Berkeley Talks transcript: Will the post-pandemic era be the next ‘roaring ’20s’?

Listen to Berkeley Talks episode #106: “Will the post-pandemic era be the next ‘roaring ’20s’?”

Leo Feler: Welcome to this edition of the UCLA Anderson Forecast Direct. We’re very pleased to have with us professor Martha Olney. Professor Olney is at UC Berkeley. She has been at UC Berkeley since 1991 and specializes in, amongst many topics, economic history, race, credit allocation, discrimination, and so we’re very thrilled to have her on this edition of Forecast Direct.

Martha Olney: Thank you very much. It’s great to be here.

Leo Feler: So professor Olney, we wanted to start off with some questions comparing the 1920s, since you’re an economic historian, with what this next decade might be like. So there’s been some discussion that we’re going to have the roaring 2020s coming up, drawing parallels to the roaring 1920s. And I wanted to get a sense from you, what were the 1920s like economically and socially?

Martha Olney: It’s an interesting question to think about the parallels, because what immediately comes to my mind as somebody who, when I studied the 1920s, I was really focused on consumer spending. And the piece of consumer spending that I was focused on was particularly household spending for durable goods, so cars, appliances, furniture, jewelry, those sorts of things, and the role of installment credit in making a boom in consumer durables possible.

When I very first started my work for my dissertation, this is eons ago, in econ speak, I was looking to see was there a shift in demand for durable goods? Or was it just a movement along an existing demand curve? And that led me down a long path, which got me to the conclusion of it was a shift in demand. And it was a shift in demand that was facilitated in large part by increased availability of consumer credit, primarily in the 1920s in the form of installment credit.

Credit cards don’t come along until the 1950s. Credit from merchants had been there previous to the 1920s, but the development of the installment plan was something that was new to the 1920s. And so, when I think about the 1920s, what I think about is the ways in which families were able to access credit and purchase goods that they would not have been able to afford otherwise. When I did my work back in the ’80s, it was before the admin of behavioral economics. And so when I was doing my work, the response to it was, “Well, but that would not be economically rational. Why would they buy on credit when they could simply save up the money and not pay all of that interest? And then they could use the saved money in order to buy those things.”

And at the time, we didn’t have Matt Raven and others who had already done all this great work to show that people don’t do that. People aren’t good at planning for the future and saving now to buy something in two years. But they are good at making their payments once they make a commitment. And in fact, that’s what we saw in the 1920s, that people bought on credit. So when I think of the ’20s, what I think of is there was widening inequality. But it was also a time when a lot of families were introduced to consumer goods and consumerism in a way that hadn’t been true previously.

Leo Feler: So, did this lead to a boom in consumer spending?

Martha Olney: Yes.

Leo Feler: … and introduction of installment credit?

Martha Olney: Yes.

Leo Feler: So now when I think about credit has become more easily available and look at mortgage rates below 3% right now, car manufacturers are offering 0% loans for 72 months, do we have… It’s not a novelty. It’s just easier to get credit for those that qualify now. Do you think that might drive a boom in consumer spending these next few years?

Martha Olney: It certainly could. It certainly could. And the interesting thing to me about installment credit, both the car loans that you’re talking about for now and in the 1920s, is people are making a multi-month commitment. In the 1920s, they were making a 12- to 24-month commitment. And now you’re right, it’s a six or seven-year commitment for a car. And people typically don’t make those commitments with the intention of not seeing them through. So, you go into buy a car, and you sign on the dotted line, and you’re going to pay for this car over the next six years. And most people don’t do that with the like, “Yeah. Or, you know, if I can’t make my payments, they’ll repossess the car.” And so, what I found from the 1920s carrying into the 1930s was people taking on these installment debt contracts were not willing to default on the contracts.

And so, when push came to shove, when there were pay cuts… I assume you at UCLA, as well as us at Berkeley, you have pay cuts coming this coming year. When there were pay cuts, when there were layoffs, what I found was that people didn’t default on their installment contracts. They cut back on their consumption spending wherever they could in order to make the payments on the car and not lose the car. That’s great if you are the company that has lent the money to the consumer to buy the car, because you’re not getting all the defaults on those contracts. Not great for the restaurants in town, not great for the clothing stores in town, because those are the kinds of spending that people cut back on. When we had the 2008 crisis and we had so many people who had become heavily indebted, both in mortgages and also in home equity lines, in that case if you defaulted on that home equity line of credit, you lost your house.

And so when there were, again, pay cuts in the 2008-2009 period, you saw this nationwide. So, this is the work that me and [inaudible] have done, but we saw it very vividly around here in Berkeley where the restaurants were empty. People didn’t lose their houses. They didn’t lose their cars. They did not go out to eat. They didn’t go shopping. They didn’t go out to eat. And so, there were these big cutbacks in consumer spending. And so you get this irony where you get this boom in credit financed, durable spending that then obligates people to make fixed regular payments that is great so long as their income stays up. But then if there’s a crisis that happens, such as 1930 or 2008, then people look for ways to complete those contracts, even in the face of declining income.

Leo Feler: Yeah. So, now heading into this decade then, this suggests that this might be a headwind, because we’ve seen people go out and get mortgages, buy houses in record numbers. And sure the interest rates are much lower, but these home values and these home prices are higher. We’ve seen consumption of durable goods spike during this period of time. What we’ve seen is people cutting back on services. And I guess the intuition is that once we are able to go out and spend, all that pent up demand is going to get released and people will go to restaurants. People will go to bars.

