During the 1970s, Arthur Okun, an esteemed economist and former policy advisor to Lyndon Johnson, introduced a simple method to evaluate the economic state of the nation known as the “misery index.” This index combined the rates of inflation and unemployment, offering a basic yet flawed measure. While critics argue that the index fails to capture the true economic harm caused by unemployment, it has historically served as a reliable predictor of overall economic sentiment.
It is worth noting that the misery index, which rose significantly alongside inflation during 2021 and the first half of 2022, has now dramatically fallen over the past year. In fact, it has returned to the level observed when President Biden assumed office. This remarkable turnaround raises several questions: Is this improvement real? (Yes.) Will ordinary Americans notice? (They already have.) Will they credit Biden for it? (That remains uncertain.)
The decrease in the misery index is a reflection of what did and did not occur. Despite a continuous stream of dire warnings in the news media, the United States avoided a recession. Over the past year, the country added four million jobs, while the unemployment rate remained near a 50-year low. On the other hand, inflation experienced a rapid decline. However, the sustainability of this decline has been questioned given that “core” inflation, excluding volatile food and energy prices, has been stubbornly persistent. Critics argue that this improvement may be temporary.
Nevertheless, economists who closely observe the data recognize that the traditional measure of core inflation has become unreliable due to the delayed impact of a surge in rents that ended in mid-2022. Interestingly, this surge was likely caused by the rise of remote work prompted by the Covid-19 pandemic rather than any policy implemented by the Biden administration. Alternative measures of core inflation that exclude housing costs generally show a clear pattern of disinflation. While inflation remains higher than pre-pandemic levels, it has significantly decreased. Pessimism regarding the inflation outlook is diminishing.
Although traditional measures of economic sentiment have become problematic in recent years due to partisan biases and the influence of news media narratives, specific questions yield more positive responses. When asked about the current job market, most Americans say it is a good time to find a quality job. Simultaneously, expectations regarding future inflation have significantly declined. Moreover, an analysis of internet search data reveals a decline in searches for “inflation” and “recession” over the past year, contrasting with the surge observed during 2021-22 along with the misery index.
Actions should not be overlooked when assessing economic sentiment, as strong consumer spending, record-breaking levels of air travel, and various other indicators suggest that Americans are generally optimistic about their economic situation. However, despite the decline in the misery index, polls indicate that voters still hold negative views of President Biden’s handling of the economy.
Some experts argue that this unfavorable perception is a result of wages failing to keep up with inflation. However, a similar situation occurred during most of the Reagan years, and real wages have recently been rising. Will voters eventually recognize the positive outcomes of Biden’s economic policies? Or has the inflation shock of 2021-22 established a narrative portraying Biden as an ineffective economic manager that has become deeply ingrained in the public consciousness as well as the news media, making it challenging to alter opinions even amidst rapid economic improvement?
President Biden is making efforts to change this narrative by highlighting the improved data and a notable surge in manufacturing investment. However, the success of this narrative shift remains uncertain. One precedential encouragement for Biden is Ronald Reagan’s experience in the mid-1980s. Reagan initially faced low approval ratings but eventually won a landslide victory in 1984 due to the economic recovery.
Moreover, even if Biden fails to alter the narrative, it may not have a significant impact. High inflation was expected to lead to a substantial loss for Democrats in the midterm elections. Unexpectedly, Democrats performed well, likely due to social issues such as abortion playing a more prominent role than economics. These social issues are not disappearing, while high inflation is. Arguably, Biden does not need to convince Americans that his economic policies have been highly successful; he simply needs to demonstrate that the economy is faring reasonably well.
And indeed, by most measures, the economy is thriving.
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