America is between the two crises. The recovery will not happen by itself
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| America is between the two crises. The recovery will not happen by itself |
The United States, like other countries, has become more vulnerable since the outbreak of the Covid-19 pandemic, because Americans can no longer participate in active activities that require close human contact. Millions of workers now need to find other productive tasks to do, and many of these new jobs will not be as valuable as the previous ones.
However, there is no economic reason why the depression caused by the COVID-19 crisis is particularly deep or long-lasting. The United States is a global leader in technological and organizational competence and is home to a highly-skilled workforce. The problem is, the recovery will not happen on its own.
The fact that it took a decade for the United States to fully recover from the 2008 financial crisis would be beneficial for an exit from the current crisis. At the time, the housing construction sector in the United States had already shrunk to its normal size before the outbreak of the subprime mortgage crisis, which meant that no sectoral structural adjustment was required. The challenge, instead, was to identify and reallocate resources to goods that had not been previously produced and that would become more valuable in the future.
Moreover, the 2008 financial crisis and the recession that followed did not undermine the skill of American workers or reduce the effectiveness of existing technologies. In the short term, this crisis has destroyed many professional networks and eroded social trust underpinning the division of labor in the economy. The only long-term effect has been a loss of investor confidence in the ability of private-sector financial institutions to create safe and appropriately valued financial assets.
As a result, it took a decade for employment in the US to emerge from the mortgage crisis. The world lacked safe assets, and governments had failed to address this problem the right way. For its part, the United States has had to do more to mobilize additional risk tolerance in the private sector, provide safe public assets, and support the working class, including by printing money and increasing investments to boost effective demand and employment growth.
Although there is no reason why it will take a decade for employment to return to a pre-epidemic level, it will likely happen again. Today, the same forces that drove policymakers to declare victory over the crisis and switch to the "austerity" policy in 2010 are back in action. It is clear that the US federal government will not introduce any new policy initiatives to alleviate the economic depression or improve the failed US public health response over the next month.
Likewise, the Republican Party clearly has no idea how to achieve a "V-shaped" recovery. Additional tax cuts for the rich would boost demand and employment as they did when the Republican Party passed the Tax Cuts and Jobs Act in late 2017: Nothing at all. Likewise, reducing social programs may make workers more desperate in searching for employment opportunities; But despair will not translate into additional job opportunities in the absence of spending. Nobody in the White House of President Donald Trump knows what to do, and no one will be qualified enough to implement the right policy if it is found in error.
With the Republican Party controlling three points of the US government's four veto power - the presidency, the Senate, and the Supreme Court, ”America will not be able to achieve a coherent response to the growing crises it is experiencing at least until January 2021. Republicans are already doing their best. Do everything they can to prevent voters from casting their votes before the elections are due in November. But if those efforts fail and the Democrats succeed in taking over the White House and perhaps even the Senate, what should the Republicans do to save America from another lost decade?
First and foremost, the Democratic Party must adhere unconditionally to the principle that every American should be granted the right to a job. While this job is not necessarily high-income, it should be sufficient to keep workers' families above the poverty line. Each policy under consideration must be judged on whether it complies with this principle.
The federal commitment to full employment is not a new idea. The U.S. Labor Code of 1946 adopted this principle but has since declined due to complaints that government support for full employment is unaffordable. The best response to such objections would have been John Maynard Keynes’s ironic comment during a 1942 BBC radio address that “whatever we can do, we can afford it”. What he meant was that the financial system does not function as independent binding restrictions on economic activities, rather it is specifically in place to support these activities.
Finding useful jobs for those looking for work is definitely something we can do. Adjusting the prevailing payments and financial structures to support full employment would undoubtedly have consequences. For example, we may discover that under conditions of full employment the rich will have to take significant risks in order to achieve sustainable double-digit growth in their wealth. As Keynes argued, full employment "would result in a much lower rate of interest" and thus would be "euthanasia for the rentier economy". So be it. To maintain their luxurious lifestyle, the rich will have to either spend their capital or bet invest in risky projects.
Full employment support may also require higher and more progressive taxation, and it may lead to levels of public debt that seem irrational to those who lived through the 1970s. So be it. If a higher debt ratio is required to achieve full employment in the medium term, then this is sufficient justification. But it could have dire consequences if the economy shifts from its current secular slump, then a high debt ratio will not be necessary.
Finally, restoring and maintaining full employment may require shifting demand from elite consumption to labor-intensive sectors such as public health. It may also require the creation of a large-scale labor-intensive public works program. Let it be. Time to make full employment our top priority. Once we do that, everything will then be fine.