term paper on recovery strategy for a bad economy

Building back better: A sustainable, resilient recovery after COVID-19

For the economic recovery from the COVID-19 crisis to be durable and resilient, a return to ‘business as usual’ and environmentally destructive investment patterns and activities must be avoided. Unchecked, global environmental emergencies such as climate change and biodiversity loss could cause social and economic damages far larger than those caused by COVID-19. To avoid this, economic recovery packages should be designed to “build back better”. This means doing more than getting economies and livelihoods quickly back on their feet. Recovery policies also need to trigger investment and behavioural changes that will reduce the likelihood of future shocks and increase society’s resilience to them when they do occur. Central to this approach is a focus on well-being and inclusiveness. Other key dimensions for assessing whether recovery packages can “build back better” include alignment with long-term emission reduction goals, factoring in resilience to climate impacts, slowing biodiversity loss and increasing circularity of supply chains. In practice, well-designed recovery policies can cover several of these dimensions at once, such as catalysing the shift towards accessibility-based mobility systems, and investing in low-carbon and decentralised electricity systems.

1. Governments’ first priorities in tackling the COVID-19 pandemic have been to overcome the health emergency and to implement rapid economic rescue measures, the latter mostly aimed at providing essential liquidity and protecting livelihoods in the face of abrupt losses of income. As the health crisis gradually abates in some countries, attention is now turning to preparing stimulus measures for triggering economic recovery. This policy brief examines how these stimulus packages can create a recovery that “builds back better”, i.e. not only getting economies and livelihoods back on their feet quickly, but also safeguarding prosperity for the longer term. This means triggering investments and societal changes that will both reduce the likelihood of future shocks and improve our resilience to those shocks when they do occur, whether from disease or environmental degradation. At the heart of this approach is the transition to more inclusive, more resilient societies with net-zero GHG emissions and much reduced impacts on nature. Other OECD policy briefs examine the role of environmental health in strengthening resilience to pandemics (OECD, 2020[1]) and COVID-19 and the low-carbon transition (OECD, forthcoming).

  A more resilient economy depends on a shift to sustainable practices

2. In addition to the immediate human suffering caused by the disease itself and the loss of livelihoods for millions, the COVID-19 pandemic has also highlighted several key vulnerabilities of our societies and economic system . Global interconnectedness has helped to create huge economic and social benefits for decades, albeit unequally, but also facilitated the rapid spread of the pandemic. More broadly, the speed and depth of the economic crisis have shown that a core principle of the global economy – prioritising short-term economic growth and efficiency over long-term resilience – can have huge societal costs. The precariousness of long and complex global value chains has been revealed, with many countries struggling to acquire medical and other strategic supplies. Social inequalities have been exposed and rapidly exacerbated by the massive but uneven loss of employment, with the equivalent of more than 300 million jobs potentially at risk (ILO, 2020[2]) . Although this is not the first economic crisis to expose these frailties, the depth and breadth of the current circumstances have brought the issue of resilience and preparedness high in the public consciousness.

3. The exposed vulnerabilities are particularly sobering when seen in the light of an even bigger future threat to the global economy: environmental degradation driven by our current economic system. The world’s environmental emergencies are as pressing as ever, even if they may seem distant during such a very human crisis. The impacts of climate change, air pollution, biodiversity loss and poor ocean health already cause immense suffering globally and harbour further systemic vulnerabilities for the global economy that could ultimately eclipse the current crisis. Physical and economic impacts from climate change are already being felt, and some regions have experienced extreme weather events at the same time as tackling COVID-19, such as super-cyclone Amphan in Bangladesh and Typhoon Vongfong in the Philippines (UN, 2020[3]) . Without structural changes to our economies, continued accumulation of greenhouse gases (GHGs) in the atmosphere will lead to potentially catastrophic further impacts. While the economic shut-down has led to some widely-reported environmental improvements, such as reduced emissions of GHGs and air pollutants and less water pollution, these in themselves will have almost no long-term impact (Le Quéré et al., 2020[4]) . If economic activity resumes as before, they are likely to be temporary and quickly erased. Indeed, GHG emissions rebounded and resumed growth in the aftermath of the recent economic crises (OECD, 2020 forthcoming).

4. These interlinked environmental crises may also heighten the likelihood and likely impact of future infectious diseases. The economic pressures driving biodiversity loss and the destruction of ocean health can have cascading impacts on societies, and may increase the risk of future zoonotic viruses (those which jump from animals to humans) due to the expansion of human activities leading to deforestation, combined with the increased demand for and trafficking of wildlife (Jones et al., 2013[5]) . Declines in local environmental quality, including air and water pollution, can influence the vulnerability of societies both to disease and to the effects of a less stable climate, with impacts likely to affect poorer communities more (OECD, 2020[1]) .

5. Returning to “business as usual” will not deliver a sustained long-term economic recovery that also improves well-being and reduces inequality. With massive stimulus packages starting to be unveiled around the world, governments, businesses and societies as a whole have both a responsibility and self-interest to not only look for near-term measures to shore-up livelihoods and employment, but also to take a step back and reflect on the political and economic driving forces leading to the current crisis.

6. Despite encouraging signs from governments, businesses and citizens, recovery plans have so far mostly fallen short. Many governments have recognised the need and opportunity of a sustainable recovery. For example, in April 2020, the G20 Finance Ministers agreed to “commit to support an environmentally sustainable and inclusive recovery” (G20, 2020[6]) . Encouragingly, an international poll covering developed and developing countries also suggests that a majority of citizens see a focus on environmental issues as a continued priority as we emerge from the COVID-19 crisis (IPSOS MORI, 2020[7]) . The fragilities exposed by the pandemic may act to underline the reasons that environmental issues were becoming top political priorities around the world before COVID-19 struck. In 2019, millions of people, spearheaded by youth, protested in the streets for climate action, leading to several governments officially declaring a “climate emergency”. Biodiversity loss and the ongoing mass species extinction were also gaining headlines around the world, and the visible crisis engulfing the world’s oceans had become a front-line political issue in several countries. As recently as January 2020, climate change and biodiversity loss topped the World Economic Forum’s list of global risks (World Economic Forum, 2020[8]) . The social and economic case for a sustainable, resilient recovery is very clear. Despite this, economic recovery measures proposed so far have mostly scored poorly on environmental metrics, with unsustainable support outstripping sustainable measures in many countries (Vivid Economics, 2020[9]) . While there is significant support for “green” technologies and industries, in particular in European countries, in many cases this is outweighed by ongoing support for “brown” activities that may lock-in emissions intensive pathways.

  “Building Back Better”: key dimensions for a resilient economic recovery

7. The term “Building Back Better” has been increasingly and widely used in the context of the economic recovery from COVID-19 (WRI, 2020[10]) (We Mean Business Coalition, 2020[11]) . The notion originated in the context of recovery and reconstruction from physical disasters 1 , with an emphasis on making preventative investments that improve resilience to, and so reduce the costs of, future disasters. The challenge of re-igniting the global economy in the aftermath of the economic crisis triggered by COVID-19 is of course different. There has been no physical disaster, and the focus is global. Yet the economic crisis is so severe, the risks from returning to previous patterns so high, and the opportunity to embrace a more sustainable recovery so clear, that the term is relevant in this context. Even at the global level, there is still an emphasis on prevention, as the investments and behavioural changes made will pay dividends in the future through reduced exposure and increased resilience to costly future disruptions – whether due to climate change, disease, or a confluence of these or other factors.

8. To “build back better”, recovery measures can be assessed across a number of key dimensions (Figure 1). Common to all these dimensions is the need for urgent decisions taken today to incorporate a longer-term perspective. For example, assessing measures against these dimensions can expose where competing potential targets for stimulus spending may offer similar near-term benefits in terms of job creation, but very different long-term outcomes for sustainability and resilience (for example, whether or not the stimulus leads to investment in long-lived high-emitting infrastructure that may lock-in GHG emissions far into the future).

9. A central dimension of building back better is the need for a people-centred recovery that focuses on well-being, improves inclusiveness and reduces inequality. To improve public support, recovery policies need to be measured on more than just economic growth and total job creation. Emphasising other elements that improve well-being, such as income, job quality, housing and health is important to achieve this (OECD, 2020[12]) . More specifically, where stimulus packages target environmental objectives, a focus on people’s well-being is also crucial to cement the social and political acceptance of environmental measures (OECD, 2019[13]) . Even before the crisis, the impact of environmental policies on inequalities among and within countries, and between genders, was a mounting key concern in several regions, and this is even more critical in the current context. Means for ensuring that environmental measures are socially inclusive include making taxes and subsidies progressive (supporting the most vulnerable) and preparing the workforce for the green transition, for example by adapting and adopting “Just Transition” principles refocused for an era of economic crisis and recovery (OECD, 2017[14]) .

10. The relative importance of the other dimensions will likely vary across different country contexts, according to their development priorities, infrastructure needs and social circumstances, in particular for developing countries. These dimensions include:

Aligning recovery measures with long-term objectives for reducing GHG emissions. Avoiding the worst impacts of climate change is key to future resilience and stability. A careful assessment of the influence of stimulus packages on future GHG emissions trajectories is crucial, including in the context of moving towards net-zero emissions. This relates both to near-term emissions of economic activities receiving liquidity support, as well as long-term structural implications of potential lock-in through infrastructure investment decisions facilitated by recovery packages. The long-lived nature of infrastructure investments likely to be made through stimulus packages means that decisions made now will have implications for decades to come, and could determine whether the world can achieve its goals of averting the worst impacts of climate change.

Strengthening resilience to the impacts of climate change. Resilience to climate change is one specific aspect of improving the overall resilience of economies and societies. In particular, infrastructure networks will face increasing pressures from the impacts of climate change, but also play an important role in building society’s resilience to those impacts. Infrastructure investment is likely to be a key component of recovery measures in many countries – in part because of job creation potential – and it is important to ensure that infrastructure investments are climate resilient and do not increase exposure and vulnerability. This will reduce direct economic damages from climate related disasters and minimise the indirect costs created by the cascading impacts caused by the disruption of both critical services and economic activities. New infrastructure investments, including in low-carbon developments, need to build in resilience against future climate impacts, by assessing climate risks across the lifetime of the project. Retrofitting existing infrastructure is more costly, both organisationally and in terms of physical investment (OECD, 2018[15]) .

Integrating more ambitious policies to halt and reverse biodiversity loss and restore ecosystem services, including through nature-based solutions. Biodiversity and ecosystem services are fundamental to economic activities and human health; deforestation and other land use change have been linked to the spread of diseases. Investment in natural infrastructure such as reforestation and wetland and mangrove restoration are not only a cost effective and sustainable way to improving resilience to climate impacts, but offer employment opportunities similar to man-made infrastructure investments. Investments targeted through stimulus packages need to better assess and value biodiversity and ecosystem services, and integrate these values into decision-making. In addition, government support that is potentially harmful to biodiversity must be identified and reformed. Additionally, valuing natural capital is integral to improving a range of environmental health dimensions that are important for societal resilience to pandemics and other shocks (such as cleaner air and water (these issues are covered in detail in another policy brief (OECD, 2020[1]) )

Fostering innovation that builds on enduring behaviour changes . Continued technological and process innovation will be critical to achieving climate and other sustainability goals. Governments play a key role in fostering an innovation ecosystem, well beyond funding basic research and development (OECD/The World Bank/UN Environment, 2018[16]) . However, the COVID-19 pandemic will affect cultural norms and behaviour in ways that are not yet known. To be effective at creating jobs and improving resilience, stimulus packages need to take into account potential behaviour changes that could affect the saliency of different policy measures, including for innovation. For example, tackling reluctance to take public transport by encouraging measures to reduce crowding, improve hygiene and to encourage “active” transport modes; introducing measures that better support remote working (including well-being aspects) in order to reduce demand for transport such as encouraging remote working and events.

Improving resilience of supply chains, including through increased adherence to circular economy principles: the COVID-19 pandemic and containment measures have raised new questions about the systemic resilience of complex global production methods and value chains, triggering renewed interest in more diversified and more localised production and shorter supply chains in certain sectors. The environmental implications of such a shift are far from clear, but there is a role for policy, including through stimulus packages to ensure that local supply chains do genuinely improve resilience and reduce environmental impacts, including by improving resource efficiency and increasing circularity of supply chains.

11. Fortunately, designing stimulus measures in this way does not mean starting with a blank slate. International agreements already exist across many of these dimensions, such as the Paris Agreement on climate change, the Aichi Biodiversity Targets, and the Sendai Framework for disaster risk reduction. The UN Sustainable Development Goals also provide an overarching compass for ensuring that social development and well-being is fully integrated with environmental objectives. In terms of policy measures, many of the needed actions to build back better and improve resilience through stimulus packages can build on existing knowledge of policy design implementation. For example, although GHG emissions were growing until 2019, the experience from more than two decades of designing and implementing climate responses and assessing their effectiveness remains relevant. Similar policy knowledge exists for halting and reversing biodiversity loss, and improving circularity of material use, among others. Additionally, there are some key lessons from environmental measures integrated into stimulus measures following the global financial crisis in 2008-09 (Agrawala, Dussaux and Monti, 2020[17]) . 2

  “Building Back Better” in practice

12. This section provides some key examples of opportunities for “building back better” across sectors, highlighting where public stimulus spending could be oriented to align across several of the above dimensions simultaneously. These examples are clearly not exhaustive, but are highlighted here because of their relevance for where stimulus investments can catalyse important systemic change in economic sectors while also meeting the urgent need for creating employment, or otherwise trigger changes necessary to support longer-term resilience outcomes. While these examples cover a wide range of specific policy areas, some overarching policy guidance is provided in Box 1.

  Enhancing biodiversity while ensuring a resilient supply of food

13. Biodiversity and natural infrastructure such as forest, wetland and mangrove ecosystems, are essential inputs for many economic activities, and are central to hundreds of millions of livelihoods. Natural ecosystems are also essential pillars of resilience. Yet most of this natural capital is undervalued in the economy, or valued only as a harvestable commodity and not for the vital ecosystem services provided. The unpriced natural capital consumed by primary production (agriculture, forestry, fisheries and mining) and some primary processing sectors (including cement, steel, pulp and paper) was valued at USD 7.3 trillion in 2013 (Natural Capital Coalition, 2016[18]) . However, despite the introduction of some policies to value biodiversity, in particular through payments for ecosystem services, most existing approaches to measure and value natural capital loss remain limited (OECD, 2019[19]) . Through recovery packages, governments may have leverage to increase private finance for nature-based solutions and to enlarge the commitment of businesses and investors to measure biodiversity impacts, dependencies, risks and opportunities, e.g. through conditions for financial support in recovery packages to agriculture and other sectors with close links to biodiversity (OECD, 2019[19]) .

