I, too, know that flash of resentment when grocery store prices feel like they don’t make sense. I hate the fact that a small treat now feels less like an earned indulgence and more like financial folly. And I’m concerned about my kids now that house prices look like telephone numbers.
But I breathe through it. And I remind myself of the useful perspective that my training as an economist should bring. Sometimes it helps, so I want to share it with you.
Simple economic logic suggests that neither your well-being nor mine depends on the absolute magnitude of the numbers on a price sticker.
To see this, imagine falling asleep and waking up years later to discover that every price tag has an extra zero on it. A gumball costs $2.50 instead of a quarter; the dollar store is the $10 store; and a coffee is $50. The 10-dollar bill in your wallet is now $100; and your bank statement has transformed $800 of savings into $8,000.
Importantly, the price that matters most to you — your hourly pay rate — is also 10 times as high.
What has actually changed in this new world of inflated price tags? The world has a lot more zeros in it, but nothing has really changed.
That’s because the currency that really matters is how many hours you have to work to afford your groceries, a small treat, or a home, and none of these real trade-offs have changed.
This fairy tale — with some poetic license — is roughly the story of our recent inflation. The pandemic-fueled inflationary impulse didn’t add an extra zero to every price tag, but it did something similar.
The same inflationary forces that pushed these prices higher have also pushed wages to be 22 percent higher than on the eve of the pandemic. Official statistics show that the stuff that a typical American buys now costs 20 percent more over the same period. Some prices rose a little more, some a little less, but they all roughly rose in parallel.
It follows that the typical worker can now afford two percent more stuff. That doesn’t sound like a lot, but it’s a faster rate of improvement than the average rate of real wage growth over the past few decades.
Of course, these are population averages, and they may not reflect your reality. Some folks really are struggling. But in my experience, many folks feel that they’re falling behind, even when a careful analysis of the numbers suggests they’re not.
That’s because real people — and yes, even professional economists — tend to process the parallel rise of prices and wages in quite different ways. In brief, researchers have found that we tend to internalize the gains due to inflation and externalize the losses. These different processes yield different emotional responses.
Let’s start with higher prices. Sticker shock hurts. Even as someone who closely studies the inflation statistics, I’m still often surprised by higher prices. They feel unfair. They undermine my spending power, and my sense of control and order.
But in reality, higher prices are only the first act of the inflationary play. It’s a play that economists have seen before. In episode after episode, surges in prices have led to — or been preceded by — a proportional surge in wages.
Even though wages tend to rise hand-in-hand with prices, we tell ourselves a different story, in which the wage rises we get have nothing to do with price rises that cause them.
I know that when I ripped open my annual review letter and learned that I had gotten a larger raise than normal, it felt good. For a moment, I believed that my boss had really seen me and finally valued my contribution.
But then my economist brain took over, and slowly it sunk in that my raise wasn’t a reward for hard work, but rather a cost-of-living adjustment.
Internalizing the gain and externalizing the cost of inflation protects you from this deflating realization. But it also distorts your sense of reality.
The reason so many Americans feel that inflation is stealing their purchasing power is that they give themselves unearned credit for the offsetting wage rises that actually restore it.
Those who remember the Great Inflation of the ’60s, ’70s and early ’80s have lived through many cycles of prices rising and wages following. They understand the deal: Inflation makes life more difficult for a bit, but you’re only ever one cost-of-living adjustment away from catching up.
But younger folks — anyone under 60 — had never experienced sustained inflation rates greater than 5 percent in their adult lives. And I think this explains why they’re so angry about today’s inflation.
They haven’t seen this play before, and so they don’t know that when Act I involves higher prices, Act II usually sees wages rising to catch up. If you didn’t know there was an Act II coming, you might leave the theater at intermission, thinking you just saw a show about big corporations exploiting a pandemic to take your slice of the economic pie.
By this telling, decades of low inflation have left several generations ill equipped to deal with its return.
While older Americans understood that the pain of inflation is transitory, younger folks aren’t so sure. Inflation is a lot scarier when you fear that today’s price rises will permanently undermine your ability to make ends meet.
Perhaps this explains why the recent moderate burst of inflation has created seemingly more anxiety than previous inflationary episodes.
More generally, being an economist makes me an optimist. Social media is awash with (false) claims that we’re in a “silent depression,” and those who want to make American great again are certain it was once so much better.
But in reality, our economy this year is larger, more productive and will yield higher average incomes than in any prior year on record in American history. And because the United States is the world’s richest major economy, we can now say that we are almost certainly part of the richest large society in its richest year in the history of humanity.
The income of the average American will double approximately every 39 years. And so when my kids are my age, average income will be roughly double what it is today. Far from being fearful for my kids, I’m envious of the extraordinary riches their generation will enjoy.
Psychologists describe anxiety disorders as occurring when the panic you feel is out of proportion to the danger you face. By this definition, we’re in the midst of a macroeconomic anxiety attack.
And so the advice I give as an economist mirrors that I would give were I your therapist: Breathe through that anxiety, and remember that this, too, shall pass.
The post I’m an Economist. Don’t Worry. Be Happy. appeared first on New York Times.
