With each election cycle, voters are left with the same question: If the economy is so great, why am I struggling to pay my bills? The economic indicators aren’t wrong, but the divergence between the macro economy and the “lived economy” of ordinary people is real.
“I think the simplest way to explain the apparent contradiction is that the U.S. economy is strong in the aggregate but highly uneven underneath,” said Johns Hopkins Carey Business School Professor Alessandro Rebucci. “The phrase often used is the ‘K-shaped economy.’ Asset owners, high earners, and wealthy households have done well, while many low- and middle-income households are still under pressure from the cumulative rise in prices and higher borrowing costs that followed the COVID pandemic.”
A “K-shaped economy” occurs when different population segments or business sectors experience vastly different rates of economic progress and growth. It earns its name because the diverging paths resemble the arms of the letter "K" on a graph. As Rebucci explains, America’s jobs, GDP, consumer spending, and the stock market all look solid, even as many households feel worse off.
“People do not experience ‘core inflation’ or ‘real GDP’; they experience grocery bills, higher rents, insurance premia, car payments, and credit-card rates.”
“People do not experience ‘core inflation’ or ‘real GDP’; they experience grocery bills, higher rents, insurance premia, car payments, and credit-card rates,” he said. “Even when inflation falls, prices do not go back down. So, the economy can be improving in rate-of-change terms while still feeling unaffordable in level terms.”
According to Rebucci, some of the unevenness comes from the fact that the U.S. economy is increasingly supported by spending among the wealthiest income earners. He says the affluent benefit most from stock-market gains and housing wealth appreciation, which leaves them with ample disposable income to spend on non-essential goods and services.
Meanwhile, households living paycheck-to-paycheck are more exposed to price increases for food, rent, gasoline, insurance, and interest rates. Rebucci notes that while inflation recently slowed from its peak after the pandemic, overall prices remain much higher than they were a few years ago. “Economists celebrate disinflation because the rate of price increase has slowed, but consumers often ask a different question: ‘Why does everything still cost so much?’ If rent, groceries, health insurance, childcare, and credit-card payments absorb more of the monthly budget, a strong labor market may still feel like treading water,” he said.
Rebucci is quick to point out that the current economic sentiment is not partisan. Groups feeling the strain of everyday spending include many non-college-educated, rural, younger, and minority-led households, but also plenty of middle-income families living in metropolitan areas with expensive housing markets. Politically, that frustration can show up in different ways.
“The common denominator is economics, not ideology; it is the gap between aggregate prosperity and individual economic hardship,” he said.
