Umair Haque: Why everyone but economists knows the economy sucks.Why the numbers understate how much economic pain people are really In — And Why It Matters

Why the Numbers Understate How Much Economic Pain People Are Really In — And Why It Matters We’re at one of those strange moments. Another one. I’d sum it up like this. Everyone but economists think the economy sucks. Ask an economist, and you’ll get an answer a little bit like this: “Things aren’t so bad! They’re getting better! Inflation’s falling! See — look. What are you people so upset about?” Meanwhile, ask the average person, and they’re incredibly pessimistic.

The American public continues to rate the U.S. economy in mostly negative terms in March, with 83% describing current economic conditions as “only fair” or “poor.” Just 16% consider them “excellent” or “good.” Furthermore, 72% think conditions are getting worse, while 23% say they are improving. Why the disconnect? Ask the economist again, and they’d probably tell you that people are overreacting, suffering a hangover from the last couple of years, that it’ll take them some time to catch up, emotionally, to economic reality. But is that really true? Or do people have a point here that economists — and politicians — aren’t really hearing?>

There’s a wrinkle in this story my fellow economists are telling — three, to be precise. That narrative is now what it so often is. Everything’s going back to normal. Nothing to worry about here. And the main line of evidence used to support it is inflation — beginning to fall. It’s now around 5% — that’s not so bad, is it? And yet people clearly don’t feel as if inflation’s falling very much.

So what gives? There’s inflation — and there’s inflation. What’s happening is that economists are often looking at “core CPI” — but that, crucially, excludes food and energy. LOL. Food and energy. You know, the basics. When we look at broader measures of inflation — that don’t exclude the necessities — a very different pattern emerges. One that’s much more dire, in fact. And explains why people are so pessimistic. That pattern loo

ks like this. Prices are beginning to fall in some ways. But when it comes to the basics, the necessities? Prices are still skyrocketing. Fast. Hard.

Let me give you two examples.

Food? It’s not rising at 5%. Its inflation rate is still 10%. Then there’s shelter. It’s not “disinflating” — it’s rising in a straight line. Not at 5%, but 8%. Now. An economist might look at these numbers, and make a big mistake. Average them. Against each other, and against other kinds of goods in the economy. But a person doesn’t think that way, because their household finances don’t work like that. When the price of food is rising by 10%, and the price of shelter is rising by 8%, suddenly, in real terms, you’re almost 20% worse off than you were a year ago.

Let me make that point really, really clear. Economists average, but people have to add. Add up all these costs. An economist can look at inflation rates across different kinds of goods, average them, to arrive at a figure of 5%, and say — why, that’s not so bad! What are people so worried about? They are making a category error. People’s finances don’t work like that. When you have to pay 10% more for food, and then another 10% more for shelter, you’re not averaging. Those costs are additive. You are 20% worse off — and it feels, now, as if you’re balanced on a knife edge.

This is exactly we see very real danger signals pulsing through the economy. Personal debt levels are soaring. People are using buy now, pay later schemes for…necessities. Delinquencies are beginning to rise. People are struggling to bear all these costs. And economists are not really doing a good of understanding what the economy is actually like for most people. People aren’t experiencing anywhere near a 5% inflation rate. If they were, they’d breathe a massive sigh of relief. Instead, they’re experiencing runaway inflation, at life-shattering rates.

10% more for this basic, 10% more for that one. It all adds up pretty fast, and before you know it? You feel poor, even if you’re making what used to be considered a pretty healthy income. So how much worse is it for people right at the average? Or below it? That’s half of society. How are they affording double-digit rises for multiple kinds of basics? When you’re paying 10% more for this kind of basic, and then 10% more for that one — it’s cold comfort to hear someone say, “but so what! Look, at least the price of this kind of thing — clothes!! — is only rising by just 3%. So on average, it’s not so bad!” You’re not averaging. You’re trying to make ends meet, and those costs add up. And incomes that aren’t rising anywhere near as fast. Know anyone that’s gotten a 20% raise in the last year? That’s going to get another 20% this year? I didn’t think so. Nobody’s income is rising fast enough to keep with what the reality of inflation is experienced as — not just averaged away as.

Let me make that even more concrete. What other forms of inflation don’t these “core” numbers — which first exclude necessities like food and energy, and then, even when and if they include them, average them away, which creates a statistical illusion, because, well, the price of luxuries rising more slowly is cold comfort when you’re skipping meals to make ends meet, which 39% of Americans now say they’ve done to be able to make house payments? Consider what you might call the Feeconomy.

It’s now the subject of jokes. Go to a hotel, and there are “resort fees,” even if, LOL, it’s just a bland corporate hotel in the sticks, or worse. Order some food, and — Jesus, why does my pizza cost $50? — the fees are more than the food. The fees become more absurd by the day. “Convenience fee,” “processing fee,” “order fee,” “inactivity fee,” “administrative fee,” fees for paying the fees. How much do those add up to? The answer to that question is: a hell of a lot. We know that, because corporate profits are at their highest point in…history…ever. That’s not because people are happy to pay a fair price to get a great deal. It’s because corporations have learned to add these absurd fees to everything, in increasingly exploitative yet unavoidable ways. They did that as a form of risk-shifting: the fees effectively become a fixed cost that consumers have to pay. When Covid was snarling supply chains, this made a lot of sense — for corporations. It passed risk on to people — there’s the variable cost, the food, hotel room, whatever, and then the fixed one: the fees. Double whammy. That tactic has worked incredibly well, because now, like I said, corporate profits have skyrocketed to their highest point in history. But inflation statistics don’t really capture any of that. They look at prices. Not fees. But by now, what do we know? The fees can often be as much again as the good itself. You know it, because you’ve lived it.

