America’s Cash Glut – The New York Times
Low income growth has been a defining economic problem in recent decades. With brief exceptions, the incomes of most middle and working class American families have grown frustratingly and slowly – far behind economic growth – since the late 1970s.
Surprisingly, however, the past two years have been one of those exceptions. Even in the midst of a global pandemic, most American households are doing better financially than they were in 2019.
How could that be? A pandemic is not a financial crisis. Covid-19 has caused a horrific amount of death and disease and disrupted the rhythms of daily life. But it did not damage credit markets or household balance sheets, like the housing bubble of the early 2000s did. Instead, the pandemic caused a brief and brutal recession.
Today, the unemployment rate has fallen below 5%. Home values - the biggest asset for most families – continued to rise. The S&P 500 is more than 30% higher than it was before the pandemic. And the federal government, in the Trump and Biden administrations, pumped billions of dollars into the economy, largely through checks sent directly to people.
As a result, revenues increased:
Household wealth has also increased:
Wealth inequalities have increased over the past two years, as shareholding is highly concentrated among the rich. But income inequality has declined, with the largest percentage income gains falling towards the bottom of the economic spectrum, as government stimulus programs have been concentrated there.
The full picture is a relatively cash rich country. “The household balance sheet is by far the strongest part of the economy’s balance sheet,” Mark Zandi, chief economist at Moody’s Analytics, told me.
These trends are mostly positive. Compared to before the pandemic, most families – not all, of course – can more easily afford school fees, a medical procedure, house repairs, a new vehicle, and many other expenses.
But the glut of money also created complications. If you’re trying to figure out why the country is grappling with new economic issues – including labor shortages, rising inflation, and supply chain issues like backups at ports – the cash glut is overwhelming. much of the explanation.
“Off the charts”
The economic dynamics behind rising inflation and supply chain issues are fairly straightforward: This is a case where demand exceeds supply.
Not only do Americans have more money than in 2020 or 2019, but many have also spent the past two years delaying certain purchases. In recent months, they have started buying again, especially physical goods. Many services – like dining, movies, and vacations – are still affected by Covid.
The increase in purchases of goods has been remarkable: Inflation-adjusted retail spending in the United States has risen 14% in the past two years, according to Commerce Department data released on Friday. This is a larger increase than in the previous seven years combined. “The demand is out of the ordinary,” Pete Buttigieg, transportation secretary, told CNN yesterday.
Americans aren’t the only ones buying more goods, either. In other countries, consumers have pent-up demand as well, and governments have put in place sweeping pandemic stimulus programs. This graph, based on data compiled by Jason Furman, professor of economics at Harvard, shows the recent increase in consumer spending in high-income countries:
There are other reasons for supply chain problems and rising inflation. Precautions against Covid and pandemic disruption in factories, warehouses and ports also play a role. “The world is far from being fully vaccinated against the coronavirus, and that means factories in, for example, Vietnam are still struggling to meet demand as workers continue to fall ill,” wrote Amber Phillips of the Washington Post.
But the main reason for the increase in demand is the glut of cash. “There is a sudden, massive increase in demand that far exceeds the capacity of the market,” recently wrote Craig Fuller, managing director of FreightWaves, a publication that covers logistics.
On the contrary, some observers have given the impression that the situation more complicated than it is, suggesting that the economy is suffering from a mysterious disease, such as 1970s-style “stagflation” (a mixture of stagnation and inflation). “The use of ‘stagflation’ is wrong”, Olivier Blanchard, former chief economist at the International Monetary Fund, written last week. “We don’t see anything as stagnation. What we are seeing instead is very strong growth, fueled by private and public demand, hitting supply constraints and leading to sharp price increases. “
it will not last
There is no quick fix to these problems. Private companies and government officials are taking steps to expand the supply chain, such as President Biden’s recent announcement that the Port of Los Angeles will operate 24 hours a day. Movements like this are likely to help modestly. But supply chain delays and uncomfortably high inflation will likely last for at least a few more months.
I think it’s important to keep in mind that the cash glut is almost certainly a temporary phenomenon, created by the pandemic. It will likely end by next year. The government’s major stimulus programs have for the most part already been completed.
On the other hand, the underlying problems that have caused the weak income growth in recent decades are not expected to go away. The balance of power between employers and workers remains oriented towards employers, due to the increasing concentration of companies and the reduction of unions, which will slow down wage growth. And the slowdown in educational gains means America’s workforce will continue to struggle to keep up with technological change.
All of this creates a difficult task for policymakers, including members of Congress debating Biden’s agenda. They face a set of long-term economic challenges quite different from the immediate ones. Right now, American families have so much money that the rest of the economy is struggling to keep up. Soon, many families will likely be struggling again.
In a future newsletter, I will explore another consequence of the cash glut: the current shortage of workers in many industries.
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