The actual economic recession linked to the COVID pandemic proved to be extremely short, lasting only the months of March and April 2020.
Of course, the disruptions and restrictions associated with the pandemic in areas such as health, employment, sectors of the economy, online education and travel have continued in various forms since then. But by focusing on economic issues, what have we learned? Remedies for the Recession: Lessons from the U.S. Economic Policy Response to COVID-19edited by Wendy Edelberg, Louise Sheiner and David Wessel and available free online, offers nine essays on different aspects of economic policy response.
Here’s a look at some of the issues from “Lessons Learned from the Extent of Economic Policies During the Pandemic,” by Wendy Edelberg, Jason Furman, and Timothy F. Geithner.
The US economy has experienced a V-shaped recovery the likes of which have not been seen in recent recessions. Real gross domestic product (GDP) exceeded its pre-pandemic level in the second quarter of 2021 and was close to pre-pandemic potential estimates in the fourth quarter of 2021. The unemployment rate ended 2021 below 4.0%, just slightly above its level. was two years earlier, before the pandemic. …
Overall, the US fiscal response appears to have been much larger than the response undertaken by any other country; this was especially true in 2021, when fiscal policy was as supportive as it was in 2020. The recovery in US GDP has been among the strongest of any advanced economy, but the recovery in US employment has been among the weakest ; this suggests that the size of the response and, perhaps, its character and pre-existing institutions all matter. …
The economy has suffered major side effects from the pandemic and the associated policy response, including the highest rate of inflation in 40 years, far outpacing wage increases and leading to the largest declines in real wages since decades. Additionally, the US government has incurred significant debt during the pandemic. With most forms of fiscal support expiring, real household income is likely to be weaker in 2022 than in 2021 and may well be below its pre-pandemic trend. As a result, poverty is on track to increase in 2022. In addition, inflationary pressures and efforts to moderate these pressures could halt the expansion.
Ultimately, the economic policy response to the COVID-19 recession should be judged not only by its consequences in the spring of 2020, not by what happened over the next two years, but also by the effects longer term, and whether the response will prove to have contributed to a stronger and more sustainable economy in the future. …
Here is a non-exhaustive list of lessons I learned from the book’s essays. I will list the table of contents of the book below.
1) When the pandemic recession first hit, the effects were severe and it was unclear how long it might last. Thus, the priority of economic policy was to go big and fast: in particular, some policies were spending large sums of money on rebates, stimulus, unemployment insurance, and the like. Some of them distributed money in a largely untargeted way. For example, the Paycheck Protection Program funneled hundreds of billions of dollars into companies with fewer than 500 employees, with the idea that it would protect jobs, but given that it was essentially free money from the government, much of it ended up going to the owners of the firms. Economic policy at the start of 2020 had to choose between targeting and speed, and above all chose speed.
2) The original focus of economic policy in March and April 2020 was not really about helping the economy recover: it was about helping large parts of the economy shut down to minimize the risk of the spread of the pandemic, but in a way that was trying to support income.
3) The economic recovery from the pandemic has happened faster than expected. So when Joe Biden took the presidential oath in January 2021, there was widespread sentiment that additional fiscal stimulus was needed. But the recession had ended in April 2020 and the vaccines had arrived. In fact, the US economy at the start of 2021 was in quite a different situation than the year before. In a crisis situation, we sometimes have the feeling that “we can never do too much”. But continuing and extending federal support payments into 2021, as if it were still 2020, was a mistake and helped launch inflation.
4) Compared to the EU experience, the US labor market has experienced a much steeper fall. One reason was that US payments to the unemployed were very high, sometimes more than 100% of previous wages, while payments in European countries typically replaced around 70-90% of lost earnings. Second, European countries have emphasized “partial unemployment” policies, which are similar to part-time unemployment. The idea was that instead of a company laying off some workers completely, the company could cut the hours of all workers, with the government then compensating for much of the wage difference. These policies aim to preserve employer-employee ties, with the idea that such ties make it easier to return to work – and much easier for the employer to demand that employees return to their jobs. There are longstanding arguments about the merits of subsidizing workers through unemployment insurance or subsidizing jobs with short-term work programs. Both approaches probably have a role to play, but during a brief and brutal pandemic shock, short-time work has real advantages.
5) Around the start of the pandemic recession, there were fears that state and local governments would face serious strains, but the end result was more mixed. Louise Sheiner writes:
So what happened to state and local government revenues, employment and spending in the first two years of the pandemic? Revenues have not fallen as much as first feared, and federal aid has been more than enough to offset any loss of revenue in every state. Nonetheless, state and local government employment has fallen sharply, and the decline has been quite persistent: state and local government employment in February 2022 was 3% below the January 2020 level. angle, in February 2022, the state and local sector accounted for 23% of the employment deficit in the United States compared to its pre-pandemic trend. … Overall, it seems clear that job losses vary greatly from state to state in ways that cannot be fully explained. … [G]generous federal aid to states has clearly not been enough to reverse or prevent all job losses. An important question is, why not? What did state and local governments do with federal aid, and why didn’t they use it to increase employment?
6) Vulnerabilities in the US financial system have played an important role in the spread of some recent recessions, notably the Great Recession of 2008-2010 and the recession of 1991, which had some links to the collapse of the savings and savings sector. loans. But during the pandemic recession, the US banking system worked very well. Much of this performance was due to the effectiveness of the rules put in place after the Great Recession on the capital and safety standards that banks had to meet. The Federal Reserve also played a role in extending short-term credit and ensuring that financial markets did not freeze, particularly in March 2020, but overall the story of the financial sector is the success of previous reforms.
The book often returns to the theme that the next recession is likely to come from its own idiosyncratic cause – i.e. not from a pandemic – and it is worth considering what policies could be put in place now that would trigger automatically when the recession hits. Here is the table of contents for the book as a whole: