Inflation and the power of narrative

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January 25, 2022

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Kathryn Gamble for The New York Times

By Paul Krugman

Opinion Columnist

President Biden had what I'd call a human moment yesterday. After a Fox News correspondent shouted out a question about whether inflation would be a political liability, Biden could be heard muttering: "No, it's a great asset. More inflation. What a stupid son of a bitch." Seriously, can you blame him?

But why is inflation proving to be so much of a political liability? The idea that Americans are down on the economy because price increases have outstripped wage growth has hardened into conventional wisdom. And there's obviously something to that. But the political reaction is disproportionate to the actual decline in real wages, and I'd argue that journalists are missing a large part of the story if they fail to realize that.

Let's talk about the long view of wages and prices.

Here's the annual rate of change in real wages — the rate of wage increase minus the rate of inflation — for blue-collar workers since the late 1970s:

Real wages over the long run.FRED

Obviously there was a huge decline following the 1979 oil shock. Perhaps less familiar is the fact that real wages fell for much of the Reagan era. In particular, in October 1984 — on the eve of the presidential election — real wages were 1.4 percent lower than they were a year earlier. In October 1988, they were down 0.6 percent. Yet, Republicans won both elections by large margins by running on the economy.

What about our current situation? The most commonly used wage numbers have been screwy during the pandemic, because of compositional effects. For example, average wages shot up in 2020, not because workers were getting big raises, but because low-wage workers were laid off in disproportionate numbers. So we need to look at estimates that are supposed to correct for these compositional effects…

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