While the multiple dimensions of “building back better” span many specific policy areas, some key recommendations for governments to consider are:

Screen all elements of stimulus packages for their longer terms implications across the key dimensions outlined above, prioritising actions that:

Combine benefits for jobs and reducing inequality with implications for longer-term resilience, including by avoiding locking-in emissions intensive infrastructure and systems.

Can be implemented quickly, including “shovel-ready” targets for public investment and existing policy frameworks that can be rapidly scaled up

Favour cross-sectoral, cross-government approaches that take a long-term, systemic view rather than single technological outcomes

Build pipelines of “shovel-ready” sustainable infrastructure projects: take co-ordinated cross-ministry action to build pipelines of sustainable projects that can be implemented quickly, while avoiding favouring established emissions-intensive activities just because they are fast

Maintain (and increase) ambition of long-term environmental objectives (including net-zero GHG emissions) and ensure that policies and investments triggered through stimulus packages are aligned with those outcomes , for example:

Avoid relaxing existing environmental regulations to provide near-term relief, as the costs of longer-term vulnerability will often outweigh short-term economic relief

Make subsidies and other government support for specific industries conditional on both environmental improvements (including GHG emissions) and better overall resilience (including for the workforce)

Make energy pricing coherent as part of fiscal reorganisation post-crisis, including phasing out fossil-fuel subsidies and building carbon pricing that includes social protections (e.g. using carbon pricing revenue to mitigate distributional implications for households, as well as to finance support for structural adjustment of workers and communities).

Actively support development of green finance flows to improve resilience, encouraging longer-term horizon for financial decisions :

Measure the consistency of investments and financing with climate change mitigation and resilience, building on existing private and public sector initiatives (Jachnik, Mirabile and Dobrinevski, 2019[20])

Promote robust and transparent definitions and standards for green finance in order to guide financial allocations and investment (including taxonomy approaches);

Increase potential for public finance to catalyse private investment by further empowering public finance institutions: e.g. by increasing lending authority and ability to co-invest.

Increase and improve capacities to assess, manage and publicly disclose climate change-related financial risks, building on existing frameworks and approaches (e.g. TCFD, NGFS).

Design public procurement processes that value both resilience and low-carbon as well as promoting innovation : for example ranking bids based costs over the asset lifetime under different climate impact scenarios, and accounting for life-cycle GHG emissions.

Provide specific support for reskilling and training for industries affected by the immediate crisis and longer-term decarbonisation, along with supportive policies such as reforming housing policies to encourage mobility.

14. The food sector is fundamentally important for the conservation and sustainable use of natural capital, and ultimately dependent on it. Secure food supply is essential for well-being and economic stability – indeed even to sustain life – meaning that the availability and affordability of food are likely to be key government priorities coming out of the crisis (OECD, 2020[21]) .

15. The agriculture sector faces growing threats including from climate change and infectious diseases of plants and livestock. It is also a major driver of environmental degradation. Land-use change, including for agriculture, is responsible for a large part of deforestation. Furthermore, excessive fertilizer use has important implications for freshwater and ocean ecosystems due to nutrient run-off. Increased ecosystem pressures due to agriculture could also have implications for potential creation of new human diseases. Agricultural expansion into zones close to wilderness areas increases pressures on biodiversity, and agricultural intensification, for example with denser livestock populations, can increase the chance of zoonotic transfer of viruses across species (Jones et al., 2013[5]) .

16. Agriculture already receives substantial government support globally. In 53 countries analysed by the OECD, farmers received around USD 528 million in support in 2019 (OECD, 2019[22]) . In addition to securing jobs and preventing near-term supply disruption, recovery measures should aim to reshape policies in the sector to promote environmental sustainability and resilience, and innovation for improved productivity. In the context of the COVID crisis, there is potential to focus on reform of the most harmful and distortive measures, including but not limited to the reinforcement of coupled supports (i.e. those proportional to production or livestock), as well as the relaxation of environmental regulation. Such measures could otherwise contribute to locking-in unsustainable practices and delay the transition of food systems towards sustainable practices. Investments and training aimed at triggering farmers’ transition to more sustainable agricultural practices would benefit the environment, climate, as well as farmers’ livelihoods.

17. More generally, patterns of consumer food choices can be important levers for ambitious climate mitigation as well as for improving health and well-being through balanced diets. Where access to sufficient protein is not an issue, policies to promote lower-emission food choices may also help, such as encouraging more plant-based food choices or shifting to sourcing from lower-emission livestock systems. Measures that could contribute to such objectives include public communication campaigns or education. It is also crucial that, governments address the issue of food security for vulnerable populations. Food stamps and increased subsidies may also be an option to help vulnerable populations, as long as physical access to healthy food and diets is ensured.

  Investing for low-carbon, resilient electricity systems

18. Economic stimulus packages can help accelerate the shift towards a zero-carbon, climate-resilient electricity system while creating jobs. While large-scale renewables remain important in this regard, distributed renewables, demand-side energy efficiency and improving the flexibility of the power system are also important opportunities.

19. Energy-related stimulus measures need to consider the changed context of the global energy system, with a historic reduction in energy demand expected in 2020, contributing to extremely low and volatile fossil fuel prices (IEA, 2020[23]) . Enduring low oil and gas prices reduce incentives for energy efficiency and renewables, as well as leading to reduced investment in fossil fuel industries. Energy investment is expected to decline sharply in 2020, even for renewables (IEA, 2020[24]) . In this context, using stimulus spending to invest in and mobilise finance for ‘shovel-ready’ utility-scale renewables (e.g. wind and solar photovoltaic) remain key levers for a sustainable economic recovery. But this is only part of the story. Stimulus packages can additionally seek to drive investment in other measures that accelerate decarbonisation while also improving resilience of the electricity system, both to climate impacts and demand shocks such as that triggered by the current crisis. Examples include energy efficiency, distributed energy resources and improving the flexibility of the power system. In developing countries, measures that increase electricity access, including through off-grid or mini-grid renewable systems, can have many benefits for employment, well-being, health and societal resilience ( (IEA, 2017[25]) .

20. Energy efficiency is a clear candidate for a green recovery package but it is essential to achieve climate goals and is often generally labour-intensive. More than 3.3 million people are employed in energy efficiency in the US and EU alone, most of them in small and medium sized enterprises (IEA, 2020[26]) . Prioritising energy conservation and distributed energy resources also improves the resilience of the power system while delivering on a number of well-being benefits (enhanced affordability, lower environmental footprint, lower investment needs in network infrastructure). Beyond power, an important target for energy efficiency is the building sector (covered below). Energy efficiency across the economy can also mean a switch to electricity for energy uses previously directly using fossil fuels, such as electrification in industry, roll-out of electric vehicles and electric heat pumps as part of building energy efficiency measures (IEA, 2018[27]) . While this electrification trend can have substantial benefits for reduced air pollution at the point of use, the implications for GHG emissions depend on the decarbonisation of the underlying electricity system, as well as its ability to handle the increased demand pattern.

21. Challenges to scaling up energy conservation and distributed energy resources during the recovery include the relatively small scale of these projects and potential liquidity constraints for both households and firms. Governments could leverage on existing programmes, create ‘project pipelines’ of shovel-ready projects, and identify partners (e.g. utilities, municipalities, housing associations) and channels (e.g. energy efficiency obligations, on-bill financing) that help scale up the programmes in the short-term without creating a boom and bust cycle (IEA, 2020[26]) . These measures can be accompanied by investments in training to reduce skill shortages in the power and energy sector, including for energy system engineers and building retrofit specialists.

22. Another important target for stimulus packages is public investment in flexibility of power systems. This can include electricity storage (notably lithium ion batteries, also essential for electric transport), smart grids (e.g. rollout of smart meters) that are crucial for demand response, facilitating the integration of variable renewable energy sources and improving interconnection of grids. The lock-down measures imposed during the COVID-19 crisis have shone a spotlight on the importance of grid system flexibility, because falling demand has raised the share of renewables due to their priority dispatch and low-running costs. Finally, innovation in the energy sector is essential for technologies that will be essential for reaching net-zero emissions over the longer-term, including carbon capture and storage.

  Energy efficient housing as part of compact, resilient and sustainable cities:

23. The confinement of hundreds of millions of people to their homes due to COVID-19 has highlighted major failures in the housing sector and illuminating social inequalities related to the quality and comfort of dwellings and building services such as sanitation. Situations where poor quality housing increases inequality by posing major threats for security and health have become ever more visible, including through indoor air-pollution, as well through increased living costs due to poor energy efficiency.

24. Cities, and the building sector more broadly, are key targets for energy efficiency improvements. Buildings account for nearly 30% of global CO 2 emissions, both through direct burning of fossil fuels for heating and indirectly through their electricity consumption (IEA, 2019[28]) . To achieve the goals of the Paris Agreement, there is a strong need both for retrofit of existing building stock and for new builds to meet stringent energy-efficiency standards. Despite the clear benefits of investing in building efficiency, the barriers are well-known, including the need for upfront capital, behavioural inertia and split incentives between landlords and tenants. In emerging economies, the investment gap for green buildings is estimated at USD 1 trillion annually according to the IFC. While country contexts vary for both types of investments, policy gaps (e.g. the need for building standards and incentives for energy efficiency), and the need for robust and scalable business and financing models, are typically key factors standing in the way of accelerated investment. Stimulus packages could therefore be critical to invest in the massive retrofits needed to reduce GHG emissions from the building stock at the same time as improving living conditions and creating jobs. Measures include direct grants, tax breaks for efficiency investments and potentially scrappage schemes for inefficient household appliances. Good experience with such measures was gained from stimulus measures following the 2008 financial crisis (Agrawala, Dussaux and Monti, 2020[17]) . Policy incentives for residential energy efficiency also present clear opportunities for attracting private sector investment ( (I4CE, 2020[29]) .

25. More broadly, economic recovery measures need to consider better coordination between housing policies and wider urban planning. In many countries urban planning has led to sprawling cities, with structurally higher GHG emissions and air pollution than dense cities, for several reasons including increased reliance on private cars. The COVID-19 pandemic could exacerbate this trend through an increase in demand for less dense neighbourhoods. For example, city dwellers may seek single-family homes in less dense neighbourhoods, due to a perception of higher infection risk in more dense housing. This could run counter to efforts to curb GHG emissions and could create a tension between balancing future resilience with mitigation. Transforming cities into liveable places where people want to live and stay can help offset this trend and contribute to both decarbonisation, resilience and lower inequality. Measures could include integrating programmes to retrofit buildings as part of wider sustainable development plans for neighbourhoods. In addition, creating the conditions for the uptake of eco-districts, both as part of urban revitalization and new developments, can help to make cities attractive places to live, as well as improving resilience to climate change impacts such as more intense heatwaves. Finally, promoting mixed land-uses and enhancing walking and cycling accessibility are key, providing redundancy in transport options that is a pillar of improved resilience, discussed further below.

  Catalysing the shift towards accessibility-based mobility systems

26. For passenger transport, stimulus packages should aim to combine support for a transition to less polluting cars with investments that initiate a shift towards accessibility-based mobility. The automotive sector is a major global employer, accounting for around 14 million jobs globally, and has been severely affected by the COVID-19 crisis (ILO, 2020[30]) . As governments consider longer-term support for ailing car manufacturers, they can ensure that such support is contingent on environmental improvements including accelerating the shift to electric cars as well as more efficient, cleaner ICE vehicles. However, recovery measures should also embrace a shift towards mobility systems designed around accessibility (the ease of reaching jobs, services, leisure activities, etc.), rather than only emphasising an accelerated uptake of private electric vehicles. The latter would lock-in private vehicle ownership and low-occupancy vehicle use. This would limit the overall emissions reduction potential of the transport sector, and also implies a less resilient system due to overreliance on one transport mode. A mobility system based heavily on private vehicles is also badly equipped to achieve other social and economic goals (e.g. reduced inequality, better health and less congestion).

27. Investing in public transport remains essential both for mobility and for jobs: almost as many people work in public transport as in the car industry (13 million) (UITP, 2017[31]) . However, governments need to recognise new challenges for public transport, such as people being reluctant to take mass transit for sanitary reasons (ITF, 2020[32]) . As well as urgent hygiene and social distancing measures, over the longer term financial support and infrastructure spending could be targeted to enhance capacity, reduce crowding and rebuild the appeal of public transport, especially as capacity is likely to be strained while social distancing measures remain in place (Liebreich, 2020[33]) . Already some cities have benefited from traffic drops during the contingency phase to speed up public transport projects, such as the Bus Rapid Transit extension in Reno, and the metro construction in Los Angeles. 3

28. Governments could also envisage cooperation with both public transport providers and businesses in two ways. Firstly, to support the shift towards public transport pricing schemes that make more efficient use of transport capacity (e.g. peak/off-peak pricing) and secondly, to encourage more flexible working schedules and remote working where possible. In parallel, investment in electric vehicle charging infrastructure is a key opportunity for recovery packages, both for private vehicles and electrified public transport such as buses. Charging plans need to take into account the opportunity cost for other modes as well as public space used.

29. As economic activity resumes, there is an opportunity to reallocate road space and encourage active transport, as a means to create jobs, reduce emissions, improve resilience and even boost public health. At least150 cities around the world have already taken emergency action to create temporary cycle lanes and other space for active transport that allows for social distancing rules (ITF, 2020). To make these temporary changes permanent, stimulus measures could support redesigning road space away from cars to more sustainable modes (with a holistic view to enhance accessibility and promote safety) and adequately price it, building on evidence from the air quality and road safety improvements due to COVID-19 lockdown measures. Active transport modes and micro-mobility (e.g. electric scooters, bike sharing schemes) will be key to prevent a big shift from public transport to the car; supporting them with both investment and road reallocation is also important. R&D support could focus therefore in innovations around electric micro-mobility rather than exclusively on electric cars. Reconfiguration of road-space should also consider the need to better accommodate freight movement (particularly of last-mile travel inside dense city areas) and ensure transition to cleaner fleets; especially as urban freight volumes could increase with higher demand of e-commerce post-COVID. Pursuing an accessibility-based model, encouraging active and public transport modes, will also set a better context for advancing and increasing effectiveness of phasing out fossil fuel subsidies (where these are still in place) and implementing ambitious carbon prices (OECD, 2019[13]) .

