If You’re Not in the Top 10%, the “Economy” in Headlines Isn’t Yours

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You might be familiar with the phrase, "In this economy?" But it turns out, there might be more than one "economy" out there. There's a deep disconnect between what we hear about in the headlines ("The economy is great!") and our day-to-day experiences affected by wage stagnation, inflation, and high interest rates. We dig into it with the help of Mark Zandi, the chief economist at Moody's Analytics.

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Our show is a production of Morning Brew and is produced by Henah Velez and Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our Chief Content Officer and additional fact checking comes from Kate Brandt.

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Transcript

Transcript

Judd Cramer:

So this has been a topic of a lot of debate among economists, politicians, and just the everyday person is about why there seems to be this disconnect. When we had numbers like right now, the unemployment rate is 3.9%, and as I said, inflation is in the mid 3%...when those numbers existed in the 2018, 2019, folks seem to be pretty happy, but now they're not. And so the question is why.

Katie:

You might be familiar with a certain catchall phrase that seems to be coming in handy more and more these days. It's the “Thanks, Obama” of the 2020s: “In this economy?”

You know, the “Go to your weeklong bachelorette trip in Croatia…in this economy?” ‘The economy’ as a concept has become a sorted meme of itself and until recently, I hadn't given it much thought. I referenced the economy as casually and carelessly as one might mention the weather as though it's a scientific measurable fact of life that we all experience when we step outside the comfort of our homes and into the commercialized third spaces all around us.

But I became interested in the economy in the colloquial sense as one 20-something with a job is wont to do, when I noticed it felt like the terms meaning was beginning to splinter from any sort of collective understanding. “The economy is doing great,” headlines would reassure, while every real person I knew was sweating their grocery bill and crossing all 10 toes that their check engine lights didn't blink to life, thereby landing them in their nearest used car dealership facing an 8% interest rate.

Welcome back to The Money with Katie Show, Rich Economically Rational Actors. Today we are exploring the mismatch between what the data tells us about the economy and what we experience in our day-to-day reality.

I had help from two people today to try to make sense of hashtag this economy.

Judd Cramer:

I'm Judd Cramer. I'm a lecturer in economics at Harvard University.

Mark Zandi:

Hi, I am Mark Zandi. I'm the chief economist of Moody's Analytics. It's good to be with you.

Katie:

If you are a devout Rich Person, you might notice that this isn't the first time that I've broached this subject. In the last year, a few months ago I published a piece on moneywithkatie.com in which I dubbed it the “Feeling Bad for the Joneses” economy, whipping up a namesake that kind of plays on the phrase “keeping up with the Joneses.” Here is a snippet that summarized my thesis at the time: “Every three years the Federal Reserve tries to understand the economic wellbeing of consumers. They ask how they're feeling about their own finances as well as about the state of the economy as a whole. Here's the weird thing, when asked how they think everyone else is doing. Survey respondents were quick to tell the Fed that the economy is trash, but when asked about their own financial situation, they felt decidedly rosier. The last time people felt this okay about their own finances, the number of people who rated the economy as good or excellent was more than twice as high.

Rather than keeping up with the Joneses admiring their shiny new Buick lacrosse and spending our way into oblivion to win a material arms race, we feel bad for the Joneses. In short, everyone thinks the economy sucks…for everyone else.” End quote.

You see, I had been reading a lot of Paul Krugman’s work at the time, a left-leaning economist who The Atlantic recently called out for being an upper class, out-of-touch liberal (yikes) by citing the fact that Paul volunteered that he “had ‘no idea’ what he paid for roughly the same groceries three years earlier, although he allowed that olive oil seemed costly” and that when he was scoffing at the price of his produce heavy shopping trip, he had forgotten about the scotch that he grabbed on the way to self-checkout, which as a sidebar, it occurs to me that any well-meaning pun can be decontextualized in a bit of journalistic slam poetry.

And now I'm wincing imagining all the objectionable little throwaway lines that are littered in my writing that would give a Money with Katie naysayer plenty of legitimate fodder to paint me, too, as an out-of-touch drunk.

The TLDR of the media landscape during much of 2023 was basically, “Why is everyone complaining? Things are great.” In fact, just yesterday as of the time of this recording, this was on May 20th, I read an Annie Lowrey article in The Atlantic about Biden's reelection prospects that was bemoaning this same story: Quote, “Indeed the sunny numbers about the economy, the low jobless rate, strong wage growth, soaring wealth accumulation and falling inequality fail to account for some cloudier elements. Americans remain stressed by and ticked off about high interest rates and high prices. Homes and cars in particular are unaffordable given the cost of borrowing and insurance and inflation has moderated, but groceries and other household staples remain far more expensive than they were during the Trump administration.

The majority of Americans are better off because their incomes have grown faster than prices, but most people understandably think of their swelling bank account as a product of their own labor and price increases as a result of someone else's greed. People want prices to come down and that's not happening.” End quote.

So all last year I hear these sentiments from my comfortably employed, housed, and fed purview and I thought, yeah, why is everyone so pissed?

