The American economy is still in dire straits
The August jobs report was published Friday morning, and the news is both good and bad. On the plus side, the headline unemployment rate fell to 8.4 percent. Something like half of the job losses created by the coronavirus pandemic have been recovered. On the negative side, just 1.4 million jobs were created, and a big chunk of them were temporary census work. The number of permanent job losses jumped sharply, and for odd reasons the stock market is falling. More broadly, it has been a month since most of the coronavirus rescue measures expired, putting an extra drag on recovery.
There has been considerable economic improvement since April. But the American people will need a great deal more help if the economy is to actually recover to full strength. Republicans have apparently given up on fixing the economy, but Joe Biden and Democrats should keep this fact at the top of their minds.
The CARES Act rescue package was enormous, but the coronavirus economic shock was even bigger. As Bill McBride writes at Calculated Risk, it now appears as though there is a "normal" recession developing rapidly within the partly-faded coronavirus shock. Many of the temporary layoffs are being reversed, but the number of permanent ones is increasing quickly. And now most of that rescue is gone, which is sucking $15 billion in income out of the economy every week.
Since the $600/week FPUC expired, actual UI payments out the door have fallen by $15 billion per week. That's the equivalent of almost 4% of GDP. pic.twitter.com/mIyb1kEPEB
— Ernie Tedeschi (@ernietedeschi) August 17, 2020
So far there has not been much of a decline in measured consumer spending since the end of July, but that could be because many data sources do not measure spending from unemployment benefits (as they are typically sent out through pre-paid cards that might not be counted in the data), or because people are dipping into their savings they've piled up over the past five months — which can't go on forever.
Moreover, a complete recovery to full employment and production is going to be impossible so long as the virus is raging. The huge infection spikes in states like Arizona and Florida have since fallen somewhat, which can only be because people largely stopped going about their normal activities. Since President Trump did not even try to control the virus and is not going to start, that means bars, restaurants, tourism, and other industries are all going to be fighting a huge business headwind until a vaccine is actually developed and deployed (which is still not guaranteed to happen).
Meanwhile, there is an accelerating eviction crisis, as people who could not access CARES Act benefits or have since spent through the benefits are being thrown out of their homes by the tens of thousands:
“We ain’t got nowhere to go.”
From a family with toddlers to an elderly woman on her own in the Houston heat, a constable goes from one home to the next, evicting some of the many Americans falling behind on rent as a Texas evictions moratorium was lifted. @KyungLahCNN reports pic.twitter.com/TZOthxt8SP
— New Day (@NewDay) September 3, 2020
All this reinforces something I have argued over and over since the pandemic struck: When considering a response to a big economic collapse like this, the important thing is to aim high. The reason is the huge imbalance of downside risk — if the stimulus is too small, then the economy will remain depressed potentially indefinitely, and the incumbent party will bleed political support as people blame it for the bad conditions. If it's too large, then, as Duncan Black jokes, "People might have a little extra money? Oh no. How can we measure the scale of the human tragedy this would cause." (Economist Mark Thoma made exactly this argument about the inadequate Recovery Act stimulus in 2009, and he was completely right.)
Now, House Democrats did pass a HEROES Act extension of pandemic rescues (though only after they had given up all their leverage back in March), while Senate Republicans have failed to even agree among themselves on what should be part of an additional rescue package. Some are apparently committed to austerity, while others have likely given up on Trump winning re-election, and are preparing to sabotage the economy to ruin a Biden presidency.
Yet some Democratic elites, naturally, are now helping out Republicans by trying to lower expectations. Jason Furman, President Obama's former chief economist, argued on Twitter that since unemployment is now "only" 8.4 percent, then the $600 per month boost to unemployment should be cut to $400. This is grotesquely irresponsible both on moral grounds and on the long-term trajectory of growth and productivity, and the kind of attitude that is going to doom a Biden presidency to ignominious failure. If the economy is not fixed by November 2022, then the Democrats will get swept in the midterms, just like they were in 2010 when unemployment was nearly 10 percent.
The thing to do is keep the rescue packages coming until the virus is defeated, and then keep the stimulus accelerator at full throttle until full employment and production is reached, which means sustained inflationary pressure. If Biden wins in November and the Democrats take Congress, that will be the single most important factor in whether or not they quickly lose their grip on national- and state-level power again as they did in 2010. Let's hope they've learned a little bit from the last decade of economic history.