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Culture War Roundup for the week of October 30, 2023

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A deep and enduring “vibecession” – Partisan differences are increasingly dominating perceptions of the economy.

By almost every metric, the US economy is doing quite well at the moment. There are many ways to evaluate economic vitality. The most obvious is the headline unemployment rate, which was used throughout the Great Recession to monitor the (slow) recovery. Today, though, unemployment is hovering near record lows at <4%.

Beyond this, there are somewhat nerdier, more technical measurements that still capture important aspects of the economy. Things like inflation, GDP growth, and the stock market. All of these indicators are somewhere between “good” and “great”. Inflation has come way down and is now around 3.7%. Core inflation, a better measurement of long-term inflation that excludes volatile commodities like gas prices, is even lower at around 2.5%, essentially hitting the Fed’s 2% target. GDP growth is surprisingly high for Q3 at 4.9%. The stock market is also doing fairly well, with the S&P500 being less than 10% off its all-time high at the end of 2021 and being well-above the pre-COVID high in Jan 2020.

Drilling even deeper, at this point you start to get the indicators people and the media can “fish” for in order to find bad news. Things like median wage growth, wealth inequality, and prime-age labor participation rate. The thinking with these metrics is that even if the more commonly cited stats are doing well, they might not paint a full picture. For instance, if the economy is growing but the rich are eating all the gains, then things like wage growth and inequality can show how most people aren’t benefitting. Likewise, if the unemployment rate has fallen because people have become discouraged and just don’t bother looking for work any more, then labor participation can show what’s really going on. The steelman of these metrics is that they can be helpful in painting a fuller picture, although in practice I’ve often only seen them used when people are willing to use motivated reasoning to paint the economy as underperforming (e.g. politicians, doomers, or the media just trying to create a story). That said, even by these metrics the US economy is doing well. Median wage growth is very high and is well-above inflation. Regular Americans are getting richer, and wealth inequality has fallen.. The prime age employment rate is also near record highs.

In spite of all of this though, many peoples’ opinions of the economy remain in the dumps. The consumer sentiment index has recovered only slightly from its record low a few months ago, but is still barely better than during the worst parts of the Great Recession. What gives? Well, there’s quite a bit of evidence that it’s just partisan emotional expression, i.e. “vibes”. There’s plenty of data showing that Americans tend to rate the national economy as being much worse than their own personal financial circumstances. Kevin Drum has some evidence that this national-personal split is mostly being driven by Republicans. 71% of Democrats and 57% of Republicans say the economy is doing well in terms of their personal situation. But in terms of the nation as whole, 58% of Democrats and just 5% (!!!) of Republicans say the economy is doing well on a national scale. So you have this goofy scenario where Republicans across the country say things are going well for them individually, but as a collective things must simply disastrous. Where is this “disaster” occurring? “Well, not here, but it’s surely happening somewhere”. The 5% mark is particularly interesting because it perfectly matches Republican’s approval rating of Biden. In other words, it seems like asking people how well the economy is doing is just a proxy for “what do you think of the current sitting president”. I’d doubt the numbers would correlate this perfectly all the time, but there’d still be a significant relationship. Whichever party doesn’t control the White House will see the economy in much more pessimistic terms.

Currently this is just applied to Republicans being pessimistic, but it’s almost certainly symmetrical. When Republicans eventually take back control of the presidency, it’s not hard to predict that Democrats will suddenly think the sky is falling in economic terms.

I hate the discourse around inflation - when people say "inflation is down" they are talking about a decrease in the rate of change, not a decrease of an absolute number. This is unlike many other things we talk about in economic life; when the unemployment rate goes down, more people have jobs; when there is a decrease in the mortgage rate, houses cost less, etc. This condition people to think that an economic indicator "going down" means that things are getting better.

This is not the case with inflation. When inflation "goes down," it does not mean that prices are actually decreasing back to the levels that existed prior to the inflation. Deflation is a separate phenomenon that almost never actually happens (and maybe shouldn't be allowed to happen - I'm not smart enough to parse the monetary theory of it all). When inflation "goes down," it means "you're still paying way more for stuff than you were a year ago, but at least the prices aren't skyrocketing up quite as fast anymore; you have some time to rebudget and get used to these new, permanently higher prices."

That statement isn't actually a "good sign" for the economy; at best it means "things aren't actively getting worse." Unless there is some significant increase in productivity to drive prices back down, people are still having to pay more for goods and services than they did previously; their money is worth less and they are poorer now than they were previously. The damage has already been done.

It does mean that things are getting better. We want low and stable inflation. If prices were falling, that would be corrected by the central bank printing more money, which results in an equal increase in wages. It doesn't reduce your purchasing power, but it does help avoid a recession.

people are still having to pay more for goods and services than they did previously; their money is worth less and they are poorer now than they were previously.

This is actually intended by the Federal Reserve — the typical inflation target is 2%. The reasoning behind this is that money is only useful if it is spent for goods and services — people who make the goods and perform the services will only do so if there is demand for it, and the inflation gives a little nudge to spend money rather than hoard it. Put differently, spending money is equivalent to soliciting work from other people. No spending, no working.

As a counterpoint, the creators of cryptocurrencies typically think that this is a terrible line of reasoning, and therefore created their own money.

You seem to be confused by the terminology. "Inflation" is the rate-of-change. "Price levels" are the absolute number. Inflation increases price levels, such that price levels can remain elevated even though inflation has decreased.

High inflation really is the enemy more than price levels. High inflation skews lots of things and eats into purchasing power if wages don't keep pace. Price levels are arbitrary, and all that really matters is how much stuff people can buy relative to what they could purchase yesterday (or 10 years ago). This more important phenomenon usually gets shortened to the term "real income", i.e. income adjusted for inflation. As per the sources in the OP and stuff like this, real income is up.

If we had 1000% inflation for a year, and then suddenly returned to stability at ~2% or whatever the target is, would you think that this was a sign of a smoothly running economy?

No because hyperinflation is typically devastating for an economy and can have impacts that take years to resolve. 1000% is Zimbabwe tier.

After several years of regular 2% inflation though, things would mostly get back to normal, minus societal trust issues that 1000% inflation was ever possible in the first place of course. This is assuming that people's incomes mostly kept track with inflation, which usually happens unless there are other economic shocks.

This is assuming that people's incomes mostly kept track with inflation, which usually happens unless there are other economic shocks.

Like funding a bunch of wars or something?

Of course it's a matter of degree, but I don't think "well inflation is back to 2% now, everything's fine" is a good general principle; it might be true, but it might not.

Like funding a bunch of wars or something?

Hardly a new phenomenon. The US was in Afghanistan for 20 years. Ukraine aid is ~6% of the Pentagon's budget.