Some of my favorite writers and thinkers like Derek Thompson covered this conundrum a lot on his show, Plain English. A quick scan of his feed reveals that he attempted to resolve this dissonance in July ‘23, August ‘23, March ‘24 and April ‘24 beginning with an episode called “Americans Think The Economy Is Terrible, the Data Tell Another Story” and ended with “What Many Economists and I Got Wrong About This Economy.” Yeah, that pretty much sums it up.

If you're unfamiliar because you have managed to find a way to spend your time that doesn't involve scrolling cursed CNBC headlines. Here's basically how the argument goes…

CNBC:

“Despite declining inflation, a healthy labor market with record low unemployment as well as stocks that remain in a bull market, consumer sentiment remains below pre pandemic levels.”

Katie:

To be fair, I've made a lot of these arguments myself in trying to understand what's going on like in my aforementioned essay. Why are people so bearish when the standard measures that we use to gauge economic vitality seem to be encouraging?

So today, let's take those points one at a time and understand why the economy you hear about in headlines might not really represent a plurality of Americans.

The first indicator that's often trotted out is declining inflation. This means the rate at which things are getting more expensive is lower now than previous 7% to 9% highs. Crucially, it does not mean things cost less, something that feels too obvious to be worth stating, but might help explain our sentiment data mismatch and we're going to dig into that.

The next thing you'll often hear about is a strong labor market with record low unemployment. The primary problem with the unemployment rate as a measure of economic strength is that it doesn't tell us much about the quality of the jobs. A 2016 paper from Katz and Kruger found that an astounding 94% of jobs created since 2005 have been contract or freelance jobs, not salaried positions with benefits and stability. It's a binary “yes or no” “employed or not” measure, not a qualitative assessment of how those jobs pay or how stable they are. This is an area where someone who spends a lot of time thinking about these data could pipe up and say, well, that's only partially true because by definition a tight labor market with low unemployment implies that labor has the upper hand and that they can demand higher wages because they're in shorter supply and this is a fair point. So we will talk about that too.

And lastly, they'll mention stock market gains. This one is the easiest to undermine because while 61% of Americans own stocks via their retirement accounts or taxable brokerage accounts, a rate that has stayed more or less consistent since 1998 when Gallup started measuring the richest, 10% of Americans possess 93% of the total wealth in the market. So that is to say if the stock market was worth $10 and six in 10 Americans owned stock, one of those six people, or put another way, one of the 10 owns $9.30 of it while the other five people split the remaining $0.70 and the remaining four people have none. (That's partially why this show exists to get more people investing meaningful amounts of money in the market!) But in the meantime, a bull market is going to disproportionately benefit people who have substantial money in that market already. Otherwise, stock market gains as an indicator of economic strength are relatively meaningless to the country as a whole where significant ownership is not the norm.

It might be worth asking explicitly what are we really trying to describe when we individually employ this term? A technical definition per Investopedia might offer something like, “The economy is the total of all activities related to the production sale, distribution exchange and consumption of limited resources by a group of people living and operating within it.” End quote.

But when normal people that is non-economist use this phrase, it feels like we're talking about whether or not we feel job security or if we can afford to buy a home.

It's a little like we're talking about our own little personal economies, how much we're earning, how hard we're working to earn that money, what's happening to our asset base, assuming we have one, and how much we have to pay for the goods and services that we want or need through this lens, it's easy to see which supposed economic indicator would rise to the top as a measure of our pain, the only one that we interact with on a daily basis prices. I wanted to ask real economists about how we measure price changes. So I called up Judd and Mark to ask them.

Judd Cramer:

There are really 330 million price indices. Each one of us has our own basket of goods, so the government does their best job to estimate what the price of the goods that the average American is consuming, how that's changed over the month. They send out enumerators to grocery stores and car dealerships and they ask people who are renting their homes how much they're paying and they sort of put all those things together and then it spits out a number. That sort of tells us on average how prices have changed over the last year, but especially now as prices have been rising rapidly in certain product categories, people definitely think that there might be some undershooting going on.

Katie:

Mark said something similar about the monthly surveys and he mentioned that there are a lot of moving parts in the way CPI is calculated that you might not have considered.

Mark Zandi:

It's a messy thing, constructing it, lots of moving parts, lots of assumptions. For example, the BLS tries to correct for quality, which makes a lot of sense. Think about the cell phone today compared to a cell phone a year ago or certainly 10 years ago. If you're still paying the same price, the price actually has fallen because you're getting a lot more for your money. The BLS tries to capture that. There's all kinds of issues with the construction, but I'd have to say it's a reasonable representation of reality and where there are errors, there are probably no bigger today than they were a generation or two ago. They're the same errors.

Katie:

Okay, that's interesting. Now that you say that though, has the way that we've measured it changed, you're triggering a memory for me of I feel like I've heard that in the last year or two like, oh, they changed to the way that it's constructed, that's going to change the reading. Is that true or no?

