Economists (of which I am one) are cheering about recent economic measures for our nation. Inflation rates are falling without the high levels of unemployment expected to produce disinflation. Real wages have risen. Hard-to-employ groups are finding jobs as employers drop prior credential requirements. Indeed, the soft landing the US Federal Reserve Bank is shooting for may be achievable (underscore “may,” as so much uncertainty remains).
So why does most of the nation (7 in 10 according to a March 2023 CNN poll) believe the economy is still bad?
One hypothesis is that people are upset because, although the inflation rate is falling, prices remain significantly higher. They feel they need to spend a larger percentage of their income on meeting their needs.
Yes, prices are up. And, higher prices make them worse off. But incomes are also rising. If incomes increase more than prices, they are better off. How then do we test our hypothesis to determine if individual households are in fact worse off?
Testing the hypothesis
That’s where the CBO comes in to help the analysis. The US Congressional Budget Office (CBO) is our Congress’ budgetary guru. I had the joy of working there for a year early in my doctorate training. The group is like the umpire in a game of angry rivals – bringing unbiased facts to bear to Congressional debates between the Democrats and Republicans. Both sides hate some of the budget umpire’s rulings, like in football and tennis.
CBO collected data around what it called “2019 bundles of consumption goods” that households purchased. What was counted in the bundle differed for different income groups because what households buy varies significantly by income. For example, high income earners travel more by plane. CBO then looked at how the outlay required to purchase the bundles changed as prices rose in 2020, 2021 and again in 2022.
Why keep the bundle for an income group the same across the years? Covid dramatically altered what we purchase. Keeping the same goods in the bundle each year allows us to ask, is a higher or lower percent of households’ income used to purchase this bundle? If lower, they’re better off. Higher, worse off. (Note: As data is lacking, income measures do not include healthcare benefits from the government or employers. CBO uses the adjective “adjusted” in the linked charts to reflect this correction.)
The CBO also needed to measure income. They did this in two ways. The first is called Market Income, which is the sum of labor income, business income (e.g., for the self-employed), income on financial assets, and income from non-governmental sources (e.g., lottery earnings). The second measure—Market Income After Transfers and Taxes— goes one step further and makes allowances for government transfers (e.g., our COVID checks or Unemployment Insurance payments) and taxes (e.g., income and property taxes).
What did the CBO learn?
As to the cost of the consumption bundles, prices rose on average most for those in the lower income groups and least for the highest income groups. This result is not surprising since lower income groups spend proportionately more on essentials like food and gas than do higher income households. And these goods had very high rates of inflation.
Over three years, from 2019-2022, all income groups devoted a smaller share of Market Income After Transfers and Taxes to consumption, albeit the decline was biggest for the highest income groups (more than 5% less) and smallest for other income groups. (See the top chart in Figure One). The same was true for all but the lowest income group if we look at the share of Market Income. (See the bottom chart in Figure One.)
In short, between 2019 and 2022, the percentage of income available to either increase consumption or savings increased for American households.
But the story changes in the last year alone, 2021-2022. All but the highest income groups needed to spend more of Market Income After Taxes and Transfers in 2022 than in 2021 to purchase the set bundle. (See the top chart in Figure Two.) This outcome may explain the decline in savings rates (See Figure Three), since savings is determined by calculating income minus consumption.
Put yourself in the situation of the average American. COVID led to high savings, financial help from the government, and a historically tight labor market where Market Income was rising rapidly (faster than prices were increasing). (See Figure Four, which looks at income growth corrected for inflation, which is called real income.) That pattern—incomes increasing faster than prices—was true for Market Income After Taxes and Transfers, except in the final year the CBO examined (2021-2022). In 2022 the government transfer payments stopped. At the grocery store, all the prices were much higher and real income (net of transfers and taxes) was lower.
As we move through 2023, the labor market is getting looser (e.g., starting salaries are lower as is the rate of “quits”—how many people left jobs they were not fired from). Savings are no longer growing and, for many households, dwindling.
Add the negative press from far-right media sources, and the hypothesis is likely correct: Americans are dissatisfied with the economy because here in 2023 they feel like their purchasing power is declining due to much higher prices and slower-to-no increase in income.
The economy is usually the driver of election results. Will that happen this year? If the choice is Biden versus Trump, I hope not!