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Quick thread on the why and how of fiscal stimulus given the state of the economy. First it's important to understand the size of the damage. We have *still* lost more jobs than the worst of the Great Recession. That's a remarkable level of job loss (chart from @crampell)...
Now it's true, there are a lot of ways that this recession is a lot less damaging than the Great Recession. The housing market is fine, household and business balance sheets have been to a significant extent bailed out by massive amounts of relief. That is all very good..
We also have a lot of pent us savings, which should be released when the pandemic is over. A lot of the job loss is also temporary, a business is still there, there customers will be back, but they are at 30% staff bc of the pandemic. That all suggests fast bounceback...
However, 2.1 million workers who have lost their jobs post-pandemic say their job loss is permanent. This can be from business resizing or the elevated level of business failure in some sectors. Either way, you cannot put that back in the box quickly.
So even if we have a lot of temporary job loss bounce back as the pandemic ends, and we have pent up savings being released, I don't think we should assume the recovery will simply be self-correcting at an efficient speed...
2.1 million permanent lost jobs is a lost, and we businesses to create new jobs there. In addition, we have all the population growth that would have translated to new jobs that we haven't created. That's probably another 1 million at least.
So does this call for fiscal stimulus? The truth is we are in brand new macroeconomic territory here. We have never *paused* the economy for an entire year, and attempted to fill the gap with federal spending.
I think it would be a serious error lacking in humility to jus assume the economy will self correct and make up the 3 million or more jobs we need it to create in a quick manner.
What's more, the costs are entirely asymmetric here. If somehow the economy miraculously creates 3 million NEW jobs (not just the old ones coming back) overnight and we do fiscal stimulus, guess what? We still weren't at full employment in 2019. The risk of overheating is low
But while I think the totality of the evidence calls for fiscal stimulus, I think *when* is very very important. If we send out $2,000 checks this month it will be pushing on a string. We should wait to send out fiscal stimulus when the pandemic is over.
Ironically Larry Summers had this half right. Stimulus that leads another $300 to be spent at home depot, or bids up new home prices, will not be putting demand into the parts of the economy that need it.
The checks should come when the pandemic is over, so they can supercharge pent up demand for the service sector which is where the permanent job loss & business failure has happened and thus new job creation is going to be concentrated.
So no, given the massive strain the economy has endured and levels of output gap we will have when this is over we should not assume the recovery will proceed fast enough. We should have fiscal stimulus. But let's have it when we need it, not when we are social distancing still.
To date, we have had an economic relief framework with spending and that has been correct. But we will soon need to switch to a stimulus framework, which is very different.
