In 2024, amidst a heated election — one in which many people considered American democracy at stake — the economy still stood out as the most important issue. Polls showed that the economy was the number one issue among voters and that voters believed Trump would be better for the American economy. Most voters believed that economic conditions were bad, and they predicted more trouble on the horizon.
People’s opinions didn’t match the overall picture from official statistics: investment was strong, unemployment low, and wages grew faster than inflation. The simple picture was that the economy was going up, but people were feeling down. This mismatch was puzzling.
This simple picture misses a lot. Some have even suggested that the economy was doing so well that it galvanized support for Republicans (who tend to win elections when the economy is growing). But that doesn’t explain the pervasive negative attitudes people reported. To understand that we must look at politics and policies, public (mis)understanding of inflation, and the variation of economic effects beyond just the overall average.
Down on policy
People’s opinions about the economy are strongly related to their political views. So, people’s reported pessimism about the economy may reflect pessimism about policy.
If so, why were people so negative about the Biden administration’s policies? The administration empowered unions and cracked down on corporate power, and it invested hundreds of billions of dollars in American manufacturing and technology — mostly in Republican-voting areas. Although it may be too soon to know the full effect of these policies, early signs indicate success — especially for lower-income and working class Americans. This seems like the sort of economic populism which would appeal to voters, so why didn’t Bidenomics deliver at the polls?
EfIP Co-Director Dani Rodrik offers some explanations.
The first is that Bidenomics did deliver — but not enough to win the presidential election. Incumbents all around the world fared poorly in 2024, and Democrats did well by comparison.
The second is that policies take time, both to have a noticeable economic effect and then to change politics.
The final explanation offers a critique of Bidenomics: that it wasn’t targeted to the current economy. The administration’s focus on “manufacturing, old-style union power and worker organizations, and geopolitical competition with China… paid too little attention to the changing structure of the economy and the nature of the new working class.” Only 8% of workers are in manufacturing, so it’s unrealistic to expect that sector to revitalize the middle class. Instead, policy should have been aimed at low pay and precarious employment in services — things that impact far more people on a day-to-day basis.
Reconnecting the Democratic Party to its roots must start with the recognition that today’s working class has changed and has different needs.
Inflation loomed large
Among all the complications and nuances of economics and policy, one thing stood out as unambiguously important: inflation. In 2022, inflation reached the highest level in decades, and Americans felt the pinch. However, wages grew even faster than overall inflation, so why were people so averse to rising prices?
Research by EfIP Co-Director Stefanie Stantcheva provides some answers. She surveyed over 2,000 Americans to better understand the public’s beliefs about inflation.
People have some misconceptions about inflation, but their understanding isn’t totally off base.
There is a perception that inflation is unambiguously a bad thing.
Misconception: The most obvious reason people dislike inflation is that they perceive a decrease in purchasing power. To some extent, this arises out of misunderstanding: increases in grocery prices are attributed to inflation while increases in wages are attributed to on-the-job performance. If, in fact, both increases result from inflation, then inflation doesn’t hurt purchasing power, but people will think it does.
Or is it? There are important individual differences. On average, wages grew faster than overall inflation, but not everyone matches this average; some people’s purchasing power was reduced. This is especially important to acknowledge for lower-income households since they are disproportionately affected by high inflation.
Misconception: Under some circumstances (including the economic conditions in 2022), economists see a policy tradeoff between inflation and unemployment. Reducing inflation (for instance with tighter monetary policy) would mean increasing unemployment. According to Stantcheva’s survey, most Americans don’t view inflation this way. Only 25% of the public view the trade-off like economists.
Or is it? Policy doesn’t happen in a vacuum. The people most affected by both inflation and unemployment can be compensated with redistributive policy. So, even if high inflation is the right choice to maintain low unemployment, inflation doesn’t need to be a burden for most Americans. The public’s anger about inflation might be an expression of their anger at (real or perceived) policy inaction.
Misconception: In explaining the causes of inflation, people tend to focus on personal choices rather than impersonal market forces. Republicans mostly blame the Biden administration and Democrats mostly blame the greed. These aren’t the direct causes of inflation: Biden didn’t control the central bank, and greed remains constant (presumably) while inflation goes up and down.
When asked “When inflation gets very high, what do you think is the reason?” Americans focus on personal choices and have noticeable partisan differences.
Or is it? Although politics and greed weren’t the direct causes of inflation, there’s no doubt that misguided politics and unfettered greed have hurt the average American’s economic situation. Inflation might not be the right ground for these issues, but it’s not a misconception for the public to be angry about them.
What does this mean for inclusive prosperity?
In the short run, policymakers and pundits need to better understand the distributional consequences of economic shocks — especially in real time.
EfIP members Emmanual Saez and Gabriel Zucman have created a data visualization platform which follows wealth and income changes across the distribution, and it updates as new data arrives: quarterly and sometimes even monthly.
There are high-frequency household surveys, estimates of monthly personal income, and so on, but all these sources are scattered and limited, making hard to address basic questions like: “to what extent is income for the working-class lower today than on the eve of the pandemic? Has government intervention been enough to close that gap or is more needed?” That’s the gap we sough to address.
— Gabriel Zucman
In the long run, improving people’s economic outlook will require deep changes. People aren’t just angry about a few years of inflation. Public satisfaction with the American economy has been dismal for a long time. Pew surveys show that since 2000, the share of Americans who say the economy is excellent or good has averaged around 30%, and only briefly exceeded 50%. The public is dissatisfied with the broader economy and larger structural changes such as automation and globalization. Achieving inclusive prosperity means addressing a swathe of issues including systemic changes.
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