The black box economy
May 17, 2021 Vox
The pandemic economy has been strange and unpredictable from the get-go.
Throughout the past 14 months, the twists and turns have been surprising: The housing market boomed, the stock market soared, people got into day trading, everyone hoarded toilet paper, and lumber became a must-have. There’s been widespread disagreement about how much support from the government was needed, whether the country was doing too much or not enough, or whether help would come at all. We won’t know whether the country overshot or undershot the response for years, and there’s still uncertainty about what’s happening in the labor market, prices, and other areas. And the prevailing theme has been one that has nothing to do with the economy directly: As long as Covid-19 isn’t under control, the economy isn’t either.
“Having been a forecaster for 10 years, we were surprised all the time, because nobody has a crystal ball and particularly if you just pull out one data series, one month, there’s just no way,” said Claudia Sahm, a former Federal Reserve economist and now a senior fellow at the Jain Family Institute. “It’s going to be a wild ride; the data through the end of this year, they’re going to be tough.”
The country and the world are staring into a black box of uncertainty on the economy. It’s frustrating, but it’s also inevitable. Anyone who says they know exactly what is going on in the economy right now is lying. The same goes for anyone who says they know what’s going to happen next.
“Because of the unique nature of this crisis, there are going to be some swings,” said Mike Konczal, director of macroeconomic analysis at the Roosevelt Institute. “In a year, they’re going to be trivia questions, but right now we’re obsessing about them.”
Few people will probably remember two years from now that the price of used cars and trucks went up by 10 percent in April.
We know that the economy is different now than it was a year ago and that it will be different a year from now. What’s not clear is exactly how. And what we need now — including economists, experts, and policymakers — is the intellectual humility to recognize that’s the case.
“At this point, most things should be presumed temporary until proven permanent,” said Jed Kolko, chief economist at the jobs website Indeed.
It’s unnerving to admit what we don’t know, and the pandemic has been a real exercise in that. But after so long of staring into the abyss, maybe it’s time we embrace it.
The Bureau of Labor Statistics recently reported that the US economy added 266,000 jobs in April, far below the 1 million jobs economists expected, leaving many people shocked. The number was so shocking that CNBC reporter Steve Liesman double-checked it live on air. Nick Bunker, an economist at Indeed, wrote that it “might be one of the most disappointing jobs numbers of all time.”
Much of this is a question of expectations. Many economists have anticipated the labor market to bounce back quickly, and with the country still 8 million jobs from where it was pre-pandemic, a quarter-million-jobs-a-month recovery isn’t going to cut it. But one month of data isn’t really enough to definitively say what’s happening with jobs and workers; April could be a blip, or it could be a sign of an ongoing ominous trend. Many economists and experts are trying to extrapolate from it, but they’re also the same economists and experts who didn’t see it coming.
There are some things we do know: Employers are posting more jobs, and there is a growing demand to hire. We know that more people are getting vaccinated, and as that happens, hopefully, concerns about contracting Covid-19 will fade. We also know that caregiving is still a burden that many working parents face, and with the school year ending, taking care of kids and working is tough to balance. For some families, going back to work right now might not be worth it. The entire labor situation just is out of whack.
“The economy is reopening and restarting in a way that we really have never seen before, and we know that’s not all going to happen in sync,” Kolko said. “The rate at which employers become more eager to hire won’t match exactly the rate at which job seekers are more eager to start working.”
We also may not yet have a clear sense of what, exactly, just happened. In the April jobs report, the BLS also revised its numbers from previous months and said that the US actually added more jobs in February and fewer jobs in March than it initially reported. The situation is still fluid. Konczal pointed out that monthly revisions to the jobs report — the changes the BLS makes to its estimates of prior months — have been double to triple this year what they have been on average in the past 40 years. “The BLS is trying very hard in very difficult circumstances to get accurate surveys, but it is hard work.”
Some business groups, economists, and politicians have seized on the jobs numbers to push their own political priorities. The Chamber of Commerce, for example, called for the US to end expanded unemployment insurance benefits after the April jobs report, arguing that the extra $300 in weekly benefits is keeping people out of the workforce. A handful of states, all run by Republicans, have already announced their plans to wind down expanded unemployment programs next month.
Many employers now, and after every economic downturn, complain they can’t find workers and that the social safety net is keeping people on the sidelines. Progressives, meanwhile, insist that expanded unemployment isn’t keeping anyone out of the workforce at all, and if employers want people to take jobs, they should pay more.
It’s impossible to parse exactly what is motivating workers at the moment, and what is disincentivizing potential employees and to what extent. Unemployment insurance might allow some workers to rethink their priorities a little, but that doesn’t mean that rug should be pulled out from under them.
