The latest hotness about the economy is that people aren't satisfied with low inflation. They don't merely want prices to rise more slowly, they want prices to return to their old levels.
I don't know if this is true, or even whether it's an effective attack line. Either way, it ain't gonna happen. In the past 60 years, prices have declined exactly once, and even then only slightly:
But I'm curious about whether this new attack is true. Are people really upset because prices went up and then stayed up? It's certainly possible, but here's a point of comparison:
Inflation was high during the first year of Reagan's presidency but then subsided thanks to Paul Volcker's recession. However, it rose again at the end of 1983. During the entire period of Reagan's 1984 reelection campaign it was above 4% and even spiked as high as 6%. Needless to say, this means prices continued to be high. They certainly never returned to their old level.
Were people upset about this back then? Beats me, but "Morning in America" sure was successful and Reagan won reelection in a rout. It couldn't have bothered people all that much.
Today, we're coming off an inflationary peak quite a bit lower than Reagan's; the current inflation rate is lower than it was during 1984; the unemployment rate is lower; and real blue-collar wages are flat—just as they were during Reagan's first term. So why is there apparently so much more economic angst this time around?
Fox News is one reason. But I suspect there's another: it takes a while for people to adjust to economic news. Inflation went down nearly to zero in 1982 and 1983, and that gave people plenty of time to adapt to the idea that Reagan had defeated inflation. It went back up in 1984, but it wasn't until 1985 that people really noticed.
This time around, we've been in a high-inflation environment for the past two years, and people have adapted to that. Inflation is now coming down, but it will take another year before everyone responds. If Biden is lucky, by next summer people will have adapted to the idea that inflation is no longer a problem—but only if he's lucky.
Drum seems to sometimes selectively pick stats that lead to conclusions that few economists would agree with. I doubt many would be convinced by the argument above that the economy is as strong now as it was leading into Reagan's landslide victory.
But I think his main point here is right. Despite the fact that inflation has slowed, people still go to stores and everything seems more expensive than it should. At some point those prices will seem normal (assuming inflation doesn't shoot up again) and people's perception of the economy will be more positive (assuming we are not in a recession at that point). The big question from a political perspective is when that will happen.
Kevin's excellent and insightful blog suffers from one, or at least one, fundamental error. He assumes that people's political preferences are ultimately based on objective, measurable factors. It's the same flawed assumption that underpins the discredited 'rational choice' theory of voter behavior in democracies.
Employment, unemployment and real wage growth would be stats that indicate the economy is currently doing as well or better than the economy was in 1983-1984. While these arent the only important stats, they are pretty big ones.
Its interesting how powerful the narrative is. The very different narrative has led you to believe that the stats tell a certain story....but really its the narrative, not the stats themselves.
"I doubt many would be convinced by the argument above that the economy is as strong now as it was leading into Reagan's landslide victory."
You're right. The economy today is stronger. Take a look at the misery index numbers back then.
This is not a case of cherry-picking. Kevin took a current argument and found relevant data; his first chart spans 60+ years. Keep in mind that the second chart (which spans a decade) shows a rate of change, which never goes below zero. That means that prices never declined, not even briefly, much less to a significantly-lower-than-peak level. I think most economists would expect this; wage ‘stickiness’ is a mainstream assumption; that makes a new price floor.
Media, media, media, media, media.
Republicans are really good at suckering the mainstream media into doing their propaganda work for them:
(a) relentlessly pound the media companies for "liberal bias"
(b) thus making the media company bosses fret that they may lose advertising revenue,
(c) thus media companies bend over backwards to decontextualize everything in a way that they think will end the accusations of bias
(d) Republican message-meisters, when they stop laughing at their good fortune, double down on their accusations of "liberal bias" in the media
(e) continue ad infinitum
For many people, inflation is simply a way to justify their antipathy to the Biden administration and Democrats in general. Rather than say "I'm a committed Republican no matter what positions the two parties take" - which they understand would mark them as mindless sheep - they look for rational arguments to underpin their predetermined preferences. If it wasn't inflation it would be immigration, or interest rates, or "weak" foreign policy, or any other contested public policy issue on which the administration is open to criticism.
Agree completely. And it isn't just people, it's the political press. They have to have a few negative Biden stories to roll out for balance. The problem for Biden is that it is the same two or three stories over and over, so they sink in. Trump & the Republicans have so many different stories that none of them really land in the mind of the dullards whose votes determine outcomes in swing states.
Cf. EMAILS!!!
