The president who walks into the Oval Office on the afternoon of Inauguration Day 2021 will face a weak economy with high unemployment. The coronavirus pandemic and lockdown orders this past spring led the economy to face its greatest challenge since the Great Depression. That president's first task will be to deal with the human and economic damage from the aftermath of the pandemic recession. How should he think about this challenge?
To begin, it is helpful to understand the magnitude of the crisis-the speed and depth of the pandemic recession. Lockdown orders and fear of the coronavirus caused the labor market to fall off a cliff in March 2020. Seasonally adjusted initial claims for unemployment insurance benefits were elevated at 282,000 during the week ending March 14. The next week, there were 3.3 million new claims for unemployment benefits, shattering the 1982 record of 695,000 new claims in a single week. The week after that, which ended on March 28, there were 6.9 million initial claims.1
The unemployment rate was remarkably low in February, standing at 3.5 percent. In March, it rose to 4.4 percent, and in April, it peaked at 14.7 percent, the highest rate since the Great Depression. Unemployment increased by a factor of four in just two months.2 For comparison, it took nearly two years for the unemployment rate to double during the Great Recession, rising from 5 percent in December 2007 to 10 percent in October 2009.
At the time of this writing, the unemployment rate is over 8 percent, and there are over 13 million unemployed workers in the nation. Although the unemployment rate has fallen rapidly, it will likely remain at recessionary levels throughout 2021.
Unemployment of this magnitude represents millions of workers on the sidelines who could be earning income, producing output, and contributing to overall economic demand. It means the economy is failing to converge quickly to a new equilibrium in which workers are put to their best and most productive use.
And it is a human tragedy. Many people tend at least in significant part to understand themselves through what they do for a living. "I'm a teacher" and "I'm a salesman" are more than occupational descriptions; they are statements of identity. Unemployment deprives people of a large part of themselves. Jobs are a source of personal fulfillment and a principle way many of us provide for our children. Moreover, in a market economy, paid employment is a major mechanism of social contribution. Getting up and going to work benefits not only the individual but also the whole of society.
Work creates community. Many of our closest friends were first merely colleagues. Many people met their spouse on the job. The lockdowns and social-distancing guidelines Americans have lived with since the spring of 2020 underscore the importance of professional community by depriving us of its physical manifestation.
Our jobs are often also primary vehicles for personal expression and creativity. Work educates our passions-liberating us from them-by directing them to productive ends. In these ways, work, properly understood, is deeply spiritual. Man "is called to work," wrote Pope Saint John Paul II. Citing the Church's "conviction that work is a fundamental dimension of human existence on earth," the late pope wrote in Laborem Exercens: "Man is the image of God partly through the mandate received from his Creator to subdue, to dominate, the earth. In carrying out this mandate, man, every human being, reflects the very action of the Creator of the universe."3
The president who takes the oath in 2021-Joe Biden or Donald Trump-should be impressed, then, with not only the magnitude of the economic damage the nation faces but also the importance and urgency of economic recovery.
Fiscal Policy to Support Economic Recovery
The president should take care not to confuse changes in economic activity with levels of activity. The economy will recover rapidly in the months before Inauguration Day 2021. The 2016 presidential election saw much debate over whether 4 percent gross domestic product (GDP) growth was outlandish and impossible. Keeping that in mind, consider that in the third quarter of 2020-July, August, and September-the economy is likely to have grown at an annual rate of more than 30 percent (although precise figures will emerge only after revisions still to come). And the fourth quarter will see double-digit growth.
In part, of course, this will happen because recovery from the pandemic recession will be faster than is typical due to the nature of the downturn. But more important, economic growth will explode in the second half of 2020 because it is being measured relative to the second quarter of 2020, and March and April were colossally awful months for the economy. GDP plunged in the second quarter of 2020 at a 31.7 percent annual rate, the worst quarter since the Great Depression, and by a wide margin.4
Why does this matter? Because it can be simultaneously true that economic growth is exploding and the economy is weaker than it has been since the worst months of the Great Recession. The economy will need significant fiscal-policy support despite rapid rates of growth.
