By normal standards, the U.S. economy continues to look very good. The unemployment rate has now been below 4% for 27 months, and inflation, while slightly higher than the Federal Reserve's target of 2%, remains fairly low. But when I say that, I get a lot of backlash. Some people get angry.
Much of that backlash is partisan. Donald Trump explained that the unemployment rate rose in Friday's jobs report, but wait! — rated it “terrible” from 3.83 percent to 3.87 percent, and I’m sure many Americans believed him.
But it's not all partisan. Some of the backlash has come from readers who are more on the left, saying things like: “Well, the economy may be strong, but all the gains have gone to the upper echelons.” Or, “While the official inflation rate may be low, the prices of essential goods such as food and energy are significantly outpacing wage increases.”
So I've put together some data to show that these claims aren't actually true, and some that might help explain why many people think they're true. We thought it might be worth explaining the new research.
Let's start with the argument that recent economic growth has only benefited the wealthy. Not many people seem to know this, but the truth is almost the opposite. Since the pandemic, the wages of low-wage workers have risen significantly faster than those of higher-wage workers, a phenomenon that David Orter, Arindrajit Dube and Annie McGrew describe as an “unexpected It's called “compression.” For example, here are the Atlanta Fed's estimates of wage growth for the lowest and highest wage quarters of the workforce.
But one might argue that perhaps wages are rising faster at the bottom, but that inflation will hit low-wage workers even harder. That's a natural objection. But how big of a problem is it? It turns out that the Bureau of Labor Statistics has experimental measurements of inflation at various income levels.
Fully mapping these indicators to wage data would be a project for economists with more experience in the field than me (Hi Arin! Would you like to try it?), but I I created a simple version. The BLS regularly publishes estimates of typical weekly wages at the 10th, 50th, and 90th percentiles of the wage distribution, and also publishes estimates of consumer prices for the bottom, middle, and top quintiles of the income distribution. (currently only until December 2023), it's almost the same. The comparison looks like this:
Yes, inflation was slightly higher for low-income Americans. This is probably because they spend a higher proportion of their income on food and energy. However, the difference in inflation rates was buried by the difference in wage growth rates.
Therefore, the claim that low-income Americans are being hit harder by inflation is not supported by the facts. Yes, America has a huge problem with inequality, and I am a huge supporter of efforts to reduce inequality in our society. But while the problem hasn't gone away, it hasn't gotten worse in recent years either.
Still, aren't the prices of essential goods like food and energy rising much faster than wages? As mentioned earlier, these types of goods have a relatively large impact on the impact of inflation on low-income people. While it's true that it can, the full answer may surprise you.
First, let's take a look at how the price of food (groceries) at home compares with the median normal weekly wage of workers (for comparison with the previous graph we used this measure using). While food prices were low relative to wages during the worst of the pandemic, they rose as the economy recovered, especially after Russia invaded Ukraine.
But right now, the typical worker's purchasing power when it comes to food is about the same as I remember it was in early 2019, when a guy named Trump was bragging about how great the economy was.
What about energy? The price of a gallon of gasoline as a percentage of your typical weekly income is:
This number has fluctuated widely and even spiked when Russia invaded Ukraine, but it is currently in the same range as it was during most of the late 2010s.
So the story of Americans struggling to cope with rising prices for general goods and essentials doesn't seem to match the data. Of course, some may believe that all the data is falsified by the deep state. If you do, it's hard to argue, but private measures like the one provided by Trufration (a crypto-based project, aimed at showing, hmm, that the actual inflation rate was higher than official reports) It may be interesting to note that the data provided by the government (which I suspect is very similar to government data).
So why do so many people believe otherwise? One answer is that Ryan Cummings, Giacomo Fraccaroli, and Neale, contributors to the Briefing Book, an incredibly valuable website. It could be in a new report by Mahoney. Their report, titled “Bad News Bias in Gasoline Price Coverage,” shows that there is far more television news coverage when gas prices are high than when they are low. Here is the money graph:
As I mentioned earlier, gas prices fluctuate widely. If people only listen when gas prices are high, it's no wonder they perceive gas prices to be abnormally high relative to wages, even when they're not.
Although the authors did not perform the same experiment on food prices, there is no doubt that the same phenomenon applies there. We've all heard that egg prices will rise in 2022 (mainly due to the bird flu outbreak). It is true that many did not know that in 2023 prices fell even more rapidly.
This bias against bad news doesn't necessarily reflect partisanship (although Fox News stands out for its negativity, according to Briefing Book). Much of it probably reflects the old adage, “Where it bleeds, it connects.”
But why is this bias worse than it has been in the past? I have never tried to quantify this, but it is clear that in the aftermath of the Covid-19 pandemic there have been much more volatile price movements than usual. Seems obvious. And considering bad news bias can lead to the perception that inflation is worse than it actually is.
All in all, thought-provoking food, and probably more affordable food than you might imagine.
quick hit
Remember when having a lot of empty seats was a bad sign?
But now we have everything normalized.
I don't think the word “stagflation” means what you think it means.
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