Samuel Corum/Sipa USA via AP Images
Inflation has been falling rapidly, and is now nearly down to where it was before the pandemic.
For months now, there has been an interminable discussion about why Americans are extremely pessimistic about the Biden economy. The numbers do seem extreme—in late 2022, for instance, the University of Michigan’s survey of consumer sentiment registered a lower number than it had during the pit of the Great Recession in 2008.
It’s an ongoing debate in part because the Biden economy has different characteristics pointing in different directions, some of them not seen in decades. Unemployment is extremely low, but 2022 saw the worst inflation in four decades. Wages at the bottom of the income ladder have been rising strongly, and roughly 40 percent of the post-1980 increase in inequality has been reversed, but segments of the upper middle class have seen appreciable declines in income. Due to rising interest rates, payments on new home mortgages are very high, but the vast majority of homeowners have 30-year loans locked in from pre-pandemic days with a low rate.
On balance, this is a great set of outcomes for the working class. But when it comes to polling, I increasingly suspect that the analysts may be overthinking things to some degree. I believe that most Americans view inflation as morally wrong, particularly after decades of relative price stability.
After all, people do not just view prices as an accounting convenience; they are also thought to carry moral implications, which can be seen in the language of buying and selling itself. A price viewed as acceptable to a buyer is a fair price. If you paid too much for something, you got ripped off. A seller who exploits market conditions to raise prices is gouging the customer.
One might call this a sentiment of market egalitarianism. Prices are morally sound insofar as they are transparent and fair—meaning neither party to a transaction is leveraging some advantage to make a disproportionate, unearned profit. That’s why a really serious violation of price norms, like gas stations that jack up prices after a natural disaster, can spark protests or even violence.
The economist Richard A. Radford once examined this thinking in a famous paper on the economics of a POW camp. He served in the British Army during the North Africa campaign, was captured by the Germans in 1942, and spent the rest of the war imprisoned. In the camp, he observed a complex economy grow up among the prisoners, complete with a bank and a regulated commodity exchange, with cigarettes (provided by the Red Cross) serving as money. He found that each camp had a “just price” for everything:
While the assessment of the just price, which incidentally varied between camps, was impossible of explanation, this price was nevertheless pretty closely known. It can best be defined as the price usually fetched by an article in good times, when cigarettes were plentiful. The “just price” changed slowly; it was unaffected by short-term variations in supply, and while opinion might be resigned to departures from the “just price,” a strong feeling of resentment persisted.
Libertarian economists often mock this kind of thinking. Complaining about unfair prices is simply irrational, they believe, because the market always maximizes utility by letting supply calibrate to demand on its own.
But this is not true even on its own terms, particularly in conditions of inequality or emergency. If the supply of taxis is limited during a time of high demand and high inequality, for instance, it is “rational” in the economic sense for everyone but the rich to prefer taxis be allocated by queuing rather than price, because otherwise the rich (who may not even notice the cost) will get all the taxi rides, and everyone else will be priced out.
This is most evident during wartime. The Roosevelt administration understood during the Second World War that it would be disastrous to let prices float, because the price of goods vital to everyday life like gasoline, rubber, steel, and food would surge upward, harming the citizenry, while randomly well-placed companies would enjoy massive unearned profits. It would have been unfair and would undermine the social solidarity on which necessary wartime sacrifices rested. It also would have been inefficient, because big chunks of economic production would have surged into mega-profits for defense contractors and commodity producers rather than into guns, tanks, and planes.
Hence the government set up a rationing system, so that the state could obtain a large share of economic production for the military without bidding prices up beyond the reach of normal households.
In any case, I believe moral outrage is behind a lot of the complaining about inflation one sees on the news and social media. And there’s a case to be made that such sentiments are at least partly justified. No doubt some inflation was always going to happen thanks to the disruptions caused by the COVID-19 pandemic and the war in Ukraine, but as recent research has shown, many companies with market power seized on the situation to push prices up out of sheer opportunism. (Biden and the Democrats would have been wise to take a page out of FDR’s book, alas.)
Still, any conception of price fairness is inherently somewhat arbitrary. No shopper considering a purchase sits down with their pay stubs and bank account and calculates what fraction of their disposable income the purchase would represent relative to prior years. They just see that the price has gone up, and tend to conclude they’re being cheated.
But if prices stabilize, they should tend to become the new normal, fair price. As Radford pointed out, the “just price” varied between camps, and did change slowly. More recent research agrees: As Ryan Cummings and Neale Mahoney demonstrate in their Briefing Book newsletter, inflation has a powerful negative impact on consumer sentiment measures, but the effect decays at a rate of about 50 percent a year.
So given that inflation has been falling rapidly, and is now nearly down to where it was before the pandemic, I suspect that consumer sentiment will improve. Hopefully that happens fast enough for the Democrats to get some credit for it in the 2024 election.
