US Economic Unhappiness (Again)
People in the United States continue to feel unhappy despite improving economic numbers. It’s showing up in all the recent political polls.
Ignoring all the other troubles that weigh on our minds, from wars to politics (or maybe I repeat myself), we just had a post-pandemic tidal wave of government spending and inflation. For my general view on the effects of these things, see my earlier column from January this year: Why We are So Unhappy Today.
Today I add to that column with something of an update as I hear reference in conversations to Americans having finally depleted their pandemic savings.
Private Savings
“Why are people unhappy now? The economy is growing and inflation has finally fallen.”
The answer, I believe, can be demonstrated in a few graphs. The first is private savings. You might have heard that private savings rose dramatically during the pandemic. That’s true and is a result of two things. First, we went out and bought fewer things, especially services. This increased our savings. Second, the U.S. government transferred tremendous amounts of money directly to households during the pandemic.
This is a graph of net private savings relative to GDP dating back to 1948 or so. Can you spot the pandemic? Yep, the GIANT spikes at the end. Would you call that “historically unprecedented in post-WWII America”? The answer: yes.
The key to understanding unhappiness, and especially to explaining why it’s so bad now, is to notice that the level of savings post-spike is less than it was pre-spike. By every measure, the savings we built up and received from the government during COVID has been spent.
Our extra savings is gone, and now we’re living off our normal incomes and budgets again but in a world where prices are 20% higher on average. That’s a kick in the gut.
Real Disposable Income
This is a graph of price-adjusted, after-tax income (i.e., real disposable income) for the last 10 years. The black line is a hand-drawn trend line from 2015 until today.
Two things should jump out: first, the two spikes, and second, that real disposable income (blue line) has been below trend (black line) since late 2021.
The spikes did three things. First, they helped us all feel wealthier during COVID than we really were. Second, they led to massive savings. And third, they generated inflation through a massive stimulation of aggregate demand.
We felt richer, saved more, and consumed more. But we weren’t really richer because the economy didn’t magically learn how to generate extra real net wealth or learn to supply that many extra goods and services overnight. That is, productivity didn’t change. So, after the 2020-2021 period of fiscal-monetary inebriation, we woke up “the next day” with a hangover.
That’s where the second point comes in. Since late 2021, real disposable income has been below where it should have been if the pandemic had never happened. This means that we realized that we aren’t as well off as we expected to be. Maybe call it an inflation-and-low-real-income hangover.
The massive stimulus caused a delusion that lasted for a few years. We didn’t notice we were actually getting poorer. We didn’t notice because we got extra money in our pockets, delayed some taxes, delayed student loan payments, delayed rent and other payments and so on. It felt good, but we all knew in the back of our minds that nothing comes free in life.
Putting the Two Into Perspective
This is another graph of real disposable income (red line) and net private savings (blue line), this time indexing both to 100 on January 1, 2019, for presentation purposes.
Net private savings show that we saved most of that initial stimulus spike and much of the second one as well. Perhaps we spent a bit more of that second round of stimulus, which would help explain the subsequent inflation.
Now look at what happened next. The two lines crossed around July 2021, and real savings (blue line) declined, then stabilized at a level below its old 2019 level. Real income (red line) spiked a little and then flatlined.
This helps explain for me the “why now” piece. From about July 2021 onward, we had about the same real income as pre-pandemic, but inflation was rising, so everything cost more. Psychologically, we saw and knew it but didn’t fully feel it because we could still buy what we wanted from our extra savings. Again, we felt richer than we really were. This kept both the delusion and inflation alive.
Now, we are living on our own budgets. Our real incomes have not risen much in five years (since 2019), and everything feels more expensive due to inflation.
Conclusion
We are finally feeling the pain and facing the true reality. It will take some time to adjust to this. It’s like borrowing money to go on a tropical island vacation. It’s great, and the free drinks at your hotel resort and the long, relaxing days on the beach make you forget how hard work is. But then you return home, return to work, and you have a pile of debt to pay off.
That’s where we are today in America and many countries around the world, post-pandemic. It’s no surprise, then, that when asked, people say they are unhappy. I do too a few weeks after my vacation, right around the time the credit card bills arrive in the mail.
Inflation is particularly harsh and divisive. It adds to inequality across income groups in society. The wealthy are harmed the least and they can pay teams of accountants and lawyers to minimize their inflation and tax burdens. The poor are harmed the most and have the least ability to protect their livelihoods.
What is needed now are pro-growth policies and significant fiscal constraint in the United States. That is the only way to help the lowest-income people and everyone else in a non-inflationary and sustainable way so we can all be better off. I’ll have more to write on that soon.
Thank you for reading.