The recession caused by the Covid-19 pandemic was the shortest on record, thanks to swift, strong and bipartisan action by Congress. It took just over two years to regain all the lost jobs – hard to fathom as more than six million people applied for unemployment insurance in one week at the end of March 2020. Americans were healed by their government, which prevented what otherwise would have been massive financial suffering.
“This is the best, most successful response to an economic crisis we’ve ever had, and it’s not even close,” H. Luke Shaefer, a University of Michigan professor who is an expert on deep poverty, told a House committee in the fall of 2021.
But by the time Dr. Shaefer testified, inflation began to rise and suck all the air out of the room. As the economic conversation moved (and stayed there) to inflation and its causes, the debate shifted from what the government had achieved to whether it went too far. Inflation hawks blamed the pandemic response for driving up consumer demand, which they say drove up prices, hurting many people as the cost of food, rent and other necessities rose.
The fracas about inflation threatens to damage the memory of the concrete evidence that the federal government is fully capable of keeping Americans afloat when the economy sinks. “We showed we could do it, this is what we should be doing from now on,” JW Mason, an economist at the John Jay College of Criminal Justice, told me. The open question now is whether we will ever do it again.
In fact, the Federal Reserve is actively working to undo much of the government’s achievements. To fight inflation, the Fed has raised interest rates in the hope that this will cause companies to pull out, spend less on wages and hire fewer people (or even lay off some) and dampen demand. Even with inflation falling this year, it is widely expected that the agency will announce another rate increase next week and that it is entirely possible that rates will be increased later this year.
When the pandemic started in March 2020, the federal government reacted with lightning speed. Five days after declaring a national emergency, President Donald Trump signed the bipartisan Families First Coronavirus Response Act on March 18. Less than two weeks later, he signed the also bipartisan Coronavirus Aid, Relief and Economic Security Act.
Together, the packages sent about $2 trillion to $600 more in weekly unemployment benefits and expanded eligibility, $1,200 in stimulus checks, and more food aid. In December, Congress provided $900 billion more through the Coronavirus Response and Relief Supplemental Appropriations Act, which included $300 in weekly unemployment benefits and $600 stimulus checks. In March 2021, with Joe Biden in the White House and Democrats leading the Senate, Democrats passed $1.9 trillion through the US bailout, which included another round of stimulus checks, an expanded child tax credit, and rent assistance. Overall, aid was more than three times what it was during the Great Recession in 2007.
Results also came quickly. The pandemic recession lasted only two months. Unemployment reached 14.7 percent in April 2020, but fell to single digits within four months. The unemployment rate has remained below 4 percent since early 2022. The proportion of working Americans in their best working years recently reached its prepandemic peak. “We haven’t really seen jobs recover at this rate,” Arindrajit Dube, an economist at the University of Massachusetts, Amherst, told me.
There are other ways to measure success. Amid staggeringly high unemployment, poverty fell to an all-time low in 2020 and then fell again in 2021. Hunger remained the same.
Hardship was averted thanks to government aid that helped replace lost revenue. But as the economy quickly recovered, Americans also began to earn more, especially those earning the least. Wage growth for people earning in the bottom 10 percent increased by 6.4 percent between January 2020 and last September. “That really flips the script for what’s happened over the last 40 years,” said Dr. dub. Typically, low-wage workers see the greatest job losses in a recession, which translates into higher unemployment and lower wage growth. But not this time. While low-wage workers suffered many job losses during the pandemic, their wage growth has been higher in this recession than in any of the last four.
Wage growth has been so strong for those earning the least that income inequality has actually narrowed. Inequality has generally increased since the 1980s, but robust wage growth in the aftermath of the pandemic has erased more than a quarter of the gap between the lowest and highest paid. “This isn’t the kind of change we often see,” said Dr. dub.
It’s hard to know exactly what the counterfactual would have looked and felt like, how deep and wide the hole would have been without strong congressional action. But Moody’s Analytics estimates that without federal aid, economic output would have fallen three times more in 2020 and we would have had a double recession the following year. Jobs would not have recovered until 2026 and unemployment would have remained in the double digits well into 2021. Wage growth would have crept to a record low. Poverty has reached record levels.
