What will the COVID-19 recovery look like? That question has economists around the world confused and, frankly, slightly terrified. Many of the horsemen of past economic catastrophes appear to be back with a vengeance. Some economists worry about inflation: as consumers regain confidence, go out, and spend their money in stores with empty shelves, prices and wages may be skewed, hurting creditors and investors. But deflation is a much more dangerous alternative, and it is one deemed even more likely by many analysts. As unemployment levels skyrocket, demand will continue to fall even as supply recovers, forcing producers to lower prices. Central bankers and political figures are doing their best to land in between these extremes. Without international coordination, though, it appears that the United States and the European Union will take very different approaches to recovery.
The goal of all recovery policies is stemming unemployment—laid-off workers contribute to both demand and supply-side shocks. Despite agreement on this point, it is in handling unemployment that the United States and European Union have diverged the most. The United States has focused on aggressive stimulus in the form of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in late March, and several other rounds of stimulus. This stimulus took the form of loans to small businesses, corporate subsidies, and direct cash payments. Meanwhile, the EU has taken an approach broadly focused on wage subsidies, meaning that EU countries (as well as many others in other parts of the world, including Canada and South Korea) are paying wages directly to keep workers employed.
At first flush, it seems like the EU took the smarter approach. They kept people working for the first few months of the crisis, while unemployment in the United States spiraled. Moreover, the small US cash payments to workers, controversy around corporate bailouts reminiscent of the Great Recession, outdated unemployment software, and opaque regulations around small business loans have all led to a US unemployment rate of 11 percent. The situation is likely to worsen, too, as structural unemployment (meaning permanent unemployment because of macroeconomic factors), is on the rise.
But the situation is nowhere as clear-cut as it seemed in the middle of June. Since then, the unemployment rate for the eurozone has started to climb closer to 10 percent, as US jobless claims shrink slowly. The eurozone’s protections could be its downfall: about 45 million workers, a third of the total employment base in Germany, France, Britain, Italy, and Spain, are at high risk of losing their jobs, highlighting the dilemma for governments as they plan to amend or extend their subsidies.
Most governments have extended their programs into the fall for fear of huge job losses. However, policymakers and analysts are increasingly calling for an end to these kinds of programs. The pandemic, they argue, is not simply a short-term “pause” on economic activity, but rather a systemic shift in employment trends. Katharina Utermöhl, a senior economist at Allianz, recently wrote that “Extending job protection will just postpone the problem,” in a study showing that 9 million of the 45 million at-risk jobs are in sectors that are likely to struggle or experience extreme restructuring after the crisis.
In particular, economists have criticized continual employment in sectors such as retail and tourism, which are unlikely to maintain the same pre-pandemic workforce, even if a vaccine became available shortly. In fact, pre-COVID-19 employment in service sectors was inflated to begin with due to a fall in productivity per worker, leading to high employment for the same output. That situation is likely to be reversed in the new normal, as employers react with density restrictions and capital productivity-enhancing measures. Investment in industries that can no longer support workers on their own regardless of government protection is, according to many economists, shortsighted. A continuation of these kinds of policies could lead to a rise in “zombie jobs” in dead-end industries propped up by government subsidies.
Even as the United States has experienced a sharp rise in unemployment claims, and signs of structural unemployment grow, the majority of US unemployment is temporary. US employment laws make it easy for newly unemployed workers to get rehired quickly in a dynamic economy. European officials worry that their economies will soon fall victim to US-like jobless claims, but things might in fact get much worse. Job churn is relatively easy to fix; structural unemployment is not.
Both the United States and the European Union need to think hard about their new COVID-19 toolkits in the coming months. A study from the Peterson Institute suggests that neither body’s approach has been fully correct. There should be some shift toward the US model that provides larger unemployment subsidies, but working with unions and industry to try to preserve sustainable jobs is still essential in large swaths of the economy.
And there is room for policies neither region has considered. So far, both US and EU legislators have ignored debt restructuring for small and medium-sized companies and other aid to help them pay rent. This point is even more important in light of the EU’s July COVID-19 stimulus plan, which includes 750 billion euros (US$826.5 billion) in a mixture of grants and loans. The deal has no provisions for debt restructuring, even as it is likely to increase the debt burden on weak economies like Greece and Italy. That debt is crucial to keep those economies from collapsing in the short term—but it could lead to inflation and debt crises in the long term.
At the time of publication, the United States has yet to pass a continuance on the US$600 weekly unemployment benefits or another major stimulus bill. As in the European Union, having the liquidity and government support to help with unemployment transitions would prevent short term crises and potentially allow governments to prepare for a debt crisis down the road. Doing nothing could lead to higher infection, death, and poverty rates as desperate people seek work, a hard deal to make even if it does lead to a more dynamic economy years down the road.
How else might we plan the post-pandemic economy? Now is the time for testing new ideas and reimagining entire industries. Many countries have put a premium on green infrastructure and growth projects that can boost employment and aid the recovery. Canada is planning on investing in electric vehicle charging facilities, improved water management, and clean-up projects. Meanwhile, some left-wing economists are thinking more seriously about universal basic income and job retraining to ease the pain of higher unemployment over the next few years. One thing is clear: governments all over the world have a lot of work to do if they want to support continued prosperity for their people. Funding for new business will be a critical part of the recovery—whatever that recovery looks like.