The American economy is sicker than we realized.
Last month, U.S. employers added a piddling 49,000 jobs, far less than 105,000 estimated by Bloomberg’s survey of economists, according to data released by the Labor Department on Friday. What’s worse, labor-market conditions in December and November were weaker than they first appeared: Revised estimates of labor-market conditions from late last year reveal that the economy shed 227,000 jobs in December, greatly exceeding the 140,000 job losses that the government initially reported. Meanwhile, November’s jobs gain was revised down from 336,000 to 264,000.
Put these findings together and you get a picture of a stalled recovery, in which roughly 10 million Americans are looking for work that they cannot find.
The official unemployment rate did tick down from 6.7 percent to 6.3 percent, but this was primarily because 406,000 workers exited the labor force. This likely reflects a combination of workers growing discouraged in their job hunts, frightened by the hazards of in-person work given public-health conditions, and/or overwhelmed by child-care duties as in-person learning remains limited.
The jobs numbers came out just hours after the Senate passed a $1.9 trillion budget resolution, which will empower Democrats to enact Joe Biden’s COVID-relief package on a party-line vote.
In recent days, both Republicans and moderate Democrats have insisted that the president’s stimulus is excessively large. Former Obama administration economist Larry Summers made a version of this argument in the Washington Post.
Summers’s argument is twofold. First, as an economic matter, Biden’s stimulus is at least three times larger than the “output gap” in the U.S. economy, as estimated by the Congressional Budget Office. In normal-person terms, the output gap is the disparity between how much stuff our economy could produce if it fully employed our nation’s labor and resources and how much we are poised to produce under current demand conditions. The CBO estimates that this gap will run between $20 billion and $50 billion a month for the remainder of 2021. Biden’s stimulus, meanwhile, would increase demand by roughly $150 billion a month. And if demand outstrips productive capacity, the result is rising prices (a.k.a. inflation).
The second part of Summers’s argument is that even if the Biden plan does not exhaust our economy’s resources, it risks burning through the fiscal space and “political capital” necessary for enacting the rest of the president’s program, including much-needed investments in everything from “infrastructure to preschool education to renewable energy.”
Neither one of these arguments is persuasive.
For one thing, there is little reason to trust the CBO’s estimate of the output gap. As the Roosevelt Institute’s Mike Konczal and J.W. Mason note that the agency’s projection is premised on a dubiously high estimate of America’s short-term growth rate in the absence of further stimulus and a dubiously low estimate of the economy’s long-run growth potential. The CBO assumes that a 3.9 percent unemployment rate is the lowest that the U.S. economy can withstand without generating unacceptably high inflation, this despite the fact that America’s unemployment rate stayed below 4 percent for two years before the pandemic — and hit 3.5 percent for a sustained period — without triggering inflation high enough to exceed the Federal Reserve’s 2 percent target. The output gap is an immensely difficult thing to estimate, so it is impossible to know whose figures are right. But many economists have produced projections many times larger than the CBO’s. The downward revisions in Friday’s jobs report lend credibility to the notion that America is farther from filling the output gap than the CBO projects.
More fundamentally, even if one accepts the CBO’s bizarre premise that the United States must keep at least 3.9 percent of workers unemployed at all times in order to avoid inflation, the office’s projections suggest that it will take four years for the unemployment rate to fall back down to that figure absent further stimulus. Given the human costs of long-term unemployment — and the economic costs of letting our nation’s labor power lay idle — there is no reason to accept such a long delay in the restoration of full employment.
Even if Biden’s stimulus were to inject more demand into the economy than existing productive capacity can absorb, that wouldn’t necessarily be a bad thing. For most of the past decade, inflation has come in lower than the Federal Reserve’s target rate of 2 percent. If undershooting the target for years was tolerable, then slightly overshooting it should be too. Further, there’s a strong case that the 2 percent target is excessively low. For much of the postwar economic boom — the golden age of American capitalism — inflation ran higher than 2 percent, sometimes much higher. A 4 percent inflation rate would be beneficial in some respects. A weaker dollar would make American manufacturers more competitive in global markets, while reducing the real value of borrowers’ debt burdens; which is to say, such inflation would redistribute wealth from creditors to borrowers, which is a progressive transfer in the aggregate. Further, to the extent that inflation is driven by tight labor markets empowering workers to demand higher wages, running the economy “hot” will effectively transfer income from capital to labor.
Price increases have downsides, of course. And depending on which sectors the price hikes are concentrated in, they could disproportionately burden working people. But if the alternative to accepting such inflation is accepting that America’s unemployment rate will remain above 3.9 percent for the next four years — and never return to the low it reached in January of last year — then that is a trade worth making.
Summers’s concern about Biden exhausting his “political capital” is more reasonable. Fortunately though, the president’s green infrastructure plan boasts strong support among congressional Democrats in general — and pivotal senator Joe Manchin, in particular. In an interview with the Bipartisan Policy Center Wednesday, Manchin lamented the fact that the COVID pandemic had 1) prevented Democrats from making infrastructure their top legislative priority, 2) called for investment in America’s roads, bridges and green technology, and 3) likened the scale of the program he envisions to the New Deal or Dwight Eisenhower’s federal highway law. To avoid running the economy too hot, Democrats could structure a green infrastructure bill such that the bulk of its spending does not take this year, but at a more opportune time — say, during the early fall of 2022 and/or 2024.
Happily, this isn’t Summers’s winter: Following reports that the former Obama adviser’s op-ed had found sympathetic readers in Biden’s White House, the president clarified Friday morning that his stimulus ambitions remained undiminished. “We can’t do too much here,” Biden told reporters, “but we can do too little.”