The Real Economy

by: dreaminonempty

Wed Jul 29, 2009 at 10:12

We can find out the state of the Real Economy just by asking.  The answers reflect what people are going through in their day-to-day lives, in a way that does not give more weight to the wealthiest or those whose income is based on dividends and capital gains.  It also reflects the political reality - economic factors are important in how people make political decisions - personal, local economic factors - and while there are certainly disparities in rates of voting, ballot access, and ballot spoilage between the wealthiest and the poorest, each vote still counts as one vote.

Here's 17 years of data from the NYT/CBS poll:

Click to enlarge.

But how does this relate to the economic variables we hear reported on the news?

The public perked up their ears at all the recent talk about "Green Shoots" but they're not really buying it.  There was a shift from Poor to Fair, but that is now shifting back to Poor.  The percent saying the economy is Excellent or Good, meanwhile, remained pretty steady, going up from a low of 8% in March to 10% today.  

We can also see the political implications of these numbers as well:

The vast majority of people say we do not have a good economy, and almost half now disapprove of Obama's handling of the economy.  They really don't like the alternative, however: Only 33% trust Republicans in Congress more than Obama when it comes to handling the economy.  56% trust Obama more; this has changed little since February, when the numbers were 26%/61%.

The Real Economy and GDP

So back to the first graph: how does the personal economy relate to the indicators economists fret over?  The first thing to look at is what we hear about as 'The Economy' - GDP - and recessions.

Click to enlarge.

The shaded areas show officially determined recessions.  We immediately see several things: first, although the overall pattern of both measures is similar, there's often a disconnect in sign.  Even when we have GDP growth, often the Real Economy is described as bad by a majority of people.  On the other hand, the public has done a good job identifying the beginning of a recession in 2001 and 2007.  But why do people think the economy is bad even if we're not in a recession?

Partly it's because this graph is comparing apples and oranges.  The poll asks, Is the economy good now?  GDP growth tells us if it is getting better.  The economy can still suck rotten eggs while GDP is growing robustly.  For example, suppose we have a farming village with 400 people living on 100 small farms.  One year, there is a drought, and only 10 farms produce any crops.  This drought continues, and the next year only 15 farms produce crops.  The year after that, only 22 farms produce crops.  Ask the farmers, they'll tell you this is a terrible time - they can barely feed the children, people are sick.  But their economic output during this terrible time is growing at a rate of 50% per year!

This apples and oranges comparison is seen in our language, too.  Look in the thesaurus and you'll see the following under recession:

Synonyms:   bad times, bankruptcy, big trouble, bottom-out, bust, collapse, decline, deflation, depression, downturn, hard times, inflation, rainy days, shakeout, slide, slump, stagnation, unemployment

Many of these words are looking at absolute measures: bad times are bad times; times may be improving, but they're still bad now.  This is very different from the academic, technical sense of the word recession, which applies only to when times are getting worse, not when times are bad now, but improving.  In other words, there is a commonly used sense of the word recession that relates to the state of the economy, not the direction of change.  For example, we don't say that the Great Depression ended when economic growth resumed around 1933 - it lasted the whole decade.  Here's a hypothetical example:

Click to enlarge.

So when the official muckety-mucks delcare The Recession is Over!  many people will simply scowl and say Like Hell It Is!  Where's My Job?

The Real Economy and Jobs

So is there a relationship between the Real Economy - what people experience - and the economic data spit out every quarter or month?  Yes: we can find it in jobs.

Click to enlarge.

Here we see that unemployment tracks very well with the percent of people who say the economy is bad.  I've used the broadest unemployment numbers here; you can see the same thing with any of the unemployment measures.

It's not a perfect relationship.  First, unemployment is still increasing, but the poll numbers are close to maxing out - we can't go above 100%.  Second, we see that people were more unhappy with the economy in the 2000s than the unemployment numbers might have warranted, and/or less unhappy than the unemployment numbers warranted in the 1990s.  I've chosen a scale that emphasizes the disconnect in the 2000s, because we have numbers to explain that: prices were going up and real wages were going down.  As Barbara Ehrenreich put it, "Growth, some of the economists are conceding in perplexity, has been "de-coupled" from mass prosperity."

So the unemployment numbers are the ones to keep an eye on, if we care about what happens to real people, and if we're looking for political consequences of economic policies.  That's the Real Economy, what people actually experience.  Unemployment probably can't go down without GDP increasing first, so we still need to pay attention to the Green Shoots/Brown Weeds debate.  But unemployment will not necessarily go down when GDP goes up; there could be a long time of further rising unemployment, like in the Bush years. And when unemployment does go down, we have to pay attention to what kind of jobs people actually get, and whether the jobs can support them.

Cross posted at Daily Kos.