Lessons from 2008 for fighting the pandemic of 2020
Congress is trying to engineer a new round of COVID-19 relief to end a months-long deadlock over how best to support struggling businesses, workers, families and local governments. With little time left in a lame duck session that will end shortly before the holiday season, a bipartisan group of legislators has proposed a $908 billion package that would provide funding for some Democratic priorities, with a price tag Republicans may be able to stomach.
The proposal would provide $300 a week in supplemental unemployment insurance for out-of-work Americans for roughly four months, $288 billion for small businesses, $160 billion for state and local governments, $82 billion for education, a litigation shield for businesses and a variety of lesser funding for transit and health-related initiatives, including nutrition and coronavirus testing, tracing and vaccination. The package is less than the $2.2 trillion House Democrats sought earlier this year, but it's nearly double what Republicans previously said they were comfortable spending.
House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer said Wednesday that the plan should become the basis for further negotiations with Senate Majority Leader Mitch McConnell and Treasury Secretary Steven Mnuchin.
This potential breakthrough lands at a time when the savage economic impact of the pandemic appears to be easing. The economy is expected to grow at an annual rate of 11.1% in the fourth quarter after inflation, according to the Federal Reserve Bank of Atlanta. That would follow a bounce of 33.1% last quarter and lift GDP to just below its pre-coronavirus level by year's end. The unemployment rate fell to 6.9% in October from 14.7% in April. COVID-19 vaccines are in the pipeline and equity markets have been soaring. There's light on the horizon.
So what do we want federal support to accomplish? In answering that question, political and business leaders should keep in mind the hard lessons learned in the 2008 financial crisis about the need to both resuscitate an ailing economy in the short term and, to promote long-term growth, realign human and financial resources.
With a vaccine now all but in hand, it can be easy to forget that the COVID-19 battle is not yet over, and the economy remains vulnerable. These risks are plain today, as daily coronavirus cases and deaths continue to climb, and they will remain a concern further out. Details around a vaccine rollout remain murky, and if distributing shots to 330 million Americans proves more difficult, time consuming and costly than anticipated, the economy could be hobbled well into 2021 and beyond.
It's also easy to overlook the millions of Americans who are still suffering. Roughly 10 million workers have yet to recover jobs lost during the pandemic, and millions more are standing in breadlines. There are also millions of unemployed Americans who don't show up in these statistics because they've stopped looking for work.
According to Feeding America, the country's largest hunger-relief organization, about 54 million Americans could soon be without reliable access to regular meals, 17 million more than before the pandemic began. It's not clear when and how quickly their suffering will ease once COVID-19 has been defeated.
In this context, an effective relief package must do more than carry the economy for the next several weeks or months. It should cultivate a more robust economy that promotes profitable and productive companies and a prosperous workforce. We continue to believe that will require unflinching investment in education, infrastructure and public health, and a safety net for the most vulnerable Americans.
COVID-19 has laid bare the dangers of failing to do this, if they weren't already obvious. Simply put, in America since the 1970s, the rich have grown richer and the poor, poorer. The result: In 2019, half of U.S. households had incomes below $68,703 — which in most places isn't enough to cover basic expenses, according to MIT's living wage calculator. Economic inequality has also risen to alarming levels. Measured by the Gini Index, it is now the highest on record. The U.S. has become one of the most economically unequal countries in the developed world.
This isn't merely a morality tale. Americans have enjoyed historic and robust economic growth for decades because the country has had an unusually large, healthy, diverse and well-educated middle class — people who work hard, innovate and like to buy things. Everyone, regardless of economic station, benefits when the middle class is growing and the underclass shrinks. But for some time now, the American middle class has been eroding.
In a country where consumer spending fuels roughly 70% of growth, perhaps it's no accident that, from 2007 to 2019, the economy grew by just 1.7% a year after inflation. It was the most anemic 13-year period on record, according to numbers going back to 1947 compiled by the U.S. Bureau of Economic Analysis.
The failure to address income inequality, poor access to high-quality education and other problems that undermine economic security have undoubtedly fed the polarization that's been ripping apart the country's politics, institutions and social fabric — and that may inflict further economic damage. This is a lesson we should have learned from experience.
During the 2008 financial crisis, the federal government came to the aid of Wall Street and corporate America, but did little to help ordinary Americans, many of whom were still digging out when the pandemic hit this year. About 20% of the workforce lost jobs when the Great Recession began in 2007, and many of them never secured comparable work again. Younger workers' livelihoods were derailed, leaving them skittish about buying homes and starting families. Nest eggs shrank, homes were lost, college was put off, mental and physical health declined, productivity weakened, and personal dreams were permanently shattered.
Economists have a word for this kind of lasting damage: "hysteresis," derived from the Greek word for "scars." U.S. workers were scarred, and the economy was unnecessarily hobbled, by an overly austere response to the 2008 crisis — by Congress, the Obama White House and the business community. The Federal Reserve was left to use monetary policy to fill an economic void left by leaders too timid, unimaginative and ill-informed to fully wield fiscal policy.
It's crucial not to make the same mistake this time. There's ample precedent to show how economically beneficial thoughtful and robust fiscal policy can be. When, in the 1930s and '40s, the U.S. made sweeping investments in research, infrastructure and economic security, it helped usher in decades of prosperity for all Americans.
By the same token, it's dangerous to take comfort in economic indicators — such as the market rebound we are seeing now — that may affect only the most affluent Americans.
The next round of relief spending, whatever its size and scope, should embrace policies that make the economy, infrastructure and the public health system more resilient, and give working Americans the support and opportunities they need to prosper. That matters not only for the next few months, but for decades to follow.
O'Brien is a senior columnist for Bloomberg Opinion. Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.