  Improving resilience of supply chains while accelerating the shift towards circular economy principles

30. The COVID-19 crisis has shone a spotlight on the resilience of global value chains, which have become increasing complex and globalised in recent decades. If firms seek to improve resilience by shortening supply chains or making them more local, it will be important to ensure that such changes do not inadvertently increase emissions or other environmental impacts. Additionally, economic recovery policies may provide an opportunity to improve resource efficiency overall, including through exploiting job creation possibilities related to the circular economy.

31. Producing and shipping raw materials and manufactured goods along global supply chains is a key pillar of global economic activity but also a major source of environmental pollution. Materials management already accounts for nearly two-thirds of global GHG emissions, and is projected to increase by two-thirds by 2060 under current trends (OECD, 2019[34]) . Despite widespread policy efforts to encourage greater recycling and circularity of both production and consumption, the rate of recycled materials globally remains low.

32. The pursuit of efficiency and minimised costs in recent decades has led to highly complex supply chains, often with global reach and concentration in Asia (particularly in the People’s Republic of China). This contributed to emissions reductions in developed countries, as some emissions were effectively “off-shored” to countries higher up the value chains, because emissions are usually measured based on where goods are produced rather than where they are consumed. The resulting complex supply chains may in some cases be more exposed to risk of disruption, in part due to an emphasis on leanness and efficiency at the expense of redundancy and resilience. Another factor is the geographic concentration of upstream actors, meaning for example that disruption of a single supplier can ripple across multiple supply chains. The sheer complexity of supply chains also plays a role, as companies lack awareness of all the suppliers and secondary suppliers in their supply chains, making proper evaluation of risk challenging (Choi, Rogers and Vakil, 2020[35]) . However, if firms seek to improve resilience by shortening supply chains or building in redundancy, it will nevertheless be important to ensure that these changes do not lead to increases in emissions or environmental impacts. For example, within the OECD area there is evidence that off-shoring led to overall reduction in emissions, due to relocation to regions with less GHG-intensive production (Garsous, 2019[36])

33. The recovery measures proposed by governments also present an opportunity to seek greater circularity in supply chains, which can act both to improve resource efficiency and resilience for businesses (by building greater resilience to supplier risks) and society (by reducing environmental risks). In circular value chains, waste is minimised and end-of-life products are recovered for reuse, remanufacture, and recycling. This is achieved through improved product design (e.g., for disassembly, remanufacturing and recycling) and increased efficiency in the use of material resources, which generates a number of benefits. The availability of recycled materials and products for reuse and remanufacture leads to new sources of supply and supports the diversification of supply chains. Circular value chains also help to advance climate mitigation via reduced primary material production and opportunities to shift consumption towards product-service and other circular business models). Governments can catalyse the uptake of circular value chains via green public procurement (e.g., the Netherlands’ Most Economically Advantageous Tender procedure), removing trade barriers on scrap, landfill fees, Extended Producer Responsibility, and capacity building amongst firms (OECD, 2019[37]) ; (Yamaguchi, 2018[38]) .

34. An increased use of digital technologies for supply chain management can also improve resilience and reduce the likelihood of disruptions, by providing data to identify and evaluate a number of resource efficiency risks and opportunities. On one hand, digitalisation lays the foundation for disclosure of climate-related risks by companies for example through the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD). The recovery from COVID-19 opens an opportunity for governments to require both clear actions towards alignment with environmental policy objectives, as well as disclosure of climate-related risks as conditions for financial support through recovery policies. However, this would need to be applied cautiously in order to avoid hindering activity through administrative burdens, so may be best applied to larger firms. On the other hand, automation and digitalisation of industrial processes often enhances the efficiency of production – including by heavy industry – thereby reducing emissions. Governments can catalyse this shift by attaching conditions on stimulus packages to increase the uptake of these technologies, as well as through targeted innovation policies. However, as job creation is often at the heart of stimulus measures, the implications of automation for the work force would need careful consideration and active labour market management.

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Andrew PRAG (✉ [email protected] )

Coined in 2006 in the aftermath of the 2004 Asian tsunami, by 2015 the term “Building Back Better” was in widespread use by the Disaster Risk Reduction (DRR) community and was incorporated into the priorities of the Sendai Framework for Disaster Risk Reduction (United Nations Office for Disaster Risk Reduction, 2015[40]) . It generally refers to the recovery, rehabilitation and reconstruction phase after a disaster to increase the resilience of communities through the restoration of physical infrastructure and societal systems. In that context, there is evidence that disasters did pave the way for regulatory and policy changes to enhance resilience and invest in prevention (OECD, 2014[39]) . The emphasis is not only on preventative measures to reduce cost of recover, but also on incorporating social and environmental improvements for increasing well-being of impacted societies.

The stimulus measures enacted following the global financial crisis of 2008-09 included many examples of governments seeking to integrate aspects of sustainability, with varying degrees of success both economically and environmentally (Agrawala, Dussaux and Monti, 2020[17]) . The similarities between COVID-19 and that crisis are however limited. The nature of the economic and social crisis currently engulfing the world is fundamentally different, borne out of a deep and wide drop in demand right across the real economy, rather than emanating from the financial sector. Importantly, the environmental outlook is also different than it was in 2008. More than a decade later, the need to act on climate change and biodiversity is much more urgent and more broadly accepted by the public. In addition ten years of technological development have seen vast cost reductions in key technologies.

In Los Angeles, the COVID-19 crisis has helped L.A. Metro ( the transport authority) to overcome original opposition from residents, as speeding construction during this time will minimise construction impacts for local business when activities are renewed (Bliss, 2020).

What a Successful Economic Recovery Plan Must Look Like

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Three keys to a resilient postpandemic recovery

The global economy has demonstrated significant resilience through the COVID-19 pandemic, bouncing back faster than expected. Economic momentum remains strong , but nations and organizations are encountering cross-currents in supply chains, workforce availability, and inflation. The pandemic response comes in the context of a worsening climate crisis and rising economic inequality. These compound challenges remind us that crises can become watersheds of policy and strategy.

Indeed, the foundations of future growth are often laid as societies respond to the weaknesses crises expose. At this juncture, our recovery’s success is still not assured. History shows that in times of disruption, resilience depends on adaptability and decisiveness . Once the most acute period of the pandemic subsides, a resilience agenda will become the key to future prosperity .

To build a better future, the emphasis must now shift from defensive measures and short-term goals to a sustainable, inclusive growth agenda. Growth is a precursor to economic development. A sustainable inclusive growth agenda will focus on growth that supports the health and repair of the natural environment while improving the livelihood of wider population segments. We need to find pathways to a genuinely better society, so that our actions make our planet and our economies more resilient and secure.

The foundations of future growth are often laid as societies respond to the weaknesses crises expose. History shows that in times of disruption, resilience depends on adaptability and decisiveness.

But how can leaders meet this resilience challenge to achieve sustainable and inclusive growth? Getting there will depend on effectively and holistically addressing the conditions of our economies and societies and, crucially, their interrelationships—climate, healthcare, labor needs, supply chains, digitization, finance, and inequality and economic development. Three considerations suggest the path forward:

• Public- and private-sector leaders need to take a broad view of the resilience agenda. At the moment, labor shortages, the rise of the digital economy, supply chain disruptions, inflation, and inequality are all addressed in isolation, with overly specialized solutions developed in organizational silos. Such an approach does not adequately address interdependencies that exist between them, and the broader, longer-term trends driven by climate change, societal developments, and geopolitical dynamics. One model response is the European Commission’s “Recovery Plan for Europe,” with its emphasis on the interdependencies between education, healthcare, housing, climate change, economic growth, competition, and jobs, and the need to address them in a holistic framework. The difficulties encountered in implementing such plans will be a measure of the distance we must travel to bring along everyone in society.
• Strategies and structures have to be designed for flexibility and speed. We can assume disruption and accelerated change lie ahead. Nations and organizations must therefore approach issues with built-in adaptability and agility. Speed is important. The COVID-19 pandemic, and its ever-changing trajectory and impact, has shown that we need more timely information, up-to-date strategic agendas, and shorter decision cycles. The initial approach to stopping the virus spread, aimed at eliminating COVID-19 completely, is now being rethought. When circumstances change, so too must the response of business and government. To face uncertainty, our organizations have to be flexible and always learning. These attributes will weigh more in our solutions than defensive economic buffers (the key answer in the financial crisis of 2007–08). The new stance allows us to respond to supply chain discontinuities, technological leaps, and societal changes. More value is placed on anticipating disruptions and trends than in developing detailed budgets and plans.
• Beyond building resilience in business and the economy, public and private leaders must also build societal resilience. Truly sustainable and inclusive growth solutions go beyond improving business and economic performance. They also contribute to the reparation and sustenance of the natural environment, enrich low-income countries, and truly improve the lives and livelihoods of historically marginalized population segments. This understanding can be fully embraced in the purpose statements and actions of companies as well as public institutions. For companies, the adoption of environmental, social, and governance (ESG) standards and metrics can help optimize strategy for positive societal impact. For governments, measures such as New Zealand’s Living Standards Framework takes a step in the right direction, valuing more than top-line GDP numbers as indicators of national wealth.

We can shape a common resilience agenda, but to do it we must urgently intensify the dialogue between the public and private sectors. Key decisions and financial commitments made now will determine our direction in the aftermath of the pandemic. Our starting point is a consolidated view of the resilience themes. This will enable us to better understand the opportunities for sustainable and inclusive growth—for companies, countries, and societies. We must strengthen our resilience muscles now. At stake is nothing less than a prosperous future for organized life on our planet.

Klaus Schwab is the founder and executive director of the World Economic Forum. Bob Sternfels is McKinsey’s global managing partner.

This article appeared in Fortune on January 27, 2022, and is reprinted here by permission. Copyright © 2022 Fortune Media IP Limited. All rights reserved.

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Bubbles pop, downturns stop

11 facts on the economic recovery from the COVID-19 pandemic

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Mitchell barnes , mitchell barnes former research analyst - the hamilton project lauren bauer , and lauren bauer fellow - economic studies , associate director - the hamilton project @laurenlbauer wendy edelberg wendy edelberg director - the hamilton project , senior fellow - economic studies @wendyedelberg.

September 29, 2021

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Despite the headwinds created by the Delta COVID-19 variant, the economy is recovering. Economic growth during the pandemic has generally surpassed consensus expectations while households and businesses have maintained a surprising amount of activity and spending while social distancing.

The strength in economic output was, in part, a result of the enormous legislative response to both the pandemic and to the human hardship it caused. This includes laws passed in 2020 and 2021 by Congress, chief among them the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Consolidated Appropriations Act, and the American Rescue Plan Act. Successive rounds of substantial fiscal support have boosted economic activity since March 2020 and are projected to continue to do so through 2023. To give a sense of the potential impact of federal action on the economy, Edelberg and Sheiner (2021a) estimated that a package of similar magnitude to the American Rescue Plan would boost economic output by 4 percent in 2021 and 2 percent in 2022.

These 11 facts on the economic recovery from the COVID‑19 pandemic build on much of The Hamilton Project’s work over the past year and a half.

• Since the onset of the pandemic, The Hamilton Project has provided guidance to policymakers on the fiscal policy response writ large ( Edelberg and Sheiner 2020 , 2021a , 2021b ; Shambaugh 2020a , 2020b , 2020c , 2020d , 2020e ).
• In the summer and fall of 2020, The Hamilton Project published essays from leading economic thinkers projecting how COVID-19 would change the economy ( Autor and Reynolds 2020 ; Edelberg and Shambaugh 2020 ; Hardy and Logan 2020 ; Rose 2020 ; Stevenson 2020 ), provided interim evidence on the state of the economy ( Bauer, Broady, et al. 2020 ), and published rapid evaluations and policy proposals on nutrition assistance ( Bauer, Pitts, et al. 2020 ) and small business ( Hamilton 2020 ).
• The Hamilton Project has focused on the disparate impact of the pandemic and its economic consequences on women ( Bauer 2021 ; Bauer, Buckner, et al. 2021 ; Bauer, Estep, and Yee 2021 ), communities of color ( Aaronson, Barnes, and Edelberg 2021 ; Broady et al. 2021 ; Grooms, Ortega, and Rubalcaba 2020 ), and frontline essential workers ( Nunn, O’Donnell, and Shambaugh 2020 ; O’Donnell 2020 ).
• The Hamilton Project has focused on providing research regarding critical policy areas, including food insecurity ( Bauer 2020a , 2020b ; Bauer and Schanzenbach 2020 ), housing insecurity ( Broady, Edelberg, and Moss 2020 ; Edelberg et al. 2021 ), and labor market distress ( Aaronson and Edelberg 2020 ; Bauer, Dube, et al. 2021 ; Bauer, Edelberg, and Parsons 2020 ; Gilarsky, Nunn, and Parsons 2020 ; Nunn 2020 ; Nunn and O’Donnell 2020 ; Nunn, Parsons, and Shambaugh 2020 ).
• The Hamilton Project has commissioned policy proposals to rethink the social insurance system ( Barnes et al. 2021 ), including unemployment insurance ( Dube 2021 ), paid leave ( Byker and Patel 2021 ), housing ( Collinson, Ellen, and Keys 2021 ), child care ( Davis and Sojourner 2021 ), workforce development ( Holzer 2021 ), and postsecondary education ( Arum and Stevens 2020 ).

Based on this body of work and the facts in this paper, we draw the following conclusions at this point in the economic recovery. First, the initial rapid economic recovery and expected slowing creates risks that policymakers should heed. Second, fiscal support has been essential to accelerating the recovery. Third, greater federal investment in infrastructure, both physical and human, is key to improving the country’s longer-term economic prospects.

The Economic Recovery

With the ongoing effects of fiscal support, pent-up demand from consumers for face-to-face services, and the strength in labor markets and asset prices, economic growth is poised to be strong for the remainder of 2021. Indeed, the Congressional Budget Office (CBO) projects that real GDP will grow 7.4 percent from the fourth quarter of 2020 to the fourth quarter of 2021 (CBO 2021c). Moreover, CBO predicts that, by the middle of 2022, real GDP will exceed its sustainable level by 2.5 percent. The sustainable level of GDP, also known as potential output, is not a ceiling. Instead, it is the estimated level of output, given current laws and underlying structural factors, that the economy can achieve without putting upward pressure on inflation. As the factors boosting growth in the short term begin to wane, real GDP growth is expected to slow significantly.

