By Council of Economic Advisers Members Jared Bernstein and Heather Boushey
The greatest threat to the United States economy continues to be containing the spread of Covid-19. President Biden’s top economic priority is to get to the other side of this crisis by ramping up the production and distribution of the vaccine, supporting businesses and households that need it most, and launching an inclusive, equitable recovery.
Need for Action – Monday’s CBO Report
On Monday, the Congressional Budget Office (CBO) projected that without additional government spending, the unemployment rate will remain above its pre-pandemic projections until 2024. This means millions would be unemployed for years after the health threat has lessened, unless we take action.
The projections on economic growth relative to the beginning of the pandemic also underscore the urgency of additional action. While the CBO forecasts that growth in gross domestic output will rebound in 2021, back up to 3.7 percent for the year, that pace would not—absent additional action—return GDP to potential until 2025. CBO’s forecasts include the December relief package but not President Biden’s proposed American Relief Plan.
Some people took the CBO’s projections for growth in 2021 as a sign that we can wait to see whether additional fiscal relief is needed. But in fact, what the CBO is projecting is dire: around 7 million people out of work in 2021 whom CBO thought before the pandemic would be working. That’s dire – and a call to immediate action, not calm, not wait-and-see.
The Pandemic’s Toll on American Workers and Families
In addition to CBO’s macroeconomic estimates of when the economy will return to pre-pandemic employment and growth trends, the current crisis is generating deeply inequitable outcomes for American families. Almost a year into the pandemic, almost 11 million workers remain unemployed and around 4 million have been unemployed for six months or longer. More than 2 million women have left the labor force, many in the wake of school closures and challenges with child care. These job losses have been concentrated among lower wage workers.
In addition, more than 15 million adults are behind on rental payments, nearly 24 million adults — and as many as 12 million children — are struggling with food insecurity, and more than 80 million adults are having trouble covering usual household expenses. The COVID-19 pandemic and related economic crisis have brought tens of millions of Americans to the brink of financial ruin through no fault of their own.
The Economics of the American Rescue Plan
It does not have to be this way. In designing the American Rescue Plan, President Biden tasked his team with building a bottom-up plan that provides resources for our highest priority needs: getting shots in arms, opening schools, and providing relief to the workers, families, and small businesses that need it most.
That bottom-up approach also makes sense top-down, looking at the economy as a whole and the challenges that yesterday’s CBO report laid bare: a labor market that is projected to recover too slowly and economic output that fails to get back to pre-pandemic expectations soon enough.
Two independent analyses of the American Rescue Plan have made this clear.
First, Moody’s Analytics projects that the President’s Plan will bring the economy to full employment a full year earlier than a baseline without additional fiscal stimulus. This is significant because it’s a difference of 4 million jobs in 2021. But it’s also important because history shows that lower-income workers – and Black and brown workers – see the largest wage gains when the economy is at full employment.
Second, leading Brookings Institution economists projected that, if the President’s plan is enacted, GDP would reach CBO’s pre-pandemic projection at the end of 2021, while CBO says we won’t reach potential GDP until 2025 without additional economic relief. As they conclude, “In all, with the $1.9 trillion package, we project that cumulative real GDP between 2020 and 2023 would end up close to its pre-pandemic projection.” Simply put, the ARP gets the overall economy back on track.
Of course, economic projections are uncertain, particularly in the midst of a pandemic that is making estimates of potential supply and the path of demand highly variable. This is all the more so because the steps we take or don’t take now can shape the course of the pandemic and, thus, the economic recovery to come. But despite this uncertainty, there’s a lot we do know about how to guide policy:
- We know that prolonged periods of high unemployment and low labor force participation have scarring effects on the labor market and on working people.
- We know we are living through a K-shaped recovery, in which those at the top are continuing to thrive, while those at the bottom are struggling to make ends meet.
- We know that getting back to full employment, as quickly as possible, will make a major difference in the lives of tens of millions of people, particularly those most at risk of being left behind.
- We know the costs of aggressive action today are especially low, with real interest rates and real debt service payments as a share of GDP at historic lows.
Unique crises call for unique approaches. Our economic strategy in response to this pandemic-induced economic crisis is centered around the belief that the costs of inaction are far higher than the costs of acting too aggressively. We should not wait for years for the economy to return to full employment and get the economy back to pre-pandemic expectations. Relying on the usual tools and the usual approaches to determine how much government action we need is a recipe to ensure that we come out of this crisis weakened and that we do not take this opportunity to build back better. We cannot afford to make this mistake.