As President-elect Joseph R. Biden, Jr. prepares to take office this week, his government and the Federal Reserve are aiming for a unique economic goal: getting the job market back to where it was before the pandemic.
The vibrant job scenario that existed 11 months ago – with 3.5 percent unemployment, steady or growing labor force participation and steadily escalating wages – turned out to be a recipe for raising all boats, creating economic opportunities for groups long ago marginalized and reduce poverty rates. And the price gains remained manageable and even a little negative. This contrasts with efforts to push the limits of the labor market in the 1960s, which are largely responsible for laying the groundwork for rampant inflation.
Then, the pandemic interrupted the test’s execution and efforts to contain the virus led unemployment to soar to levels never seen since the Great Depression. The recovery was interrupted by additional waves of contagion, keeping millions of workers at a distance and causing job losses to resume.
Legislators across the government agree that a return to this heated job market should be a central goal, a notable change since the last economic expansion and one that could help shape the economic recovery.
Biden made it clear that his administration will focus on workers and chose senior officials with a focus on the job market. He chose Janet L. Yellen, a labor economist and former Fed chairman, as his Treasury secretary and Marty Walsh, a former union leader, as secretary of labor.
In the past, lawmakers and Fed officials tended to preach loyalty to full employment – the lowest unemployment rate an economy can sustain without fueling high inflation or other instabilities – while withdrawing fiscal and monetary support before reaching that goal, as they worried with a patient more approach would cause price spikes and other problems.
That shyness seems less likely to appear this time.
Biden is expected to take office while Democrats control the House and Senate and at a time when many politicians are less concerned that the government will take on debt thanks to historically low borrowing costs. And the Fed, which has a history of raising interest rates as unemployment falls and Congress spends more than it collects in taxes, has pledged to be more patient this time.
“Economic research confirms that in conditions like today’s crisis, especially with such low interest rates, taking immediate action – even with deficit financing – will help the economy in the long and short term,” Biden told a news conference. on January 8, noting that quick action “would reduce scarring in the workforce”.
Jerome H. Powell, the Fed chairman, said on Thursday that his institution is strongly focused on restoring lower unemployment rates.
“This is really what we’re most focused on – it’s getting back into a strong job market quickly enough that people’s lives can get back to where they want to go,” said Powell. “We were in a good place in February 2020 and we think we can go back there, I would say, much sooner than we feared.”
The scenario is set for a macroeconomic experiment, which will test whether large government spending packages and growth-friendly central bank policies can work together to promote a rapid recovery that includes a wide range of Americans without incurring harmful side effects.
“What happens to the Fed is that it really is the tide that raises all boats,” said Nela Richardson, chief economist at ADP payroll processor, explaining that the central bank focused on work can lay the groundwork for growth robust. “What fiscal policy can do is target specific communities in a way that the Fed cannot.”
The government has promptly spent to support the economy in the face of the pandemic, and analysts hope that more aid is on the way. The Biden government has suggested an ambitious $ 1.9 trillion spending package.
While this is probably not fully approved, at least some more tax spending seems likely. Goldman Sachs economists expect Congress to actually approve another $ 1.1 trillion in relief during the first quarter of 2021, adding to the $ 2 trillion pandemic relief package approved in March and the $ 900 billion in additional aid approved in December.
This would help spur a faster recovery this year. Goldman economists estimate that spending may help push the unemployment rate down to 4.5 percent by the end of 2021. Unemployment stood at 6.7 percent in December, the Bureau of Labor Statistics said earlier this month.
This government-backed recovery would come in stark contrast to what happened during the 2007-2009 recession. At that time, the largest Congressional package to contain the consequences of the crisis was the $ 800 billion American Recovery and Reinvestment Act, passed in 2009. It ran out long before the unemployment rate finally dropped below 5%, in early 2016.
At the time, concern about the deficit helped to contain more aggressive fiscal policy responses. And concerns over economic overheating prompted the Fed to start raising interest rates – albeit very slowly – in late 2015. As the unemployment rate fell, central bankers were concerned that inflation could wages and prices are waiting and were eager to return the policy to “normal” configuration.
But economic thinking has undergone a radical change since then. Tax authorities are more confident in increasing public debt at a time of very low interest rates, when it is not so expensive to do so.
Fed officials are now much more modest in judging whether or not the economy is “in full employment”. In the wake of the 2008 crisis, they thought that unemployment was testing its healthy limits, but unemployment continued to fall dramatically, without fueling uncontrolled price increases.
In August 2020, Mr Powell said that he and his colleagues will now focus on the “shortcomings” of full employment, rather than “deviations”. Unless inflation is actually rising or financial risks are rising, they will see falling unemployment as a welcome development and not a risk to be avoided.
This means that interest rates are likely to remain close to zero for years. Senior Fed officials have also signaled that they hope to continue buying large sums of government-guaranteed bonds, about $ 120 billion a month, at least in the coming months.
Fed support may help government spending to accelerate demand. Families are expected to accumulate large savings stocks when receiving stimulus checks in early 2021, and then withdraw them as vaccines spread and normal economic life resumes. Low rates can make large investments – like houses – more attractive.
Still, some analysts warn that today’s policies could result in future problems, such as runaway inflation, financial market risk taking or a damaging outstanding debt.
In the mid-1960s, Fed officials were heavily focused on seeking full employment. In testing how far they could push the labor market, they did not try to avoid inflation as it rose and saw higher prices as a trade-off for less unemployment. When the United States took its final steps to move away from the gold standard and an oil price shock hit the early 1970s, price gains took off – and it took a massive monetary squeeze by the Fed and years of serious economic hardship for control them.
There are reasons to believe that this time is different. Inflation has been low for decades and remains contained around the world. The link between unemployment and wages, and wages and prices, has been more tenuous than in recent decades. From Japan to Europe, the problem of the era is weak price gains that hold economies in stagnant cycles, eroding space to cut interest rates in difficult times, not excessively rapid inflation.
And economists are increasingly saying that while there may be costs for long periods of growth-friendly fiscal and monetary policy, there are also costs of being too cautious. Putting the brakes on expanding the labor market earlier than necessary can leave workers who would have received a boost from a strong labor market on the sidelines.
The period before the pandemic showed exactly the risks that are lacking in overly cautious policymaking. In 2020, unemployment for blacks and Hispanics fell to record levels. The participation of older workers, who were expected to remain permanently depressed, actually increased somewhat. Wages were rising faster for those earning less.
It is unclear whether 3.5 percent unemployment will be the exact level that the United States will reach again. What is clear is that many policymakers want to test what the economy is capable of, rather than guessing ahead of time a magical figure.
“There is a danger of computing a number and saying, it means that we are there,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said at an event earlier this month. “We are going to learn about these things experimentally, and that for me is the right risk management stance.”