WSJ’s Grep Ip: “What’s Wrong With the Economy? It’s You, Not the Data.”
In The Wall Street Journal’s latest poll of swing states, 74% of respondents said inflation has moved in the wrong direction in the past year.
This assessment, which holds across all seven states, is startling, sobering—and simply not true. I’m not stating an opinion. This isn’t something on which reasonable people can disagree. If hard economic data count for anything, we can say unambiguously that inflation has moved in the right direction in the past year.
In the 12 months through February, inflation, according to the century-old consumer-price index, was 3.2%, compared with 6% a year earlier. Use a slightly different time horizon, or a slightly different measure (such as the index the Federal Reserve prefers) and you get similar results. Take out food and energy—or for that matter look only at food and energy—and inflation is still down.
So, on the one hand, Ip is right. Inflation is definitely down from a year ago. Were I asked that question, I would have answered it “correctly.” I’m a trained social scientist, follow the news incredibly closely, and am thus understand what the question means.
But I don’t blame the 74% who got the answer “wrong.” This isn’t a case where “feel” something that just ain’t true. No, ask a normal person whether inflation has “moved in the wrong direction,” they aren’t going to compare rates but rather directions. And, since prices are noticeably higher, it’s moving in the wrong direction.
People, almost surely wrongly, expect that an end of inflation means that prices should be going down. And, hey, it happens sometimes. Gas prices are in fact down from where they were a year or so ago (but higher than they were a month or so ago). Egg prices, too, have gone down. But all sorts of things are still much higher priced than they used to be.
Indeed, Ip acknowledges this later in the piece. Sort of.
It’s tempting to chalk this up to a misunderstanding. Lower inflation means the level of prices is still rising, just more slowly than before. People sometimes conflate inflation with the level of prices and believe inflation is getting worse because the price level keeps going up (it rarely goes down).
A recently released Brookings Institution study by Harvard University economist Stefanie Stantcheva sheds light on exactly how people think and feel about inflation. It found that half of respondents defined inflation correctly, as rising prices. The other half defined it incorrectly, mentioning such things as “price gouging” or “overpriced everything.” So, some people might conflate high prices with high inflation. But enough to explain our survey results? Doubtful.
I mean, if nothing else, this explains roughly 50%. That means we just have to explain 24%. And, again, an instinctive answer isn’t necessarily a rational one. If folks had been asked “Is the rate of inflation higher or lower this year compared to last?” we’d have a much better gauge of understanding the thing Ip is trying to understand.
By 47% to 41%, more Journal poll respondents think their investments or retirement savings went in the wrong direction in the past year—a period in which the stock market roared to record highs, home values held steady or rose, and interest on savings went up.
The average customer retirement account at mutual fund giant Vanguard grew 19% last year. True, that didn’t make up for the 20% decline in 2022, especially after inflation. But it hardly qualifies as the wrong direction.
By more than 2-to-1 (56% to 25%), respondents said the economy had gotten worse rather than gotten better over the past two years. That is difficult to square with robust employment growth, unemployment near its lowest in half a century, or growth in gross domestic product, which actually accelerated last year.
So, look, we have to factor negative partisanship, the Fox News effect, and all manner of other things into the polling data. But, as the just-passed Nobel laureate Daniel Kahneman explained, humans are naturally much more loss-averse than is rational. The massive rise in prices—followed by the massive hike in interest rates to combat inflation—was a crushing blow to people’s investments and retirement savings. Any money in a savings account was suddenly worth significantly less than it was. Homes, which are most people’s only source of wealth, were suddenly much harder to sell. For that matter, buying a cheap retirement home in Florida or some other warm, low-tax state suddenly became out of reach for millions.
It’s not at all unreasonable, then, that people factor that into to their reaction to polling questions that gains in the stock market, much less the GDP. Indeed, I follow this sort of thing much, much more closely than something like 95% of Americans and I couldn’t tell you what the GDP is without Googling it.
Again, Ip seems to acknowledge humans aren’t homo economicus before expecting that they should be:
To be sure, inflation and shortages were severe from 2021 through early 2023 and the improvement in the data since might not have been enough to erase those bad memories. Still, there is evidence people actually do notice things getting better around them. Surveys by the University of Michigan, for example, find consumer confidence has risen.
Moreover, while respondents rate the national economy as bad by a significant margin, they rate their own state’s economy as good by almost as much.
This is reminiscent of how voters tend to assign low marks to Congress but high marks to their own representatives. But the definition of a good Congress depends a lot on your politics, whereas the definition of a good economy ought to be somewhat objective. Everyone (except a few central bankers) wants lower unemployment. And swing states’ economies have largely tracked the nation’s.
I’m closer to homo economicus than most. I’m analytical by nature, reinforced by training. Nor do I watch Fox News or listen to right-wing podcasts and the like. But my impressions of the economy are still far more based on my personal experience than broader trends.
So, for example, I’m aware of the unemployment figures and welcome low unemployment. But, so long as my wife and I maintain our jobs, that really doesn’t much factor into my sense of how things are going. Like most, I’m irrationally aware of fluctuations in gas prices. I’m pretty well aware of grocery prices, especially meat prices, as I do most of the grocery shopping. I know that the price of new and used cars is still radically higher than it was two or three years ago. Ditto restaurant prices, even at the sort of places where I might go grab lunch.
And another thing: my sense of time on these things is much more vague than my sense of direction. I suspect that’s true of most people. So, polling on “the last year” is likely not to line up very well with the actual data. It’s just not how we’re wired.
Finally, at the point of the column where most would have stopped reading, Ip gives us this:
All of this suggests that the bad vibes about inflation and the economy are interlaced with a deeper pessimism about the country—what I’ve previously called “referred pain.”
Stantcheva’s study shows that inflation evokes broader feelings of injustice. People tend to believe that prices rise faster than wages, that companies raise prices because they can but don’t raise wages because they don’t have to, and that the rich always do better with inflation. (Those things are true at times but not over long periods of time.)
Stantcheva told me that, while inflation clearly generates bad feelings, bad feelings about the country or the economy might make them more pessimistic about inflation. For instance, her study finds that, whereas economists associate lower unemployment with higher inflation, the public believes weak growth, high unemployment and high inflation all go together. As one survey respondent said: “To me, inflation is when the economy is more than just hurting. It’s when it’s too tough just to keep positive.”
This is well outside my professional expertise but it rings true to me. Human beings are complicated creatures. Our perceptions are based on a whole lot of things, not just the data economists collect.
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Author: James Joyner
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