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Promoting Economic Recovery After COVID-19

Melissa Kearney and colleagues offer bi-partisan plan for economic recovery

In a June 16 Washington Post OpEd piece, based on an Aspen Institute Working Paper, Faculty Associate Melissa Kearney, with colleagues Jason Furman, Timothy Geitner, and Glenn Hubbard, laid out a bi-partisan plan to manage the economic fallout from the COVID-19 pandemic.

The economic crisis caused by the COVID-19 pandemic idled about one-sixth of the U.S. economy and displaced one in four American workers. Given the magnitude of economic losses that have taken place it is unlikely the economy will reach pre-pandemic levels anytime soon, as substantial portions of the economy will likely experience significant reallocation with some businesses going bankrupt and others using this as an opportunity to downsize employment.

The path to economic recovery requires containing the spread of the virus and developing better treatments, and ultimately a vaccine. Economic policies, however, can play an important role in protecting people from the suffering associated with the reduction in aggregate demand, limiting “second round” damages that spillover into sectors that were not directly affected by the virus and putting the economy in a better position to recover more rapidly as the virus-related limits on economic activity lessen and, hopefully, go away entirely.

The federal government’s monetary and fiscal responses have been more ambitious than in any previous economic crisis. Although the monetary and fiscal efforts have had missteps and limits, overall they have succeeded in protecting the disposable personal income of most households and made funds available to get many businesses through the current period.

More is needed moving forward. Many of the fiscal measures to date expire over the next two months. The next wave of fiscal policy should focus on extending, transitioning, or adapting these efforts so that the balance of policy shifts toward safely encouraging and rewarding a return to work and supporting a market-based reallocation of business and jobs.

The report focuses on fiscal policies aimed at bolstering the economic security and productivity of workers, small and mid-sized businesses, and state and local governments through a prolonged recovery from the worst ravages of COVID-19. The authors consider a time frame of 12 to 36 months after the onset of the pandemic, when they expect business activity to resume, albeit at less than full capacity, and aggregate employment outcomes to be on an improved trajectory. They premise their recommendations on the expectation that macroeconomic conditions will be weak for some time and that economic life will take place amid sizable uncertainty about the future path of the virus causing COVID-19 and the fact that its economic consequences could outlast the worst of the virus itself.

Their strategy comprises four important elements:

  1. support unemployed/underemployed workers;
  2. bolster wages of low-wage workers & encourage employment;
  3. lending support to businesses;
  4. financial support to state/local govt, including for k-12 & higher ed

Many of our proposals are contingent on economic circumstances and as a result their cost depends on how the economy unfolds," Kearney writes. "If there is a rapid, V-shaped recovery with output and employment returning to trend by the second quarter of 2021, then these proposals would cost nearly $1 trillion. If instead we had a long, slow recovery - despite vigorous fiscal policy - with an unemployment rate of 12 percent at the end of 2020 that fell by 1 percentage point per year thereafter, the total cost would be $2 trillion. The Congressional Budget Office (CBO) would formally 'score' these proposals by looking across the probability distribution of all outcomes for this recession as well as future recessions and likely come up with an overall cost estimate around the top of this range. Overall, our proposals would increase GDP and jobs and reduce the unemployment rate. The precise amount depends both on economic circumstances and the size of the policies."

The Aspen Institute Economic Strategy Group: Jason Furman of Harvard, who chaired the Council of Economic Advisers under President Barack Obama; Timothy Geithner of Warburg Pincus, who was Treasury secretary during the Obama administration; Glenn Hubbard of Columbia University, who chaired the Council of Economic Advisers under President George W. Bush; and Melissa Kearney of the University of Maryland, the director of the Economic Strategy Group.

Jason Furman, Timothy Geithner, Glenn Hubbard, and Melissa S. Kearney. (2020) Promoting Economic Recovery After COVID-19.

See the Aspen Institute Working Paper