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Speaking of the Economy
Understanding economics while watch the news on TV
Speaking of the Economy

Dec. 14, 2022

Understanding Economics in the News

Topic: Financial Education
Audience: General Public

Adam Scavette provides an approach to interpreting news coverage of the economy and applies that framework to the major economic stories of 2022. Scavette is a regional economist based at the Baltimore, Md., branch of the Federal Reserve Bank of Richmond.

Speaker


headshot of Adam Scavette

Adam Scavette

Regional Economist

Transcript


Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guest today is Adam Scavette, a regional economist at the Richmond Fed's Baltimore branch where he studies the economies of Maryland, West Virginia, and Washington, D.C. Before joining the Richmond Fed earlier this year, he worked in the research department of the Philadelphia Fed.

Adam, welcome to the show.

Adam Scavette: Thanks, Tim. Happy to be here.

Sablik: Today, we're going to be talking about a presentation you gave back in October for Economic Education Month on how to understand economic news. But before we get into the details of that presentation, what was it like to meet with high school teachers for this event? What sort of questions did they have for you?

Scavette: We discussed a lot of current events that we'll be discussing later on: stimulus spending since 2020, monetary policy changes, and immigration's impact on the labor market.

What was really interesting is that the teachers had questions about my back story and how I got into economics. My parents didn't study economics or anything like that; they worked at the casinos in Atlantic City. But when I was in high school, I read a book that was pretty popular at the time called Freakonomics. It explores a lot of different topics related to human decision making.

At the time, I hadn't taken an economics course in high school, so I thought economics was more like finance and the stock market. I had a very limited understanding. When I read the book, I realized that it was more about human decision making. That's what led me down that path. I realized that I could also use tools from mathematics and go into other disciplines like political science, so I thought it was a really good path to take in college. I ended up continuing that into graduate school, and I landed a job at the Fed [after I got] my master's degree. The rest is history.

Sablik: Over the last two years, there's certainly been no shortage of big economic events: the pandemic, trillions of dollars in fiscal stimulus programs, supply chain disruptions, and shortages of goods and workers, just to name a few. It can be a lot to try and make sense of.

In your presentation, you talked about how many big economic shocks can be understood through the lens of a simple supply-and-demand framework. Why did you choose that framework, and how have you used it in your own work to gain an initial understanding of economic news?

Scavette: I chose the supply-and-demand framework because it's the simplest tool that we have to explain dynamic cause and effect. Many people are familiar with the supply-and-demand models since it's usually one of the first diagrams that teachers cover in a high school or a college economics course.

Forces of supply and demand work together to set prices in a capitalist economy. A really simple diagram can usually show how shifts in any one market may affect the quantity and price of a good or service. The framework isn't sophisticated enough to show us the degree to which the prices will change, but usually we can get a sense of the direction in which it will change if we make a few assumptions about the market.

I don't sit around drawing supply and demand curves in my day-to-day job, but I use the logic behind the curves quite often. Whenever I'm reading a news article about some economic event, I try to figure out whether it's going to impact the supply or the demand side of the market. Interestingly enough, many economic events affect both sides. So, if you want to assess the impact on prices, for example, you might need to assess which side of the market will be more affected by the shock.

Sablik: We're recording the show at the end of 2022, so I thought it seemed appropriate to look back at some of the biggest events of the past year or two and use this supply-and-demand framework to think about how we got here.

I think it's fair to say that inflation has probably been the biggest economic story of this year and there are many factors that have contributed to elevated prices. Let's start with supply shocks. Can you walk us through some examples of those?

Scavette: Sure, Tim.

One supply shock example that a lot of listeners are probably familiar with at this point is the global semiconductor shortage. If you've tried to buy a washing machine or a car in the past two years, you've probably noticed that supplies have been pretty limited and prices have been high. This has to do with the materials used to manufacture these products. This global semiconductor shortage has caused supply chain issues for a lot of different electronic [and] consumer goods that rely on these parts. This has caused an effective negative supply shock, which raised the prices of many of these goods that rely on semiconductors.