That support should be timely. The need to act urgently is critical to avoid a situation in which the short-term economic damage from the pandemic and the lockdowns creates longer-term, deeper problems. For example, the majority of layoffs so far have been temporary, but if the economy remains weak, then our unemployment problem will become stickier and harder to reverse. The damage to unemployed workers will increase significantly as their skills deteriorate, their professional networks fray, their mental health suffers, and employers become less willing to consider them for jobs due to the length of their unemployment spells.
Similarly, forbearance and anti-eviction measures, along with federal grants to small businesses, have allowed many businesses to avoid paying bills, including rent and mortgages. These policies work in the short term, and a rapid recovery-aided by fiscal policy-would restore economic demand and business revenues to the point that they could resume responsibility for their financial obligations. Without adequate fiscal-policy support, economic recovery will be slower, the medium-term ability of many firms to meet their financial obligations will be in doubt, and massive structural problems in the commercial real estate sector could develop.
Fiscal support should be temporary. On Inauguration Day, the president should proceed under the assumption that the economy will need much less fiscal support in 2022 than in 2021. Spending from a permanent expansion of middle-class entitlement programs would boost the economy over the next year, but it would also threaten long-term prosperity and should be avoided.
Support should be targeted. The goals of economic recovery spending should be to support the productive capacity of the economy and avoid real human suffering. Federal bailouts of large, publicly traded companies should be avoided because they do not advance either goal. The same is true of support for upper-income households.
But avoiding a wave of wasteful small business bankruptcies by replacing a portion of their lost revenue can preserve the productive infrastructure of that sector. Incentives for business investment and entrepreneurship can help the economy not just recover but rebuild. Strengthening the social safety net prevents suffering among low-income households and supports overall economic demand. Federal grants to states and localities support the supply side of the economy by keeping their employees in jobs and support consumer spending by preserving those employment relationships.
Economic recovery programs should be prioritized in 2021 above other policy goals the president may have. Tax increases suppress economic activity and should be avoided in a time of significant economic weakness. Trade wars disrupt supply chains. The economy would recover faster from the pandemic-a large supply-side shock-if they were avoided.
In the policy debate around the shutdowns of 2020, it was common to hear the goal described as a three-part plan: First, freeze the economy in place when the shutdown began. Second, build a bridge across the shutdown by replacing business and household income lost during the shutdown. Third, when it was safe to partially reopen the economy, flip the switch back on, having preserved as much of the pre-pandemic economy as possible.
This is the right way to think about the shutdown. But with the economy partially reopened, the goal should no longer be to preserve things as they were before the pandemic. The goal should be to avoid the wasteful destruction of productive economic infrastructure-for example, the network of relationships built up by small businesses-but that goal has to be pursued without slowing down the process of workers reallocating across sectors and firms.
Some businesses are finding they can be profitable with a fraction of their pre-pandemic workforce. For example, a restaurant may have found a way to make up a large share of lost table-service revenue with takeout orders. If the restaurant lays off five waiters and adds two cooks, it can make a profit. If it has its pre-pandemic personnel structure, it cannot. The faster businesses figure out how to survive in the new economy, the faster the economy will fully heal. Policy shouldn't slow that process down by encouraging and incentivizing employers to maintain pre-virus employment levels.
The same dynamic is at play at the industry level. For example, as of mid-September-the time of this writing-there was a devastating 5 percentage-point decline in consumer spending relative to its pre-virus level, up from a catastrophic 19 percentage-point hole in April. But the state of the recovery across industries varies substantially. As of the early fall, personal care, clubs, sports, entertainment, and hotels each had yet to recover to 50 percent of their precrisis level.5 For the economy to heal, some industries need to expand, and others need to contract. The faster the economy reaches its new equilibrium, the sooner we can get back to broad-based growth.
