Can Biden change the economic narrative? – 7/4/2023 – Paul Krugman

In the 1970s, Arthur Okun, an economist who had been a policy adviser to President Lyndon Johnson, suggested a quick and dirty way to assess the country’s economic situation: the “misery index,” the sum of inflation and unemployment. It was and is a gross measure, easily criticized.

The measurable economic damage of unemployment, for example, is far greater than that of inflation. This index, however, has historically done a good job of predicting general economic sentiment.

It is worth noting that the poverty index – which soared along with inflation during 2021 and the first half of 2022 – dropped last year. It is now back to the level it was when President Joe Biden took office.

This remarkable turnaround raises several questions. The first: is it real? (Yes.) The second: Will ordinary Americans notice? (They already have.) The third: Will they give Biden credit? (This is much less clear.)

The fall in the poverty index reflects both what did not happen and what did. What did not happen, despite a series of dire warnings in the media, was a recession. The US economy created 4 million jobs last year, and the unemployment rate remained near a 50-year low.

What happened was a rapid decline in inflation. But is this decline sustainable? You may have seen reports pointing out that core inflation, which excludes volatile food and energy prices, has been “sticky”, suggesting that the improvement on the inflation front will only be a temporary phenomenon.

But almost every economist who pays attention to the data knows that the traditional measure of core inflation has gone rotten, because it is being driven largely by the late effects of a rise in rents that ended in mid-2022. by the rise of remote work triggered by the Covid-19 pandemic, not by any Biden administration policy.

Alternative measures of core inflation that exclude housing in general show a clear pattern of disinflation; inflation is still higher than before the pandemic, but it has dropped a lot. If you really think about it, it’s still possible to be pessimistic about the inflation outlook, but it’s getting harder and harder. The good news about inflation and the economy as a whole seems real.

But are people noticing this improvement? Traditional measures of economic sentiment have become problematic in recent years: ask people how the economy is doing, and the answer is heavily affected by both partisanship and, I believe, media narratives. That is, what people say about the economy is very often what they think they should say.

However, if you ask Americans more specific questions, such as whether now is a good time to find a quality job, they will usually say yes. At the same time, their expectations about future inflation have declined substantially.

And if you look at a new indicator – what information people are looking for on the internet – you find that searches for “inflation” and “recession” skyrocketed in 2021-22 along with the poverty index, but have dropped in the last year.

Finally, as always, it’s important to watch what people do as well as what they say. Strong consumer spending, record levels of air travel and many other indicators suggest that Americans are feeling pretty good about their economic circumstances.

But will Biden get credit? Polls suggest voters are still giving him very low marks for his handling of the economy, despite the drop in the poverty rate.

Some analysts have argued that this biased view reflects an inability of wages to keep pace with inflation. But that was also true during most of the years of former President Ronald Reagan, and real wages have been rising lately anyway.

It remains to be seen whether voters’ views of Biden’s economy will eventually reflect the good news? Or did the 2021-22 inflationary shock establish a narrative of Biden as a bad economic manager that has become too deeply ingrained — in both the public consciousness and the media — to be dislodged even as the economy improves rapidly?

Biden himself is striving to change that narrative, pointing to both improving data and a notable increase in manufacturing investment. But I have no idea if he will succeed. An encouraging precedent for Biden: Ronald Reagan still had a very low approval rating in mid-1983, but won a landslide victory in 1984 on the strength of the economic recovery. Biden may yet change the narrative of his economic policy.

Even if he doesn’t, maybe it doesn’t matter. High inflation should have ensured a huge Republican wave in the midterm elections. Instead, the Democrats did surprisingly well, presumably because abortion and other social issues played a bigger role than the economy. These social issues are not going away, while high inflation is. Arguably, Biden does not need to convince Americans that his economic policies have been wildly successful; he just needs to argue that the economy isn’t doing so badly.

And it’s not. In fact, by most measures, the economy is doing pretty well.

_{Translated by Luiz Roberto M. Gonçalves}

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