The recession caused by the Covid-19 pandemic was the shortest on record, thanks to swift, robust and bipartisan congressional action. It took a little over two years to recover all the lost jobs – hard to fathom because of that more than six million people filed unemployment insurance claims in one week at the end of March 2020. Americans were overwhelmed by their government, which prevented what would otherwise have been massive financial suffering.
“This is the best, most successful response to an economic crisis that we’ve ever done, and it’s not even close,” H. Luke Shaefer, a professor at the University of Michigan who is an expert on deep poverty, told House committee in the fall of 2021.
But as Dr. Shaefer testified, inflation began to rise, sucking all the air out of the room. As the economic conversation turned to inflation and its causes (and stayed there), the debate shifted from what the government had achieved to whether it had gone too far. Inflation hawks blamed the pandemic response for boosting consumer demand, which, in their telling, drove up prices, causing pain for many people as the cost of food, rent and other necessities rose.
The debate over inflation risks reminding us of concrete evidence that the federal government is perfectly capable of keeping Americans afloat when the economy sinks. “We’ve shown we can do it, this is what we should be doing from now on,” John Jay College of Criminal Justice economist JW Mason told me. The open question, now, is whether we’ll ever do it again.
In fact, the Federal Reserve is actively working to undo many of the government’s achievements. To fight inflation, the Fed raised interest rates in the hope that they would cause businesses to cut back, spending less on wages and hiring fewer people (or even firing a bunch of them) and cooling demand. Even as inflation fell this year, the agency is widely expected to announce another rate hike next week and may very well continue to raise rates later this year.
When the pandemic started in March 2020, the federal government responded with lightning speed. Five days later declaring national crisis, President Donald Trump signed the bipartisan Families First Coronavirus Response Act on March 18. Less than two weeks later he signed the similarly bipartisan Coronavirus Aid, Relief and Economic Security Act.
Together, the packages sent about $2 trillion through $600 extra in weekly unemployment benefits and expanded eligibility, $1,200 stimulus checks and more food assistance. That December, Congress provided $900 billion more through the Coronavirus Response and Relief Supplemental Appropriations Act, which included $300 in weekly unemployment benefits and $600 in stimulus checks. In March 2021, with Joe Biden in the White House and Democrats in control of the Senate, Democrats passed $1.9 trillion through the US Rescue Plan, which included another round of stimulus checks, an expanded child tax credit and rental assistance. All in all, the relief was more than three times as much like what was offered during the Great Recession in 2007.
Results also came quickly. The pandemic recession lasted only two months. Unemployment hit 14.7 percent in April 2020 but fell to single digits within four months. The unemployment rate has stayed below 4 percent starting in early 2022. The share of employed Americans in their prime working years recently reached its pre-pandemic peak. “We really haven’t seen jobs recover at this pace,” Arindrajit Dube, an economist at the University of Massachusetts, Amherst, told me.
Difficulty was averted thanks to government aid that helped replace lost income. But as the economy quickly recovered, Americans also began to earn more, especially those with the least. Wage growth for people earning in the bottom 10 percent rose 6.4 percent between January 2020 and this past September. “That really flips the script on what’s happened in the last 40 years,” Dr. Dube said. Typically, low-wage workers see the biggest job losses in a recession, which translates into higher unemployment and lower wage growth. But not this time. Low-wage workers did suffer large job losses in the pandemic, but their wage growth was higher in this recession than in each of the last four.
Wage growth has been so strong for those earning the least, in fact, that income inequality has actually shrunk. Inequality has generally widened since the 1980s, but robust wage growth after the pandemic has erased more than a quarter of the gap between the lowest and the highest paid. “This is not the type of change we see often,” Dr. Dube said.
It’s hard to know exactly what the counterfactual would look and feel like, how deep and wide the hole would be without powerful congressional action. But Moody’s Analytics ratings that without federal aid, economic output would fall threefold further in 2020 and we would experience a double-dip recession the following year. Jobs would not recover until 2026 and unemployment would remain in the double digits until 2021. Wage growth would have crawled at a record low. Poverty would have hit record highs.
