In a recent CNN interview, Paul Krugman of The New York Times expressed his confusion over why everyday American voters don’t share his optimistic view of President Joe Biden’s current economic situation—a Goldilocks economy that neither runs too hot nor too cold. Key indicators such as falling inflation, low unemployment, economic growth, and high stock market valuations seem to suggest a robust economy. However, despite these positive metrics, Krugman questions why only 36 percent of voters approve of Biden’s economic performance.
Journalist Glenn Greenwald argues that Krugman’s perspective may be influenced by class bias, assuming that Krugman’s financial stability in real estate, stocks, and bonds might be clouding his judgment. However, the issue might not be about money, but rather the relevance of Krugman’s economic ideas in the present context. Both Krugman and his critics like Greenwald emerged professionally during Jimmy Carter’s presidency, a time when Republicans used the “misery index”- a combination of unemployment and inflation rates—to great effect in their political discourse. This index proved particularly potent in 1980 when Ronald Reagan secured the presidency.
Fast forward to today, with both inflation and unemployment at levels between three and four percent, the misery index remains low. In the 1970s, such numbers would have been celebrated by those in power. Yet, mainstream economists still puzzle over the lack of high inflation in times of low unemployment, a phenomenon that continues to perplex them. Krugman is among those who find it remarkable when the misery index remains low in the present context.
However, it’s important to note that the misery index was always more of a headline figure. Delving deeper, one discovers that its two components do not directly impact most people as pundits may assume. While unemployment rates might rise during tough times, they still typically affect only a small segment of the workforce. People generally retain their jobs even during economic downturns.
Inflation, on the other hand, does affect everyone. However, what matters to the average person is not just the month-to-month or year-to-year price fluctuations but how these changes affect their purchasing power and living standards over time. Rising or falling living standards are tied to the relationship between wages and prices. When wage growth outpaces price increases, people tend to fare well. Conversely, when wages lag behind inflation, times become tougher.
This is where President Joe Biden faces a challenge. During his tenure, living standards have not seen significant improvement. Between early 2021 and mid-2023, prices have risen faster than wages, resulting in a decrease in real (inflation-adjusted) hourly wages and real weekly earnings, albeit modest. Moreover, this average likely masks a more substantial real wage drop for families starting below the average income. Given income distributions, there are consistently more families earning less than the average than those earning more.
Historically, American households could offset stagnant earnings by adding more workers and jobs per household. While these additional jobs weren’t always high-paying, they allowed families to maintain their living standards despite the decline in high-wage manufacturing positions. This trend was evident in the late 1980s and 1990s when women, young people, and minorities entered the workforce in significant numbers.
However, this trend has slowed down, and the employment-to-population ratio remains below 2019 levels. Additionally, with the conclusion of pandemic relief policies, the US savings rate has plummeted from 20.4 percent of earnings in early 2021 to a meager 3.5 percent. Krugman interprets this as a sign of confident spending, but it is more likely an indicator of financial stress.
Given these factors, it’s understandable why President Biden’s economic approval rating is low. This sentiment may persist until American voters experience tangible improvements in their finances. People are generally not swayed by pundits’ claims of economic greatness, particularly if they perceive that wealthier Americans are benefiting more than they are.
In light of the upcoming election and the current economic landscape, it’s unwise to tell American workers that they have never had it better. Such arguments have historically proven ineffective in the realm of politics.
Perhaps Krugman, who worked for Reagan in 1983, has forgotten the powerful question Reagan posed during a 1980 debate against Carter: “Are you better off today than you were four years ago?”
