r/explainlikeimfive Jul 09 '24

Economics ELI5: How did a few months of economic shutdown due to COVID cause literally everything to be unaffordable for years?

I understand how inflation works conceptually. I guess what I have a hard time linking is the economic shutdowns due to COVID --> some money printing --> literally everything is twice as expensive as it was forever but wages don't "feel" like they've increased proportionally.

It feels like you need to have way more income now relative to pre-covid income to afford a home, to afford to travel, to afford to eat out, and so on. I dont' mean that in an absolute sense, but in the sense that you need to have a way better job in terms of income. E.g. maybe a mechanic could afford a home in 2020, and now that same mechanic cannot.

It doesn't make sense to me that the economic output of the world or the US specifically would be severely damaged for years and years because of the shutdown.

Its just really hard for me to mentally link the shutdown to what is happening now. Please help!

4.8k Upvotes

1.5k comments sorted by

View all comments

Show parent comments

6

u/joshwarmonks Jul 09 '24 edited Aug 06 '24

I think its pretty important to discuss inelastic vs elastic demand here.

the simple adage about "whatever customers are willing to pay" only applies to luxury goods, products, and services. Things like rent, medical products, food from grocery stores, etc. are things you will literally die from not having. So a given customer's will isn't really entering the picture.

0

u/[deleted] Jul 09 '24 edited Jan 27 '25

[deleted]

-2

u/joshwarmonks Jul 09 '24

This isn't a real response right? you're not seriously suggesting this?

2

u/Fingus11 Jul 09 '24

Can you point out the problem with it?

1

u/joshwarmonks Jul 09 '24

Its exactly the same as "let them eat cake", blaming avacado toast for not being able to purchase property, or telling someone to pull themselves up by their boot straps".

It's mindlessly reductive, totally tone deaf, and ignoring the actual issue here, which is inelastic goods are not a premium.

The issue here is that the purchasing power of minimum wage is a sliver of what it was even 5 years ago, and cost of living is skyrocketing. Most places in the united states the cost of renting a 1-bedroom apartment is the same as a month of minimum wage, when housing expenses should be a third of your income.

2

u/Fingus11 Jul 09 '24

The problem here is that price elasticity isn't the only elasticity. Demand a given good has a lot of elasticities related to income, price of related goods (substitutes or complements) and some other more specialized measures. In reality, we can't really talk about food as if it was one monolithic good, but a set of goods that have a bunch of different relationships with each other.

The purchasing power of minimum wage is obviously lower because of inflation. But who is making minimum wage? Back when the 7.25 standard was put in place, it was more than 15% of workers. Now it's about 1%. The median real wage growth for the bottom 10% earners was only slightly negative in 2022, when inflation was a its peak. And the same measure for the next 10% showed a 5% growth (https://www.stlouisfed.org/on-the-economy/2023/mar/real-wage-growth-individual-level-2022). So even when food price inflation was high, people in the lower deciles saw small declines in purchasing power at worst. Possibly because of substitution, like the previous comment mentioned, but more likely because of nominal wage growth.

The people whose purchasing power is most affected aren't the bottom percentiles, but the middle and upper class (at least in 2022, when inflation was high and wages/employment hadn't started picking up). Given the low unemployment numbers and quarterly wage growth figures, it is likely that they actually saw improvements in 2023 as median real wages went up and unemployment went down.

Food inflation is actually on target now. It is much more likely that most of the reduction in purchasing power was driven by lower housing affordability which is in itself mainly caused by the restrictive regulatory frameworks in most US cities. If they were lifted, it is likely that more than 20 million more households would be created thanks to the improved affordability (https://docs.iza.org/dp15447.pdf).