But there is no reason to panic. The United States has had a nearly perfect economic cooling over the past few years, maintaining a strong jobs market and good GDP growth while settling down from the post-covid reopening highs. We are not only doing better than anyone expected; we are doing far better than our peers in Europe, including Britain, and Japan. The biggest challenge — housing inflation — is a slow-moving problem that has come as no surprise to markets or individuals coping with higher rates.
So, what’s going on? Something that sounds bad but is, in reality, encouraging: The era of cheap is over.
The past five years — which have featured a pandemic, the war in Ukraine and the aftermath of both — signal the end to an economy that was based on cheap everything: cheap money, cheap energy and cheap labor. All of that is going away or gone. A decade and a half of go-go speculation is finished. The era of cheap is kaput.
The first to go is the era of easy money. This isn’t a short-term response to President Biden’s much–needed post–pandemic fiscal stimulus. (In fact, that stimulus is exactly what kept the U.S. economy resilient while peers flagged, according to a recent New York Fed report.) This is a return to an economy that is more rational and hardheaded. Not all companies, or stocks, are created equal. Many have too much debt on their books.
Years of easy money propped up everything. A higher cost of capital will be painful temporarily, but it will give markets what they’ve needed for years — a reason for investors to sort out risky investments (like more than a few consumer tech and meme stocks) from safer ones (industrials set to benefit from a manufacturing boom).
Cheap energy is over, too. One outcome of Russia’s invasion of Ukraine is the realization (especially in Europe) that getting crucial commodities from autocrats is never a good idea. The United States, Europe and China are, in different ways, all speeding up the transition to a green economy.
At home, that means more wind and solar farms, more electric cars and more diverse supply chains to build it all. This will be inflationary in the short term, as it means manufacturing new products and investing in new technologies. But it will be strongly deflationary if we can make the shift.
Finally, the era of cheap labor has ended. Wages are rising, and we’ve seen more labor activity, including strikes, this year than in the past four decades. More will follow. This is an appropriate response to decades of wage stagnation amid record corporate profits. Unions, but also non-union workers in many areas of the economy including construction and manufacturing, have been buoyed by the largest infrastructure investment since the 1950s — which has given them negotiating power that they haven’t had in years. Meanwhile, companies in the service sector are reconsidering their usual hire-and-fire-fast approach, having been trained by the pandemic to hang onto employees as long as possible.
Yes, artificial intelligence could throw a spammer in all this. CEOs are looking to use it to bring down labor costs. But workers today are becoming more proactive about demanding more control of both trade and technology; striking writers in Hollywood are still negotiating about how AI is used in the entertainment business, a tactic that will spread quickly to other industries.
The end of cheap is a huge shift. It means Main Street rather than Wall Street will drive the economy. It will make for a more balanced and resilient economy. The bond market won’t like it, and there will be calls to return to the old ways, particularly if inflation continues to bite.
But the past few years have taught us all that cheap isn’t really cheap. It’s just putting your troubles on layaway.
