One-Handed Economics

Eakinomics: One-Handed Economics Congress and the administration continue to squabble over just how big a pile of taxpayer money to plow into unemployment insurance, checks to low-income households, assistance to states and localities, and backstops for lending programs at the Federal Reserve and Small Business Administration. Looking past the arrival of vaccines and the end of the pandemic, the Biden team is focused on massive spending programs as the route to faster growth. In both cases, the “size matters” analysis is incomplete and misleading. How the money is spent is just as important. The current approach focuses on demand and using government transfers and direct spending to boost demand. But economists were given two hands for a reason: There is supply as well as demand, and both have to be accounted for in the analysis. During the pandemic, there are fundamental supply constraints. There are limitations on the occupancy of restaurants, school and childcare considerations limiting work, fears of legal action inhibiting owners of businesses, and other limitations produced by the coronavirus. There is no stimulus check that will solve those problems, and doubling its size won’t change that. If well-targeted, it will provide invaluable assistance to those in financial need, but it will have no magic multiplier effects. Past the pandemic, The New York Times’ Eduardo Porter highlights another long-term supply constraint: retraining workers whose old jobs have disappeared for the new jobs that will be viable in the future. As he puts it, “Training has always been a challenge for policymakers, and the pandemic complicates matching new skills with jobs.” True enough. Better apprenticeships (see here, here, or here) are one possibility, but even successful re-training programs will take time. In some industries, the effective supply of labor will be a constraint on firms even after the coronavirus is no longer an issue. Congress should provide some needed assistance to the financially strapped and long-term unemployed. But don’t expect any magical impact on the pace of economic recovery either before or after the pandemic has been tamed.