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As President-elect Joseph R. Biden, Jr. prepares to take office this week, his administration and the Federal Reserve are headed toward a singular economic goal: to bring the job market back to where it was before the pandemic.
The buzzing work environment that existed 11 months ago – with 3.5% unemployment, stable or rising labor force participation, and steadily rising wages – has proven to be a recipe for lift all boats, create economic opportunities for long disenfranchised groups and reduce poverty rates. And the price gains have remained manageable and even a little low. This contrasts with efforts to push the boundaries of the labor market in the 1960s, which are widely accused of laying the foundation for soaring inflation.
Then the pandemic halted the test, and efforts to contain the virus pushed unemployment to skyrocket to levels not seen since the Great Depression. The recovery has since been interrupted by new waves of contagion, which keep millions of workers on the sidelines and cause job losses to resume.
Policy makers across government agree that returning to this hot job market should be a central goal, a notable change from the last economic expansion and one that could help shape the economic rebound.
Mr Biden has made it clear that his administration will focus on workers and has chosen senior officials focused on the labor market. He called on Janet L. Yellen, a labor economist and former Fed chairman, as treasury secretary and Marty Walsh, a former union leader, as labor secretary.
In the past, lawmakers and Fed officials tended to preach allegiance to full employment – the lowest unemployment rate an economy can sustain without stoking high inflation or other instabilities – while removing fiscal and monetary support before reaching this goal because they feared that a more patient This approach would lead to price spikes and other problems.
That shyness seems less likely to return this time around.
Mr Biden is set to take office as Democrats control the House and Senate and at a time when many politicians are less worried about government debt thanks to historically low borrowing costs. And the Fed, which is used to raising interest rates as unemployment falls and Congress spends more than it collects in taxes, has pledged to be more patient this this time.
“Economic research confirms that with conditions like today’s crisis, especially with interest rates this low, immediate action – even with deficit financing – will help the economy, long and long. short term, “Biden said at a press conference on Jan. 8, stressing that swift action” would reduce the scars in the job market. “
Jerome H. Powell, the chairman of the Fed, said Thursday that his institution was focusing closely on restoring unemployment rates to the lowest levels.
“This is really what we focus on the most – is getting back to a strong job market fast enough that people’s lives can get back to where they want to be,” said Powell. “We were in a good position in February 2020, and we think we can go back, I would say, much sooner than we had feared.
The stage is set for a macroeconomic experiment, which will test whether big government spending programs and pro-growth central bank policies can work together to foster a rapid rebound that includes a wide range of Americans without suffering any pain. harmful side effects.
“The problem with the Fed is that it’s really the tide that lifts all boats,” said Nela Richardson, chief economist at ADP payroll processor, explaining that the work-oriented central bank can lay the groundwork for robust growth. “What fiscal policy can do is target specific communities in a way the Fed can’t.”
The government has spent willingly to support the economy in the face of the pandemic, and analysts expect more help to be on the way. The Biden administration has suggested an ambitious $ 1.9 trillion spending program.
While it probably won’t pass in its entirety, at least some additional budget spending seems likely. Goldman Sachs economists expect Congress to actually pass an additional $ 1.1 trillion in the first quarter of 2021, on top of the $ 2 trillion pandemic relief plan adopted in March and the $ 900 billion in additional aid spent in December.
This would help accelerate the recovery this year. Goldman economists estimate the spending could help push the unemployment rate to 4.5% by the end of 2021. Unemployment was 6.7% in December, the Bureau of Labor Statistics said earlier this this month.
Such a government-backed rebound would be in stark contrast to what happened during the 2007-2009 recession. At the time, Congress’ biggest package to counter the fallout from the recession was the US Law of 800. billion dollars on recovery and reinvestment, adopted in 2009. It was depleted long before the unemployment rate finally fell below 5% in early 2016.
At the time, concerns about the deficit helped stem more aggressive fiscal policy responses. And concerns about the economic overheating prompted the Fed to start raising interest rates – albeit very slowly – at the end of 2015. As the unemployment rate declined, central bankers feared that wage inflation and prices didn’t wait around the corner and were eager to bring the policy back to a “normal” setting.
But economic thinking has undergone a profound change since then. The tax authorities have become more confident to increase public debt in an era of very low interest rates, when it is not that expensive to do so.
Fed officials are now much more modest in judging whether the economy is at “full employment” or not. In the wake of the 2008 crisis, they thought unemployment was testing its healthy limits, but unemployment continued to fall sharply without fueling skyrocketing price hikes.
In August 2020, Mr Powell said he and his colleagues would now focus on the “gaps” of full employment, rather than the “gaps”. Unless inflation really picks up or financial risks emerge, they will see falling unemployment as a welcome development, not a risk to be avoided.
This means that interest rates are likely to stay near zero for years to come. Senior Fed officials have also indicated that they plan to continue buying large sums of government guaranteed bonds, around $ 120 billion per month, for at least the months to come.
Support from the Fed could help government spending boost demand up a gear. Households are expected to build up large savings stocks when they receive stimulus checks in early 2021, and then cut them back as vaccines become widespread and normal economic life resumes. Low rates can make big investments – like homes – more attractive.
Yet some analysts warn that current policies could lead to future problems, such as runaway inflation, risk-taking in financial markets, or damaging debt overhang.
From the mid to late 1960s, Fed officials focused heavily on the pursuit of full employment. While they were testing how far they could push the labor market, they did not try to control inflation as it rose and saw rising prices as a trade-off for lower unemployment. When America took its final steps to move away from the gold standard and an oil shock hit in the early 1970s, price hikes took off – and it took a massive belt tightening. Fed monetary policy and years of severe economic hardship to tame them.
There is reason to believe this time is different. Inflation has been low for decades and remains contained around the world. The link between unemployment and wages, and wages and prices, has been weaker than in past decades. From Japan to Europe, the problem at the time is the weak price gains that trap economies in cycles of stagnation by reducing the leeway to reduce interest rates in times of difficulty, not a inflation too fast.
And economists are increasingly saying that while there may be costs associated with long periods of pro-growth fiscal and monetary policy, there are also costs in being overly cautious. Slamming the brakes on a labor market expansion sooner than necessary can leave workers who would have benefited from a boost from a strong labor market on the sidelines.
The run-up to the pandemic showed how overly prudent policy is likely to be lacking. By 2020, unemployment for blacks and Hispanics had dropped to record levels. The participation of workers in the prime of life, which should remain depressed all the time, has in fact accelerated somewhat. Wages increased fastest for the lowest incomes.
It is not clear whether 3.5% unemployment will be the exact level America will reach again. What is clear is that many policymakers want to test what the economy is capable of, rather than guessing a magic number in advance.
“There is a danger in calculating a number and saying that means we’re here,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said at an event earlier this month. “We’re going to learn more about these things in an experiential way, and that’s the right risk management posture for me.”
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