Hans Despain of Nichols College on American struggling in economy

The U.S. economy seems to be doing well. GDP is growing, unemployment has been below 4% for a record 23 months in a row, and inflation is at a three-year low. 

Regardless of these strong economic numbers, only 36% of Americans approve of President Biden’s handling of the economy. Gallup’s Economic Confidence Index is a dismal -26.

President Joe Biden touts the facts: “Inflation is coming down. Jobs are growing. We created 800,000 manufacturing jobs.” Nevertheless, poll after poll shows a double-digit lead for former President Donald Trump over Biden on who is better for handling the economy.

There have been several explanations offered for the disconnect between consumer sentiment and economic data. Some argue that increased social media usage and its tendency to amplify bad news artificially drags down views of the economy.

In an effort to avoid declaring “Americans are stupid,” Noble Prize-winning economist Paul Krugman has embraced partisan bias.  Krugman claims most Americans are simply wrong about the state of economy. He correctly points out “most workers’ earnings have significantly outpaced inflation since” 2020.

Krugman says the war on inflation has been “largely won,” but Americans are still upset by the “past” inflation.

Economists at Stanford have convincingly demonstrated there is indeed a partisan bias.  To put it simply, the Stanford theorists find “Republicans cheer louder when their party is in control and boo louder when their party” is not in the White House. But they emphasize partisan bias explains only 30% of the “disconnect.” The other 70% is left unexplained.  

Is Krugman correct, are Americans perhaps “stupid?”

I don’t think so.

Krugman accurately argues much of the economic data is good. It is also true that double-digit inflation is no longer a threat. But Krugman is wrong to claim the U.S. economy is “better” than a “Goldilocks economy,” he overbakes the partisanship, labor conditions are far worse than suggested by the unemployment rate, 50% of Americans renting their homes are now cost-burdened by that rent, American households are drowning in credit card debt and the so-called “past” inflation is still haunting American consumers.

There is not enough space in this column to address each of the dismal economic conditions of the gloomy labor conditions, the cost-burdened renters, income-sucking credit card debt and the specter of inflation haunting Americans.  So allow me to demonstrate one, the specter of inflation.

In 2019 a box of Cheerios was $4.99, in 2024 many Americans are paying $8.99.  Likewise the price of a restaurant meal has become prohibitive for many Americans in 2024.  We can multiply these examples, but these painful hits on our budgets are probably not the main drain on American pocketbooks.

Rather the real culprit haunting American wallets is housing.

In 2019 the median price of a home in Worcester was $258,000. Today it is $387,000. A 50% increase in the price of a home in just five years. 

But far worse is the increase in interest rates. In 2019, with good but not prefect credit, the prevailing interest rate in Worcester was approximately 3.25%. Today that same homebuyer is facing an interest rate of 7.5%.  

The $129,000 increase in the median-price Worcester home is painful enough. But it is the interest rate that is a far greater financial burden. Let me unfold the mathematics of the typical Worcester homebuyer.

Suppose in 2019 a young couple decided to buy a median-priced Worcester home.  Suppose they have saved just over $51,000 for their 20% down payment.  They finance with a bank $200,000 at 3.25% interest.  With the typical property tax and home insurance, the monthly mortgage payment for our hypothetical couple in 2019 would have been approximately $1,281 per month.  

That same couple in 2024 go to the same house and the price is now $387,000. Assuming that couple are able to save an additional $30,000 for their 20% down payment of $80,000, they are now financing $307,000. Their new interest rate is now 7.5%. Assuming that property taxes and insurance have not increased, their new monthly mortgage is $2,577.  

The 30-year-life payment in 2019 would have been a grand total of approximately $575,000; in 2024, it would be $1,150,000.  That is a difference of nearly $600,000 for the lifetime of the loan.  

Regardless of what President Biden and Krugman tell us in their speeches and columns, Americans are struggling in this economy.

It is the economy again, stupid!

Hans G. Despain is professor of economics and chair of the honors program at Nichols College.