The US Economy Is Thriving After Two Years of Covid. The Great Recession Is to Blame.

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When President-elect Barack Obama was prepared to take office during the depths of the Great Recession, he faced a critical issue before assuming the presidency: How much money would it take to plug the hole created by Wall Street’s implosion and the collapse of the housing market? Christina Romer, then a member of Obama’s Council of Economic Advisers, conducted three assessments and concluded that a stimulus plan needed be at least $1.2 trillion, if not more, if Obama does not want unemployment to spike.

However, another confidant, soon-to-be National Economic Council Director Larry Summers, expressed concern that the trillion-dollar figure would raise eyebrows and add significantly to the debt. When Romer, Summers, and other senior advisers met with Obama to review his alternatives, Summers proposed only $550 billion and $890 billion. “There was no real talk about exceeding a trillion dollars,” a meeting participant told journalist Ryan Lizza. In the end, Congress approved a $787 billion deal. It increased unemployment benefits by only $35 per week and, in lieu of direct stimulus payments, provided Americans with a tax credit that had minimal effect on their spending. Much of the money would remain in the bank for at least another year or two.

Romer’s prophecies were subsequently fulfilled. By October, the unemployment rate had reached double digits and would not return to its pre-recession level of 4.7 percent for nearly seven years, nearly a decade after the crisis began. Hunger was still a third higher two years into the recession than it had been. For years afterwards, wage growth was modest.

 

US Economy Is Thriving

 

Then, approximately a decade later, a pandemic struck the entire world. This time, the federal response was markedly different. Within weeks, the government disbursed trillions of dollars in help. Moody’s Analytics reports that “no other nation responded more aggressively to the outbreak than the United States.” Rather than lawmakers fearing backlash for doing too much, the fear was that the government would not do enough. As a result, the country has experienced an unprecedented economic resurgence.

Unemployment increased to 14.7 percent in April 2020, but quickly returned to single-digit levels within four months. Today, two years after the crisis began, the unemployment rate is below 4%, and the economy is on course to recoup all lost jobs by year’s end. The last two years have seen substantial wage growth, particularly for the lowest-paid workers—over the last two years, pay has increased by 6.1 percent for positions in the bottom half of the wage distribution. Despite the economic upheaval, poverty decreased to its lowest level on record in 2020. Insecurity over food has decreased. The recession caused by the epidemic lasted only two fiscal quarters, making it the shortest recession on record.

“There was nothing in the pandemic’s character that precludes it from serving as the catalyst for a more rapid downturn. The swift recovery we witnessed was not inevitable.”

Without strong federal intervention, Moody’s forecasts that GDP would have fallen three times as much in 2020 and the US would have entered a double-dip recession in 2021. The country would not restore all lost jobs until 2026, and unemployment would have remained in the double digits for the majority of 2021. Wage growth would have slowed to a record low. Rather than decreasing, poverty would have increased to its second-highest level on record.

“We averted a great deal of human pain,” said Chuck Marr, the Center for Budget and Policy Priorities’ senior director of federal tax policy. J.W. Mason, assistant professor of economics at John Jay College and a Roosevelt Institute fellow, concurred. “It is a gigantic success storey.”

 

 

US Economy Is Thriving

 

Naturally, the two economic crises stemmed from quite different sources. The Great Recession was precipitated by the financial sector’s collapse and a housing bubble, which rippled through the economy over time and eventually resulted in a decline in people’s incomes, resulting in a drop in expenditure and an official recession. The epidemic triggered a recession by effectively shutting down a large portion of the economy for several weeks.

Nonetheless, as with Wall Street’s collapse, the epidemic posed the risk of a negative economic spiral. At first, experts disagreed on whether the recovery would be V-shaped or L-shaped—whether it would accelerate or drag on for years. “There was nothing about the pandemic’s nature that precludes it from being the catalyst for a more rapid fall,” Mason explained. “The swift recovery we witnessed was not inevitable.” If widespread unemployment resulted in a massive loss of revenue, the crisis would have prolonged as firms that reopened shuttered again as consumers failed to show up due to a shortage of cash in their pockets.

The true distinction, however, was in the manner in which the government responded. On March 13, 2020, President Trump declared the country to be in a pandemic; by March 18, he had signed the Families First Coronavirus Response Act into law, and less than two weeks later, the Coronavirus Aid, Relief, and Economic Security Act into law. The two agreements totaled more than $2 trillion in federal spending. The legislation includes $1,200 stimulus cheques, a weekly boost of $600 in unemployment benefits, enhanced eligibility for food assistance, and emergency paid leave. In December 2020, Congress enacted the $900 billion Coronavirus Response and Relief Supplemental Appropriations Act, and Democrats passed the $1.9 trillion American Rescue Plan Act in early 2021, which included another round of stimulus checks and expanded child tax credit payments. Congress has granted nearly $5 trillion in help over the last two years alone, more than three times the amount approved during the entire Great Recession.

This type of strong, swift action guaranteed that, despite the fact that an unprecedented 23 million individuals registered for unemployment in a single week in May 2020 — more than quadruple the number during the Great Recession’s height — the government ensured that their earnings were not wiped away. Once the first limitations were lifted, spending continued, allowing many firms to maintain their doors and payrolls. Undocumented immigrants were not eligible for much of the relief, and many people struggled to qualify for expanded unemployment benefits. The unemployment rate for black people remains double that of white people. Nonetheless, the majority of Americans are financially better off now than they were when the pandemic began.

