Tell the truth about Biden’s economy

Exaggerating the harms of inflation doesn’t help working people.

American workers’ wages have been rising faster than prices for more than a year now. Their nation’s economy, meanwhile, is the envy of the wealthy world: Since the Covid recession, the United States has seen nearly twice as much growth as any other major rich country without suffering significantly higher inflation. And economic analysts expect that America will continue to grow at double the rate of its peers for the rest of 2024.

This growth will enhance an already robust economy. The nation’s unemployment rate has sat below 4 percent for more than two years now, the longest such streak since the 1960s. With labor markets persistently tight, low-income workers have finally secured some leverage over their employers, and wage inequality has fallen as a result.

Nevertheless, US voters give their nation’s economy poor marks in surveys. In the latest polling from Civiqs, 61 percent of respondents rate the “national economy” as “fairly bad” or “very bad” — with 39 percent choosing the latter description.

Other polls indicate that this widespread pessimism is preventing the public from ascertaining basic economic facts. For example, 74 percent of swing-state voters in a recent Wall Street Journal poll said that inflation had moved in the wrong direction over the past year, a statement that is straightforwardly untrue.

Liberal pundits are generally keen to correct popular misperceptions of economic statistics, and they are ideologically invested in Joe Biden’s reelection. For these reasons, many have spent the past few months touting the economy’s objective virtues and bemoaning the public’s misguided discontent.

Such commentary can make liberals sound complacent about the American people’s myriad economic challenges. And yet, although commentators should not ignore those difficulties, they also shouldn’t exaggerate them. Affirming the working class’s misperceptions of the Biden economy does it no favors. To the contrary, validating the public’s economic pessimism risks shifting American macroeconomic policy in an anti-labor direction.

But this hazard is lost on many in the commentariat. In recent months, several pundits and influencers have sought to portray the contemporary economy’s champions as cosseted elites who’ve lost touch with reality. And their argument boasts superficial plausibility.

After all, the Paul Krugmans of this world enjoy an exalted place in America’s socioeconomic hierarchy. The Democratic economists who sing the Biden economy’s praises in prestigious publications are generally much wealthier than the voters who lament runaway inflation in opinion polls. And sometimes, the former really do gloss over the more unfortunate aspects of Biden’s economic record.

If you zero in on these omissions, the posture of these Democratic economists can appear unseemly: Where do these rich liberals find the nerve to tell working-class Americans that they should stop worrying about rising food prices and start loving the Biden economy?

Countless self-styled populists have made versions of this argument in recent months. This X post from the author Carol Roth is a crude, but not atypical, example: “Paul Krugman doesn’t know any regular Americans, and so he and the rest of the corporate press mock and gaslight you while you struggle with your rent or mortgage, food and other living costs. Absolutely zero compassion or connection to reality.”

And yet, although this brand of commentary is populist in affect, it may be contrary to workers’ best interests in practice. The signature strengths and weaknesses of the Biden economy — its low unemployment and elevated prices — are byproducts of one fundamental policy decision: Faced with the Covid recession, the US government chose to prioritize poverty reduction and full employment over minimizing the risk of inflation.

Put differently, instead of forcing the nation’s most vulnerable workers to pay the inescapable economic costs of the pandemic through prolonged periods of material deprivation and joblessness, we spread those costs across the entire population through a temporary period of high inflation.

This is not how the US government has traditionally responded to recessions. And it is an approach to macroeconomic policy that simultaneously centers the interests of the working class and promotes economic growth.

Yet it is also politically vulnerable due to widespread misconceptions about how the economy works. If those misconceptions lead the electorate to punish lawmakers for prioritizing full employment, then macroeconomic policy will likely shift rightward in the future, and the next recession will take a needlessly large toll on America’s most vulnerable.

To appreciate the pitfalls of anti-inflation populism, we need to first grapple with the strongest arguments for that outlook. The Atlantic’s Michael Powell helpfully assembles these in his most recent column, titled “What the Upper-Middle-Class Left Doesn’t Get About Inflation.”

Powell argues that liberal commentators’ enthusiasm for the Biden economy betrays their class privilege. “The modern Democratic Party, and liberalism itself,” Powell writes, “is to a substantial extent a bastion of college-educated, upper-middle-class professionals, people for whom Biden-era inflation is unpleasant but rarely calamitous.”

But “poor, working-class, and lower-middle-class” Americans aren’t so insulated from the harms of rising prices. Telling them that the economy is actually strong is both incorrect, in Powell’s view, and politically counterproductive.

In making this case, Powell makes several strong points.

