Ten finance guys are drinking in a bar. Nine of them are Masters of the Universe — wheeler-dealers who make many millions of dollars every year. The tenth is what Gordon Gekko, in the movie “Wall Street,” called a “$400,000-a-year working Wall Street stiff.”
Then the stiff leaves for a while, maybe to answer a call of nature. When he leaves, the average income of the guys still in the bar shoots up, because he’s no longer dragging that average down; when he comes back, the average drops again. But these fluctuations in the average don’t reflect changes in anyone’s income.
Why am I telling you this story? Because it’s most of the story of wages in the U.S. economy since Covid-19 struck. In 2020 the average wage of workers who still had a job shot up, because those who were laid off were disproportionately low-wage service workers. Then, as people resumed in-person shopping, started going to restaurants and so on, growth in average wages was held down because those low-wage workers were being rehired. You need to look through these “compositional effects” to figure out what was really happening to earnings as that played out.
Until recently I thought everyone — well, everyone following economic issues — knew this. (Assuming that people know more about the numbers than they actually do is an occupational hazard for nerds who become pundits.) But lately I’ve been seeing even mainstream news organizations publish charts that look like this:
And these charts are accompanied by commentary to the effect that real wages generally rose under Donald Trump but have generally fallen under Joe Biden, which in turn is supposed to explain why Americans are feeling so negative about the economy.
But that’s not what these charts actually tell us. Mostly they reflect the working stiff temporarily leaving the bar, then coming back.
There are wage measures that try to adjust for changes in the mix of workers, like the Atlanta Fed’s wage growth tracker. If we use this measure instead of average wages, the picture looks like this:
The spurious wage surge of 2020 is gone, as is the wage stagnation of early 2021. It’s still true that wages lagged behind inflation in 2021 and 2022, but they have run well ahead of inflation this year.
Even this view of economic performance, however, misses some of the temporary distortions caused by the pandemic. Prices of many commodities were very low in 2020 — the price of oil briefly went negative! — not because policy was good but because the world economy was flat on its back, depressing demand. These prices surged as the economy recovered, and there were also large but temporary disruptions to supply chains — remember all those ships waiting for someplace to unload their cargoes?
Oh, and Russia’s invasion of Ukraine brought war to one of the world’s major food-producing areas.
In the end, it’s basically a fool’s errand to try and compare economic performance before and after the White House changed hands; there was just too much crazy stuff going on. What we can say, with considerable certainty, is that while prices have gone up a lot since the pandemic began, most workers’ wages have risen significantly more:
OK, at this point one runs into a buzz saw of criticism. I am regularly assured by correspondents that economists’ measures of inflation are meaningless, because they exclude food and energy. No, they don’t; economists often use measures of “core” inflation for analytical purposes, but the Consumer Price Index, which is what I’m using here, includes everything.
Or I’m told that real people know that inflation is still running hot, whatever the government numbers may say. Actually, the American Farm Bureau Association, a private group, tells us that Thanksgiving dinner cost 4.5 percent less this year than last. Gasbuddy.com, another private group, tells us that prices at the pump are down more than 30 percent since their peak last year. Neither turkeys nor gas prices are good measures of underlying inflation, but both show that the narrative of inflation still running wild is just not true.
Sorry, folks, but “immaculate disinflation” — rapidly falling inflation without a recession or a big rise in unemployment — is actually happening. The 2021-22 inflation surge definitely rattled Americans after decades of relative price stability, and I’m not here to lecture people about their feelings. But I guess I am here to lecture journalists about using statistics. Presenting misleading numbers that seem to justify public opinion is actually an act of disrespect: Voters have a right to their feelings, but journalists have a duty to present the facts, as best we can understand them.
And while the public’s negative view of the economy is a major puzzle, acknowledging that puzzle is no reason to soft-pedal the evidence that the U.S. economy is currently doing very well — indeed, much better than even optimists expected a year ago.
Claudia Sahm makes the case for financial progress at greater length.
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