For some people, the COVID pandemic has had a silver lining: more savings. According to the Federal Reserve Bank of St. Louis, American savings rates reached a 60-year high of 33.7 percent in April 2020 up from 12.9 percent in March 2020. (We have data on savings rates going back to 1960.)
This means that month Americans saved an about a third of their income, on average. This percentage has remained high, at 20.5% in January 2021, the most recent data available at the time of this writing. For context, the previous high was 17.3 percent in May 1975. The National Bureau of Economics Research reported that 27 percent of stimulus payment from the CARES act was saved as well.
Saving money is good, right? While it might be good for individuals, it isn’t so good for the economy, especially when people stop spending money at local businesses, which in turn may lay off employees or shut down entirely. In April 2020, the unemployment rate skyrocketed from 4.4 percent to 14.7 percent, according to the Bureau of Labor Statistics.
Let’s think about all of the things people likely spent less on when the economy shut down (feel free to add to this list in the comments):
- Meals at restaurants
- Tickets to concerts, movies, and other gatherings
- Haircuts and other personal beauty services
- Spontaneous purchases in brick-and-mortar stores
- Lodging and other travel expenses (like rental car costs, tours, and entrance fees)
At my university, we normally have to pay to park on campus (yes—even faculty pay—with the exception of Nobel laureates, who get free parking for life). When the stay-at-home order started, we were required to work from home, so the university stopped taking the parking fee from our paychecks. The city also taxes local parking, so the city lost quite a bit of revenue. While not everyone drives to work, the university employs over 28,000 people, so that’s a lot of parking money and taxes lost.
I have saved hundreds of dollars just from not commuting to campus on parking and gas, and have gotten several rebate checks from my auto insurance provider for driving so little. All of my travel plans were canceled, saving me thousands of dollars (but of course causing some disappointment).
Not everyone spent less money during the pandemic; it was the highest-earning households that reduced their spending the most. As Harvard Business School-based Opportunity Insights reported, the top 25 percent of earners’ credit card spending declined by two-thirds, while the bottom 25 percent of earners spent about the same amount as pre-pandemic. This is likely because higher earners’ spending is likely more discretionary (dining out, and other things that are not necessary for survival), while lower earners likely spend the majority of their income on basic necessities like rent and food.
While some people benefited by spending less money, many people suffered because so many others spent less. In my stay-at-home situation, campus restaurants lost business when students were sent home and employees largely remained off campus. Meetings that were catered went on Zoom, so local restaurants and all of the people in food service jobs lost business. Ironically, those working in service-sector jobs in higher-income areas lost the most work, according to Opportunity Insights:
As businesses lost revenue, they laid off their employees. In the highest-rent ZIP codes, more than 50% of low-wage workers at small businesses were laid off within two weeks after the COVID-19 crisis began; by contrast, in the lowest-rent ZIP codes, fewer than 30% lost their jobs.
People with jobs in leisure and hospitality (hotel workers, food service workers) were the most likely to lose their jobs or experience a reduction in income from the pandemic-related shutdowns. When the conference I was scheduled to attend was canceled, thousands of hotel rooms went vacant and even more thousands of meals at restaurants near the conference were never purchased. A net saving for some means job loss for others. When my flight for a European vacation was canceled, after a few phone calls I got my money back, but the airline lost thousands of dollars in revenue, as did the places where we had reservations to stay.
Inequality.org details how the pandemic exacerbated income inequality:
Of the more than 600 U.S. billionaires, the richest five (Jeff Bezos, Bill Gates, Mark Zuckerberg, Warren Buffett, and Elon Musk) saw an 85 percent increase in their combined wealth during this period [March 18, 2020-January 18, 2021], from $358 billion to $661 billion….
Oxfam reports that from March 18 to the end of 2020, global billionaire wealth increased by $3.9 trillion. By contrast, global workers’ combined earnings fell by $3.7 trillion, according to the International Labour Organization, as millions lost their jobs around the world.
While I doubt that most people who were able to save money from the pandemic-related shutdown are happy that it happened, it is another tangible reminder of the impact of income inequality. Considering those considered essential workers risk greater exposure to the virus, the costs are more than financial.