The U.S. never fully recovered from the Great Recession. One of the benefits of the $1.9 trillion covid relief package unveiled Thursday night by President-elect Joe Biden is that – in addition to helping Americans hurt by the pandemic – it could help America accomplish that goal.
At that point, U.S. politics can safely return to arguments about whether tax increases or spending cuts are the best way to reduce the deficit. It may be a tired debate, but if it means U.S. has finally healed from the scars of the Great Recession, it will be welcome.
In the years following a typical downturn, the economy experiences a period of above-average growth that “makes up” for the ground that had been lost. With the possible exception of a brief upswing in late 2017 and mid-2018, the U.S. economy did not experience that period after the Great Recession. In fact, GDP in the first quarter of 2020 was 5% below its pre-crisis trend.
At the beginning of 2018, there was some evidence that these forces were beginning to reverse themselves. Employers were more desperate for workers than they had ever been. Some expanded the pool of people they were willing to hire, thus drawing more people into the labor force. Others experimented with labor-saving technology that resulted in a boost in productivity.
Then President Donald Trump started a trade war, and the boom slowed. Things seemed set to improve again after U.S.-Mexico-Canada Agreement was signed in late 2019 and the U.S. and China signaled they were closing in on deal. That’s exactly when covid-19 struck, shrinking the economy at a record pace.
As horrific as the pandemic has been, it also inspired Congress to take the boldest economic relief action in history. Total relief allocated by Congress over the course of 2020 totaled about $4.5 trillion. Relief has been so powerful that household balance sheets have actually improved dramatically. Savings are up, credit card debt is down and fewer Americans are strapped for cash.
Now, the incoming Biden administration is preparing to ask for another $1.9 trillion in relief. That may seem like overkill – but overkill is precisely what the economy needs to close the gap still remaining from the Great Recession.
In the ideal scenario, as vaccinations reduce and eventually eliminate the need for social distancing, consumer spending will surge on entertainment, dining and other activities that most Americans have had to forgo. That surge will lead to a rapid rehiring of both of workers on furlough and many who had permanently lost their jobs.
Some small businesses that have closed their doors will not be able to reopen, and that is a tragedy that will impede the recovery. But if the surge in spending is strong enough, those who have survived will be able to expand, taking even more workers off the unemployment rolls.
By the end of this year or the beginning of the next, the demand for workers could become so tight that employers will once again turn to hiring previously neglected workers and investing in labor-saving technology.
That’s why a relief package that simply does the bare minimum to compensate businesses for the losses associated with the latest wave of the pandemic won’t suffice. Any package also needs to try to improve household balance sheets.
If this effort is successful, then not only will productivity rise and the size of the workforce grow, but inflation will also increase. That may be seem like a bad thing, but some inflation is necessary for the healthy operation of a modern economy.
The Federal Reserve sets a goal for inflation to average 2% over the long term. Yet, since the Great Recession, its preferred measure of inflation has been persistently below target. That means the Fed requires a brief period of abnormally high inflation to get back on track, and roaring consumer spending is the best hope for achieving it.
If this effort is successful, then by 2023 the U.S. economy will be radically different than it is now. Having finally reached full potential, it will also raise difficult but familiar questions about how to pay for all the spending that was necessary to dig the U.S. economy out of one the deepest holes of the last 100 years.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Smith is a Bloomberg Opinion columnist.