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Inflation, Unemployment and Omicron

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Ben Tafoya
February 6, 2022

The U.S economy has rebounded at an accelerated pace since the COVID-19 downturn of the late winter and spring of 2020. Figures from the Bureau of Economic Analysis show an upturn of economic activity of 1.7% from Q3 to Q4 of last year. This translates into an annualized rate of growth at 6.9%, which is high compared to the previous quarters and offers hope for a more generalized prosperity because of economic growth.

Unfortunately, the wage gains we see in an economic recovery have been eroded due to inflation. According to Bureau of Labor Statistics figures, average wages in the United States have declined over the course of the past year. Yet the distributions of wealth and income show continued concentration in the top cohorts. The Congressional Budget Office projects an increase in nominal income of 2.3% in the top 1% of incomes, while the middle quintile was at 1.1%. Once adjusted for taxes and transfers, the five-year projections look even better for the upper income percentile and very modest for the mid and lower levels.

We would typically expect that those incomes for the middle- and lower-income cohorts would rise as unemployment dropped. In 2021, the number of jobs increased by 6.6 million following the loss of over 9 million in 2020. This leaves us short over 2 million jobs to recover to where we were pre-pandemic, and we will need more to get back to trend. Yet, the Federal Reserve is on tap to pull back its monetary policy that supported the economy during the first two years of COVID-19.

Inflation has risen to its highest level in over 40 years. The combination of low wage growth—leisure and hospitality are an exception—and high inflation puts pressure on household budgets. Cost pressures on housing, gasoline and food will increase insecurity for workers and put pressure on all levels of government to help relieve some of the pressure. While policymakers are acknowledging today’s inflationary pressures, the increases in real estate values have persisted for many years and continue to translate into higher rents.

The pandemic has reinforced these patterns. While rents initially dipped at the beginning of the pandemic, they have continued on their pre-pandemic trend. The American Rescue Plan Act (ARPA) has authorized a variety of emergency housing programs to ease the problem. Yet these measures will not address the underlying cause of housing cost issues. For example, the National Low Income Housing Coalition identifies a shortage of almost 700,000 affordable housing units in New York State alone. As is to be expected, economic dislocations, such as those caused by the pandemic, deepen existing structural challenges for public policy.

Energy costs are also presenting challenges for average households. Average prices of home heating oil are up 46% this winter in New England. According to AAA, retail gasoline prices have increased a full dollar per gallon over the past year. This correlates with declining inventory of oil in the bellwether tanks of Cushing, OK. Worldwide trends are similar. With crisis over Ukraine threatening commercial relations between Europe and Russia, pressure has been placed on natural gas. Organization of the Petroleum Exporting Countries (OPEC) and its cooperating countries have plans to slowly increase production starting in March, but that may not be soon enough to blunt the inflationary trend. This will barely address the dramatic cuts in oil output after oil prices cratered in the spring of 2020.

After the end of Federal programs to support individuals and businesses through the CARES Act in 2020, and ARPA in 2021, it appears that further assistance falls to the states and localities. Potential actions include income tax cuts proposed by governors in California, Connecticut, and Massachusetts with proposals to cut state gasoline taxes in Illinois and Florida. But as always, if states cut revenues during flush times the question remains if they will have resources to keep needed services should the economy slow or move to recession.

Families with children have taken budget hits from the escalating costs of childcare as the increased childcare tax credit expired recently. Dependent care also ended with the expiration of the special provisions within ARPA. This will result in withdrawals from the economy as money from households goes to these areas, or intensifies what has come to be known as the Great Resignation and the workforce continues to shrink.

Through this period, those that have investment in the equities markets have done very well. The Dow Jones Industrial Average, a barometer of stock market activity, was up 18.7% in 2021 and the NASDAQ Composite Index was up 21.4%. The issue for 2022 regards how this prosperity can be more broadly based, and some measure of equity achieved. With the Federal Reserve promising to raise interest rates soon, there is always a concern that actions to lessen inflation will harm employment. It is a difficult balance, which is frequently done at the expense of average wage earners. Particularly considering the ongoing and uneven impact of the pandemic, it is time for action that raises average incomes.

Author: Ben Tafoya is an adjunct faculty member at both Northeastern University and Wentworth Institute. Ben is the author of a chapter on social equity and public administration in the recently published volume from Birkdale, Public Affairs Practicum. He can be reached at [email protected] or Twitter as @policyben. All opinions and mistakes are his alone.

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