First, and most compellingly, he notes that measures of “real wages” don’t take account of rising borrowing costs. Inflation has fallen sharply since 2022, but interest rates have risen. And since Americans finance many of their purchases through debt, higher interest rates dampen the impact of slowing price growth. As he notes, a recent National Bureau of Economic Research working paper found that when you account for borrowing costs, the public’s mood about the economy comes much closer to tracking objective changes in the cost of living.

Second, Powell correctly observes that low-income Americans are much more vulnerable to sudden increases in the cost of food and energy than are more affluent Americans. The inflationary spike of 2021 and 2022 was indeed deeply bruising for a large swath of the US population: Most US workers suffered from declining real wages for nearly all of Biden’s first two years in office. Things have turned around since then, but many workers still have less purchasing power now than they did when Biden was inaugurated. And it’s understandable that others would have lingering resentments.

Third, Powell rightly notes that the American economy remains riven by structural inequalities. Many households have never fully recovered from the 2008 foreclosure crisis. And the nation’s skimpy welfare state keeps many workers perpetually on the brink of financial crisis.

Fourth, America is suffering from a housing shortage that makes homeownership unaffordable for the middle class and rent burdensome for many workers.

But none of these points refute the core claims of the so-called “upper-middle-class left” — namely, 1) that national economic conditions are significantly better than most voters recognize and 2) that America’s Covid-era macroeconomic policies, while imperfect, were remarkably successful in mitigating the inescapable economic damages wrought by the pandemic.

Powell never engages with the second point. Rather, his piece focuses on portraying the first claim as a delusion of the privileged. Yet his argument suffers from a fundamental flaw: When analyzing the impact of inflation on Americans’ finances, he repeatedly ignores the inextricable and countervailing impact of wage growth. Ironically, this exact error likely explains a considerable portion of the public’s economic discontent.

Early in his column, Powell writes that since 2019, America’s working-class has “weathered 20 percent inflation and now rising interest rates—which means they’ve lost more than a fifth of their purchasing power.”

This is simply false. You cannot measure a trend in workers’ purchasing power over time by looking exclusively at changes in their costs. Since 1947, the consumer price index has risen by roughly 1,400 percent. If we applied Powell’s logic to that data point, we would conclude that Americans’ purchasing power had apocalyptically collapsed since the Truman administration. But of course, Americans are not poorer today than they were in 1947 — because since that year, the median US household income has increased byroughly 2,400 percent.

Similarly, although consumer prices have risen 20 percent since 2019, the average hourly wage among nonmanagerial workers in the US has grown by 25 percent over the same period. Put differently, at least for Americans who don’t debt-finance their expenditures, purchasing power is higher today than it was in 2019.

It’s difficult to say exactly how one should factor interest rate increases into this equation, since exposure to elevated borrowing costs varies so widely across the population. But it’s safe to say that, even considering the impact of higher rates, Americans have not lost anything close to one-fifth of their buying power since 2019, if they’ve lost any at all. Were that actually the case, inflation would be minimal because consumers would not be able to afford to bid up the prices of goods and services, and the economy would likely be in recession.

Powell does eventually acknowledge that wages have been rising faster than inflation for a while now. But he minimizes this fact by suggesting that it is only true if you ignore food and energy prices.

As an example of liberals’ out-of-touch optimism, he links to a report from the Center for American Progress (CAP), which found that nearly 60 percent of US workers enjoyed higher inflation-adjusted earnings in 2023 than in 2022. In Powell’s telling, the upshot of that report is “that median wage growth has nudged ahead of the core inflation rate.”

He then suggests that this is a trivial fact because“core inflation” — which is to say a version of the consumer-price index that excludes volatile food and energy prices — is a poor gauge of household costs. After all, Powell notes, grocery and gas prices are “economic indicators that affect Americans’ daily lives.”

Yet this whole line of argument is a non sequitur: The CAP report that Powell cites includes food and energy prices when calculating real wages. It does not argue that wage growth has “nudged ahead of thecore inflation rate.” Rather, the report shows that wage growth has outpaced inflation, full stop. (When I asked Powell about this discrepancy, he told me that he had not intended to link to the CAP report. I know from personal experience that adding the wrong hyperlink to a piece is an easy mistake to make — yet Powell’s column does not cite or link to any other example of liberal economists measuring real wages using core inflation.)

It is true that macroeconomists tend to focus on “core inflation” when analyzing monetary policy. But this is merely because food and energy are globally traded commodities, the prices of which are influenced by myriad factors that have little to do with consumer demand in the United States, such as outbreaks of bird flu or geopolitical conflicts.

In other words: Powell is right that core inflation is a poor gauge of the public’s cost burdens. But I’m not aware of any commentator who has used it for that purpose.

