Thread by @Historian_Steve

1. This third THREAD in my 4-part series on Inflation and the Economy analyzes the uniquely American conundrum of a gap between consumer sentiment and the macroeconomic indicators of our economy.

Here I’ll talk about the nature of the two political parties and COVID.

2. Parts 1 and 2 were fact-driven. Parts 3 and 4 will be more analytical (although of course any analysis requires facts).

Part 1 on the negatives is here:

Part 2 on the positives is here:

https://x.com/Historian_Steve/status/1823507621107958150

https://x.com/Historian_Steve/status/1823659753899491708

3. Consumer sentiment tracked alongside macroeconomic indicators pretty well for 40 years. If the economy expanded or contracted, you’d see this movement reflected (accurately) in consumer sentiment. Then in 2020 the sentiment and indicators diverged.

4. The gap between consumer sentiment and macroeconomic indicators has perplexed a lot of economists and informed commentators. Explaining this gap has been the source of numerous think pieces. In December 2023, economist Justin Wolfers said…

5. ...that bleak readings on sentiment, along with fears that a recession lay ahead or had even begun, were “completely at odds with...the underlying data….”

Wolfers added, “I’ve never seen a disjunction between the data and the general vibe quite as large as I saw.”

6. When I say that there is a gap, I mean that American consumers are a lot more pessimistic about the economy than a dispassionate examination of the major trends and statistics would suggest. What explains this gap? This thread unpacks many of the answers.

7. We should start with a paradox. American consumers answer surveys as if they’ve been in a recession since 2020 but they’re spending money to a degree that unemployment, wages, and GDP are all in positive territory. We are not in a recession.

8. There’s a disconnect between what people say about their personal finances versus what they say about the national economy. Their personal finances are fine or good. They’re spending money. But somehow they think the economy is in the dumps.

9. This has led some commentators to say, “Watch what [consumers] do, not what they say.” If the economy was truly as bad as they said it was, they wouldn’t be spending all this money. They wouldn’t have the money to spend! @mcopelov

https://x.com/mcopelov/status/1794013543932530773

10. As Joey Politano points out, consumers may not like the prices of fast food, but they’re still spending money on fast food, and not a paltry sum.

11. An interesting complication that may yield further insights about the nature of our economy is that sentiment differs depending on whether you hold stock. It could be that those without stock didn’t participate in many of the positives of our economy.

12. Another feature of this gap is relevant. It seems to be purely a U.S. problem. Germany, France, and the UK don’t have the same gap.

13. As for why, I’d throw out a few guesses.
- social media may have less influence or more regulations in Europe
- we are in general more religious than Europeans are
- our conservative parties are more extreme on things like climate and more prone to a cult of personality

14. What explains the gap in the U.S.? Is it inflation?

Maybe a little bit. A Twitter friend of mine argued to me that unlike unemployment, inflation is something everyone notices.

15. If the unemployment rate goes from 7% to 3%, several million workers may have gotten jobs, but they may be located in parts of the country or sectors that are disconnected from your day-to-day lives. In contrast, nearly everyone goes to the gas station and grocery store.

16. My friend’s point is plausible, but it still doesn’t fully explain the gap. Inflation is only relevant with respect to income and wages. If inflation goes up 21% but your wages go up 26% what exactly is the problem, beyond just being annoyed?

17. And why would inflation be especially annoying to Americans? Germany, France, and the UK have even higher inflation than in the U.S., but the consumers of those countries are not nearly as frustrated as Americans.

18. Is the economy unfair? Yes, and I talked about corporate greed in Part 1. But the economy isn’t any more unfair compared to 2019 when Americans were giving it high marks. Thus far these answers cannot fully explain the gap.

https://x.com/Historian_Steve/status/1823509787981791698

19. What about political polarization? Ah, now we’re onto something. Indeed, the country has become more polarized over the last 20 years. Americans are more likely to view the economy through the lens of their partisan loyalties.

20. What absolutely needs to be underscored is that this polarization is NOT SYMMETRICAL. The Democrats are not mirror images of the Republicans, who are more extreme. I therefore disagree with Annie Lowrey and Joseph Uscinski on this point.

21. I composed a series of charts to prove this. I first went to the Yougov survey on this topic.



In the left-hand column, you can select how Republicans, Independents, and Democrats feel about the economy.today.yougov.com/topics/economy…

22. Here are the three images you get from this survey among Republicans, Independents, and Democrats.

What do you notice?

23. Republicans clearly have a greater intensity and variation in the peaks and troughs of their views of the economy. The Democrats’ variation is more measured.

24. As you might expect, how each side views the economy depends on who occupies the White House. Republicans are more likely to view the economy favorably with a Republican president and vice versa. This is how polarization shapes our views of the economy.

25. But the lines clearly show that the differences between the parties are NOT SYMMETRICAL. And not only do the Republicans have a much more dramatic reversal of sentiment, but they are more often factually incorrect in their assessments.