The EMAILS!! might be the best proof that the details and data dont matter. The narrative matters. Its not much different with inflation.
Inflation was high during the first year of Reagan's presidency but then subsided thanks to Paul Volcker's recession.
Inflation was quite high in 1979 and early 1980 (the latter part of the Carter administration). While 1981's inflation was high by today's standards, by the standards of that era it wasn't too shocking. Also, by the time Reagan became president, inflation had been plaguing the US economy for a full decade. Americans just weren't going to punish the Gipper for a single year of highish inflation (that he largely inherited).
Biden has suffered politically in large part because, by 2021, inflation was a very distant memory for most Americans, so it seemed quite new at the time (and therefore a hideous shock) when it arrived on the scene.
I personally suspect Joe will be fine in terms of the political effects of higher prices, because inflation continues to drop. A recession is the bigger danger for him. If a recession holds off another 10-11 months, he probably wins a second term.
The Republicans got hammered in the 82 midterms because of unemployment.
It almost never talked about, but the attempted assassination of Reagan gave him a barrier against personal attacks. The news people talked about him like he was a great hero. They smiled when they said his name.
Good point here-- that Reagan's general sanctification really began with that shooting, as far as media and lower-information voters go. He was already a right-wing hero for his long-time GE speechifying and Hayekian histrionics and for cracking down on college students in CA, but his responses when he was shot were just about perfect mythification fodder for the media machine. (I'm not dissing him personally for what had to be extremely painful to do, but pointing to the way it was treated.)
Also, it's worth remembering just how obsessive his advance people were about getting his stage settings right for those all-important visuals. Deaver had to have just the right shade of blue hangings behind him (yes, Rs were the blue party then) to make his eyes look right, as one example.
Whatever he might actually have done in office, his whole presidency was run as a Hollywood production, and by people who knew how to create the surface they wanted. They put the patina on Morning in America, packaged for a receptive media machine.
The Reagan assassination attempt was horrible. I was a kid and can clearly remember the number of my favorate shows interrupted over and over with the news. One of many reasons I could never vote for a Republican.
When I heard that I said something like 'oh thank jesus is the evil bastard dead?' appalling the person who told me.
Thank you. The 70's inflation was far more extended and didn't look like it was ever going to change. Volcker's brutal interest rate increases crushed it and the increase in 83 wasn't enough to change people's impressions that inflation had been tamed.
Good post, I agree completely.
I'm glad Kevin brought up the Reagan Administration and inflation as an example because if Reagan got the good fortune of inflation going from 18 percent in February of 1980 to zero in 1983 (which also included 11 percent unemployment in order to do so) why is Biden not receiving the same benefit from seeing inflation going down from nine percent to 3.2 percent without double-digit interest rates? And I believe it's for the reasons you pointed out and the fact, as Kevin has mentioned, that unlike 1983, there's a TV network totally devoted to the point of comedy to tarnish any accomplishment by any President not a Republican which skewers all surveys on the economy because now it's simply a partisan question.
One thing that should be added, food and fuel prices really went DOWN in the early 80s and this is what people noticed the most. Even if that meant the both the oil patch and farmers suffered with lower prices and higher interest rates for their loans on equipment and mortgages. This led to crises in commodities in the mid-80s.
As a general rule, most people search for facts that support their conclusion. They dont draw novel conclusions based on changing data, instead they change which data they claim to care about.
if you tell people that inflation is caused by a pandemic, then they're going to expect that prices return to "normal" post pandemic. most people, even highly educated ones, don't understand the economic truths underlying this post. speaking for myself, I certainly didn't and expected groceries etc to return to pre- pandemic prices. i expect this will be a major issue for Biden going forward.
Exactly. People complain about things being more expensive, they're told it is because of inflation, so when inflation comes down, most people expect prices to go down. It's not like inflation is actually explained to anyone on the news or something, it's just given as the reason prices are high.
Absolutely right. The ignorance of how basic economics works is stunning. I'm not an economist, but it's butt-simple: when demand exceeds supply, the suppliers raise their prices; when supply exceeds demand, they have no choice but to lower them. During the Trump-era pandemic, demand shrunk dramatically, causing prices to crash. And supply chains were devastated, causing lots of job losses. Then when Biden took over and vaccinations surged, demand came back, prompting businesses to raise prices to restore supply chains AND make up for all the lost revenue. Hiring also surged, lowering unemployment, but apparently this doesn't matter anymore.