When you recognize that real wages are higher today than they were in 2019 — a year when Americans gave their nation’s economy historically high marks — it becomes clear that Powell’s strongest arguments don’t add up to a rebuttal of the Biden economy’s boosters.

Yes, low-income Americans have suffered the most from inflation. But they also benefited the most from the ultra-tight labor market of the early Biden presidency. Between 2020 and 2022, real wages grew by 5.7 percent for those at the very bottom of America’s income ladder.

Yes, rising rents and home prices constitute a national crisis. But even taking housing into account, life has been getting more affordable for Americans over the past year as their real incomes have risen. And in any event, the primary target of Powell’s critique — the New York Times’s Paul Krugman — is well aware of the housing crisis and has called for policymakers to relax restrictions on apartment construction in order to address it.

Yes, the US economy is profoundly unequal and unjust. But this was also the case in 2019, when wage inequality was even higher than it is now, and Americans strongly approved of the economy five years ago. So the existence of such inequities cannot by themselves explain the public’s mood.

Finally, it is absolutely true that measures of real wages do not account for changes in borrowing costs. This is a significant limitation. And Powell is totally right that many liberal commentators have given it short shrift. But even the National Bureau of Economic Research paper that he cites notes that fully incorporating borrowing costs into the consumer price index still doesn’t fully explain the gap between objective economic conditions and consumer sentiment.

More basically: If borrowing costs were completely nullifying the impact of real wage increases — and Americans’ purchasing power was actually falling — then we would not expect to see US consumers increasing their spending. Yet retail sales rose sharply during the first quarter of this year.

Notably, if Americans’ spending habits suggest that they are doing reasonably well financially, their survey responses often indicate the same. In recent polls of Michigan and Pennsylvania voters, roughly 60 percent said their personalfinances were in “good” or “excellent” shape, even as a similar percentage declared the national economy “bad” or “not so good.”

Economic commentators have no obligation to abet Joe Biden’s reelection. But they do have a responsibility not to exaggerate the contemporary economy’s weaknesses. And this is especially true if they wish their commentary to advance the interests of working people.

The past four years witnessed a historic experiment in fiscal policy. Traditionally, recessions have brought increases in poverty and prolonged periods of elevated unemployment. But during the Covid downturn, poverty in the United States actually declined.

After the Great Recession of the late 2000s, it took more than nine years for America’s unemployment rate to return to its pre-crisis level. After the Covid downturn, it took just over two years.

These triumphs of economic management — and the elevated prices of the past three years — are inextricably linked.

The pandemic simultaneously reduced the economy’s productive capacity and induced a sudden shift in consumer preferences: All across the wealthy world, socially distanced households shifted their disposable income away from in-person services and toward manufactured goods.

Even in the absence of a public health emergency, the global economy would have struggled to accommodate this abrupt change in consumer demand. Add in pandemic-induced factory closures, and a gap inevitably opened up between demand for goods and their supply.

We could have brought supply and demand into balance by throttling the purchasing power of the most vulnerable working-class households: If you condemn 10 percent of the workforce to unemployment and 20 percent of households to poverty, you’ll alleviate inflationary pressure, since fewer people will have the money necessary for bidding up prices.

Instead, we chose to minimize the recession’s impact on the vulnerable to a historically unprecedented degree. A painful, but fleeting, period of high inflation proved to be the price of this decision.

Unfortunately, most voters do not recognize the connection between the Biden era’s inflation and its low unemployment or strong wage growth. A new analysis of survey data by the Harvard economist Stefanie Stantcheva lends credence to an old hypothesis: People tend to attribute wage gains to their own efforts or their employers’ largesse — rather than to market dynamics — even as they blame price increases on government mismanagement.

This is a potential problem for progressive macroeconomic policy. If voters will punish elected officials for presiding over inflation but won’t necessarily give them credit for engineering real wage gains, then Congress will have an incentive to err on the side of understimulating the economy during the next recession.

Powell never explicitly criticizes Biden’s fiscal policies. The main upshot of his piece is that Democratic politicians should not try to persuade voters that the economy is good but should instead embrace populist rhetoric and deflect blame for high prices onto greedy corporations.

This is reasonable advice for Biden and Kamala Harris. But public intellectuals serve a different function than politicians. Trying to make voters appreciate the connection between inflation and wage growth — or the fact that the United States has done a superlative job of navigating a worldwide economic crisis — may be a quixotic task. But it is not an inherently classist or condescending one.

To the contrary, such commentary ultimately aims to help workers make more informed choices at the ballot box so that they can better preserve their leverage in the labor market.