More thoughts on the recession, stimulus, and recovery

This drop is overwhelmingly associated with a sharp drop in demand for services, like restaurant meals, hair salons, and other personal services. Interestingly, the size of the drop is not affected to any substantial extent by laws on shutdowns. Areas where these services were fully available saw comparable declines in spending as areas where these services were still subject to lockdowns.

There are two major takeaways from these findings. First, the drop in demand that we have seen to date has little to do with declines in income. The top quartile has reduced its spending not because it lacks the income to spend, it has reduced spending because it is scared to spend in the areas where it would ordinarily be spending its money.

An implication is that any further efforts at boosting the economy should be better targeted than the first rounds. For example, giving $1,200 to every adult in the country was not a very effective way to boost the economy. While this was payment was phased out for very high-end earners, the phase out only affected the top 2-3 percent of the income distribution, the bulk of the top quartile received their checks even though they were not suffering any income loss as a result of the pandemic.

The other major take away is that if we want people to use restaurants, hair salons, gyms, and other services, the issue of legal shutdowns matters far less important than ensuring their safety. This means actually getting the pandemic under control. While virtually every wealthy country has been able to do this, outside of the Northeast corridor, new infections are higher than ever in the United States. This means that without a vaccine and/or effective treatment, we are likely to see demand for a wide range of services badly depressed for the foreseeable future.

This matters in a big way because these industries provide tens of millions of jobs largely to less-educated workers. These sectors also disproportionately employ women and people of color. If they continue to see demand at far below pre-pandemic levels, it will mean a massive and persistent increase in unemployment for the less-educated segments of the workforce. This will quickly reverse all the gains that lower-paid workers were able to make as the labor market tightened in the prior five years.

Shaping the Stimulus

The most immediate need in the next round of a rescue package to come from Congress is for money for state and local governments. Their budgets have been devastated by the loss of tax revenue due to the shutdown and the additional demand for services. The Center on Budget and Policy Priorities calculated that the shortfalls could be as high as $500 billion.

They have already laid off 1.6 million workers and this number will hugely increase if Congress does not provide a large chunk of money to make up for their shortfalls. Some people have pointed out that the laid-off workers were largely teachers, who were not paid for the period in which schools were shut down. This is true, but if state and local governments cannot get the money to make up shortfalls, many of these teachers may not be called back in the fall and other workers are likely to be laid off to make up the cost of paying the teachers who are called back. Cutbacks at the state and local level were one of the main reasons that the recovery from the Great Recession was so slow. We should not make an even larger mistake now.

The Post Office will also need substantial funding to stay in business, as it has seen both a sharp decline in revenue and sharp increase in spending due to efforts to keep its workers safe. As with state and local governments, the employees of the Post Office are disproportionately Black. This is due to the fact that Black workers in the public sector have faced less discrimination than Black workers in the private sector. As a result, the public sector has historically been an important source of middle-class jobs for Black workers. This will be threatened if the fallout from the pandemic forces large cutbacks in employment.

There has been a peculiar debate over the extension of the $600 weekly supplements to unemployment benefits that are scheduled to end next month. It is important to remember the reason these were included. We gave people this supplement because we did not want them to work. The point was to keep people whole through a period in which the economy was largely shut down in an effort to contain the virus.

In this context, the question we should be asking in deciding whether to continue the supplement is whether it is safe to work. This depends on our progress on containing the virus. One obvious way to determine the extent to which the pandemic has been contained is the positive rate on new tests. If the positive rate is below some low level, say 3 percent, then it would be reasonable to remove the supplement in that area (this can be county specific), however, if we are seeing high positive rates, then as a matter of policy it would make more sense to encourage people to stay at home than to work.

For the areas where the virus is under control, it would still be desirable to have some supplement to the standard benefit. Benefits in many states have been eroded in recent decades so that it would be very difficult for unemployed workers to survive on them. In a context where the nationwide unemployment rate is virtually certain to be in double digits through the rest of the year, most of the unemployed are not going to be able to find work. For these reasons, a smaller supplement, perhaps $200 a week, should be left in place until the economy has recovered more.

In addition, we should also increase SNAP benefits to protect those at the bottom of the income ladder. Food prices have risen sharply since the pandemic hit. These increases may be reversed in the months ahead, but for now, low-income families have to cope with high food prices, with no increase in benefits. It is also important to remember that SNAP spending is a small share of the total budget. At $70 billion a year, it is just 1.6 percent of total spending. It is less than one-fifth of the premium we pay each year for prescription drugs because of government-granted patent monopolies.

Longer Term Recovery

At the point where we have developed effective treatments and/or a vaccine, many people will go back to eating at restaurants and flying for vacations. However, there are some changes in spending patterns that are likely to be enduring.

It is likely that much of the increase in telecommuting will be permanent. This means that many fewer people will be going to downturn offices and taking advantage of restaurants, bars, gyms, and other services in central cities at lunch and after work. People are also likely to be taking many fewer business trips, as meetings will take place on Zoom. Also, many colleges and universities will likely be downsized, as more instruction takes place on the web, decreasing retail sales in college towns.

While there will be other long-term changes resulting from the pandemic (maybe even some questioning of government-granted patent monopolies for prescription drugs), the basic point is that large numbers of workers are likely to still be displaced even after the immediate impact of the pandemic is over.

This actually presents a great opportunity. If the private sector is not spending enough to fully employ the workforce, then the public sector has to fill the gap. In this case, we don’t need to have make-work jobs, we have enormous unmet needs.

Most obviously we need people to increase our capacity for clean energy and conservation. This can mean millions of jobs for people installing solar panels, insulation, and other energy-saving measures. We also need to ramp up our child care capacity. The lack of adequate child care was driven home in the pandemic as many health care and other essential workers had difficulty making arrangements when child care facilities shut down. We also need more health care workers as we move towards establishing a universal Medicare system. This will likely mean many more nurses, nurses’ assistants, and other health care professionals. And we will need social workers or other trained professionals who can be the first responders in many non-violent situations where the police are currently called in.

We can’t imagine that all the people who lose their jobs in restaurants and hotels will be able to work installing solar panels or train to be nurses, but that is not how the labor market functions. In a normal pre-pandemic month, more than five and a half million workers lost or left their job every month. As jobs are generated in these new areas, many currently employed people will look to fill them. That will create job openings that former restaurant and hotel workers can fill. The story is not as simple as this, as we know there is considerable discrimination in the labor market and many pockets of high unemployment, but we don’t have to imagine that we need to match up displaced workers directly with the newly created jobs in clean energy, child care and health care. The labor market is far more flexible than this story implies.

Anyhow, a full discussion of the post-pandemic economy is a much longer story, but the basic picture is actually a positive one. More telecommuting will mean a more productive and less polluting economy. It will also lead to more dispersion of higher paid jobs, benefiting many of the areas that have been left behind in the last four decades and lowering rents and house prices in places like New York City and San Francisco. If we can get through a very bad stretch for the country and the economy, the future could actually be quite bright.