As of May 2024, the US economy looks pretty good on paper.
Inflation was a Large fat zero: Average price did not increase at all last month. unemployment was 4 percent — a rate lower than at any time during the Reagan, Obama or Bush administrations — and added a healthy 272,000 jobs to the economy. Wages are paid Rising faster than prices For months now.
But Americans don’t seem particularly psyched about the situation. Consumer sentiment has improved since last year, when it declined due to anger over inflation, but the latest report at the University of Michigan 77.2 gives a feeling estimate.
This is only an arbitrary index, but it indicates how Americans felt in the spring of 2013, when unemployment was around 7.5 percent and the economy was still struggling to recover from the financial crisis.
Likewise past periods of low inflation and low unemployment saw people much happier. Just before Covid, the sentiment index was 101; In February 2000, it was 111.3. Those economies look a lot like the ones we have now, but people aren’t responding like they used to. (And to make things even more confusing, the University of Michigan recently changed that method.)
Economists have developed several theories as to why this might be. Ryan Cummings and Neil Mahoney of Stanford argue that much of this gap can be explained bias (Republicans say the economy is bad when a Democrat is in office) and Inflation is hurting the mood of the country Even after the worst is over.
Others, like pseudonyms Quantian 1 and a Team including former Treasury Secretary Larry Summers, there are arguments that high interest rates are the culprit. Between 2000 and early 2020, interest rates were still very low; It was relatively cheap to buy a house or car or roll over credit card debt. The situation is different now because those high rates drive up such costs and people are mad.
This last theory is quite difficult to evaluate. Interest rate changes are mostly caused by the Federal Reserve, which makes decisions based on the state of the economy. So are consumers reacting to interest rates, or to the economic conditions (eg high inflation) that prompted the interest rate changes to begin with?
So I don’t want to embrace the whole hog of interest rate theory. But I’d like to tease one more interesting implication of this. High interest rates can be especially disruptive in the United States because we rely on debt to raise the standard of living of the middle class more than most peer countries.
We have chosen to prioritize debt over building a welfare state, and that can make interest rate rises more painful here than in Europe.
Debt United States
if you look Family Loan Information, you start to wonder what’s wrong with countries that speak English. Australia is the world champion in debt, followed by Canada and then New Zealand. The United States ranks after those three and the United Kingdom at least debtor
Although we are all different compared to France or Germany or Japan. Part of this is because English-speaking countries do not produce enough housingWhich means the cost of houses (and thus the number of people taking out mortgages to buy them) has gone up a lot.
But part of it has to do with the English-speaking world A relatively stingy approach to social welfare Compared to continental Europe. Many scholars, notably Johns Hopkins sociologists Monika Prasadnoted that there appears to be a trade-off between household debt and government social spending.
You look at it empirically (countries with more debt spend less on welfare), and the basic reason is pretty simple: both debt and social programs are ways that people can access goods they don’t have money for.
Let’s say you can’t afford a place to stay. One way to get you is for the government to build social housing and charge you subsidized rent. Another way for Govt Build a massive regulatory apparatus Designed for 30-year, fixed-rate mortgages are available to anyone who wants them. Some countries, most famous Austria, ex; The American did the latter, his driving Massive increase in home ownership Since the New Deal.
One sees this in health care as well. The United States, famously, is alone among rich countries in not having a national health care scheme that sets prices and provides universal coverage. As a result, it has much more medical debt than it should anywhere else. A problem that other countries solve with price controls and social insurance, we solve with loans.
Within the United States, debt can trade off with social programs: A recent study found that the rate at which people acquire medical debt Half fell States that expanded Medicaid as part of Obamacare, but states that did not, fell by just 10 percent.
This dynamic goes on even with automobiles: The US has more cars per capita than any other country Outside of microstates like San Marino and, for some reason, New Zealand. These are Purchased with too much auto loan. Not coincidentally, we have too Less access to public transit Compared to peer countries. This is another place where we have chosen debt over social spending. (Student loans, perhaps surprisingly, don’t fit the pattern, because both Many other countries have loan-based systems and reason Significantly more people in the United States are finishing high school and going to college than most peer countries.).
No country for high interest rates
So what should you take from this besides “the US is a strange country that made some strange choices”?
A possible takeaway is that all of this makes inflation unusually politically toxic in the US.
The main way to deal with inflation is to raise interest rates, make borrowing more expensive and reduce the rate of housing construction, business spending, etc. But Americans are unusually vulnerable to rising interest rates if debt-heavy. Given the way we have structured our economic lives, the cure can be as unpleasant as the disease.
The only way is to avoid the need to raise interest rates in the first place – and that, as we’ve learned over the years after financial crises, sometimes means tolerating brutal levels of unemployment. Maybe we won’t win.
A more promising way is that government social spending can play a somewhat surprising role, one that goes beyond simply improving people’s living standards. We know that from countless studies Debt hurts people in ways that aren’t just financial. By replacing debt, social spending not only gives people more financial resources, but also prevents the unique anxiety and indignity of being in debt even when interest rates are low.
You see something like how countries with rich safety nets handle cases. Here’s a fact that always amazes me: By 1991, there were About 200,000 lawsuits in the United States related to asbestos and asbestos-caused disease. In the Netherlands, where asbestos-related diseases were at least five times more common than in the United States, there were fewer than 10 cases.
The reason was not actually legal; The Dutch had the right to sue their employers for damages. because, as Scholar Robert A. Kagan explainedThe Netherlands had a generous disability and health insurance system that affected people did not need or want to sue.
Debts and lawsuits felt like subtle American institutions, like barbecuing or refusing to use the metric system. But they are a choice, and we can also choose to use a strong social safety net to avoid them.
