Editor’s Note: Gerald Cohen is the chief economist at the Kenan Institute of Private Enterprise.  This post is one portion of a WRAL TechWire series on gratitude, published in November 2021.  

CHAPEL HILL – As an economist, sitting down to Thanksgiving dinner for me not only means enjoying family, friends and good food, but also thinking about the economic events that have brought such bounty to our table.  In normal times, I would reflect on the system of incentives by which farmers grow food, appliance makers build ovens and stoves and utilities keep us lit and warm.  I also would consider how that system has failed some Americans, and ways we might improve upon it to ensure greater inclusivity.  However, this year, there are additional economic events to be thankful for—as well as challenges to ponder.

I am grateful for vaccinations and the aggressive monetary and fiscal policy response to COVID-19—both of which helped put the economy back on track so that it is now larger than it was before the pandemic hit. A s a result, I am very appreciative that we have dug ourselves out of the resultant economic hole (and that we did so more quickly than expected).

In the same way that vaccinations have allowed my family to gather once more for the holiday, the safety they generally provide has allowed many more people to become comfortable returning to stores, eating in restaurants and flying on planes.  As a result, retailers, restaurants and airlines are hiring back some workers they had laid off during the pandemic.  This, in turn, has a knock-on effect as those workers’ salaries spur more shopping, eating out and traveling, creating a virtuous circle.

Unfortunately, many of those high-touch workers were less fortunate 18 months ago, which is why the aggressive policy responses of the federal government and Federal Reserve were so important.  Policies such as raising unemployment benefits and extending them to gig workers kept people fed, housed and engaged in the economy.  If that had not happened, it would have been much harder to get those people back to work.  It’s hard to find a job and stay engaged at work when you don’t have a roof over your head, or your car has been repossessed.  At the same time, policies such as the Paycheck Protection Program helped keep small businesses afloat and ready to hire back workers when the demand returned.

While the U.S. economy is now larger than it was pre-pandemic, challenges remain. Most notably, inflation has picked up meaningfully, eating into the purchasing power of all households (thus making our turkey, fixings and heating bills more expensive), and we remain more than four million jobs short of where we were before COVID-19 hit.

Kenan Institute: Supply shortages here to stay?

There is a very active debate among economists about whether the pick-up in inflation is temporary—driven by supply constraints and a post-COVID bounce in demand, in particular for goods—or permanent, meaning that consumers’, workers’ and businesses’ perceptions of inflation have changed.  When people start to expect larger price increases and fatter raises, it can become a vicious inflationary circle.

Meanwhile, though demand for housing and goods—such as cars and furniture—has exceeded pre-pandemic levels, demand for services—such as restaurants and travel—remains depressed, as evidenced by the number of nonstop flights to and from Raleigh-Durham Airport, RDU.  This is partly because of continued risks from COVID-19, though other structural factors such as business travel needs and in-office practices mark longer term shifts.  Thus, we have not returned to previous levels of employment in many service industries.  Moreover, some workers have retired, others have moved away from their previous jobs and so aren’t available to return to those jobs, while others are not yet ready to look because they remain caretakers or have health care concerns.

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The inflation and labor market issues are interrelated in a number of potentially conflicting ways.  For instance, many of the supply constraints are a result of worker shortages; thus, by getting more people back to work, we will alleviate some of the inflation pressures.  On the flip side, if policymakers feel the inflation pressures are here to stay, they will be less comfortable increasing spending on worker training or child-care options, which would alleviate some of the worker shortages.  Unfortunately, it will take time to determine how much the inflation and labor market issues are structural or cyclical.  But in the interim, I remain hopeful these challenges will be eased by this time next year so I can return once more to pondering the economics of Black Friday.