By Betsey Stevenson / Bloomberg Opinion
The typical American is a lot richer now than they were just before the pandemic; and this improvement is at least partially due to government support for families and businesses in 2020 and 2021. There are other factors, of course, but it’s clear that a strong safety net plays an important role in supporting not only families but also the overall economy.
The Federal Reserve’s latest comprehensive survey of consumer finances lays out broad gains in family income and net worth from 2019 to 2022. While those with the most education and the highest net worth saw the biggest gains in median income, the increase in net worth was seen across all incomes. The gains in net worth affected families young and old, those with low incomes and high, homeowners and renters. In addition to government programs, a rising stock market and soaring housing prices played a role. All told, the average real value of families’ financial assets increased by nearly one-third in the three years covered by the report.
What does it all mean? One lesson is the importance of smart, well-timed public policy. Amid the peak of uncertainty and income loss during the pandemic, the government stepped in to support households and businesses Then, as the economy reopened, households were ready to spend again.
Government support did more than help boost demand. It may have also helped create a positive supply shock; an expansion in the economy’s overall capacity.
Initially, government support was blamed for creating so much demand that it sparked inflation. But this demand-led recovery has proved to be more resilient than past recoveries. And inflation has come down even amid fast economic growth and unemployment rates near 50-year lows.
This strong economy is not a mystery. Only one thing can allow inflation to come down in the face of strong economic growth and low unemployment: expanding supply. To be sure, some of this expansion occurred because bottlenecks in supply chains were cleared. That’s not the full story, however. High demand created a wealth of opportunities, and Americans have been chasing them.
By way of illustration, consider the explosion in entrepreneurship in the immediate aftermath of the pandemic. The Fed survey shows that in 2022, 1 in 5 families owned a business, the highest share on record. More detailed research shows that applications for new businesses reached an all-time high in July 2020 and have remained elevated through this year. This research also shows that the growth in business ownership included substantial growth in new business hiring; and that young firms exhibited striking resilience through the pandemic.
This explosion in business formation represents American dynamism at its best. The public had unmet demand, and businesses and employees scrambled to find a way to meet it.
While some people started new businesses, others sought out new jobs. Workers changed jobs and started businesses at unprecedented rates, taking advantage of changes in working conditions to find better pay, more interesting work, or a better fit for their skills and personal life. With workplace flexibility came opportunities to relocate, fueling a vibrant housing market.
Today, a higher share of prime-age men and women are employed than before the pandemic. For women, the share is a record high. Clearly, supporting families and businesses during the worst days of the pandemic did not sap motivation or create a generation detached from the labor force. As people returned to the labor force, businesses were able to continue hiring — and hence expand — despite the low unemployment rate.
The jury is still out on whether this is a permanent return to the economic dynamism that America has lost in recent decades. But it’s already evident that government support can help stimulate such dynamism even as it works to make economic downturns less painful.
The purpose of a safety net is not merely to help people keep food on the table and a roof over their head. It can also give them the security they need to take risks. Over the last several decades of technological and economic change, the U.S. has pushed more of the responsibility of managing risk onto households. More of the risks of the costs of college, planning for retirement, managing health care and navigating job loss now falls on families.
And here lies the perhaps more important lesson: This risk pushed onto families in recent decades may be responsible for the decline in new business formation that economists have been puzzling over. During the pandemic, the government took away some of these risks. Families didn’t have to make payments on student loans, and they were insulated from eviction. Everyone got some cash through stimulus payments, and those with children got even more throughout 2021. Those who were unemployed got enough cash to survive.
Maybe taking away some of this risk creates the freedom to take other risks. America has been moving away from safety nets, reducing cash support for low-income and unemployed families out of a fear of creating dependency. But the last four years show that safety nets can also give people the time and security to make changes to their lives when things don’t go as planned. They can potentially spur more economic engagement.
The result of the tens of trillions of dollars the U.S. spent on pandemic relief and assistance has been a strong and resilient economy that has defied predictions. And it all started with the strongest safety net America has ever had.
Betsey Stevenson is a professor of public policy and economics at the University of Michigan. She was on the president’s Council of Economic Advisers and was chief economist at the U.S. Department of Labor.
