We may be learning to live with COVID but as the latest inflation report shows, it’s still a pandemic economy. Two and a half years after the first lockdowns, the economy remains weird: It can take more than a year to get a dishwasher, many months to get a passport, businesses are short-staffed, stores routinely run out of basic staples like pain reliever and, of course, there is high inflation. Americans enjoyed years of plenty, where the newest, best thing was always available and many services got cheaper by the day. Now somedays it feels like we woke up in the dystopian second half of “Atlas Shrugged.”
When will things finally get back to normal? In some ways maybe never. The pandemic accelerated changes to the economy that were already in the works. And it upended many of our assumptions, changing the economic relationships that formed the basis for many forecasts, making everything from inflation to consumer spending harder to predict for years to come. There will always be parts of the economy, like energy prices, that we have less control over, but other aspects can be fixed. One day soon we should again be able to count on fully stocked shelves and more stable prices.
So here’s a quick rundown of what should snap back, and what we should all start getting used to as the COVID economy evolves into the new economy.
Things that will go back to normal:
The labor shortage is a big deal. It’s a major reason why the economy is still weird. Every recession loses workers and some people, especially men, are still not working. Adding to the current shortages is the fact that legal immigration is still effectively on hold, with a backlog of visas that have yet to be processed. The Biden administration should make this a much bigger priority. But relative to other recessions the labor market has recovered, wages are up and people are returning to the labor force. Fewer people are retiring and even some of the pandemic early retirees are coming back to work. The supply chain is still messed up. The pre-pandemic world economy was incredibly efficient because goods were made with parts from all over the world. But the system was complex and the pandemic showed just how vulnerable it was to disruption. In December last year ports were starting to unclog and the computer chip shortage was easing, but hopes for normalcy in 2022 were squelched by Russia’s war on Ukraine. China is still having COVID-driven shutdowns. And a U.S. freight rail strike appears to have just been narrowly averted. Even so, the Citi index of supply chain pressures shows it’s better than a year ago. There will be more improvement if energy costs fall and more people go back to work. Longer term, companies may become more resilient to future disruptions and better diversified.
Issues that aren’t going away:
Inflation uncertainty means more volatility in asset markets. Once the supply chain and labor market heal, inflation will ease somewhat and stabilize, and that will help stabilize asset markets. But it will be a very long time before inflation falls back to 2% or lower again. Between demographic changes and weaker trade relationships, inflation may be naturally higher no matter what central banks try to do. We might need to learn to live with 3% or 4% inflation. And that means interest rates (and mortgages) will be higher too. Offices are still empty. The next few months will reveal what the future of work will look like as some bosses demand all employees come back to the office. Some will go back reluctantly and others never will. Business districts already have more life, but they aren’t bustling five days a week. Offices aren’t full every day and most public transportation is still down to 60% of its pre-pandemic levels. The pandemic established working from home as a viable option and the office will never be the same. Trust in institutions also may never recover. During the pandemic everything was politicized, from public health to central banking. It was somewhat inevitable as government becomes a bigger part of life in an emergency; it’s condemned for bad decisions (prolonged school shutdowns was a predictable tragedy) and it doesn’t get credit for good policies. Nonetheless, distrust will undermine the economy going forward because strong trust in the government and its services, corporations and cultural institutions is critical to a healthy economy and public safety. Fewer children are in public school, many people no longer trust election results, the justice system or public health authorities.
The pandemic economy will outlast the pandemic. Some of the changes, like how we use technology, may one day turn out to be positive. But more than two years on, bottlenecks of the flow of goods and people means we are still living with shortages, high inflation and a lot of uncertainty about when at least some things might get back to normal.
Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.” This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
