Unveiling Economic Trends: A Deep Dive into Wage Growth and Inflation and How to Accurately Interpret the Information
Introduction
In economics, the interplay between wage growth and inflation forms an intricate narrative of an economy’s health. We recently embarked on dissecting this relationship through a comprehensive analysis visualized in graphs juxtaposing average wage growth, whose data we acquired from The Federal Reserve Bank in Atlanta against annual inflation, and data we acquired from the U.S. Bureau of Labor Statistics.
What is Inflation?
In simple terms, inflation is the increases in the price of goods over time, and conversely, it is also the decline of purchasing power over the same period.
Why Inflation Matters
When inflation has a sudden spike, it becomes noticeable and painful for consumer's wallets. Consumers find their income can’t stretch as far as it once did when this happens.
Inflation Over the Past Two Decades
Over the past two decades and the last 5 presidents (the current president excluded), inflation in the United States has remained relatively low, averaging 1.8%. While each president we will show has faced their fair share of economic issues in the past 30 years, after looking at the data, there are market forces that have caused volatility in the market, affecting wages and inflation. While it's easy to point the finger at a specific president, the issue is much bigger than one person. However, given our data points, we will discuss how some groups over others benefited when certain presidents were in office and factors that caused presidents to have volatility in wages and inflation.
Wages & Inflation: The Why Behind the What
Viewing the graph below comparing overall wage growth to inflation to the untrained eye will be rife with confirmation bias. Republicans and Democrats will point out where their presidents succeeded, and the other side faltered. However, and it could be my own confirmation bias, I will discuss how presidents take too much credit and too much blame for the economy. Instead, one should look at this graph compared to a relay race and how the baton, in this case, the economy, was passed to the next runner, the new president.
Bill Clinton, the 42nd president of the United States, was in office during the dot com bubble. This time, spanning from Dec 1996 to 2000, was the beginning age of the Internet when many young founders ventured to what would now become Silicon Valley to create online startups. The graph indicates just this, too. As you can see on the far left, in 1997, wage growth was at that time at an all-time high, just under 5%, with average inflation of around 2.3%. Democrats to this day still claim Clinton did amazing things for the economy and that George Bush inherited a great economy and screwed it up. However, what they fail to remember or, more likely, hope you do not is the warning Alan Greenspan gave to the head of the Federal Reserve of “irrational exuberance.” This warning was given to Congress that the market for these companies was overvalued. Many of these companies had no revenues and customers yet public money continued to be poured into them. As the old saying goes, what comes up must come down, and that is exactly what happened once many of these companies went bust, leading to the dot com burst that fell onto the lab of the next president.
George W. Bush, the 43rd President of the United States, took office in what would be the most turbulent and troublesome of any president since FDR. Within one year of taking office, the dot com bubble burst, and the Enron & WorldCom scandals took place, along with 9/11. As you can see in the graph, starting from 2000, overall wage growth took a pretty steep nose dive before flattening out naturally right before an election year. Critics like to point out how the economy got significantly worse under Bush, while correct any reasonable person can clearly see the reasons were far beyond Bush’s control, hence the passing of the baton might not have been as smooth as it could have been. However, from 2004 to 2008, overall wage growth increased until 2008 when the banks and bankers in America, due to shady business practices, bankrupted us, sending overall wage growth into a steeper dive for the next president than when Bush came into office. In this case, the baton was pretty much dropped as the next president came into office.
Barack Obama, 44th President of the United States, took office at the height of the financial crisis. As a result, overall wage growth fell to its lowest point from 1997 to 2023. Having nothing to do with President Obama, he did shoulder quite a bit of the blame even though during his tenure, the country had record-low inflation that continued into President Trump's term as president. It's only fair to point out that while inflation rose in 2012, it fell below 2% after 2012, and wages, in general, began rising until 2016 when the next president came into office. Notice what I said in general in my last statement. While inflation remained low and wages eventually rose during Obama year, certain voting blocks got left behind and adversely affected the next Democratic contender for president.
Left Behind: African Americans
Many Republicans state the reason African Americans didn't come out to vote for Hilary Clinton (thank you) during the 2016 election was because the Democrats didn’t put a black person on the ballot. While mostly true I also believe that they were bitter and felt a little left behind due to Obama era economics. I’m happy to be called out on my own confirmation bias, however, its clear in the graph that overall wage growth for non-white people remained significantly lower than for white people. In fact, non-whites benefited greatly from the Trump administration as their wage increases were greater than whites.
Left Behind: The Rust Belt
What single-handedly led to the greatest upset of all time in President Trump defeating Hilary Clinton was how Clinton and Obama-era policies left behind workers in the mid-west. Much of the American factories in the United States lie in the midwest, specifically Michigan, Wisconsin, Ohio, and Pennslyvania. 20 years of Democrat policies that helped businesses offshore manufacturing to avoid paying high union wages left many white manufacturing workers in the midwest to show their frustrations with the Democratic party by voting for President Donald Trump. As clearly evident in the graph below, overall wage growth did not increase for these workers until 2016, when President Donald Trump, who ran as a populist, brought manufacturing jobs back to America. Even though in the 2020 election, the workers in these states decided not to back Trump after actually delivering for them in comparison to previous presidents.
Donald Trump, the 45th President of the United States of America, ushered in an economic breakthrough unlike any of his predecessors. He brought manufacturing jobs back, wages increased, inflation continued at a record low, non-white overall wages increased significantly more than there white peers. Even during COVID, when millions of people were being laid off, inflation remained low at an average of 1.95%, and overall wage growth remained steady, given what the country was going through. While Trump was pro-business and had good policies, during Trump's presidency, outside of COVID, there were no massive economic earthquakes like the ones Bush and Obama had to deal with. We also did not get involved with any foreign wars. So the debate here is whether or not Trump was great with policy or were things relatively stable until COVID?
Joe Biden
Joe Biden, 46th President of the United States of America, took his presidency right as the COVID pandemic was ending, even though they continued to enforce totalitarian rules on American citizens that violated just about every civil liberty we have. Biden took over as American manufacturing jobs returned, wage growth was strong, and inflation was relatively low. Except for right when he came into office as the country was coming out of COVID, his administration saw record spikes in overall wages but, more importantly, record inflation. During Biden’s first term, inflation averaged 6.2%, 5 times higher than that of Presidents Donald Trump and Barack Obama. Inflation reached its climax at 8% during Biden's first year. Inflation was to be expected after coming out of a pandemic but agitating a homicidal dictator into war by discussing onboarding boarding states Ukraine and Georgia into NATO, whom Russia said were their redlines to peace as far back as 1992, led to a greater spike in inflation. Maybe presidential policies are a major factor in economic conditions.
Conclusion: Survivor Bias
Presidents take too much credit for good economies and too much blame for poor economic conditions. The real lesson here is that data is not present in the data you’re evaluating to determine a problem and find a solution, better known as survivor bias.
Survivor bias developed by Abraham Wald during WW2 is the logical error of concentrating on entities that passed a selection process while overlooking those that did not. It was developed after pilots came back from Germany after bombing runs, showing their commanders where the bullet holes were and lobbying them for more armor where you could see the bullet holes (see below). However, what needed to happen was to ask where the planes not returning were getting shot, i.e., the engines and nose.
In short, take your time with conclusions when you are looking at data, graphs, etc. Take a moment to truly understand what was going on during this time and determine if those outside factors whose data you do not have are influencing what you’re trying to interpret.
