As COVID-19 began to spread throughout the U.S. last year, first quarter GDP dropped 5 percent, among the larger post-war declines on record. The second quarter, of course, set the record, dropping 31 percent. Experience over the centuries and across the globe has indicated that drops on this scale precede financial crises and depression. Yet when fourth quarter GDP comes out later this week, there is a chance that it will finish the year at about the same place it started. In many ways, even if it falls short of that, we will still have accomplished the greatest economic comeback on record.
What happened, and to what do we owe this success? While there will certainly be disagreement over the details, massive fiscal and monetary policy response kept things afloat despite the massive shutdowns. Policy-makers (full disclosure, I was among them) recognized that this was a very unusual recession, something completely outside the bounds of the normal dispute between supply-siders and Keynesians.
As Democratic congressman Henry Steagall (yes, that Steagall) put it in 1932, a year in which the Great Depression appeared to be accelerating and in which U.S. GDP tumbled by nearly 13 percent,
we cannot stand by when a house is on fire to engage in lengthy debates over the methods to be employed in extinguishing the fire. In such a situation we instinctively seize upon and utilize whatever method is most available and offers assurance of speediest success.
And, at least arguably, the arrival of COVID and the impact of our collective response to it were events further removed from traditional economic analysis than those that triggered the Great Depression.
On the business side, consider the following example to understand the thinking that guided our economic policy response to the pandemic last year. Imagine you are a banker in a small town that has dozens of successful, profitable businesses, but all of them are forced by the government to shut down. They each come to you and ask you for a loan. If the town opens up quickly enough, you know they will be good for the money. But the duration of the shutdown is uncertain, and if you lend to all of those (hopefully temporarily) shuttered enterprises, you might yourself start running short of cash. Accordingly, you might make no loans at all. Unless the government steps in, the businesses will all fail.
Now, from an individual perspective, imagine you have a friend with a solid career and great earnings history who has just broken her leg and has to spend three months out of work. If you lend her the money, she won’t have the power turned off, won’t face eviction, and will be able to keep food on the table. If you don’t, her life may completely fall apart.
What differentiates these two circumstances from the traditional business-cycle debate is that “stimulus” isn’t really being provided in either case. The cash that you offered your friend, or that offered by the government to struggling businesses, is better classified as “relief.” A Keynesian might be dismayed if the government transfer isn’t consumed. But if the recipient saves it, it is actually good news, because it means that the lifeline was sufficient and the money can be paid back sooner.
The word “relief” is all the more appropriate because of the way the pandemic can — and should — be seen as a natural disaster. When a hurricane strikes a region, and federal monies go in to help that region out, it’s not normally a matter of partisan controversy. In the case of COVID-19, it was as if that hurricane hit not a single region, but every pocket of the country. And remarkably, in a year bedeviled by multiple difficulties, enough relief was delivered to make the year as a whole almost flat economically. Indeed, empirical work is already showing the relief is responsible for that almost miraculous result. Treasury secretary Mnuchin’s team released a study in December that showed that the PPP program, for example, had a dramatic, statistically significant positive effect in supporting about 51 million jobs.
By contrast, GDP in the euro zone, which was much less creative with its policy, dropped about 7–7.5 percent, and is still for now dropping like a stone.
Given that strong history, you might wonder why yet another relief package is necessary. If so, you share the same sentiment as many of my friends, who shot me mystified emails when President Biden and others in his administration mentioned that I support more relief. While the implication that I support their entire bill is incorrect, the reason to support relief in general is simple. The pandemic is still here, sadly, and likely to get worse before it gets better, perhaps dramatically so, if some of the forecasts about the impact of COVID-19’s more infectious (and possibly more deadly) “British variant” turn out to be correct. CDC research appears to indicate that this variant may become the dominant strain by March. There’s also the South African variant to think about, too.
The disturbingly sharp decline in many economic variables is not yet visible in the government data, but some of the real-time indicators that can be followed online have turned decidedly south. For example, according to tracktherecovery.org, relative to last January, 29.7 percent of small businesses were shut at the end of December, compared with under 25 percent at the beginning of the same month. The equivalent figures for small businesses in the leisure and hospitality industry were 45.3 percent (December 1) and 48.3 percent (December 31). Overall employment was down 8.7 percent at year-end relative to last January, compared with a decline of 6.2 percent in the middle of October. For low-wage workers it was down 25 percent, compared with around 21 percent in mid October. Most disturbing is the trajectory, which clearly inflected around October for virtually everything we can track.
Why have things turned? It is not that, for the most part, governments have engaged in stringent new lockdowns (although that could change). On the contrary, it’s because, as conservatives have always known, people are smart and, more often than not, have behaved rationally. With a vaccine on the way, the benefit of staying at home has skyrocketed. All being well, if you can just make it a couple of more months, the nightmare will be behind you. In the meantime, you should take as few risks as possible. This sentiment is clearly visible in all kinds of social-distancing data. At the peak of the shutdown, time outside the home was down 23 percent relative to last January, but climbed back most of the way to pre-pandemic levels by October. Yet earlier this month, it was down about 17 percent relative to a year ago.
The good news is that the vaccination rate was already running close to President Biden’s target of a million doses a day even before he took office. However, Biden’s correct observation that the pace will need to pick up from that is a reminder that there is still a long way to go — a reality made even more pressing by the new strains. The economy’s positive response to recovery policies last year can serve as a useful guide. Just as for hurricanes, relief should not be a partisan matter, and that’s as true just as much when a second hurricane strikes after the first.
That said, a bill that draws on the lessons of last year would look a good deal different from the package that the president has put forward. While there are elements within Biden’s proposal that genuinely count as relief and should be supported, on other aspects it’s hard to avoid the conclusion that the president followed Rahm Emanuel’s infamous advice of not letting a crisis go to waste. He has taken the real need for relief and used it as a Trojan horse to smuggle in a series of policies that owe more to politics than to the pandemic.
First, his proposal includes a massive bail out for state governments, which is really just a transfer to a few traditionally blue states that had major budget problems pre-pandemic. Second, the drop in economic activity this quarter (absent additional policy) should be much smaller than occurred in the second quarter of last year. The amount of dollars provided under a bill truly focused on helping the country weather the latest stage of the pandemic ought to take that into account. Sadly, the size of this package suggests that a broader agenda is involved. Down the road, all this spending, whether justifiable as relief or otherwise, will lead to a long-term budget reckoning, and the bigger the spending, the bigger the reckoning. Third, it is positively foolish to increase the minimum wage to $15 as the president proposes. Those 29.3 percent of businesses that are still shut down might well just call it quits if their labor costs are set to skyrocket when they are able to open again.
Thinking back to the example of the small town, a business will take the loan from government rather than declare bankruptcy only if it expects to make enough profits after we escape the crisis to offset the losses it has incurred during the pandemic. If firms expect higher taxes, higher regulation, and higher labor costs down the road, all of which President Biden has promised, then they are much less likely to try to stick it out now. It will be remarkable if we avoid a lengthy depression and even financial panic given the terrible shocks we have endured this year. If we do, it will be because politicians recognized that while Keynesian stimulus is controversial, relief should not be, and also because President Biden and his team shelved their campaign promises in recognition of the reality that short-run perseverance depends on long-run optimism. Unfortunately, it appears that that recognition has yet to dawn.