In the run-up to the election, the Democrats were highlighting how great the US economy was doing, while the Republicans were calling it a disaster. Let’s just draw this lesson: never tell the voters that what they’re experiencing is wrong. Voters have a choice, and telling them they are delusional has never been a winning campaign slogan.
But in reality, both sides were correct. By all the traditional measures, the US economy was blowing the socks off the rest of the world. And for everyday working-class Americans, it sucked. How can this be? That’s the difference between the national economy and personal economy.
Let’s start with the optimistic side, the one proffered by the Democrats. Before the election, the last set of inflation indicators came in at an 2.1% annual rate, which is almost exactly on target for the Federal Reserve (aka the Fed), and that’s what they want, to make for a economy which is running smoothly and is predictable enough for the business community to plan upon. This was down from a post-pandemic peak of 8.3%, and the reduction came within a period of only twenty-four months, which was unprecedented. In effect, the Fed got the soft landing it sought, curbing inflation without causing a recession, which was the usual method used in the past. Economists will be studying and writing about this for decades, it’s that unusual.
President Biden gets very little credit for this, as is appropriate. He tried to spend much more early in his term, which might have sent inflation out of control; he was only stopped by Senator Manchin, despite the Fed’s warnings. Even the Fed was late to the game, agreeing briefly with the Biden administration that inflation was only temporary, but as the data mounted, they quickly changed their tune and took it on with aplomb and courage.
Meanwhile, the money sent to individuals by both Presidents Trump and Biden kept people afloat, and freed them from jobs in businesses which may or may not survive the pandemic. In the end, this sparked a rash of new small business creation, a traditional source of American economic dynamism which had withered after the Obama years. Nations which sent money to keep people in jobs at the same company didn’t fare as well.
All of which is to say that America came out of the Covid lock-down in better shape economically than most every large economy, recovered quicker, and accelerated from there. Don’t believe me? Try these statistics from The Economist:
- America is 50% of world GDP today, up from 40% in 1990.
- China’s GDP was 75% of ours, now it’s only 66% and lagging.
- Output per person is 30% higher than Canada/Europe, which is roughly double the 1990 levels.
- My personal favorite: in Mississippi (America’s poorest state), workers earn more on average than Brits, Germans, or Canadians.
But how could Americans feel worse off when we had it better than everybody else? First off, no one knows or cares how everybody else feels. We all exist in our own economic bubbles. No worker ever thinks, “Gee, I’m glad we only have 8% inflation here, Turkiye has 53%!” What they think is, “hamburger was $6.00 a pound last year, and it’s $7.00 a pound now.” And when inflation drops to 2%, all they think is, “hamburger was $6.00 a pound last year, and now it’s $7.12 a pound.” Disinflation or the lessening of inflation is NOT deflation, so until consumers settle in and accept the new, higher prices, they will be upset.
But wait, weren’t wages going up more than prices? So weren’t those workers complaining unfairly, as they were better off despite the inflated prices? It is a fact that wage growth among the poorest workers was greater than price inflation. But this is where psychology comes into play. People on the working edge of poverty seek stability: they are often referred to as living “paycheck to paycheck” meaning they are one missed paycheck or large unexpected expense away from disaster. So when prices are going up in real time (every time they go to the store) but their pay jumps annually or irregularly, it adds to their stress, regardless if the totals for the year work to their advantage. And, workers attribute pay raises to their merit: I deserved this raise, I earned it. Price rises are done by somebody else to me, so it’s them (the government, the business, the bad guys) screwing me over. If I get a raise, I want it to show up in an improved lifestyle for my family, not just to keep up with what “the man” is doing to me.
On top of the inflation issue, working-class families faced an affordability crisis. Affordable housing, whether to rent or buy, became rare. Cities practiced an updated form of redlining designed to keep wealthy urban enclaves free of “those people” (working class folks of whatever race). Housing starts moved further and further out into the suburbs, where you could still build, but builders make more profit building McMansions out there, not duplexes or multi-family low-rises. Various forms of insurance rose above the inflation rate. Medical and child care expenses did the same. And don’t even contemplate the cost of a college education, which was the credential to success. Notice that none of these (even college) was considered discretionary spending for a family.
And this wasn’t just a post-pandemic event. The reigning orthodoxy in economics for the past fifty years has been dubbed neo-liberalism. It holds that if every country trades freely (no tariffs, no state subsidies, no other impediments to free trade) and all producers and consumers are free to compete in the market, everybody will benefit. On the macro scale, meaning for the world as a whole, this is demonstratively true. The world recently ran a little experiment, where China went from communism to state-controlled capitalism, got invited into the World Trade Organization, and it moved over 800 million people from poverty and created a Chinese middle class. Nothing like that has ever happened in the history of the world. And it happened without completely free trade, just “freer” trade.
The same thing happened with NAFTA, the original free-trade agreement between Canada, the US, and Mexico. It created a middle class in Mexico with good jobs in steady careers, leading to real democracy (before it was a one-party state) and a booming economy, which then greatly dropped the level of out-migration to the United States. So looking through the telescope at the big picture, it benefited everyone.
But looking through the microscope at your specific picture as a middle-class American manufacturing worker, something different happened. Competing against non-unionized workers in developing countries, or manufacturing sectors subsidized by foreign governments, those American workers lost out. True, those American workers could now buy much cheaper products from China, and all those Chinese people were not starving. But the price to the American worker was a steady decrease in their relative pay and benefits, or a loss of the job/career altogether.
Neo-liberal economists had an answer for this: the government will provide greater benefits to such workers, and training to transition to other career fields. Here are the problems with this otherwise brilliant plan. First, you’re a worker, and you want to do a job, not get a handout. That’s not just pride, that’s self-respect. Second, if you have grown up in a family of three generations of auto workers, you may not take kindly to a plan to re-train as a nurse in an assisted living facility. Oh, it’s a job with increasing demand, and one that can’t be off-shored to China, but it’s also not something you want to do. The same goes for schemes to turn manufacturing workers into coders, teachers, or day-care providers (all fields with job growth). At this point the neo-liberal economist would wash his hands and say, “well, if they don’t want to adjust, that’s on them.” Which works on the macro-economic scale, but not in Akron, or Mobile, or Pasadena.
All this has been going on for roughly fifty years. Look at this chart from Pew Research. Two things should jump out at you: first, the middle class has decreased as a share by over 16% (10 percentage points= a sixteen percent decrease). Second, the poor share has increased over ten percent, and the rich share has increased over a whopping seventy percent. When you look at those numbers, you must admit our economy has moved more people from poor and middle class into rich than the other direction, which is striking. You must also notice that for roughly every two middle class persons making it into the rich category, one middle class person became poor.* This is the outcome we described above: an economy where growth and productivity is roaring, envied by other countries, but where the working class claws desperately to keep up and feels like it’s getting worse, . . . because for them, it is.
The Democrats have previously seen unions and government intervention as the means of redress to this challenge; Republicans typically saw it as a matter for the free market to address. Neither is sufficient. Unions in general have proven too feeble and corrupt to protect workers, government intervention just introduces unintended consequences to the market, and the free market left to its own devices sees no problem here. The escape of working class voters from the Democratic party in this election may be a wake-up call for them; there is already a pro-worker movement in the GOP (check out the American Compass, which JD Vance supports) looking to change its perspective.
The good news is we’re facing this challenge with a roaring economy behind us, which means we have resources at hand. The bad news is that also lets some folks think we don’t have to address the challenge. But our national and personal economies depend upon it!
* In a real statistical analysis, this is not strictly true, as some rich people became poor and vice versa, but as a generalization it holds.