26. I did an experiment to confirm my hypothesis. I went to and drew up a graph for Real GDP per capita for the same years covered in the Yougov survey. The graph looks like this. measuringworth.com

27. What would happen if I matched up Republicans’ views of the economy with this graph from Measuring Worth? That would give us a method of seeing the degree to which Republicans were accurate in their assessments.

28. The results were astonishing. Republicans were saying it was a bad economy in 2009 (correctly I’d add), but then they were saying the exact same thing with the SAME PERCENTAGE in early 2016.

They COMPLETELY MISSED or explained away the economic growth of those years.

29. Republicans were refusing to acknowledge a growing economy merely because a Democrat, Obama, was president. They wrongly said the economy was getting worse when the opposite was true. Republicans' views were wildly at odds with easily verifiable facts.

30. The next step for me was to add in a bit of color to distinguish the Obama, Trump, and Biden years, as well as the COVID recession. Now the Republican partisanship was laid bare.

31. Republican sentiment LITERALLY TURNED ON A DIME once their beloved cult leader entered the White House. It was a dramatic reversal as clear as night and day.

To see more of this thread click on “Show Replies.”

32. The economy for Republicans in mid-2016 was apparently dismal but turned stellar overnight once Trump became president, even though the graph of Real GDP per capita shows continuity between the late Obama years and early Trump years.

33. If you’re looking for the same partisan reversal on the Democratic side, you won’t find it. Put the sentiments of the two parties side by side along with Real GDP per capita and this is what you get. The shifts among Democrats are more muted and attenuated.

34. The one period where Democrats accurately described a worsening economy was during the acute stages of the COVID pandemic—when the entire world economy was collapsing.

35. The conclusion from this survey is abundantly clear: Democrats’ views are more closely aligned with the objective reality of the economy.

36. If you wanted any more proof from this survey that Republicans harbor a deeply irrational skepticism of economic performance under Democratic presidents, look at this. Biden enters office. Real GDP goes up. Now, 80% of Republicans think the economy is getting worse! 🤬

37. Stunningly, Republicans think the economy is worse right now than in mid-2009, the nadir of the Great Recession, when millions of people had lost their homes, when the stock market had lost 57% of its value, and when unemployment was above 10%. This is spectacularly false.

38. One obvious conclusion is that if economic indicators are so skewed by partisanship, their value is questionable at best, unless it is to reveal ignorance. The other is that it’s impossible to separate questions of economics from politics and morality.

39. I’m always stunned that economists and economic historians I know do all this work on trade and slave-based economies but then yell at you for bringing up questions of morality and politics.

But maybe that's a conversation for a different day.

40. In any case, my conclusions here are supported by the work of other scholars.

41. I encourage you all to read this substack by Ryan Cummings and Neal Mahoney. Republicans cheer more loudly when their guy is in the White House. They boo more loudly when a Democrat is president.
briefingbook.info/p/asymmetric-a…

42. To rephrase, any time a Democrat is in the White House, we can expect that consumers’ views of the economy will have a built-in negative bias. Consumers will rate the economy more negatively precisely because Republicans have become so self-interested and extreme.

43. Let’s assign numbers based on the research of Cummings and Mahoney. Imagine the bias built into Democrats’ views of the economy is +2. If the partisan bias for Republicans is two-and-a-half times larger, their partisan bias would be -5.

44. Our discreditable and corrupt mainstream media splits the difference between the two sides and assumes that this method is “objective.” But here’s the problem. Splitting the difference between 5 and -2 does NOT equal zero. It equals -1.5.

45. So what is the significance of -1.5? It means that splitting the difference between extreme Republicans and only mildly partisan Democrats does not give you an objective view. It gives you a distorted one!

46. We’ve now explained almost all of the gap between sentiment and the fundamentals. It is almost entirely a Republican phenomenon that skews the samples. This is what Cummings and Mahoney say.

47. Have you ever talked to a Ronald Reagan fan? They won’t shut up about him. They think he’s a saint. This saintly status, of course, is undeserved if you look at the actual economic numbers. It’s yet another manifestation of untrustworthy Republican partisanship.

48. I suspect this canonization of Reagan stems from the fact that Republican voters take their cues from the magnates of Big Business who applauded Reagan’s tax cuts, deregulation, privatization, and assault on labor unions.

49. Let’s prove this point with more evidence. Here is a graph of consumer prices. If you line up inflation under both presidents, Biden’s is not that much higher. And yet our public memory says Reagan created “Morning in America” while Biden led the “Worst Economy Ever.”

50. I also lined up the unemployment rates under both presidents. This graph is my own creation. Reagan’s never went below 5%. Biden’s not only went below 5%. It was under 4% for over two years!

51. Again, this raises the question of why inflation is prioritized so far more above jobs? That’s like saying manufacturing output is way more important than the price of houses or wages—it doesn’t make sense. They’re all macroeconomic statistics.

52. If you want to be a sophisticated person, you should consider a variety of metrics before you opine about the economy. Focusing on one is like focusing on the number of ground balls hit to second base and saying the team with the most should win the game.

