real

This is an update to a previous post that I did on per-capita real consumption in 1990 vs 2021. As of 2021, we still weren’t sure after the pandemic what was transitory vs structural, and it was unclear whether incomes would keep up with inflation. We now have three more years of data through 2024. News flash: We’re even richer.

I like to use the BEA real quantity indices. Those track what is actually consumed in volumes rather than by deflating total spending by price indices. Divided by population, we can calculate the real quantities of goods and services that people actually consumed per capita.

Even after the pandemic policies have settled down, we are still SO MUCH RICHER – and even richer than we were with all of the pandemic-related stimulus. The worst consumption category since the pandemic has been food and beverage for off-premise consumption, and that is *up* 4.6% since 2020, increasing 31% since 1990. So, while I understand that people can’t enjoy the the low prices of yesteryear, we are still better off in that category than pre-pandemic. In the other categories, everything is awesome.

Since 1990, our consumption of communication services has risen 332%, our houses are 254% better furnished, and we have 118% greater quality-adjusted clothing consumption. All of this is already adjusted for inflation and is per-capita. Since the pandemic, these numbers are still up by 20.4%, 9.8%, and 31.1% respectively. People didn’t like the post-pandemic inflation. I get that. But these improvements in average consumption are mind boggling.

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By the time most students exit undergrad, they get acquainted with the Aggregate Supply – Aggregate Demand model. I think that this model is so important that my Principles of Macro class spends twice the amount of time on it as on any other topic. The model is nice because it uses the familiar tools of Supply & Demand and throws a macro twist on them. Below is a graph of the short-run AS-AD model.

Quick primer: The AD curve increases to the right and decreases to the left. The Federal Reserve and Federal government can both affect AD by increasing or decreasing total spending in the economy. Economists differ on the circumstances in which one authority is more relevant than another.

The AS curve reflects inflation expectations, short-run productivity (intercept), and nominal rigidity (slope). If inflation expectations rise, then the AS curve shifts up vertically. If there is transitory decline in productivity, then it shifts up vertically and left horizontally.

Nominal rigidity refers to the total spending elasticity of the quantity produced. In laymen’s terms, nominal rigidity describes how production changes when there is a short-run increase in total spending. The figure above displays 3 possible SR-AS’s. AS0 reflects that firms will simply produce more when there is greater spending and they will not raise their prices. AS2 reflects that producers mostly raise prices and increase output only somewhat. AS1 is an intermediate case. One of the things that determines nominal rigidity is how accurate the inflation expectations are. The more accurate the inflation expectations, the more vertical the SR-AS curve appears.*

The AS-AD model has many of the typical S&D features. The initial equilibrium is the intersection between the original AS and AD curves. There is a price and quantity implication when one of the curves move. An increase in AD results in some combination of higher prices and greater output – depending on nominal rigidities. An increase in the SR-AS curve results in some combination of lower prices and higher output – depending on the slope of aggregate demand.

Of course, the real world is complicated – sometimes multiple shocks occur and multiple curves move simultaneously. If that is the case, then we can simply say which curve ‘moved more’. We should also expect that the long-run productive capacity of the economy increased over the past two years, say due to technological improvements, such that the new equilibrium output is several percentage points to the right. We can’t observe the AD and AS curves directly, but we can observe their results.

The big questions are:

What happened during and after the 2020 recession?
Was there more than one shock?
When did any shocks occur?

Below is a graph of real consumption and consumption prices as a percent of the business cycle peak in February prior to the recession (See this post that I did last week exploring the real side only). What can we tell from this figure?

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