CBO’s projection is subject to a great deal of uncertainty. In particular, the resurgence in the pandemic stemming from the Delta variant, vaccine hesitancy, and the slowness in vaccinating children ages 12 and younger appear to have dampened the growth of consumer demand and employment. Recent data suggest that the latest COVID-19 wave might be waning. However, if the Delta variant—or others that take its place—continue to affect consumer behavior and supply chains, the economic recovery will be notably slower.

In addition, although consensus projections are for a soft landing, including a couple of quarters with GDP roughly moving sideways, the slowdown could be more abrupt and painful than those projections suggest. There are actions that Congress could take to help avoid a painful slowdown in activity—both by fine-tuning the timing of spending and by focusing resources on policies that boost potential output. For example, changes in policy that repurpose fiscal support from boosting current aggregate demand to policies that would boost the economy’s potential (such as federal investment in infrastructure that would increase labor supply and human capital) would increase the chances of a soft landing, in part by raising the landing area to a higher level.

The Uneven Nature of the COVID-19 Pandemic and Economic Recovery

As of September 26, 2021, more than 687,000 people in the United States have died from COVID-19; and more than 4.7 million have died worldwide (Johns Hopkins 2021). At the onset of COVID-19, the virus displayed clear geographic trends, beginning in densely populated coastal cities then spreading to more rural parts of the country (Desjardins 2020). With the pandemic first hitting the Northeast, in April of 2020 New York and New Jersey accounted for more than 60 percent of deaths and more than 40 percent of hospitalizations from COVID-19. The Delta variant and vaccine hesitancy have changed the geographic patterns: as shown in figure A-1, since mid-July 2021 patients hospitalized with COVID-19 in the South have risen to account for nearly two‑thirds of the US total, with half of those patients in Florida and Texas (broken out from the rest of the region in the figure).

The economic downturn caused by the pandemic has created widely different experiences across sectors and demographic groups. In the spring of 2020, spending on consumer services sharply contracted and has yet to fully recover. Indeed, of the 22 million total jobs lost in March 2020, nearly 19 million were in service-providing businesses, including a decline of 8 million in leisure and hospitality. Leisure and hospitality has added back more than 6.5 million jobs so far; as a result, it is still 10 percent short of returning to its pre-pandemic level, and even farther below its expected level in the absence of the pandemic. Other industries, such as financial services, that experienced shallower dips in employment during the onset of the pandemic, have also been the quickest to recover as their workforces were better able to shift to remote work.

Those sector dynamics disproportionately hurt women, non-white workers, lower-wage earners, and those with less education (Stevenson 2020). Because workers among those groups were more likely to be employed in the services sector, and in particular in the leisure and hospitality sector, they experienced job losses at much higher rates. For example, the gap in the rates of unemployment between Black and white men jumped from 3 percentage points to 6 percentage points during the initial downturn. By July, that gap had partially fallen back and was 4 percentage points.

The uneven recovery is also evident when we focus on consumer spending at retail establishments. Between February and April 2020, overall retail sales sank 22 percent before quickly recovering to their pre-pandemic level just a few months later. As people began social distancing, spending shifted to at-home consumption, benefiting businesses like online retailers, grocery stores, and suppliers of building and garden materials. Indeed, spending on total retail sales has averaged 16 percent higher than its pre-pandemic level so far this year. At the same time, some categories of retail sales were severely depressed until showing signs of recovery in March of this year; those include in-person dining and spending on clothes, electronics, and appliances.

Overall, the pandemic continues to weigh on aggregate demand for goods and services. In addition, bottlenecks and supply shortages have created challenges for businesses to meet consumer demand for some products, particularly as consumer demand has shifted wildly. Also, the pace of hiring has not kept up with the pace of labor demand, as job matching has been held back by a number of factors described below.

Those developments have led to a notable increase in inflation. Because prices fell in 2020, one-year changes from August 2020 to August 2021 overstate the increase in inflation since the pandemic began. Instead, focusing on the annualized rate of inflation since February 2020 shows that inflation through August 2021 (as measured by the core consumer price index) was 3.1 percent, substantially lower than the one-year trend but still higher than any annual increase since the early 1990s.

There are two primary reasons why the rise in inflation is unlikely to persist. First, the significant shifts in demand and bottlenecks are a function of the recent, temporary pace of economic activity. For example, demand for automobiles recovered quickly during the pandemic to high levels even as production was curtailed, in part due to disruptions in the supply chain for critical semiconductors. The result has been a sharp increase in prices for new and used vehicles. Second, as production is increased (with normalization of global supply chains) and growth in demand abates, inflation should slow overall.

Nonetheless, certain factors will continue to create inflationary pressure; even with the slowdown, economic activity over the next year or so will continue to exceed the sustainable level. We might also see price spikes in certain services as demand shifts. For example, from March 2021 through July sales at restaurants were up 14 percent while sales at building materials and garden stores were down 11 percent. Such changes could lead to price surges at restaurants that more than offset softer prices at stores selling building materials and garden supplies. In addition, the rapid rise we have seen in home prices will likely translate into significantly higher rental costs across the country.

Fact 1:  In the second quarter of 2021, GDP returned to its pre-pandemic level.

Since the economy hit bottom in the second quarter of 2020, economic growth has surpassed consensus expectations formed at the beginning of the pandemic. As a result, in the second quarter of 2021 real GDP exceeded its pre-pandemic level. With economic growth boosted by the ongoing effects of the fiscal support enacted by Congress in 2020 and 2021, pent-up demand from consumers for face-to-face services, and the strength in labor markets and asset prices, real GDP appears on track to grow at the rapid pace of roughly 6 percent in 2021. To be sure, the Delta variant threatens that projection. However, even in the initial stages of the pandemic, when people had far less information and fewer mitigation resources, consumer spending and overall economic activity was remarkably resilient.

The surprising strength in GDP and the improvements in expectations are evident from CBO’s upward revisions to its projections (shown in figure 1). In the third quarter of 2020 the level of GDP was 4.8 percent above the projection that CBO published at the beginning of that quarter. Moreover, since July 2020 CBO has revised up projected GDP for 2023 by nearly 7 percent, where the projected level of GDP at the end of 2023 is now 2 percent above CBO’s pre-pandemic forecast. Nonetheless, through 2023 the cumulative shortfall in real output relative to a pre-pandemic projection is expected to total about $400 billion in 2012 dollars (CBO 2020a, 2021c). Note that CBO’s projections show a soft landing, with real GDP showing only modest growth by late 2022. The slowdown could be more abrupt and painful than those projections suggest.

Fact 2: The sharp decline in employment in spring 2020, which was largely concentrated in the services sector, has only partially reversed.

Figure 2 shows the percent difference in overall employment from the peak month prior to recent economic downturns through the month where employment recovered to its previous business cycle peak. Across the labor market, employment is still down 5.3 million from February 2020 and down about 9 million from where trends in employment were headed to prior to the pandemic.

From February to April of 2020, employment declines in the leisure and hospitality sector accounted for about 40 percent of the total 22 million jobs that were lost. Conversely, a partial recovery in that sector has fueled employment growth since then. Overall, from February through July of this year, monthly employment rose by more than 700,000 on average. In August that pace slowed significantly, however. The resurgence of the pandemic likely held back the recovery in the leisure and hospitality sector, which saw no net gain in employment in August. In that sector, employment is still down 1.7 million jobs from February 2020.

In comparison to previous recessions, the COVID-19 recession has been worse for the services sector relative to the goods sector. Consider the average outcomes across the four recessions from 1981 to 2019, 18 months from when the different recessions began: employment in the service sector was 1 percent below its pre-recession peak and employment in the goods sector was 10 percent below its peak. In contrast, as of August 2021 employment in the service sector was still 4 percent below its February 2020 level and employment in the goods sector was 3 percent below.

Fact 3: Millions of workers are no longer eligible for Unemployment Insurance.

Over the summer of 2021 in some states, and in the first week of September 2021 in the remainder of states, enhanced UI expired. That set of policies had significantly expanded eligibility to workers not covered by regular UI (Pandemic Unemployment Assistance [PUA]), extended the number of weeks that a worker could receive UI (Pandemic Emergency Unemployment Compensation [PEUC]), and increased the generosity of benefits (Federal Pandemic Unemployment Compensation [FPUC]). Prior to the CARES Act, which created PUA, PEUC, and FPUC, only 30 percent of workers were eligible for unemployment compensation.

Figure 3 shows the total number of unemployed workers superimposed over weekly continued UI claims for regular UI benefits and Extended Benefits, which automatically extends weeks of eligibility based on a state’s economic conditions, as well as claims for emergency programs: PUA and PEUC.

Note that the level of unemployment greatly underestimates the number of people who lost jobs during the pandemic. To be described as officially unemployed, a person must be actively looking for work; however, millions of people effectively have left the labor force since March 2020 but were eligible for the expanded UI benefits. At the time that the emergency programs expired, there was a gap of more than 5.5 million workers who were in the labor market and unemployed, but not receiving UI. We project that gap to close only modestly through the end of this year.

Fiscal support has helped people prioritize their health over labor market income, which was certainly one of the goals when the support was put in place in the spring of 2020 and when it was reauthorized several times. Preliminary analysis suggests that UI generosity had a modest effect on recipients’ job-finding rates (Petrosky-Nadeau and Valletta 2021). Nonetheless, we see no compelling evidence that the cancellation of those benefits so far has led to significant increases in aggregate employment (Coombs et al. 2021; Pardue 2021). On the other hand, the abrupt elimination of access to UI benefits for millions of people creates financial hardship for those who are unable to work owing to health risks or other constraints.

Fact 4: The number of job openings and the number of workers quitting their jobs is higher now than in the past 20 years.

Despite job openings being their highest since the end of 2000 (the earliest available data), several factors are holding down employment gains. One factor is that the share of workers quitting jobs each month is at a series high. As figure 4 shows, the quit rate generally moves with the job opening rate, since workers are more likely to switch jobs in a strong labor market. Moreover, in the current environment the composition of labor demand is changing, and workers may be taking time to move from temporary jobs they took during the pandemic. Taken together, record job openings, the slowness of job matching, and the depressed level of labor force participation has created wage pressure, particularly for workers in the service sector, for younger workers, and for workers with less formal education.

In addition to the depressed rate of job matching, also worrying is the lack of recovery in the labor force participation rate, which is the share of the population working or actively seeking work. That rate fell from 63 percent to 60 percent between February and April of last year, when nearly 8 million workers left the labor force. The participation rate recovered about halfway by June 2020, but has remained stubbornly depressed since then.

Factors unique to the pandemic have disproportionately affected labor force participation among certain groups even if these changes do not meaningfully affect aggregate levels (Furman, Kearney, and Powell 2021). For example, among mothers of elementary school–aged children—which is the demographic likely bearing the brunt of school closures (Amuedo-Dorantes et al. 2020)—the share that is employed fell more than that of mothers who did not have children in elementary school (Bauer, Dube, et al. 2021). Consequently, addressing the child-care crisis moves in the right direction but will not on its own make up the ground that has been lost in aggregate labor force participation.

Fact 5: Even with recent jumps in inflation, lower income workers are seeing increases in real wages.

Upward pressure on wages has been good news, particularly for low-income workers and workers in certain industries. As shown in figure 5, wages for those in the bottom quartile of the wage distribution are up 7.0 percent from their pre-pandemic level, or 4.6 percent at an annual rate. That rate of growth is close to what that group experienced in 2019, when the consensus held that the labor market was relatively tight. Some sectors have seen particularly strong wage gains. For example, over the past 12 months average hourly earnings in the leisure and hospitality sector have grown nearly twice as fast as the overall private industry average. Other sectors seeing strong gains in hourly earnings include retail trade, transportation and warehousing, and financial activities.

Because of recent increases in the rate of inflation, workers’ purchasing power is not rising as fast as nominal wages. Price increases in recent months led to declines in real wages from March to June 2021. Those declines partly offset increases in real wages earlier in the pandemic for wage-earners in the bottom quartile, when inflation was soft and nominal wages were rising. In July and August real wages for that group notably accelerated. Overall, from February 2020 to August 2021 real wages for the bottom quartile have risen 2.4 percent, or 1.6 percent at an annual rate. That is considerably below the rate we saw in 2019 when real wage growth was 2.4 percent at an annual rate for the bottom quartile. Moreover, real wages are roughly unchanged for those in the highest quartile, in contrast to a gain of 0.8 percent in 2019.

Fact 6: Post-pandemic, income after government taxes and transfers, as well as household saving, have been above their recent trends.

Disposable personal income (DPI, or total aftertax income) in 2020 and so far in 2021 has been higher than if DPI had simply grown at its trend rate of the previous five years. In aggregate, DPI has so far been higher than trend by a total of $1.4 trillion since the start of the pandemic.

In 2020 weak aggregate compensation of employees was more than offset by a sharp increase in government benefits, leaving total DPI a cumulative $630 billion above its trend level over the course of that year (figure 6). As a result of additional dispensation of government social benefits to households in January and March of this year, DPI has been higher, on average, by about $115 billion each month since January than if it had grown at its trend pace. Since March of this year those benefits have come down sharply but remain elevated. Under current law, the boost to DPI should fully wane by early next year. (See Alcala Kovalski et al. 2021 for related information about the waning fiscal support.)

As a result of the significant boosts to DPI and restrained services spending during the pandemic, aggregate household saving has skyrocketed. In every month from March 2020 through April of this year, the rate of saving was higher than in the past four decades; in some months it was roughly double the previous post–World War II peak. In total, households have roughly $2.5 trillion more in savings than if DPI and spending had grown in line with trend rates in the five years prior to the pandemic. Moreover, home prices and stock market prices have surged, leading to large increases in household wealth. Those resources will help to finance the pent-up demand for forgone spending. Ultimately, households will view the increase in savings and wealth as financial resources to support long-term, relatively steady consumer spending.

Fact 7: Fiscal support led to a reduction in poverty in 2020.

By the Official Poverty Measure (OPM), poverty increased from 10.5 percent to 11.4 percent from 2019 to 2020. After taking into account the enormous fiscal support provided to households in 2020, the percentage of the US population in poverty, as measured by the Supplemental Poverty Measure (SPM), fell from 12 percent to 9 percent (figure 7). While poverty as measured by the SPM is typically lower than OPM for children, 2020 was the first time that SPM was lower than the OPM overall.

The two policies that had the most significant effects relative to earlier years, because they were the most changed from prior policy, were the expansion of unemployment compensation and checks to households. If Congress had not enacted relief for families, SPM poverty would have risen to 12.7 percent rather than falling to 9.1 percent.