Mark Zandi:

Well, it's evolving. It's not stationary. It's always changing. It is always improving, trying to do things a little bit better. The weights that are used, they change too, right? Because people’s spending behavior changes like post-pandemic or spending more on goods, less on services that will be reflected in the index, but there are changes to methodology. The way you measure used car prices. That's a whole thing in and of itself that you can write PhD thesis about, but that has changed over time. So yes, it has changed, but I would say the changes are for the better. They improve the quality of the information that's being provided and there's no big event. It's not like the index changes wholesale at any given point in time. It just pieces of it evolve over time in an effort to, again, to create a better representation of the reality of what's going on with the prices.

Katie:

So aside from the underlying data, it's also worth pointing out the more obvious flaw in the way that we cover inflation in the news. The growth charts that compare wage growth and price growth often show percent change, which sometimes makes it look as though at different points, one is higher than the other in an absolute sense.

So for example, the charts that I've seen recently show the line graph for wages steadily above the line graph for inflation, which visually suggests that wages in an absolute sense are higher, but since the graphs are measuring change, it really just means that something that increased by 9% last year, in other words, inflation, when the other thing wages only increased by 5% are now in reverse positions, where inflation is making prices cost 3.5% more than last year while wages are up between 4% and 5%.

So while this is statistically true, of course the problem with percent change as a meaningful narrative for making intuitive sense of the world around us is that a huge 9% bump followed by a 3% bump based on that new higher number is still a really substantial increase.

For example, using those same numbers for wages and inflation for 2022 and 2023, something that used to cost $100 now costs $113. The wages, assuming they also started at a level $100 are now only clocking in at $109 even though the rates of change are back to a level you would hope to see and wages now appear higher than inflation. If 2022 were your starting point, prices are still higher than wages, but maybe 2022 isn't a fair starting point. In fact, if our primary thesis is that the pandemic is what threw us into this alternate timeline, it might be more accurate to say that the January 2020 measurement was the last point at which things were normal, whatever normal means. If my math is correct, you can pull the percent change for each year since 2020 using a starting point of prices at $100 and wages at $100.

And for the record, I'm using $100 as an arbitrary baseline figure just to demonstrate how both things have changed since January, 2020, assuming that was our normal point of parody and see how your original $100 amount would've shifted year over year. And drum roll please…we are technically at parity again, which means things should feel the same way they did four years ago. You can imagine my surprise and delight when I learned this and I hop over to my trusty Instagram feed to unveil the good news to everyone like, “Hey guys, I know you all think your lives are hard right now, but did you know that technically everything is the same as it used to be?”

Insert car crash sound here.

My announcement was met with…a healthy level of hostility. People pointed out that this isn't exactly the win that you would hope for. It can feel like you've just hustled for four years to stay in the exact same place. A common sentiment is, “Yeah, I've worked really hard to get those raises every year and I still don't feel like I can afford anything more than I could before the pandemic.” Underneath it all, there is this unspoken expectation that your lifestyle will improve over time as you earn more—and when that expectation goes unmet, it can feel like a real gut punch.

Mark Zandi:

The way I would frame it is it takes about a thousand, and I'm rounding obviously, but it takes about a thousand bucks more to buy the same goods and services today than was the case three years ago before inflation took off.

Katie:

Per year. Is that an annual figure?

Mark Zandi:

Yeah, about a thousand bucks, and wages are for the typical, let's say the median worker, is up just about a thousand bucks, maybe a little bit more, yeah. Okay, so that means people's real, so-called real wage or their purchasing power is unchanged over the past three years, which it's okay. I mean if you go into recession then generally your wages will fall behind inflation and your purchasing power declines. But it's not great, right? Because it should be the case that our purchasing power steadily increases over time because that goes to our productivity. We are getting—as a collectively as a workforce, we're getting more and more productive. We're able to produce more stuff with the same amount of labor effort, all the work that we do, and the benefit of that goes somewhere and some of that should go to us as workers. It means that our wages should generally rise faster than the rate of inflation. If it doesn't, then it feels a little bit crummy.

Katie:

There is of course one glaringly obvious area where things are not like they were in January 2020, the housing market. A recent Zillow report found that Americans need to earn 80% more than they did before the pandemic to comfortably afford a home—80% more. That means if you made $75k in 2020, you would now four years later need to earn $135,000 to qualify to buy the same home you would've been able to afford back then. That's the equivalent of getting more than a 15% raise every year, and this too might trigger a Money with Katie content memory at some point a couple months ago I posted a video that basically said people judge if the economy is good based pretty much solely on whether or not they feel that they can afford a house.

I asked Mark and Judd how housing is factored in because it feels like claiming that we're at parity with 2020 is a little misleading when this context is considered.

Judd Cramer:

Housing is something that certainly a lot of young people are very, very aware of. Interest rates are high housing, prices are high, mortgage rates are high, and that's something that really feels pretty disconcerting to us. If we see that our wages have risen a certain amount, but still we're nowhere closer to making the down payment on our home, we're not going to feel great about that. The problem with that in particular in the inflation measure is when somebody buys a home, they don't buy a home just for today or just for next year. They buy it for the next 10 years. And so when we're buying that home, it's not just consumption this period, it's also investment in the future.

