by Jeanette Garretty, March 15, 2021
It is close to impossible to find an economic forecast these days that does not begin and end with a discussion of the medical research around the coronavirus, COVID-19 vaccines, virus variants and population vulnerability. While an intense focus on the pandemic is valid – it is the clear cause of a global recession and an undismissible factor in the pace and shape of the global recovery—a related benefit to economists is that the medical uncertainties provide a convenient explanation for economic forecasts gone wrong. Furthermore, it somehow seems more respectable for economists to be thrown in league with epidemiologists than the usual weather forecasters.
The heavy reliance of current economic outlooks on predictions for the pace and timing of vaccinations and herd-immunity is less than satisfying, however. Throughout the second half of 2020, US statistics for consumer spending, business investment, state & local government budgets, and earnings growth, to name a few, have consistently surprised on the upside, even as virus outbreaks and local “lock-downs” have moved capriciously through the population. In China, the virus is controlled but not eradicated and lock-downs are not uncommon; yet, economic growth has been robust. And in Europe, where it long-appeared that the pandemic had been brought under greater control than in the United States, widespread economic recovery has floundered.
An alternative, perhaps controversial, view of the recent and future economic path is that at this point the pandemic contributes to, but does not conclusively determine, the overall pace of economic growth. There exists a far more influential explanatory variable, one that is consistent with the focus on the medical uncertainties of the pandemic but which is given a broader scope through the magic of fiscal stimulus: income. The 1% decline in US retail sales in December, following a decline in November, came at a time of rapidly spreading coronavirus case counts and more severe lockdowns in major population centers – but also at a time when funding from various income support programs were beginning to wind down and a new fiscal stimulus package had not yet been confirmed to worried consumers. In contrast, the eye-popping 5.3% growth in US retail sales in January appears to reflect the dissemination of funds from the fiscal stimulus signed on December 27, 2020, despite the coronavirus spread that was still raging.
With this in mind, it seems proper to leave the epidemiology to the medical professionals and focus on what economic models have to say about the fiscal and monetary stimulus, current and future. Macroeconomic models do a very poor job of linking financial market changes (e.g. money supply and interest rates) to the “real” economy of productive activity and an often excellent job of processing changes in government spending, making them quite suitable to an analysis of a relatively near term economic outlook in which monetary policy is unlikely to change.
The fiscal stimulus bill (“The American Rescue Plan”) sent to the President on March 10 will have significant economic impact. Macro-forecast models suggest that both the size and substance of this latest – and probably last—pandemic relief package will increase US economic growth in 2021 by 2 to three percentage points. That is impressive and has little historical precedent.
Many economists have supported the American Rescue Plan as an appropriate action ensuring that the still recovering US economy will overcome the many economic obstacles to near and long-term growth: retail bankruptcies, delinquent mortgages and rent payments, commercial real estate vacancies, ongoing job loss, et. al. Yet, t is highly likely that the US economy would have continued to grow in 2021, even without the American Rescue Plan, pushed along by previous stimulus packages and the success of vaccinations. It is equally likely, however, that without this most recent stimulus, the number of underemployed workers and labor-force drop-outs (“discouraged workers”) would remain high and wage growth would be substantially less. Although the unemployment rate would have fallen, the numbers would continue to disguise the actual job loss, which today still numbers close to 10 million.
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, has observed that the economic benefits of the last, long economic expansion– specifically wage growth and employment opportunity– did not spread widely throughout the US population until the unemployment rate dropped below 4% in 2018. The American Rescue Plan reflects a policy objective of getting back to the levels of employment witnessed in the 18 months prior to the pandemic-instigated collapse of the economy in March 2020 as quickly as possible, and then moving forward with additional growth that will serve to reduce income and opportunity inequality. Many economists also endorse this policy objective as critically important to the long run economic health of the United States, while simultaneously acknowledging that reducing the disturbing and widening income inequality formed over the past three decades is not a goal that can be so-easily achieved with the stroke of a pen and the opening-up of government coffers.
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