weight for economists who share Sahm’s perspective. The poverty rate exceeded 3.9 percent last month. However, beyond poverty rates, there are other positive trends such as a stable Consumer Price Index, decreased income inequality driven by workers seeking better-paying jobs, rapid job growth, and potentially surpassing pre-pandemic wage levels after accounting for inflation.
Despite these encouraging economic indicators, the Financial Times survey is not an outlier in revealing widespread economic pessimism. The Conference Board’s Consumer Confidence Index from October showed continued “pessimism” among individuals, and a CNN poll conducted in August found that 75% of respondents viewed the economy as either extremely or very weak.
Here are seven theories that attempt to explain this phenomenon:
1. It takes a moment for people to change.
The unprecedented social and economic crisis brought on by COVID-19 resulted in job losses for many people. About 60 million individuals reported that they had been unable to work in the previous quarter due to pandemic-related business closures or losses in May 2020. Then, inflation set in, driving up the cost of food, power, rent, and housing. Although price increases are leveling off, financial circumstances changed rapidly in both directions, requiring time for people to adjust. Public opinion has historically followed the business cycle, declining during recessions and improving during expansions, but pay hasn’t kept pace with inflation until recently. People might start to feel better about the economy as wage growth, job growth rates, and lower inflation continue to rise quickly. Furthermore, respondents may be evaluating the Joe Biden Economy based on the past two years, not just the past month, which could influence their opinions.
2. Simply put, prices matter more.
Prices seem to affect people more negatively than employment. According to a Financial Times poll, 60% of respondents believe that preventing inflation is more crucial than maintaining well-paying jobs, with only 30% supporting the latter. For the general public, a low poverty rate, while important to economists, may not be sufficient. Price awareness stems from the fact that it directly impacts people’s daily lives, whether they are businesspeople or low-wage earners. In contrast, job losses affect only a small percentage of the population even during periods of high unemployment. Additionally, people may view pay increases or new jobs as the results of their own efforts, whereas inflation is beyond their control. If someone is working a well-paying job in an inflationary environment, they may perceive themselves as doing well, but they believe the overall economy is struggling.
3. There are high expectations.
The federal government provided significant support during the crisis, including eviction moratoriums, direct payments to individuals, student loan payment pauses, support for low-wage workers, tax breaks for parents of young children, and financial assistance to state and local governments. This support may have raised expectations for what constitutes a “good economy.” Despite these benefits, many people are not performing as well as they were a few years ago on certain metrics. Real disposable personal income peaked in March 2021 and has since declined. Americans may have spent most of the money they had set aside for the pandemic, even though they experienced an increase in income in 2020 and 2021. True wages are higher now than in January 2020 but remain lower than in mid-2020. The fact that low-income workers are experiencing the most wage growth adds another layer of complexity, potentially explaining why middle- and upper-class workers do not perceive the economy as improving.
4. The cost of living is a burden.
In August, housing affordability reached a record low due to high-interest rates, making it difficult for the average family to afford a home. Housing costs are rising despite a slowdown in general inflation. Dissatisfied homeowners who wish to buy may feel trapped due to their low refinancing rates. Moving now comes at a high cost, as it means giving up those favorable rates. Respondents express strong dissatisfaction when asked about the current conditions for buying a home, which can influence their overall perception of the economy. The primary governmental response to inflation has been to raise interest rates, further increasing housing costs.
5. Middle-income earners are the biggest winners.
According to a recent study on income inequality, inflation-adjusted wages have reached new highs for Americans in the bottom 10 percent of earners since the pandemic. Real wage growth has not been comparable for those in the 50th or 90th percentile. This might explain why people in the top third of income earners have experienced the most significant decline in consumer confidence, dropping 24 points in 2023 compared to the average between 2000 and 2020. In contrast, those in the middle third of income earners have only lost 15 points in consumer confidence. High-income individuals may be more sensitive to the challenges of a competitive labor market, even though they are performing better in absolute terms than lower-income individuals. While low unemployment is undoubtedly positive, it also has drawbacks, such as overworked service establishments and challenges in finding and retaining workers for low-paying jobs. These downsides may be more widespread than the benefits, as not everyone has access to new, higher-paying employment.
6. Media bias toward negative news.
President Biden suggested last month that the media’s penchant for reporting negative news contributes to people’s negative economic perceptions. The disconnect between how people describe their personal financial situation and how they perceive the larger economy is often attributed to media influence. Some argue that the internet, including sites like Fox News and The New York Times, plays a role in shaping Americans’ views of the economy. While media bias can affect how Americans perceive the state of the economy to some extent, survey responses have remained relatively stable since 2020 when people are asked about their exposure to good or bad news about the economy.
7. Partisan influences.
According to a recent report on politics and the economy from the Reagan administration, individuals aligned with the party in power tend to have more positive economic expectations than those from the opposing party. Democrats tend to believe that Democratic leaders are good for the economy, while Republicans may hold the opposite view. However, recent research suggests that Democrats may gain less from political cheer and suffer more from it than Republicans. When a Republican is in the White House, Republicans’ economic expectations exceed predictions by about 15 points compared to Democrats’ expectations, which exceed predictions by about 6 points. But when a Democrat is in the White House, Democrats’ expectations only exceed predictions by 6 points, while Republicans’ expectations fall by 15 points.
In addition to these explanations, there is a broader question of what lessons policymakers will draw from this divergence between public perceptions and economic indicators. This discussion is not merely about whether voters view the economy as good or bad, but rather about the lessons future politicians will take regarding how to respond to economic downturns. Policymakers grapple with defining the appropriate responses to economic challenges, including the balance between fiscal stimulus and inflation concerns, in a rapidly changing world.