To see why floating voters remain disappointed and ready for political change, consider how things looked for middle- and low-income people in January 2021. Although the world was shut down, relief programs such as generous unemployment benefits mitigated the damage. Approximately 70 percent of recipients were earning more than they could have earned by working. Low-income households were able to increase consumption, while middle-income households saved and paid down debt. By the end of the pandemic, there was a notable decline in the number of households reporting that they could not easily cover an expense of $400.
Households not only could breathe a little easier, but they could also dream bigger, and this led to the so-called Great Resignation. Thanks to the financial cushion, workers can finally leave a job they hate, take the time to retrain for a better job, perhaps another job, or perhaps just take a mental health leave or early retirement. Now you can find it.
They felt dizzy until inflation ate away at their savings.
As Matt Yglesias pointed out in the latest edition of his newsletter, this was bound to happen. Everyone had more money, but because they weren’t actually producing more, consumers were effectively locked into bidding wars for a limited supply of goods and services. Ta. Much of their wealth was then consumed by the resulting inflation.
If the baseline was pre-pandemic, the situation for these people is not actually worse now. In fact, apart from inflation, they are objectively better off in many ways. But if your baseline is what they thought was possible in January 2021, even if they still had some potential. Extra Their savings are essentially lower than they were three years ago. They probably still have a job, but it’s not as easy to find a new job as it was a few years ago.
And, of course, “aside from inflation” is a pretty big digression. People really hate inflation, even if wages go up to compensate. As economist Stefanie Stancheva suggested in a paper presented at a recent Brookings Institution conference, this is partly because rising wages are due to our own efforts, while rising prices are due to others. This is because there is a tendency to That’s partly because inflation affects some people more than others. Not all incomes rise enough to offset inflation. And that’s partly because the Federal Reserve doesn’t like raising interest rates, which it uses to curb inflation, causing prices for debt-financed goods like cars to soar. Rising interest rates are also causing a lock-up in the housing market as people continue to use old 3% mortgages.
When asked when things will return to normal, many people think of the housing market. Of course, they’re not counting on pandemic-extraordinarily cheap mortgages, but they’re curious to know when they’ll be able to get a mortgage again at an affordable rate, at least for less than 5 percent. thinking.
And they don’t like my answer. “Maybe never?” Maybe what they think is normal is actually not.
Perhaps the Fed’s current struggle to bring inflation down to 2% is more normal than it was in the pre-pandemic decade, when the Fed had its money printers “full stan” and still frequently failed to hit inflation. You could say that. Up up to 2 percent. Before the global financial crisis, when real interest rates on government debt were reduced to virtually zero, people were willing to take home loans at 6%. In the 1990s, people thought he had 7.5 percent pretty decent.
The reason it feels unusual now is because most of us have spent our entire adult lives living for 40 years when inflation was falling around the world and interest rates were falling with it. Because I have lived. This is largely due to improvements in central bank policy, which is why we trust the Fed to get things back under control. However, central banks may have received significant help from globalization, market liberalization, and other trends that reduce inflationary pressures. At the same Brookings conference, economists Hassan Afrouzi, Marina Halak, Kenneth Rogoff, and Pierre Yared offered reasons to believe that these trends may now be reversing.
An aging society and high debt due to the pandemic could tempt governments to run large budget deficits, triggering inflationary pressures. Globalization is stalled by protectionist politicians and geostrategic conflicts. Maintaining price stability may require a more aggressive and hawkish monetary policy than a few years ago, which would be a negative. Central bankers may face political and economic pressure to increase inflation.
The best defense against this pressure is to strengthen central bank independence, but of course politicians seeking to promote inflation may want to go in a different direction.best protection against that The simple fact that President Biden’s current polling reveals may be that people really, really hate inflation. But then they won’t be excited about aggressive interest rate hikes or job losses either. It is difficult to know exactly what will happen if such trade-offs become more commonplace.