So when the government tries to measure CPI, the consumer price index, they actually don't include housing prices or mortgage rates because those aren't just consumption. They're also consumption and investment. There are some theoretical reasons for why housing prices and mortgage rates shouldn't be included, but for somebody like me who's looking to buy a house, I'm very, very aware of those prices. So that's one big difference now versus before pandemic is that mortgage rates are way up, interest rates are way up. Those things don't make their way into the inflation indices. So that's one factor that I think has been understudied.

Katie:

Yeah, I think based on kind of where I'm sitting on my perch as a personal finance person, it does anecdotally seem to me that when we talk about whether the economy is good or bad, we are mostly referencing whether or not we feel like housing is within reach. And I think it makes sense because it is the largest item in the budget for the majority of people. So if that majority of your budget is feeling like it's skyrocketing, then yeah, it makes sense that no matter what the rest of the data is telling you, you would feel squeezed and you would feel unhappy with that.

One thing that I wanted to ask you about is basically about all of the super high inflation in the 1970s, and you're referencing the fact that mortgage rates like housing, these things are not factored into inflation. And I think someone could hear that and go, well, they should be, obviously they should be because that's a huge portion of my budget that's going to really determine whether I'm having to spend more or not if that's getting higher. But on this podcast that I had listened to a couple years ago, they were talking about this doom-loopy relationship that can cause where if you're including people's mortgage payments in the inflation print and interest rates are higher, then that's going to make inflation look even higher because they're spending more money on that, and then because inflation looks higher, they raise interest rates even more and then that cycle just, it just happens at infinitum. And so I'm curious, is that interpretation accurate? Is that true?

Judd Cramer:

Yeah, so definitely I think a lot of people now would say, even though we don't include housing, we include rent in the index, and some would say we sort of have that doom loop. Now, rent inflation is very high, has been measured at a high rate. So as we know the Fed raised interest rates like crazy and then all of a sudden people who were starting to do a lot of construction on new apartment buildings and new rental structures in 2021, 2022, right now we have an all-time low in multifamily housing starts, and so construction is going down, and so not only are housing prices staying high, but also rental prices are staying high and that is included. So yes, I think there's a lot of thought about this is the question when we talk about what should the Federal Reserve be targeting in terms of inflation.

Katie:

So to put a finer point on that, mortgage payments used to be included, but now they just include rents. So you might think that that totally omits the cost of home ownership, but Mark elaborated on this in our conversation.

Mark Zandi:

In terms of home ownership, the cost of home ownership, that's also based on rent. It's based on the implicit rent that a homeowner would have to pay themselves if they were renting that home. That's actually the way the Bureau of Labor Statistics calculates the cost of home ownership.

So it actually overstate in that case, overstates as you were pointing out, the impact of inflation on those homeowners because most homeowners, 40% of homeowners don't have a mortgage at all. 60% do, but they've locked in at three, 3.5%, 4%, so their mortgage payment is not rising, but that's irrelevant to the way it's measured in the consumer price index and other inflation measures based on rent, the mortgage rate is not directly involved in the measurement of inflation whatsoever. Now, in some countries it is, and it used to be in the United States, if you go back, I think this was a methodological change in 1983, I'm making that up, but that's probably pretty close.

Let's say January of 1983. Before that, it was based on mortgage payments. After that, it's based on implicit rent. It's called owner's equivalent rent, which that's a whole ‘nother can of worms. Most other countries don't even try to measure that. They keep it outside of because they say, okay, if I own a home, that's more of an investment than anything related to consuming anything, so I shouldn't even have that in the measure of inflation. But here in the US we do account for it and we count for it by looking at rents. By the way, this is a sidebar, if you excluded OER like the rest of the world does the owner's equivalent rent inflation is already back to the federal reserve's target. It's 2% year over year. So the OER is actually adding a full percentage point to measured inflation. So if anything in my view, inflation is overstated, not understated.

Katie:

Well actually though, that kind of brings up a different point that I am thinking about with this owner equivalent rent, which is that rents have gone up a lot, but the price to buy, it's like the rental market though, seems like it's still a better deal in a lot of places than the buyer's market.

Mark Zandi:

Totally. I mean for the first time in my professional memory, almost universally coast to coast, it makes more sense to rent than buy at this point given where mortgage rates are 7% fixed mortgage rate and given where house prices are renting makes a lot more sense.

Katie:

One related point here, often I would look at homeowners, particularly those who secured sub-3% mortgages in 2021 and think, man, they are really sitting pretty. They are insulated from the largest inflationary segment of what is driving this growth. And in fact, it's even better than that.

Not only are they not exposed to increasing shelter costs beyond perhaps insurance, but they own the very asset that is inflating in this way, the middle class, who by the way, smart asset pegs as those earning between $52,000 and $155,000 in household income isn't just one group, it's two: those who already locked in a low mortgage that hopefully they can afford, and those who are subject to rent movement and are trying to save for a down payment in the midst of it, usually to buy a home that last year cost roughly 44% more than it did in early 2020.