On TV news, we saw an endless string of gas station & grocery stores interviews featuring price lamentations, but I don't remember a single interview with someone who got their old job back. Don't wanna be accused of liberal bias!
"Were people upset about this back then? Beats me, but "Morning in America" sure was successful and Reagan won reelection in a rout. It couldn't have bothered people all that much."
The difference is the 1970s and early 1980s saw inflation in the high single digits and occasionally spiking to double digits, and so four percent seemed like a nothing burger. Over the past 20 years, however, inflation has been around 2% or lower, and so the 8% was a shock and 3% still seems high.
PPI is down under 2%. Markups over 2% is just greed
"They don't merely want prices to rise more slowly, they want prices to return to their old levels.
I don't know if this is true, or even whether it's an effective attack line. Either way, it ain't gonna happen."
Of COURSE this is true. It's always been true and always will be.
It helps a lot that we talk constantly about prices. Deflects from the fact that most industries and corporations are seeing record profits right now, which implies that they could lower prices if they wanted to but they just don’t want to.
Paul Krugman has been talking about these perceptions for some time. The latest piece has references to recent research. Most of his columns are behind a paywall, but the link below might work:
https://www.nytimes.com/2023/11/14/opinion/partisanship-economy-polling.html?unlocked_article_code=1.-kw.QrYF.j-D1GLwoxKaz&smid=url-share
I bet that, if you broke down responses by age group, older people are more fixated on "inflation" than young cohorts. That's because they don't understand "inflation" to mean a rate, but think of it instead as the fact that they remember Commodity A being sold at price X and now it's 3X. The problem is that the older you get, the more compressed time becomes, and they think that it was "only a few years ago" that Commodity A was at price X, when in reality it was 40 years ago.
Oh boy. Now and again, I come across something that makes me think, “I read something about that in Scientific American a few years ago”; and when I look it up, ‘a few’ = 30+ …
I bet that, if you broke down responses by age group, older people are more fixated on "inflation" than young cohorts. That's because they don't understand "inflation" to mean a rate,..
I think it's mainly because older people have substantially less ability than younger folks to raise their incomes. In most cases a 74 year old can't look for a higher paying job, or a side hustle. I doubt they have a weaker understanding of economics.
I actually did see a discussion on our company chat system where 20-something employees seemed confused about why "decreasing inflation" does not mean "price go down".
Metaphors about car acceleration seem to have cleared up the technical confusion, if not the unhappiness. I don't know how widespread that sort of thing is, but these are college grads working for a blue chip.
Agree. There is a general cognitive difficulty in understanding the relationship between levels and rates of change.
Sentiment surveys show people think we're in the depths of a depression. That's what people tell you. But do they act like we're in the depths of a depression? No. If they did, we'd be in a depression. We're in a robust economy. Pay attention to what people do with their money, not what they say to a pollster.
A pet theory of mine is that people of a certain kind (journos included) don't make their assessment about the economy based on the price of fish (eggs, gas, etc.) but on the balance in their 401(k)s. The stock market is not the economy, but it's the one piece of econ news that makes the news on an hourly basis. The market is still well off its all-time highs from the beginning of 2022. As it continues to rally, more of these people will begin to feel the economy is not doing so bad after all. When new all-time highs come around, it will be harder to deny that things are looking bright. I think it may change the way the economy is covered.
I think for the average "person-in-the-street" it really is the overall price level, and to them "ending inflation" means prices go back down to what they were in 2020. The big difference between now and the mid-80s is that in the mid-80s people had experienced nearly 20 years of inflation swings that brought a certain amount of familiarity with how inflation works. But today you have to be in your 50s to have any real memory of high inflation, and even then those would be childhood memories.
I am very upset prices don't drop. I am confused, however, at how my voting choices would help make that happen.
Many people seem to understand inflation as "Prices are higher than I like"
I’d like to add one other thing here. For me, and I think a lot of older middle class types, prices are much higher. To some extent, that’s because we have far more choice in the things we buy and tend to purchase more “premium” items. For example, I bought some apples today. Gee, I thought, apples sure are expensive nowadays. Then I checked myself. The apples I prefer are a more expensive variety. There are many types of apples to choose from now. When I was young there were only a few. The apples I like didn’t even exist a few years ago. There are cheaper varieties but I don’t like them as much. But my first thought was “apples sure are expensive”. It’s the same with a lot of other things I buy. So, I can go away from the store thinking about how high prices are. But to a large extent I’m not comparing, um, apples to apples.
I did exactly that last week.