How the virus could weigh down America's economy for the long haul
The pre-pandemic economy's biggest problem is only going to get worse
President Trump frequently called the pre-pandemic American economy the best in the country's history. And in some ways it was pretty impressive. The stock market was way up and unemployment way down — as the president's social media accounts constantly reminded us.
But all that good stuff only came after a long, so-so recovery from the Great Recession. In the decade before that devastating downturn — one many of us probably thought would be the worst we would ever experience — economic growth averaged 3.3 percent a year, adjusted for inflation. In the decade after the 2007-2009 recession, however, growth averaged 2.3 percent, a percentage point lower. And that slower pace was a big reason wage growth was steady but unspectacular.
Now, of course, the quarantined economy is suffering its worst contraction since the Great Depression, if not ever. It might shrink as much as 40 or 50 percent, on an annualized basis, from April through June. But as states gradually reopen, the economy should start growing again, maybe quite quickly at first. After that, it might oscillate between slower and faster growth, depending on the future path of the coronavirus outbreak.
For his part, Trump is tweet-promising to "build the greatest economy in the world AGAIN!" But we have to do better. Much better. Before the COVID-19 collapse, economists from Wall Street to Washington were forecasting the long-term U.S. growth rate at a bit below 2 percent. One reason is the demographic-driven decline in labor-force growth. America is getting older and having fewer kids. With fewer new workers, the ones we have will need to be more productive, at least if future growth is going to be anywhere near as strong as past growth. Unfortunately, rich nations entered into the pandemic in the midst of a 15-year-long productivity growth slowdown.
Now there are also all sorts of virus-related reasons to think even those reduced growth and productivity rates will be tough to achieve going forward. Maybe the Two Percent Economy downshifts to a One Percent Economy. In the new analysis "The COVID crisis and productivity growth," economists Filippo di Mauro of the National University of Singapore and Chad Syverson of the University of Chicago highlight several reasons for concern. Among them: disruption to schooling, the loss of operational know-how at failed firms, and the creation of "zombie" companies that survive long after the pandemic only due to government support. About that last point, Di Mauro and Syverson write, "While there are arguments for limiting business closures at least in the short run, zombie firms might further limit the ability of new, higher-productivity businesses to enter."
But some of the wounds might be self-inflicted if a more risk-averse, pandemic-shocked society and government pursue populist, "drawbridge up" responses to the pandemic. Case in point: Trump suspending immigration to protect jobs. While the measure is supposedly temporary, it gives aid and comfort to the notion that immigrants are bad for the economy. That simply isn't true. The latest piece of evidence is a new NBER working paper, "Immigration, Innovation, and Growth," which demonstrates the positive impact immigrants continue to have on American economic dynamism and innovation. From the paper: "The significant increase in local wages suggests immigration not only affects innovation and creative destruction, but also the overall level of economic growth."
Or as legendary investor Warren Buffett said the other day at the annual Berkshire Hathaway shareholder meeting (live-streamed, of course) while marveling at the "miracle" and "magic" of the American economy: "Can you imagine that? For 231 years, there's always been people that have wanted to come here." And it would be a very bad thing if they stopped coming. Immigrants account for nearly half of the U.S. workforce with a science or engineering doctorate. In Silicon Valley, 64 percent of engineers are foreign-born. Indeed, more than half of U.S. startup "unicorns" have at least one immigrant co-founder.
Perhaps even more likely than more anti-immigration policies are more anti-trade actions. Trump has already mused about slapping China with $1 trillion in tariffs as punishment for the pandemic, while Sen. Josh Hawley, a Missouri Republican, just wrote a New York Times op-ed calling for the World Trade Organization to be abolished. Across the conservative world there are calls for "industrial policy," a wonky term for a range of actions including trade protectionism and subsidies for favored industries — especially those whose owners or workers lean toward the party dispensing the favors. Sounds like a recipe for even more zombie companies.
The coronavirus has created myriad obstacles to faster economic growth and the opportunities it generates. Don't think populism can't make things worse.
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