James R. and Helen D. Russell Professor of Finance; Senior Associate Dean for Strategy and Academics
What should one make of the COVID economy?
The unemployment rate is falling, but nearly 10 million Americans who lost their jobs to the pandemic remain unemployed. A speedy vaccine rollout promises to reopen many sectors of the economy, but the national debt is on the rise. School and daycare closures have hit mothers, especially Black and Latinx ones, hard—but a new child tax credit promises to lift millions of families out of poverty.
As yet another stimulus package leaves the Oval Office with a signature—and the IRS sends an unprecedented third stimulus check to many Americans—one could be forgiven for wondering what to make of it all.
So we asked Jan Eberly, a professor of finance at Kellogg and senior associate dean of strategy and academics, for her take. The last time the U.S. was pulling itself out of a recession—the Great Recession—Eberly was assistant secretary and chief economist at the Treasury. The experience gave her a clear view of the power and challenges of using public policy to restore jobs, incomes, and the broader economy.
Eberly explains that there is plenty that policymakers are doing to encourage a quick recovery. But it is important to understand just how different this crisis is from other economic crises.
“We can address what is happening in the economy,” she says. “But the underlying issue is the pandemic. Fundamentally, this is a public health shock and that must be first and foremost in the recovery.”
Here, Eberly offers her take on this strange, new pandemic economy.
Prior to March 2020, the U.S. economy was humming nicely, and weekly unemployment claims numbered just a few hundred thousand. Then, the coronavirus hit, and 7 million jobs were lost seemingly overnight. Over March and April, losses climbed to 22 million.
New unemployment claims have since come down. “But there are still nearly 10 million people who have not returned to their jobs nor found a new job in the pandemic economy,” says Eberly, “which is more people than were unemployed at the height of the Great Recession.”
Moreover, she explains, job losses were not spread evenly over the economy. Unlike in previous downturns, where people pressed “pause” on purchasing durable goods like cars or furniture, two-thirds of the decline in consumer spending this time was on services. In particular, the in-person services—restaurants, hotels, airlines, barbers—that have been absolutely clobbered. And because of the low wages associated with most in-person services work—as well as the overrepresentation of Black, Latinx, and women workers in these industries—the pandemic has been absolutely devastating for those already struggling economically. Women were also disproportionately impacted by school closures and the loss of childcare.
Given that the pandemic’s effect on the economy has not been equally shared, policymakers needed to focus not so much on “stimulus” as on “insurance,” says Eberly. After all, the map of the pandemic economy is so unusual that using traditional stimulus can even be counterproductive if it channels support to parts of the economy that are already spared or even thriving in a remote environment.
Instead, “it’s more like FEMA and emergency relief: effectively, a hurricane hit the economy, and you try to target policy on the people and parts of the economy that are most affected,” says Eberly. “But targeting is hard to do at the scale of the U.S., especially when the ways in which the pandemic hit are different than in the past. So policymakers have had to innovate or try to use existing programs in novel ways.”
How have policymakers been targeting their efforts—and to what effect?
Most prominently, there was expanded unemployment insurance, which was of course targeted to precisely those individuals who had lost their jobs. The expansion boosted the size of the unemployment checks, how long they could be collected, and—for the first time—even who was eligible in the first place.
The pandemic was a “wake up to reaching the gig economy!’” says Eberly. “The expanded unemployment insurance was also available to people who didn’t have formal employment. It was really a transformation in availability of unemployment insurance.”
Another targeted policy: the foreclosure and eviction moratoria, which protect homeowners and renters who have been directly affected by the pandemic. During the Great Recession, the housing market was at the epicenter of the financial crisis; during the pandemic economy, fueled by low interest rates and different living needs, housing has proven to be a relative strength. Still, that is cold comfort for the many individuals who have lost their jobs and might otherwise lose their homes.
In Eberly’s view, there is reason for cautious optimism that the moratoria are doing exactly what they are intended to do. “The early research on this says that we’re not seeing people losing their homes—that they own or that they rent—as we did during the financial crisis,” she says. However, as the moratoria end, there is a lingering question of whether and how the accumulated arrears will be paid, and how renters, borrowers, and also smaller landlords will fare as the bills come due.
