2022 will have the weirdest economy in decades

Last year saw the highest inflation in almost 40 years, with the Consumer Price Index up 7 percent. "Core" inflation, which leaves out food and energy costs, was a still-high 5.5 percent. The Federal Reserve is now expected to start hiking interest rates in March, well ahead of previous expectations.

It's not all bad news, though. Unemployment is near a record low, with every sign it will continue to fall throughout the coming year. Wage growth is surging, particularly at the bottom of the income ladder. People are quitting jobs and finding new ones at a record clip.

This year will also have a midterm election, and we'll probably go to the polls amid the weirdest economy in many decades — with possibly the highest inflation since the early 1980s but also the best job market since the 1960s. It will be an interesting test case for how economic outcomes influence politics, and we'll see if the Democratic Party can take credit for its genuine successes.

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I'd be a fool to make concrete predictions about what will happen between now and Election Day. However, I can outline two plausible scenarios.

First would be a good future, where inflation settles down but growth and job creation keep ripping. For instance, if the Omicron wave is the last acute phase of the pandemic, that would give businesses time to untangle supply chains while spending rebalances away from goods and towards services.

That's important because though overall consumer spending has roughly followed the pre-pandemic trend, we've seen much more spending on goods and much less on services, as people are staying at home instead of going out to restaurants, theaters, vacations, and so on. This creates inflation because prices tend to be "sticky" downward, meaning they fall slowly even with weak demand. So we have massive spending on goods, bidding the prices up, but the correspondingly weak spending on services means stagnant prices, not a deflationary counterbalance. Once people no longer fear the pandemic, that should end.

Then there's a bad option. If there's another variant after Omicron, we could be in for yet another year of pandemic, and supply chain problems could persist into 2023. We might even begin a true wage-price inflationary spiral, which could lead in turn to drastic interest rate hikes from the Federal Reserve that would create a recession.

I suspect (setting aside tail risk possibilities like the crypto bubble blowing up the global banking system) the true future will be somewhere in the middle. Given that Omicron is both incredibly contagious and much less deadly than the Delta variant, but also gives cross-immunity to Delta, this spring might really be the point at which COVID stops being a major concern (alas, exterminating the virus entirely is impossible at this point). There's no guarantee, but I'd guess this may be the final phase of intense pandemic life.

However, even if the pandemic fades away, it might be quite awhile before supply chain problems get fully ironed out. As I've previously argued, the weak post-2008 recovery left terrible scars in the form of systematic underinvestment in all kinds of sectors — raw materials, semiconductors, houses, and more. New semiconductor factories take a long time to get operating, and houses take a long time to build (if you can build at all, which is virtually impossible in high-demand states like California because so much land is zoned for single-family homes exclusively). I would not be at all surprised if overall inflation stays at 4 or 5 percent for a year or so even as the pandemic winds down.

Still, let's suppose a middling to positive economy later this year. There are some chronic shortages and prices keep going up in certain areas, but jobs are plentiful and wage increases far outstrip inflation. What does that mean for Biden and the midterms?

On the one hand, many people genuinely hate inflation, especially in the form of gas price increases. Americans have had a decade of rock solid prices and have learned to expect full stores and rapid, free delivery of whatever they want to buy online. Even partly empty shelves and a seven-day delivery schedule is apparently a sign of looming dystopia for lots of folks.

On the other hand, a lot of the worst-off people in our country are doing better than they have in 20 years. Wage growth for the bottom quarter of earners — the people whose backbreaking labor enabled all the cheap conveniences of the post-2008 years — was increasing at a 5.1 percent annual rate in the most recent figures. That's the best rate since 2002, when the economy was still in a post dot-com collapse funk, and it's much higher than income growth for the top quarter, which is just 2.7 percent. There are presently more job openings per unemployed person than at any time in the Obama or Trump presidencies. The unemployment rate is already where it was in 2018 and still falling. We may see the lowest unemployment since the 1960s or even the 1950s, when it dropped below 3 percent.

If my worst-case scenario comes true this year, Biden will be blamed, and Democrats will lose the midterms. That's a clear lesson of history. But whether incumbent parties get credit for good times is less clear. Al Gore, for instance, didn't cruise to victory in his 2000 presidential race despite former President Bill Clinton presiding over a red-hot economy for several preceding years.

Ultimately, whether Biden and his party get credit for an economic boom largely produced by left-wing Democrats' influence on the pandemic rescue packages is a political question. Can Biden harness good outcomes among downscale workers who usually don't vote in large numbers? Can Democrats figure a way to communicate their message that isn't just complaining about biased media coverage? Can union organizers take advantage of favorable conditions to reverse the long decline of the labor movement — if the sudden surge of organizing at Starbucks is just the beginning — and will that energy and organizing strength go into the midterm campaign? And can Biden can use the presidential megaphone to convince people good times are actually good?

We'll find out soon enough.