Sluggish income growth has been a defining economic problem of recent decades. With only brief exceptions, the incomes of most middle-class and working-class American families have grown frustratingly slowly — trailing well behind economic growth — since the late 1970s.
Surprisingly, however, the past two years have been one of those exceptions. Even amid a global pandemic, most American households are doing better financially than they were in 2019.
How could that be? A pandemic is not a financial crisis. Covid-19 has caused a horrible amount of death and illness and interrupted the daily rhythms of life. But it has not damaged credit markets or household balance sheets, as the housing bubble of the early 2000s did. Instead, the pandemic caused a sharp, brief recession.
Today, the unemployment rate has fallen back below 5 percent. The value of homes — the largest asset for most families — has continued rising. The S&P 500 is more than 30 percent higher than it was before the pandemic. And the federal government, across both the Trump and Biden administrations, has pumped trillions of dollars into the economy, much of it through checks sent directly to people.
As a result, incomes have surged:
Household wealth has also risen:
Wealth inequality has increased over the past two years, because stock ownership is highly concentrated among the affluent. But income inequality has declined, with the largest percentage income gains coming toward the bottom of the economic spectrum, because government stimulus programs were focused there.
The full picture is a country relatively flush with cash. “The household balance sheet is far and away the strongest part of the economy’s balance sheet,” Mark Zandi, the chief economist of Moody’s Analytics, told me.
These trends are mostly positive. Compared with before the pandemic, most families — not all, to be sure — can more easily afford college tuition, a medical procedure, a house repair, a new vehicle and many other expenses.
But the glut of cash has also created complications. If you’re trying to figure out why the country is struggling with some new economic problems — including labor shortages, rising inflation and supply-chain problems like backups at ports — the cash glut is a big part of the explanation.
‘Off the charts’
The economic dynamics behind rising inflation and the supply-chain problems are fairly straightforward: It’s a case of demand exceeding supply.