It has not been the most dramatic (that would
be 2008 or 2020), and neither the best (2000 or 2019) nor the worst (2009).
Rather, it has been a year in which economic dynamics that had seemed
entrenched for decades came apart or changed in fundamental ways. Workers
attained the upper hand over employers; supply chains broke; inflation surged;
and the economy rebuilt itself from its depressed pandemic levels with
In contrast to the last economic cycle, the
government tried overheating the economy for once. For better and worse, it
The unemployment rate, 6.7% in December 2020,
fell to 4.2% 11 months later. That same shift took 3 1/2 years in the last
expansion, from March 2014 to September 2017.
But the flip side has been soaring prices and
many goods in short supply. Inflation has reached its highest levels in four
decades. In surveys, Americans are remarkably unsatisfied with economic
conditions. The growth numbers have been good. The vibes have been bad.
These are the most important things to learn
from a year in which the economic ground beneath our feet shifted.
Yes, you can overheat the economy.
In the early months of 2021, there was
vigorous disagreement between people in the centrist and left-of-centre
economics worlds. Was the $1.9 trillion pandemic rescue plan the Biden
administration enacted, on the heels of a $900 billion bipartisan package
passed in the final weeks of the Trump administration, too big relative to the
hole the economy was in?
For example, in February, the Congressional
Budget Office projected that the 2021 output gap — the economy’s shortfall
relative to its full potential — was only $360 billion. Even if you think the
CBO numbers are too cautious, estimates like that implied that the pandemic
relief that passed a month later would send too much money coursing through the
economy and result in inflation.
That, anyway, was the interpretation by
traditional models of how fiscal stimulus works. Defenders of President Joe
Biden’s approach emphasised, among other things, risk management — doing
everything possible to get money into Americans’ hands, aggressively roll out
vaccinations and get the economy back to its pre-pandemic path as quickly as
These views were shaped in large part by the
experience of the last expansion. Fiscal austerity was a major reason for a
painfully long slog out of the global financial crisis. After years or arguably
decades in which the central crisis was an underheated economy, the experience
of 2021 is a reminder that overheating can cause its own discontents.
With demand for goods exceeding supply,
especially for physical items, it is clear that the surging prices and other
related problems (shortages and shadow inflation) are now America’s central
economic problems. Economists will debate how much they are attributable to
excess stimulus for years to come. But regardless of where one comes down on
that question, the events of the last few quarters are a reminder that just
because the risks of overheating were dormant for a long time does not mean
they have gone away.
When supply chains get messed up, it is hard
to un-mess them.
The disruptions to supplies of all sorts of
goods have their roots in the earliest weeks of the pandemic, when
manufacturers the world over pulled back on production amid collapsing demand
and a public health crisis.
But things did not play out as in past
recessions. Demand for physical goods surged in late 2020 and into 2021 — not
like a typical recession in which demand for cars and other big-ticket items is
That happened because consumers shifted their
spending toward physical goods and away from services, and government support
kept incomes stable, preventing a collapse in overall demand.
The result: an economywide occurrence of the
“bullwhip effect,” a phenomenon from the field of operations management in
which small shifts in demand ripple through supply chains to cause wild swings.
The complexity of modern global supply chains
and the fact that this bullwhip effect has played out across countless
industries has made it a fiendishly difficult problem to solve. The issue is
not just a shortage of semiconductors, or shipping containers, or any other
single item. It is shortages of all these things crashing together in ways that
make the feeling of scarcity and shortages more intense.
More power for workers does not necessarily
make workers happy.
The tension between soaring demand and
pandemic-limited supply showed up in the labour market in 2021 as well. The
result was that workers were in command to a degree not seen in at least two
This showed up across multiple dimensions.
Wages have been rising rapidly. Companies have been forced to be more creative,
flexible and aggressive in attracting a workforce. The rate of people quitting
their jobs soared. After two decades in which employers were mostly able to
have their pick of workers, the tables had turned.
And people hated it.
That is an exaggeration, of course. The Great
Resignation is real, and plenty of people have taken advantage of this moment
to secure a better, more rewarding employment arrangement. But in the
aggregate, people view the state of the economy as horrendous.
In a Gallup poll in early December, 67% of
adults said the economy was getting worse. Overall economic confidence matched
its lowest levels from the early days of the pandemic and was lower than it was
in the very weak economy of 2010 and 2011.
Some of this is surely tied to the fact that
prices are rising more quickly than average wages, which means an average
worker’s purchasing power is declining. Wage gains have been highest, in
percentage terms, in lower-paying industries. In effect, hourly workers have
been securing raises, while middle-managers and white-collar workers are, on
average, losing significant ground.
Moreover, while labour shortages are
empowering for many workers, they also cause their share of hassles. For every
worker who quits for a higher-paying job, there are workers asked to cover the
shift and a middle manager struggling to find a replacement.
People like having more agency, sure, but
labour shortages have also made their lives worse in their roles as managers
and consumers — and it shows in the public opinion data about the economy.
People really, really, really do not like
For Americans younger than 50 or so, inflation
is something you read about in history books or in articles about other
countries. At least it was this time a year ago.
That changed abruptly in 2021, for reasons
involving the economic dynamics discussed above. Even if the rate of inflation
comes down in 2022 — if prices rise more slowly — it is readily apparent that
inflation is weighing heavily on Americans.
It is easy to say the discontent is overblown:
In theory, at least, inflation creates both winners and losers. But whether an
individual is better or worse off can depend on whether that person has secured
one of those big wage increases that the tight labour market has allowed.
It also depends on the mix of things people
buy — for example, whether they needed to purchase a car this year or not (a
more expensive proposition). It matters whether they owe money at a fixed
interest rate and therefore get the luxury of repaying their debts with dollars
that buy less.
But 2021 has made it clearer why inflation is
less of a micro story about how higher prices affect individuals and more one
of generalised discontent.
For one thing, this inflation surge has
manifested itself in ways beyond those easily measured — in poorer customer
service because of labour shortages, less selection on store shelves and more
hassle planning Christmas gifts far ahead of time.
For another, during a pandemic and a time of
profound polarisation, high inflation adds to the sense that the world is a
chaotic mess and will only get worse.
And finally, it is natural human psychology to
view the negatives of inflation (higher prices for consumer goods) and its
positives (higher wages) differently. That pay raise was money I earned fair
and square; that higher grocery bill is an affront done to me by powerful
forces beyond my control.
All that speaks to the central challenge for
economic policymakers in 2022. For all the progress the economy made in 2021,
it felt like a period of scarcity and want, whatever the growth numbers say.
Achieving better vibes in 2022 depends on making it a year of abundance.
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