Ivan Illan is Chief Investment Officer at AWAIM® and bestselling author of Success as a Financial Advisor For Dummies.
As a student of economic history, it never ceases to amaze me how many times the adage of “while history may not repeat itself, it often rhymes” comes to fruition.
In the course of our firm’s routine macroeconomic research, we discovered yet another example of such rhyming. The periods of 1975 to 1980 and 2019 to 2024 witnessed similar percentage increases in U.S. public debt per capita (around 50%) and modest increases in real disposable income (less than 10%). This is hardly a coincidence since both periods included highly similar contributing factors, which could explain these disturbing trends.
1975-1980: Economic Stagnation And Inflation
The 1970s experienced a period of stagflation, which is characterized by high inflation and stagnant economic growth. The result was an erosion of real disposable income, despite nominal wage increases. The oil crises of 1973 and 1979 led to skyrocketing energy prices, contributing to inflation and reducing disposable income.
Increased government spending on social programs and defense during the Cold War era contributed to rising public debt. In particular, an expansion of Social Security benefits and cost-of-living adjustments increased expenditure. Also, increased and extended unemployment insurance payouts were implemented to support the large unemployed population. Lastly, welfare programs, such as Aid to Families with Dependent Children experienced a dramatic increase in enrollment with food stamps and other nutritional assistance programs significantly expanded to address poverty and hunger. Efforts to combat economic stagnation through fiscal stimulus also increased public debt.
High inflation during this period led to high interest rates, which substantially increased the cost of servicing public debt. More debt and higher costs mean more debt to pay for higher costs, begetting a challenging upward spiral of debt service payments.
2019-2024: Covid-19 Pandemic And Aftermath
The pandemic led to unprecedented government spending on relief programs, including stimulus checks, unemployment benefits and business support, significantly increasing public debt. However, despite these drastic measures, real disposable income growth has been limited due to economic disruptions and rampant inflation.
Fiscal policies, including relief packages in the form of the CARES Act (2020) and the American Rescue Plan Act (2021), aimed to stimulate the economy. Infrastructure spending through the Infrastructure Investment and Jobs Act (2021) and support for businesses with the Paycheck Protection Program contributed to enormous public debt increases. Monetary policies, including low interest rates and quantitative easing, aimed to support economic recovery but also increased debt levels.
The post-pandemic recovery experienced supply chain disruptions and labor shortages, contributing to inflation and limiting real income growth. Rising costs of goods and services outpaced wage growth, further reducing real disposable income. Initially, low interest rates during the pandemic helped manage debt servicing costs, but rising rates in response to inflation then increased these costs over time.
The Path Forward
Both periods saw significant government spending in response to economic challenges, leading to increased public debt. Inflation played a critical role in both periods, eroding real disposable income despite nominal wage increases. Both periods experienced significant economic disruptions (oil crises in the 1970s and the Covid-19 pandemic in the 2020s) that necessitated increased government intervention and spending.
Understanding these factors could help in formulating policies to manage debt and support income growth in future economic cycles. But unlike periods in the past, recent government spending has proven to be less impactful on GDP growth than ever before. As a result, fiscal prudence on household and business spending could indicate a better path forward.
Businesses should become even more selective in their capital investments to generate future growth. Households should be even more discerning in their investment portfolios relative to their goals. Relying excessively on equities to fully fund a retirement plan, for example, may increase the risk of running out of money too soon. And given the demographics of the U.S. population (e.g., baby boomers), this could add further strain to the economy in the coming years if fiscal policies are not implemented to reduce government debt sooner rather than later.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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