An important way to speed the adjustment process is to support workers through active labor market policies. One-time reemployment bonuses for unemployed workers can encourage employment while supporting consumer spending. The recovery is likely to be geographically uneven, with some parts of the economy experiencing tight labor markets well before others. Offering long-term unemployed workers assistance to relocate to a stronger local labor market would help the economy recover faster and would help unemployed workers, who are often liquidity constrained, get back on their feet.
How to pay for the trillions of dollars that will be spent on recovery from the pandemic recession? The past several years have witnessed a rethinking among economists about the risks of large deficits and growing debt. As with many economists, the reality that rapid increases in the national debt have not extinguished demand for US government bonds by investors in global capital markets or reversed the four-decade decline in real interest rates has led me to conclude that deficits and debt are less harmful than I had previously thought. Inflation has also remained low for the past two decades.
This suggests that the deficit spending associated with pandemic response should not raise undue alarm. But that observation is a far cry from an endorsement that the next president abdicate responsibility to address the nation's long-run fiscal imbalance. Instead, it is an acknowledgment that in the face of the most significant economic threat since the Great Depression, the US has more room to spend what needs to be spent and that dealing with longer-term, structural budget issues can be done after the threat has passed.
But dealing with it is a high priority. And the large amount of money spent on economic recovery does not fundamentally change the nation's fiscal imbalance or the right way to address that imbalance. Before the pandemic, the nation's debt-to-GDP ratio was on an unsustainable upward trajectory because of the gap between projected spending on Social Security and Medicare and projected tax revenue. After the pandemic, the same thing is true.
The right way to address this situation is, gradually, to phase in reductions in Social Security and Medicare benefits that over time significantly reduce their spending. The majority of fiscal consolidation should come from spending cuts, but tax revenue should be increased modestly by broadening the tax base or increasing taxes on consumption and pollution.
Low interest rates give the US more room to address the costs of the pandemic. But they are not a blank check. Pandemic spending should be prudent and adequate, not profligate.
After the Pandemic
The United States faced serious, long-term economic challenges before the pandemic. Those challenges remain, and the president who takes the oath in 2021 will need to address them. In addition to debt and deficits, discussed above, declining rates of workforce participation, particularly among men, are troubling. Policy should advance economic opportunity to low-income households by increasing earnings subsidies, such as the earned income tax credit. These subsidies lift millions of people-including several million children-out of poverty each year, and by increasing the financial rewards from working, they increase employment.
Barriers to opportunity in the labor market should be torn down, and additional barriers should not be erected. Occupational licenses are often little more than barriers to entry that protect incumbent workers. And a $15 per hour federal minimum wage would be deeply problematic for the least educated, least experienced, and most vulnerable workers in our society.
The labor market rewards more skills with higher wages, and public policy must discover how to increase worker skills. After decades of disappointing job-training efforts, work-based learning shows promise. It relies on market forces to design curriculum, combining on-the-job training with classroom instruction. More research is needed to determine what approaches are most effective, but these programs hold potential for a more productive, higher-paid workforce.
Another crucial engine of skill formation is schools. The state of many K-12 schools is a national scandal, and the primary and secondary education model, including curriculum, needs to be reassessed with fresh eyes. (Why, for example, is the school year nine months and not 11?) Community colleges could increase skills and educational attainment beyond high school. For many young people, they are a better route to labor market success than traditional, four-year colleges. We need to invest more in community colleges while holding them accountable for outcomes. And as a culture, we need to ditch the "college for all" mentality and encourage a broader range of pathways to opportunity.
The reduction in economic dynamism-in startups, entrepreneurship, and worker fluidity across jobs and industries-is troubling. Corporate rent seeking distracts from productive activity. The United States needs to renew its commitment to market competition-including in the labor market, where noncompete and no-poaching agreements have proliferated.
