Sometimes, something that seems too absurd to be taken seriously really should be taken seriously. As Paul Krugman argued a couple of days ago, Trump backers’ sense of betrayal by Trump may actually explain much of the negative attitude being reported by surveys of consumer sentiment.
There has been an ongoing debate among economists as to why households are so negative on the economy. The problem is that the economy seems reasonably good by most measures. The unemployment rate, at 4.3 percent, is relatively low by historical standards. Real wages are at least modestly outpacing inflation. People are buying big- ticket items like cars at a healthy pace and still going out to restaurants.
Many of us have argued that much of the apparent prosperity can be explained by the top quintile spending based on their stock gains. There surely is some truth to this. I have noted that spending at fast-food restaurants, which is presumably driven primarily by the behavior of more moderate-income households, has been stagnating since last summer and has been weak since 2023. Other measures, like delinquency rates for mortgages held by moderate-income households and student loans, suggest serious financial stress. Still, it doesn’t add up to record low rates of consumer sentiment.
My friend Jared Bernstein has argued that people are unhappy even if inflation has slowed from pandemic peaks because prices are still high. The argument is that people expect prices to fall back to where they were before the pandemic. or at least be lower than they are now.
As much as I respect my friend and former colleague, I can’t buy this one because I remember the 1980s. We had very high inflation in the 70s and early 80s, which then fell to more manageable levels (3 percent – 4 percent) by the middle of the decade. People were generally happy that inflation had fallen to a moderate pace. I don’t recall anyone complaining that prices were still high. I’m sure such people existed, but their voices were not being amplified by major media outlets, so no one took this complaint seriously. I find it hard to accept that consumer psychology has changed so vastly in the last four decades.
This brings me back to Paul Krugman’s argument that the main reason sentiment is low is that people feel Trump betrayed them. This requires a small step back. Measures of consumer sentiment have a strong partisan slant. Democrats say the economy is terrible when a Republican is in the White House and vice versa. This has always been the case, but the tendency has gotten more extreme in the last two decades, and it’s stronger for Republicans than Democrats.
Anyhow, sentiment was already low at the time of the 2024 election, and then we got the expected switch with Republicans saying things were good and Democrats saying things were terrible. But a big part of the reason that Republicans said things were good is they actually believed Donald Trump’s promise to bring prices down. They expected there would be zero inflation in the year after Donald Trump took office. That is literally what they answered in surveys.
This is where polarization explains a lot. I’m sorry, but all my friends and acquaintances and I know Donald Trump lies all the time. As an economist, I also know that it is not possible to have a general decline in the price level without a serious recession.
Therefore, I knew Trump’s promise to lower prices on day one was absurd. What I could not imagine was that millions of Trump’s supporters took his promise seriously. I confess to being sufficiently out of touch with tens of millions of my fellow citizens that I really had no idea what they thought about the world.
I don’t mean to mock their lack of knowledge. Most people are not economists and don’t follow economics closely. They also distrust Democrats and the media, sometimes for good reasons. Therefore, they thought it was plausible that Trump would send prices downward shortly after he took office.
Now these Trump backers feel betrayed. They expected lower prices and instead got higher inflation due to tariffs, mass deportations, and now Trump’s war. If we have a story where the Democrats feel the economy is terrible because a Republican is in the White House, and pursuing some genuinely terrible policies, and Republicans saying the economy is terrible because they feel their president has betrayed them, we get a situation where most people say the economy is terrible.
That seems a plausible explanation for the seeming disconnect between an at least moderately healthy economy and record-low levels of consumer sentiment. I’m open to other stories, but at the moment, this one seems the most compelling.
This first appeared on CEPR.