53. Ever since the advent of FoxNews on cable tv and Rush Limbaugh on AM radio in the 1990s, conservative voters have inhabited a media ecosystem of lies. Now it’s NewsMax and the Voice of Real America. Here’s a good example. @David_Charts

54. Americans overall have an emotional reaction to inflation, not a logical one. Consider the analogy of crime or climate change. If you ask Americans what they think about crime, they’ll probably say that it is increasing. Wrong.

55. Beyond a blip in 2020 due to COVID and the George Floyd protests, crime is undergoing a long-term decline that began in the 1990s.

nytimes.com/2023/12/11/opi…

56. If you hear about a plane crash in the news, you might become scared of flying. But this is an irrational opinion in a statistical sense when over 40,000 Americans die in car crashes every year while less than 400 die in airplanes.

57. You wouldn’t want to forsake flying because of one crash just as you wouldn’t say human-caused climate change is fake merely because you experienced one snowstorm in June in one part of the planet on one weekend in one year.

58. There is more to this story. The more I thought about the two parties, the more I realized that it is not just Republicans who are responsible for these low numbers on consumer sentiment. Some responsibility belongs with the Democrats.

59. So what is it about the Democratic coalition that might contribute to this negativity? One is the respect for education and critical thinking.

60. We will support a Democratic president if it deserved, but unlike Republicans we will not fall victim to a cult of personality by blindly following our leaders when they lie to us all the time.

61. In addition, a small but vocal and activist segment of the Democratic Party will not be pleased with any economy assuming current property relations. As I have spent the last 23 years of my life in American universities in California, I am familiar with this type.

62. Labels can be problematic, but we might describe this generic type as part of the left wing of the Democratic Party; socialist-leaning; semi-socialist; democratic socialist, etc. They don’t want a dictatorial, Stalinist takeover or violent revolution but they also…

63. see value in Marx’s critiques of capitalism. They want a political economy similar to what exists in Scandinavia. They assume that Democrats would win every election in a landslide if they’d stop being neoliberal shills (I disagree with this assumption).

64. They spend most of their time criticizing Democrats and if you ask them to decide between Democrats and Republicans, they’ll drag their heels and just barely recognize that substantive policy differences exist between the two parties.

65. Their ideas are worth considering but the bottom line for the purposes of this thread is that they will never be happy with any economy, no matter how good. In their ceaseless quest to proclaim their virtue and compassion, they’ll have a very difficult…

66. ...time recognizing positive macroeconomic indicators as anything but sellouts to the discourse of Friedmanite monetarism. If someone, somewhere is suffering (is there such a thing as a life without suffering?) they’ll be sure to tell you about it.

67. These types of folks represent maybe 10-20% of the Democratic coalition, large enough to prevent any kind of orthodoxy or uniformity of opinion that exists on the more homogeneous political right, dominated as it is by so many white, Christian men.

68. Another feature of the Democratic coalition is that many of its voters live in areas where the housing crisis is most acute. On top of that, a lot of Democratic voters are economically marginalized or POC for whom inflation is a difficult situation to navigate.

69. Making things more difficult for the Democrats is the absence of an effective communicator who can use the bully pulpit. While Biden deserves much credit for the Inflation Reduction Act and Chips Act, he does not dominate media coverage like Trump.

70. In some ways that is good because Trump’s constant lies make people frustrated. But Republicans, far more than Democrats, sell the hell out of their products. They’re a party of used car salesmen and masters at branding (think Trump university and Trump steaks).

71. The first presidential debate on June 27, 2024, put Biden’s weaknesses as a communicator in stark relief. The weaknesses were so manifest that he eventually dropped out of the race.

72. In the absence of an effective communicator who could sell his party’s successes to the American public through media, it’s no surprise that Democratic Party voters would be tepid about an economy with many strengths.

73. It’s time to get to the most important reason that explains gloomy sentiment in the U.S. It is the collective trauma of COVID. The social maladies that came with lockdowns are too numerous to list and link to here.

74. Suffice to say that anxiety and depression became more common. So did poor student performance in schools.

75. COVID wreaked havoc with the mental health of millions of Americans, to say nothing of all the deaths and physical ailments. The sad thing is we weren’t in great shape in terms of mental health even before the pandemic.

76. See Jean Twenge’s research on this topic. Greater smartphone and social media usage since about 2012 have done a number on our kids.

nytimes.com/2023/05/19/pod…

77. A study by the Chicago FED found that the disconnect between sentiment and the fundamentals—the gap I’ve been referring to—started in Spring 2020. FED economist Claudia Sahm has talked about this.

reuters.com/markets/us/us-…

78. For a variety of reasons we have not had any closure to the COVID crisis. It is COVID, combined with the peculiar characteristics of our two major political parties, that goes far in explaining the gap between sentiment and the fundamentals.

END.

Stay tuned for Part 4.

78. (Add-on): Part 4 of my investigation proposes a media-centered explanation for why Americans view the economy so negatively. It also explores the positive economic record among Democratic Party presidents while unpacking key economic concepts.

https://x.com/Historian_Steve/status/1825100484694446252