The limits of American recovery

BERKELEY — The United States is home to 4 per cent of the world’s population but 21 per cent of confirmed COVID-19 deaths; it accounts for 25 per cent of the Global North’s population but 50 per cent of its excess mortalities, deaths from all causes above the usual rate, registered during the pandemic.

Moreover, America’s current cumulative cases per million are almost four times higher than in the European Union, though the latter itself appears to be experiencing a second wave. While the US continues to lose around 1,000 people to COVID-19 each day, the EU’s daily death toll is closer to 300 and Asian countries in the Global North are losing almost nobody. And no, this is not a continental North American problem: Canada loses only around ten people per day to the virus.

After so many months of failure to confront the pandemic, America’s world-leading fatality and infection rates are no longer a surprise. The question is what the current trajectory of the pandemic means for the US economic recovery.

The first thing to bear in mind is that a recovery from the initial pandemic-induced depression earlier in the year is already around 60 per cent complete. After falling from 80.5 per cent in February to 69.7 per cent in April, the employment rate for prime-age workers (25-54 years old) climbed backto 75.3 per cent in August. As of the time of this writing in late September, it has probably increased to around 76.5 per cent. But, for comparison, that is around where prime-age employment was at the nadir of the 2008-09 Great Recession.

A second point to note is that the recovery experienced so far may represent all that the US will get for now. Just because the economy has recovered by 60 per cent does not mean that it will get all the way back to 100 per cen. After all, the current recovery is unfolding in the shadow of the recovery from the 2008 financial crisis and Great Recession, which was also a period of zero-lower-bound interest rates.

It is worth remembering that this previous recovery did not feature a recovery in production, which remained as far below its pre-crisis trend as it had been when the unemployment rate was at its peak. As employment recovered slowly after the Great Recession, productivity continued to lag ever-further behind. But, because there was a persistent lag in output, too, this lack of productivity growth allowed for employment eventually to recover.

One lesson of recent history, then, is that modern market economies after a crisis seem to require not just the standard contributions of entrepreneurial capitalism but also an additional boost from another spending channel to drive production back up to its previous trend. But when interest rates are already near zero, such stimulus cannot come from further monetary easing, as indeed it did not after the Great Recession. Worse, it is becoming increasingly unlikely that stimulus in the future will come from expansionary fiscal policy, the obvious alternative to interest-rate cuts, owing to debt concerns and political gridlock.

Yet another cause for fear is the prevalence of the virus itself. The average of 1,000 COVID-19 daily deaths being recorded each week implies that there are 10,000 symptomatic cases emerging every day. That is enough to worry anyone who ventures out of her house. With such a persistently high risk of contracting the virus, US consumers will continue to be much more cautious than their counterparts in Japan, Canada, or Germany when it comes to returning to semi-normal economic activities like dining out or air travel.

As such, even if America could stage a rapid recovery and restore employment to its previous levels, the justifiable fears of US consumers would pose a significant hurdle to sustained growth, as would the glaring absence of business investment in today’s economic climate.

That leaves only the government to serve as an engine of recovery. But the US government is currently led by President Donald Trump, a leader who has consistently failed every test posed by the pandemic. Making matters worse, his closest advisers apparently regard high unemployment and waves of small-business bankruptcies as salutary developments that will strengthen American’s work ethic in the long run.

As for the Democratic presidential contender, Joe Biden, it remains to be seen whether he will accept the federal government’s role as employer of last resort. In the meantime, while the rest of the Global North is well on its way to recovery, America will remain mired in political acrimony and economic malaise.

J. 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. Copyright: Project Syndicate, 2020. www.project-syndicate.org