Why the U.S. economy just downshifted, and how to reverse that

What happened? Why did the economic bounce-back that began after the initial pandemic shutdowns start fading by late summer? And what can be done to get the economy’s mojo back? I see four factors responsible for the downshift: The failure to control the novel coronavirus, the short-lived harvesting of low-hanging […]

What happened? Why did the economic bounce-back that began after the initial pandemic shutdowns start fading by late summer? And what can be done to get the economy’s mojo back?

I see four factors responsible for the downshift: The failure to control the novel coronavirus, the short-lived harvesting of low-hanging fruit (quick rehires), Congress and the Trump administration’s failure to provide more relief (as has been widely reported, Trump walked away from these negotiations on Tuesday) and the sudden restructuring of businesses. But there is one factor that could help reverse it all.

Before getting into these phenomena, consider the worrisome indicators below the top-line job gains. September saw the largest one-month jump on record in the number of long-term unemployed — 781,000 people — with data back to 1948. That counts anyone looking for work for at least six months. To be sure, one month does not a new trend make, but a different trend reinforces the concern that significant numbers of people could end up with long spells of joblessness: the quick shift from temporary to permanent job loss. In April, when employers thought they’d soon be able to call furloughed workers back to work, only 11 percent of the unemployed were on “permanent” layoff (not expecting to be recalled to their former job). By last month, that share had spiked to 36 percent.

In other words, the low-hanging fruit of the job market — folks who could quickly return to work once commerce began to come back — has been picked. What we’re left with is a high-risk game of musical chairs, with too many job seekers competing for too few jobs.

It is in this regard that the 661,000 added jobs last month are a less positive sign than they might seem. Payrolls are still down almost 50 percent from their pre-crisis level, and the pace of job growth has slowed, a development that relates to weakening consumer finances. This correlation gets to the role of Congress and the White House in the weakening economy.

The figure below plots the percent change in real monthly consumer spending and the deceleration of job growth. In fact, as I show here, household incomes actually fell in August (the most recent data we have), for a simple reason: The gradual return of labor-market earnings failed to offset the loss of income from the expiration of enhanced unemployment benefits. Now, even though there’s a growing risk that too many people could get stuck in long-term unemployment, there’s still no relief package.

Of course, the absence of virus control and its impact on commerce across the land is another factor for the slowing in job gains, compensation, and consumer spending. While March/April-level shutdowns are behind us and unlikely to return, commerce can’t come back in any full, lasting manner without gaining control of the virus. Economist Mark Zandi finds that, all else equal, “every sustained 10,000 increase in daily confirmed infections ultimately results in an approximately 0.5 percentage point increase in the unemployment rate.” International comparisons by economist Harry Holzer find that had the United States “ … been as successful in each measure as the other … countries, nearly nine million more Americans would be employed and over 100,000 would still be alive.”

Finally, another factor closely related to the virus is its potentially lasting impact on shifts in key sectors of the economy. The second-largest cinema chain in the U.S. — Regal, which happens to be the local theater where my wife and I had many a laugh and tear — is closing all its theaters again, with 40,000 jobs at stake, after reopening them in August. Sticking with entertainment, Disney just announced cuts in 28,000 jobs, about a quarter of its workforce. Big airlines are in serious trouble, but so are small businesses, especially restaurants and retail.

Of course, sectors are always growing and shrinking, as trade, technology and consumer preferences evolve and change, but such shifts tend to be gradual. When they’re not, like the negative shock to our manufacturers from aggressive Chinese competition in the 2000s, serious and lasting disruptions to families and communities can occur.

That’s the bad news. The good news is that in every case I’ve mentioned here, public policy can make a positive difference. The Trump administration’s epic failure to even try to provide national guidance on virus control must be reversed by the type of science-driven approaches that have worked effectively elsewhere. Now that the president has dramatically walked away from the stimulus negotiations, shocking negotiators and tanking the stock market, it may fall to new leadership, post-election, to quickly pass and implement a robust relief package.

But while another temporary package would have helped get us more quickly to the other side of the crisis, the structural risks, from long-term joblessness to business failures, require a deep, forward-looking public investment agenda. The picture painted above is one of great uncertainty for many in the private sector, and at times like this, public investment has large, positive multipliers. As new research by the International Monetary Fund shows, it pulls in private investment and creates jobs, especially in areas such as clean energy, health care, education, transportation and digital infrastructure.

All of which leads us, like it or not, to politics. Joe Biden, whose campaign I informally advise, has laid out an elaborate agenda in all the areas noted above. The Trump agenda, from what analysts have been able to discern, focuses on high-end tax cuts. As reported in this paper, nonpartisan analyses find the Biden plan to be more pro-growth in the ways I described above.

In other words, it is possible and essential to reverse the downshift. But that won’t happen unless forthcoming political outcomes make it so.

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