To see why swing voters might still be disappointed and ready for a political change, consider what things looked like to middle- and lower-income folks in January 2021. The world had shut down, but relief programs mitigated the damage, including unemployment benefits generous enough that about 70 percent of recipients were making more than they had by working. Lower-income households had been able to increase their consumption, while middle-income households saved and paid down debt. By the end of the pandemic, there was a noticeable drop in the number of households reporting they couldn’t easily cover a $400 expense.
Households not only breathed a little easier but also could dream bigger, and this culminated in the so-called Great Resignation. Thanks to their financial cushion, workers finally could leave workplaces they hated and take their time finding something better, maybe retraining for a different job, maybe just taking a mental health break or early retirement.
It was a heady feeling, until inflation ate their savings.
This had to happen, as Matt Yglesias pointed out in a recent edition of his newsletter. Everyone had a lot more money, but we weren’t actually producing more stuff, so consumers effectively got into bidding wars for the limited supply of goods and services. Then, a lot of their wealth was consumed by the resulting inflation.
These folks aren’t actually worse off today, if your baseline is pre-pandemic; in fact, aside from inflation, they’re objectively better off in many ways. But if your baseline is what they thought was possible in January 2021, well, even if they still have some extra savings, they have less, in real terms, than they did three years ago. They probably still have a job, but it’s not as easy to get a new one as it was a couple of years ago.
And, of course, “aside from inflation” is a pretty big aside. People really hate inflation, even if their wages rise to offset it. In part, this is because they tend to attribute wage increases to their own efforts but blame price increases on someone else, as economist Stefanie Stantcheva suggested in a paper presented at a recent Brookings Institution conference. In part, it’s because inflation affects some more than others; not all incomes rise enough to offset inflation. And, in part, it’s because they hate the higher interest rates the Federal Reserve uses to control inflation, which supercharges the cost of debt-financed goods such as cars. Rate increases have also caused the housing market to lock up, as people squat on their old 3 percent mortgages.
The housing market is often what people are thinking about when they ask me when things will get back to normal. They don’t expect the absurdly cheap mortgages of the pandemic, of course, but they’d like to know when they’ll be able to get something reasonable again — at least under 5 percent.
And they don’t like my answer, which is: Maybe never? Maybe what they think of as normal actually isn’t.
Arguably, the Federal Reserve’s current struggle to get inflation down to 2 percent is more normal than the decade preceding the pandemic, when the Fed turned the money printers to “full stun” and still frequently failed to get inflation up to 2 percent. Before the global financial crisis, which slammed real interest rates on government debt down to effectively zero, people were happy to get a 6 percent mortgage. Heck, in the 1990s, people thought 7.5 percent was pretty decent.
The reason it doesn’t feel normal now is that most of us have lived our entire adult lives during a four-decade period in which inflation was falling across the globe — and interest rates along with it. This was thanks in large part to improved central bank policies, which is why we trust the Fed to get things back under control. But central banks might have had a lot of help from globalization, market liberalization and other trends that reduced inflationary pressures. At the same Brookings conference, economists Hassan Afrouzi, Marina Halac, Kenneth Rogoff and Pierre Yared presented reasons to believe those trends might now be reversing.
Aging societies and a mountain of pandemic debt will tempt governments to run big deficits, which can create inflationary pressure. Globalization has stalled, because of protectionist politicians and geostrategic conflict. Maintaining price stability might take more aggressively hawkish monetary policy than it did a few years ago, and that will hurt. Central bankers might face political as well as economic pressure to inflate.
The best protection against that pressure is stronger central bank independence — though, of course, politicians looking for an inflationary boost might try to move in the other direction. The best protection against that might be the simple fact, revealed in President Biden’s current polls, that people really, really hate inflation. But then, they won’t be thrilled with aggressive rate hikes or unemployment, either. It’s hard to know exactly what will happen if such tradeoffs become more normal.
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