A strange economic phenomenon is happening. By most objective measures, U.S. economic performance under the Biden-Harris administration has been superior to that under the Trump administration, and a vast majority of Americans report satisfaction with their economic situation. And yet, most Americans believe the economy is faring poorly, resulting in a large gap between their lived economic experience and perception of the state of the national economy. A review of the economic facts and an explanation of the perception gap are sorely needed.Under Trump, from the fourth quarter of 2016 to the fourth quarter of 2020, the U.S. economy grew 7.4% adjusted for inflation. Under Biden-Harris, through the second quarter of 2024, the economy grew 10.6%, reaching an all-time, inflation-adjusted, high of $22.9 trillion and besting the $20.7 trillion at the end of the Trump administration. Even comparing the size of the economy at its peak of nearly $21 trillion at the end of 2019 under Trump, thereby excluding the effect of COVID-19 on his economic record, the economy is still $1.9 trillion larger under Biden-Harris. And taking into account population growth as well as inflation, gross domestic product per capita reached a record high of $68,088 per person in the second quarter of 2024 under Biden-Harris, far exceeding its peak of $63,257 under Trump in the last quarter of 2019.Jobs fell by 2.7 million under the four years of Trump and have grown by 16.2 million through September of 2024 under Biden-Harris, a difference in the Biden-Harris administration’s favor of a stunning 18.9 million jobs. Trump protests this comparison and asserts that the job gains under the Democrats are simply a “bounce back” from the loss of jobs due to the pandemic during his last year in office. This claim is false. Employment under Trump reached a high of 152.3 million in February 2020—before COVID-19. Under Biden-Harris, total employment reached a record high in September 2024 of 159.1 million, 6.8 million more jobs than at the peak of jobs during the Trump years—much more than a mere bounce back.What about inflation? It is true that prices grew less under Trump, 7.7%, compared to 20.3% under Biden-Harris through August of 2024. However, the effect of inflation on well-being depends largely on what happens to wages as prices change. So, what happened to wages and inflation under Biden-Harris? In August 2024, wages were 26.1% higher and prices were 21.7% higher than they were in February 2020, the pre-COVID jobs and earnings peak under Trump. Thus, wage growth outstripped price increases by 4.4 percentage points over the period and the purchasing power of workers is now greater under Biden-Harris than it was under Trump.What about health insurance? Under Trump, the number of Americans without health insurance rose by 2.2 million between 2016 and 2019, before COVID-19. By 2022, under Biden-Harris, the number without health insurance fell by 3.3 million, resulting in “the lowest rate of residents without health insurance in U.S. history.”The cognitive biases being exploited to warp perceptionsIn short, the Biden-Harris administration presided over a stronger economy than under Trump. Consistent with these economic facts, the Federal Reserve’s 2023 annual survey found that 72% of Americans said they were doing fine financially. However, in a striking inconsistency, only 22% thought the national economy was doing well. The gap between people’s perception of their well-being and that of the national economy “has nearly doubled since 2019”. How do we explain this extraordinary misperception gap?A celebrated paper by Ola Svenson has shown that most drivers consider themselves better than the average driver. It is arguable, following this, that most people simply think they have fared better than the average person. However, the enormous growth in the gap between people’s perception of their own well-being and that of the economy over the last four years cannot be explained in terms of the Svenson bias.Fortunately, there are explanations derived from a body of research that draws on economics, psychology, and biology, and, interestingly, also shed light on contemporary American politics.One insight is that the way information, or misinformation, is presented can significantly affect perceptions of reality. This is the “framing effect.” Former president Donald Trump has repeatedly claimed that he presided over “the greatest economy in the history of our country,” and that the economy is now “horrible” and “destroyed.” J.D. Vance expanded on this theme during the Vice-Presidential debate, asserting that the economy is now “atrocious” and that Trump had ensured that Americans had access to health insurance.As noted above, these claims are false. However, research shows that framing the narrative does affect people’s perceptions of reality. Repetition of these false claims has likely produced an “anchoring effect,” where people define an inflated past benchmark with which to compare the current situation. They may then perceive the current economic situation as poor because it is not living up to the imagined past, even if the present economy is objectively better than the past economy.Once perceptions are framed and anchored, confirmation bias—the tendency for people to pay attention only to evidence that agrees with their perceptions and to ignore contrary information—tends to set in.Additionally, the “availability heuristic” causes people to focus on attention-grabbing and unusual events that come readily to mind when judging an economic problem. This may be influencing perceptions of inflation. For example, the average price of goods and services has risen only 20.3% under Biden-Harris, but in surveys and focus groups, people often refer to sharp increases in the prices of some goods (e.g. gas, eggs, or used cars) and of the “doubling” or “tripling” of prices. Loss aversion and the “endowment effect” may also explain the preoccupation with inflation. Research shows that people experience financial losses more intensely than equivalent financial gains. Thus, even when wages rise faster than prices, the loss of purchasing power from inflation may be perceived as more significant than the gain in purchasing power from the wage increase. Similarly, an increase in wages that enables an individual to save and add to their net worth (endowment), combined with inflation that erodes the value of their endowment by the same, or even lesser, amounts may be experienced as a net loss.Negativity bias also causes people to focus on bad economic news and ignore positive developments. Social influence, or discussions with peers and exposure to social media, can intensify negative perceptions leading to a pessimistic view of the economy. Social media may amplify this effect, as negative stories spread quickly, reinforcing the belief that the economy is struggling.Consider, also, that behavioral economists have discovered that fairness, and not just self-interest, affects economic perceptions. Thus, when judging the performance of the economy during the Trump administration, people often discount outcomes in 2020 when COVID-19 wreaked havoc on the economy because it would be unfair, as Trump often reminds us, to blame him for the devastation caused by the pandemic. Indeed, we repeatedly provided economic data for the pre-COVID years of the Trump administration precisely because we do not believe it is fair to hold him fully responsible for the effects of the disease on the economy.Manipulations such as deliberately misrepresenting the past to frame and anchor perceptions, taking advantage of the availability heuristic, preying upon negativity bias, abusing social influence, and self-servingly appealing to fairness are often received unconsciously. For example, notice how our sense of fairness (and through us, yours) may have been played upon by Trump and his supporters, leading us in this essay to discount the economic performance under Trump in 2020 because of COVID-19. However, neither Trump, his supporters, nor we apply the same grace to Biden-Harris when describing inflation during their administration. And yet, as economists, we are very much aware of the extensive research that shows that the supply-side distortions caused by COVID-19 were a major factor in the inflation during the Biden-Harris administration.Regardless of whether the next president is guided by facts or self-aggrandizing manipulations, we suspect that the perception gap will narrow over time as people’s understanding of economic conditions more closely aligns with the realities of our personal and national economic well-being.More must-read commentary published by Fortune:The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