Lackluster productivity growth is a direct threat to today's prosperity, as productivity is the primary driver of wages, and to longer-term prosperity, as it governs the evolution of living standards. Increasing workforce participation and improving education and training will boost productivity, as will encouraging economic dynamism and market competition.
"The president who takes office in 2021 will commence his term in a moment of economic weakness. But he should not lose sight of the resources our society has at its disposal to not only recover but thrive."
Immigration will increase both economic growth and productivity. The United States needs more high-skilled immigrants. The case for admitting a greater number of lesser-skilled immigrants is less clear-cut, but count me with those who say more would be better. It should go without saying that immigrants to the United States should come legally. It should also go without saying that the nation's posture toward immigrants should be to welcome them as people beginning their journey to being Americans, with skills, courage, and determination that will benefit the nation. The United States should do everything it can to preserve its place as the destination for many of the world's most talented, most ambitious, and hardest-working migrants. Losing that would accrue to the nation's significant detriment.
Finally, to boost productivity, the United States tax code needs a friendlier posture toward saving and investment. And the government should substantially increase grants to scholars for basic scientific research. The US has many of the world's brightest scientific minds and best universities. Their discoveries will shape our future prosperity.
Needless to say, this is not an exhaustive accounting of the priorities that should define the president's approach to the economy in the coming years. But these are essential aims-preconditions for recovery and prosperity.
The Potential and Limits of Presidential Power
As the next presidential term begins, the president should resist the temptation of thinking he can control the economy. He cannot. The economy is shaped by the decisions that millions of American households, workers, and businesses make each day. It is shaped by world events and powerful, global forces-by migration flows, war and peace, geography, and technology. A microscopic virus just brought the economy to its knees.
But the president can influence the economy, largely by altering incentives. When shaping policy, he should remember that. He should ask himself whether a particular policy change will make it more or less likely that people will go to work and businesses will invest.
The president should also remember the merits of doing big things with bipartisan support. Tax policy and health policy are unstable because each was overhauled in the past decade by one political party, without the support of the other. If both parties have ownership of major changes in public policy, then those changes are more durable. Businesses can plan better if policy is stable and certain. Bipartisan policy is also often better policy.
And finally, the president should not forget the foundations of prosperity. The post-World War II liberal international order should be strengthened, not weakened. It has been a foundation for transatlantic prosperity. Maintaining the rule of law is crucial for many reasons, including maintaining investor confidence in the United States; securing our nation's place as a global destination for business and talented, hardworking immigrants; and encouraging the risk-taking that fuels entrepreneurship, dynamism, and productivity growth.
Basic social stability is essential for these purposes as well, and the president should not attempt to divide Americans based on racial or class lines. Particularly given our nation's tragic history with race, a president who stokes and inflames racial divisions is doing the nation-including the economy-a grave disservice.
The president who takes office in 2021 will commence his term in a moment of economic weakness. But he should not lose sight of the resources our society has at its disposal to not only recover but thrive.
1. US Department of Labor, Bureau of Labor Statistics, "Revision to Seasonal Adjustment Factors," press release, September 3, 2020, https://www.dol.gov/ui/data.pdf.
2. US Department of Labor, Bureau of Labor Statistics, "The Employment Situation-April 2020," press release, May 8, 2020, https://www.bls.gov/news.release/ archives/empsit_05082020.pdf.
3. John Paul II, Laborem exercens, encyclical letter, Vatican, September 14, 1981, http://www.vatican.va/content/john-paul-ii/en/encyclicals/documents/hf_jp-ii_ enc_14091981_laborem-exercens.html.
4. US Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product, 2nd Quarter 2020 (Second Estimate); Corporate Profits, 2nd Quarter 2020 (Preliminary Estimate)," press release, August 27, 2020, https://www.bea.gov/ news/2020/gross-domestic-product-2nd-quarter-2020-second-estimate-corporateprofits-2nd-quarter.
5. Goldman Sachs Economics Research, "US Economic Recovery Tracker: Sept. 11 Update," September 11, 2020