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Economic Stimulus Works

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The April jobs numbers are out: Last month, the American economy created about 428,000 net new jobs, and the unemployment rate held steady at 3.6 percent. It’s weaker than reports from last year, though still stronger than any report from either the Obama or Trump administrations. More importantly, as economist Irving Swisher points out, we reached one very important milestone: The fraction of workers aged 25-54 with a full-time job matched the pre-pandemic mark of 71.8 percent.

It took just two and a half years to recover America’s labor market strength after the pandemic caused the worst economic shock in American history. It makes a stark comparison to the period after the 2008 recession, when hitting the same mark took almost 13 years.

The proof is in the amount of stimulus between the two disasters. The Great Recession saw one stimulus under President Bush of $152 billion, and the $831 billion Recovery Act—or about 7 percent of 2008 GDP put together. During the pandemic, by contrast, we had about $5 trillion in stimulus spread out between all the different rescue packages—or about 23 percent of 2019 GDP.

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Obama administration economists knew at the time that their stimulus was not nearly big enough, but they talked themselves into not even trying to get a larger one, or boosting its effects with legal trickery. The Great Recession was only great because the response was not nearly as big as the hole it was intended to fill.

Now, it’s open for debate whether or not the $1.9 trillion American Rescue Plan (passed in March last year) was too big. I’ll admit that there has been considerably more inflation than I anticipated when it was passed, and some provisions were clearly a bit rushed (like the aid to states and local governments, which hasn’t even been spent yet in many places). On the other hand, the pandemic and war-caused supply chain disruptions are certainly a major factor behind inflation—just witness the price increases hitting Europe and the U.K., which didn’t do nearly the same amount of stimulus. It’s easy to imagine an American counterfactual where inflation is only a bit less bad but we’re still at 6 percent unemployment.

In my view, even if the ARP was bigger than ideal in retrospect, that was far from clear at the time, and it was still better to overshoot than undershoot. The American economy has recovered in terms of jobs and growth faster than any other major economy, even China—something that hasn’t happened in more than 20 years. And it’s better to have the Federal Reserve raising interest rates ahead of a hot economy than pushing on a string trying to revive an economy that is still weak even with rates at zero.

That’s a lesson we learned during the post-2008 lost decade. The Fed tried all kinds of tricks at the time to boost demand—cutting rates to zero, single instances of asset purchases to push more liquidity into the economy, ongoing asset purchases, and so on. None of them worked to restore full employment in anything like a timely fashion.

What worked this time was stimulus and lots of it. There is every reason to think that more stimulus would have had the same effect in 2009—indeed, it certainly would have worked even more quickly, because the shock of the financial crisis was nowhere near as bad as the shock of the pandemic. A bank run within the financial system and a decline in home values was quite bad, to be sure, but ultimately the problem was entirely about social constructs: money, companies, contracts, asset values, and so forth. These were created by humans and could have been fixed by humans relatively easily, given sufficient political willpower.

The pandemic, by contrast, caused extreme physical disruptions in the day-to-day life of everyone on the planet. Businesses that relied on in-person activity, like bars and restaurants, were either rescued by their national governments or went belly-up by the tens of thousands. The sudden withdrawal of consumer spending caused a surge in unemployment an order of magnitude greater than any in American history. Online delivery businesses were swamped with new orders and struggled to build out capacity. Oil demand plummeted so fast that for a brief time oil futures contracts went into steeply negative territory. Hospitals and clinics were run ragged trying to care for millions of COVID-19 patients. Most importantly, of course, over a million Americans perished from the virus, and millions more have suffered lingering side effects. It’s amazing the economy has recovered as fast as it has.

In the future, austerity politics is going to rear its head. President Biden is already starting to boast about cutting the budget deficit like Obama constantly did. It’ll be critical to remember this period the next time a recession rolls around—we may have some inflation now, but that only proves that stimulus works, and anyway modestly rising prices are better than mass unemployment. John Maynard Keynes was right all along.