Targeted stimulus crucial to keeping US recovery going
And now for some good news. In the year through June, the U.S. economy has outperformed all other major advanced economies. The current quarter is likely to represent the fastest economic growth in recorded U.S. history. Consumers of overwrought media may well be unaware of this.
For the seven largest advanced economies in the year through June, the OECD calculates U.S. economic growth is least bad, at -9.5 percent, followed by Japan, Germany and our neighbor, Canada, at negative 10.0, 11.7 and 13.5 percent respectively. Major economy laggards are Italy, France and the United Kingdom with dismal contractions of 17.3, 19.0 and 21.7 percent.
For the quarter ending September, the U.S. economy is projected by the New York Federal Reserve Bank to grow 15.6 percent. The Atlanta Federal Reserve and leading private forecasters project still faster 29.6 and 21.0 percent growth. The record quarterly U.S growth since such statistics began in 1947 was 16.7 percent in 1950’s first quarter.
Denizens of the maligned D.C. “swamp” may consider taking their hands off the other party’s throats for just a moment to applaud this outstanding initial recovery that involved both parties’ contributions. Of course, the work is not yet finished. Rather than returning to clutching one another’s throats, the political establishment must roll up their sleeves and finish the job.
The paramount objective for U.S. economic policy must be reducing unemployment. The public health cost of unemployment often is ignored by public health policy. Projections for coronavirus mortality have been all over the place, but, one of the gloomier forecasts predicts 410,000 U.S. deaths by year end. According to the National Academy of Sciences, the average U.S. COVID-19 fatality loses 11.7 years of life expectancy. These figures represent a tragic toll of 4.8 million years of human life lost to the disease. For unemployment, researchers from the Federal Reserve and Columbia University in one of the most prestigious peer-reviewed economic journals have found, “. . . a loss in life expectancy of 1.0–1.5 years” for an average age worker. The 24.2 million U.S. workers counted by the Bureau of Labor Statistics in August who were ” unable to work because their employer closed or lost business due to the pandemic” represent an unthinkable 24-36 million years of human life lost from unemployment, dwarfing the disease impact.
Unfortunately, as with riding a bicycle, it’s a lot faster for an economy to go downhill than up, and the U.S. needs to change gears. Initial broad economic stimulus has succeeded. U.S retail sales are at record highs. Personal income after inflation for 2020 is 5.8 percent ahead of last year.
Broad federal spending failed to boost the U.S. out of the last downturn. The Congressional Budget Office calculates a figure for what government spending would be without business cycle effects from recessions. Of the three steepest slumps since World War II, two with minimal spending growth had much stronger recoveries. In two years following wrenching recessions of 1974-5 and 1981-2, cyclically-adjusted federal spending grew by 0.2 and 0.3 percent of GDP, while overall economic growth averaged 4.5 and 5.7 percent. Following 2008’s steep downturn, federal spending increased by 1.7 percent of GDP, but overall growth was a meager 2.3 percent.
At the current recovery stage, broad stimulus is duplicative and ineffective. The major unemployment problem is opening up sectors stymied by consumer fears and lockdowns. Around $1 trillion of unused U.S. government funds remain for pandemic response, which should be retargeted from stabilizing capital markets and other macro purposes to direct relief for closed sectors and their structurally unemployed.
The Wall Street Journal reports upgraded indoor ventilation can “ensure clean air, scientists say.” Our crash efforts to develop a vaccine are both promising for their potential and risky in their ultimate success. They may take longer to complete than needed. We need a comparable crash program to make indoors safe again. HVAC updates, air purifiers and test equipment should be provided to schools, offices, factories, stores and restaurants to reduce potential coronavirus transmission, enabling safe use.
As indoors becomes safe, demand for depressed sectors can be stimulated. The United Kingdom instituted an Eat Out to Help Out program that encouraged restaurant orders and boosted patronage to 80 percent of normal, compared with 40 percent in the U.S. Similar incentives may work for travel.
The U.S. government can be proud of what it has done so far. An unprecedented rebound this quarter is as much as could be hoped for, but a long road ahead remains. We will cover it more quickly if our massive resources are focused on the greatest distress holding us back.
Douglas Carr is a financial markets and macroeconomics researcher. He has been a think tank fellow, professor, executive and investment banker. Follow him on Twitter @DougCarrMarkro.