Does Anyone Know What’s Going on in This Economy?

Assessments of wage growth and household finances have taken on a Rashomon-like quality, with the same objective situation shape-shifting into a range of subjective narratives. In one telling, “wage gains have kept full-time workers’ weekly median earnings roughly steady since early 2020, when taking price hikes into account.” In another, “the U.S. job-creation machine has boosted wages, recently outpacing inflation.” Some would say “wage gains are moderating” while others emphasize that “wage gains continue outpacing inflation.”

ONE THING TO READ THIS WEEK

Remarkably, all four of those quotes come from the same Wall Street Journal story, which is your one thing to read this week: The Haves and Have-Nots at the Center of America’s Inflation Fight.

I’m not recommending the article because it’s especially good. To the contrary, it’s a mess. The wage issue is just one example. Are “household finances are largely holding up” or have “excess savings accumulated during the pandemic been fully depleted for the bottom 40%”?

Are “delinquency rates for credit cards higher than at any point since the aftermath of the Great Recession” or is “overall debt still low by historical standards” and “an uptick in delinquencies stems from tighter lending standards rather than consumer weakness”?

Does “low-income customers’ spending remain robust” or is “spending by high-earners” needed to “counteract slowdowns elsewhere”?

These dueling quotes are not presented side-by-side in the story, with the conflicts then adjudicated. To the contrary, they are scattered throughout and presented uncritically, as if one can arrive at the story’s end with a better understanding of what is going on in the economy.

Instead, what one learns is that modern economic data and analysis are woefully ill-equipped to capture the more complicated and textured realities of American households. Especially when it comes to inflation, the technical concept of a rising economy-wide price level studied by macro-economists turns out to do a terrible job capturing the economic pressures that households face. It turns out to be quite hard to say whether wages are up or down relative to inflation and, even resolving that question, to know which households will be squeezed or prospering.

One obvious problem that somehow went overlooked until recently is that borrowing costs are not incorporated into formal inflation measures. This is especially dangerous because policymakers respond to rising inflation by raising interest rates, driving up costs especially for lower-income households more dependent on borrowing at the very moment everyone is focused on slowing the increase in prices. Larry Summers and colleagues published a remarkable paper in February pointing out what should have been understood and accounted for long ago: “The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers.”

At this point, it’s worth questioning, respectfully of course, whether economists have any idea what the hell they’re measuring or talking about. The insistence on using whatever data they happen to have on hand as the proper measure of human flourishing brings to mind the metaphor of the drunk looking for his car keys under the streetlight. But at least the drunk knows he has not found them. Economists just pick up whatever rock they find illuminated in a puddle and declare success.

A better project for economists in the coming years would be to take seriously their claim that they are engaged in a scientific enterprise and get back to the basic task of observation. Rather than rejecting facts that fail to align with their theory, they should be studying the actual experiences of actual households and then considering what metrics they need to create and what data they need to collect if they want to track and analyze actual well-being. This would put them back in the role of serving, rather than dictating to, the public. Maybe that sounds less fun. It would be a lot more useful.

BONUS LINK: If you’re not familiar with American Compass’s Cost-of-Thriving Index, it’s a really interesting attempt to address some of these shortcomings in the standard economic data by constructing a measure of family affordability built around the real costs and constraints that families face. It shows that while the “real value” of wages, adjusted for inflation, has at least held constant in recent decades, the cost of basic middle-class security for a family of four has risen much faster, so supporting a family on one income has become much harder. I explained the approach in detail in this American Affairs essay, and had a good debate about the methodology at the American Enterprise Institute.