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A Q&A with Rodney Ramcharan: Economic Perception versus Fact

A Q&A with Rodney Ramcharan: Economic Perception versus Fact

Professor Ramcharan discussed the country’s economic health and how it differs from many people’s perceptions.

by: Alexander Bernard
11.04.24
Rodney Ramcharan

Professor Rodney Ramcharan discussed how the country’s financial health differs from its citizens’ economic perceptions.

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Many economists believe the United States economy is back on the upswing. Over 60% of Americans, however, have a less optimistic view of the country’s financial state, despite decreasing inflation rates, the Federal Reserve’s cutting of interest rates, and the increase of median household income.

Marshall News spoke with Rodney Ramcharan, professor of finance and business economics and policy advisor of the Federal Reserve Bank of Philadelphia, on the gap between economic perception and data, how to measure economic growth, and where the United States stands compared to the rest of the world.

Interviewer: Many factors seem to indicate the country is improving economically, but the polls seem to reflect that people still feel the economy is doing poorly. How do you rationalize these two conflicting narratives?

Rodney Ramcharan: During the pandemic, there was definitely a negative real wage shock. People, especially at the lower end of the income distribution, did suffer a fairly sharp decline in their real incomes, in their ability to buy things.

In the last year and a half, that’s changed. Once inflation came down, what transpired is that real wages rose more than the inflation rate. On average, for the most part, people are better off today than they were four years ago — on average. That’s especially true if you own your own home because you didn’t have to pay the rent, which has gone up, and home prices have gone way up.

People who own stocks have done extremely well. People who neither own their home nor have stocks have seen their real wages go up.

The question you’ve asked me is, “Why is the perception there?” My answer is, I do not know. People have studied this and there seems to be a partisan divide.

As an economist, how do you assess economic health?

RR: I think the standard metric would be looking at GDP growth, which is still quite strong. It came in yesterday (10/31/24) or this morning (11/1/24) at 2.8%, which is quite strong. Real income is now growing at a reasonable clip as well after falling during the pandemic. Corporate profits are very high, so consumers are doing well. Consumer spending is still strong. Corporate profits are strong. Corporate investment is strong.

In every dimension, it’s reasonably positive, and that’s a puzzle because the interest rate is high. People had expected the economy to go into a tailspin. It has not. The inflation rate has come down and the economy has been quite steady, quite strong, in fact.

To give you an international perspective on this, the U.S. economy is outperforming every economy in the world. It’s outperforming China. It’s outperforming the EU by huge bounds. There’s no developed country in the world that is doing as well as the United States … It’s not just about performing, but our technologies, our rate of invention is well beyond everybody else.

When our GDP is going up and our economy is flourishing on a global scale, can the average person feel that growth?

RR: GDP is a rough measure. It’s masked by differences in income.

When you look at the CPS data, the Current Population Survey, which does collect weekly data or monthly data for about 20,000 households, and it does measure their income, we could see that there’s significant real wage growth for lower income people as well.

In the last year and a half, real incomes are growing, especially at the lower end of the distribution. This is, of course, coming off of the COVID-19 pandemic where real incomes fell for those people. If you take the average of COVID and post-COVID, it’s still positive as well.

It could very well be that people are looking at a price level and not looking at their wage level. I go to the grocery store and I see eggs are $6 a dozen. And I say, “Oh my God, how terrible is life?” My income has increased by more than that, but I’m not looking at my income at that moment. Those could also be some of the fallacies that people are attuned to.

From your experience, is the gap between economic perception and economic reality greater than it’s been in recent memory?

RR: You’re right, we’ve never seen a divergence like this. It’s only in the last couple of years we have begun to see a divergence between what people believe and what they are actually experiencing.

I think this is still at the frontier of our knowledge. We don’t have a clean and clear study that could apportion the misinformation part from something else that’s going on.

We also need to be mindful that maybe the data is missing something big. Maybe people are feeling some kind of threat. It could be that they’re feeling that there’s greater uncertainty about their income. It’s growing, but there’s a lot more risk involved. Maybe, people are beginning to reflect that risk. That sense of risk is not something that our data does a good job in measuring.

What do you account for positive economic signs, such as the decrease in inflation, the Federal Reserve cutting interest rates, and the GDP growing at a faster rate?

RR: The COVID pandemic disrupted the supply chain dramatically. When the pandemic ended, people’s “consumption basket” changed as well. What I mean by that is, “Before the pandemic, I was consuming eggs. After the pandemic, I want to go buy airplane tickets.”

The economy had to rapidly make this big adjustment. That led to massive supply chain bottlenecks after the pandemic, as well as businesses trying to meet the new demand for different products. So there was a significant increase in inflation, not coming necessarily from fiscal policy or even not necessarily coming from monetary policy per se, but from the disruptions in the economy.

With the passage of time, those disruptions faded as ports were able to reopen, as firms could better adjust the plants and better retool to produce the goods that people actually wanted. Prices abated, the rate of increase slowed, and the economy began to stabilize.

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