In addition, each of the three rounds of the stimulus relief checks have had income restrictions, which target them to individuals who earned less than either $100,000 or $80,000 (depending on the round) but provide broad support.
There have also been multiple rounds of funding to the Paycheck Protection Program (PPP), which was intended to support smaller businesses than those that usually benefit from broad credit relief. In Eberly’s view, this is a case where a potentially innovative program was hampered by the lack of existing connections to quickly target funds to those most in need.
With this latest round of stimulus relief, state and local funding is finally getting a boost. Earlier relief packages danced around the issue, assisting badly battered states and cities by providing funds for schools, vaccines, testing, and food assistance. But this time, money is going straight to state and city coffers. “Three hundred fifty billion for state and local governments that have been hit hard by the pandemic is what states and cities were asking for,” says Eberly. The funds “give them more flexibility to buttress programs and needs that arose during the pandemic, especially after the exhaustion of their rainy-day funds.”
Finally, and perhaps most surprisingly, the latest round of stimulus also provides targeted relief to families with children in the form of an enhanced child tax credit. For all but the highest earning families, the credit will be increased to $3600 for kids under 6, and $3000 for kids under 18—and critically, it will be refundable and paid out throughout the year, meaning that families who don’t ordinarily earn enough to benefit will still receive periodic checks for the full amount. Some estimates suggest that the benefit could lift 40 percent of children out of poverty.
“The group in the U.S. most exposed to poverty is children,” says Eberly. “The credit is helping families with children who were especially vulnerable during the pandemic because they were vulnerable already.”
This could be transformational. If this credit is extended to subsequent years, she says, “it could reduce childhood poverty and distress for those who need it most—and where the benefits could change lives.”
It is too soon to know whether economic changes, like work-from-home, and policy changes, like targeted fiscal support, will last. But the pandemic has forced action and innovation. The first CARES Act was passed in record time and provided crucial initial support. When the pandemic outlasted that first effort, policymakers came back with targeted support plus some broad measures intended to bridge the economy through a tough winter and on to post-COVID.
Eberly is optimistic that these measures will act as that bridge. Some sectors of the economy have already bounced back or are poised for a quick recovery. After all, many individuals who have remained employed throughout the pandemic have extra money in their pockets and will want to spend it. Savings are at record highs and some spending categories are already strong.
“As the underlying public-health crisis recedes, some parts of the economy will come back energetically. People will be able to get out and travel and live their lives with more confidence,” Eberly says.
Still, she worries that other parts of the economy will be far slower to recover, and that many workers who have been the hardest hit will continue to struggle. One particular concern as the pandemic drags on is that, once individuals have been out of the labor force for a long time, it gets harder and harder to return. “When people talk about the ‘scarring’ of the economy, it’s usually around long-term unemployment,” says Eberly. This is especially true for groups that had higher unemployment rates to begin with and were just getting more economic traction pre-pandemic.
Small businesses, long shuttered, could run into similar problems as they try to reopen. And while new businesses will eventually step in to fill the gap, that all takes time. “We will see some good headlines, I hope. I’m optimistic about that,” she says. “But it won’t lift everyone simultaneously.”
What Eberly is not particularly concerned about at this time? The accumulated debt, which is paying for all of this relief. There is near unanimous consensus among economists that the national debt is large, and quickly growing larger. And there is concern that it may constrain our ability to act so aggressively in the future. But “the best thing we can do for future fiscal stimulus is to get the economy back on its feet,” she says. “Right now, there is a necessary focus on recovery. And with interest rates low, there is some breathing room to invest in a stronger, more resilient economy.”
Above all, Eberly hopes that the extraordinary moment will convince Americans that thoughtful, competently executed, and well-targeted government policies can go a long way toward building an economy that works for everyone. Amid the missed opportunities and unimaginable losses, there also came innovation and a deep commitment to help provide relief.
“If what people and policymakers learn is that governments can help—to intervene effectively to provide relief from a once-in-a-generation pandemic—that would be a success of policy,” she says.
Jessica Love is editor in chief of Kellogg Insight.