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.
READER COMMENTS
Robert D.
Nov 6 2022 at 1:20pm
I don’t think there will be any sort of austerity during my lifetime. Politicians and government spending are like the scene from Dr. Strangelove where Major Kong rides the bomb, and I suspect the result will be much the same.
Scott Sumner
Nov 6 2022 at 2:44pm
It may not seem like “austerity”, but it will be austerity relative to a world where excessive debts were not incurred.
In any case, what happens after your lifetime is also very important to many people.
Spencer
Nov 6 2022 at 3:07pm
People were very happy with their stimulus checks. The problem is that the injection of new money wasn’t sterilized. Monetarism involves controlling total legal reserves. Paul Volcker destroyed monetarism.
The only tool, credit control device, at the disposal of the monetary authority in a free capitalistic system through which the volume of money can be properly controlled is legal reserves. The money stock can never be properly managed by any attempt to control the cost of credit. Interest is the price of loan funds. The price of money is the reciprocal of the price level.
As Dr. Richard G. Anderson (the world’s leading guru on bank reserves) wrote me:
“Spencer, this is an interesting idea. Since no one in the Fed tracks reserves…”
And Anderson reconstructed the St. Louis figures’ required reserves to conform to the DIDMCA (obfuscating what really happened under Paul Volcker).
Spencer
Nov 6 2022 at 3:14pm
The way to stop inflation is to raise reserve ratios and reservable liabilities. Anyone who has studied legal reserves should already know that. But as Anderson said, nobody tracked reserves. That’s what “Black Monday” was all about. It was also what caused the GFC, negative rates-of-change in legal reserves.
Spencer
Nov 6 2022 at 3:28pm
Paul Volcker destroyed monetarism. Monetarism involves controlling total legal reserves, not nonborrowed reserves.
Spencer
Nov 6 2022 at 3:46pm
Paul Volker Destroyed Monetarism.
Nick Ronalds
Nov 6 2022 at 6:59pm
With the Federal Debt now around 130%, depending on how you count it I suppose (a lot more if you include unfunded liabilities, e.g.) surely the price will be paid for longer than just the next few years. I’m thinking my grandchildren will be paying it in one way or another.
Andrew_FL
Nov 7 2022 at 11:33am
People are not disappointed by low productivity. People are disappointed by disappointing levels of output.
Scott Sumner
Nov 7 2022 at 12:52pm
Hmmm, I wonder if the two are related?
Andrew_FL
Nov 7 2022 at 1:59pm
Of course in general they are related. But productivity (GDP /hour worked) is not especially low right now. It is simply back down to trend from pandemic highs. And regardless of whether disappointing levels of output are caused by disappointing productivity or disappointing employment, it is output which consumers consume, not productivity.
Jose Pablo
Nov 8 2022 at 1:30pm
“Average disposable incomes are now falling, even without accounting for inflation”
Umm … if the stimulus were designed to “substitute” the loss of earnings due to the pandemic impact, now that this earnings are back (and with a vengeance since, for instance, nominal GDP in the US is significantly bigger than pre-pandemic and nominal GDP, not real, drives nominal disposable incomes “without accounting for inflation“) why are “disposable incomes without accounting for inflation” falling?
It should mean that the stimulus was way bigger than required to “just substitute” the lost (and now recovered) earnings, shouldn’t it?
James W Oliver
Nov 9 2022 at 4:30pm
Wasn’t it more relief/welfare than fiscal stimulus? Either way fiscal should only do relief/welfare, stimulus should be left to the fed except in the most serious of circumstances.
seer of things
Nov 9 2022 at 11:44pm
I don’t recall much discussion about why the CARES Act of March 2020 needed to include $1200 for individuals without regard to their employment situation. Contrast this to what happened in Canada where there was money given to replace lost income. Of course the obvious explanation is that 2020 was an election year in the U.S.. Once the precedent was set and promises made in the 2020 campaigns, there “had to be” more checks but the precedent opened the floodgate.
nobody.really
Nov 10 2022 at 12:53pm
According to Vox (emphasis added):
I’m reminded of George Bernard Shaw’s Pygmalion (1912), Act II:
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