When Sweet Statistics Clash With a Sour Mood
By DANIEL GROSS
Published: June 4, 2006
LAST Tuesday, when President Bush introduced Henry M. Paulson Jr. as his choice to replace John W. Snow as Treasury secretary, Mr. Bush rattled off a string of impressive economic statistics.
"In the first quarter of 2006, the U.S. economy grew at an annual rate of 5.3 percent, the fastest growth in two and a half years," he said, as Mr. Paulson, the chief executive of Goldman Sachs, looked on. "We added 5.2 million new jobs since August of 2003. The national unemployment rate is down to 4.7 percent. Productivity is high, and that's leading to higher wages and a higher standard of living for the American people."
Yet in the latest New York Times/CBS News poll, only 28 percent of the respondents said they approved of President Bush's handling of the economy, while 66 percent disapproved — the worst such ratings of his presidency. Only 6 percent rated the economy as very good, while 46 percent said it was fairly bad or very bad. And consumer confidence plummeted last month, according to the Conference Board.
This strange and unlikely combination — strong and healthy aggregate macroeconomic indicators and a grumpy populace — has been a source of befuddlement to the administration and its allies. It's not unreasonable to assume that Mr. Snow is being replaced as Treasury secretary in part because he couldn't make Americans appreciate just how well the economy is performing. And it's possible to detect among Bush partisans an element of frustration at the public for what they see as its failure to do so. In Iowa last month, Rudolph W. Giuliani bluntly dismissed concerns about the economy and higher gas prices by saying, "I don't know what we're all so upset about."
Gas prices and the Iraq war have surely contributed to this disconnect. But a lesser-known factor is also at work: the misleading aggregates.
Aggregates — big-picture figures like the unemployment rate, productivity and growth in the gross domestic product — are highly useful to economists. But to most people, they're abstractions. You can't use a low unemployment rate to pay a mortgage.
As a result, large aggregates "are something that people may hear about in the news, but don't have a direct impact on how people feel," said Lynn Franco, director of the Consumer Research Survey at the Conference Board.
Aside from being abstract, many of the most popular aggregates are simply misleading. Dean Baker, a director of the Center for Economic and Policy Research in Washington,puts the Consumer Price Index — the main gauge of inflation — at the top of the list.
"It has no direct relationship to what people perceive as inflation," he said. Mr. Baker notes that the index doesn't take account of rapidly rising co-payments and higher insurance deductibles when it calculates health and medical costs. And to gauge inflation in housing, the index approximates a measure of rent instead of looking at home purchase prices.
"We've had a huge run-up in the price of housing, and that doesn't show up in the C.P.I.," he said. So while the index shows that inflation is elevated but still under control — up 3.5 percent from April 2005 to April 2006 — many Americans find themselves paying sharply higher prices for essential goods and services.
In addition, aggregates generally are averages, which are of declining utility in an economy characterized by greater inequality of income and assets. In an interview with The Wall Street Journal in March, Mr. Snow took pains to point out that there had been substantial gains in per-capita income (8.2 percent, after inflation) and net worth (24 percent, before inflation) from the beginning of 2001 to the end of 2005.
The data he cited were averages, or means, and that can be misleading. "The average wage is a useful indicator if you want to know what's happening to the tax base, but it might not tell you what's going on for the individual worker," said Alan B. Krueger, an economics professor at Princeton and a former chief economist at the Labor Department. Consider a hypothetical country with 300 million workers. Say the chief executive of an investment bank gets a $300 million raise this year, while the other 299,999,999 workers don't get a raise. In the aggregate, the average per-capita salary has risen by $1, but only one person has more money in his pocket.
To see how typical workers are doing, it's better to look at median wages and incomes — the midpoint that separates the top 50 percent from the lower 50 percent. And median income, which was stagnant during President Bush's first term, is struggling to keep pace with inflation. "Median household income has gone nowhere since the turn of the decade," said Mark Zandi, chief economist at Moody's Economy.com.
Mr. Zandi puts the problem with averages another way. "If you put one foot in a tub of hot water and the other in a tub of cold water and take the average, everything is fine."
THIS dichotomy accurately describes the economy. From 2001 to 2004, the average net worth of an American family rose 6.3 percent, according to the Federal Reserve's Survey of Consumer Finances. But not everybody grew richer. For the bottom 40 percent of families by income, the median net worth fell. "It just doesn't resonate with people when the Treasury secretary says everything is fine," Mr. Zandi said. "It's fine for half the population, and it's clearly not for the other half."
There's a final reason that the aggregates may not accurately capture the public mood. Aggregates shed light on the performance of the economy in the last month, or in the last quarter. By contrast, measures of sentiments and polls gauge feelings about the present and expectations for the future.
"Consumers tend to view current conditions as quite favorable, but their expectations for six months down the road are rather pessimistic," said Ms. Franco of the Conference Board. "It could be that we're nearing a peak, and this is as good as it gets."
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