United States: The secret triumph of economic policy | Business

During the last days, all the news talks about the rise in prices. And I get it: a 7% rise in the CPI over the past year is a surprise, especially since a lot of people, myself included, didn’t see it coming.

But there is another story that should attract more attention: the extraordinary success of the United States in limiting the damage caused by a horrible pandemic. In fact, it is very likely that, when we look back, we will see the economic management of the last two years as a triumph of policy despite the rise in inflation.

I already wrote about this in part in my column last week, but I think something more needs to be said. As I pointed out in it, unemployment has fallen as fast lately as it did during the recovery known as “the dawn of America” ​​from the Reagan era. What I want to do now is put the recovery in a larger historical context.

Early in the pandemic, many observers feared that we were about to experience a repeat of the 2008 financial crisis, only worse. In fact, there were a couple of weeks in March 2020 where the financial system teetered on the brink of collapse. But the Federal Reserve pulled us back from the precipice.

However, even as the financial crisis subsided, there was widespread fear that the recovery from the health crisis recession, like that of the Great Recession, would be slow. Economic forecasters interviewed in the spring of 2020 expected the median unemployment rate in 2022 to be above 6%. The truth is that it has already dropped to 3.9%, a percentage only slightly higher than before the arrival of the coronavirus.

Jason Furman, who was one of Obama’s leading economists, has proposed a useful way to compare recessions: look at the cumulative unemployment they produce. If the unemployment rate exceeds its pre-recession level by one percentage point per year, we are looking at a “one point year” unemployment excess. Based on this, how many points a year of unemployment has the pandemic inflicted, and what does it look like when compared to the past?

For minor technical reasons, my calculations differ somewhat from Furman’s, but the message is the same: the Covid-19 recession has done surprisingly little damage, all things considered. The costs of the Great Recession were enormous—more than 20 points a year—not only because unemployment soared, but also because it lasted. Thanks to the rapid recovery, the costs of the collapse caused by the coronavirus have been much lower: around seven points per year. While the initial jolt to the economy was devastating, the ultimate hit to unemployment from a deadly, life-altering disease was comparable (by my calculations, somewhat lower) to what we suffered after the tech bubble burst in the 1990s. That is, the covid-19 may have cost fewer jobs than the collapse of the dot com.

Part of this story with a happy ending reflects the underlying economic fundamentals. For the record, I argued from the start that we would experience a quick recovery because the crash was not preceded by private sector excesses. But surely large-scale public spending, especially the Coronavirus Aid, Relief, and Economic Security Act of 2020, agreed to by both major parties, and the American Bailout Plan of 2021 also helped.

Now, what about inflation? There is no doubt that right now we could have had lower inflation if we had accepted a slower job recovery. However, would it have been worth the trade? The clear answer is that returning to full employment was more important than avoiding inflation, if—a capital “yes”—inflation eventually subsides.

Here’s why: While it’s true that inflation eats into real incomes, we have overwhelming evidence that maintaining full employment is extremely important for reasons that go beyond money. Jobs provide income, but for many workers they also bring dignity, so being unemployed is far more detrimental to happiness than lost dollars can explain. And full employment is especially crucial for young people, since going from university to a bad job market can darken a person’s professional life for many years, probably their entire lives. Consequently, returning the United States to full employment as quickly as possible was urgent, and worth it even if the price was putting us through, say, two years of high inflation.

The counterargument is that inflation will be hard to get rid of, that it will take root in expectations throughout the economy, and that bringing it down again later will require another nasty recession. And I cannot guarantee 100% that this will not happen.

However, at this point there is little evidence that the price hike will take root. The bond market implicitly expects high inflation this year, but not beyond. The point is not that the market is necessarily right, but rather that a leading indicator of inflation expectations shows no signs that people are betting on a return to the 1970s. Consumer surveys say something similar: expects high inflation this year, but much lower over the next five years, which means an implicit forecast of a return to normal.

So at the moment it looks like we are in for an extraordinarily quick economic recovery after a devastating blow to the economy, achieved at the cost of an uncomfortable but probably temporary rise in inflation. And considering what could have happened, this amounts to a triumph of politics.

Paul Krugman He is a Nobel laureate in economics. © The New York Times, 2022.

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