2022 Year in Review : A Lesson in Economics
Instead of giving you my opinion on what I think might happen in 2023 or copy and paste Blackrock’s economic outlook of the future, I wanted to highlight some basic economic principles at work in 2022. I was very grateful to have studied economics, accounting, and finance at Mercyhurst in 2008, when the US experienced one of the greatest economic recessions in history. I learned how to apply textbook education to real life situations due to the current events that were taking place before my eyes.
Fast forward to 2022 and there are a number of economic principles that are able to be highlighted due to similar measures.
The first principal in your Economics 101 class learned and that you can apply to life experience is the law of supply and demand. The law of supply and demand is “a theory that explains the interaction between sellers of a resource and the buyers of a resource”. This “theory” can be applied to just about anything that happens in your daily life and is not exclusive to money, however most of these observations are correlated to money.¹
Cheap and Free Money
In reaction to the world shutting down due to COVID-19, governments across the globe deposited cash into bank accounts in order to encourage people to spend the money and create economic activity. It is estimated that the US deposited over $391 billion dollars into citizens' bank accounts in 2020-2021. This artificial increase in the supply of money created an artificial increase in demand for products/services.²
The second action by the government to increase the money supply was the lowering of bank interest rates. This action affects multiple sectors of the economy with the most obvious being:
Real Estate
A - monthly mortgage payments became lower which enabled buyers to spend more on a house creating more demand
B - current homeowners were able to refinance their mortgage at a lower rate which gave them more money to spend elsewhere creating more demand for goods/services
C - current homeowners’ home values rose because of the increased demand which enabled them to take out home equity loans or cash out refinancing at low rates to spend elsewhere which created more demand for goods/services
Businesses
A - Businesses could take out loans with low rates which gave them more money to open additional locations, hire and pay more workers and produce more products/services
Stimulus checks, low interest rates for housing and low cost business expansion are all factors that increased the amount of money supply that people had to spend which artificially created demand for products and services. During a time when people were restricted from working, factories were shut down (still are in China), and unemployment benefits were plentiful, the goods and services weren’t able to be produced fast enough for the demand that the free money was causing.
If goods and services aren’t able to be produced at the same rate that the money supply grows, then there is a price imbalance which causes the price of the goods and services to increase (inflation).
Changes in Labor Supply
Most mainstream media outlets talk about the “labor shortage”, the “great resignation” and how the “new normal” behavior of people is affecting the workforce. I do agree that COVID has created new work behaviors and has had an effect on the labor market, however in my opinion, the more obvious reason behind the labor shortage is the aging population.
Per the US Census data from 2019, the number of people 65 and older grew by 36% from 2009 to 2019, which can be interpreted as roughly 14.4 million more people becoming of “traditional retirement age”.³ As an advisor talking to retirees and pre-retirees daily, it was apparent during COVID that the baby boomer population opted to retire or at least temporarily step away from the workforce so that they didn’t have to deal with the changes that COVID had caused (working from home, using more technology, less human interaction, wearing masks, etc).
It is also no secret that the birth rate in the US has significantly declined since 2007, which means the number of people that are becoming of legal working age (age 14 in PA) has rapidly decreased (by about 20%).⁴ The one-two punch of the baby boomer generation quickly aging and the rapid decrease of generation Z in my opinion is creating a lasting effect on the labor market that isn’t going to change overnight.
When there is a shortage of workers (lack of supply), wages can increase for two main reasons. Employers are willing to pay more to retain good workers since there are less people to choose from and workers who test the job market know that employers are willing to pay more, so they can ask for more. If business owners pay employees more, they have to cut costs in other ways, make less profit, and/or raise the price of their product or service. Most efficient businesses already operate on thin margins, which leaves no other option but to raise the price of the goods/service that they provide which causes price inflation.
When the population gets older, there will continue to be demand for goods and services with less workers to provide them. That imbalance of supply and demand will cause the prices of goods and services as well as wages to increase.
The Economics of Education
Most people reading this can agree that it is difficult to know what you want to do with your life when you are graduating high school at the age of 18. Some could argue that higher education (post-secondary) opens more doors by giving you the opportunity to learn about different careers, gain experience with internships, and see how people outside of your family and friends live and earn a living.
There are many different careers and ways of life that all provide different paths to individual happiness and fulfillment, however the purpose of this section is to emphasize the imbalance between career earnings from a profession that requires a college education vs. one that doesn’t (traditionally referred to as blue collar or trade related).
From an economic standpoint, when does it stop making sense for a college educated teacher earning a $44k per year salary to invest over $100k in education when he/she could start working at the age of 18 in a trade related career (making $44k) per year with no post-secondary education?
I ran the numbers of the net earnings (not including taxes) of a teacher making $44k with annual 3% salary increases paying $100k of student loans at 7% ($775/month for 20 years) which yielded net earnings after 44 years (retiring at 65) of $3,732,130. I then compared that to a plumber with a starting salary of $44k and increasing at 3% annually with no student loans. The total earnings for the plumber after 48 years (retiring at 65) is $4,593,969.
Sure there are certain risks/rewards to every profession but from a monetary perspective this is a simple calculation that shows the plumber earning $861,839 more by choosing this trade over a profession that requires a higher barrier of entry (cost of post-secondary education). Another real life example is a highly educated electrical engineer at a large Pittsburgh corporation who earns $120k per year to design complex substations is being paid less than the high school educated linesman who is installing it. There is an obvious imbalance of skilled trade labor vs. “educated” labor.
History has told us that white collar jobs that require a college degree have generally yielded greater earning potential. As a financial advisor, I see student loans becoming a burden on household finances, preventing people from moving, having children and causing financial stress as some loan payments mimic that of a second mortgage. It is becoming more common that higher education no longer provides the advantageous economic benefit that it once did and is more often causing unnecessary financial stress.
In Review
Although there are some blunt truths in sight, the purpose of this article is to encourage you to feel good about the economic outlook moving forward. Free money has been spent and the Federal Reserve Board has gotten rid of cheap money, which means that the spike in artificial demand is behind us. As we are currently seeing, it is taking some time for people and the market to correct back to equilibrium of normal supply and demand for products, but signs are pointing in the right direction.
Population demographics will continue to be a challenge on the supply of labor which will cause prices and wages to increase. Technology, robots, and immigration can help in this department but those solutions can’t be printed as quickly as Biden bucks. The educational shift seems to be like the topics of sex and money…no one wants to talk about it. Economically it is making less sense to pursue traditional education paths and the law of supply and demand in the labor market is proving it.
The only constant in life is change and I am happy to have had the chance to observe the changes that happened in 2022.
Happy New Year!
¹ - https://www.investopedia.com/terms/l/law-of-supply-demand.asp
⁴ - https://econofact.org/the-mystery-of-the-declining-u-s-birth-rate
