Politics has distorted Americans’ views on the economy

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According to a recent poll, a majority of Republicans and a plurality of Democrats think the United States is in a recession. The question is how to take their complaints seriously.

Most Americans probably aren’t familiar with the formal definition of a recession – “a significant decline in economic activity that spreads through the economy and lasts longer than a few months” – but they do know that current gas prices and food are particularly high, and inflation is rising the fastest 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 coherent, it would be the opposite.

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

The Bush administration never succeeded in realizing the vision of the property society. But fast forward to the present: Quite unintentionally, the pandemic has brought about the property society – a distorted and somewhat dystopian version. Household balance sheets have been remarkably strong and liquidity is high, partly because the pandemic has reduced spending and partly because of the federal government’s fiscal policy response.

You might think Republicans would find this situation at least tolerable. Yet, because they are not in power, they emphasize the negative aspects of the current economy.

Many Democrats are also inconsistent. The largely democratic approach to household welfare is to use subsidies and regulations to drive down the prices of important commodities. These programs can include food stamps, public and subsidized housing, and Medicaid. The theory is that high and volatile market prices in these areas are damaging, justifying subsidies or, in some cases, direct provision.

These transfer programs, which many Democrats want to expand, have the longer-term effect of lowering savings rates. If Unemployment Insurance and Medicaid are made more generous, for example, the demand for savings will decline, as the government takes a larger share of the tab.

At the risk of oversimplifying, the Democratic ideal can be said to be one of low prices, with government helping to block or mitigate sharp price increases for household products. In this ideal, strong household balance sheets are not a priority, as many of the preferred policies would lower savings rates.

You might think, then, that Democrats would consider the current combination of high savings with high and volatile prices to be quite disastrous. Yet apologists for the current economic situation are more frequently Democrats. Paul Krugman, for example, has repeatedly argued that there is a huge disconnect between how people portray the economy and what they actually do. Basically, he thinks there are too many complaints.

So, who is right ? Is the US economy something to be happy about or not? There is no simple answer. I will say that I have noticed that many people quickly internalize wealth gains and emotionally focus on losses, such as the higher prices of many consumer items.

But in at least one sense, the optimists are right. In a few years, some of the wealth added to household balance sheets will remain. At the same time, food and energy prices may well have returned to more normal levels. Happiness levels should rebound.

Such a future may seem too distant and uncertain to make Americans happy now. People are myopic and over-expect the future. That’s one reason the policy leans the other way – which may mean there’s something to the vision of a property society after all.

More from 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 reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

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

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

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