Thread by @Nate_Cohn

Over at the Morning, @DLeonhardt is going back and forth a bit with @paulkrugman about why consumer confidence is low, despite a growing economy.
They have two theories; I'll add a third

Krugman notes the inflation numbers aren't *so* bad that it should mean consumer confidence is *this* low.
I do agree with that premise.

If you fit a quick model of consumer confidence as a function of inflation, gdp, income, and unemployment, you'd guess that consumer confidence should be 10-15 points higher or so, depending on model specification. A fairly large gap (truth is red; est is black)

Now I'd note that, at least with this model, the public wouldn't be expected to think things are soaring. The economy looks slightly below average here. But that does depend on variable selection and I didn't have the stock market when I did this, which might nudge it higher

So why does the economy think the economy is terrible when it should probably be no worse than slightly below-average, and maybe even better than that?
Krugman and Leonhardt have two competing theories: media coverage and COVID-induced economic challenges that aren't in the data

In support of the Leonhardt thesis, I'd note that there's are certainly a lot of unusual economic challenges that voters could rightfully perceive that aren't reflected in the data. And a lot of it is highly visible--like when flight delays get blamed on staff being out bc COVID

In support of the Krugman thesis/my corollary is something interesting in this economic data: the timing of the collapse of consumer confidence

In July, there was zero gap between perception and reality on the economy, at least by this measure.
In August, a huge one had opened up and it hasn't recovered.

It is not my view that this August drop was associated with an abrupt change in the state of the economy.
It was associated with an abrupt change in public confidence in the Biden administration, associated with the rise of Delta and Afghanistan

It would be fun to know the exact field period of the survey. But the same August drop occurs, of course, in other data--like Biden approval rating and the right-track wrong-direction numbers

And of course, August largely precedes the peak of the supply chain shortages and inflation--or even the peak of Delta.

And if you look at the questions in the confidence index, they're pretty... right track-wrong track-ish. It's hard for politics not to bleed into these kind of questions about the country as a whole, imo

In Krugman's interpretation, this is just about unfair media coverage of the economy.
But my counter-interpretation is that this is mainly about perception of the Biden administration (whether fair or not)

Deservedly or not, the public lost confidence in the Biden administration's competence and leadership in August. The country has had an adrift and hopeless feel since then, with no sense of direction back to normalcy, etc. And that's what's holding back economic confidence

Krugman's argument is that it's excessive coverage of inflation that's skewing perceptions of the economy.
Mine is that it's attitudes about the Biden administration/direction of the country are skewing perceptions of the economy

https://twitter.com/johnhugg/status/1488504880675364870?s=20&t=-DQElnXMN_HCLUgvBiyjOA