The US economy is in trouble. The epidemic is still disrupting global supply chains and rising inflation to historic highs.
Overall, the economy has rebounded quickly from the COVID-19 shock. The latest unemployment data showed 3.9 percent, a historically outstanding number seen once every decade or so. Wages are rising fast, especially in low-wage jobs. If the epidemic ends this year and supply chain problems are resolved, 2022 may be the finest employment market for employees since the 1960s.
That may happen. Even without further improvements, this pales in contrast to the 2008 financial crisis’s sluggish recovery. But President Barack Obama and the Democratic majority in Congress failed their most essential task: restoring full employment.
Let me start by revisiting last year’s narrative. As of January 2017, the unemployment rate was 6.4%, and 76.4% of prime working-age adults (25 to 54) were employed. As of 2014, nearly halfway through Obama’s second term. A year later, the unemployment rate has practically halved, and the prime-age employment rate has risen to 79.0%, roughly the same as in 2018.
In other words, the post-2008 recovery was so feeble that we achieved four years of growth in 2020. 6.4 million jobs were generated in the last year, more than half of Obama’s net employment creation.
Why is there a difference? The solution is simple: stimuli. In 2009, the Obama administration and Democrats in Congress enacted an $831 billion economic rescue plan, less than half of what the government’s own analysts recommended. So while the acute recession ended, the subsequent growth and job recovery were pitiful.
A total of $5 trillion has been spent to combat the COVID-19 pandemic, including $2 trillion in March 2020, $1.9 trillion in December 2020, and $1.9 trillion in March 2021. Unlike the 2009 Recovery Act, much of it went to people and firms who were inclined to spend it.
Yes, they are two quite distinct cases. In 2008, we experienced a financial crisis and a property market collapse. Now we have a pandemic. But there were a lot of economic commonalities.
To paraphrase Keynesian theory, modern economies are prone to expenditure crashes. When individuals lose their jobs and money, they stop spending, which causes other businesses to fail, which causes further job losses, and so on. The 2008 crisis was a prime example.
The 2020 crisis was unique in that individuals chose to stay home. During the first several weeks of the lockdown, demand was also dramatically reduced. Without the CARES Act, the economy and perhaps even civilization would have collapsed (remember, at the peak of the economic disaster in March and April 2020, America lost over 6 million jobs in one week).
These situations have enough in common — and policy responses to differ — that we know spending eliminates recession and unemployment. With money comes speed. By Election Day 2010, Democrats might have reduced unemployment from 10% to 5% if they had spent enough money on the economy in 2009.
So how did Democrats go so wrong? Many Obama supporters claim Congress couldn’t pass more stimulus, but that’s not the whole picture.
An economist and his chief of staff, Rahm Emanuel, made a gut check estimate about what moderates would vote for in the Senate, then declined to suggest anything more. They didn’t aim high hoping to be negotiated down to a lower figure. They began too low. Obama failed to say he would veto any stimulus measure too small, allowing the stock market drop and widespread fear to drive a larger bill through Congress (this is exactly how the bank bailout got jammed through mere months prior).
Summers and other important advisers, including Tim Geithner and Peter Orszag, rejected techniques that would have improved the effect of the stimulus without boosting its headline price. In order to relieve budget concerns, they might have refinanced state debt at the ultra-low federal interest rate or front-loaded expenditures with tax hikes that would not take effect for years. In addition to combating climate change, they could have created employment by forming a green infrastructure bank that would have provided $10 of stimulus for every dollar appropriated.
That didn’t happen because Democratic Party decision-makers wanted too little stimulus. They condemned their party to a 2010 midterm wipeout.
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This is not meant to support the Biden administration’s choice to let the unemployment benefits increase expire in September or its apparent strategy to prioritize economic recovery above pandemic management. Because of disturbances in child care and worker health, it appears that failure to contain the epidemic hindered rather than boosted the economy. Even if stricter public health restrictions (like vaccination requirements) slowed the economy, it would have been worth it to save lives and rescue the hospital system, which is in danger of collapse in many states.
The balance between economic and human health did not exist in 2009. There was no reason not to go hog-wild with stimulus, say $2 trillion to start. Even better, Democrats could have put up mechanisms to keep money flowing as long as inflation was below 5% and unemployment was over 5%.
We’ve done better than in 2009. Let’s hope America learns from the pandemic rescue packages for future disasters.