Dean Baker on Economy

The Post Asks Why We are Gloomy

A front page Washington Post article notes that consumers have the most negative attitudes about the economy in almost three decades, even though measures like the inflation rate and unemployment rate are not very high. After reviewing possible explanations, it concludes that people are now expecting better: "coming off two decades of prosperity and low inflation, Americans have come to treat low unemployment and inflation as givens."

Actually, most of the last two decades have not been especially prosperous. Wages did not keep pace with inflation over most of this period, with the notable exception being the years from 1996 to 2001. While inflation was relatively low, economic theory argues that workers care about their real wage, not the rate of inflation per se. The view that workers are happier with 3 percent inflation and 2 percent wage growth, than 5 percent inflation and 5 percent wage, contradicts widely held economic theory. If the Post wants to argue this position, they should find some research that supports their view or directly lay out the argument for readers.

The most obvious reason that consumers would feel gloomy is that tens of millions of homeowners have just seen most of their life's savings disappear in the housing crash. Real house prices have fallen by almost 25 percent over the last two years, costing the typical homeowner $55,000 over this period. While the Post notes the decline in house prices, it does not view it as a key factor in explaining the public's attitudes.

It is also worth noting that demographics may play a role in public perceptions. When workers are young, they tend to see their pay rise as they get more experience. In other words, a typical 30 year-old earns more than a typical 25-year old. This means that even if wages are going down throughout the economy, most workers may still be seeing rising wages.

However, with the huge baby boom cohort now in the ages between 44 and 62, this age effect has largely disappeared or is even going in the opposite direction. If wages economy-wide are falling, then most workers are probably experiencing this decline directly.