Thursday, August 09, 2007

Public Opinion & US Economy

One blog that I really like and admire is Back Talk written by an anonymous person who describes himself (or herself) as "a professor at a research university, a registered Democrat, a liberal by some measures, but a radical conservative relative to the large majority of my colleagues." The author is an economist of talent given the analysis and manner of thinking exhibited in Back Talk.

The following is an introduction to a couple of excellent posts about the actual state of the US economy as opposed to public perceptions that I recalled from early June of this year that serves as an excellent introduction to an article from today's Wall Street Journal that I will get to shortly. Here from Back Talk, "What Americans Think About Their Economy":

Americans are not happy with the state of their economy, which either means that they are insane or that the media is so negative that Americans do not realize how good they have it. It's definitely the latter.

The health of an economy is measured by such things as GDP growth, GDP per capita, unemployment, inflation, budget deficit and cumulative debt. Additional issues include income inequality (we aren't doing that well if only the rich are getting better off), the trade deficit, and the exchange rate for the dollar.

People need some perspective before forming an opinion about the economy, but they never get that from the news media.
There are two kinds of perspective that are needed: perspective over time and perspective over place. That is, on all of these measures, how do the current numbers compare to prior years in which we were much happier with the state of economy? In addition, on each of these measures, how does the American economy stack up against the other major industrialized nations of the world (i.e., the G7)?

After the professor goes through all the data he concludes:

...Americans fail to appreciate the strength of their fabulous economy. Our economy is not only as good as it has ever been (unless you count the bubble economy years), it is better than any large economy on the planet (as I'll show again tomorrow). Perhaps that's not good enough for you, but, if not, you should consider having your head examined, because that's where the problem lies.

Now let's turn to the WSJ piece today, "Fair But Unbalanced: How the Media Promote False Pessimism about the Economy":

...[T]he most recent Wall Street Journal economic forecasting survey, from July, shows that 49 out of 60 forecasters expect real GDP to grow at an average annual rate of 2%, or faster, in 2007. Of the remaining 11 forecasters, only two expect growth of less than 1%, and only one expects a recession. For 2008, the forecasters are even more optimistic, with none expecting recession.

There are at least a half-dozen other institutions publishing surveys, and all of them report very similar results among the 100 or so active professional forecasters. Except for two well-known economists (Nouriel Roubini at New York University, and Gary Shilling of A. Gary Shilling & Co.), who are not in many surveys, a super-duper majority of professional forecasting economists believe the economy will continue to expand during the next year and have believed so for the past four or five years.

Despite this, an NBC News/Wall Street Journal poll taken in late July found that 68% of Americans thought that the economy either was in recession already, or would experience a recession sometime during the next 12 months. Interestingly, this is not much of a change from the past. This same survey question has been polled at least five times since September 2002. Each time a robust majority of between 65% and 85% of respondents thought a recession either was under way or would occur within the year. Americans have been bearish on the economy for quite some time.

In short, over the past five years, forecasting economists from academia, consulting shops, financial services and industry have a perfect 5-0 record against a random sample of American citizens. It's important to understand that economists are not always right. Some even say that economists were put on earth to make weathermen look good.

In fact, some suggest that the experts don't know what they are talking about. They say that economists make the mistake of looking at aggregate data, for GDP or overall income, which hides serious dislocations for the middle class and those with lower incomes. Those who argue this point believe that unfair foreign competition and unfair distribution of income are leaving many Americans behind.

But this is hard to believe. The economy moderated last year, but the unemployment rate is still just 4.6%, almost a full percentage point below its 20-year average of 5.5%. Since the jobless rate first fell below 5% in December 2005, average hourly earnings have expanded at a 4.1% annualized rate--as good as any year during the late 1990s. And recent research shows that incomes for the bottom fifth of wage earners have risen faster in the past few decades than incomes at the top, hard work is being rewarded more by performance pay, and income volatility is no worse today than it was in the 1980s and 1990s.

Stranger still is a July poll by the American Research Group (ARG) in which 68% of respondents rated their own personal financial situation as "good, very good or excellent." This is a huge improvement from March 2003, when another ARG poll found only 46% of Americans were either "hopeful or happy" about their personal financial situation, while 46% were "worried or angry."

This begs the question: If the actual economic data, the views of professional economists and the self-proclaimed personal financial situation of a majority of Americans have improved this much, why are people so worried about the economy? Why do people assume they are the exception rather than the rule?

One answer is that people gather knowledge about the rest of the economy, the part they cannot see, from watching news. As a result, it could be that the format behind most business journalism skews perceptions and creates pessimism. To be very clear, I am not arguing that business news is purposefully biased. But what seems clear is that in the name of producing an entertaining product, and in an attempt to provide contrasting views, the true consensus of experts is rarely reported.

...The global economy may never have been as strong as it is today. The pace of technological achievement has boosted living standards for billions of people, and promises to do even more in the years to come. It's sad, really, that so many people can't enjoy it because they fret so much about the future.

Let me suggest fully reading the two posts in Back Talk that provide an exceptional review of where the US economy does stand now compared to the past and compared to other world economies. These posts are from June 5 and 6: What Americans Think About Their Economy, which provides a perspective of the US economy over time, and then read Perspective Over Place.

I also highly recommend the blog for insightful analysis on current topics with a bent toward what I call the economic way of thinking.

I further suggest that anytime you read or hear references to the economy in newspaper articles, news magazines, blogs, blog comments and, most especially editorials, letters to the editor, and campaign speeches and promises you turn a keen ear and eye to the assumptions made and the facts involved as most often than not both will be wrong.

I get particularly incensed when I read letters and comments about the terrible spending deficits in the US right now - typically quoting the amount and never in the context of a percentage of GDP or in any historical context of past numbers, or the growth of the economy overall compared to actual deficit trends. The same is true in almost all negative descriptions of the economy because right now the negatives are very hard to find and be honest at the same time.

I have no doubt when the occupant of the White House changes then suddenly the economy will turn excellent in every way in the eyes of the mainstream media. No doubt at all.

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