By: Ralph Townsend
The recent economic news in Alaska and the US has been dominated by two stories: the challenges that firms confront in hiring, despite significant unemployment, and supply chain disruptions. These events lead to the obvious question: Why is this recession so different?
The current recession was born in a uniquely explosive burst. The unemployment rate jumped more than 10%, from 4.4% to 14.8%, in the single month between March and April of 2020. But the fiscal response to this recession was equally unique and decisive. On March 27, 2020, before that disastrous April had even started, Congress enacted the $2.2 trillion CARES Act by essentially unanimous agreement.
Additional rounds of stimulus have brought the total to $5.2 trillion. The federal stimulus ultimately included an extra $300/week for unemployment benefits, extension of unemployment benefits to gig workers, the Payroll Protection Program, three rounds of stimulus checks totaling $3,200 per person, an enhanced child tax credit, and large transfers to states, communities, tribes, and non-profits. Similar fiscal response by governments around the world also avoided a world-wide recession that could have dragged the US economy down. By October 2021, the unemployment rate had fallen to 4.6%, despite the resurgence of the delta variant.
The starkly different experiences in the Great Recession highlight the uniqueness of the current recession. The pain of the Great Recession developed gradually, but inexorably, over 2 years as unemployment increased from 4.4% in May 2007 to 10.0% in October 2009. It took almost 2 years for Congress to enact the American Recovery and Reinvestment Act (ARRA) in February 2009. The lack of bi-partisan support for ARRA (only three Republican Senators voted for the bill) reflects the equivocal nature of support for that recovery plan. There is wide agreement among economists that ARRA was “too little, too late.” Recovery from the Great Recession was painfully slow: It took almost a decade, until February 2017, until unemployment returned to 4.4%.
The decisive and immediate fiscal response gave this pandemic recession a truly distinctive feature: personal income and wealth increased significantly during the recession, even though unemployment jumped a historic 10% in a single month. Total personal income increased by 6.9% from 2019 to 2020. This robust growth has continued into 2021, with reported third quarter personal income now 11.9% ahead of what it was in 2019. Family wealth has also increased significantly. The S&P 500 Index is up 42% from February 1, 2020, to November 1, 2021, which will fuel large retirement income gains for those with defined contribution pension assets. The S&P Case-Shiller Home Price Index is up 24% from February 2020 to August 2021, so families with homes have gained significant equity. Data from the New York Federal Reserve Bank indicates that credit card debt balances fell 14% between the fourth quarter of 2019 and the third quarter of 2021, so families are also reducing the liability side of their personal balance sheets. Of course, the total figures hide the deeper information that a sizable portion of the population has been very negatively impacted by the pandemic recession. The median earnings data, which excludes transfers like unemployment and the stimulus checks, provide a clear sense of the unevenness of the impact of the recession. While the median earnings of all workers fell 1.2% between 2019 and 2020, the median earnings of those working full-time increased a very substantial 6.9%. And for many of those with full-time jobs, the shift to at-home work meant fewer job-related expenses.
The strong wealth and cash position of many American families probably explains part of current challenges for employers in labor markets. A key factor for labor markets has been the decline in labor force participation rate, from 63.3% in February 2020 to 61.6% in October 2021. While this 1.7% decline may not seem large, labor force participation normally is very stable, and this decline is historically unprecedented. Two important forces are driving that decline. First, the labor force participation for older workers, who are part of the baby boom generation that has dominated the work force for fifty years, declined significantly. This is not unusual during recessions; older workers who lose their jobs opt for retirement in all recessions. But the combination of serious coronavirus risk for older workers and the substantial gains for defined contribution retirement plans provides both a push and pull for those considering retirement. Second, employees are understandably reluctant to return to some workplaces because of continuing coronavirus risks, confrontations with co-workers and customers over vaccines or masks, and childcare challenges. Given strong balance sheets and cash reserves, some families can afford to sit on the sidelines for a few months while these forces resolve themselves. And while the empirical evidence is thin, there is widespread talk of a “Great Reassessment” of work/family balance and personal life goals. Finally, many are pleased that tight labor markets are raising the incomes of non-college-educated workers for the first time in a generation.
The higher income for families has also contributed to the current pandemic supply chain disruptions in two ways. First, the level of demand for goods and services has not fallen, but there are fewer workers to produce those goods and services. Second, families have changed what they want during this pandemic. The demand for services like dining out and entertainment have been replaced by demand for goods like food to prepare at home, sporting goods, and electronic equipment. Families where both adults and children are spending more time at home are looking for larger, more comfortable homes. Those additional physical goods need to be produced and delivered to customers. Much of that production is in Asia, which has also been impacted by the pandemic. The supply chains were simply not large enough to absorb this surge in demand for goods, and transportation firms face their own labor market challenges. Small changes and disruptions that firms previously had the resiliency to manage are cascading into serious disruptions. It will take time for the economy to adjust to those changes and to work through the supply chain issues.
For those thinking about the next step in the fiscal response to this recession, looking back to experiences in previous recessions may be of limited value. The strong growth in income and wealth have made this a truly unique recession. And whether the pandemic recedes or resurges will greatly influence the immediate future of the economy. Repeated surges like the delta variant will keep employees on the sidelines and will continue to tilt the mix of goods and services demanded by consumers. If stimulus is withdrawn and new variants of the virus emerge, do we risk the long tail of economic pain that we saw in the Great Recession? And while both the Biden administration and the Federal Reserve insist that the current inflationary pressures are transitory, there is the underlying fact that the US economy is expecting more goods from a workforce that is reduced in the US and in much of the world. The very uneven pain of this recession leads to questions about whether the appropriate stimulus going ahead needs to be better targeted at those whose incomes have actually declined. Looking further down the road, is reform of childcare delivery required to reverse the decline in labor force participation? Fiscal and monetary authorities are peering through a very cloudy crystal ball caused by a very unique recession.
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