The economy that a renter faces is not the same economy that an owner faces. Those who own assets are in a fundamentally different position than those who don't right now, which might be why The Atlantic called their saucy Paul Krugman hit piece “What the Upper Middle Class Left Doesn't Get About Inflation. They write, quote, “The modern Democratic party in liberalism itself is to a substantial extent a bastion of college educated upper middle class professionals, people for whom Biden era inflation is unpleasant but rarely calamitous poor working class and lower middle class people experience a different reality. They carry the searing memories of the great recession and its foreclosure crisis when millions of American households lost their homes. A large number of these Americans worked in person during the dolorous early days of the pandemic and saw its toll up close and since 2019 they've weathered 20% inflation and now rising interest rates, which means they've lost more than a fifth of their purchasing power tell these Americans that the economy is humming, that median wage growth has nudged ahead of the core inflation rate and that everything's grand and you're likely to see a roll of the eyes.” End quote.

This is where the upper crust of the middle-class spectrum experiences things totally differently from the rest of their stratum to the point that it's basically like living in a completely different country. Sure, things might cost more now, which is annoying, but if you're a top 10% household, so that is your household either earns roughly $191,000 or more, or you have a household net worth of approximately $854,000 or more according to Yahoo Finance, you likely own assets that have risen with inflation too. You have gotten richer at the same time things have become more expensive, which has an offsetting effect on your bottom line. In fact, it feels strange to classify these people as middle class at all, and I suppose if we're using the SmartAsset data, they're not, and maybe this is the core of the dilemma and why everyone feels so angry.

How is it that owning your home and having retirement savings means your upper class and has it always been this way or has our understanding of what it means to be truly middle class shifted? It could be chicken or egg. We point to six figure salaries that are technically still middle class because that's what's needed today to buy a home and achieve what we envision as a middle class life, but have the last few years transformed the middle class life into an upper class commodity?

I imagine a majority of the people who have the disposable time and interest in listening to a verbose podcast about personal finance probably skew closer to the educated upper middle class end of the spectrum than the lower middle class working poor who probably don't have the spare time and energy in their day for my musings, but I shouldn't make assumptions. You might be someone for whom the consumer price index for food rising 25% from 2019 to 2023 wasn't merely inconvenient, but totally calamitous and you might be annoyed as hell at all the headlines telling you to buck up because inflation's trending downward. The hard thing is prices aren't going back down and economists like Judd and Mark would warn us that you shouldn't want them to. That can cause what's known as a deflationary spiral and it's bad.

Judd Cramer:

So this is something where I have my consumer hat on the everyday person, and then I sort of have, okay, well this is what we studied in the textbook and this is why as an economist, I like there being some inflation. Personally, when I'm thinking as a consumer, I'm thinking, wouldn't it be great if instead of growing one to 3% these things fell and so the price tomorrow would be cheaper and then I could buy more tomorrow and my dollar was getting more value instead of less value. I would say two things. So one, the reason why the US economy is sort of the strongest economy in the world is because of the US consumer. We have a strong consumer who consumes a lot. I mean, it could also be a weakness if we get overextended, but the US consumer has been extraordinarily resilient and is the reason why we have so much innovation and we consume well more than other countries.

And that sort of leads to this innovation. And one of the reasons that falling prices might be a detriment would be, okay, if I know that the price of housing is going to fall 10% next year, I'm not going to buy a house this year. Or if I know that the price of this bag or glasses or whatever is going to decline in the future, then you're a lot more reluctant to spend today. And even though it's sort of circuitous, the money that you spend today is what the GDP is, the money that I spend goes to the companies that then hire my friends and do the research and produce the goods tomorrow.

And so if we get into this situation where everybody thinks that nobody is going to, prices are going to fall in the future, so nobody's going to buy today, so then nobody invests today, then you get into the situation where you have fewer people working and you have less resiliency.

And the biggest example that we have sort of around the world, I know if some of your listeners are interested in traveling in the future, I love Japan. I'm a huge Japan advocate, so you should all go to Japan. But Japan has been the situation where they have not had inflation for many years. So when I went there the first time and now I go there again, 20 years, and the price is the same, the Coke bottle is still a dollar, it hasn't changed. It's good for us as travelers who have American dollars, but for the Japanese consumers it actually hasn't been good, but because the price hasn't been growing, people haven't been innovating, employment hasn't been so impressive, and they just don't have the will to buy the same way that we do in the United States.

Katie:

But what I think I'm struggling to make the connection between, or what I'm honing in based on what you just said, is this interesting connection between consumption and economic strength or how, oh, these, it just sounds so counterintuitive. The prices in Japan have stayed relatively consistent, and so because things are not getting more expensive, their populace does not feel the need to work as hard, and so their economy isn't growing as quickly. And as an American worker that hears that, I'm like, well, I might actually prefer that situation. In fact, I might not want to feel as though I have to keep lighting this fire under my ass to keep going because everything that I want to buy is just getting consistently more and more expensive. It just strikes me as an interesting example where the economic theory feels at odds with what's good for humanity. Is that too big of a jump that I'm making here?

Judd Cramer:

No, I love getting philosophical. I think that, yeah, that is definitely something that I feel relative to Europe or whatever. People always complain about the work-life balance in the US and one reason for that is because things are just more expensive in the US so to achieve the same level of consumption, you have to work more, but also wages are higher. So there is this sort of big picture thing about what are the trade-offs we're making as a society in terms of these decisions? And I think that's something that I love to think about, but in general, economists tend to come down on the side of ‘it's good having that proverbial fire behind us, pushing us to work and creating this more vibrant, dynamic economy.’

Katie:

Yeah, what are the trade-offs we want to make as an economy? What do we want to be incentivized to do? That of course brings us to our work, our labor.

So if prices aren't going to go back down, then wages need to keep rising and rising faster than the prices do. Nima Shirazi and Adam Johnson, hosts of the Citations Needed podcast, point out the way media coverage of labor issues and the economy flattens class conflict that it papers over these very differences. A middle class family earning $150k per year that owns the home it lives in and contributes to a 401(k) plan at work does not share an economy with a lower middle income worker who does not own any assets and is paid by the hour. And to my earlier point, a middle class family earning $150k who rents is in a very different position still than one that bought a home in 2021.

Citations Needed:

We are regularly exposed to news media updates on some vague notion of the economy, though it's never really defined. The economy we're told is something that will suffer if work stoppages happened, even though striking workers might stand a chance to reap some economic benefits in the longt erm, it's also something that somehow does just fine, even thrives despite rising homelessness, poverty, food insecurity, and the general stress and anxiety among the public about their ability to afford basic needs.

Against all of this pundits still wonder why people in the United States have doubts about the strength of the economy when by their standards it's doing so well, but when the economy is at odds with the interests of the working public, what does that tell us about media's understanding and use of the term whose interests are truly reflected in mainline media's definitions or lack thereof of the quote-unquote economy?”

Katie:

The economy you hear about in headlines, they say yes, the very one that is supposedly cruising along right now might not be your economy.

The best example is the way that strikes are covered. 2023 was a huge year for strikes between SAG-AFTRA and the UAW. The headlines were constant. Some claims that the strikes could slow the economy and trigger job losses, while others noted that the strikes have cost the economy billions, but whose economy?

Shawn Fain, the United Auto Workers President, spoke very plainly about whose economy would be affected:

Shawn Fain:

It's amazing to me how analysts, when workers asked for their fair share, it's always the end of the world. In the last decade, these companies made a quarter of a trillion dollars in profit. In the last six months alone, they made 21 billion in profit. In the last four years, the price of cars went up 30%. CEO pay went up 40%. No one said a, no one had any complaints about that, but now God forbid that workers actually ask for their fair share of equity in the fruits of the labor and the product they produce, and all of a sudden it's the end of the world, the talking heads, the pundits, the companies want to say that if we strike, it can wreck the economy. It's not that we're going to wreck the economy, we're going to wreck their economy. The economy that only works for the billionaire class, it doesn't work for the working class.

Katie:

I got to admit, that quote makes me want to run through a freaking wall.

Overall, their assessment warns against taking things at face value, which is a really good reminder for someone like me who ingests a lot of financial media and doesn't always think critically or independently about the terminology being used and whose interests in might represent. They say no one would ever see a headline saying UPS strike could lead to $30 billion in gains for UPS workers or threat of strike could lead to billions more in the hands of the working class because again, people don't strike for the lulls. They treat these striking workers like they’re Bond villains who have an ideological hatred of the economy versus attempting to disrupt the normal flow of economic activity for some long-term benefit.

I asked Judd to help me make sense of this: We hear constantly about how strong the US economy is, but why does a strong US economy, why is it not translating to Americans being in a position of economic strength?

Judd Cramer:

Yeah, so I love your question. So you are definitely right that if we look at the wages that a full-time year round worker was taking in 1979 is one of the years that they point to as sort of inflation adjusted when the highest adjusting for different demographic characteristics as well when wages were sort of highest at the median, which seems insane that we've had so much growth in the quote growth in the last 45 years, and we sort of haven't gotten to that spot. And one thing that reflects is the declining share of the economy that is going to labor. It used to be in the upper 60% and now it's around 60%.

Katie:

Sorry, it used to be upper-60s and now it's 60%?

Judd Cramer:

Yeah. So you can think about it as basically 7% of the economy in some sense used to go to workers and now is sort of being taken home by corporate profits or different returns to capital, et cetera. There is more money, but the share that's going to labor is lower in terms of how do we create an economy where that money is getting redistributed to workers without losing some of our dynamism and without all of these openings. That's sort of the billion or I guess trillion dollar question. And I think what was interesting about Covid is we sort of had this experience when folks were sitting inside a lot, then they got their money, and then we all wanted to go to restaurants really badly and there weren't enough people to work in restaurants. And restaurants that used to pay $12 an hour we're posting $20 an hour and we were going to these restaurants and we were complaining that nobody was servicing our table or cleaning our table.

