Rapid inflation, lower employment: how the US pandemic response measures up

The United States spent more aggressively protecting the economy from the pandemic than many global peers, a strategy that has helped create faster inflation – but also a faster economic upswing and rapid job gains.

Now, however, the United States is struggling with what many economists see as an unsustainable shortage of workers who threaten to keep inflation high and who may demand a firm response from the Federal Reserve. Nevertheless, US employment has not recovered as fully as in Europe and some other advanced economies. This reality makes some economists ask: Was US spending worth it?

As the Fed raises interest rates and economists increasingly warn that it may require at least a mild recession to stop inflation, the risk increases that US ambitious spending will end up with a checkered legacy. Rapid growth and a sharp decline in the labor market have been major gains, and economists across the ideological spectrum agree that a certain amount of spending was needed to avoid a recurrence of the painful slowdown that followed the previous recession. But the benefits of faster recovery can be reduced as rising prices erode wage slips – and even more so if high inflation causes the central bank to set policies in a way that pushes unemployment down the road.

“I’m concerned that we traded a temporary growth gain for permanently higher inflation,” said Jason Furman, an economist at Harvard University and a former economic official in the Obama administration. His concern, he said, is that “inflation could stay higher, or the Fed could control it by lowering output in the future.”

The Biden administration has repeatedly claimed that to the extent that the United States sees more inflation, the political response to the pandemic also created a stronger economy.

“We got a lot more growth, we got less child poverty, we got better household balances, we have the strongest labor market by any calculations I’ve ever seen,” Jared Bernstein, a financial adviser to President Biden, said in an interview. “Were all these achievements accompanied by heat on the price side? Yes, but a certain degree of that heat appeared in any advanced economy, and we would not trade it back for the historical recovery we helped generate.”

Inflation has picked up around the world, but price increases have been faster in America than in many other affluent nations.

Consumer prices were up 9.8 percent in March from the year before, according to a measure of inflation that removes owner-occupied housing to make it comparable across countries. It was faster than in Germany, where prices rose 7.6 per cent in the same period; UK, where they rose 7 per cent; and other European countries. Other measures similarly show that US inflation surpasses that of its global competitors.

The relatively large price jump in America is due at least in part to the country’s ambitious spending. Research from the Federal Reserve Bank of San Francisco attributed about half of the country’s annual price increase in 2021 to the government’s spending response. The researchers estimated the number, which is imprecise, by comparing the US inflation outcome with what happened in countries that spent less.

“The size of the package was very large compared to any other country,” said Oscar Jordà, a co-author of the study.

The Trump and Biden administrations spent about $ 5 trillion on pandemic aid in 2020 and 2021 – far more as a share of the nation’s economy than what other advanced economies spent, based on a database compiled by the International Monetary Fund. Much of that money went directly to households in the form of stimulus checks, extended unemployment insurance and tax deductions for parents.

Payments to households helped stimulate rapid consumer demand and rapid economic growth – progress that has continued into 2022. A global economic outlook released by the International Monetary Fund last week showed that the US economy is expected to grow by 3.7 percent this year, faster than About 2 percent trend prevailing before the pandemic and the average of 3.3 percent expected across advanced economies this year.

It followed even faster 2021 growth. And as the US economy has expanded so rapidly, unemployment has fallen. After rising to 14.7 percent in early 2020, unemployment is roughly back to the lowest levels in the 50 years that prevailed before the pandemic.

It is a victory the politicians have celebrated. “Our economy was booming faster than most people anticipated,” Biden said in his State of the Union speech last month. A major White House report on April 14 noted that the United States had experienced a faster recovery than other advanced economies, measured by gross domestic product, consumption expenditure and other indicators.

But increasingly, at least when it comes to the job market, the United States’ performance looks less unique.

Unemployment in the United States rose much higher at the beginning of the pandemic, partly because US policies did less to counter layoffs than those in Europe. While many European governments paid companies to keep workers on the payroll, the United States focused more on giving money directly to those who lost their jobs.

