Fast federal response to pandemic key to US economic recovery, economists say
Workers demonstrate in Miami Springs, Florida, in September 2020, in support of continued federal unemployment benefits in the pandemic economy. Economists say that direct support to workers helped spur the country’s economic recovery. Photo by Joe Raedle/Getty Images.
The public health emergency declaration ended on Thursday, and with it some of the policies that helped the U.S. recover from the many of the economic effects of the coronavirus pandemic. Although COVID-19 is still a public health threat, the national economic crisis it created has subsided with the U.S. economy back to its pre-pandemic growth rate.
Economists say that the federal response to mass unemployment and business closures, through legislation that includes the CARES Act, Families First Coronavirus Response Act, American Rescue Plan Act, and other policies, helped fast-track the recovery. But the lasting effects of the pandemic on the labor force and how well prepared policy makers are to handle a potential recession or another pandemic is unclear.
“I think that this recovery was tremendous compared to any recovery in recent history because of the scale of the investments that were made by policymakers,” said Elise Gould, senior economist at the Economic Policy Institute, pointing to the child tax credit as one example that helped fuel the strong recovery. “So I think the incredible bounceback that we saw in employment and wage growth was driven directly from, in large part, to the kinds of investments that policymakers made in things like shoring up the unemployment insurance system, making that stronger, making it a better safety net for many workers.”
Lessons learned from federal investments
The policies that helped the economy recover from the effects of the pandemic could have reached more vulnerable people, however, and some sectors, like health care, are still suffering because of it. There are also many potential long-term effects that economists don’t yet understand, such as how Long COVID is going to affect the workforce or whether more remote work is here to stay and how that will influence the economy. They added that the lessons learned from the federal government’s reaction to the pandemic could prepare us for a recession or another pandemic.
Lindsay Owens, executive director of the Groundwork Collaborative, said lawmakers should take a similar approach in the future and focus on direct support to workers.
“Workers are the backbone of the economy,” she said. “If our workers are home sick, we’re going to have to kick into high gear on the safety net again and the good news is we know how to do that, with student loans, the eviction moratorium, unemployment insurance, extended unemployment insurance for freelancers, child tax credits, and so on.”
Still, the business stimulus in particular could have been better targeted, said Connel Fullenkamp, economist and professor of the practice in economics at Duke University. The Small Business Administration’s inspector general, found that at least 70,0000 of the Paycheck Protection Program’s loans were fraudulent. Other loans went to businesses that possibly could have survived the economic fallout without assistance.
“I think what we’re finding out now is that it was a little too easy for a lot of unscrupulous players to grab a piece of that pie,” he said. “Some of that’s being clawed back, of course, but a lot of it is just going to be lost and up in the wrong pockets. … It’s really hard to do targeted stimulus to anybody and especially for business. If Biden actually gets his proposal across to increase funding to the IRS, they and other government agencies could do a much better job of simply tracking taxpayers and businesses in order to do things like more targeted stimulus stimulus payments.
States used funds from the American Rescue Plan Act of 2021 for eviction prevention, food programs, mental health services, and wiping people’s medical debt, but also spent the monies on building more prisons and offsetting tax cuts. More of it could have also been spent on modernizing unemployment insurance, economists said.
Lauren Bauer, fellow in economic studies at the Brookings Institution, said states could have done more to improve the administration of their programs as they received this huge influx of federal funding.
“The support for state and local governments was very, very generous in part because in the Great Recession, the lack of generosity to state governments really slowed the recovery. But because revenues didn’t actually fall that much, they were made more than whole,” Bauer said. “And so because of that, asking them to do some investment in administration of these social insurance programs seems like a pretty reasonable way to have them take responsibility for the role that they play in both protecting households but also getting money down to the ground so that it can be spent to stimulate a recovery.”
What the pandemic has meant for workers
The effects of COVID on the workforce, and certain sectors and industries in particular, are still developing, but economists say health care, education, child care, and public sector workers have all been seriously impacted. Fullenkamp said that it can be hard to disentangle labor market changes that happened because of expected generational shifts versus workers leaving the labor force because of the pandemic.