Another factor behind the decrease in poverty was the relatively strong wage growth for those at the bottom of the income distribution who remained employed (see fact 5). Notably, those wage gains came on the heels of strong wage growth in 2018 and 2019, when the tight labor market benefited lower-wage workers.

In 2021 continued fiscal support—particularly the full refundability of and the increase in the child tax credit and increases to the Supplemental Nutrition Assistance Program (SNAP) maximum benefit—as well as the continued labor market recovery should help to lift households out of poverty. Sustained progress in reducing post-tax-and-transfer poverty as measured in the SPM is possible through making permanent some of the policies enacted to counter the COVID-19 recession.

Fact 8: To date, 36 states have made progress in catching up on delinquent rent and mortgage payments.

To help Americans struggling to make mortgage and rent payments in the midst of a sharp contraction in labor income in the spring of 2020, policymakers put in place several relief programs. Those programs initially took the form of foreclosure and eviction moratoria and later also included financial support.

Delinquent mortgage borrowers experiencing economic hardships related to the pandemic, who had a federally backed mortgage, which includes mortgages backed by Federal Housing Administration, Veterans Administration, Fannie Mae, and Freddie Mac loans, were automatically eligible for forbearance through September 30, 2021. The government put in place help for mortgage servicers who are generally required to make payments to investors regardless of whether borrowers are delinquent. According to the Federal Reserve Bank of New York, forbearance plans disproportionately benefitted low-income borrowers, especially those holding FHA-insured loans and those living in disadvantaged neighborhoods (Haughwout, Lee, Scally, and van der Klaauw 2021). In addition, Congress’s American Rescue Plan provided nearly $10 billion to help homeowners who were behind on their mortgage and utility payments.

The federal eviction moratorium expired in August 2021, although some states have extended such protections. The federal government has allocated $46.5 billion in relief to help renters make their back payments and to help landlords who are owed those payments. State and local grantees had provided only $5.1 billion of the first $25 billion allocated for emergency rental assistance through July 2021 and news reports (Siegel 2021) suggest distribution of aid continues to be slow, even with recent US Department of the Treasury (2021) guidance to expedite delivery. With regard to the money that was distributed in the first quarter of 2021, more than 60 percent of households who received aid had household incomes under 30 percent of typical incomes in their geographic area.

Nonetheless, the broader fiscal support and the partial recovery in the labor market has helped to reduce the number of people who are behind on their payments. Figure 8 shows how much progress has been made in getting caught up on rent or mortgage payments by state, from each state’s peak to the most recent data spanning July and August. Three-quarters of the states reached their highest share of missed rent or mortgage between December 2020 and March 2021. Since peaking, the share of residents who reported missing rent or mortgage payments is lower in 36 states by statistically significant amounts.

Fact 9: The strength in durable goods spending and weakness in spending on consumer services stands in sharp contrast to previous recoveries.

Together, social distancing and substantial support to households led to a surge in spending on durable goods even as households curtailed spending on services—a dramatic departure from behavior in more-typical recessions. As shown in figure 9a, overall real spending on goods initially sank 13 percent from February to April of 2020, but then quickly rose and had exceeded its pre-pandemic level by June. This rise included purchases such as vehicles, household furniture, and recreational equipment; after adjusting for inflation, so far in 2021 purchases of those durable goods have averaged 25 percent higher than pre-pandemic spending. In contrast, spending on services—many of those being face-to-face transactions such as live entertainment and dining at restaurants—fell steeply during the pandemic. Real services spending dropped more than 20 percent in the spring of 2020 and has yet to recover to pre-pandemic levels.

These patterns diverge from prior recessions. In most prior recessions, spending on durable goods remains subdued for an extended period, as in the case of the Great Recession where 18 months into the recovery, goods expenditures remained 7 percent below the pre-recession peak. In addition, figure 9b shows that, in each of the prior three recessions, spending on services temporarily plateaued in the first year of recovery before resuming growth. But in none of these prior recessions did services dip below their pre-recession levels for any sustained period—another sign of the uniqueness of the COVID-19 recession.

In recent months, demand has begun shifting back toward services as people begin resuming normal activities. From March to July, goods purchases declined moderately, while spending on services climbed 3 percent; notably, spending on live entertainment, hotels, and public transportation collectively increased by 35 percent over those four months.

Fact 10: Retail inventories are unsustainably low.

Through August 2021, much of the consumer demand for goods has been met by drawdowns of inventory. As shown in figure 10, the retail inventory-to-sales ratio spiked at the beginning of the pandemic when spending plummeted. Since then, however, the ratio has fallen precipitously. This is particularly true for the automotive sector, where shortages of semiconductors have constrained production. Even outside of that sector, production has been insufficient to keep up with demand. Indeed, unfilled orders and delivery times are elevated across the manufacturing sector. Disruptions in global supply chains have been a continuing obstacle, in particular backlogs at ports that have increased the cost of shipping to historic highs.

On the one hand, capacity utilization in the manufacturing sector has recovered close to its pre-pandemic level. On the other hand, historical patterns and recent surveys of manufacturers suggest that they will increase utilization well beyond that level to replenish inventories as demand recovers.

In addition to investment in inventories, survey data suggest that investment to expand capacity and productivity is poised to increase. Private investment in equipment and structures has partially rebounded since the second quarter of 2020 but has not yet returned to pre-pandemic trends. As of the first quarter of 2021, investment in business equipment had rebounded as a share of potential output, but additional investment is required to make up for lost investment during the pandemic. A rebound in investment in structures is more than accounted for by investment in residential structures; in fact, investment in residential structures as a share of output is back to levels not seen since 2007. Nonresidential structure investment, however, is still down as a share of potential output.

Fact 11: There were more new business applications and fewer bankruptcies in 2020 and 2021 than in 2018 and 2019.

Newly created businesses appear to be a major source of production of the goods and services that households are demanding. Figure 11a shows new business applications of firms that the Census Bureau characterizes as having a high propensity to employ workers. Since the summer of 2020, we have seen the highest level of applications since the agency began to track the series in 2004. Applications have perhaps reflected new business opportunities in the wake of the pandemic. The prospective new businesses are concentrated in online retail, which makes up a third of the increase in total new applications, and in service sector industries, which suffered some of the largest employment losses early last year (Haltiwanger 2021).

In the past year and a half, fewer firms have failed than initially feared, due in part to fiscal support like the Paycheck Protection Program that offered forgivable loans to small- and medium-sized businesses. Figure 11b compares cumulative commercial bankruptcies for the past four years. The full year 2020 ended with 17 percent fewer bankruptcies than in 2019, while 2021 is currently on track to record the fewest commercial bankruptcy filings since at least 2012 (when the data became available). More specifically, Chapter 7 filings and Chapter 13 filings, which represent asset liquidation and those of sole proprietorships, were 16 percent and 45 percent lower in 2020 than 2019, respectively. In contrast, Chapter 11 filings, which historically have reflected the reorganizations of large firms, jumped 29 percent in 2020. That increase also likely reflects legislation enacted in February 2020 and then expanded under the CARES Act, which offered smaller businesses the ability to reorganize under Chapter 11 and thus remain viable.

Although the business sector appears to have done well overall, some acutely affected sectors have seen more closures. For example, early evidence shows an elevated rate of exits for heavily COVID-affected businesses, such as barber shops and hair salons (Crane et al. 2021).

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Three Policy Priorities for a Robust Recovery

When the Group of Twenty finance ministers and central bank governors gather in Jakarta, in person and virtually, this week, they can take inspiration from the Indonesian phrase, gotong royong, “working together to achieve a common goal. This spirit is more important than ever as countries are facing a tough obstacle course this year.

The good news is that the global economic recovery continues, but its pace has moderated amid high uncertainty and rising risks. Three weeks ago, we cut our global forecast to a still-healthy 4.4 percent for 2022, partly because of a reassessment of growth prospects in the United States and China.

Since then, economic indicators have continued to point to weaker growth momentum , due to the Omicron variant and persistent supply chain disruptions. Inflation readings have been higher than expected in many economies; financial markets remain volatile; and geopolitical tensions have sharply increased.

That is why we need strong international cooperation and extraordinary agility. For most countries, this means continuing to support growth and employment while keeping inflation under control and maintaining financial stability—all in the context of high debt levels.

Our new report to the G20 shows just how complex this obstacle course is and what policymakers can do to get through it. Let me highlight three priorities :

First, we need broader efforts to fight ‘economic long-Covid’

We project cumulative global output losses from the pandemic of nearly $13.8 trillion through 2024. Omicron is the latest reminder that a durable and inclusive recovery is impossible while the pandemic continues.

But considerable uncertainty remains about the path of the virus post-Omicron, including the durability of protection offered by vaccines or prior infections, and the risk of new variants.

In this environment, our best defense is to move from a singular focus on vaccines to ensuring each country has equitable access to a comprehensive COVID-19 toolkit with vaccines, tests, and treatments. Keeping these tools updated as the virus evolves will require ongoing investments in medical research, disease surveillance, and health systems that reach the “last mile” into every community.

Upfront financing of $23.4 billion to close the ACT-Accelerator funding gap will be an important down payment on distributing this dynamic toolkit everywhere. Going forward, enhanced coordination between G20 finance and health ministries is essential to increasing resilience—both to potential new SARS-CoV-2 variants, and future pandemics that could pose systemic risks.

Ending the pandemic will also help address the scars from economic long-COVID . Think of the profound disruptions in many businesses and labor markets. And think of the cost to students worldwide, estimated at up to $17 trillion over their lives due to learning losses, lower productivity, and employment disruptions.

School closures have been especially acute for students in emerging economies where educational attainment was much lower to begin with—threatening to compound the dangerous divergence among countries.

What can be done? Strong policy action. Scaling up social spending, reskilling programs, remedial training for teachers and tutoring for students will help economies get back on track and build resilience to future health and economic challenges.

Second, countries need to navigate the monetary tightening cycle

While there is significant differentiation across economies and high uncertainty going forward, inflation pressures have been building in many countries, calling for a withdrawal of monetary accommodation where necessary.

Going forward, it is important to calibrate policies to country circumstances. It means withdrawal of monetary accommodation in countries such as the United States and the United Kingdom, where labor markets are tight and inflation expectations are rising. Others, including the euro area, can afford to act more slowly, especially if the rise in inflation relates largely to energy prices. But they, too, should be ready to act if economic data warrants a faster policy pivot.

Of course, clear communication of any shift remains essential to safeguard financial stability at home and abroad. Some emerging and developing economies have already been forced to combat inflation by raising interest rates. And the policy pivot in advanced economies may require additional tightening across a wider range of nations. This would sharpen the already difficult trade-off countries face in taming inflation while supporting growth and employment.

To prepare for this, borrowers should extend debt maturities where feasible now , while containing a further buildup of foreign currency debts. When shocks do come, flexible exchange rates are important for absorbing them, in most cases, but they are not the only tool available.

In the event of high volatility, foreign exchange interventions may be appropriate, as Indonesia successfully did in 2020. Capital flow management measures may also be sensible in times of economic or financial crisis: think of Iceland in 2008 and Cyprus in 2013. And countries can take macroprudential measures to guard against risks in the non-bank financial sector or where property markets are surging. Of course, all these measures may still need to be combined with macroeconomic adjustments.

In other words, we need to ensure that all countries can move safely through the monetary tightening cycle.

Third, countries need to shift their focus to fiscal sustainability

As countries emerge from the grip of the pandemic, they need to carefully calibrate their fiscal policies . It’s easy to see why: extraordinary fiscal measures helped prevent another Great Depression, but they have also pushed up debt levels. In 2020, we observed the largest one-year debt surge since the second world war, with global debt—both public and private— rising to $226 trillion .

For many countries, this means ensuring continued support for health systems and the most vulnerable, while reducing deficits and debt levels to meet their specific needs. For example, a faster scaling back of fiscal support is warranted in countries where the recovery is further ahead. This in turn will facilitate their shift in monetary policy by reducing demand and thus helping to contain inflationary pressures.

Others, especially in the developing world, face far more difficult trade-offs . Their fiscal firepower has been scarce throughout the crisis, which has left them with weaker recoveries and deeper scars from economic long-Covid. And they have little scope to prepare for a post-pandemic economy that is greener and more digital.

For example, the IMF last year described how green supply policies , including a 10-year public investment program, could raise annual global output by about 2 percent compared to the baseline on average over 2021-30.

All these policy actions can help us find a new modus vivendi for a more shock-prone world . But they may be hampered by debt. We estimate that about 60 percent of low-income countries are in or at high risk of debt distress, double 2015 levels. These and many other economies will need more domestic revenue mobilization, more grants and concessional financing, and more help to deal with debt immediately .

That includes reinvigorating the G-20 Common Framework for debt treatment . This should start with offering a standstill on debt service payments during the negotiation under the framework. Quicker and more efficient processes are needed, with clarity on the steps to go through, so that everyone knows the road ahead—from formation of creditor committees to an agreement on debt resolution. And make the framework available to a wider range of highly indebted countries.

The IMF’s role

The IMF plays an important role in this area by providing macroeconomic frameworks and debt sustainability analyses. And we encourage greater debt transparency : by requesting greater disclosure of what a member country owes and to whom when it seeks IMF financing, and by working with our members through the IMF-World Bank Multi-Pronged Approach to debt vulnerability .

We also need to build on the historic allocation of Special Drawing Rights of $650 billion. As well as holding the new SDRs as reserves, some members have already begun to put them to good use. For example: Nepal for vaccine imports; North Macedonia for health spending and pandemic lifelines; and Senegal to boost vaccine production capacity.

To magnify the impact of the allocation, we encourage channeling of new SDRs through our Poverty Reduction and Growth Trust , which provides concessional financing to low-income countries, and the new Resilience and Sustainability Trust .

With its cheaper rates and longer maturities, the RST could fund climate, pandemic preparedness, and digitalization policies that would improve macroeconomic stability for decades to come. The G20 has given its strong backing to the RST, and we aim to have it fully operational this year.

As countries face up to multiple challenges, the IMF will support them with calibrated policy advice, capacity development, and financial assistance where needed. The key is to bring agility into all aspects of policymaking—but even that is not enough.

We also need to follow the spirit of Indonesia’s motto, Bhinneka Tunggal Ika —"Unity in Diversity.” Together we can get through the obstacle course to a durable recovery that works for all.

