A few months after President Donald Trump’s election, I spoke to an economist, prominent in the Obama administration, at a cocktail reception. He was incensed by Trump’s assertion that he’d bring 4 percent growth to America. “What a joke! Everyone knows that’s impossible,” he said. I told him that it was very possible—though, admittedly, it might first require a downturn or recession that destroyed some productive capacity. Of course, back then, I envisioned nothing like what would happen to the American economy in 2020. Nonetheless, it turns out that my prediction may be right: late last month, another Obama-era economist, Jason Furman, told Democrats that he anticipated high growth in the third quarter.
As bad as the current recession is—unemployment reached nearly 15 percent in May, and with the Congressional Budget Office projecting that GDP will fall 11.2 percent (37.7 percent annualized) in the second quarter—the numbers are deceiving. The downturn resulted from a deliberate policy to cease economic activity in response to a pandemic. Suppressing the economy on this scale, for months, is unprecedented in American history. In the past, when countries had to stop economic activity and their productive capacity was destroyed, usually due to war, they came roaring back when they rebuilt and acquired new capital. In the years after World War II, for example, America grew by more than 10 percent; even Europe experienced accelerated growth. Overall, countries with access to capital and strong, market-oriented institutions enjoy strong recoveries when external events temporarily destroy their economies.
Before the Great Recession, recoveries were usually strong, with growth rates around 6 percent to 8 percent annually. In a typical recession, some economic shock undoubtedly occurred: people lost jobs and consumed less, and weaker companies went out of business or embraced long-overdue restructuring. When the economy stabilized, layoffs stopped, and people started buying things again. The economy would rally, sometimes even stronger, because the recession reallocated capital—both money and workers—to more productive areas. Recovery from the 2008 recession proved slower, in part because it was such a deep recession but also because the housing crisis hit American families particularly hard. Many Americans ultimately lost their most valuable or only asset and incurred high amounts of debt.
This current recession and its recovery will be different. This time, we might expect an even stronger recovery because capital was paused, but not destroyed (assuming the recent urban unrest can be controlled). Many people can still work, and the machines are running. Since government imposed the lockdowns, reopening will instantly fuel more economic activity and growth. One month into a tepid reopening, unemployment has already fallen to 13.3 percent. Economists estimate, moreover, that about 58 percent of laid-off workers will return to their jobs. Household balance sheets are in good shape, too. Though it’s a distressing period, those balance sheets had low debt in January, the unemployed received generous Covid-19-related benefits, and home confinement meant money saved. The American consumer is poised for lots of spending, or what economists call “pent-up demand.”
The CBO projects a 15.8 percent annualized growth rate in the second half of 2020—far more than the 4 percent regarded as impossible by the Obama economist. In addition, the CBO expects 4.2 percent growth in 2021. This growth may not undo all the economic damage, but it would represent rates that we haven’t seen since the postwar era.
There’s reason to be optimistic that the actual growth rates will be even higher. The CBO projection assumes that people won’t venture out, go to restaurants, travel, and resume normal activities. Indeed, many people will remain cautious about returning to their old lives. But in recent weeks, before the protests, people had begun venturing back to restaurants in reopened states. Widespread participation in the recent protests, moreover, suggests that many are less fearful of crowds than we thought, and if no widespread infection results, more people will become comfortable with going out again.
Warning signs exist, however. Economists were initially hopeful for a V-shaped recovery—one where growth is so large and fast that we’d repair all the damage by early 2021. But the lockdown went on for months, and the virus is still with us, at least to some degree. This means that growth, though likely higher than we’ve experienced in living memory, won’t be as large as we need. Businesses must restart with reduced capacity. Many retail and small businesses that entered the crisis in weak positions won’t survive. Virus fears and failing businesses could weaken demand, which will turn the virus shutdown into a more typical, drawn-out recession. Unemployment will likely be higher than 3.7 percent for years.
A second or third wave of Covid-19 could mean future shutdowns. If protests result in more infections, fear will return; shutdowns could resume before they’ve even formally ended. In that case, we may not see positive growth until the fourth quarter.
Over the long term, we may live in a lower-growth world. A cold war with China, for example, would mean less trade and growth. The U.S. and China are the world’s two largest economies and are deeply intertwined. Disconnecting them would cause significant economic dislocation.
Equally concerning are calls to refashion the economy to be more “resilient and less efficient.” This usually means less reliance on global supply chains, just-in-time production, and trade. But efficiency, by definition, means more growth for less resources. Resilience is expensive: it means keeping more resources available in case something terrible happens. The price that we’d pay for “more resilience and less efficiency” is less growth in normal times, along with less productivity and stagnant living standards. That may sound fine today, when making respirators and N95 masks remains critical—but in normal times, it will be a hard pill to swallow.
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