Like many people, I put on some pounds during the pandemic. Not catastrophic — I kept working out, and I think my cardio fitness has held up. But I was doing a lot less walking than normal, and also, in retrospect, engaged in too much comfort eating.
So now I’m doing what has worked for me in the past: going hungry, with restricted calories, two or three days a week. This is not proselytizing — the best diet is the one you can actually keep to, and I just happen to have a personality more suited to brief self-inflicted spasms of suffering than to maintaining sustained self-discipline.
But why does intermittent fasting work, when it does? You might think that people would just splurge on non-fasting days, making up for the lost calories. Apparently, however, they don’t — there’s only so much you can consume before your stomach hurts, so people eat a bit more than normal after a fast day, but not enough to prevent weight loss.
Why am I providing you with what surely seems like Too Much Information? Because it is, I believe, relevant to how we should think about the economy over the next year or so.
Back in March, when Congress passed the $1.9 trillion American Rescue Plan, some economists — most prominently and vehemently Larry Summers, but he wasn’t alone — began warning that the plan would lead to dangerous inflation.
You might think that the spike in consumer prices over the past few months has vindicated these warnings, but actually what we’ve been seeing so far isn’t at all the story Summers and others were telling. Recent inflation has been all about spot shortages as the economy tries to recover from pandemic disruptions — surging prices of used cars, all by themselves, account for a remarkably large fraction of the past few months’ price rises.
This kind of inflation will probably be transitory. Lumber prices, which some view as a sign of things to come, have fallen. Wholesale used car prices appear to have leveled off. There are some indications that the shortage of computer chips is easing.
No, the story from the inflation worriers was about the risk of a much broader form of inflation. Consumers, they pointed out, were already sitting on a huge stash of savings — about $2.6 trillion, according to Moody’s — that had been built up during the pandemic, when they couldn’t spend because everything was locked down. In fact, savings rates during the pandemic hit levels we hadn’t seen since World War II, when spending was restricted by rationing:
And then the federal government handed out a lot of money — those $1,400 stimulus checks, enhanced unemployment benefits, child care allowances. Add that to those excess savings, and we’ve got something like $4.5 trillion (insert Dr. Evil voice) in cash floating around, which is a lot even in a $22 trillion economy.
The argument of our latter-day inflationistas is that all of this portends a huge surge of pent-up consumer spending, which will overheat the economy and result in broad-based inflation that will be costly to bring back under control.
Now, one response would be to invoke Milton Friedman’s famous permanent income hypothesis. Way back in 1957, Friedman argued that consumer spending depends not on current income, but on the income people expect to have over the longer term. An implicit side effect is that consumer spending should also depend on wealth, but not too strongly, because people will try to spread wealth-based spending over a long period too. A Friedman-type analysis would say that both the savings accumulated during the pandemic and the stimulus checks will have only modest effects on consumer spending, because households will spend down their windfall over a number of years, not all at once.
OK, while Friedman’s hypothesis has proved very useful in understanding consumption, it has also been proved wrong in detail. Consumers don’t base spending decisions entirely on current income, but they react a lot more to short-term income than permanent income theory says they should. That’s partly because many people — even some among the wealthy — are cash-constrained, wanting to spend more than their income but unable or unwilling to borrow. It may also be because people don’t make lifetime budget plans the way economists sometimes assume; they engage in “mental accounting” that may lead them to spend more of a windfall than they would if they were engaged in hyper-rational planning.
So maybe people will spend a lot of their 2020 savings and their 2021 stimulus checks after all, justifying the inflationistas’ fears.
Or maybe not. Because consumption during the pandemic was … odd.
The last time we saw saving on this scale was, as I said, during World War II. And here’s the thing: While there was some wartime rationing of many goods, for the most part people were unable to buy consumer durables, like cars and washing machines. This set the stage for a huge surge in spending as people were able to fill the backlog of durable goods purchases they had been forced to postpone under rationing:
This time, however, durable goods purchases held up fine; if anything, after a brief drop during the first weeks of lockdown, they increased:
So this was an odd consumer slump, in which people were blocked from consuming services like restaurant meals and hotel stays, but remained able to buy stuff — and may in fact have bought more stuff than usual to compensate for the service constraints: Pelotons instead of trips to the gym, kitchen remodelings instead of going out to eat.
This creates a situation very different from the one that prevailed after World War II. Then, people rushed to buy the cars and home appliances they had been prevented from buying under rationing. That is, there really was a lot of pent-up demand. But you can’t suddenly eat all the restaurant meals you didn’t get to eat during lockdown; people will probably spend a few months dining out more than usual, and they may engage in some revenge vacation and travel. But there’s a limit to how much of that you can do — just as there’s a limit to how much you can stuff yourself after a fast day. See, I told you my TMI would be relevant!
So my guess is that there’s less to those huge excess savings numbers and big stimulus numbers than meets the eye. Overheating is still possible, and the Fed should keep its eye on that possibility. But the big numbers aren’t as scary as they seem.
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