We also have the very recent experience of the Great Recession to compare it to. “My biggest takeaway from the incredible success of the labor market recovery from the pandemic recession was that the jobless recovery that followed the Great Recession was a policy choice — a cruel and misguided policy choice,” said Lindsay Owens, the liberal’s executive director. think tank Groundwork Collaborative.
In December 2008, Christina Romer, the incoming chair of Barack Obama’s Council of Economic Advisers, estimated that a federal stimulus package would need to be more than $1.2 trillion to prevent mass unemployment. Larry Summers, who would soon be director of the National Economic Council, dropped the idea. The package that passed was $787 billion. Just two years later Mr. Obama looked for “grand bargain” on deficit reduction. His eventual agreement exchanged dollar-for-dollar federal spending to increase the debt ceiling, which shaved points off the gross domestic product and saved jobs from an economy still struggling to recover.
The unemployment rate hit double digits in October 2009 and remained above its pre-recession rate for nearly eight years. Prime employment would not hit its pre-recession high mark until January 2019. Food insecurity climbed from 11.1 percent of households in 2007 to 14.7 percent in 2009. Wage growth remained stagnant for a decade.
The labor market was so soft that Americans were desperate for employment and workers were trapped in menial jobs. It was particularly painful for young people, who were stuck on a broken escalator to better employment, leaving “a huge negative impact on an entire generation,” Dr Dube said.
If the goal was to keep inflation low, the government did great – it stayed depressed for many years. But employment and wages also grew. Americans have done “poorly” despite “really, really low inflation,” said Michael Madowitz, director of macroeconomic policy at the left-leaning Washington Center for Equitable Growth. It was a “lost decade”.
It is clear that the government has made a much more successful response in the pandemic. But the victory lap was cut short. At first, businesses and conservatives began to complain that by being too generous, the government was causing too many Americans to give up. “No one wants to work anymore,” moaned employers whose employees left for better jobs. That story never held, especially considering how many studies have found that more generous unemployment benefits did no cause people to stop working, neither did taking them away push them into jobs.
Then when inflation began to rise in 2021, concern turned to the idea that federal aid was fueling it. Americans had too much government largesse in their bank accounts, the reasoning went, so they bought too many goods and services, driving up prices. Strong wage growth only fueled the fire.
But that story doesn’t quite hold either. When Dr Dube and co-authors examined this question, they found that while the tight labor market had some effect on inflation, it was only responsible for about a fifth from the rise in non-energy prices. If the only factor affecting inflation were the tight labor market and subsequent higher wages, inflation would be only 2.3 percent at the end of 2022. The economists Andrea Cerrato and Giulia Gitti came to a similar conclusion, finding that higher demand in the recovery could explain only. a quarter of the increase in general inflation.
The whole idea was always a bit ridiculous: “How did stimulus checks of $1200 cause inflation in Turkey?” Dr. Owens noted. “Probably not.”
However, many people used high inflation to blame the government for doing too much. “A lot of people, whether they’re honest about it or not, want to use the current inflationary episode as a morality play,” said Skanda Amarnath, the executive director of Employ America.
What is implied when people express outrage at high inflation, and claim that it was caused by high demand after people had stimulus checks and unemployment benefits to see them through, is that they would have preferred to supply less – which would have led to a slower, more painful recovery,” locking many people out of work for a long time,” said Mr. Amarnath. “It sounds ridiculous to say, ‘We shouldn’t be getting the jobs back quickly because of inflation.'” But that’s exactly what they mean.
Another economic meltdown will happen at some point. Lawmakers will face whether — and how — to act. They could heed the lesson of the pandemic era that the government can and must act quickly to prevent suffering and economic collapse. But if they focus instead on low inflation and decide that the better model was the anemic response to the Great Recession, we will be in for a long time that threatens the American people’s income and the economy of its potential.