And why is service bad? It used to be better. And that's sort of what that economy looks like. We had sort of a labor shortage, wages were going up and the companies that weren't able to pay that were sort of understaffing. And I think that that was a really interesting experience. And so actually as a result of covid, we have seen what wage growth we have seen has mostly come at the lower end. So sort of unusually in the US it used to be the case that especially in the 1990s, 2000s, most of the earnings growth was concentrated the top half if not the top 5% or 1% of wage structure. But actually during Covid, especially in the recovery when there were just a lot of demand for these sort of in-person services that people hadn't been able to partake in, we saw that wages have grown for that group a bunch. So I think there is no, or at least no country in the world has been able to perfectly balance. We have a growing economy, we have high wages, we have good service, and we have all of these other things. And so that's something that we're all trying to figure out.

Katie:

What I think I hear you saying, or what I think someone would volley back is, well, if people have too much money or you do increase labor share of income, people are not going to work as harder. The labor market's going to be too tight. And as a consumer, each person is a producer and a consumer, and if it benefits you as a producer, then you might actually not like it as a consumer, it means the service will get worse or prices will go up. And I guess I conceptually can see that.

I think at the same time I think about that argument that you'll often hear about, well, if you pay a McDonald's worker more, the Big Mac is going to cost $20. And then I'm in Copenhagen buying a Big Mac and I know the person behind the counter is making $22 an hour and the Big Mac costs less than it does in the United States. So I'm like, well, what gives some of it feels like, I'm sure we have tested it to an extent, but some of these arguments feel a little convenient to the status quo that like, oh, sorry, no, we have to keep paying people, not very much. Otherwise everything is going to go sideways and yeah, I don't know anything in there that sparks anything for you or I'm just riffing at this point. I don't even have a question.

Judd Cramer:

No, I love it. No, no, it all does. And it's interesting. So I went to graduate school to study labor economics and a lot of my older professors were sort of experts on labor unions in the 1950s and 1960s. But when we actually look at what's gone on in the private sector, the amount of people who are belonging to unions, that's gone down drastically. Then I think it's not a coincidence that that's gone on at the same time that the labor sheriff income has gone down.

Katie:

So in preparation for this episode, I came across a recent article from CNN that dubbed our particular economic era, “the tepid twenties.” There's this idea that feels omnipresent in financial media, that an economy that's growing expands people's quality of life by improving the standard of living and making households in general wealthier. Growth is basically the goal and at all costs. And as one CNN business article from May writes, “In the United States, growth has been vigorous thanks to strong consumer spending and gains in productivity. America's economic strength is precisely why the IMF last month revised its forecast for global economic output up to 3.2% from the 2.9% projected back in October.”

So let me translate that for you. The output growth and productivity driven by US workers alone is carrying the metaphoric team on its back right now. The article details how the Eurozone, which sounds like a mid-aughts boy band, and China have been slowing growth, but not the good old US of A, we just keep trekking on in our lifted F-150s.

This jumps out at me for one simple reason, and I want to use an e-commerce analogy to explain it. In online sales and marketing, there are a couple different levers that you can pull to increase your sales. So for example, you can drive more traffic to the page or you can focus on making more people who visit your landing page want to buy your product. The latter is called conversion rate or how many people that saw your offer converted and purchased it. Usually conversion rates are really low, like around 1%. So most people focus on driving more traffic to their page. They go, Hey, if I know 1% of people are going to buy my product, the only way to sell more product is to get it in front of more people. But if you increase your conversion rate, that is the number of people that are landing on the page that are deciding to buy it. You don't need more people on the page. You can sell more products by increasing the number of visitors who choose to buy.

So if you're like, I thought we were talking about the economy, how did we get here? It's because I think the way that the US economic mindset as determined by economists and policymakers equates overall growth with an increase in quality of life and household wealth, right? It's equating the growth with that increase in quality of life. And it reminds me a little bit of a business that's only looking at the number of people on the landing page. We are by and large ignoring the fact that another way to improve quality of life and increase household wealth is to just increase the proportion of the gains that are being created that get shared with the broader labor force. If the end goal of economic growth is for people to end up with more money, which is what we're assuming will improve their quality of life, sure you can make them work double the hours or businesses could share more of their profits with the labor force, you don't have to increase the overall revenue, you just have to increase the labor share of income.

And look, as I say it out loud, I realize it sounds pretty Pollyanna, but the point is that this economic coverage only ever tends to examine that one overarching metric and everything else is in service of that. Is GDP growing? Are we producing more? The mainstream financial outlets never seem to examine whether more is actually the solution to the problem that we are trying to solve or acknowledge that the conversion rate, which in this case is the share of revenue being paid to the laborers who created it, is not fixed. It's dynamic. In fact, we have every reason to believe that workers are actually more productive than they have ever been. The trend line is basically an unflappable uphill climb while wages have not come close to keeping pace. According to the St. Louis Federal Reserve, the front graph above shows a disturbing pattern. Since the early 1970s, there has been an apparent disconnect between labor productivity and real wages. The accumulated difference was 70% at the end of 2022. Though I did ask Mark and Judd to corroborate this because the idea that our productivity is consistently outpacing wages or that is labor share of the income created, they were able to shed a little bit more light on the topic.