But to your point, we have to keep in mind that yes, while overall the economy has been able to accumulate savings during this period to be able to do that, there is this risk that they’ve also taken on several new contracts on your durables, on car payments, on home payments. And that leaves the economy in a precarious situation should things not turn out as we envision them. Then, people have to cut back and actually not consume on restaurants and bars and hotels.

Martha Olney: I’ll tell you, since you’re down there in LA, the visual that I have in my head is the surfer who has just caught an amazing wave. And it’s just like, the adrenaline is rushing because they’re on top of this fabulous wave, never ends well.

Leo Feler: Do you think we’re at that position now?

Martha Olney: Not yet, no.

Leo Feler: So, the 1920s, we know how it ended with the Great Depression, and we learned a lot of lessons from that. We created institutions to prevent that from happening again. And yet 2008, we saw that there were some frailties in those institutions. Going in now into this pandemic and this recovery, what do you think are the risks of something like the Great Depression happening again? Or is that just a foregone conclusion at this point that it can no longer happen?

Martha Olney: We did put some measures in place in the 1930s to try to prevent this from happening again. And then over time, we weakened those, so a lot of the banking reforms for instance. The other thing that I have thought about a lot is the changes in what we produce over the last a hundred years or so and the impact of that on the pace of recovery from recession. I have some work with [inaudible] where we looked at the rise of services in the United States and how the rise of services has lengthened recovery from a recession, once you control for the depth and the length of the downturn. And the estimates that we had are that recoveries today are 40% longer than they were.

If we had today the mix of goods and services that existed half a century ago, recoveries would be 40% shorter. When we have a good spaced economy… And I’ll tell you, thinking about this, the evolution of this idea in my head really came from teaching macro for years to undergraduates and telling the classic Keynesian story about how do recoveries happen? And there was always the stories that we told have always been stories based on a good space economy.

So, there’s a little bit of optimism that starts, and production picks up, and then people get jobs. And when they get jobs, they can go out and they can go shopping. And when they go shopping, that creates jobs for somebody else. And they can go out, and they can go shopping there. We get our standard Keynesian multiplier. Well, what starts that whole process off? What has to start that whole process off has to be the production of structures or goods, because those things can be produced ahead of demand. Services are produced and consumed in the same moment. And so the restaurant meal isn’t produced until you and I are sitting in the booth or at the table. Your teeth aren’t going to get cleaned unless you actually go to the dentist and sit in the dentist’s office. And so the services that are produced are only produced when the demand exists.

And so, is it as an ever increasing share of an economy is based on services, that share of the economy has to wait for the recovery to take hold in order for the recovery to continue taking hold. But the recovery starts with the goods sector.

Leo Feler: Do you think this time is different because of the pandemic?

Martha Olney: See, that’s an interesting question. If this recession is different, because what happens is when the lockdowns end… And this is where it’s interesting to think about is this going to be a moment or is it… Fauci has talked about how the end of the pandemic, it’s not going to be a moment. It’s going to be a phased in thing. So, is there going to be a time when they say, “Okay, great. Everybody, you can go back to restaurants now.” And then everybody goes to restaurants, and then the multiplier kicks off and voila, we’re good.

Or is there going to be a time when the current California lockdown ends because we get less usage of our ICU beds, and you could go back to restaurants, and some restaurants open and some don’t, and some people get vaccinated and more people get vaccinated, and then more people go to the restaurants, and then the jobs get created? It could be. It could be that the decline in services demand this time has not been income-driven but has been regulation-driven, I guess is the way to say it.

Leo Feler: Well, regulation and fear.

Martha Olney: Yeah, pandemic-driven, one way or another. So, it could make a difference. But it’s interesting to just… I’ve got some… Just so I made sure I did my numbers right when I talked to you, I printed out some things. In the U.S. economy today, over 60% of what we produce are services, if you take shares of GDP. And I believe it’s over 80% of jobs are service producing jobs. About 30% of what we produce are goods, and about 10% of what we produce are structures. If you compare that with say the 1950s, in the 1950s, about 50% of what we produced was goods, instead of 30% today. About 40% of what we produced were services instead of 60% today. And again, about 10% was structures.

So, the structures part doesn’t really change. It’s this switch between goods and services. In addition to the lessons from the ’20s, this is another piece that’s in my head and I’m thinking about as to how this post-pandemic recovery might unfold.

Leo Feler: Do you think that we are at a different structural point of our economy where we won’t be able to sustain continued 3%, 4% growth per year the way that we had after the 1930s, after coming out of the Great Depression?

Martha Olney: Yes, I do. And I think that, again, because of this rise of services, and the gains in productivity and services just aren’t as possible as gains in productivity and goods manufacturing. And when you look at the productivity growth rates over the last 50 years and break it out by growth in productivity, in goods manufacturing, versus growth in productivity in service production… They don’t talk about service manufacturing… service production, the productivity growth in a good sector, almost always outstrips productivity growth in the service sector. But there’s just limits in terms of the increases in productivity and service production and far less in goods manufacturing.

So, goods manufacturing, there’s less of a limit in terms of the gains in productivity, although they come from capital for labor substitution. And so as we shift towards a more service dependent economy, that’s going to in and of itself slow down the possible rates of growth of productivity.

Leo Feler: I hear you. I hear you. Well, thank you, professor Olney. It’s been a pleasure. I really appreciate it.

Martha Olney: Thank you so much for the invitation, I really appreciate it.

Leo Feler: Thank you.