Politics has distorted Americans’ view of the economy

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According to a recent poll, a majority of Republicans and a majority of Democrats believe the US is in a recession. The question is how seriously you take their complaints.

Most Americans probably don’t know the formal definition of a recession — “a significant decline in economic activity that spreads across the economy and lasts more than a few months” — but they do know that gas and food prices are particularly high at the moment . and inflation is rising at its fastest rate in 40 years. At the same time, unemployment is below 4% and the US economy continues to create new jobs at a rapid pace.

When it comes to the economy, Republicans tend to focus on the negative and Democrats on the positive. If the parties were intellectually consistent, it would be the opposite.

Think back to the presidency of George W. Bush. Republicans offered a consistent (if controversial) vision of economic success: a “property society” where net worth was relatively high, savings were high, and people relied on their own resources to cope with the vicissitudes of the market to become. With secure property rights and high savings, momentary disruptions could be offset by individual saving. People could temporarily cope with higher prices by consuming less or looking for suitable substitutes. The initial problem, if there was one, was that not enough households had enough property and material resources.

The Bush administration has never succeeded in making the vision of the ownership society a reality. But fast to the present: quite unintentionally, the pandemic gave birth to the condominium society – a distorted and somewhat dystopian version. Fiscal balance sheets were remarkably strong and liquidity high, partly because the pandemic reduced spending and partly because of the federal government’s fiscal response.

One would think that Republicans would at least find this situation tolerable. However, since they are not in power, they emphasize the negative aspects of the current economy.

Many Democrats are also inconsistent. The broadly democratic approach to household well-being is to use subsidies and regulations to drive down the prices of key commodities. Such programs could include food stamps, public and subsidized housing, and Medicaid. The theory is that high and volatile market prices in these areas are detrimental, arguing for subsidies or, in some cases, outright provision.

These transfer programs, which many Democrats want to expand, have the longer-term effect of lowering savings rates. For example, when unemployment insurance and Medicaid are made more generous, demand for savings falls because the state picks up more of the bill.

At the risk of oversimplifying, the Democrats’ ideal is low prices, with the government helping to block or mitigate large price increases on household products. Under this ideal, robust household balance sheets are not a priority, since many of the preferred measures would lower savings rates.

One might think, then, that Democrats would view the current mix of high savings with high and volatile prices as quite disastrous. But the apologists for the current economic situation are more often democrats. Paul Krugman, for example, has repeatedly argued that there is a huge disconnect between how people portray the economy and how they actually are. Essentially, he thinks there are too many lawsuits.

So who is right? Is America’s economy something to be excited about or not? There is no easy answer. I will say that I’ve noticed that many people quickly internalize wealth gains and become emotionally focused on losses, such as B. Higher prices for many consumer goods.

But in at least one respect the optimists are right. In a few years, some of the additional wealth will still be on household balance sheets. At the same time, food and energy prices may have returned to more normal levels. The happiness level should recover.

Such a future may feel too distant and uncertain to make Americans happy right now. People are short-sighted and overestimate the future. That’s one reason for politics to veer in the other direction — which could mean there’s something to the vision of an owner company after all.

More from the Bloomberg Opinion:

• The biggest threat to the US economy is policymakers: Allison Schrager

• Who is to blame for a recession, Biden or Powell?: Daniel Moss

• Biden’s economic hubris gives way to humility: Karl W. Smith

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Tyler Cowen is a columnist for the Bloomberg Opinion. He is Professor of Economics at George Mason University and writes for the blog Marginal Revolution. He is co-author of Talent: How to Identify Energizers, Creatives, and Winners Around the World.

More stories like this are available on bloomberg.com/opinion

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