How to make sure this recovery is quicker than the last
We're only a few weeks into the national coronavirus lockdown, and it's pretty clear the country is already in a deeper economic hole than in 2008.
In the Great Recession, it took approximately two years for the jobless rate to peak at 10 percent. This time around, roughly 17 million Americans have filed for unemployment in less than a month. That by itself gets us an unemployment rate around 13.8 percent. And there's every reason to think unemployment will go significantly higher before the turnaround starts.
Another thing that should be pretty clear is this: We absolutely cannot afford another recovery like the one we had after 2008.
Once the Great Recession commenced, it took almost a decade for the unemployment rate to get back down to its previous ebb. That slow-grind recovery meant years and years in which people couldn't find work and couldn't repair their livelihoods. It permanently ruined millions of families; it destroyed voters' trust in their government and their society; it drove the Tea Party and a poisonous right-wing backlash that ultimately put President Trump in office. Frankly, if we're starting from 15, 20, or even 25 percent unemployment, it's difficult to imagine how we could have a similarly slow recovery that doesn't destroy the country.
Now, back in the middle of the last century, America regularly had what economists call "v-shaped" recoveries: Even if the initial job loss in a recession was quite deep, employment made it all back up extremely fast. And a lot of initial projections of the coronavirus crisis blithely anticipated a v-shaped recovery with a quick rebound in the latter half of 2020 — though the realization seems to be dawning that there's no inherent reason to expect this. Indeed, the last three recessions, in 2008, 2001, and 1990 (in blue, brown, and black in the graph below) have been quite different. Jobs and wages took forever to claw their way back: an "L-shaped" recovery. And this repeated process, of employment falling and taking years to recover, goes a long way towards explaining why most Americans' pay has stagnated for the last three or four decades.
— David Dayen (@ddayen) April 3, 2020
At a basic level, the v-shaped recessions and recoveries of the past happened because aggregate demand — how much households and businesses want to spend — regularly outpaced the economy's capacity to generate aggregate supply — i.e. goods and services. Policymakers worried such an overshoot would cause too much inflation, so the Federal Reserve would step in to tighten monetary policy and raise interest rates. That would cut off the flow of credit needed to make spending happen, and a recession would result. But as soon as the Fed loosened again, households and businesses quickly bounced back.
"Today, and really since the 1980s or 1990s, we've had an economy where demand tends to lag behind supply even in good times," J.W. Mason, an associate professor of economics at John Jay College in New York City, told The Week. The bottom-up pressure of abundant demand that powered the economy in the mid-century, and that the Fed sometimes got in the way of, has simply gone away. In fact, the last few recessions were caused by some crisis in the economy — a bursting stock bubble, the housing collapse — even as the Fed loosened monetary policy and cut interest rates to fight the downturn. "Even with abundant credit, businesses are just wary of investing that much and households don't feel they can expand their spending that much," Mason said.
Ask a mainstream economist why that bottom-up pressure of aggregate demand went away, and they'll likely tell you it's a mystery. But I don't think it's too hard to speculate: The mid-century period came right after World War II.
The government pumped massive amounts of spending and investment into the economy to fund the war effort, driving unemployment down to an astonishing 1.5 percent. Meanwhile, the Fed kept interest rates low to help finance all the government borrowing, and inflation was managed with specific regulations regarding prices and how much credit private banks could create.
Even after the war ended, it took a long time for the aftereffects of that massive demand infusion to dissipate — or, more precisely, for the rise of free-market economics to convince policymakers to deliberately dismantle that economic inheritance. WWII-era taxes on the wealthy were astonishingly high, which prevented them from extracting the money from the economy, and those tax rates weren't cut until the 1960s. The Fed didn't start using interest rates to control inflation again until 1951. Union strength remained high, and Congress kept steadily increasing the real minimum wage, until almost 1970. Federal regulations that prevented corporations and financial firms from growing too large and gaining too much exploitative market power lasted several decades as well before policymakers tore them down. It arguably wasn't until 1980, when Fed Chairman Paul Volcker set off a massive recession to combat inflation, that the WWII era's economics of bottom-up demand were finally wiped out.
The lesson should be obvious: If we're going to have a fast and robust recovery from the coronavirus-induced recession, we need to go back to that old policy playbook. The U.S. government must step in and provide the spending and investment that private households and businesses can't muster.
In fairness, the CARES Act Congress recently passed at least gets the ball rolling. It gave a big boost to unemployment benefits, and started up a lending program aimed to keep businesses from folding on the condition they keep people employed. The trick will be keeping the increase to unemployment benefits going, and the small business lending program well-financed, not just until the threat of the coronavirus has passed, but through the economic recovery as well. If we do that, we'll pump a lot of demand into the economy that households and businesses can then draw upon.
But to be safe, we should look at reconstituting WWII-style government investment and economic planning. There's already talk of this to provide the medical equipment and services needed to combat the virus itself. But this approach is equally useful for getting the economy back on its feet after the crisis. We just need the right peacetime-equivalent project to WWII. A Green New Deal would be perfect: It would involve massive public investments and hiring to build out America's renewable energy capacity, to electrify all our cars and vehicles, to refurbish our homes and buildings to be energy efficient, and more. Barring that, President Trump and some members of Congress have at least been talking about a big new infrastructure bill.
Mason recently projected that we'd need to spend about $3 trillion, both to sustain the economy during the coronavirus pandemic and help it recover afterwards. But that assumed the downturn would be as bad as 2008, and we now know it will be significantly worse. Given that the economy was already in the doldrums for decades, and the CARES Act was only $2.2 trillion, we should be thinking about spending several trillion more.
If we want the old v-shaped recoveries back, that's what it's going to take.
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