We also have the very recent experience of the Great Recession to compare it to. “My biggest takeaway from the incredible success of the labor market recovery from the pandemic recession was that recovering unemployment from the Great Recession was a policy choice — a cruel and misguided policy choice,” says Lindsay Owens, the executive director of the liberal think tank Groundwork Collaborative.
In December 2008, Christina Romer, the new chair of President-elect Barack Obama’s Council of Economic Advisers, estimated that a federal stimulus package would need to exceed $1.2 trillion to avoid mass unemployment. Larry Summers, soon to become director of the National Economic Council, dismissed the idea. The package that was passed was $787 billion. Just two years later, Mr. Obama a “grand deal” on deficit reduction. His eventual deal traded dollar-for-dollar federal spending cuts for raising the debt ceiling, cutting points off gross domestic product and undermining jobs from an economy still struggling to recover.
The unemployment rate reached double digits in October 2009 and remained above pre-recession levels for nearly eight years. Prime-age employment would not reach its pre-recession peak until January 2019. Food insecurity rose from 11.1 percent of households in 2007 to 14.7 percent in 2009. Wage growth remained stagnant for a decade.
The job market was so weak that Americans were desperate for work and workers were trapped in bad jobs. It was especially painful for young people, trapped on a broken escalator to better work, with “significant negative impact on an entire generation,” said Dr. dub.
If the goal was to keep inflation low, the government did a great job – it remained depressed for years. But so did job and wage growth. Americans fared “badly” despite “very, very low inflation,” said Michael Madowitz, director of macroeconomic policy at the left-leaning Washington Center for Equitable Growth. It was a ‘lost decade’.
It is clear that the government responded much more successfully to the pandemic. But the victory lap was aborted. Initially, corporations and conservatives began to complain that the government’s being too generous had caused too many Americans to give up. “No one wants to work anymore,” moaned employers whose employees left for better jobs. That narrative never held up, especially given the number of studies that have shown that more generous unemployment benefits didn’t cause people to stop working, nor that taking them away pushed them into employment.
As inflation began to pick up in 2021, the concern turned to the idea that federal aid was the fuel. Americans had too much government generosity in their bank accounts, the argument went, so they bought too many goods and services, driving up prices. Strong wage growth only fueled the fire.
But that story doesn’t quite add up either. When dr. Dube and co-authors examined this question, they found that while the tight labor market had some impact on inflation, it accounted for only about one-fifth of the rise in non-energy prices. If the only factor influencing inflation had been the tight labor market and resulting higher wages, inflation would have been just 2.3 percent by the end of 2022. Economists Andrea Cerrato and Giulia Gitti came to a similar conclusion, finding that higher demand during the recovery could explain only a quarter of the rise in headline inflation.
The whole idea was always a bit ridiculous: “How did $1200 stimulus checks cause inflation in Turkey?” noted dr. Owens up. “Probably not.”
Yet many people have used the high inflation to reprimand the government for doing too much. “A lot of people, whether they’re honest about it or not, want to use the current inflation episode as a morality game,” said Skanda Amarnath, the executive director of Employ America.
What is implicit when people express outrage at the high inflation, claiming it was caused by high demand after people were given stimulus and unemployment benefits to get through, is that they would have preferred to bid less — which would have caused a slower, more painful recovery, “leaving many people out of work for a long time,” said Mr. Amarnath. “It sounds ridiculous to say, ‘We shouldn’t get the jobs back quickly because of inflation.’” But that’s exactly what they mean.
One day there will be another economic nosedive. Lawmakers will be faced with whether – and how – they should act. They could take to heart the lesson of the pandemic era that the government can and must act quickly to avoid suffering and economic collapse. But if they focus instead on low inflation and decide that the better model was the anemic response to the Great Recession, we are in for years of slogging that saps the American people of income and the economy of its potential.