As this pandemic hopefully winds down, its useful to think through the forecasts and analysis that economists got right, and what we got wrong. This is important because the U.S. has not ever been through such a deep, rapid, nor nearly simultaneous economic downturn. Never has our fiscal response been as rapid or comprehensive. Thus, economists have played an important and lingering role in this pandemic. I begin with what we got right.
The pandemic’s effect on the economy was fast and furious. Nearly all the jobs lost during the downturn occurred before any government action to close restaurants and bars, enforce mask standards or limit gatherings. State governments responded with wildly different limitations, making it relatively easy to isolate the effect of disease and government action on the economy. Over the past several months a number of high-quality studies have made clear that it was disease, not government, that delivered and sustained this recession.
From the very beginning, the economics profession made it clear that fixing the economy meant ending the pandemic. That proved right. Whether or not the government interventions ultimately reduced the disease incidence is an epidemiological question, not an economic one. But, any analysis of the cost and benefits, particularly of low-cost measures like mask wearing, would justify much of what happened last spring.
Economists were also correct about the general magnitude and industries most affected by the pandemic. For example, in March 2020 the center where I work published a study of those occupations most at risk nationally, and reported about 28 million workers at risk, with the average wage of about $15 per hour. As it turns out, job losses in the first quarter exceeded 22 million, and were heavily clustered on workers making less than $15 an hour. Given the uncertainty of the moment, that turned out to be a highly prescient analysis.
Last spring there was a loud chorus of economists warning of the effect of deep tax losses to state and local governments. Because Congress and two administrations heeded this warning in their fiscal response, that danger passed. There were a number of smaller matters economists got right, but we also missed some important economic changes.
Few economists foretold the major changes to consumption and savings that COVID and the broad fiscal relief brought. Consumer spending on entertainment and recreation remains almost 15 percent below pre-pandemic levels, while grocery spending is 17 percent higher. Overall consumer spending is up 13 percent, and among taxable retail, spending is a whopping 25 percent higher than pre-pandemic levels.
The spending shift boosted tax revenues as households shifted consumption to more taxable items. A big portion of this was in the home construction sector. Perhaps too many economists were busy with home improvement projects last summer to recognize the implications of this consumption shift. These changes are likely transitory, or if not, do not present a compelling challenge to public policy.
Nearly every economist worried about the pace of labor market recovery following the pandemic. Many of us felt that the combination of low interest rates and longer-term pandemic risks would motivate firms to adopt labor-saving technology. In particular, bars, restaurants, accommodations and other face-to-face industries would likely see lower demand for workers in the post-pandemic era. Some of this has happened, but right now the greatest angst is over a labor shortage, not labor surplus.
It is too early to know any of this for sure, but over the past three months, job growth has largely stalled. Businesses claim this is due to workers unwilling to take a job, but for every new job created nationally, more than five workers lost benefits. Something else is happening.
Few economists, myself included, made public predictions of a permanent decline in labor supply. It seems increasingly likely that workers, especially low-income workers, have shifted their desire to work. Some of this may be transitory, due to childcare issues, but some of it is permanent. Today it is increasingly clear that the only thing that will change this behavior is higher wages. I would not have anticipated this a year ago, and only a few other economists did so. In our defense, this is not really a public policy problem. Businesses are not owed workers any more than people are owed jobs. To argue otherwise is quite literally a mark of at least borderline socialism, but then intellectual consistency in these matters is no longer in vogue.
The biggest change from COVID is one few economists predicted back in April or May of 2020. Today it seems likely that 20 percent of jobs can be performed remotely, or at least quasi-remotely. This is a radical change that will upend housing and labor markets. Workers who can labor entirely at home no longer need to commute and are free to live nearly anywhere. Workers who work mostly at home can dramatically expand their household location choices. Businesses who can offer this flexibility can pay less for the same quality of work.
Taken together, this means flatter, less-densely populated cities. It means less commuting congestion and more demand for broadband and technology education and training. Homes will change to include quiet office spaces, and the demand for single family housing in suburban and smaller-town America will grow. This necessarily means that families will choose neighborhoods with a greater emphasis on amenities such as schools, parks, public safety and walkability.
These changes were coming, but we probably just went through a multi-decade period of change in just a year or two. Few economists saw this coming early last year, but we are now in the midst of a great reckoning. However, I’m not sure seeing this change early would’ve made a huge policy difference. Economists have argued for almost three decades that household location decisions are primarily connected to local amenities. Some communities heeded this overwhelming evidence; others ignored it. Those who listened and acted successfully on quality of place will likely experience a boom decade. Those places that did not, will experience quite the opposite.
The lesson here is not that economists are especially knowledgeable about the future. We are not. But, this profession has very good tools for understanding long-term changes in behavior and for thinking through the implications of those changes. We also understand a bit about what causes local economies to grow or shrink. Those places that heeded these lessons have reason to view the recovery with some optimism.
