May 31, 2020
The Pandemic’s Damage Is Long Term
The past several months ushered in unprecedented changes in economic activity. By the end of May, roughly one in four workers were unemployed and many sectors of American commerce ground to a virtual stop. The previous high of unemployment was registered at 25.5 percent in the summer of 1933, the depths of the Great Depression. While our data may soon eclipse that level, our economic conditions are far better.
After adjusting for inflation, we are six times more affluent than we were during the Great Depression. This fact manifests itself in our economic worries. Today, we concern ourselves with internet access for students, economic security for gig workers and other matters an epochal distance from the worries of the Dustbowl. Our affluence permits us the ability to replace lost income and subsidize healthcare. In terms of human suffering, our economy today is not comparable to the Great Depression.
Still, current economic conditions may well grow bad enough to destabilize the Republic. No democracy with an unemployment rate of 25 percent failed to face significant challenges to its liberty. In 1932, the communist and socialist parties seen nearly a million votes in the US presidential elections. A 29 percent unemployment rate helped usher a little known National Socialist party into Germany’s parliamentary majority. This is not a prediction. Rather it is a warning that the way in which we deal with the economy and the pandemic will have lasting consequences, for good or ill.
One important aspect of dealing with the crisis is honestly acknowledging the potential depth and duration of the downturn. Every economic forecast has the US economy declining substantially in 2nd Quarter. While there is great variation in the projected decline and rebound, most projections have 2020 as the worst year for economic growth since the Great Depression. Most projections for 2021 are similarly stark.
Economic models perform poorly in many domains. We cannot well predict turning points, particularly those caused by pandemics. We cannot well predict changes to tastes and preferences, nor can we anticipate every policy response. However, models of the macroeconomy are very good at incorporating past experiences, weighing those that are most relevant today and applying them to the near future. These models can tell us something about the likely duration of this downturn.
Assessing the economy today, we have a few salient facts to consider. First, mounting evidence suggests that state orders to shelter-in-place or stay-at-home had less economic impact that first thought. Deep declines in consumer and business spending on restaurants, travel and recreation occurred before these orders. Moreover, in places that have substantially lifted these restrictions, spending in these categories is less than half the pre-pandemic levels. This is relevant because it means the disease, rather than the state order, is driving the economic declines.
Over the past two months, some 36 million Americans became unemployed, smashing previous records for the speed and level of job losses. One optimistic note in these data is that three quarters of newly displaced workers report they are temporarily unemployed, and expect to be back at work soon. For many, this is likely true. American factories have mostly idled because of supply chain disruptions from China, and are now resuming operations. Many other businesses are figuring out how to adjust to the disease and are resuming some or all of their operations.
The challenge is that 9 million newly displaced workers are permanently laid-off. This number will rise as the recession lingers. We entered this downturn after the longest expansion in history. Recessions leave only strong companies in their wake, but recoveries allow weak companies to accumulate. This downturn will expose many firms as not viable, leaving their workers permanently unemployed.
This downturn initially struck industries in retail, tourism and hospitality, where the typical worker has less formal human capital. It is too early to know the full effect of this pandemic on these sectors, but it seems clear that retail, tourism and hospitality face long-term changes that will require many workers to change occupations. That process will not be seamless or quick. These job losses were broadly distributed across the nation, which may have unforeseen consequences on the speed of recovery and the movement of workers.
Economic models and historical data can tell us something about the speed of recovery. In particular, we’d wish to better understand the time it takes to re-absorb those workers facing permanent job losses. These numbers are not encouraging.
The fastest full post-war recovery was after the 1982 recession. It took a full 38 months after the end of the downturn for the economy to absorb 9 million workers. However, a substantial share of those workers were temporary layoffs, and Americans were more geographically mobile in the 1980s than today. If we take the average job creation following the last three recessions, it would take 54 months to create 9 million jobs and it took 67 months to do the same in the wake of the Great Recession. None of these analyses considers growth in the labor force, which has grown by an average of 1.2 million persons per year in this century.
Putting all this together simply reveals that under even optimistic assumptions the labor market disruption of this pandemic will linger for four years. Estimates derived from more recent downturns suggest a much longer path to full recovery. This is a very different prognosis from even two months ago.
About the Author
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