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BERKELEY – Like almost all other countries, the United States has become poorer since the COVID-19 pandemic began, because Americans can no longer engage in valuable activities that require close human contact. Millions of workers now need to find other productive things to do, and many of these new tasks will not be as valuable as the ones they replaced.
But there is no economic reason why the depression triggered by the COVID-19 crisis should be particularly deep or prolonged. The US leads the world in technological and organizational competence and is home to a highly skilled workforce. The problem is that recovery won’t happen by itself.
The fact that it took a decade for the US to recover fully from the 2008 financial crisis should inform today’s thinking. Back then, the US housing-construction sector had already shrunk back to its normal size before the subprime-mortgage crisis erupted, which meant that no sectoral structural adjustment was required. The challenge, rather, was to identify and reallocate resources to previously unproduced goods that would become more valuable in the future.
Moreover, the 2008 financial crisis and ensuing recession did not make American workers less skilled or reduce the effectiveness of existing technologies. In the short term, it destroyed many professional networks and reduced the social trust that underpins the economy’s division of labor. The only long-term effect was a loss of investor confidence in private-sector financial institutions’ ability to create safe, properly-rated financial assets.
But that is why it took a decade for US employment to recover from the subprime crisis. The world was short of safe assets, and governments failed to address that problem in the right way. The US, for its part, should have done more to mobilize extra private-sector risk-bearing capacity, create safe public assets, and support workers, including by printing money and buying stuff to drive effective demand and employment growth.
Although there is no reason why it should take a decade for employment to return to its pre-pandemic level, that is probably what will happen. The same forces that led policymakers to declare victory over the crisis and shift to “austerity” in 2010 are already at work again today. It is clear that the US federal government over the next month will offer no new policy initiatives to mitigate the depression or to improve upon America’s failed public-health response.
It is also clear that the Republican Party has no valid ideas for how to achieve a “V-shaped” recovery. Additional tax cuts for the rich would do as much to boost demand and employment as they did when the GOP rammed through the Tax Cuts and Jobs Act in late 2017: absolutely nothing. Similarly, slashing social programs might make workers even more desperate to find jobs; but despair won’t translate into additional employment if the spending isn’t there. Nobody with any authority in President Donald Trump’s White House knows what to do, and no one would be competent enough to implement the right policy if they stumbled on it accidentally.
With the GOP controlling three of the US government’s four veto points (the presidency, the Senate, and the Supreme Court), America will remain without a coherent response to its multiplying crises at least until January 2021. Republicans are already doing everything they can to suppress voter turnout ahead of the election this November. But assuming that those efforts fail and Democrats reclaim the White House and potentially even the Senate, what should they do to rescue America from another lost decade?
First and foremost, the Democratic Party must commit unconditionally to the principle that every American who wants a job should be able to find one. And while that job need not be great, it must pay enough to keep the worker’s family above the poverty line. Every policy under consideration should be judged by whether it accords with this principle.
A federal commitment to full employment is not a new idea. The US Employment Act of 1946 embraced the principle, but has since been watered down, owing to complaints that government support of full employment is unaffordable. The best response to such objections has always been John Maynard Keynes’s quip during a 1942 BBC radio address that, “Anything we can do, we can afford.” What he meant is that, far from acting as an independent binding constraint on economic activities, the financial system exists precisely to support such activities.
Finding useful jobs for willing jobseekers is surely something we are capable of doing. But adjusting the prevailing payments and financial structure to support full employment would of course have consequences. For example, we might discover that, under conditions of full employment, the rich would need to bear substantial risk in order to achieve sustained compound growth on their wealth. As Keynes argued, full employment would “lead to a much lower rate of interest” and thereby function as the “euthanasia of the rentier.” So be it. To maintain their glitzy lifestyles, the rich would either have to draw down their capital or wager it on risky enterprises.
Supporting full employment also may turn out to require higher and more progressive taxes, and it may lead to public-debt levels that would seem unfathomable to those who lived through the 1970s. So be it. If sky-high debt is required to achieve full employment in the medium term, it is justified. The only way that it could become dangerous is if the economy were to shift out of its current secular stagnation, at which point sky-high debt would no longer be necessary.
Finally, restoring and maintaining full employment may require that we divert demand from elite consumption to labor-intensive sectors like public health. It also may require a large-scale labor-intensive public-works program. So be it. It’s time to make full employment our highest priority. Once we have done that, everything else will fall into place.
Bradford DeLong, a former deputy assistant US Treasury secretary, is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research.
© Project Syndicate 2020
