After a devastating loss of life and tragedy for many families all over the country, COVID-19 and the subsequent economic crash has led to wild speculation about the future of the US economy. Both economic experts and investors are unsure about what letter the economy will look like in the near future. Will the economy look like a W, U, Z, or L?
No matter what letter of the alphabet the economic recovery will emulate, experts concede that the US and global economy are officially in a recession. In fact, this is the worst recession witnessed since the Great Depression in the 1930s. To put it into context, the US had an unemployment rate of 14.7% in April and 13.3% in May. While this does not compare to the 24.9% unemployment rate during the Great Depression, it is higher than at any other time in modern history. Worse, the gloomy situation is set to continue as the International Monetary Fund’s (IMF) most recent forecast predicts that the US economy will shrink by almost 6% this year (compared with a contraction of about 7% in the eurozone and 5% in Japan).
However, unless there are repeated unfortunate global events, most analysts are confident that the US economy will eventually recover. “In the long run, and even in the medium run, you wouldn’t want to bet against the American economy. This economy will recover. It may take a while… It could stretch through the end of next year,” says Fed Chairman Jerome Powell.
What will determine the shape of the graph that the US economy will follow to reach pre-COVID levels? In this article, we will analyze how the government’s prioritization of human health, past recovery trends, and small business investments will factor into a long-term economic recovery.
Prioritizing people and households
People are at the heart of any economy, so it only makes sense that the needs of the general public are prioritized and individuals and families who are at risk of poverty from this recession are helped. With the high unemployment rate, many people are draining their emergency funds or, perhaps more likely, increasing borrowing on high interest rates. Household financial stress has led to mental illness and its negative side-effects, such as increased substance abuse, domestic violence, and even suicide.
One of the best ways to help the public is to set up federal funding so that it reaches people and small businesses directly; helping individuals retain employment or acquire the skills they need to find new jobs. An example of this in recent history is during the Great Recession of 2008 where state workforce agencies increased enrollment in government training programs by 56% in 2009 and again in 2010. This type of investment can keep the economy running as much as possible (by retaining employment) and foster growth in new areas by introducing skills in the populace that may have never existed. Investing directly in the public to retain employment and enroll in training programs may serve to protect the public health as well.
Learn from existing trends
As we’ve written before, some of the most vulnerable members of our society were the ones hit hardest by the coronavirus pandemic. It is important to understand the trends and systems that led to this inequality in our economy and provide support where it is needed the most.
From analyzing historical data, we learned that during the Great Recession, the bottom 10 percent of earners suffered a loss of income two-and-a-half times worse than the richest 10 percent. Unfortunately, we are witnessing more of the same from the COVID-19 pandemic so far. Research by McKinsey has found that Black Americans are more likely to have jobs that are at risk of layoffs, furloughs, or reduced hours than are white Americans.
Current estimates show that 60 million people in the world could be pushed into extreme poverty in 2020. World Bank President David Malpass summarizes what it would take for an economy to help the people who need it the most:
“Policy choices made today—including greater debt transparency to invite new investment, faster advances in digital connectivity, and a major expansion of cash safety nets for the poor—will help limit the damage and build a stronger recovery. The financing and building of productive infrastructure are among the hardest-to-solve development challenges in the post-pandemic recovery.”
Countries that moved swiftly to support their populations were largely effective in containing the effects of the virus on the economy. New Zealand, for example, locked down the country for four weeks in late March. The Prime Minister routinely referred to her constituents as her “team of five million” in battling the coronavirus and worked on a financial stimulus equaling 4% of the national GDP. Current cases in New Zealand now average around 1 new case per day.
Investing in small businesses
It takes a lot of effort to start a new business. You must have a business plan, set up your supply chain for the goods/services you will provide, find a location and suppliers, hire workers, and arrange financing for it all. If a business declares bankruptcy and shuts down during the pandemic, the whole process has to be repeated. That will take resources like time and money and make the recovery slower. In addition, firms may be fearful that the economy will close again and may be less likely to invest in equipment or research and development. A great method to prevent an economic contraction is to ensure that small businesses can continue functioning in a period of low activity so that business activity does not have to be kickstarted again.
Some examples of small business support are states supplementing federal relief efforts. California has established a $50 million microlending program for businesses that are ineligible for Small Business Administration loans. Similarly, Chicago enacted a $100 million small business resiliency fund to assist businesses that could not get support from the federal Paycheck Protection Program.No one could have predicted the COVID-19 pandemic or the ensuing global economic crises. It is clear, however, that governments who are being proactive in their approach to public investment and health are seeing the benefits of their approach. On the other hand, less than half (49%) of Americans think the government is handling the pandemic “very” or “somewhat” well and there are few signs that public investment is being prioritized in the US. It is clear that public policy will need to first prioritize human lives, shore up small businesses so the economy does not collapse, and learn from economic crises of the past. Only then will the economy truly and sustainably recover from its current recessionary state.