If it isn’t “morning in America,” it’s at least no longer midnight.
After a year of widespread death, social isolation, and unemployment, COVID hospitalizations are falling, businesses are reopening, and the economy is recovering. Fewer Americans applied for unemployment benefits last week than at any time since March 2020. Retailers saw a larger increase in sales last month than they’d enjoyed in nearly a year.
This is not an instance of “nature healing.” Rather, America’s incipient post-pandemic boom is a product of contingent policy choices. The U.S. is widely projected to outgrow the rest of the developed world this year, with the International Monetary Fund predicting that we’ll see 6.4 percent GDP growth while advanced industrial economies as a whole will see (“only”) 5.1 percent. America’s underlying economic strengths and privileged access to vaccines is part of this story. But our nation’s exceptionally robust fiscal and monetary response to the COVID crisis might be the primary factor. The U.S. has already spent $6 trillion battling the pandemic and its economic consequences; as a percentage of the GDP, that’s significantly more than most developed countries have spent. Meanwhile, the Federal Reserve has deployed a variety of radical measures for keeping credit cheap and abundant. As a result, U.S. households will exit the pandemic with more savings and less debt than they had at its onset, while the county’s unemployment rate is expected to hit 4.5 percent by the end of this year; by contrast, after the Great Recession ended, it took nearly eight years for unemployment to return to a level that low.
America’s austerity-enthusiasts insist that all this evasion of needless material suffering will come at a terrible cost. The government can’t just step in and shelter its population from the slings and arrows of outrageous economic fortune. Or at least, it can only to do this to a point: According to Larry Summers, Biden’s $1.9 trillion American Jobs Plan overfilled our economy’s demand shortfall, thereby risking a sustained surge in inflation. And Summers is not alone in such fears. One recent survey found 77 percent of Americans expressing some level of concern about price rises in their country.
For the moment, however, there is scant evidence of any durable, economywide inflation of the kind the U.S. experienced in the 1970s. Growth in consumer prices remains modest, and judging by the yield on ten-year U.S. Treasury bonds, investors don’t expect significant inflation in the long term either. Which makes sense. There is no contemporary analogy to the 1970s oil shock. American labor is far weaker and more disorganized than it was four decades ago and thus less capable of securing inflationary wage increases. Further, the U.S. consumes more goods and services from overseas today than it did during the stagflation crisis, which renders consumer prices less sensitive to domestic labor conditions.
But economywide, wage-push inflation isn’t the only kind that counts. America’s robust fiscal and monetary policies have indeed increased upward pressure on prices in one part of the U.S. economy — and unless inflation in that sector is addressed, the post-COVID recovery will be compromised.
The answer to America’s actual inflation problem, however, isn’t to choke off aid to struggling families, or to raise the cost of credit to keep unemployment from falling “too low.” The answer is to build more homes.
America had a housing crisis long before COVID reached our shores. In 2018, the U.S. was 2.5 million units of housing short of buyer demand, according to the mortgage-finance company Freddie Mac. Meanwhile, rental prices were rising far faster than renters’ incomes.
But as with so many of our collective and personal problems, the past year has made the housing shortage far worse: Today, America is 3.8 million homes short of demand (which is to say, of demand among the subset of the population that can plausibly afford home ownership). As a result, the median price of a U.S. home this February was 16 percent higher than one year earlier, while in March, a record-high 42 percent of U.S. homes sold above their list price.
This disastrous housing bottleneck was born of many causes. Restrictive zoning laws, inadequate funding for public housing, and the mass bankruptcy of homebuilders after the 2008 crash have long constrained housing supply. But the pandemic, and our government’s (very good) policy response, rendered the housing market’s dysfunction more severe and conspicuous.
In an ordinary recession, housing demand and supply fall in tandem. But 2020 was no ordinary recession. Most Americans did not lose their jobs to the pandemic but did accumulate record savings, as myriad forms of consumption became less appealing or unavailable and various forms of federal aid padded their incomes. Meanwhile, months of quarantine led many such Americans to desire more space than their current homes allowed, and rock-bottom mortgage rates emboldened them to pursue that desire. And yet, even as the pandemic increased demand for housing, it suppressed supply. Lockdowns produced supply-chain bottlenecks throughout the construction industry and delayed regulatory permitting processes.
Finally, in addition to the longtime regulatory constraints on housing development, and the pandemic’s contradictory implications for supply and demand, the shortage has been deepened by demographic churn: The millennial generation is now entering its prime home-buying years. The cohort’s rate of homeownership rose by nearly 8 percentage points since 2017, and its demand for homes is poised to increase at an accelerating pace. Absent drastic policy changes, supply will not keep up. Most millennials are specifically looking for starter homes, which are especially hard to come by. With opportunities for development limited by restrictive zoning, builders have favored large, luxury homes that can be sold at a higher margin. In 2020, just 65,000 new homes were smaller than 1,400 square feet; in the late 1970s, 400,00 such homes were built annually. Low supply has beget high prices: By one estimate, first-time homebuyers in 2019 paid 39 percent more than they had 40 years earlier.
Critics of Biden’s stimulus and Jerome Powell’s expansionary monetary policy have claimed that they will increase inequality, burden younger generations, and stymie growth. As an argument for austerity, this critique is profane; as a case for the insufficiency of robust demand-management, it’s worthwhile. If Democrats don’t find a way to increase America’s supply of homes, the housing shortage will do all that the inflation hawks claim to fear. Low interest rates are not inherently incompatible with reducing inequality. But if loose credit conditions juice housing demand — while supply remains constrained — then those already wealthy enough to own homes will grow richer, while (relatively) low-net-worth Americans will lose a larger share of their incomes to mortgage payments or rent. Given generational discrepancies in homeownership, this will mean “burdening our grandchildren.”
Failure to pair demand-side fiscal policy with some combination of public housing construction and regulatory reform, meanwhile, will hold back economic growth. According to the economists Chang-Tai Hsieh and Enrico Moretti, “stringent restrictions to new housing supply” reduced growth in the U.S. by 36 percent between 1964 and 2009; which is to say, absent restrictive zoning laws that made it financially impossible for young Americans to move to high-productivity areas, the typical U.S. worker would now earn $3,685 more each year.
Democrats are aware of this problem. Biden’s infrastructure plan includes a $5 billion grant program that offers federal funds to municipalities that loosen their zoning restrictions. In the Senate, Amy Klobuchar is pushing a similar grant program, which would provide localities interested in zoning reform with funding and expert support upfront, rather than after such reforms are put in place.
But the prosperous areas where zoning restrictions are most prevalent also tend to be places where the appeal of federal aid is weakest. Grant programs are worthy endeavors and could make a real difference at the margins. To truly solve the housing crisis and sustain the “Biden boom,” however, Democrats will need to think bigger.