Really --- it's the media's fault

By Fester

The recent poll that showed 90% of the United States adults believing that the economy is either 'poor' or 'not so good' is a little bit higher than I expected but in the general ball park.  However it is being dismissed by a blogger whose analysis I normally respect as mere blather:

While I think that there’s plenty of room for concern, I think the idea that the economy is in poor shape is poppycock. As Will Rogers said, they don’t know nothin’ but what they read in the newspaper.

Let's see what we can blame the media for?  We can blame it for laziness, we can blame it for inanity, and we can blame it for not being able to find and pursue their comparative advantages most effectively.  However we can not blame it for the following items that may have a significant impact on how people perceive their economic circumstances.

The fixed costs of living or at least the least variable demand ideas are increasing rapidly in price.  As I was driving this morning, regular unleaded at one gas station near my house was $3.42/gallon and the other station was at $3.49 a gallon.  Both record nominal highs, and a significant increase from last year.  Diesel was at $4.30 a gallon.  And we have not even come close to the summer driving season.  Food prices have been increasing dramatically.  This graph from Barry at the Big Picture shows that transportation and food prices, which are relatively inelastic in the short run are increasing above the seasonally adjusted rates.  Medical expenditures are also rapidly increasing.

The seasonal adjustments intentionally understate 1st quarter price changes so people have seen high price increases that they typically expect and also unexpected increases in food and fuel. 

This would be tolerable if cash compensation was increasing at or above the actual costs of living, but that is not the case.  Right now the U-6 measure for unemployment is on the upswing and this measures economy wide underemployment and unemployment, hours worked have dropped and real wages have been flat or declining again. Finally median family real income has declined over this economic cycle.  That has never happened post-war until now.   

So consumers are under pressure from both ends.  Higher fixed costs and lower incomes through either increased unemployment, fewer hours worked, or flat wages.  Now this would not be so bad if people could access their reserves, but there is a problem here, and the problem is not the media. 

Over the previous economic cycle, Americans as a whole had negative savings rates.  During the boom times we were borrowing to keep up with the expectation that trend GDP growth would soon produce trend wage and income growth as well as trend workforce participation rates.  That did not happen; most wage gains were eaten up by higher health care costs. Consumption smoothing was based on a false hope of future growth.  The cycle was a fizzle for most people. 

The big area of reserve accumulation for most Americans was in the real or nominal value of their homes.  Great increases in nominal equity gave at least the illusion of people having a sufficient cushion available for hard times as HELOCs could be opened and maintained with a zero draw down until an emergency hit. With the housing bubble bursting and the credit market freeze-up, these reserves have dissipated.  Either the equity that was believed to be there is no longer there as homes are re-marked to a newer and much lower price, OR the lenders are shutting down the equity lines.   

So going into a highly probable recession American consumers are faced with higher short term fixed costs, high debt loads, few reserves and comparatively weak income performance during the 'boom' years.  As long as the system is stable and running in a single direction of higher nominal home values, the system at least  seemed to work.  Any shock, anticipated or not, and the wobbling overwhelms personal stabilizers.  A baby's breath is sufficient to knock people off of their personal financial stability while in previous cycles a strong gale was needed to accomplish the same dislocation. 

And that is not the media's fault. 

Comments

[Dave Schuler]

As I noted in my post, there's room for concern. Poor? No—as you acknowledge yourself. But there are certainly indications that could justify concern and that's why there is room for concern.

In the study a majority characterize the economy as “poor”, which the fundamentals don't support. In the same study 65% are optimistic about the their own family's economic prospects. Why the discrepancy?

I don't think all of the discrepancy can be laid at the media's door but where do you think people are getting their information about other people's economic situation?

In reality the president doesn't really have a great deal to do with the economy other than to be cheerleader. Bush is the worst president in that particular regard of my memory so, clearly, some of the blame must be placed at Bush's door.

And I think that some of the blame belongs to Chicken Little Congressmen.

Note that I'm talking about blame for the discrepancy between the way people think the nation's economy and their own are doing.

[Kat]

"While I think that there’s plenty of room for concern, I think the idea that the economy is in poor shape is poppycock. ... In the study a majority characterize the economy as “poor”, which the fundamentals don't support. In the same study 65% are optimistic about the their own family's economic prospects. Why the discrepancy?" [emphasis mine]

Two things that may well explain the discrepancy:

One is the nature of polls, and the peculiar way they phrase questions. The pollsters asked, 'would you describe the state of the nation's economy these days as excellent, good, not so good or poor?' But, people don't answer the literal question -- they interpret it, and answer the question they believe the pollsters intended to ask.

For instance, I would interpret the phrase 'these days' to mean something closer to 'now and in the foreseeable future' rather than more literally as 'this very moment'. Why? Well, it's sort of like being asked to assess the health of a friend who's a skydiver. While you may know them to be young and physically robust, if you're asked about the state of their health just after their parachute fails to open, your answer is likely to be quite pessimistic, even though you're well aware that, for the moment at least, they're just as healthy as they were before the plane took off.

"...where do you think people are getting their information about other people's economic situation?"

I think they answered based on their own situation. Consider their answers to Q. 32: Have recent price increases in gasoline caused any financial hardship for you or others in your household, or not?

Yes: 67%
No: 32%
No opinion: 1%

Webster's definition of hardship: something that causes or entails suffering or privation (lack of what's needed for existence).

38% said higher gas prices had caused them 'serious hardship'. It's too bad the pollsters didn't ask similar questions about higher food prices, higher utility bills, and higher healthcare costs.

As to why '65% are optimistic about their own family's economic prospects'... I took a look at the poll's demographics, and think there are a couple of things which may explain this:

1. The younger of those polled have never experienced a recession or serious inflation of basic necessities, and therefore may be overly optimistic about how well they'll fare.

2. It seems likely that the vast majority of the 53% who are married are middle-aged or older. On average, married householders have higher incomes, and middle-aged people are at the peak of their earning power and are more likely to have successfully weathered past recessions -- all things which may have contributed to their confidence that they'll personally be able to weather another recession.

Kat

[Dave Schuler]

That's a good exposition, Kat, but the question is how they know what they know. Barring the unlikely explanations, there are several likely ones:

- inductive reasoning based on their own circumstances
- deductive reasoning based on their observation conditions and the cirumstances of others
- authority

I think that Occam's Razor suggests the last explanation.

Note that I'm not imputing motive. I think it's inherent—if it bleeds, it leads.

[fester]

Dave --- Kat has most of my response in hers (Thanks Kat) --- I would also say personal networks are an important factor.

Let me analogize --- right now the Pittsburgh Pirates have 65% of their players playing at or above major league competent level, however 90% of the players would agree that the Pirates are a below major league level of competent team. The discrepancy is that the decent Pirates players know that more of their teammates suck and have playing time than what they would expect to see on a competent major league team.

My personal networks consist of multiple groups, the relevant one if I was to answer this question is the set of groups composed of households/couples who I know a lot about and they know a lot about me including general financial status. That is roughly 20 nodes on the chart. Normal times usually have between 0 and 2 nodes having trouble of some sort (lay-off, unexpected large bill as the health insurance really isn't that good); right now there are 4 nodes in trouble, and another 2 or 3 with trouble potential. So 80% of my close personal network would report that they are in okay to good financial shape, but a very large percentage I would guess would also report that the economy is poor.