Is there a disconnect between public perception of the economy and economic reality?

And if so, will perception catch up to reality before the next presidential election?

This Washington Post report is about two liberal University of Michigan economists in a common-law marriage, who disagree strenuously about the state of the American economy and why, according to polls, Americans are so unhappy with it. The report strikes me as a human-interest story for nerds, but it’s also a contribution to understanding a question that could prove crucial in next year’s election.

The polls are unambiguous about how Americans view the economy. In a December Fox News poll, only 14 percent of voters said they're better off in the Biden economy than they were before. And according to the latest numbers from Gallup, just 3 percent believe the economy is “strong.” Only 19 percent call it “good.” 68 percent say the economy is getting worse. 

These opinions are difficult to square with the economic data. The unemployment rate remains remarkably low. The GDP numbers aren’t bad. The stock market (in which 61 percent of adult Americans are invested) is booming. Inflation is high, but down considerably from its peak in mid-2022. Wage growth caught up with the inflation rate about a year ago and now exceeds it.

So why is America so down on the economy?

According to Betsey Stephenson, one-half of the couple in the Post’s story, voter frustrations are an understandable response to a very real phenomenon — the difficulty families have faced for more than a half-century in improving their material conditions, exacerbated by the more recent shock of inflation and, to an extent, partisan politics.

Stephenson’s view, as the Post characterizes it, is that wages have been largely stagnant in the U.S. since the 1970s, while inequality has skyrocketed. After the pandemic-induced downturn in 2020, America’s economic rebound gave people a sense of optimism. However, the most severe inflation in four decades largely washed away the gains.

As Stephenson puts it:

The higher prices feel like the straw that broke the camel’s back of an economy that has felt so rigged, so hard to navigate, and seems to be putting up roadblocks at every turn. And they’re just fed up about it.

But her partner, Justin Wolfers, finds this view “incoherent” (the Post’s description). He points out that, whatever they may be telling pollsters, Americans aren’t acting like they are unhappy with their economic circumstances. For Wolfers, signs of optimism include business owners making substantial investments; consumers spending at a rapid clip; and workers leaving their jobs in droves, reflecting confidence that they can find new ones.

How does Wolfers explain the poll numbers? According to the Post, he blames them on a disproportionate psychological response to inflation that fails to recognize that wages, not just prices, have risen. He also suspects that public polling is broken.

Although the Post describes both economists as liberals, these conflicting views suggest an ideological divergence. Stephenson sounds like a left-wing populist (Donald Trump might offer a similar diagnosis of American economic history since the 1970s). Wolfers sounds like a conventional liberal.

Ideology aside, who has the better case?

I’ve always believed that Americans know how they’re doing financially. Thus, my inclination in assessing the economy has been to rely at least as much on how Americans perceive economic conditions as on what economic numbers say.

But Wolfers’ point is that how Americans are behaving is a better indicator of how Americans perceive the economy than what they tell pollsters. With consumer confidence high; with people spending lots of money this holiday season; and with large numbers of workers quitting their jobs (although this trend seems to be subsiding), it’s difficult to conclude that only 22 percent of Americans really believe the economy is “strong” or “good,” and even more difficult to believe that Americans will continue to be this disgruntled.

For what it’s worth, I believe the poll numbers reflect, with some exaggeration, the economic conditions of earlier this year. I suspect that perception hasn’t yet caught up to current reality. (I readily acknowledge, though, that my economic situation isn’t typical.)

For me, the big question is how Americans will view the economy when voting begins in the Fall. If what I take to be the economic reality stays where it is or becomes more favorable, then in my view the economy won’t be a drag on Joe Biden’s re-election prospects.

Stated differently, I believe the economy is now performing well enough, other things being equal, to re-elect an average U.S. president.

However, other things may not be equal, and Biden is certainly not an average U.S. president. He’s much older and much less sharp.

Moreover, his policies have given rise to crises and anxieties more severe than those of an average president — the situation at our southern border being the most notable example. And finally, it may be the case that in our culturally-divided country, it isn’t just “the economy, stupid” any longer.

Accordingly, positive perceptions of the economy — if they exist or come to exist next year — may not be enough to carry Biden to reelection. But they sure would help him.