Mark Zandi:

I mean, productivity growth is good, but it's down from where it was historically. I mean, productivity growth is one and a half percent per annum. That's what it's been since the pandemic. That's what it was in the period leading up to the pandemic. If you go back before the financial crisis, it was a solid two, two and a half percent per annum. So we're down, no doubt about it.

Now, there's some reasons to be hopeful that it's going to pick back up again. I mean, business formation has been booming, a lot of new businesses across lots of industries since the pandemic. But you're right, if you look from the late seventies, early eighties up until the financial crisis, you're right, the labor share was under a lot of pressure. Wage growth did not keep up with productivity since the financial crisis, except for this period in the post pandemic period, which that was a massive shock to the economy.

It's not surprising it would mess with things for at least a while. The labor has been able to get its fair share of those productivity gains. Wage growth is real. Wage growth has been good, has been pretty good this last three years, not so much, but that goes to the pandemic and the Russian War and Ukraine and the effect that had on inflation. But it feels like we get to the other side of the ill effects of those things which we are doing because labor market's tight wage growth has picked up that labor is going to get their fair share, and that should not be the problem that it has been in terms of wage growth.

Judd Cramer:

Now that we sort of have this stronger economy, there is some possibility that we're going to sort of see if not getting all the way towards $22. People who are working at McDonald's are getting a lot more money than they were before. You drive down the highway and you see signs for opening salaries that were much higher than they were for or five years ago. And then I think the FTC has done some stuff about, it used to be illegal for you would sign an agreement, a non-poaching agreement between franchisees or a non-compete agreement where if I were working at this McDonald's on this street and there's a Burger King right across the street, and that owner would offer me $1 more and I would like it in the quote free market, that was sort of forbidden by my contract. The FTC has sort of taken the preliminary ruling that that's illegal.

So maybe that'll lead to some more bargaining power for lower wage workers. And yeah, I think where we fall on this is sort of a question that we have to decide as society. I think the Reaganomics thought was he famously, the air traffic controllers wanted to get paid more money for their air traffic controlling, and the union went on strike, and he famously just fired them all and said, if we have to pay air traffic controllers more money, then your airplane prices are going to be higher and that's going to be worse for the economy and blah, blah, blah, blah.

And that was sort of where the American populace was at the time. I think it could be the case that the American populace will change in the future. I tend to think that we're sort of still in this status quo situation where we sort of have these disparities that we are a little bit aware of, but we don't necessarily know we want to fix them or even if we wanted to fix them, how we would do it.

So it's a fascinating time, but this Covid situation was like, it was obviously terrible, but for economists, it was like this interesting natural experiment about what, there was this debate, how much do consumers care about inflation? People used to say, oh, we don't really care about it now. We know. No, no. They really care about it. People hate it. People really hate inflation a lot more than if you read papers from the ‘90s and 2000s, nobody cared about inflation. It was like whether it was 2% or 2.5% or 1.5%, nobody cares. But once it goes up to 9%, people are very, very aware of it. So I think if anything, this is going to push us towards doing the cost minimization.

Katie:

I always think it's funny that you mentioned we're aware of the disparities to an extent, but we're still kind of on the fence about fixing them. It reminds me of, there's a sociologist named Matt Desmond. He wrote a book called Evicted that was a Pulitzer Prize winner, and he just recently wrote another one about poverty and kind of the whole premise that undergirds his message is, we're as a country with inequality and the fact that the poverty rate here is so high because by and large, it's like what enables the middle and upper classes to be middle and upper class. And so we kind of all benefit and profit from the fact that there are low wage workers and that services and goods are cheap. And to your point about us finding out that like, oh, people hate when prices go up. It's like that's a natural tension and I can excuse it more or see it more.

I think for the middle class where they're kind of already on the cusp, but they aren't economically that better off than a low wage worker is. They're certainly better, but not better to the extent that a top one or five percenter is better, where it's pretty much just like, I don't like that my groceries cost more, but I make $500,000 a year, so what do I really care? It's like if you're making $70,000 a year, yeah, you're not a low wage worker, but you're still living relatively close to the edge. And so I can kind of see why this becomes a tension, and I don't know, maybe that's why worker solidarity and unions are so important.

Katie:

So yeah, you'll hear things like, ah, the economy is slowing, and I assume that that's meant to strike fear in people. Maybe it makes you work a little harder because you're afraid of being laid off because you hear the economy's getting worse. Maybe it makes you spend a little differently. But as Nima and Adam originally pointed out, it's worth asking whose economy is slowing down.

After all, if our new prices are here to stay and there's no reason to believe that things like houses are going to get cheaper, an increase in wages or the labor's share of the income that they create is the only tenable solution that I see. And it's pretty clear to me based on the productivity versus wages graph, that increased worker output is probably not the lever that needs to be focused on and continued to pull to make that happen.

That is all for this week. So I'll see you next week, same time, same place on the Money with Katie Show.

Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Kate Brandt.