Why so glum (part 2)
In 2021, I predicted that the mood of the public would become increasingly gloomy, partly due to the removal of stimulus. This past June, I cited a Michigan survey that showed record low consumer sentiment.
A new article in The Economist cites evidence that this phenomenon is affecting most OECD countries, and provides some reasons.
The Economist notes that sentiment is even worse than what a model would suggest based solely on the inflation figures, and cites a number of factors including slow productivity growth. But this caught my eye:
The second relates to the comedown from the stimulus bonanza. In 2020-21 rich-world governments doled out trillions of dollars to households, boosting disposable incomes by an unusually large amount. This year governments have largely stopped the handouts. Average disposable incomes are now falling, even without accounting for inflation. Nobody likes that.
The third relates to the stimulus bonanza itself. A new working paper by Ania Jaroszewicz of Harvard University, and colleagues, finds tentative evidence that people who get modest cash payments of up to $2,000—the sort of amounts given out during the pandemic—actually become unhappier. These payments are not big enough to be life-changing, and may simply highlight what recipients are unable to afford. The fiscal response to covid, it seems, has a sting in its tail.
I am becoming more and more convinced that much of the fiscal stimulus was a mistake. Even if it made people happier (which seems increasingly doubtful), society will have to pay a price over the next few years in terms of painful austerity. Once again, there are no free lunches.