Now That Everyone Is Bullish, Be Cautious

When the shops closed and the workers stayed at home, the gross domestic product, broad levels of goods and services, collapsed in the United States. According to the Federal Office for Economic Analysis, GDP fell by 5 percent in the first quarter of 2020 and by more than 31 percent in the second quarter. The unemployment rate rose from March to April last year by more than 10 percentage points to almost 15 percent. This was the highest level and increase since the Bureau of Labor Statistics began collecting data in January 1948.

The Federal Reserve joined in March 2020. There wasn’t much she could do on her own against the corona virus – the efforts of the last presidential administration were dilatory at best, historians say. But the Fed and federal government have been able to prop up the markets, provide emergency aid to millions of people, keep at least some small businesses alive, and enable most large businesses to make big profits when the Economy recovers.

Meanwhile, the federal government has allocated more than $ 5 trillion to various coronavirus-related aid packages, and the Fed has provided trillions more credit, intervened in financial markets, bought large amounts of bonds, and kept short-term interest rates near zero.

All of this contributes to a “biden boom economy,” as Princeton economist Alan S. Blinder put it in the Wall Street Journal. Economic growth could exceed 7 percent in the first quarter and will almost certainly be spectacular for the entire year compared to 2020.

But there is the problem. These annual economic and financial figures are comparisons to the depths of the pandemic. The statistics are inevitably distorted by “base effects”, which in business parlance means that the coronavirus-induced recession last year made many current numbers seem unnaturally high. They don’t provide much clue as to where we are going in 2022 and beyond.

As Neil Irwin explained in the New York Times, the current spike in inflation may not be as worrying as it would seem, as his comparisons are based on the depressed prices from a year ago, when so many people were huddled indoors.

In addition, Alberto Cavallo, a Harvard economist who has studied inflation in depth, told me that the pandemic had many subtle effects through radical changes in consumption and supply patterns. People on lower incomes, for example, who pay a higher proportion of their income for food, have experienced higher inflation than people for whom food is a relatively small expense.

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