Unemployment fell sharply in the United States as well, but so did elsewhere. Many European countries, Canada and Australia are now back to or below their prepandemic unemployment figures, data reported by the Organization for Economic Co-operation and Development showed.

And when it comes to the percentage of people who actually work, the United States lags behind some of its global peers. The nation’s employment rate is around 71.4 percent, still slightly down from almost 71.8 percent before the pandemic.

In comparison, the countries in the eurozone, Canada and Australia have higher employment rates than before the pandemic, and Japan’s employment rate has fully recovered.

Europe’s more complete employment recovery may in part reflect its different regulations and different approaches to supporting workers during the pandemic, said Nick Bennenbroek, international economist at Wells Fargo. European aid programs effectively paid companies to keep people on the payroll even when they could not go to work, while the United States supported workers directly through the unemployment insurance system.

The relatively subtle difference had a major consequence: Because fewer Europeans were divorced from employers, many flocked straight back to their old jobs as the economy reopened. Meanwhile, pandemic layoffs touched on an era of soul-searching and job change in the United States.

“You did not have much motivation to reconsider the assessment of your working life situation,” said Bennenbroek. “What we first saw in the United States was much more disturbing.”

Disruption has had its benefits. America now has a record 1.8 jobs open to every unemployed worker, which in some ways has given employees more power to demand more flexible schedules, better benefits and higher wages.

Wages in the US are rising at the fastest pace in four decades, while wage growth in Europe has been more subdued. Mr. Bernstein, the White House adviser, now called the United States’ situation “the strongest labor market in generations.”

But the hot labor market carries its own risks. Firstly, wage growth is not keeping pace with the rapid inflation of many people, which leaves some households alone even when their wage slips become larger. And the rise in wages could make companies try to cover their costs by raising prices even more.

Higher wages could be a “feeder to inflation,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, told reporters Wednesday.

“It’s unbearably hot,” Fed Chairman Jerome H. Powell said of the labor market during an event on Thursday. “It is our job to make it a better place where supply and demand are closer.”

America’s sharp wage increases may mean that the Fed must react more aggressively to slow down the economy. The central bank is trying to tame inflation by raising interest rates in an attempt to make money more expensive to borrow, which can slow down spending and cool economic conditions.

But if the Fed has to raise interest rates to high levels to restore economic calm, it could embark on a recession that pushes unemployment higher. Mr. Powell and his colleagues have said they hope they can land the economy softly without inducing that kind of pain – but they recognize that a downturn is a risk.

Ultimately, the legacy of America’s major aid programs may depend on what happens in the months ahead. If inflation moderates without painful action from the Fed – something some economists still believe is at least possible if the pandemic disappears, supply chains normalize and workers return to the labor market – the short period of rapid price increases may end up looking like a relatively small price. to pay for a strong economic recovery that in some ways surpassed those staged abroad.

But if central bankers decide to take more drastic steps, resulting in a recession, it could reverse some of the recent progress – and the consequences are likely to be worse for low-wage workers who have experienced the strongest job and wage gains.

The war in Ukraine could complicate attempts to judge America’s achievements against its global peers. Economic growth in Europe had accelerated late last year, but the Russian invasion – and the increase in fuel costs that came with it – threatens to derail recovery there. The United States may also have consequences, but is relatively isolated from the Russian and Ukrainian economies.

“Europe was doing well, and I was very optimistic before the war,” said Gian Maria Milesi-Ferretti, an economist at the Brookings Institution who has studied recycling in the United States and Europe. “But now the shock of war is completely asymmetrical between the United States and Europe.”

Central banks around the world are reacting while prices are rising rapidly. Interest rate rises are underway in the UK, and European decision-makers have become more cautious as inflation has jumped higher. This may mean that these economies, after accelerating through an improvement together, are now slowing down.

“For a while, inflation began to rise, and central banks remained very calm about it – but that time has passed,” said Carlos Viana de Carvalho, an economist at Brazilian asset manager Kapitalo Investimentos and a former Fed economist. – The attitude has changed.

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