Recovery from recessions can often be characterized by an explosion in pent-up demand, but the current boom has little precedent. If the Federal Reserve is correct in forecasting that economic growth will reach 7% in 2021, it will be the strongest performance since the recovery from the double-dip recession of the early 1980s. But this good news is no accident. .
It may upset supporters who are unwilling to give this administration – or the previous one – any credit, but this reopening validates last year’s political experience of being bolder, more generous, and quicker in times of crisis.
The early successes of this recovery stem from how Congress and the Federal Reserve, our country’s central bank, approached the pandemic recession using a new approach: go early and go deeper in political support. As the economy came to a halt, policymakers resisted popular misconceptions and handed households and businesses loose cash assistance. Congress passed stimulus with the general mantra that the cost of doing too little was greater than potentially doing a little a lot.
“Congress passed stimulus with the general mantra that the cost of doing too little was greater than potentially doing a little a lot.”
In the last recession, when the federal government did less, people in their early working years were still dropping out of the labor market six years after the recovery started, and the labor share of national income fell to a low. all-time low in 2014. Mortgage defaults and foreclosures have remained near record highs. By 2011, the gap by which unemployment of blacks exceeded that of whites had reached a decades-high.
This time around, we see the benefits of policy making that are not stingy. Companies that had to use funds to pay their employees and cover essential operating expenses typically did so; workers who were unemployed received additional cash assistance, which they fed back into the economy to cover necessities and, yes, to buy products from home.
The current explosion in growth and hiring has had a less welcome companion, inflation. The Fed’s preferred indicator for consumer inflation rose 3.9% in May from a year ago – and could rise in the coming months – fueling intense speculation among followers of the conventional economics as to whether we will see a return to the high inflation of the 1970s or a loss. confidence in the US dollar.
“There is intense speculation among adherents of mainstream economics as to whether the United States will see a return to the high inflation of the 1970s or a loss of confidence in the dollar.”
Nevertheless, it should be remembered that there is a deliberate reason for this new political approach. After years of reflection, the Federal Reserve last year codified a new approach to monetary policy with the promise to seek a “broad and inclusive” achievement of maximum employment: to keep credit cheap and accessible. long enough to produce a strong labor market that could reduce social disparities and increase productivity.
This simpler approach to monetary policy
was accompanied by the fiscal stimulus enacted in 2017 – the significant tax cuts enacted by the last administration – and carried out during an expansion, in defiance of the traditions of fiscal conservatism celebrated by the leaders of both parties. The new framework won. Right before the pandemic, there was stable, non-inflationary growth, stronger wage growth for low-wage workers, and the narrowest gap on record between black and white unemployment rates.
And now, the first evidence shows that the new, more generous economic framework – now enforced by the Biden administration in its own way – is being proven once again.
WEALTH IS ON THE RISE AND THE DIFFERENCE BETWEEN THE TOP 1% AND THE LOWER 50% IS NARROW THAN DURING THE LAST CRISIS.
This will be the first recession in which consumers of all income and wealth levels emerge with a stronger financial position than when they started. Growth is booming and consumer confidence in June hit its highest level since February 2020.
CONSUMER CONFIDENCE IS RISING.
Households have used the various sources of cash support – like stimulus payments and unemployment benefits – to feed their families or consolidate their savings and keep their homes and cars, even as millions of jobs have been lost . The Census Bureau reported a drop of more than 30% in the number of Americans suffering from hunger last year, a marked departure from the increase in hunger and poverty that typically accompanies a recession.
FEWER PEOPLE ARE IN DELIVERY ON THEIR LOANS.
Defaults on a range of consumer loans such as mortgages, auto loans and student loans have fallen from already low levels last year, reflecting both cash support and effort policies that allowed some loan repayments to be temporarily withheld during the pandemic.
Mortgage foreclosures and personal bankruptcies are at an all time high. Consumers spend money but don’t get into much debt and keep a lot of savings.
PEOPLE ARE LOOKING FOR JOBS, BUT MANY ARE WAITING FOR SOMETHING BETTER.
Companies complain about labor shortages, but millions of people are actively looking for work. A recent survey by the placement platform Indeed showed that workers are looking for a job but not on an urgent basis – a reflection of health concerns, challenges with childcare and the fact that some have provided a financial cushion, this that gives them a way to say no to bad, low-paying offers.
Others have more financial leeway because of the income of a working spouse. Political support does not discourage work, but rather gives workers stronger bargaining power. This can disrupt business models that have become dependent on a plentiful and cheap labor force, but those that adapt are likely to be more productive.
THE GAP OF BLACK-WHITE UNEMPLOYMENT IS REDUCING.
Workers in the leisure and hospitality sectors, who have suffered the most from job losses due to the pandemic, see the biggest pay increases, and the gap between black and white unemployment rates has shrunk at a rapid rate.
Yet political support was far from complete. Too many workers have still fallen through the cracks. As a recent Bloomberg article documented, millions of people have had difficulty claiming unemployment benefits, and the effectiveness (and generosity) of benefits varied widely from state to state. The most recent census reading showed an increase in hunger. The distribution of income and wealth in the US economy is still very uneven. Positive news on some fronts does not mean mission accomplished.
INFLATION IS ON THE RISE BUT SEEMS MODERATE IN THE LONG TERM.
Most of the price spikes consumers are experiencing this year are clearly linked to supply chain disruptions or readjustments made during the reopening. These account for most of the surge in inflation to date.
More conventional policy advisers who are very clearly concerned about inflation on TV may be correct that we will see more persistent inflationary pressures, but markets are generally voting with the Fed’s assessment that the heat from that moment will be largely transitory. Interest rates are still low, with little indication that the creditworthiness of the United States is in question.
We could very well see a slightly higher execution rate on wage growth and inflation in the years to come, and the Fed might have to raise interest rates at some point to keep it under control, but this would most likely be because we have reached full employment faster than in recent economic cycles, an indicator of success.
While the policy response to the pandemic was flawed, having a bolder Congress and a more generous Fed is paying off. The economic scars typically associated with job loss during a recession have been reduced. And now we can emerge with healthier and broader consumer activity, the key to fueling our economy.
Amidst all the terror and cynicism vying for our attention, the good news this summer shows that we can truly learn from our mistakes and make policies that improve people’s lives.