Even before the epidemic, left-of-center economists and Democratic Party officials had reached an agreement over the 2009 stimulus: it was too modest and too brief. “It is quite evident that Congress’ response in 2008, 2009, and 2010 was just insufficient and premature,” said Rakeen Mabud, principal economist of the Groundwork Collaborative. Even if the Obama administration was unable to pass a trillion-dollar-plus measure the first time around, it could have signalled that another would be necessary. Rather than that, by 2010, Obama’s White House has shifted its focus to deficit reduction. The federal government “turned from being a tailwind to a headwind far too soon,” according to Moody’s Analytics chief economist Mark Zandi.

One of the difficulties parliamentarians faced in 2009 was a lack of recent experience with direct government expenditure in times of crises. Bill Clinton planned a substantial stimulus programme during his presidential campaign to combat the recession that began in 1990, but he cancelled it once in power at the urging of advisers advocating budget reduction. “Fiscal policy had lain inactive for a long period of time,” Marr explained. Some questioned the federal government’s ability to disburse money quickly enough during a crisis—or whether it should at all.

 

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“The pandemic occurred as a result of a natural calamity. It was just obvious that the government should intervene and bolster people’s incomes.”

Between 2008 and 2020, policy wonks and legislative leaders alike absorbed lessons from the federal government’s response to the Great Recession. Biden said that the government “paid a price” for failing to “celebrate” its accomplishments. The Obama administration’s advisers who advocated for moderation have been replaced by significantly more left-leaning ones. Obama appears to have recognised in recent years that his administration’s policy response was insufficient. “I want candidates to offer initiatives that go beyond what we were able to do in the past, because politics has changed,” he told a 2019 fundraiser gathering. When Mason speaks with young Capitol Hill staffers, he says, “it feels extremely different.” It appears as though they have truly digested the notion that the 2009 stimulus was insufficient.”

The pandemic’s nature may also have lubricated the federal government’s wheels. The urgency and severity of the situation drew everyone together; until the American Rescue Plan was implemented in early 2021, all pandemic relief packages received bipartisan approval and were signed by Trump. While policymakers were able to pick scapegoats for the Great Recession — whether it was banks or underwater homeowners – the epidemic was entirely preventable and struck without warning. The government physically ordered individuals not to work for public health grounds, resulting in mass unemployment. “The pandemic occurred as a result of a natural calamity,” Zandi explained. “It was plain to see that the government needed to intervene and support people’s incomes.”

This atmosphere of bipartisanship has now vanished. The last stimulus package was passed entirely on Democratic Party lines, and Republicans have moaned ever since. Lack of congressional action has resulted in the elimination of the enlarged child tax credit and unemployment insurance payments, while emergency paid leave has long since expired, the eviction moratorium has expired, and rental assistance has largely dried up. All analysts agreed that the economy is on solid ground as jobs and earnings continue to expand. However, misery has returned: child poverty soared significantly in January in the absence of CTC payments, and evictions are increasing across the country. Even when the omicron surge fades, life has not returned to normal—and, where it has, impoverishment for vulnerable Americans has followed.

Nonetheless, economists hope that a key lesson from the epidemic holds true for the next crisis: the federal government can and must intervene during times of economic distress to protect Americans’ money and avert misery and lacklustre growth.

This conclusion may be jeopardised by today’s excessive attention on inflation. While all of the experts I spoke with acknowledged that inflation is a concern, they all predicted it will be brief. The critical question is whether current inflation is worth the cost of averting a prolonged recession. “In retrospect, it would be ideal if we could get it just right and avoid a jump in inflation, but we can’t,” Dean Baker, senior economist at the Center for Economic and Policy Research, said. “So, do you err on the side of excess or deficiency?” If the government had not responded so forcefully, inflation might have been contained, but at the cost of increasing unemployment, lower incomes, increased hunger, and “a lengthy period of depressed growth and stagnation,” Mason explained.

There is a significant possibility that, in retrospect, Americans may conclude that rising inflation was an indication that the government went too far. “My concern with the inflation argument is that it does not overshadow the effectiveness of this,” Marr added. Democratic Senator Joe Manchin scuttled the Build Back Better legislative package, which was intended to be an investment in long-term economic growth, citing, among other reasons, his concern about inflation. “I don’t want the lesson to be, ‘Oh jeez, don’t do so much the next time,'” Marr explained. “That is the incorrect lesson. And as a result, people will be harmed.”

The country has recently witnessed a live demonstration of what happens when the government responds fast and forcefully in times of economic crisis, and we discovered that it works. Infrastructure was constructed to deliver new benefits—from stimulus checks and child tax credit payments to nonfilers to previously unavailable rental assistance—that can be sustained or revived in the event of another crisis. “It did create a precedent for strong federal expenditure in times of crisis,” Baker said. “In 2009, you couldn’t even convince Democrats to accept something like that.” Both parties endorsed it in 2020.

“We’ve proved that when anything goes wrong in the economy, when some component of the intricate machinery fails, it is not necessary for people to lose money,” Mason explained. “Once you’ve established that it is feasible, there is no going back.”

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