The Three Biggest Lessons of the Coronavirus Economy

Since the coronavirus pandemic hit the American economy like a bulldozer, last spring, we’ve learned three important lessons. Getting the policy response right matters enormously. Aggregate economic statistics can disguise a great deal of individual hardship. And by far the most effective remedy for reviving the economy is defeating the virus. Developments over the past few days have confirmed all of these lessons.

On Thursday, the Commerce Department reported that the gross domestic product, which is the broadest measure of the economy’s output, fell by 3.5 per cent in 2020. That was the biggest decline in a single year since 1946, but it was a considerably better outcome than many economists were forecasting last spring, as many factories, stores, and other businesses were forced to close. When members of the Federal Reserve’s main policymaking committee met last June, their median prediction was that G.D.P. would fall by 6.5 per cent in 2020 as a whole, and that the unemployment rate at the end of the year would be 9.3 per cent. The actual decline in G.D.P. was barely half of what was projected, and the jobless rate also undershot the Fed’s projections: in December it stood at 6.7 per cent.

A big reason for this better-than-expected performance was that policymakers—Congress and the Fed itself—provided an unprecedented amount of support for the economy when it needed it most. The $2.2 trillion cares Act, which Congress passed on a bipartisan basis in March, “delivered the most extensive fiscal relief in U.S. history. Moreover, it was targeted primarily to vulnerable families, workers, and small businesses,” the White House Council of Economic Advisers noted in a recent report. On the monetary side, the Fed rolled out a series of emergency lending programs, cut interest rates to near-zero, and pumped trillions of dollars into the bond markets.

Taken together, these programs prevented what policymakers feared most at the time: a downward spiral, in which layoffs caused by the pandemic would lead to big falls in income and spending, which, in turn, would prompt further layoffs, and so on. This feedback process is what turns recessions into depressions. By sending cash to households, jobless workers, and small businesses, and making it easier for large corporations to raise money (through the Fed programs), the federal government propped up aggregate income and spending, which otherwise would have cratered. In fact, these programs were so successful that over-all personal disposable income—the total amount of income that Americans have left to spend after paying taxes—didn’t fall at all. On Friday, the Commerce Department reported that personal disposable income rose slightly in December, to $15.5 trillion on an inflation-adjusted basis. That’s about three hundred billion dollars above the figure for last February, before the pandemic hit.

This unprecedented operation to prop up household incomes helped to support spending by consumers, which accounts for about two-thirds of the gross domestic product. In April, as many people were stuck at home and many stores closed, consumer spending collapsed. However, it then recovered strongly for six months, before falling slightly again in the final two months of the year, as the second wave of the virus kicked in. In December, over-all personal-consumption expenditures totalled about $12.9 trillion. That represents a decline of four hundred billion dollars compared to last February, but this drop was much smaller than many economists had feared.

To repeat Lesson 2, these aggregate figures don’t capture the fate of millions of Americans who have suffered greatly during the past eleven months. Many of these people work in the industries hardest hit by the closures—hotels, restaurants, and hospitality or leisure businesses. Others have been forced to give up work to look after their children or other family members. According to the Labor Department, the official jobless total was 10.7 million in December, of whom four million had been out of work for twenty-seven weeks or more. Even these dire numbers fail to give a full picture, however.

For one thing, they don’t count Americans who have dropped out of the labor force. Thanks to population growth, the workforce usually grows every year, but between December, 2019, and December, 2020, it declined by four million people. The jobless figures also don’t tell us about workers who have had their hours cut or have experienced a cut in their wages. “There are now 26.8 million workers—15.8% of the workforce—who are either unemployed, otherwise out of work because of the virus, or have seen a drop in hours or pay because of the pandemic,” Heidi Shierholz, an economist at the Economic Policy Institute, wrote earlier this week. “Further, we started losing jobs again in December.” On Thursday, the Labor Department reported that another 1.3 million people had filed for jobless benefits last week. Two-thirds of these new claimants filed for regular state unemployment benefits; the other third filed for benefits under a program that Congress introduced for gig workers last March.

The burden of the pandemic has fallen hardest on members of minority groups and low-paid workers—including undocumented workers—who can’t work from home and don’t have the financial reserves to weather an extended recession. Last month, for example, when colder weather and the spread of the virus prompted more layoffs, the Latino jobless rate rose from 8.4 per cent to 9.3 per cent, and the jobless rate among workers who have less than a high-school degree rose from 9.2 per cent to 9.8 per cent. By comparison, the unemployment rate among whites was six per cent, and among people with college degrees it was just 3.8 per cent.

Despite the expansion in jobless benefits, which Congress scandalously allowed to lapse briefly before renewing the program in December, the pandemic is continuing to cause a great deal of anxiety and hardship. To gauge the impact, the Census Bureau launched a new survey this past April, in which it asks people about their living conditions. The latest survey was taken earlier in January. “Nearly 24 million adults—11 percent of the total—reported that their household sometimes or often didn’t have enough to eat in the last seven days,” Claire Zippel, an analyst at the Center on Budget and Policy Priorities, pointed out in a blog post about the survey’s results. “An estimated 15.1 million adults living in rental housing—1 in 5 adult renters—weren’t caught up on rent.”

The coronavirus spending bill that Congress passed in December, which was worth about nine hundred billion dollars, is already providing some additional support to hard-hit households, and the $1.9 trillion package being pushed by the Biden Administration, if it gets enacted, would provide a good deal more. However, virtually all economists agree that the real key to reviving the economy, and alleviating hardship, is to defeat the virus. Given the resistance to strict lockdown measures in the United States and other Western countries, that equates to vaccinating most of the population in the next few months. Should this happen, many economic forecasters are predicting a vigorous economic upturn in the second half of the year. Goldman Sachs, for example, is predicting that the U.S. G.D.P. will rise by 6.6 per cent in 2021, which would be the biggest increase since 1984.

As of Saturday, according to the Centers for Disease Control and Prevention, 22.9 million Americans, or about 6.9 per cent of the population, had received at least one vaccine shot. That puts the United States ahead of many countries, but far behind Israel, where 52.6 per cent of the population has been vaccinated, and quite a bit behind the United Kingdom, where 12.3 per cent has been immunized. President Biden has pledged to raise the vaccinated figure to a hundred million by the end of April, which would have a big impact. That’s assuming, of course, that the vaccines provide adequate protection against whatever strains of the virus are prevalent by then. On the basis of the latest scientific studies, including the results from the clinical trials of a new vaccine from Johnson & Johnson, that seems a reasonable supposition. Although the trials showed that the J. &  J. vaccine was only fifty-seven-per-cent effective at preventing infections in South Africa, where almost all of the infections in the trial were caused by a particularly virulent variant of the coronavirus, the vaccine was more than eighty-nine-per-cent effective in preventing serious illnesses. That’s encouraging. But economic policymakers, like epidemiologists and all the rest of us, will be closely monitoring what course the virus may be taking next.