Since 2020, the United States has weathered a once-in-a-century pandemic, the highest inflation in 40 years, and the aftermath of two foreign wars. Now, with a higher annual growth rate last year than in 2022, the U.S. economy is quashing fears of another recession while offering lessons for combating future crises.
Claudia Sahm, a former Federal Reserve economist who now runs a consulting firm of the same name, said: “The United States has truly bounced back from this and is moving forward as if COVID-19 never happened.” ” he said. “We won this. It wasn’t just a fluke.”
On Friday, President Biden praised the latest government data showing annual inflation in the second half of 2023 has fallen to the Federal Reserve’s target of 2%. Coupled with Thursday’s news that the economy grew 3.1% over the past 12 months, the Commerce Department report showed that the United States appears to have achieved a soft landing economically.
The post-pandemic recovery has challenged long-held economic beliefs, such as the idea that there is an inverse relationship between unemployment and inflation. (As one rose, the other was expected to fall.) This view, expressed in what economists call the Phillips curve, has turned out to be of little use in explaining the economy’s recent movements.
Washington’s success in economic recovery suggests a new approach to future economic downturns, one that relies more on the power of the government’s wallet rather than the Federal Reserve’s control of credit costs.
“Putting money in people’s hands, which means moving interest rates centrally, will make monetary policy and fiscal policy more powerful,” Sahm said. “You can’t go into the next crisis saying, ‘Oh, the Fed got this.'”
Personal consumption drives the economy: Real consumption increased by 0.5% in December, the fastest pace since January last year. Pending home sales also surged. Following a series of good news, economists at JPMorgan Chase & Co. announced they have raised their first-quarter growth forecasts.
IBM, Visa and General Electric each reported profits last week that beat analysts’ expectations, another sign that the economy remains healthy.
The $28 trillion U.S. economy has weathered multiple shocks over the past year and returned to its pre-pandemic growth trajectory. The size of the economy, adjusted for inflation, returned to its pre-pandemic peak in early 2021. By the end of September, it was more than 7% larger than before the pandemic. This was more than double the increase in Japan and far better than the 0.3% increase in anemic Germany. British Parliament data.
For most Americans, growth has been rewarded in the form of higher wages. After inflation, U.S. wages rose 2.8% in the four years ending in September, the most recent comparison available.
Most other countries in the Group of Seven developed countries saw declines, according to Treasury data. Wages in Italy fell by more than 9% during this period, and workers in Germany earned 7.2% less than before the pandemic.
“The U.S. has seen a particularly strong GDP recovery, with inflation cooling earlier and more rapidly than in other large developed countries. And real wage growth is unique to our recovery.” Secretary Janet L. Yellen said: In a speech in Chicago last week.
The origins of this disastrous performance can be traced back to lawmakers’ swift response to the coronavirus pandemic in March 2020. Before the month was over, Congress approved more than $2 trillion in economic aid, even as businesses closed and 17 million Americans lost their lives. work.
It was just the beginning of Washington’s generous response to the worst economic crisis since the Great Depression. Congress ultimately approved about $6 trillion to rescue the economy from the pandemic. Presidents Donald Trump and Biden took executive actions such as suspending student loan payments, which added an additional $875 billion to the relief tab. Committee for a Responsible Federal Budget.
The Fed helped by lowering borrowing costs for consumers and businesses and buying trillions of dollars worth of government securities and mortgage-backed securities to boost the economy.
However, the main force behind today’s strong economy is fiscal policy – the use of government spending and taxes to promote growth. Under two presidents, one Republican and one Democratic, lawmakers have chosen to pump cash into the economy to fend off the coronavirus.
According to the International Monetary Fund, government spending such as stimulus checks, loans to small businesses and enhanced unemployment benefits all amount to an astonishing 25.5% of gross domestic product.
Spending in major countries in Europe and Asia has fallen significantly. In Germany, the government has earmarked 15.3% of GDP to fight the pandemic. France spent 9.6% and Italy 10.9%. Even the UK, which has the closest economic outlook to the US, lags far behind the US at 19.3% of GDP.
“The scale of fiscal support for the U.S. economy was an order of magnitude larger than for Europe,” said Neil Shearing, chief economist at Capital Economics in London.
To be sure, America’s response to the crisis was not without flaws. Biden, determined to avoid the policy failures that led to an anemic recovery after the 2008 financial crisis, may have overcompensated.
The last burst of coronavirus relief, the $1.9 trillion American Rescue Plan in early 2021, boosted growth while contributing to price increases that pushed inflation to a 40-year high of 9.1%. It is widely believed that
The relief plan included $1,400 stimulus checks for most Americans, expanded unemployment benefits, and aid to state and local governments. The American Rescue Plan, introduced in December 2020 on top of a separate $900 billion program, was responsible for a 2 to 4 percentage point spike in inflation, according to several studies by economists.
Some economists say emergency aid to the battered economy has pushed the nation’s debt to a record $34 trillion, or more than 120% of annual economic output, exacerbating long-term threats to the nation’s prosperity. It is said that there is.
As the pandemic subsided, Biden also secured legislative victories on infrastructure, subsidies for the semiconductor industry and clean energy projects. Dean Baker, an economist at the Center for Economic Policy Research, said they were not designed to be stimulus measures, but they had that effect by funneling additional money into the economy.
“These effects started last year as the effects of the first stimulus package wore off. I think this was mainly luck, but incredibly good timing,” he said.
The United States benefited from free spending and prompt policy. But Europe suffered from its proximity to the front lines of Russia’s war against Ukraine. Until the conflict erupted in February 2022, countries such as Germany relied on Russia for much of their natural gas needs. The war caused food, fuel and fertilizer prices to rise significantly, causing inflation to soar in the euro area.
Europe’s response to the economic crisis generally required companies that received government aid to keep their employees on the payroll. Americans were laid off but helped by unemployment and stimulus checks, while Europeans kept their jobs.
That spared them the uncertainty of a stalled labor market, but often left them stuck in jobs they wouldn’t need in a post-pandemic world.
For years after the 2008 crisis, President Barack Obama, under pressure from Republican Congresses, accepted the need to cut federal spending. As a result, the Fed has had to fight the economic downturn on its own. Next time, the nation’s eyes may be on the Capitol, thanks to the pandemic experience.
Economists say one lesson from the pandemic recovery is the power of governments’ ability to tax and spend. Congressional action can affect the economy faster than the delayed effects of changes in borrowing costs and is more certain than the outcome of other non-conventional Fed policies aimed at promoting growth. .
“Governments can really influence the speed of recovery from recession through fiscal policy,” said Michael Strain, a former Fed economist now at the American Enterprise Institute. “Now, there are a million caveats to this.”
Not every economic downturn requires massive government intervention, and whatever programs are implemented should be well designed and carefully policed. For example, as the Small Business Administration rushes to release coronavirus aid, the agency says it has disbursed more than $200 billion in potentially fraudulent business loans and related assistance. inspector It was reported last year.
This is more than the Department of Transportation’s annual budget.
Some economists see more than government policy behind the U.S. economic recovery. In the spring of 2020, as the pandemic put millions of Americans out of work almost overnight, many responded by starting new businesses.
That trend has continued for four years. The number of applications for taxpayer identification numbers submitted to the Internal Revenue Service in December was 457,316, compared to 314,337 in December 2019.
“I think we’re seeing something about the American spirit and the kind of economic dynamism that doesn’t exist in other high-income countries to the extent that it exists here for some reason,” Strain said. “One of the most interesting things happening in the economic world right now, and over the past few years, is the huge boom in entrepreneurship.”