Back in the 1970s, Arthur Okun, an economist who had been a
policy adviser to Lyndon Johnson, suggested a quick-and-dirty way to assess the
nation’s economic condition: the “misery index,” the sum of inflation and
unemployment. It was and is a crude, easily criticized measure. The measurable
economic harm from unemployment, for instance, is much higher than that from
inflation. Yet the index has historically done quite a good job of predicting overall
economic sentiment.
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So it seems worth noting that the misery index — which
soared along with inflation during 2021 and the first half of 2022 — has
plunged over the past year. It is now all the way back to its level when
President Joe Biden took office.
The U.S. economy added 4 million jobs over the past year, and the unemployment rate has remained near a 50-year low.
This remarkable turnaround raises several questions. First,
is it real? (Yes.) Second, will ordinary Americans notice? (They already have.)
Third, will they give Biden credit? (That’s a lot less clear.)
The plunge in the misery index reflects both what didn’t
happen and what did. What didn’t happen, despite a drumbeat of dire warnings in
the news media, was a recession. The U.S. economy added 4 million jobs over the
past year, and the unemployment rate has remained near a 50-year low.
What did happen was a rapid decline in inflation. But is
this decline sustainable? You may have seen news reports pointing out that
“core” inflation, which excludes volatile food and energy prices, has been
“sticky,” suggesting that improvement on the inflation front will be only a
temporary phenomenon.
But just about every economist paying attention to the data
knows that the traditional measure of core inflation has gone rotten, because
it’s being driven largely by the delayed effects of a surge in rents that ended
in mid-2022. This surge, by the way, was probably caused by the rise in remote
work triggered by the COVID-19 pandemic rather than by any Biden administration
policy.
Alternative measures of core inflation that exclude shelter
by and large show a clear pattern of disinflation; inflation is still running
higher than it was before the pandemic, but it has come down a lot. If you
really work at it, it’s still possible to be pessimistic about the inflation
outlook, but it’s getting harder and harder. The good news about inflation, and
about the economy as a whole, does look real.
But are people noticing this improvement? Traditional
measures of economic sentiment have become problematic in recent years. Ask
people how the economy is doing, and their response is strongly affected both
by partisanship and, I believe, by the narratives conveyed by the news media.
That is, what people say about the economy is, all too often, what they think
they’re supposed to say.
The plunge in the misery index reflects both what didn’t happen and what did. What didn’t happen, despite a drumbeat of dire warnings in the news media
But if you ask Americans more specific questions, such as whether
now is a good time to find a quality job, they typically say yes. At the same
time, their expectations about future inflation have declined substantially.
And if you look at a novel indicator — what information
people are searching for on the internet — you’ll find that searches for both
“inflation” and “recession” soared in 2021-22 along with the misery index but
have plunged over the past year.
Finally, as always, it’s important to look at what people do
as well as what they say. Strong consumer spending, record levels of air travel
and many other indicators suggest that Americans are feeling pretty good about
their economic circumstances.
But will Biden get credit? Polls suggest that voters are
still giving him very poor marks for his handling of the economy, despite the
decline in the misery index.
Some analysts have argued that this jaundiced view reflects
a failure of wages to keep up with inflation. But this was true for most of the
Reagan years too, and in any case real wages have been rising lately.
So will voters’ views of the Biden economy eventually
reflect the good news? Or did the inflation shock of 2021-22 establish a
narrative of Biden as a poor economic manager that has become too deeply
entrenched — both in the public consciousness and in the news media — to be
dislodged even as the economy rapidly improves?
Biden himself is trying hard to change that narrative, by
pointing both to the improving data and to an impressive surge in manufacturing
investment. But I have no idea whether he’ll succeed. One encouraging precedent
for Biden: Ronald Reagan still had fairly low approval in mid-1983, then went
on to win a landslide in 1984 on the strength of the economy’s recovery. Biden
might yet turn the narrative on his economic policy around.
And even if he can’t, it might not matter. High inflation
was supposed to guarantee a huge red wave in the midterm elections. Instead,
Democrats did surprisingly well, probably because abortion and other social
issues played a bigger role than economics. Those social issues aren’t going
away, while high inflation is. Arguably, Biden doesn’t need to convince
Americans that his economic policies have been highly successful; he just needs
to make the case that the economy isn’t doing too badly.
And it isn’t. In fact, by most measures the economy is doing
quite well.
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