Public polls seem to be saying one thing, economic facts another. Real Clear Politics compendium of 11 opinion polls on whether participants approve or disapprove of President Biden’s handling of the economy show a negative -22.5 percent spread.
Yet we have had the unemployment rate below 4 percent for two years, current inflation is hovering at 2.5 percent and still declining, and consumers continue in record numbers to travel and enjoy leisure activities.
Household wealth has also increased 37 percent since 2019, per the New York Fed, the minimum wage has risen to the mid-teens in most states (except a few red states), and there is a labor shortage with nine million job vacancies that has resulted in record wage increases in multiple industries.
Why the disconnect between economic reality and public opinions? Could it be poll takers are asking the wrong questions, like are you better off today than during the pandemic?
Most of the respondents say they are personally better off, but the economy isn’t improving. How can that be?
I maintain it is what I call the Irrational Pessimism of investors, which are most Americans that respond to said polls. It is the opposite of what Nobelist Robert Shiller has called Irrational Exuberance, but for the same reasons.
Yale Professor Shiller is one of the founders of behavioral finance and author of many books that won him the Nobel Prize in 2013. His research has said that most people act irrationally when making financial decisions. Such decisions are mainly based on hearsay, rumors, and plain old irrational exuberance.
For example, the housing bubble was caused by the public’s belief that housing prices only rose but never fell since they hadn’t fallen for decades, said Shiller.
Professor Shiller has written about it in successive editions of his book, Irrational Exuberance. And former Fed Chair Greenspan first brought such behavior to the world’s attention before the 2000 Dot-com recession, as I said recently.
So why would not the public behave irrationally having just weathered the worst pandemic in 100 years—that is, being irrationally pessimistic in the face of so much financial trauma?
His research and that of other Neo-Keynesian (those who essentially believe that government is needed to maintain a healthy economy, as happened with FDR’s New Deal) show that most financial decisions aren’t based on the careful search of facts, but mental laziness, even in the housing market.
It has essentially refuted those economists who believed since the 1970s that financial markets behaved rationally—i.e., that investors carefully thought through their financial decisions, hence unregulated, free markets were the surest way to prosperity.
That didn’t prove the case, of course, as the six recessions since 1980, including the Great Recession, have proven.
So, in fact, poll respondents may not be thinking of their own personal well-being in these polls. They tend to act more rationally when the personal stakes are highest.
But understanding complex markets is another matter, and one that takes more time and effort. Perhaps by November and presidential election time rolls around, the American public will take the economic consequences of their decisions more seriously, and not leave it to hearsay, word-of-mouth and irrational pessimism. Let us hope so.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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