Many Democrats were perplexed before the presidential election by the apparent discrepancy between public impressions of the economy and “economic reality” as shown in different official figures. The public’s apparent inability to grasp the strength of the economy rankled many in Washington. The right-wing echo chambers, they said, were tricking people into believing totally ridiculous stories about the United States’ deterioration.
What they hardly thought about was the possibility that something else may be the cause of the discrepancy, such as if the official figures were inherently inaccurate. What if the statistics that bolster the argument for widespread affluence were actually exaggerations? What if, on the contrary, pessimistic economic forecasts were actually closer to the mark?
Some of the underlying frustrations are ones that I can connect to. Throughout my career, which began in the 1990s when I was comptroller of the currency, I have devoted significant time and energy to studying the discrepancies between popular belief and economic reality, with a focus on financial matters. Over the past 25 years, I’ve had the pleasure of befriending and advising numerous officials, including members of the Federal Reserve, individuals in charge of regulatory agencies, and numerous leaders in Congress. They have informed me that they believe it is their duty to disregard public opinion and address the economy as it is through the use of concrete statistics. They take official figures from the government at face value.
However, as my interest has grown to encompass the entire economy rather than just finance, I have begun to doubt that confidence due to the discrepancy between official statistics and public opinion. Being an adviser to lenders and investors throughout the nation and an insider in Washington, DC, two worlds that never appear to collide have been a blessing for me. My skepticism regarding the accuracy of official measures on unemployment, wage growth, and overall economic soundness has grown as I have toggled between the two.
For many in Washington, these figures have repeatedly signaled a low unemployment rate, rising earnings for middle-class Americans, and, to varying degrees, annual economic growth that benefits everybody. While traveling around the nation, though, I’ve come across something quite different. Places that seemed to be getting progressively more sleazy. Those areas that seemed vacant. A homeless encampment had been set up outside the Federal Reserve itself, and I would pass it on my way into work every day in Washington. Then I started to see a second trend that was present both within and outside of Washington, DC. Generally speaking, Democrats appeared to be far more likely to accept the economic data at face value. In contrast, Republicans appeared to be more likely to trust their own eyes when they made a decision.
The consequences of this miscommunication in the nation’s capital have been significant. Over the course of several decades, a few of government agencies have consistently produced several economic statistics at predetermined intervals, utilizing essentially the same technique or sources. Very few have ever questioned the veracity of the numbers they provide. In light of my recent misgivings, I assembled a group of academics under the auspices of the Ludwig Institute for Shared Economic Prosperity a number of years ago with the intention of thoroughly investigating a number of commonly referenced headline figures.
We were astonished by what we found. Voter impression, not incumbent numbers, was more indicative of reality for at least 20 years, if not longer, including the months leading up to the election. According to our findings, most of the data collected by the several agencies is correct. On top of that, those organizations employ brilliant, caring individuals. However, there are errors in the filters that were utilized to calculate the headline figures. This leads them to provide an overly optimistic view of reality, which is in odds with what actually happens.
An especially egregious example would be the unemployment rate, which is arguably the most often reported economic measure. Several things are misled by the number, which is known to specialists as the U-3. To begin with, it considers the millions of individuals who are unknowingly under-employed to be working. This includes those who, for instance, work part-time while looking for full-time work. Second, it ignores the fact that a large number of Americans have given up on the labor market altogether. Lastly, no one’s income is taken into consideration by the prevalent statistic. So, even if you’re living on the streets, your income is sporadic, and you can’t provide enough food for your family, the government will still consider you “employed.”
I don’t think the individuals who were proud of the low unemployment rate going into the election last year realized that the 4.2% statistic in November included homeless people who worked odd jobs as “employed.” However, significant consequences follow. With a filter that accounts for those who are either part-time workers or earn less than the poverty line (around $25,000 per year), the true unemployment rate drops to 23.7%. Not exactly cause for celebration, considering that one out of four workers in the US is effectively unemployed right now.
Examining the technique used to tally Americans’ earnings reveals a similarly false image. The most popular official metric, sometimes referred to as “weekly earnings,” only accounts for full-time income and does not include those who are jobless or working (usually lower-paid) part-time. So, for those who are keeping score, the current national median pay is about $61,900. But if you include part-timers and the jobless in your workforce tracking, you’ll find quite different outcomes. According to our data, the median pay is little over $52,300 annually. Imagine for a second a situation where the median income of American workers is 16% lower than what the numbers show.
This is also true of inflation, which is likely to be the most talked-about subject in the 2024 campaign. Despite prices being elevated from pre-pandemic levels, Democrats spent a significant portion of the campaign highlighting that inflation had subsided by Election Day. Additionally, it was pointed out by many that earnings had increased more rapidly, at least according to the prevalent figure which just considers full-time employment. The Consumer Price Index, which measures the cost of living for eighty thousand products and services nationwide, was the primary data point used to support these assertions.
However, the CPI also has a fairly optimistic view of the world. People with lower incomes spend a disproportionate amount of their money on necessities like food, healthcare, and housing, and they buy a far smaller percentage of the 80,000 commodities that the CPI covers. The total figure is obviously impacted by that: The Consumer Price Index (CPI) fails to capture the true extent to which inflation affects the majority of Americans if, for example, the cost of insurance, studio apartments, and eggs increases at a greater rate than the cost of luxury products and second houses. Obviously, that is the precise account of events.
In a different indicator that my colleagues and I have modeled, we focus on the measurements of prices charged for basic necessities, the goods and services that lower and middle-income families usually cannot live without. This indicator excludes many of the items that only the well-off tend to purchase, as they tend to have more stable prices over time. Again, this case shows how the data mask the difficulties experienced by people with lower earnings. Cost of living for Americans with low incomes has grown 35% faster than the CPI since 2001, according to our alternative statistic. Alternatively stated: Contrary to popular belief, the amount of money needed to sustain a middle-class lifestyle during the past 20 years has increased at a far faster rate than previously thought.
Naturally, after the epidemic, the impact was even more noticeable. The Consumer Price Index (CPI) showed that prices had risen 4.11 percent due to inflation in 2023. However, our analysis shows that the actual cost of living increased by 9.4 percent, which is more than double the market rate. Furthermore, it exposed the often-quoted counterargument that wage rises exceeded inflation in the post-COVID-19 crisis. Our more precise estimate of weekly wages, when placed on top of our more targeted measure of inflation, makes it quite evident that buying power declined at the median by 4.3% in 2023. Once again, the reality for most Americans was far more bleak than what anybody could have imagined based on the prevalent data leading up to the 2024 election.
Now we may turn our attention to the subject of GDP, a number that is often seen as a stand-in for overall prosperity and so may be the most significant economic statistic. Keeping tabs on the total amount of domestic output is useful, to be sure, but GDP isn’t ideal even when measuring that. While the figure’s claim to tracking generic national wealth is admirable, it suffers from a serious limitation: it shows very nothing about the distribution of the resulting affluence. As an example, GDP would increase even if a tiny fraction of the population received a disproportionate share of the benefits of economic expansion and the rest of the population remained uneducated. And that is precisely what has transpired, to a significant extent.
We are often reminded, as stated in a famous phrase by former Senator Daniel Patrick Moynihan, that although we have the right to our own ideas, we do not have the right to our own facts, and this is said at a time when trust in institutions of all kinds is plummeting. In theory, that stands to reason, at least in economics. The truth, however, is that the facts are irrelevant so long as the leading indications continue to be deceptive. The opportunity to dispel the illusion that misled Democrats in 2024 is within our reach. We must now decide whether or not to make a course correction.