2024-11-14 04:19 Views:158
A political economist explains why, for at least 20 million US households, there is good cause for disillusionment over the economy. FILE PHOTO
Don Leonard, The Ohio State University
Inflation has slowed down, and real incomes – typical wages adjusted for inflation – have bounced back to levels last seen before the COVID-19 pandemic.
Democrats campaigned in 2024 on the overall strength of the economy. President Joe Biden proclaimed in the days following the election that the U.S. economy is “the strongest in the world.”
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Yet Republicans retook the White House, and are on track to retake both houses of Congress, in part by casting a much dimmer view of the economy. President-elect Donald Trump campaigned on the supposed strength of his first-term economic record, only to characterize current conditions as a “cesspool of ruin.”
Economists argue that Republican nostalgia for the economy under Trump’s first term is largely misguided. However, the GOP’s pessimism over current economic conditions resonated with voters.
Some analysts have dismissed voters’ concerns about the economy as merely a perception problem. Many economists and investors have been calling this mismatch between rosy macroeconomic indicators and public opinion a “vibecession.” The implication is that because there’s no recession underway or around the corner, widespread economic pessimism is unwarranted and irrational.
ADVERTISEMENTGiven that the economy was the top issue in the minds of most American voters, was the 2024 election decided by vibes alone?
As a political economist and regional planner, I have sought to understand the causes of this apparent mismatch between economic indicators and the perceptions of everyday Americans. What I learned is that, for at least 20 million U.S. households, there is good cause for disillusionment. The method the federal government uses to calculate real incomes tends to capture the economic realities of higher-income people better than those of working-class and middle-class Americans.
Real income rose, at least officially
Peaking at a 40-year high of 9% in June 2022, elevated inflation rates helped push real incomes for the typical household down from US$81,210 in 2019 to $77,540 in 2022, as wage growth failed to keep up with rising prices.
In 2023, real income for the typical American – the amount of money they’re making, adjusted for inflation so you can track how it changes over time – rebounded to $80,610.
And yet consumer sentiment remains at low levels typically seen only during economic recessions. According to one Pew survey, the share of Americans who say that their personal financial situation is in excellent or good shape declined from 50% in 2019 to 41% in 2024.
Not all baskets are created equal
The consumer price index for all urban consumers is the measure of inflation that the Bureau of Labor Statistics uses to calculate real incomes. To arrive at this figure, the bureau averages the prices for a basket of goods and services. It then assigns weights to individual items based on their relative importance in terms of what average American consumers spend on things like food, housing and medical care.
To understand why this method of averaging can skew real income and inflation data to reflect the economic realities of wealthier households, consider what’s going on with housing, the biggest expense for most Americans.
The Bureau of Labor Statistics presumes that housing accounts for 36.5% of all expenditures for the average American household. That leaves 63.5% of their purchasing power left to cover the costs of other goods and services.
By itself, that’s a staggering figure. The Department of Housing and Urban Development officially considers anyone spending more than 30% of their household’s income on housing to be “cost-burdened.” That means they “may have difficulty affording necessities such as food, clothing, transportation, and medical care.”
The problem is that, in 2023, nearly 15% of all U.S. households, including 24% of those who rent, spent more than half of their income on housing. These 20 million American households, who the housing department considers severely cost-burdened, surely don’t have enough disposable income left over after paying for shelter to cover other basic necessities.
To make matters worse, this predicament isn’t evenly distributed. Lower-income families are much more likely to rent, and renters are more likely to be severely cost-burdened.
To be sure, the Bureau of Labor Statistics acknowledges that its methods don’t always reflect reality when it comes to estimating how much a given household spends on one category of goods or another.
However, one problem with this distortion is that the errors systematically understate the impact that rising housing costs have on low-income families.
Other basket cases
The problems with the consumer price index aren’t limited to housing.
Based on my analysis, the way the bureau assesses health care costs is also deeply flawed. One of the assumptions behind the consumer price index is that households spend 8% of their income on health care. But all Americans pay far more than that, according to a 2020 Rand Corporation study.
Middle-income people spend around 21%, the lowest-earning households spend 34%, and the highest-earning U.S. households spend 16% of their income on medical services, Rand found.
Virtually everyone spends money on housing and health care. But the consumer price index also takes into account items that not everyone has to spend money on at a given point in time.
For example, the index assumes that American households spend, on average, only 0.7% of household income on child care or preschool each year. For families with infants or toddlers, the reality is much grimmer. One 2024 survey put the average cost of child care at 24% of household income.
Another expense that not everyone has to deal with is higher education.
The consumer price index assumes that the average American household spends 2.4% of its income on college tuition and fees each year. This number is more difficult to parse, as education expenses and financial aid vary dramatically. So do student loan burdens and repayment plans.
But anyone paying college tuition or juggling student loan payments is clearly spending more than 2.4% of their income per year on those bills. And the share of total income devoted to student loan payments is far higher for the people who are least able to afford them.
The Bureau of Labor Statistics uses this approach because not everybody has these expenses in a given year. While that might make some sense in terms of national statistics, it doesn’t reflect consumer reality for large segments of the population – including recent college grads, parents and people facing expensive medical procedures.
For all Americans facing the steep cost of medical care, and for those also paying for college or child care, wage growth has not kept up with their expenses. And while wages do appear to be keeping up with rising housing costs according to the consumer price index, lower-income Americans spend a much larger share of their household income on shelter than its estimates would suggest.
Economy was on many voters’ minds
Based on the disconnect I’ve identified between what the official data says about current economic conditions and what millions of Americans are going through, I wasn’t surprised to see the GOP make inroads in 2024 with working-class and middle-class voters.
According to the exit poll data, Kamala Harris won among families who made less than $30,000 in 2023 and those who made more than $100,000. By comparison, Trump won among families who earned between $30,000 and $99,999 — too much to qualify for government assistance, but – in many cases – not enough to get by.
This election was about more than just pessimistic vibes. For tens of millions of American families, it was about real economic pain that isn’t as easy to spot in official economic data as it probably should be.
Don Leonard, Assistant Professor of Practice in City and Regional Planning, The Ohio State University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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