Analysis | Economists have let down middle-class Americans

What we should all hope is that 2021 proves to be a teachable moment – and that everyone takes the lessons to heart. In general, economics has been thrown off course by the old adage that wages are the most reliable indicator of deep inflation.

Policymakers were penalized in 2021 as wages remained stable during the early months of the inflationary wave, even as indicators such as consumer prices, consumer spending and available savings were in the red, especially with regard to the goods and services most important to the well-being of middle and low income Americans. Going forward, analysts will have to remember to broaden their scope, or at least throw off the blinders that have steered our collective wisdom in the wrong direction.

But the problem wasn’t actually entirely new – 2021 just exposed what we now know is a broader and deeper concern. Without anyone paying much attention to it, our collective over-reliance on wage data has had the perverse effect of allowing prices to rise even when revenues have stagnated, a shift that has made it more difficult for ordinary people to maintain a steady lifestyle. If the price of milk, gas and housing rises without commensurate wage increases, ordinary families are robbed of their purchasing power. And yet monetary policymakers are reluctant to intervene without clear evidence of accelerated wage growth.

Research from the Ludwig Institute for Shared Economic Prosperity shows that in 2021 alone, the cost of living increased by 6.1% for middle-class families, while nominal wages for a typical full-time worker only increased by 1.4%. Perhaps even more concerning, over the past 20 years, the true cost of living for middle- and lower-income Americans has risen 50% more than commonly used metrics such as the consumer price index. And that mirrors the same core problem that stems from our over-reliance on wage data: The CPI is over-emphasizing the more modest price increases that continue for goods and services aimed more exclusively at the well-to-do, even as wages are much more modest. increased. In both cases, policymakers who responded based on their traditional reliance on prevailing indicators were shielded from the harrowing fate befell low-income and working-class families.

Sometimes, when citizens complain that the government does not take their well-being sufficiently into account, they substantiate their claims with thin porridge. But here the evidence is clear. The economic world has taken an approach that has pitifully placed the interests of those responsible for paying hourly wages over the interests of those who earn them. Fortunately, however, this is driven less by a desire to pick winners and losers in the economy than by a mistaken belief that wage data is some kind of statistical holy grail. And for that reason, the shock born from 2021 should lead to a quick correction.

To counteract these wage-oriented dynamics, the economic world should start providing the Fed and other policymakers with predictive models that put more emphasis on prices, consumer demand and disposable income levels, particularly for middle- and lower-income Americans. Second, Congress should begin to take to heart the net effect of that data—the pervasive and real concerns common people have when inflation makes them poorer—in shaping the nation’s social safety net.

Finally, Americans in general need to look at inflation differently. What matters most is not a single price for a particular product or service, but whether the typical family is more or less equipped to cover the costs. Rising prices are an even bigger problem when wages do not rise in line with the price of other necessary goods and services.

The US cannot tolerate an endless spiral in which the middle-class family is constantly being impoverished. To reverse course, we must first recognize that the mistakes of 2021 were not born out of malice, but out of misperception.

We already have new ways of understanding and interpreting statistics that better reflect both the current and future realities for people’s financial lives. In order to make the right course correction, the economic world will have to orient itself. Hopefully, the short-term shocks caused by this latest episode of widespread economic turbulence will help policymakers set a course for a smoother course going forward.

More from other writers at Bloomberg Opinion:

• Why the Fed should raise rates by 50 basis points: Mohamed El-Erian

• Economists now have a good excuse to be wrong: Tyler Cowen

• Stupid, stupid and leading economic indicators: John Authers

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

Eugene A. Ludwig is president of the Ludwig Institute for Shared Economic Prosperity, managing partner of Canapi Ventures and CEO of Ludwig Advisors. He was the 27th controller of the currency.

Philip Cornell is a senior economist at the Ludwig Institute for Shared Economic Prosperity.

More stories like this are available at bloomberg.com/opinion