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Report | Budget, Taxes, and Public Investment

Principles for the relief and recovery phase of rebuilding the U.S. economy : Use debt, go big, and stay big, and be very slow when turning off fiscal support

Report • By Josh Bivens • November 24, 2020

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The economic shock of the COVID-19 pandemic demands an overwhelming policy response. The pandemic has both caused horrendous economic harm and exposed the rot in our economy’s ability to provide security for all. The policy response must first stop the economic bleeding caused by the pandemic, and then second, build a more resilient economy that repairs the rot.

By “stop the bleeding” we mean using fiscal policy to end the crisis of joblessness and restore the labor market to a reasonable degree of health. Failing to invest enough to sustain a healthy labor market would fatally compromise both the political and the economic ability to structurally reform the economy’s key institutions to create fairer outcomes. We have seen this failure before, with fiscal recovery efforts following the Great Recession of 2008–2009 that were insufficient and too short-lived. As a result of this austerity, it took a full decade for the labor market to return to even its pre–Great Recession health (which was too modest a benchmark to begin). 1 It seems clear that a key reason why the Obama administration was unable to get ambitious reform efforts finished after its first year in office was the continued intense labor market distress.

This memo explains why policymakers need to pass roughly $3 trillion in debt-financed fiscal support now, with the first $2 trillion hitting the economy between now and mid-2022. This amount of upfront stimulus, combined with investments that ensure a very slow phaseout of this fiscal support, are needed to ensure a return to a high-pressure, low-unemployment labor market by mid-2022. Specifically, the memo calls on policymakers to take the following actions:

• Finance fiscal support with debt. The point of federal spending now is to boost aggregate demand growth (spending by households, businesses, and governments), so financing this support with taxes would make it less effective. 2
• Aim for a high-pressure labor market by picking an ambitious unemployment rate target that constitutes labor market health. Pre-COVID, the unemployment rate hit 3.5% with no evidence that it was too low and likely to lead to a surge of inflation. We suggest targeting an overall unemployment rate of 3%. 3 Running the economy at this low level of unemployment for a sustained period creates a high-pressure labor market, one with enough competition for workers to drive faster and more equal wage growth and reduce race-based disparities in wages and unemployment.
• Refuse to accept the self-defeating notion that the COVID-19 shock will leave (or has already left) permanent and unfixable economic scars. Policymakers should run the economy hot and see how much we can heal the damage that the COVID-19 shock inflicted on measures like potential output. 4
• Avoid the premature and precipitous withdrawal of fiscal support by ramping up public investments in public goods that are appropriate to debt-finance even during times of full economic health. For the sake of future crises, we should also start building automatic triggers in things like unemployment insurance and aid to state and local governments. But, for the coming years, discretionary fiscal support should be continued. Specifically, to avoid tumbling down a fiscal cliff into an economic contraction in 2023, policymakers should ramp up public investments in such public goods as clean energy, energy efficiency, and early child care and education, and sustain these investments—and their debt-financing—at least through 2024.
• Finally, note that this $3 trillion in needed fiscal support is for hitting economic targets. Money is still clearly needed for virus containment and will be needed for rapid vaccine deployment in coming months. Public health measures are the most important part of the response to the pandemic, so whatever money can usefully help on this front should be added on top of this economic package of relief and recovery.

Below we elaborate on this proposal for $2 trillion in debt-financed fiscal support between now and the middle of 2022, followed by support on the order of $400 billion annually until the end of 2024.

Do not fear debt: Relief and recovery measures should be unambiguously debt-financed

The point of fiscal support is to increase spending by households, businesses, and governments to spur employers to hire. Tax increases put a drag on this spending. While the U.S. needs major progressive reform to taxes, as policymakers plan how to stop the economic bleeding caused by COVID-19, they should be thinking of how to maximize the plan’s stimulative effects, and this means financing with debt. Progressive tax reform, when it occurs, should target economic “bads” like emissions of greenhouse gases and the staggering number of socially unproductive financial transactions that funnel money to Wall Street. This reform should also aim to put a brake on rising inequality and reduce incentives for CEOs and other high earners to rig the rules of the economic game to transfer more money their way. 5

But there is no need to think about revenue as policymakers plan on how to stop the economic bleeding caused by COVID-19. All relief measures should be debt-financed. Even the “back-end” relief measures that help to avoid a sharp fiscal cliff as the front-end stimulus winds down should be debt-financed. Because any such back-end measures could in theory come on line with the labor market largely healed, optimally they should be measures that make sense to finance with debt even during times of full employment. Two such measures that meet this requirement are investments to mitigate the emission of greenhouse gases and investments to shore up our woefully underfunded early child care and education system (Gould and Blair 2020).

The logic of using debt even in normal times to finance these investments is clear: The vast majority of their benefits will accrue to future generations. But for the effects of climate change or present-day malinvestment in education, these future generations will almost surely be richer than present generations. Given this, borrowing from future generations to finance these types of investments makes perfect sense. Some hold the misconception that debt incurred always constitutes a burden on future generations. It does not. The heirs of a society and economy also receive any assets financed by debt, which in this case would be a cleaner, more energy-efficient economy and a better-educated workforce.

Go big and stay big: Do not repeat mistakes of past crises

Recovery from the Great Recession of 2008–2009 was agonizingly slow, largely because the admirable initial round of fiscal recovery efforts was too small and ended too quickly. Policymakers did not acknowledge what has become increasingly clear: Long-run trends (such as rising inequality) are making it harder and harder for the U.S. economy to generate sufficient spending by households, businesses, and governments (aggregate demand) to absorb the economy’s resources (including potential workers). 6 This “secular stagnation” means that fiscal support cannot be a one-shot “jump start” that can be pulled back quickly as private-sector demand generation roars to life. Instead, fiscal support must be large enough and last long enough that the boost provided ebbs only after the Federal Reserve begins raising interest rates. In short, there must be an attempt to overshoot the target to ensure that private-sector demand generation really is running fast enough when the last bit of fiscal support fades out. 7

When setting the target we should avoid fulfilling the bleakest prognosis by setting it too low. Economists and policymakers often express concern that severe recessions can permanently “scar” the economy’s underlying productive capacity (sometimes called potential output ), leading to slower growth for a long time—even after the short-run demand shortfall is rectified. 8 We should not assume this, and in particular we should not assume it when addressing a shock that is still less than year old. Given the very promising signs of a vaccine on the horizon, there is every reason to think that economic normalization will be possible in 2021, as long as recovery is not held back by a shortfall of demand. This means that policymakers’ goal today absolutely should be to return economic growth to the trajectory it was on before the shock . This goal will inform the assessment of how much fiscal support is needed.

For insight on the level of fiscal support needed when the economy is depressed and interest rates are stuck at near-zero like today, policymakers often look to measures of the “output gap”—the difference between what GDP is projected to be in coming months and years under current conditions (actual GDP) and projections of what it would be were the economy running at maximum sustainable output (potential GDP).

Figure A shows forecasts made by the Congressional Budget Office (CBO) for actual gross domestic product (GDP), a forecast for potential GDP made in January 2020 (pre-COVID-19) and a forecast for potential GDP made in July 2020.

It is far too soon to assume COVID-19 shock has permanently scarred U.S. growth : Forecasts for actual GDP and potential GDP (in January and July 2020), 2019–2025

The data below can be saved or copied directly into Excel.

The data underlying the figure.

Source: Data from Congressional Budget Office (2020a, 2020b).

Copy the code below to embed this chart on your website.

CBO has projected a large decline in potential output growth for coming years, as shown by the distance between the top and middle lines in the figure. To the degree that this is driven by estimates of the effect of the COVID-19 economic shock, this degradation of the economy’s potential should not be taken as a given. 9 Specifically, focus on the difference between the forecast of actual GDP by the middle of 2022 and the two forecasts of potential GDP. If one believed the July 2020 forecast of potential GDP (with the effect of COVID-19 baked in), then one would think the “output gap”—the difference between potential GDP and actual GDP averaged across every quarter between now (November) and the middle of 2022 (July)—is 4.1%. If one instead compares the forecast of actual GDP with the January 2020 forecast of potential GDP, the gap averaged across quarters in the same period is 7.7%.

For our goal of estimating the size of the stimulus needed to close the real output gap, we land between the two CBO estimates. Specifically, we estimate an output gap based on comparing the forecast of actual GDP with a forecast of potential GDP that is derived from projected unemployment rates. For these unemployment projections, we adjust CBO forecasts based on two factors: Unemployment has already fallen in the second half of 2020 more rapidly than CBO projected, yet reductions in labor force participation and the misclassification of unemployed workers as employed during the pandemic has led to official estimates of unemployment understating the true degree of labor market slack. Based on this adjusted unemployment projection, and applying historical relationships between unemployment and output gaps, we find that between now and the middle of 2022, there is an average output gap of 5.0%.

‘Going big’ means aiming for 3% unemployment

Additionally, CBO estimates of output gaps are based on assumptions that the unemployment rate should be roughly 4.5%. This actually represents some real progress. Before the Great Recession hit, CBO estimated this “natural rate of unemployment” to be 5.0%. But the unemployment rate reached 3.5% right before the COVID-19 shock, and yet there was no sign of economic “overheating”: Both interest rates and inflation were far below historical averages, and inflation continued to register below the Federal Reserve’s 2% target. Given the lack of recent overheating, and given especially that there are real benefits to running the economy “hot” after periods of steep recessions, policymakers should not aim to merely close the output gap, they should aim for a very low unemployment rate in the ensuing recovery. Specifically, it seems like 3.0% unemployment is a reasonable target. 10 It is possible that 3.0% is too ambitious, and that economic overheating will set in before we hit that rate, and the Federal Reserve governors might feel compelled to raise interest rates. But it is far more likely that the economy can sit at 3.0% unemployment—or even below—for quite some time before inflation rises fast enough and for long enough to compel the Fed to step in.

Most crucially, however, a scenario involving fiscal support that is strong enough to prompt a monetary policy offset is a sign of success, not failure . The entire point of fiscal support is to push the economy to a point where private-sector sources of demand growth are strong enough to keep the economy pinned at a healthily low unemployment rate even as extraordinary fiscal support is withdrawn. Providing enough fiscal support to overshoot the goal of closing CBO’s estimated output gap and instead hitting an unemployment rate of 3.0% would require an extra 1% of GDP in fiscal support. Applied to our adjusted output gap of 5% identified above, this means fiscal support in the next couple of years should be closer to 6% of GDP, or even a bit above given that social distancing measures might reduce the multiplier effects of stimulus in the very near-term.

Don’t withdraw too quickly: Ending fiscal support should be done very gradually

In the era of chronic demand shortfalls, fiscal policy measures to fight recessions should not be seen as jump-starting a car—providing a one-time burst that can be immediately removed. Private sources of demand generation in recent decades have been quite weak. This means that if large fiscal support is removed quickly, the fiscal contraction can overwhelm private sources of growth and tip the economy back into recession.

Figure B compares CBO’s forecast of actual GDP with two possible scenarios of fiscal support. Under the “short-lived stimulus” scenario, ambitious support is provided between now and the middle of 2022 but is removed quickly thereafter. Under the “long-lived stimulus” scenario, the same level of ambitious initial support is provided, but it is supplemented by a more gradual drawdown between mid-2022 and the end of 2024. Under the short-lived fiscal support scenario, the economy enters a period of substantial contraction in early 2023 as the rapid fiscal contraction overwhelms trend sources of private demand growth. Under the long-lived fiscal support scenario, the back-end support allows the economy to return to trend growth without ever entering an outright contraction.

Fiscal support needs to be big and long-lasting : Forecasts of actual GDP with no stimulus, short-lived stimulus, and long-lived stimulus, 2019–2025

Note: The forecast of actual GDP with no stimulus is from CBO. Construction of stimulus effects is described in Appendix A.

Source: Author’s analysis of data from CBO 2020b.

Putting it all together: How much and what should be in relief and recovery measures?

Closing an output gap of roughly 5% (a more realistic estimate than CBO’s for the reasons outlined above) and then overshooting to push the unemployment rate to 3% requires fiscal support equivalent to roughly 6%–7% of GDP. Given the unique nature of the COVID-19 economic shock, the most pressing part of this aid should be to provide relief to those made jobless by the pandemic. A clear model is the enhanced unemployment insurance (UI) provisions that were part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in the spring. These provisions significantly increased the generosity of UI payments and also expanded the universe of people eligible to receive UI. These are incredibly well-targeted measures, and would also serve to provide a powerful economic stimulus when we are able to relax virus-induced social distancing measures (Bivens 2020c). For the purposes of this memo, we assume that UI benefits are increased by $600 per week between now and the middle of 2022, eligibility expansions are maintained over this period, and available weeks of benefits are extended. Given the projected path of unemployment, these extended benefits will cost on average $250 billion at an annualized rate between now and the middle 2021.

Another obvious pressing need for relief and recovery measures is federal aid to state and local governments. State and local governments have revenue sources that have been damaged enormously by the COVID-19 shock. They also provide the front-line public response in many areas related to health and education—and both health and education services have been put under enormous strain by the virus and the need to respond safely. For this memo, we assume that $500 billion at an annualized rate is provided to state and local governments between now and the middle of 2022.

Besides enhanced UI benefits, a range of other targeted safety net measures would provide crucial relief to families and a needed spur to recovery once social distancing measures relax. We assume $100 billion at an annualized rate is provided in enhancements to the Supplemental Nutrition Assistance Program (food stamps), low-income rental assistance programs, and other targeted safety net measures in coming years.

Finally, we provide for public investments in early child care and education and in mitigating greenhouse gas emissions that ramp up immediately and reach peak levels of $400 billion annually by the fourth quarter of 2021. Crucially, these investments do not begin ramping down in 2022. Instead, they remain—and remain debt-financed—at least through the end of 2024. While these public investments will take time to ramp up to full potential, a key virtue is that they provide a very gradual ramping down of fiscal support over time, hence avoiding any sharp contraction. These investments are what kept the “long-lived-stimulus” line in Figure B from ever becoming outright negative.

Relief and recovery measures are just stage one of what is needed from here

A very substantial near-term, debt-financed package of relief and recovery is needed just to allow U.S. families to survive the coming years and to push the labor market back to genuine health by mid-2022, while avoiding a fiscal cliff that would cause contraction soon thereafter. It is important to note that these estimates only include what it would take for a return to health of the economy . Obviously the most important issue in the coming months will concern virus containment and the rapid deployment of vaccines. These public health measures will likely be expensive to do well, and this money should absolutely be spent (and debt-financed). Any cost for these public health measures should go on top of what is estimated for economic relief and recovery in this report.