Now imagine what that means at an economic level. Inflation’s understated. By how much? Maybe twice as much in some crucial areas. Because fees double “prices,” which are what “inflation” looks at — but at this point, they’ve just become another form of price increases. This is why inflation’s soaring in another sector — not coming down, but a straight line going up: services. Those fees are often concentrated in the service sector of the economy, hence, there is where you can see inflation rising. But the Feeconomy is hardly exclusive to services, and so inflation numbers are understating, by up to as twice as much, in many sectors, how hard people are being hit by rising prices. So now let’s come back to the average person. There they are. 10% for more this basic — food. 10% more for that basic — shelter. On top of that, fees have now become their own kind of inflation, maybe adding another 10% on top of all that. The average person’s now looking at a 30% hit. That’s horrific. Nobody, really, short of someone who stumbled into or inherited serious wealth, can manage that, especially not in a short period of time. And none of that’s really abating. Worse, there’s some economist, who’s averaged away the pain you’re feeling, created a statistical illusion — and then ignored whole categories of it — telling you that everything’s fine, and you’re the crazy one. No wonder people are so pessimistic. What this kind of game does? Economists not really understanding that the lived experience of an economy isn’t statistical illusions? All it does is undermine faith and trust in institutions themselves, because people think — rightly — that institutions and leaders are completely out of touch with their lives. That benefits no one, in the end.

There’s one basic that’s “fallen” in price recently — energy. I put it in quotes because the price of energy is of course a manipulated thing. OPEC’s already announced cuts, which means, of course, energy prices will rise. Meanwhile, of course, hello, there’s climate change, which I’ll come back to. So people don’t feel as if prices for basics like these are falling — they just feel that they’ve become volatile. And that’s true.

You’d have to be pretty naive, these days, to think that energy prices are going to fall, over the long run. By now, I suspect, most people are making the link between climate change, and rising energy prices. So while they might welcome a temporary respite, they also know that’s all it is. They expect higher energy prices over their lifetimes, and they’re right to. And that brings me to the heart of the issue, which I want to explain — but it’s a little subtle and complex, so bear with me. All the above is subject to a kind of fractal effect. Why don’t people feel good about the economy? Because necessities — which “inflation” measures often simply ignore, or undercount — are skyrocketing in price the most frequently and the fastest. But even among those, it’s the most basic necessities that are themselves rising in price fastest and hardest.

What do I mean by that? Think of food. It’s not gourmet pates and pink food coloring that’s soaring in price. It’s cereals, grains, meat. The most basic of the basics. We are entering a new economic age. And it’s not going to be a good one. Why is this weird fractal effect happening? Not just necessities soaring in price, but the most basic of basics even within necessities? Because this is the reality of the Age of Extinction. The planet’s hit its limits. The mega-scale impacts of climate change are here. We begin to experience them every day — from new variants of a pandemic that, no, hasn’t “ended,” to mega-weather, to rivers running dry. Our supplies are out of juice. At the most basic level. Crop failures are already hitting double digits in many regions, seasonally — that’s why prices of the most basic of basics, like cereals and grains and meat, are rising fastest. What happens when the water runs out? To all the stuff that’s made from water now running out?

We are entering a new economic era. And in it, the old method — “the price mechanism” — is shuddering. Like a patient having a heart attack on an EKG. For a reason. It is telling us something. Our civilization’s ability to supply itself has hit its limit. We are now entering the greatest supply shock in human history. We have little to no inkling how we’re going to supply ourselves with the basics at a civilizational scale…in maybe even as rapidly as a decade. Water, food, energy — all that’s made from, with, of them. Prices are soaring, skittering, skyrocketing, exploding to send us this warning.

We face two futures. One, we invest, and learn to supply ourselves with basics again — in clean, green, often circular, “closed-loop” ways. So far, we’re not even remotely close. That’s the greatest project of reinvention in human history, because right now, our Industrial Age economy doesn’t do it for anything. Not one thing, in our vast, pulsing economies. Two, the price mechanism goes on breaking down. The end of that road is Soviet style rationing — which, of course, is already here, in many ways, here and there, for water, for vegetables, for shelter, and so forth.

As insurance and banking systems fail, unable to bear the costs of bad debts and stranded assets — think of uninsurable houses plunging off a seaside cliff, and now think of how fast sea levels are, gulp, actually rising, not to mention the temperature — our ability to govern an economy like this, with “prices” at all, will begin to fail in catastrophic ways.

Usually, that sort of thing’s accompanied by hyperinflation, fascism, and social implosion. The kind of good news is we still have a little bit of time to choose. The bad news? It’s just a handful of years now, and, well, this pain? This pessimism? It’s just a small taste of the dystopia that awaits if we continue doing…not nearly enough. This isn’t really “inflation.” Wrong way to think about. It’s an economy rapidly, suddenly, having something very much like a heart attack. It’s muscle weakened. It’s changing — and not in a good way. It’s becoming one that’s running out of basics, on a dying planet. Hey, at least now you know.

Umair.