The Economic Recovery Is Working – The American Perspective
April employment numbers are out. Last month, the US economy created about 428,000 net new jobs and the unemployment rate held steady at 3.6%. That’s weaker than reports from last year, but still stronger than most reports from the Obama or Trump administrations. More importantly, as Skanda Amarnath, Executive Director of Employment America, pointed outwe reached a very important milestone: the proportion of workers aged 25 to 54 in full-time employment matched the pre-pandemic mark of 71.8%.
It took just two and a half years to regain strength in the US labor market after the pandemic caused the worst economic shock in US history. This draws a stark comparison with the period following the 2008 recession, when it took almost 13 years to reach the same level for workers aged 25 to 54.
Proof of this is the amount of stimulus between the two disasters. The Great Recession saw a stimulus package under President Bush of $152 billion and the Recovery Act of $831 billion, or about 7% of 2008 GDP combined. During the pandemic, on the other hand, we had about $5 trillion in stimulus spread across all the different bailouts, or about 23 percent of 2019 GDP.
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Obama administration economists knew at the time that their stimulus package was not big enough, but they refrained from trying to get a bigger one or increase its effects with legal trickery. . The Great Recession was only great because the response was not as big as the hole it was meant to fill.
Now it is open to debate whether the US $1.9 trillion bailout package (passed in March last year) was too big. I admit there has been considerably more inflation than I anticipated when it was passed, and some provisions were clearly a little rushed (like aid to state and local governments, which doesn’t has not even been spent yet in many places). On the other hand, the pandemic and the supply chain disruptions caused by the war are certainly a major driver of inflation – just look at the price increases hitting Europe and the UK, which haven’t done nearly the same amount of stimulus. It’s easy to imagine an American counterfactual where inflation is only a little less bad but where we are still at 6% unemployment.
In my opinion, even if the ARP was greater than ideal in retrospect, it was far from clear at the time, and it was always better to overshoot than undershoot. The US economy has recovered in terms of jobs and growth faster than any other major economy, even China, something that hasn’t happened in over 20 years. And it’s better for the Federal Reserve to raise interest rates ahead of a booming economy than to pull a string in an attempt to revive a still weak economy, even with zero interest rates.
It’s a lesson we learned in the lost decade after 2008. The Fed tried all sorts of tricks back then to stimulate demand – holding rates at zero for years, large and continuous asset purchases to inject more cash into the economy, etc. None of them worked to restore full employment in time.
What worked this time was the raise and a lot of things. There is every reason to think that more stimulus would have had the same effect in 2009 – in fact, it would certainly have worked even faster, as the shock of the financial crisis was nowhere near as severe as the shock of the pandemic. A bank run within the financial system and a drop in home values were bad enough, sure, but ultimately the problem was all about social constructs: money, businesses, contracts, the value of assets, etc. These were created by humans and could have been fixed by humans relatively easily, given enough political will.
The pandemic, on the other hand, has caused extreme physical disruption to the daily lives of everyone on the planet. Businesses that relied on in-person activities, such as bars and restaurants, were either bailed out by their national governments or went bankrupt by the tens of thousands. The sudden pullback in consumer spending caused unemployment to rise an order of magnitude greater than any in American history. Online delivery companies were overwhelmed with new orders and struggled to build capacity. Demand for oil fell so rapidly that for a brief period, oil futures entered deep negative territory. Hospitals and clinics have been run to shreds trying to care for millions of COVID-19 patients. More importantly, of course, more than a million Americans have perished from the virus, and millions more have suffered from lingering side effects. It’s amazing that the economy has recovered so quickly.
It is important not to oversell this. Real wages are falling due to inflation, which has given the public a shockingly negative view of the economy. They are right to be unhappy to be working less than a year ago. But many more work, and weren’t in the lost decade. Since almost all workers are affected by inflation and only the unemployed are affected by mass unemployment, the situation may be worse overall. But millions of people have the stability they didn’t have after the last crisis. We must not forget what caused this.
In the future, the policy of austerity will make its appearance. President Biden is already starting to brag about cutting the budget deficit like Obama was constantly doing. It will be essential to remember this period the next time a recession hits – we may have some inflation now, but that only proves that the stimulus is working, and anyway a modest rise in prices is better than a mass unemployment. John Maynard Keynes was right all along.