MainStreet Macro: Three lessons from history

This is a busy week for the economy. Not only are key members of the Federal Reserve meeting to discuss the hot topic of inflation, we’ll also get a report card on economic growth in the first quarter. 

What happens next for the economy is uncharted. We’ve never seen such a collision of low interest rates, massive fiscal stimulus, easy money and wealth disparity. We don’t know if the vigorous pace of growth will continue in the second half of the year, or even whether all sectors can recover if it does.

Economists have a saying about what our economy just experienced – it’s not the speed that kills, it’s the sudden stop.  That’s exactly what happened, a sudden an abrupt stop of a 10-year expansion in which 22 million jobs were lost in a two-month period, erasing all the job gains in the previous decade.  We’ve seen economic sudden stops in emerging countries, but never in an advanced country and never at a global scale.

Given the unprecedented global impact of the pandemic, what can Main Street expect from the economy in the new normal? Will it be a mere reset of the old normal or something different?

There are no shortage of questions about the future. My crystal ball is still on backorder, but here are three lessons history teaches about economic growth.

1. The economy’s components move in tandem, but not in lockstep

During expansions and contractions, key components of the economy tend to move in the same direction. This is known as the business cycle.  Recessions tend to be much shorter than expansions, but there’s nothing formulaic or precise about how long either lasts.

Before the pandemic, the U.S. was in year 10 of its economic cycle, the longest expansion in the country’s history.  We don’t know how long the next expansion will last, but history shows that as the economy grows, inflation and employment also will grow, just not in lockstep.

That caveat is important in assessing the dynamics of the current economy. Currently, the overall recovery is outpacing job gains, for example, and productivity is high. But with fewer workers generating more output, the economy becomes less equal. That leads us to Lesson Two. 

2. The pie gets bigger, the slices get smaller

Over the last decade, wealth in the U.S. has nearly doubled, to $122 trillion in the fourth quarter of 2020 from $63 trillion for the same period in 2010.  Yet the share of that wealth held by the middle class has fallen to 28 percent from 30 percent.

This pattern of unevenly dispersed economic gains is part of a historical trend that has been exacerbated by the disproportionate impact of the pandemic on certain workers and consumers. Thirty-five percent of workers making less than $15 an hour were laid off or furloughed due to the pandemic, according to ADP research.

This compares to job loss of just 17 percent among workers making more than $30. At the same time, assets held primarily by the wealthy, such as stocks and vacation homes, have soared in value since the pandemic began.

Source: St. Louis Federal Reserve Economic Research

3. Growth comes from innovation

Open any macroeconomics text and you’ll find mention of one key catalyst of growth – technological progress. (If you don’t have a textbook lying around, I have several I can loan you.

Seen through this lens, many drivers of the current economic recovery were well in place a decade ago – automation, digital transformation, virtual work, and e-commerce. 

In other words, the pandemic didn’t cause these trends, it just accelerated their adoption. The development bodes well for standards of living and economic well-being over the long term.

My Take

Conventional wisdom holds that the economy is expected to see strong growth in 2021. The now-widespread administration of vaccines, consumers itching to spend on long-prohibited pastimes such as travel and manicures, rock-bottom interest rates encouraging investment, and a huge, federal-powered ATM of deficit spending likely will converge this year to eclipse the lackluster 2.3 percent average growth rate of our last decade-long expansion.

Still, what comes next is anyone’s guess. History tells us what could happen, but not what will happen.

Another lesson from history is that the normal state of the economy is one of constant change, reluctant adaptation, and jagged progress.  The challenge of growth – as it has been throughout time – is how to make progress inclusive and widely shared.

To put it plainly – there has never really been a “normal” for the economy. Economic revolutions are always occurring. Monetary policy is transforming. Education and science extend what is possible. Social movements demand increasing institutional accountability.  Natural weather events and unnatural wars upend best-laid plans. New markets and products are discovered. Fiscal policy moves between competing regimes. Globalization reframes winners and losers. 

And now a pandemic has ushered in a new way of working and engaging with other economic actors in commercial transactions, expanding the digitally-equipped workforce and creating a technology-dependent consumer base.

Even my crystal ball, if it ever arrives, would be hard-pressed to give us answers.