The Krugman Boom: Don’t Bank on It

November 19, 2020

I have largely been in agreement with Paul Krugman in his assessment of the economy over the last dozen years or so, but I think in his latest column he let the promise of a post-Trump era get the better of him. Krugman notes that the distribution of effective vaccines should allow people to return to their normal lives.

He argues that this will lead to a spending boom, as consumers have accumulated savings through the slump and will now be in a position to spend lots of money. As a model he points to the boom in 1983 and 1984 after the Fed lowered interest rates.

While I have not been one of the doomsayers predicting economic collapse, I can’t be as optimistic as Paul on this one. First, just to be clear, Krugman does not at all question the need for immediate and substantial stimulus. In the next few months, with the pandemic spreading largely unchecked until vaccines become widely available, millions of people will be thrown out of work as restaurants, bars and other businesses in the service sector are either forced to close or see demand collapse even if they remain open.

These people will need unemployment benefits, protection from eviction, and other support until the labor market improves. State and local governments will also need massive aid to avoid a further round of layoffs and to provide essential services, including setting guidelines and rules for safe re-openings.

But getting beyond this period, once the vaccines have allowed us to return to normal, will there be a spending spree? Krugman is right about the state of people’s balance sheets. The people who have stayed employed have been doing well. The government gave them $1,200 checks, many have refinanced mortgages often saving a percentage point or more in annual interest. That’s $2,000 a year for someone with a $200,000 mortgage. And, many have been saving money as a result of not commuting to work, eating out at restaurants, or spending on other services.

Still, I don’t see this as a 1983-84 type spending boom for the simple reason that the sectors that drove that boom, housing and car buying, have not been depressed. The boom in those years followed large contractions in home buying and construction, as well as car buying, which were the result of the Fed’s high-interest rate policy.

At the trough of the recession in the third quarter of 1982, residential construction was down more than 40 percent from its peak in 1979. New car sales were down by more than 15 percent. The recovery was driven by the reversal of these drops. By the second quarter of 1984, residential construction was up almost 70 percent from its level of two years earlier. New car sales were almost 50 percent higher than they were in 1981. This was the basis of the 1980s boom.

We can’t tell any comparable story today. Both housing and car sales have done very well through this downturn. Residential construction in the most recent quarter was actually more than 5 percent higher than in the fourth quarter of 2019. Car sales were almost 8.0 percent higher. Clearly, there is no basis for expecting a boom based on pent-up demand in these sectors.

The question is whether we should expect a huge boom in other consumption spending. That doesn’t seem likely to me. We will see people return to restaurants, but do we think they will be eating meals out every night? People will go to gyms and movies again, but this will not create the sort of boom we had in 1983 and 1984. If you look at the various categories of consumption spending, it’s very hard to see anything like the booms in housing and car buying we had after the 1981-82 recession.

So what’s my story? I see many of the changes forced by the pandemic as being permanent. First and foremost, many of the people who were forced to work from home will continue to work from home. Some may move away from the cities where they are working. (We are already seeing this.) We are also likely to see less business travel as meetings and conferences are held over Zoom. We’ll see more telemedicine and, hitting close to home, less in-person classes in colleges and universities.

In many ways, this is great news. People will save hundreds of hours a year on commuting. We will also see large reductions in greenhouse gas emissions by eliminating unnecessary travel. (This will be recorded as a drop in GDP, which is yet another case where GDP is not a good measure of well-being. In effect, we are eliminating work-related expenses that provide little welfare to anyone. I discuss this issue more here.)

The downside in this story is that many of the jobs that were dependent on supporting this commuting economy will not be coming back. We are talking about millions of lost jobs in restaurants, gyms, and other businesses that serve the people who come into the city to work each day. These people will not easily find new jobs.

It is also likely to be the case that the finances of cities like New York, Boston, and others seeing major reductions in their commuting population will be badly strained. This means that they will lack the resources to help displaced workers get new jobs in areas where they are needed, like health care, child care, and clean energy.

The really bad part of this story is that the displaced workers will be overwhelmingly women, Blacks, Hispanics, and others who are disadvantaged in the labor market. These groups had been doing relatively well as the labor market tightened between 2014 and 2020. These gains evaporated with the pandemic. These groups may see this pain enduring long into the future.

So, this is a story of worsening inequality. Large sectors of the population will be doing just fine, but those at the bottom will be getting kicked in the face. I expect a Biden administration will try to help this displaced workforce, but the Republicans in Congress will be celebrating the pain in “Democrat” cities.

I can’t say how this will shape elections in 2022 and 2024. The people who are doing well may be happy and vote for Biden and the Democrats. But if the economy shapes up like I fear, this will not be a story worth celebrating.        


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