“I think one of the things that we can say for sure is that the pandemic accelerated the Baby Boomer retirement and brought a lot of retirements forward that would have otherwise played out over many, many years, much more slowly,” he said. “… I think we’re seeing that great resignation is more of a temporary phenomenon. We’re seeing people being drawn back into the labor market for a number of reasons. One is simply that the wages are going up finally and also that people did run out of stimulus money and prices are going up and that is going to pull some people back into the labor market.”
Low pay for “frontline” or “essential” workers needs to be addressed before the next pandemic, some economists said.
Gould said pay for public sector jobs such as those in health care and education, need to improve if we’re going to prepare for future economic challenges.
“We’ve seen this tremendous bounceback in private sector employment. Public sector employment, particularly state and local jobs, are still down. We have seen slow progress over the last few months but they’re still down a significant amount,” she said. “… I would have hoped that more of that [stimulus] money would have been used to help shore up that employment when the services that are being provided are in health care and education.”
Child care is also a huge issue, said Owens, of Groundwork.
“Between December 2019 and March 2021, about 9,000 child care centers closed,” she said. “The shortage of child care workers is gonna have to be addressed and that only gets addressed by making those jobs better. You’re going to have to pay child care workers more. … We will be weaker going into the next pandemic because we haven’t solved this for child care.”
The question of how COVID-19 illnesses will affect the labor force is still being researched and will take time to understand, economists say. Sixteen million working-age people have Long COVID, a 2022 Brookings Institution report found.
“I think it’s going to take a bit for someone to really carefully figure out how Long COVID and the changing health status of people and generally people’s feelings about public health and their own health are changing the labor force,” Bauer said.
Looking ahead to the next crisis
Is the U.S. prepared for the next pandemic or next recession? We’re better prepared for remote work and unemployment insurance isn’t going to hold people back from joining the labor force, some economists say. Policymakers have also demonstrated that they can mobilize quickly on vaccine rollouts.
“The very generous unemployment insurance didn’t really seem to hold people back from trying to get a job when jobs are available, which is a pretty big lesson for how to use the unemployment insurance system in the next recession to sustain consumption without preventing a labor market recovery,” Bauer said.
It’s still unclear what the effects of increased remote work will have on the economy overall, but some research has shown that the savings in time commuting to work can benefit employers because 40% of that time has been used to get more work done. However some employers have pushed back on remote work. An EY-Parthenon report released this month said that worker productivity fell 2.7% in the first quarter. Gregory Daco, chief economist at EY-Parthenon told Yahoo News that remote work could be a factor but that job churn may also be responsible. But in any case, businesses are better prepared for a sudden shutdown of offices than they once were.
“Businesses kind of figured out work from home pretty fast and were able to maintain, you know, decent levels of productivity in the workforce. We obviously won’t be kind of starting that process over from scratch if we have to send people home again,” Owens said.
Bauer added that more workplace flexibility could be better for keeping women in the workforce. Early in the pandemic, 9 million men lost jobs, but 11.5 million women did, and some women decided to take on child care and leave their jobs as it became more difficult to receive support outside the home.
She said a “no-brainer” in every recession is making sure that unemployment insurance and SNAP, and Medicaid are working swiftly and covering as many people as they can.
The pandemic has also exposed the problems in our supply chain, which have to be addressed before the next big economic vulnerability.
“A big part of the economy that we experienced really beginning in 2021 was because of our broken supply chain,” Owens said. “…We don’t have a spare semiconductor, a spare COVID test, a spare frozen pizza. … That left us really vulnerable to shortages and we have got to build resilience in our supply chain.”
The pandemic also showed us that for the next major health threat, the federal government is capable of moving quickly and should do so again, Owens added.
“The vaccine got done relatively fast and it’s worth remembering that there was massive federal incentive and investment in that, and that allowed it to lift off,” she said. “In the next pandemic, I would do all of that again.
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