After being ravaged by the COVID-19 pandemic, the United States is seeing its fastest economic growth in decades. Almost half of Americans are vaccinated, states and cities are beginning to reopen, and the labor market is close to pre-pandemic levels. However, there are unintended consequences of short-term, unchecked economic growth.
In a standard economy, the Federal Reserve tries to keep inflation at about 2% year over year. Every financial quarter, the Presidents of the Federal Reserve Banks try to determine how the prices of goods and services, known as personal consumption expenditures (PCE), will change over time. When the pandemic hit, the national GDP declined 32.9%, the worst quarter in US history.
According to the Bureau of Economic Analysis (BEA),this was caused by “decreases in PCE, exports, private inventory investment, nonresidential fixed investment, residential fixed
investment, and state and local government spending that were partly offset by an increase in federal government spending.”
Because of this, the Consumer Price Index increased 4.2% from April 2020 to April 2021. The Bureau of Labor Statistics reported that the increase is the largest since 2008 when the CPI rose 4.9%. In August 2020, Fed Chairman Jerome Powell announced that inflation would run slightly above 2% to support the ailing economy. This increase is partly because airline fares, hotels, and other products return to their previous levels.
Gargi Chaudhuri, head of Blackrock’s iShares investment strategy for the Americas, told Barrons that supply disruptions added to the transitory inflation. For example, car and truck rental prices have increased dramatically because of the shortage of chips. Almost every car manufacturer, including Ford, Jeep, Mercedes, Hyundai, and Subaru use these chips. In the medium term, Chaudhuri expects companies to prepare for supply disruptions, causing small inflation increases. “We don’t mean runaway inflation. We just expect it to move from a 1.5% to 2% level to something more like 2.5% to 3%.”
During the Jackson Hole Economic Policy Symposium, Powell stated that “many find it counterintuitive that the Fed would want to push up inflation. However, inflation that is persistently too low can pose serious risks to the economy.” CNBC’s Jim Cramer believes the central bank won’t interfere with growth until the US economy outperforms expectations.
A Natural Disaster
Recessions are almost impossible to predict in advance. They can be caused by stagnant wages, high unemployment, asset bubbles, and more. So economists use the yield curve to determine the economy’s health, representing the interest paid by different bonds and investment notes at specific times. Most yield curves look at three month, two-year, five-year, ten-year, and thirty-year benchmarks.
A standard yield curve means long-term bonds will have a higher yield than short-term ones. In a recession, short-term bonds will have a higher yield than long-term bonds, known as an inverted yield curve.
Because the COVID-19 pandemic was not a manufactured recession, the recovery path won’t look the same as previous recessions. Countries can hit a ‘liquidity trap,’ which happens when the interest rate is so low that printing money doesn’t aid the economy.
In 2008, former Fed chairman Ben Bernanke began aggressively printing money to no avail. As a result, the US was in a liquidity trap, making the Fed’s monetary policies useless. In 2009, former President Barack Obama enacted the American Recovery and Reinvestment Act, which altered the economy’s trajectory and offset the liquidity trap. As a result, the unemployment rate stayed at about 10% until April 2010, when it dropped to 9.6%. It took nearly six years before it was below 5%.
Congress followed those same steps in 2020, printing $2.4 trillion to battle the economic fallout of COVID-19. Those four stimulus packages were more significant than any other federal program in 2019, adding to the already massive US debt. According to the Congressional Budget Office, 2020 revenue was $3.4 trillion, and spending was $6.6 trillion. The federal deficit was 14.9% of GDP, and it doesn’t look like it’s going down anytime soon.
America’s economy is recovering to pre-pandemic levels, albeit painfully slowly. The Bureau of Labor Statistics reported unemployment fell to 5.8%, with sizable gains in hospitality and leisure, education, and healthcare. Despite this, there are still 9.3 million unemployed people, and the labor participation rate still sits at about 61.5%. Additionally, non-white Americans still have a higher unemployment rate than white Americans. For example, in May 2021, unemployment rates for Black and Asian Americans were 9.8% and 5.5%, respectively. White Americans had an unemployment rate of 5.1%.
The Brooking Institution reported that none of the 200 metropolitan areas they researched “managed to grow their economies, raise standards of living, and reduce gaps by income, race, and place consistently from 2008 to 2018.” And since non-white Americans are three times as likely to contract COVID-19, these disparities have only increased. There are several ways to combat these inequities, both short and long-term.
The first short-term solution is to make affordable housing an attainable goal for every American. Black Americans had a home ownership rate of 45.1% in the first quarter of 2021, the lowest of all measured demographics. White Americans had a home ownership rate of 73.8%, a staggering 28% difference. This discrepancy has existed for nearly 100 years.
The National Community Reinvestment Coalition has created a 20-year plan to increase Black homeownership to 60% in the next 20 years. “A focus on African American households over the age of 40 with credit scores between 600 and 700 and a median annual household income of $40,000 to $100,000 is a group that is vital to strengthening Black homeownership rates.” The NCRC also stated if three million more Black homeowners were added by 2030, the homeownership rate would be 57.5%.
The second, more long-term solution is baby bonds. This has been growing in popularity since it was introduced, and it’s a logical step to reducing wealth inequality. Baby bonds are simple. The government creates an investment account for infants based on household wealth. When they reach a certain age, they can use the money for whatever they see fit; college, creating a business, or a down payment. A hypothetical study by Naomi Zewde at the CUNY School of Public Health found that “it is mathematically and fiscally feasible to make substantial headway in reducing the generationally accumulated disparity in wealth that has burdened African American households throughout this country’s history.”
The US economy is returning to normal. But returning to a system that doesn’t benefit everyone is unacceptable.