The Corner

Capital Matters

Savings and Incentives

Yesterday, the New York Times had a piece that included this paragraph about why inflation should be cooling down soon:

They point to calculations by Mark Zandi, a Moody’s Analytics economist, that suggest Americans who have left the labor force will begin flocking back into the job market by December or January, because they will likely have exhausted their savings by then.

Isn’t that a round about way to admit that inflation was in part the product of COVID-relief packages? Another way to say this: Isn’t this a soft admission that the decrease in aggregate supply, which most blame for the current inflation, may also be partly caused by the policy responses to COVID? I will point to this post by Tyler Cowen that asked a question about the role played by the relief packages.

As an aside, it is an interesting statement coming the same Zandi who predicted last year that ending unemployment insurance would mean that “unemployment will remain in double-digits until well after the pandemic is over.” Now he talks about workers “flocking back into the labor market” when they have exhausted their savings, which are in part a product of those benefits.

Finally, considering the debate over more payments to families in order to reduce poverty, I will note that this statement by Zandi seems to mean we shouldn’t count on it. Hoover Institution’s John Cochrane sums it up well:

Economists bemoan “hand to mouth” consumers with little savings. Consumers get some savings, thanks to checks from feds. Do they start to “build intergenerational wealth?” No, promptly quit jobs until savings are gone again.

In the end, it’s always bad incentives that get you.

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