It is entirely possible that former President Donald Trump will get back into the White House in large part because Americans misunderstand inflation.
I’m not arguing that the inflation surge early in President Biden’s term wasn’t a real problem. It was. I’m not even arguing that all the damage done by that surge has been undone. It hasn’t.
What I am saying is that people are making several related mistakes that cause them to overestimate the size of price increases, the harm they have done and the culpability for them of Biden and his veep. Those mistakes, combined with Trump’s undeserved reputation as a mastermind of business, are causing them to believe that Trump would be better than the Democrats at managing the economy.
The first mistake is to focus on the rise in prices without taking into account the rise in wages — or, for retirees, the increase in Social Security payments, which are tied to the cost of living.
At the beginning of the inflation spike, prices really did race ahead of wages. That opened up a household deficit that had to be filled with savings or borrowing, Amy Crews Cutts, an economic consultant to the financial services company Primerica, told me. That’s a fair point.
But lately wages have grown faster than prices, as the White House Council of Economic Advisers keeps saying. Inflation-adjusted wages are still down from January 2021, but by only 1.4 percent, compared with a decline of 4.2 percent at the worst point.
To make that point in a fresh way, I put together a chart of how much various essentials cost, not in dollars, but in the number of minutes it would take to purchase them for someone earning the average hourly wage. (It’s a version of the “time price” coined by Marian Tupy and Gale Pooley in “Superabundance,” a book I wrote about last year. The concept is that if the price of an item goes up 10 percent but the average wage goes up by an equal amount, there’s no change in the number of minutes of work required to buy it.)
The chart shows that tomatoes, bananas and milk are cheaper now than when Biden took office by the only measure that really matters, which is consumers’ buying power, in this case measured by minutes of work.
Other items are more expensive now, and that’s undeniably bad. Gasoline, the price of which bounces around, is substantially costlier. But the only product on the list that remotely justifies the inflation hype of Trump and his running mate is eggs, which take more than twice as many minutes of work to buy now as when Biden took office. (Lest I be accused of selection bias, my table includes all the items that the Bureau of Labor Statistics has prices for in its monthly release of average price data.)
That brings up a second mistake, which is accentuating the negative. To go around saying that inflation is out of control because eggs cost more is like saying there’s a drought because it hasn’t rained this afternoon. A third mistake is to blame costly eggs on Biden and Vice President Kamala Harris, instead of blaming avian flu and other idiosyncratic factors.
People focus on their higher expenses and ignore their higher income partly because they attribute price increases to inflation, while they attribute the compensating wage increases to their own hard work and excellence, as Stefanie Stantcheva of Harvard found in a survey that I featured in May. That’s a fourth mistake.
“The first lesson you learn as a pollster is that people are stupid,” Tom Jensen of Public Policy Polling, a Democratic polling firm, told Politico in 2012, presumably in a moment of frustration, as I wrote in my May newsletter.
Stantcheva does not accuse anyone of being stupid, and neither do I. But I think sensible people can err when pure logic bumps into human nature. It’s normal to compare prices when you go shopping. Up is bad. The fifth mistake, however, is to remain anchored to a price from long ago, when conditions were vastly different. I remember when gasoline was less than a buck a gallon. So what?
We human beings are bad at imagining counterfactuals. What would the world be like today if Congress and the White House and the Federal Reserve had moved early and aggressively to keep inflation under control? Much worse, I’m afraid. Prices would be lower, but we very likely would have gone through a long and deep recession.
Inflation, while by no means a good thing overall, did serve a purpose when Covid disrupted the economy, reducing the supply of some items and increasing demand for others. If the overall price level had remained the same, some prices and wages would have had to fall drastically to offset others that rose. But workers hate taking wage cuts, so employers probably would have cut jobs rather than pay more. Inflation allowed employers to impose stealth pay cuts — raises below the rate of inflation — that were more palatable, saving jobs and keeping the economy from spiraling downward.
“The price shock was necessary,” Richard Portes, an economist at the London Business School, told me. “You need inflation to get reallocations after supply shocks. That was necessary. It was right, economically. And now it’s been completed.”
The sixth mistake is for people to say inflation remains high because prices are high. Wrong. Inflation is the increase in prices, not the level of prices. It’s unrealistic to expect prices to go back down to where they were before the pandemic. That would require a Great Depression-scale economic downturn that dried up demand for goods and services. I realize I’m not the first to make this point, but it bears repeating because the mistake keeps being made.
Inflation would be higher under Trump than under Harris because Trump would raise tariffs, pushing up prices, and expel undocumented immigrants, shrinking the labor force. If you’re thinking of voting for Trump despite his manifest flaws because you think the Democrats blew it on inflation and Trump would do a much better job, I have one word: Don’t.
Elsewhere: Investors Are Predictably Irrational
Three papers this year by a team of experts in behavioral finance uncover a new explanation for the effectiveness of “factor” investing, which is picking stocks on the basis of factors such as their size or the ratio of book value to market value.
A “large chunk” of factor investing’s success comes from its tendency to foreshadow surprises in companies’ earnings, the experts write. Investors keep getting surprised because as a group they tend to be irrationally optimistic about some companies and irrationally pessimistic about others, according to the research, which is by Pedro Bordalo of the University of Oxford’s Said Business School, Nicola Gennaioli of Bocconi University, Rafael La Porta of Brown University and Andrei Shleifer of Harvard University. I learned of their work in a weekly research note from Dan Rasmussen, the founder of Verdad, an asset manager.
Quote of the Day
“‘My boy,’ he says, ‘always try to rub up against money, for if you rub up against money long enough, some of it may rub off on you.’”
— Damon Runyon, “A Very Honorable Guy,” collected in “On Broadway” (1990)
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