Labor market normalization should not constitute the limits of economic policymakers’ ambition. The COVID-19 shock did not just cause enormous economic harm, it also exposed huge weaknesses in the economy’s ability to guarantee economic security—both now and when faced with future shocks. These weaknesses were bred by decades of intentional underinvestment and this underinvestment will need addressing in myriad transformative ways. 11

But unless we address the immediate crisis of the labor market, both the political and economic support for these longer-run measures to rectify past underinvestment will be crushed. Failure to engineer a rapid recovery from the Great Recession was politically poisonous to the prospects of progressive policy change more generally, as voters lost any confidence in the federal government’s capacity to effectively tackle big issues. On the economic side, there are numerous reasons why long-run investments to change the structure of the U.S. economy will have their greatest effects when the labor market is closer to healthy. Reforming social insurance systems, for example, is likely best done when the existing systems are not inundated by desperate claimants. Building up a stable, professionalized workforce for care work will become easier when the labor market is not so damaged that millions of potential workers will take nearly any job available. Granting workers greatly enhanced rights to join a union will likely lead to much better outcomes if it is not done in a context in which a large pool of unemployed workers gives employers a huge power advantage when bargaining. In short, stopping the economic bleeding first and fully is not a substitute or a distraction from the longer-run effort to create a fairer U.S. economy generally. It is instead a crucial first step.

As here and in earlier reports, the cautionary tale for future efforts is the failure to generate sufficient fiscal support for recovery from the Great Recession. Too many people blame the slow recovery from the Great Recession on largely irrelevant things like its association with a financial crisis. This is excuse-making that lets policymakers off the hook. The fact is that the too-slow recovery was driven by a fiscal policy response that was too weak. We should not make the same mistake following the COVID-19 recession.

Appendix A: Methods

This appendix explains how the effects of fiscal stimulus in Figure B were constructed. For the spend-out of unemployment insurance, we took the effect of enhanced UI benefits from May through July of 2020 on personal income, as measured by the Bureau of Economic Analysis (BEA) and divided by a measure of the unemployment rate in those months that accounted for misclassification within the Current Population Survey (CPS) and the falloff in labor force participation between January and those months. This gives a measure of additional UI payments per percentage point of unemployment. We then took a modified measure of CBO’s forecast for unemployment (CBO 2020b) and applied this measure to that forecast to obtain the extra UI spending that would result. 12

For the measure of federal aid to state and local governments, we first use estimates of the likely state and local budget shortfalls caused by the COVID-19 shock between now and the middle of 2022.

For the measure of safety net programs, we use the roughly $100 billion included for these programs in the HEROES Act (Health and Economic Recovery Omnibus Emergency Solutions Act) passed by the House of Representatives in June.

The modified CBO unemployment forecast accounts for the fact that CBO’s last projection was made in July 2020, and unemployment as reported by the Bureau of Labor Statistics (BLS) has recovered more rapidly than CBO forecast it would. Concretely, CBO forecasts unemployment averaging 13.3% in the third quarter of 2020, but it instead averaged 8.8%. However, accounting for the pandemic-induced rise in labor force nonparticipation and the rising misclassification in surveys would boost this 8.8% unemployment rate to roughly 12.2%. 13 From there, we allowed the unemployment rate to decline in percent terms at the same pace forecast currently by CBO.

We use this path of estimated unemployment rates that take account of pandemic-induced nonparticipation to back out an implicit output gap. Historically, each percentage point of unemployment over the CBO nonaccelerating inflation rate of unemployment (NAIRU) is associated with an increase in the output gap of 1.4 percentage points. This derived output gap is the one we identify in the paper as averaging over 5% between now (i.e., the third quarter of 2020—the latest date for which we have decent data) and the middle of 2022.

We assume that the full effect of UI benefits, aid to state and local governments, other safety net spending, and public investments hit the economy over six quarters. Although this is slightly more spread out over time than some other estimates of fiscal stimulus, a slower phase-in seems particularly appropriate in the current moment, as social distancing measures are almost sure to reduce any economic effect of relief and recovery spending for a couple of quarters at least (though these efforts will still be improving human welfare, if not GDP in full measure).

For multipliers we assume 1.5 for each provision. This is a small underestimate relative to some past research, but, again, these effects might be attenuated in the short run due to social distancing measures, so this seems like a safe estimate.

For our public investment measures, we assume they take a year of phasing in to reach the full $400 billion annualized spending. The difference between the “short-lived stimulus” and “long-lived stimulus” is simply that this fiscal support stays on line through the end of 2024.

Appendix B: Can automatic stabilizers substitute for the gradual phaseout of stimulus?

Some might wonder if putting triggers on key policies like UI and federal aid to state and local governments might substitute for passing fiscal support today that has a longer phaseout (as called for in this memo). It would absolutely be a good thing if new and improved “automatic stabilizers” that wind down only as key benchmarks of labor market health are reached were passed into law (see for example, Gould 2020). But even on top of much better triggers for making some of these policies automatic in the future, we also need to ensure long-lasting discretionary fiscal support in the coming years.

Automatic stabilizers, by definition, begin providing less fiscal support as the economy improves. In this way, unless the triggers for winding down are extremely powerful and long-lasting, automatic stabilizers are unlikely to provide enough fiscal support on their own to overshoot current estimates of the natural rate of unemployment and help push the economy all the way to 3% unemployment. Given the unique nature of the COVID-19 shock, a uniquely large and long-lasting fiscal support is needed to ensure that a fully healthy labor market is quickly regained.

If we pass powerful and well-calibrated triggers for programs like UI and for federal aid to state and local governments in coming years (and, again, we certainly should do that), the discretionary fiscal stimulus that will be needed in coming recessions will be far smaller. Most of the work in combatting the earliest phases of future recessions will be done by automatic programs.

1. Seen Bivens 2016 for documentation of the historically austere fiscal policy support given to recovery from the Great Recession.

2. See Bivens 2020a on the relationship between aggregate demand and debt-financed stimulus.

3. See Bivens 2020b on the lack of inflationary pressures stemming from a sub-4% unemployment rate in the pre-COVID-19 economy.

4. See Bivens 2019 and Girardi, Meloni, and Stirati 2018 on the potential long-run macroeconomic benefits of rapid and sustained aggregate demand growth.

5. See Piketty, Saez, and Stantcheva 2014 for evidence of the correlation between low top marginal tax rates and aggressive bargaining by high earners to increase their compensation.

6. See Summers 2014 for the first elucidation of this “secular stagnation” thesis. See Bivens 2017 for how it is likely driven in large part by rising inequality.

7. This logic is slightly different from, but largely related to, the arguments laid out in Krugman 2015.

8. See Ball 2014 for the logic and evidence that prolonged periods of demand shortfalls cause reductions in estimated potential output, as well as for some evidence that this “hysteresis” can be potentially reversed with a period of rapid demand growth.

9. Following the Great Recession, CBO began systematically downgrading its estimates of potential GDP growth as well. Even though this downgrading took place over a much longer time frame than the January-to-July period in which the latest potential output revisions took place, it likely was still quite misleading. Much of the decline in in potential output was likely driven by an aggregate demand shortage, and could have been substantially healed with a period of rapid aggregate demand growth (again, see Bivens 2019 and Girardi, Meloni, and Stirati 2018).

10. It is worth noting that an overall unemployment rate of 3% implies a Black unemployment rate of roughly 5%. While this would be a historically low Black unemployment rate, there likely would still remain a gap between white and Black unemployment. Macroeconomic policy alone is unlikely to completely erase the Black/white unemployment ratio, but macroeconomic policy can certainly make the gap much less pronounced.

11. For the overarching policy agenda indicating what is necessary to provide for a more efficient and far fairer U.S. economy, see EPI’s policy agenda, https://www.epi.org/policy/.

12. These unemployment adjustments follow the methodology used by Shierholz (2020).

13. For more on misclassification and other issues with the unemployment rate, see Shierholz 2020.

Ball, Lawrence. 2014. “ Long-Term Damage from the Great Recession in OECD Countries .” National Bureau of Economic Research (NBER) Working Paper, May 2014.

Bivens, Josh. 2016. Why Is Recovery Taking So Long—and Who’s to Blame ? Economic Policy Institute, August 2016.

Bivens, Josh. 2017. Inequality Is Slowing U.S. Economic Growth: Faster Wage Growth for Low- and Middle-Wage Workers is the Solution . Economic Policy Institute, December 2017.

Bivens, Josh. 2019. “ Looking for Evidence of Wage-Led Productivity Growth ” EPI Macroeconomics Newsletter , December 10, 2019.

Bivens, Josh. 2020a. “ Debt and Deficits in the Coronavirus Recovery: Answers to Frequently Asked Questions ” (fact sheet). Economic Policy Institute, July 2020.

Bivens, Josh. 2020b. “ The Signal the Unemployment Rate Provides Can Change a Lot over Time .” EPI Macroeconomics Newsletter , January 31, 2020.

Bivens, Josh. 2020c. “ Cutting Off the $600 Boost to Unemployment Benefits Would Be Both Cruel and Bad Economics .” Working Economics Blog (Economic Policy Institute), June 26, 2020.

Bureau of Economic Analysis. 2020. “ Effects of Selected Federal Pandemic Response Programs on Personal Income ” [online data table]. Published October 30, 2020.

Bureau of Labor Statistics (BLS). 2020a. “ Table A-1. Employment Status of the Civilian Noninstitutional Population .” Employment Situation data tables. Accessed November 2020.

Congressional Budget Office. 2020a. Budget and Economic Outlook, 2020 to 2030 . January 2020.

Congressional Budget Office. 2020b. Budget and Economic Outlook, 2020 to 2030 . September 2020.

Girardi, Daniele, Walter Paternesi Meloni, and Antonella Stirati. 2018. “ Persistent Effects of Autonomous Demand Shocks .” Institute for New Economic Thinking (INET) Working Paper, February 2018.

Gould, Elise. 2020. “ The Unemployment Rate Is Not the Right Measure to Make Economic Policy Decisions Around the Coronavirus-Driven Recession .” Working Economics Blog , Economic Policy Institute, March 20, 2020.

Gould, Elise, and Hunter Blair. 2020. Who’s Paying Now? The Explicit and Implicit Costs of the Current Early Care and Education System . Economic Policy Institute, January 2020.

Krugman, Paul. 2015. “ Rethinking Japan .” New York Times , October 20, 2015.

Piketty, Thomas, Emmanuel Saez, and Stephanie Stantcheva. 2014. “ Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities .” American Economic Journal: Economic Policy 6, no. 1, 230–271.

Shierholz, Heidi. 2020. “ Nearly 11% of the Workforce Is Out of Work with No Reasonable Chance of Getting Called Back to a Prior Job .” Working Economics Blog , Economic Policy Institute, June 29, 2020.

Summers, Lawrence. 2014. “ U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound .” Presentation to the National Association of Business Economists (NABE).

See related work on Budget | Unemployment insurance | Public Investment | Infrastructure | Recession/stimulus | Job creation | Deficits and debt | Unemployment | Jobs and Unemployment | Stimulus/stabilization policy | Public Investment | Coronavirus

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A closer look at the U.S. economic recovery and what comes next

Johns hopkins economist jonathan wright shares insights on key indicators for recovery amid the covid-19 pandemic as well as thoughts on what was learned during the great recession.

By Saralyn Cruickshank

Even as the U.S. Federal Reserve abruptly canceled plans for its annual in-person conference in Jackson Hole, Wyoming, due to rising coronavirus cases, Fed Chair Jerome Powell has been staunch in his opinion that the delta variant poses no substantial risk to U.S. economic recovery. During the now virtual event this weekend, the Fed is expected to announce rollbacks to financial and policy supports issued during the peak of the U.S. COVID-19 transmission, but the question still remains: How will the U.S. economy recover from a historic pandemic?

For insights, the Hub reached out to Johns Hopkins economist Jonathan Wright . An expert in econometrics, empirical macroeconomics, and empirical finance, Wright is also experienced in economic forecasting and analysis. The longtime university professor shared his thoughts about what the U.S. economic recovery might look like, what he'll be watching for, and what parts of the economy have already recovered—and might even be booming.

What are the economic challenges that have arisen this past year because of COVID-19?

The level of output (gross domestic product), which for the second quarter is back to where it was in 2019, is still below what we'd want it to be. Output is supposed to grow over time. And so there has been a period of a year and a half where there was no net growth, but worse than that, the level of employment is down by 7 million people. A lot of that is down to the labor force having shrunk—people aren't just not working, they're also not actively looking for a job. They may have retired earlier, for example. People are still afraid of getting sick, and that's driving them to stay out of the labor force. They have child care problems. And one other thing I think belongs on the list (though I wouldn't put it at top) is that the level of unemployment benefits might be discouraging some people from going back to work. The fact that the level of employment is still 7 million below where it was—including many people of so-called prime age, the 25-to-54-year-old group—that's still a big worry.

So, the reopening of the economy, perhaps not too surprisingly, has proved to be a slow and difficult process, even with all the stimulus in place. The recession ended in April 2020 as the economy has been growing since then, but the economy was in a very deep hole. The first part of the recovery was fast, but over the last year or so, has proceeded more gradually.

Last year there was a lot of talk about supply chain constraints causing economic problems. Are we still facing those?

Yes, we are still facing those as well. There are certain sectors with bottlenecks, semiconductors being one, and although it's not pervasive, there certainly are constraints which have affected some sectors like the automobile sector. International trade has been affected, so that would be another thing that's a part of restarting the economy that's running slowly. Supply chain constraints are causing inflation in some sectors. As a result, the Fed's preferred inflation measure is now running at 3.5%, which is above the long-run target. But firms are adapting to supply disruptions and will probably build more robust supply chains in the future.

What are some of the things that our economic institutions like the Federal Reserve can do to jump-start our economic recovery?

One thing is monetary policy, which is the level of interest rates, and the Fed has done all it can do there. The level of interest rates has been set to zero. It's not practical, at least in the U.S., to have rates below zero. They have also bought Treasury securities and mortgage-backed securities to try to directly lower longer-term interest rates. The Fed has effectively done everything it can to put the pedal to the metal.

The other thing is fiscal policy, which includes emergency spending and enhanced unemployment benefits. This has helped a great deal. It enabled people to maintain their spending when they otherwise would not have been able to. One person's spending is another person's income, and not having unemployment insurance is exactly the kind of thing that would have brought about a more intractable recession.

