Understanding Our Strange Economy

The NYT has an insightful article that helps explain Why Markets Boomed in a Year of Human Misery. Based on national accounting data, it reveals a complicated economic picture where policy, markets and consumer behavior intersected in unexpected ways. 

It begins with an analysis of the National Income and Product Accounts, which captures how Americans are earning and spending. What it shows is that, relative to the same period in 2019, personal income of Americans (in aggregate) actually increased during this historical pandemic by $1 trillion!

And that was due mainly to Congress and the Trump Administration's surprisingly swift and effective response to the Covid-induced national lockdowns. 

The CARES Act and stimulus checks contributed to $775 billions of additional income. And because of the Paycheck Protection Program (PPP), businesses saw a $29 billion relative gain in income rather than an estimated $143 billion loss in its absence. (Government works! Yay!)

But what about the economic fallout from the historic rise in unemployment in March and April? The cruel reality of income inequality comes into play here. Most of the unemployment was concentrated in lower paying jobs that couldn't be moved online. As the article notes: "the arithmetic is as simple as it is disorienting. If a corporate executive gets a $100,000 bonus for steering a company through a difficult year, while four $25,000-per-year restaurant workers lose their jobs entirely, the net effect on total compensation is zero." So, in aggregate, worker's compensation dropped just $43 billion over the Mar-Nov period, despite mass unemployment.

But this is just half the story. There were big changes in the spending side of ledger this year relative to 2019 as well.

Due to Covid, Americans spent $575 billion or 8% less this year on vacations and services like restaurants, movies, concerts and sporting events. This was modestly offset by increased spending on durable goods (like home office and gym equipment) and non-durable goods (like mineral water, stationery and clothes to look good on Zoom) by about $100 billion. And due to the Fed's interest rate cuts, households saved an additional $59 billion in interest payments.

So, in total American households spent $535 billion less in the Mar-Nov period in 2020 than in 2019.

This bears out Larry Summers' point that for many Americans the pandemic "reduced the ability to spend more than the ability to earn." That brings us to the third important component of the economy: Savings. Collectively, Americans earned more and spent less in 2020.

                                                        Savings = Disposable Income - Spending

or,                                                    Savings = +$1,030 billion - (- $535 billion) 

or,                                                    Savings = +$1,565 billion

So, what did Americans do with $1.56 trillion of additional savings? For one thing, they held on to more cash. Deposits at commercial banks are up ~20% since March. Others bought houses, causing housing prices to rise 8% nationally. Many others put money in the stock market, helping the S&P 500 rise 70% from the February lows to end the year up 16%. For the most daring (like the Robinhood day-traders) the stock market became a fun casino and stocks like Tesla its biggest slot machines.

To be sure the Fed played a key role in helping cut short a nasty bear market. Powell & Co. were instrumental in stabilizing financial markets in March when credit markets briefly froze and threatened the sustainability of the economic system. Yet, the dynamics around savings described above may have played a more sustained role in this wild stock market rally that left many puzzled and angry at perceived moral hazard...But who knows? And who knows how stocks will react once everyone gets vaccinated and returns to normal(ish) life. Does the savings trend reverse and money flow out of the stock market? Or are peoples' views of consumption and savings durably modified? 

And it's worth remembering the benefits of aggressive fiscal and monetary policies were not experienced equally across economic strata. Those who avoided major economic damage during the pandemic were largely the same people who were also doing better before it.