Sablik: Demand for goods and services has also been impacted by the fiscal stimulus passed in response to the pandemic. Using the supply-and-demand framework. How would we expect that stimulus to affect prices?

Scavette: The pandemic fiscal spending put a ton of extra money into people's pockets, whether it was through the stimulus checks, the child tax credits, or enhanced unemployment insurance. Since many were stuck at home early in the pandemic and places to spend money in person — for example, bars or restaurants — were shuttered, people used the extra funds to buy large household appliances and furniture. For example, my wife and I upgraded our coffeemaker since we weren't stopping at La Colombe on the way to work at the Philly Fed anymore. The stimulus spending resulted in the positive demand shock, which raised the prices of many of these durable goods. Later on in 2021 when in-person activities largely resumed across the country, we saw the demand shift to services such as airline tickets and hotel rooms as people "revenge spent" excess savings from these government stimulus funds.

Sablik: Another big story of the last year or two has been in the labor market and the challenges of trying to find workers. We can also think of the labor market in terms of supply and demand, where wages are the price of labor. What are some examples of how the pandemic has affected the supply and demand for workers?

Scavette: A lot of my work focuses on economic development policies which seek to improve the economic well-being of a specific area by increasing, for example, job growth or reducing poverty. Whenever I'm reading about one of these policies, I immediately try to discern whether it's affecting the demand or supply side of the workforce in these areas.

For example, tax incentives to businesses and economically blighted areas target the demand for labor. Think of industrial recruitment, like a state giving money to a business to locate there or state urban enterprise zones. The idea here is that firms will hire more workers if it becomes cheaper for them. On the other hand, policies that are focused on workforce development programs usually target the supply of labor. In these types of programs, the policies will put people through education and skills training in order to prepare them for local jobs.

So, those were two examples of historic public policies that target the supply or the demand side of the labor market. In terms of the pandemic, the demand for labor increased via stimulus spending. The CARES Act put a lot of stimulus money into the economy as well as the American Rescue Plan Act, which we just spoke about. However, the supply for labor experienced a negative shock for two main reasons.

One reason is because immigration into the United States was restricted during the pandemic, to the point where most estimates suggest that the U.S. workforce today has 2 million fewer immigrants than it would have had if immigration had continued at pre-pandemic levels. That's one of the main reasons why we're seeing labor shortages and high wage increases in lower paying industries such as leisure and hospitality, food services, retail, and healthcare.

A second reason is because many older workers decided to retire during the pandemic. A study by the St. Louis Fed suggested there were about 2.6 million excess retirees than predicted during the pandemic. Many of these older workers retired due to health and safety concerns about the virus. Also, rising asset values made retirement more desirable.

When you bring all these labor market factors together during the pandemic, you end up with about 6 million fewer people in the labor force, which makes hiring more difficult and labor more expensive. On top of about $5 trillion in stimulus spending, that has put upward pressure on labor demand. These factors together explain why companies are still struggling to find workers to meet demand and often increase wages in order to do so. These rising wage rates have contributed to the high overall inflation the nation has experienced since 2021.

Sablik: The Fed has also certainly been active this year in regard to inflation, raising interest rates rapidly to try and bring that back down. Can this framework help us understand how the Fed's actions impact prices in the broader economy?

Scavette: I think that the supply-and-demand framework can be helpful in this case. Interest rates — just like the wage rate or the price of a sofa — represent a price, specifically the price of borrowing money. When the Fed raises interest rates, they are effectively causing a negative supply shock for money. This makes money more expensive and in shorter supply. As borrowing becomes more expensive, banks and other lenders pass their costs on to the consumer by increasing interest rates for mortgages, auto loans, or commercial lending. These expensive borrowing prices make it less desirable for people to buy houses [and] cars or to expand their business through capital investments. By making it more expensive to borrow, the Fed hopes to ease price pressures by lowering the overall level of demand in the economy.

Sablik: Adam, thanks so much for coming on the show and sharing a tool for making sense of all the economic news that we've seen this year.

For listeners interested in keeping up with all the work that Adam and our other regional economists are doing, you can check out the Region & Communities section of our website, Richmondfed.org. And if you enjoyed this episode, please consider leaving us a rating and review.

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