Money illusion doesn’t just affect feelings, however: It can also affect behavior. In one study, researchers asked people to imagine an economy in which everything had gone up 25%, including their income. They were then asked to think about a leather chair they had planned to buy for $400. Two-fifths of people said that they would not buy the chair at its new price of $500 — even though their income had also risen by 25%.
These cognitive biases show how inflation is different from other economic experiences, such as unemployment. But since these biases also affect behavior, they can’t completely explain the gap between feelings and actions.
Which brings me back to my original question. Why is the gap between attitudes and action so large? Much of the economic anger expressed in the polls may be less about current economic conditions and more about the economy the US has built over the past 40 years: one of high and rising inequality, with greater economic fragility due to higher income volatility and a reduced safety net. A deep-seated anger about how the economy is “rigged” has been simmering since long before the pandemic.
This anger — mixed with the real pain of inflation and the frustrations borne out of cognitive bias and partisan politics — has created a toxic stew. The result is that, at a moment when America should be celebrating an economy that has outperformed both expectations and its international competition, people are gloomy and anxious. Like a dysfunctional family, we are heading into the holiday season overflowing not with joy but with resentment.
Betsey Stevenson is a professor of public policy and economics at the University of Michigan. She was on the president’s Council of Economic Advisers and was chief economist at the U.S. Department of Labor.
This column was provided by Bloomberg News.