So fiscal policy has done a lot. Now, the question becomes, at what point does the fiscal policy, which is boosting demand, become too much? Becomes such that it just drives up prices because the productive capacity of the economy has been reached? I don't think we're there, but I think that's a legitimate question. Economists talk about the output gap, which is the difference between what the economy produces and what it is capable of producing. I think there is still an output gap—I think there are still unused resources. But a debate is appropriate about how far fiscal stimulus can go before it generates inflation. And by inflation, I'm not talking about temporary inflation to do with supply chain disruptions and that kind of thing, but a more persistent form of inflation.

One unfortunate potential side effect of everything that's been done is that asset markets—stock prices, prices of corporate bonds, securities, housing prices—are now very frothy and expensive. I don't worry too much about seeing consumer prices going up in an unsustainable way. To the extent that that happens, the Fed will have the means to slow the economy and to bring inflation under control, and will much prefer to do this than to worry about an economy stuck at zero interest rates. But I think there are worries about asset prices, and to some extent that may be setting up problems down the road. Not that it would have been appropriate for monetary policy to do any less because of those concerns, but asset prices are extremely elevated. That is the worry that we should have in the back of our heads as the economy gets back to health—that the valuations of our financial assets are in some cases very hard to justify.

Are there sectors where we already have recovered, or are we, across the board, still recovering compared to 2019?

I think there are many sectors that have not only recovered but have boomed relative to 2019. Obviously IT would be a good example of that. In many ways, what the pandemic has done has been to accelerate into the space of 18 months a lot of changes and productivity growth that would otherwise have taken place over many years. But, of course, there are other sectors that are a long way off recovery—the obvious ones being hospitality and travel. It'll be a long time before they get back to where they were. So it's a very uneven recovery, and that uneven recovery is what I think drives the difficulty in getting people from old jobs into new jobs. Say you were working before in the airline industry, and that job has gone and is not coming back for several years, then finding an alternative match that works for the employer and employee is going to take time. On the bright side, the fact that the economy is producing about the same amount as it did at the end of 2019, but with far fewer workers, means that productivity per worker is up. Some of that higher productivity is likely to stay even as people get back to work. The pandemic has in a sense forced firms to find higher productivity solutions.

What do you look at as key indicators of economic health? What should we be watching for?

I'll be looking at the output of the economy, gross domestic product. That's actually the one, which as I say, seems to be in the best shape, although it's still only about where it was in 2019, which is far from ideal.

The other things that I would look at in particular would be the labor force participation rate. What fraction of people are working or looking for a job, particularly in the 25-to-54 age cohort, the prime age cohort. We know that the population is aging, so labor force participation is trending down very slowly as baby boomers are retiring. There's nothing worrisome or unexpected about that. But the decline in labor force participation among the middle age cohort, that's more worrisome. And I think that would be my single biggest indicator of economic health. The unemployment rate, while way down from its highs, is still a good way away from full employment. For now, although wages are up, they are up slower than inflation notwithstanding productivity growth. Wages rising faster than inflation with productivity continuing to rise would together be a sign of a very healthy recovery.

I think it's also important to look at measures of unemployment rate across different groups. In recessions, the unemployment rates of minorities rise faster, and that's been shown on this occasion again. So that's an indicator that I think is particularly important to see coming down as we move back toward full employment. And it's also important to keep an eye on inflation. Inflation is high, but there are good reasons to think that's a temporary problem and that inflation will come back down next year. But there is a risk that it does not, and if so that indicates more persistent inflation pressures that should not be dismissed as transitory special factors.

How do you expect the delta variant and rising breakthrough cases of coronavirus to affect economic recovery plans?

The news over the last month on the virus has been disappointing and means a slower recovery in employment and output than we had hoped for. It also means that stimulus is likely to stay in place a bit longer than seemed likely earlier in the summer. For example, the Fed seemed to be moving toward phasing out its asset purchases, and that may now come more slowly. The economy has learned to adapt, to live alongside the virus to some extent. It seems to me most likely that the delta variant will slow—but not derail—the recovery. But there are downside risks, and particularly in financial markets because they seem to be pricing a very optimistic outlook.

What do you wish more people understood about the current economic status of the country? What do you know, as an economist, that you wish more people understood?

I think economists and policymakers learned a lot from the mistakes after the Great Recession. Too little was done to restart the economy, there was too much worry about government debt, too little worry about an economy running below capacity for a long time, and too much worry about inflation, which didn't exist. And policymakers and economists have certainly taken that lesson to heart. This time fiscal stimulus has been much larger, much faster, and monetary policy was extremely front-loaded and made clear that it was going to do what it takes. We were not obsessed with the debt-to-GDP ratio the way we were, mistakenly, in 2009 and 2010.

Having said all that, I think it's important to remember that there are resource constraints in the world. Debt to GDP is not something that has some arbitrary cap at 90% that beyond which there's disaster, but there are limits to it. And the pandemic has used up a certain amount of fiscal space, and over the very long run, that leaves less fiscal space for other things. So I guess I would try to remind people that resource constraints still exist. Fiscal and monetary policy can do a lot, and it's done a lot, and it's done well, but resource constraints are still real.

Posted in Voices+Opinion , Politics+Society

Tagged economics , economy , covid-19

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These countries are the most optimistic about economic recovery from the pandemic

People in different countries have varying levels of optimism about when they think the economy will bounce back. Image:  Unsplash/Ross Sneddon

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• China is the most optimistic country when people are asked when they think there will be an economic recovery from the pandemic.
• By comparison, people in Russia are the most pessimistic.
• One thing most people seem to agree on is that they expect their governments to take responsibility for leading the return to growth.

More than half of people in China think the economy there has already recovered from the pandemic.

That’s one of the headline findings of a survey carried out by Ipsos and the World Economic Forum, between 25 June and 9 July. Altogether, more than 21,500 people in 29 countries were quizzed on their views of post-pandemic economic life.

Some 56% of Chinese respondents said things were already back to where they should be. That number shoots up to 83% when those who think the recovery will have happened within a year are factored in.

In Saudi Arabia too, a majority of people (63%) think the recovery will have happened in a year’s time. There, 25% say the economy has already recovered.

Elsewhere, however, optimism is in shorter supply. Of the 29 countries surveyed, Russia, Colombia, South Africa and Romania are the places where the fewest people expect a swift recovery.

In Russia, just 4% of people think the recovery has happened and just 6% more think things will be better in a year. A large majority (66%) expect to have to wait more than three years for the economy to bounce back.

Have you read?

We asked young people about work and skills. here's what they told us, world leaders must put women at centre of covid-19 recovery, covid-19 recovery: some economies will take longer to rebound – this is bad for everyone.

Between one half and two-thirds of survey respondents in South Africa, Argentina, Romania, Colombia, Hungary, and Poland say they think economic recovery is more than three years away, following the pandemic.

Looking ahead

When it comes to the question of who should assume responsibility for leading a country to economic recovery, the answer given most often by respondents was their government. Averaged across all 29 countries, that was the view of 53% of people. But 48% of people didn’t mention their government at all when thinking about where a recovery might come from, indicating a possible lack of trust in their national leaders.

In Russia, nine out of 10 people surveyed said the government carries the responsibility for sorting things out. Close behind, other countries where a very large majority felt that way include Hungary (88%), South Korea (86%), China (78%), Malaysia (73%) and Saudi Arabia (70%).

An almost-mirror-image of those findings came when Ipsos asked whether small businesses should be responsible for the post-pandemic economic recovery. Low numbers of people in Russia (7%), South Korea (10%), Hungary (14%), and Saudi Arabia (19%) thought that was the case. Those countries where the largest numbers of people do think small businesses have a major role to play, are all Spanish-speaking.

“The world is at a global turning point where leaders must cooperate, innovate and secure a robust recovery," said Sarita Nayyar, Managing Director, World Economic Forum, adding that corporations, civil society and governments must work together to address the major challenges facing the globe and that "those that focused on the short-term have been the first to suffer".

Reading the signs

The survey also looked at what people think an economic recovery looks and feels like – the signs that will tell them things are getting better. It transpires there are two things that lead people to think things are getting better. The first is when they see people they know being called back to work or getting a new job. An average of 79% of people gave that as their top answer. It was closely followed by seeing new businesses open (78%).

Across all 29 countries surveyed, the range of answers citing those two indicators was from 63% to 89%.

The COVID-19 global pandemic continues to disrupt manufacturing and supply chains, with severe consequences for society, businesses, consumers and the global economy.

As the effects of coronavirus unfold, companies are asking what short-term actions they need to take to ensure business continuity and protect their employees. How should they be preparing for the rebound and increasing their manufacturing and supply systems’ resilience?

The World Economic Forum, in collaboration with Kearney, brought together senior-level executives from various industry sectors to identify the best response to the COVID-19 crisis. Their recommendations have been published in a new white paper: How to rebound stronger from COVID-19: Resilience in manufacturing and supply systems.

Read the full white paper, and more information in our Impact Story .

Companies are invited to join the Forum’s Platform for Shaping the Future of Advanced Manufacturing and Production. Through the Platform’s work, companies can join with other leaders to help find solutions that support the reconfiguration of global value chains post-COVID-19.

An increase in tourism was also mentioned as a key sign of recovery by a global average of 72%. It was highest in China (90%), Saudi Arabia (85%) and South Africa (84%), and lowest in Argentina (52%), Russia (59%) and Colombia (60%).

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Paul Krugman

Stumbling into goldilocks.

By Paul Krugman

Opinion Columnist

The U.S. economy has been far more successful at recovering from the Covid shock than it was in dealing with the aftermath of the housing bubble of the 2000s. As I noted in my latest column , four years after the 2007-9 recession began, employment was still five million below its pre-recession peak. This time it’s up by almost six million.

And while there was a wave of inflation, it seems to have broken. This is especially clear if you measure inflation the way other countries do. The Harmonized Index of Consumer Prices differs from the regular Consumer Price Index in that it doesn’t include Owners’ Equivalent Rent, an imputed cost of housing that nobody actually pays and is very much a lagging indicator; and by this measure inflation has already been cut to roughly 2 percent, the Fed’s inflation target:

Basically, America rapidly restored full employment while experiencing a one-time jump in the level of prices without a sustained rise in inflation , the rate at which prices are rising. Not bad, especially considering all the dire predictions made along the way.

But could we have done better? And to the extent that we got it right, were we just lucky?

My take is that we did very well, that the U.S. response to the Covid shock was, in retrospect, fairly close to optimal. But the miracle of 2023, the combination of rapid disinflation with a strong economy, was sort of an accident. Policymakers thought that raising interest rates would cause a recession and raised them anyway because they thought such a recession was necessary. Fortunately, they were wrong on both counts.

What do I mean by saying that policy was close to optimal? Covid disrupted the economy in ways previously associated only with wartime mobilization and demobilization: There was a sudden large change in the composition of demand, with consumers shifting away from in-person services and buying more physical stuff, a shift enlarged and perpetuated by the rise of remote work. The economy couldn’t adapt quickly to this shift, so we found ourselves facing supply-chain problems — inadequate ability to deliver goods — together with excess capacity in services.

How should policy respond? There was a clear case — nicely formalized in a 2021 paper by Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub and Ivan Werning presented at the Fed’s Jackson Hole conference that year — for strongly expansionary monetary and fiscal policy that limited job losses in the service sector, even though this would mean a temporary rise in inflation. And that’s more or less what happened.

The big risk in following such a policy was the possibility that the rise in inflation wouldn’t be temporary, that inflation would become entrenched in the economy and that getting it back down would require years of high unemployment. This was the argument infamously made by Larry Summers and others. But that argument turned out to be fundamentally wrong — not just a bad forecast, which happens to everyone, but a misunderstanding of how the economy works. Although inflation lasted longer than Team Transitory expected, it has, as we predicted, subsided without a big rise in unemployment. Notably, inflation never became entrenched in expectations, the way it did in the 1970s:

In fact, America has had the strongest recovery in the advanced world without experiencing significantly higher inflation than other countries:

U.S. policymakers, then, seem to have gotten it more or less right. But as I’ve already suggested, this was arguably a lucky accident.

It’s instructive to look at the projections made by members of the Fed’s Open Market Committee — which sets interest rates — in December 2022 and compare them with what actually happened:

The F.O.M.C. had been raising rates since early 2022 in an effort to control inflation, and it’s clear from the projections that members believed both that its efforts would cause a recession and that a recession was necessary. Their median projection was that economic growth would almost stall and unemployment would rise by about a percentage point, which would have triggered the Sahm Rule linking rising unemployment to recession. And if growth had actually stalled, it would probably have gone negative, because large growth slowdowns tend to cause sharp declines in business investment.

What actually happened was that the economy proved far more resistant to higher interest rates than the Fed expected, so growth kept chugging along and unemployment didn’t rise significantly. But inflation fell anyway, coming in below the Fed’s projections. So the economy surprised the Fed in two ways, both positive. Disinflation, it turned out, didn’t require a bulge in unemployment; but rate hikes, it turned out, didn’t damage employment as expected.

My view is that the first error, believing that we needed high unemployment, is hard to excuse — there were very good reasons to believe that the 1970s were a bad model for postpandemic inflation — while nobody could have known that the economy would shrug off high rates. But then, I would say that, wouldn’t I, because I didn’t make the first mistake but did make the second.

In any case, the remarkable thing is that these were offsetting errors. The Fed’s error on inflation could have led it to impose a gratuitous recession on an economy that didn’t need it, but rate hikes turned out to be appropriate, not to induce a recession but to offset a spending surge that might otherwise have been inflationary. Overall, policy seems to have been about right, creating an economy that was neither too cold, suffering unnecessary unemployment, nor too hot, experiencing inflationary overheating.

Yes: Policymakers stumbled into Goldilocks.

What went right? As I’ve said, the claim that inflation would be hard to tame never made much sense given what we knew. The economy’s resilience in the face of high interest rates is harder to explain, although a driving force may have been immigration: Slow population growth was one popular explanation of secular stagnation , so an influx of working-age adults may have been just what we needed.

I guess the larger point is that in macroeconomics as in life, it’s important to be good, but also very important to be lucky. And we got lucky this time.

Immigrants haven’t taken jobs away from the native-born but have boosted growth .

Interest rates have less effect on nations like America, where most mortgages are fixed-rate .

Something else that was transitory: the pandemic murder surge .

A favorite guidepost for policy has become blurry . (Can guideposts do that?)

Facing the Music

A bit of “ Escapism .”

Paul Krugman has been an Opinion columnist since 2000 and is also a distinguished professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @ PaulKrugman