“There’s always this uncertainty, and it takes some time to get enough data to form a narrative,” Sahm said. “A complex phenomenon has complex causes.”
Beyond the basic question of what’s going on in the economy, how permanent or fleeting is it?
Take, for example, inflation, which has been creeping up in some areas. The Consumer Price Index (CPI), which measures the average change in prices paid by consumers for things like food, clothes, housing, and transportation, ticked up by 4.2 percent in April compared to a year ago. And in some areas, such as gas and used cars, prices have gone up quite a bit. But the broader question on inflation — and the one the Federal Reserve is focused on as it tries to figure out its next steps on the economy — is whether that inflation is transitory or, to put it more plainly, temporary. Prior to the pandemic, inflation was running confoundingly low in the US economy, and economists were puzzled by why it wasn’t going up. Early on in the pandemic, the economy actually saw some deflation, meaning prices went down. Now, many economists say it’s okay to have some inflation, within reason, and they believe it will be short-lived.
“An episode of one-time price increases as the economy reopens is not likely to lead to persistent year-over-year inflation into the future,” said Fed Chair Jay Powell at an April news conference.
Again, it depends on how high inflation is and how long it lasts.
“The progressive economic agenda of spending through a downturn never promised zero inflation. It said the inflation there would be moderate and manageable,” said Lindsay Owens, interim executive director of the progressive think tank Groundwork Collaborative.
The persistent doubt of what is temporary and what is permanent in the burgeoning post-Covid-19 economy is hardly contained to inflation. It often plays out in high-level economic debates, but it’s easy to observe in day-to-day life, too. Plenty of people still don’t know when they’re going to go on vacation again, and when they do, where they’ll be comfortable going. Return-to-office plans are still being hatched, and what the future of work looks like is in flux. Whether or not white-collar workers wind up working from home more doesn’t just impact their companies, it also affects the businesses and workers that support them.
A lot of what’s going on in the economy isn’t going to show up in the data, and if and when it does, it won’t happen for a while. “It’s just this different world, and in this world we’re in, trying to address things at the scale that we are may mean that we don’t have the best tools to watch in real time, or the way we talk about things aren’t the right way to talk about things,” Konczal said.
Perhaps a prime example of a rather unexpected development — and one of uncertain durability — is the housing frenzy. Early on in the pandemic, some people expected that the housing market, like many parts of the economy, would struggle amid mass unemployment and widespread uncertainty. Instead, prices didn’t just hold steady, they soared. Preexisting trends, such as low mortgage rates and a cohort of home-ready millennials, combined with a pandemic-induced desire to get more space and out of the city, caused a surge in demand. And the supply just wasn’t there. Housing accessibility is not going away as a problem in the US, but the current mania for a single-family home that’s pushed prices so high could fade. Or maybe it won’t. Some economists predicted it would cool off months ago.
We shouldn’t overlook the curious developments in the economy that have been positive and heartening, either. An unprecedented amount of support from the government, from expanded unemployment to stimulus checks, has helped millions of people and kept them from slipping into poverty. Savings rates increased during the pandemic; credit card debt is falling to the point that it’s actually making life harder for banks. People have paused their student loan payments and been able to relax, a little, about the prospect of losing their homes. Part of what makes guessing what will happen in the economy next is that the country has never had a response like this before — no one knows what this amount of stimulus will do, or how quickly or how slowly. Or what will happen when some supports go away.
“The raw ability of the government to stabilize incomes, I think was remarkable given how weak American social infrastructure is,” Konczal said. “America can actually do things.”
Nothing about the past year and change has been easy or exactly expected. In some ways, things have been better than anticipated — the vaccine arrived earlier than many believed possible, the economic downturn wasn’t as long and deep as expected, and the government stepped in multiple times to deliver much-needed support. In other ways, it’s been worse — hundreds of thousands of people have died, the economy has experienced a number of fits and starts, and an uneven recovery has taken hold. In other ways, the economy has just been, well, kind of odd (who could have expected a shortage of chicken wings, or a cyberattack on an oil pipeline?).
In retrospect, many of the developments in the economy make sense. Of course people bored at home decided to renovate. Of course stimulus checks would make people resort to short-term lenders a little less. The precariousness of domestic and global supply chains is hardly new, nor is the country’s inadequate child care system.
“To the extent we’re going to see a problem, it likely reflects longstanding problems we knew were problems before Covid,” Konczal said.
And Covid-19 exacerbated a lot of problems — problems we’re still reeling from and probably will be for a long time. It felt like the world fell apart in 2020, and it’s going to take a long time to put it back together.
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