What we learned about the economy in 2021

For those studying the vicissitudes of the economy, 2021 has been the most interesting year of the 2000s. It was not the most dramatic ...


For those studying the vicissitudes of the economy, 2021 has been the most interesting year of the 2000s.

It was not the most dramatic (it would be 2008 or 2020), nor the best (2000 or 2019) nor the worst (2009). Rather, it was a year in which economic dynamics that seemed entrenched for decades either collapsed or changed fundamentally. The workers took over the employers; supply chains have broken down; inflation has jumped; and the economy has rebuilt itself from its depressed pandemic levels with astonishing speed.

Unlike the last economic cycle, the government tried to overheat the economy for once. For better or for worse, it has succeeded.

The unemployment rate, 6.7% in December 2020, fell to 4.2% 11 months later. That same change took three and a half years in the last expansion, from March 2014 to September 2017.

But the flip side has been soaring prices and the shortage of many products. Inflation hit its highest level in four decades. In the polls, Americans are remarkably dissatisfied with economic conditions. The growth figures have been good. The vibrations were bad.

These are the most important things to learn from a year in which the economic terrain beneath us has changed.

In the first months of 2021, there was a vigorous disagreement between people in the centrist and center-left economic worlds. Was the $ 1.9 trillion pandemic rescue package adopted by the Biden administration, on the heels of a $ 900 billion bipartisan plan adopted in the last few weeks of the Trump administration, was it too much? important compared to the hole in which the economy was located?

For example, in February, the Congressional Budget Office forecast the 2021 output gap – the economy’s deficit from its full potential – to be only $ 360 billion. Even if you think the CBO’s numbers are too conservative, estimates like this implied that relief from the pandemic that happened a month later would send too much money into the economy and lead to inflation.

In any case, that was the interpretation by traditional models of how fiscal stimulus worked. Advocates of the Biden approach have emphasized, among other things, risk management – doing everything possible to put money in Americans’ hands, aggressively roll out vaccination and get the economy back on track. prepandemic as quickly as possible.

These views were shaped in large part by the experience of the latest expansion. Fiscal austerity was one of the main reasons for a painfully long exit from the global financial crisis. After years, if not decades, in which the central crisis was an underheated economy, the experience of 2021 is a reminder that overheating can cause its own discontent.

With demand for goods exceeding supply, especially for physical items, it is clear that soaring prices and other related issues (shortages and phantom inflation) are now America’s central economic problems. Economists will debate to what extent they are attributable to excessive stimulus in the years to come. But no matter where one asks this question, the events of the last quarters remind us that it is not because the risks of overheating have remained dormant for a long time that they have disappeared.

Disruptions in the supply of all kinds of goods originate in the first weeks of the pandemic, when manufacturers around the world halted production due to collapsing demand and a public health crisis.

But things did not turn out like in past recessions. Demand for physical goods jumped in late 2020 and into 2021, unlike a typical recession in which demand for cars and other big-ticket items is depressed.

This happened because consumers shifted their spending toward physical goods rather than services, and government support kept incomes stable, preventing a collapse in aggregate demand.

The result: an economy-wide occurrence of the ‘boost effect’, a phenomenon in the field of operations management in which small changes in demand spill over into supply chains to provoke wild fluctuations.

The complexity of modern global supply chains and the fact that this spike effect has occurred in countless sectors has made it a devilishly difficult problem to resolve. The problem isn’t just a shortage of semiconductors, shipping containers, or whatever. It’s the shortages of all of these things that crumble in a way that makes the feeling of scarcity and scarcity more intense.

The tension between surging demand and supply constrained by the pandemic also manifested itself in the labor market in 2021. The result was that the workers ordered to a degree not seen in at least two decades.

It has manifested itself in several dimensions. Salaries have increased rapidly. Businesses have been forced to be more creative, flexible and aggressive in attracting a workforce. The rate of people leaving their jobs has skyrocketed. After two decades in which most employers had their choice of workers, the situation had reversed.

And people hated it.

This is an exaggeration, of course. The Great Resignation is real and many people have taken advantage of this moment to secure a better and more rewarding contract of employment. But overall, people consider the state of the economy to be appalling.

In one Gallup poll In early December, 67% of adults said the economy was getting worse. Overall economic confidence is at its lowest levels since the early days of the pandemic and was below what it was in the very weak economy of 2010 and 2011.

Part of this surely has to do with the fact that prices are increasing faster than average wages, which means that the purchasing power of an average worker is decreasing. Wage gains were highest, in percentage terms, in the lowest-paying industries. Indeed, hourly workers have obtained increases, while middle managers and white-collar workers are losing a lot of ground on average.

Moreover, while labor shortages empower many workers, they also cause their share of hassles. For every worker who quits for a better paying job, there are workers invited to cover the shift and a middle manager struggling to find a replacement.

People like having more agency, of course, but labor shortages have also made their lives worse in their roles as managers and consumers – and it shows in the public opinion data on the economy.

For Americans under the age of 50 or so, inflation is something you read in history books or in articles about other countries. At least, that was a year ago then.

This changed abruptly in 2021, for reasons related to the economic dynamics discussed above. Even if the inflation rate declines in 2022 – if prices rise more slowly – it is evident that inflation is weighing heavily on Americans.

It’s easy to say that the discontent is overblown: in theory, at least, inflation creates both winners and losers. But whether a person is better off or worse off may depend on whether they got one of those big pay rises that the tight job market allowed.

It also depends on the mix of things people buy – for example, whether they should buy a car this year or not (a more expensive proposition). It doesn’t matter that they owe money at a fixed interest rate and therefore have the luxury of paying off their debts with dollars that buy less.

But 2021 has shown more clearly why inflation is less of a micro-story about how higher prices affect people, and more of widespread discontent.

On the one hand, this surge in inflation has manifested in ways beyond those easily measurable – in poorer customer service due to labor shortages; less choice on store shelves; and no more hassle of planning Christmas presents well in advance.

On the other hand, during a pandemic and a time of deep polarization, high inflation adds to the feeling that the world is a chaotic mess and will only get worse.

And finally, it is natural for human psychology to look at the negative aspects of inflation (higher prices for consumer goods) and its positive aspects (higher wages) differently. This pay raise was money I earned fairly; this higher grocery bill is an affront to me by powerful forces beyond my control.

All of this speaks to the central challenge for economic policymakers in 2022. Despite all the progress the economy made in 2021, it looked like a time of scarcity and need, regardless of the growth numbers. Achieving better vibes in 2022 depends on making it a year of plenty.

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