OPINION: Supply chains are disrupted, but that isn’t enough of a headwind to keep economic output from booming, fueled by massive household savings.
CAMBRIDGE, Mass. —Commentators have generally offered two arguments about advanced economies’ performance since COVID-19 struck, only one of which can be true. The first is that the economic rebound has been surprisingly rapid, outpacing what forecasters expected and setting this recovery apart from the aftermath of previous recessions.
The evidence To be sure, inflationary pressures reflect both supply and demand factors, the exact combination of which is unknowable. But when considering the economy as a whole, it is implausible that all the individual supply stories would add up to the generalized inflation we have seen. It is far more likely that the increase in demand exceeds what the economy can produce, leading to higher prices.
Surprisingly strong growth What about real GDP? Here, we need to remember that all the supply-side stories are different ways of saying that real output was constrained. Overall, the U.S. economy grew 1.6% annually from the end of 2019 to the end of 2021, which is only slightly lower than previous estimates of the economy’s potential. That is an amazing accomplishment considering all the headwinds that have reduced potential GDP: lower immigration, premature deaths, reduced capital formation, and the hysteresis associated with high unemployment.
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